Please go ahead.Ebrahim Poonawala Good morning. I guess just on deposits. So, you mentioned the excess deposit diversification played a role in the quarter. One, give us a sense of like how much of your deposit base or NIB within noninterest-bearing that you would consider operational versus excess? And do you see some of that still continuing as businesses? And would love some perspective around just from a customer base standpoint, in terms of small businesses, treasurers, CFOs actively thinking about diversifying. Like is that trend done? Or do we — do you still expect that to continue? Maybe if you can start there, yes.Jim Herzog Yes, good morning, Ebrahim. I’ll take that, and Peter may want to add on. In terms of what percentage were noninterest-bearing or operational, we view them as largely operational.
In fact, 95% of our noninterest-bearing are tied to treasury management products.So, from that standpoint, it is a largely operational base. Now there are fluctuations in terms of how much they need to put in those noninterest-bearing accounts to take care of operational needs and what they can leverage from an ECA standpoint. And there probably is still just a little bit of excess in there, which is why we see the ratio coming down from 52% to 53% down to around 50%.But we think largely that attrition is gone. In terms of where the diversification efforts might go, things seem pretty settled down right now, and I think that’s going to depend largely on just what happens to the industry in terms of other events that might happen. But for now, it does feel like the diversification efforts have largely settled down, and those are the trends that we’ve seen over the last two to three weeks, three to four-week season.Peter Sefzik Yes, I would agree with that, Ebrahim.
This is Peter. And I would just also continue to point to where we saw most of the diversification occur. And you mentioned small business.In our retail franchise, small business, business banking, middle market, most of those businesses really had not seen the diversification issue. It’s been sort of business as usual, if you will. People use deposits for running their businesses or — and what — and so forth. But the strength of the rest of our deposit base is something that we are really, really proud of and are going to continue to lean into. And so, I think Jim is exactly right. We feel like the diversification efforts, if you will, at this point, have pretty much stabilized.Ebrahim Poonawala Noted. And I guess maybe just another question, Jim, around the outlook for NII, NIM.
I was wondering if you could give a sense of the trajectory that saw 67% year-over-year growth. How do you see quarterly NII and NIM trending from your — from 1Q levels?Jim Herzog Ebrahim, I’m going to probably refrain from giving, as I often do from specific NIM percentage guidance. I think this example is a great — this quarter is a great example of why we don’t like to give that. With our business model being a commercial bank, we do see some variations in a number of line items, cash securities, et cetera.And in this particular quarter, we did put a lot of safety net level of cash onto the balance sheet, which does put a drag on NIM percentage and it just creates a kind of a noncorrelation between the numerator and denominator. We just don’t see them going in the same direction or correlating very well.So, the NIM percentage, I’m shying away from still.
We’re obviously probably moving towards the low 3s, but I wouldn’t want to get more specific than that. And I would just stick to the percentage guidance that we gave for the quarter and the full year.Ebrahim Poonawala But Jim, if rates don’t get cut, do you expect fourth quarter NII to be the low point for the year in terms of as we think about the exit?Jim Herzog We — obviously, we are doing a little bit of a reset with the deposit runoff. And so, we have the second quarter guidance out there. We actually have net interest income probably growing slightly quarter-to-quarter after that. That’s a function of loan growth primarily.And we do expect to get some degree of seasonal deposits probably later in the second half of the year, and that’s beyond the day impact that you might get.
So, we do think that we’re going to be in a positive trajectory from the second quarter on. We’re just essentially resetting that baseline in the second quarter.Ebrahim Poonawala That’s helpful. Thank you.Operator Next, we have a question from Manan Gosalia with Morgan Stanley. Please go ahead.Manan Gosalia Good morning. Another question on deposits for you. You noted you’ve retained a lot of the relationships and only lost some of the, I guess, excess balances that people were holding. So, in terms of the room to bring those deposits back, what is the strategy here? Is it just to pay up on rate or through ECR to bring those deposits back? Or is there anything else you can do? And is there a level of deposits you think would flow back once this volatility subside?Peter Sefzik Manan, this is Peter.
