Synovus Financial Corp. (NYSE:SNV) Q3 2021 Earnings Conference Call October 19, 2021 8:30 AM ET

Company Participants

Kevin Brown - Head of IR
Kevin Blair - President & Chief Executive Officer
Jamie Gregory - Chief Financial Officer

Conference Call Participants

Brad Milsaps - Piper Sandler
Ebrahim Poonawala - Bank of America
Jennifer Demba - Truist Securities
Michael Rose - Raymond James
Anthony Elian - JPMorgan
Steven Duong - RBC
Brody Preston - Stephens Inc
Christopher Marinac - Janney Montgomery Scott
Brady Gailey - KBW

Operator

Good morning. And welcome to the Synovus Third Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I will now turn the call over to Kevin Brown, Head of Investor Relations. Please go ahead.

Kevin Brown

Thank you, and good morning. During today's call, we will reference the slides and press release that are available within the Investor Relations section of our website, synovus.com. Kevin Blair, President and Chief Executive Officer, will begin the call. He will be followed by Jamie Gregory, Chief Financial Officer, and we will be available to answer your questions at the end of the call.

Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law.

During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendix to our presentation.

And now Kevin Blair will provide an overview of the quarter.

Kevin Blair

Thank you, Kevin. Good morning, everyone. And thank you for joining our third quarter earnings call. Before I begin my remarks regarding this quarter's earnings, I want to take a moment to acknowledge the recent and tragic deaths of our Specialty Lending Division CEO, Jonathan Rosen; his assistant, Lauren Harrington; his 14 year old daughter, Allie; and Allie's friend, Julia. All 4 were killed in a plane crash on October 8 shortly after take-off from a private airport in Atlanta.

Many of you have likely heard us mentioned Jonathan's name or may have even met him. And you've certainly heard us talk about the extensive impact he has made on our company since we acquired his life insurance premium finance company, Entaire Global One in 2016.

In addition to exceeding expectations in growing his premium finance division, he also oversaw our asset based lending team and built out a world class structured lending business. But as successful as he was in his work, he was even more passionate about his family and helping others, especially evident through his Rosen Family Foundation that promotes financial empowerment across the socioeconomic spectrum. His assistant, Lauren, was equally dedicated to her work and to impacting others.

As you can imagine, our entire work family is dealing with tremendous shock and sadness over this unimaginable loss, but Jonathan built an amazingly talented team that is doing a remarkable job of carrying on under difficult circumstances.

Jonathan would have wanted it no other way and would have been the first to acknowledge that all of his business success was more of a product of his team rather than himself.

I am not sure I agree, but I am confident in the team he has built to carry his vision forward. Please join us in keeping the families, friends, and colleagues of all lost in your thoughts and prayers.

Now let's shift to our third quarter results. We are delivering on our growth objectives, as evidenced by the period end loans, core operating deposits, and broad based fee income growth.

At the same time, we have maintained good expense discipline, while continuing to invest in longer-term initiatives and have managed through the challenging interest rate environment by strategically investing excess liquidity, while continuing to lower the overall cost of deposits.

Loan growth was extremely strong for the quarter, as funded commercial loan production increased almost 70% versus the previous quarter, which more than offset the ongoing elevated levels of payoffs and pay downs.

Fee income was up $8 million or 8% versus the second quarter, with wealth and capital markets income posting strong growth, as well as core banking fees returning to more normalized levels post COVID.

Our treasury and payments team set a new high bar in terms of new production at $10.6 million year-to-date, surpassing its full year 2020 totals during the month of September.

We also continued to deliver on our Synovus Forward initiatives, which reached a pretax run rate benefit of approximately $100 million by quarter end. And we're making great progress in planning for the additional $75 million worth of benefits to be delivered by the end of 2022.

Synovus Forward represents our ongoing innovation and profitable growth mindset, but it will also drive our efficiency efforts in order to ensure we deliver on our sustainable top quartile financial performance objectives.

On the efficiency front, additional branch consolidation is underway with four additional branches scheduled for closure by year end, and we will continue to rationalize the branch network as we reinvent the retail delivery model.

The efficiency efforts will enhance returns, but also allow us to further our investment and specialized talent to build out new businesses and product lines.

Through strategic hires this quarter, we have expanded our specialty lending coverage to restaurant services, strengthened our middle market Florida presence, and announced our expansion into the Corporate and Investment Banking segment.

We continue to make progress on our efforts to digitize our business. Through the third quarter, we have migrated 90% of our clients on to Synovus Gateway, our commercial portal. And usage of My Synovus, our consumer platform, indicates that digital usage continues to expand with an additional 10% increase in enrollment in active users. Moreover, a concerted effort has led to a 43% increase in paperless enrollment in 2021.

We’ve recognized that many of these advancements are table stakes in our industry, and therefore we are focusing additional resources on more transformational opportunities. Efforts are underway to expand our digital engagement through insights.

We are also expanding the solutions we offer our ISO and ISV clients and are working on the next generation of fully integrated treasury solutions. These and other initiatives are all focused on delivering new sources of revenue in the coming quarters and years ahead.

Our strategic plan forward balances our investments in both core and transformational initiatives in order to generate both short and long-term returns, while building on our core differentiation principles.

Now let's take a look at the financials for the quarter. On slide three, we've included some key financial highlights for the quarter. I'd like to begin with loan growth, which increased $923 million, excluding changes in P3 balances.

As mentioned previously, record levels of funded commercial production drove the growth for the quarter. We expect this momentum to carry into the fourth quarter as commercial pipelines remain robust.

Quality deposit growth continued in the third quarter, including an increase in core transaction deposits of $1 billion. We continue to take advantage of this liquidity environment to focus on remixing our deposit base and along with strategic repricing, this has helped lower the overall cost of deposits by an additional 3 basis points to 0.13%.

We continue to experience balanced augmentation, but a core focus on operating accounts has led to DDA and NOW production to increase 34% versus the prior quarter. Jamie will provide additional details regarding the balance sheet. But our goal remains consistent in this environment, attracting and deepening core relationships.

