Synovus Financial Corp (SNV) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Synovus first-quarter 2016 earnings conference call.

(Operator Instructions)

It is now my pleasure to turn the floor over to your host, Bob May. 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, synovus.com. Kessel Stelling, Chairman and Chief Executive Officer will be our primary presenter today, with our executive team available to answer your questions.

Before we begin, I'll remind you that our comments made 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 website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments, or otherwise, except as may be required by law.

During the call, we will reference non-GAAP financial measures related to the Company's performance. You may see the reconciliation of these measures in the appendix of our presentation.

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

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

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

The results for the quarter included restructuring charges related to four branches that will be consolidated next month. Additionally, the quarter reflected a slightly higher tax rate due primarily to an approximately $550,000 discrete adjustment on state taxes. For the full year we expected an effective tax rate in the 36% to 37% range.

Total revenues were $281.3 million, up $2.5 million or 0.9% sequentially, and up 4.8% versus a year ago. Total loans grew $328.6 million or 5.9% annualized on a sequential quarter basis, and grew $1.65 billion or 7.8% versus a year ago. As just a matter of information, that's the longest year-over-year percentage growth since the second quarter of 2007.

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

On the capital front, 5.4 million common shares or $158.5 million had been repurchased under the $300 million share repurchase program. That's from program inception in October of 2015 through April 18, 2016. That's at an average price of $29.25.

During the quarter, we repurchased 3.9 million to common shares for $110.9 billion at an average price of $28.44. Capital ratios remained strong with common equity Tier 1 ratio of 10.05% versus 10.37% in the fourth quarter of 2015 and 10.8% in the first quarter of 2015.

Turning to page 4, I'll give you a little more color on loans. As I said earlier, total loans grew $328.6 million or 5.9% annualized on a sequential quarter basis, and 7.8% versus the first quarter of 2015. CRE loans grew $216.3 million or 11.8% annualized.

Retail loans grew $71.7 million or 6.7% annualized and C&I loans grew $40 million or 1.5% annualized. Kevin and I will give you more color during the Q&A, but loans increased across most specially lines, with solid growth in corporate real estate, senior housing, point-of-sale lending, and consumer mortgages.

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

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

On page 5, a little color on deposits. Average core deposits again increased $55.9 million or 1% annualized versus the fourth quarter, $2.09 billion or 10.5% versus a year ago. Fourth-quarter 2015 average core deposits were seasonally higher, reflecting a sequential quarter growth of 10.3% annualized versus third-quarter 2015, compared to 8.2% growth of average core deposits for all of 2015. So, fourth quarter a little inflated there.

Period-end core deposits, excluding SCMs increased $238.2 million or 4.9% annualized sequentially, and $1.61 billion or 8.8% versus a year ago, reflecting continued growth in our deposit portfolio. And we do believe that our deposit strategy will yield core positive growth sufficient to support our loan growth for 2016.

On page 6, talk a little bit about the margin. You will see, up 9 basis points. We had guided to 3.25% in the first quarter. Pleased to see the margin come in at 3.27%.

Net interest income was $218.2 million, up $5.6 million or 2.6% versus the fourth quarter of 2015, and up 7.3% versus the first quarter of 2015. Again, margin 3.27%, up 9 basis points.

I'll give you a little color on the make up there. The yield-earning assets was 3.73%, up 10 basis points from the fourth quarter of 2015, reflecting the full quarter benefit from the December rate increase The yield on loans increased 7 basis points to 4.15% versus 4.08% in the fourth quarter.

The new and renewed deal loans increased 15 basis points, 3.81% versus 3.66% in 4Q 2015. Average balances at the Fed decreased $199.5 million or 20.2% to $790.4 million. Again, saw improvement in them due to that factored in. A basis point proven due to higher yield of investment securities.

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

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

On page 7, non-interest income -- first quarter of 2016 adjusted non-interest income was $63.1 million, down $3 million or 4.6% versus fourth quarter of 3.1% versus the first quarter of 2015. Core banking fees, $33.3 million, were down $1.7 million or 4.8% in the fourth quarter of 2015, driven primarily by seasonally lower services charges on deposit accounts and lower SBA gains.

A little more color there -- service charges on deposit accounts decreased $811,000 or 4% versus the fourth quarter of 2015, primarily due to seasonally lower SF fees. And gains from the sales of government guaranteed loans, which, again, are primarily SBA loans, were $711,000 for the quarter compared to $1.4 million in the fourth quarter. Gains from this source vary from quarter to quarter as they just depend on the timing of the sales. For the full year we expect to exceed the $5.4 million in gains that we realized in 2015.

