Synovus Financial Corp.
Q2 2015 Earnings Call Transcript

Published: 21 Jul 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Synovus Second Quarter 2015 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. And the floor will be open for your questions and comments following the presentation. Now, I’d like to turn the floor over to your host, Bob May. Sir, the floor is yours.

[Robert May:]

Thank you and good morning, everyone. During the call, we will be referencing the slides and press release that are available within the Investor Relations section of our website, synovus.com. Kessel Stelling, Chairman and Chief Executive Officer, will be our primary presenter today, with our executive management team available to answer your questions. Before we begin, I’ll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties. And the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendix to our presentation. Thank you. And now, I’ll turn it over to Kessel Stelling.

[Kessel Stelling:]

Thank you, Bob, and good morning, everyone and welcome to the call. As normal, I’ll walk us through the deck and review the highlights and then at the conclusion our usual team is here to answer any of your questions. So let’s go right to the deck page three and review second quarter highlights. As you’ll see from the relation to that second quarter net income available to common shareholders was $53.2 million or $0.40 per diluted common share. Diluted EPS increased 5.2% versus the first quarter of 2015 and 25.5% versus the second quarter of 2014. Net income available to common shareholders was $55.9 million or $0.42 per diluted common share, excluding litigation contingency expense. Our adjusted pre-tax, pre-credit cost income was $103.6 million, the increase of $2.6 million or 2.6% versus the first quarter of 2015, and $4.7 million or 4.7% versus the second quarter of 2014. Credit quality trend remained favorable during the quarter, again strong asset quality numbers overall. Our NPL ratio declined to 0.81% from 0.92% in the first quarter of 2015 and from 1.27% in the second quarter of 2014, while a net charge-off ratio declined 13 basis points to 0.10%. Total loans grew $388.7 million or 7.4% on a sequential quarter basis and grew 5.1% versus a year ago. Also strong core deposit growth, average core deposits grew $889.9 million or 17.8% annualized versus the first quarter of 2015, and 7.4% versus the second quarter of 2014. On the capital management side, we continued to execute our plan to return excess capital to shareholders while maintaining strong capital levels. Since October of 2014, we’ve now repurchased $202.9 million or 7.5 million shares, reducing our total share count by 5.4%. And as you can see later capital ratio has remained strong through the common equity Tier 1 ratio of 10.73%. It will – I’ll now take you through slide four and go into a little more color on the loan growth as I’ve previously mentioned loan growth of $388.7 million, 7.4% annualized sequentially and I’ll give you a little color, and it was really across all loan categories with CRE loans growing $164.3 million or 9.5% annualized, retail loans growing $127 million or 13.6%, 13% annualized and C&I loans growing by $97 million or 3.8% annualized. Only $41 million or 11% of the total loan growth this quarter was from syndications and again Kevin Howard will give a little more color on the loan growth later in the presentation. I’m pleased that our specialty units again reported solid results and continue to gain traction, as we built long-term customer relationships and good customer acquisition in that space. Corporate real estate grew $111 million, the consumer mortgage portfolio increased $91 million or 21.5% annualized. Senior housing grew by $42 million, equipment finance grew by $27 million, a SBA in government guaranteed lending, a strong loan production of $36 million up 74% versus the first quarter, a 15% and 111% versus the second quarter of 2014. Year-to-date production there $57 million up, 84% versus year-to-date 2014 due to second quarter. The net growth in that portfolio was $11.4 million, this is a growing of our company. We think, the third quarter production would be stronger than quarter two, and then our medical office portfolio, a number of our new specialty loans grew by $10 million during the quarter. I’m also pleased to see strong growth across our geographic markets from a market perspective, key strategic markets including Atlanta, Nashville, Tampa, Jacksonville and Columbus. All posted solid loan growth and we continue to expect loan growth in the mid-single digits for the full year. Take you to page five, again a strong deposit story as we said average core deposits up approximately $890 million or almost 18% for the first quarter. We’re really pleased with the continued growth in core deposits. It’s really as well as the improved mix compared to last year. The results from our retail strategy are encouraging, we – I’ve almost achieved our expected 30% increase in retail sales productivity it’s currently 28.3%, following the launch of our retail strategy in the third quarter of 2014, which we’ve talked about really since that. And that included improved sales tools and training for frontline bankers, enhanced digital applications for our retail customers, all of which have contributed to our deposit growth. Our small business deposit balances grew $200 million – grew by $209 million from the second quarter of 2014 and new margin accounts are up 21% over the same period. Transaction migration continues as our customers are enjoying more convenient channels for the routine service transactions with increases in both mobile and ATM deposit usage and decreases in teller transactions, simply put our investments in technology are paying off and we were pleased to see this. The transaction migration also allowed reduction of 13 branches in the fourth quarter of 2014 and overall decrease in teller staffing compared to last year, a couple of updates, Apple Pay launched in early June and our A&B credit card issuance has begun and we’re really – I’m pleased with all of our advances there, transaction accounts DIN now continue to grow average balances for checking account continue to increase, again and I gave you the average core deposit – a period in core deposits increased $698.2 million or 13.7% annualized from the first quarter 2015 to $21.2 billion and $1.66 billion or 8.5% versus the second quarter of 2014. Average core deposits, excluding state county and municipal deposits grew $836.4 million or 18.9% annualized versus the first quarter of 2015 and 8.4% versus the second quarter of 2014. And finally, total average deposits of $22.47 billion increased $851.1 million or 15.8% annualized versus the first quarter and $1.6 billion or 7.7% versus the second quarter of 2014. On slide six, we talk about net interest income and our net interest margin. Our net interest income, which was $203.6 million, increased $381,000 from the first quarter of 2015, the net interest margin 3.15% down 13 basis points from the first quarter of 2015. I’ll take you through that – that decline. Yield on earning assets was 3.61% down 12 basis points versus the first quarter; yield on loans declined five basis points to 4.14% versus the first quarter. The new and renewed yield on loans decreased 10 basis points to 3.70 versus 3.80 in the first quarter of 2015. And again the increased balances of Fed contributed seven basis points of the decline. So of the 13 basis point decline over half of that was just based on increased balances at the Fed, which Tommy will talk about a little later. We do expect the margin to be flat to slightly down in the second half of 2015, from 2Q 2015 level as modest loan yield pressures offset by liquidity deployment, and again Tommy will give a little more color on that. You’ll see the net interest income sensitivity on the chart at the right and again we see 100 basis point increase in short-term rates. The change in our net interest income would approximate 4.2% and on a 200 basis point increase, the estimated increase would be 6.2% in net interest income. Slide seven, we had growth in non-interest income driven by higher mortgage volume and core banking fees, I’ll take you through those numbers. But 2Q 2015 adjusted non-interest income was $66.8 million, up $1.7 million or 2.6% versus the first quarter and $3.5 million or 5.5% versus the second quarter of 2014. Our mortgage unit had another strong quarter, as we continue to benefit from the rate environment as well as strategic talent additions investments in key markets, enhanced product offerings. Our mortgage banking income was $7.5 million or 15.8% increase from the first quarter, reflecting a 20% increase in production volume. And we expect that the mortgage banking income for second half of the year will be similar to our year-to-date level. We also anticipate more aggressive talent additions for mortgage loan originators in the second half of the year, as a result of really our story and improve recruiting and hiring practices, especially