Total adjusted revenue of $500 million increased 2% from the prior quarter, while adjusted expenses declined $1 million to $267 million. This resulted in a 6% increase in adjusted pre-provision net revenue quarter-on-quarter.

An $8 million reversal of provision for credit losses resulted from the provision expense associated with strong loan growth being more than offset by a reduction in life of loan loss estimates. Adjusted net income was $178 million or $1.20 diluted earnings per share.

As we have returned to a position of growth, we have done so with strong credit, liquidity, and capital metrics. The net charge-off ratio declined 6 basis points this quarter to 0.22%, while the NPL and NPA ratios each fell 1 basis point.

The ACL ratio was down 12 basis points, excluding P3 loans ending the quarter at 1.42%. And the CET1 ratio declined 12 basis points to 9.63% and remained slightly above our stated range.

At this point, I'll turn it over to Jamie to provide more details on the financials. Jamie?

Jamie Gregory

Thank you, Kevin. Starting with slide four, we ended the quarter with total assets of $55.5 billion and loans of $38.3 billion. Total loans, excluding P3 balances grew $923 million, up 3% from the prior quarter, led by growth in C&I and third-party consumer loans. P3 balances declined $818 million.

In the third quarter, we had record commercial loan production. However, transaction activity remained elevated, which led to a $500 million increase in payoffs, primarily in the CRE portfolio.

Regional economic data, as well as client conversations continue to give us a cautiously optimistic outlook on the pace of economic recovery in our footprint. We continue to see growth in commitments and are well positioned to increase funded loan balances as market uncertainty and liquidity subsides.

C&I line utilization declined approximately 70 basis points to 39%. A return to normalized levels of C&I line utilization would result in over $750 million in funded balances.

The liquidity environment continues to be a headwind to consumer loan demand and resulted in declines in our HELOC portfolio of $50 million. Our third-party lending strategy is one means of responding to this liquidity and capital environment, providing attractive risk adjusted returns, while diversifying the loan portfolio.

We continue to leverage third-party consumer lending to offset consumer loan declines, as evidenced by the $267 million increase in third-party consumer loans for the third quarter.

In order to offset continued increase in liquidity, we grew the securities portfolio by $1 billion to 19% of total assets at the end of the quarter. As evidenced in the appendix, a significant portion of the growth was in short dated securities, which mature in less than 1 year.

We intend to continue rebuilding the third-party consumer loan portfolio to pre-pandemic levels, as long as we secure more assets with attractive risk adjusted returns.

At the end of the third quarter, third-party held-for-investment balances were $1.7 billion or 3% of total assets. Growth in this portfolio is predicated on overall balance sheet dynamics, including capital, liquidity and client loan growth.

As you can see on slide five, core transaction deposits increased $1 billion or 3% from the prior quarter. Core non-interest bearing deposit growth of $490 million or 3% was offset by strategic declines in time and brokered deposit portfolios.

Total deposit costs continued to decline with a reduction of 3 basis points to 13 basis points. This was primarily driven by deposit mix optimization and strategic reductions in high cost transactional deposits.

Time deposits declined 35% from the prior year, accounting for 5% of total deposits compared to 9% a year ago. This was led by the reduction in higher cost CDs. While we believe there are additional opportunities for improvement through ongoing product repricing and the continued disciplined balance sheet management, it is likely that deposit costs remain relatively stable over the next two quarters.

As shown on slide six, net interest income was $385 million, an increase of $3 million from the prior quarter. The net interest margin was stable with a decline of 1 basis point to 3.01%.

We are focused on profitable growth over the long-term, which includes further optimization of the balance sheet through strategies I just outlined on the previous slides.

Our top priority remains multi-solution client growth. However, we believe there are further opportunities to balance credit, duration and liquidity risks. We believe this longer term view, in conjunction with strong commercial loan production in our high growth Southeast footprint, can provide outsized NII increases.

We reiterate our previous guidance that NII, excluding P3 will increase in the second half of the year. Loan growth and the deployment of excess liquidity are expected to offset headwinds from continued fixed rate repricing and a slight reduction in LIBOR.

We expect P3 revenue to decline between $8 million and $12 million in the fourth quarter. The net interest margin continues to be pressured by the liquidity environment. While liquidity is generally accretive to NII, the impact of cash on the balance sheet and securities portfolio growth are likely to continue to be a NIM headwind for the foreseeable future.

Slide seven shows total adjusted non-interest revenue of $114 million, up $8 million from the previous quarter. The increase was led by growth of $5 million in capital markets, which resulted from swap income and $2 million in loan syndication fees. The growth in syndication fees is evidence of why we believe we have opportunities to go upmarket and compete. Kevin will speak more to this shortly.

Broad based growth across other NIR categories was evidenced by our performance in our treasury group and core banking fees and highlighted by our wealth areas that are up more than 25% year-over-year.

In the third quarter, we had approximately $4 million in revenue associated with SBA loan sales and low income housing transactions. In the fourth quarter, we expect adjusted NIR to decline as broad based growth is more than offset by the continued normalization of mortgage revenues, seasonality of our brokerage business, and third quarter gains that are not expected to repeat.

Slide eight highlights total adjusted non-interest expense of $267 million, down $1 million from the prior quarter. A $5 million reduction in third-party processing fees was offset by a $4 million increase in production incentives and additional project spend of $2 million.

We expect a similar level of adjusted non-interest expense in the fourth quarter, with some increases in areas related to increased branch staffing expense, as well as revenue and customer facing projects as we invest for future top line growth.

Key credit metrics on slide nine remain stable, near historical lows. The net charge-off ratio fell 6 basis points to 0.22%, while criticized and classified loans declined 22%. The NPA and NPL ratios were each down 1 basis point. Past dues were flat at 0.13%, excluding the increase from P3 loans.

We expect net charge-offs in the fourth quarter to remain relatively stable. And assuming a similar trend in economic improvement, a further reduction in the ACL ratio, which ended the quarter down 12 basis points excluding P3 loans to 1.42%.

