Synovus Financial Corp
NYSE:SNV
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Synovus Financial Corp
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Good morning, and welcome to the Synovus Second Quarter 2018 Earnings and Merger Announcement Call. All participants will been in listen-only-mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Steve Adams, Senior Director of Investor Relations. Please go ahead.
Thank you, good morning everyone. During the call today, 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 also available to answer your questions.
We're also joined this morning by Kent Ellert, President and Chief Executive Officer of FCB Holdings; as well as Matt Paluch, Senior Vice President and Director of Investor Relations. Kent will also be available this morning for Q&A along with Kessel during the merger announcement portion of our call.
Before we get started, I’ll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as may be required by law.
During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendix to our presentation. Certain subject matter discussed in this call will be addressed in a joint proxy statement and prospectus to be filed with the SEC. We urge you to read it when it becomes available because it will contain important information. Information regarding the persons who may under the rules of the SEC be considered participants in the solicitation of shareholders of Synovus and FCB in connection with the proposed transaction will be set forth in the joint proxy statement and prospectus when filed with the SEC.
Due to the number of callers we do ask that you initially limit your time to two questions this morning. If we have more time available after everyone's initial questions we'll reopen the queue for follow-ups. I'll also mention that our presentation this morning does include slides related to both second quarter earnings for Synovus as well as the merger with FCB which we announced earlier today.
Earnings related slides are contained in Slides 1 through 30 in your presentation, while the merger announcement slides are covered in 31 through 50 of the webcast. At this time I’ll now turn the call over to Kessel Stelling.
Well thank you Steve and good morning to everyone. Welcome to our second quarter earnings call, as you've seen from our second press release we're also very excited to announce today's signing of a definitive merger agreement to acquire FCB Financial Holdings Inc. I'll spend time this morning providing more detail on our strong second quarter results as well as sharing the compelling strategic and financial benefit from the combination of Synovus and FCB.
I am joined this morning by our Synovus senior leadership team and as Steve mentioned Kent Ellert, CEO of FCB Financial Holdings and Matt Paluch, Senior Vice President, Director Investor Relations for FCB are also with us today and you'll have a chance to hear from them later this morning.
But first let's talk about this quarter's earnings and I'm going to start in the earnings deck on Slide 3, which provides a summary of our second quarter results. Diluted EPS was $0.91 for the quarter, on an adjusted basis diluted EPS was $0.92 up 7.8% from the previous quarter and up 52.6% from the same period a year ago. The second quarter results are driven by continued expansion of our net interest margin, solid fee income growth as well as a lower effective tax rate.
Return on average assets was 1.42% on a reported basis, on an adjusted basis return on average assets was 1.43% up 7 basis points sequentially and up 42 basis points from a year ago. Our total revenues increased 12.3% versus the second quarter last year while adjusted expenses increased 5.9% year over year. Continued positive operating leverages resulted in a further reduction in the adjusted efficiency ratio with second quarter declining to 56.01%.
On the balance sheet side average loans for the quarter increased 596 million or 2.4% versus a year ago and average deposits grew 1.28 billion or 5.1% versus a year ago. We continue to see a stable credit environment with a non-performing asset ratio at 0.50%, a 3 basis point improvement from the previous quarter and a 23 basis point improvement from a year ago. Lastly in terms of capital management and returns we continued to see improvement in overall capital efficiency with an adjusted ROE of 15.59% up 510 basis points from a year ago, adjusted return on average tangible common equity improved to 15.97% up 522 basis points from a year ago.
Moving to Slide 4 you'll see total loans of 25.13 billion grew $251 million sequentially to 4% annualized, compared to this time a year ago total loans grew 703.5 million or 2.9%. Growth for the quarter was anchored by consumer loans up 268 million as well as 174 million of growth in the C&I portfolio. Consumer growth was generated from our third party partnerships and our portfolio and mortgage products. C&I growth was broad based across premium finance, small business and senior housing. We continue to see reduction in the CRE portfolio down a 192 million for the quarter, payoff remain at elevated levels and we've seen the competitive landscape continue to [intake] supply throughout the year. Nevertheless our teams are maintaining their discipline and achieving a risk return balance that we feel is appropriate given our risk appetite.
Moving to Slide 5 and deposits; total average deposits of 26.27 billion increased 480 million sequentially and have increased 1.28 billion or 5.1% versus a year-ago. Average core deposits increased 509 million versus the first quarter of 2018, with strong growth and non-interest bearing deposits of 148 million as well as 144 million of growth in time deposits. Given the solid growth in core deposits for the quarter we reduced the overall level of broker deposits declining 30 million and we continue to be pleased with our growth in customer deposits while enhancing the overall mix. Same time our focus on flashing [ph] discipline has allowed us to do so while minimizing our cost of fronts.
Moving to Slide 6, on net interest income up 284.6 million increasing 10.3 million or 3.8% versus the previous quarter, compared to the same period a year ago the net interest income increased 34 million or 13.3%. The net interest volume for the quarter is 3.86% or up 8 basis points from the previous quarter and up 35 basis points from a year ago. The improvement for the quarter was driven by an 18 basis point increase in loan yields during the March and June short-term rate increases as well as the positive shift in mix.
Partially offsetting the yield enhancement the effective cost of funds increase 8 basis points sequentially to 61 basis points as the cost of interest bearing deposits increased 11 basis points this quarter. Asset deposit beta has increased this quarter relative to previous quarters at 67% and 41%, respectively. The interest bearing core deposit beta for the quarter is inflated by roughly 8% due to our strategic shift for accelerating growth and time deposits.
Turning to Slide 7, and fee income; total volume on interest income for the quarter was 73 million up 6.3 million versus the prior quarter and up 4.7 million versus the same period a year ago. First quarter of 2018 and the second quarter of 2017 include the impact from net decreases and the fair value of private equity investments of 3.1 million and 1.4 million, respectively. Additionally the second quarter of 2018 includes the net investment securities losses of 1.3 million.