in key strategic markets, like Tampa, like Atlanta and like Nashville. And we might presently have a strong pipeline of talent additions and we – our sales group in specific markets is allowing us to generate more secondary income, so we’re encouraged, encouraged there. Core banking fees $32.4 million, an increase of $876,000 or 2.8% for the first quarter of 2015 driven primarily by higher service charges on deposit accounts and bankcard fees. Service charges on deposit accounts were up $661,000 or 3.5% versus first quarter, bankcard fees up $422,000 or 5.2% versus the first quarter of 2015. I mentioned SBA, SBA gains of $1.4 million compared to $1.5 million in the first quarter year-to-date to $2.8 million up, $1.6 million over a year ago. FMS revenues were $19.8 billion for the quarter or 2.8% increase on a linked quarter basis and a 3.7% increase from a year ago. Assets under management now totaled $10.75 billion, reflecting a 4.3% increase from a year ago. And our strategies in the FMS unit are expected to continue to result in growth and revenues and customer relationships through talent acquisition, new lines of business and realigned incentive plans. On slide eight, we talk about our continued progress on expense management adjusted 2Q 2015 best was $166.9 million down $495,000 or 0.3% from the first quarter. I’ll take you through some of those components, employment expense was $94.6 million down $1.9 million versus the first quarter reflecting $2.9 million seasonal decline in employment taxes, partially offset by a $1.1 million increase in insurance expense and higher commissions and incentives. Head count decreased by 26 or 0.6% versus the first quarter and 197 or 4.2% versus the second quarter of 2014, reflecting the continued implementation of efficiency initiatives. And again as we say often, it is a continuous process here and we look everyday for ways to drive down expense. Advertising expense $2.9 million down $578,000 versus the first quarter. We do expect advertising expense for second half of the year to increase from the first half level, based on increased levels of spend related to our branding campaign as well as various product campaigns. Special fees $6.4 million up $823,000 versus the first quarter due to higher attorney fees. And as we guide our 2015 adjusted non-interest expense is expected to approximate 2014 levels of $600 million – give or take $675 million, reflected a continued efficiency efforts in investments and talent and technology. So, if you do the math, second half 2015 adjusted non-interest expense will be higher than the first half, again due to advertising technology IT spend annual merit increases. On slide nine, credit quality again long, long day story of our company, but continues to show rate improvement. On the first graph you’ll see a 10.6% linked quarter reduction in non-performing loans, now $174 million or 0.81% compared to $194 million or 0.92%, for the first quarter year-over-year improvement is 33.1%. NPAs were down 11.1% to $240 million or 1.1% compared to $270 million or 1.28% in the prior quarter and representing via the 34% year-over-year improvement. NPL inflows dropped 17.9% compared to the first quarter and we expect both NPLs and NPAs to continue to decline at a modest pace for the remainder of 2015. Graph on the top right shows the credit cost of $12.8 million, down $2.9 million or 18 – 18.2% from $15.7 million in the first quarter, and representing a 24.3% year-over-year improvement. Provision expense was $6.6 million compared to $4.4 million in the first quarter. Other credit cost declined 45.2%, linked quarter is $6.2 million from $11.3 million in the first quarter of 2015. We’ve previously got the credit costs to be $15 million to $20 million per quarter. We now believe that they will be at the lower end of that range and possibly even better. Bottom left graph shows the net charge-offs for the second quarter of 2015 were $5.3 million, 0.10% for the quarter, 13 basis point improvement from last quarter. We feel confident that these charge-offs will end in 2015, below our previously guided range of 30 basis points to 40 basis points due to continued significant credit improvements we’ve experienced. Graph on bottom right shows past dues greater than 30 days. Past dues remain at low levels, currently at 24 basis points. And it’s also worth noting there are 90 day past dues, are only 2 basis points. Again, we’re very pleased. We continue to experience significant improvement in our key credit metrics, while also reducing our credit cost. On slide 10, we’ll talk a little about capital ratios and the strong leverage review. Some of those [indiscernible] even as reminder the second quarter of 2015 capital ratios include the impact of $50.3 million in common stock repurchases. The first quarter of 2015, the capital ratios include the impact of $59.1 million in common stock repurchases. So, the 2Q, 2015 common equity Tier 1 ratio is 10.73%. All capital ratios except TCE or Basel III transitional ratios for first quarter of 2015 were based on Basel I rules. The Tier 1 capital ratio at 10.73% versus 10.80% in the first quarter of 2015. Total risk based capital 12.18% versus 12.65% in the first quarter of 2015. Leverage ratio 9.48% versus 9.66% in the first quarter of 2015. And again, TCE ratio 10.13% versus 10.43% in the first quarter of 2015. Our second quarter, Basel III CET I ratio was estimated at 10.09% on a fully phased in basis. And then just a quick recap on our share repurchase, since October 14 through July 20, yesterday, we repurchased $202.9 million or 7.5 million shares, at an average repurchase price of $26.94, reducing the total share account by 5.4%. So we have $47.1 million remaining, in remaining repurchased authority pursuant to the share repurchase program that we had previously approved and announced. So before we go to questions, just a little bit about our go forward story. We’ve reviewed the financials in detail, another one of the highlights of the quarter was our recent recognition is one of America’s most reputable banks by American banker magazine reputation institutes. In other words, this was one of only three banks to be ranked in the top 10 among customers and non-customers, and we were specifically recognized for our leadership presence and our deep commitment to our few communities. I mean, we’re very proud of that coming out of this long financial crisis, there is really no better validation than our local leadership, our relationship banking delivery model works in this. And our ability to turn to a position of strength post crisis and continue to report – improve performance core [indiscernible] where we believe is driven primarily by the way we were able to and are able to personally connect with our customers in our local markets. Looking ahead over the last half of the year, we expect our brand [indiscernible] to continue to drive new customer acquisition. Our realignment of talent with an increased focus on reaching out the targeted customer segments continues to payoff, as we see an increase in referrals and need to expand the relationships with existing customers and really in our ability to reach new and different kinds of customers. The growth in our customer base is expected to generate loan growth in line with guidance, as well as continue core deposit growth. As we said earlier, we’re very pleased and our retail sales productivity continues to improve with 28.3% increase over 2014. We’re already very close to our 2015 year-end targets of a 30% improvement or continues to enhance the way we deliver products and services to customers as we continue to invest in each channel technology and branches on, so we just optimize the customer experience while maximizing efficiencies. We feel good about our efforts to boost the income, we’ve had an aggressive out reach for our family asset management team, which in other functions is a traditional family office serving multi-generational wealth clients, and we create strong partnership bankers that have created a great pipeline with potential growth in the second half of the year. We’ve launched new business lines through Synovus trust. And again, I’m pleased with that strategy. We’re planning to aggressively hire mission-based [indiscernible] originators and retail brokerage consultants by year-end. And finally, as we wind down our current share repurchase program, we’ll continue to provide updates on the next steps in our ongoing capital management plan. So in closing, we’ve reported along the second half of the year, we are confident about our growth plan. We believe, it provides a right road map for further accelerating performance. No doubt that there continues to be headwinds, putting pressure on the entire industry. That team is clearly demonstrating its ability to overcome the challenges and find solutions that will allow us to win relationships and new business from customers and prospects a variety of segments. So with that operator, I will pause and we’ll be happy to take questions from the callers on the line.

