Synovus Financial Corp (SNV) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Synovus' Second Quarter 2017 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 our -- 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, and welcome to everyone participating on our call today.

As usual, I'm going to walk us through our earnings deck, and then I have our executive team with me to answer any and all questions that you might have.

Before we get into the deck, you'll see just a very solid quarter for us, performance that really does show progress towards our stated intermediate and long-term financial goals and objectives.

So we're really pleased with the quarter.

And we'll start on Slide 3 to show broad-based improvement in many of our key metrics.

So if you'll just go to Slide 3 with me, you'll see we reported net income available to common shareholders of $73.4 million, that represents almost a 27% increase versus second quarter of 2016.

Diluted EPS was $0.60, up 6% versus the first quarter and up almost 30% versus the second quarter of '16.

Our ROA increased to 1%, improving 4 basis points sequentially and 17 basis points versus a year ago.

Our ROE rose above 10% to 10.34%.

We were also pleased to see that our return on average tangible common equity increased 229 basis points versus the second quarter of '16 to 10.62%.

From a balance sheet perspective, we continue to deliver balanced growth.

Total average loans grew $1.42 billion or 6.2% versus a year ago.

Total average deposits grew $1.38 billion or 5.9% from a year ago.

Along with the balanced loan growth, we continued to see favorable credit quality metrics with a NPA ratio of 0.73%, declining 8 basis points from a year ago.

We've also experienced continued improvement in several profitability measures that I'll highlight.

Total revenues were $319.8 million, up $15.7 million or 5.2% sequentially and up 10.5% versus a year ago with net interest income increasing 13.4% and adjusted noninterest income increasing 3.4%.

And again, with the disciplined approach to pricing, we've expanded the net interest margin to 3.51%, up 9 basis points sequentially and up 24 basis points versus a year ago.

And lastly, with our focus on driving positive operating leverage, the efficiency ratio declined below the 60% mark to 59.90%, down from 64.84% the previous quarter and 65.11% a year ago.

So great improvement there.

Moving to Slide 4. I want to provide a little more color on loan growth this quarter.

The amounts on the graph represent period-end balances.

Loan growth on a sequential quarter basis was $172 million or 2.8% annualized.

C&I loans grew $10 million during the quarter.

That was driven primarily -- there was a $66 million increase in the owner-occupied portfolio, a $42 million increase in small business loans and a $25 million increase in life insurance premium financing loans from our Global One division.

The solid growth in those categories was largely offset by approximately $100 million decline in the revolving commercial line utilization.

For the quarter, consumer loans grew $207.2 million or 16.3% annualized with consumer mortgages increasing $120 million or 20.5% annualized.

About $52 million of the growth was driven by production in the physician loan portfolio, which is a strategic growth initiative.

We also saw solid growth in our lending partnerships, growing $107 million in the second quarter of '17.

And again, in keeping with our focus on diversification and risk mitigation, CRE loans declined $45 million or 2.4% annualized.

For the quarter, retail shopping centers as well as land and development loans experienced an approximately $40 million decline in outstanding balances.

On a year-over-year basis, loans grew $1.37 billion or 5.9%; C&I loans grew almost $800 million, $796 million to be exact or 7.3%; consumer loans grew $666 million or 14.4%; and CRE loans declined by $93 million or 1.2%, reflecting growth in investment properties of $185 million while seeing a $278 million reduction in the nonstrategic 1-4 family and land and development portfolios.

Total average loans grew $314 million or 5.2% annualized versus the first quarter and $1.42 billion or 6.2% versus the second quarter of '16.

And again, keeping with the diversification theme, we were really pleased to see the C&I loans now represent over 48% of our total loans with consumer loans increasing to 22% of the portfolio while CRE loans have now declined to 30% of our outstanding loan balances.

Moving to Slide 5 in deposits.

Second quarter '17 total average deposits were $24.99 billion increasing $73 million or 1.2% annualized versus the first quarter.

The real story here is really the shift in mix during the quarter.

We experienced a seasonal decline in SCM deposits of about $187 million.

Average core transaction deposits increased $261.3 million or 5.8% versus the first quarter.

That increase took us to $18.41 billion.

That also includes 11.9% or $190 million increase in demand deposit accounts.

So again, I'm pleased with the shift in mix in here.

On a year-over-year basis, the second quarter of '17 total average deposits increased $1.38 billion or 5.9% versus the second quarter of '16.

Again, average core transaction deposits increased $1.56 billion or 9.3% versus the second quarter of '16.

And again, it was due to an increase in customer average balances, which we really do believe are the result of our focused efforts to attract and grow deposit relationships in the small business and mass affluent segments.

So I'm really pleased with the efforts of our bankers both in discipline and in customer acquisition there.

And again, the results of the disciplined approach to pricing and the shift in the mix gives us strong year-over-year deposit growth while maintaining very stable deposit costs.

So pleased with the deposit story both for the quarter and on a year-over-year basis.

Moving to Slide 6. Net interest income was $251.1 million, increasing $11.2 million or 4.7% versus the first quarter and 13.4% versus the second quarter a year ago.

The increase in net interest income primarily driven by market expansion, as previously stated, the NIM was 3.51%, up 9 basis points from the first quarter and 24 basis points from a year ago.

Yield on earning assets, 3.99%, up 11 basis points versus the first quarter and 26 basis points versus the second quarter a year ago.

Yield on loans, 4.36%, up 11 basis points sequentially and 21 basis points versus the second quarter of a year ago.

The investment security yield was 2.11%, up 4 basis points sequentially and up 22 basis points versus the same quarter a year ago.

And again, we've maintained the focus on overall deposit pricing discipline, and the result has been a relatively stable cost of funds at 46 basis points for the quarter, up 2 basis points from both the first quarter of '17 and the same quarter -- the second quarter of '16.

