Synovus Financial Corp. (SYU1.DU) Earnings Call Transcript & Summary

Well, thanks, everybody. Thanks for joining us this afternoon. We're excited to have the management team from Synovus here to join us for a little commentary and conversation. We have Kevin and Jamie. Thanks a lot.

Maybe you come out with some new slides last week. Anything you want to maybe say to kick it off?

Yes. Jared, after 12 successive one-on-one meetings, I will make this number 13, which, hopefully, I can keep my energy level high. But look, thank you for the opportunity to speak. It's great to be with you. As Jared said, for many of you, we released a new slide deck last week before another conference, and the intention was to do a couple of things. Number one is to reinforce our commitment to our transformational journey to ensure that we continue to invest in the really important areas of the bank that we think drives value propositions for our clients, which means we've got to continue to enhance our overall team member engagement. And so we're focused on generating higher engagement of our team and attracting new team members. Two, we have to build on a foundation of strong client loyalty. We talked about the fact that this past year, we were #3 in the J.D. Power survey in the Southeast from a consumer standpoint. And on the Greenwich Awards, we finished 2024 with 25 awards, which puts us the fourth highest of mini-bank in the United States. So building on that foundation, we want to get through some of the short-term issues that exist within the industry and focus on normalizing a level of growth and returning to what we would consider normal growth in a great footprint in the Southeast. At the same time, we want to make sure that investors understand that we are focused on continuing to reduce our risk profile. It's obvious to us that part of the investment thesis is that we're in a great footprint. I think we have a great model, but there is a perceived level of risk that we want to minimize, and it starts with credit. And one of the great updates that we had last week was that we expect the third quarter to come in at 25 to 35 basis points, so down from what we had seen earlier in the year. And as we had forecasted, we expected the second half of the year to come in lower than the first half. Two, capital levels, when we talk with certain investors and others, we've seen that our CET1, although we feel that we have excess capital relative to some of the other banks that were compared to, it was a little lower. So at 10.61% CET1, we're at the highest level we've been in over 8 years. And then lastly, coming out of the Silicon Valley issue from last year, liquidity has been top of mind. And our team has worked to continue to grow core deposits. We're up 3% year-over-year, which I think exceeds that of most of our peers. And at the same time, we've been able to bring down our wholesale funding levels by over 30%. So that helped to fortify our message and what we're trying to do. The update for the quarter was around the third quarter and updated guidance. So it was really, other than the credit message I mentioned earlier, we did say that revenue would come in a little lighter than what was originally anticipated. And that was primarily a function of the fact that our previous guidance had a December rate cut, not a September rate cut. So incorporating a September rate cut would provide a little bit of pressure on the margin in the quarter. As we shared with some of the updated disclosures, loans have begun to reprice. One month SOFR started to move at the beginning of September. And so as our loans are repricing, we're not going to see the deposit betas, and reduction in deposit rates happen until after the Fed cuts rates. So that puts short-term margin compression that were neutral to the front end of the curve, but it takes some time, say, 90 to 120 days to have that play out. So in the short run, it's about a $5 million to $7 million hit during the easing cycle for each 25 basis point rate cut. But again, when you come out of the other side, it becomes neutral. We were able to offset some of that revenue headwind with lower expenses and, as we mentioned, lower credit. So at net-net, the update should mean that EPS is largely in line with consensus or slightly better. But that was the genesis of why we did the slides. And I think at the end of the day, we spend a little time today at the conference explaining some of the nuances behind the update.

Great. Maybe on the growth side, the loan growth side, for the last few quarters, we've seen a little bit of a decline in the 0% to 3% growth range. I think caught some people off guard early on, just given the strength of your markets and the growth in the markets. Can you talk a little bit about some of the puts and takes of what's behind that, where you're seeing some pressure and I think maybe the payoff paydown activity levels as well?