[Operator:]

Thank you very much. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Okay, we’ll take our first question from Kevin Fitzsimmons with Hovde Group. Your line is live.

[Kevin Fitzsimmons:]

Hey, good morning, everyone.

[Kessel Stelling:]

Good morning, Kevin.

[Kevin Fitzsimmons:]

Kessel, one – one question on the margin, I understand a big piece of that decline was from the increased balances of the Fed, but just trying to dig a little deeper on why that all occurred, was that – is this really part of a more deliberate strategy ahead of rising rates to lock in more low cost funding even though there is – there is not the place to put at the work near term in terms of the loan growth or is it more just to factor the environment that just a loan growth is not – not coming in as much as you would hope relative to the – to the deposit growth? Thanks.

[Kessel Stelling:]

Yeah. Kevin, right question. It really wasn’t any kind of bad or strategy relates to rates. It really was a strategy. It relates to core deposits and we said going back towards the end of last year, that we would fund our loan growth this year with core deposit growth. Our loan deposit ratio was at the – high end where we thought it needs to be and certainly started this year with a strong focus on – again relationship banking and core deposit growth and account acquisition, and our retail strategy is having great success. Our bankers are having great success. And so, yeah, the deposit machine has maybe out stripped the loan machine through the first half of the year. But we believe it’s a good solid strategy and it’s really a validation of our post-crisis model. So it wasn’t so much a bet on rates as it was again a deliver strategy to increase that focus, increase the productivity of the retail side, and the result of core – strong core deposit growth we’re very pleased with. As it relates to balances, Tommy will talk a little bit more about that, I’m sure he’s going to get a margin question. So, I’ll let him kind of comment on that when that question comes up.

