Synovus Financial Corp (SNV) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Synovus Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) .

It is now my pleasure to turn the floor over to your host, Steve Adams. Sir, the floor is yours.

Thank you, and good morning. During the call today, we will reference 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 this morning; with our executive management team also available to answer your questions.

Before we get started, 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.

(Operator Instructions) Thank you, and I'll now turn it over to Kessel Stelling. Kessel?

Thank you, Steve, and good morning to everyone. Welcome to our fourth quarter earnings call. Before I go to the deck, I want to thank Steve for assuming his role and bid farewell to Bob May, who's sitting next to Steve. And Bob has, many of you who don't know, has taken on expanded responsibilities in our strategic financial review. So I think, Bob, you completed 14 earnings calls. This is your 15th. So thanks for your time and [saddle deer] as well. So I'm going to walk us through the earnings presentation, then we'll open the line for questions.

Like last quarter, there is quite a bit of noise in the numbers for this quarter. But let me start with Slide 3, which will provide a summary for the quarter. As you'll see, the results for the quarter reflect a $47.2 million tax reform-related charges as well as a $43 million loss from the previously announced redemption of our $300 million principal senior notes. Diluted EPS was $0.23 for the quarter. On an adjusted basis, diluted EPS was $0.72, up 10.7% from the previous quarter and up 32% from the same period in the period a year ago. When I move to the next slide, we'll do our best to reconcile those numbers, both with numbers that went into the adjustment and other select items that we thought warranted calling out this quarter.

Return on average assets was 37 basis points on a reported basis. On an adjusted basis, ROA was 1.12%, up 7 basis points sequentially and up 21 basis points from a year ago. We continue to generate positive operating leverage in the quarter. As you'll see, the total adjusted revenue is increasing 12.1% versus the fourth quarter of last year, while adjusted expenses increased 7.6% versus the same quarter a year ago. Managing expenses continues to be a priority. We're pleased that we finished the year with an adjusted efficiency ratio below 60%.

On the balance sheet side, average loans for the quarter increased $889 million or 3.7% versus a year ago. And average deposits grew $1.6 billion or 6.6% versus the same quarter a year ago. From a credit quality perspective, nonperforming assets ratio declined to 53 basis points, a 21 basis point improvement from a year ago.

And lastly, in terms of capital management and overall returns, we continue to see improvement in capital efficiency with an adjusted ROE of 11.96%, up 246 basis points from a year ago. The adjusted return on average tangible common equity improved to 12.26%, up 257 basis points from a year ago.

Moving on to Slide 4. Again, it provides a summary of selected items impacting the quarter's results. The first section of this slide summarizes the items that are excluded from our adjusted earnings per share calculation. The first item, as I mentioned, is the $47 million in net income tax expense related to the effects of federal tax reform. $46 million in total is due to remanagement of our deferred tax assets at the new federal income tax rate of 21%. Slide 17 in the appendix provides further details.

The second item relates to benefit from research and development tax credits and certain favorable adjustments to our 2016 state income taxes. Since both items relate to tax years prior to 2017, we excluded them from adjusted EPS. The $1.7 million increase in the estimated Global One earnout payment is due to the newly enacted lower federal income tax rate, which increases the estimated earnout payments. And as we disclosed in the previous quarter, we did incur $23 million of pretax loss from the redemption of our $300 million senior notes during the fourth quarter. So again, those are the large majority of the items that were excluded from adjusted EPS.

The second section of the slide summarizes other significant items that are included in the computation of adjusted earnings per share, but we thought warranted lifting out. So during the fourth quarter, we recorded a favorable adjustment to our state income tax enforcement factors, which reduced our state income taxes net of federal benefit of $4.6 million. Approximately $1 million of this benefit related to fourth quarter tax core earnings. The remaining $3.6 million related to the first 9 months of the year. This favorable change to our state enforcement factors is also expected to result in lower state income tax expense in the future periods. The asset impairment charge of other assets held for sale are elevated this quarter, totaling $2.5 million pretax. These write-downs related to miscellaneous, corporate real estate and other assets. And lastly, the quarter reflects a $3.3 million expense for a onetime $1,000 cash award to team members who were not participants in our management bonus plans.

Moving to Slide 5. You'll see loans grew 5% sequentially and 4% versus a year ago. The amounts on the graph represent period imbalances. Loan growth on a sequential quarter basis was $300 million or 4.9% annualized. C&I loans increased $298 million or 10% annualized during the quarter. That increase was driven by growth in community banking of $182 million, which included both net new loan growth of $49 million and a seasonal increase in revolving commercial line utilization of $133 million. And we saw continuous outperformance in our specialty areas, including senior housing and Global One.

