Synovus Financial Corp (SNV) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

Now I'd would like to turn 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 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 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 to our presentation. Thank you and now I'll turn it over to Kessel Stelling.

Thank you, Bob, and good morning to everyone and welcome to our third-quarter earnings highlights call. As usual, I will walk us through the deck and then we will open up the floor to questions to our team, which today includes Kevin Blair, our new CFO, and the usual team members, to address any and all of your questions.

Let's jump right into the deck on page 3. Profitability continued to improve during the quarter. We reported net income available to common shareholders of $62.7 billion which represents a 13.2% increase versus a year ago.

Diluted EPS was $0.51, up 10.1% versus the second quarter of 2016 and 21.2% versus the third quarter of 2015. Adjusted diluted EPS was $0.52. That excludes $1.2 million restructuring charges, $550,000 in merger-related expenses and $189,000 for litigation net recovery. So that is up 5.2% versus $0.49 in the second quarter of 2016 and up 23% versus $0.42 in the third quarter of 2015.

Our return on assets was 88 basis points, improving 5 basis points sequentially and 7 basis points versus a year ago. Adjusted ROA increased to 90 basis points, up 2 basis points sequentially and up 8 basis points versus a year ago.

Total revenues of $294.1 million, up $4.8 million or 1.6% sequentially and up 7% versus a year ago. The adjusted efficiency ratio improved to 60.55% for the quarter, a 99 basis point sequential quarter improvement and a 128 basis point improvement versus a year ago.

Moving the balance sheet, total loans increased $202 million or 3.5% annualized on a sequential quarter basis, and grew $1.4 billion or 6.4% versus one year ago. We will get a little more color about that loan growth later in the call. The total average deposits grew $422.3 million or 7.17% annualized versus the second quarter of 2016 and 5.1% versus the third quarter of 2015.

A couple of highlights on credit quality and capital management, our NPL ratio of 64 basis points improved 8 basis points from the third quarter of 2015. Our return on average tangible common equity improved 126 basis points versus the third quarter of 2015 to 8.96%.

A little bit on capital management, during the third quarter we entered into as an accelerated share repurchase agreement to repurchase the remaining shares under the $300 million repurchase program. $289.4 million, or 9.7 million shares, have been repurchased to date at an average price of $29.78. Our total share count has been reduced by 7% from a year ago. Capital ratios remain strong with a common equity tier one ratio of 9.97% versus 10.01% in the second quarter of 2016 and 10.6% in the third quarter of 2015.

Moving to slide 4, a little more color on loans. We had sequential quarter growth of $202 million, or 3.5% annualized, on a sequential-quarter basis and 6.4% versus third quarter of 2015. Retail loans grew $182.1 million or 15.7% annualized. C&I loans increased $60.6 million or 2.2% annualized, partially offset by a decline in CRE loans of $42.1 million or 2.2%.

Year-over-year loans have increased $1.4 billion or 6.4% annualized. Retail loans grew $648.3 million or 15.6% annualized. C&I loans increased $490 million or 4.7% annualized. And CRE loans grew $258.1 million or 3.6%.

We were pleased we continued the portfolio of diversification in our retail growth, both in consumer mortgages and lending partnerships. Consumer mortgages of $2.24 billion grew $111 million or 20.7 % annualized sequentially. And the lending partnerships portfolio totaled $352 million as of September 30, 2016, and increased $98.2 million sequentially.

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

Turning to slide 5, you'll see total average deposits of $24.03 billion increased $422.3 million, or 7.1% annualized, versus the second quarter of 2016 and increased $1.17 billion, or 5.1%, versus the third quarter of 2015. We continue to decrease our reliance on higher cost time and brokerage deposits which represent 19% of average third-quarter 2016 deposits versus 20.3% a year ago. Average broker deposits for third quarter of 2016 include $313.9 million of our new bank deposit suite product, which was introduced in May of 2016, and that compares to $139.3 million in the previous quarter.

