Jul 18, 2017
Executives
Bob May - Senior Director, IR, and Capital Management Kessel Stelling - Chairman and CEO Kevin Blair - EVP and CFO Kevin Howard - EVP and Chief Credit Officer
Analysts
John Pancari - Evercore ISI Ebrahim Poonawala - BofA Merrill Lynch Jennifer Demba - SunTrust Robinson Humphrey Casey Haire - Jefferies Jared Shaw - Wells Fargo Securities Brady Gailey - Keefe, Bruyette and Woods Emlen Harmon - JMP Securities Nancy Bush - NAB Research Christopher Marinac - FIG Partners Jake Civiello - RBC Capital Markets
Operator
Good morning, ladies and gentlemen, and welcome to the Synovus Second Quarter 2017 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host, Bob May. Sir, the floor is yours.
Bob 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 of our presentation. Thank you, and now I’ll turn it over to Kessel Stelling.
Kessel Stelling
Thank you Bob and good morning and welcome to everyone participating on our call today. As usual, I’m going to walk us through our earnings deck and then I have our Executive Team with me to answer any and all questions that you might have.
Before we get into the deck, you’ll see just a very solid quarter for us, performance that really does show progress towards our stated intermediate and long-term financial goals and objectives that we are really pleased with the quarter. And we’ll start on Slide 3 to show broad-based improvement in many of our key metrics.
So if you’ll just go to Slide 3 with me. You’ll see we reported net income available to common shareholders of $73.4 million, which represents almost 27% increase versus the second quarter 2016.
Diluted EPS was $0.60, up 6% versus first quarter and up almost 30% versus the second quarter of ’16. Our ROA increased to 1%, improving 4 basis points sequentially and 17 basis points versus a year ago.
Our ROE rose above 10% to 10.34%. And we’re also pleased to see that our return on average tangible common equity increased 229 basis points versus the second quarter of ’16 to 10.62%.
From a balance sheet perspective, we continue to lever balanced growth, total average loans grew $1.42 billion or 6.2% versus a year ago. Total average deposits grew 1.38 billion or 5.9% from a year ago.
Along with the balanced loan growth, we continued to see favorable credit quality metrics with NPA ratio of 0.73%, declining 8 basis points from a year ago. We’ve also experienced continued improvement in several profitability measures that I’ll highlight.
Total revenues were 319.8 million, up 15.7 million or 5.2% sequentially and up 10.5% versus the year ago with net interest income increasing 13.4% and adjusted non-interest income increasing 3.4%. And again, with a disciplined approach to pricing, we’ve expanded the net interest margin to 3.51%, up 9 basis points sequentially and up 24 basis points versus a year ago.
And lastly with our focus on driving positive operating leverage, the efficiency ratio declined below the 60% mark to 59.90%, down from 64.84% the previous quarter and 65.11% a year ago, so great improvement there. Moving to Slide 4, I want to provide a little more color on loan growth this quarter.
The amounts on the graph represent period-end balances. Loan growth on a sequential quarter basis was 172 million or 2.8% annualized.
C&I loans grew $10 million during the quarter. That was driven primarily, it was a $66 million increase in the owner occupied portfolio, a $42 million increase in small business loans, and $25 million increase in the life insurance premium financing loans from our Global One division.
The solid growth in those categories was largely offset by approximately $100 million decline in revolving commercial line utilization. For the quarter, consumer loans grew 207.2 million or 16.3% annualized with consumer mortgages increasing 120 million or 20.5% annualized.
About 52 million of the growth was driven by production in physician loan portfolio, which is a strategic growth initiative. We also saw solid growth in our lending partnerships growing 107 million in the second quarter of ‘17.
And again, in keeping with our focus on diversification and risk mitigation, CRE loans declined 45 million or 2.4% annualized. For the quarter, retail shopping centers as well as land and development loans experienced approximately $40 million decline in outstanding balances.
On a year-over-year basis, loans grew 1.37 billion or 5.9%, C&I loans grew almost 800 millions, 796 million to be exact or 7.3%, consumer loans grew 666 million or 14.4%, and CRE loans declined by 93 million or 1.2% reflecting growth in investment properties of 185 million while seeing a 278 million reduction in the non-strategic 1-4 family and land and development portfolios. Total average loans grew 314 million or 5.2% annualized versus first quarter and 1.42 billion or 6.2% versus the second quarter of ‘16.
And again, keeping with the diversification theme, we're really pleased to see C&I loans now represent over 48% of our total loans with consumer loans increasing to 22% of the portfolio while CRE loans have now declined to 30% of our outstanding loan balances. Moving to Slide 5 and deposits, second quarter ’17 total average deposits were 24.99 billion, increasing 73 million or 1.2% annualized versus the first quarter.
The real story here is really the shift in mix. During the quarter, we experienced a seasonal decline in SCM deposits of about $187 million.
Average core transaction deposits increased 261.3 million or 5.8% versus the first quarter. That increase took us to 18.41 billion.
That also includes 11.9% or $190 million increase in demand deposit accounts. So again, I’m pleased with the shift in mix here.
On a year-over-year basis, the second quarter ’17 total average deposits increased 1.38 billion or 5.9% versus the second quarter of ’16. Average core transaction deposits increased 1.56 billion or 9.3% versus the second quarter of ‘16.
And again it was due to an increase in customer average balances, which we really do believe are a result of our focused efforts to attract and grow deposit relationships into small business and mass affluent segments. So I’m really pleased with the efforts of our bankers both in discipline and in customer acquisition there.
And again, the result of the disciplined approach to pricing and the shift in the mix gives us strong year-over-year deposit growth, while maintaining very stable deposit costs. So pleased with the deposit story, both for the quarter and on a year over year basis.
Moving to Slide 6, net interest income was 251.1 million, increasing 11.2 million or 4.7% versus the first quarter and 13.4% versus the second quarter a year ago. The increase in net interest income was primarily driven by margin expansion.