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

Mortgage banking income was $5.5 million for the quarter, up $1.3 million or 32.6% sequentially, and down 15.4% from a year ago. The sequential quarter increase was primarily driven by the increase in the secondary market gains associated with a growing pipeline as we move into the spring homebuying season.

And we do believe our FMS and mortgage units are well-positioned for future growth. We continue to aggressively pursue sound acquisition strategies in key markets. We have seen significant gains with the mortgage origination team in the Tampa, Huntsville, and Birmingham markets, and, more importantly, position the mortgage origination and brokerage business to make 2016 a very successful [talent] acquisition year.

On page 8, on expense management, I want to first call your attention to a change in presentation beginning this year and I think it will make sense to all of you but let me walk you through that. We had reclassified ORE and other credit costs out of credit costs into adjusted G&A. I know many of you in your models showed it that way anyway.

There is no change in guidance but let me walk through. Again, these items totaled $5 million for the first quarter, $31.7 million for all of 2015. We expect the ongoing impact of this change to 2016 to be $4 million to $5 per quarter. So, with this change in presentation, we now expect adjusted non-interest expense to be flat to slightly up compared to 2015. The expectation is based on, again, a low single-digit percentage increase in adjusted non-interest expense, which we had previously guided, and those are expected to be offset by a decline in foreclosed real estate and other credit costs.

Slide 13 of the appendix provides more specifics regarding the change in presentation, which, again, we think will be easier for all of us going forward. But the main point here is this is no change in guidance, just a reclassification of those expense categories. In fact, we are pleased with the continued progress on expense management and efficiencies. We show favorable non-interest expense comparisons to both linked quarter and prior year.

First-quarter of 2016 adjusted non-interest expense was $179 million, down $1.4 million or 0.8% versus the four quarter of 2015. Headcount decreased by 63 or 1.4% since year and, reflecting the continued implementation of efficiency initiatives. Other expenses were $6 million lower in the fourth quarter, reflecting lower professional fees and advertising expense.

Professional fees of $6.1 million were down $2.1 million or 25.8%, driven by lower consulting fees and advertising expense, $2.4 million, was down $1.3 million. We expect that advertising spend to increase during the remainder of the year as we have resumed our brand awareness activities.

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

On page 9, let's turn to credit. Again, Kevin Howard will give a little more color later in the call. Credit quality remains favorable even as we see movement towards more normalized levels in most of our credit metrics, as anticipated.

NPAs were flat over the prior quarter, with our NPA ratio declining slightly to 95 basis points from 96 basis points last quarter, and 1.28% in the same quarter a year ago. NPLs ended the quarter at 78 basis points.

We were also pleased to see meaningful declines in accruing TDRs and in criticized and classified loans. More detail on these items can be found in the appendix. Provision expense, $9.4 million, increases by $4.4 million from $5 million in the fourth quarter of 2015, primarily attributable to a decrease in the volume of recoveries.

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

I'm pleased to see past dues still at historically low levels increase to 28 basis points. But, again, very acceptable level of past due loans, up from 21 basis points in the fourth quarter to 27 basis points in the first quarter of 2015. Our 90-day past dues remain at 1 basis point.

We continually analyze our credit performance by industry, property type, geography, and many other loan characteristics. And, while 2015 saw some credit metrics reach historically low levels, they aren't likely sustainable. We believe our portfolio will continue to exhibit solid performance in 2016. Again, Kevin will be happy to talk in more detail about that.

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

The first quarter of 2016 CET1 ratio, 10.05%. Tier 1 capital 10.05% versus 10.37% the fourth quarter. Total risk-based capital 12.26% versus 12.7% in the fourth quarter.

The leverage ratio, 9.15% versus 9.43% fourth-quarter 2015. Our TCE ratio, 9.62% versus 9.9% in the fourth quarter of 2015. And the first quarter of 2016 Basel III CET1 ratio is estimated at 9.47% on a fully phased-in basis.

So, that's it for the first-quarter highlights. Just a couple of points on our go-forward story and then we will be happy to open it up for questions. We are focused on activities in three key strategic areas for this year and beyond.

Clearly, we want to broaden business lines and growth in market share in all of our markets. We want to gain greater efficiency. We continue our focus on investments in our people.

Balanced loan growth, we talked about earlier, and supported by core deposit growth, will be a top priority for all of our bankers. We expect mid single-digit loan growth for 2016, again balance across our portfolio. We continue investing in talent. We believe it can help us expand in the government guaranteed area, SBA, USDA.