This quarter, the baseline economic outlook improved. However, due to economic uncertainty, our multi-scenario framework included a 45% bias to downside scenarios.

As noted on slide 10, the CET1 ratio declined 12 basis points to 9.63% due primarily to capital deployment for growth in our loan and securities portfolios, as we continue to actively manage excess liquidity. Strong financial performance allowed us to return capital to shareholders through share repurchases and common shareholder dividends.

Through the end of the third quarter, we have completed approximately $167 million of the $200 million share repurchase authorization for the year. And we expect to repurchase the remaining $33 million in the fourth quarter.

We will continue deploying capital to support client growth and facilitate opportunistic inorganic opportunities like third-party consumer purchases, while returning capital to our shareholders.

Our capital position remains strong, and we are well positioned to complete key strategic objectives focused on profitable growth, prioritizing multi-solution client relationships.

I'll now turn it back to Kevin.

Kevin Blair

Thank you, Jamie. On March 3rd, 2020, the Federal Reserve announced an emergency rate cut of 50 basis points. That same day, we unveiled details of Synovus Forward, a plan we created in 2019, that would deliver an incremental pre-tax run rate benefit of $100 million by the end of 2021.

We're excited today to share that our efforts to date have yielded approximately $100 million in pre-tax benefits. Half of the benefit to date comes from expenses, which were front loaded in the plan to better fund the journey forward.

As a reminder, the most significant items to date have come from organizational efficiencies and headcount reductions, a reduction in third-party spend, as well as branch and non-branch real estate consolidation. As a result of these actions, as well as demand management, our adjusted expenses are down $15 million year-to-date or 2%.

Although expense reductions will become a lower percentage of the Synovus Forward benefits in 2022, we will continue to manage with discipline, as we expect inflationary pressures, especially around wages, will impact our overall expense base over the near term.

One of our ongoing initiatives is branch rationalization. We are scheduled to close an additional four branches in the fourth quarter, bringing our total consolidation to 20 locations since January 2020. We have additional closures planned in 2022, as we continue to see the opportunity to optimize the network and do so without having outsized attrition.

While we rank favorably in key metrics, such as deposits per branch and branch proximity, we believe our digital efforts, as well as the shifting behaviors of our clients provide an opportunity to further streamline our delivery through our bricks-and-mortar channel.

And these changes are not limited to branches. Last month, we announced the strategy to optimize our real estate here at our headquarters by selling our own real estate and consolidating our nine corporate and retail locations in Uptown Columbus into three, it allows us to evolve our workplace for the future of work, while reducing our overall square footage by over 60%, leading to a lower run rate expense and greater flexibility for potential future optimization opportunities.

As we move forward, a key focus on expenses will be on optimizing how and where we invest. By delivering ongoing efficiencies in this quickly changing landscape, we have and will continue to reallocate resources from infrastructure to innovation and support functions to revenue producing talent.

Our investments will be governed and prioritized by the objective of maintaining long-term positive operating leverage, which leads to our discussion regarding revenue enhancement within Synovus Forward. Much of the future benefits are predicated on the use of analytics to drive a deeper share of wallet. Enhanced analytics are now firmly in place for our commercial line of business, and we have begun development for our consumer LOB to comment the high touch approach that our team members deliver today. These more timely and actionable insights promote our ability to offer more meaningful advisory capabilities and solutions and better meet the needs of our clients.

A significant portion of the incremental revenue benefit in the third quarter relates to our profitability enhancements, as well as our balance sheet management efforts. Similar to our pricing for value initiative within treasury management, beginning in the fourth quarter of 2020, we began utilizing various analytical tools and capabilities to actively drive deposit costs lower.

Of the 26 basis point decline in deposit pricing that occurred over that time frame, our Synovus Forward initiatives drove additional product and customer level repricing, which represented 3 basis points of that decline, contributing $15 million in incremental pre-tax run rate benefit by the end of the quarter.

Additional balance sheet management efforts have largely been centered around increasing the risk adjusted yield of the loan portfolio. Targeted remixing of a subset of consumer loans throughout 2021 has translated into relative higher yields, resulting in an incremental pre-tax run rate benefit of $16 million.

We remain committed and on track to achieve the cumulative pre-tax run rate benefit of $175 million by the end of 2022 and are confident about the opportunities ahead to achieve those benefits. Consistent with our reporting today, we will provide more detail on each initiative as they are sized and realized.

Some of the future initiatives are a function of our renewed focus on innovation. I'm excited to provide more details regarding new products and solutions later in the year, as we work towards their respective rollout.

Our 2021 outlook on slide 12 remains unchanged from the prior quarter. However, I'd like to share some additional updates on how we expect to end the year. In July, we mentioned that we expected 2021 loan growth, excluding balance change from P3 and third-party consumer loans to be at the low end of the 2% to 4% guidance.

While payoff activity remains a significant headwind, recent productions, client conversations and our loan pipeline leads us to expect loan growth to be in the lower half of our guidance.

Although excluded from the guidance, it's important to note that we've increased third-party consumer loans more than $1 billion year-to-date, and our total loans at the end of the third quarter were up 4%, excluding changes in P3 balances.

Total adjusted revenues are expected at the higher end of the negative 1% to 1% guidance, as the balance sheet management efforts we've taken throughout the year to monetize excess liquidity and reduce the cost of funds are being complemented by broad based fee revenue growth outside of the normalization of mortgage revenues.

Similarly, total adjusted expenses are expected to end the year within the existing guidance of negative 1% to negative 2%, thus providing the opportunity to achieve positive operating leverage. We expect to achieve this reduction, while making longer term investments in talent and technology that support accelerated top line growth.

We also reiterate our capital and tax guidance. The capital guidance assumes we compete - complete the full $200 million share repurchase authorization this year and achieve our loan growth targets. We're also trending towards the lower half of the effective tax rate guidance of 22% to 24%.

Before opening the call for Q&A, let me first thank all of our Synovus team members for their third quarter efforts. There are so many to mention. But I do want to acknowledge our wholesale banking team who generated record levels of loan production, our FMS and treasury and payment solution teams who generated 25 plus percent fee income growth versus 2020 and our community bank for continuing to drive strong core deposit growth.