The last part of your question, I’ll say is, yes, we believe there is a level of deposits that would flow back. I would say the number 1 thing that we do is we talk to our customers pretty greatly.We continue to believe that we provide a better customer relationship, better service than other banks. And quite often, it’s not unusual for people to come back to us because they don’t get the service that they wanted at another institution. So, I think when we get to the other side of this, that will probably be the number 1 reason we start to see deposits flow back.But I also want to iterate again, as Jim said, that’s not necessarily something we’re relying on in our outlook. We think that we will see it. But we believe that, that will just be a function of us providing great customer service.
I don’t think we’re going to have to pay up for it necessarily or things like that.Curtis Farmer Yes, I might just emphasize, too, Peter, I don’t believe that across all of our portfolios, this is probably less about rate and more about sort of two things. One is the sort of surge excess deposits flowing out that we saw during COVID, stimulus, PPP, et cetera. And we were expecting that in the quarter that we would lose some of that. And then those that have sought diversification, I think as the noise level settles down across the industry and things get back to normal, I think we’ve got a good opportunity at some of those deposits coming back on balance sheet. And we’re just staying very, very close to all those customers. They have access to our relationship managers, but also to any of us on the leadership team as well.Manan Gosalia Got it.
And then maybe to round out the discussion on the balance sheet. You added a lot more short-term and long-term debt this quarter to boost your liquidity. How should we think about the right level of liability mix outside of deposits and the right level of cash that you want to hold on the balance sheet going forward?Jim Herzog Yes. Those questions are connected to each other. Certainly, the level of cash that we hold will really be strongly correlated to what’s going on in the industry. We always want to make sure we have an abundant level of cash during turbulent times. So, we have been comfortable with our targeted $3 billion level of cash prior to the disruption in the industry. Obviously, we pushed closer to $9 billion, as we have on the slide, on Slide 9.
And we will hold there for some period of time until we’re sure the industry has passed some of this turbulence, to the extent we have loan growth, of course, we’ll see that start to go down.On the funding side of the balance sheet, we started with very low levels of unsecured debt. As you can see on Slide 9, probably some of the lowest amongst our peers. So, we felt like we were in very good shape to begin with. We have a lot of flexibility. We did draw on a lot of FHLB during the initial days of the crisis, which we thought was a very prudent thing to do.The good thing is we did that in a way that gives us tremendous flexibility. A lot of those maturities are latter, starting this year all the way through the next couple of years. And so, we have the option as those maturities come up to either roll them over or let them just mature naturally.So, we feel like we have a tremendous amount of flexibility, but it’s going to depend on the environment that will drive the amount of cash we have and the amount of funding that we have on the balance sheet.
But we are starting from very low levels, and we feel really good about our current position. So, we’re fortunate that we have that capability.Manan Gosalia And is that largely revenue neutral because you’re raising essentially close to the Fed funds rate and then you’re deploying that in cash?Jim Herzog There is a modest strength on that. There’s probably 40 to 50 bp trade as I look at it. And that’s one of the reasons we shied away from NIM percentage guidance. I mean not only just cash simply capability to inflate or deflate the balance sheet. But whether that’s free cash coming in, in the form of deposits or it’s cash carrying a negative spread, that can make an impact on the NIM percentage, too.So, baked into the outlook, we do have a fair amount of cash still there.
And that’s one of the things that I look at as an opportunity as we move towards later in the year and into ’24, we’ll get past that modest amount of trade from the negative spread on the cash carry.Manan Gosalia Great. Thanks for taking my questions.Operator [Operator Instructions] Next, we go to the line of Brody Preston with UBS. Please go ahead.Brody Preston Hi. Good morning, everyone. Could I just circle back on the NII guide? I just need — I was just hoping to get some help tying the 2Q, what the step down that you have for 2Q versus the full year guide. Just because if I try to run through the numbers quickly, it kind of looks like at the midpoint of the 2Q guide relative to the full year guide, you kind of expect like a 3% step-up in the back half of the year on the quarterly NII run rate.
And so, can you help me understand sort of how we get there and how much of that assumption is driven by what you do with borrowings?Jim Herzog Yes, there’s a little bit of play in there as you take the midpoints of those percentages. So, I wouldn’t put the stuff up in the second half of the year quite at that level. There’s just a little bit of rounding trying to navigate those mid percentages that you mentioned.We do see a small step-up in the second half of the year. Some of that is days. Some of that is loan growth, a little bit of seasonal deposits we expect to come in. So, you will see a very small step-up quarter-to-quarter as we go through the year, probably not quite at a level that you just mentioned, Brody.Brody Preston Okay. Okay.
