Synovus Financial's (SNV) CEO Kessel Stelling on Q2 2016 Results - Earnings Call Transcript

| About: Synovus Financial (SNV)

Start Time: 08:30

End Time: 09:34

Synovus Financial Corp. (NYSE:SNV)

Q2 2016 Earnings Conference Call

July 19, 2016, 08:30 AM ET

Executives

Kessel Stelling - Chairman and CEO

Dallis Copeland - EVP and Chief Community Banking Officer

Kevin Howard - EVP and Chief Credit Officer

Bob May - Sr. Director IR and Capital Management

Analysts

Brad Milsaps - Sandler O’Neill

Kevin Fitzsimmons - Hovde Group

Nancy Bush - NAB Research

Ebrahim Poonawala - BofA Merrill Lynch

Emlen Harmon - Jefferies

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Jesus Bueno - Compass Point

Jared Shaw - Wells Fargo Securities

Christopher Marinac - FIG Partners

John Pancari - Evercore ISI

Jennifer Demba - SunTrust Robinson Humphrey

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Synovus Second Quarter 2016 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation.

Now, I’d like 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 Web site, 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 in our SEC filings, which are available on our Web site. 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’ll turn it over to Kessel Stelling.

Kessel Stelling

Thank you, Bob, and good morning everyone. Thank you for joining our second quarter earnings call. I’ll walk through the highlights, give you a little view on the rest of the year and then happy to take your questions with the rest of the team.

Just a slight change in the lineup today. Many of you know we announced early this year Tommy Prescott had announced his retirement effective later in the year. We announced last week the appointment of Kevin Blair effective August 17. And so we were planning to celebrate Tommy’s 63rd straight earnings call today but he had a tree fall on his home last night.

We had a pretty violent storm come through Columbus and I just saw the pictures, so we gave Tommy a pass so he can deal with the damage to his home and get his family back under a dry roof. So we wish him the best of luck and we’ll say a little bit more about Tommy. But in his place, most of you know Bob May and Bob will assume that role today and help us with any of your questions.

So with that, let me move right into the second quarter highlights. Second quarter net income available to common shareholders was 57.9 million or $0.46 per diluted common share. Adjusted diluted EPS was $0.49. That excludes the $5.8 million restructuring charge, up 13.1% versus $0.43 in the first quarter of '16 and up 16.9% versus the $0.42 in second quarter of '15.

Second quarter of '16 also reflects a lower tax rate in the benefit of an $800,000 discrete adjustment on state taxes. Total revenues were 289.3 million, up 8.1 million or 2.9% sequentially and that’s 7% versus the year ago. Total loans grew 302.7 million or 5.3% annualized on a sequential quarter basis and grew 1.57 billion or 7.3% versus the year ago.

Total average deposits grew 397.8 million or 6.9% annualized versus the first quarter of '16 and 5.1% versus the second quarter of '15. Please also see improvement in credit quality metrics. Our NPL ratio declined to 0.67% from 0.78% in the first quarter and NPL decreased 13.5% from first quarter of '16 as well.

On our share repurchase, 8 million common shares or $236.2 million have been repurchased under the $300 million program from program inception in October '15 through June 30 of '16. Total share count has been reduced by 6.2% from a year ago. During the quarter, we repurchased 2 million common shares for 60.5 million at an average price of $30.02.

The capital ratio remains strong with the common equity Tier 1 ratio of 10.2% versus 10.04% in first quarter of '16 and 10.73% in the second quarter of '15. Our adjusted ROA was 88 basis points compared to 81 basis points in the first quarter of '16.

Moving to Slide 4, a little additional color on loans. As I said earlier, total loans grew 303 million or 5.3% annualized on a sequential quarter basis, 7.3% versus the second quarter of '15. Retail loans grew 261 million or 24.1% annualized. C&I loans increased 146 million or 5.4% annualized, partially offset by decline in CRE loans of 106 million or 5.6%.

On a year-to-date basis, loans have increased 5.7% annualized, retail loans grew 332.6 million or 15.6% annualized, C&I loans increased 183.3 million or 3.4% annualized and CRE loans grew 113 million or 3.1%.

Loans increased across most specialty lines with solid growth in consumer mortgages and our lending partnership with GreenSky and our new partnership with SoFi, senior housing, asset-based lending and medical office.

Our government guaranteed lending production totaled 22.5 million compared to 17.8 million in the previous quarter and from a market perspective, we generated strong loan growth in key markets such as Atlanta, Nashville, Columbus, Tampa, Jacksonville, and Athens and we do expect continued loan growth in the mid-single digit range, that 4% to 6% range, for 2016.

Slide 5, a little more color on deposits. Total average deposits 23.61 billion, an increase of 397.8 million or 6.9% versus the first quarter and they increased 1.14 billion or 5.1% versus second quarter of '15. Period-end total deposits increased 476 million or 8.2% annualized sequentially and 1.28 billion or 5.6% versus a year ago reflecting continued growth in our deposit portfolio.

Brokered deposits increased 291.6 million versus the first quarter and reflect the addition of a new bank deposit sweep product now being offered to our Synovus Securities customers, which added 307.7 million in new deposits as of June 30, 2016.

Average core deposits increased 156 million or 2.8% annualized versus the first quarter and 1.36 billion or 6.5% versus a year ago. Average core deposits, excluding SCM deposits, increased 316.7 million or 6.5% versus the first quarter and grew 1.36 billion or 7.3% versus the second quarter of '15.

Our period-end core deposits, excluding SCM, increased 233.8 million or 4.7% sequentially and 1.27 billion or 6.7% versus second quarter of '15. And we continue to expect that our deposit strategy will yield core deposit growth which will support our loan growth.