Now looking more closely at deposit rates.

The cost of interest-bearing core deposits increased 2 basis points sequentially to 0.38% due to the strategic repricing of some specific products and customers.

In the Page 15 of the appendix, you'll see additional information on the interest rate sensitivity as well as the investment securities and the loan portfolios.

Moving to Slide 7. Let's talk a little about the fee income.

Noninterest income in the second quarter was $68.7 million, down $3.2 million or 4.4% versus the first quarter of '17 and up 1.2% versus the second quarter of '16.

Just as a reminder, other income last quarter included net investment securities gains of $7.7 million, which drove the quarter-over-quarter decline.

Adjusted noninterest income was $70 million.

It was an increase of $4.1 million or 6.2% versus the prior quarter and an increase of 3.4% versus the same period a year ago.

A little more color there.

Fiduciary and asset management fees increased 3% sequentially and 8% compared to a year ago.

Again, driven by solid growth in assets under management, which are up about 9% from a year ago.

In addition to lift in the equity markets, we continue to see the benefit from new customer acquisition and very pleased to see that our financial consultants are driving gains in production and assets under management.

Gains from the sale of government-guaranteed loans, consisting primarily of SBA loans, were $1.9 million for the quarter, up $1.2 million, both sequentially and versus a year ago.

And pleased to see the most recent SBA production volume rankings show that we rank #4 in our footprint out of more than 280 lenders, including a top 5 ranking in 4 of our 5 states.

So pleased with the momentum there.

Mortgage revenue for the quarter, $5.8 million, unchanged from the previous quarter and down $2.6 million versus a year ago.

Mortgage production increased 7% sequentially and declined 7% from a year ago, reflecting a decline in refinancing volume.

On a year-to-date basis, interest revenue is $2.4 million, representing a strong 25% growth over the same period a year ago.

This product line continues to benefit from talent additions as well as our ability to significantly deliver insurance solutions across our customer base.

And again, we're pleased with the continued momentum in our financial management services group, our capital markets and our SBA units.

Moving to Slide 8. We'll spend a few minutes on expenses.

Second quarter of '17 total noninterest expense was $191.7 million.

It was a decrease of $5.6 million or 2.9% versus the first quarter of '17, an increase of 1.7% versus the second quarter a year ago.

Personnel expense declined on a sequential quarter basis due primarily to employment expenses while other expenses rose predominantly due to increases in professional services and third-party processing.

Our 2Q '17 adjusted noninterest expense of $191.4 million increased $837,000 or 0.4% versus the first quarter of '17 and up 5% versus the second quarter of '16.

And again, as a result of the strong revenue growth, the second quarter efficiency ratio of 59.90% improved from 64.84% in the first quarter of '17 and 65.11% in the second quarter of '16.

The adjusted efficiency ratio of 59.56% improved from 62.25% in the first quarter and down from 63% in the second quarter of '16.

Again, in keeping with our longer-term targets to get the company below 60%, pleased to see the movement there for the quarter.

Turning to Slide 9. Our credit quality metrics continue to be favorable.

First graph shows NPA, NPL and delinquency trends.

The NPA ratio decreased by 4 basis points to 0.73% compared to 0.77% in the prior quarter and 0.81% in the same quarter a year ago.

NPL remained flat from the last quarter at 65 basis points.

So we're down from 67 basis points in the first quarter of '16.

Past dues remained low at 0.27%, which is a 1 basis point increase over the previous quarter, a 3 basis point increase over the first quarter of '16.

But again historically, low levels there.

Net charge-offs from second quarter were $15.7 million or 0.26% compared to 0.12% in the fourth quarter and 0.11% in the first quarter of '16.

The increase for the quarter was due primarily to a $3.3 million charge-off on a legacy credit for which the loss had been fully reserved in a prior quarter as well as a $2 million sequential quarter decrease from recoveries.

Despite the increase in charge-offs during the quarter, we remain within our stated guidance for the year of 15 to 20 basis points with a year-to-date charge-off ratio of 19 basis points.

So we expect to end the year within that guidance.

Kevin and I will be happy to provide more color on that in the Q&A section.

Provision expense of $10.3 million reflects an expected increase from $8.7 million in the first quarter.

This compares to $6.7 million in the same quarter a year ago.

Key driver of the increase over the prior quarter was the previously mentioned $2 million reduction in recoveries.

We do expect provision expense to continue to increase slightly throughout the remainder of the year, driven by continued lower rate of recoveries coupled with loan growth and more stabilized loan loss reserve.

The allowance for loan losses decreased by $5.4 million in the second quarter to $248.1 million, and the ratio declined 3 basis points to 1.02%.

However, coverage ratios remained strong with reserve covering NPLs at 160% or 205% if you exclude the impaired loans for which the expected loss has been charged off.

And again, we're pleased with the fact that with our balanced loan growth, all of our credit metrics remain favorable within stated guidance while we continue to exercise great disciplined approach to growing that portfolio.

Moving to Slide 10.

A little bit about capital.

Capital ratios remained strong in the quarter with growth in earnings outpacing the growth in risk-weighted assets.

Just to highlight a few.

Second quarter of '17 CET1 ratio was 10.02%, up 16 basis points versus the first quarter of '17.

And again, the second quarter ratio on a fully phased-in basis is estimated at 9.81%.

Tier 1 capital, 10.36% versus 10.18% in the first quarter.

And again, as the disallowed DTAs continue to decline, you'll see Tier 1 capital now exceeds CET1.

Total risk-based capital, 12.24% versus 12.09% in the first quarter.

The TCE ratio, 9.15% versus 9.04% in the first quarter.

And again, as expected, the disallowed DTA continues to decline at $143.4 million, down 49.2% from a year ago.

And lastly, we repurchased $30.2 million in common shares for the quarter, bringing us to $45.3 million for the first half of '17.