Consumer loans increased $296 million or 21% annualized. Consumer mortgages increasing $76 million or 12% annualized. A little color there, the growth in consumer mortgages was broad-based, with private wealth and position portfolios contributing most of the growth. And from a market perspective, the growth in mortgage portfolio is driven by strong growth in Nashville, Atlanta, Birmingham and major metro markets in Florida. We also continue to see solid growth in our lending partnerships, which increased by $223 million during the quarter. Additional partnership balances were required this quarter due to the increase in liquidity from the Cabela's transaction.

CRE loans declined $293 million or 16% annualized. For the quarter, investment properties portfolio decreased by $255 million, including a $144 million decline in multifamily.

For the full year, loans grew $931 million or 4% on a period-end basis. C&I loans increased $480 million or 4%. Consumer loans grew $889 million or 18%. And CRE loans declined by $439 million or 6%. Growth in consumer loans is driven by increases in lending partnerships of $600 million and consumer mortgages of $337 million or 15%.

Total average loans grew $112 million sequentially and grew to $190 million or 3% annualized, excluding transfers to held-for-sale. Compared to the same quarter a year ago, average loans grew to $889 million or 3.7%.

We continue to be pleased in our efforts to drive portfolio diversification. C&I loans now represent 49% of total loans. Consumer loans increased to 24% of the portfolio, while CRE loans have now declined to below 28% of outstanding balances.

Moving to Slide 6 in deposits. Average deposits grew 15.7% sequentially, 6.6% from a year ago. Total average deposits of $26.29 billion increased $999 million sequentially. Excluding broker deposits, total average deposits increased $331.6 million or 5.5% annualized versus the prior quarter. Average core deposit -- core transaction deposits of $18.8 billion increased $189 million or 4% sequentially, reflecting a $139 million increase in noninterest-bearing DEAs.

On a year-over-year basis, total average deposits increased $1.62 billion or 6.6%. Similarly, average core transaction deposits increased $1 billion or 5.7% versus a year ago. An overall increase in our customer average balances, our focused efforts to attracting growth relationship in small business and the fluid segments have largely driven the year-over-year growth in core transaction balances. And we're pleased to continue to enhance the mix of our deposits, with average noninterest-bearing deposits continuing to grow, increasing $139.2 million or 8.3% annualized sequentially and growing $309 million or 6.3% for the full year.

Moving to Slide 7. Net interest income was $269.7 million, increasing $7 million or 2.7% versus the third quarter and 15.5% versus the fourth quarter '16. I'll give you a little color there. The increase was driven by loan growth as well as margin expansion. The net interest margin for the quarter was 3.65%, up 2 basis points from the previous quarter and up 36 basis points from a year ago. The improvement in the quarter was driven by an 18 basis point increase in our investment securities yields stemming from the third quarter repositioning as well as a 6 basis point increase in loans -- loan yields due largely to the short-term rate hike in December. The increased yield more than offset the margin drag as well as our increased cash position from the -- for the quarter, resulting from the acquisition of the $1.1 billion in broker deposits late in the quarter. Effective cost of funds increased 2 basis points sequentially to 50 basis points, reflecting a higher cost from the aforementioned Cabela's broker deposits, partially offset by refinancing of the $300 million debt that will result in an annualized $14 million improvement in net interest income.

Cost of interest-bearing core deposits was 42 basis points, up 1 basis point for the quarter, as we've increased deposit rates in various products and segments. But given our overall pricing discipline, deposit bases remain well below moderate levels of less than 10% for the year. Page 20 in the appendix includes additional information on interest rate sensitivity as well as the investment securities and loan portfolios.

Turning to Slide 8 and fee income. Total noninterest income in the quarter was $69.4 million, down $66.1 million from the prior quarter, down $4.7 million from a year ago. As a reminder, the third quarter included a $75 million Cabela's transaction fee, partially offset by $8 million in investment securities losses. Additionally, the fourth quarter '16 included $5.9 million in investment securities gains. Adjusted noninterest expense of $69.3 million increased $834,000 versus the prior quarter and $632,000 versus the same period a year ago. Core banking fees of $33 million declined $121,000 sequentially and $2.4 million or 6.9% versus a year ago. The sequential quarter decline reflects a $302,000 decrease in service charges on deposit accounts, partially offset by a $281,000 increase in SBA gains. For the full year, SBA gains were $5.3 million, up 8.4% versus a year ago.