Yes. As we've talked about, when you look at loan growth, you really have to peel back the onion to see what's going on underneath with all the different levers. And so first and foremost, when we look at second quarter, our production was actually up about 50%. Funded production up 50% first quarter versus -- or second quarter versus first quarter. Now in fairness, if you compare second quarter '24 to second quarter of '23, it's still about 10% lower. So although production is increasing, it's still not back to the levels prior to what we saw post the Silicon Valley crisis last year. Pipelines, as we entered the third quarter, were up about 8% over where they were when we entered the second quarter. So what that would suggest is that overall loan production is continuing to increase. So why aren't we growing loans? And maybe why the revision down on the guidance? It really has to do with, number one, balance sheet optimization. One of the things that we've done throughout 2024 is ensure that we're putting our capital to the highest returning asset classes and that we're doubling down on those businesses where we feel like they're relationship based and there's an opportunity to not only generate loan growth, but also liquidity and ancillary fee income growth. As such, when you look at the second quarter, we had 2 large headwinds. Number one, senior housing. We peaked at about $4 billion, and we felt like, from a diversification standpoint, we want to bring down those balances. And so we brought those back down to about $3.5 billion. There are about $200 million of runoff in the second quarter, and that was strategic and intentional. We also ran off about $200 million in shared national credits and what we call our national accounts area where we're buying into other folks' syndications, again, intentional, trying to minimize the amount of capital that we're deploying into non-relationship asset classes. And then when you add on the fact that the line utilization was off $250 million, so same line utilization, first quarter to second quarter down $250 million. That was the $650 million headwind that some we anticipated with the restructure of the optimization, the line utilization we didn't, and that's what's been bringing down some of the outstandings growth. When you fast forward into the third and fourth quarter, we always anticipated loan growth to be loaded to the back of the year. We do expect CRE payoff activity to continue to pick up. We average -- we've averaged, over the last several quarters, about $550 million of payoff paydown activity. Our normal average is around $750 million to $800 million. So we expect that latency to pick up, and then we'll see some paydown activities in the third, fourth and maybe in the first and second quarter almost as a catch-up. And that's what's driving some of the headwinds. But without the optimization headwinds and without a utilization headwind, we think as productivity continues to improve that we'll start to see that loan growth trajectory change.

What would you say, once you have those headwinds behind you, what's a good sort of long-term growth target for a company your size in your markets?

Yes. It's hard to put an absolute number on it because you're trying to ascertain what the economy is growing. But we talk a lot about, for us to be successful, we have to grow at about 100 to 200 basis points above the underlying market growth. So if we're growing 3% -- the economy is growing 3%, we think 4% to 5% is winning because you're not only getting your fair share, but you're taking market share. And I would just tell you that when you look at what's driving the growth, it's the areas that we're investing. Middle market is up 8% this year. CIB is up double digits -- or it's doubled just based on its new size. Structured lending continues to grow. ABL continues to grow. Our core banking area -- or I'm sorry, our commercial banking, community banking area grew for the first time in a long time. So the categories -- those commercial categories that we've invested in and we think are great asset classes and great relationship opportunities, they're all growing. And I think if we can continue to have that scenario where those businesses are growing and you remove those headwinds, you're going to get outsized growth.

On the utilization rates, interesting that, that keeps coming down. From talking to your clients, what's holding them back? The existing clients, what's holding them back from using more? Is it the rate environment, the economic uncertainty, political uncertainty? And what needs to change to get that?

It's -- I think it's all of the above. It's, number one, they're still carrying excess cash. When we look at the average balance per account on the commercial side and compare it back to December of 2019, our commercial clients are still about 25% higher in average balance, which tells us they have excess cash to use. And when you look at the relative cost of having to use your line of credit, it's -- they're choosing to use their cash before they're drawing on that line. So that's first. Two, we do a survey every quarter, and we have 16,000 clients. So we have about 500 clients that respond to the survey. So maybe it's the same 500 clients, maybe it's new people each quarter. But for the first time in 7 quarters, the #1 concern was not inflation, but rather the election. And so as I think about that, it's less about whether you're hoping the Democrats win or Republicans win. It just shows you that they look at the election as having some fears and -- fears of the unknown. And so as that outcome is known, I think you'll see people start to come off the sideline if that's holding them back. We talked about interest rates, and I think lower interest rates will drive demand. But in many ways, if you're a commercial client and you're taking out a floating rate loan, you know once you have some certainty that rates are coming down, I don't know that interest rates in and of itself would prevent you from borrowing money if you really convicted that it's a necessary project, whether it's CapEx or whether it's building inventory or such. So I think the confluence of a lot of events, getting the election behind us, lower interest rates, lower cash balances, a lot of those things should drive demand up a little bit.

In the Southeast, the Southeast is strong geography overall. What other pockets that are better for you that you're seeing better opportunities? And how is the competitive dynamic changing in the market?