Adjusted non-interest income of 74.7 million increased 4.6 million versus the prior quarter and 4.7 million or 6.7% versus the same period a year ago. For the quarter we experienced growth across multiple areas and categories most notably our investments in the brokerage and asset management businesses continue to yield strong growth with fiduciary asset management, brokerage, and insurance revenues of 25 million increasing 1.5 million or 6.1% sequentially and 4 million or 19.1% versus the same period a year ago.
Turning to Slide 8, non-interest expense of 204 million increased 8.9 million or 4.5% sequentially and increased 6.4% versus the same period a year ago. Current quarter includes a $2.3 million expense for a valuation adjustment of the VISA derivative partially offset by a $1.4 million benefit from the recovery of a previous litigation settlement expense. Adjusted non-interest expense of 202.7 million increased 4.9 million or 2.5% sequentially and increased 11.3 million or 5.9% from a year ago.
Growth and expenses for the quarter was driven by continued investments in technology, expenditure related to our unified brand program and credit expenses as first quarter 2018 had a sizeable recovery. We remain very disciplined in managing our expense base with investments focused on enhancing the customer experience as well as revenue generation. Moreover the ability to continue to deliver positive operating leverage has driven our adjusted efficiency ratio below 57% at 56.41%.
On Slide 9, you'll see the loan portfolio continues to perform well, on the first graph you'll see a reduction in both the NPL and NPA ratios. The NPA ratio decreased 3 basis points sequentially to 50 basis points and decreased by 23 basis points versus a year ago. The NPL ratio decreased by 1 basis point sequentially to 47 basis points and decreased by 18 basis points from a year ago. We're very pleased that past dues remain to their levels ending the quarter at 22 basis points. Net charge offs for the quarter were 17.8 million or 29 basis points annualized up from 4.3 million or 7 basis points annualized in the first quarter of '18 and 15.7 million or 26 basis points annualized in the second quarter of '17.
The increase in charge offs in the second quarter was primarily related to timing, through the second quarter our year to date charge offs are 18 basis points which is well within our guidance of 15 to 25 basis points and we expect to end the year within that range. The allowance for loan losses decreased 4 basis points to 1% sequentially which represents a $6 million decrease. The decrease is primarily due to charge off of specific reserve placed on two credits in the first quarter. Compared to a year ago the allowance is up 3.6 million while the ratio is down by 2 basis points. Coverage ratios remain strong have increased from a year ago as the reserve coverage NPLs at 2.15% or 263% if you exclude impaired loans towards the expected loss has been charged off.
Moving to Slide 10 and capital, our capital ratios remain strong and continue to be well above regulatory requirements. Regulatory capitals benefited from earnings growth as well as from a $200 million preferred stock issuance during the quarter. I want to walk through that issuance. On June 21st we completed a public offering of $200 million of Series B preferred stock. The offering generated net proceeds of a 195 million which will largely be used to fund the redemption of all our outstanding shares of Series C preferred stock. The redemption of Series C will be completed in August and will require the accelerated recognition of the original underwriting discount totaling 4.1 million as well as payment of the 2.6 million preferred dividend.
The extinguishment loss of 4.1 million will be recognized through equity in a manner similar of the [treatment] dividend paid to preferred stock as set forth in the prospectus for a recent Series D current offering. We expect the Board to declare dividend in September of 3.2 million. Following the redemption of Series C, Tier 1 and total risk based capital ratios should return to previous levels. Additionally during the quarter our capital actions include the repurchase of 50 million in common stock bringing that year-to-date repurchases to 76.8 million. Compared to a year-ago we've reduced our total share count by 3.8 million shares or 3.1%.
On Slide 11; just to comment briefly on our original 2018 guidance for key financial metrics along with our year-to-date results. From a balance sheet perspective we are on track for delivering our stated deposit growth guidance but our average loan guidance of 4% to 6% will be somewhat under pressure and will be slower than expected start earlier this year. We still believe we will achieve 4.6% growth for the year on a period end basis. We've seen stronger sales and pipeline momentum this past quarter and expect that to continue in the upcoming quarters.
Revenue has been strong in the first half of 2018. Given the current interest rate environment as well as our expectations around pricing and balance sheet growth we feel confident that net interest income growth for the year will fall within the top end of our guidance. We renew our expectations that total noninterest expense will increase between zero to 3% for the year as we continue to invest in revenue producing opportunities while continuing to have a keen focus on efficiency and productivity.
However given the execution of our tax credit initiatives we now expect from our effective tax rate maybe actually at or below the said range. We do not foresee a significant changes in the credit environment or underline quality with NPLs and NPAs expected to remain relatively flat for the year. We maintain an expectation for net charge-off ratio in the range of 15 to 25 basis points as recoveries continue to moderate. We also continue to expect the loan loss reserve ratio will remain above 1%.
As announced at the beginning of the year we have authorization for up to a $150 million of share repurchases in 2018. The size and timing of future quarter repurchases will continue to be situational and dependent primarily on the organic business growth and market conditions. However we do intend to execute open market share repurchases associated with our current authorization before the beginning of the proxy solicitation in connection with the shareholder vote related to the proposed merger with FCB Financial Holdings and may repurchase additional shares after the vote.
So before I transition to our discussion just surrounding to the definitive merger agreement with Florida Community Bank, I want take just a brief moment to thank our Synovus team, who are all here every day to meet and exceed our customer's expectations. Our people are really the difference and the way they deliver value to your customers directly impacts our financial results. Having recently completed our unified brand initiative and again being recognized one of the most reputable banks in the industry I've never been more confident in our future and our team's ability to win.
The landscape is no doubt competitive and we feel the pressure of every single day to raise the bar of our growth, profitability and efficiency. We are committed to becoming more agile encouraging our team to operate with innovative and continuous improvement mindset so we can deliver even better value-added customer experience.