Fiduciary asset management, brokerage and insurance revenues was $21.8 million, increased $599,000 or 2.8% sequentially and $1.4 million or 7.1% from a year ago. The increase was driven by solid growth in assets under management, which ended the quarter at $14 billion, up 23% from a year ago. Our talent acquisition and market expansion strategies continue to bring new customer wins. With continued growth in the business in an accelerated pace, we're pleased that includes an annual 32% growth at brokerage assets under management to $2.5 billion.

On the talent acquisition front, our FMS unit had a very successful year. We strengthened our competitive position. Talent additions included a new private wealth team at Augusta, a new family asset management office in Nashville as well as brokerage professionals in Charleston and Birmingham. Mortgage revenues of $5.6 million were flat sequentially and up 2.6% from a year ago.

Turning to Slide 9. Noninterest expense of $226.5 million increased $20.9 million or 10.2% sequentially and increased 17.2% from a year ago. As noted earlier, fourth quarter includes a $23 million loss from the redemption of our $300 million senior notes. The third quarter included ORE and other impairment charges totaling $8.8 million. Adjusted noninterest expense of $201.1 million increased $7 million or 3.6% sequentially and 7.6% from a year ago. Again, the sequential quarter increase is driven by a $4.5 million increase in advertising spend; onetime cash in awards totaling $3.3 million, which were previously mentioned; and asset impairment charges or held-for-sale assets totaling $2.5 million.

The year-over-year increase in expenses is driven by strategic investments in talent, technology, higher third-party processing expense related to the surge in fee of our third-party lending partnerships, higher self insurance costs and the addition of Global One. Through continued positive operating leverage, the adjusted efficiency ratio for the quarter was 59.29% compared to 58.59% the previous quarter and 61.81% a year ago. For the full year, the adjusted efficiency ratio improved to 59.87% compared to 62.67% for 2016.

On Slide 10, briefly on credit quality. The first graph is NPA, NPL and delinquency trends. As you'll see, the NPA ratio decreased by 4 basis points from 57 basis points to 53 basis points sequentially, and down 21 basis points from a year ago. The NPL ratio increased by 7 basis points on a 1 quarter basis, moving from 0.40 to 0.47, an increase by 17 basis points from the fourth quarter '16. The increase in the quarter was expected as our dispositions during the quarter focused on held-for-sale loans and ORE properties that were marked to liquidation values in the third quarter, driving our normal pace of NPL sales. Kevin and I will give you more color on that.

Past dues improved from 35 basis points to 21 basis point. That compares favorably to our normalized past due levels over the past year. Net charge-offs for the fourth quarter were $9 million or 0.15% annualized compared to 0.62% in the third quarter and 0.14% in the fourth quarter of 2016. Remember, in comparing linked-quarter performance to the third quarter, charge-offs include the impact of held-for-sale transfers.

Provision expense for the quarter was $8.6 million, down from $39.7 million in the third quarter. That third quarter number would've been $12 million if you net out the impact of the held-for-sale transfers. Provision expense was $6.3 million in the fourth quarter last year. The allowance for loan losses stayed fairly flat over the prior quarter, with the ratio moving from 1.02% to 1.01%. Compared to a year ago, the allowance is down $2.5 million, ratio is down about 5 basis points. Coverage ratios remained very healthy as the reserve covers NPLs at 216% or 253% if you exclude impaired loans versus the expected loss has been previously charged off.

Moving to Slide 11 on capital. Our capital ratios continue to be well above regulatory requirements. The quarter included a $47.2 million in tax reform-related charges, which reduced CET1, Tier 1 capital, total risk-based capital and leverage ratios by approximately 16 basis points. Credit impact was partially offset by a reduction in disallowed DTAs. $35 million in AMT tax credits is no longer recorded as DTAs, which benefited capital ratios by about 11 basis points. So on a net basis, the regulatory capital ratios were reduced by 5 basis points due to the effects of tax reforms. As you'll see, CET1 ratio of 9.9%, down 7 basis points sequentially. Tier 1 capital, 10.38%, down 5 basis points sequentially. Total risk-based capital of 12.23%, down 7 points sequentially. Leverage ratio of 9.19%, down 15 basis points sequentially. Tangible common equity ratio, 8.88%, unchanged from the previous quarter given the period and declined cash balances, as we reported from the Cabela's transaction. And also as expected, disallowed DTA continues to decline. It's now $70.4 million, down $148 million from a year ago.

