Synovus Financial Corp. (NYSE:SNV) Q4 2024 Earnings Conference Call January 16, 2025 8:30 AM ET

Company Participants

Jennifer Demba - Head of Investor Relations
Kevin Blair - Chairman, President and Chief Financial Officer
Jamie Gregory - Executive Vice President and Chief Financial Officer
Bob Derrick - Executive Vice President and Chief Credit Officer

Conference Call Participants

Jon Arfstrom - RBC Capital Markets
Michael Rose - Raymond James
Anthony Elian - JPMorgan
Jared Shaw - Barclays
Bernard Von Gizycki - Deutsche Bank
Manan Gosalia - Morgan Stanley
Stephen Scouten - Piper Sandler
Christopher Marinac - Janney Montgomery Scott
Catherine Mealor - KBW
Nicholas Holowko - UBS
Timur Braziler - Wells Fargo
Gary Tenner - D.A. Davidson

Operator

Good morning, and welcome to the Synovus Fourth Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions.

[Operator Instructions] Please note this event is being recorded. I'll now turn the call over to Jennifer Demba, Senior Director, Investor Relations. Please go ahead.

Jennifer Demba

Thank you, and good morning. During today's call, we will reference the slides and press release that are available within the Investor Relations section of our website, synovus. com.

Kevin Blair, Chairman, President and Chief Executive Officer, will begin the call. He will then be followed by Jamie Gregory, Chief Financial Officer, and we will be available to answer your questions at the end of the call. Our comments 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 because 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. And now Kevin Blair will provide an overview of the quarter.

Kevin Blair

Thank you, Jennifer. Last night, we were pleased to release strong 2024 fourth quarter and full year results. Synovus reported fourth quarter EPS of $1.25%, which was up 6% from the previous quarter.

Excluding the FDIC special assessment, adjusted fourth quarter EPS rose 18% year-over-year. For 2024, EPS was $3.03%, while adjusted EPS was $4.43%. 2024 was a year of healthy focused growth, effective collaboration and delivery of exceptional value to our clients, team members and shareholders.

Over the past year, Synovus executed well on the strategies we outlined in late 2023 and demonstrated solid momentum, which should continue in 2025 and beyond. Last year, we grew balances 4% in our higher-growth commercial lending segments, which includes middle market, corporate and investment banking and specialty lending. While we had strong loan production in these segments, they were impacted by significant payoffs in 2024 due to broad-based market activity.

We also grew core deposits by 3% and launched a new legal industry deposit vertical and small business banking product bundle. As a result of our relationship banking approach, we grew treasury management, capital markets and wealth fees at a healthy and sustainable pace. At the same time, we continue to exercise disciplined operating cost control in 2024 with adjusted noninterest expense declining 3% and an adjusted efficiency ratio of 54.33%.

Our loan losses improved year-over-year and the preliminary common equity Tier 1 ratio increased 62 basis points to 10.84%. Finally, we had strong profitability metrics with adjusted return on average assets of 1.15% and adjusted return on tangible common equity of 15.84%. Now let's move to the financial highlights for the fourth quarter.

The most notable highlights in the fourth quarter included net interest income growth, significant quarter-over-quarter improvement in our cost of deposits, net interest margin expansion and continued growth in noninterest revenue. Also, net charge-offs were at the lower end of the expected range, while capital ratios continue to move higher. Adjusted revenue increased 3% on a sequential and year-over-year basis.

Lower deposit and funding costs and loan hedge maturities drove 3% quarter-over-quarter growth in net interest income. Funded loan production remained strong, but period end and average loans declined from a drop in commercial line utilization, elevated levels of loan payoffs and further strategic non-relationship loan rationalization. Healthy core deposit growth was supported by public fund seasonality as well as growth in money market and operating deposits across our core commercial business line.

Our team members remain focused on accelerating core funding generation through sales activity and product expansion, such as the new legal industry deposit vertical. Adjusted noninterest revenue increased 2% from the prior quarter as stronger core banking, capital markets and wealth management income more than offset lower mortgage lending and commercial sponsorship revenue. Adjusted noninterest expense was up 2% from the third quarter and down 12% year-over-year.

Ongoing cost initiatives and continued diligence have contained overall expense growth. At the same time, we have continued making strategic investments that position Synovus to drive long-term shareholder value. On the asset quality front, as expected, net charge-offs were 26 basis points compared to 25 basis points in the third quarter and 31 basis points in 2024.

Lastly, we further bolstered our common equity Tier 1 ratio in the fourth quarter through solid earnings accretion while executing about $50 million of share repurchases. Before I turn it over to Jamie, I want to acknowledge Chief Credit Officer, Bob Derrick's significant contributions to this company over his more than 20 years at Synovus. Today's earnings call is his final one before he retires at the end of March.

Bob has been a tremendous credit organization leader over the past five years, and we wish him well in his retirement. Now Jamie will review our fourth quarter results in greater detail. Jamie.

Jamie Gregory

Thank you, Kevin. As you can see on Slide 6, period end loan balances ended the fourth quarter down $512 million or 1% sequentially and down 2% year-over-year. The loan growth environment was particularly challenging in the fourth quarter.

Lower commercial line utilization, primarily from larger corporate facilities resulted in a $150 million quarter-over-quarter headwind. Also there were robust payoffs of about $1.8% billion over the past three months, which impacted our higher growth C&I lending verticals. Despite these headwinds, funded loan production remained strong in the fourth quarter, while commitment production rose 8% from the third quarter, which was the strongest period of the year.

The lending environment in 2024 was significantly impacted by market headwinds and balance sheet optimization. However, we are pleased with the progress Synovus made in repositioning non-core portfolios and expanding strategic verticals to support growth in 2025. Turning to Slide 7.

Core deposit balances grew $1.1% billion or 3% sequentially during the fourth quarter as seasonality contributed to public funds growth of $940 million, up 13% from the third quarter. Core deposits, excluding public funds, increased $206 million in the quarter and were up 2% year-over-year. There was a 6% sequential increase in interest-bearing demand deposits and money market funds, combined, which were partially offset by a 5% decline in time deposits.

