Synovus Financial Corp (SNV) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Synovus second-quarter 2014 earnings conference call.

(Operator Instructions)

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

Thank you, and good morning, everyone.

During the call, we will be referencing the slides and press release that are available within the Investor Relations section of our website www.synovus.com. Kessel Stelling, Chairman and Chief Executive Officer, will be our primary presenter today with executive management team available to answer your questions. Before we begin, I'll remind you that our comments may include forward-looking statements.

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

During the call, we will reference non-GAAP financial measures related to the Company's performance. You may see the reconciliation of these measures in the appendix to our presentation. Finally, Synovus is not responsible for, and does not edit or guarantee, the accuracy of earnings teleconference transcripts provided by third parties. The only authorized webcast is located on our website.

Due to the number of callers, we ask that you initially limit your time to two questions. If you have more time available after everyone's initial questions, we will reopen the queue for follow-up.

Thank you, and now I'll turn it over to Kessel Stelling.

Thank you, Bob, and good morning to everyone.

I want to begin by congratulating Bob on his new assignment, and wishing Pat Reynolds much success and enjoyment in retirement. Pat has served our Company well for many years and I know you all will join me in wishing Pat a happy and peaceful retirement. And, Pat, I am sure you are listening out there, so hope we do you proud today.

I do want to apologize to some of our listeners who maybe did not get our release in as timely a manner as you would normally get it today. We were posted on synovus.com at 7:30 this morning, but there was some difficulty crossing Business Wire, so it is out now, and it has been since 7:30. If you haven't had your normal chance to review, hopefully, our presentation today will fill any of those gaps for you. Let me move right into the second-quarter highlights.

Net income available to common shareholders, $44.3 million or $0.32 per diluted common share. Excluding restructuring charges, our net income available to common shareholders was $49 million or $0.35 per diluted common share.

Adjusted revenues, $268.4 million, up $8 million or 3.1% versus the first quarter, we are pleased with that increase. Total loans grew $296.8 million sequentially, or 5.9% on an annualized basis. Again, please with loan growth across the footprint. We will give some color to that in just a moment.

Our adjusted pre-tax, pre-credit cost income was $98.9 million, up $2.4 million or 2.5% versus the first quarter. And then we had significant improvement in credit quality during the quarter. Our NPL ratio declined to 1.27% from 1.91% in the first quarter of 2014 and 2.47% in the second quarter of 2013. Our NPLs declined $125 million, or almost 33% from the first quarter of 2014, and $224 million or 46% from the second quarter of 2013.

So tremendous improvement in overall credit quality, and, again, our capital ratios closed the quarter very strong. I will go into those in a minute. But Tier 1 common equity increased 17 basis points versus the first quarter to 10.41%.

Let me give a little more color now on the loan growth. As a mentioned, total loans grew $297 million or 5.9% sequentially. It was driven by strong growth both in C&I and retail loans. It was the fifth consecutive quarter of reported loan growth.

We had strong second-quarter growth across the footprint, but in particular Nashville, Tampa, Atlanta, Athens, Greenville-Spartanburg, Charleston, and Savannah, just to name a few. So, again, strong performance across the footprint in most of our core markets.

On slide 5, we will talk a little bit about where the growth occurred. C&I balances increased $182 million or 7.2% annualized. We had growth in local markets of $109 million, or about 60% of the total C&I growth. And, again, to highlight just a few markets where we had strong C&I growth, Nashville, Columbus, Tampa, Athens, Statesboro, Jacksonville, Augusta, and Valdosta. So we are pleased with the mix of the growth and how it occurred, again, across the footprint.

About $60 million of our C&I growth was in syndications, 33% of the total C&I growth. But in particular, I would like to highlight that that growth includes wins from our local markets as our bankers partner with our large corporate banking teams. In a couple of [three] markets to highlight, Sumter, South Carolina; [Run],Georgia; Nashville and Birmingham, Alabama, all, again, good partnerships between our core bankers and our syndicated team.

Our CRE balances declined $14.5 million reflecting targeted reductions in residential, and our land portfolio of $130 million, while growing the investment property portfolio, about $115 million or 9.9% annualized.

Investment property growth was driven primarily by the multi-family category with additional growth in office buildings and hotels. Residential C&D and land portfolio now represents only 4.5% of our total portfolio, compared to a peak of 28% in the fourth quarter of 2007. A little more color on the loan growth, retail loans grew $130 million or 14.3% annualized for the quarter. Atlanta and Tampa were the primary support with heavy HELOC growth.