[Kevin Fitzsimmons:]

Now I guess, I’m just wondering if you guys are being just a little conservative on this, or is there a chance the margin could improve over the course of the back half of the year as you put this excess liquidity to work or is it just that the – the offsetting loan yield pressure is just going to offset that?

[Kessel Stelling:]

Yeah, that’s probably a great transition to the question I thought Tommy would get. So I’ll let Tommy address that.

[Thomas Prescott:]

Yeah, Kevin, it sounds like the – the question up. So I’ll just kind of take your view into the third quarter and our outlook on that, and that might help describe where we’re headed, you know we have had a tremendous deposit outcome and as Kessel mentioned a good problem to have and – but the impact on the margin is truly a timing difference and it will settle at some point. You got to keep in mind that the impact on the margin of excess liquidity does have the same impact as the loan yields and the pressure that’s on investment, securities and the cost of funds, and so forth. So it’s – its bad optics, so it doesn’t have the same impact on net interest income, which you all know about, I know. So as we move into the third quarter, we’ve guided flat to slightly down, and we’ve done that because we believe there will be some continuation of loan yields. We’re trying to grow loans in a very competitive market out there. And then, so the rest of that – that’s the biggest part of the core equation. The rest of it will be, what’s excess dollars at the Fed. And we believe that – and our intention will be to pull some of that excess liquidity down, we’re continuing to grow deposits, but probably not at the same pace that you’ve seen. And we’ll also deploy excess liquidity, our funding loans, adding securities and our intention would be to bringing the liquidity rate, as soon as we can, the excess liquidity down to $1 billion or less, all the way in the range of $1 billion down to $700 million, don’t know if all that can happen in the third quarter, but directionally that’s where we’re heading.

[Kevin Fitzsimmons:]

Okay.

[Operator:]

Okay. We’ll take our next question from Ebrahim Poonawala with Merrill Lynch. Your line is live.

[Ebrahim Poonawala:]

Good morning guys.

[Kessel Stelling:]

Good morning.

[Ebrahim Poonawala:]

I guess, first quick question, Kessel, just in terms of loan growth, you provided good color in your prepared remarks, I think as we look at your guidance for mid single digit and the 7.4% you put in the second quarter, should we think about third quarter given where the economies and your comments earlier, that we are probably like a 2Q growth run rate would be sustainable at least looking out into 3Q, if not through the second half of the year?

[Kessel Stelling:]

I think, I think we believe our – our guidance is still good guidance, if you go back to the first quarter, we obviously were a lot softer in the first quarter for us, obviously there are timing differences. So we were pleased with the growth in the second quarter. And so on a year-to-date basis, we’re right within our guidance. And based on hyper competitive rates, which we often back away from, and other competitive bankers in the market, we still believe our guidance is solid, but are not raising that – that’s not to say any given quarter might be less or greater than 2Q, but no revised guidance towards the back half.

[Ebrahim Poonawala:]

Understood. And just a separate question or a follow-up on the net interest margin. The cost of deposits went up, I’m assuming part of that is your promotional approach in getting deposit growth. If I’m not sure if you or Tommy can talk about in terms of what we should expect in terms of cost of deposits going forward and if you’re at all seeing funding pressures from other banks within your markets?

[Kessel Stelling:]

Yeah, when we really started up the deposit machine back in late last year, we – we had campaigns, products rising, incentives focused with the frontline team members to make sure we get that – deposits was important as loans. So, and we were willing also to have some promotional items, and but I could see us backing away from that in the second half of the year. And I think there’s opportunity for stable and maybe later in the year possibly some downward movement in the cost of funding. That’s the way we see it.

[Ebrahim Poonawala:]

That’s helpful. Thanks for taking my questions.

[Kessel Stelling:]

Thank you.

[Operator:]

Okay. We’ll take our next question from David Bishop with Drexel Hamilton. Your line is live.

[David Bishop:]

Hey, good morning, Kessel.

[Kessel Stelling:]

Good morning, Dave.

[David Bishop:]

Hey, I think you mentioned during that the preamble, the 28.3% growth in retail – like of retail accounts or retail products. What is that specifically referring to, is that the number of accounts per household, the growth in those fees, just get – trying to get some color in terms of what you’re particularly measuring there?

[Kessel Stelling:]

Yeah. It’s really just unit sales of deposits or loan products by FTE and the branches. So obviously as sales go up, we get lift there and as staffing goes now. But it’s – we’re just measuring the unit sales per FTE in a branch system.

[David Bishop:]

Got it. And then noted the good growth in terms of the commercial real estate loan portfolio there. Any commentary in terms of the length of projects as sort of the tenure of the size of the loans you’re willing to make that moved up a little bit. Just maybe get some color in terms of what you’re seeing in terms of that market that’s adding some resilience?

[Kevin Joseph Howard:]

Yes. David, this is Kevin. Obviously we saw the primary growth in the investment real estate that was pretty mixed, multi-family some of the construction trials we had there, loans we had put on the books in the fourth quarter and first quarter starting to draw up, that drove some of the growth. We did some growth in office, some refinance there, not as much construction, very little construction on office, where we’ve had some opportunities and some refinance coming out of the permanent markets and really good strong credit there. It’s actually some areas where we haven’t seen a lot of growth in, hotels and shopping centers, not a lot there but some growth. So [indiscernible] I will ask it with a pretty meaningful, still has the residential book shrink a little bit. So the net growth of commercial real estate was good, driven by the which has been strategic for us to grow the income producing side.

[David Bishop:]

Great. Thank you.

