Synovus Financial Corp
NYSE:SNV
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Synovus Financial Corp
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Good morning, ladies and gentlemen and welcome to the Synovus Fourth Quarter 2017 Earning 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 Steve Adams. Sir, the floor is yours.
Thank you and good morning. During the call today, we will reference the slides and press release that are available within the Investor Relations section of our website, synovus.com. Kessel Stelling, Chairman and Chief Executive Officer will be our primary presenter this morning, with our executive management team also available to answer your questions.
Before we get started, I'll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as may be required by law.
During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendix to our presentation. Due to the number of callers, we do ask that you initially limit your time to two questions. If we have more time available after everyone’s initial questions, we will reopen the queue for follow-up.
Thank you. And I’ll now turn it over to Kessel Stelling. Kessel?
Thank you, Steve and good morning to everyone. Welcome to our fourth quarter earnings call. Before I go to the deck, I want to thank Steve for assuming his role and did farewell to Bob May who is sitting next to Steve and Bob is, as you all know, has taken on expanded responsibility in our strategic financial review. So, I think, Bob, you completed 14 earnings calls. This is your 15th. So thanks for your time as well.
So I’m going to walk us through the earnings presentation and we’ll open the line for questions. Like last quarter, there is quite a bit of noise in the numbers for this quarter, but let me start with slide 3, which will provide a summary for the quarter. As you’ll see, the results for the quarter reflect a $47.2 million tax reform related charge as well as $23 million loss from the previously announced redemption of our $300 million principal senior notes. Diluted EPS was $0.23 for the quarter.
On an adjusted basis, diluted EPS was $0.72, up 10.7% from the previous quarter and up 32% from the same period, a period a year ago. When I move to the next slide, we’ll do our best to reconcile those numbers, both with numbers that went into the adjustment in other select items that we thought warranted calling out this quarter. Return on average assets was 37 basis points on a reported basis.
On an adjusted basis, ROA was 1.12%, up 7 basis points sequentially and up 21 basis points from the year ago. We continued to generate positive operating leverage for the quarter. As you’ll see, the total adjusted revenues increasing 12.1% versus fourth quarter of last year, while adjusted expenses increased 7.6% versus the same quarter a year ago. Managing expenses continues to be a priority. We’re pleased that we’ve finished the year with an adjusted efficiency ratio below 60%.
On the balance sheet side, average loans for the quarter increased $889 million or 3.7% versus a year ago. Average deposits grew 1.6 billion or 6.6% versus the same quarter a year ago. From a credit quality perspective, the non-performing assets ratio declined to 53 basis points, a 21 basis point improvement from a year ago and lastly, in terms of capital management, the overall returns, we continue to see improvement in capital efficiency with an adjusted ROE of 11.96%, up 246 basis points from a year ago. The adjusted return on average tangible common equity improved to 12.26%, up 257 basis points from a year ago.
Moving on to slide 4 again to provide a summary of selected items impacting the quarter’s results, the first section of the slide summarizes the items that are excluded from our adjusted earnings per share calculation. The first item, as mentioned, is the $47 million in net income tax expense related to the effects of federal tax reform, 46 million of the total is due to re-measurement of our deferred tax assets at the new federal income tax rate of 21%. Slide 17 of the appendix provides further details.
The second item relates to the benefit from research and development tax credits and certain favorable adjustments to our 2016 state income taxes. Since both items relate to tax years prior to 2017, we had excluded them from adjusted EPS. The $1.7 million increase in the estimated Global One payments is due to the newly enacted lower federal income tax rate, which increases the estimated earnout payments and as we disclosed in the previous quarter, we did incur $23 million pretax loss from the redemption of our $300 million senior notes during the fourth quarter. So again, those are the large majority of the items that were excluded from adjusted EPS.
The second section of the slide summarizes other significant items that are included in the computation of adjusted earnings per share, but we [indiscernible]. So during the fourth quarter, we recorded a favorable adjustment to our state income tax apportionment factors, which reduced our state income taxes, net of the federal benefit, of 4.6 million. Approximately 1 million of this benefit related to the fourth quarter taxable earnings. The remaining 3.6 million relates to the first nine months of the year.
This favorable change to our state apportionment factors is also expected to result in lower state income tax expense in to future periods. The asset impairment charge and other assets held for sale are elevated this quarter, totaling $2.5 million pretax. These write-downs relate to miscellaneous corporate real estate and other assets and lastly, the quarter reflects a $3.3 million expense for one-time $1000 cash reward for team members, who are not participants in our management focus plans.