Moving to Slide 12. In 2017, just as a reminder, our capital actions included a repurchase of $175 million of common stock, 4 million shares at an average price of $43.53, which reduced our share count by 3.3%. In total, we returned $245 million of capital to our shareholders with a combination of stock repurchases just mentioned and common stock dividends. For 2018, our capital actions include the new authorization of a share repurchase program of up to $150 million. The size and timing of repurchases during the year will be based upon loan growth, liquidity and capital optimization. We're also very pleased to announce that our Board of Directors has approved a 67% increase in our common stock dividend, to $0.25 per share with a forward dividend payable -- effective with the quarterly dividend payable in April of 2018.

Before we go to 2018, I just want to, on Slide 13, walk through another brief summary, which shows several key metrics that I think reflect the broad-based management improvements that the company achieved in 2017. Our financial results were in line with our 2017 guidance. And we achieved our previously announced long-term targets for EPS growth, ROA and the adjusted efficiency ratio. Adjusted EPS grew 27.7%. Adjusted ROA improved to 1.04%. The adjusted efficiency ratio improved to 59.87% for the year. Additionally, we achieved further growth in diversification of the balance sheet, improved credit quality, and we ended the year with a strong capital ratios. We're really proud of our team's accomplishments.

And lastly, we hit these key financial targets while staying very focused on the completion of other significant efforts. And just to recap a few of those: Our conversion to a single-bank operating environment that opened the door for our single-brand transition, which our team's excited about, is underway. It's getting to completion, with the last signs converting in mid-2018. The implementation of several new technologies and tools, the launch of our enhanced website, the introduction of a new suite or credit core products. All investments improving the customer experience. We completed the Cabela's transaction, which provides $75 million in additional revenue that was utilized in part to complete balance sheet restructuring actions that will benefit the company in 2018 and beyond. We completed a major space with consolidations in markets like Atlanta and Birmingham. We had labor efficiency. We've opened 2 new modern highly customer-centric branches. We made continued investments in our existing team, and we added outstanding talent in key markets across our footprint and to our Synovus board. And perhaps the highlight of the year, which we really do believe represents the heart and dedication of our team, was the recognition at the top of the 2017 most reputable bank list, as published by the American Banker/Reputation Institute mid-2017. So a great '17.

I'd like to take you to Slide 14, which will give you a view into our 2018 guidance, and then we'll talk about beyond that. We do expect 2018 to be another solid year from a balance sheet perspective. We expect average loan growth of 4.6%, driven by continued growth in consumer. And C&I lending is expected to benefit from the investments in talent that we made in 2017. We expect deposits to grow at a pace that support our loan growth, maintaining the loan-to-deposit ratio at an optimal level of about 95% while continuing to maintain deposit basis in the 30% to 40% range as compared to historical levels of 50% to 60% in previous rate cycles. We expect net interest income growth of 11% to 13%. That assumes a 25 basis point increase in rates in March and September. If there are no interest -- if there are no changes in rates for the year, the growth in net interest income is expected to be between 9% and 11%.

Given the investments in talent in our mortgage and brokerage business units, we expect adjusted noninterest income growth of 4% to 6%, which is higher than what we experienced in 2017. That, along with a strong net interest income growth, is expected to result in total adjusted revenue growth between 9.5% and 11.5% for the 2018 year. We expect total recorded noninterest expense growth of 0 to 3%, which includes incremental investments in 2018 as we look for a portion of the benefit received from the tax reform. Our investments will be focused on revenue-generating talent additions; enhancements to our digital capabilities and resulting customer experience; additional team member benefits on top of our increased 401(k) match of 5%, which we announced midway through the quarter and a $1,000 bonus for majority of our team members announced in December and January; additional investments in information securities; as well as technological advancements to drive ongoing efficiencies.

Despite the incremental level of investments, we do expect to get -- again postpone operating leverage in 2018. We also expect an effective tax rate of approximately 23% to 24%, a net charge-off ratio of 15 to 25 basis points. That modest increase in the range reflects the continued decline in recoveries from legacy credits. And as noted earlier, our capital actions for 2018 include a 67% increase in our common dividend and a share repurchase authorization of up to $150 million.

We had said previously we would update our 3-year targets on this call, having briefly achieved our stated long-term goals. So just a brief upview of 3-year targets for EPS growth, ROA, return on average tangible common equity and adjusted efficiency ratio. First, I just want to reflect on the path that's gotten us to this point. Since 2014, we've experienced broad-based financial improvements in the 3 key financial areas I just mentioned: growth, profitability and efficiency. From a growth perspective, adjusted EPS, which was $1.44 per diluted share in 2014, has grown at an compounded annual growth rate of almost 21%. From a profitability basis, we've been rapidly increasing our adjusted return on assets from 79 basis points in 2014 to 1.04% in 2017. And we've increased our adjusted return on tangible common equity from 6.96% in 2014 to 11.14% in 2017.