[Operator:]

Okay. We’ll take our next question from Jefferson Harralson with KBW. Your line is live.

[Jefferson Harralson:]

Hi, thanks. Am I ask about the Shared National Credit exam, are the results there in the numbers today or they coming in third quarter or is there anything interesting coming out that exam that changes things for you guys.

[Kevin Joseph Howard:]

Jeff, this is Kevin again. We got the results as I think most everybody did in the middle of June and we went ahead and ran those. We had probably three or four downgrades. They looked at all of them. I think it’s $1.8 billion portfolio. So we were pretty pleased with the results and we did or had run down and absorb that during the second quarter. And with no really industry wide, I think all four of them were reported from industry, so really no concentration in that work.

[Jefferson Harralson:]

All right. And my follow-up with asset sensitivity, could you guys become more asset sensitive of this quarter? I don’t have the formal presentation in front of me, but with all the cash it seems like you should be getting a lot more asset sensitive or are there some offset somewhere?

[Thomas Prescott:]

Jefferson, this is Tommy. It’s similar to where we’ve been still at a very strong asset sensitive level, we slightly lowered than in the first quarter as we remix some of the balance sheet and so forth, but still a good standing and waiting to see the actual movement in the excess in the rates.

[Jefferson Harralson:]

And you kind of said about, how much excess cash do you have and I’ll pass it to the next person, how much excess cash is there?

[Thomas Prescott:]

We got – you’re talking about cash that’s in the Fed...

[Jefferson Harralson:]

We’re not – not really just at the – at the Fed and all cash accounts to redistribute into [indiscernible] securities at some point?

[Thomas Prescott:]

Yeah. We were at $500 million.

[Jefferson Harralson:]

Okay. All right. Thanks, guys.

[Operator:]

Okay. We’ll take our next question from Tyler Stafford with Stephens. Your line is live.

[Tyler Stafford:]

Hey, good morning, guys. Good morning.

[Tyler Stafford:]

[indiscernible] just my main two questions, just curious on updated thoughts about M&A from here, how are you thinking about it? Do you feel like we’re at a point now where you might consider small deal or is it just still a little bit too early?

[Kessel Stelling:]

Well, we’ve already talked about our focus, which is still internal and it is every day and we’re executing our updated five-year plan. We’re pleased with the continued financial performance. We said – really as soon as we exit the [ph] TARP and has we’ve been very clear about capital plan and use of excess capital that we thought you want to return excess to our shareholders. That said there is an active market out there. We sometime refer to here the book of the week club in terms of deals that are floating around, but that is not our focus. So, could there be something that might get our interest, there could be, but it would have to be something that strategically was again at the right time, at the right price, in the right market that was just clearly in the best long-term interest of our shareholders. So it doesn’t guide our everyday thinking, but we’re certainly aware of opportunity out there, as I’m sure most of our competitors are as well.

[Tyler Stafford:]

Okay. And then, I know you talk more broadly about expenses for the back half of the year, but specifically on I guess the professional fees, I know the presentation called out some heavy attorney fees that drove that line item up this quarter with the four plus no end litigation expenses quarter. Could we see that line item tail off or would that be elevated just given the litigation?

[Kessel Stelling:]

Yeah. Given any given quarter, you’re going to see some movement – moving around, but over the year of those two categories are ones we expect to continue on a year-to-year basis in a positive way for us.

[Tyler Stafford:]

Okay. That’s it from me, guys. I appreciate it.

[Kessel Stelling:]

Thanks, Tyler.

[Operator:]

Then we’ll take our next question from Nancy Bush with NAB Research. Your line is live.

[Nancy Bush:]

Good morning. How are you?

[Kessel Stelling:]

Good morning.

[Nancy Bush:]

Kessel, could you just talk a little bit about competitive conditions in the Atlanta market, I mean that’s been a market that I think is just now sort of beginning to come out and I’m wondering if new entrants are flocking into the lending market there, and if you could just also discuss demand there?

[Kessel Stelling:]

Yeah. I would say strong to both, new entrants, competition and demand. I think our Atlanta bank is doing very well, and I’d say our Atlanta bank and our entire team in Atlanta, we have a strong core team at Bank of North Georgia, where we have our traditional retail business commercial, strong private banking, great success stories coming there from private banking, private wealth and partnerships, to have our company, our middle market of large corporate teams, corporate real estate all of that is changed, are working well in Atlanta. But yeah, we see a lot of competition there, there are some new entrance and certainly not to be dismissed, but competition is from those core main stream Atlanta banks that have been there for long time and sort of SaaS deal, we run into the community banks. I don’t know larger dealers will run into the regional or superregionals or in some cases the national players. So healthy market, healthy competitive competition, Kevin I don’t know, you might have little more color on the types of transactions you’re seeing coming out of Atlanta.

[Kevin Joseph Howard:]

We’re seeing a little [indiscernible], mortgage had a lot of success on the mortgage side, the commercial real estate side has been really good. We’ve got lot of good customers who got through the cycle and are building again where we’re actually doing some home building in certain segments there mainly driven by the north side of Atlanta and the job growth is also chartered in Atlanta. It’s our largest by far any those kind of indicators. We’re seeing from the REIT home value re-sales and how our data shows about 200,000 new homes plus 300,000. It’s – with the exception maybe some sales then on the east side a little bit, I would say Atlanta has pretty fully recovered on the residential side. So we’ve been very pleased with not only the type of quality growth but the mix has been pretty good as well.