Now let me transition to the second deck that we have provided. As mentioned earlier we are delighted to be joined this morning by Kent Ellert, President and CEO of FCB Financial Holdings, the holding company and parent of Florida Community Bank. Today Synovus and FCB Financial Holdings are now signing agreement for Synovus to acquire FCB Holdings for $2.9 billion in Synovus shares.
Our company has been in Florida for more than three decades and we've been following FCB for many years and have long admired their business performance. I spent time with Kent earlier this year and I really liked his business philosophy, his culture and his outlook. As the senior management teams of the two companies get more and more time getting to know each other we realized a lot of similarities between our companies and our approach to community-based relationship banking.
Over the extensive due diligence process our views were further reinforced as we found a similar risk management culture, a focus on communities, conservative credit and several complimentary capabilities that could make us stronger together. We believe this agreement is an unparalleled opportunity for Synovus, to combine with the number one Florida headquartered Florida focused community bank with a very strong presence in South Florida, the fastest growing market in the country's fourth largest state. It significantly increases Florida's contribution to our overall business by extending our footprint in a state where again we've operated for more than 30 years and already have our presence in Jacksonville, Orlando, The Panhandle and the State's West Coast.
It unites two companies with similar cultures and values and complementary customer focus community-based approaches to banking. Clinically this agreement is consistent with our commitment than any acquisition have a strong strategic rationale which this clearly does, while providing compelling financial returns and minimal impact to tangible book value dilution.
We will begin the discussion on Slide 1. Simply put, the merger Synovus and Florida Community Bank creates a stronger company with elevated growth and meaningful value creation. It makes us the number one midcap bank [heading toward] the South East with the addition of high performing senior leaders and producers, and the ability to leverage existing investments across a broader footprint.
Pro forma deposits for the combined company total $36 billion. Accommodation with FCB also elevates our growth profile through the addition of a high quality high growth bank and one that is meaningfully outperforming industry growth in the state and taking the market share. It elevates our growth profile through the addition of complimentary products and capabilities and by strengthening our Florida footprint which now becomes one-third of our pro forma franchise.
The merger enhances profitability and returns, it reduces our risk profile by diversifying our geographic footprint and its neutral to our capital position with no expected impacts on our forward capital distribution plans. FCB is a very special company and a great market. It has a strong credit book with minimal charge-offs, a strong presence in the fastest growing market in the country's fourth larger state and a team of experienced, empowered, exceptional community focused bankers. We are delighted that Kent will play a key role as a member of the Synovus senior team and leader of our Florida operations.
Kent and I have been very focused on the cultural fit of the two franchise and more importantly that he and I, our respected senior teams are very excited about the opportunities that will result in bringing our firms together and have spent much time together. This transaction is well structured, and it's a perfect fit for both companies. Its low risk. Its consistent with the criteria we've established for an acquisition, which includes a compelling strategic rationale mid to high single-digit EPS accretion and [an earn back] period of less than three years.
Now I’d like to turn the call over to Kevin Blair to walk you through the transaction summary and other details.
Thank you, Kessel. I'll start my comments on Slide 2, which provides a summary of the proposed transaction. This is a 100% stock transaction with a fixed exchange ratio of 1.055 Synovus shares for every FCB share. It translates into an aggregate consideration of $2.9 billion or $58.15 per share based on yesterday's closing rates with current FCB shareholders owning approximately 30% of the combined company. The offer price represents a 13.5 times multiple on 2019 estimated EPS and a 2.3 times multiple on tangible book value per share.
As Kessel has addressed, FCB Financial Holdings' President and CEO, Kent Ellert will be the Executive Vice President of Synovus Financial and Florida Market President. In addition we have retention plans and packages in place to ensure that we retain other key FCB leaders. The Synovus Board of Directors will not change as a result of this transaction at this time. Following the customary regulatory and shareholder approvals we will be targeting a transaction close by first quarter of 2019.
Turning to Slide 3, I want to focus on the quality of the Florida Community Bank franchise. FCB is the largest Florida headquartered Florida focused bank and serves as the primary bank for many of the Florida's top companies. Kent and his team has developed an exceptional banking franchise with a strong sales culture. As a result FCB is delivering high quality organic loan and deposit growth averaging over 20% for the last several years. Through a relationship oriented approach delivered by a seasoned team of Florida Bankers, FCB has rapidly gained relationships and market share amongst the top markets throughout the State of Florida.
Utilizing historical view for the combined companies for 2015 through second quarter of 2018 Synovus' overall loan and deposit growth was increased 400 basis points from mid-single digits to high-single digits. As important FCB's outsize levels of growth have been disciplined. With exceptionally low losses and solid credit quality metrics across all assets classes. Given this distinctive level of performance FCB continues to receive many accolades in recognition including Forbes number 8 Best Bank in America and Bank Directors number 6 Best Mid-Cap Bank in the U.S.
Moving to Slide 4. This proposed merger creates a stronger company. First it has high performing bankers with deep local market experience. This is a strong team of proven bankers with a long and successful track record of generating organic growth. The FCB approach is balanced with a focus on both loan and deposit generation. Together the commercial and retail branch team members are driving the enhanced core deposit strategy and their efforts are paying dividends. With overall demand deposit production increasing rapidly in 2018 and becoming a core tenet of the operating model. The addition of FCB's talent to our existing Florida franchise will make us a stronger company.
Second the merger builds on Synovus' 30 plus year history in Florida by expanding our footprint in the four of the state's top 10 markets where Synovus previously had no presence. Miami, Daytona Beach, Port St. Lucie and Palm Beach. As a result Florida will now comprise more than one-third of the pro forma franchise with 98 branch locations and an overall market share of 2% in one of the fastest growing states in the United States. The enhanced footprint will also make us a stronger company.
Third the combination of our two companies provides needed economies of scale for our technology, marketing and product offerings, although size in and of itself is not a differentiator the larger revenue base of the pro forma company provides the opportunity to augment spending in the ever changing and evolving digital space as well as other core technology investments. In addition the ability to leverage our robust product suite across a larger customer base will enhance the opportunity to deepen our share of wallet and to improve the overall customer experience. Therefore scale will help us become a stronger company.