As previously stated, the NIM was 3.51%, up 9 basis points from the first quarter and 24 basis points from a year ago. Yield on earning assets, 3.99%, up 11 basis points versus the first quarter and 26 basis points versus the second quarter a year ago.
Yield on loans 4.36%, up 11 basis points sequentially, and 21 basis points versus the second quarter a year ago. The investment securities yield was 2.11%, up 4 basis points sequentially and up 22 basis points versus the same quarter a year ago.
And again, we’ve maintained the focus on overall deposit pricing discipline and the result has been a relatively stable cost of funds at 46 basis points for the quarter, up 2 basis points from both the first quarter ’17 and the second quarter of ’16. Looking more closely at deposit rates, the cost of interest bearing core deposits increased 2 basis points sequentially to 0.38% due to the strategic repricing of some specific products and customers.
On page 15 of the appendix, you'll see additional information on the interest rate sensitivity as well as the investment securities and loan portfolios. Moving to Slide 7, I’ll talk a little bit about the fee income.
Non-interest income in the second quarter was $68.7 million, down 3.2 million or 4.4% versus the first quarter or ’17 and up 1.2% versus the second quarter of ’16. Just as a reminder, other income last quarter including net investment security gains of 7.7 million which drove the quarter over quarter decline.
Adjusted non-interest income $70 million, it was an increase of 4.1 million or 6.2% versus the prior quarter, an increase of 3.4% versus the same period a year ago. A little more color there, fiduciary and asset management fees increased 3% sequentially and 8% compared to a year ago, again driven by solid growth in assets under management, which are up about 9% from a year ago.
In addition to the equity markets, we continue to see the benefit from new customer acquisition and very pleased to see that our financial consultants are driving gains in production and assets under management. Gains from sale of government guaranteed loans consisting primarily of SBA loans were 1.9 million for the quarter, up 1.2 million both sequentially and versus a year ago.
And pleased to see the most recent FDA production volume ranking showed that we ranked Number Four in our footprint out of more than 280 lenders, including a Top 5 ranking in four of our five states, so pleased with the momentum there. Mortgage revenue for the quarter 5.8 million, unchanged from the previous quarter and down 2.6 versus a year ago.
Mortgage production increased 7% sequentially and declined 7% from a year ago reflecting a decline in refinancing volume. On a year-to-date basis, interest revenue was 2.4 million representing a strong 25% growth over the same period a year ago.
This product line continues to benefit from talent additions as well as our ability to seamlessly deliver insurance solutions across our customer base. And again we’re pleased with continued momentum in our financial management services group, our capital markets and our SBA units.
Moving to Slide 8, we’ll spend a few minutes on expenses. Second quarter of ’17, total non-interest expense of 191.7 million, it was a decrease of 5.6 million or 2.9% versus the first quarter of ’17 and increase of 1.7% versus the second quarter a year ago.
Personnel expense declined on a sequential quarter basis, due primarily to employment factors, while other expenses rose predominantly due to increases in professional services and third-party processing. Our 2Q ’17 adjusted non-interest expense of 191.4 million increased 837,000 or 0.4% versus first quarter of ’17 and up 5% versus the second quarter of ’16.
And again, as a result of strong revenue growth, the second quarter efficiency ratio of 59.90% improved from 64.84% in the first quarter of ’17 and 65.11% in the second quarter of ’16. The adjusted efficiency ratio of 59.56% improved from 62.25% in the first quarter and down from 63% in the second quarter of ’16.
Again, in keeping with our longer term targets to get the company below 60%, pleased to see the movement there for the quarter. Turning to Slide 9, our credit volume metrics continued to be favorable.
First graph shows NPA, NPL and delinquency trend. The NPA ratio decreased by 4 basis points to 0.73% compared to 0.77% in prior quarter and 0.81% in the same quarter a year ago.
NPL remained flat from the last quarter at 65 basis points and we’re down from 67 basis points in the first quarter of ’16. Past dues remain low at 0.27% which is 1 basis point increase over the previous quarter and 3 basis point increase over the first quarter of ’16, but again historically low levels there.
Net charge offs for second quarter were 15.7 million or 0.26% compared to 0.12% in the fourth quarter and 0.11% in the first quarter of ’16. The increase for the quarter was due primarily to $3.3 million charge-off on a legacy credit for which the loss have been fully reserved in the prior quarter as well as a $2 million sequential quarter decrease in recoveries.
Despite the increase in charge-offs during the quarter, we remain within our stated guidance for the year of 15 to 20 basis points, with a year-to-date charge-off ratio of 19 basis points. So expect to end the year with a net guidance, Kevin and I will be happy to provide more color on that in the Q&A section.
Provision [Technical Difficulty] 10.3 million reflects an expected increase from 8.7 million in the first quarter. This compares to 6.7 million in the same quarter a year ago.
Key driver of the increase over the prior quarter was the previously mentioned $2 million reduction in recoveries. We do expect provision expense to continue to increase slightly throughout the remainder of year driven by continued lower rate of recoveries coupled with loan growth and more stabilized loan loss reserve.
The allowance for loan losses decreased by $5.4 million in the second quarter to 248.1 million and the ratio declined 3 basis points 1.02%. However, coverage ratios remained strong with reserve covering NPLs at 160% or 205% if you exclude impaired loans for which the expected loss has been charged off.
And again we're pleased with the fact that with our balanced loan growth, all of our credit metrics remain favorable within the stated guidance, while we continue to exercise very disciplined approach to growing that portfolio. Moving to Slide 10, a little bit about capital, capital ratios remained strong for the quarter with growth in earnings outpacing the growth in risk weighted assets.
Just to highlight a few, second quarter ’17 CET1 ratio was 10.02%, up 16 basis point versus first quarter ’17 and again, the second quarter ratio on a fully phased-in basis is estimated at 9.81%. Tier 1 capital 10.36% versus 10.18% in the first quarter and again as disallowed DTAs continue to decline, you’ll see Tier 1 capital now exceed CET1.