In addition, on the strength of positive operating leverage as well as really strong expense discipline, we've reduced our efficiency ratio by over 600 basis points to 59.87%. This overall performance enhancement is being driven by our ability to organically grow the business while experiencing more moderate backhauls and an increase in margin and overall productivity. We're confident we can sustain the momentum into the coming years. We believe that executing on our strategic initiatives will allow us to continue to enhance customer experience, which will, in turn, lead to growth and improve profitability. As such, we'll continue to strive for double-digit EPS growth over the next 3 years. And we believe through a combination of growth in the bottom line as well as prudent share repurchase efforts and newly effective tax reform, we expect a 20-plus percent 3-year compounded annual growth and earnings per share. From a profitability standpoint, continued balance sheet optimization, margin expansion as well as lower tax expense will -- we believe will allow us to increase our ROA to above 1.35% during the 3-year horizon and our return on average tangible common equity to over 15%.

Lastly, our strong growth and revenue will be balanced with growth in our overall expense base. We'll continue to invest in talent and technology to improve the customer experience while fueling future growth. We'll do so while maintaining positive operating leverage and believe we should drive our efficiency ratio below 57% during this same time frame.

So we've made great progress over the last 5 years. We're excited and confident that our dedicated and talented teams will continue to drive higher levels of performance in 2018 and the years to come.

We'll be happy to take your questions about any of that, about the fourth quarter, the year in review or the go-forward view. And with that operator, we'll open up the call for questions.

(Operator Instructions) And the first question is coming from Brad Milsaps.

Sandler O'Neill. Kevin or Kessel, I was curious if you could kind of maybe walk through some of the moving parts of the balance sheet this quarter. I know last quarter, you finished with a fair amount of liquidity. It looks like you started to kind of work through that. Probably didn't get all the way finished, but could you walk through kind of what the plans are there? And then could you just refresh my memory around the timing of when you prepaid the debt versus when the new debt came on and sort of how much double accounting or overlap you had? And kind of what that can kind of mean going into the first quarter?

Brady (sic) [Brad], this is Kevin. So I'll take that. So when you look at the average balances for the quarter as it relates to the cash side, we were a little over, I guess, $800 million, where the previous quarter we were roughly at $500 million. And so when you look at those 2 numbers, you'll see that we still have a little bit of an inflated cash position for the quarter. As Kessel mentioned, we were able to overcome that. That cost us about 4 basis points in the margin. If you looked at period-end balances, we were already at that lower level by the end of December. So we will be able to get through the additional cash that we received from the Cabela's transaction, and that will show up as a 4 basis point improvement in the first quarter margin. Second question, as it relates to overarching strategy. Remind me again, Brady (sic) Brad , what the second question was.

Yes. So this is Brad.

I'm sorry, it was the debt. I apologize. On the debt, we paid that off late -- we refunded it late in October, and we paid it off early in November, November 9. So there will still be a benefit of roughly half a quarter that will pick up in the first quarter '18.

Great. Just a follow-up. Are you pretty much done? I mean, obviously, the balance sheet is always moving. It's fluid. But are you pretty much done with all your sort of initiatives around the Cabela's trade? And anything else that you kind of see out there? Or you think you're kind of through the biggest pieces of what you want to do?

We're through the biggest pieces. If you look back last quarter, if you recall, we had about $27.8 million that fell to the bottom line that we did not use in the third quarter through some of the balance sheet restructuring. As Kessel mentioned earlier, Brad, we had about $23 million of onetime expense this quarter associated with the debt extinguishment. So largely, we're through all of our actions. And so now we should be able to reap the benefits of some of the bond restructuring as well as the balance sheet restructuring efforts that we've completed.

And the next question is coming from Jennifer Demba.

SunTrust. Kevin, just wondering if you could walk us through, from a high level, 0 to 3% expense growth for 2018. What are kind of the puts and takes there? And then my second question just relates to your steep increase in the dividend versus a little bit less share repurchase authorization this year. Just walk us through that decision.