As we stated in January, our repurchase volume will continue to be opportunistic based upon the levels of organic loan growth, stock price, liquidity levels and just overarching capital levels.

Before we go to the Q&A, a little bit about the 2017 outlook.

I know we, and you all, and most of us are concerned about the political and economic uncertainty for the remainder of '17, but we remain confident in our ability to continue to grow and enhance profitability, and believe we achieved the targets we have laid out.

And from a balance sheet perspective, our year-to-date '17 results were in line with our 2017 guidance, and we expect to continue these growth trends of average loan growth between 5% to 7%, average total deposit growth of 5% to 7%.

Again, that's consistent with our previous guidance.

As a result of the balance sheet growth and now the most recent June rate hike, we're now expecting net interest income growth between 12% to 14% for '17.

As a reminder, our original guidance was 8% to 10%.

Last quarter, we increased it to 10% to 12%, given the Fed's March rate increase.

So we now expect that to be 12% to 14%.

Again, keeping with previous guidance.

This updated range assumes no further rate hikes this year.

However, we do remain in an asset-sensitive position and have potential upside if provisional rate hikes occur.

Despite the increased volatility in the equity markets and the softer mortgage environment, our investments in fee-producing business continue to provide positive momentum that we believe will drive adjusted noninterest income in the 2% to 4% range, again, in keeping with our previous guidance.

We still expect total noninterest expense to increase between 2% to 4% for the year while maintaining positive operating leverage.

But certainly, there is pressure on the expense line, and our team remains focused every day on containing that line.

We originally disclosed 2017 estimate of 36% to 37% for our effective tax rate.

Again, that was updated last quarter to 34% to 35%, and we do believe that 34% to 35% is an appropriate range now for the year.

Again, we don't see any significant changes in the credit environment.

Our underlying credit quality, NPLs and NPAs are expected to remain relatively flat for the year.

We maintain an expectation, as I've said earlier, for a net charge-off ratio in the range of 15 to 20 basis points as recoveries continue to moderate like they did this quarter, and we also expect that the loan loss reserve ratio will remain above 1%.

And again, as announced at the beginning of the year, we have authorization for up to $200 million in share repurchases in 2017.

We completed purchases of $45.3 million for the first half, and the size and timing of future repurchases will continue to be situational, dependent primarily on the level of organic business growth and stock price.

To close, before we go into the Q&A, on behalf of the team, again, we're very pleased with the results in the quarter and equally excited about the momentum that we feel we have moving into second half of this year and beyond.

Our team is never satisfied.

So while we all recognize the urgency to constantly push more and producing better results, we are energized as we hit these important milestones like 1% on assets and sub-60 efficiency.

Again, this -- confirming that we are on the right path.

But no pause, and again, look forward to pushing those key measures in the right direction.

We've had a lot of positive recognition this year, everything from outstanding customer service early this year to most recently being recognized by the Roundtable for Corporate Social Responsibility.

But again, I have to just thank our team for our most recent ranking as the Most Reputable Bank in the country by American Banker and Reputation Institute.

This is especially an honor for our team.

This just validates that our different brand of banking, our transparency about who we are and how we do business and our deep commitment to strengthen our communities resonates with customers and especially our noncustomers.

So as we briefly celebrate the honor, we're looking at all the ways we can capitalize on the growth opportunity that this award and our full transition to a single brand in 2018 represent.

We're making great progress in preparing for the brand change.

Again, this year, converting all of our divisions to a single operating bank platform.

And again, excited about the pending changes, and we're hearing great feedback from our team members, from our customers and our communities about the short- and long-term benefit of this unified Synovus brand.

So the bottom line is, our team really is thrilled and excited about the opportunities ahead.

We look forward to sharing more of that with you on the quarterly calls for the rest of the year and beyond.

And then just finally, before we head into Q&A, I just want to provide a brief update on the Cabela's World's Foremost Bank, Cap One transactions.

Again, we have our disclosures out there.

You're probably aware, on July 3, the Federal Trade Commission approved the pending merger between Cabela's and Bass Pro.

And on July 11, Cabela's shareholders also voted to approve the deal.

The comment for our April 19 application to the Federal Reserve seeking approval for our portion of the transaction has ended, and the Federal Reserve is now in the review process.

There's no processing deadline for our application under the rules or regs.

And so the application remains pending.

Again, we can't predict or control the time frame for the process, but we remain hopeful that this event will be a third quarter closing.

And that's probably all I can say on that transaction, but I'm sure you might have more questions.

So with that, operator, we'll be happy to open up the floor to questions.

And we have, again, our team of executives to answer anything on your mind.

(Operator Instructions) And the first question is coming from John Pancari.

Evercore ISI.

Okay.

On the margin front, just want to get your thoughts on the outlook there.

Obviously, the result came in better than expected, at least for me, this quarter.

And I wanted to get your thoughts on the back half of the year where -- what type of progression you think we could see in the margin?

And then also just get your thoughts on deposit betas.

Where they're trending now?

Sorry, if I missed the comment there.

John, this is Kevin Blair.

I'll take that.

So you saw for the quarter, we had 9 basis points of margin expansion.

That was predicated on the March rate hike.

That was a large factor there.

So as we look out into the third quarter, we'll obviously get a bit of a tailwind from the June rate hike.

It may not be as large as what we saw in the second quarter, given the fact that we continue to bring down cash balances, which helps to expand the margin.

And it really depends on the steep of the yields -- the slope of the yield curve.

As we look at our investment portfolio, as you'll note this quarter, we only had accretion there of roughly 4 basis points where in previous quarters it were a little higher, just because the yield curve has been less steep than what it was in previous quarters.

So we think we can continue to see somewhere between a 5 to 8 basis point increase in the margin just based on the rate hike.

That's why we've increased our guidance to 12% to 14%.