The middle market area we think has great opportunity, and core commercial lending space in key high-growth markets. Again, as I mentioned earlier, we expect our government guaranteed team to increase production from 2015 levels by more than 50% during 2016. We will begin to see the impact of our middle-market talent investments in 2017 and beyond.

We are piloting several enhancements through our digital channel that will improve the ease of loan application. And we do expect continued increases in retail sales productivity as we focus on connecting customers and prospects with products and services to deliver the highest value. We saw a 27% increase in retail sales productivity in 2015 and expect another double-digit increase in sales productivity in 2016.

Again, we continue to invest in growing our previously mentioned government guaranteed lending groups in our FMS customer segments to increase overall fee income. Talent acquisition has and continues to be a major part of our fee-income growth strategy, especially in these two areas mentioned, government guaranteed mortgage and retail growth. Again, for the full year we expect to exceed the gains from sales from government guaranteed loans, primarily SBA, that we realized in 2015. And we do think that our private wealth teams are strategically positioned in 16 markets across the footprint, and will continue to build total relationships with high potential clients.

Again, on the expense management, we do believe we can drive our adjusted efficiency ratio below 60% over the long term. For 2016, we expect adjusted non-interest expenses to remain flat to slightly up compared to 2015. As we stated earlier, we've announced four branch consolidations this year and we anticipate further consolidations as we reposition investments to channels through which our customers prefer to be served.

Just as a reminder, since 2010, we've consolidated 20.4% of our branches. With the four scheduled to consolidate in May that percentage increases to almost 22%, we think a leader among our peers at a 22% reduction in overall branch count.

We will continue to achieve additional efficiencies through ongoing direct expense savings opportunities. But, as you know, many of the larger opportunities have already been addressed for our team over the past few years. We will continue to rely on investments in technology and banking channels to bring efficiency to processes and systems and to migrate customers to lower-cost delivery channels such as online, mobile, and ATM banking.

Later this week we will have the opportunity to share our story with our shareholders at our annual meeting. I hope to see some of you there. We certainly have a great story to tell, both about our successful 2015 and the many opportunities ahead in 2016 and beyond. Our strategic priorities are in order, our team is solid, and will only get stronger as we grow existing and add more specialized talent.

We are actively investing in strengthening our team in the communities that we serve. We think it's a great formula for continued, solid, financial performance.

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

(Operator Instructions)

John Pancari, Evercore ISI.

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

Yes, it is.

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

I think in December we did talk about two rate hikes during the year. I don't think we, like most other banks, are betting the year on additional rate hikes. We believe again, and we are operating that there will be no future rate hikes. And we think there could be slight pressure -- slight, if that's the case.

Again, we were pleased to see margin grew to 3.27%. We had guided to 3.25%. So, maybe slight pressure without additional rate hikes. I've given up trying to predict if and when we are operating as if there will not be any, but we certainly, and we are trying to illustrate in the table, what effect we might see if there were an additional rate hike.

Okay. And if I can squeeze in one more -- could you just discuss the deposit data that you are seeing today. I noticed that the deposits costs actually went down this quarter. Could you just discuss what you are seeing in terms of deposit pricing?

Yes. This is Tommy. I will be glad to take care of that. On the deposit side, when you look back at a year ago, we had $2 billion increase since that point, even at the end of March of last year, the same quarter.

What we've got right now is we had a temporary slowdown in the first quarter of this year. We had a really big boost in the fourth quarter of last year. So, we had, really, some momentum that came from that but not a lot of growth that came out of this period.

So, while the growth moderated compared to the 10.5% rate during the last year of the growth, we continue to anticipate that the core deposit growth will match the loan funding on a go-forward basis. Once again, you've got to go back to what we had in 2015. Really, we had all of the categories working there in a very positive way. So, we are very comfortable that we will move forward on that basis.

Okay, thank you.

Kevin Fitzsimmons, Hovde Group.

Hey guys, good morning. If I could just ask a question, dig a little deeper into the fee income. If you look at slide 7, we had pretty decent-sized linked declines in other fee income but then also other non-interest income.

So, am I right in assuming that the other fee income decline is mostly the SPA gains being lower? And, if so, what is driving the other non-interest income item, because that was down a pretty clip linked quarter? Thanks.

Let me talk about the SBA piece while our team is looking at other categories. That was lower. We had a big push at year end. And with SBA fee income sales, as you know, those vary fairly substantially quarter to quarter.

So, we had a big December, and then that was down again the first quarter. But, again, that not only normalizes but production itself, which doesn't correlate necessarily to income but it certainly influences, will be up as much as 50% year over year. So, that is the SBA piece. Tommy, do you want to hit the other category?