Slide 6, to talk about the NIM, you’ll see net interest income 221.4 million, up 3.3 million or 1.5% versus the first quarter of '16 and up 8.7% versus the second quarter of '15. Our net interest margin again was unchanged from first quarter of '16, actually up 12 basis points versus the second quarter of '15.

Yield on earning assets was 3.73% unchanged versus the first quarter, yield on loans 4.15% also unchanged versus first quarter. New and renewed yield on loans increased 4 basis points to 3.85% versus 3.81% in first quarter '16. Effective cost of funds remained unchanged at 46 basis points and our cost of interest bearing core deposits was down 1 basis point to 0.36%.

We continue to expect an increase in net interest income for the full year in a flat rate environment as compared to 2015 will be approximately 7.5% and then could experience slight down pressure in the third quarter of '16 in that flat rate environment.

On Slide 7, to talk about non-interest income, for the second quarter total non-interest income was 68 million, up 4.7 million or 7.5% versus the first quarter of '16 and down 1.4% versus the second quarter of '15. Adjusted non-interest income, which excluding the investment securities gains, net was up 7.6% versus the first quarter and up 1.6% versus the second quarter of '15.

Core banking fees of 33.8 million, up 488,000 or 1.5% from the first quarter of '16. Service charges on deposit accounts increased 530,000 or 2.7% versus the first quarter of '16. Gains from sales of government guaranteed loans, primarily SBA loans, were 716,000 this quarter compared to 711,000 for the first quarter, relatively flat.

FMS revenues of 20.5 million for the quarter, up 1.5 million 8.1% sequentially and up 4% versus a year ago. Brokerage revenue increased 855,000 or 13.2% during the quarter. Mortgage banking income was 5.9 million for the quarter, up 457,000 or 8.3% sequentially and down 20.9% from a year ago. Other non-interest income was 2.2 million primarily due to a $900,000 gain from private equity investments, which in the first quarter reflected a $390,000 loss.

On Slide 8, a focus on non-interest expense. Second quarter of '16 adjusted non-interest expense was 182.4 million, up 3.1 million or 1.7% versus the first quarter. Employment expense was 97.1 million, down 4.3 million or 4.2% reflecting a seasonal decline in payroll taxes.

Advertising expense of 7.4 million, up 5 million as a result of resuming brand awareness activities. We expect the second half of '16 will approximate the first half of '16 expense. ORE expense was 4.6 million, up 1.9 million versus the first quarter primarily due to disposition-related costs.

The adjusted efficiency ratio improved to 61.54% this quarter compared to 61.92% in the first quarter of '16. And again, we remain very focused of achieving our long-term goal of adjusted efficiency ratio below 60%. 2016 adjusted non-interest expense is expected to be slightly up versus 2015.

In the second quarter, the results included 5.8 million in restructuring charges. Approximately 5 million of these charges relate to continued corporate real estate optimization activities. We’re also continuing to evaluate our branch network while employing additional digital and online capabilities to increase convenience for our customers while lowering transaction costs.

And have identified this quarter three branch consolidations to be completed by year end, which will be an addition to the four branches that we closed earlier this year. We now expect our branch network to be 240 locations by year end, which will represent almost a 23% reduction from year end 2010.

I touched on credit quality. Continued improvement in credit quality, NPA down 13.5% from the prior quarter while our NPA ratio declined 81 basis points from 95 basis points last quarter and 1.11% from the same quarter a year ago. NPL during the quarter also down 13.5% in the first quarter while the NPL ratio decreased to 67 basis points from 78 basis points in the first quarter.

Provision expense was 6.7 million reflecting a decrease of 2.7 million from 9.4 million in first quarter. Year-to-date, provision expense is 16.1 million compared to 11 million last year. The decrease in the second quarter was primarily attributable to increase in the volume of recoveries as well as broad-based improvement at credit portfolio. However, we do expect the recoveries to subside in the second half of the year, which could cause provision expense to increase modestly compared to the first half. Kevin Howard will be happy to give you color on that later in the call.

Net charge-offs decreased by 1.2 million moving to 6.1 million or 11 basis points from 7.4 million or 13 basis points in the prior quarter and up from 5.3 million or 10 basis points in the second quarter of '15. As you know, we guided beginning of the year that charge-offs for the year will be between 20 to 30 basis points.

We’re pleased with the first two quarters of the year. And based on better-than-expected credit performance, we now believe we’ll be below that guidance and our expectations for the second half of the year of the charge-offs will be between 10 and 20 basis points.

Past dues decreased 24 basis points, which continues to be a very acceptable level for past due loans. It’s down from 28 basis points in the first quarter of '16 and flat compared to 24 basis points in the second quarter of '15. 90-day past dues increased 3 basis points compared to 1 basis point in first quarter '16 and 2 basis points in the second quarter of '15.

We’re very pleased with that performance we experienced in the second quarter as well as the past few years. Our bankers and our credit team have remained very disciplined also producing solid loan growth rate, which is why we expect the remainder of this year to be very favorable from a balance sheet quality standpoint.

To touch on capital on Slide 10 and I’ll give you a little color in what some of these ratios include and don’t include. The second quarter of '16 capital ratios include the impact of 60.5 million in common stock repurchases and a phase out sub-debt maturing in the second quarter of '17.

First quarter of '16 capital ratios include the impact of $110.9 million in common stock repurchases and early extinguishment of 124.7 million of sub-debt on 2017 notes. And second quarter '15 capital ratios include the impact of 50.3 million in common stock repurchases.

Maybe to just run through some of those ratios, the second quarter of '16 CET1 ratio is 10.02% versus 10.04% in the first quarter. Tier 1 capital 10.06% versus 10.04% in the first quarter of '16, and you’ll see disallowed DTA is continuing to decline and Tier 1 capital has now begun to exceed CET1.