We also think that any future rate hike, if we were to get one in September, there would be additional upside there, as well as a December rate hike because we'd get a little bit of the lag with LIBOR changing a little earlier than the Fed moving rates.

And to your second part of your question, I think that is the real question, is what are deposit betas going to be?

The impact that will have for NIM will be predicated on how high the betas go.

As you'll see from our results to date, we've maintained a low single-digit beta for our deposits.

We think like the industry, at some point, that's going to change.

It hasn't changed to this point.

So we've been able to realize a low-single digit, but we continue to model betas in the 50% range as we look out into the future.

So the competitive landscape will determine what those are, but the betas that we're modeling will still stay in that 50% range.

It will ramp up over the additional rate hike that we may see over time.

But in the beginning, that should start off in the 25% range and ramp up to -- close to 100% by the end, but it will average around 50%.

So again, upside for the margin rest of the year, but it won't be as much as we've seen in the previous quarters.

Okay.

And that -- Kevin, that 5 to 8 you just said, that will be for third quarter as the range?

Yes.

Just going off of what we had from the rate hike in June, that would be something we should expect.

And then fourth quarter, obviously, somewhat less than that?

Yes.

Less than that.

Yes.

Okay.

And then on the loan side, just wanted to get some thoughts around what you're seeing on loan demand?

Where business sentiment is right now?

Are you starting to see any apprehension or increased apprehension given the chaos in D.C.?

And what's your update there?

Yes, John.

This is Kevin Howard.

We did -- that did sort of stymy our [debt] to our C&I loan growth, we had a little bit of growth there.

Kessel mentioned that the utilization, it was down 1.5%, which results about $115 million of same-store borrowers from quarter-to-quarter.

We believe -- while our -- while the balance sheets of our commercial customers are strong, they've been more in a wait-and-see mode, I would say, when it comes to CapEx spend and expansion this quarter.

That's one of the bigger reductions we've had in utilization in some time.

So I do thought some of that also some seasonality in the first half of the year.

That will -- should go more favorable in the second half of the year.

So I think you'll see that turn around.

I really do.

Been talking to one of our line leaders this morning, they've already seen a pickup since quarter end in the pipeline.

So again, I believe if you pulled that utilization out, we'd be talking about 4.5%, 5% growth in C&I for the quarter.

You can't -- and I'm just saying, even if it were just even.

So I would say -- I mean, to answer your question there is -- I think there's optimism from what I hear.

I talked to a lot of our credit officers.

I just believe that it was a little bit of a wait-and-see when it comes to spend.

And again, as I've already mentioned, I think there's some seasonality in that as well in the first half of the year for us.

All right.

Okay.

And one last one.

Kessel, just wanted to get your updated thoughts around M&A and whole bank acquisitions and appetite there for deals.

Yes.

No change on our end, John.

Still an active market there.

We see a lot of whole bank activity.

We see some non-bank, which we also have some interest in.

But again, no change in our appetite, which again, just goes back to our disciplined process.

And if we are going to consider whole bank, it's got to make strategic and financial sense for us.

And that doesn't mean we don't take good, hard looks.

But we're again -- where we're going to do that, it's -- needs to be a bank that will bring us something we don't have.

We obviously -- we can grow our real estate book ourselves.

Some banks that have heavy real estate concentrations wouldn't have a lot of appeal to us.

And so again, we're active reviewers, but appetite hasn't changed at all.

And quite frankly, I think that has served us well.

I think our internal focus is again -- continues to give us a stronger currency to participate longer term.

So that was a long way of saying no real change, but a lot of activity in the market for us to look at.

And the next question is coming from Ebrahim Poonawala.

Bank of America Merrill Lynch.

Just first question, I guess.

If you can touch upon credit.

Kessel, I believe you called out that C&I charge-off in the quarter and sounded like you already had provision for that.

So would love any color on that, if that was a specific credit and if we -- if you're seeing any particular vertical where you're seeing weakness.

And secondly, I guess, if I can just follow up on your detailed CRE disclosure that you provide in the deck.

I just wanted to sort of get your thought process around -- there's a lot of chatter around retail CRE.

And just wondering if that makes you want to preemptively reallocate some reserves toward that book or how are you thinking about, just a credit outlook 12 months out for that portfolio?

Ebrahim, this is Kevin Howard.

I'll start with the first part of that.

Talking about the charge-off.

As Kessel mentioned, there was an increase.

I would attribute that more to timing.

I mean, our first quarter was lower than expected.

We guided within 15 bps to 20 bps.

That's where we're at right now, and that's where we think we're going to -- that's our projection for the rest of the year.

Color on the charge-offs, really again, a little bit of timing.

There was a $3.3 million C&I credit that we were well reserved on as well as a consumer credit that was about $1.5 million, we were also well reserved on going into the second quarter.

Those converted to charge-offs, if you look at it, about an $8 million increase in charge-offs and 2 of that was -- as we mentioned on the last call, we expected less recoveries throughout the year.

That was the 2 of the million.

And really, those 2 credits, again, reserved credits that converted to charge-offs happened during the quarter.

That was $5 million.

So it was timing was more than anything, I would say, when those happened so -- and we had some small business charge-offs as well that -- as that -- that portfolio, and we have grown that, we grew it this quarter, and have grown it pretty steady.

That's starting to season a little bit, but we weren't at all -- I mean, I wish I could change the timing, but appropriate accounting treatment, we needed to take those charge-offs this quarter versus last quarter, and but -- outside of that, we, again think we're going to be within the guidance for the year.

And again, that's still a pretty healthy number.

And I wouldn't be a lot more worried about it, Ebrahim, but our NPAs came down during quarter, our past dues are in the mid-20s.

So I think overall, outside of a little timing there, we know, we did expect to see an increase this quarter.

I think we were 10 to 15 -- I mean, this year, last year.