Importantly, noninterest-bearing deposits were stable in the fourth quarter. Our core commercial business lines were the primary drivers of our nonpublic funds deposit growth. Our strong fourth quarter core deposit growth allowed us to further reduce brokered deposits by $230 million.

As a result, our wholesale funding ratio improved further and is now 11% compared to 13.5% in the year ago period. As we look at funding costs, our average cost of deposits declined 26 basis points in the fourth quarter to 2.46% from 2.72% in the third quarter. That reflects an approximate 42% repricing beta quarter-over-quarter and aligns with our intentional efforts to manage our deposit costs amid the changing rate environment.

Now moving to Slide 8. Net interest income was $455 million in the fourth quarter, a 3% increase from the prior quarter. Our net interest margin came in at 3.28% for the fourth quarter.

The six basis point increase was supported by hedge maturities and effective management of our deposit prices. There was also a nonrecurring favorable interest adjustment in the fourth quarter, which benefited the NIM by four basis points. Conversely, a higher cash position and our $500 million debt issuance earlier in the quarter served as headwinds.

As we look to the first half of 2025, we expect the margin to be in the mid-320s, which is relatively stable, exclusive of the nonrecurring fourth quarter items. Our guidance assumes a modestly consistent pace of NIM expansion in the second half of 2025 on continued fixed rate asset repricing and a more steady rate environment. Our sensitivity profile remains relatively neutral to the front end of the curve and we remain slightly asset sensitive to longer-term rates.

However, during an easing cycle, the margin will still exhibit short-term pressure due to the timing lag between loan and deposit repricing. We continue to produce solid consistent growth in noninterest revenue driven by key areas such as Treasury Management, Capital Markets, Wealth Services and Commercial Sponsorship. Slide 9 shows total reported noninterest revenue of $126 million and adjusted noninterest revenue of $125 million, which was up 2% quarter-over-quarter.

Sequential growth in core banking, capital markets and wealth management fees was partially offset by a drop in mortgage banking and seasonally lower commercial sponsorship income. Adjusted noninterest revenue declined 1% year-over-year as growth in capital markets and wealth services income was more than offset by the elevated commercial sponsorship fees in the year ago period. In 2024, treasury management fees increased 11%, while capital markets fees grew 13%.

Also commercial sponsorship fees jumped 66% in 2024 as we fully onboarded our new GreenSky relationship and saw healthy increases in other sponsorship revenue. We will continue to invest in core noninterest revenue streams that deepen our client relationships and have shown steady growth over the past few years. Moving to expense.

Slide 10 highlights our continued operating cost discipline. Reported and adjusted noninterest expense was $309 million in the fourth quarter, which was down 12% year-over-year. Adjusted noninterest expense increased 2% from the prior quarter, impacted by higher personnel costs, FDIC premiums and technology initiatives.

Also charitable contributions as well as an increase in our donor advised fund increased $2.5% million from the third quarter. Excluding the FDIC special assessment, adjusted noninterest expense rose 1% in 2024. While headcount declined 2% last year and fraud-related losses improved, growth was primarily due to higher incentive payments, credit-related legal fees and technology-related infrastructure investments.

Importantly, over the past five years, we have realized significant back-office efficiencies through an 11% decline in headcount, which have been reinvested into frontline talent and various product enhancements. As we outlined at an industry conference in December, our operating expense growth range should normalize in 2025 driven by strategic investments. These initiatives include expanding our middle market commercial and wealth relationship manager teams and other growth and infrastructure-related investments that are critical to long-term sustained performance.

Moving to Slide 11 on credit quality. Our fourth quarter net charge-offs were $28 million or 26 basis points, which fell at the lower end of our expected range of 25 to 35 basis points. Nonperforming loans were relatively flat at 0.73% of total loans.

The provision for credit losses increased from the third quarter. The allowance for credit losses rose by approximately $4 million to $539 million or 1.27% of total loans compared to 1.24% in the third quarter. The increase was primarily due to strong fourth quarter loan production, partially offset by elevated payoffs, which impacted the duration of the portfolio.

We continue to expect net charge-offs to be 25 to 35 basis points in the first half of 2025. As seen on Slide 12, our capital position improved 20 basis points during the fourth quarter with the preliminary common equity Tier 1 ratio reaching 10.84% and preliminary total risk-based capital now at 13.8%. Our core earnings profile continues to support our capital position, even with about $50 million of share repurchases completed in the fourth quarter.

In 2024, we increased our preliminary CET1 ratio by 62 basis points, inclusive of $270 million of common stock repurchases. Healthy earnings accretion was supplemented by a risk-weighted asset optimization exercise in the second quarter, which freed up capital for securities repositioning and share buyback. I'll now turn it back to Kevin to discuss our 2025 guidance and capital plan.

Kevin Blair

Thank you, Jamie. I'll now continue with our updated financial guidance for 2025, which is unchanged from the expectations we outlined in December. Our goal is to tighten our guidance range as the year progresses and there is more certainty on the pace of the underlying economic and balance sheet growth as well as the timing of planned strategic investments.

Period end loan growth is expected to be 3% to 6% in 2025. In the prior quarters, we have experienced increases in our pipeline and committed loan production. Also our fourth quarter survey confirmed that commercial client sentiment continues to improve post-election, which will likely boost loan demand.

Growth will be primarily driven by ongoing success in middle market, corporate and investment banking and specialty lending business lines with anticipated growth between 10% and 15% this year. This growth should be supported by the success of previous relationship manager hires as well as planned 2025 additions. Furthermore, we expect that loan payoffs from market-related activity and non-relationship loan rationalization will decline in 2025.

We maintain our expectations for core deposit growth of 3% to 6%, despite a competitive landscape and uncertainty around Federal Reserve monetary policy we have confidence that our focus on core deposit production, a continued slowing in the pace of diminishment as well as new deposit verticals and expansion of relationships will continue to bear fruit in 2025. The adjusted revenue growth continues to be a range of 3% to 7%, which assumes the target Fed funds rate declines to 4% and the 10-year treasury yield remains relatively stable to recent levels. We expect the NIM will be in the mid-320 range in early 2025 as the short-term headwind due to lead-lag impact is offset by the tailwind of fixed rate asset repricing.

