Synovus Financial's (SNV) CEO Kessel Stelling on Q1 2016 Results - Earnings Call Transcript

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Synovus Financial Corp. (NYSE:SNV)

Q1 2016 Earnings Conference Call

April 19, 2016 8:30 AM ET

Executives

Bob May – Sr. Director IR and Capital Management

Kessel Stelling – Chairman and Chief Executive Officer

Thomas Prescott – Executive Vice President and Chief Financial Officer

Dallis Copeland – Executive Vice President and Chief Community Banking Officer

Kevin Howard – Executive Vice President and Chief Credit Officer

Analysts

Rahul Patil – Evercore ISI

Kevin Fitzsimmons – Hovde Group LLC

Brad Milsaps – Sandler O'Neill

Ebrahim Poonawala – BofA Merrill Lynch

Michael – SunTrust

Christopher Marinac – FIG Partners

Timur Braziler – Wells Fargo

Chris Spahr – CLSA

Nancy Bush – NAB Research

Jesus Bueno – Compass Point

Operator

Good morning, ladies and gentlemen and welcome to the Synovus First Quarter 2016 Earnings Conference Call. [Operator Instructions] At this time all participants have been placed on listen-only mode, we will open the floor for your questions and comments after the presentation.

It is now my pleasure to turn the floor over to your host, Bob May. Sir, the floor is yours.

Bob May

Thank you, and good morning everyone. During the call, we will be referencing the slides and press release that are available within the Investor Relations section of our website, synovus.com. Kessel Stelling, Chairman and Chief Executive Officer, will be our primary presenter today, with our executive management team available to answer your questions.

Before we begin, I will remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the Company’s performance. You may see the reconciliation of these measures in the appendix of our presentation.

Thank you. And now, I will turn it over to Kessel Stelling.

Kessel Stelling

Thank you Bob, and good morning everyone. We’ll jump right into the highlights, give a brief summary of the quarter and then as is our custom we’ll open it up for questions from our team. So let’s jump right into the highlights on Page 3.

First quarter net income available to common shareholders $50 million or $0.39 per diluted common share. Adjusted diluted earnings per share $0.43, excluding a loss on early extinguishment of debt, litigation contingency/settlement expense, and restructuring charges compared to $0.44 in the previous quarter and up almost 15% versus a year ago.

The result for the quarter included restructuring charges related to four branches that will be consolidated next month. Additionally, the quarter reflected a slightly higher tax rate due primarily to an approximately $550,000 discrete adjustment on state taxes.

For the full year, we expect an effective tax rate in the 36% to 37% range. Total revenues were $281.3 million up $2.5 million or 0.9% sequentially and up 4.8% versus a year ago. Total loans grew $328.6 million or 5.9% annualized on a sequential quarter basis and grew $1.65 billion or 7.8% versus a year ago. And as a matter of information that’s the largest year-over-year percentage growth since the second quarter of 2007.

Average core deposits grew $55.9 million or 1% annualized versus the fourth quarter 2015 and 10.5% versus the first quarter of 2015. Credit quality metric remained favorable and the overall quality of our loan portfolio improved. Total criticizing classified loans declining 6% since year-end and we were pleased with results in the recent Shared National Credit exam.

On the capital front; $5.4 million common shares or 158.5 million have been repurchased under the $300 million share repurchase program, as from program inception in October 2015 through April 18, 2016, that’s an average price of $29.25.

During the quarter, we repurchased 3.9 million common shares for $110.9 million at an average price of $28.44. And capital ratio remained strong with Common Equity Tier 1 ratio of 10.05% versus 10.37% in the fourth quarter of 2015 and 10.80% in the first quarter of 2015.

Turning to Page 4, give you a little more color on loans. As I said earlier, total loans grew $328.6 million or 5.9% annualized on a sequential quarter basis and 7.8% versus the first quarter of 2015. CRE loans grew $216.3 million or 11.8% annualized, retail loans grew $71.7 million or 6.7% annualized and C&I loans grew $40 million or 1.5% annualized. Kevin Howard will give you more color during the Q&A, but loans increased across most specialty lines with solid growth in corporate real estate, senior housing, point of sale lending and consumer mortgages.

Government guaranteed lending production consisting primarily of SBA loans totaled approximately $18 million compared to $31.5 million in the previous quarter and $122 million for all of 2015. For the year, we do expect to increase production from 2015 levels by more than 50%, reflecting the continued investments in this unit, including the addition of five experienced SBA product specialist earlier this year.

From a market perspective, we generated strong loan growth in high growth markets such as Atlanta, Birmingham, Tampa and Nashville, but also saw success in some of our smaller markets such as Montgomery, so pleased with the geographic diversity of our growth. While first quarter 2016 loan growth was at the higher end of our guidance for the year, we do continue to expect loan growth in the mid-single digits for 2016 and we expect that to be balanced across the portfolio.

On Page 5, a little color on deposits, average core deposits again increased $55.9 million or 1% annualized versus the fourth quarter, $2.09 billion or 10.5% versus a year ago. Fourth quarter 2015 average core deposits were seasonally higher reflecting a sequential quarter growth of 10.3% annualized versus third quarter 2015 compared to 8.2% growth in average core deposits for all of 2015, so fourth quarter little inflated there. Period end core deposits excluding SCMs increased $238.2 million or 4.9% annualized sequentially and $1.61 billion or 8.8% versus a year ago, reflecting continued growth in our positive portfolio and we do believe that our deposit strategy will yield core deposit growth sufficient to support our loan growth for 2016.

On Page 6, talk a little bit about the margin, you’ll see up 9 basis points, we had guided to 3.25% in the first quarter, pleased to see the margin come in at 3.27%. Net interest income of $218.2 million, up $5.6 million or 2.6% versus the fourth quarter 2015 and up 7.3% versus the first quarter of 2015, again margin up – 3.27% up 9 basis points. I’ll give you a little color on the make up there, the yield on earning assets was 3.73%, up 10 basis points from fourth quarter 2015, reflecting the full quarter benefit from December rate increase. The yield on loans increased 7 basis points to 4.15% versus 4.8% -- 4.08% in the fourth quarter.