Moving to slide 5, you’ll see loans grew 5% sequentially and 4% versus a year ago. The amounts on the graph represent period end balances. Loan growth on a sequential quarter basis was $300 million or 4.9% annualized. C&I loans increased 298 million or 10% annualized during the quarter. That increase was driven by growth in community banking of $182 million, which included both net new loan growth of 49 million and a seasonal increase in revolving commercial line utilization of 133 million and we saw a continued strong performance in our specialty areas, including senior housing and Global One.
Consumer loans increased 296 million or 21% annualized. Consumer mortgages increasing 76 million or 12% annualized. A little color there, the growth in consumer mortgages was broad based. The private wealth and position portfolio contributing most of the growth and from a market perspective, the growth in the mortgage portfolio was driven by strong growth in Nashville, Atlanta, Birmingham and major metro markets in Florida. We also continue to see solid growth in our lending partnerships, which increased by 223 million during the quarter.
Additional partnership balances were acquired this quarter due to the increase in liquidity from the Cabela’s transaction. CRE loans declined 293 million or 16% annualized. For the quarter, the investment properties portfolio decreased by 255 million, including $144 million decline in multifamily. For the full year, loans grew 931 million or 4% on a period end basis. C&I loans increased 480 million or 4%. Consumer loans grew 889 million or 18% and CRE loans declined by 439 million or 6%. Growth in consumer loans was driven by increases in lending partnerships of 600 million and consumer mortgages of 337 million or 15%.
Total average loans grew $112 million sequentially and grew 190 million or 3% annualized, excluding transfers held for sale. Compared to the same quarter a year ago, average loans grew to 889 million or 3.7%. We continue to be pleased with our efforts to drive portfolio diversifications. C&I loans now represent 49% of total loans. Consumer loans increased 24% of the portfolio, while CRE loans have now declined below 28% of outstanding balances.
Moving to slide 6 and deposits, average deposits grew 15.7% sequentially, 6.6% from a year ago. Total average deposits of 26.29 billion increased 999 million sequentially. Excluding brokered deposits, total average deposits increased 331.6 million or 5.5% annualized versus the prior quarter. Average core transaction deposits of 18.8 billion increased 189 million or 4% sequentially, reflecting a $139 million increase in non-interest bearing DTAs. On a year over year basis, total average deposits increased 1.62 billion or 6.6%.
Similarly, average core transaction deposits increased 1 billion or 5.7% versus a year ago on overall increase in our customer average balance and our focused efforts to attract and grow relationships in small business and the fluid segments here largely driven the year over year growth in core transaction balances and we are pleased to continue to enhance the mix of our deposits with an average non-interest bearing deposits continuing to grow, increasing 139.2 million or 8.3% annualized sequentially and growing 309 million or 6.3% for the full year.
Moving to slide 7, net interest income was 269.7 million, increasing 7 million or 2.7% versus the third quarter and 15.5% versus the fourth quarter of ’16. [indiscernible] driven by loan growth as well as margin expansion and net interest margin for the quarter was 3.65%, up 2 basis points from the previous quarter and up 36 basis points from a year ago. The improvement for the quarter was driven by 18 basis point increase in our investment securities yields, stemming from the third quarter repositioning as well as a 6 basis point increase in loan yields, due largely to short term rate hike in December.
The increased yield more than offset the margin drag that was caused by our increased cash position for the quarter, resulting from the acquisition of the 1.1 billion in brokered deposits late in the quarter. The effective cost of funds increased 2 basis points sequentially to 50 basis points, reflecting a higher cost from the aforementioned Cabela’s brokered deposits was partially offset by re-advancing of the $300 million debt and resulted in an annualized $14 million improvement in net interest income.
The cost of our interest bearing core deposits was 42 basis points, up 1 basis point for the quarter as we increased deposit rates in various products and segments. But given our overall pricing discipline, the deposit betas remain well below modeled levels at less than 10% for the year. Page 20 of the appendix includes additional information on the interest rate sensitivity as well as the investment securities and the loan portfolios.
Turning to slide 8 and fee income. Total noninterest income for the quarter was 69.4 million, down 66.1 million from the prior quarter, down 4.7 million from a year ago. As a reminder, the third quarter includes the $75 million Cabela’s transaction fee, partially offset by $8 million in investment securities losses. Additionally fourth quarter ’16 included 5.9 million in investment securities gains.