Total risk-based capital 12.24% versus 12.09% in the first quarter, with TCE ratio at 9.15% versus 9.04% in the first quarter. And again as expected the disallowed DTA continues to decline at a 143.4 million, down 49.2% from a year ago.
And lastly, we repurchased 30.2 million in common share for the quarter bringing us to 45.3% for the first half of ’17. And as stated in January, our repurchase volume will continue to be opportunistic based upon the levels of organic loan growth, stock price, liquidity levels and just overarching capital levels.
Before we go to the Q&A, little bit about the 2017 outlook, I know we and you all, and most of us are concerned about the political and economic uncertainty for the remainder of ’17. But we remain confident in our ability to continue to grow and enhance profitability and believe we achieve the targets we have laid out.
From a balance sheet perspective, our year-to-date ’17 results were in line with our 2017 guidance. And we expect to continue these growth trends of average loan growth between 5% to 7%, average total deposit growth of 5% to 7%.
Again that's consistent with our previous guidance. As a result of the balance sheet growth and now the most recent June rate hike, we're now expecting net interest income growth between 12% to 14% for ‘17.
As a reminder, our original guidance was 8% to 10%, last quarter we increased to 10% to 12% given the March rate increase and we now expect that to be 12% to 14%. Again keeping with previous guidance, this updated range assumes no further rate hikes this year.
However, we do remain in an asset sensitive position and have potential upside and provisional rate hikes occur. Despite the increased volatility in the equity markets and a softer mortgage environment, our investment in fee producing business continue to provide positive momentum that we believe will drive adjusted non-interest income in the 2% to 4% range, again, in keeping with our previous guidance.
We still expect total noninterest expense to increase between 2% to 4% for the year while waiting positive leverage, but certainly there is pressure on the expense line and our team remains focused every day on containing that line. We originally disclosed 2017 estimate of 36% to 37% for our effective tax rate.
And that was updated last quarter to 34% to 35% and we do believe that 34% to 35% is an appropriate range now for the year. Again, we don't see any significant changes in the credit environment or underlying credit quality, NPL and NPAs are expected to remain relatively flat for the year.
We maintained an expectation as I said earlier for net charge-off ratio in the range of 15 basis points to 20 basis points as recoveries continue to moderate like they did this quarter. And we also expect that the loan loss reserve ratio will remain above 1%.
And again as announced at the beginning of the year, we have authorization for up to 200 million share repurchase. In 2017, we completed purchase of 45.3 million for the first half and the size and timing of future repurchases will continue to be situational and primarily at a level of organic business growth and stock price.
To close, before we go into the Q&A, on behalf of the team, again we’re pleased with the results in the quarter and equally excited about the momentum that we feel we have living in the second half of this year and beyond. Our team is never satisfied, so while we all recognize the urgency to constantly push more and produce even better results, we are energized as we get these important milestones like 1% on assets and sub-60 efficiency, gain just confirming that we are on the right path, but no pause and again, look forward to pushing those key measures in the right direction.
We have a lot of positive recognition this year, beginning from outstanding customer service earlier this year to most recently being recognized by the roundtable for corporate social responsibility. But again I have to just thank our team for the most recent ranking as the most reputable bank in the country by American Banker and Reputation Institute.
It’s especially an honor for our team. This just validates that our different brand of banking, our transparency about who we are and how we do business and our deep commitment to strengthen our communities resonates with customers, and especially our non-customers.
So as we briefly celebrate the honor, we are looking at all the ways we can capitalize on the growth opportunity that this award and our full transition to a single brand 2018 represent. We’re making great progress in preparing for the grand change.
Again, this year converting all of our divisions to a single operating bank platform and again excited about the pending any changes. We're hearing great feedback from our team members, from our customers and our communities about the short and long term benefit of this unified Synovus brand.
So the bottom line is our team really is thrilled and excited about the opportunities ahead, we look forward to sharing more of that with you on the quarterly calls for the rest of the year and beyond. And then just finally, before we head into Q&A, I just want to provide our brief update on the Cabela’s [indiscernible] Capital One transaction.
Again we have our disclosures out there. You’re probably aware that on July 3, the Federal Trade Commission approved the pending merger between Cabela and Bass Pro.
And on July 11, Cabela’s shareholders also voted to approve the deal. The comment for our April 19 application to the Federal Reserve seeking approval for our portion of the transaction has ended, and the Federal Reserve is now in the review process, there is no processing deadline for our application under the rules or regs.
And so the application remains pending and again, we can’t predict or control the timeframe for the process, but we remain hopeful that this event will be third quarter closing and that’s probably all I can say on that transaction but I’m sure we might have more questions. So with that operator we’ll be happy to open the floor to questions and we have again our team of executives to answer anything on your mind.
Operator
[Operator Instructions] And the first question is coming from John Pancari. John, your line is live, please announce your affiliation and pose your question.
John Pancari
Evercore ISI, good morning guys. On the margin front, just want to get your thoughts on the outlook there.
Obviously, the result came in better than expected at least for me this quarter. And wanted to get your thoughts on the back half of the year where, you know, what type of progression you think we could see in the margin, and then also just get your thoughts on deposit betas, where they are trending now, I’m sorry if the missed the comment there.
Thanks.
Kevin Blair
Hey John, this is Kevin Blair, I’ll take that. So you saw for the quarter, we had 9 basis points of margin expansion.
That was predicated on the March rate hike, that’s a large factor there. So as we look out into the third quarter, we will obviously get a bit of tailwind from the June rate hike.
It may not be as large as what we saw in the second quarter given the fact that we continue to bring down cash balances which helped to expand the margin, and it really depends on the steep of the yield - the slope of the yield curve. As we look at investment portfolios, you’ll note this quarter, we only had accretion there of roughly 4 basis points wherein previous quarter it was a little higher just because the yield curve has been less steep than what it was in previous quarters.