Yes, I'd be glad to do that. We talked a while ago about some of the issues that affected the quarter, and we do believe it's largely a seasonal and, in some cases, one-off items. And we think we'll move forward in a positive way after the first quarter.

The other fee income $4.8 million, down $994,000, or 17.1%, from one quarter ago, is primarily due to customer swaps. We had a significant amount of that in the fourth quarter, and none at all in the first quarter, and that's just a phenomena that moves around. But we will see more of that in a positive way going forward.

Other non-interest income, $6.9 million, down $2.4 million, which is a big piece of the drop in the first quarter. The fourth quarter had a $1.4 million gain in some of the ancillary items we have like the tax credit investment, the other equity method investments, and so forth. So, what was $1.4 million in positives turned into $390,000, so a big gap there.

That moves back and forth throughout the quarter, but it was low in this quarter. Mortgage banking held well and move forward. So, we do expect to see a better quarter in this fee income on a go-forward basis.

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

Kevin, I think you are right on your first statement, it would probably be more balanced. Just for the benefit of the broader audience, this authorization was a 15-month authorization announced in October of 2015 to run through calendar year 2016. So, $300 million. And, again, we accelerated on the front end, or certainly in this quarter.

So, six months into it, and little over halfway. We think the remainder of it will be fairly balanced over the remaining nine months. We will certainly be opportunistic but don't expect to be at the pace you might have seen this past quarter.

Great, thank you.

Brad Milsaps, Sandler O'Neill.

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

That is correct.

Okay. So, you don't expect to bring that down much further?

No, I think we are about at where we're going to stay.

Okay, great. And, Kessel, I appreciate the color on asset quality, and it sounds like you guys are feeling pretty good coming out of your SNC exam. Just curious, you or Kevin, any additional color there on how you are thinking about provisioning for the remainder of the year. Obviously, it's been a volatile start to the year with the stock market.

Just curious how that, if at all, translates to your customer base. It seems like your reserve here has bottomed out around 112, 113 basis points alone. Is that where you feel like that number will turn out to be a floor?

Brand, Kevin and I had a spirited discussion on that topic early this morning, so I will let him share his thoughts on that with you.

Thanks. Hello, Brad. I think the provision, yes, it did, as Kessel mentioned in his opening comments, as expected and as we guided we see that increase in little bit. We know we are not going to get the recoveries as we get further away from the recession.

Recoveries -- I think there were over $7 million in the fourth quarter, they were more like $3 million this quarter. So, you can see those will wind down as we get further away.

Provision probably stays about where it's at, to be honest with you. It could possibly build maybe a little bit, but I also think our ORE expense, which is more buried into the G&A side now, will come down and offset that.

If I were adding them both up, my guidance would be, on overall credit costs, probably around, as low as 12 some quarters, maybe as high as 16 or 17. But provision stay in that 9, 10 range. That's how we see it right now.

But, also, on the reserve, yes, we see the reserve being fairly flat. There is definitely, if you just follow the math, as we like to say, there are some downward pressures, older loans with high reserves. As we see these segments Kessel mentioned, like watch list and substandard loans and TDRs reduce, those have higher reserves replaced by higher-quality new pass credits. It puts a little pressure there.

We also are cautious of where the reserve is at. We don't really want to see it get any lower. We can get a little more conservative, when possible, dealing with qualitative factors to offset that. And those are the things we're doing to keep the reserve where it's at.

There's definitely pressure going in the way of reduction. But, as I see it, you add all that up, I see reserves staying, as you mentioned, fairly flat throughout 2016.

All right, thank you, Kevin. I appreciate it.

Ebrahim Poonawala, Bank of America Merrill Lynch.

Good morning, guys. Just moving back to something Kessel you mentioned in the press release and in your opening remarks around growth, it does feel like overall growth remains pretty challenging. Within that context, how are we winning market share? Is it on the pricing front?

What are the markets which is driving growth? And is there any potential that growth could potentially surprise now from your mid single-digit loan growth guidance for the year as we move into 2016?

Let me start, and see if the team wants to add to it. Again, we were pleased to see growth at the higher end of our guidance for the quarter. Again, our concern is not as much that number as it is the quality and the overall balanced growth, which I have seen has been very disciplined as we slowed down some areas, which certainly could have led to even higher growth numbers. So, it's not just the percentage amount, it's the type of assets we are putting on our books.

The growth, as we mentioned, was in the larger markets, the Atlantas, the Birminghams, the Tampas, the Nashvilles. We are really pleased here. That's where we made large investments in people, as well.

So, could we see higher growth? We are actively recruiting in the market and we've got a great story to tell to bankers who want to be a part of our team, and our way of business, and our way of treating customers. As we are able to add talent, we do think that could lead to additional growth opportunities or even teams of talent.

