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Synovus Financial Corp. (NYSE:SNV)

Q2 2013 Earnings Call

July 18, 2013 5:00 pm ET

Executives

Patrick A. Reynolds - Director of Investor Relations

Kessel D. Stelling - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Synovus Bank and Chief Executive Officer of Synovus Bank

Thomas J. Prescott - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Synovus Bank and Executive Vice President of Synovus Bank

Kevin J. Howard - Chief Credit Officer, Executive Vice President, Chairman of Credit Risk Committee, Chief Credit Officer of Synovus Bank and Regional Chief Executive Officer of Synovus Bank

Roy Dallis Copeland - Chief Banking Officer, Executive Vice President, Chief Banking Officer of Synovus Bank and Executive Vice President of Synovus Bank

Analysts

John G. Pancari - Evercore Partners Inc., Research Division

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Erika Penala - BofA Merrill Lynch, Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

Christopher W. Marinac - FIG Partners, LLC, Research Division

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Operator

Good afternoon, ladies and gentlemen, and welcome to the Synovus Second Quarter Earnings Conference Call. [Operator Instructions] Now I would like to turn the floor over to your host, Director of Investor Relations, Pat Reynolds. The floor is yours.

Patrick A. Reynolds

Thank you, and thank you all for joining us on the short notice for our call today. During the call, we will be referencing the slides and press release that are available within the Investor Relations section of our website at synovus.com. Kessel Stelling, Chairman and Chief Executive Officer, will be our primary presenter today, with our executive management team available to answer all of your questions.

Before I begin, I need to remind you that our comments may 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 as a result of new information, or other developments, or otherwise, except as may be required by the law.

During the call, we will discuss non-GAAP financial measures in reference to the company's performance, and you can see the reconciliation of these measures in our GAAP financial measures in the Appendix to our presentation.

Finally, Synovus is not responsible for and does not edit or guarantee the accuracy of earnings teleconference transcripts provided by third parties. The only authorized webcast is located on our website. We do respect the time available this afternoon and desire to answer everyone's questions. [Operator Instructions]

And now, I'll turn it over to Kessel Stelling.

Kessel D. Stelling

Thank you, Pat, and good afternoon to all of you all. So I want to add my thanks to all of you for joining us on short notice. And by now, I hope you got a chance to review both our earnings announcement that we released after the market closed today and also the announcement concerning our plans for TARP redemption and the capital actions associated with that plan.

I'll refer you to Pages 19 and 20 in your Appendix. As we consistently stated, we believed that the major component of our TARP redemption would be from internally available funds. And I think you'll see that's the case as we've received approval to dividend $680 million from Synovus Bank to the parent company as part of our plan to fully redeem the approximately $968 million of TARP preferred stock. Additionally, as part of this plan, we've announced an offering to issue a $185 million of common stock as well as a plan to $130 million preferred stock offering.

While I'd like to spend our entire call today discussing our announced TARP redemption, the fact that we've launched a securities offering requires that I keep my remarks on that topic to a minimum. However, I do want to share just a few thoughts on this with you now.

Today, the announcement of our planned TARP redemption represents the culmination of our journey to return Synovus to a position of strength that we have discussed for some time. Over the last several years we've laid out for our shareholders, our regulators, our customers and our team members a very clear, deliberate and aggressive plan to return Synovus to sustainable profitability. This plan includes taking significant actions to strengthen credit quality, to stabilize and remix the balance sheet and improve operating efficiency, while investing in the talent and technology that will enable us to support growth and enhance the customer experience. We've said that the execution of the plan would lead to confidence and sustainability of our company's future profitability, as well as continued improvement in credit quality, and that the reversal of our DTA valuation allowance and TARP redemption would follow from that.

As you know, we announced the reversal of the DTA evaluation allowance in the fourth quarter of 2012, and in today's announcement, regarding TARP redemption in the third quarter as the next step in the execution of this plan.