We had meaningful mortgage growth in Nashville, Birmingham, Columbia, South Carolina, Atlanta and Tampa. Our HELOC portfolio was up about $63 million or 15.7% annualized. That's primarily the result of a successful HELOC campaign. I know the consumer [board] [sides] strategic talent additions in key markets and growth in purchase originations.

So we are really pleased with the performance on the retail side. Substantially all of our retail loans are to end market customers, no indirect lending products there. We think that gives us increased opportunities, certainly, for cross-selling.

So based on the quarter's performance, based on our pipeline, based on our economic outlook and our footprint, we had previously guided 4% to 5% loan growth for the year. We believe 4% to 6% is now a more appropriate range, so we changed our guidance slightly, again, from 4% to 5%, to 4% to 6% on an annual basis.

Slide 6, on core deposits, a few bullets there. Total average deposit, $20.86 billion, increased $138 million or 2.7% versus the first quarter. Average core deposits decreased about $28 million or 0.6% versus the first quarter, and average core deposits, excluding average time deposits, grew by $164 million, or 4.1% versus the first quarter.

On slide 7, take you to the margin. We were pleased to see the net interest margin increase to 3.41%. We had guided pressure, and this certainly is pressure, but pleased to see the increase 2 basis points up from the first quarter. A few of the components, the yield on earning assets was 3.86%, unchanged from the first quarter of 2014. Our yield on loans decreased 2 basis points to 4.32%.

Our effective cost of funds was 45 basis points, a 2-basis-point improvement from the first quarter. Net interest income increased $4.5 million versus the first quarter, driven primarily by loan growth and a higher day count. And we do expect slight downward pressure on our net interest margin in the back half.

And I will call your attention to the net interest income sensitivity box on the right of that slide. We are positioned, as we've said before, to benefit from potential rate increases.

You will see, therefore, illustrative purposes, 100-basis-point change in short-term rates. We estimate over 12-month period about a 3.8% increase in net interest income. A 200-basis-point increase would yield about 5.9% increase in net interest income.

On slide 8, again, very pleased to see that mortgage revenue, core banking fees, and our FMS revenues grew by 7.9%. 2Q 2014 adjusted non-interest income was $63.4 million, a $326,000, or 0.5% increase from the first quarter.

Excluding the first quarter gain on branch property sale of $3.1 million, adjusted non-interest income increased $3.4 million sequentially. Core banking fees of $32.6 million were up $1.5 million, or 4.7% in the first quarter driven by higher bank card fees. Mortgage banking income increased $1.8 million, or 50.5% versus the first quarter, driven by a 56% increase in production, again, over the first quarter. FMS revenues, $19 million, increased $1 million, or 5.3% sequentially, driven by increases in brokerage revenue and fees from trust services.

On slide 9, again, we continue our focus on expense management. Adjusted second-quarter 2014 non-interest expense, $169.5 million, up $2.4 million versus the first quarter, driven by planned increases in advertising expense, which we had previously discussed. Advertising expense was $6.3 million, up almost $4 million versus the first quarter. Our employment expense was $92.5 million, down almost $1 million versus the first quarter of 2014.

We do plan to close 13 bank branches across the five-state footprint. Those closures are planned for the fourth quarter of 2014, so this quarter's results include restructuring charges estimated at approximately -- the total charges are approximately $13 million; $7.7 million reported this quarter. The remaining charges were approximately $6 million relating to exit costs for lease properties are expected to be reported during the fourth quarter of 2014.

A little color on those branches, again, 13 branches closing in the fourth quarter, they have an aggregate of about $40 million in loans and $184 million in deposits, which is less than 1% of our total deposits, so we don't expect a meaningful financial impact there. Specific locations that will be closed we made public upon the respective customer notifications, which will be taking place over the next few days.

And then finally, on the expense front, as we've talked about the implementation of our new expense savings initiatives of about $30 million remain on track. We continue to offset many of those investments -- many of those savings with investments in talent, technology, and marketing.

I talked previously about credit, I will take you to slide 10 and talk more specifically about our credit results for the quarter. On the first graph, you'll see credit costs were $17 million compared to $18 million in the first quarter, representing a 29% year-over-year improvement. We expect total credit costs to be fairly flat for the remainder of the year in comparison to the past couple of quarters as we continue our strategy of working out remaining legacy problem loans as we experience provision expense related to loan growth.

The graph to the right of that shows net charge-offs for the second quarter of $35 million, or 69 basis points, up from $15 million in the first quarter. The elevation there was directly related to the significant reduction in NPLs this quarter, as evidenced by our declining credit costs. You can see the expense for these charge-offs had been previously recognized.

