Synovus Financial's (SNV) CEO Kessel Stelling on Q3 2016 Results - Earnings Call Transcript

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Synovus Financial Corp. (NYSE:SNV) Q3 2016 Earnings Conference Call October 18, 2016 8:30 AM ET

Executives

Bob May - Senior Director, IR, and Capital Management

Kessel Stelling - Chairman and CEO

Kevin Blair - CFO

Dallis Copeland - EVP and Chief Community Banking Officer

Kevin Howard - EVP and Chief Credit Officer

Analysts

Jefferson Harralson - KBW

Jennifer Demba - SunTrust Robinson Humphrey

Ebrahim Poonawala - Bank of America

Kevin Fitzsimmons - Hovde Group

Jared Shaw - Wells Fargo Securities

Brad Milsaps - Sandler O'Neill

Nancy Bush - NAB Research

Christopher Marinac - FIG Partners

Jesus Bueno - Compass Point

Operator

Good morning, ladies and gentlemen, and welcome to the Synovus Third 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, and welcome to our third quarter earnings highlights call. As usual I will walk us through the deck and then we'll open up the floor to questions to our team, which today includes Kevin Blair, our new CFO, and the usual team members to address any and all of your questions.

So let's just right in the deck on page three, profitability continued to improve during the quarter, we reported net income available to common shareholders of $62.7 million, which represents a 13.2% increase versus a year ago. Diluted EPS was $0.51, up 10.1% versus the second quarter of '16, and 21.3% versus the third quarter '15. Adjusted diluted EPS was $0.52. That excludes $1.2 million in restructuring charges, $550,000 in merger-related expenses, and $189,000 for a litigation net recovery. So that's up 5.2% versus $0.49 in the second quarter '16, and up 23% versus $0.42 in the third quarter of '15.

Our return on assets was 88 basis points, improving five basis points sequentially, and seven basis points versus a year ago. Adjusted ROA increased to 90 basis points, up two basis points sequentially, and up eight basis points versus a year ago. Total revenue of $294.1 million, up $4.8 million or 1.6% sequentially, and up 7% versus a year ago, and the adjusted efficiency ratio improved to 60.55% for the quarter, a 99 basis point sequential quarter improvement, and 128 basis point improvement versus year-ago.

Moving to the balance sheet, total loans increased $202 million or 3.5% annualized on a sequential quarter basis, and grew $1.4 billion or 6.4% versus a year ago. We'll give a little more color about that loan growth later in the call. Total average deposits grew $422.3 million or 7.1% annualized versus second quarter '16, and 5.1% versus the third quarter of '15.

A couple of highlights from credit quality and capital management, our NPL ratio, 64 basis points, improved eight basis points from the third quarter of '15. Our return on average tangible common equity improved 126 basis points versus the third quarter '15, to 8.96%. A little bit on capital management, during the third quarter we entered into an accelerated share repurchase agreement to repurchase the remaining shares under the $300 million repurchase program. $289.4 million or 9.7 million shares have been repurchased to date at an average price of $29.78. Our total share count has been reduced by 7% from a year ago, and capital ratios remain strong with a common equity Tier 1 ratio of 9.97% versus 10.01% in the second quarter of '16, and 10.60% in the third quarter of '15.

Moving to slide four, a little more color on loans. We had sequential quarter growth of $202 million or 3.5% annualized on a sequential quarter basis, and 6.4% versus third quarter '15. Retail loans grew $182.1 million or 15.7% annualized, and C&I loans increased $60.6 million or 2.2% annualized partially offset by a decline in CRE loans of $42.1 million or 2.2%. Year-over-year loans have increased $1.4 billion or 6.4% annualized. Retail loans grew $648.3 million or 15.6% annualized, C&I loans increased $490 million or 4.7% annualized, and CRE loans grew $258.1 million or 3.6%.

We were pleased with the continued portfolio diversification in our retail growth, both in consumer mortgages and lending partnerships. Consumer mortgages of $2.24 billion grew $111 million or 20.7% annualized sequentially, and the lending partnerships portfolio totaled $352.0 million as of September 30, 2016, and increased $98.2 million sequentially.

We continue to see optimization within the CRE portfolio with growth in investment properties portfolio while seeing declines in the 1-4 family and the land acquisition categories. And from a market perspective, we generated strong loan growth in key markets such as Atlanta, Birmingham, Chattanooga, and Nashville, as well as several other markets throughout our footprint, and we do expect loan growth, including the Entaire portfolio of approximately 6% to 7% for 2016.

Turning to slide five, you'll see total average deposits of $24.03 billion increased $422.3 million, or 7.1% annualized versus the second quarter of '16, and increased $1.17 billion or 5.1% versus the third quarter of '15. We continue to decrease our reliance on higher cost time and brokered deposits which represent 19% of average third quarter '16 deposits versus 20.3% a year ago. Average brokered deposits for third quarter '16 include $313.9 million of our new bank deposit sweep product which was introduced in May of 2016, and that compares to $139.3 million in the previous quarter. Average core transaction accounts increased $512.7 million or 12.1% annualized versus the second quarter of '16, and $1.26 billion or 7.8% versus a year ago.