And as we've grown the portfolio and it seasons more and our recoveries become less of a factor than maybe they were from the recession, that we would increase that -- that's why we increased that guidance to where we did.

And the second part of your question, I believe involves a kind of -- CRE?

Retail.

The retail?

The retail CRE.

Oh, I'm sorry.

Yes.

Sure.

I'll cover that as well.

And we're certainly aware and conscious of the store closures and the e-commerce challenges to traditional retail.

I'll walk you through maybe real quickly, a slide -- I think we've got it on Page 20 in the deck.

If you don't have that, I'll sort of just give some color on it.

But first of all, retail CRE is performing well.

I think we're 6 basis points on past due.

We've had virtually no NPLs, charge-offs over the last few quarters.

It's very diversified, granular portfolio, not only about property type, but geographically as well.

I think we have 3 loans between $20 million and $30 million.

That's the largest ones.

I think we have $10 million -- between $10 million and $20 million.

And the rest of them are pretty small loans.

So no big exposures there.

The tenant mix has consistently -- consisted of very few store closures.

And as demonstrated in the slide, the portfolio primarily consists of stand-alone credit tenants, like drugstore, dollar discount, auto part dealers.

Also as you can see, we have a lot of service-oriented provider-type centers, grocery store anchors and neighborhood and local destination-type properties.

We have -- we believe that they'll be a lot less susceptible to e-commerce encroachment.

And just real quickly, our -- we looked at -- and this is kind of towards year-end, when we did our annual analysis, pretty much the whole portfolio.

LTVs were in the low 60s.

Coverages 150% to 160% of debt service and just the property is 94% stabilized.

So it's very little in construction.

What we do have in construction is usually some type one-off drugstore-type quick-construction, short-term loans.

So we feel -- we're certainly aware and keeping our eye on those closures and trying to be in front of that as possible, but not -- as of this point, again, it's -- the portfolio is healthy.

And let me say one last thing, we've had also sort of stymied our real estate growth a little bit, as we've had $100 million in reduction year-to-date in the retail CRE portfolio.

As you can tell, we're not originating a lot.

But the good news there is the portfolios are paying off like they were supposed to, sale of properties, permanent financing.

And so we think we got our arms around it.

We -- certainly -- something that we're waking up thinking about every day as we see those announcements.

That was helpful.

And just I guess shifting to expenses.

I think Kessel mentioned in his opening remarks that you finally had a quarter where the efficiency ratio dipped below 60%.

I think looking out further, if you think about sort of 2018, absent any boost to the margin from higher rates, how do you think about sort of the trajectory of the efficiency ratio?

Do you think you've reached a point where it should be steady state absent rate benefit?

Or is there more in terms of expense cuts that you're thinking of?

Yes, Ebrahim.

This is Kevin Blair.

I'll take that.

We've talked a lot about maintaining positive operating leverage as we look at expenses, so we would project the efficiency ratio to continue to decline over time.

Obviously, the rate environment as you mentioned, would determine how quickly that efficiency ratio does go down.

But in general, we'll do that through more of the revenue side of the income statement.

There are always efficiency opportunities, and we maintain a list of those.

We're constantly looking at ways to rationalize our staffing, looking at our facilities and branch optimization from a facility standpoint as well as just looking at process and automation improvements.

So there are always the efficiency opportunities, but we'll be able to continue to reduce the efficiency ratio going forward, primarily through the positive operating leverage of higher revenue growth.

And so should we assume that sort of -- when we think about the expense growth relative to your guidance for this year, that's kind of the pace of expense growth with -- looking out over the next year, all else equal?

We haven't given the '18 guidance at this point.

But the numbers that we've given this year feel more like a normalized growth rate around expenses.

There's -- obviously, depending on whether you're looking at the reported or their restructuring numbers, but I think 3% to 4% expense growth is normal for us in this time of cycle.

(Operator Instructions) The next question is coming from Jennifer Demba.

SunTrust Robinson Humphrey.

Question, to get to the next level of profitability for you, just following up on Ebrahim's questions.

When you talk about revenue growth opportunities, can you kind of give us some more detail on where you think your biggest opportunities lie, whether they'd be geographically or by line of business, by loan category?

Where are you underperforming you think you can do better?

I mean, it's really broad, Jennifer.

We talked about discipline of fee income growth this quarter or this year.

We've made tremendous investments, a lot last year.

But investments in our mortgage origination team, in our financial management services, in trust, in brokerage, in insurance, which you saw that lift this quarter.

Private wealth has been a big area of focus.

We've got an intense effort underway right now on the mass affluent spreads.

You would think our brand of banking sells well in that market, and we've seen again, growth there in small business.

SBA, we made -- restructure and investment in that team over the last couple of years.

And so we're seeing fee lift there.

Geographically, we think our urban markets still give us great opportunity.

We feel like we have a lot more opportunity in the middle market space that we continue to invest in and look at better ways through our lines of business, through our community bank and through our corporate bank, ways to penetrate some market segments that maybe we have not been quite as successful as we think we should have.

So it's really across the board.

Again, the larger urban markets, we think we're a more attractive place to recruit to.

And even though I've chastised our team about celebrating too much on the most reputable bank, it does give you a pretty good platform to recruit to when team members are on the bubble, thinking about coming to you versus someone else or leaving someone where they've been for 20 years.

And we've got a lot of examples of success over the last 30, 60, 90 days, where high performing team members have joined our company.

So it really is across the board.

We're excited.

We think the brand actually gives us growth opportunity.

It's amazing how many people still don't understand who we are and where we are and what we can do with our broader capabilities.

So again, it's line of business, it's product, it's brand, it's geography.

And we really have strategies in place to capitalize on all of those.

Second question.

It's just a modeling question.

You had a $1.7 million earn-out liability adjustment expense.

Is that onetime?

Or will that reoccur?