Average core transaction accounts increased $512.7 million, or 12.1% annualized, versus the second quarter of 2016 and $1.26 billion, or 7.8%, versus a year ago. Average non-interest-bearing deposits grew $185.8 million, or 12.1%, versus 2Q 2016 and 8.7% versus 3Q 2015.

We recently received our annual FDIC deposit market share data. I continue to be pleased with the traction we have in most of our key markets, as well as overall markets, with customer deposits growing 6% over the measured time frame. Over the last year we continued to rationalize our branch network, focusing on improving the mix of our deposits by reducing reliance on timed deposits. We lowered our overall funding costs but have also long been able to maintain and grow market share throughout our footprint.

Moving to slide 6. Net interest income was $226 million, increasing $4.6 million, or 2.1%, versus the second quarter of 2016 and increasing $18.2 million, 8.8%, versus the third quarter of 2015. Our net interest margin, pleased to see, stable at 3.27%, obviously unchanged for the second quarter. The yield on earning assets was 3.71%, down 2 basis points versus the second quarter. The yield on loans was 4.14%, down 1 basis point versus the second quarter.

Our effective cost of funds was 44 basis points, down 2 basis points from the second quarter of 2016. Our cost of interest-bearing core deposits was down 1 basis point to 35 basis points. The effective cost of core deposits, which includes non-interest-bearing deposits, was 24 basis points versus the second quarter of 2016, at 25 basis points.

Net interest income percentage growth for full year is expected to be in the high single-digits. Our fourth-quarter NIM is expected to remain stable versus the third quarter, that assumes no changes in rates. If the Fed were to increase short-term rates in December, we believe the 4Q NIM is expected to increase by approximately 1 basis point.

Turning to slide 7, non-interest income, 3Q 2016 total non-interest income was $68.2 million, it grew $269,000, or 0.4%, versus the second quarter and 1.6% versus the third-quarter of 2015. Core banking fees of $34.8 million increased $989,000, or 2.9%, from the second quarter of 2016 and increased 0.6% in the third quarter of 2015.

Gains from the sale of government guaranteed loans, SBA loans, of $1.3 million increased $579,000, or 80.9%, from the second quarter of 2016 and 15.6% from the third quarter of 2015. Our fiduciary asset management brokerage and interest revenues of $19.6 million decreased slightly $250,000, or 1.3%, from the second quarter of 2016 and increased 2% from the third quarter of 2015. Mortgage banking income of $7.3 million increased $1.4 million, or 23.4%, versus the second quarter of 2016 and 22.9% for the third quarter of 2015.

Turning to slide 8. Third quarter of 2016 total non-interest expense was $185.9 million, it decreased $2.7 million, or 1.5%, versus the second quarter of 2016, it increased 4.5% versus the third quarter of 2015. Our 3Q 2016 adjusted non-interest expense was $183.9 million, increasing $1.5 million, or 0.8%, versus the second quarter of 2016 and 3.6% versus the third quarter of 2015.

Employment expense was $101.9 million, up $4.9 million or 5% sequentially, reflecting annual salary increases and higher incentive comp. We continue to manage this important component of our expense page which reflects a 1.7% reduction in headcount versus a year ago. And we continue to invest strategically in talent and technology that enhances the customer experience and we believe drives revenue growth.

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

Pleased to see the adjusted efficiency ratio improved to 60.55% this quarter from 61.54% in 2Q 2016 and 61.83% in 3Q 2015. Our third-quarter 2016 efficiency ratio improved to 63.13% from 65.11% in the second quarter of 2016 and 64.65% in the third quarter of 2015.

Our year-to-date adjusted non-interest expense of $545.6 million increased $16.5 million, or 3.1%, versus a year ago. We continue to expect a low single-digit increase in adjusted non-interest expense for the full year but we remain very focused on achieving our long-term goal of an adjusted efficiency ratio below 60%.