Average non-interest bearing deposits grew $185.8 million or 12.1% versus 2Q '16, and 8.7% versus 3Q '15. We recently received our annual FDIC deposit market share data. I continue to be pleased with the traction we have in more of our key markets as well as overall markets, with customer deposits growing 6% over the measured timeframe. Over the last year, we continued to rationalize our branch network, focusing on improving the mix of our deposits by reducing reliance on time deposits, and we've lowered our overall funding costs, but have also largely been able to maintain and grow market share throughout our footprint.

Moving to slide six, net interest income is $226 million, increasing $4.6 million or 2.1% versus the second quarter of '16, and increasing $8.2 million -- $18.2 million or 8.8% versus the third quarter of '15. Our net interest margin, pleased to see, stable at 3.27%, obviously unchanged from the second quarter. The yield on earning assets was 3.71%, down two basis points versus the second quarter. The yield on loans was 4.14%, down one basis point versus the second quarter. Our effective cost of funds was 44 basis points, down two basis points from the second quarter of '16. Our cost of interest bearing core deposits was down one basis point to 35 basis points. The effective cost of core deposits, which includes non-interest-bearing deposits was 24 basis points versus the second quarter of '16, at 25 basis points.

Net interest income percentage growth for the full year is expected to be in the high single digits. Our fourth quarter NIM is expected to remain stable versus the third quarter. That assumes no changes in rates. If the Fed were to increase short-term rates in December, we believe the 4Q NIM is expected to increase by approximately one basis point.

Turning to slide seven, non-interest income, 3Q '16 total non-interest income was $68.2 million grew $269,000 or 0.4% versus the second quarter, and 1.6% versus the third quarter '15. Core banking fees of $34.8 million increased $989,000 or 2.9% from the second quarter of '16, and increased 0.6% from the third quarter of '15. Gains from the sale of government guaranteed loans/SBA loans of $1.3 million increased $579,000 or 80.9% from the second quarter of '16, and 15.6% from the third quarter of '15. Our fiduciary/asset management, brokerage, and incurrence revenues of $19.6 million decreased slightly $250,000 or 1.3% from the second quarter of '16, and increased 2% from the third quarter '15. Mortgage banking income of $7.3 million increased $1.4 million or 23.4% versus the second quarter of '16, and 22.9% from the third of '15.

Turning to slide eight, third quarter of '16 total non-interest expense was $185.9 million, and decreased $2.7 million or 1.5% versus the second quarter of '16. It increased 4.5% versus the third quarter of '15. Our 3Q '16 adjusted non-interest expense was $183.9 million, increasing $1.5 million or 0.8% versus the second quarter of '16, and 3.6% versus the third quarter of '15. Employment expense was $101.9 million, up $4.9 million or 5% sequentially, reflecting annual salary increases and a higher incentive comp. We continue to manage this important component of our expense base which reflects 1.7% reduction in headcount versus a year ago, and we continue to invest strategically in talent and technology that enhances the customer experience and we believe drives revenue growth.

Advertising expense was 5.6 million, down 1.8 million versus the prior quarter. You may recall we guided advertising expense for the second half of the year would approximate the first half of the year, which was 9.8 million. We now expect that to be slightly lower than the first half of the year.

Pleased to see adjusted efficiency ratio improved to 60.55% this quarter from 61.54% in 2Q16, and 61.83 in 3Q15. Our third quarter '16 efficiency ratio improved to 63.13% from 65.11% in the second quarter of '16 and 64.65% in the third quarter '15. Our year-to-date adjusted non-interest expense of 545.6 million increased 16.5 million or 3.1% versus a year ago. We continue to expect a low single digit increase in adjusted non-interest expense. Full year, we remain very focused on achieving our long-term goal of an adjusted efficiency ratio below 60%.

Turning to slide nine, you can see credit quality trend remained favorable for the quarter. In the first graph, you'll see a continued reduction both the NPA and the NPL ratio. NPL declined $43 million or 19.3% over the prior year and 8.3 million or 4.4% over the prior quarter. Past dues remained historical low levels. As you will recall, last quarter we lowered our guidance for net charge-offs for the entire year to range of 10 to 20 basis points. Our net charge-off ratio year to date this quarter is 12 basis points. We believe we'll end the year towards the lower end of our guidance. Kevin Howard will be happy to take more questions on that later.

Provision expense $5.7 million reflects a decrease of $1 million from second quarter of 16. Year-to-date provision expense is $21.8 million compared to $14 million last year. The allowance of loan losses into the quarter, in third quarter was 254 million or 1.09%. It represents a sequential quarter decline of 1.3 million when compared to prior quarter and $2.9 million increase from the year ago. And we're pleased to see another strong quarter. From the standpoint of credit fundamentals, we really do believe we have a disciplined approach to loan growth require our bankers and our credit team continuing to allow the company to grow while maintaining a very sound and diversified balance sheet. We look forward to closing out the year with much stronger credit profile than we had just a year ago.

Moving to capital on Slide 10, we maintained strong capital ratios. Our third quarter 16 CET 1 ratio was 9.97% versus 10.01 in the second quarter, well above regulatory minimums. Tier 1 capital 10.06%, unchanged versus second quarter. And as you'll see as the disallowed DTAs continue to decline, Tier 1 capital has now began to exceed CET 1 capital.