Jennifer, I'll take that.

So for the quarter, the liability adjustment was for our Global One acquisition, and we had a contingent asset that we've realized for the quarter that increased that earn-out liability.

That was a specific item for this quarter.

But going forward, as we look at that earn-out, we will continuously update the pro formas to estimate what the income will be for that business.

As you may recall from the acquisition, the earn-out terms call for payments to the Global One former shareholders based on a percentage of the bottom line.

So we'll continuously update that number as we get performance data.

But this quarter, it was an adjustment.

There may be future adjustments based on that forecast.

And your next question is coming from Casey Haire.

Jefferies.

Kevin, I wanted to follow up on the loan growth outlook.

Sounds like that your commercial -- the commercial side of the house is in a bit of a wait-and-see period here.

If that were to continue, would you -- what's the appetite to have consumer -- this consumer side of the house to continue to drive the bus?

So specifically, SoFi and GreenSky, by my math, I think you guys are at that 3% level that you guys kind of outlined.

Is there an appetite to go above and beyond that if commercial continues to be weak?

Yes.

I mean, first of all, I think commercial is going to pick up on C&I.

I think it's one of those quarters where there's some seasonality.

I think there -- like I said, the pipelines's building.

Let me comment on the small business is growing.

Premium insurance, finance is growing.

Community Bank owner-occupied is a part of the portfolio that's been growing.

Senior housing has -- while they didn't have net growth numbers this quarter, they have been -- we have a pretty favorable forecast we think on the ABL and middle market over the next 12 months.

So I'm optimistic again that the second half and the next 3 or 4 quarters, we're going to be able to grow C&I.

I think it's one of those quarters where we had some utilization and numbers that hit us a little bit more than we thought and think that ticks back up.

So I do think that.

And I think on the consumer side, we'll look -- our mortgage company has really got a strong franchise that has been growing, and we'll get growth there.

Back to the SoFi, you are -- you're correct, we're just a little under that 3%.

I think we will, it's something that we have -- I think we even mentioned last call we might -- we like the returns, we like the risk-return profiles of those 2 relationships.

We do think we'll expand those probably up more to 3% to 4% right now, maybe more to come on that the next couple of quarters.

But I can see us increase and pass that.

Again, we -- that was our original guidance, and we like what we see.

But I -- we're not doing it out of dependency because we're not -- we're concerned about the commercial book.

It's more we like the risk-return profile and the opportunity there.

One of our big goals, as we've mentioned before, is to get our consumer book up in the mid-20s.

And I don't think you're kind of just get there through card and HELOC and mortgage.

And we've got to do some things that we maybe historically have not done and partnered up.

And while it is a small part of our balance sheet, it's helping our consumer get to a -- we've rebalanced the balance sheet over several years, it's helping us get there.

And it's one of the engines that we've had some success in the last couple of years.

Long story short, I think we will get above, that through the year, and then we'll probably guide into that in the next quarter where we think we'll take that.

Okay.

Great.

And just switching gears to the Cabela's transaction.

Obviously, a lot of optionality with what you guys can do with the proceeds, including balance sheet restructuring the some of the -- on the debt side or disposing of some credits, troubled credits.

Just any updated thoughts you could share with us as we pull closer to the close date?

Yes.

You nailed it.

Those are things that we are considering.

We always consider really pre-Cabela's transaction and post-Cabela's transaction.

We'll always be looking at ways to optimize the balance sheet.

But no real updates there.

Again, we continually model things like asset dispositions.

And again, the debt is a matter of -- obviously, everyone can see some of the higher-priced debt we have out there.

So no updates other than that's just part of our ongoing financial review.

And as we can update that, we certainly will.

Okay.

Great.

And then just quickly, the deposit mark, is that -- are you still thinking that's 25 basis points at this point versus that $185 million?

It'd probably be a little lower because rates have rallied a little bit.

So as we stated, the portfolio today is on the books at $185 million at Cabela's.

So depending on when we close the transaction, we'd have to take it based on the curve that day.

But I think it's a little less than 25, but not that different.

And the next question is coming from Jared Shaw.

Wells Fargo Securities.

Yes, most of my questions I guess were asked.

Just on the deposit trends, with the good growth you saw this quarter in the TDAs and in your comment around deposit betas, when do you actually think the customer's preference actually kicks in and you see the deposit beta start to kick up.

I mean, it's a -- you're still seeing the strong growth in the most efficient form of deposits for you?

Jared, that's a great question.

I don't know.

I wish I knew the answer because I would -- that would be more price optimizing on our book.

But I think when rates start to get at 2%, I think the consumer may begin to change their preferences and start to take the extra effort to move some money around.

We also know that with the floating NAV, on money funds, a lot of the money has moved into the [GOVY] funds recently.

Those are paying in the mid-50 to 60 basis point range.

If we get pressure from the money funds again, I think you'll see pressure on the underlying deposit betas.

The way we look at our portfolio is -- we look at all of our products, and we look at the competitive landscape to determine how we reprice.

And we're selectively making changes to this point.

So going forward, as competitors move their rates, we'll obviously have to have a response.

But we're also actively -- today, increasing rates in some of our relationships where we want to make sure that we're maintaining and growing the relationships.

So not a great answer in terms of where and when it's going to be.

We know when absolute rates get a little higher, it's going to start moving and when the competitive landscape changes, it's going to get higher.

But we're still modeling for the next 25 basis point rate hike to have it lower than our long-term betas of mid-50s.

Okay.

And then just when you look at the growth this year, year-to-date in the noninterest-bearing deposits, what's the general breakdown between new customer growth versus higher average balances?

It's -- we have a lot of growth and higher average balances when you look at the DDA accounts.

We're up roughly 12% to 13% depending whether it's consumer or commercial, but we're also bringing in our share of new relationships.