Over the medium term, our balance sheet remains relatively neutral to short-term interest rates, which is expected to lead to solid margin expansion once the easing cycle concludes. We anticipate adjusted noninterest revenue of $500 million to $520 million this year. We believe continued core execution areas such as treasury and payment solutions and capital markets as well as the refinement of our delivery models and consumer banking, wealth services and third-party payments will support our sustained fee income momentum.

Adjusted noninterest expense is expected to grow 3% to 7% from a combination of several initiatives, which include a renew producer hiring program that should increase our middle market commercial and wealth teams. That said, we will continue to be very disciplined in expense management while investing in areas that deliver long-term shareholder value. On the credit quality front, we anticipate that net charge-offs should remain in the 25 to 35 basis point range in the first half of 2025.

As we have stated previously, our loss given default on current problem credits is expected to be lower than it was in several periods over the last two years. Moving to capital, we will target a relatively stable CET1 ratio. Beginning in April, our quarterly common equity dividend will increase to $0.39%.

Our priority on capital deployment remains client loan growth. However, we do expect to leverage share repurchases to balance out organic capital generation to achieve our overall capital objectives. For 2025, the Board authorized a $400 million common share repurchase program that gives us flexibility to manage capital in multiple scenarios.

Finally, we anticipate the tax rate should approximate 22% in 2025 largely supported by additional tax credit investments. Synovus' strategic actions over the past two years as well as the strength of our business model and the relative economic growth of our footprint have positioned our company for strong long-term revenue, earnings and tangible book value growth and top quartile operating metrics. We are focused on opportunities where we have the greatest right to win, being clear and confident in the actions we take and winning as a collective team.

And now, operator, let's open the call for questions.

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question for today comes from Jon Arfstrom from RBC.

Your line is now open. Please go ahead.

Jon Arfstrom

Thank you. Good morning, everyone.

Kevin Blair

Good morning, Jon.

Jennifer Demba

Good morning.

Jon Arfstrom

Kevin, can you talk a little bit more about the loan growth expectations. You flagged some of the headwinds, but it looks like you've seen better production as well. Curious what you're hearing from the borrowers.

And then what could keep you at the lower end or the higher end or put you at the higher end of the range. It feels like I'd take the over, but just curious what your thoughts are on that.

Kevin Blair

I appreciate your optimism, Jon, I really do. Look, I'm very optimistic about our prospects for returning to what we consider to be a more normalized growth environment in '25. It starts with client sentiment.

And we just completed our fourth quarter commercial client survey. And as you would expect, post the election, we saw a fairly sizable increase in expectations for business activity in '25. Now we know that, that optimism is largely anticipatory, but we're starting to see some green shoots in various areas across our footprint and amongst several industries.

And I think you see that secondly, in our production and pipelines. We expect our production to increase roughly 15% in 2025. We saw production trough this past year in the first quarter and it continued to build so much so that in the fourth quarter, Jon, our committed production was the highest level that we've seen in both CRE and C&I in eight quarters.

So that production momentum is continuing to build. Thirdly, we have been adding new resources throughout 2024 and those resources will continue to mature and that they'll bring over more and more relationships and grow the balance sheet. Last year, we added 11 middle market bankers, which is a roughly 30% increase in that business line.

Fourthly, as you know, we've been optimizing our balance sheet over the last two years. In 2023, we sold a portfolio, but in '24, we proactively reduced our exposure to various asset classes, syndicated lending, senior housing, aviation, those three combined were about $1 billion in runoff. That's largely complete.

And so as you look into the future, you're not going to have that headwind. The other factor that I think will help us is line utilization. We've kind of bottomed out at 43%.

If you just art back to last year, that number was 50 -- 47% the previous year was over 50%. So we could get good growth just by seeing utilization return to normalized levels. And then I'll just end with the payoff activity.

You mentioned that this past quarter, we had $1.6% billion in commercial payoffs. And if you compare that to the first three quarters, it was roughly $1 billion. So if that number will return to more normalized levels, which we expect, it will take that headwind off the table.

So for all those factors and that's why I think there's a lot of levers that give us great confidence that we'll be able to produce strong loan growth in '25.

Jon Arfstrom

Okay. Good. That's very helpful.

Jamie, just one for you. You're indicating very slight margin pressure in the first quarter and that gives us a good starting point. But how do you expect the margin to trend after the first quarter.

Can you give us some of the puts and takes around that. Thank you.

Jamie Gregory

Yes, Jon, as you look at the margin in the first half of the year, as Kevin mentioned in the prepared remarks, we are expecting that to be in the mid-320s. We did have about a four basis point impact in the fourth quarter on some nonrecurring interest. But once you normalized for that stability in the first half of the year.

And then we expect to see margin expansion as fixed rate asset repricing starts to flow in, in the second half of the year. Given the current outlook, we believe that the margin could end the year in the mid-330s with a tailwind heading into '26 from there.

Jon Arfstrom

Okay. Thanks, guys. Appreciate it.

Kevin Blair

Thank you, Jon.

Operator

Thank you. Our next question comes from Michael Rose of Raymond James. Your line is now open.

Please go ahead.

Michael Rose

Hey, good morning, everyone. Thanks for taking my questions. Maybe just on the buyback and capital return.

I know you guys are talking about keeping the CET1 relatively stable. But if we do go into this kind of deregulatory environment, is there more leverage there as we think about kind of the intermediate term for the CET1 ratio. And could we kind of expect even more capital return, assuming your growth expectations on the loan side hold.

Thanks.

Jamie Gregory

Yes, Michael, let me jump in here. As we look at our capital plan before we get into the deregulation or potential deregulation, our capital plan for 2025 gives us a lot of flexibility. If you look at the authorization for $400 million in share repurchases, we believe that gives us flexibility and a wide range of scenarios.