I also want to reiterate my excitement for our new team members we have on-boarded this past quarter and for those that are scheduled to join us in the fourth quarter. As I announced in the beginning of the call, we will be building out a corporate and investment banking team, which will allow us to move up market a bit into a segment that I believe we have the capabilities and talent to win in.

The team will be built around specific industry specialties to allow for customized and expert advice in providing credit and depository products, as well as traditional capital market solutions.

We'll share more about the progress in this area as well as other build-outs, including our restaurant services division and our expanded Florida commercial strategy over the coming quarters.

Lastly, I'm pleased to share that we will be hosting an Investor Day in early February 2022, our first in many years. During this event, we'll provide clearer, long-term guidance with supporting information from our various business units to show where we're focused on in driving profitable growth.

You'll hear from more of our leadership team, and I believe you'll share the confidence that I have that we will be successfully delivering on our key strategic and financial objectives.

With that, I'll turn the call over to our operator for the Q&A portion.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Brad Milsaps from Piper Sandler. Please go ahead.

Kevin Blair

Morning, Brad.

Brad Milsaps

Hey, good morning.

Kevin Blair

Good morning, Brad.

Brad Milsaps

Good morning. Kevin, just you guys had a nice quarter about loan growth. Just curious if you could just add a little bit of color to kind of the nature of the C&I growth. You know, is it coming from your existing customers or you know, are you going - you're starting to see success with some of your maybe you know, out of market, upmarket type lending that you're looking to do. Just kind of wanted to get a sense of kind of where some of the growth is coming from?

And you know, I know you commented - it seems like you are still conservative with your guidance you know, at least through the end of the year. But just kind of curious, you know, are you encouraged that you can kind of get back to that sort of mid-single digit top rate that you've talked about over the longer term?

Kevin Blair

So yeah, Brad, thank you for the question. And look, we're really excited about what the third quarter was able to prove out from a growth standpoint. We - at the top of the house, the $923 million worth of growth ex-PPP is about 10% annualized. But to your point, if you back out the third party, we still grew our - what we would call kind of our core loans, $660 million or 8% annualized.

Big piece of that, as you mentioned, came from C&I, it was roughly $600 million worth of growth or 14% annualized. And it was really across a bunch of different areas. Not only you mentioned upmarket, there was growth in specialty lending, but there was also growth in our core middle market franchise.

We also saw a tremendous amount of diversified growth across some of the NAICS Codes. We had 5 NAICS Codes that had over $50 million worth of growth, including finance and insurance, health care, accommodations and foodservices, construction and manufacturing. So it was really, really broad based.

When you look at the total production, total production was up about 50% versus where it was last quarter and just C&I. At the same time, we also saw growth in CRE. We saw a 90% increase in production quarter-over-quarter there.

So as we shared at the beginning of the year, we really felt like commercial was going to be the place we had the right to win and where we would grow, and we think the third quarter proved that out.

In terms of being able to maintain that mid-single-digit long term, yeah, we've always felt like we will be able to produce a level of growth that exceeds that of our state GDPs. The question mark that we've had, and it continued this quarter, we were just able to overcome it.

When you look at the level of payoffs that we had at $2.1 billion in commercial, that was about $700 million higher than the nine quarter average. So when you look at what's happening from our client’s perspective, we have a lot of customers who are taking chips off the table because of the prospective change in capital gains, as well as cap rates on the CRE side being very, very low.

So, we believe that we'll be able to continue the momentum on the production side. We think some of these new businesses that we're bringing on board will provide some tailwinds on that, with the real headwinds being the payoffs that we saw this quarter, and we would expect to see those elevated again in the fourth quarter as we close out 2021.

Brad Milsaps

Thank you. And as my follow-up, Jamie, I was curious if you could comment on kind of the impact of GreenSky selling to Goldman on Synovus. I know a little over a year ago, you changed that relationship to where it was less of a balance sheet part for you guys and more of one that impacts fee income.

But just kind of curious what it means for the P&L going forward, presumably if that relationship with Synovus no longer exists?

Jamie Gregory

Yeah, Brad. I mean, it's a great question. You're well aware that our relationship with GreenSky goes back a long ways, and it's been a great partnership between organizations. But also, you're aware that our third-party portfolio has evolved over time as we look for the right assets that fit our strategic priorities.

Within GreenSky, you've seen the relationship evolve from the HFI strategy to an HFS strategy that actually uniquely helped both companies. And so, the relationship has been very close. We're pleased with how we've worked together, so we can both achieve our strategic objectives and priorities.

And we're in conversations with GreenSky as we navigate through their changes, and we're comfortable we will find an amicable solution. I would say it's too early to think about what the future state may look like because it's just uncertain at the moment, but we're in conversations with them, and we feel good about where we are.

Brad Milsaps

Okay, great. Thank you.

Kevin Blair

Thanks, Brad.

Operator

The next question comes from Ebrahim Poonawala from Bank of America. Please go ahead.

Kevin Blair

Morning, Ebrahim.

Ebrahim Poonawala

Good morning.

Jamie Gregory

Morning, Ebby.

Ebrahim Poonawala

And firstly, sincere condolences for the tragedy that you mentioned, Kevin.

Kevin Blair

Thanks, Ebby.

Ebrahim Poonawala

Just maybe to start out at the very last point in terms of the build out of the - I think restaurant finance, and you mentioned the corporate investment bank. How meaningful are those build outs going to be as we think about operating leverage over the next few quarters?

You've been in that 54%, 55% adjusted efficiency. I'm just wondering, are we on track where over the next - course of the next year or two we are moving to the low 50s. Give us a sense of just maybe the cadence of what that investment spend around building out those businesses look like?

Kevin Blair

You know, Ebby, it's a really good question because as we've said in previous quarters, you know, our focus is getting back to a long-term positive operating leverage environment. And for us that's going to be the calibration for how we evaluate how much money we're willing to spend on certain investments.