Total risk based 12.05% versus 12.25% in the first quarter of '16; leverage ratio 9.10% versus 9.15% in the first quarter of '16. Our tangible common equity ratio 9.52% versus 9.62% in the first quarter of '16 and our 2Q '16 Basel III CET1 ratio is estimated at 9.49% on a fully phased-in basis.

Again, before I briefly reiterate our key areas of focus for 2016, I’d like to take a moment to acknowledge and thank our team for their continued commitment to delivering exceptional service to our customers, clearly a driver of our success and for investing and strengthening our communities across the Southeast.

We are very grateful to be named by the American Banker and the Reputation Institute as Number 2 of 2016 of Most Reputable Banks, actually Number 1 among prospect non-customers and by Georgia Trend Magazine as one of the best places to work in our headquarter state.

I think the American Banker recognition demonstrates our commitment to exceptional service and services, continued validation of our relationships that are modeled through leaders and bankers who are embedded in our local markets. The Georgia Trend recognition reflects our ongoing commitment for fostering a people-first work environment and again that we’ve received similar awards into other areas of our footprint.

Also, again, I want to thank Tommy Prescott who might be listening today. He wished me luck. After seeing pictures of his house, I wish him luck as well. But this would have been Tommy’s 63rd I believe earnings call. Maybe all have commented on him every positive way. I know [indiscernible] reminded me that Nancy Bush who’s probably on the call called Tommy our secret weapon during the financial crisis.

So best wishes to Tommy today and we’ll have a more appropriate way to say farewell to Tommy. He will be with us in the coming months to assist in a seamless transition as you would expect him to do. So feel free to drop him notes, but he is still with us and after today we will be working hard again.

So let’s talk again about the remainder of 2016. We remain committed to delivering greater value to our customers through our relationship-based approach while using new predictive analytics so as to enhance relationships and improve our profitability. Hopefully, you saw some of those results this quarter. We’re constantly bringing on new revenue-generating accounts [indiscernible] especially in areas like mortgage, retail brokerage, other wealth management lines and specialty lenders and in the C&I space.

We’re continuing to hear success story from partnerships across our product lines as we strategically pursue more profitable and total relationship. Our team’s focus on business lines has led to an 8.3% increase in small business TBAs, a 28% increase in new merchant sales, a 33% increase in new small business car sales from the first half of 2016 and we expect continued momentum from our team in the second half of the year.

We’re also taking a number of steps to achieve our long-term goal of adjusted efficiency ratio of below 60% including the implementation of new internal systems that represent significant investments in a more efficient processing of loans and improved customer experience.

We’re also preparing for 2017 transition of all our bank divisions into a single processing environment. We’re already operating on a single platform but we believe the elimination of multi-bank processing represents another big step along with an effort to simplify our operating environment in a post-charter [ph] consolidation. It will bring in efficiency, reduce risk and facilitate faster execution of new technology solutions that better serve our customers in this rapidly changing environment.

So a lot of activities underway and certainly we enter the second half of the year fully alert to the current economic climate, including the thought of lower rate for longer but we remain optimistic about our ability to improve profitability to the third and fourth quarters. I talked about our team. I think it’s been proven. They have a level of expertise and a passion for our customers and communities that combine a solid execution of our strategic priorities will result in continued growth and progress for our company.

I’ll be happy to talk about any of that in the Q&A section. So now, operator, I’ll open up the floor for questions. And again, the usual team is here and Bob May will take questions on our financials. So we’ll open it up now for questions.

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions]. We’ll take our first question from Brad Milsaps. Please announce your affiliation and then pose your question.

Brad Milsaps

Hi. Good morning. Brad Milsaps of Sandler O'Neill.

Kessel Stelling

Good morning, Brad.

Brad Milsaps

Hi, Kessel. I appreciate the color on the branch consolidations and the restructuring charges you took this quarter. Just maybe wanted to jump into that a little bit more. It looks like you expect expenses to be maybe slightly up for the year. It would seem that maybe the second half, you could get maybe a little bit more leverage kind of based on your run rate right now. Just kind of curious as you kind of look out, can you quantify a little more what we might expect from some of these, the most recent restructuring charge in terms of maybe dollar change or is most of this going to be reinvested back in the franchise and in other ways that might offset?

Kessel Stelling

Yes, Brad, thanks for the question. Most of what you’ll see in this branch announcements were anticipated when we gave our expense guidance earlier in the year. So these would not – well, there will certainly be savings but not incremental to our guidance. It’s really part of our ongoing business model. I think this past quarter we certainly had related to our real estate optimization and specifically in Atlanta some transactions that we believe long term, again, are the right things to do for our company there in our previous guidance. But I can tell you the team – this morning at about 6 AM, we were talking about additional ways to drive that expense line. So nothing to revise in way of guidance but I can tell you a very robust effort underway to look at again additional branches, additional real estate optimization, additional efficiencies from some of these processes I talked about to continue to drive positive operating leverage.

Brad Milsaps

Great. Yes, you guys have done a great job in that regard. Just kind of looking year-over-year, the adjusted expense is up maybe 6% or 7%. Is that principally because maybe you accelerated some of the advertising that wasn't there maybe last year? I know you kind of gave some guidance around that number for the back half, but just want to make sure I'm kind of clear on that.

Kessel Stelling

Yes, advertising is a big driver here and again that’s significantly this quarter and those expenses are somewhat lumpy but we believe it’s a great investment that will again over time drive revenue, but that’s the primary driver.

Brad Milsaps

Okay, great. And then just one kind of housekeeping, maybe for Bob, just on the tax rate. What might be a good number to use going forward? I know that can kind of bounce around quite a bit, but just kind of curious kind of what your thoughts were there.