As Kessel mentioned in his talking points, both on the small business side as well as our mass affluent strategy is bringing in more accounts overall.

But the largest impact is on the balance augmentation and average deposits.

And the next question is coming from Brady Gailey.

Keefe, Bruyette & Woods.

So congrats on hitting the 1 ROA.

I think longer term, you all talked about the goal of kind of a 1-plus ROA.

So just asking about the plus.

I mean, do you think that you could see the ROA expand from here over the next couple of years?

And do you think, like a 1.10% to 1.15% ROA would be possible over the next 2 or so years?

We do.

Again, we have not updated the guidance, but we had a lot of discussion in anticipation of that question.

And again, without getting into specific guidance, we've said all along, the 1% was not a goal.

It was just a measuring point along the journey.

We did that, and we believe quarter-to-quarter, you might see a little bumpiness, but we believe that the trend is obviously up and certainly see the 1.10% without getting time-specific and into the ranges you talked about.

And as we refine that, we'll update targets and try and be a little more specific there.

But the short answer is, yes, we do see the 1.10%.

And again, we'll be laying out plans both internally and externally for guidance around that.

Okay.

And then on the buyback.

The stock continues to do pretty well.

It's up, I think around 10% year-to-date.

And with the stock in the mid-40s, do you think that it becomes a price point where you think about stopping the buyback?

Or do you think the buyback kind of continues as it has?

Brady, we said with the $200 million in authorization, there are several factors that weigh into how much we do from a share repurchase perspective.

And the stock price is one of those factors.

Obviously, we're doing a return on investment anytime we make a decision to do share repurchase.

And at $44, $45 it's a inflated price, but if you believe it's going to go to $55, it would be a decent ROI to buy back the shares.

So it's one component of our decision.

We also look at overarching capital levels.

We're managing to a range there, and we also look at the level of organic loan growth that we have every quarter.

So when we combine all those factors, it really determines how big the repurchase will be each quarter, not solely based on stock price.

And the next question is coming from Emlen Harmon.

JMP Securities.

You guys have given us a fair amount of color just on the retail deposit dynamics this quarter.

Could you talk a little bit about what you're seeing on the commercial side of the house?

And are you starting to see competitive dynamics shift there at all?

I'll take that, Emlen.

This is Kevin.

For the quarter, what you see is, on the top line reporting number of 1.2%, it's a bit muted because when you dig into the data there, you'll see that most of the runoff for the quarter came in our municipal deposits, down about $187 million, as Kessel mentioned.

When you look at the core transaction deposits, we're actually up 5.8%.

It's a seasonal quarter, so when you look at it quarter-over-quarter, sometimes it can be bit (inaudible).

If you go back to last year in the second quarter of '16, core transaction deposits only grew about 1.8%.

So we're actually seeing an accelerated growth in those core transactional deposits.

And it's coming out of both the consumer side of the house as well as the commercial side.

We are seeing a little more price tension on commercial pricing, and that's probably where most of our deposit beta has been allocated at this point or have been seen.

But it's not to the point where it's inflated.

And people are just being more strategic and surgical around repricing on the commercial side.

We also haven't seen an outflow of what we would consider commercial nonoperational deposits.

We think we have about $2.5 billion to $3 billion of the commercial nonoperational.

That's the balance that everybody is looking at.

If you look at the third and fourth quarter and the Fed's balance sheet, we think those are fairly sticky balances.

They're not in high interest rate products.

So we don't think they're going to leave as the Fed's starts to taper their balance sheet and there's more pressure there.

So we feel pretty good about the underlying data.

And Kessel mentioned the statistic, but up 10% year-over-year on the core transactional deposits really speaks to the franchise and how we're able to deliver through the community and the retail organizations.

Got it.

And then just one other one on the NIM.

The sub-debt redemption in June, is that included in your 5 to 8 basis points of NIM improvement for the third quarter?

Just how you're thinking about funding that?

Can you fund it with what you got on the deposit side already?

Yes.

It is included in the guidance.

And yes, the way you would think about it is, we're going to get some pickup there.

And you can look at the coupon, it was a little over 5%.

We'll fund that through our other traditional wholesale funding alternatives, whether that's broker or FHLB and also through core deposits.

So you do the math, 5% coupon, we can fund it at less than 2%.

We're going to get somewhere between a $7 million to $10 million pickup in NIM on an annualized basis just by retiring that debt.

And the next question is coming from Nancy Bush.

NAB Research.

Yes, two questions.

First, I get that everybody on the commercial side is kind of sitting and waiting to see if we finally get some order in Washington.

But how much, Kessel, would you say that the competitive situation in the Southeast right now, which I've never seen to be so competitive as it is right now, is impacting your growth?

And are you having to give up any growth due to pricing or terms or anything like that?

Yes.

It's a great question, Nancy.

I think there like 5 people around the table that want to answer it.

But I'm going to answer it for them.

So yes, the competition is intense.

As we began preparations for today, several weeks ago, and I was looking at the components of the loan growth primarily and where we grew, where we didn't grew.

I challenged the team, both the business line leaders, the credit and the risk areas to say, if we're losing to competitors, is it intentional?

In other words, are we -- we getting last look, and we see rates that we won't do?

Or is it -- so is it rate, is it structure and kind went down the line, so the answer is yes, competition is unreasonable in some cases.

In certain business lines, some of the larger corporate opportunities, we feel like were we to [match] or participate in the transaction that would have actually been a negative return to the company.

We have no interest in that.

So there have been some rate issues.

There have been some structure issues.

Again, on a personal note, I challenged our team about one of my referrals that went to a competitor, and we required, I believe, it was 30% equity in a nonrecourse real estate transaction and our competitor did it for 20%.

And I was challenging our team on who was right and who was wrong because it was a good piece of business.

So it's a long way of saying the competition is intense and that does have something to do with it.