The new and renewed yield loans increased 15 basis points to 3.81% versus 3.66% in 4Q 2015. Average balances at the FED decreased $199.5 million or 20.2% to $790.4 million, again saw improvement in NIM due to that factor, and 1 basis points improvement due to higher yield investment securities.

Effective cost to funds 46 basis points, up 1 basis point from the fourth quarter and the cost of interest bearing core deposits down 1 basis points to 0.37%. The NIM could experience slight pressure if there are no further increases and the FED fund rates for the remainder of the year.

You will see the table on this page, it illustrates net interest income in a flat rate environment, will increase by approximately 7.5% based on our expectation of mid-single digit loan growth and slight expansion in the margin. The growth rate would obviously accelerate, rates will move up during the year.

On Page 7, non-interest income, first quarter 2016 adjusted non-interest income was $63.1 million, down $3 million or 4.6% versus the fourth quarter and 3.1% versus the first quarter of 2015. Core banking fees $33.3 million, were down $1.7 million or 4.8% from the fourth quarter of 2015, driven primarily by seasonally lower service charges on deposit accounts and lower SBA gains, a little bit more color there. Service charges on deposit accounts decreased down $811,000 or 4% versus the fourth quarter 2015, primarily due to seasonally lower asset fees and gains from the sales of government guaranteed loans, which again are primarily SBA loans were $711,000 for the quarter compared to $1.4 million for the fourth quarter gains from this vary from quarter to quarter as they just depend on the timing of the sales. For the full year we expect to exceed the $5.4 million of gains that we realized in 2015.

FMS revenues were $19 million for the quarter, down $796,000 or 4% sequentially, down 6.5% versus a year ago. Brokerage revenue declined $395,000 or 5.7% during the quarter driven by market conditions, which reduced transaction volume.

Mortgage banking income was $5.5 million for the quarter, up $1.3 million or 32.6% sequentially and down 15.4% from a year ago. Sequential quarter increase was primarily driven by the increase in the secondary marketing gains associated with the growing pipeline as we move into spring home buying season. And we do believe our FMS and mortgage units are well positioned for future growth, we continue to aggressively pursue talent acquisition strategies in key markets. We’ve seen significant gains with the mortgage origination team in the Tampa, Huntsville and Birmingham markets, and more importantly positioned the mortgage origination brokerage business to make 2016 a very successful talent acquisition year.

On Page 8, on expense management, I want to first call your attention to a change in presentation beginning this year and I think it will make sense to all of you. Let me walk you through it. We have re-classified ORE and other credit cost, out of credit cost into adjusted G&A, I know many of you, your models showed it that way anyway. There is no change in guidance, but let me walk through again, these items totaled $5 million for the first quarter of $31.7 million for all of 2015, so we expect ongoing impact of this change in 2016 to be $4 million to $5 million per quarter, so with this change in presentation we now expect adjusted non-interest expense to be flat to slightly up compared to 2015. The expectation is based on again, single-digit percentage increase and adjusted non-interest expense, which we have previously guided. I mean those are expected to be offset by decline in foreclosed real estate and other credit cost.

Slide 13 of the appendix provides more specifics regarding the change in presentation, which again we think will be easier for all of us to unfold, but the main point here is this is no change in guidance, just a reclassification of those expense, categories. In fact we’re pleased with the progress on expense management and efficiencies, we show favorable non-interest expense comparisons to both linked quarter and prior year. First quarter 2016, adjusted non-interest expense was $179 million, down $1.4 million or 0.8% versus the fourth quarter of 2015.

Headcount decreased by 63, a 1.4% since year end, reflecting the continued implementation of efficiency initiatives. Other expenses were $6 million, lower than fourth quarter, reflecting lower professional fees and advertising expense, professional fees of $6.1 million were down $2.1 million or 25.8%, driven by lower consulting fees and advertising expense of $2.4 million was down $1.3 million, we expect that advertising spend increase during the remainder of the year as we resumed the advertising of our brand awareness activities.

The adjusted efficiency ratio improved to 61.92% this quarter compared to 62.17% in the fourth quarter of 2015 and we do remain very focused on achieving our long-term goal of an adjusted efficiency ratio below 60%.

On Page 9, turn to credit and again, Kevin Howard will give a little more color later in the call. Credit quality remains favorable even as we movement towards more normalized levels in most of our credit methods as anticipated. NPAs were flat over the prior quarter with our NPA ratio declining slightly to 95 basis points from 96 basis points last quarter and 1.28% in the same quarter a year ago. NPLs into the quarter at 78 basis points. We were also pleased to see meaningful declines in accruing TDRs and in criticized and classified loans, more details on these items can be found in the appendix. Provision expense $9.4 million, increased by $4.4 million from $5 million in the fourth quarter in 2015, primarily attributable to a decrease in the volume of recoveries.

Moving on to net charge-offs, net charge-offs increased by $4 million, moving to $7.4 million or 13 basis points from $3.4 million or 6 basis points from the prior quarter, and down from $12.3 million or 23 basis points in the first quarter of 2015. As previously stated we believe, net charge-offs will be in 20 basis points to 30 basis points range for the year, as we expect gross charge-offs to remain low, but with less offset from recoveries.

Pleased to see past dues still at historically low levels, it increased to 28 basis points, but again very acceptable level of past due loans up from 21 basis points in the fourth quarter, 27 basis points in the first quarter of 2015, our 90 day past dues remained at 1 basis point. And we continually analyze our credit performance by industry property type and geography, many of the loan characteristics and while 2015 saw some credit metrics reach historically low levels or likely sustainable, we believe our portfolio continue to exhibit solid performance in 2016, again Kev will be happy to talk in more detail about that.

A little bit more on the capital front, again, first quarter 2016 capital ratio include the impact of $110.9 million common stock repurchases and early extinguishment of $124.7 million of sub-debt on 2017 notes. Fourth quarter 2015 capital ratios included the impact of $37.1 million of common stock repurchased, $250 million subordinated debt issuance and early extinguishment of $46.7 million of sub-debt 2017 notes.