The hard part about a competitive question, and we were talking about this earlier, there are 85 banks in Miami. There 83 banks in Atlanta. Heck, in Albany, Georgia, there's 15 banks. In Columbus, Georgia, there are 16 banks. So there's not ever a lack of competition, regardless of the environment. You're always competing, and you're competing on all the facets of business, price, value, service, those things. So the great thing about being in the Southeast, it's growing 2x the national average and population, 33% faster in household income growth, but everybody knows that. So you get a lot of new entrants. I've seen some de novo banks in Alabama recently. All that said, we don't expect competition to ever become easier, and that's why we have to continue to raise the bar on the things we do well. Now the way that we're able to offset that is, number one, continue to attract the best talent. We're in a commoditized world at the end of the day, and how we deliver our services on a proactive basis is what I think differentiates our bank. And we talk about Synovus as being in that perfect size where we have all the capabilities to compete with the larger institutions, but we haven't lost sight of what personal attention means to a client. And so we can compete with those smallest banks who do provide great client service. And I think when we value how we're going to continue to grow, it's less about expanding our footprint. It's about adding more talent to increase density within the footprint we're in. It's adding new products and capabilities that allow us to sell more solutions, that deepen the wallet share and increase the profit per relationship. And it's about adding specialty businesses that allow us to attract business, not only in the Southeast, but across the U.S.

At the Investor Day a few years ago, you laid out several key initiatives as future earnings growth drivers. Now that we're 2.5 years or so away from those initial projections, which continue to drive the most excitement for you? And which have become maybe a little less of a focus?

I think if we go back to Investor Day, everything there still excites me, but some have matured faster than the other. So when we rolled out corporate and investment bank back in late 2001, into 2022, we focused on 3 verticals: financial institutions; tech media, communications; and health care. And as we fast forward to today, where -- we've made about $8 million year-to-date PPNR in our corporate investment bank business. And I think we're just starting to brush the surface on what we can achieve. This last quarter, we had close to $3 million in capital markets income from that business. Loans are up to about $750 million. And I would suggest that we're doing all this with about 15 clients. So that's going to continue to grow over time, and there's going to be step movements in terms of its revenue growth because we have 25 FTEs that are managing that business, and we're not having to add new resources to grow. So it's exponentially growing PPNR. Our MAAST program, as I've talked a lot about, that's our money-as-a-service technology. It's an embedded finance platform. We rolled that out. We started to pilot it with some independent software vendors. And what I said on the second quarter earnings calls, we pulled the product back, and we're going back into the development phase to make sure that the product we have today not only functions in a scalable manner, but can actually be monetized by driving substantial fee income. And what I mean by that is we went out and started onboarding clients with a payment facilitation capability, hoping that with that payment facilitation capability, we would start to garner new deposits. And the fee income from that would be achieved through money movement and through the payment facilitation. What we found with the initial offering is that we missed some of the payment facilitation fee income, and we are putting too much effort around the depository side. And so with new leadership, we refocused the product. We're going to focus it more on our ISO business, our merchant acquiring business. It's still a viable solution with products that I think will generate good fee income growth and some deposits that go with it. But like anything else, we need to make sure that what we're delivering is not just an MVP product, but something that gives us something that's exciting to those end users. And so it's not where we thought it would be now, but we haven't spent a tremendous amount of money getting this here. So going back and retooling the product and refocusing it, we still think it can be a moneymaker for the bank. Outside of that, I think some of the other areas we've invested heavily in analytics. On the consumer side, we have a suite of products where we provide insights to the bankers, insights to our consumers that drives the opportunity to present a new sale. And although the revenue numbers are small at this point, it's growing 50% a year on what we attribute as new sales that were a direct result of an insight to the banker or to the client themselves. We've added a lot of new products in our treasury area, an FX product that now has been growing over 100% a year in revenue. We've added an accounts payable platform. So generally, I'm very excited about all the things that we've done. What I'm really excited about is getting those -- all those products and all the businesses to a point where it's just growing and we're able to grow an expense base that won't be growing at the same pace the revenue is.

Maybe drilling down on a couple of those. It seems like the regulatory uncertainty around banking as a service has -- the scrutiny has certainly increased this year. How has that changed your view more specifically around MAAST?