So, we think we can continue to see somewhere between 5 to 8 basis point increase in the margin. Just based on the rate hike, that’s why we’ve increased our guidance to 12% to 14%.
We also think that any future rate hike if we were to get one in September, there would be additional upside there as well as December rate hike because we get a little bit of the lag with LIBOR changing a little earlier than the FED moving rates. And to your second part of your question, I think that is the real question is, what are deposit betas going to be.
The impact that will happen then will be predicated on how high the betas go. As you’ll see from our results today, we've maintained a low-single digit beta for our deposits, we think like the industry at some point that’s going to change.
It hasn’t changed to this point, so we've been able to realize a low-single digit, but we continue to model betas in the 50% range as we look out into the future. So the competitive landscape will determine what those are, but the betas that we're modeling will still stay in that 50% range.
It will ramp up over the additional rate hike that we may see over time, but in the beginning it should start off in the 25% range and ramp up to close to 100 by the end, but it will average around 50. So, again upside of the margin rest of the year, but it won't be as much as we've seen in previous quarters.
John Pancari
And Kevin, that 5% to 8% you just said, that would be for the third quarter is the range?
Kevin Blair
Just going off of what we had from the rate hike in June that would be something we should expect.
John Pancari
And then fourth quarter obviously somewhat less than that?
Kevin Blair
Yeah less than that.
John Pancari
And then on the loan side, just wanted to get some thoughts around what you're seeing on loan demand, where business sentiment is right now, are you starting to see any apprehension or increased apprehension given the chaos in DC? And what's your update there?
Thanks.
Kevin Howard
Yeah John, this is Kevin Howard. Yeah, we did this sort of timing I guess our C&I loan growth.
We have a little bit of growth there. Kessel mentioned that the utilization was down 1.5%, which was also about $115 million of same-store borrowers from quarter to quarter.
I feel we - while the balance sheet of our commercial customers are strong, they’ve been more in a wait and see mode I would say when it comes to CapEx spend and expansion this quarter. That’s one of the bigger reductions we’ve had in utilization in some time.
So I do feel like some of that is also some seasonality in the first half of the year. That should go more favorable in the second half of the year.
So, I think you'll see that turn around. I really do, been talking to one of our line leaders this morning, they've already seen a pick up since quarter end in the pipeline.
So again, I believe if you pull that utilization out, we’d be talking about 4.5%, 5% growth in C&I for the quarter. We can’t and I'm just saying even if it did, we’re just even.
So I would say kind of the answer to your question, there is, I think there's optimism from what I hear. I talked to a lot of our credit officers; I just believe it was a little bit of a wait and see when it comes to spend.
And again, as I already mentioned, I think there's some seasonality in that as well in the first half of the year for us.
John Pancari
And one last one, Kessel, just wanted to get your updated thoughts around M&A and whole bank acquisitions and appetite there for deals? Thanks.
Kessel Stelling
Yeah. No change on our end, John, still an active market there.
We see a lot of whole bank activity, we see some non-bank which we also have some interest in. But again, no change in our appetite, which again just goes back to our disciplined process and if we are going to consider whole bank, it's got to make strategic and financial sense for us.
And that doesn’t mean, we don’t take good hard looks, but we are again, we’re going to do that. We’d be a bank that will bring us something we don't have, we obviously -- we can grow our real estate book ourselves.
Some banks that have heavy real estate concentration wouldn’t have a lot of appeal to us. And so again, we're active reviewers, but appetite hasn’t changed at all and quite rightly I think that has served us well.
I think our internal focus again continues to give us a stronger currency to participate longer term. So that was a long way of saying, no real change, but a lot of activity in the market for us to look at.
Operator
Thank you. And the next question is coming from Ebrahim Poonawala.
Ebrahim, your line is live, please announce your affiliation and pose your question.
Ebrahim Poonawala
Thank you, Bank of America Merrill Lynch. Just first question I guess if you can touch upon credit, Kessel, I believe you called out that CNI charge off in the quarter and sounded like you already had provision for that.
So would love any color on that if that was a specific credit and if you're seeing any particular vertical where you're seeing weakness. And secondly, I guess, if you can just follow up on your retail CRE disclosure that you provide in the deck and just wanted to sort of get your thought process around, there is a lot of chatter around retail theory and just wondering if that makes you want to preemptively reallocate some results toward that book or how you're thinking about just a credit outlook 12 months out for that portfolio.
Kevin Blair
Ebrahim, this is Kevin, I'll start the first part of that, it talks about the charge. As Kessel mentioned there was an increase.
I would attribute that more to timing. I mean our first quarter was lower than expected, we got to then 15 to 20 bps.
That’s where we're at right now and that's what we think we're going to - that's our projections for the rest of the year. Color on the charge-offs, really again a little bit of timing.
There was 3.3 in C&I credit that we were well [indiscernible] as well as consumer credit that was about 1.5 million, we were also well reserved on going into the second quarter. That was converted to charge off, if you look at it, about an $8 million increase in charged offs.
Two of that was as we mentioned on the last call we expected less for coverage throughout the year, that was two of the million and really those two credits again reserve credits that converted to charge off, happened during the quarter that was 5 million. So, timing was more than anything and I would say when those happens and we had some small business charge-offs as well.
That portfolio we have grown that, we grew it this quarter and have grown it pretty steady, we start to see that a little bit. But we're [indiscernible] I mean, I wish I could change the timing, but appropriate accounting treatment we needed to take those charge-off this quarter versus last quarter.
Outside of that, we again think we're going to be within the guidance for the year. And again still a pretty healthy number.