Total risk-based capital ratio 12.05%, unchanged versus the second quarter. Our leverage ratio, 8.98% versus 9.10 in the second quarter of '16, tangible common equity ratio 9.28% versus 9.52% in the second quarter of '16, and again, the disallowed ETA continues to decline a 249.9 million decrease from 32 million from the second quarter '16. Our third quarter 16 Basel III common equity ratio Tier 1 is estimated 9.49% on a fully phased-in basis. And again, we returned a $106.2 million to shareholders during the quarter including the repurchase of $91.5 million of common stock and 14.7 million in common dividends.

Continuing with capital management on Slide 11, again as you will recall we announced a $300 million common stock repurchase program in October 2015. Since inception through September 28, 2016, we completed a repurchase of common stock through open market transactions totaling 250 million or 8.5 million shares and average price of $29.47 per share. Effective September 29, '16, we entered into an accelerated share repurchase agreement to repurchase remaining $50 million of common stock under the program. We repurchased 1.2 million shares upon execution of the ASR agreement at an initial average price of $31.87. And remaining shares we repurchased upon settlement of the ASR on or before December 28, 2016.

So you may have noticed today we released the results of our DFAST submission in Investor Relations section of our website synovus.com. Results showed the capital ratios are maintained above regulatory minimums throughout the forecast period in severely adverse scenario of the holding company and the bank. As we talk about our go-forward plans in the fourth quarter, through the completion of our annual financial planning process, we expect to outline guidance for 2017 balance sheet growth, revenue and expense opportunities, and capital management activity. We plan to share this guidance on the January earnings call.

Key themes for our performance targets continue to be balanced growth in all three categories: our loan portfolio, our focus on positive operating leverage to achieve our targeted efficiency ratio of below 60% a necessary step to reaching and exceeding 1% return on average assets. And prudent capital management will allow for continued EPS and return on average tangible common equity improvement.

Again for the remainder of the year, we expect continued loan growth funded by core deposit growth. Talent acquisition will remain a high priority especially those who will drive mortgage and retail brokerage fee income growth as well as specialty lenders in C&I space. The focused execution or our retail strategy is expected to bring further growth in our high value targeted segments.

We expect expenses to increase slightly with continued investments in talent, technology, improve the customer experience. And we expect an even stronger credit profile at year end compared to a year ago. And again, foundational assessment in any of these areas is our team is just very highly engaged everyday in identifying needs of our customers and providing the kind of exceptional service and solutions that build total and lasting relationships.

So now, operator, I would like to open the line for questions. I will remind our callers that we now have two Kevins in the room, Kevin Howard and Kevin Blair. So, if you have a question for Kevin, we'll do our best determine which one, but you feel free to request to one of your choice, but all of our team is ready to open questions -- to answer questions. So, now we can open the lines.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] And we'll take our first question from Jefferson Harralson. Please announce your affiliation and then pose your question.

Jefferson Harralson

Hi, thanks. KBW. I was going to ask you guys about balance sheet management this quarter. Looking at the average balance sheet, you had a big increase in the mortgage loans. Was that just a functional or a good mortgage quarter, or was that a strategy to hold more loans on the balance sheet?

Kessel Stelling

Jefferson, I'll let Kevin Howard kind of talk about movement in the balance sheet and certainly portfolio mortgage product is a part of that. So, Kevin you want to talk about the balance sheet in general?

Kevin Howard

Yes. Mortgages in particular we had a good momentum there for a several quarters. It's actually down a little bit from last quarter, but it's a very good quarter. We expect that seasonality in that in the second and third quarter particular, that will come down a little bit in the fourth quarter most likely, but we've been real pleased with that really in the strong markets as well where we want to be. We've had a lot of new boots on the ground in places like Nashville, Atlanta, Tampa, and had a lot of good growth there on the mortgage side.

But yes, that's been intentional to hold more of the private clients. We've got several programs positioned and even some jumbo loans, but had good growth among all three of those. But overall from a balance sheet, yes, we were happy. It was -- you know, it's not -- the economy is not overly robust right now, and -- but at the same time, we grew 3.5% in -- you know, C&I and that's ought [ph] to follow more of the year-over-year, we've been in mid single digits -- are closer to 4% there on C&I, but we did have some growth there too, 2% growth in C&I as Kessel mentioned. Good growth in senior housing on the C&I side. We had some positive growth in C&I and the Community Bank as well, in our middle market and large corporate. So we had not big numbers, but we were positive in a pretty challenging quarter and a pretty challenging environment on the C&I side.

And also as Kessel mentioned, we had good growth in our investment real estate, and that's intentional. We have focused more on the investment side. We had $50 million of growth there. Even though we pulled back construction a little bit, I think construction has been a lot less component of the investment real estate than it was at the beginning of the year. The big runoff there that gave us a net reduction in real estate was more the legacy residential side of it. We had a $90 million reduction, a little bit bigger than we thought it would be, in the residential-related side, but again, a lot of that is legacy. So anyway, I think a fairly balanced quarter when you look at it from a strategic side on the real estate, and the C&I, and the consumer.

Jefferson Harralson

All right, and it looks like –- would you say that you guys built liquidity in this quarter too, I'm looking at the Fed funds, sold piece of it. So you maintain margin while building liquidity, or is it –- it seems that's about a $100 million increase to that Fed fund sold number?

Kevin Blair

Yes, so Jefferson, this is Kevin Blair. As we were able to grow core deposits for the quarter, we were able to pull back on some of the wholesale funding. So you'll see a decline in FHLB borrowings as well as some of the repo accounts. And again, just it's simply a function of being able to grow core deposits.