If loan growth is anywhere in our range of 3% to 6% or if it's above or below that. We have flexibility to maintain stable capital ratios even beyond that, if loan growth was as high as 10%, we could maintain relatively stable capital and keep CET1 10.5% or higher. But you're right that we do use the industry and what others are doing is one of the things that influences our capital ratio objectives.

There is no modeling that would tell us we need to be running as high as we are in CET1. When we do severe adverse stress testing, we are adequately capitalized. We have plenty of excess.

And so we will be keeping a close eye on where the industry is and we'll take that into consideration as we think about our future CET1 targets.

Michael Rose

Very helpful. And then maybe just as a follow-up, just back to Jon's question around the margin. I think one of the potential levers is just a continued decline in broker deposits.

I think you guys are about 9.5% of total now. Is there a range you'd like to get that down to. And as you think about the margin guide that you just gave for the back half of the year, what does that assume in terms of cash balances, which you called out as being elevated.

And are there any other levers that could be supportive of a range even above what you just guided to. Thanks.

Jamie Gregory

Cash balances definitely were elevated in the fourth quarter. We do expect some reduction in cash balances, which will be margin accretive as we go through 2025. With regards to broker deposits, we do expect to see that continue to decline in 2025.

But as you're aware, we use that as basically just a marginal funding vehicle, just like home loan bank advances, you can see that those are currently sitting at zero. And so we have a lot of available liquidity available to us, but we use broker deposits, home loan bank kind of enter -- we can intermix between the two of those. But currently we're not expecting to need to grow those.

We expect those to stay low and actually brokered to decline because we're forecasting core deposit growth and core loan growth to be relatively in line in 2025.

Michael Rose

Very helpful. Thanks for taking my question.

Kevin Blair

Thank you, Michael.

Operator

Thank you. Our next question comes from Anthony Elian of JPMorgan. Your line is now open.

Please go ahead.

Anthony Elian

Hi, everyone. On your 2025 outlook slide, you reiterated pretty much all parts of it. But you still expect the FOMC easing cycle to continue in the first half. I guess if we don't get a rate cut in the first half, can you just talk about the impact to your 3% to 7% revenue growth guidance you expect.

Jamie Gregory

Yes, Tony. It's a great question. We have spent a lot of time talking about the lead-lag impact and how that will be a temporary headwind to NII as we go through the easing cycle.

But you can rest assure that as much as we've talked about it externally with you and investors, we've talked about a lot more internally. And the team had a lot of success in the second half of 2024 being prepared for all scenarios, both as far as knowing exactly what we wanted to do, but also how we want to communicate with our clients. And we were really successful in that.

And so if you go back, in July and October, we are talking about $4 million to $7 million impact per 25 basis point ease. When we executed that in the second half of the year, the realized lead-lag impact was more like $2 million to $4 million, about half of what we had said before. And that was because we were able to efficiently and effectively reprice those deposits lower.

So I think as we look forward, it's hard to know exactly what the industry will do. But for us, we think that it's likely that reduced impact of $2 million to $4 million per 25 basis points would be incremental to the guide that we put on that slide.

Anthony Elian

Thank you. And then my follow-up, if your revenue growth guidance comes towards the lower end, so say that 3% range, will expenses follow towards the lower end as well or do you have less of a lever to pull on expenses given the strategic initiatives, hires and tech investments you plan to make this year. Thank you.

Jamie Gregory

Tony, that will result in reduced expenses because they are variable. But you're right to assume that there are some of those expenses that are more fixed because they're part of our strategic goals, the strategic plan of incremental hiring, incremental technology and product solutions. And so that spend, we expect to happen.

But you're right that some of the expense base is variable and would decline if we were at the lower end of the revenue guide.

Anthony Elian

Thank you.

Operator

Thank you. Our next question comes from Jared Shaw of Barclays. Your line is now open.

Please go ahead.

Jared Shaw

Hey, good morning, everybody.

Kevin Blair

Good morning.

Jared Shaw

Maybe looking at the capital markets. Any color you can give in terms of trajectory there as we look through the year, anything specific coming up at the beginning that could drive either upside or downside there.

Kevin Blair

Jared, that business can be lumpy just based on large transactions. But when you look over the last year, we're up about 13% in capital markets. And as we've talked about on previous calls, what's most exciting about that line item is the level of diversity and that exists underneath that rollup where it used to largely be derivatives sold to clients, it's much more diversified into not only derivatives, but also getting fee income from syndication and lead arranger fees, debt capital markets, FX, small business sales.

And so with that increased diversification, we feel very confident that we should produce yet another year of double-digit growth in capital markets. And that's a function of continuing to offer these new solutions and increasing the penetration into our client base. But as I mentioned earlier, when loan growth returns to more normalized levels, these fees are largely correlated with higher production.

So we are very confident that we'll continue to grow that line item. And as we build out some of our businesses like our structured lending division, our corporate investment bank, middle market, these are the business units that generally generate the large share of those fees. So, yes, we're very confident in our ability to continue to grow that.

And that's across the board, quite frankly, Jared, in fee income we gave you numbers there, but that's going to be another year of single-digit -- mid-single-digit growth. But when you look over the last four years, our core fees, excluding mortgage, and I only exclude mortgage because of the interest rate environment, we've grown 11% on a CAGR basis over those last four years. So the important part for us is creating a sustainable level of fee income growth.

And that means that we'll continue to focus on things like capital markets, but expand our third-party payments business. We'll continue to focus on things like treasury and payment solutions and wealth and all those things combined will continue to generate good organic growth.

Jared Shaw

Okay. Thanks. And just as my follow-up, following up, I guess, on Michael's question on capital with very strong capital here and an administration coming in that's perceived to be more industry-friendly.

Does that change your view on M&A at all or how should we think of your appetite on M&A.

Kevin Blair

I don't think anything has changed on our side. We've said the best investment we can make is in Synovus and executing on our plan we feel like the last year, we've had a tremendous amount of momentum. You see it in some of our numbers, where we believe we're performing in top quartile levels with returns.