First quarter 2016 CET1 ratio 10.05%, Tier 1 capital 10.5% versus 10.37% in the fourth quarter. Total risk based capital 12.26% versus 12.70% in the fourth quarter. Leverage ratio 9.15% versus 9.43% in the fourth quarter 2015. Our TCE ratio 9.62 versus 9.90 in the fourth quarter 2015 and the first quarter 2016 Basel III CET1 ratio is estimated at 9.47% on a fully phased-in basis.

So that’s it for the first quarter highlights, just a couple of points on our go-forward story and then we’ll be happy to open it up for questions. We are focused on activities in three key strategic areas for this year and beyond. Clearly, we’re going to broaden business lines and growth and market share in all of our markets. We want to gain greater efficiency and we want to continue our focus on investments and our people.

Balanced loan growth, we talked about earlier in support of our core deposit growth will be a top priority for all of our bankers. We expect mid-single digit loan growth for 2016, again balanced across our portfolio. We continue investing in talent, we believe can help us expand in the government guaranteed area SBA and USDA, the middle market area we think has great opportunity in core commercial lending space in key high growth markets. Again, as I mentioned earlier, we expect our government guaranteed team to increase production from 2015 level, by more than 50% during 2016. We will begin to see the impact from our middle market talent investments in 2017 and beyond. We’re piloting several enhancements through our digital channel that will improve the ease of loan occupation, and we do expect continued increases in retail sales productivity as we focus on connecting customers and prospects with products and services grow to the highest value, we saw 27% increase in retail sales productivity in 2015 and expect another double digit increase in sales productivity in 2016.

Again, we continue to invest in growing our previously mentioned government guaranteed lending groups and our FMS customer segments to increase overall fee income, talent acquisition has and continues to be a major part of our fee income growth strategy, especially in these two areas mentioned government guaranteed and mortgage and retail brokerage.

Again, for the full year, we expect to exceed the gains from sales from government guaranteed loan, primarily SBA that we realized in 2015. And we do think our product wealth teams are strategically positioned, 16 markets across the footprint and will continue to build relationship with high potential clients.

Again, on the expense management, we do believe we can drive our adjusted efficiency ratio below 60% over the long-term. For 2016, we expect adjusted non-interest expenses to remain flat to slightly up compared to 2015. As we stated earlier, we announced four consolidation for this year and we anticipate further consolidations as we reposition investments to channels in which our customers prefer to be served. Just as a reminder, since 2010, we consolidated 20.4% of our ranges with four scheduled to consolidate, in May that percentage increases to almost 22% we think – among our peers at 22% reduction in overall range count.

We will continue to achieve additional efficiency through ongoing direct expense savings opportunities, but as you know many of the large opportunities have already been addressed for our team over the past few years, we’ll continue to rely on investments and technology and banking channels to bring efficiency to processes and systems and to migrate customers to lower delivery channel such as online, moat with ATM banking.

Later this week, we will have the opportunity to share our story with our shareholder at our annual meeting. Hope to see some of you there, we certainly have a great story to tell both about our successful 2015 and the many opportunities in 2016 and beyond. Our strategic priorities are solid, and only gets stronger as we grow existing and add more specialized talent, we’re actively in strengthening our team and the communities we serve. We think it’s a great formula for continued solid financial performance.

So with that operator, we’ll open it up to questions, we have our team ready and standing by and we’re happy to take questions from the callers.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from John Pancari from Evercore ISI. Your line is now live.

Rahul Patil

Yes, this is Rahul Patil on behalf of John. I just wanted to ask about the Fed rates hike in December, is that fully priced-in in the loan yields as of this quarter.

Kessel Stelling

Yes, it is.

Rahul Patil

Okay. And then I know you mentioned that you expect slight NIM pressure if there are no Fed rate hikes, I’m just trying to see what is your rate hike assumptions embedded currently in your NIM outlook for this year, because I know you previously had mentioned you expected two rate hikes in 2016, has that changed?

Kessel Stelling

Well, I think in December we did talk about two rate hikes during the year. I don’t think we like most other banks are betting the year on additional rate hike, so we believe again that – and we are operating, there will be no future rate hikes and we think there could be slight pressure, slight again, we were pleased to see the margin move to 3.27%, we had guided to 3.25%, so maybe slight pressure without additional rate hikes, I’ve given up trying to predict if and when we’re operating as if there will not be any, but we certainly and we’re trying to illustrate the table what affect we might see if there were an additional rate hike.

Rahul Patil

Okay. And just one, if I can squeeze in one more. Could you just describe the deposit beta that you are seeing today, I noticed that the deposit cost actually went down this quarter. Could you just discuss your – what you’re seeing in terms of deposit pricing?

Thomas Prescott

This is Tommy, I’ll be glad to take care of that. On the deposit side, when you look back at a year ago, we had $2 billion enquiries set back point even at the end of March of last year's second quarter. And so – what we’ve got right now is, we had a temporary slowdown in the first quarter this year, we had a really big boost in the fourth quarter of last year, so we had some, really some momentum that came from that, but not a lot of growth that came out of the – this period, but – so, while the growth moderated in – compared with 10.5% range there, last year of the growth, we continue to anticipate that core deposit growth will match the loan funding on a go forward basis, and once again you got to go back to the what we had in the 2015, and really we had all the categories working there in a very positive way, so we are comfortable that we’ll move forward on that basis.

Rahul Patil

Okay. Thank you.

Operator

Our next question is from Kevin Fitzsimmons from the Hovde Group. Your line is now live.

Kevin Fitzsimmons

Hey guys good morning.

Kessel Stelling

Good morning Kevin.

Kevin Fitzsimmons

If I could just ask you a question, dig a little deeper into the fee income, if you look at Slide 7, we had pretty decent sized linked declines in other fee income, but then also other non-interest income. So am I right in assuming that the other fee income decline is mostly the SBA gains being lower, and if so what's driving the other non-interest income item that was down a pretty big clip linked quarter? Thanks.