Jefferson Harralson

All right. Great, thanks guys. I'll leave it to someone else.

Kevin Blair

Thanks, Jefferson.

Operator

Thank you very much. We'll take our next question from Jennifer Demba. Please announce your affiliation and then pose your question.

Jennifer Demba

Thank you. SunTrust Robinson Humphrey. Two questions; first of all, how was your growth in South Carolina this quarter, and how has it tracked relative to your internal expectations over the last several quarters?

Dallis Copeland

Hi, Jennifer, this is D [ph]. Just talking about South Carolina, and I'll touch on, I guess, loan and deposit growth. Two components I would say are deposit growth this quarter was strong. It would have been one of our strongest market from a deposit side -- from a deposit side growth. We have had -- earlier in the year we have had some struggles with growth across South Carolina on the loan deposit -- excuse me, on the loan side from South Carolina. It was okay, but as you can see it's not listed as one of our strongest growth markets.

Jennifer Demba

Any particular reason you've been struggling with growth there, it seems like it's economically robust?

Dallis Copeland

Yes, we've actually seen good growth in the upstate this year. We've had some decent growth in the center of the state as well. We had a couple of larger customers that were related in the Charleston Area, and they've driven the majority of what that reduction has been. There is some positive momentum now, but those were early part of the year, and we've been overcoming just a couple of larger customers that we actually actively decided not to bank any longer.

Jennifer Demba

Okay. And second question is on M&A, Kessel, just curious as to what your interest level is at this point, and what types of - is it more non-bank focused at this point than whole bank focused?

Kessel Stelling

Yes, I'd say it's consistent with prior quarters, Jennifer. We were very pleased to announce the Entaire and then subsequently close that transaction, and we're that bit right into our strategic priorities of balance sheet and revenue diversification at terms I think that were good for both parties. And we're really excited about having that team on boarded, and seeing that portfolio grow. We would continue to have interest in those types of strategic partners again where we think one plus one would equals three. And we think that can be the case with Entaire. There is a lot of bank -- still chatter out there, but we've been, again, very consistent that our interest is not in doing a large diluted transaction that our current shareholders would pay the price for. So we'll keep our powder dry, we'll be very disciplined as I think we have been, and we've had a lot of looks. And again, we wouldn't look at a whole bank acquisition, but again, it would have to make great strategic and financial sense. And again, I think there'll be plenty of opportunity in the longer term as our currency gets stronger. So our appetite is unchanged again, and we think Entaire is a great example though of the types of acquisitions that using our currency wisely and picking the right partners can have great, both, short-term and long-term benefit for our shareholders.

Jennifer Demba

Are there a lot of opportunities like Entaire out there in the marketplace right now?

Kessel Stelling

Well, we want to say we got the best one out there, and as a complement to Jonathan Rosen and that team. But I think there could be others. And without speaking specifically to any I think a lot of people have seen this transaction and certainly others. And so we'll continue to keep our eyes open and talk to our investment banking partners about the types of opportunities that would make sense. I don't know how many there are just like this, but I'm certain there are more.

Jennifer Demba

Thank you.

Kessel Stelling

Thank you, Jennifer.

Operator

Okay, we'll take our next question from Ebrahim Poonawala. Please announce your affiliation and then pose your question.

Ebrahim Poonawala

Hi, good morning. I'm from Bank of America.

Kessel Stelling

Good morning.

Ebrahim Poonawala

I guess those questions, Kessel, on capital management there. I appreciate you sort of wanting to wait until Jan in terms of announcing any other capital actions. But as we think about where capital ratios have moved over the last year, and in terms of your desire to keep some dry powder either for portfolio acquisitions or whole bank deals, should we expect any change in terms of your philosophy around capital return. And if you can sort of also help us understand what is the constraint when we look at the capital ratios. Is there one particular ratio that you're looking at more closely?

Kessel Stelling

Yes, thanks, Ebrahim. Maybe Kevin Blair and I would tag team that. So I would say there's no change in overall philosophy of capital priorities. We thought that prudent, efficient capital management was key to our go-forward story. And I hope over the last two years our shareholders believe we've demonstrated that. And as you know, historically we had discussed on this call, but when we announced our capital plan last year it was a 15-month plan. That's why we've shifted into the first quarter of next year. So again we want to be very prudent. We want to make sure that we manage it efficiently; we return what we can, that we keep the appropriate focus on the common dividend, and then do keep enough for that potential opportunity.

And as far as different ratios, we don't give a lot of guidance about absolute ratios, because as you know those are completely based on stress testing, regulatory discussions, overall economy, and specific to any bank. But let me just turn to Kevin Blair and let him give any color he'd like to as it relates to capital.

Kevin Blair

Thanks, Kessel. So Ebrahim, one of the things that -- it's a good time to ask the question given the DTAS [ph] results that we just shared. And if you go look at the disclosures you'll see that through that severely adverse scenario we had roughly 320 basis points of capital erosion that includes capital actions, including keeping the dividend and share repurchase through the nine quarter forecast period. If you were to back those out, our capital erosion was roughly a little over two percentage points. So I give you that as a backdrop. As we look at our ratios, as Kessel said, there's no magic to establishing a ratio, but we're going to continue to look at that relative to the capital erosion that we would see in our stress test scenarios to be able to gauge what levels we want to maintain going forward.