Turning to slide 9, you can see credit quality trends remain favorable for the quarter. In the first graph you'll see a continued reduction in both the NPA and the NPL ratio. NPLs declined $43 million, or 19.3%, over the prior year and $8.3 million, or 4.4%, over the prior quarter. Past dues remain near historically low levels.

As you will recall, last quarter we lowered our guidance for net charge-offs for the entire year to a range of 10 to 20 basis points. Our net charge-off ratio year to date through the quarter is 12 basis points. We believe we will end the year towards the lower end of our guidance. Kevin and I will be happy to take more questions on that later.

Provision expense of $5.7 million reflects a decrease of $1 million from the second quarter of 2016. Year-to-date provision expense is $21.8 million compared to $14 million last year. The allowance for loan losses into the third quarter were $254 million or 1.09%, it represents a sequential quarter decline of $1.3 million compared to the prior quarter, and a $2.9 million increase from a year ago.

We are pleased to see another strong quarter from the standpoint of credit fundamentals. We really do believe we have a disciplined approach to loan growth. We're proud of our bankers and our credit team for continuing to allow the Company to grow while maintaining a very sound and diversified balance sheet. We look forward to closing out the year with a much stronger credit profile than we had just a year ago.

Moving to capital on slide 10, we maintained strong capital ratios. Our third-quarter 2016 CET1 ratio was 9.97% versus 10.01% in the second quarter, well above regulatory minimums tier one capital 10.06%, unchanged versus the second quarter. As you will see, as the disallowed DTAs continue to decline, tier one capital has now begun to exceed CET1 capital.

Total risk-based capital ratio 12.05%, unchanged versus the second quarter. Our leverage ratio 8.98% versus 9.10% in the second quarter of 2016. Tangible common equity ratio 9.28% versus 9.52% in the second quarter of 2016. And again, the disallowed DTA continues to decline, at $249.9 million, a decrease of $32 million from the second quarter of 2016.

Our third-quarter 2016 Basel III common equity ratio tier one is estimated at 9.49% on a fully phased-in basis. And again, we returned $106.2 million to shareholders during the quarter, including the repurchase of $91.5 million in common stock and $14.7 million in common dividends.

Continuing with capital management on slide 11. Again, as you recall, we announced a $300 million common stock repurchase program in October of 2015. Since inception through September 28, 2016, we completed the repurchases of common stock through open market transactions totaling $250 million, or 8.5 million shares, at an average price of $29.47 per share.

Effective September 29, 2016 we entered into an accelerated share repurchase agreement to repurchase the remaining $50 million of common stock. Under the program we repurchased 1.2 million shares by execution of the ASR agreement at an initial average price of $31.87. And the remaining shares will be repurchased upon settlement of the ASR on or before December 28, 2016.

Some of you may have noticed today we released the results of our DFAST submission on the investor relations section of our website, synovus.com. The results show that capital ratios are maintained above regulatory minimums throughout the forecast period and the severely adverse scenario at both the holding Company and the Bank.

As we talk about our go-forward plans in fourth quarter through the completion of our annual financial planning process, we expect to outline guidance for 2017 balance sheet growth, revenue expense opportunities and capital management activities. We plan to share this guidance on the January earnings call.

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

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

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

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

(Operator Instructions)

Jefferson Harralson.

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

Jefferson, I will let Kevin Howard talk about movement within the balance sheet. Certainly the portfolio mortgage product is a part of that. So Kevin, you want to talk about the balance sheet in general?

Yes, all mortgages in particular, we've had good momentum there for several quarters. Actually down a little bit from last quarter, but it is a very good quarter. We expect that seasonality in that in the second and third quarter in particular. That will come down a little bit in the fourth quarter, most likely, but we have been real pleased. They're really in strong markets as well, where we want to be.

We've had a lot of new boots on the ground in places like Nashville, Atlanta, Tampa, and had a lot of good growth there on the mortgage side. But yes, that has been intentional to hold more of the private clients. We've got several programs positioned and even some jumbo loans, but had good growth among all three of those.

