Comerica Incorporated (NYSE:CMA) Q3 2023 Earnings Call Transcript

Comerica Incorporated (NYSE:CMA) Q3 2023 Earnings Call Transcript October 20, 2023

Comerica Incorporated beats earnings expectations. Reported EPS is $1.84, expectations were $1.7.

Operator: Hello, and welcome to the Comerica Third Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Kelly Gage, Director of Investor Relations. Please go ahead, Kelly.

Kelly Gage: Thanks, Kevin. Good morning, and welcome to Comerica’s third quarter 2023 earnings conference call. Participating on this call will be our President, Chairman and CEO, Curt Farmer; Chief Financial Officer, Jim Herzog; Chief Credit Officer, Melinda Chausse; and Chief Banking Officer, Peter Sefzik. During this presentation, we will be referring to slides which will provide additional details. The presentation slides and our press release are available on the SEC’s website, as well as in the Investor Relations section of our website, comerica.com. This conference call contains forward-looking statements. And in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations.

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Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements. Please refer to the safe harbor statement in today’s earnings presentation on Slide 2, which is incorporated into this call, as well as our SEC filings for factors that can cause actual results to differ. Also, this conference call will reference non-GAAP measures. And in that regard, I direct you to the reconciliation of these measures in the earnings materials that are available on our website, comerica.com. With that, I’ll turn the call over to Curt Farmer.

Curt Farmer: Well, thank you, and good morning, everyone. Thank you for joining our call. Today, we reported third quarter net income of $251 million, or $1.84 per share — moderation per share, exceeding expectations. [indiscernible] optimization and moderation in customer demand drove the decline in average loans to $54 billion. Successful execution of our targeted deposit strategy grew customer balances, enabling us to repay $5 billion in maturing FHLB advances. Our continued focus on fee income produced another robust quarter, and credit quality remained very strong with modest net charge-offs, following three consecutive quarters of net recoveries. Complementing our compelling financial results, we advanced other strategic initiatives.

Small business remains a priority. And I’m excited to announce that we exceeded our $5 billion lending goal ahead of our three-year commitment. With our investments in talent, products and services for this important sector, we believe small business will become a growth engine over time. Achievements such as publishing our first financed emissions report, making community development investments and recognition for our volunteer program further underscore the value we place on supporting the communities we serve. Advancing our Ameriprise partnership and selective talent acquisition within wealth management, position us to achieve our noninterest income objectives while deepening customer relationships. We continue modernizing our approach to technology to better enable agile product enhancements as we leverage off-premise platforms to run over three quarters of our business applications.

Progress towards these initiatives allow us to balance the strength of our legacy for the future vision to sustainably support our customers as a trusted banking partner. Moving to a summary of our results on Slide 4. Average loans declined $1.4 billion, with the largest reduction resulting from our strategic exit of Mortgage Banker Finance. Success in winning new deposits and bringing back customer balances drove an increase in average deposits of $1.6 billion. Net interest income exceeded expectations for the quarter, even with the impact of competitive deposit pricing and loan trends. Credit quality remains very strong despite continued expected migration. Outperformance in noninterest income partially offset higher-than-expected expense pressures.

Finally, profitability and loan selectivity further enhanced our capital position as we generated an estimated CET1 ratio of 10.79%, above our 10% target. Despite the disruptive industry events earlier this year, we effectively managed our balance sheet to create abundant liquidity, enhanced returns over time, while taking care of our customers and exceeding the profitability expectations. Now, I will turn the call over to Jim, who’ll walk through the quarter in more detail.

Jim Herzog: Thanks, Curt, and good morning, everyone. Turning to Slide 5. Our strategic actions and shift to optimization caused average loans and commitments to decline. The exit of Mortgage Banker Finance is progressing as expected and contributed to almost half of the reduction in average balances. We still expect the exit to be substantially complete by year-end. Declines in equity fund services were largely concentrated in non-relationship customers, but we remain committed to this important business. Lower utilization within general middle market reduced balances, reflecting softening loan demand in this elevated rate environment. Ongoing funding of multi-family and industrial construction projects continue to drive higher commercial real estate utilization, but we saw an inflection in commitment growth as we strategically managed pipeline and origination volume.