I think we went into that business understanding the challenges, not only from a regulatory standpoint, but just from a compliance standpoint. And our MAAST product is less about supporting some of the other FinTechs. It was more around a payment facilitation platform that also had checking products and treasury products. So when you think about payment facilitation, it's something that we know very well. Synovus for many years has been a sponsor bank, which means that we work with merchant acquirers to give them access to the Mastercard and Visa rails. And today, that business at Synovus earns us between $15 million and $20 million a year. So extending the MAAST product with a digital banking solution was really more of an extension of what we're already doing from a payment facilitation. So it wasn't as big a risk for us because we've already been doing something in that domain for some time. And two, from an AML/BSA perspective, for relationships like GreenSky and others that we've had, we've really bolstered our teams around AML/BSA and fair lending to ensure that we're dotting the i's and crossing the t's. So we didn't view MAAST as being a real big risk like some of these other banks that just go out and deal with a lot of FinTechs and are onboarding a lot of different clients from a lot of different platforms.

You mentioned the success in CIB and the growth you've seen there. Is there an opportunity for that to expand beyond the initial targeted industries? And how do you see that integrating more with the rest of the bank as that matures?

Absolutely as an opportunity. When you focus on 3 initial verticals, the perfect plan would be, as we achieve some level of scale within those verticals you start adding another vertical. But one of the things that we've been very clear on is that we're not going to go out and build it and hope they come. So you won't see us go from 3 verticals to 12 verticals. We'll add 3. They'll produce, we'll generate a lot of revenue, a lot of preprovision net revenue. And then it'll earn us the right to go do another vertical. And I would submit to you that our success is really predicated on the talent that we're able to acquire on the CIB side. Now if we were able to get a team of bankers in that we felt that fitted -- fit our culture and generated a substantial level of growth, we would invest there tomorrow. But generally speaking, we wanted to put this thing on sort of a treadmill where we build up these 3, earn money and then add more or add a subvertical under there. But I think it's proven out just based on the positive PPNR that we can be relevant in the space and that we should be looking for additional opportunities.

Similarly on the treasury side, you've expanded with Accelerate Pay and integrated payments. How has that changed your expectations with some of the goals you have in treasury?

Yes. I think one of the things you guys should know on the treasury side, when you think about investment, there's never a finish line. I think that's the one area where innovation continues to ring loud for me in terms of investment. Because our commercial clients, if you go back 20 years, 15 years, where all the discussion was around consumer digital innovation, I feel like the digital applications that our consumers use today are largely mature in that the functionality that's desired by our clients are largely 3 or 4 things. It's money movement, it's checking your balance, it's paying bills, some additional services like financial planning or budgeting. But when you think about what we're spending on the consumer digital side, it's more self-serving, sending your own wire, doing things online that you used to have to do in a branch or through a call center. On the commercial side, it's all new products. It's trying to streamline back-office operations for these commercial clients and integrate our commercial platform into their ERPs. And that's so important because if you're able to integrate your commercial platform into the client's ERP, the ability for a client to move is very challenging. It's very difficult to unplug that platform and switch banks. So it creates a stickiness, number one. That's great for our existing clients. It's really bad if we're trying to attract a new client. So our accounts payable platform was a capability that would streamline clients' ability to send payments. We've done the same thing on the receivables side, a whole new platform there. As I mentioned earlier, we have an FX platform. We're today working on a better onboarding tool. So when our clients come on, it's easier to be able to get them set up on our platform for the reason I mentioned earlier. If they're going to move, you better make it easy. And down the road, we have some other things we're doing, like cash forecasting, where we're looking at tools to allow our clients to better manage their cash. It's something we'll have to continue to invest in. Our business has been growing about 16% a year. And if you look at 2020, I was looking at the slide the other day, our treasury team was making about $50 million a year. This year, that number will be almost $90 million. And so it's not only a revenue driver. It's a satisfaction driver, and it's one that allows us to differentiate our offerings when you're sitting in front of a prospect. It's now not just leading with credit. You can lead with new products and new solutions.

I guess, along those lines, capital markets had a strong second quarter. With the update in the slides, it seems like third quarter may be a little bit weaker from there. How should we be thinking about sort of a good run rate longer term in capital markets?

Do you want to take that one, Jamie?