Adjusted non-interest expense of 69.3 million increased $834,000 versus the prior quarter and 632,000 versus the same period a year ago. Core banking fees of 33 million declined 121,000 sequentially and 2.4 million or 6.9% versus a year ago. The sequential quarter decline reflects a $302,000 decrease in service charges on deposit accounts, partially offset by a $281,000 increase in SBA gains. For the full year, SBA gains were 5.3 million, up 8.4% versus the year ago.
Fiduciary/asset management, brokerage, and insurance revenues of 21.8 million increased 599,000 or 2.8% sequentially and 1.4 million or 7.1% a year ago. The increase was driven by solid growth in assets under management, which ended the quarter at 14 billion, up 23% from a year ago. The talent acquisition and market expansion strategies continue to bring new customer wins and continued growth in the business and accelerated [indiscernible] brokered assets under management to $2.5 billion.
On the talent acquisition front, our aforementioned unit had a very successful year which strengthened our inventory position. Talent additions included a new product [indiscernible] a new family asset management office at Nashville, in Nashville as well as brokerage professionals in Charleston and Birmingham. Mortgage revenues of 5.6 million were flat sequentially and up 2.6% from a year ago.
Turning to slide 9, noninterest expense of 226.5 million increased 20.9 million or 10.2% sequentially and increased 17.2% from a year ago. As noted earlier, the fourth quarter includes a $23 million loss from the redemption of our $300 million senior notes. The third quarter includes ORE and other impairment charges, totaling 8.8 million. Adjusted non-interest expense of 201.1 million increased 7 million or 3.6% sequentially and 7.6% from a year ago. Again, the sequential quarter increase is driven by $4.5 million increase in advertising spend, one-time cash award of 3.3 million, which was previously mentioned and an asset impairment charges on held for sale assets totaling $2.5 million.
The year-over-year increase in expenses is driven by strategic investments in talent, technology, higher third-party processing expense, fee of our third party lending partnerships, higher self insurance costs and the addition of Global One. We will continue the positive operating leverage. The adjusted efficiency ratio for the quarter was 59.29%, compared to 58.59% the previous quarter and 61.81% a year ago. For the full year, the adjusted efficiency ratio improved 59.87% compared to 62.67% for 2016.
On slide 10, briefly on credit quality. The first graph shows NPA and NPL and delinquency. As you will see, the NPA ratio increased by 4 basis points from 57 basis points to 53 basis points sequentially and down 21 basis points from a year ago. The NPL ratio increased by 7 basis points on a linked quarter basis, moving from 0.40 to 0.47 and decreased by 17 basis points from the fourth quarter of ’16. The increase in the quarter was expected as our dispositions during the quarter focused on held for sale loans and ORE properties that were marked to liquidation values in the third quarter, rather down normal pace of NPL sales. Kevin Howard will give you more color on that.
Past dues improved from 35 basis points to 21 basis points. That compares favorably to our loan allowance past due levels over the past year. Net charge-offs for the fourth quarter were 9 million or 0.15% annualized compared to 0.62% in the third quarter and 0.14% in the fourth quarter of 2016. Remember, when comparing linked quarter performance, the third quarter charge-offs include the impact of held for sale transfers. Provision expense in the quarter was 8.6 million, down from $39.7 million in the third quarter. That third quarter number would have been 12 million if you net out the impact of held for sale transfers.
Provision expense was 6.3 billion for the fourth quarter of last year. The allowance for loan losses stayed very flat over the prior quarter with the ratio moving from 1.02% to 1.01%. Compared to a year ago, the allowance was down 2.5 million, ratios down to 5 basis points, coverage ratio remain varied out these reserve covers. NPLs at 216% or 253% if you exclude the impaired loans, the expected loss has been pretty small.
Moving to slide 11, on capital, our capital ratios continue to be growing above regulatory requirements. The quarter included the $47.2 million in tax reform related charges which reduced the tier 1 capital, total risk based capital and leverage ratios by approximately 16 basis points. That impact was partially offset by a reduction in disallowed DTAs, 35 million in ANT tax credits no longer recorded in these DTAs, which benefited capital ratios by about 11 basis points.
So, on a net basis, the regulatory capital ratios were reduced by 5 basis points due to the effects of tax reforms, but as you’ll see, CET1 ratio of 9.9%, down 7 basis points sequentially, tier 1 capital, 10.38, down 5 basis points sequentially, total risk based capital 12.23%, down 7 points sequentially, leverage ratio of 9.19%, down 15 basis points sequentially, tangible common equity ratio of 8.88%, unchanged from the previous quarter, given the period end decline cash balances as we bring forward the part from the Cabela’s transaction and also as expected, the disallowed DTA continues to decline. It’s now 70.4 million, down 148 million from a year ago.