Kessel Stelling

Well, let me talk about the SBA piece, while our team is looking at our other category. So that was lower, we had a big push at year end and with SBA fee income sales, as you know those vary fairly substantially quarter to quarter, so we had a big December and that was down again in the first quarter, but again we believe that not only normalizes, but production itself, which doesn’t co-relate necessarily to income, but it certainly influences it to up as much as 50% year-over-year. So that is the SBA piece, and Tom do you want to hit the other category.

Thomas Prescott

I’ll be glad to do that. We talked a while ago about some of the issues that affected the quarter, and we do believe that it’s largely for seasonal and in some cases just kind of a one of items and we think we’ll move forward in a positive way after the first quarter. The other fee income, $4.8 million, down $994,000 or 17.1% from one quarter ago, it’s primarily due to customer swaps, we have big, a significant amount of that in the fourth quarter, and none at all in the first quarter and that’s just a phenomenon of it. It moves around, but we’ll see more of that in a positive way going forward.

Other non-interest income $6.9 million, down $2.4 million, which is a big piece of the drop in the first quarter. The fourth quarter had a $1.4 million gain in some of the ancillary items like tax credit, investments, the other equity method investments and so forth, and so – what was $1.4 million in positives turned into a $390,000, so a big gap there, that moves back and forth during the quarter, so when it was low in this quarter. Mortgage banking held well and move forward, and so we do expect to see a better quarter in this fee income on a go forward basis.

Kevin Fitzsimmons

Okay great. And just one quick follow-up. Kessel, you highlighted the progress you guys have made in the buyback authorization, can you just give us a sense for – so what's remaining on the program and what time period you'd be expecting to complete it over and should we look at it on a fairly balanced basis over the next – like if it’s going to be year-end 2016, is it fairly balanced over the next three quarters or would you guys look to be more front end loaded based on where the stock is today?

Kessel Stelling

I think you’re right on your first statement, probably more balanced, so just for the benefit of the broader audience, it was this authorization with a 15 month authorization announced in October of 2015 to run through calendar year 2016, so $300 million and again, we accelerated on the front end, certainly in this quarter, so six months into it will over half way, but we think the remainder of it will be fairly balanced over the remaining 9 months, we’ll certainly be opportunistic, but don’t expect to be at the pace you might have seen this past quarter.

Kevin Fitzsimmons

Great, thank you.

Operator

Our next question is from Brad Milsaps from Sandler O'Neill. Your line is now live.

Brad Milsaps

Hey, just a follow-up on the NIM, maybe a question for Tommy. Did the margin guidance encompass any further drawdown in the liquidity of the Fed funds number, you guys have done a nice job bringing it down from the second quarter of last year, just kind of curious if you feel like that, is it pretty much at a floor?

Kessel Stelling

Yeah, that’s correct.

Brad Milsaps

Okay. So that – so you don’t expect to bring that down much further?

Kessel Stelling

I think we’re about it, in this stage.

Brad Milsaps

Okay, great. And Kessel I appreciate the color on asset quality and it sounds like you guys are feeling pretty good coming out of – your SNC exam, just kind of curious if you or Kevin you know any additional color there on how you are thinking about provisioning for the remainder of the year, obviously it’s been kind of been a volatile start to the year with the stock market, and just curious how that, if at all translates to your customer base and it seems like your reserve year has kind of bottomed out around 112 basis points, 113 basis points of loan, is that kind of where you feel like that number will turn out to be a floor?

Kessel Stelling

Brad, Kev and I had a discussion on that topic early this morning, so I'll let him share his thoughts on that with you.

Kevin Howard

Thanks, Kessel. Hello, Brad, I think the provision, yeah as Kessel mentioned in his opening comments as expected and as we guided we’d see that increase a little bit, we know we’re not going to get the recoveries as we get further away from the recession. I think there were over 7 million in the fourth quarter, there were more like 3 million this quarter, so you can see that, that was wind down and as we get further away. So provision probably stays about where it’s at, to be honest, that could possibly build may be a little bit, but also take our ORE expense, which is more buried into the G&A side, and that will come down and offset that. If I were to kind of add them both up, it would be on – overall credit cost probably be around, could be as low as 12 some quarters, may be as high 16 or 17, but provision stay in probably in that 9, 10 range, that’s how we see it right now.

But I’ll talk about reserve here, we see the reserve being fairly flat, I mean there is definitely, if you look at – if you just follow the map as we like to say, there is some downward pressures, older loans with higher reserve as we see these segments Kessel mentioned like watch list and substandard loans and TDRs reduced, those have higher reserves replaced by higher quality new pass credits, puts a little pressure there, but we also have an – we’re conscious of where the reserve is at, we don’t really want to see it get any lower. We can get a little more conservative, when possible we’re dealing with qualitative factors to offset that, and those are the things we’re doing to sort of keep the reserve where it’s at. There is definitely pressure going in the way of reduction, but as I see it – that up, I see reserve stay in, as you mentioned fairly flat throughout 2016.

Brad Milsaps

Alright. Thank you Kevin, I appreciate it.

Operator

Our next question is from Ebrahim Poonawala from BofA Merrill Lynch. Your line is now live.

Ebrahim Poonawala

Good morning, guys. I think, just moving back to something Kessel you mentioned in the press release and in your opening remarks around growth, I think, it does feel like, mean overall growth the main is pretty challenging, within that context, how are we winning market share, and on the pricing front, what are the markets which is driving growth, and is there any potential that growth could potentially surprise, now from your mid-single digit loan growth guidance for the year as we move into 2016?