[Nancy Bush:]

Okay. Tommy a question for you. I just want to make sure I understand this. On your weight sensitivity chart, you show short-term increase of 100 bps, gives you up 4.2% in net interest income, I believe. Is that – I just want to make sure that’s a short-term that’s not across the curve, and therefore does that mean with 25 bps that we’re expecting in September, December whenever it comes. You get proportionally 1% or whatever, could you just go into the mathematics there a little bit?

[Thomas Prescott:]

Sounds like you described it well, it’s a one year ramp just like the 200 bps would be, just bigger [ph] bites on the 200 bps.

[Nancy Bush:]

Okay. Thank you.

[Operator:]

Okay. We’ll take our next question from David Alexopoulos with JPMorgan. Your line is open.

[Steve Alexopoulos:]

Hey, guys it’s Steve Alexopoulos.

[Kessel Stelling:]

Hi, Steve.

[Steve Alexopoulos:]

I wanted to start on capital, how much excess capital do you guys estimate you currently have?

[Kessel Stelling:]

Steve, I won’t put a number on that, we felt like the 250 we announced was the right number at right time for us and we needed to execute that before we signaled any additional and excess capitals in the eyes of us and the eyes of regulators and the eyes of those on this call. Sometimes you’re going to be three different numbers, I really rather just rest it by saying we continue to look at our capital plan, evaluate the results of our divest process, really in all of our internal capital planning. And to the extent, we can again comment on additional capital actions which is probably where you’re headed and we’ll do that at the appropriate time.

[Steve Alexopoulos:]

Okay. Kessel, following up on your earlier comments that you’re not prioritizing M&A. Is there any reason we shouldn’t expect buybacks to continue at some pace going forward?

[Kessel Stelling:]

We believe that current buyback program has been very effective and we’ve been pleased with the execution of that. So, from a mathematical standpoint, I don’t’ want to disagree with your theory. We believe there are a number of different ways to manage capital efficiency to share repurchases – we’ve led with that and so absent factors that are really – wouldn’t be aware today. I’m not going to disagree with your basic premise, so I just wouldn’t want to get out ahead ourselves. Again we were very clear that we wanted to execute on the original plan and once we have done that towards the end of that, which we’re obviously hitting the last quarter, we’ll comment on additional capital actions as we see appropriate and we were able to do that.

[Steve Alexopoulos:]

Okay. Fair enough. May be to switch gears to expenses for a minute. Just looking at the expense guidance that you gave, how much will you spend on IT and technology in 2015 and is that ahead, when we should be thinking about for 2016 as well?

[Kessel Stelling:]

Yeah. Well, what we’ve said without breaking it down by component that the back half – that we still believe we’ll be at 60, 75 run rate so, you can do that math to get a number for the back half. And that’s really not just technology, IT, it’s advertising, which quite frankly, I’m anxious to spend. I think we had a very, very effective launch of brand campaign. We got a lot of feedback. We’ve been somewhat quiet and we want to make sure that we’re back with the second phase of that campaign, so it will be a mix of technology, IT investments. We continue to again introduce tools to make customer experience better. But it also be advertising and investment in people in the back half, so that’s why we just – again without breaking that back there. We haven’t gotten to 2016 guidance publically. We are clearly looking at our 2016 run rates. You have to find that right balance of investment and expense cut and a point we think we can guide is. We’ll certainly do that, but I will tell you that there is certainly a bias towards driving expense at our model. I mean, everything we do around here.

[Steve Alexopoulos:]

Okay. Thanks for taking my questions.

[Kessel Stelling:]

Thanks, Steve.

[Operator:]

Okay. We’ll take our next question from Jennifer Demba with SunTrust. Your line is live.

[Jennifer Demba:]

Thank you. Good morning.

[Kessel Stelling:]

Good morning.

[Jennifer Demba:]

My question is on expenses. Kessel, can you give us an update on how you are thinking about the corporate real estate consolidation and in any further branch consolidation, are you thinking about over the next 12 months to 18 months?

[Kessel Stelling:]

Sure. This is [indiscernible] corporate real estate as a whole later than ongoing. We have a very small dedicated group of which I’m a part of, maybe I’m not part of dedicated to these. But I’m part of the group that meets on a regular places to look at ways to drive occupancy cost at our model. We talk publically about Atlanta just because that’s the biggest opportunity even though, there is also our biggest probably opportunity to growth because of our acquisition model there. We do think there is an opportunity to reduce our overall square footage there and get more efficient, and while doing that create branding opportunity by getting bankers together and both our core bank teams and our specialty groups in Atlanta, that in some cases don’t know each other too well and so we’d love to do that. That overall corporate real estate effort though is not limited to Atlanta. We’ve been very aggressive here in Columbus about how we have trying to better utilize real estate and lease out excess capacity. I mean, we’ve said we’ve used professionals to do that. We’ve done the same thing and continue to do it in Birmingham. And really across the footprint, we look for ways to get more efficient with our space there. From a branch standpoint, we mentioned what we closed in the fourth quarter and with the introduction of technology and then this overall customer behavior, we’ve certainly seen teller transactions continue to decline, and we’ve adjusted our teller staffing model to address that. But we will more opportunities for branch closures, and it’s an ongoing process. [indiscernible] leave that effort, we discussed it. I think at least as early as yesterday in front of the lands in which we looked at branch activity and short-term versus long-term. I mean, look for opportunities to get more efficient there. So nothing to announce now, but over the next 12 months to 18 months, quite frankly, I wouldn’t mind opening a branch or two or more. But it would not look like the branch, if I asked, it would be 1,200 square feet to 1,800 square feet and use a lot more technology. And while we’re doing that, we do have to look for ways to take out of our footprint some of the larger less efficient ranges. So net I believe we would certainly have fewer branches, 12 months to 18 months from now.