We talked about in previous earnings that the 12% total risk-based capital is the number that you would expect to continue to see as well as the Tier 1 ratio at 10%. Our CET1 number is slightly below 10%, as Kessel shared earlier. I think you could see that number deviate plus or minus 50 basis points just based on capital actions. But going forward you will continue to see good capital distribution as we share our 2017 plan.

Ebrahim Poonawala

That's helpful. And switching gears just in terms of loan growth. Kessel, if I heard you correctly you mentioned the lending partnerships transfer [ph] of loans were at $352 million this quarter up about $100 million. And I recall last quarter you said over the next couple of years that portfolio can go to maybe five to 600 at the pace that we've been at in the last couple of quarters, looks like we'll get there in the first half of next year. So could you remind us in terms of how comfortable you are in terms of that portfolio being more than just 2% to 3% of the total loan book, and should we be worried about in terms of credit around those loans, and if not why not?

Kessel Stelling

Well, yes, let us tag team. So I think we got it to maybe up to around 3% of the balance sheet, and we want to be very deliberate and methodical about how we on boarded both of those relationships. And our senior team have been in constant communication with senior teams from both of our partners on a very regular basis. We've been very pleased with both of those partnerships, both the quality of the asset generated and the overall yield in relationship. And again, we'll continue to look at what we target. But Kevin why don't I turn to you, Kevin Howard for additional color on -- and we're referring to, again, SoFi and GreenSky, but any color you want to add to those.

Kevin Howard

Kessel, you said it well. I mean, we've been pleased with the partnership. What we're seeing from a quality standpoint and yield risk I suggested and I think you're right. We're probably -- if we win at this pace it would be about the middle of next year before we guided the 2% to 3% of the balance sheet. It's probably a little further because we'll start to get some payoff velocity there. As we've been revving it up there's been over the last couple of quarters with SoFi and then GreenSky, maybe we're at a full year now, but we'll start getting reductions there. So I think that gives us runway going into next year. We'll evaluate that before I come back in the next quarter or two, see where we're at. See if we want to take that position up a little higher. Right now we'll stay between our 2% and 3%.

We do like what we've seen. We like to purpose own -- SoFi is an opportunity for refinancing student loans at better terms for the borrower than they may have had, and that's a good purpose. GreenSky is more point-of-sale home improvement type loans. These, either one are debt consolidation type loans, so we like that going in, and we like the scores we've seen, in the mid to upper sevens on average is where we've seen as far as FICO scores. So we like the quality, and we like the overall profile. And we'll keep evaluating that whole position as we go forward.

Ebrahim Poonawala

Got it. And if I may sneak in just tied to that on credit, I think overall you mentioned 10 basis points for the -- 10 to 20 expected to be at the lower end. To the extent you have any visibility I'm just wondering if you can talk to 2017 when -- like what do you think in terms of what's the reasonable rate of charge offs, and how much room do we have on the reserves, both from a ratio and a dollar standpoint, if you can give any clarity that would be helpful?

Kevin Blair

I'll start with the charge-offs, and as Kessel mentioned, we do think obviously where we're at, at this point in the year, that's not too hard of a call, that we think we'll be in the lower end of that guidance that we already adjusted down during the year. I think it's going to tick up into next year some. One of the reasons we've been down on charge off is the recoveries have been a little more robust than what we thought. As we got further away from the recession my view was that the recoveries would start becoming less of a factor. And quite frankly they've stayed pretty steady. And our gross charge offs have been 18 to 20 basis points over the last three quarters. But net, obviously with the recoveries should've brought that down.

And that's, I think, number one, we're in a fairly flat economy. And you can't help but to be conservative going forward, and think that -- and we're growing at a pretty healthy pace. There'll be some provisions, some credit cost in there. So a little bit maybe -- I think it's smart to think that that could be elevated a little bit more next year. As well as I think the recoveries will -- you know I've said this already before a couple of quarters ago, but I do believe next year based on kind of what we see as far as recoveries they will be less of a factor. So we do think that'll tick up some. We're not ready to make a hard call, but I don't think they'll stay in this 10 to 12 basis point range as far as charge off.

And Ebrahim, I think your other question was more toward the reserve I guess. There's probably -- our thoughts are, and it's been this way all year, it's been flat from reserve from a dollar standpoint, ticked down a few dips from our ratio. I think there could be, our thoughts are, it's probably the same, probably flat on dollars, and potentially a tick -- a BIP or two down over the next quarter or two, could be in there. I don't see it going a whole lot lower than that. As I think -- again I think there'll be little bit more flattening out moving into next year.

Ebrahim Poonawala

That's extremely helpful. Thanks for taking my questions.

Kevin Blair

Thank you, Ebrahim.

Operator

Thank you very much. We'll take our next question from Kevin Fitzsimmons. Please announce your affiliation and then pose your question.

Kevin Fitzsimmons

Hovde Group. Good morning, guys.

Kessel Stelling

Good morning, Kevin.

Kevin Fitzsimmons

Kessel, you all have been talking for quite some time about diversifying the loan book, and specifically deemphasizing commercial real estate, and emphasizing C&I and retail. More recently with the scrutiny that the regulators have put on the CRE concentrations, and I know you talked about it last call. What has that done or what have you observed that that has done to C&I pricing and structure. And we've heard from a few banks that what this scrutiny has done is it's caused some more traditional commercial real estate heavy banks to quickly deemphasize that and jump into C&I even if they're not -- they don't really have an expertise built up, and that's causing more undisciplined pricing? And just wondering if you're seeing that, is that having anything to do with the slower pace of growth in C&I this quarter, and just your general sense on that? Thanks.