But overall from a balance sheet, we were happy. The economy is not overly robust right now, but at the same time we grew 3.5% in C&I. I follow more the year over year, we've been in mid-single digits or closer to 4% there on C&I. But we did have some growth there, 2% growth on C&I, as Kessel mentioned.

Good growth in senior housing on the C&I side. We had some positive growth in C&I as a community bank, as well, in our middle-market and large corporate. So we had not big numbers, but we were positive in a pretty challenging quarter and a pretty challenging environment on the C&I side.

As also Kessel mentioned, we had good growth in our investment real estate, and that is intentional. We have focused more on the investment side; we had $50 million of growth there, even though we pulled back construction a little bit. As a matter of fact, construction has been a lot less component of the investment real estate than it was at the beginning of the year.

The big runoff there that gave us a net reduction in real estate was more the legacy residential side of it. We had and $90 million reduction, a little bit bigger than we thought it would be in the residential-related side. But again, a lot of that is legacy. So anyway, I think a fairly balanced quarter when you look at it from a strategic side on the real estate and the C&I and the consumer.

All right. And it looks like, would you say that you guys built liquidity in this quarter too? I'm looking at the Fed funds sold piece of it, as if you maintained margin while building liquidity? Or is it -- it seems about $100 million increase in that Fed funds sold number.

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

Great. Thanks, guys, I'll leave it to someone else.

Jennifer Demba.

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

Hey, Jennifer, this is D. Just talking about South Carolina and I will touch on loan and deposit growth, two components. I would say our deposit growth this quarter was strong. It would have been one of our strongest markets from a deposit-side growth. We have had, earlier in the year we have had some struggles with growth across South Carolina on the loan side from South Carolina. It was okay, but as you could see, it's not listed as one of our strongest growth markets.

Any particular reason you have been struggling with growth there? It seems like it is economically robust.

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

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

Yes, I would say it is consistent with prior quarters, Jennifer. We were very pleased to announce the Entaire and then subsequently close that transaction. That fit right into our strategic priorities of balance sheet and revenue diversification at terms I think that were good for both parties. And we are really excited about having that team onboarded and seeing that portfolio grow.

We would continue to have interest in those types of strategic partners, again, where we think one plus one would equal three. And we think that can be the case with Entaire. There is a lot of bank still chatter out there, but we have been, again, very consistent that our interest is not in doing a large dilutive transaction that our current shareholders would pay the price for.

So we will keep our powder dry; we will be very disciplined, as I think we have been. We've had a lot of looks and, again, we wouldn't not look at a whole-bank acquisition. But again, it would have to make great strategic and financial sense. And again, I think there will be plenty of opportunity over the longer term as our currency gets stronger.

So our appetite is unchanged. Again, we think Entaire is a great example, though, of the types of acquisitions that, using our currency wisely and picking the right partners, can have great, both short-term and long-term, benefit for our shareholders.

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

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

Thank you.

Thank you, Jennifer.

Ebrahim Poonawala.

Bank of America. First question, Kessel, on capital management. I appreciate you wanting to wait until January in terms of announcing any other capital actions, but as we think about where capitalization has moved over the last year, and in terms of your probably desire to keep some dry powder either for portfolio acquisitions or whole-bank deals, should we expect any change in terms of your philosophy around capital return? And if you can also help us understand what is the constraint when you look at the capital ratios. Is there one particular ratio that you are looking at more closely?

Thanks, Ebrahim. Maybe Kevin Blair and I will tag-team that. I would say there's no change in overall philosophy of capital priorities. We thought that prudent efficient capital management was key to our go-forward story and I hope over the last two years our shareholders believe we have demonstrated that. And as you know, historically we had discussed on this call, but when we announced our capital plan last year it was a 15-month plan. That's why we have shifted into the first quarter of next year.