Moving to slide 12, in 2017, just as a reminder, our capital actions included a repurchase of $175 million of common stock, 4 million shares at an average price of $43.53, which reduced our share count by 3.3%. In total, we returned 245 million capital to our shareholders with a combination of the stock repurchases just mentioned and common stock dividends. For 2018, our capital actions include the new authorization of a share repurchase program of up to $150 million. The size and timing of repurchases during the year will be based upon loan growth, liquidity and capital optimization. We’re also very pleased to announce that our Board of Directors had approved a 67% increase in our common stock dividend to $0.25 per share, with the quarterly dividend payable – effective with the quarterly dividend payable in April 2018.
Before we go to 2018, I just wanted to, on slide 13 walk through another slide, where it shows several key metrics that I think reflect the broad based nature and the profitability that the company achieved in 2017. Our financial results were in line with our 2017 guidance and we achieved our previously announced long-term targets for EPS growth, ROA and the adjusted efficiency ratio. Adjusted EPS grew 27.7%. Adjusted ROA improved to 1.04%. The adjusted efficiency ratio improved to 59.87% for the year. Additionally, we achieved further quarter in diversification of the balance sheet, improved credit quality and we ended the year with strong capital ratios.
We’re really proud of our team’s accomplishments. And just lastly hitting key financial targets, while saying great focus on completion of other significant efforts and just to recap a few of those. Our conversion to a single bank operating environment that opened the door for our single brand transition, which our team is excited about. It’s on the way, scheduled for completion with the last signs in the mid-2018. The implementation of certain tools, the launch of our enhanced website, the introduction of new suite of credit card products, all investments improving customer experience.
We’ve completed the Cabela’s transaction, which provides $75 million of additional revenue that was utilized in parts, completed balance sheet restructuring actions that will benefit the company in 2018 and we now completed major space consolidations in markets like Atlanta, and Birmingham, which are getting greater efficiency. Those are the two new modern pilot customer branches. We made continued investments in our existing team and we added outstanding talent in key markets across our footprint and to our Synovus board. And perhaps the highlight of the year, which we really do believe represents the hard and dedication of our team, was the recognition at the top of the 2017 most reputable bank list as public private American banks, reputation institute mid-2017. So a great ’17.
I’d like to take you to slide 14, which will give you a view into our 2018 guidance and then we’ll talk about beyond that. We do expect 2018 to be another solid year from a balance sheet perspective. So we expect average loan growth of 4% to 6%, driven by continued growth in consumer and C&I lending is expected to benefit from the investments in talent that we made in 2017.
We expect deposits to grow at a price that support our loan growth, maintaining the loan and deposit ratio at an optimal level of about 95%, while continuing to maintain the deposit betas in the 30% to 40% range as compared to the historically levels of 50% to 60%, including rate cycles. We expect net interest income growth of 11% to 13%. That assumes a 25 basis point increase in rates in March and September. If there are no changes in rates in the year, the growth in net interest income is expected to be between 9% and 11%. Given the investments in talent and our brokerage business unit, we expect adjusted noninterest income growth of 4% to 6%, which is higher than what we experienced in 2017.
That along with the strong net interest income growth is expected to result in total adjusted revenue growth between 9.5% and 11.5% for the 2018 year. We expect total reported noninterest expense growth of 0 to 3%, which includes incremental investments in 2018 as we look for a portion of the benefits received in tax reform, our investments will be focused on revenue generating talent additions, enhancements to our digital capabilities and the resulting customer experience, additional team member benefits on top of our increased 401(k) match of 5%, which we announced midway through the core and the $1000 bonus for a majority of our team members announced in December and January, additional investments in information securities and technological advancements to drive ongoing efficiencies.
Despite the incremental level of investments, we do expect to get at the end post operating leverage in 2018. We also expect an effective tax rate of approximately 23% to 24%, a net charge-off ratio of 15 to 25 basis points. That modest increase in the range reflects the continued decline with recoveries from legacy credits. And as noted earlier, our capital actions for 2018 includes 67% increase in common dividend and a share repurchase authorization of up to $150 million.
We have said previously we will update our three year targets on this call. We had previously achieved our stated long term goals, so just to briefly up you of three year targets for EPS growth, ROA, return on average tangible common equity and an adjusted efficiency ratio. First, I just want to reflect on the path that’s gotten us to this point. Since 2014, we’ve experienced broad based financial improvements in the three key financial areas, I just mentioned, growth, profitability and efficiency.