Bob May

Yes, it bounced around. We had the discrete item in the first quarter and then went the other way in the second quarter, but overall we still feel comfortable with the 36% to 37% tax rate for the year.

Brad Milsaps

Okay, great. Thank you.

Kessel Stelling

Thanks, Brad.

Operator

We’ll take our next question from Kevin Fitzsimmons. Please announce your affiliation and then pose your question.

Kevin Fitzsimmons

Good morning. Kevin Fitzsimmons, Hovde Group.

Kessel Stelling

Good morning, Kevin.

Kevin Fitzsimmons

Kessel, I appreciate the continued outlook you all provide on the margin and on NII. Can you drill down a little deeper into the margin on your outlook for possible slight downward pressure on the margin? It was impressive that it stayed stable this quarter, but given what we've seen post-Brexit with the tenure and what the yield curve has done, what levers do you have to only keep it at that point, at a slight downward pressure, given what seems to be a less accommodative environment in front of us? Just if you can talk about positives and negatives in terms of the margin. Thanks.

Bob May

Hi, Kevin, it’s Bob. Yes, on the margin we guided the slight pressure and really because of the shift down in the yield curve, I mean overall we have about 12% of the earnings assets are in the bond portfolio and about 45% are in fixed rate. And so that’s where the pressure is coming. The variable side and the credit spreads on the CRE side are actually improving. But just for 2016 we really wouldn’t expect a lot of pressure because it would take a little bit longer for that to get into the balance sheet. We have a pretty short duration bond and loan portfolio on the fixed side. So it’s really more of a 2017 event if we ended up having low for long that you could see modest pressure in 2017. So the levers as you mentioned, we’re going to focus on the deposit pricing as well as continue to focus on the risk-adjusted profitability within the overall portfolio.

Kevin Fitzsimmons

Great. Thanks, Bob. And just one quick follow up. I think on last quarter’s call, Kessel, we talked about the buybacks and it being more of a balanced pace probably for the quarters remaining in 2016. Are you still expecting that? And just I guess how you feel about buybacks with where the stock is here today. Thanks.

Kessel Stelling

Yes, thanks, Kevin and we do expect – as you’ll recall that the plan we announced last October was a five-quarter call. So we have two quarters obviously left and we expect that to be balanced over the remainder of the year. We certainly watched the price of the stock and again, without getting into the details of where our leverage, although we expect it just to be balanced and play out over the rest of the year in a fairly normalized fashion.

Kevin Fitzsimmons

Okay, great. Thank you.

Kessel Stelling

Thanks, Kevin.

Operator

Thank you. We’ll take our next question from Nancy Bush. Please announce your affiliation and pose your question.

Nancy Bush

Hi. Please give Tommy my congratulations. Tell him I hope to retire someday, but I've got to stop spending money first.

Kessel Stelling

Okay, will do, Nancy.

Nancy Bush

Yes, two questions; the strong retail loan growth, Kessel, it seems like you’ve sort of handed off loan growth to retail now versus wholesale and I’m wondering if that’s a deliberate effort or if that’s just sort of a payoff for some of your investments you made quarters ago or sort of what’s going on in that handoff?

Kessel Stelling

Yes, so and I’ll let Kevin Howard – I don’t know if we handed off but we certainly have been very intentional about balance sheet diversification. You’ll notice this quarter CRE came down. We had announced last – we guided last quarter that we had slowed down our construction lending, so the offshoot to that was again growth in other areas like retail, portfolio mortgages, our partnerships with GreenSky and SoFi. Again, the portfolio mortgage product great growth and our position mortgage program and some of our other very targeted portfolios there. So I don’t want our four C&I bankers or any of our specialty lenders think we’ve handed off what we expect them to do. But it has been very intentional and we’ve been very pleased. Kevin, do you want to add a little color on that?

Kevin Howard

Yes, I’d say over the last two or three years we wanted to rebalance the balance sheet and grow more diversified and I think that’s part of the strategy there. We were pleased with the consumers. We’ve been investing and growing our mortgage company for the last several years in the right markets, more boots on the ground and key markets has been important for us. We’ve had double-digit growth there now for about the last couple of years actually. But also we’ve started trying to – one of the initiatives we had to rebalance was to move our consumer loans a little closer from 18%, 19% and this all happened overnight, but maybe over the next three to five years move it closer to about 25%, part of the risk management initiative. And just grow the consumer more. We think that adds a lot of value to the company and so we have stuck our toe in the water a little bit, as Kessel mentioned on some of the indirect lending. That’s not going to big play in our playbook compared to others but it’s something we wanted to do by allocating 2% to 3% of our balance sheet there over the next couple of years in those initiatives. So that will help boost growth as well. So I think that just again, as Kessel mentioned, kind of an overall more balanced approach to our growth is maybe we were historically kind of before the recession.

Nancy Bush

Yes. Kessel, I would just ask along with that when you mentioned that you were slowing down CRE and given the warning that we’ve had, pretty strong warning from the OCC in the past few months, was that part of it? Were you seeing what the comptroller has warned about or are you just was slowing down CRE just part of this rebalancing?

Kessel Stelling

It was part of rebalancing. We certainly are – we say that we’re not OCC regulated. We stay pretty much involved with all of our regulators to make sure we understand their current thinking and their longer term thinking. And I think Kevin and his team do a really good job of looking at not just next quarter or two but look out over a year or two because obviously when you add construction loans, those balances really had a longer tail to build. And looking at the pace we were on in construction lending, where that might take us in the out years, we just felt like it was prudent and certainly consistent with regulatory guidance. It was prudent to slow down the onboarding and new construction loans and we felt like we had a very focused team that could build those gaps elsewhere.

Nancy Bush

Okay, great. And just a second question. In the wealth management results, you had a very strong sequential rise in those results and I’m wondering how much of that is market impact and how much of that is new accounts, if you could just – you’ve been ramping up your emphasis in that business and I’m wondering if we’re finally starting to see some good results?