Again, we want to be very prudent. We want to make sure that we manage efficiently, we return what we can, that we keep the appropriate focus on common dividend and then do keep enough for that potential opportunity. And as far as different ratios, we don't give a lot of guidance about absolute ratios, because as you know, those are fluid based on stress testing, regulatory discussions, overall economy and specific to any bank. But let me just turn to Kevin Blair and let him give any other color he would like to as it relates to capital.

Thanks, Kessel. Ebrahim, one of the things -- it's a good time to ask the question, given the DFAST results that we just shared. If you go look at the disclosures, you'll see that through that severely adverse scenario, we had roughly 320 basis points of capital erosion. That includes capital actions, including keeping the dividend and share repurchase through the nine-quarter forecast period.

If you were to back those out, our capital erosion was roughly a little over 2 percentage points. So I give you that as a backdrop. As we look at our ratios, as Kessel said, there is no magic to establishing a ratio. But we're going to continue to look at that relative to the capital erosion that we would see in our stress test scenarios, to be able to gauge what levels we want to maintain going forward.

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

That's helpful. And switching gears, in terms of loan growth, Kessel, if I heard you correctly you mentioned the lending partnerships [conserve] loans were at $352 million this quarter, up about $100 million. I recall last quarter you said over the next couple of years that portfolio can go to maybe $500 million to $600 million at the pace that we've been at in the last couple of quarters. Looks like we'll get there in the first half of next year.

Could you remind us in terms of how comfortable you are in terms of that portfolio being more than just 2% to 3% of the total loan book? And should we be worried about, in terms of credit around those loans? And if not, why not?

Let's tag-team. I think we guided to maybe up to around 3% of the balance sheet. And we wanted to be very deliberate and methodical about how we onboarded both of those relationships. Our senior team have been in constant communication with the senior teams from both of our partners on a very regular basis.

We have been very pleased with both of those partnerships, both the quality of the asset generated and the overall yield in relationship. Again, we will continue to look at what are the appropriate targets. Kevin, why don't I turn to you, Kevin Howard, for additional color on -- and we're referring to, again, SoFi and GreenSky. But any color you want to add to those.

Kessel, you said it well. We've been pleased with the partnership, what we're seeing from a quality standpoint and yield risk price adjusted. And I think you are right, we probably, if we went at this pace it would be about the middle of next year before we guided to 2% to 3% of the balance sheet. Probably a little further because we're starting to get some pay-off velocity there.

As we have been revving it up, there's been, over the last couple of quarters with SoFi and then GreenSky and maybe we are at a full year now. But we will start getting productions there, so I think that gives us runway going into next year. We will evaluate that. We'll probably come back in the next quarter or two, see where we are at, see if we want to take that position up a little higher. Right now we'll stay between our 2% and 3%.

We do like what we see we and like the purpose on -- SoFi is an opportunity for refinancing student loans at better terms for the borrower than they may have had, and that's a good purpose. GreenSky is more point-of-sale home improvement-type loans. Either one are debt consolidation-type loans. We liked that going in and we like the scores we have seen, in the mid to upper 7s, on average, is where we have seen as far as FICO scores. So we like the quality and we like the overall profile. We'll keep evaluating that whole position as we go forward.

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

I will start with charge-offs. As Kessel mentioned, we do think -- obviously where we are at, at this point in the year, that's not too hard of a call. We think we will be at the lower end of that guidance that we already adjusted down during the year.

I think it is going to pick up into next year some. One of the reasons we have been down on charge-offs is the recoveries have been a little more robust than what we thought. We got further away from the recession. My view was that the recoveries would start becoming less of a factor, and quite frankly, they stayed pretty steady. Our gross charge-offs have been 18 to 20 basis points over the last three quarters, but net, obviously, with the recoveries have brought that down.

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

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

That is extremely helpful. Thanks for taking my questions.

Thank you, Ebrahim.

Kevin Fitzsimmons.

Hovde Group. Kessel, you all have been talking for quite some time about diversifying the loan book and specifically deemphasizing commercial real estate and emphasizing C&I and retail. More recently, with the scrutiny that the regulators have put on the CRE concentrations, and I know you talked about last call, what has that done or what have you observed that has done to C&I pricing and structure?