From a growth perspective, adjusted EPS which was $1.44 for 2014 has grown at a compounded annual growth rate of 21%. From a profitability basis, we have rapidly increased our adjusted return on assets from 79 basis points in 2014 to 1.04% in 2017. And we’ve increased our adjusted return on tangible common equity from 6.96% in 2014 to 11.14% in 2017. In addition, on the strength of the positive operating leverage as well as really strong expense discipline, we’ve reduced our efficiency ratio by over 600 basis points to 59.87%.
This overall performance enhancement is being driven by really the organically growing the business while experiencing more moderate backhauls and increase in margin and overall productivity. We’re confident we think the same will be into the coming years and we believe that executing on our strategic initiatives will allow us to continue to enhance the customer experience, which will internally to grow and improve profitability. As such, we will continue to strive for double digit EPS growth over the next three years and we believe through a combination of growth and the bottom line as well as prudent share repurchase efforts and again the effects of tax reform, we expect a 25% three year compounded annual growth in earnings per share.
From a profitability standpoint, continued balance sheet optimization, market expansion as well as lower tax expense, we believe will allow us to increase our ROA to above 1.35% during the three year horizon and our return on average tangible common equity to over 50%. Lastly, our strong growth in revenue will be balanced with growth in our overall expense base. We’ll continue to invest in talent and technology to improve the customer experience, while dealing this growth. We will do so while maintaining positive operating leverage and believe we should drive our efficiency ratio below 57% during this same timeframe. So we’ve been great performers over the last five years. We’re excited and confident that our dedicated talented team continue to drive higher levels of performance in 2018 and the years to come.
We’d be happy to take your questions about any of that, both fourth quarter, year in review or the go forward view. And with that, operator, we’ll open up the call for questions.
[Operator Instructions] And the first question is coming from Brad Milsaps.
Hi. Good morning. Sandler O'Neill. Kevin or Kessel, I was curious if you could kind of maybe walk through some of the moving parts of the balance sheet this quarter. I know last quarter, you finished with a fair amount of liquidity. It looks like you started to kind of work through that, probably didn't get all the way finished, but can you walk through kind of what the plans are there. And then, could you just refresh my memory around the timing of when you prepaid the debt versus when the new debt came on and sort of how much double counting or overlap you had and kind of what that can kind of mean going to the first quarter?
Brad, this is Kevin. So I will take that. So when you look at the average balances for the quarter, as it relates to the cash side, we were a little over I guess $800 million, where the previous quarter, we were roughly at $500 million. And so when you look at those two numbers, you’ll see that we still had a little bit of an inflated cash position for the quarter. As Kessel mentioned, we were able to overcome that. That cost us about 4 basis points in the margin. If you looked at period end balances, we are already at that lower level by the end of December. So we will be able to get through the additional cash that we received from the Cabela’s transaction and that will show up as a four basis point improvement in the first quarter margin.
Second question, as it relates to overarching strategy and remind me again, Brad, what the second question was. I’m sorry. It was the debt. I apologize. On the debt, we paid that all late -- we refunded it late in October and we paid it off early in November, November 9. So there will still be a benefit of roughly half a quarter that will pick up in the first quarter ‘18.
Great. Just to follow up, are you pretty much done? I mean, obviously, the balance sheet is always moving, it's fluid, but are you pretty much done with all your sort of initiatives around the Cabela's trade and anything else that you kind of see out there where you think you’re kind of through the biggest pieces of what you want to do?
We’re through the biggest pieces. If you look back last quarter, if you recall, we had about $27.8 million that fell to the bottomline that we did not use in the third quarter through some of the balance sheet restructuring. As Kessel mentioned earlier, we ended up $23 million of one-time expense this quarter associated with the debt extinguishment. So largely, we’re through all of our actions. And so now, we should be able to reap the benefits of some of those bond restructuring as well as balance sheet restructuring efforts that we completed.
Thank you. And the next question is coming from Jennifer Demba.
Thank you. Good morning. SunTrust. Kevin, just wondering if you could walk us through from a high level, 0 to 3% expense growth for 2018. What are kind of the puts and takes there? And then my second question, just relates to your steep increase in the dividend versus a little bit less share repurchase authorization this year, just walk us through that decision.
Yes, Jennifer. I’ll start with the expenses. So the 0 to 3% range just to put it in context, from a numbers standpoint, it translates to roughly 821 million to 845 million in expense. And so that number is elevated from levels that you probably expected to see and as Kessel mentioned in his talking point, we are reinvesting part of the benefit that we are receiving from the after tax cash flow of [indiscernible] additional dollars to invest in things like revenue producing FTEs, some additional technology investments as it relates to digital, but also towards to continue to drive efficiency.