We've engaged in a continuing dialogue with our regulators about the necessary steps that will enable us to redeem TARP since the return of profitability in the third quarter of 2011, all of which have factored into the execution of our plan to improve credit, to decrease operating expense and strengthen our capital position. Over the past 18 months we have carefully considered the mix of fund we intend to use for TARP redemption in light of assessment of our capital needs, liquidity, regulatory expectations and growth in the future. The size of the offerings announced today is based on discussions with regulators and management assessment of the appropriate levels of Tier 1 common equity, Tier 1 leverage and other capital ratios.

Our Tier 1 common equity and Tier 1 leverage ratios pro forma for the offerings and TARP redemption would be 9.74% and 8.72%, respectively. Following the offerings and the planned redemption of the TARP preferred stock, we believe that our solid capital position will provide us the flexibility to grow our balance sheet, as the economy continues to improve and capitalize on future strategic opportunities.

Currently, the TARP preferred stock, including dividends and accretion of discount, reduces net income available to common shareholders by approximately $59 million per year. After TARP redemption, the annualized benefit from the elimination of this cost, net of the impact of the above transactions to be undertaken to facilitate the redemption of TARP is expected result and a net increase and diluted earnings per share of approximately $0.04 based on annualized 2Q'13 earnings.

I'd also note that after we redeemed the TARP preferred stock, the warrants associated with the treasury TARP investment will remain outstanding. We intend to evaluate the potential repurchase of these warrants directly from the treasury or through anticipation in a subsequent auction process, which may or may not be successful.

As I'm sure you understand, there are many questions you might want to ask us on this call that we will not be able to answer due to the pending securities offering, but we do want to give you a very clear picture about our second quarter performance. So with that, I'll take you to Page 4 in your deck and talk about the second quarter, before we open the floor for questions.

I think you'll see, as evidenced by the slide, momentum continues during the second quarter. Pretax income of -- was $72.9 million, up $26.4 million or 57% versus first quarter pretax income of about $47 million. And up $35.6 million or 95.2% over the same quarter a year ago.

Net income available to common shareholders was $30.7 million, $0.03 per diluted common share, compared to $15 million or $0.02 per diluted common share for the first quarter '13 and $24.8 million or $0.03 per diluted common share for -- for the second quarter of 2012. I'll remind you that the 2013 earnings are fully taxed at 37% while the second quarter '12 earnings reflected a $2.1 million tax benefit.

Again, another big story of the quarter: credit improvement. Certainly, a key driver of higher profitability. Credit cost of $24 million declined, $25.3 million or just over 51% from $49.3 million in the first quarter of '13 and decreased $46.4 million or 66% from the same quarter a year ago.

Another big story at the end of the quarter was total loan growth. Our loans grew $240.4 million sequentially or 5% on an annualized basis and we'll talk a little bit more about the makeup of that growth on a later slide.

On Page 5, again graphically, we just wanted to illustrate those credit trends that saw such strong improvement: credit cost; net charge-offs; NPL inflows; NPLs. I'm going to go into more detail on each of these items in the following slides. But I think they provide a great graphical illustration of the across-the-board improvement we need to see in our credit card folio.

In addition to the metrics shown here, just a few other key performance metrics that improved and are worth mentioning: special mention low declined over $600 million or 37% over the second quarter of '12 and approximately $230 million linked quarter; substandard accruing loans decreased $457 million or 43% compared to the same quarter a year ago and almost $50 million over the prior quarter; and our exposure to higher risk segments of residential C&D and land continues to decrease, down 85% from its peak at the end of 2007; loan loss reserve remains healthy at 1.71%. You'll find additional detail on each of these items in the Appendix.

On Slide 6, to dive a little bit more into credit cost, again, you'll see credit cost experience a significant improvement; 51% down from the, again, $49 million in the first quarter. And key contributors there, a larger volume of recoveries, better results on disposition, lower mark-to-market costs and favorable migration trends. We're hesitant to guide quarter-to-quarter, but we do believe that credit cost in the second half of the year will be slightly better than in the first half.