We've heard from a few banks that what this scrutiny has done is it has caused some more traditional commercial real estate-heavy banks to quickly deemphasize that and jump into C&I even if they don't really have an expertise built up. And that is causing more undisciplined pricing. Wondering if you are seeing that? Is that having anything to do with the slower pace of growth in C&I this quarter? Just your general sense on that. Thanks.

Let's try a tag-team there. Kevin Howard was nodding. We were talking yesterday, Kevin, about -- Kevin answered Kevin, a question for the two Kevins how you would answer that (laughter), so you can (multiple speakers). We will let Kevin Howard jump on that, too, in terms of what you're seeing in committees. I think naturally the answer is yes.

But going back to the CRE and additional scrutiny, I think the guidance really goes way back and we really, in our minds, were ahead of it. We put in steps to slow and curb the construction side of our real estate lending late last year and got a lot more intense heading into this year. But yet we've still seen great opportunity and great volume. We know it's created some pressure on some good actually good customers in that space and we've done our best to try to accommodate.

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

From a C&I perspective, it's a good point, Kevin. There is by far the most competitive space to lend in. And then on top, coupled with that, there is not a lot of typical expansion in CapEx that you would like to see in a slower growth economy. That's what we are obviously going through so that makes it even more competitive when there is less to shoot for. So it definitely is.

But we have not tried to push that too hard. You see, of the three components, it is the least of our growth. If you look at a year-over-year basis, we are probably 3% to 4%, as I mentioned. We relied a lot more on our specialty lines, where we think we've had a lot of our growth from senior housing and did more this year than maybe we have in some of the other parts of the portfolio. But we are not trying to push that too far; we're not trying to flip the switch.

Also we're not abandoning the real estate side. I think we are going to have healthy growth next year in real estate. Part of that was intentional, not necessarily regulator-pushed but we have internal limits and we were getting close to 20% of our investment portfolio, was in the construction phase. That's something we've wanted to move down; I think we've moved it down close to 13%. We intentionally pulled back on construction a little bit this year.

And also, we have good dialogues with our regulators. We are not near the 300%, or the 100% and 300% guidance. I think we are more like 50% or 60% of the 100%, which is development and construction. And then your overall CRE levels are in the mid 2s and we've got plenty of runway there. I think the key there is -- and they know we are more of a real estate-centric, where we are in our footprint. And I think our regulators thought we were on top of it and have good data and market intelligence there, and that is something we have been building over a while.

So there is no discomfort that I am aware of there, it's jut we are aware of those limits. But we've had, again, we are not abandoning that. We will continue to grow. Our focus has been more, again, as you mentioned, being more diversified. You can look at the results; the last two years have been very mixed between C&I, CRE and retail. And that's been intentional.

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

Thanks, Kevin.

Jared Shaw.

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

Jared, this is Kevin Blair. Loan deposit ratio is right around 96% and I think we see that range, the guidance we've given in the past, as anywhere from 96% to, let's say 99%. And as we have noted, with the acquisition of Entaire, we are actually bringing on a little over $357 million in loans there. Now, what you will note is that, other than the growth that we had with the Synovus Sweep Account in our brokerage deposits, brokerage deposits are actually going down. They are down to roughly 5.4% of total fundings.

So to answer your question, we expect good continued core deposit growth coming out of our community banking segment, as well as our retail segment. And I think we will be able to supplement some of the additional funding opportunity through additional wholesale deposit generation, but we will continue to reduce our reliance on broker deposits. All that being said, we will maintain a loan-to-deposit ratio below the 100% range.

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

Yes, Jared, let me break it down. We showed a $4.9 million increase in personnel expense quarter over quarter. If I break that down, about $1.8 million of that increase was just due to our annual merit cycle, our salary administration cycle.