As a reminder, back in January we guided that charge-offs for the year would be less than 50 basis points. We ended the first half of the year right at 50 basis points and do expect to end the year below 50 basis points on an annualized basis. Kevin Howard would be happy to take questions on that subject later in the call.

The bottom left graph shows a significant reduction on our nonperforming loans, again, very pleased with that. It dropped over 32% during the quarter, ending the quarter at 1.27%. Additionally, our NPAs moved below 2% with the ratio at the end of the second quarter at 1.76%.

Again, we guided earlier in the year that NPAs would move towards 1.5% by year end 2014, and that NPLs would end near 1%. The reduction this quarter gives us confidence in reaffirming that guidance with the possibility that we'll end the year below that guidance.

And finally, the graph on the bottom right shows NPL inflows of $34 million, down $1 million from the first quarter, down 49% from the same quarter a year go. We continue to see good progress in the overall quality of our loan portfolio as we continue to experience reductions in all of our problem asset metrics.

On the next couple slides, I think, we'll show you a look back just at where we were 2.5 years ago related to the quality and composition of our loan portfolio, and highlight the results of some of the efforts we have made over that time that have led to a much stronger and much more balanced credit portfolio. On this page, I will call your attention to both accruing TDRs and past dues. The graph on the left shows the meaningful reduction we have experienced in accruing TDRs, which was over $100 million or 20% in the first half of 2014.

Again, I know Kevin has spoken to this often, 99% of our accruing TDRs are paid current with almost no past dues over 90 days. Approximately half of the TDRs are rated better than substandard, 70% of them are not residential or land related. We continue to experience very few subsequent defaults in our TDR portfolio. Again, though, pleased to see the reduction there.

And then, another indicator of the improved quality of the portfolio is past due ratio, obviously, a predictor of future defaults. And you can see from the graph that our past dues greater than 30 days are now only 30 basis points. The 90-day past dues are only 2 basis points. So, again, very pleased there.

And then, on slide 12, you will just see more graphical evidence of the strength of the loan portfolio in both diversity and quality. The first graph on the left shows the much improved mix of the loan portfolio by type. CREs down to 32% from 36% in 2011, and down from a peak of over 45%. I think a big driver of that shift in our mix, as we've talked about, and our confidence in maintaining the balance is our disciplined concentration policy, our investment in new talent in key areas to support our strategies, and the implementation of new strategic business lines.

So the current portfolio mix is in line with our stated goal with 50% to 55% C&I, 30% to 35% CRE, and 20% retail. It really better positions us for the future as we continue to import are lending strategies to support a healthy growth of our Company, again, as evidenced by this quarter's results.

The graph to the right shows the improvement in the quality of the loan portfolio by risk [rate]. Again, great to see that improvement, substandard accruing and nonperforming loans now represent only about 3% of total loans, down from 11% at the end of 2011. And we think this healthy momentum will continue to see that as we move throughout 2014 and beyond.

Slide 13, call your attention, again, to our strong capital ratios and we will talk about capital management, I'm sure, in the Q&A, and we will leave that discussion for there. But just to give you some color on capital ratios. All Tier 1 capital ratios increased versus the prior quarter primarily due to earnings and DTA accretion with some offset from loan growth. Tier 1 common equity, I mentioned earlier, 10.41%, up 17 basis points from the prior quarter. Tier 1 capital, 11.01% versus 10.85% in the first quarter of 2014.

Total risk-based capital, a slight decline, 13.03% versus 13.31% in the first quarter, it reflects a $90 million reduction related to the subordinated debt which matures in June of 2017. Our leverage ratio, 9.69 versus 9.46. TCE, 10.91% versus 10.78%. And our Tier 1 common ratio for the second quarter under Basel III is estimated at 10.20%, which is well in excess of the minimum requirements. Again, just remind you that we still have a very significant deferred tax asset that will continue to generate regulatory capital in future periods.

[Finally], the story of the quarter is we continue to successfully execute our plan for improving financial performance as evidenced by another quarter of solid operating results, really, across all fronts. Our activities are continuing to be centered on enhancing the customer experience as we continue to emphasize strong local leadership as a key differentiator and a driver of our future success.

I want to talk a little bit before we go to Q&A about the path ahead and the path to improve earnings. First, I will just comment on branding efforts, which we are investing heavily in. We're pleased with the progress of those efforts. Those are designed to promote our comprehensive offerings and increase market share.