Kessel Stelling

I don’t have an exact breakout there, Nancy. I will tell you that it certainly reflects the impact of some of our hiring. We managed some great team members over the past quarter and quarters and years and some of that business takes a little longer in cycle. You saw good increases in brokerage this past quarter. So some of that I think is market and quite frankly I think as our company continues to heal and I probably don’t want to overplay the reputation, because you know how that can slip from year-to-year but I think our company is better position in a lot of these markets. And further we get in the prices, the better story our bankers have to tell. I think that certainly plays out in the wealth side. So I’d say it’s a combination of initial talent and certainly market conditions as well.

Nancy Bush

Okay. Thank you.

Kessel Stelling

Thanks.

Operator

We’ll take our next question from Ebrahim Poonawala. Please announce your affiliation and then pose your question.

Ebrahim Poonawala

Good morning. From Merrill Lynch.

Kessel Stelling

Good morning, Ebrahim.

Ebrahim Poonawala

Just a quick sort of follow up on the question around loan growth. I think as we sort of look out for the back half of the year just in terms of – Kessel, I would love to get your thoughts around the overall sort of health of the real estate market in the Southeast and the opportunities maybe at some point you decide to sort of dial back in growth on CRE? Just what’s your outlook on that for the next 6 to 12 months?

Kessel Stelling

Yes, so as you asked me, so I don’t want to avoid it, I’m going to let Kevin give you more color but I will tell you that there is still healthy demand out there and the opportunities that we see have been sponsorship strong equity in those credits and pricing has actually gotten better. So we are in way abandoning that sector. We got a great team. We just again want to temper that production a little bit to give us that balance sheet diversification. I think Kevin has spoken to groups recently kind of on the overall health. So, Kevin, why don’t you take the outlook as we certainly have some very strong areas and some areas that might give you a little bit of concern?

Kevin Howard

Yes, and we’re not at all abandoning real estate. It was obviously down a little bit this quarter but we would like that to be more flat than down over the rest of the year. So we’ll have to make new construction loans in the second half of the year to be flat but obviously there’s a lot of payoff velocity there. So I want to make sure everybody understands we are moving in that direction. We’re watching some markets. We had probably more construction in the second half of the year than we expected but we pulled back intentionally there as a balance sheet management approach. But we’re watching certain markets. They have had a lot of units come onboard that we watch the absorption there of that, such as in the multifamily area. Places like Atlanta and Nashville there’s been other strong job growth, good wage growth in those markets. So I think they can absorb it fine but there has been a lot of units in a couple of those markets. We want to kind of watch more and then maybe participate in for a couple of quarters and see how that absorbs. But again, we’re sticking to the mark. There’s great job growth in 30,000 plus in Tampa, more than that in Orlando; good job growth and wage growth. There’s very low unemployment places like Charleston. Obviously Nashville and Atlanta sort of off the charts. The economies are good for real estate. There has been a lot of construction over the last year, year and a half in those markets. So we’re going to be cautious, we’re going to participate, stay with these builders who we’ve been with for a very long time. And so we’ll put on some good real estate in the second half of the year.

Ebrahim Poonawala

That’s excellent. I think just switching quickly to expenses, I’m sorry if I missed it around, as we go forward, should we still expect restructuring charges to be sort of persistent on a quarterly basis, or do we see that fade away given that sort of most of the major restructuring that you probably had to do on the real estate side is behind?

Kessel Stelling

Well, I don’t know that I would call them persistent. There’s very strict accounting rules about when we have set to restructuring charges or not. I will say this that we continue to look for ways to improve long-term operating performance. And if those ways include any restructuring related to additional real estate or branch exits, we would certainly have those, but I can’t be a lot more specific than that. But again, our interest is ongoing and the valuation of all of those real estate facility in long term – long term we know there will be some but to predict when, how much and what quarter is a little difficult to do. But again, the focus is on improving the long-term operating performance.

Ebrahim Poonawala

Got it. Thanks for taking my questions.

Kessel Stelling

Thank you.

Operator

We’ll take our next question from Emlen Harmon. Please announce your affiliation and then pose your question.

Emlen Harmon

Hi. Good morning. I’m calling from Jefferies.

Kessel Stelling

Good morning.

Emlen Harmon

Good morning. Just on the repurchases I heard your message about just kind of getting that – leveling that out across the back half of the year. Could you remind us kind of what the constraining financial factor is on repurchases? Just what prevents you from re-upping that program sooner than next year?

Kessel Stelling

It’s really in sync with our capital plan and after our stress test in capital planning – announced again to get it in a calendar year sync, we announced in October of last year a five-year $300 million that we thought that really did play well into our capital plan. It kept our capital levels at ratios we thought were appropriate for your company. So we’ll complete that through the remainder of this year and then give appropriate updates at the completion of that plan. There’s no one binding constraint but again this is what the 300 was authorized. We’re actually kind of ahead of just a normalized pace to retire that, but obviously all capital ratios are important. We reference total risk-base to CET1, total Tier 1, liquidity, a lot of binding for influencing constraints there. So we’ll give updates on a 2017 plan a little later but we think we’re really appropriately on pace with this plan and again pleased with the execution thus far this year.

Emlen Harmon

Okay, great. Thanks. Just hoping we could get a quick update on the SBA business, kind of what these look like there this quarter, any hiring, just a trajectory on that?

Kessel Stelling

Yes, I’ll let D. Copeland take that.