And I won’t be a lot more worried about it Ebrahim, but our NPA stayed down during the quarter, our past dues are in the mid 20s. So I think overall outside of a little timing there, we know we did expect to see an increase this quarter, I think we were 10 to 15 this year, I mean this year - last year as we’ve grown the portfolio and it seasons more and our recoveries become less of a factor, maybe they were from the recession that we would increase that, that’s why we increased that guidance the way we did.
And the second part of your question, I mean, what you’ve asked, on CRE. I’m sorry.
Yeah. Sure.
I’ll cover that as well and we’re certainly aware and conscious of the store closures and the e-commerce challenges to traditional retail. I’ll walk you through maybe real quickly a slide, I think we’ve got it on page 20 in the deck.
If you don’t have it, I’ll sort of just give some color on it. But first of all, retail CRE is performing well.
I think we’re six basis points on past dues. We’ve had virtually no NPLs, charge-offs over the last few quarters.
It’s very diversified, granular portfolio, not only by property type, but geographically as well. I think we have three loans between 20 million and 30 million.
That’s the largest one. Here we have 10 - between 10 and 20 and the rest of them are pretty small loans, so no big exposures there.
The tenant mix has consistently consisted a very few store closures. As demonstrated in the slide, the portfolio primarily consists of standalone credit tenants, like drug store, dollar discount, auto part dealers.
Also as you can see, we have a lot of service oriented provider type centers, grocery store anchors and neighborhood and local designation type properties and we just, we believe that they will be a lot less susceptible to e-commerce encroachment. And just real quickly, we looked at and this is kind of towards year end, when we did our annual analysis, pretty much the whole portfolio, the LPVs are in the low 60s, coverage is 150 to 160 of debt service and the property is 94% stabilized.
So very little in construction, what we do have in construction is usually some type - one-off drug store type, quick construction, short-term loans. So we feel - we are certainly aware and keeping our eye on those closures and trying to be in front of that as possible, but now - at this point, the portfolio is healthy and let me say one last thing, we’ve had also sort of, real estate growth a little bit, as we had $100 million in reduction year-to-date in the retail CRE portfolio.
As you can tell, we are not originating a lot, but the good news there is the portfolios are paying off like they were supposed to sell a property, permanent financing. And so we think we've got our arms around and it’s certainly something that we're waking up, thinking about everyday as we see those announcements.
Ebrahim Poonawala
That was helpful. Thank you.
And just I guess shifting to expenses, I think Kessel mentioned in his opening remarks that you finally had a quarter where the efficiency ratio dipped below 60%. I think looking out further, if we think about sort of 2018, absent any boost to the margin from higher rates, how do you think about sort of the trajectory of that efficiency ratio?
Do you think you've reached the point where it should be steady state, absent rate benefit or is that more in terms of expense cuts that you’re thinking of?
Kevin Blair
Ebrahim, this is Kevin Blair. I will take that.
We talk a lot about maintaining positive operating leverage as we look at expenses. So we would project the efficiency ratio to continue to decline over time.
Obviously, the rate environment, as you mentioned, would determine how quickly that efficiency ratio does go down, but in general, we’ll do that through more of the revenue side of the income statement. There are always efficiency opportunities and we maintain a list of those.
We’re constantly looking at ways to rationalize our staffing, looking at our facilities and branch optimization from a facility standpoint as well as just looking at process and automation improvements. So there are always the efficiency opportunities, but we will be able to continue to reduce the efficiency ratio going forward, primarily through the positive operating leverage of higher revenue growth.
Ebrahim Poonawala
And so should we assume that sort of, when we think about expense growth, relative to your guidance for this year, that's kind of the pace of expense growth we are looking out over the next year all else equal?
Kevin Blair
We haven't given ‘18 guidance at this point, but the number that we've given this year feels more like a normalized growth rate around expenses. There is - obviously depending on whether you are looking at the reported or the restructuring numbers, but I think 3% to 4% expense growth is normal for us in this time of the cycle.
Operator
Thank you. [Operator Instructions] The next question is coming from Jennifer Demba.
Jennifer, your line is live. Please mention your affiliation and post your question.
Jennifer Demba
SunTrust Robinson Humphrey. Good morning.
A question, to get to the next level of profitability for you, just following up on Ebrahim’s questions, when you talk about revenue growth opportunities, can you kind of give us some more detail on where you think your biggest opportunities lie, whether they be geographically or by line of business, by loan category, where are you underperforming you think you can do better?
Kessel Stelling
I mean it's really broad, Jennifer. We talked about this from a fee income growth this quarter and this year, we've made tremendous investments, a lot last year, but investments in our mortgage origination team and our financial management services and trust and brokerage and insurance, what you saw that list this quarter.
Private wealth has been a big area of focus. We've got an intense effort underway right now in the mass affluent strategy.
We think our brand of banking sells well in that market and we've seen again growth there in small business, SBA, we made restructure and investment in that team over the last couple of years and so we are seeing these lists there. Geographically, we think our urban markets still give us a great opportunity.
We feel like we have a lot more opportunity in the middle market space that we continue to invest in and look at better ways through our lines of business, through our community bank and through our corporate bank, ways to penetrate some market segments that maybe we have not been quite as successful as we think we should have. So it is really across the board.
Again, the larger urban markets, we think, were more attractive place to recruit to. And even though our guys are keen about celebrating too much on the most reputable bank, it does give you a pretty good platform to recruit to and team members are on the bubble, thinking about coming to you versus someone else or leaving someone where they've been for 20 years and we’ve got a lot of examples of success over the last 30, 60, 90 days, where high performing team members have joined our company.
So it really is across the board, we are excited, we think the brand actually gives us growth opportunity. It's amazing how many people still don't understand who we are and where we are and what we can do with our broader capabilities.
So again it’s line of business, it’s product, it’s brand, it’s geography and we really have strategies in place to capitalize on all of those.
Jennifer Demba
Second question is just a modeling question. You had a $1.7 million earn-out liability adjustment expense, is that one-time or will that reoccur?