And so when we look at the corporate and investment banking unit or some of the other build-outs, like the restaurant services division or new talent in Florida, we're going to make sure that when we make those investments, number one, that they have a solid earn back that we look at what that business or product unit would bring to the P&L, and we want to make sure that it's a relatively short payback period.

Two, as we build out some of these units and we'll share that with you, you know, we believe that we'll be able to continue to invest, while finding efficiencies in other areas that will allow us to maintain that positive operating leverage.

So I wouldn't want you to think that we're going to go out and build out these new businesses and it's going to be a side note, as it relates to our overarching goals on the efficiency front.

Now we're not in a position today to give you our 2022 or 2023 efficiency targets. But based on the goal of maintaining positive operating leverage, you should assume that our goal is to continue to push that efficiency ratio lower despite some of these investments.

And the way that we're laddering many of these investments many will start to produce, and that will allow us to start to fund new initiatives and build out the teams at - an even greater scale over time. But to us, it needs to be synergistic to where we're not only growing the bank, but it's helping to fund future growth.

Ebrahim Poonawala

All right. That's helpful. And just, I guess, maybe, Jamie, the third-party partnerships, you mentioned it's about 3% of assets. Remind us how you're thinking about how large it can get? What it was previously when you had both those third-party relationships pre-pandemic?

And just as a follow-up on GreenSky, is the only impact, let's say, if that relationship would be terminated, tied to the held-for-sale balances or are there additional P&L impacts that we should be thinking about? Thanks.

Jamie Gregory

Yeah, Ebrahim. On the third-party, we are very comfortable with that portfolio being at the same level that it was pre-pandemic. And so if you looked at the percentage of loans, we showed a percentage of assets in our presentation today. But if you look as a percentage of loans, it peaked around 6%, in the third quarter of '19, it was 5%.

We're comfortable in that area, and there's no magic to the size of that portfolio. We feel that we are very capable in managing that portfolio. We believe in our partnerships. We've had long relationships with all of them and feel good about where we are and our knowledge of those loans. And so we're very comfortable with that portfolio. Recently, you've seen us diversify the risks embedded in that portfolio by looking at collateralized loans, as well as shorter duration loans.

And so we feel good about the opportunities we're finding there, and it is our intent to continue growing that portfolio as we move forward. But we will only do so if the right - risk-adjusted returns are there.

With regards to GreenSky and the future evolution of that portfolio, I would just say that the two significant components of that are the HFS strategy and the HFI strategy, but it's too early to comment around the potential financial impact in the various scenarios that could play out.

Kevin Blair

But Ebrahim, I would just add - I just want to make sure you have - our held-for-investment there is now less than $250 million. So it's a relatively small balance on our outstanding loans and held-for-investment side. So it has been continuing to diminish over time.

Ebrahim Poonawala

That's helpful. And because one of the big synergies that Goldman obviously sites is on the funding side, so I would assume at some point they want to bring all of that in-house. So thanks for that clarification. And thanks for taking my questions.

Kevin Blair

Thank you.

Operator

The next question comes from Jennifer Demba from Truist Securities. Please go ahead.

Jennifer Demba

Thank you. Good morning.

Kevin Blair

Good morning.

Jamie Gregory

Good morning, Jennifer.

Jennifer Demba

Kevin, wondering if you can expand on your comments on going upmarket and just kind of talk about what kind of loan sizes you are now willing to do versus previously? And if you could talk a little bit about restaurant services, and what that team will do?

Kevin Blair

So Jennifer, as it relates to going upmarket, you know, outside of the expansion into this corporate and investment banking capabilities, our wholesale bank has already built out a syndicated finance arm. This quarter, we had a very large Lead Arranger fee, $1.6 million on a transaction that we led.

And so we believe today we already have the capabilities to go upmarket and originate larger loans over $100 million and sell down those loans. So that would continue under this corporate and investment banking model.

We do want to make sure that as we build this out, we're not going to build a generalized model. We're going to go after industry specialty in the corporate and investment banking space, and that will be predicated based on what's available in the marketplace from a talent standpoint. But also we'll align that with those areas that we think were particularly strong in the Southeast and with our existing banking franchise to make sure that we leverage that.

In terms of hold limits, we really haven't changed our hold limits, that will stay the same. We generally do not keep credits larger than $100 million, and that would not change there. Our total hold levels would not change. It's really just - but we'll go upmarket for larger customers - to be able to sell some of those down.

On the restaurant services business, it was really attracting a team from a super regional bank that has been covering franchise and restaurant businesses nationally. It would be full service, QSR and the like.

We've proven out with things like specialty finance, senior housing, where when we bring in very skilled bankers that have industry expertise, we're able to grow that business. And we think we've been able to do that with the attraction of this team that will focus on restaurant services.

Jennifer Demba

Okay. Thank you.

Operator

The next question comes from Michael Rose from Raymond James. Please go ahead.

Michael Rose

Hey, good morning. And thanks for taking my question. Just wanted to circle back to the revenue guide. If I just take the high end, it implies about a $21 million decline from the third quarter revenues to get to the adjusted full year guidance.

And I understand about $10 million of that's going to be declining PPP fees, given the 8% to 12% step down. Can you just kind of speak to that and what the puts and takes are, it just seems conservative?

Jamie Gregory

So yeah, Michael, this is Jamie. Thanks for the question. As we look at the revenue guide and outlook for the fourth quarter, you are right, there are some revenues that happened in the third quarter that will not likely to recur in the fourth quarter. Paycheck Protection Program, being the first. As you mentioned, we expect that to decline somewhere between $8 million to $12 million in the fourth quarter. Obviously, that's highly uncertain.

But on the fee revenue side, NIR was very strong in the third quarter. And we saw the same broad based growth that we've been talking about for quarters and it's a really good story.

However, there are a few things that happened in the third quarter that are not likely to recur in the fourth quarter. And those include some sales of affordable housing, SBA sales. And then there will also be some seasonal impacts in trust, brokerage and mortgage that could be quarter-on-quarter headwinds.