And some of the numbers that we've been able to reinvest are showing up already in the revenue line. So when you look at the guidance for revenue, next year, if we did state the midpoint of the guidance, we're showing about 11% total revenue growth and some of that growth is being anchored by further investments in some of our revenue producing fee income position, brokerage, mortgage loan originators. So we're already starting to deploy some of those investments into this year's earnings stream.
In addition to that, over the next week, month, quarter, we're looking at further investments that will help to generate revenues this year, but also in out years, in ’19 and ’20. And so we're being very purposeful in how we think about those investments, but when you look at the top line and you look at this 11% growth, on an operating leverage perspective, it’s still giving you a 4% in operating leverage and is giving you 1.6 times. So, we feel as if we're still being prudent in our expense growth, but we aren’t taking advantage of some of the after-tax cash flows of the tax reform.
As it relates to the dividend and we looked at the execution around returning some of the benefit to our shareholders, one area that we did go fairly significantly up and it’s in our dividend, and when you look at it from a yield perspective and from a payout perspective, we felt like the 67% increase to a dollar per share on an annual basis put us more in line with some of our competitors and put the dividend yield at close to 2%, which also, we felt, was very important, given the competitive landscape.
Thank you. And the next question is coming from Ebrahim Poonawala.
Bank of America Merrill Lynch. I just wanted to follow up in terms of loan growth guidance. It’s very clear that we saw very strong momentum in C&I at the end of fourth quarter, Kessel. As we think about ’18 and we look at sort of the makeup of loan growth in ’17, do we expect ‘18 to resemble ’17 where it's driven by the partnership loans, consumer and then C&I or is it going to -- should we expect a different composition of loan growth?
I think you addressed it to me. I’ll let Kevin take most of it. It will be a little different, because we don’t think we’ll see the paydowns on the CRE side that we experienced this year. We saw pretty dramatic declines in a lot of our CRE categories, which we believe will level off. But Kevin, why don’t you give a little more color on the categories you see?
Yeah. I’d be glad to. I think the purchases, the third party partnerships, I think that will be much less. We'll have some growth there. We've guided mid single digits. We’re in the 4.5% range now. So a little bit and that growth there, certainly not as much as ’17. I think, as Kessel mentioned, offset the CRE portfolio, maybe stabilizing a little bit more. We had a tremendous amount of payoffs the second half of the year as you saw form earlier our multi-family portfolio and a lot of the de-risking is kind of out of the balance sheet now.
As you know, we’ve had major reductions, $200 million this year and some of the land and special assets portfolios, the Cabela’s transaction that helped us in the third quarter. We moved a lot to held for sale. We're moving that all this quarter and the first -- the fourth and first quarter. So that drop, $400 million, we think we actually we’ll be close to maybe even it a little bit in that growth. I think you won’t start to see that till maybe the second, third, fourth quarter. We’ve had really good production towards the second half of ’17.
So, I think the funding will start to show up in the real estate. And again as Kessel mentioned, the paydowns and the de-risking Florida, we'll get some of that still left, but not certainly at the pace we had in ’17. So I think they kind of offset each other a little bit. And then I think the C&I, we just keep doing what we do. I mean, we're growing in a lot of different areas. We grow in ABL, as Kessel mentioned, senior housing, our community bank has good utilization left and good growth this quarter. And that's good to see, small business had growth.
We think we've invested pretty heavy in the middle market space and we think that sort of helps pay dividends. I think if you talk about kind of the composition, maybe of the different portfolios, you probably talk and maybe not 17%, 18%, in consumer, more 10% to 15%. I think you're mid-single digits in the C&I. Hopefully, we will get some lift in utilization for the year.
We were down in utilization, up this quarter, but down for the year. And then CRE stabilizes and that sort of helps offset. So that’s our thoughts on 4% to 6% and probably the one thing that swings us toward the higher end of the guidance, maybe versus the lower end is that utilization. We were positive with the outlook for next year, our borrowers. Hopefully, there is some expansion, CapEx built into there, wasn't as much as it was in ’17. I don’t feel like that might play out a little better for us in ‘18.
And if I could just follow up on the margins, so Kevin, you mentioned I guess the 4 basis point lift to the 365, so the margin in the first quarter starting would be around 370, could you remind us the sensitivity to each Fed rate hike for the margin and do we expect additional sort of time deposit runoff, like we saw in the fourth quarter, which were flat previously as we think about 2018?