We've moved into the capability phase of that campaign after piloting the awareness phase. In Atlanta and Birmingham we're rolling out television, print, digital ads in a broader base of markets beginning next month. Again, we believe that effort will pay dividends for our Company as we increase market share and drive traffic into our banks.

And from a balance sheet growth, again, pleased with this quarter, and quite frankly, the last five quarters' reported growth, but we continue to take steps to increase the pace of that growth. We're better aligning our commercial banking talent with our customer needs and targeted market opportunities, and really trying to get the right bankers in front of the right customers and certainly in front of the right prospects.

We do see an opportunity in the high opportunity middle-market segment and we are taking some steps there, both internally and through external investments in talents to better penetrate that market, just as we have successfully done in large corporate senior housing and equipment finance. And we really do believe that as a Company we can differentiate ourselves in the middle market space and we will be excited to detail more of those efforts in the coming quarters.

From a retail standpoint, over the past several months, we have engaged in a complete refresh of our retail banking strategy. It is going to allow us to leverage our community banking model to deliver a much more focused approach to attracting and serving consumer and small-business customers, again, very much a sales focus there. We are excited about the opportunities that will give us. And then, also, we are implementing new and enhanced technology that offers the added convenience customers now demand.

Just a couple of examples: our virtual branch ATM rollout finishes up this month, a very successful rollout as evidenced by customer behavior to date. And we're launching our enhanced online business banking center for commercial customers beginning in August. We'll also offer enhanced mobile banking, person-to-person and account-to-account payment options by year end.

Net interest income, we do see opportunities for net interest income growth, driven by balance sheet growth and a continued focus on pricing as evidenced, again, by our margin behavior this month.

And certainly, our path as illustrated in the table, will be accelerated by an increase in short-term interest rates. So we see increases there through normal activity, certainly acceleration through short-term interest rates.

On a fee income standpoint, again, pleased to see the increases that we did this quarter, but we will continue our efforts to generate new fee income by expanding our team of retail brokerage financial consultants, mortgage originators, and trust professionals offering highly specialized training and licensing to our private wealth management retail bank teams, and really, just through all of our core banking operations and through our specialty areas better integrate the specialty bankers in with our core teams to grow fee income and lots of examples of success as I travel around the footprint there.

A couple of other items from an expense standpoint, credit-related expenses, we do expect further reductions in credit costs as legacy problem loans steadily subside. And we expect continued reductions in credit-related environmental soft cost, and I think Kevin can talk about that later, as well. So future reductions in credit-related expense.

And then overall, from an efficiency standpoint, we will continue our relentless focus on efficiency by managing the level and positioning of headcount; reviewing and adjusting our branch network, which never stops; and all the operations associated with that. Again, making sure that we are matching our behavior with our evolving customer behaviors and preferences, and then continuing to streamline and enhancing our internal processes while ensuring a positive customer experience.

Again, a solid quarter of performance. The team is very energized about the quarter and the steps that we just outlined as we continue to position our Company as a leader for customers and communities across the Southeast. Again, we will be happy to take questions on anything we covered today, or anything else that we didn't cover.

And so, operator, at this time, I'll be happy to open the floor to any questions with our callers.

Thank you.

(Operator Instructions)

John Pancari at Evercore.

Good morning, guys.

Good morning, John.

Just a question on the [snik] front. What was the total shared national credit balance as of the end of the quarter? And then, what businesses saw the share national credit growth? Was it all the senior housing business? And the, also, if you have a comment on what yields you're putting on this production? Thanks.

This is Kevin, John, good morning. The [snik] was about $1.4 billion, in that ballpark before the quarter started. We're about $1.47 billion now. What was the other part of the question?

This is D. The second part was about the senior housing. We actually had a slight reduction on the senior housing syndicated during the quarter.

But the industry, by the way, some of the industries we did increase -- this is Kevin again -- I'm sorry. In manufacturing and in transportation, we increased in those segments within the syndication portfolio during the quarter.

Okay, and then the yields that you are putting on that paper? The new money yields?

I don't know if we've disclosed in each of the different portfolios. I can talk to the overall new and renewed, but we have not disclosed the rate on each of those.

Okay, all right. And then, separately, on the capital front, just hop to that topic real quick. Kessel, I just want to see if you could talk a little bit about your thoughts around capital deployment. Particularly given the solid 2Q results, the increase in your capital levels, they are relatively solid where they stand right now, and then also the substantial benefit from a potential recapture of the DTA? So, wanted to get your thoughts on deployment and specifically a potential buyback.