Some of the investments that I mentioned, such as middle market, take a little longer to see mature. But we are pleased overall. We think we've got -- we were looking at pipelines this morning. Kevin, you and D. were talking about that earlier today, so if you want to add a little color into where you think some other growth opportunities might be.

This is D. I will touch on a couple of things. One is pipeline. We have seen some positive trends in the C&I pipeline out in the markets that we've had. It is still challenged, though on the C&I side.

One of the things we have not counted for in the guidance that we've given is economic lift, if we were to have some of that. Just like we have not accounted for rate gains in the second half of the year. That's one place that could be a positive, is as we get that lift.

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

I was going to say, I heard the word challenge. I would say year-over-year growth is around 8%, and that's about, actually a little bit higher than maybe what we thought. Remember, we've still got a little bit of credit burn. We are moving the watch list and substandard credits. All that goes against what we're trying to do.

Now, we're setting to get to normalization there as we get the balance sheet more positioned like we wanted to. But I think that's a pretty good number. In this quarter, I think we even teed it up, that we would be on the lighter side of growth, maybe 1% or 2% and we ended up being a little bit higher.

We had good real estate growth, which we knew we would fund up some constructions there, did some refinancing, consumer strategies that we put in place over the last year. Good growth there. And the C&I had a lot of seasonality in that.

Utilization was down 1.5%. We know in the first quarter, a, if we run that correctly we're going to get that in the first quarter. But we see that building over second, third and fourth quarter.

I think the economy, as D. said and Kessel mentioned, mid single digits will probably dictate whether we are on the higher side of mid single or the lower side. But we do you feel like the right strategies are there, the performance has been there over the last year to be in that middle single-digit growth, and hopefully on the higher side, as the economy plays out, and certainly some of our strategies. We like balanced growth and if you look year over year, we've had pretty good balanced growth in all the consumer, real estate, and C&I categories.

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

Yes, we're watching. You look at, especially the last few years, our growth, actually it's been all on the income-producing side. I think were up $230 million-plus on income-producing. And, actually, if you count all the residential components, including land, we were down $20 million this quarter.

So, we are still shifting the outlook on the real estate, and how we are approaching it is a completely different portfolio. So, yes, that does factor in.

We are also aware. We have had pretty good growth rates in the last couple years in CRE. We are looking at the construction portfolio. I will tell you, we are pulling back there. I think we'll probably do half the construction loans, we'll do this year that we did compared to the last couple years.

We're watching rent growth versus wage growth. There's a couple of markets that are getting a little ahead, and we are pulling back there. So, we're watching the construction component and pulling back some there.

But also, we've tightened up a couple of other policies. We're watching our hold levels on office. We have been having some really good refinance opportunities there. But we are being particular there.

We've actually tightened up some policies in some of the other real estate categories. We are not exiting them, we are just being cautious, watching the growth. So, that's been our thoughts on the real estate side.

Got it. And if I may squeeze one more in for Kessel. You mentioned you've given up on predicting what's going to happen with rates. As we look out over the next 12 to 18 months, how do we get the returns improved from your view from an execution standpoint? It looks like you are doing everything on the expenses and capital return, but can we actually move the needle from an ROA/ROE perspective if rates do not help?

Yes, we can. We actually spent a good bit of time looking at that over the weekend, as we always do, prepping for these calls. We show a 7.5% increase in net interest income with a flat 8.5%, up 25 basis points. And moving into 2017, any additional increases would obviously give us lift there.

We continue to invest in these areas that we believe give us meaningful opportunity to change the fee trajectory and get those fee businesses producing at a better rate. We've made investments in profitability systems that will really allow us to, we think, more properly get compensated in a lot of our markets and business lines where historically we weren't as precise on overall returns. So, I think we've got ability there.

We think we've got continued ability from a deposit pricing standpoint, even as rates might move up, to control those costs a little more. And we will continue to get expense out. The pace might be a little slower now, but the activity and the effort to identify and implement those expense cuts is very robust.

So, the short answer is yes, you can expect improved returns. Obviously slower without rate increases. When I say we are not giving up on predicting we have our baseline assumptions but we also have actions that we know we can and will take regardless of any Fed rate actions.

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

Jennifer Demba, SunTrust.

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

There will be some offsets and some variance quarter to quarter. But we do think, and as we said, in the brokerage space there was some market volatility in the first quarter that depressed that. On the SBA side we have made investment. That was slower in the first quarter. So, we believe that picks up, the brokerage picks up.