Kessel Stelling

Yes, let's try a tag team there, Kevin Howard was nodding. We were talking yesterday Kevin about if Kevin asked a Kevin a question for the two Kevins how to answer that, so he was saying to me, well, we'll let Kevin Howard jump on that too in terms of what they're seeing in committees. I think naturally the answer is yes. Now going back to the CRE and additional scrutiny I think the guidance really goes way back, and what we really, in our minds, were ahead of it. We put in steps to slow and curb the construction side of our real estate lending late last year, and got a lot more intense heading into this year. But yet we've still seen great opportunity and great volume. And we know it's created some pressure on some actually good customers in that space, and we've done our best to try and accommodate.

So what CRE opportunities we've seen we still see good equity, good opportunities for pricing there. But I think the natural byproduct is, yes, those that maybe don't have the expertise to jump in and those that do have the expertise lower price. Kevin maybe you can talk about what you're seeing in committee, and not to name names but just examples of that, because I'm sure we're seeing that.

Kevin Howard

Yes, from a C&I perspective -- I mean, it's a good point, Kevin. There it is by far the most competitive space to lend in, and that I'll talk, coupled with that, there's not a lot of your typical expansion in CapEx that you'd like to see in a slower growth economy. That's what we're obviously going through. So that makes it even more competitive when there's less to shoot for, so it definitely is. But we haven't tried to push that too hard. You see, of the three components, it's the least of our growth -- if you look at a year-over-year basis, we're probably 3% to 4%, as I mentioned. And we rely on a lot more on our specialty lines, where we think that's -- we've had a lot of our growth from senior housing. Then that did more this year then maybe we have some of the other parts of the portfolio. But we're not trying to push that too far. We're not trying to just flip the switch.

And also, we're not abandoning the real estate side. I think we're going to have healthy growth next year in real estate. Part of that was intentional and not necessarily regulator push, but we kind of have internal limits. And we were getting close to 20% of investment portfolio was in the construction phase. That's something we wanted to move down. I think we've moved it down to close to 13%. So in intentionally pulled back on construction a little bit this year. And also we have good dialogues with our regulators. We're not near the 300%, you know, the 100 and 300 guidance, I think we're more like 50 or 60 of the 100, which is development and construction, and then your overall CRE levels are in the mid-twos. And we got plenty of runway there. And I think the key there is -- and they know we have more of a real estate-centric, where we are in our footprint.

And I think our regulators thought we were on top of it, and have good data and market intelligent there. And it's something we've been building over a while. So I think there's -- so there's no discomfort that I'm aware of there. It's just we all wear those limits, but we've had -- again we're not abandoning that. We'll continue to grow. Our focus has been more, again as you mentioned, being more diversified. And I think that you could -- and you noticed the results for the last two years have been very mixed between C&I, CRE, and retail, and that's been intentional.

Kevin Fitzsimmons

Okay, great. That's all I had. Thanks guys.

Kessel Stelling

Thanks, Kevin.

Operator

Thank you very much. We'll take our next question from Jared Shaw. Please announce your affiliation and then pose your question.

Jared Shaw

Hi, good morning. Thanks. Wells Fargo Securities. Just looking at the other side of the balance sheet, looking at the funding, given where the loan-to-deposit ratio is and some of the growth in the newer lending segments, where do you see loan-to-deposit ratio going, and would you envision any change to the funding strategy as you look out over the next year?

Kevin Blair

Jared, this is Kevin Blair. Yes, loan-to-deposit ratio is right around 96%. And I think we see that range, the guidance we've given in the past is anywhere from 96% to let's say 99%. And as we've noted with the acquisition of Entaire we're actually bringing on a little over $357 million in loans there. Now what you'll note is that other than the growth that we've had with the Synovus Sweep account and our brokerage deposits. Brokerage deposits are actually going down. They're down to roughly 5.4% of total funding. So, to answer your question, we expect good continued core deposit growth coming out of our community banking segment as well as our retail segment. And I think we'll be able to supplement some of the additional funding opportunity through additional wholesale deposit generation, but we'll continue to reduce our reliance on brokered deposits. All that being said, we'll maintain a loan-to-deposit ratio below the 100% range.

Jared Shaw

Okay, thanks. And then looking on the expenses of the growth and salaries, are there any new initiatives driving some of the growth in salaries, whether it's on the business generation side or on the -- are there any regulatory initiatives or investments that need to be made or are being made that we're seeing come with the sellers.

Kevin Blair

Yes, Jared, let me write that down. So we showed a $4.9 million increase in personnel expense quarter-over-quarter. And if break that down about $1.8 million of that increase was just due to our annual merit cycle, our salaries and administration cycle. We had an extra pay day this quarter, which was about $1.1 million. Commissions were about $1.2 million quarter-over-quarter, and that's just given some of the production numbers that we saw with mortgage and in our retail line of business, and then had an incremental $750,000 in healthcare expenses. So some of that is anomalous to the quarter, it won't obviously repeat, obviously the extra payday. We actually expect personnel expense to come back down in the fourth quarter as we've guided the overall expense levels being in the lower digit 2%-3% range for the year.