Kessel Stelling

Well, let me start, and see if the team wants to add to it. So again, we were pleased to see growth at the higher end of our guidance for the quarter, and again, our concern is not as much that number, as it is the quality and the overall balanced growth, which I have seen has been very disciplined as we slowed down some areas, which certainly could have led to even higher growth numbers. So, it's not just the percentage amount, it’s the type of assets we are putting our books to grow this we mentioned was in the larger markets, the Atlanta, the Birmingham's, the Tampa’s, the Nashville. We are really pleased there, that’s why we’ve made large investments in people as well. So, you know, could we see higher growth, we are actively recruiting in the market. And, we have got a great story to tell to bankers. Who want to be a part of our team, and our web business, and our way of treating customers. So as we are able to add talent, we do think, that could lead to additional growth opportunities or even teams of talent. Some of the investments I've mentioned such as middle market, take a little longer to see mature, but we are pleased overall. We think we’ve got, we were looking at pipelines this morning. Kevin and D was talking about that earlier today, so if you guys want to add a little color on where you think other growth opportunities might be.

Dallis Copeland

This is D, I will touch on a couple of things. One, is pipeline, we have seen some positive trends in the C&I pipeline out in the markets that we’ve had. It is still challenge though on the C&I side. If we have – one of the things we are not counting for and the guidance that we’re giving is economic life. If we would have some of that, just like we have not accounted for rate gains in the second half of the year. So that's one place it could be a positive as we get that life.

And we also are continuing to add in the specialty lines, as Kessel mentioned, and in the high growth markets, and increase capacity of those bankers as we bring them on. I don't know if Kevin if there's anything else you wanted to add.

Kevin Howard

I heard the word challenge. And I would say year-over-year growth is right – it’s around 8%, and that's about, actually a little bit higher than may be what we though. We still got a little bit of credit burn, we are moving those watch list and substandard credits that goes against what we're trying to do. Now, we're starting to get to normalization there as we get the balance sheet like more position like we’re willing to, but I think that's a pretty good number. In this quarter, we even teed it up, that we would be on the lighter side of growth, maybe 1% or 2% and we ended up being a little higher.

We had good real estate growth, which we knew we would bond up some constructions loan there, did some refinancing, consumer strategies that we’ve put in place over the last year, good growth there, and the C&I side, a lot of seasonal within that. I mean utilization was down 1.5%. We know in the first quarter, if we underwrite that correctly we’re going to get that in the first quarter, but we see that building over the second, third and fourth quarter, so I think the economy as D said and Kessel mentioned will – mid-single digits, I think will probably dictate whether we are on the higher side of the mid-single or the lower side. But, we do feel like the right strategies are there, the performance has been there over the last year to be in that mid-single-digit growth. And hopefully, on the higher side as the economy plays out in some of our strategies. We like the balanced growth, and if you look year-over-year, we’ve had pretty good balanced growth in all the consumer real estate C&I categories.

Ebrahim Poonawala

Understood. And just in terms of – to your point around commercial real estate, within your market, I mean there's been a lot of headlines around CRE, just wondering if there's anything internally that you guys have changed around how you are approaching that asset class, or if you are seeing any markets where you are sort of pulling back a little bit given what happened over the last few years?

Kessel Stelling

Yes, we're watching. If you look at, especially the last few years, our growth actually has been all on the income producing side. I think we’re at 230 plus million on the income production, and actually if you count all the residential components including land, we were down $20 million this quarter. So we are still shifting the outlook on the real estate and how we are approaching it is completely different portfolio. So yes, that does factor in, but we are also aware. We have had pretty good growth rates in the last couple of years in CRE. We are looking at the construction portfolio, I will tell you, we are pulling it back there. I think we'll probably do have the construction loans we did – what we did last year that we did compared to the last couple of years. So we’re watching rent growth versus wage growth. There is a couple of markets that are getting a little ahead, and we are pulling back there. So we're watching the construction component and pulling back some there.

But also, we’ve tightened up a couple of other policies. We’ve had – we’re watching our hold levels on office, we have been having some really good refinance opportunities there, but we are being particular there. And we actually tightened up some policies and some of the other real estate categories. So we are not – we are being cautious watching the growth. And, so that's kind of been our thoughts on that real estate side.

Ebrahim Poonawala

Got it. And if I may squeeze one more in for Kessel, I guess you mentioned you’ve given up on sort of predicting what’s going to happen with rates, I guess as we look out over the next 12, 18 months, how do we get sort of the returns improve from your, I mean your view from an execution standpoint, looks like you are doing everything on the expenses on capital return, but can we actually sort of move the needle on from an ROE, ROE perspective if rates don’t have?

Kessel Stelling

Yeah, we can. We actually spent a good bit of time looking at that over the weekend, as we always do prepping for these calls, but we show 7.5% increase in net interest income with a flat 8.5%, up 25 basis points and moving into 2017 any additional increases would obviously give us -- there we will continue to invest in these areas that we believe give us meaningful opportunity to change the view trajectory and get those fee businesses producing in better rate. We've made investments in profitability systems that really allow us to -- we think more properly get compensated in a lot of our markets and business line where historically we weren't as precise on overall returns. We think we got ability there. We think we've got continued ability from a deposit pricing standpoint to even as rates might move up to control those cost a little more than we'll continue to get expense out and the pace might be a little slower now, but the activity and effort to identify and implement those expense cuts is very robust.

So, the short answer is yes, you can expect improved returns, obviously slower without rate increases and when I say we're not given up on predicting, we have our baseline assumptions, but we also have actions that we know we can and will take regardless of any fed rate actions.

Ebrahim Poonawala

Got it. That's helpful. Thanks for taking my questions.

Kessel Stelling

Thank you, Ebrahim.

Operator

Our next question comes from Jennifer Demba from SunTrust. You line is now live.

Michael

This is Michael in for Jennifer. Kessel, just wanted to ask you on the fee income side. I appreciate some of the seasonal impact for this quarter, but going forward just with all the investments that you called out that you are making. Should we expect an acceleration in fee income growth from here or are there still kind of secular pressures that are offsetting the net growth?