I won't go into all the areas that we see potential lift, but we don't think the first quarter trend is any big indicator. We do think there are opportunities for lift in a number of those categories. Again, mortgage, we have made tremendous investment in originators and we continue to hold costs down in the back room. I can't give you any dollar fee guidance but I can tell you the efforts are to, yes, move that in a deposit direction going forward, knowing that there will be some quarters that have some seasonal fluctuations.

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

We love, number one, investing in our own people and helping them grow additional business. And then as we recruit in the market with individuals or whole teams, it allows us to get a little deeper into their backgrounds or people. I think we have done a good job over the last four or five years as we brought in different teams that were well-vetted by all of us from a production and risk standpoint. So, we are very active there.

And then the whole bank M&A usually comes with a little different pricing structure. And to date we felt like buying our own stock back in the market was a better value for us. We think we know the value of that stock better than we know the value of some of these other companies. It doesn't mean -- I knew we'd get to the M&A question pretty soon -- it doesn't mean there is no shortage of looks.

But, as I've said, we are very disciplined in how we look at that. Certainly would have interest in whole banks that fit the kind of characteristics of banks that do business the way we do, where we could get a lot of cost out and it makes sense for our shareholders. But absent one of those presenting themselves, we will buy our own stock back, we'll invest in our own people, and we will opportunistically look to make additional hires and/or teams of bankers.

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

On the C&I book, which is about one-third, or a little bit more than that, of the C&I within working capital lines, and that's what I was referring to, it went from about 46.5% to 44.5%. So, it went down 2% during the quarter. We expect that to be mid 40%s, quite frankly. It fluctuates. It can fluctuate 2% to 3% according to the given quarter. Usually, it is a good lift in the fourth quarter, or third and fourth quarter, where there's a lot of deals.

So it could be probably 2% to 3% to 4% as the year plays out I don't see it really getting above 50 just based on the way the loans are structured here. But that's a nice lift. That could be $100 million, $150 million to $200 million of just loans you do not have to originate that you get growing throughout the year. Those are the numbers we are focused on, on the utilization.

Thanks.

Christopher Marinac, FIG Partners.

Thank you, good morning, Kessel and team. I was curious about your views on commercial real estate concentration. I know for years you have had the ability to stratify for the regulators. But just curious how you think that evolves. Does this at all place any constraints on how you look at loan growth and how loan growth evolves the next few quarters?

This is Kevin. I think the key to that is, especially with our regulatory relationships, are we on top of it. Do we have good data, are we tracking it, watching the migration trends. That's what's important to the regulatory group, and that's what's important to us.

We think it balances between 30% and 35%. 35% of our portfolio feels a little high. We're in the 33% range. I think it may have been up 0.5%, I think down. It fluctuates a little bit. So, you'll see it bounce in that area. We do not see it getting higher than that.

And I think, number one, it is prudent. We don't want to see too high growth rates in any particular category we're keeping our eye on. But we also don't have that tendency we once had.

I think we got really good strategies there on the consumer side. We've seen good growth in the percentage of the balance sheet, good C&I, good balanced growth.

So, I think the Company will grow more balanced. But we are watching that. We're watching particular categories.

But I think the most, probably, important shift from our concentrations of years past has been more shifted into the income side versus maybe the dependency of sale of assets in the residential and land side. And we've seen just rapid turnaround there. And that's what we have been focused on.

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

Yes, Chris, great question. Al Gula is in the room, but I'm not going to let him talk because we would then spend the next hour talking about cyber security. And I say that in a positive way. The investments, they're just ongoing. I don't know that you can ever say you've spent enough, and you can never say that what you have spent protects you.

I think we have a very robust plan to measure that investment, to measure return on that investment. I think we're well-positioned there, not only meeting with Al regularly with our Chief Information and Security Officer to make sure from his standpoint he believes we're properly invested. A lot of oversight from our risk committee.

A lot of participation with peer groups. Banks are better at sharing data on cyber security than I think anything we do as an industry. And that's a complement to the industry. And I think there's greater coordination now among not just our regulatory agencies but other agencies of the federal government that historically maybe didn't share data.

Maybe not exactly as precise as you wanted. We spend a lot. We will continue to spend a lot. If the question is do we have any major area where we are under-invested that we have to catch up, I don't believe so. But I have never met a chief information security officer that couldn't spend whatever you would put in the budget.

But it's a very, again, robust process. We have outsiders come and look at what we're doing and evaluate and share with management, share with our risk committee, share with regulators. So, again, I don't want to ever say that we feel good about cyber security because I feel like the industry is under attack. But I feel like we are appropriately invested and we will continue to do that.