Our net charge-offs were 47% lower than the second quarter than in the first, coming in at about $30 million or 61 basis points; compared to $57 million or 1.18% in the first quarter. We had guided previously that we see charge-offs fall below 1% in the second half of the year. We're pleased to have achieve these milestone earlier than expected, and I think really this is the first time that charge-offs has been below 1% since before the credit crisis. Again, some of the same factors that drove credit cost led this improvement, increased recovery and lower mark-to-market losses and better realization on assets sold.

On Slide 7, I think the header says it well: NPL inflows decreased 46.2%, NPLs declined 36% from a year ago. Again, inflows of $67 million in the second quarter represented a 20% improvement over the first quarter, almost 40% over the same quarter a year ago. We had expressed confidence in the fourth quarter, then again last quarter. Our inflows will remain low and that we talked about the makeup of our portfolio. And we had very few large credits. I need to special mention our substandard at the time. We had 2 substandard accruing and 6 special mention credits greater than $20 million. At the end of this quarter, we now only have 3 special mention credits greater than $20 million, with the largest being approximately $30 million, and 2 substandard accruing credits over $20 million, with the largest at approximately $40 million. Again, we anticipate NPL inflows will continue to improve overall. We could see occasional bumps based on timing and seasonality.

Nonperforming loans ended the quarter at $483 million, or 2.47%, which is a 36% improvement over the second quarter of '12 and a 6% improvement over the first quarter of '13. We believe that this number will trend downwards toward 2% or possibly below 2% by the end of the year.

Page 8, just a quick snapshot of past due. We're very pleased last quarter at 0.46%, and this quarter at 0.41%. That continues to give us additional confidence on our positive credit outlook, as our portfolio continues to perform according to our expectations.

Slide 9, I think a good graph of our portfolio by risk grade. Past rated loans increased $544 million from the first quarter. Past rated loans now represent about 89% of our total loans compared to 82% just a year ago. Again, as I said, past rated loans increased $544 million and the substandard special mention and nonperforming loans had substantial decline again, now representing only 11% of our portfolio compared to 18% a year ago. So, again, a good snapshot of the distribution by risk grade there.

Slide 10, I previously mentioned loan through $240 million sequentially, 5% annualized. I think the better part of the story, or as good a part, is that the growth was broad based across many categories. Growth in C&I certainly across many industries. The growth occurred primarily in our largest markets: Atlanta; our major markets in South Carolina; Birmingham; Tampa, as well as large corporate lending.

C&I loans grew $185 million or 8.2% annualized. Retail loans grew almost $79 million or 7.9% annualized. CRE climbed to $20.4 million. Again, I'll call your attention to the graph. You may remember that CRE had peaked at 46%. We had guided over the last couple of years our intent to move our percentages to a 65% C&I retail and maybe 35% CRE. And that now stands at 68% C&I in retail and 32% CRE, as our bankers continue to do a great job penetrating our markets. We've continued to invest in talent and growth strategies in our major markets and I think those efforts, as you see, are paying off as we focus on relationships in all of those markets.

Slide 11, core deposits. We are $144.1 million from the first quarter. $36.1 million of that was from a Sunrise Bank transaction, which we announced in the second quarter. Core deposits, excluding time deposits, increased $249.1 million versus the first quarter. Again, that $23 million of that was from the Sunrise Bank transaction. And again, as a company and our bankers continue to emphasize relationship banking and relationship accounts, and we are very pleased with both the growth and the mix of our deposit base.

On Slide 12, our net interest income, stable. The margin down slightly on higher liquidity. Net interest income increased $2.3 million versus the first quarter due to loan growth and a higher day count. Our modest NIM decline was 4 basis points versus the first quarter as expected. About 3 of those basis points were actually due to higher liquidity levels. Yield on earning assets, 3.88%, down 7 basis points. Effective cost of funds, 49 basis points, down 3 basis points versus the first quarter. Our cost of core deposits, importantly, 28 basis points, down 2 basis points from the first quarter, down 13 basis points from the second quarter of 2012. And we expect our net interest margin to remain stable in the back half of the year.

On Slide 13. A few highlights on fee income. Noninterest income increased $371,000 from the first quarter. We've gotten $11.4 million from the same quarter a year ago. That was driven, though, primarily, by the $8.2 million decrease in private equity investment gains and $2.8 million decrease in investment security gains, again over the same quarter a year ago.