Moving to Page 5 and continuing with the theme, as Kessel mentioned the combination of Synovus and FCB creates the number one midcap bank headquartered in the South East. Given the growth dynamics of the South East and our unique value proposition we go very well positioned to continue to gain market share while enhancing overall returns. As seen in the map on this page the physical presence of the combined company consisting of 300 branch locations provides a solid coverage across our five state footprint. More specifically Florida with $13 billion in aggregate deposits will now represent our second largest state behind Georgia with the pro forma company becoming the sixth largest regional bank in the state of Florida.
Moving to Slide 6, the second key tenet of the merger is an elevated growth profile. Let's first discuss the market itself. Florida is the largest economy in the South East and the fourth largest state in the US. Florida also has two times the number of businesses and operations than the next highest state. Florida also remains one of the fastest growing states in both population and income and with the combination of FCB, Synovus will significantly increase its positioning to capture a greater share of the underlying geographic growth.
South Florida in particular is a great opportunity for our company. Miami is the number one market in the South East by population with 11.3% growth since 2010. This is twice the national average. In addition when evaluating the growth opportunity from a deposit standpoint Miami stands out in terms of absolute dollar growth with approximately $50 billion in growth since 2012 higher than any other MSA in the southeast.
The confluence of population growth, favorable economic climate and diverse economy presents a tremendous opportunity for our company. I want to emphasize though that the Florida story is not just about a rising tide lifting all boats. Florida is a hyper competitive banking market and FCB has been highly successful in generating outsized growth in the geographies where it has a presence, outpacing market growth in the state's top five MSAs. Simply stated the FCB footprint is accretive to the existing Synovus footprint and it creates an elevated growth profile for the combined company.
Another way this transaction expands our growth profile on Page 7 is by expanding and enhancing our products' capabilities and scale. Although the transaction metrics do not consider revenue synergies we believe the opportunities are significant. From a commercial banking perspective both Synovus and FCB have had a robust sales execution model. As the organizations align there will be opportunities to cross pollinate specific products as well as industry vertical expertise. Both parties possess unique solutions and expertise which will be additive as they are expanded across the larger footprint.
With our larger balance sheet capacity and stronger commercial banking products we will be able to deepen customer relationships and drive higher revenues. On the retail side we expect to contribute to the ongoing efforts and improvement of FCB's deposit profile by focusing on demand deposits and core transactional accounts which will lead to a relatively lower overall funding cost over time. In addition the expansion of consumer and small vehicles lending products and to the FCB branch network will provide new sources of growth and opportunity to continue to drive our margin expansion.
We also have an opportunity for incremental fee income in both retail and commercial. FCB currently generates less than 10% of its revenues from fee income while Synovus is at a much higher level. We expect to derive new sources of revenue from the delivery of wealth management products and solutions, particularly given the wealth demographics in the markets in which FCB operates as well as their existing customer base. Through enhanced products and capabilities Synovus will build an elevated growth profile.
Ultimately this merger is about creating meaningful and sustained value for our shareholders. I'll provide an overview of the financial benefits and the key assumptions in the next three slides beginning on Page 8. We believe the financial metrics of this transaction are compelling with mid to high-single digit accretion from both a GAAP and a cash basis. The transaction also provides a robust lift to returns as ROGCE increases by a 160 basis points to over 17% while maintaining stable levels of capital. It also delivers an IRR that is well above our cost to capital and higher than alternative returns provided through normal common share repurchases. The combination of the companies also improves our overall risk profile through a diversification both from a geographic and business mix perspective.
Moving to Slide 9, given the comprehensive due diligence process as well as the conservative modeling assumptions we believe this to be a low risk transaction. We've completed a comprehensive due diligence review of all the key risk types over an extended period of time. We've had full engagement of executive management and deployed a dedicated 80 member due diligence team with validations provided by third-party advisors. We are very comfortable with FCB's loan portfolio and the underlying credit profile from an underwriting documentation and monitoring perspective.
Moreover, FCB's overall risk appetite and framework fully met our expectations from a compliance and government standpoint. We expect an efficient integration process as we run common core systems. We also benefit from the invaluable experience, we have gained during our 28 bank operating platform transitions, our unified brand initiative, as well as the Global One and Cabela's transactions completed in 2016 and '17 respectively. We also believe this integration will be smoother as we are partnering with a company with extensive integration experience.
Another mitigating factor for transaction risk in this merger is the conservative approach we've taken in the key transaction and modeling assumptions. In general we use three consensus estimates for purposes of our accretion as well as intangible book value dilution impacts for both companies. We've validated these assumptions by completing detailed bottoms up financial forecast. We obviously view this opportunity as a market expansion rather than a cost synergy transaction. As such we estimate cost synergies of $40 million, which represents only 26% of FCB's current operating expenses. This estimate was also completed using a line-by-line bottoms up analysis of personnel and operating expenses.
The credit bar totals 105 million pretax and represents 1.1% of loans outstanding. The loan and liability rate marks are moderate and will accrete over a four and three year period respectively. We have estimated a $105 million for upfront restructuring charges. For modeling purposes this expense has been included in dilution calculation at close, again, providing conserve consumptions in the modeling of the impact for tangible book value dilutions. Lastly the core deposit intangible is estimated at 1.75% and will be amortized over 10 years.
Moving on to Page 10, let me touch on the pricing of the transaction and the key geometrics. As previously mentioned we believe this is a well structured transaction with the price to forward earnings [Technical Difficulty] and the price to tangible book value of 2.3 times both of which are lower than the median of precedent deals announced over the last year and half. Looking at our growth synergies we project GAAP EPS accretion of $0.28 in 2020, with cash EPS accretion of $0.36 representing growth of 6.5% and 8.4% respectively.