Yes, Jennifer. I'll start with the expenses. So the 0 to 3% range, just to put it in context from a number standpoint, translates to roughly $821 million to $845 million in expense. And so that number is elevated from levels that you probably expected to see. And Kessel mentioned in his talking point, we are reinvesting part of the benefit that we're receiving from the after-tax cash flow of tax reform. And so taking some additional dollars to invest in things like revenue-producing FTEs, some additional technology investments as it relates to digital, but also towards a swamp to continue to drive efficiency. And some of the numbers that we've been able to reinvest are showing up already in the revenue line. So when you look at the guidance for revenue next year, if you just take the midpoint of the guidance, we're showing about 11% total revenue growth. And some of that growth is being anchored by further investments in some of our revenue-producing fee income position, brokerage, mortgage loan originators. So we're already starting to deploy some of those investments into this year's earnings stream. In addition to that, over the next weeks, months, quarters, we're looking at further investments that will help to generate revenues this year, but also in out-years, in '19 and '20. And so we're being very purposeful in how we think about those investments. But when you look at the top line and you look at the set 11% growth, on an operating leverage perspective, it's still giving you 4% in operating leverage and it's giving you 1.6x. So we feel as if we're still being prudent in our expense growth, but we are taking advantage of some of the after-tax cash flows of the tax reform. As it relates to the dividend -- and we looked at the execution around returning some of the benefit to our shareholders, one area that we did go fairly significantly up in is in our dividend. And when you look at it from a yield perspective and from a payout perspective, we felt like the 67% increase to $1 per share on an annual basis put us more in line with some of our competitors and put the dividend yield close to 2%, which also we felt was very important given the competitive landscape.

And the next question is coming from Ebrahim Poonawala.

Bank of America Merrill Lynch. I just wanted to follow up in terms of loan growth guidance. It's very clear that we saw very strong momentum in C&I in -- at the end of fourth quarter, Kessel. As we think about '18 and we look at sort of the makeup of loan growth in '17, do we expect '18 to resemble '17, where it's driven by the partnership loans, consumer and then C&I? Or is it going to -- should we expect a different composition of loan growth?

EB, you addressed it to me. I'll let Kevin take the most of it. It will be a little different because we -- I don't think we'll see the paydowns on the CRE side that we experienced this year. We saw pretty dramatic declines on a lot of our CRE categories, which we believe will level off. But Kevin, why don't you give a little more color on the categories that you see?

Yes, I'll be glad to. The -- I think some of the -- we --the purchases, the third-party partnerships, I think that will be much less. We'll have some growth there. We've guided mid-single digits. We're in the 4.5% range now. So a little bit on that growth there, certainly not as much as '17. I think, as Kessel mentioned, all set. The CRE portfolio may be stabilizing a little bit more. We had a tremendous amount of payoffs in the second half of the year, as you saw, primarily in our multifamily portfolio. And a lot of the derisking is kind of out of the balance sheet now. As you know, we've had major reductions, $100 million, $200 million this year, and some of the land and special assets portfolios, the Cabela's transaction that helped us in the third quarter. We moved a lot to held-for-sale. We're moving that all this quarter and the first -- the fourth and first quarter. So that drop, $400 million, we think that -- we think, actually, we'll be close to maybe even a little bit of net growth. I think you won't start to see that until maybe the second, third, fourth quarter. We've had really good production toward the second half of '17. So I think the fundings will start to show up in the real estate. And again, as Kessel mentioned, the paydowns and the derisking sort of -- we'll get some of that still left, but not certainly at the pace we had in '17. So I think they kind of offset each other a little bit. And then I think the C&I, we just keep doing what we do. I mean, we are growing in a lot of different areas. We grow in ABL, as Kessel mentioned, senior housing. Our community bank had good utilization lift and good growth this quarter, and that's good to see. Small business had grown. We think we've invested pretty heavy in the middle market space, and we think that sort of helps pay dividend. So I think if you talk about kind of the composition maybe of the different portfolio, we should probably talk in maybe not 17%, 18% in consumer, more 10% to 15%. I think you're mid-single digits into C&I. Hopefully, we'd get some lift in utilization. For the year, we were down in utilization. Up this quarter, but down for the year. And then CRE stabilizes, and that's what helps offset. So that's our thoughts on 4% to 6%. And probably the one thing that swings us toward the higher end of the guidance maybe versus the lower end is that utilization. We're positive with the outlook for next year. Our borrowers, hopefully, there's some expansion CapEx built into there. Wasn't as much of that in '17. I don't feel like that may play out a little bit better for us in '18.

That's helpful. And if I could just follow up on the margins. So Kevin, you mentioned, I guess, there's a 4 basis point lift to the 3.65%. So the margin in first quarter starting would be around 3.70%. Could you remind us the sensitivity to each fed rate hike for the margin? And do we expect additional sort of time deposit runoffs like we saw in the fourth quarter, which you had flagged previously, as we think about 2018?