So we feel good about our overall revenue guidance for '21. We expect to land at the higher end of that range, and we think that we're positioned well heading into 2022.

Michael Rose

Okay. That's helpful. And then maybe just going to the margin, if I exclude PPP fees, it looks like the core margin was down somewhere closer to 8 basis points this quarter. Do you think we're getting to a point where the NIM is going to start to stabilize, particularly as loan growth picks up and the rest of the PPP is forgiven just as we move forward? Thanks.

Jamie Gregory

Yeah. As we look at the margin, I mean, there are obvious headwinds as we move forward just to the headline margin. I know you excluded P3, which we do as well. But that decline in P3 fee recognition in the fourth quarter will impact the headline margin fairly significantly in the fourth quarter.

But when you exclude the Paycheck Protection Program, you have a couple of cross currents. So first is current rates are a slight headwind to both NII and the margin, given current short term and long term rates. But the liquidity environment is a notable NIM headwind that we're working against, as we try to deploy our liquidity and our balance sheet.

Our outlook for the margin, in general remains in the same context we discussed last quarter, with a medium term margin in the 3% area. But we would highlight that the NIM outlook is very dependent on that future deposit growth.

That deposit growth, that incremental liquidity, is generally accretive to NII. But that increased cash on the balance sheet or even if we deploy it to the securities portfolio is NIM dilutive.

So you know, we feel good about our core NII outlook. We believe it points to steady growth as liquidity is deployed into client loans, third-party and securities that should more than offset the rate headwinds at current levels. But we do acknowledge that the liquidity environment can impact the margin pretty significantly.

Michael Rose

Very helpful. Thanks for taking my question.

Kevin Blair

Thank you, Michael.

Operator

The next question comes from Steven Alexopoulos from JPMorgan. Please go ahead.

Anthony Elian

Hi, good morning. This is…

Kevin Blair

Good morning.

Anthony Elian

Good morning. This is Anthony Elian on for Steve. My first question on loan growth. On slide four, you showed that commercial loan payoffs were about $2 billion in the third quarter.

Give a sense of how much of these payoffs are refinancing and staying with Synovus in the funded production bucket as opposed to the funded bucket representing brand new loans to the bank?

Kevin Blair

Tony, that none of those would have been refinanced out. So those are total payoffs so they would have exited the balance sheet.

Anthony Elian

Okay. So the blue bar is a little more than $2 billion, that would represent entirely new production to the bank?

Kevin Blair

That's right. Those are new loans, new originations funded loans. And then on the other bar, that represents payoffs. And as I said earlier, that $2.1 billion in commercial payoffs over the last nine quarters has averaged only about $1.4 billion. So we've seen elevation there.

But when you look at the production side, that $2.5 billion worth of funded production, new loans, it's actually up 70% versus the previous quarter. So despite the fact that we did see elevated payoffs, we were able to overcome that by seeing a much higher increase in production.

Anthony Elian

Okay. Great. And then my follow-up, so you kept the loan growth outlook unchanged at the low end or the low half of 2% to 4% ex-PPP and ex-third-party consumer, which if I just do the math, it would imply a little bit of a slowdown in terms of dollars of growth in the fourth quarter.

Anything particular you're seeing that could lead to loan growth decelerating or is this just a little bit of conservatism baked in here? Thank you.

Kevin Blair

Tony, it's a good question. It's like a - you know, we're looking at a crystal ball and trying to look at all the elements. Our pipelines remain robust. They are still up 20% over where they were entering the year.

They're down a little bit from the beginning of the third quarter just because we had such strong production. So we're very confident in the production side of the equation.

What's the challenges on these payoffs, as we close out 2021, knowing that there is a potential for a change in tax treatment, we're cognizant that there could be elevated activity this quarter that would result in even higher payoff activity.

Now we don't have anything at this point that would show that that's the case, but we want to make sure that as we look into the fourth quarter, we evaluate that as a potential. So that's our guidance last quarter was that we would be at the low end of the range.

We suddenly said in our guidance this quarter that we would be above the low end of the range, so we could move more towards the median. But it really will be a function of what that payoff activity is, not our productivity.

Anthony Elian

Thank you.

Operator

The next question comes from Steven Duong from RBC. Please go ahead.

Steven Duong

Hey. Good morning, guys.

Kevin Blair

Good morning, Steve.

Steven Duong

So just a question on your margin, I guess your interest rate sensitivity table from last quarter, there is the gradual parallel 100 basis point rise in rates. Your NII goes up by 3.2%.

Can you share with us the deposit beta assumptions that you put into that in terms of whether they were fully loaded on the first rate hike or if they were graduated up through that fourth quarter period?

Jamie Gregory

Yeah. As we think about deposit betas in this environment, we expect that deposit betas will be very low - fairly de minimis for the first few rate hikes. Beyond that, we would expect to see something in the area of about a 40% beta as rates go higher from there.

Steven Duong

Okay. So is that in your interest rate sensitivity table in the second quarter?

Jamie Gregory

Yes.

Steven Duong

Okay, got it. And then just my follow-up is just on your expenses. You guys are doing a great job managing the expenses. Are you seeing any signs of wage pressure popping up as you try to manage these expenses?

Kevin Blair

Steven, that's a new headwind. Obviously, everybody sees what's happening with the labor force and potential inflation around wages. We're seeing that as well predominantly in our entry level positions in those folks that make below the median wage here at Synovus, which is right around $60,000. We did, in the third quarter make an adjustment to all of those individuals to give a cost of living adjustment just based on that.

But I think as we're looking at hiring in new talent, we see the cost rising across the board. And I think that's just something that, whether it's the financial services industry or any other industry, I think it's just part of the equation.

And part of what makes it important to build a place that people want to work. When you look at our attrition this year, annualized, we're still at about 23% in total attrition. If you compare that back to 2019, we were roughly at 19%.

So although we've seen an increase in attrition, it's not at the levels that some of our peers are experiencing from some of the benchmarks I've seen. So I think, for us, part of it is going to be to compete from a wage standpoint.