Kevin Blair
Demba, I will take that. So for the quarter, the liability adjustment was for our Global One acquisition and we had a contingent asset that we realized for the quarter that increased that earn-out liability.
That was a specific item for this quarter, but going forward as we look at that earn-out, we will continuously update the performance to estimate what the income will be for that business. As you may recall from the acquisition, the earn-out term is called prepayment to the Global One former shareholders based on a percentage of the bottom line.
So we will continuously update that number as we get performance data, but this quarter, it was an adjustment, there may be future adjustments based on that forecast.
Operator
Thank you. And your next question is coming from Casey Haire.
Casey, your line is live. Please mention your affiliation and post your question.
Casey Haire
Jefferies. Thanks, good morning guys.
Kevin, wanted to follow-up on the loan growth outlook. It sounds like that the commercial side of the house is in a bit of a wait and see period here.
If that were to continue, what is the appetite to have consumer side of the house to continue to drive the bus, specifically SoFi and GreenSky, by my math, I think you guys are at that 3% level that you guys kind of outlined. Is there an appetite to go above and beyond that, if commercial continues to be weak?
Kevin Howard
Yes. First of all, I think commercial is going to pick up on C&I.
I think it is one of those quarters where there is a seasonality. I think like I said, the pipeline is building.
Let me comment on it, the small business is growing, premium insurance and finance is growing, community bank, owner occupied as a part of the portfolio, that's been growing. Senior housing is consisting, while they didn’t have net growth numbers this quarter and they have been and we have a pretty favorable forecast we think on the ABL and middle market over the next 12 months.
So I’m optimistic again that the second half and the next three or four quarters, we are going to be able to grow C&I. I think it’s just one of those quarter where we have some utilization and numbers that hit us a little bit more than we thought and I think that picks back up.
So I do think that. And I think on the consumer side, we will look - our mortgage company has really been a strong franchise and has been growing and we’ll get growth there.
Back to the SoFi, you are correct, we're just a little under that 3%. I think we will, it’s something that we have - I think we’ve mentioned last call, we like the current, we like the risk recurrent profile of those two relationships.
We do think we’ll expand those probably up more to 3% to 4% right now, maybe more to come on that in the next couple of quarters. But I can see us increasing past that.
Again, we - that was our original guidance and we like what we see. But we are not doing it on a dependency, because we are concerned about the commercial book.
It’s more. We like the risk return profile and the opportunity there.
One of our big goals as we've mentioned before is to get our consumer book up in the mid-20s and I don’t think you’re going to just get there through card and HELOC and mortgage and we've got to do some things that we maybe historically had not done and partnered up. And while it is a small part of our balance sheet, it’s helping our consumer get to rebalance the balance sheet over several years.
It’s helping us get there and it’s one of the engines that we've had some success with in the last couple of years and, but long story short, I think we will get above that through the year, and then we will probably guide into that in the next quarter where we think we will take that.
Casey Haire
Okay, great. And just switching gears to the Cabela’s transaction, obviously a lot of optionality with what you guys can do with the proceeds, including balance sheet restructuring, some of the, on the debt side or disposing of some credits, troubled credits, just any updated thoughts you could share with us as we pull closer to the close date?
Kessel Stelling
You nailed it. Those are the things that we are considering.
We always consider really pre-Cabela’s transaction and post-Cabela’s transaction, while they will be looking at ways to optimize the balance sheet, but no real updates there. Again, we continually model things like asset dispositions and again the debt is a matter of, obviously, one can see some of the higher priced debt we have out there.
So no update of them, they’re just part of our ongoing financial review and as we can update that, we certainly will.
Casey Haire
Okay, great. And just quickly the deposit market, are you still thinking that's 25 basis points at this point versus that 185?
Kevin Blair
It would probably be a little lower, because rates have rallied a little bit. So as we stated, the portfolio today is on the book at 185 at Cabela’s.
So depending on when we close the transaction, we have the ticket based on the curve that day, but I think it is a little less than 25, not that different.
Operator
Thank you. And the next question is coming from Jared Shaw.
Jared, your line is live. Please mention your affiliation and post your question.
Jared Shaw
Hi, good morning. At Wells Fargo Securities.
Most of my questions I guess were asked. Just on the deposit trends, with the good growth we saw this quarter in the TDAs and then your comment around deposit betas, when do you actually think the customer preference actually kicks in, you see the deposit beta start to kick up, I mean it’s - you’re still seeing this strong growth in the most efficient form of deposits for you?
Kevin Blair
Hi, Jared. That’s a great question.
I don't know, I wish I knew the answer because I would be more price optimizing our book, but look, I think when rates start to get at 2%, I think the consumer may begin to change their preferences and start to take the extra effort to move some money around. We also know that with the floating NAV on money front, so a lot of the money has moved into the [indiscernible], those are paying in the mid-50 and 60 basis point range.
If we get pressure from the money front again, I think you will see pressure on the underlying deposit betas. And the way we look at our portfolio is, we look at all of our products and we look at the competitive landscape to determine how we have repriced.
And we are selectively making changes to this point. So going forward, if competitors move their rates, we will obviously have to have a response, but we are also actively today increasing rates in some of our relationships where we want to make sure that we are maintaining and growing the relationship.
So, not a great answer in terms of where it is going to be. We know when absolute rates get a little higher, it's going to start moving and when the competitive landscape changes, it's going to get higher.
But we are still modeling for the next 25 basis points rate hike, to have it lower than our long-term data of mid-50s.
Jared Shaw
Okay, thanks. And then just when you look at the growth this year, year to date in the non-interest-bearing deposits, what’s the general breakdown between new customer growth versus higher average balances?
Kevin Blair
If we have a lot of growth in higher average balances, when you look at the DDA accounts, we are up roughly 12% to 13%, depending on whether it’s consumer or commercial, but we are also bringing in our share of new relationships. As Kessel mentioned in his talking point, both on the small business side as well as our mass affluent strategy is bringing in more accounts overall.