The transaction dilutes our tangible book value per share by $0.80 or 3.3%. On a [nodamic] basis we expect earn back to our forward tangible book value per share and slightly under two years. While utilizing a static approach the earn back is still within three years on both the GAAP and cash basis. The tangible book value dilution is understated slightly due to the rollover of existing FCB auctions and warrants and to Synovus auctions and warrants versus stock, thereby lowering the basic share count.
With that let me turn it back over to Kessel for our closing comments.
Thank you Kevin. I know we covered a lot and I just want to take you to Slide 11 for some summary observations, most of which you have probably heard but let me close with these observations before we go to Q&A.
We strongly believe this merger is a strategically compelling transaction that will create a stronger company elevated growth and meaningful long-term value for both shareholders and customers of Synovus and FCB. It’s a well structured, low risk transaction that is totally consistent with our M&A criteria which include a compelling strategic rationale, mid to high single digit EPS accretion and earn back of less than three years.
By coincidence the [indiscernible] this transaction allows exactly five years after another momentus of that for Synovus our exit from TARP on July 26, 2013. Most people on this call are well aware of the energy our team has invested in rebuilding this company from TARP consolidation to return to profitability to exiting TARP to ultimately increasing capital returns to our shareholder base. Every day the last five years this team has been working to make Synovus stronger, to improve our service to customers and communities, to enhance and increase our products, services and capabilities, to restore competence credibility with investors, regulators, team members and other key stakeholders and to find new opportunities to create long-term value.
That way Kent and his team have done much the same at FCB. This transaction is the next logical step in the transformation of our company. It’s a result of discipline and patience and it's a strong step towards the future. And we are happy to take any questions both on our earnings presentation or this combination. Again, we won't take questions about FCB's second quarter release, those are available via press release. I and Kevin Howard and Kevin Blair will take questions again on the results and on the merger and will also ask Kent to comment at the appropriate time.
I think Steve has reminded you we would like to hold to two questions per caller. We will stay on the line longer than normal given the amount of information we are sharing so we will ask from your patience as you ask your questions and we will do our best will be efficient with our answers.
So now operator I'd like to turn it back to you for questions.
[Operator Instructions] The first question comes from Jennifer Demba of SunTrust. Please go ahead.
First, Kessel and Kevin do you see any opportunity to have better than 26% cost savings out of FCB over the next couple of years? And then second are you still comfortable with your previous guidance of a standalone company earnings per share CAGR of 20% through 2020?
Let me take a crack and Kevin can follow-up. We do see an opportunity in better than 26% but just as a reminder this was not about a cost play it was about a great combination with growth opportunities and revenue synergies. So the 26% was not based on any deal of precedent, it wasn’t based on other couple of transactions, it was truly built on a bottoms up forecast that involved members of the Synovus senior team and the members of the FCB senior team. So we will look for efficiencies and the typical background functions but there are no obviously cuts planned to any of the revenue areas and in fact we really right away that the FCB team is expanding and growing in their market. So yes over time the commitment from both teams is to continue to look for ways to make this transaction better than announced today that's our goal. But we want to make sure that our assumptions were very conservative in nature and again built from bottoms up. I think the second question was about an earnings…
And about the three year target Jennifer our 20% CAGR target over the next three years as a standalone company we will keep that and at some point we will update guidance as it relates to growth but we felt like it would a bit confusing to talk about a new growth number since our previous growth number was a three year CAGR. But yes we are reaffirming the ability to grow our core business 20% over that three year time frame.
The next question comes from Ken Zerbe of Morgan Stanley. Please go ahead.
I guess first question is for Kent if that's okay. I was hoping if you could just talk about your I guess why you were willing to accept a lower price from where your stock is currently trading? I get on a combined basis it creates value for the combined entity but a lot of the banks have also done that sold at a premium.
Well, first of all I think you may have done a good job of answering the question. From our standpoint it's really about finding the very best outcome for this platform and for its shareholders, and first of all what I would tell you is that we've inherited this opportunity for any particular reason of something going on with respect to our business model. The concept of quality, quantity and sustainability which is a theme that FCB operates under is doing very well. Externally the Florida economy is extremely attractive and we see a strong roadmap for growth. As you would note in our earnings release today we continue to have very strong earnings highlighted by record core earnings per share, very strong efficiency and margin expansion. But even with that we continue to look externally for what is the best course of action to take our company to the next level.
And looking at the opportunity with Synovus and it’s been well presented today by the management team scale, synergy and fit are quite obvious to our team and this is a process that we’ve taken months to uncover and to be quite confident in. When you look at the scale in this opportunity the balance sheet of Synovus allows us to do more for the clients of FCB. When you look at the technology of Synovus it allows us to better serve the clients of FCB. When you look at the deep product suite it allows us to go deeper with the relationships we have with clients for FCB and across their deep management team they quite frankly have expertise that we don’t have and very much need at FCB. So we have the scale and then you look at synergies and the synergies can be fairly straightforward, you can take a look at the map and you can say there are cost synergies and revenue synergies.
But think about market position. We've spent the better part of 10 years building FCB in South Florida and we do and are very proud of the robust business model that we have built. And by the way the team of seasoned bankers that have been onboard during that entire duration. But then you look at the growth plans for FCB and that's what this is about, how do we go forward and you look at the I4 Corridor. If you look at FCB we're two years into growing the I4 Corridor which is Sarasota, Tampa across the Orlando market and we're a $1.3 billion in deposits in that market. And I know what those teams have in front of them, five years of hard work to build a brand there and move market share away from the big banks.
But in this combination overnight we're over $3 billion in that marketplace, we go from seven offices to 20 offices, a sales team that goes from seven to 16, and guess what, the Synovus banner is well respected and strong and that will give us an opportunity to move forward what FCB brings to the table and take three or four years out of the equation. So while we can refine the math to pennies our view is this is a very, very attractive transaction strategically for the shareholders and that will be realized over time as we do what we always do on both sides of this table, prove ourselves everyday in the marketplace and make this an extremely successful combination.