Sure. Capital markets, first, the second quarter was very successful in capital markets. And when you look at it, we had 3 different line items that have more than $3 million in revenue, which is -- just shows the diversity and the focus of our growth in that business. And so we're very pleased with what we've seen there. And I think that's a testament to how sustainable it is, that we can continue having these strong quarters in capital market going forward. Also diversity of the source of the business, we had CIB contributing a few million dollars. We had middle market, commercial. Everything from swap fees to debt capital markets to lead arranger fees, it was a very successful quarter. The reason for the revision down was because -- and we mentioned this on the earnings call in July, we do have some lumpy deals out there that we still believe will happen. They're just getting delayed. And so that's leading to that revenue getting pushed out. We're not sure when it will happen. We still believe it will happen, but it could be the fourth quarter, it could be the first quarter. But it's more a timing issue than anything changing in the core business.

And maybe I just want to add one thing to that. So to your point on sustainability, when you look at the categories Jamie mentioned, derivatives. As loan production increases, derivatives should increase. Syndication and joint arranger fees, as loan demand increases, they should increase. If you look at DCM, we really just started participating in DCM. So as we do more activity and have larger clients, that will increase. FX is another category in there. Again, we just rolled out the new platform last year. It represents 11% of the category. It should continue to increase. So when you look at the categories Jamie mentioned, all of them have the ability to grow. It's not like we've hit some sustainable level and it's not going to grow from here. Loan demand and activity should be a catalyst for growth in those categories as well.

Great. Lets go to the questions for the audience. And also we'd love to open it up to Q&A. So if anyone has any questions after we go through these 4, I'll ask you to raise your hand. So first question we've asked everybody is, what's your current position in the shares of Synovus, overweight, market weight, underweight or not involved? You can use your BlackBerry and click the right answer.

This could make us really sad here. I don't know if it is going to be a good outcome or not.

We'll see. It's -- still few more coming in. So looks like this is a theme we've seen at all the mid-cap bank so far is not involved. It feels like there's a lot of potential and opportunity with investors that are starting to look at the space or reengaging in the space. 24% overweight, 14% equal weight and 10% underweight. Second question, which segment of the bank will help Synovus differentiate itself the most over the next 5 years, the core middle market C&I, the specialty C&I, treasury and payment solutions that we were just speaking about, CIB or MAAST?

Can I vote here?

You can't answer that. Alright. Let's see. Core middle market C&I, I guess, taking advantage of the strong geographies and the strength of the relationships. Treasury and payment solutions, #2. Third question, net charge-offs are expected to be lower in the second half versus first half. Where do '25 -- 2025 net charge-offs end up: less than 20 basis points, 20 to 30, 30 to 40, 40 to 50 or greater than 50? Jamie, you can answer if you want. Almost 30 to 40; 20 to 30, #2; and then greater than 50, #3. And the last question, which would have the most impact on improving Synovus' valuation: above peer loan growth, better relative margin performance, stronger fee growth, better expense control, credit quality outperformance, more active share repurchase or an accretive bank acquisition? Better relative margin performance, credit quality outperformance, and accretive acquisition is #3; and 0 for buybacks. Great. Well, that's...

That's informative for us.

Yes, there you go. Any questions? Let's see what the audience has. Raise your hand, and we can give you a microphone. No? Shy audience today. All right. Well, we can jump into that. I guess, with the discussion around margin outperformance, maybe for you, Jamie, if we end up seeing a 50 basis point cut first versus the '25, how does that change your expectations around sort of the dynamic of margin in NII in the near term?

A few things. First, when we model our sensitivity, and we've spoken about a 40 to 45 beta in the easing cycle on deposits, we believe that we're neutral. So we believe that where we go into the easing cycle and the margin is where we're going to come out. So that's -- once the deposit is fully repriced, we believe we can talk about the lag impact, and that will be margin and NII headwind during the cycle, but we believe that we're neutral overall once we come through it. 50 basis points, next week, we'll do a couple of things. One, it would cause the lag impact to be less because the market is not forecasting that. So if we get hit of a surprise 50, well, that's less lag because your loans have been repricing less leading up to it. So that's a positive. The second thing that's a positive is we believe that if you go 50 basis points at a time that, that is an easier client conversation about pricing exception deposits down. And so we think that that's a positive. When you look at our deposit base, 25% of our deposits are higher cost, really exception priced non-maturity deposits. And so those are the ones that -- our RMs are already teed up. We're ready to go. But for them, that's probably an easier conversation to call to a client when the Fed goes 50. And so we think that, that leads to a higher [indiscernible] on the way down and perhaps quicker as well.