The floating nature of our commercial loan portfolio benefited from rising rates as loan yields continued to climb to 6.34% in the third quarter. Slide 6 demonstrates our successful deposit generation. Average deposit balances increased 2.4%, exceeding expectations and HA trends as we added new deposits and won back customer balances that diversified earlier in the year. In fact, corporate banking and middle market California both closed the quarter in line with their early March balances after experiencing more concentrated diversification in Q1. As expected, noninterest-bearing deposits trended down at a decelerating rate with the lowest balance decline in the last four quarters. Considering that modest reduction, our deposit mix was more impacted by growth in the denominator, with success in winning interest-bearing deposits.

We continue to view our deposit mix as a competitive advantage, providing a more stable and cost-effective funding source than our peers. Industry efforts to enhance liquidity drove competition. And when combined with a higher rate environment, deposit costs increased to 290 basis points, resulting in a cumulative beta of 55%. In recent weeks, deposit betas have been moderating and we intend to remain nimble on our relationship pricing approach, so we are able to balance customer needs with profitability targets, while closely monitoring the market. With an even lower percentage of uninsured deposits, the operating nature of our accounts and an enviable customer base, we believe our strong deposit profile is now even more attractive. As shown in Slide 7, our effective liquidity strategy and strong deposit growth allowed us to absorb all of our contractual wholesale funding maturities this quarter.

We expect to continue to utilize excess cash to further reduce wholesale funding in the coming quarters. Our loan-to-deposit ratio continue to trend favorably, closing at 80% for the quarter. With significant liquidity capacity and very light remaining unsecured funding maturities, we have flexibility to manage funding needs and are better positioned to prioritize high-return growth in 2024. Period-end balances in our securities portfolio, on Slide 8, declined $1.1 billion, with paydowns, maturities and a $710 million negative mark-to-market adjustment. Although we have nominal treasury maturities remaining in 2023, larger scheduled maturities and anticipated securities repayments over the next two years are projected to benefit net interest income and AOCI.

Altogether, we project a 25% improvement in unrealized securities losses over the next two years. This estimated burn-off is sensitive to the dynamic rate environment and length in the quarter-end. However, since our portfolio is pledged to enhance our liquidity position, we do not anticipate any need to sell securities and, therefore, unrealized losses should not impact income. Overall, our security strategy remains unchanged as we stopped reinvesting over a year ago, and we maintain our entire portfolio as available for sale, providing full transparency and management flexibility. We will continue to closely monitor final regulatory rules to consider the impact on our security strategy as we consider the need for future compliance. Turning to Slide 9.

Net interest income decreased $20 million to $601 million, but outperformed expectations. We were encouraged by the lower pace of decline in net interest income as we move closer to what we believe may soon be an inflection point. Competitive deposit pricing and lower loan balances offset the benefits of loan yields and reduced wholesale funding balances. With the strategic management of our interest rate sensitivity, rates have phenomenally impacted income and we remained effectively asset neutral. As shown on Slide 10, successful execution of our interest rate strategy and the current composition of our balance sheet favorably position us with minimal negative exposure to a gradual 100 basis points or 50 basis points on average decline in interest rates.

By strategically managing our swap and securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position over time. Credit quality remains very strong, as highlighted on Slide 11. Following three consecutive quarters of net recoveries, we observed modest net charge-offs of $6 million. As expected, credit migration continued with greater concentration in businesses with more relative exposure to elevated rates and inflationary pressures, including commercial real estate, leveraged loans, and technology and life sciences. While the economic forecast improved slightly from the prior quarter, the outlook remained uncertain, which when coupled with lower loan balances, which impacted loan mix, contributed to an increase in our allowance for credit losses to 1.38% of total loans.