Core banking fees, $31.6 million, up $449,000 versus the first quarter of $148,000 over the same quarter a year ago. The year-over-year increase reflects the benefit from fee income initiatives implemented in the second quarter of 2012.

Service charges on deposit accounts down slightly $326,000. Bankcard fees up $774,000 from the first quarter, reflecting seasonal increases, as we expected the mortgage banking income remains strong, up $420,000 from the first quarter, down $645,000 from the second quarter a year ago. We certainly expect a decline in mortgage revenues during the back half of '13, as others in our industry have. But again, the mortgage revenue is not a tremendous driver of our overall performance, and we think we can manage the decline very well.

FMS revenues, which include trust, brokerage, global creative, financial and many of our support companies -- our family office, which you remember was recognized by Bloomberg as one of the top 50 in the country just last fall. Those revenues were stable in the first quarter, increased $1.7 million or 9.5% year-over-year, again reflecting the strong and diverse source of income there. And we continue to make strategic talent additions in major markets for both mortgage and FMS business lines.

Slide 14, adjusted noninterest expense, down 6.3% versus the second quarter a year ago. Noninterest expense decreased $1.1 million versus the first quarter, $227.1 million or 13% versus the second quarter of '12. Our adjusted noninterest expense increased $4 million to 2.4% versus the first quarter, primarily driven by a $3.3 million increase in professional fees and elevated level of miscellaneous loss items, which we do not think will reoccur again. Compared to the second quarter of 2012, our adjusted noninterest expense is down $11.2 million or 6.3%.

We continue to do a good job managing our expenses. Headcount is down 398 positions, or almost 8%, since the second quarter of 2012. Our $30 million, previously announced expense reduction initiative is on target. And we continue to review additional opportunities there. As I've said many times before for our company, and you will see continued efforts there, and we expect a decline in adjusted noninterest expense during the back half of '13 from the second quarter 2013 run rate.

On Slide 15, call your attention to our solid capital ratios and believe you would agree. Capital levels continue to build. And again, I won't go through all of them. But you can see Tier 1 capital, 13.49. These are pre-TARP adjusted numbers, I'll call your attention to that. Tier 1 common 8.97. Total risk-based, 16. And again, you can read the others for yourself.

I'll also better call your attention to the bottom of that chart and you'll see that we, at the end of the second quarter, have $675 million remaining of a disallowed deferred tax asset, and that will certainly bolster capital levels as it accretes into regulatory capital in future periods.

Slide 16, again, just a reminder of the second quarter '13 developments. Some of which we might have talked about on the last call but some happen after that in April of 2013. The Federal Reserve Bank of Atlanta and the Georgia DBF lifted, our parent company Memorandum of Understanding, we set the time we expected the FDIC would follow suit. And in May of 2013, the FDIC and Georgia Department of Banking did lift the Synovus Bank MOU. And then in May of 2013, we also completed the FDIC-assisted acquisition of approximately $57 million in deposits from Sunrise Bank. Again, that was a deposit only, no loans, no real estate transaction.

I think in summary -- I know you're going to have a lot of questions -- in summary, I'll call your attention to Slide 17. As I've said before and I believe today, this company is well positioned for the future. We are a strong banking franchise coming out of a long very tough period, but a strong banking franchise and a thriving geography throughout our 5-state footprint. I think our numbers prove that it's a great model driven by relationship based banking. We're consistently recognized for customer service excellence in retail, middle market and small business banking, and we're growing our market share and certainly in markets across our southeastern footprint.

Our strength in balance sheet, I think, is undeniable, as we continue to de-risk the balance sheet by reducing exposure to the high-risk asset classes. We've improved revenue generation capacity from our balance sheet remixing and rightsizing of our expense base, and we certainly have a solid capital position, which helps us create the solid operating foundation and a great segue to our roadmap for the future.

Again, we have great customer growth, expansion, retention strategies tailored in the markets we serve. We had some very seasoned talent additions to add to our just very loyal group of bankers that will allow us to match high growth opportunity markets and support new and emerging business lines.