So what we have in the appendix is that it’s about 1.54% annualized NII sensitivity for every 25 basis points. So that's what we would expect under a modeled scenario. As Kessel mentioned, we've been running – we shared that we, for 2017, we had roughly a 10% beta. We think that this December rate hike that we just had will translate closer to a 30% beta, so we could get a little bit of additional benefit with the lower numbers there. But we think in general, we could get 8 to 12 basis points in the first quarter of margin expansion, just associated with the 4 basis point drag I talked about as well as the December rate hike. Higher in the range, if we get a March rate hike, lower in the range if we don't see another hike until after March.
Thank you. And the next question is coming from Michael Rose.
Raymond James. Just wanted to follow up on the loan growth, a lot of talk this quarter around competition and what that could potentially do to spread? So have you guys factored in any of that as you think about your margin outlook and the loan growth outlook?
Are you talking about the spread again, Michael in terms of loan growth.
Yeah. There's been a lot of talk this quarter about with the tax reform kind of competing away, the profits over time through increased loan competition, loan growth for the industry is still somewhat anemic. So just wanted to get your thoughts and see if any of that's in your thought process or baked in to your outlook?
And look, we have not baked anything that would show any compression of the margin associated with competing out the lower tax rate or yield. It’s obviously going to happen in some form or fashion. The competitive landscape is ever changing and we, I'm sure, that there will be some competitors that feel as if they can pass back some of their tax savings through loan yields.
We feel very confident that we’ll continue to improve overall margins, just through our mix, as we look to continue to grow our consumer portfolio, which carriers a higher yield. And as we move to some of the growth that we talked about with C&I, where we can get some improved yields there as well. So, we’re not, at this point, we don't see anything in the short term that gives us pause.
We do think over the long haul, there will be pressure to continue to price loans more aggressively, given that the market has been fairly soft. Now, if we do see some economic benefit, with GDP moving up and we see demand pick up, that may help to mitigate some of that risk. But short term, Michael, long answer to a question is that we're really not concerned at this point.
And then maybe just for a follow-up on a separate topic for Kevin Howard. It looks like the C&I NPLs picked up this quarter. Can you explain what drove that? And then just broadly, what are you guys thinking around credit trends? Are there any early warning signs on any categories that you guys are taking a closer look at this point or is it smooth sailing here for the next year or two?
No. I think that's a little bit of timing. Our C&I credit quality is strong. Past dues were meaningfully down, I think, the 16 bps, chargeoffs, 21 bps there on C&I. The inflows were up a little bit. That was maybe $7 million, $8 million credit that went into inflow out of the portfolio, but that's not too unusual. That will happen from time to time, but overall, the credit quality in the C&I book. And as we've grown our small business book over the last two or three years and that’s been nice and steady growth, we do expect that to tick up a little bit or some seasonality, but nothing really in there, in the C&I book other than that. It’s healthy. And I'm sorry, what was the second part of your question, Mike?
Just broadly, is there any categories you guys are keeping a closer eye on or any areas you’re curtailing lending at this point?
We pulled back, as we mentioned a couple of quarters and wanted to kind of de-risk some of the exposure to the e-commerce side earlier in the year on the retail CRE and that's been, as you see, about $150 million in drop throughout the year. So that's something we wanted to do and we feel good about that portfolio. As a matter of fact, it's high performing. We're just not pursuing a lot of opportunities there. We’re still watching a couple of markets from a multi-family standpoint.
We really like the multi-family space that certainly have had a couple of market that we've seen get overheated and we’re watching there. The leverage loans, that's a small part of what we do, but there certainly seems to be a lot of competition in the C&I. People seem to be maybe getting a little more higher on leverage that we’re uncomfortable with. And so we have sort of stayed away from those type loans. That’s kind of what we’re watching within the portfolio. I don’t have, other than, right now, I can’t put my hand on one particular part. I mean, it’s – we’re watching all of it, but I think overall, the migration is stable and we think ’18 as far as a credit performance look a lot like what ’17 did.
Thank you. And the next question is coming from Nancy Bush.
Nancy Bush, NAB Research. Kessel, I have to ask you the optimism question. You've always been sort of, I guess, sanguine about business prospects, et cetera, as we went through ’17 and we're getting sort of a varying reaction now to the impact of the tax cuts, et cetera. Can you just tell us where you kind of stand on that scale and what you're hearing from your customers?