As we look into '25 and '26, we think that our organic growth strategy will continue to play out. Now what I've said on previous calls, if the world around us changes, we'll have one or two options, right. We'll either take advantage of all the disruption that occurs if there's more M&A or we'll have to participate at some point.

And I believe that right now, our best approach going forward is to continue to focus on organic growth, continue to improve our returns and our relative currency that maybe one day it puts us in a position to talk about M&A, but it's not a front burner part of our strategy today.

Jared Shaw

Great. Thanks for taking the questions.

Operator

Thank you. Our next question comes from Bernard Von Gizycki of Deutsche Bank. Your line is now open.

Please go ahead.

Bernard Von Gizycki

Hi, guys. Good morning.

Kevin Blair

Good morning, Bernard.

Bernard Von Gizycki

So my first question on the 2025 expense growth range of the 3% to 7%, I think you previously identified 1% to 2% in efficiencies to help offset some of that expense pressure. Could you just maybe talk through some of the areas you're looking for the efficiencies, whether it's reduction in footprint or headcount or technology efficiencies that you could lean into to possibly get that 1% to 2%.

Jamie Gregory

The story on efficiency remains similar to what we've said in the past. I mean the majority of our expense is in personnel. And so we try to get as efficient as we can and how we go to market.

And what we believe is that when you look at these improvements, process improvements, typically, it's a win for the client. It's a win for the team member and it's a win for the shareholder. And so we continue to focus our efforts on optimization, automation in the back office.

And so that's our number one area of focus. And then beyond that is looking at our real estate, ensuring that we're optimized there with our square footage, both for corporate offices and branch and really just looking at how we go to market. So it's the same story as before.

It's just a continuous improvement mindset as we look at how we go to market to our clients.

Bernard Von Gizycki

Okay. Great. And then just I know you're trying to refine the delivery models for payments, the consumer bank and wealth.

Could you just talk to how far along you are and the benefits you see there.

Kevin Blair

Well, each one is a little different. Let's start with payments. What we're doing on the payment front is we're expanding our third-party ISO sponsorship model.

So today, let's say, we have a little less than 20 clients that we provide sponsorship for -- we have a pipeline that could, in essence, double the number of clients that we serve on that sponsorship side. So you could see -- continue to see good growth there. Just to put that in a reference point, we make about $25 million a year off that sponsorship business.

So it could be growing at a much faster pace there. On the wealth side, we've been under this reimagination strategy for some time. We started with a Business Owner Wealth Strategy where we created positions that just focused on advisers who work with our commercial bankers and taking our commercial clients and winning their private wealth business.

We had over 200 new relationships this past year and incremental revenue associated with that. We're taking that same model and trying to apply it across all of our wealth platforms to create a much more seamless delivery model that will allow us to get deeper wallet share of our commercial clients, but also just quite frankly, some of our consumer and prospects around our footprint. And on the consumer side, what we're trying to maximize is the productivity of our branches.

So as you know, the number of transactions that occur within the branch continue to decline. We continue to create a lot of digital applications that provide self-service capabilities for our clients. And so we're asking our branch team to focus more on the small business clients.

And that's the client that is much more -- has the needs of a branch and would react positively to having more outreach from our bricks and mortar. So we're not that we're leaving the consumer business. We're using digital analytics and other things to maximize that business, continue to generate deposit growth, but starting to focus a little more on the small business client around those branch locations.

And so that's early on. The other two are further along.

Bernard Von Gizycki

Okay, great. Thanks for taking my questions.

Operator

Thank you. Our next question comes from Manan Gosalia from Morgan Stanley. Your line is now open.

Please go ahead.

Manan Gosalia

Hi. Good morning. I wanted to follow up on the question on expenses.

It sounds like you're suggesting there is room for positive operating leverage if you're at the mid to high end of the revenue guide, but it might get a little bit more difficult if you're at the low end of the revenue guide. Is that the right way to think about it. And then just in terms of the puts and takes there is loan growth and the shape of the yield curve really.

Are those the two biggest drivers and whether you can get that positive operating leverage or not.

Jamie Gregory

You are thinking about it correct. If we're at the high end of the revenue guide, the positive operating leverage is definitely easier. As we look at 2025, as you can see in our guide, we do expect those to be relatively in line with each other, given our current outlook.

But you're right that the higher end makes that easier. As we think about it, operating leverage is, positive operating leverage is an important goal for us, but it's less important to us than winning on our strategic priorities. And we believe in these hires that we're making, we believe in the technology improvements and we think that they position us well for 2026 and beyond.

And so we're going to lean into those in 2025 and it's our objective to shoot for positive operating leverage as well. But that's secondary to winning on the strategic objectives. And so that's generally how we think about it.

If you look at the fourth quarter, quarter-on-quarter versus prior year, we do expect to see positive operating leverage starting there and then it gets easier from there. So that's at a high level how we look at it.

Kevin Blair

And Jamie let me just add one thing there. So when I look at our -- can I just add one point. When I look at our investments and I think about what Jamie has talked about in terms of $25 million roughly in investments.

That includes the market expansion that we've talked about. It talks about the wealth optimization, expanding our third-party payments platform, our legal entity, deposit strategy as well as an expansion of our structured lending division. So that's almost $20 million there.

All of those initiatives will drive significant revenue and balance sheet growth in the future. So that's one of the things we really don't want to stop. We feel like we have a unique opportunity at this point to lean in on all of those items and we want to do it.

To Jamie's point, there's some flexibility and some other things, but that's the fixed expense that from an investment standpoint, we think pays dividends for many years to come.

Jamie Gregory

And Manan let me continue. I didn't answer your question of what puts us at the high end of the range. You are right to think that loan growth is clearly the biggest driver there.

As far as revenue and what could push us to the high end. But in that, there's also fee revenue growth. If market activity is more elevated, you could see higher than the mid-single-digit in fee revenue growth.

Funding mix is an important component there. So there are a lot of different pieces that could come together to push us to the high end or the low end of our revenue guide.