Kessel Stelling

Well there will be some offsets and some variance quarter-to-quarter. But we do think and as we said in the brokerage space, there was some volatility in the first quarter to depress that. On the SBA side, we made investment that was slow in the first quarter, so we believe that picks up, the brokerage picks up, the -- we're -- I won't go into all the areas that we see potential lift, but we don't think the first quarter trend is any big indicator. We do think there are opportunities for lift in a number of those categories. Again, in mortgage, we've made tremendous investment in originators and continue to hold cost down in the backroom. So, can't give any dollar fee guidance, but I can tell you that the efforts are to yes move that in a positive direction going forward knowing that there will be some quarters that have some seasonal fluctuations.

Michael

And one other one for you, Kessel. Just curious how you are thinking about the investment in hiring teams and what you are seeing out there. It seems like there are some strength in that pipeline versus just traditional whole bank M&A, kind of how you are pairing those against one another at this point?

Kessel Stelling

Well, we love number one investing in our own people. And helping them grow additional business. And then as we recruit in the market with individuals or whole teams, it allows us to get a little deeper into their backgrounds where people who have done a good job over the last four, five years, as we bought in, different teams that were well vetted by all of us from a production and risk standpoint, so we're very active weighed on them, whole bank M&A usually comes with little different kind of pricing structure and to-date we felt like buying our own stock back in the market was a better value for us.

We think we know the value of that stock better when we know value of some of these companies that doesn't, mainly we get to the M&A question pretty soon doesn't mean there's no shortage of looks. But as I've said, we've very disciplined in how we look at that. Certainly we had interest in whole banks that fit the kind of characteristics of banks that do business the way we do, where we could get a lot of cost out and make sense for our shareholders. But absent, one of those, pretending themselves will buy our own stock back, will invest in our own people and will optimistically look to make additional hires and/or teams with bankers.

Michael

Okay. And one last one if I can, D and Kevin, you guys mentioned line utilization. Can you just give us an idea of kind of where that is now and potentially where you think that could go, if we saw greater economic strength in that markets that you are in?

Thomas Prescott

Well on the C&I book which is about a third of or a little bit more that of the C&I is in more working capital, and that's what I was referring to. It's sort of -- it went from about 46.5% to 44.5%, so it went down 2% during the quarter. We expect that to be mid-40s quite frankly. It fluctuates. It can fluctuate 2% to 3% according to the given quarter. Usually it gives a good lift in the fourth quarter where there is a lot of -- third and fourth quarter where there is a lot of field. So it could be probably 2% to 3% to 4% as the year plays out. I don't see it really getting about 50 based on just kind of the way the loans are structured there. But that's a nice lift. That could be, $100 million, $150 million to $200 million of just loans you don't have to originate that you get growing throughout the year. So, those are kind of the numbers we're focused on, on the utilization.

Michael

Thank you.

Operator

Our next question is from Christopher Marinac from FIG Partners. You line is now live.

Christopher Marinac

Thanks. Good morning. Kessel and team, I was curious about your views on commercial real-estate concentration. I know for years you've had the ability to stratify for the regulators. But just curious sort of how you think that evolves and is this at all a place in -- sort of constraints on how you look at loan growth and how the loan growth evolves the next few quarters.

Kevin Howard

I think, this is Kevin. I think the key to that is especially our regulatory relationships is that we're on top of it. We have the data, we track in it, watching the migration trends. That's what's important to the regulatory and that's what's important to us. I think we're not near. We think it bounces between 30% and 35%. 35% of our portfolio feels a little high. We're in the 33% range. I think it may have been up a 0.5 of 1%. I think down, it fluctuates a little bit. So you will see it bounce in that area. We don't see again higher net. And I think number one, it's prudent. We don't want to see too higher growth rates in any particular category. We're keeping our eye on, but we also don't have that dependency we want to have. I think we got really good strategies there in the consumer side. We've seen good growth in a percentage of the balance sheet, good C&I, good balanced growth. So I think the company will grow more balanced. But we're watching. We're watching that. We're watching particular categories, but I think what was the most probably important shift from our concentrations of years passed has been more shifting into the income side versus maybe the dependency of sale of assets. In the residential and land side, you've seen just rapid turnaround there, and that's what we've been focused on.

Christopher Marinac

Great Kevin, that's helpful. I appreciate it. And Kessel, just a quick follow-up. We hear a lot about cyber security in the regulatory space, and just was curious sort of what type of investments you already have in place or their additional spending that we should account for the next several quarters on that front?

Kessel Stelling

Yeah Chris, great question. Al Gula is in the room, but I'm not going to let him talk, because we would then spend the next hour talking about cyber security. Said in a positive way, investments have been -- they are just ongoing and I don't know that you can ever say you spent enough and you can never say that what you have spent protects you. We are -- I think we have a very robust plan to measure that investment, to measure return on that investment. I think we are well positioned there. Not only meeting with Al on the -- regularly with our Chief Information Security Officer to make sure from his standpoint, he believes we're properly invest, lot of oversight from our risk committee, lot of participation with peer groups. Banks are better at sharing data on cyber security than anything we do as an industry and that's a compliment to the industry. And I think there is greater coordination among our -- not just our regulatory agencies but other agencies, the federal government that historically maybe didn't share data.

So, maybe not exactly as precise as you wanted, we spend a lot. We will continue to spend a lot. The question is do we have any major area where we are underinvested, we have to catch up. I don't believe so, but I have never met a Chief Information Security Officer that couldn't spend whatever you would put in a budget. But it's a very, again robust process and we have outsiders come in and look at what we're doing and evaluate, and share with management, share with our risk committees, share with regulators. So, again, I don't want to ever say we feel good about cyber security, because I feel like the industry is under attack, but I feel like we're appropriately invested and we'll continue to do that.

Christopher Marinac

Thanks for the background here. Appreciate it.

Kessel Stelling

And Chris I was passing though that that spend is about 11% of our IT budget. So, I didn't have that number. It's a big piece and it touches a lot of the company.

Operator

Our next question is coming from Jared Shaw from Wells Fargo. You line is now live.

Timur Braziler

This is actually Timur Braziler filling in for Jared. Just a couple of questions, as most of mine have already been answered. But if you look at a flatter yield curve, can you maybe talk about what you saw in CRE pricing over the course of the quarter, maybe how it migrated from the beginning of January through March?