Yeah. I’m probably in the middle when I talked to our team yesterday about, and cautioned our team about responding to any anecdotal comments. I think it’s just early in the game. We’re talking to customers. I think everyone is excited about different areas of the tax cut, but has that yet translated into increased lending, business activity, investment. We don’t see evidence of that, but we are cautiously optimistic that maybe in the back half of the year, that translates into growth that hopefully pushes us at a higher end of our range. We’ve guided 4% to 6% of loan growth. So, if that translates into real business activity, maybe we see that if the higher end and if it -- we base our opinion on tax that we see and hear. And again, I think the move is good. We just want to see the move translate to real activity and growth.
Secondly, you've given an effective tax rate for 2018 of 23% to 24%, and most of the industry has been at sort of the 20% to 21% level. Can you just give us the factors that would make your level a bit higher?
Nancy, this is Kevin Blair. So, if you think about the statutory rate that would be including federal and state, it would be roughly 26% and so ours being a 23% to 24% is the tax advantage businesses that we’re in, tax exempt lending as well as some of our tax credit strategy. As you may recall, over the last several years, we’ve been operating with net operating losses and so we have had a lower tax burden as a result of that. So, our focus on initiating tax strategies have not really come into focus really until these last couple of quarters as we’ve exhausted our federal NOLs. And so I think what you’ll see is starting out of the gate, we're in that 23% to 24%, as we’ll be able to utilize some of the tax credit strategies that we've put in to place, as Kessel talked about, just this quarter. But over time, now that we're through the federal NOLs, you’ll see us initiate additional tax credit strategies that can drive down that rate overtime.
And just Kevin, one other issue, I mean, remind me, your FTE adjustment as I recall is quite small. So there will not be any kind of material impact on NIM, well there from the FTE.
It’s roughly $300,000, Nancy. So it’s immaterial.
And just one final question, mortgage, can you just give us an insight into how the mortgage pipeline stands right now. I know, it's seasonally -- should be seasonally low, but any kind of foresight in to how you see the mortgage business shaping up this year?
Yeah. Look, it was a year for us that we felt like, even though the numbers are down 6% in total fee income, we took more than our fair share. When you look at the NBA market, total production, it was down 14% and we were only down 8%. Now again that doesn’t win us any awards, but we're starting to again take share. So as you look into next year, the forecast for next year has production down 6% for the industry. We think we will be up next year and it’s from our ongoing strategies of adding additional mortgage loan originators. And so we expect the first quarter to be up a couple of percentage points. And look, there is a headwind with the ten-year treasury, as there is 260, but we're going to be able to overcome the reduction in the refinanced volume by just adding additional sales staff.
Thank you. And the next question is coming from Christopher Marinac.
FIG Partners in Atlanta. Kessel and Kevin, wanted to ask a little bit more about GreenSky and how that adjusted it is to development, it’s the pace of purchasing from them will be higher in 2018?
I think it will not be as high as – it will not be as much in ’18 as it was in 2017. Like we've guided in the past, kind of mid single digits was where we were, our comfort level. We’re already at 4.5%. We sort of look at them together. They’re pretty close to the same balances, a little bit more on the SoFi side and the GreenSky, but yeah, we continue -- we're going to continue that partnership, just the purchases will not be as much as they were in 2017.
And Chris, I’ll just add. That’s really is from the overall balance sheet concentration as we try and manage all categories, the relationship is strong. We like the credit. We like the company. We like the performance, the background and everything, but so it’s just simply a matter of balance sheet validation.
Got it. Are there potential relationships, Kevin or Kessel that you can grow like this, like SoFi and GreenSky, just to have new additions in the future?
There are, Chris. We are in constant evaluation, none like announced this morning, but constant evaluation with our teams to look at similar fintech partners, that give us some accelerated asset generating capability at lower cost and some hopefully better yields. So, we probably will get 100 to settle on the two that we get and we probably look to maybe 100. So, yeah, there are others and we stay very deeply involved in our look at those decisions, it will be good partners for us that would get our model and our risk tolerance and so hopefully, more to come on that in the coming months.
[Operator Instructions] And there are no more questions from the lines.
All right. Well, I want to thank you. Let me close by thanking all of you on the call for your interest in our company. I especially want to thank though the entire Synovus team for what I consider to be an incredible 2017. I think the loyalty of our customers are reputation, our reputation, recognition, our ability to improve the customer experience. So all the result of the passion that our team has for services, success. I think I really do believe our team members did initiate us now and they will continue too in the future. So big thanks to them. Thank you, all for being on the call today and have a great rest of the day.
Thank you, ladies and gentlemen. 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.