But the largest impact is on the balanced augmentation and average deposits.
Operator
Thank you. And the next question is coming from Brady Gailey.
Brady, your line is live. Please mention your affiliation and post your question.
Brady Gailey
Keefe, Bruyette and Woods. So congrats on hitting the one ROA.
I think longer term, you all talked about the goal of kind of a 1 plus ROA, so just asking about the plus. I mean do you think that you could see the ROA expand from here over the next couple of years and do you think like a 1.10 to 1.15 ROA would be possible over the next two or so years?
Kevin Blair
We do. Again, we have not updated guidance, but we get a lot of discussion in anticipation of that question and again without getting into specific guidance, we've said all along the 1% was not a goal that was just a measuring point along the journey, we did that and we believe - quarter-to-quarter, you might see a little lumpiness, but we believe that the trend is obviously up and certainly see the 1.10 without getting time specific and in the range as you talked about.
And as we refine that, we will update targets and try and be a little more specific there, but the short answer is, yes, we do see the 1.10 and again, we will be laying out plans both internally and externally for guidance around that.
Brady Gailey
Okay. And then on the buyback, stock continues to do pretty well.
It’s up, I think around 10% year to date. With the stock in the mid-40s, do you think that it becomes a price point where you think about stopping the buyback or do you think the buyback kind of continues as it has?
Kevin Howard
Brady, we said with the $200 million amount revision, there are several factors that weigh into how much we do from a share repurchase perspective and the stock price is one of those factors. Obviously, we are doing a return on investment any time we make a decision to do share repurchases.
And at 44, 45, it’s employed across. But if you believe it’s going to go to 55, it would be to detail to buy back the share.
So it’s one component of our decision. We also look at overarching capital levels we are managing to a range there and we also look at the level of organic loan growth that we have every quarter.
So when we combine all of those factors, it really determines how big the repurchase will be each quarter, not solely based on stock price.
Operator
Thank you. And the next question is coming from Emlen Harmon.
Please mention your affiliation and post your question.
Emlen Harmon
Thanks. JMP Securities.
You guys have given us a fair amount of color just on the retail deposit dynamics this quarter. Could you talk a little bit about what you are seeing on the commercial side of the house?
Are you starting to see competitive dynamic shift there at all?
Kevin Blair
I’ll take that Emlen. This is Kevin.
For the quarter, we can see it on the top line reporting number of 1.2%, it’s a bit muted, because when you dig into the date there, you will see that most of the run-off for the quarter came in our municipal deposits, down about $187 million as Kessel mentioned. When you look at the core transaction deposits, we are actually up 5.8%.
It is a seasonal quarter, so when you look at it quarter-over-quarter, sometimes, it can be [Technical Difficulty]. If you go back to last year and second quarter ‘16, core transaction deposits only grew about 1.8%.
So we are actually seeing an accelerated growth in those core transactional deposits and it’s coming out of both the consumer side of the house as well as the commercial side. We are seeing a little more price tension on commercial transact - on commercial pricing and that’s probably where most of our deposit data has been allocated at this point or been seen.
But it’s not to the point where it’s inflated and people are just being more strategic and surgical around their pricing on the commercial side. We also haven't seen an outflow of what we consider commercial non-operation as a process.
We think we have about $2.5 billion to $3 billion of the commercial non-operational. That's the balance that everybody is looking at, if you look at the third and fourth quarter and the Fed's balance sheet, we think those are fairly sticky balances.
They are not high interest rate products. So we don't think they’re going to lead events as the Fed starts to take their balance sheet and there is more pressure there.
So we feel pretty good about the underlying data and Kessel mentioned the statistic, but up 10% year-over-year on the core transactional deposits really speaks to the franchise and how we’re able to deliver to the community and the retail organization.
Emlen Harmon
Got it. Thanks.
And then just one another one on the NIM, the sub-debt redemption in June, is that included in your 5 to 8 basis points of NIM improvement for the third quarter and just how are you thinking about funding that, can you fund that with what you have on the deposit side already?
Kevin Blair
Yes. It is included in the guidance and yes, the way you think about it is, we are going to get some pick up there.
You can look at the coupon. It was a little over 5%.
We will fund that through our other traditional wholesale funding alternatives, whether that’s broker or FHLB and also through core deposits. So if you do the math, the 5% coupon, we can fund it at less than 2%, we are going to get somewhere between $7 million to $10 million pick up in NIM on an annualized basis, just by retiring that debt.
Operator
Thank you. And the next question is coming from Nancy Bush.
Nancy, your line is live. Please mention your affiliation and post your question.
Nancy Bush
Good morning. NAB Research.
Yes. Two questions.
First, I get that everybody on the commercial side is kind of sitting and waiting to see if we finally get some order in Washington, but how much Kessel would you say that competitive, the competitive situation in the South East right now, which I have never seen to be so competitive as it is right now, is impacting your growth and are you having to give up any growth due to pricing or terms or anything like that?
Kessel Stelling
Yes. Great question, Nancy.
And I think there are about five people around the table to want to answer it, but I want to answer it before them. So yes, competition is intense.
As we began preparations for today several weeks ago and I was looking at the components of the loan growth primarily, and where we grew, where we didn’t grew, I challenged the team, both business line leaders, the credit and the risk areas to say, if we are losing to competitors, is it intentional, in other words, are we getting last look and we see rates that we won’t do and - or is it, so is it raise the structure and got to look down the line. So the answer for you is yes, competition is unreasonable in some cases, in certain business lines, some of the larger corporate opportunities, we feel like we are [indiscernible] that we've actually done a negative return at a company, we have no interest in that.
So there had been some rate issues, there have been some structure issues. Again on a personal note, I challenge our team about one of my referrals that went to a competitor and we required I believe it was 30% equity and a non-recourse real estate transaction and our competitor did it for 20%.