Super. Thanks for the background here. I appreciate it.

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

Jared Shaw, Wells Fargo.

Hi, good morning. This is actually Timur Braziler filling in for Jared. Just a couple of questions, as most of mine have already been answered. If you look at a flatter yield curve, can you maybe talk about what you saw in CRE pricing over the course of the quarter? Maybe you haven't migrated from the beginning of January through March.

Yes, on the CRE pricing, as Kevin mentioned, we are very careful on what we are watching, and watching it. But we actually are slightly up in CRE pricing. It's been variable but we've been able to move those yields slightly up on the overall CRE pricing for the quarter.

Okay, is that with a three handle, or are you now starting to approach low fours, as well?

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

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

We capture it but we can't match up dollar for dollar which gets to go to the bottom line and which gets reinvested. But that's part of our overall expense management plan, those four and others that we will continue to look at. But those are part of our existing expense guidance.

We knew going into the year that we would certainly get expenses out of some branch consolidations. And, again, that process is ongoing every day. So, with these four, that will be almost 22% of our overall branch network.

I don't have any guidance for how many more this year but as we get there we will certainly share that. And, again, that is baked into our expense guidance for the year.

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

This is Tommy. The payroll taxes were the big number in there, $7.8 million in the first quarter of 2016 and $3.6 million one quarter ago. So that's the big piece and it's because of the payroll taxes that tend to amortize, drops some in the future quarters.

Okay, great. Thank you.

Chris Spahr, CLSA.

Thank you. Good morning. The restructuring charges of $1.1 million, is that related strictly to the four branches? And could we expect anymore charges going forward?

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

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

Are you referring to the sub debt or are you referring to another category?

I guess I'm just broadly defined. For example, just on your supplement, when you look at the schedule for average balances and yields, just looking at, say, the long-term debt line there. I know it's down linked quarter but it is up year over year.

The cost of the debt was issued in December of 2015. That was the piece that went along with the sub debt.

We've also added some liabilities with the Federal Home Loan Bank. You might be referring to some of that. That's really just an opportunity to pretty efficiently manage in that category.

And then what you saw in the first quarter of $4.5 million really had to do with the tender that occurred during that time, the $125 million. The premium you have to pay with that is, for the most part, $4.5 million.

Sure. Okay. So, do you think, then, we could at least model under the liability side that the average level of the long-term debt and the yields, or the costs, will be more or less flattish going forward? Or do you think we could see some positive changes there?

I think you're in the zone. I think that's fair enough.

Okay. And then, finally, on the litigation costs, I know they're episodic from quarter to quarter, but if you look on a full-year basis, they seem to be somewhat recurring over the past three or four years, albeit down from 2013 and 2014. How could we think about that going forward and at least when we're trying to map GAAP earnings?

We want to continue to push down legal costs, and I think we have done a good job of doing that. There are some, as we had this quarter, some expenses tied to some legacy issues that we think continue to decline overall. We offer very positive encouragement to our legal team every day to push those costs down.

Longer term, we believe those costs continue to decline. As Kevin mentioned earlier, we still have some credit burn as we move through the last remaining pipeline of some of the legacy issues.

Thank you. And one last question, if I may, regarding the CET1 ratio. Is there a comfort zone that you have when you work with the Board on your buyback authorizations? At what point do you think you've got to tamper back the pace of buybacks relative to your core earnings?

We haven't given absolutes. Our Board is very involved in the capital planning process which flows out of the stress testing. And it's, again, a very continuous, robust process. We consider a lot of factors there. We look at our concentrations, we look at our risk profile, we look at the classified and criticized credit.

And, yes, we look at the percentage of earnings but we also, again, continue to have DGA accreted to regulatory capital, which, again, is outsized for most companies. So, I'd say it's an annual process. It might be an annual approval but it's an ongoing process.

So, I wouldn't say that there is an absolute ratio. That is one data point in a number of factors that really influenced our decision on share buyback, dividend increase, and any other capital actions.

All right, thank you.

Nancy Bush, NAB Research.

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

Yes, Nancy, this is Kevin. It's a little of both. Number one, the problem loans with our NPA, our ROE down to $40 million, our NPL is down, there's not as much to recover.

And, by the way, there was a spike in the fourth quarter. Sometimes in the very end of the year, a lot of people settle, get some recoveries done. So, that $7.5 million was as high as it had been in several quarters. We didn't expect to retain those levels.

But I do think it's probably where it's going to be for us for a while, probably going the other way. And it is a function of the market. Definitely to recover you have to have some positive things in the market to get those recoveries back, some positive things have to happen. And that certainly did over the last two or three years for us, that there's been good recovery in our markets and we have been able to unload some of the real estate at better prices than we had booked, so therefore we got net recoveries.