Let me just add, because we've been very clear. We weren't necessarily looking to do an acquisition at this time, our standalone prospects are great as were FCB, steady growth, good credit environment, expanding margin and we've looked at a lot of targets over the last several years that just didn't give us a revenue synergies because of the maybe lack of compellability of people or cultures or of asset classes that certain banks specialized in. In this combination we really think FCB also brings a lot of expertise to us. They've got a great middle market platform in south and south eastern Florida that really does allow us to leverage our footprint as well. So I think this is really one of those unique combinations. We always talk about one plus one is equal three maybe it equals four but I think both teams see the ability to do more together with this transaction. I know I cut you off you got a second question.
Yes, second question is for Kevin. Why at the end you mentioned that stated 3.3% tangible book value dilution was understated. If you adjust for the stock impact that you mentioned what is sort of the other tangible book value dilution number?
When you think about that as when you try to back in the share count. Today the combined tangible book value of the pro forma entity we are taking that against the 166 million shares. There were probably 2.3 million options and warrants. They are going to roll over into options and warrants here at Synovus that are not being picked up in the basic share count. If you were to add that back the $0.80 per share would go to $1.14, so it would end up being right around 4.5% dilution if that was included in the basic shares.
The next question comes from Brady Gailey of KBW. Please go ahead.
So if you look FCB they have been growing 20% plus organically for the last few years. Synovus has been kind of in that mid-single-digit level. Once you put these two companies together what are you guys think will be kind of the new organic growth for the combined company?
Yes, I’m going to let Kevin talk about growth but as you just stated we like their growth platform. We like their markets. We like the scale we get in existing markets. We already perform better in markets like Tampa than we did in some of our less robust more roll markets. So getting more scale in Florida both in our existing markets and new markets it is great for us. So we like the markets. We like their platform. We like their expertise. And one of our Director's very widely said as we evaluated this opportunity unless they will go down there and mess up what they're doing. And again, Kevin Howard and his team of senior credit officers spent a lot of time in the Florida market, not just looking at credits but spending time with the senior credit team there to make sure that our policies, our procedures, our appetite wouldn’t do anything to curb or inhibit the kind of growth we've seen from FCB historically. So Kevin I’ll let you talk about maybe the growth order book.
Yes, so I think Brady from looking at the history with FCB you have obviously seen the number in the 20% range, over time as the portfolio grows and as built into the consensus forecast we assume that that growth rate will subside a bit. At the same time we feel like from a Synovus standpoint the mid single digit loan growth target is our long-term target. And so when you know those two together as FCB portfolio starts to mature and the resulting growth as well lower we think we move the company from really being a mid single digit growth organization into a high single digit loan growth organization. And one of the data points that I shared in the prepared remarks was if you just take a look at 2015 through second quarter 2018 by combining the organizations it would have increased our growth rate by roughly 400 basis points so I think that's a good move with some as we think about moving forward seeing that mid-single digit to high-single digits transition.
My second is on the deposit side. I know Kevin you talked about this a little bit but I think FCB's cost of interest bearing deposits are about double of what Synovus' are and I think I heard you say you've worked to kind of remix that. So can you just about the effort their on the deposit side and how long you think it would take to remix FCB's deposits towards something that look closer to the legacy Synovus deposit side?
And I would say that FCB is already doing the work for me. I mean there is a lot of work it's been done today the transition their growth in deposits into non-interest-bearing deposits. In the last several quarters they continue to pass over 200 million of non-interest bearing growth and that's a core tenant to how we are going to get the overall cost of funding down. We've got to make sure that we're getting the lower cost of deposits when we make the loans and we're able to generate a full some relationship. Now from our perspective where we see some updates obviously this is a market that is rich in CDs and so that's part of the reason why the overall cost of funding is a little higher.
But we think as we talk about some of the revenue synergies that are introducing some of our segment based approaches into the FCB footprint it's going to drive new deposit opportunities. First and foremost we think our small business lending platforms that will be able to expand into Florida not only generate new loan assets but they generate $3 of deposits for every $1 in one of them. And so to be able to bring in those small business deposits through the network it's already there will help to lower the costs.
Number two, we also think that our mass to fluid and our high network strategies that we are rolling out in the Synovus footprint will play well with the deposits base in Florida. Today, not having a wealth management platform many of those deposits are moving to a brokerage house or off balance sheet elsewhere we think we will be able to bring them back on balance sheet.
And then lastly just having the ability to leverage our core deposit franchise in some of our rural markets which has slightly lower deposit betas will be able to leverage that by taking those dollars and deploying those into the faster pace growth market that FCB is in. And so I think it's a combination of what FCB is doing today a couple of tweaks to the model that we will be able to adjust and lastly leveraging our strong deposit base today to help fund their future growth.
And Brady obviously our retail teams collectively on the FCB side and Synovus side are both excited about the opportunity that this brings the combined company. Kent's leadership on the retail side our leadership, Kent and I personally have been involved in meetings where we've talked about the ability to take the advancements we've done on retail side both from a product and the service from a sales management and to leverage that with some scale. So I think our retail teams are very excited about the opportunity to go to market together.
The next question comes from Casey Haire of Jefferies. Please go ahead.
I wanted to follow-up on that deposit question. I didn’t see it in the deck but is there what sort of deposit retention you have baked into the model? And then similarly on the asset side see the bunch of the deals in the Southeast where CRE run off is a big headwind to the loan growth picture post close, just wanted to see if you could share with us any assumptions you have given that it will be a decent size $8 billion CRE book post close?
I'll take that, from a deposit standpoint we really had modeled minimal attrition, if you look at how we developed the call sales there we're only considering up to two branch closures. This is not a deal that's going to have a tremendous amount of consolidation and divestiture. So the overall deposit runoff will be minimal. We did obviously look at certain sensitivities around that number in conducting our financial analysis but in general we don't feel like that's a big risk. Also on the CRE side obviously the combined portfolios were within regulatory levels as it relates to capital, so it doesn't create any constraints for us.