And it's rate and it's structure.

And again that said, I think that the -- we're still pleased that we maintained a discipline, and there are a lot of bankers that say, "If Kevin Howard would take some of his limits off or if Mark Holladay would loosen some risk parameters, we could have growth." But we've, again chosen to stay in this kind of disciplined, balanced approach, which has led to, as we talked about, 48% C&I, 22% retail, 30% CRE.

We said several years ago, "Can we get CRE to 30%?" That's been very intentional.

Again, we could take the governor off of the real estate pipeline and that number could grow really quick.

So -- but your underlying point of you've never seen competition like this in Southeast is very fair and certainly, has some effect on our growth numbers.

But again, in many cases, it was intentional that we chose not to match or meet or beat what was on the table.

Okay.

My second question is this, now that you guys have hit the 1%, 10% milestones.

And I kind of look back at the years of the crisis, when you guys had to do quite a bit of stuff at one time, mostly the collapsing of the charters and the consolidation of the company.

Are there any projects in terms of systems, et cetera, et cetera, that are remaining from those days?

And if so, are those numbers incorporated in your expense growth guidance?

Yes, we're current -- I mean, everything we know today is incorporated in our expense growth guidance.

But we, again, have efforts underway right now, to look at ways to reduce expense that aren't in our guidance.

I know we've got -- looking at Kevin, and I think a session later this week on Friday to look at opportunities to further reduce in terms of just -- some of the ways we operate, not necessarily headcount.

Actually, just ways to get more efficient as a company.

There are always legacy investments that need upgrading.

But what we know today is on the table.

But there are, again, intense efforts, and we've spent a lot of time over the -- we never stop -- but over the last 2 weeks, again, as we get ready for this call, looking at -- to go forward, what do we think our expenses run rate looks like in this back half, in '18?

What investments can we afford to make?

What customer-facing investments are needed or have -- that have already been made, what have the results have been?

So there's no -- I mean, we had Project Optimus that some of you all may remember that had a big number tied to it.

We had a $100 million reduction in 2011, announced in January of '11, that was certainly a project but lots of little projects now.

Again, both on the expense and the revenue side.

But nothing -- no big hangover that's not in our run rate.

And the next question is from Christopher Marinac.

On past quarters, like Kevin had implied that perhaps there was some balance sheet restructuring that you would like to do, and I was curious if maybe some of this was already happening, and it was more evolutionary than revolutionary in the balance sheet front?

Yes, Chris.

This is Kevin.

Yes, we have been doing some of that.

You'll note, as Kessel mentioned, previous quarters, there were some security gains in first quarter.

But we've also been repositioning, not only in the bond portfolio but also our loan mix, as we've talked about, and now again today, to try to maximize our return on both equity and assets.

So yes, it's filtering in through the run rate.

And going forward, as Kessel mentioned earlier, transactions like Cabela's transaction will allow us to do more, but we're already doing many of those actions today, just on a smaller scale.

Got it.

So if Cabela's closes, as you expect, does that sort of cause you to reassess that, Kevin?

Or just continue what you're doing?

We'll keep doing what we're doing.

We -- as Kessel mentioned, we have a very regimented approach to looking at ways and potential offsets to expenses and benefits to look at the NPV on making certain decisions.

Whether that's tendering debt or whether that's selling an asset or repositioning the bond portfolio, we'll keep doing that on a quarter-over-quarter basis.

But it could be larger if you get a onetime capital item such as a $77 million fee.

Thanks, Chris.

And before we go to our next question, I was just going to add, Chris, that, that as Kevin well said, it just gives us more flexibility.

The analysis is going on before we ever heard of Cabela's and will go on well after that in terms of ways to optimize, such as the debt repayment last -- I guess, in the last quarter, where we retired some of that.

So it's an ongoing process, but certainly, onetime events might give you additional flexibility.

And the next question is coming from Jake Civiello.

RBC Capital Markets.

Kessel, just one question for me.

I mean, and Kessel, in some of your M&A comments, you mentioned a willingness to consider non-whole bank transactions.

Are there any businesses where you'd like to be larger or where you aren't currently involved, in particular, in the context of the brand consolidation to come?

Or I guess, put in another way, does the brand consolidation open any new doors for M&A?

Well, I don't know that brand consolidation, just as a stand-alone event, opens doors.

I think it certainly increases awareness.

And as we convert to a single brand operated platform, certainly, if there were a whole bank M&A transaction, that operational conversion would be simpler.

But I don't know if that opens a door.

In terms of any particular businesses, we've got a pretty wide lens.

I mean, we talked about the Global One acquisition.

And again, we -- you and I have talked about that.

That was October of last year, and I was on the phone yesterday with Dan Courchesne, our President of Global One, and we continue to see from Dan and Jonathan Rosen and their team good results.

That's been a nice acquisition.

So we'll look at businesses that we feel like we know something about, that are complementary to what we do, and in some cases, maybe not new businesses, but businesses that would give us scale on the -- in some cases, on the big side.

So again, I won't get into specific types of business, but again, it would be business that we believe we know something about, that fit well with our brand, with our culture.

And again, businesses that give us scale maybe in some areas that we're already operating.

And there were no more questions.

All right.

Well if no more questions, I just want to again thank all of you for calling in today, for participating in the call, for your questions and your interest in our company.

And again, I always want to thank all of our team members that might be on this call for the work they do that allows us to get the awards we got, which are not, again, the goal, but is a result of a lot of hard work, both financial and nonfinancial.

So thanks to all of you.

We look forward, and we really are excited about the back half of the year.

And we look forward to continuous updates as we, again, make progress against all of our previously stated objectives.

So thank you very much.

Hope everyone has a great day.

Thanks, ladies and gentlemen.

This does conclude today's conference call.

You may disconnect your phone lines at this time, and have a wonderful day.

Thank you for your participation.