Manan Gosalia

That makes a lot of sense. Thank you. On loan growth, part of the weakness that we've seen in loan growth across the banks has been -- the yield curve has been inverted, it makes more sense for borrowers to term out some of their funding. Now that the yield curve is steepening again, are you seeing some more borrowing from the banks essentially on -- at the front end of the curve borrowers using more of those revolvers. Do you think that, that starts to pick up now that the yield curve is steeper.

Kevin Blair

I mean the theory is there and that, to your point, with the line utilization down to 43%, we've seen a continuous decline in that number. We feel like it's kind of hit rock bottom at this point, and you would start to see some sort of increase from here. If you go back to prior to when rates were higher and we had more of a flattish yield curve, we were in the low 50% range, 50%, 53%.

Today, we're at 43%. So if you just extrapolate that, that would give us $1 billion in balances if we were to return to more of a normalized utilization level. But we haven't seen that in actuality and it's something that we anticipate.

And I think your hypothesis is spot on, we'll just have to wait and see if borrowers do that.

Manan Gosalia

Great. Thank you.

Operator

Thank you. Our next question comes from Stephen Scouten of Piper Sandler. Your line is now open.

Please go ahead.

Stephen Scouten

Hey, good morning. Thanks. I guess as I think about some of these strategic initiatives in '25 and the relationship management hiring plan and continued progress in capital markets, can you kind of talk about where you guys think you are kind of in the, I guess, the stage of those strategic initiatives, maybe even like what inning in terms of developing out capital markets.

And if there's kind of an aspirational goal of, hey, here's where we want to get the size of the bank as we think about maximum scale and efficiency within the sector today.

Kevin Blair

Steve, it's a good question. I think each like when you think about capital markets, it's less about some goal to become a global capital markets player. It's more so to say, we know that the clients we bank today have needs outside of the traditional commercial banking sector.

And we want to make sure that we're able to capture the revenue from those solutions, whether that's debt capital markets, whether that's syndicated facilities. We're building capabilities that we know that our clients will use. And so over time, you may see us build out new capabilities like securitizations or we may have more equity capabilities.

But we're not in the mode of build it and hope that they come. We believe that you go out, you generate new business, you serve your clients, you put an ear to the track to figure out what they need and you bring in the resources and the capabilities to serve those needs. So it's not a destination.

It's really more so making sure that we capture the lion's share of our clients' needs through our own capabilities versus having other banks take that over. As it relates to just the overall innings that we're in, in terms of adding folks we've been adding middle market bankers for the last five years. We took that group from having roughly 10 bankers to now we're almost up to 50.

Our CIB unit is fully built out with three industry verticals. So we'll be adding a second vertical or subvertical under the FIG team this year. So that's just more of an extension.

What's different in this expansion is that we're investing more heavily back in our community bank, which we haven't done in quite some time because throughout the last 10 years, as we built out some of these industry verticals and we've built out middle market, we've been able to optimize our resources on the community bank side. And as we look around today, we believe that there's an opportunity to focus more what we would consider down market, clients with revenues between $5 million and $50 million and that's where we're starting to add back again. And that's probably the biggest change from what we've done in the past.

So I don't think we're in the early innings with that because we've been in that business for 136 years, but it's the first time in some time that we've really leaned in and bringing more resources back in that business.

Stephen Scouten

Got it. That's really helpful, Kevin. And then maybe the last question for me here, a follow-up.

It's just kind of around the credit outlook. I mean, obviously, it feels like credit is smooth for much of the industry, your trends are continuing to improve and are encouraging. But is there a tension point for you all as you model out future loss given defaults with where the 10-year could go.

I mean, do you get more trepidation if the 10-year goes to 5% or 5.5%. And kind of how do you think about that trajectory and the impact around credit.

Bob Derrick

Yes, Steve, it's Bob. I'll start with that. Kevin can chime in as well.

But as far as the rate curve goes, clearly, if we get too high out there, it certainly gives me trepidation. But I don't think, from a modeling perspective, it's having, where we think we're headed in terms of rates, having a negative effect on our credit outlook. I do think we're kind of at normal and beginning to see some perhaps improving credit metrics even from where we are.

Remember, we have five basis points of third-party lending. So our core charge-off ratio really around 20-ish basis points versus the 26 we report given to third-party. So I think that's a fair number in the intermediate term.

And as we look forward, number could actually improve somewhat. NPLs, we continue to make progress on flat, but we see a decline over time. So overlay an interest rate scenario on top of that, that perhaps gets adverse with a steeper back end of the curve, I don't think it has a material effect on us.

Most of our borrowers, quite frankly, are at the shorter end of the curve.

Kevin Blair

Bob, nailed it, Steve. The only thing I'd add to it is we've kind of gotten away from these disclosures. But based on that question, over the last 1.5% years, we've shown a lot of information that speaks to those renewals or those clients that are up for renewal that have a higher -- that would go up 200 plus basis points in interest rate just based on where their current rate is.

And it's a very small percentage of the book. I'd remind you that we're almost 60% of the front end of floating based loans on the commercial side. So it's less of an impact, obviously, for those guys.

But it's something we watch and our credit team underwrites assuming different interest rate scenarios and distress those debt service coverage levels. So there's not an inflection point to your question that says we're worried about it. We just have to be mindful that, that does have some impact to debt service.

Stephen Scouten

Got it. That's great color. Thank you guys for your time.

Kevin Blair

Thank you, Steve.

Operator

Thank you. Our next question comes from Christopher Marinac from Janney Montgomery Scott. Your line is now open.

Please go ahead.

Christopher Marinac

Thanks. Good morning. Just to continue with Bob, there was about $110 million, Bob, of office loans that we're rolling over in the fourth quarter.

Could you just walk us through what happened with those. And did some of those get renewed or they paid off. And then we see the very good and stable criticized numbers.

I just want to use that as an illustration for what to expect on the rest of the portfolio.

Bob Derrick

Yes. Thanks, Chris for the question. Let me start with the overall portfolio and kind of drill into what's happening on maturities.

So as we look at '25, we've got about 23% of that portfolio maturing. And if you take kind of what we had maturing in the fourth quarter, most of those, the answer to your specific question is they got renewed, regraded and we didn't see material overall detrimental effects to us in terms of credit cost. So we think that's probably a good indication that the 23% that is maturing in '25 will be similar.