Yes, John, I thought that would be your first question, so I'm glad it was a question 1b, but certainly would like to talk about that. We said over the last year, let us get a year past TARP and I think a year is up. By the way, we are glad a year is up. That was not a regulatory or even a self-imposed -- it was just -- we felt like we needed a year of performance to really think about meaningful capital actions.

But as I just said, a year is up, and I will just make some general comments here. We exited TARP with Tier 1 common of slightly less than 10%. Quickly got to 10%, it's 10.41% today. Without getting forward earnings guidance, it's pretty reasonable to see how that number approaches 11% by year end, both through earnings and through DTA accretion.

And at the point of exit, again, solid operating results but a totally different risk profile as a Company. And so, we certainly think, again, if 9.8% or 10% Tier 1 common was the appropriate exit for the risk profile that we had then, then it is just totally different today. So all that said, we do believe that we will continue to discuss internally the appropriate capital actions including share buyback. I think the timing and pace of those conversations is likely to increase, and we will be giving more color about that, hopefully, sooner rather than later.

It would require management and Board approval and, of course, regulatory approval, as well. But we do think the Company has made a strong case for that. And, again, share buyback, I think, certainly would be at the top of our list in terms of meaningful capital actions. There could also be a dividend increase in there. I will just remind everybody, that the reverse stock split certainly increases our flexibility for potential dividend increases, but from a share repurchase, we do think that is an appropriate capital action, and we hope to be able to give you more specificity about that in the weeks and months ahead.

Okay, great, thanks, Kessel.

Thanks, John.

Thank you. Ebrahim Poonawala with Merrill Lynch.

Good morning, guys.

Good morning.

I guess, Kessel, if you can go through the expense outlook. You've laid out the $30 million in efficiency initiatives which would offset some of the investments. But as we look out, what are the areas, and you mentioned in terms of some softer environmental cost, if you can talk through in terms of expectations around expenses relative to 2Q run rate going forward?

Let me take a stab at that, and, Kevin, you might want to speak to the credit environmental cost. But we've stated, and we all wish that expense cuts lined up and flow through the P&L in a very orderly fashion, it just doesn't happen that way. So we are making investments right now. Again, we mentioned our advertising, we've talked about talent, we've talked about technology, which by the way, we do believe drives revenue into the Company over time.

So short term, again, you might see quarter-to-quarter expenses up a little bit. But over time, again, the $30 million we are on track to implement. We are looking at additional expense cuts. I think, Tommy, we have guided expense levels similar to 2013 levels on an annualized basis.

And there are other opportunities that we continue to attempt to quantify. From a credit standpoint, again, we've gotten direct credit costs, but we also have a lot of -- continue to have staff devoted to those legacy credits and as that whittles down, you'll see declines both in personnel cost and other costs such as ORE, legal and other categories there. Kevin, you want to talk a little bit about just from a credit standpoint what you see there?

Yes, you've covered a little of it talking about the, just all the things associated with it. It might be the travel to go look at properties, the taxes we pay on ROE, the appraisals we have to order on a very regular basis. When you have a lot less NPAs to cover, you have a lot less expenses associated. And also, turning some of that experienced personnel to play on offense. A lot of our focused management up here will spend a lot less time on strategies to move assets off the book, and a lot more time on how to grow the quality of the balance sheet. It's a little bit all of the above associated along with the things you pointed out, Kessel.

Good, and, I guess, if you could move to margin guidance, calling for a slight pressure, I guess, in the back half of the year. When you look at the loan yields, 2-basis-point compression this quarter, is that kind of where we should expect loan yields to move forward? Is that the reasonable assumption around the decline in loan yields or -- if you can talk about where total new origination yields for this quarter relative to the book yields that would be helpful?

Yes, this is Tommy. I'll answer your question. Margin, we are guiding that we do believe we could see some back half of 2014 pressure. We actually offered that same guidance earlier in the year, talking about the whole year, we were a little bit glad to see on the positive side an uptick in the first quarter and the second quarter. And the thought process around pressure on a go-forward basis, the pressure has not come in yet on a net basis because we have had offsets like we had in the second quarter by continuing to bring the funding steps spaced down a couple of basis points.

That has kind of helped us in the second quarter, but when you really think about the loan growth that we have out there and is targeted and the environment that it is out there, the highly competitive environment, and you have some legacy loans that continue to mature at higher levels. We do believe that there will be some pressure that will come on the asset side.