Kevin Howard

And Jared, just to follow-on, you touched on regulator. And that's a constant discussion around here. So the increase was not tied to regulatory pressure. Again, we look every quarter at all the on boarding. It's fun to onboard talent in revenue producing areas. And with all due respect to my regulatory friends, it's not as fun to add people on the regulatory side but it's a necessary part of what we do. And we think we are appropriately balanced. We take regulatory feedback when they comment on staffing and areas. But that's not what drove this past quarter.

Jared Shaw

Great. Thank you very much.

Operator

Thank you. We'll take our next question from Brad Milsaps. Please announce your affiliation and then pose your question.

Brad Milsaps

Hi, good morning. Sandler O'Neill.

Kessel Stelling

Hi, Brad.

Brad Milsaps

Kevin, you mostly addressed my question on funding. But just to follow up, in the interim would you expect that you'll fund some of the Entaire loans with some of the excess Fed funds you have on the balance sheet? Just kind of curious how much lower can you drive that number or would be willing to take that liquidity number down?

Kevin Blair

Yes, I mean, we will take some of that. We've been carrying a little extra cash into the quarter, so we'll be able to fund some of that. And I think you'll see that we do get some inflows of our municipal deposits in the fourth quarter, so as that ramps up the non-collateralized portion of that, we'll be able to use that to fund some of the Entaire growth. But yes, it's really a mix between core deposit growth as well as using some of the cash that's already on the balance sheet.

Brad Milsaps

Okay, great. Thank you, guys.

Kessel Stelling

Thanks Brad.

Operator

Thank you. We'll take the next question from Nancy Bush. Please announce your affiliation and then pose your question.

Nancy Bush

NAB Research. Good morning, guys.

Kessel Stelling

Good morning, Nancy.

Nancy Bush

Kessel, I have a question for you, and it's a longer term question about expenses. I mean, theoretically technology should enable the banking industry to continue to drive down expenses on a long-term basis. And your near-term goal is to get below 60%. So how do you view the whole subjective equilibrium expenses for your company? You know, is there a number, or if you could just talk about where we can expect expenses to go over the long-term?

Kessel Stelling

Yes, Nancy, that's a great question, and we probably haven't debated that here since yesterday. We said -- we've operated in the mid 50s, 55% efficiency ratio. We see on the near-term horizon. We believe we have an opportunity to peer [ph] 60 and get into the 50s. So you're right. The technology in many cases allows you to operate more efficiently and drive expense down, but the flipside of that, it takes a lot of investment to get to there. So, the continued push, pull, struggle, request for capital spend unrelated to technology, a lot of it revenue producing, a lot of it customer facing, a lot of it cybersecurity, a lot of it fraud, but there's just a tremendous demand for capital spend, which then does have longer term expense ramification. So, I don't know where the equilibrium is. I was with Kevin Blair couple of nights ago talking about just that pipeline of technology investment over the next year, two or three. I think I have talked about it on this call, we have a much more disciplined process here now, but we try to take that multiyear look at not just the cost of what we have to onboard, but the people side of the onboarding of technology. So I probably rambled away, that didn't answer the question, but we'll get efficiency. Every business case is presented to us for technology spend has to have either a revenue lift, a customer experience lift, which should lead to a revenue lift or a efficiency play, savings gain, we then hold the business line leaders accountable too, and I wish I could be more precise than that, but it is a constant internal struggle. I have talked to a lot of my banking peers. I think they struggle with the same thing.

Nancy Bush

So the non-technology spend, where do you see that primarily going? I mean, you guys obviously are shifting your emphasis more to the retail side now. Is there more retail spend that needs to go on? I mean, where can we look for that spend to be happening?

Kessel Stelling

Well, on the retail side, as we realigned our retail bank a couple of years ago, we saw money there, but quite frankly that was an efficiency play and a productivity play throughout the retail bank, but we will continue to invest in talent and technology on the retail side. The non-technology spend, a lot of it's people, a lot of it is diversification of business line, exchange of bankers, it's mortgage, it's brokers. We have added, we have onboard just the last few weeks some a really strong people that we believe that revenue lift. So there is a lot of non-technology people spend, but again, lot of it's technology, but just keep in mind that technology is very customer focused, customer friendly. And then, you get the ongoing like the -- we refreshed a large number of our ATM fleet, that's an ongoing spend as well, which I would classify under technology as well.

Nancy Bush

Okay. If I could also ask, I mean, because you've got all these great minds in the room there, we're hearing a lot of -- or seeing a lot of sort of anecdotal evidence that particularly small business and other C&I customers may be holding back demand here in front of the election just because it's so weird. So, do you -- are you seeing that, and can you think we can expect maybe an acceleration of loan growth in the fourth quarter as a result of the election just being behind us, no matter who wins?

Kessel Stelling

Let me -- I told our team yesterday that I refuse to answer any election-related questions today, but I'll give it a try, and Kevin Howard can weigh in although I won't put him into the classification of great mind, but maybe he could -- and I say that jokingly. I think, yes, I think…

Nancy Bush

I was being kind.

Kessel Stelling

I am being kind. I am going to buy him, let's say, but I think we all see -- we all see our customers that are just sitting there kind of unsettled. And so, that's got to -- it's anecdotal that's got to correspond to -- I don't want to make big bets on anything right now. I am not making a political statement. I think it's fair to say they are unsettled. They are nervous. And I think they told us we're going to really unleash it post elections. I am not sure post election what -- again, either way what gets people enthusiastic, there is this uncertainty that I had before the elections now much more certain. So I guess naturally there is some of that. So, Kevin Howard, I don't if you have seen that, or Dave you've heard that. I think we all probably sensed it, but I am not sure how I can prove it.