As we've said, our investment in people both new and old, not by age, but by length of time here, our investment in people and partnerships are our strongest differentiators. And I think our investment in customer experience and growth strategies through our product and technology enhancements continue to pay big dividends for our company.

So our team is certainly not celebrating today. We have executed a step in the plan, which we laid out many quarters ago, but I will tell you, the team is energized and ready to go to work tomorrow to continue to execute on many strategies that we have laid out for you here today. But at this time, operator, I'll be happy to take any questions from any of the callers on the line.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from John Pancari with Evercore Partners.

John G. Pancari - Evercore Partners Inc., Research Division

Can you help quantify the amount of excess cash you have on the balance sheet now post the $680 million that you're going to use for TARP? I guess by my math, looking at the unencumbered piece could be around -- about $900 million or so that you could redeploy. So I just want to help -- if you can help quantify that. And then if you could talk about the expected redeployment or reinvestment of that cash?

Thomas J. Prescott

John, this is Tommy. You're certainly -- pro forma based on quarter end with the Fed balance approaching $1.5 billion is the main source of that test liquidity. I'll tell you your math is very close, it's obviously going forward on moving parts that will make that move around so that's a good target. I guess the other part of that question might be the parent company cash and the proceeds of this transaction will slightly bolster the little over $200 million that's sitting in the parent right now.

John G. Pancari - Evercore Partners Inc., Research Division

Okay, all right, that's helpful. And then I guess if you could just talk about the timing of the expected redeployment of that cash. Are you going to look more opportunistically at the bond portfolio given the steeper curve or purely organic into the loan portfolio?

Thomas J. Prescott

Well, we'll utilize excess cash as part of the TARP repayment. And over time, I think it's reasonable to take the rates moving on the bond portfolio. We'd love to pull that up somewhat out or dependent on the flow and the loan demand that's out there.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. And then just one other follow-up. Is the -- the amount of environmental cost in your P&L, can you just help quantify that again? The total amount of credit related cost excluding the provision that are in your operating expenses right now, that could eventually decline?

Kevin J. Howard

This is Kevin, John. I'll take a shot at that. Our other credit cost that are not provision related, I guess, for around $11 million this quarter. About $7 million, $7.5 million of that was ORE related and the other was -- other credit cost related to problem loans. We do think both of those will work down in the second half, I think we got it $10 million to $15 million in that total number, the first half of the year, I think it was there. I'll look at that headed more toward -- on the lower side of that in the next couple of quarters. If that other cost is not ORE related or provision related, it was about $3.5 million, I think it will work down. So should the total there is probably $10 million or even better before the end of this year.

Operator

We'll take our next question from Kevin Fitzsimmons with Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Just a couple quick questions. Number one, the -- how did the rating agencies play in this, Kessel? I know that -- I would assume TARP has been something they've been waiting to be dealt with. And what do you think the timing is on -- that they could step in and take you guys back up to investment grade with this development?

Kessel D. Stelling

Kevin, probably the best way I can answer that is I truly can't predict what the rating agencies will do. We have certainly done our best to bring the ratings agencies up to date on our performance and our plans, and we maintain a very close contact there. I think Tommy said it better than me before and I don't want to appear critical of any of them, but sometimes they're a little quicker to take you down than they are to take you up. I would not want to predict their timing, but we have, again, laid out our plans and our performance for them in a very clear way, and I'll just have to leave it up to them as for the timing.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then just a quick follow-up. I just wanted to clarify. So your statement in the release that getting rid of the TARP dividend but also taking into account, I guess, this -- the common offering, and I'm assuming also the preferred offering, you're calculating a $0.04 per share increase to annualized EPS. Is that how to interpret that?

Kessel D. Stelling

Yes. We've in that same calculation, calculated an opportunity cost of the $680 million that we'll give up. Not that it’s been earning a lot, but it's a combination of that number, again, plus the additional shares, plus the expected cost on the preferred offering.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

And I'm sorry, what was the opportunity cost you mentioned?