And I was challenging our team on who was right and who was wrong, because it was a good piece of business. So it is a long way of saying, the competition is intense, it does have something to do with it and it is rates and it is structure.
And again that said, I think the - we are still pleased that we maintain a discipline and there are a lot of bankers that say, Kevin Howard would take some of his limits off or would loosen some risk for him, or we could have growth, but we’ve again chosen to stay in this comp - discipline balanced approach, which has led to, as we've talked about, 48% C&I, 22% retail, 30% CRE. We said several years ago, can we get CRE to 30%.
That's been very intentional. Again, we can take the governor off of the real estate pipeline and that number could grow really quick.
So - but your underlying point of, you’ve never seen competition like this in south east is very fair and certainly has some effect on our gross numbers, but again in many cases, it was intentional that we chose not to match or beat what was on the table.
Nancy Bush
Okay. My second question is this.
Now that you guys have hit the 1%, 10% milestones, and I kind of look back at the years of the crisis, when you guys had to do quite a bit of stuff at one time, mostly the collapsing of the charters and the consolidation of the company, are there any projects in terms of systems et cetera, et cetera that are remaining from those days and if so, are those numbers incorporated in your expense growth guidance?
Kessel Stelling
Yes. Well, correct.
I mean, everything we noted today is incorporated in our expense growth guidance, but we again have efforts underway right now to look at ways to reduce expense that are in our guidance. I know we’ve got, looking at Kevin, I think a session later this week on Friday to look at opportunities to further reduce in terms of just some of the ways we operate, not necessarily headcount, actually just ways to get more efficient as a company.
There are always legacy investments that need upgrading, but what we know today is on the table, but there are again intense efforts and we spend a lot of time over the - we never saw, but over the last few weeks, again as we get ready for this call, looking at the go forward look, what do we think our expense run rate looks like and the back half in ’18, what investments came - what customer facing investments are needed or have already the name, what have the results been. So there is no - I think we have Project Optimus that some of you all may remember that a big number, we had $100 million reduction in 2011 and also during ‘11, that was certainly a project, but lots of little projects now, again both on the expense and the revenue side, but no big hangover that’s not in our run rate.
Operator
Thank you. And the next question is coming from Christopher Marinac.
Your line is live. Please mention your affiliation and post your question.
Christopher Marinac
Thanks, good morning. On past quarters, Kevin had implied that perhaps there was some balance sheet restructuring that you would like to do and I was curious if maybe some of this was already happening, again, it was more evolutionary than revenue on the balance sheet front?
Kevin Blair
Yeah. Chris, this is Kevin.
We have been doing some of that. You will know, as Kessel mentioned, previous quarters, there were some security gains in the first quarter, but we've also been repositioning now in the bond portfolio, but also our loan mix as we've talked about and now again today to try to maximize our return on both equity and assets.
So yes, it's still drawing in through the run rate and going forward and as Kessel mentioned earlier, transactions like Cabela's transaction will allow us to do more, but we're already doing many of those actions today just on a small risk scale.
Christopher Marinac
Got it. So as Cabela’s closes as you expect, does that sort of cause you to reassess that Kevin or just continue what you're doing?
Kevin Blair
We'll keep doing what we're doing. As Kessel mentioned, we've a very regimen approach to looking at ways and potential offsets to expenses and benefits to look at the NPV on making certain decisions, whether that's tendering debt, or whether that's selling an asset or repositioning the bond portfolio, we'll keep doing that on a quarter-over-quarter basis.
But it could be larger if you could get a one-time capital item such as a $77 million fee.
Kessel Stelling
Thanks, Chris. And before we get to our next question, I am just going to add Chris that that as Kevin well said, it just gives us more flexibility.
The analysis is going on before we ever heard of Cabela’s and it will go on well after that in terms of ways to optimize such as the debt repayment last, I guess in the last quarter where we retired some debt. So it’s an ongoing process, but certainly one-time events might give you additional flexibility.
Operator
And the next question is coming from Jake Civiello. Please mention your affiliation and post your question.
Jake Civiello
RBC Capital Markets. Good morning guys.
Kessel, just one question from me. I mean Kessel in some of your M&A comments, you mentioned a willingness to consider non-holding transactions.
Are there any businesses where you look to be larger or where you aren’t currently involved in particular in the context of the brand consolidation to come or I guess put it another way, does the brand consolidation open any new doors for M&A?
Kessel Stelling
Well, I don't know the brand consolidation just as a stand-alone event opens doors. I think it certainly increases awareness and as we convert to a single bank platform, certainly we are holding M&A transaction, that operational conversion would be simpler.
But other than to open stores, in terms of any particular businesses, we've got a pretty wide lens, I mean, we talk about the Global One acquisition and again, you and I’ve talked about that. That was October last year and I was on the phone yesterday with Dan Courchesne, our President of Global One and we continue to see from Dan and Jonathan Rosen and their team, good results.
That has been a nice acquisition. So we will look at businesses that we feel like we know something about that are complementary to what we do and in some cases, may be not new businesses, but businesses that would give us scale on the, in some cases, on the big side.
So again I won’t get into specific types of business, but again it will be business that we believe we know something about, that fit in well with our brand, with our culture and again businesses that give us scale, maybe in some areas that we are already operating.
Operator
And there were no more questions.
Kessel Stelling
All right. With no more questions, I just want to again thank all of you for calling in today, for participating in the call, for your questions and your interest in our company.
And again, I always want to thank all of our team members that might be on this call for the work they do that allows us to get the award that we got, which are not again the goal, but it is a result of a lot of hard work, both financial and non-financial. So thanks to all of you.
We look forward - we really are excited about the back half of the year and we look forward to continuous updates as we again make progress against all of our previously stated objectives. So thank you very much.
Hope everybody has a great day.
Operator
Thank you, ladies and gentlemen. This does conclude today's conference call.
You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.