Kevin Howard

Yes, I have the same thought too, Kessel. I mean, it's -- there's definitely the balance sheets are stronger, people -- at least it's zero, people's cash position is better. Year-over-year, looking at financial statements, so there is certainly ability to come to the bank and borrow. You're right, there's just been a lot of uncertainty out there, whether it's election or unit or not, be my guess.

Nancy Bush

All right, thank you.

Kessel Stelling

Thanks, Nancy.

Operator

Thank you very much. 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. Just want to circle back on further Kevin Blair or Kevin Howard; are new loans coming on the book sort of equivalent to this 414, or will they be a little bit lower? Just want to get a sense of that.

Kevin Blair

No. Great question, Chris. No, we've actually seen a little bit of accretion in overall loan yields come out of books, so we are up two basis points quarter-over-quarter. And so it's a little bit of tale of two ends of the spectrum. Obviously on the LIBOR side, we're seeing a little bit of uptick there. We did get five basis points of improvement in the quarter in month LIBOR, so that helped a bit. And so, that's driving most of the increase in the quarter-over-quarter production.

On the long end of the curve, as we look at some of our consumer mortgages and other longer fixed rate instruments, we were getting little bit of a dilutive impact given the fact that 10-year treasury during the third quarter was down roughly 10 basis points. So the fact that we are able to net-net be up roughly two basis points and just going on spread, tells us that as Kevin Howard mentioned earlier, our mix as we focus on C&I and CRE but also bring in some of the consumer growth that we had is offsetting where we are losing some ground in the long end of the curve. So net-net, we haven't seen a decline on the going on spread, so we should continue to see good positive momentum for yields going forward.

Christopher Marinac

Okay, great. And can you remind us the difference in yield on the SoFy and GreenSky fund just relative to the portfolio average?

Kevin Blair

Both of those, you would see a 4% -- 4.25% yield on those portfolios relative to that 4.14 that we show at the top.

Christopher Marinac

Great, that's help…

Kevin Blair

So it is accretive.

Christopher Marinac

Got it. Perfect. Okay, thanks guys.

Kessel Stelling

Thanks, Chris.

Operator

Thank you. We'll take our next question from Jesus Bueno. Please announce your affiliation and then pose your question.

Jesus Bueno

Hi, it's Jesus Bueno with Compass Point. Just quickly as you are thinking about capital return going into your planning process, if you could just go over how you prioritize, I guess the difference between loan growth, repurchases and dividend?

Kessel Stelling

Well, we will both take that. I mean, we certainly -- while these are capital funds, our customer and prospect grows. So certainly funding loan growth and -- is at the top of that stack. And again, that's the best way to grow returns for our shareholders. We've said buying shares back we believed was more attractive using our currency to buy our shares back than it was to go chase something else that we knew a lot less about. One thing I think our team is very proud of is our knowledge of this company and what the underlying balance sheet really represents. So, certainly share repurchase has been a priority but -- and then again measuring with common dividend making sure that different constituencies achieve appropriate consideration. All that said we believe all of those do allow for the opportunity to do strategic M&A transactions if they make sense going back to that disciplined approach that I talked about earlier. So, again, we want to make sure that we retain capital fund our organic growth. We want that to be stronger and then we will look at the appropriate mix of share repurchase. Again, common dividend and making sure that we are appropriately positioned should that right strategic opportunity present itself.

Jesus Bueno

That's great. Thank you. And then if I could just jump like I appreciate the color on the loan yields you provided. And just in terms of asset sensitivity, you have added entire portfolio now which has LIBOR baselines, but if you can remind us or quantify exactly you know, if we have a 25 basis point move in December, what exactly would that mean for you for your results going into 2017?

Kevin Blair

It's Kevin Blair. So, we had 25 basis points in December, we would actually get -- our asset sensitivity positioning that we disclosed is 3.1% on a ramp of 100 basis points. So, if you extrapolate what that would mean for 25 basis points, we see roughly 0.50 of NII improvement, which would generate, as Kessel said in the opening comments, one basis point actually in the fourth quarter and would translate into six basis points for 2017, which translates roughly about $15 million in NII.

Jesus Bueno

That's perfect. Thank you very much, I appreciate that. Thanks for taking my questions.

Kevin Blair

Thank you, Jesus.

Operator

Thank you very much ladies and gentlemen, I would like to turn the floor back to your host today for any closing comments they would like to make.

Kessel Stelling

Yes, thank you, operator, and thanks to all of you for listening in. Thank you for your questions and for your support of our company. I will just close by thanking a constituency that's always on this call, and that's our team. We are very proud of our needs, base, relationship-based approach to taking care of our customers. We think that trust we develop within continued to allow us to improve the operating results of the company. So I just want to thank the team for their efforts, and I get emails everyday from customers quite frankly talking about the above and beyond service that they are receiving.

So, thank you to our team, and then to all of our shareholders on this call for your continued support. We will do our best to continue to accelerate our performance, and anxious to talk again on the January call about our go-forward plans. So, thank you all very much, and hope you all have a great day.

Operator

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

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