We had an extra payday this quarter, which was about $1.1 million. Commissions were up about $1.2 million quarter over quarter. And that's given some of the production numbers we saw at mortgage and in our retail line of business. And then we had an incremental $750,000 in healthcare expenses.

So some of that is anomalous to the quarter; it won't obviously repeat, obviously the extra payday. We actually expect personnel expense to come back down in the fourth quarter, as we've guided to overall expense levels to be in the lower digit, 2%, 3% range for the year.

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

Great. Thank you very much.

Brad Milsaps.

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

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

Okay, great. Thank you, guys.

Thanks, Brad.

Nancy Bush.

NAB Research. Kessel, I have a question for you and it is a longer-term question about expenses. Theoretically, technology should enable the banking industry to continue to drive down expenses on a long-term basis. And your near-term goal is to get below 60%. How do you view the whole subject of equilibrium expenses for your Company? Is there a number? If you could talk about where we can expect expenses to go over the long-term.

Yes, Nancy, that's a great question. We probably have not debated that here since yesterday (laughter). We've said aspirationally we've operated in the mid-50%s, 55% efficiency ratio. We see on the nearer-term horizon, we believe we have an opportunity to pierce 60% and get into the 50%s.

So you are right, the technology in many cases, allows you to operate more efficiently and drive expense down. But the flip side of that, it takes a lot of investment to get you there. So the continued push-pull, struggle, request for capital spend related to technology, a lot of it revenue-producing, a lot of it customer-facing, a lot of it cyber security, a lot of it fraud. But there's just a tremendous demand for capital spend which then does have longer-term expense ramifications.

I do not know where the equilibrium is. I was with Kevin Blair a couple of nights ago talking about just that pipeline of technology investment over the next year or two or three. I think I've talked about it on this call; we have a much more disciplined process here now, where we try to take that multi-year look at, not just the cost of what we have to onboard, but the people side of the onboarding of technology. I probably rambled in a way that didn't answer your question, but we will get efficiency.

Every business case is presented to us for technology spend. It has to have either a revenue lift, a customer experience lift which should lead to a revenue lift, or an efficiency play, a savings gain that we then hold the business line leaders accountable to. And I wish I could be more precise than that, but it is a constant internal struggle and I've talked to a lot of my banking peers and I think they struggle with the same thing.

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

On the retail side, as we realigned our retail bank a couple of years ago, we spent a lot of money there. But quite frankly, that was an efficiency play and a productivity play throughout the retail bank. But we will continue to invest in talent and technology on the retail side.

The non-technology spend, a lot of it's people, a lot of it is diversification of business lines, it's teams of bankers, it's mortgage, it's brokers. We've added, we've onboarded just the last few weeks some really strong people that we believe have revenue lift. So there is a lot of non-technology people spend. But again, a lot of it is technology, but keep in mind that technology is very customer-focused, customer-friendly. And then you got the ongoing, like we refresh a large number of our ATM fleet. That's an ongoing spend as well, which I would classify under technology as well.

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

I told our team yesterday that I refuse to answer any election-related questions today, but I will give it a try. And Kevin Howard can weigh in, although I wouldn't put him in the classification of great mind (laughter). I say that jokingly.

I was being kind.

I'm being kind, I'm a fine one to say. I think we all see our customers that are just sitting there unsettled. So that has got to -- it's anecdotal, but it has got to correspond to, I don't want to make bets on anything right now. I'm not making a political statement. I think it's fair to say they are unsettled, they're nervous.

Now, have they told us we are going to really unleash it post election? I'm not sure post election what, again, either way, what gets people enthusiastic that the uncertainty I have before the election is now much more certain. So I guess naturally there is some of that.

So Kevin, I don't know if you have seen that, or D, if you have heard that. I think we all probably sense it but I'm not sure how I could prove it.

I have the same thoughts you did, Kessel. There's definitely, the balance sheets are stronger, people's -- at least in general, people's cash position is better year over year on looking at financial statements. There's certainly ability to come to the bank and borrow. But you are right, there's been a lot of uncertainty out there, whether it's election-oriented or not, be my guess.