[Jennifer Demba:]

And Kessel, just to follow up, where would you like to add scale in terms of your branches with market?

[Kessel Stelling:]

Well, I mean, I think Atlanta is a great opportunity. Our market share there is good, but it’s small relative to the pie. We think we’ve got a great team there. I think you know our team led by Rob Garcia, Bank of North Georgia and Specialty Group. And so as such a big market, as you know, when we call – when we define Atlanta, we’re really – our Atlanta footprint goes almost to the Alabama border on the West, [ph] Covington on the East, Jasper Georgia on the North and maybe Noonan on the South and I may have missed somebody. But there are some good opportunities in Atlanta, where we believe, maybe with a little more density, not a big branches, but using kind of a hub and SPOC system, that we could possibly grow some there. We would just – we’d love the way magic wand and make all of our 7,000 square foot branches go away, and replacing with new and you can’t do that overnight, but that’s overall – that’s the direction we’re headed.

[Jennifer Demba:]

Okay.

[Operator:]

Okay. We’ll take our next question from Brad Milsaps with Sandler O’Neill. Your line is live.

[Brad Milsaps:]

Hey. Good morning, Kessel.

[Kessel Stelling:]

Good morning, Brad.

[Brad Milsaps:]

Hey. You guys have been doing a great job on improving credit, kind guided total credit costs and $15 million to $20 million. You’ve done better than that over the last few quarters. Do you think you’re at a better run rate now for short of provisioning and OREO costs going forward or I know a lot will depend on loan growth, but just kind of curious, in your thoughts there around ongoing credit costs?

[Kevin Joseph Howard:]

This is Kevin, Brad. Kessel, mentioned it on the front-end of the call that we are guiding towards the lower end. We want to keep our guidance in place to 15 to 20. We do believe it has a chance to be below that guidance. We don’t stay conservative right now and stay in that range, but there is certainly, we’re optimistic and I think, there’s opportunity to be below that. And I think this last quarter reflect it and then a lot of it is, we defiantly had to add our provision for loan growth and that’s a good credit cost to have. But I’ll tell you that legacy problems have [indiscernible] faster and more efficient than we thought and that’s probably, where we’ve been under our guidance and our hope is to continue that same trend going forward the rest of the year and be at the lower end or below the credit guidance that we issued.

[Brad Milsaps:]

Great. Thank you.

[Kevin Joseph Howard:]

Thank you.

[Operator:]

Okay. We’ll take the next question from Christopher Marinac with FIG Partners. Your line is live.

[Christopher Marinac:]

Thanks, good morning. Kessel, given what do you said about the buyback a few questions ago. I just was curious on to what extent the stock price has helped your decision making in sort of speed and timing in past quarters and is that a factor going forward?

[Kessel Stelling:]

Yeah, Chris. I mean, we’re glad we kind of front-end pushed it like we said, we were going to do and we discussed the ASR we executed I guess last year and so the average price of $26 plus has been – I think, we executed very well with the help of our friends in the investment community. So we continue to watch that price and I don’t watch it every day in terms of what we’re buying back, but we’re trying to be smart about it. And again, we think, it’s still been a very good buy for our shareholders, who see us full 7.5 million shares all from the market those average prices.

[Christopher Marinac:]

Okay. Great. Thanks for that color. And just the separate question for – I guess for Kevin, just about the SBA business and is there an opportunity for you to do more. And then maybe just as a reminder, to remind us on what you do on SBA and kind of where your sweet spots are?

[Dallis Copeland:]

Yeah, this is D. Let me take that from SBA standpoint. We have – there was an intention of investment at the beginning of the year in SBA. We for the first half of the year on production standpoint almost doubled what we had done for the first half of last year. In addition to that, same thing we had almost doubled in fee income. The way we do SBA, I think is an important thesis. We do within our footprint currently that we engage the local bankers, but yet we have designated SBA perhaps to help those bankers and the footprint. So it is widespread across the entire footprint today and that is how we’re originating those loans. We expect the second half to be lot closer to the first half of this year as opposed to dropping off. We do not think it’s an anomaly for the first half.

[Christopher Marinac:]

Great D. Thanks very much for that info.

[Dallis Copeland:]

Thanks Chris.

[Operator:]

Okay. We will take our next question from Emlen Harmon with Jefferies. Your line is live.

[Emlen Harmon:]

Hey, good morning, everyone.

[Kessel Stelling:]

Good morning Emlen.

[Emlen Harmon:]

Some of your peers have been adding duration in anticipation of a curve flattening as the short-end increases. Just given the liquidity build, would that be prudent for you guys just giving your balance sheet structure and how are you thinking about that?

[Thomas Prescott:]

This is Tommy up. I think we’re well positioned, you know for that curve and honestly when you go back through the place we’ve been and you’re assuming that the freight changes, it’s what about bad debt to take for that for long-term, nobody really knows when that will actually change and I think we’re well positioned as we stand.

[Emlen Harmon:]

Got it. All right. So no point to add duration. And then, can you maybe just give us a little bit of color on the loan categories that are driving – that most driving the loan yield compression. Just kind of curious if it’s a competition effect versus a mix effect, adding some kind lower yield in categories?