Thomas J. Prescott

The opportunity cost is the $680 million that's sitting, earning 25 basis points at the Fed. We ramped that opportunity cost up a little bit, but we considered it in the calculation of the $0.04.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

I see. Okay, okay. And I was just going to ask if you've done something similar to -- with tangible book at period end? I see AOCI must've knocked that down a little, but have you kind of netted all these items together? And I'm sure we can all do that, but I just wondered if you've done something similar?

Thomas J. Prescott

It's actually a pro forma on the capital ratios post-TARP that are shown in the Appendix of this document.

Operator

We'll take our next question from Ken Zerbe with Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

First question I have, just on credit costs. I know this is kind of a really tough question to answer. But when you think about credit costs going forward, was there anything unusual, say, in this quarter? Where do you see total credit costs over the, say, the back half of the year? And I just asked because obviously with the NPA sale, a couple of quarters ago, provision was still high. I thought it would have come down, but it didn't. But now, it came down a lot. Was it a lag issue? Are we at a kind of a sustainable level at this point or is there something that we need to consider?

Kevin J. Howard

Ken, this is Kevin. Kessel mentioned, and we believe this, in the second half of the year will be less credit cost total. I think we're $73 million in the first half. We think that will work then -- I think in the second half of the year will be a little better than the first half. I think the first half of next year will be a little better than the second half. We won't -- it may not go exactly quarter-by-quarter. The number's a lot lower. There could be some bumpiness down there. In this particular quarter, we had -- Kessel mentioned that we had good recoveries. That's not always a given quarter-to-quarter, but we do believe we'll get our share of recoveries over the next 12 months. And so that's kind of where we we're at with credit cost. We think ORE expense and provision, again, second half of the year lower than the first half of the year.

Ken A. Zerbe - Morgan Stanley, Research Division

Got it. Okay, that helps a lot. And then the other -- the last question I have. Just -- and now that you've repaid TARP, or will repay TARP, does it make you more likely or more interested in pursuing other small bank acquisitions?

Kessel D. Stelling

Ken, I'm not going to get myself in that trap today. Again as I said before, the Sunrise was certainly not any kind of strategic departure. It was Synovus playing its role in the orderly liquidation of a bank that needed to, again, be dealt with. But I do think over time, as we've said, there will be opportunities like that. It is not what our focus is day to day. Our focus is on continued improvement in credit, continued improvement in efficiency and growing our balance sheet internally as evidenced by this quarter's performance of $240 million loan growth. But I think it would me wrong for me to say never, but I do think there will be opportunities down the road to do transactions that certainly have little to no risk for our company, but allow us to leverage the scale we have, and the expertise we have, that certainly has demonstrated a very long and successful record of resolving problem assets. So short answer is, again, not part of our core strategy, but certainly opportunities should present themselves down the road, and we'll be very cautious about pursuit of those.

Operator

We'll take our next question from Erika Penala with Bank of America.

Erika Penala - BofA Merrill Lynch, Research Division

My first question is on what we should expect on the loss trajectory? I appreciate the guidance on the provision for the second half of the year, but what we've been seeing from your peers all year is that the losses continue to come in much lower than we're expecting. So I guess my real question here is what do you think a normal loss range for Synovus is going forward? And also, how long do you think Synovus could operate subnormal for as the recovery of the balance sheet continues?

Kevin J. Howard

Yes, from a loss standpoint -- Erika, this is Kevin. Again, we think credit cost are working -- hard to get to a normalized cost right now. We still got some work to do. We're still at 3%, a little above that on NPAs. But we're going to still spend some money to work down those problem loans. We're doing that pretty efficient. You can see the credit cost are going in our direction. But at this time, and no more than right-guessing at it just based on historical and basically we believe, we'll model too. Can't really tell you when it will be. Our cash pay 35 to 45 basis points. Somewhere in there near is what I'm thinking. And so that's -- that's my best guess at this point, but we still got some work to do on getting to normalized credit cost.

Erika Penala - BofA Merrill Lynch, Research Division

Got it. And my follow-up question is to on the ratings agencies. Are there any potential opportunities once you finally get the upgrades in terms of balance sheet restructuring that could be accretive to your P&L that we're not thinking about currently?