Dallis Copeland

Yes, on the SBA standpoint we did over the first half of year we added seven new product specialists across the footprint. They’re working in conjunction with our bankers, so they are not responsible for 100% of the production. It’s really the banker group that works with them. So they came in late first quarter, early second quarter. Also, just to give everyone a feel, we have seen good momentum for the second half of the year with that. We have I guess one good stat that we had we have in closing right now with our SBA team more than we actually closed for the first half of the year. So we should see significant improvement in the volume there. In addition to that, our pipeline is the largest pipeline in SBA that we’ve ever had and so we should see good momentum for the second half of the year with SBA.

Emlen Harmon

Got it. I think fees that were around 700,000 last quarter, do you have a sense of what that look like this quarter?

Dallis Copeland

It was roughly the same.

Emlen Harmon

Okay, great. Thank you.

Kessel Stelling

Thank you.

Operator

Thank you very much. We’ll take our next question from Jefferson Harralson. Please announce your affiliation and then pose your question.

Jefferson Harralson

Hi. KBW. Just ask you guys about the SoFi relationship and the GreenSky relationship, just can you just talk about – I understand the GreenSky one but can you talk about how does SoFi relationship works and what type of growth do you expect to get out of it, if you can?

Kessel Stelling

Over the next couple of years we think that can be 2% to 3% of our balance sheet. You can call that maybe it balances 500 million, 600 million in that range is what we expect. Probably a mix of the two. We like these two. We thought they are among the most conservative approaches in the business and again, we’re kind of putting our toe in the water there. But like the fact that the GreenSky part is big ticket purchases, home improvement, SoFi is more student loan, refinance and high-quality underwritten on both of those. That’s what we like there versus maybe some other approaches of debt consolidation. We have avoided that side of Internet kind of lending and more approach of these two. So expect again – we’ve had good growth. We started with zero balances a year ago but I think when you start to get some payoffs there, I don’t think we’ll have huge incremental growth there over the next year or two but we see it being again probably in that 2% to 3% range over the next year and a half or so.

Jefferson Harralson

And how big is the book now of those two combined?

Kessel Stelling

If you combine them, they’re like 1%, like 240 million, 250 million in that range.

Jefferson Harralson

And then lastly, how you think about losses and reserving for those two books?

Kessel Stelling

Just not to get into too much detail there, these are partners of ours, but we have reserved appropriately for one of the relationships and we have kind of a credit waterfall for the other. I’ll probably avoid the specifics there but we think we’ve got appropriate reserve and appropriate waterfall in the losses as well on the other thing.

Jefferson Harralson

Okay. Thanks, guys.

Kessel Stelling

Thanks, Jefferson.

Operator

Thank you. We’ll take our next question from Jesus Bueno. Please announce your affiliation and then pose your question. Jesus, your line is live.

Jesus Bueno

Hello. Sorry about that. Jesus Bueno, Compass Point. Good morning, everyone.

Kessel Stelling

Good morning.

Jesus Bueno

Just jumping to the NIM stability, it was good to see the NIM stable quarter-over-quarter. If you can just go into kind of the puts and takes of that and whether – obviously a strong loan growth on the consumer side, whether kind of mix changes had any impact on that number?

Bob May

This is Bob. We were able to hold the loan yields flat as you saw within the press release tables and that’s really because of just the focus on pricing and spreads within the whole portfolio. The, I guess, pressure that we expect to see in the first quarter really because of the yield curve shift downward on the fixed loan side not necessarily on credit spreads overall. So we were able to increase in the quarter overall new loan pricing and we think we can essentially keep that going forward, but there’s just going to be some natural pressure from that lower yield curve on the long end. And then on the deposit side you see that we continued to keep deposits flat and we’ll continue to balance that growth in pricing.

Jesus Bueno

Got it, that’s helpful. Thank you. And just on the provision, see credit continue to improve and obviously the first quarter provision was kind of higher than the run rate last year. But I guess going forward, how should we think about the provision and what to expect there?

Kessel Stelling

Our provision has been a little lower than we expected in the first half of the year. Again that’s a couple of reasons. I think we’ve had good problem loan resolution but also the recoveries have been coming in, maybe a little more robust that I would have thought. That’s part of the reason we guided a little higher on charge-off. That’s kind of an unpredictable component sometime as far as the recoveries, but that has sort of driven provision down a little bit. I expect it to look more in the second half of the year like it did in the first quarter. So there’s going to be – again, recoveries could drive some volatility in there but I think with where we’re at from a balance sheet quality standpoint outlook of credit, I think it probably looks again more like the first quarter – the second half of the year versus this quarter in particular. We were pleased with that but not sure that recovery level will hold.

Jesus Bueno

Got it, thank you. And I might slip one more question one the SoFi agreement. Is this a flow purchase agreement or is it kind of more ad hoc, you can just kind of evaluate it either month-to-month or quarter-to-quarter?

Kessel Stelling

We had an agreement with them to purchase some of the loans we have. We own a certain part of that in our footprint and we have an agreement over the next I think year, year and a half I believe it is to purchase a certain amount on a per quarter basis. Certainly that’s in the contract. There’s room. We see things that are different than expected and on both sides but that’s something that we have negotiated over the next year and a half.

Jesus Bueno

That’s great. Thank you very much for taking my questions.

Kessel Stelling

Thank you.

Operator

We’ll take our next question from Jared Shaw. Please announce your affiliation and then pose your question.

Jared Shaw

Hi. Good morning. Jared Shaw with Wells Fargo.

Kessel Stelling

Good morning.

Jared Shaw

If you could just on the SoFi and GreenSky, what was the purchase origination this quarter with those channels?

Kessel Stelling

We had net growth. If you add them both up, around 100 million, 105 million adding both of those up together as far as the net growth.

Jared Shaw

And then in the actual gross originations?

Kessel Stelling

Jared, it was like 140, 150 range maybe, not more than 125 or so, yes, a little bit lower than that. There’s still some payoff loss that we’ve been in one of those programs now a year, so we’ll start to experience some payoff somewhere around 125. I think it’s in the right ballpark. And then we have the net obviously incremental growth of about 105.