Despite the securities restructuring and the step-up in yields you expected this quarter, it looks like overall asset yields will still be mostly flat. You talked about the dynamics there, and if there's any sort of specific headwinds that we should be paying attention to besides just the interest rate pressure overall.

Typically for this quarter?

This quarter going in and then, yes, through the rest of the year.

Well, we did the repositioning on the securities portfolio. And so you had part of that impact in the second quarter, part of the incremental impact this quarter. So that's -- that will be in this quarter. So you're right, loan yields are pressured by the moves on the floating rate side by the movements on SOFR. We have $19 billion of loans that reprice monthly based off 1-month SOFR. We have $2 billion of loans that reprice quarterly off a 3-month SOFR. And we have another $2 billion loans that reprice off other indices, but a lot of that is 1-year treasury, and so -- and those reset monthly. And so that has been impacting the NII this quarter. But longer term, we do have the benefit of fixed rate asset repricing. And that's going to come through over the next few years, and it's going to be a steady tailwind to the margin.

Okay. Great. Maybe shifting on to the deposit side. It's been a tough environment for deposits and liquidity over the past 18 months. What have you learned about your deposit base over this time? And how is that informing the strategy going forward?

Look, I think it's a question that was top of mind for that 18 months. Everybody wanted to test this theory that regional banks' primacy was being challenged, that you weren't too big to fail, that your depositors would take their money and run. And I think nobody wants to put the headline out after they said it, but that was incorrect. I think what we've learned about our deposit base is that it's extremely sticky. Our average depositor at Synovus has been with the institution for 18 years. And they bank with us not because of the size of our balance sheet. They bank with us because of the capabilities we bring, the service that's provided. And ultimately, there's a level of loyalty there. When you look at our Net Promoter Score through J.D. Power, it didn't get to 66 from not meeting people's expectations. And so although there was great drama around deposits leading the regional bank system, we just didn't see it. Now a couple of things that we've done and that we've done in the past that were beneficial during that time. Many other banks were looking to IntraFi during this cycle, to move balances over to that platform to provide 100% FDIC insurance. We had set up that product 2 years prior to the crisis because we knew, as you go larger with certain clients, certain individuals, whether it's an LP with an investment or a not-for-profit foundation, they may want to get 100% FDIC insurance. So we already had it set up. So when people were concerned, we were able to move over. I think it peaked a little less than $2 billion into that IntraFi product to give them 100% insurance. So when you fast forward, you got through kind of the short-term concerns. Jamie and I had hundreds of meetings with clients to talk about the safety and soundness of Synovus. And in many cases, it led to those individuals buying stock in Synovus because they had seen that maybe it was oversold at the time. But we've learned that we have an extremely sticky deposit base. Now that's the positive. On the negative side, we have agreed that one thing that will allow us to grow and expand the margin, like you guys want, is to continue to grow low-cost core operating deposits at a pace faster than our competitors. And if we look back over the 135 year at Synovus -- history of Synovus, for many of those years, 125, we were largely a CRE bank. So CRE clients don't typically carry a bunch of excess cash. And so when we fast forward to the last 10 years and the investments we made in treasury and our expansion of things like middle market, we focus more on the core operating deposits. And so as such, since that time frame, we've grown our core deposits about 3%, and that's healthy. Our cost of deposits are a little higher than we would like. It's higher than the median. And so what we're doing today is ensuring that our go-to-market strategy every day is about delivering full relationships, getting the operating accounts, making sure that we're not doing loan-only relationships. And one of the tricks that we've learned some -- from some of our competitors is that you have to have some deposit-only verticals. When you look at other banks our size, we were out there competing, trying to get deposits just from our core operating businesses. And what we've seen is that some of our competitors have verticals. And so we've added a couple of verticals. We'll talk more about those in the coming years as they start to bring on some lower-cost deposits. And hopefully, that will allow us to continue to grow loans, as I said earlier, at a faster pace when we're able to bring on some of these core operating deposits in those verticals. That's something that we've learned. And ultimately, it will be something part of our go-to-market strategy as we continue to roll out new verticals going forward.

On that point, when you look out over the next year or 2 years, where do you see the most core deposits coming from, I guess, at this point, sort of the incremental new dollar?