So -- yes. So what we have in the appendix is that it's about 1.54% annualized NII sensitivity for every 25 basis points. So that's what we would expect under a modeled scenario. As Kessel mentioned, we've been running -- we shared that we -- for 2017, we had roughly a 10% beta. We think that this December rate hike that we just had will translate closer to a 30% beta, so we could get a little bit of additional benefit with the lower numbers there. But we think in general, we could get 8 to 12 basis points in the first quarter of margin expansion just associated with the 4 basis point drag I talked about as well as the December rate hike. Higher in the range if we get a March rate hike. Lower in the range if we don't see another hike until after March.

And the next question is coming from Michael Rose.

Raymond James. Just wanted to follow up on the loan growth. A lot of talk this quarter around competition and what that could potentially do to spreads. Have you guys factored in any of that as you think about your margin outlook and the loan growth outlook?

Yes. So are you talking about the -- say it again, Michael, in terms of loan growth.

Yes. The -- there's been a lot of talk this quarter about -- with the tax reform kind of competing away the profits over time through increased loan competition. Loan growth in the industry is still somewhat anemic. So I just wanted to get your thoughts and see if any of that's in your thought process or baked into your outlook.

Yes. No, look, we have not baked anything that would show any compression of the margin associated with competing out the lower tax rate per yield. It's obviously going to happen in some form or fashion. The competitive landscape is ever-changing, and we -- I'm sure that there will be some competitors that feel as if they can pass back some of their tax saving through loan yields. We feel very confident that we will continue to improve overall margins just through our mix as we look to continue to grow our consumer portfolio, which carries a higher yield. And as we move to some of the growth that we talked about with C&I, where we can get some improved yields there as well. So we're not -- at this point, we don't see anything in the short term that gives us pause. We do think over the long haul, there will be pressure to continue to price loans more aggressively given the market has been fairly soft. Now if we do see some economic benefit with GDP moving up and we see demand hiccup, that may help to mitigate some of that risk. But short term, Michael, long answer to a question is that we're really not concerned at this point.

Okay. And then maybe just for a follow-up on a separate topic for Kevin Howard. It looks like the C&I NPLs picked up this quarter. Can you explain what drove that? And then just broadly, what are you guys thinking around credit trends? Are there any early warning signs in any categories that you guys are taking a closer look at, at this point? Or is it smooth sailing here for the next year or 2?

No. I think that's a little bit of timing. Our C&I credit quality is strong. Past dues were meaningfully down. I think the 16 bps charge-offs, 21 bps there on C&I. The inflows were up a little bit. There was maybe a $7 million, $8 million credit that went into the inflow out of the portfolio, but that's not too unusual. That will happen from time to time. But overall, the credit quality in the C&I book. And as we've grown our small business book over the last 2 to 3 years, and that's been nice and steady growth, we do expect that will pick up a little bit. More of some seasonality, but nothing really in there in the C&I book other than that. It's healthy. And what was -- I'm sorry, what's the second part of your question, Mike?

Just broadly if there are any categories you guys are keeping a closer eye on or any areas you're curtailing lending at this point?

We pulled back, as we mentioned a couple of quarters, and wanted to kind of derisk some of the exposure to the e-commerce side earlier in the year or the retail CRE. And that's been, as you see, about a $150 million in drop throughout the year. That's something we wanted to do, and we feel good about that portfolio. As a matter of fact, it's high-performing. We're just not pursuing a lot of opportunities there. We're still watching a couple of markets from a multifamily standpoint. We really like the multifamily space. But certainly, a kind of couple of markets that we see get overheated, and we're watching there. The leveraged loans, that's a small part of what we do. But there certainly seems to be a lot of competition in the C&I. People seem to be maybe getting a little more high leverage than we're uncomfortable with, and so we have sort of stayed away from those type of moves. That's kind of what we're watching within the portfolio. I don't have -- other than -- right now, I can't put my hand on one particular part. I mean, it's -- we're watching all of it, but I think, overall, the migration is stable. And we think '18, as far as credit performance, will look a lot like what '17 did.

And the next question is coming from Nancy Bush.

Nancy Bush, NAB Research. Kessel, I have to ask you the optimism question. You've always been sort of, I guess, sanguine about business prospects, et cetera, as we went through '17 and we're getting sort of a varying reaction now to the impact of the tax cuts, et cetera. Can you just tell us where you kind of stand on that scale and what you're hearing from your customers?