Jared Shaw

Okay. Thank you. And then you had mentioned earlier on some of the new systems integration or new systems conversions. Is that more just general efficiencies that you’re seeking out on your own or will there be charges with that and more of a formal systems conversion, or is that more of like a Six Sigma of best practices seeking efficiencies?

Kessel Stelling

Well, most of what we described have been in our expense run rate as we go along our [indiscernible] system, our Genesis; several of those have been again longer-term investments that quite frankly over time we think give us some benefit. They have been in our run rate. There will be some ongoing in the future. There can certainly add to the expense and that’s just part of banking light these days. But these have been ongoing investments.

Jared Shaw

Great. Thank you.

Operator

We’ll take our next question from Christopher Marinac. Please announce your affiliation and then pose your question.

Christopher Marinac

Hi. FIG Partners in Atlanta. Kessel, I want to ask about how you manage capital in future quarters and to what extent acquisitions could play a role in the future?

Kessel Stelling

Thanks, Chris. Somehow I expected that question from you and thank you for your comments in the recent American Banker article. It’s a robust plan, Chris, that doesn’t start and end with calendar year. It’s an – Bob May has been a driver of that. It involves our Board. It involves our risk committee. It involves our audit committee. It involves continuous discussions with our regulators and it’s tailored to our company not versus any set industry standards. Obviously, we are a little more concentrated in real estate than some peers and we do factor that in to our stress testing and overall capital plan. So, again, we feel like it was a well thought out and executed plan in '16. And as we get to the completion of that plan we’ll give more color on '17. Now how that factors into M&A we said, always felt that it gave us flexibility. And certainly with the share repurchase plan you can always slow that down if you feel that’s prudent. I’m not suggesting it would. I’ll just say we’ll complete that through the remainder of the year. But it gives us flexibility but again we try to be very clear that our focus is on our internal returns and hopefully results will reflect that and we’ll continue to see and evaluate opportunities in the market both unconventional banks and some specialty areas as well. We had a chance to see a lot of those but we will remain very focused and disciplined and strategic in our evaluation. But the short answer is, the capital plan gives us flexibility and we believe it’s appropriate given our risk profile.

Christopher Marinac

Great. Thanks for the background on that. And I guess just back to the SoFi and GreenSky questions of earlier, as you have success with the portfolio, would you consider adding additional vendors into those initiatives or does that just get to complicated?

Kessel Stelling

We have explored that, but again we probably led more with conservatism there as we are just kind of getting in maybe a little later than others, trying to grow a little bit strategically again at our indirect side of our consumer portfolio. But we’ve looked at several over the last couple of years. There’s potential maybe next year or so. We look at this, evaluate it and have some success and add a little bit, maybe one or two more partners, that’s a possibility.

Dallis Copeland

Chris, I’ll just add that historically maybe Synovus as a company has been accused or thought of as moving slow and as it relates to these partnerships, I would just say we’ve been very deliberate and our teams have been very, very, very engaged in evaluating multiple partnership opportunities and looking at backwinds and discussing with management. I know Wayne Akins and his team have been very involved, Kevin and his team have been in onsite visits with one of our partners. So again, I think we would continue to look but it is not something we believe replaces our core asset generating machine, it’s just a diversification and growth opportunity but will be very deliberate. And quite frankly I think I’m pleased that we’re as deliberate as we are in that space.

Christopher Marinac

Sounds good. Thanks, guys. I appreciate it.

Kessel Stelling

Thanks, Chris.

Operator

We’ll take our next question from John Pancari. Please announce your affiliation and then pose your question.

John Pancari

Evercore ISI. Good morning, guys.

Kessel Stelling

Good morning.

John Pancari

Wanted to – back to M&A, Kessel, I know you had alluded to it that you would continue to evaluate traditional banks as well as specialty areas. I guess on the specialty areas, what type of businesses would you look at? And then, separately, in terms of traditional whole bank M&A, could you just remind us what would be an optimal target size? I know some banks have expressed interest in buying larger bank targets because of the time required to acquire and integrate, and it may not be worth it for smaller banks. So what’s your thought there and then also geographic opportunities? Thanks.

Kessel Stelling

I’ll respond to that, John, on multiple fronts and knowing that we have a few investors that encouraged me to never even speak to M&A, but when I’ve been asked a question I’ll certainly do it for you. So in the specialty area, we’ve really seen some different intriguing opportunities, different types of asset classes. I don’t want to go into specific ones but they would be opportunities that would complement our existing business, maybe give us some diversity, maybe bring some skill sets into our company that we don’t currently have and not in a transformational way but just strategic of opportunities that we think would actually be irresponsible for us not to look at and evaluate. So I won’t get into any particular types but certainly opportunity there. In terms of anything big I just think again our focus needs to be on internal returns and our currency, even though we’re pleased with the three-year track, five-year track, we know that in a big transaction, it could be tougher and so we don’t see a big transaction on the horizon. We think it would be again prudent to look at opportunities that give us something we don’t have; market share where we already have a good presence, management in a market where we don’t have much of a presence, overall leadership but not just an acquisition to do headlines. So we’ll be very careful both from any kind of changeable book value dilution and make sure that it’s something that not just financially makes sense but strategically makes sense as well. And again, given your comment on geography, it would be more likely obviously to be in footprint because for us to consider an opportunity, we have to make sure we were on the higher end of some of the cost saves that you see printed in the market and typically your higher cost saves are going to come from market opportunities. So those are just kind of some of the broad parameters and again, it’s not where our core focus is but we certainly have the opportunity to review these types of transactions on a very regular basis.