And we believe that the -- as we are interested in ramping up the funding side, so we really don't think there is much more room for bringing that cost base down. So really, that is the basis for believing that we could have some modest pressure in the back half of the year. I hope that answers your question.

It does, thank you. And do you have what the new origination yields were during the quarter?

It was in the 4% to 4.10% range.

Got it. Thank you very much.

Emlen Harmon from Jefferies.

Good morning. Looking at your asset sensitivity, it has picked up a pretty good amount since the start of the year. In the 200-basis-point scenario you guys provide you are at a almost 6% improvement and that was around 5% at the start of the year. Could you talk a bit about just kind of what the most meaningful balance sheet shifts have been that provided that lift up, and where you see things trending from here?

Yes, this is Tommy. I'll be glad to do that. Probably the biggest factor is the evolution of the fixed and variable rate loans. We have more variable rate loans now that we did earlier. And that's the biggest driver and the key component that caused the asset sensitivity to lift up some between the quarters.

Got it. And is that a function of some of the new businesses that you are putting on the balance sheet, or is that just how you are addressing legacy relationships as those renew?

It is some of all of that. Probably a really big factor, though, is the floors -- we are coming out of the floors and so that is helpful to support that cause.

Got it. Okay. And then, you took the loan growth guide up just a bit. Is that more environmental or something that you guys are doing internally?

I think its both. I think our additions, investments in talent have paid off. We've been talking about getting our bankers back to playing offense. As we have done that, again, just the growth we had across the footprint, in just our good core markets, and D. and the team do a really good job of talking with our bankers not just about pipelines but just moods and customer sentiments.

It's a combination of environmental and then, again, existing behaviors, and a lot of conversations with bankers and review of pipelines, and so we thought it was appropriate to just raise the upper end of that guidance.

Got it, all right, thanks for taking my questions.

Thank you. Jefferson Harralson at KBW.

Hi, thanks. I want to ask about the $30 million in cost savings and offset by the investment. How much does that $30 million of cost savings do you think you have now? And how much is still to come in the second half?

Jefferson, this is Tommy. The $30 million that we've talked about, we're about two-thirds of the way through in terms of initiating the cost reduction. We probably, if you look at what's the benefit so far in the Company, it is a pretty small portion of that, but it is somewhere in the $8 million range. The reality, much more of the actual implementation will occur in the back half of the year, along with completing the other elements that will be initiated in the back half of the year.

All right, thank you. Also wanted to ask on your guidance for flat credit costs in the second half, shouldn't that go down a little bit with the huge amount of bad credit you ran through this quarter, or are you just keeping it high, just in case you want to run through a similar amount of credit? Or you are expecting to run through a similar amount of credit? Can you talk about that flat credit cost guidance on the back of the much improved credit that we saw this quarter?

Yes, Jefferson, this is Kevin. There is going to be some what we call positive credit cost. We expect, you heard Kessel talk about picking up the guidance a little bit. So if we have loan growth, we will see a little more provision there that is in the credit cost number.

We will continue grinding at the problem loans. They are still 1.7% or so, 1.77%, I think, of NPAs. That is not a satisfactory number around here. That's a much improved number, but we want to see that number go below 1.5%. You don't get there without continuing to be aggressive in dispositions and restructures. So I think that's a safe place for us to be probably the rest of the year is in that guidance.

Okay, thanks, guys.

Thanks.

Thank you. Jennifer Demba with Robinson Humphrey.

Thank you, good morning.

Good morning.

Advertising expense was elevated from your campaign. Is that going to continue to be the case, or will it come back down to levels you've seen previously?

It's not going to straight line. So any given quarter, based on media buys or the timing, we're really testing end market, the effect of the ads, the awareness that it is creating and can adjust according to that. I don't know that I could go into specifically by quarter, but we, again, had a major investment planned for the year. And some of this quarter was really catch up, but on a quarter-to-quarter basis it is going to fluctuate. I don't know that we can be much more specific than that.

The back half of the year is probably a little bigger than the first half. But I don't think you'd see much -- anything that would go past where we are in the second quarter.

Okay, that is helpful, thank you.

Thank you. Ken Zerbe at Morgan Stanley.

Thank you. First question, just in terms of the NIM, it looks like you've got a large FHLB stock dividend. Can you just quantify how much that added to NIM this quarter?

I believe it's about 1 basis point.

All right, one basis point. Okay. And then, second question, in terms of the loan growth, taking it from 4% to 5% to 4% to 6%, I understand the positive direction, but it seems that that's a very minor difference between loan growth.