Honestly Synovus and FCB both have some expertise in the real estate side. Obviously as we looked at the loan growth numbers we also did the same things we did on deposits and we ran some sensitivities around growth. That growth scenario was included, some changes in production or additional attrition that would occur. So again in that situation we don't think it's anything material that would change the prospective forecast.
Okay understood, and then just I guess switching to the revenue synergy you guys sound pretty optimistic. I know FCB is under way versus you guys, but is that where most of the opportunity lies and you know any thoughts on quantifying what the opportunity might be?
We got a dollar we'll quantify that against we set model doesn't include a number there, look at how -- I mean they are a strong middle market corporate real estate bank. Their fees are -- fee income is substantially less than ours so certainly on a brokerage side there's opportunity on the trust side there's opportunity. Our family office is excited about the opportunities there. Our instruments teams are excited. They've got a good mortgage team, we've got good mortgage team, we hope together we'll be even better. Small business is another great opportunity that we do very well within our platform that we think just naturally overlays their branch footprint and their entire franchise.
So I think it's in a lot of different areas, there's no one big bet that we have to make to make this work. It literally is a combination. I was asked the other day what are you running out, there's nothing to run out, we have such a similar appetite, our policies line up, our cultures line up, so we don’t think there's anything to run out. We just build on top of what they're already doing very well. I think your CRE question Kevin Howard wanted to just add a little bit there. I know Kevin you've looked deeply at that and you might want to comment on the CRE.
Yeah sure, Casey, that's a good slide of things slide 14 in the prints if you have, you can see our balance sheets are pretty similar from a breakdown of C&I consumer and real estate there and their CRE mixes heavily on the cash flow side, the income producing properties versus for sale as we are as well. You know for us we do think part of our guidance of being 4% to 6% is that we think the CRE will start will be flat second half of the year. It was obviously down the first down the first half of the year. But just looking at that we started growing the CRE again. We had a high velocity of payoffs I hope and this gives us more footprint, they are good CRE lenders. We reviewed their CRE loans in detail, the policy is very compatible. Two key regulatory guidance is the 100% of risk based capital C and D and 300% risk based capital in CRE we are both comfortably under there. It’s a lot of runway to grow CRE. And I think again the combination gives us like I mentioned more footprint to grow CRE next year as we have -- they are growing fairly balanced as we are too over the last year or so.
The next question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.
Maybe just one question on the quarter and one on the deal. On the deal did the [indiscernible] help facility this or is this something that you think that you could have done without that regulatory relief or did that help get the deal moving?
We just got it either way. I said prior to this deal there were probably no deals that I didn’t do because of current regulatory outlooks, and nothing that we'd probably accelerate if we get some relief. This was just a deal that would have made sense before or after and certainly with the $50 billion cap moving that. That gives us some breathing room but this was a compelling transaction, and the bill would not have altered my thinking there.
And then on the results this quarter for Synovus. Can you give a little color and what you are seeing on the retail loan growth there? Is that something that we can expect to see continue at elevated levels?
This is Kevin Howard. I think so, and obviously again, I’m talking not just the Synovus side but we have been pretty consistent double-digit growth in [Technical Difficulty]. We had good broad based growth in consumer, we grew at a really good quarter and our credit card grew double-digit there. Our partnership lending we continue there to grow. We are in the mid single digit range there. We probably won't grow that as much in the second half as we did in the first half of the year. And the consumer our mortgage company has been steady over the last several quarters and we expect growth there. So yes, we do expect to be as part of our guidance is to be in that probably lower price, close to that 10% range on the overall consumer growth for the second half of the year.
The next question comes from Taylor Stafford of Stephens. Please go ahead.
My questions on the deal have already been addressed so maybe just Kevin on the quarter. You guys maintained the 11% to 13% NII guidance despite the June hike. Can you just talk about that decision to not increase that? And then just any good proxy to think about on the margin expansion from here with rates?
Yes, Taylor it’s a good question. We had that debate internally. Obviously as we saw increase in the deposit betas this quarter. Looking out at September and trying to project what we think deposit betas will do for September will be the real determinant on whether we exceed our threshold or exceed our range or fall towards the upper the end of that range. For the quarter as you know we saw 8 basis points of improvement, part of that has to do with the fact that we were shifting mix on the asset side. And on the deposit side as Kessel mentioned our deposit beta was 41 when you look at interest bearing but if you back out the impact of the shift to more CDs it was really a 33% deposit beta.
As we look out in the September we are forecasting the total beta to be right around 60% so our 8 eight basis points we got this quarter will fall somewhere to a range of 4 to 6 next quarter and then as we look out into fourth quarter not having a rate hike or this assumption we are having higher beta we think it could be 1 to 2 basis points in margin improvement. So all that said we still think we're going to get the benefits of the short-term rate hikes, we just think that as the betas continue to increase the amount of expansion that we will have will be less.
And then just on the expenses for the quarter and the outlook Kevin do you still expect to come in towards the bottom end of that zero to 3% expense growth?
That's correct. So I think there are some things out there from a reported basis that will keep our expenses at that low end of that range.
The next question comes from Nancy Bush of NAB Research. Please go ahead.
First I have to give kudos to your investment bankers for keeping their mouth shut because I don’t think there was a peep about this one. Anyway first one Kessel as you know one of my pet areas is wealth management and you've touched on this a couple of times before, very competitive area for wealth management family office et cetera. Do you feel like you have the infrastructure in place and the people in place now to compete in that market or are you going to need just sort of upscale?
Well, Nancy thank you for the comment about investment bankers, their egos are needing more stroking right now so I'm just going to hope they will. So might we need some more resources yes, but I will say this that area is performing very well for us. We've had great performance from our group in Augusta that's been with us for gosh barely a year. Our new Nashville family office is flourishing. We are supporting that backroom out of our operations here. So even though this transaction didn’t include again revenue from the wealth management and the model we are going to have tremendous opportunity and I would be more than willing to add some backroom support if the opportunities in Florida are greater than we think or even as great as we think. So we've got the platform, we've got the ability to scale it more but I would love for Kent's team to say we need more resources out here because of the opportunity will that be again and work for us brokerage family office. But we are seeing again good success in some of the investments we've made in current markets supported by the platform we have here right now.