Thomas Prescott

On the CRE pricing, As Kevin mentioned, we are very careful on what we're watching and watching it, but we actually are slightly up in CRE pricing. It's been variable that we've been able to move those yield slight up on overall CRE pricing for the quarter.

Timur Braziler

Okay, is that so with a 3 handle, or are you know starting to approach to low 4s?

Thomas Prescott

Well, I guess a lot depends on whether you are taking about fixed or variable at that point. What I would maybe go back to is to tell you that our new and renewed yield on overall loans of which CRE was a good portion of the production this quarter was up roughly 15 basis points over last quarter.

Timur Braziler

That's helpful. And then maybe just switching over to expenses, the four branches that you plan on consolidating this quarter, I'm just wondering if any of that expense save is going to flow through to the bottom-line or is that going to be reinvested into other facets of the Company?

Kessel Stelling

We factor it, but I mean we don't -- we can't match up dollar-to-dollar, we just go to the bottom-line, it gets reinvested, but thus far our overall expense management plan that those four and others that we will continue to look at, but those are part of our existing expense guidance. That's now -- we knew going into the year that we would certainly get expense out of some branch consolidations and that process is ongoing every day. So, these four, that will be almost 22% of our overall branch network. I don't have any guidance for how many more this year, but as we get that, we'll certainly be sharing that and again that is baked into our expense guidance for the year.

Timur Braziler

Okay and then just maybe one more on expenses. The salary in comp line, just wondering what portion of that was related to FICA, that increase?

Thomas Prescott

It's Tom. The payroll taxes were the big number in there, $7.8 million in the first quarter of 2016 and $3.6 million one quarter ago, so that's the big piece and it's because of the Federal taxes that then amortized, drops on in the future quarters.

Timur Braziler

Okay. Great. Thank You.

Kessel Stelling

Thank you.

Operator

Our next question comes from Chris Spahr from CLSA.

Chris Spahr

Good morning.

Kessel Stelling

Good morning.

Chris Spahr

The restructuring charge is up 1.1. Is that related strictly to the four branches and could we expect there to be more charges going forward?

Kessel Stelling

They just related to the braches and as appropriate, there could be some. It just depends on the branch and the overall financial circumstance of that. But that this quarter that is related to those branches.

Chris Spahr

Okay. And then the charge for extinguishment of debt, I'm a little surprised that the -- we haven't seen a little more movement in the cost of long-term debt compared to some of your peers which seems to be trending lower for the most part in this current environment. Can you just explain the mechanics of like why your cost of long-term debt is higher?

Thomas Prescott

Are you referring to the debt?

Chris Spahr

Yes.

Thomas Prescott

So debt -- or are you referring to another category?

Chris Spahr

I guess I'm just probably defined. So, for example, I have gone to your supplement just on -- wouldn't you look at the schedule for average balances and yields, just looking at say the long-term debt line there? I know it's down linked quarter, but it's up year-over-year.

Thomas Prescott

The cost of the debt was issued in December of 2015. And so that was the piece that went along with the sub-debt and we've also added some liabilities with federal home loan buys you might be referring some to that, and that's really just an opportunity to pretty efficiently manage in that category. And then what you saw in the first quarter of $4.5 million really had to do with the tender that occurred during that time, the $125 million, and so the premium you have to pay with that is for the most part, the $4.5 million.

Chris Spahr

So do you think then we could kind of at least we can kind of model the -- on the liability side, the average levels of long-term debts and the yields be kind of or the cost will be more or less flattish going forward, or we could see some positive changes?

Thomas Prescott

We're kind of in those -- I think that's fair enough.

Chris Spahr

Then finally on the litigation cost, I know they are episodic from quarter-to-quarter, but if you kind of look on a full year basis, they kind of seem to be somewhat recurring over the past or three or four years, albeit down from 2013 and 2014. How could we think about that going forward, and from -- at least when we spread them out GAAP earnings?

Kessel Stelling

We will continue to push down legal cost and I think we've done a good job doing that. There are some as we had this quarter, so expenses tied to some legacy issues that we think continued to decline. Overall, we offer very positive encouragement to our legal team every day to push those costs down. So, longer-term, we believe those cost continue to decline as we really -- Kevin mentioned earlier, we still have some credit burn as we move through the last remaining pipeline of some of the legacy issues.

Chris Spahr

One last question if I may, regarding the CET 1 ratio, is there are comfort zone that you guys have when you kind of work with the board on your buyback authorizations? At what point do you think you've got of kind of tamper back the pace of buybacks relative to your core earnings?

Kessel Stelling

Well, we haven't given absolutes. Our board is very involved in the capital planning process which flows out of the stress testing, and it's again a very continuous robust process. We consider a lot of factors there. We look at our concentrations, we look at our risk profile, we look at the movement of classified and criticized credit, and yes, we look at the percentage of earnings, but we also again continue to have DGA appointed regulatory capital which again is outsized for most companies. So, it's a -- I say it's an annual process. It might be an annual approval, but it's an ongoing process and so I wouldn't say there is an absolute ratio that is one data point in a number of factors that really influenced our decision on share buyback, dividend increase and any other capital actions.

Operator

Our next question is from Nancy Bush from NAB Research. You line is now live.

Nancy Bush

Good morning guys.

Kessel Stelling

Good morning Nancy.

Nancy Bush

A question on recoveries. I guess I'm seeking the source of the decline in recoveries, and is it a function of the markets or is it more a function of what is on the balance sheet, what's in the loan portfolio right now? And does that signify that we are in for sort of a long tough slog in getting the rest of the stuff off the balance sheet?

Kevin Howard

Nancy, this is Kevin. It's a little of both. Number one we are the problem loans with our NPA ROR down the $40 million NPLs down. There is not as much to recover. And by the way, we had a little spike in the fourth quarter. Sometimes in the very end of the year, lot of people settle, get some recoveries done, so that $7.5 million was a positive then in several quarters. So, I don't -- we didn't expect to retain those levels. But I do think it's probably where it's going to be for us for a while and probably going the other way. And it is a functional mark. I mean you definitely need to recover, you have to have some positive things in the market to get those recoveries back, some positive things have to happen. And that certain did on the last two or three years from, it has been good recovery in our markets and we've been able to unload some of the real estate at better prices than we have looked. So, therefore we got network coverage.