Is it you have more confidence in the loan growth now? Is it that you are guiding towards truly the 6% versus the 4%? How should we -- it seems like a small nuance, so to speak. I was just wondering what you are really trying to message there? (multiple speakers)

No, it seems like a small nuance, but given that the first half of the year we've got 4% loan growth to move the annualized to 4% to 6% really suggests that for the back half we are guiding 4% to 8%. Because it would take 8% loan growth in the back half of the year to end up at 6% on an annualized basis. It really is more than just a nuance for the back half of the year. We are just expressing it in terms of annualized loan growth, given that the first half of the year is in the book at 4%.

And it is based on, again, the maturing of the investments we've made, the overall performance of our bankers, the attitudes, and, really, the opportunities that we think we are seeing both through existing and new strategies that we are deploying. So it may, again, seem like a nuance. We discussed internally the proper way to signal that, and again, it could be expressed as 4% to 8% in the back half which I think would maybe appear as a stronger signal; the math works out the same.

Got it. Yes, it was the growth in the second half that I was trying to get at. So perfect. All right, thank you much.

Thank you. Keith Murray with ISI.

Thank you. Just going back on expenses one second, do you have assumptions in there around regulatory costs just escalating in the back half of this year or in 2015? Or do you see them at a level run rate?

The regulatory costs comes in a couple of categories. One is any fees we have to pay and those are fairly modest. I guess if you put the FDIC insurance in that bucket, then you could see some continued improvement there.

The rest of the questions, probably around the internal costs that we have. And we, certainly, have changed direction of that from a couple of years ago. But we still have meaningful infrastructure, although it has been reduced some to look after all the regulatory issues. But I think on a go-forward basis we are probably at the current run rate for a while.

Okay. And then, just on fee income, I know you get asked the question on bank M&A a lot, but just thinking about trying to grow fee income, making it a bigger percentage of revenue over time, would you look at purchasing some of that growth? Is there any fee businesses in particular that you think are attractive long term that you might look at?

One, we are in, certainly, we are trying to expand there with additions of talent, as we mentioned, in trust and retail brokerage and mortgage. We've added some talent on the insurance side. We hope to see some opportunities there in terms of buying a team of producers or a book of business. You certainly -- we are always in market looking at teams. We have added, actually, wealth teams across the footprint over the last several years. I wouldn't want to get specific about any we may be talking to right now.

In terms of just acquisitions of other companies, I think, as we've said, related to just general M&A, we believe our focus today needs to be on our internal performance and improving returns on asset, improving returns on equity, hopefully, translating to a stronger currency so that longer term you certainly wouldn't rule that out. But short term it is, again, core performance, investment in talent, and potentially some additions of teams throughout our footprint.

Thank you.

Thank you. David Bishop at Drexel Hamilton.

Good morning, gentlemen. Circle back to the credit cost and the elevated charge-offs this quarter. Any way to sort of quantify the impact of the acceleration of the credit clean-up and what impact that had in terms of reported net charge-offs?

The charge-offs, which were elevated, were directly associated with our nonperforming loans moving down, as you saw, substantially. But we also did that really not elevating credit cost. The credit costs were down about $1 million this quarter. There was some reserve release in there.

There were reserves associated with problem loans that we got the problem loans off the books. Reserve converted to charge-offs and so that elevated that. At the same time, I'll mention on reserves, our coverage ratio went up substantially, as well, which we were real pleased with, up to 1.07%. That is our total loan loss reserve over our nonperforming loans.

If you exclude the loans that have been charged off, up to 1.77%, and I think we've got a -- I think it's in the appendix on page 26 that demonstrates the reserve coverages improving dramatically during the quarter, which we were very pleased with.

Great, thank you.

Thank you. Steven Alexopoulos with JPMorgan.

Good morning, everyone.

Good morning.

Kessel, I wanted to follow-up on Tommy's comments, first, about regulatory costs staying at the current run rate. We've had quite a few mid-sized and even smaller banks this quarter talk about more regulatory focus on compliance in areas such as BSA, AML. I look at the plan to improved earnings. A lot of focus on efficiency, not much commentary in terms of how much you might need to invest from a regulatory compliance view.

So my questions here are twofold, for banks your size, are you seeing more regulatory focus on these areas? And then, secondly, how should we think about the required spend, the right systems, processes in place, given this regulatory environment we have today?

That's a great question. Let me try and contrast maybe our story to some of the others. First of all, you can't ever say you spent all you ever need to spend. We do believe our level of spend is appropriate and we believe our ongoing regulatory exams validate those areas that you are discussing.