Yes. It's -- we -- so if you think about growing at that mid-single-digit level, it means we need to grow between $1.5 billion and $2 billion of deposits every year. And if I told you that it would come from one area, I think we would be short selling our teams. I think it has to come from every area. So in retail, we got to make sure that our 248 branch locations are selling to existing clients and generating new deposits. And one of the things I should mention, Jared, really, really important to this equation, the headwinds that we've seen over the last 18 months, maybe 2 years, have really been a function of the diminishment, the diminishment and the average balance per account. So some of the growth that we could see is when those average balances reach a level that we start to now see augmentation where we're starting to see average balance increases. Each quarter, the diminishment has gotten less and less. And so we're getting to a point where, maybe in the near future with inflation starting to normalize, you could see augmentation, but we need to get growth in retail. We have to have strong growth in our community bank, which is small business and business banking. We have to have growth in our middle market area. These verticals have to deliver. We have some -- the ISO sponsorship areas looking to grow deposits. We really need all of our businesses generating deposit growth. That will allow us to have more than enough capacity to continue to grow loans, but most importantly, to manage the margin with a lower cost.

And maybe shifting over to credit. On the slide update, there was an overall improvement in sort of the credit expectation. Where are you seeing the most surprised benefit? And where are you still focused as an area of concern?

Yes. We've talked about this a lot today. What I'm not signaling is that we're through the cycle and there's not going to be any other losses, right? There's -- the number of losses are going to continue, and most of them have been coming from the C&I side, right? And that's what we've been talking about is that there's been a lot of discussion around CRE, but we've seen very few losses -- a number of losses in CRE, and the majority have been on C&I. What gives us great confidence in projecting 25 to 35 in the third quarter and talking about the second half of the year being lower is, really, we look at those nonperforming assets that we have. About 80% of the nonperforming assets are comprised of 12 credits. All 12 of those are C&I credits. And we're going through and looking at the loss content in those underlying credits. Comparing that back to third quarter, fourth quarter and first quarter of this year, the loss given default of what we've had to this point has been abnormally high. There was a large credit back in third quarter of '23 that had 100% loss content. Our one large office charge-off in fourth quarter was about a 50% loss. And then in first quarter of this year, we had another C&I credit that was about a 30% loss. Those are abnormal. And so as we look at these new credits and we work through their valuation or their liquidation, we expect the loss given default to be much less. And that's what gives us confidence. There's really been nothing we've seen at this point that's given us any concern outside of what we've already seen. The only thing I would mention to you is that you should expect to see our credit metrics not move in a linear fashion. But rather, there can be some lumpy quarters where you could see NPAs pick up or criticized and classified increase the next quarter. Then they may go back down because as we're in this environment, we're going to be hypersensitive to ensure that any credit that has deterioration, we're going to downgrade. And we're not the quickest to upgrade those credits. Once they are downgraded, you need to see several quarters and maybe even a year of better performance before you upgrade it. So you could see some lumpiness in some of the metrics, but I don't think that will translate into having higher losses as a result.

And maybe just as a final question as you wrap up here, capital management. You've been buying back some stock. You still have an existing authorization. How are you looking at that? In response to the audience answer doing an accretive acquisition, what is the -- what's your appetite for M&A? What do you think the regulatory environment is right now for even presenting a deal, if there was one?

Yes. You start with capital, and I'll end with the M&A.

There's no one cared about really currently. But look, as we think about that, it's our intent to maintain capital ratios near the area where we are right now. We're at 10.6% CET1. We're using share repurchases to try to stay in that area. This quarter, we're not forecasting much loan growth. So you should expect to see share repurchase like what we have announced in the deck last week. Going forward, we'll just continue down the same path. We have authorization to do whatever we need to do. We'll just continue to manage that into the fourth quarter.

And then I love the enthusiasm of the audience, so I love that you're talking about it. But our focus is on Synovus, and we're investing in our business. We believe that you have to earn the right to do M&A. And we think that the investments that we're making today are going to generate better growth and they're going to generate strong returns. Maybe somewhere down the road, we talk about M&A, but that's not on the front burner for us. I think to your point, just given the election, people believe that the regulatory environment could potentially ease. But I think today, if you have a deal, and I'm not talking about the mega deals, but if you have a deal that you present to the regulators and you have a pretty good bill -- clean bill of health as it relates to AML/BSA and compliance, I think you can get a deal approved. I think it's those that have a little hair on them that are harder to get approved, and when they have tremendous overlap and they're wanting to close a lot of branches.

Great. Well, thanks very much. Please join me in thanking the team from Synovus for presenting today. And I hope you have a great rest of the day.

Thank you.