But as we all know, there's more to a job than just what you earn. And so we're trying to make sure that we drive better levels of engagement through development, career development, to make sure that we're offering perks outside of wages. But ultimately, we agree that you're going to see some inflationary pressure on wages as we move forward.

Steven Duong

Yeah. I appreciate that. And right now, it's just occurring at the entry level, it hasn't permeated much further up. Is that correct?

Kevin Blair

I think it's more pronounced at the entry level just because you have higher turnover there, so you are seeing the new wages come on. What's changing, I think, for all companies is the ability to work remote has widened people's sandbox, so that they can get a job, working in New York out of Atlanta, Georgia or Columbus, Georgia.

And so that, in and of itself, increases potential the cost of employment just because there's new entrants into the marketplace to be able to compete for that talent.

So I think you're going to see it across the spectrum where we've seen it to date just because of a higher level of attrition has been on those entry level positions.

Steven Duong

Great. I appreciate the color. Thank you.

Jamie Gregory

Steven, let me jump in, this is Jamie. On that deposit beta, the beta we have in there is 35% for - as rates go up, the 40% that we had is more through sites.

Steven Duong

Got it. Appreciate it. Thank you.

Jamie Gregory

Yeah.

Operator

The next question comes from Brody Preston from Stephens Inc. Please go ahead.

Brody Preston

Hey. Good morning, everyone.

Kevin Blair

Good morning, Brody.

Brody Preston

Hey, Jamie, just on the expense guidance, you gave color around the revenue guide that you expect to be towards the higher end of the guidance. On the expenses, you all are trending towards the better end of that guidance year-to-date.

And so as I think about the fourth quarter run rate, just given some of the fee income items that might not reoccur and maybe it's another slower mortgage quarter, is there any reason to think that expenses should inflect higher in the fourth quarter? Or should we continue on sort of a downward trajectory here?

Jamie Gregory

Yeah. We believe that expenses in the fourth quarter will likely be relatively stable to the third quarter. There are some typical inflationary pressures on NIE, but we also have - and we also have incremental spend for growth.

And so we have those, we have some tailwinds that come through on some of our Synovus Forward initiatives. And so as we balance all of those out, looking into the fourth quarter, we expect NIE to be relatively stable to the third quarter.

Brody Preston

Got it. Okay. And then my follow-up is a little bit of a multi-part question here, just around liquidity deployment. You guys put a decent chunk of liquidity to work. And so I guess I wanted to ask two questions as it relates to the securities portfolio.

One, it looked like that was maybe weighted towards the back half of the quarter kind of comparing the average balance in the period end a little bit, one, is that the case?

And then two, the security yields stabilize, and so you know, what's the kind of the incremental yield that you're putting on the book currently?

Jamie Gregory

Yeah, good questions. And you're right, generally about the timing and the going on yields are really, really in the context of portfolio yields. So our book yield on the portfolio in the third quarter was 1.45%. Our going on yields are in a similar context between 1.40% [ph] and 1.50% [ph]

But you can also see that we - our strategy in the securities portfolio evolved a little bit in the third quarter, and we have about $650 million of investments that have maturities less than 1 year.

And so we're trying to opportunistically deploy that liquidity in the securities book in areas that don't have as much duration risk as a conventional mortgage. And so that's one of the strategies that we're currently deploying.

Brody Preston

Got it. Thank you very much for taking my questions.

Jamie Gregory

Yeah.

Kevin Blair

Thank you, Brody.

Operator

The next question comes from Christopher Marinac from Janney Montgomery Scott. Please go ahead.

Christopher Marinac

Thanks. Good morning. Kevin, I also echo condolences for Jonathan's loss and all the related parties. I wanted to ask about your digital evolution at Synovus. And it seems that a lot has happened in the last couple of months.

And I'm just curious if you were to make this a baseball game, what inning do you think you are compared to where you really want be in future innings?

Kevin Blair

The baseball analogy, Chris, is hard because I think unfortunately this is a game that doesn't play in a nine inning framework. I think it's something that this game goes on forever. It may be one of the ones where it's a timeless game, kind of like maybe some of these cricket games that go on for days.

But the reality is we made great progress. We focused on starting with our consumer platform, My Synovus, to enhance that several years ago, we rolled it out. And if you look at the Apple Store rating today on our app, it's 4.8, which is one of the highest in the industry.

And I think that's a testament to our digital team and our consumer team working to make sure that the functionality and capabilities we have within that platform meets the needs of our customers. And it's agile and pliable so we can continue to add new functionality over time.

And I think you see that with our digital enrollment, adding Zelle to the functionality last year, moving more people to paperless. All of the things that you want to see in the digital platform.

Our focus on the consumer side really is about taking the online account origination to the next level. We've been very successful on the mortgage front, originating more than 70% of our mortgages via our digital application. We're seeing more traction on the depository side, and now we're working more towards the consumer lending platform.

So you'll - I would tell you that if you are looking at the area we're most focused on, it's online account origination, enhancing that capability and making it even easier and faster for our customers to apply for our products.

On the commercial side, we're excited about the Synovus Gateway platform. As we've shared, we've migrated about 90% of our customers over the platform. We have one additional wave in the first quarter of next year. And we think that platform in and of itself is going to create a better user experience. And it's going to allow us to continue to add new products and functionality that our customers not only need, but will allow them to reduce their back office expense that we'll be able to automate many of the functions that they're doing, so we're excited about that. As I think you look in the future, on commercial, it's more about products and solutions and making sure that we continue to add there.

So digital for us will continue to be a part of our ongoing road map. I think you'll start to switch from service into more of a sales capability. We noted on the prepared remarks that adding insights, both on our commercial side, which we've already done. We're moving towards that insight driven model on the consumer side that will allow our bankers to offer advice more frequently, and will allow the technology to queue up our customers for exciting offers or opportunities to improve their financial well being. So there is a lot of work to go here. But I think we feel like we have the right focus, and we have the right resources that will continue to drive ongoing investment.