Yes. I'm probably in the middle. I talked to our team yesterday about -- and cautioned our team about responding to any anecdotal comments. I think it's just early in the game. We're talking to customers. I think everyone is excited about different areas of the tax cut. But has that yet tax translated into increased lending, business activity, investment, we don't see evidence of that. But we are cautiously optimistic that maybe in the back half of the year, that translates into growth that, hopefully, pushes us to the higher end of our range. We've guided 4% to 6% of loan growth. So if that translates into real business activity, maybe we'll see that at the higher end. And if it -- if we see evidence of more than that, we would certainly update our guidance. So again, we're just trying to base our opinion on the facts that we see and hear. And again, I think the mood is good. We just want to see the mood translate to real activity and growth.

Okay. Secondly, you've given effective tax rate for 2018 of 23% to 24%. And most of the industry has been at sort of the 20% to 21% level. Can you just give us the factors that would make your level a bit higher?

Yes, Nancy. This is Kevin Blair. So if you think about the statutory rate that would be including federal and state, it would be roughly 26%. And so ours being at 23% to 24% is the tax-advantaged businesses that we're in, tax exempt lending as well as some of our tax credit strategies. As you may recall, over the last several years, we've been operating with net operating losses, and so we have had a lower tax burden as a result of that. So our focus on initiating tax strategies have not really come into focus, really, until these last couple of quarters as we've exhausted our federal NOLs. And so I think what you'll see is, starting out of the gate, where that 23% to 24%, as we'll be able to utilize some of the tax credit strategies that we've put into place, as Kessel talked about just this quarter. But over time, now that we're through the federal NOLs, you'll see us initiate additional tax credit strategies that can drive down that rate over time.

Okay. And just, Kevin, one other issue. I mean, remind me. Your FTE adjustment, as I recall, is quite small. So there will not be any kind of material impact on NIM. Well, there from the FTE.

We calculate, it's roughly $300,000, Nancy, so it's immaterial.

Right, okay. And just one final question. Mortgage, can you just give us an insight into how the mortgage pipeline stands right now? I know it's seasonally -- should be seasonally low. But any kind of foresight into how you see the mortgage business shaping up this year?

Yes. Look, it was a year for us that we felt like even though the numbers were down 6% in total fee income, we took more than our fair share. When you look at the MVA market, total production, it was down 14%. And we were only down 8%. Now again, that doesn't win us any awards, but we're starting to, again, take share. So as you look into next year, the forecast for next year has production down 6% for the industry. We think we will be up next year, and it's from our ongoing strategies of adding additional mortgage loan originators. And so we expect the first quarter to be up a couple percentage points. And look, there is a headwind. With the 10-year treasury, I think there is 2.60%. But we're going to be able to overcome the reduction in the refinance volume by just adding additional sales staff.

And the next question is coming from Christopher Marinac.

FIG Partners in Atlanta. Kessel and Kevin, I wanted to ask a little bit more about GreenSky and how that continues to develop. And if the pace of purchasing from them will be higher in 2018?

I think it will not be as high as in -- it will not be as much in '18 as it was 2017. Like we've guided in the past, kind of mid-single digits was where we were -- our comfort level. We're already at 4.5%. We just want to look at them together. They're pretty close to the same balances. A little bit more on the SoFi side than the GreenSky. But yes, we continue -- we're going to continue that partnership. Just the purchases will not be as much as they were in maybe -- in 2017.

And Chris, I'll just add. That really is from the overall balance sheet concentration as we try and manage all categories. The relationship is strong. We like the credit. We like the company. We like the performance, the background, everything about it. So it's just simply a matter of balance sheet allocation.

Got it. Are there potential relationships, Kevin or Kessel, that you can grow like this, like SoFi and GreenSky, just to have new additions in the future?

There are, Chris. We are in constant evaluation. None that I can announce this morning. But constant evaluation with our teams to look at similar fintech partners that give us some accelerated asset-generating capability at lower cost and some, hopefully, better yields. So we probably looked at 100 to settle on the 2 that we did, and we probably looked at maybe 100 since then. So yes, there are others. And we stay very deeply involved in our look at those to see who would be good partners for us that would fit our model and our risk tolerance. And so hopefully, more to come on that in the coming months.

(Operator Instructions) And there were no more questions from the lines.

All right. Operator, thank you. Let me close by thanking all of you on the call for your interest in our company. I especially want to thank, though, the entire Synovus team for what I consider to be an incredible 2017. I think the loyalty of our customers, our reputation, our reputation and recognition, our ability to improve the customer experience are all the result of the passion that our team has for service and success. I think -- I really do believe our team members differentiate us now and they will continue to in the future. So big thanks to them. Thank you all for being on the call today, and have a great rest of the day.

Thank you, ladies and gentlemen. That 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.