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

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

I go to Kessel and Tommy about every other quarter with that proposal, because it is tiring to work through some of the old legacy assets. But it just has still been -- we look at it -- as a matter of fact we will review it a couple of times this year -- is it getting to that inflection point where it just makes sense to move the rest of it out.

We've done those studies a couple times a year, like I said, over the last few years, and, again, it's been more capital efficient for us just to do it retail-wise and one at a time. But it's certainly something that we look at quite a bit.

And, Nancy, there's obviously a cost of doing it the way we do it, with the people that are involved, and we keep that in mind, too. Kevin hasn't made his case to me on that topic since last week.

And, again, we want to look at the economics, what is the right economic decision for the Company. But we test it, and we will continue to test it because I think you make good points there.

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

We haven't guided to a percentage. I told Wayne Akins he better be ready today, but I'm not going to put him on the spot.

We are really pleased with the retail transformation of our Company. We took it to a vertical management structure maybe a year and a half ago. It took some costs out there, but, more importantly, it put in place a really 24/7 focus on sales and service.

It involved some reductions in talent. It involved some investments in talent. It involved a change of skill sets in our branch system to really deliver what we think the customers want in the branch system.

We really had talked about a 30% increase in sales productivity last year. We ended up about 27%. We do think another double digit this year.

In terms of a percentage of revenue, we haven't gotten that specific with guidance but we think it can and will be a bigger part of our Company. I visit with our retail teams often. Wayne's out in the field. There is a high degree of energy in our retail team and we do think it can play a bigger role.

So, we've got to continue to get costs out there. We've got to continue to invest in digital and within the branches. We've actually opened a couple of new locations, prototype branches, that involve a lot more technology and fewer people, and very interactive customer experience. I visited our one in Nashville. We will see some others really soon.

So, there's probably maybe, I don't know if any of our leaders would say they've got more pressure than others. But certainly I think Wayne feels it in terms of expectations from the retail system. And as we can get more clear on revenue expectations we'll share that and disclose that.

All right, thank you.

Jesus Bueno, Compass Point.

Thank you for taking my questions. Regarding the FDIC surcharge, have you disclosed what the impact is? And, if not, could you provide us with guidance on what the quarterly or the annual run rate would be on that?

It's got some moving parts, but net-net we believe it's par compared to 2015.

Jesus, it's Bob. As compared to the first quarter, it will remain flat for the rest of this year.

Okay. And I take it that's in your expense guidance. I know that it seems like the language changed slightly on the expense guidance. I think before you had said low single digits, now it's saying flat to slightly up.

Just from reading the languages, it seems like you've gotten to lower expenses than previously. What's driving that change? Or what changed in your outlook from 4Q to 1Q?

Jesus, it's actually just a reclassification. So, we're just moving ORE out of credit costs into adjusted G&A. So, there's no change in guidance.

Before, you had two components. One we said was a low single-digit increase, one was actually going to have a decrease that combined categories now that will present adjusted G&A. That combined category on a go-forward basis, we are saying, will be flat to slightly up, which is consistent with the sum of the two parts that we had disclosed before. And that's on slide 8, but also, I think, in the appendix, maybe slide 13, would give you a little further color there.

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

It's running well. Maybe Kevin can add some color. I don't think we disclose balances but we are pleased with that partnership on a number of fronts.

We are pleased with the growth, we are pleased with the quality, we are pleased with just the overall implementation and running of that program. We thought it could be a meaningful part of our consumer retail strategy. Again, we haven't disclosed numbers but we are very pleased with that partnership.

And would you still look to perhaps maybe other types of partnerships, marketplace lenders?

Yes, we are and we will. I have seen other companies give a little color there. It is, again, to Wayne Akins and team.

They have met and visited with many. We want to be very purposeful there. But, yes, we have explored and we will continue to explore opportunities to partner with some of the marketplace lenders that we think would just be, again, good partners for us in our footprint. So, more to come on that.

Great. Thank you very much for taking my questions.

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

All right, I want to thank everyone. We are a little past our usual stop time of 9:30, but we appreciate the questions. And if there were questions we didn't get to, or you want further clarity, most of you know how to reach Bob May. Just call him or shoot him an email and he'll be happy to respond.

I want to think, again, all of you for your time and your interest in our Company. Again, we are looking forward to our shareholders' meeting in a couple of days. Hope to see a lot of our team and some of our investors, and some of you there. And then look forward to a great rest of the year for 2016. So, thank you all very much and have a great day.

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