So I think kind of going forward for us, it's a little of the market, as it has been flat. We do expect home values actually to improve. That will help us. But for us it is more what's on the book left to recover. It is just going to be less for us over the next couple of year than it has been the last couple -- the two years before.

Nancy Bush

Is there any inclination there, or any need to just say okay, here is what's left and let's get rid of it and just you, you know, sort of a fire sale or do you just kind of sit and nurse the stuff until it sells on its own?

Kevin Howard

I go to Kessel and Tommy about every other quarter with that proposal. It is tiring to work through some of the old legacy assets. But it has still been -- we look as a matter of fact, we will review it a couple of times this year and to get to that inflection point, where it just makes sense to move the rest of it out, and we've done those studies a couple of times a year, like I said over the last few years, and again it's been more capital efficient for us just to do it retail wise and one at a time. But certainly, some, we look at quite a bit.

Kessel Stelling

And Nancy we – there is obviously a cost of doing it the way we do it with the people they are involved and we keep that in mind too. Kevin, hasn't made his case to me on that topic since last week. And gain, we won't get the economics, what's the right economic decision for the company. But we tested and we'll continue to test it, because I think you know you make good points there.

Nancy Bush

Secondly, Kessel, if I may just ask you to add a little color to sort of the development of the retail strategy this year. I mean is there a sort of percentage of revenues that you want to end up with coming from the retail segment at some point, and I guess how -- if so, how do you get there?

Kessel Stelling

So we haven't guided to a percentage and I told Wayne Akins you better be ready today, but I'm not been putting on the spot. We're really pleased with the retail transformation of our company. We took it to a vertical management structure, maybe a year and half ago and it took some cost out there, but more importantly, it put in place a really 24/7 focus on sales and service. It involved some reductions in talent. It involved the change of skill sets in the branch system to really deliver what we think the customers want in the branch system. And so, we though we really had talked about a 30% increase in sales productivity last year. We ended up about 27%. We do think another double digit this year. In terms of percentage of revenue, we haven't got that specific with guidance, but we think it can and will be a bigger part of company. I visit with our retail team, often Wayne's out in the field, there is like a high degree of energy in our retail team and we do think it can play a bigger role. So we got to continue to get cost out there. We got to continue to invest in this role and within the branches we've actually opened a couple of new locations, prototype branches that involve a lot more technology and fewer people and very interactive customer experience. I visited our one in Nashville. We will see some others real soon. So there is probably maybe, I don't know any of our leader say they have got more pressure than others, but certainly I think Wayne feels it in terms of expectations from retail system. And as we can get more clear on revenue expectations, we'll share that and disclose that.

Operator

Our final question is from Jesus Bueno from Compass Point. You line is now live.

Jesus Bueno

Looking at the FDIC surcharge, have you disclosed what the impact is and if not could you provide us kind of guidance on what quarterly or annual run rate would be on that?

Thomas Prescott

It's got some movement. Net-net, we believe it's par compared to 15.

Jesus Bueno

So on par?

Bob May

Hey this is Bob. Compared to the first quarter, it will remain flat for the rest of this year.

Jesus Bueno

And I think that's in your expense guidance. I know it seems like the language change slightly on the expense guidance from -- because before you had said low single digit, now saying flat to slightly up. So, I guess -- just from reader language seems like, you've kind of did lower expenses than previously. So I guess what's driving that change, or what change in your outlook from 4Q to 1Q?

Kessel Stelling

It's actually just a reclassification, so we're just moving the credit cost, and out of credit cost into adjusted G&A. So there is no change in guidance. Before you had two components, one we said was a low-single digit increase, one would actually have a decrease. The combined categories now that we're present as adjusted G&A, that combined category on a go-forward basis, we're saying will be flat to slightly up which is consistent with the sum of the two parts that we had disclosed before. And that's further -- it's on Slide 8, but also I think in the appendix, maybe Slide 13 would give you little further color there.

Jesus Bueno

And my last question just, on the loan growth, is obviously very solid this quarter and it continued to be solid over the past several quarters. And I know you announced the GreenSky partnership last quarter. So, I was hoping, you could just provide an update perhaps on balances and maybe how the program is running relative to your expectations for the year?

Kessel Stelling

Running well, maybe Kevin can add some color. I don't think we disclosed balances, but we're pleased with that partnership on a number of fronts. We're pleased with the growth, we're pleased with the quality. We're quite pleased with just the overall implementation and running of that program. We thought it could be a meaningful part of our consumer retail strategy and again we haven't disclosed numbers, but we're very pleased with that partnership.

Jesus Bueno

And I guess, would you still look to perhaps maybe other types of partnerships with as a marketplace lenders are?

Kessel Stelling

We are and we will and I have seen other companies give a little color there. It is again to Wayne Akins team, they have met visit with many. We want to be very purposeful there. But yes. We have explored and will continue to explore opportunities to partner with some of the marketplace lenders that we think would just be again good partners for us in our footprint. So more to come on that.

Jesus Bueno

Great. Thank you very much for taking my questions.

Kessel Stelling

Thank you.

Operator

There are no more questions in the queue at this time.

Kessel Stelling

Alright. I want to thank everyone. We’re little passed our usual stop time of 9.30, but we appreciate the questions. And if there were question, we didn't get to, or you want further clarity, most of you got to reach Bob May and just call him or shoot me a mail, I'll be happy to respond. I want to thank again all of you for your time and your interest in our company. Again we're looking forward to our Shareholders Meeting in a couple of days. Hope to see a lot of our team and some of our investors and some of your there, and then look forward to a great rest of year for 2016. So thank you all very much and have a great day.

Operator

Thank you ladies and gentlemen, this does conclude today's teleconference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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