All right. Thank you.

Thanks, Nancy.

Christopher Marinac.

FIG Partners in Atlanta. Want to circle back on the loan yield, for either Kevin Blair or Kevin Howard. Are new loans coming on the books equivalent to this 4.14%? Or would they be a little bit lower? I want to get a sense of that.

No, great question, Chris. We've actually seen a little bit of accretion in overall loan yields come on the books; we were up 2 basis points quarter over quarter. And so it's just a little bit of a tale of two ends of the spectrum. Obviously on the LIBOR side, we're seeing a little bit of uptick there. We did get 5 basis points of improvement in the quarter in one month LIBOR, so that helped a bit. And so that is driving most of the increase in the quarter-over-quarter production.

On the long end of the curve, as we look at some of our consumer mortgages and other longer fixed-rate instruments, we were getting a little bit of dilutive impact, given the fact that the 10-year Treasury during the third quarter was down roughly 10 basis points. So the fact that we were able to, net/net, be up roughly 2 basis points and just going on spreads, tells us that, as Kevin Howard mentioned earlier, our mix as we focus on C&I and CRE, but also bringing in some of the consumer growth that we've had, is offsetting where we are losing some ground in the long end of the curve. So net/net, we have not seen a decline in the going on spread, so we should continue to see good positive momentum for yield going forward.

Okay, great. Can you remind us the difference in yield on the SoFi and GreenSky front, relative to the portfolio average?

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

Great. That's helpful.

It is accretive.

Got it, perfect. Okay, thanks, guys.

Thanks, Chris.

Jesus Bueno.

Jesus Bueno with Compass Point. Quickly, as you are thinking about capital return and going into your planning process, if you could go over how you prioritize the differences between loan growth, share repurchases and dividend?

Well, (we'll both date down), we certainly love to use our capital fund, our customer and prospect grows. So certainly funding loan growth is at the top of that stack. Again, that is the best way to grow returns for our shareholders.

We have said buying shares back, we believe, was more attractive using our currency to buy our own shares back than it was to go chase something else that knew a lot less about. One thing our team is very proud of is our knowledge of this Company and what the underlying balance sheet really represents. Certainly share repurchase has been a priority. And then, again, measured with the common dividend, making sure that the different [constituencies] achieve appropriate consideration.

All that said, we believe all of those still allow for the opportunity to do strategic M&A transactions, if they make sense, going back to that disciplined approach that I talked about earlier. So again, we want to make sure that we retain capital to fund our organic growth, we want that to be stronger. And then we will look at the appropriate mix of share repurchase. Again, common dividend and making sure that we are appropriately positioned, should that right strategic opportunity present itself.

That's great, thank you. Then if I could just jump back -- I appreciate the color on the loan yields you provided. In terms of asset sensitivity, you've added the Entaire portfolio now which has LIBOR-based loans. But if you could remind us, or quantify exactly, if we had a 25-basis point move in December, what exactly would that mean for you, for your results going into 2017?

It's Kevin Blair. So if we had 25 basis points in December, we would actually get -- our asset sensitivity positioning that we disclosed is 3.1% on a ramp of 100 basis points. So if you extrapolate what that would mean for 25 basis points, we'd see roughly 1.5 points of NII improvement which would generate, as Kessel said in the opening comments, 1 basis point actually in the fourth quarter, and would translate into 6 basis points for 2017 which translates to roughly to about $15 million in NII.

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

Thank you, Jesus.

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

Thank you, operator, and thanks to all of you for listening in. Thank you for your questions and for your support of our Company. I will close by thanking a constituency that's always on this call, that's our team.

We are very proud of our needs-based relationship-based approach to taking care of our customers. We think that trust we develop with them continues to allow us to improve the operating results of the Company, so I just want to thank the team for their efforts. And I get emails every day from customers, quite frankly, talking about the above-and-beyond service that they are receiving.

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

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