We have one office relationship that's on nonaccrual, that's got some size to it. We're working through that. When you get behind that one, the rated levels, as you mentioned, are less than 10% and we see some stability there.

So we'll manage through these maturities in '25. And I think the fourth quarter is a good indication, I would view that as a positive. And I think 25% should be similar.

Now it doesn't mean we won't have some office hiccups as we go forward. But quite frankly, I think we're at a stable point and actually beginning to see what may be a longer-term improvement as we get more back to office, valuations have stabilized, we think, with cap rates, and it's really market specific as you know. But overall starting to feel better about as we manage through this office portfolio.

Christopher Marinac

Great, Bob. That's really helpful. And then just, Kevin, a quick one for you on sort of lift outs in general.

I mean what would be your kind of pipeline, if you will, of new personnel and maybe what's happening below the surface there.

Kevin Blair

Yes, Chris, when you look at the market expansion program that we have in place, it involves about 70 resources to be hired in 2025, but in order to lift out those teams, it's only about 35 to 40 production resources and then we'll have support resources behind it. Our team has gone through and has done the work to identify the talent that we want. I mean it's -- it's -- everyone says that they're out there hiring the best talent.

So we've asked our teams to identify those individuals. And when timing is right, we'll have the opportunity to hire those individuals and bring them over. So as I said, this is -- it's not a strategy that we're the only ones running.

So I think what bodes well for us is our culture. People that have come here in the past over the last several years, they serve as our best reference point to be able to tell folks that are coming from those same institutions that this is an institution that values client centricity, which is what bankers want, and ultimately that we have the products and capabilities that they had at generally larger institutions. So we've built a model that appeals to those individuals.

And now it's just dotting the i's and crossing the t's and come first quarter, early second quarter, we'll make many of those hires.

Christopher Marinac

Great, Kevin. Thank you, both, very much.

Kevin Blair

Thank you, Chris.

Operator

Thank you. Our next question comes from Catherine Mealor from KBW. Your line is now open.

Please go ahead.

Catherine Mealor

Thanks. Good morning. I had one follow-up on just the margin on the deposit side.

The reduction in deposit costs was really great to see. Is there any -- can you talk to us about the trends throughout the quarter and maybe where deposit costs ended the quarter to give us a sense as to where we'll be starting first quarter.

Jamie Gregory

Catherine, as we went through the quarter in 20 -- in the fourth quarter, we saw the production rates decline fairly nicely, fairly significantly. If you look at overall production, we were down about 75 basis points from the prior quarter on production. A lot of that reduction came through in money markets.

And so we are pleased to see that. And the good thing was that money market production remained elevated even with the reduction in rates. And so things are proceeding as we expected.

We're seeing the decline in rates. If you look at the portfolios and where we broke out the beta by portfolio in the easing cycle, those betas are proceeding kind of as we expected. And so things are proceeding as we had laid out in the prior quarter.

Catherine Mealor

Great. That's helpful. And then one question or one comment you made, Kevin, about the pipeline.

You mentioned that both C&I and CRE pipelines were up in the fourth quarter which I thought was interesting on the CRE side. I'm just curious if you could give a little bit of color around that. And just with the move in the 10-year, how sensitive do you think CRE new production is to that level of rates.

Kevin Blair

Yes. Catherine, I'll answer that. And also I just wanted to draw your attention to Slide 32 in the deck, which will give you the December average rate for total deposits at $2.39%.

So that will -- it's about seven basis points below the quarter in an average rate. But as it relates to CRE, I think, part of this is just as we, as an organization, we're still doing deals over the last year, but there weren't a lot of term sheets being issued because there just weren't a lot of transactions. And so as the market activity picks up, we're well positioned with our client base to be able to do new deals.

And our bankers are being a little more aggressive at going out and pitching deals. There's two sides to that equation. One is loan demand.

We can't create that on the CRE side. That's picking up. And two, our bankers are leaning in a little more over the last year.

I think it's safe to say that many of our CRE bankers were focused on managing the credit side of it, but also cross-selling into the book. So we saw tremendous growth in deposit sales into our CRE client base. We saw greater treasury adoption and so they had a great year in that.

Now they're transitioning back into leaning a little more into loan growth. So market is picking up and our bankers are a little more focused on generating that. So as a result, even in fourth quarter, as I mentioned, our committed production was the highest level we've seen since the fourth quarter of 2023.

I'm sorry 2022. So it is starting to pick back up and we think it will pick up from here.

Catherine Mealor

Great. Helpful. And I see Slide 32.

So thank you for pointing that out. Appreciate that.

Operator

Thank you. [Operator Instructions] Our next question comes from Nick Holowko from UBS. Your line is now open.

Please go ahead.

Nicholas Holowko

Hi. Good morning. Thank you for taking my question.

Appreciate all the color on the margin trajectory as we're progressing throughout the year. I know in the past, I think you've talked about a 15 basis point benefit or so in 2025 and 2026 from the fixed rate asset repricing opportunity. I'm wondering with the moves in rates over the past couple of weeks and months.

Is that still a fair way to ballpark the opportunity or could there be some incremental upside from repricing on the yield side.

Jamie Gregory

There could be incremental upside from those numbers. As we look at 2025 and 2026, we believe that the fixed rate asset repricing benefit could be in the context of around 20 basis points a year. But when we look at that, I would just say a portion of that will drop to the margin.

And it's uncertain exactly what that portion is because that can be impacted by loan spreads, cash on the balance sheet, deposit mix, et cetera. And so it's uncertain and we're guiding for 2025 to have somewhere in the margin going somewhere between mid-20s to the mid-30s. But when you look beyond that, it's a little more uncertain how those other things will play in.

But we do see that as a material tailwind to 2026 margin.

Nicholas Holowko

Perfect. Thank you. And then just touching on credit.

I know nonperforming and criticized loans were pretty stable in the quarter. And but a small increase in the reserve ratio despite some improvement in the scenarios, which it looks like was performance driven a small component of it. So I was wondering if maybe you could touch on that and then how you're thinking about the direction of the allowance coverage as we're progressing throughout the year.