I think maybe a difference in our Company than some of the others, and this is a good news/bad news. I think the risk profile of our Company over the last two, three, four or five years required, maybe, an extraordinary investment historically to deal with the regulatory issues we were facing. Just as I mentioned on the capital management, as we come through the cycle and our risk profile decreases, we believe that those investments will be sufficient on a go-forward basis.

Do I think that the regulatory burden is increasing? Yes, it is in many ways. But for a Company that had the risk profile, and without getting into other things associated with that risk profile, our investment was heavy two, three, four years ago. And we think it is appropriate given what we see today and what we see coming.

So, again, as our risk profile improves, hopefully, in some areas; and I know our regulators are listening. In some areas, we believe we will actually have less oversight or less intrusion, but certainly it ramps up in some of the areas you mention. But we are comfortable with our level of spend and it is something we continually evaluate.

Okay. And, Kessel, maybe to follow-up on some of the capital comments with bank such as Frost and BancorpSouth having some trouble in closing deals, does it change the way you view M&A as a capital deployment tool? And why would a Company your size need regulatory approval for a buyback? Thanks.

Well, when I say regulatory approval, you want regulatory affirmation of all of your capital actions. So I won't get into the actual mechanics of what they need to do. It is just certainly something you would not want to surprise your regulators. Really, the greater test of a capital buyback is management and Board's view on the appropriate capital level.

And then the timing and mechanics and amount of what you buy back. So that is the primary driver. So when I mention regulatory approval, it's regulatory, obviously, input into those decisions. You don't want to announce a level that would make others uncomfortable. And you mentioned from an M&A standpoint, the other banks -- our focus right now isn't on M&A, it's on core performance.

But we do believe, and, again, I don't like to read about others' troubles related to closing deals, and we will never say that we are perfect by any means, but we're comfortable that our investments in both processes and systems are appropriate given the complexity of our Company today. And we continue to look for ways to strengthen that.

Okay, I appreciate the color.

Thank you. Christopher Marinac with FIG Partners.

Thanks. Kessel, D., or Kevin, just a follow-up question about the shared national credit, so that is $1.4 billion and what is that number compared to last quarter and a year ago?

Hang on, I will look that up. I've got that in front of me. A year ago it was just under $1 billion. It was about -- between $800 million and $900 million a year go. It was about $1 billion -- that would be right. About $1 billion.

And then as Kessel stated in his comments earlier, it was roughly a $60 million gross number on the C&I side, so the quarter overall, it was roughly about $74 million in total.

The indications were a little over 7% of our balance sheet, and we've stated publicly that we think about somewhere, we'll keep it in the single-digits, probably about 8%, 8.5% is what we have said in the past. So we've got a little growth left there, but also, I think what we're encouraged in, is we're starting to get pickup in all our other segments. Our consumer, our retail, even our investment real estate. So, I don't think it will grow as much as a percentage of the balance sheet as maybe it has over the last couple of years.

Great, that is helpful. And, Kevin, just as a point of clarification, any time you do a loan that is originated by another financial institution it falls in that shared national credit bucket, right? Are there any exceptions to that rule?

It's got to be a three-bank deal. And I think the size has to be over $20 million, $25 million. But it's going to be most of the credits like that will be falling in that bucket. That is correct.

Okay. I was just curious if there are times when you have smaller relationships that are less than those thresholds that come into play?

There are some two-bank -- we partner up with banks and some of the mid-sized credit from time to time that would not be in that syndication budget. There is not a lot of that, but there are some examples of that.

Okay, great, that is helpful. Thanks so much.

Thanks, Chris.

Thank you. That was our last question. I would now like to turn the floor back to management for any closing statements.

Thank you very much, and, again, thanks to all of you for joining in today, both the investment community that is on this call, and to our team members, to our customers, to our retail and institutional shareholders who participate in this call. We thank you for your continued support, for your continued interest. Again, I'll just close with what I said earlier.

Our team is certainly pleased with what has happened over the last year, and we talked this week earlier about what a difference a year makes, as last week a year ago we were making plans to exit TARP, do a capital raise. We had three ratings agency upgrades, and then just a year later, again, I think dramatic change in the risk profile of our Company. Our ability to attract and retain talent certainly increased. We are getting more looks with customers, again, based on the strength of our Company, the strength of our balance sheet.

So the team is really energized about, again, the past year, but more importantly, about taking the next steps as we work to improve profitability across all business lines. Thank you again for your time, and we look forward to sharing more of our story with you on the coming calls. Thank you very much.

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