John Pancari

All right, that’s helpful, Kessel. Thank you. The second question is just around – I guess it's really on credit, but I know you’ve seen historically some pretty good growth post-crisis in some of your wholesale businesses, whether it be some of your larger corporate loans, your national CRE, or any of the shared national credits you put on. Have you seen any adverse migration in those portfolios outside of energy where you’re seeing any cracks in any of these corporate-related relationships? Thanks.

Kevin Howard

John, I’ll take that. Knock on wood but no, we have not seen very little migration there. Obviously, as you mentioned we kind of avoided the energy side, which was good. But we haven’t really had issues there. It’s an area that struggling to grow. There’s a lot of acquisition. We’d like to see more expansion, capital expenditure type opportunity drawing on lines there. So that’s been a little slower than what we thought but we’re certainly positioned where we’ve had good years, a lot of good years of growth, several years in a row there. But as far as negative migration, had just very little, one or two smaller issues and that’s been about it.

John Pancari

Great. Okay. Thanks for taking my questions.

Kessel Stelling

Thanks, John.

Operator

We’ll take our next question from Jennifer Demba. Please announce your affiliation and then pose your question.

Jennifer Demba

Thank you. Jennifer Demba, SunTrust Robinson Humphrey. Kevin, I have a question on the investment commercial real estate portfolio. About 25% is now multifamily. Could you talk about just your internal concentration limits within the CRE portfolio and how you look at it these days?

Kevin Howard

Yes, I think we have both just the last – coming out of the crisis it’s had a complete, as we mentioned before, switch in the type of real estate lending. We were probably at that time at the mid-40s kind of going into the crisis. We’re in the low 30s. We want to get that down to about 30% of the balance sheet. I think we’re 32 now, but I think the big thing for us is we’re highly – we want that to be in the income-producing side versus the residential. It was 80-20 residential related. It’s completed reversed. It’s 80% income producing. We’re watching that. If we’re going to have one of the segments that’s a little higher than the others fairly balanced between office, multifamily, not as much in hotel and shopping centers but pretty balanced portfolio. We’re going to have one that’s probably on the higher side. We like the multifamily space. That portfolio performed better than any we had during the crisis and we got a lot of legacy developers who bank with us. We got a strong large real estate corporate team that has brought in some new business for us. Again, it’s sort of elevated. I think it will level off but over the last couple of years it’s shifting some of the – again, some of our legacy customers coming back and borrowing again that made it through. Some of the best advantage of underwriting that I think in 25 years has been in the last two or three years. Now, we are all watching those levels and that’s one of the reasons we pulled back in construction as we have seen some rent growth in a couple of markets kind of accelerate maybe higher than our appetite, so we pulled back in a couple of markets. They are strong markets but we’re still a little cautious there. We got to be careful on all this money coming in to the U.S. that has driven cap rates down. We’re not lending into those cap rates I can assure you. We’re going to underwrite the property based on potential cash flow maybe versus value. And so just the space is doing good to us, just got to make some student housing that has fit our community bank well. I think 15% to 20% of it is student related. So we got a good diversity in the multifamily as well and a good diversity in the geography. But it has had a high pace of growth over the last couple of years. We’re conscious of that and I think you’ll see that more level off over the next few quarters. We’re going to stay in that business. It’s a good business, have very low loss rates associated with it, like I mentioned, but we’re going to be a little cautious on construction there.

Jennifer Demba

What geographic areas are you concerned maybe overbuilding in multifamily today, Kevin?

Kevin Howard

We have been a little conscious of some of the – all the units in Atlanta, there’s been quite a bit of new construction there although it’s got incredible job growth numbers, I think it will absorb it. But we’re conscious there. As well as Nashville. Nashville is a great diverse market, 30,000 plus I think year-over-year job growth and good jobs. So I think it can handle it but it’s still a little rich for us probably. So those are a couple in particular that we’ve been watching but we’re still real bullish there. But again when we see numbers, rent growth kind of outpaced wage growth at that pace, from an underwriting standpoint we’re going to probably pull back and watch that a little bit more.

Jennifer Demba

Thank you.

Kessel Stelling

Any more questions, operator?

Operator

It looks like we are running right at the end of start time. I’d like to turn the floor back to your speakers for any closing comments they’d like to make.

Kessel Stelling

Okay. Thank you. We didn’t show any more calls. If there were, feel free to follow up and call Bob May and we’ll be happy to respond to you. I just want to thank everyone again today for being on the call. Again, we saw a quarter of very solid progress and really a result of a lot of great efforts by our team.

I do want to close again with a thank you to Tommy Prescott. He hasn’t gone anywhere. Matter of fact, it’s odd his seat next to me right now is empty. I don’t know if that says something about Tommy or something about me, but nobody took the seat today. So we hope Tommy will be back in probably later today or tomorrow. But I just want to say this about Tommy.

When I joined the team here in Columbus on February 2010, I was welcome with open arms by most of the people in this room but I think more so than most, Tommy and our former General Counsel Sam Hatcher kind of held my hand the early days and get me from jumping off the ledge. The windows wouldn’t open, so that was part of it as well.

But he has been such – and Sam had said he would retire when we paid off TARP and I think two minutes after the TARP announcement, Sam told me he was retiring and Tommy has stayed beyond that. But he has certainly been a friend and confidant of mine and been a steady hand on this company and on this company’s financial reporting and performance during some of the most difficult times and quite frankly during some very good times.

So I just want to say probably thanks to Tommy again. I hope some of you will reach out to him. He will be with us through the transition but on the next earnings call, Kevin Blair should be joining us. So again, thank you to Tommy. And really thank you for all of the team here across our five-state footprint who I think has day-in and day-out goes above and beyond to make sure that our customers and our shareholders get the performance they are expecting.

So thank you all. Have a great day and look forward to talking to you in the very near future.

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.