Thomas J. Prescott

All those things, I guess, I'm thinking into consideration with the rating agencies, but it's like Kessel said a while ago, we'll give them our full story and then their decision will be their decision.

Kessel D. Stelling

And Erika, I'll just add to that. I think it certainly gives confidence both to our corporate bankers and the customers that they are doing business with and allows us potentially to participate in transactions that we would otherwise not be able to participate in with our current credit ratings. So again, I can't quantify that for you. But certainly, I think it gives us the opportunity for additional business based on potential actions by the agencies.

Operator

We'll take our next question from Nancy Bush with NAB Research.

Nancy A. Bush - NAB Research, LLC, Research Division

Tommy, could you just talk about the balance sheet? I mean, you guys have historically been one of the most asset-sensitive banks in the industry. And sort of where you stand in an asset sensitivity position right now and what it's going to take to sort of shift that?

Thomas J. Prescott

Yes, Nancy, we're slightly asset sensitive right now. It would -- I guess our best scenario would be to have modest uptick including the short term rates. We continue to manage it for straight risk fee and are very thoughtful about some of the longer term loans and our competitors out there. We certainly compete with that but strike the balance, I think, on how far we go with it. We'll continue to probably push out some liabilities a little longer, assuming there's even some modest late increase going forward. But again, we are still slightly asset sensitive and looking forward to the days when rates move up a little bit.

Nancy A. Bush - NAB Research, LLC, Research Division

Yes, as a part of that, if you could just update us like you used to, on what percentage of the assets are variable rate versus fixed rate?

Thomas J. Prescott

Yes. We're about 50-50 on fixed/variable. But when you consider the floors that are out there, we're at about 70 on fixed.

Nancy A. Bush - NAB Research, LLC, Research Division

Okay. My second question would be, I know you guys are out from under the MOU, but I've got to believe that neither you nor the regulators want to go through this experience again, so I'm wondering if they're going to be any -- if you're under any kind of special examination regimen or do we just now go back to the regular exams that you're going through before?

Kessel D. Stelling

Nancy, we're just on a -- we're on a continuous exam program with our regulatory agencies and they really take place throughout the year. And I don't see a big change there. I think that our target is always credit reviews, capital planning reviews and a product risk management reviews. I don't think we'll let our guard down at all or expect anything different than what we've always have. We have a very rigorous process. I think our team has developed a great relationship with our regulators. So -- and I'm sure they're on this call is so if they would like to get easier on us, they're certainly welcome to. But we don't expect much of a change there. And again, I think that what we're doing today will serve us well into the future.

Operator

We'll take the next question from Christopher Marinac with FIG Partners.

Christopher W. Marinac - FIG Partners, LLC, Research Division

I guess one for Kevin just about the new loan growth that we've seen this quarter. Is any of that coming from sort of purchased sources, or maybe some of your loan syndications that you've been involved with as you got into the C&I growth in the past several quarters?

Kevin J. Howard

Yes, that's part of it. We -- what I like about the growth story this quarter? It was mixed. I mean, it was across the board, it's balanced. We had real estate. We had multi-family growth. That's a segment we like. We have a little office growth, warehouse growth. That's something that we've been targeting. So our investment real estate was up a little bit. Residential, it went as we wanted it to, it shrunk quite a bit. Our C&I growth, and that was part of that story, about $180 million of the $240 million growth was C&I. I think details maybe about half of that was syndicated related, and we also grew retail loans of about 7% or 8%. So I think the balance growth was probably the best part of the growth story. Syndications have been part of that story and we've been in that business a few years.

Christopher W. Marinac - FIG Partners, LLC, Research Division

Very good. And Kevin, does it make sense to do any portfolio of arms going forward in future quarters? Is that at all attractive within the loan mix?

Roy Dallis Copeland

Yes, this is D. we have been doing some of those portfolio and that contributed to some of the loan growth that we had that Kevin talked about on the consumer side. So yes, I think it does make sense to do that. It will be tough with -- especially with refinances with the loan rate jumping a little bit. But the shorter arm rates will probably be advantageous to us.