I mean there are very strong competitors there I'm thinking Northern Trust particularly. So my sense is that somewhere along the line you are going to have to add some folks and maybe just up the general game in doing that. But secondly does FCB have any industry segment lending with which you are not already familiar or you are not already in or vice versa, I mean are there going to be sort of industry opportunities in the C&I book that you are going to have there that you don’t have now?
Yes, let me take a quick stab and maybe let Kent go again. So we've talked about some of the things we do. We know they've got expertise in maritime services, in aviation services, some of the HOA products but Kent you might talk about other areas. They are again -- they are a strong platform that we're excited to be able to leverage.
You know good morning, nice to meet you. The due diligence process between our two companies did a very good job of illustration of a couple of areas where we've conducted business in the past and Synovus probably hasn't and then vice versa. And those synergies feel very good to us. We think about things like senior housing and healthcare that's something our company just didn't have the resources to be able to reach into although it's very deep in the Florida market as you know. So we think that there is leverage and opportunity in that and premium finance of course is a very much specialty practice which we don't have on board presently in our platform, so we think it will grow.
What I would tell you about the FCB platform in terms of what it brings relative to the kind of leverage you might be thinking about is we have just very deep knowledge of the marketplace and deep knowledge of the names in the marketplace. So where we can come together and say this is an asset class we'd be interested in looking at because Synovus has history there, where we may have driven by that opportunity in the past, we're going to be able to get those looks for the team. The other thing I would tell you is, I'm a 30 year banker. I've spent a lot of time at a big bank, we did a lot of mergers and this so far in my opinion has been the best in class experience around cultural fit. And I'm bringing it up at this point in the conversation because around credit it's so important you know when you go out day one, all the clients are going to want to test you and how well your credit teams work together.
And this feels very, very good, very complementary and very compatible and I really have not been in a conversation that says, I can't believe you guys did that and we haven't felt the same way going the other way. So I think we've gotten lucky in the sense of what kind of credit appetites we share.
The next question comes from Christopher Marinec of FIG Partners.
Thanks good morning, Kessel is it fair to say that the real estate concentration of other opportunities you may have looked at just was too high and that therefore the more modest real estate is much more palatable on FCB?
I mean that's a pretty quick synopses most of you know, most of what we've seen in high real estate and again with FCB not only was that not the case but they had such expertise in the corporate and middle market. So it wasn't focused on one area we like a lot what they did and that's kind of unique if you look at. You know banks typically that are smaller sometimes their specialties may be in areas that aren't that attractive. I am not criticizing others I'm saying it's not that attractive to us, in this case you know you have the double benefit of [indiscernible] extraordinarily concentrated and they bring expertise to us that will leverage across the state of Florida.
Great, thanks for that and Kevin on the IRR calculation is there any further background on the terminal value are there assumptions relating to that?
We'll share that with you offline.
The next question comes from Jake Civiello of RBC. Please go ahead.
I apologize if I missed this but what percentage of FCB loan portfolio did you perform due diligence on?
We did about 70% of their loans.
Okay. Is that on an absolute number basis or on a dollar value basis?
That's on dollar.
Dollar and portfolios.
We did a lot of sampling on smaller loans, heavy sampling in the mortgage company on smaller loans. So it was a pretty [indiscernible] FCB, well it was pretty deep due diligence in there. But it was just comment on it, it was very again, and as Kessel has mentioned as Kent has mentioned I think there is a lot of compatibility there. Loan policies were very similar and so that was the percentage we looked at. We were in there quite a while.
Are there differences in the compensation structures for the FCB loan officers? Or how do they differ from the Synovus loan officer compensation?
In some basic they certainly are Jake. We are comfortable with those compensation practices. We have talked with our teams about over the next year looking at theirs and ours and in many cases by the way we think there's were better. And they incent and reward the right behavior loan production deposit production as we do too. Ours are somewhat more complex and that’s just how big banks compensation plans grow over time. But certainly no incompatibility at all. We have looked at their top producers, how they get compensated. We are big believers in top producers need to get well compensated. So no issue there. Just by the due diligence Kevin mentioned over 70% and there was [indiscernible] reversed due diligence with FCB back to us.
Our teams agreed early on that this only works if both teams are comfortable with each other because we don't want to do anything. We both very -- in the right way we are both very proud of what we have done and how we have built banks, and quite frankly how we take care of our clients. And so there was a robust process both ways to make sure that both sides went in with eyes wide open so that when we come together as Kent just mentioned we are not out telling clients something has changed. We are out telling clients we have got scale on both sides. We have got opportunity. We have got more expertise and we can really make this combination a good one. So I don’t think anybody offended by the due diligence process but it was certainly robust both ways.
This concludes our question-and-answer session. I would like to turn the conference back over to Kessel Stelling for any closing remarks.
Well, thank you and I’ll be brief and a request to you and any others who have questions offline. Our team is available all day today and over the coming days. And we will do our best. We need to arrange joint calls with the FCB team. I know Kent is very anxious to get back to be with his team who is hearing this news today. But we will certainly -- we understand we threw a lot of hats up and so we will certainly be available for more detailed questions if any of you have them. So I just want to thank all of you for your interest, for your questions. So this was our second quarter call.
I do want make sure I think our Synovus team for the great second quarter and for everything they do that makes this kind of opportunity possible. And also although most of them probably aren’t listening, to the FCB team just to share with them my excitement and our collective excitement here of welcoming them to the Synovus family at the appropriate time. I’m anxious to get to Florida. We will let Kent have first crack at it. But our team is truly excited and really do believe that collectively we will build an environment where all the employees can thrive in a very, very healthy and just really to be glad to be a part of the combined company.
So thank you all for your time and hope you all have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.