Christopher Marinac

No, that's great. I appreciate all the background there. And I guess, in addition to the positive operating leverage that you and Jamie both talked about this morning, is it fair that the per transaction cost for Synovus is going to be a lot different in future years than what we've seen in the past?

Kevin Blair

Absolutely. I mean we talk about internally radically automating our platforms to make it not only - to cut the cycle times, but to reduce the expense. In addition, when you think about the costs associated with our bricks and mortar, we'll continue to consolidate that network and have the opportunity to reduce that cost of operations and ultimately then reduce our cost to serve. But that has to be a key component of positive operating leverage.

You won't do it just from asset sensitivity. You won't do it through balanced augmentation. You're going to have to do it by growing your business, which is a keen focus of ours, but at the same time, cutting your cost to serve.

Christopher Marinac

Great. Thanks, again for the time this morning.

Kevin Blair

Thank you, Chris.

Operator

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

Brady Gailey

Hey, thanks. Good morning, guys.

Jamie Gregory

Good morning

Kevin Blair

Morning, Brady.

Brady Gailey

I wanted to start with the reserve, you came into this year with a reserve of a little over 180 basis points. As credit has improved and fears of COVID have gone away, it's now down about 140 basis points.

Assuming credit continues to hold in and get better from here, how much further down do you think that reserve can release to?

Jamie Gregory

Yeah, it's a great question. And as you look at our credit metrics, you can see that we're not seeing credit deterioration in our loan portfolio. So we feel really good about where we are and what we have line of sight into, on the credit side is strong. And when you look at the employment outlook overall for next year for 2022, our base outlook continues to improve.

However, we do believe that the uncertainty in the economic outlook is - remains elevated, and we quantify that as a higher weighting to downside scenarios. We have that at 45% this quarter and that impacts the allowance.

And so when you look at just the base case scenario, over the past few quarters, we've seen a sequential improvement in life of loan losses in that scenario. However, we do use a multi-scenario framework. And downside scenarios kind of - they remain as severe as they were in the past. And so that weighting impacts the rate of improvement of your allowance to loan ratio.

So that's kind of what's been driving the decline and why the decline is - may be different than what you're seeing elsewhere. But we do believe that our Day One allowance is indicative of where we should return in a more normalized economic outlook, assuming that the loan mix remains the same. And so we are seeing loan mix evolve, but - and that could result in even better than Day One allowance to loan ratio.

But those are the main puts and takes. I mean there's nothing that we see today that's concerning to us on the credit side. Our base case scenario continues to show improvement. And we - if we can reduce the uncertainty in the outlook, we believe that, that will drive further allowance to loan ratio improvements.

Brady Gailey

And Jamie, remind us where was the Day One ratio?

Jamie Gregory

1.06%.

Brady Gailey

Okay. And then my follow-up, I wanted to ask just about share buybacks, not necessarily for the fourth quarter, I think we know what you guys are going to do there.

But as you look longer term, in the past several years, you guys have been pretty active in the buyback. But growth feels like it's inflecting for the industry. I'm sure it looks like it's inflecting for you all in the third quarter with the uptick.

When you look longer term, as growth kicks in, does the buyback take a backseat to that, and should we expect a lesser amount of buybacks longer term, just with you guys focusing more on deploying that capital through growth, which I know is you all preference?

Jamie Gregory

Well, you're exactly right on that being the preference and our strategic priority. I feel like, over the course of 2021, we've all been scanning the horizon with our vernaculars looking for growth in the third quarter. We feel good about how the team performed and what we delivered.

And so that's our priority, and that's our target for deploying that excess capital generated through earnings. But - when we look at longer term, we will continue to target kind of the 30% to 40% dividend payout ratio. And then beyond that, it really is balanced between risk-adjusted returns on growth on core client growth as well as third-party and share repurchases.

And so our intent is to deploy as much of that capital as possible to our clients. And so we'll see if this momentum continues, we believe it will. But that's our intent for today.

Brady Gailey

Got it. Thanks, guys.

Kevin Blair

Thank you, Brady.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Kevin Blair for any closing remarks. Thank you.

Kevin Blair

Thank you. And thanks, everyone, for your attendance today and for your ongoing interest in Synovus. As I close, I do want to congratulate once again our Head of Treasury & Payment Solutions, Katherine Weislogel, and our Chief Strategy and Customer Experience Officer, Liz Wolverton, for their recognition among American Bankers 2021 Most Powerful Women in Banking to Watch.

It's hard to believe it's been nearly 130 days since I've taken the CEO role. It's been an extremely smooth transition. And Kessel and I continue to talk regularly as he actively serves in his new capacity as Executive Chairman. I want to thank our entire team for fresh perspectives, for constructive challenges to new ideas and opportunities, for embracing change and for the excitement about our bright future.

Like many of our peers, we're continuing to monitor COVID trends and preparing for the next phase of the future of work. Despite those continued challenges, our team has been unwavering in their ability to serve clients, connecting new relationships and growth opportunities and finding ways to care for each other and our communities.

Based on our results this quarter, as well as the overall customer sentiment, we remain very optimistic that we'll continue to see a constructive economic environment as we move into the fourth quarter and into 2022, and this will continue to serve as our platform for our focus on growth.

In the meantime, our team is heads down keenly focused on making the right strategic investments in both our core foundational elements or areas and understanding that we must make room for transformational opportunities that make us more competitive, more efficient and valuable to our clients, prospects and our stakeholders. We look forward to these future opportunities and continue to tell our story and deliver on our commitments.

But if you allow me, I wanted to end today's call with one of the guiding principles that Jonathan Rosen created for his Global One business, as I believe it's a fitting way to conclude our call and also to recognize him for his many contributions.

All of his principles were established and they were very concise but powerful. This principle I chose today was number nine out of 10, and it was titled with purpose. And it was - it went, think strategically, act tactically, what we do each day must advance our strategy, if not, we are just a day older. So Jonathan, my friend, thank you for that sage advice. We will not let each day go by and realize we are just a day older. We will advance our strategy.

And with that, operator, we'll close out the call.

Operator

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