Operator

We'll take our next question from Jefferson Harralson with KBW.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Now with the DTA back and TARP repaid and a credit improvement is apparent, I guess what's the next 1 or 2 major projects or major things you're thinking about to increase that pre- pre-ROAS? Are you thinking more on the expense side, thinking more on the revenue side? Or can you just talk about how you're thinking about the pretax pre-provision earnings or pre-credit earnings and the best ways to move that higher?

Kessel D. Stelling

Jeff, I'll let Tommy take your model question. But let me talk about, from a strategy standpoint. You hit them both. We think there's certainly still improvement in credit to come and not just from a direct credit cost, but still the amount of resources that we don't do a very good job because it's kind of hard to do with quantifying as to those resources allocated to continued resolution of credit. So there's direct credit cost to continue to come out, and certainly that will happen and then certainly, costs associated with the resolution, which we don't do, again, quantify. So that's #1. From an expense side, yes, we're on track with the $30 million, but those average have never slowed down. We will continue to push down expenses. You won't see them dollar for dollar, but you will see them as we continue to get more efficient throughout our footprint. We have a number of initiatives underway today and it will, again, continue to develop through the rest of the year. And then on the revenue said we talked about, I think, very diverse stable and in some cases, growing business lines through our FMS families. But just from a pure balance sheet standpoint, I think it's obvious now that our investments and talent and the technology to associate to support some of the efforts of our corporate bankers is paying off and $240 million in loan growth was certainly a strong number for us. But we've, again, added talent to business lines throughout the footprint. We've invested in some talent in some markets that you'll be hearing about in the coming days, weeks and months as we beef up again the really core strong team we have. And I think we'll have additional opportunities there on the revenue side. I don't know that we can get into a forward look at the pre-pre, but I think it's certainly a combination, again, of credit, of efficiency and the more fun side of that which is seeing the balance sheet and revenue associated with that and the other business lines grow, as these talent additions, primarily in major markets, but begin to pay dividends for us. Tommy, you may have something to add about that?

Thomas J. Prescott

You covered it well.

Kessel D. Stelling

Okay.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

I just may -- you probably already said this, but what type of loan growth are you expecting in the second half of the year?

Thomas J. Prescott

I think what we would be willing to say at this point is that we would expect to have loan growth in the second half of the year. I would say the second quarter would be probably towards the high side of that expectation. But we would still expect to have loan growth for the second half.

Kessel D. Stelling

And Jeff, so I'll just add. You said, again, what type and I'm not sure that, that might have been that what amount as well. But I think the key is we're seeing it in the right categories. We actually believe we have running in the CRE side to be very opportunistic and get some really strong earning assets, as that number has pushed down to 32% of our total balance sheet. And again, we see some good opportunity. We've been very selective, but we don't really want to see that number rundown much more. And I think -- so you'll see broad-based growth again in major markets, strong in the C&I side. But again, we'd like to might see some, certainly, stabilization to replace the runoff on the CRE side as well.

Operator

And the last question we have today is coming from Joe Steven [ph] with Steven Capital [ph].

Unknown Analyst

Actually, my question was on loan growth, which you just answered. So Kessel, congratulations to you guys and good luck.

Kessel D. Stelling

Thank you, Joe. We appreciate your support and that's a great last question.

So operator, if there are no other questions, we'll close the call. Again, we apologize for the short notice. I hope all of you understand the circumstances, which led to the short notice. And we were pleased to be able to release early and make the other announcements that accompany the earnings release.

Again, we've got some work to do tonight and tomorrow. And I can assure all of you the work of our team will not slow down based on the execution of this step in the journey. So we appreciate your support. I want to, again, say to all of our team members that are listening in how much I appreciate what you have all done to help us reach this point and again appreciate in advance all that you're going to do to help us continue to deliver for our shareholders.

So thank you all very much for joining in. We look forward to sharing additional news as news develops in the coming days, weeks and months. So thank you.

Operator

Thank you very much. Ladies and gentlemen, this concludes today's presentation. You may disconnect your lines and have a wonderful day. Thank you for your participation.

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