[Dallis Copeland:]

Yeah, this is Dave, what I would say on the NIM compression is mainly across the board its highly competitive and all of the different segments with which we are competing, even the variable rate, corporate debt has seen tremendous pressure, as well as the community and even the retail side. So I would say we see pressure across the board, and that’s one of the things we have to watch on a daily basis to make sure we’re selective to do what’s profitable for us and the bank folks that we think we can build long-term relationships with.

[Emlen Harmon:]

All right. Got it. Thanks for taking the questions.

[Operator:]

Okay. We’ll take our next question from Chris Spahr with CLSA. Your line is live.

[Chris Spahr:]

Thank you, good morning. I’m just wondering what is the funding cost for your core deposits this quarter, and how does it compare to prior quarters?

[Kessel Stelling:]

It was up 1 basis point.

[Chris Spahr:]

That is of – that is – I see that’s on your – I guess, I’m trying to relate this to what you have on your deck versus what you might have in your supplement. So it is up 1 basis point this quarter?

[Kessel Stelling:]

That’s correct.

[Chris Spahr:]

Okay. And where do you think it could go, I know this is ties into some of the questions that we had earlier in the call, but where do you think this could go over the next few quarters? For the core deposits, the one that you talk about being up so much this quarter?

[Kessel Stelling:]

Yeah, I think it’s flat to possibly down a little later in the year.

[Chris Spahr:]

And that is in the context of also just your interest rate sensitivity and what the Fed may do as well?

[Kessel Stelling:]

That’s correct.

[Chris Spahr:]

Okay. And then, I didn’t fully understand your interest rate sensitivity question that came up earlier because it does appear that it is down on a quarter-over-quarter basis. And if it’s not necessarily avoided to extended duration, can you just tell me what the drivers are on the lower sensitivity quarter-over-quarter?

[Kessel Stelling:]

Yeah, the lower sensitivity was the – that was just change in the mix. We had a more money market accounts than CDs that was a factor. And just the fact that we had greater level of deposits, was a factor.

[Chris Spahr:]

[indiscernible] sort of the type of deposits as well.

[Kessel Stelling:]

Correct.

[Chris Spahr:]

Okay. But it’s not on the asset side, it’s mostly on the liability side?

[Kessel Stelling:]

Mostly on the liability side.

[Chris Spahr:]

And there is no derivatives or off balance sheet items, that it might be attributed to any of that action as well?

[Kessel Stelling:]

No. None.

[Chris Spahr:]

Okay. And then – all right. And then, I think actually that’s all my questions. Thank you very much.

[Kessel Stelling:]

Thanks, Chris.

[Operator:]

Okay. We’ll take our next question from Michael Rose with Raymond James. Your line is live.

[Michael Rose:]

Hey. Good morning, guys. How are you?

[Kessel Stelling:]

Good morning.

[Michael Rose:]

Hey. I have just couple of quick questions, just to ask the capital question one more time. Are you comfortable continuing to payout a 100% earnings now maybe through the next year or so?

[Kessel Stelling:]

Yeah. Again, Mike, I don’t want to break [indiscernible] earnings. We have a live audience on this call. So I’d like to say that we’re going to continue to look at certainly earnings or part of the equation overall capital levels or the part of the equation concentrations or part of that equation. So – so without getting specific about what percent of what, I would like you to say, we’re going to be very mindful of how important efficient capital management is to us and we’ll continue to try and speak to that when appropriate.

[Michael Rose:]

Fair enough. I had to try. Just as a follow up. If we assume that may be rates are lower for longer and maybe we don’t get a rate increase in the back half of the year. How would that cause you to may be revaluate your expense base to adjust may be a lower for longer type of environment? Thanks.

[Kessel Stelling:]

Yeah. You know what, we’re not waiting. If we – I don’t waited for rate to come up, we saw the much higher run rate. We think whether rates go up in the near-term or not, driving expense out is critical to us and really to every player in our industry. May be you add more on the production side as earnings increased, but we’ve been very mindful that when we add people, it’s got to generate revenues. We need to look for ways to get expense out. So certainly we would benefit from rising rates, but it’s not causing us to pause on expense initiatives, in fact Steve has been prepared for this call yesterday, we were in other meetings, talking about ways to drive expense out and rate movement doesn’t add to or tamper our enthusiasm there. We know it’s got to be done. So we’ll continue to do that.

[Michael Rose:]

Okay. Because, obviously you guys have done a good job taking out expenses out of the system. But I guess relative to maybe a few years ago, what would be the leverage that you might pull relative to some of the low hanging fruit from a couple of years ago?

[Kessel Stelling:]

Hello

[Thomas Prescott:]

I’m sorry. Is there another question in here.

[Operator:]

Okay. I’m showing no further questions in the queue. I’d like to turn the floor back to your host for any closing comments that you’d like to make.

[Kessel Stelling:]

Okay. Thank you, David. There was a follow-up in there, I’m sorry we missed that and we’ll certainly follow that. So you just send us an e-mail if you had a follow-up question. But I do want to thank all of the – certainly the caller, the analyst, the questioners, we thank and respect very much what you do and how you follow our company. So thanks for your attention this morning to our shareholders, to our team members who can call in because of their interest in our company not just short term but long term. Thank you all for all being on the call. We’ll continue as management team and leadership team to execute on this plan we described and I’m excited about the back half of 2015 and 2016 as we continue to execute to drive improved financial performance. So thank you all. Hope you all have a great day.

[Operator:]

Thank you very much. Ladies and gentlemen, this concludes today’s presentation. You may disconnect your lines and have a wonderful day. Thank you for your participation.