Thank you.

Jamie Gregory

Yes. As we look at the allowance, the $4 million increase in the allowance, there are a lot of small components that led to that. The one that we called out in the prepared remarks was the extension of the loan portfolio due to production and that was one of the larger impacts.

You're right that there was not that material of a change in the economic outlook. But I would say that the near-term unemployment rate is a little bit higher in a consensus forecast and that is a driver of the allowance calculation. When we look at life-of-loan losses, the change in unemployment is one of the largest drivers of that calculation.

So as we look forward, we're very comfortable where the allowance is at 1.27% and we would expect to see relative stability there, but it is uncertain how the unemployment rate will play out in 2025. We will learn more as we go through the year as far as policies, but the unemployment rate will be a key driver of that life-of-loan loss estimate.

Nicholas Holowko

Perfect. Thank you for taking my questions.

Kevin Blair

Thank you.

Operator

Thank you. Our next question comes from Timur Braziler from Wells Fargo. Your line is now open.

Please go ahead.

Timur Braziler

Hi. Good morning.

Kevin Blair

Good morning, Timur.

Timur Braziler

Looking back on the loan growth, clearly, the entire industry is looking for loans to rebound. I think that statement is even more profound for some of the Southeast banks. I'm just wondering what that portends for the competitive landscape.

Are you starting to see greater competition on the lending side. Is that mainly on rates right now. I guess how are you thinking of the competitive landscape progresses as we go through the course of the year here.

Kevin Blair

Timur, I think you nailed it. People have excess liquidity, they have excess capital and they want to deploy it. And if you think that the economy is going to grow at an exponential rate, you want to get your share.

So that always comes down to price competition. I think what the industry has done over the last 10 years is not used credit as a vehicle to lean in. Everyone is still trying to hit down the middle of the fairway on credit.

So then it comes to price. We're starting to see some margin compression there. And I think that's expected because we, over the last year, saw inflated spreads on new production.

If you just look at this last quarter, our going on production yield was 7.19%. The prior quarter, it was 7.47%. Some of that has to do with just the lower index.

But we're starting to see a little bit of compression around the spread over SOFR or relative to our internal funds transfer pricing. Having said that, what's been great, and Jamie mentioned this earlier, are going on production for deposits were 2.78% versus the previous quarter of 3.56%. So net-net, if you just look at new production, we're getting a 4.41% spread off that, where last quarter were 3.89%.

So we've got to continue to be smart and price loans appropriately. We have tools in place with our bankers to evaluate returns on capital and they'll use those tools to make sure that we're making the right strategic decisions. But the other offset to that is we've got to continue to price our deposits appropriately.

And if we do so, as Jamie just talked about, it gives us the opportunity to not only grow NII, but to continue to expand the margin. But we have not gone at this growth strategy without recognizing that there will be some margin compression in the industry and we've built that into our plan.

Timur Braziler

Great. And then just looking at the other side of the balance sheet, just on the wholesale funding, you guys have a good job working that down. I'm just wondering where that 11% goes throughout the course of '25.

How much more room is there to bring that down.

Jamie Gregory

Yes. Looking at that 11%, the first thing you'll notice is, as we mentioned earlier, that the home loan bank advances are at zero, so we can't really reduce that any further. But if we have core deposit growth in line with core loan growth, you would expect to see some reduction in that, but it's not going to be as material as what you've seen over the last 12 or 24 months.

Timur Braziler

Great. Thank you for the questions.

Operator

Thank you. Our next question comes from Gary Tenner of D. A.

Davidson. Your line is now open. Please go ahead.

Gary Tenner

Thanks. Good morning. Most of my questions have been answered, but I had a short-term kind of loan question.

You talked about it and I think we probably expect the year to start-off slowly, for loan growth in the group overall. But as you talk about the headwinds versus the kind of fourth quarter production levels and the good pipelines, is there an avenue to stabilize loan balances in the first quarter or is a greater likelihood another quarter of contraction before we maybe pivot the other direction.

Kevin Blair

Gary, I think we expect to see some growth in the first quarter. Obviously, it will not be the level of growth that we would expect to see in the fourth quarter of next year. But based on our production pipelines, based on what we're expecting from a payoff activity standpoint, we would expect modest growth in the first quarter.

Gary Tenner

Okay. Helpful. Thank you.

That's all I have.

Operator

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr.

. Kevin Blair for any closing remarks.

Kevin Blair

Thank you, Alex, and thank you all for your questions and your continued interest in Synovus. I want to extend my deepest appreciation to all of our team members for their exceptional contributions and achievements in 2024. Together, we delivered exceptional client service, deepened relationships and strengthen our value proposition, which continues to differentiate Synovus in a competitive and crowded landscape.

This year's performance has led to an increase in client who are raving fans, stronger and more resilient communities and shareholders who are both delighted and optimistic. Internally, we branded 2025 as Synovus Go. This signifies our commitment to connect, act and win with even greater collaboration and boldness.

We are leaning in more as we believe we have an opportunity to create sustainable outperformance in 2025 and beyond through core execution as well as accelerating growth through strategic investments and market share gains. With our footprint continuing to expand, an economic and interest rate environment offering new tailwinds and a competitive marketplace presenting opportunities through consolidation and disruption, we feel confident in our ability to navigate the future successfully. Given this is his last earnings call, I want to again offer our heartfelt gratitude to Bob Derrick for his 21 years of dedicated service to Synovus.

His numerous contributions will leave a lasting impact and he will be greatly missed. As Bob embarks on this next chapter of his life, we wish him all the best and much happiness and I'm delighted to have Bob pass the baton to Anne Fortner, and want to congratulate her on a well-deserved promotion. As always, we value and look forward to our ongoing relationships with each of you. We look forward to meeting many of you at upcoming industry conferences and want to remind you that we are always available if you have questions.

Thanks again for your attendance. And with that, Alex, we conclude our call for today.

Operator

Thank you all for joining today's call. You may now disconnect your lines.