Notably, non-accrual loans declined for the sixth consecutive quarter, and inflows to non-accruals of $14 million also declined. Consistent with our proven credit discipline, we continue to closely monitor our portfolio and expect further migration to remain manageable. On Slide 12, noninterest income of $295 million was our third highest quarter on record, following our second highest quarter in 2Q. Deferred compensation, which was fully offset in expenses, reduced $7 million, contributing to most of the noninterest income decline. Softer derivative activity more than offset increased loan syndication fees, pressuring capital markets revenue. Fiduciary income was negatively impacted by annual fees received in the prior quarter. Movement in the rate curve benefited risk management hedge income, but will vary in the future based on the rate environment and the position of our hedging portfolio.

Growth in noninterest income continues to enhance our overall revenue profile and capital efficiency over time. Expenses, on Slide 13, increased $20 million. Salaries and benefits were up $9 million and $8 million of that increase was in temporary labor due to staff augmentation, advancing technology and wealth management initiatives. Outside processing increased $7 million, driven by certain vendor terms that are sensitive to interest rates and our Trust Platform conversion. Other expenses benefited from large modernization credits from the sale of real estate, offset by increased litigation and regulatory-related expenses, consulting fees and operational losses. We believe we in the industry are in a period of calibration, as we balance the profitability and risk management impacts from the first quarter disruption, with strategic investments critical for future growth.

We remain committed to managing an efficient organization and are assessing opportunities to offset some of these pressures so that we may continue to deliver strong returns over time. Slide 14 highlights our solid capital position. Capital generation from profitability and lower loan balances drove our CET1 ratio further above our target to an estimated 10.79%. Our third quarter tangible common equity ratio of 4.62% includes a negative 502 basis point impact from AOCI. Higher rates increased unrealized losses in our securities and swap portfolios, driving a more negative impact than the prior quarter. Based on the September 30 forward curve, we anticipate approximately a 37% reduction in our unrealized losses by the end of 2025. Although the proposed capital changes do not apply to us based on our asset size, we favor a conservative approach to capital management and feel it is prudent to remain mindful of the regulations as they evolve.

Our outlook for 2023 is on Slide 15, and assumes no significant change in the economic environment. We project full year 2023 average loan growth of 7%, which would be our highest annual loan growth rate in a decade. The strategic exit of Mortgage Banker Finance and increased selectivity is expected to continue to impact fourth quarter balances. Our projected full year average deposit decline of 13% improved over prior expectations, with the success in winning new deposits and bringing back customer balances. With the exception of the impact from our Mortgage Banker Finance exit and utilizing excess cash to modestly reduce the maturing broker deposits, we expect deposits to remain relatively flat in the fourth quarter. Our outlook does not assume a significant benefit from seasonality, but if we did see a return to more normal fourth quarter seasonal patterns that may provide more upside than projected.

We still expect another record year of net interest income in 2023, growing 1% to 2% over last year’s record results. Competitive deposit pricing, continued deposit mix change, and a modest decline in loans are expected to drive a 5% to 6% reduction in fourth quarter net interest income. Although short-term rates are expected to remain high through year-end, our asset sensitivity position is designed to protect our profitability by minimizing the negative impact of rates when they decline. Credit quality remained very strong, and we expect continued migration to be manageable. We forecast full-year and fourth quarter annualized net charge offs to remain below our normal 20 basis point to 40 basis point range. Noninterest income has exceeded expectations for the first three quarters, and we project full year growth of 9% over 2022.

Benefits from non-customer income from FHLB dividends are expected to continue, but at declining rates, as we repay maturing advances. Risk management income is expected to eventually reduce over time with rates and our swap position. For the fourth quarter, noninterest income is expected to decline 3% to 4%, largely driven by a reduction in capital markets income considering market dynamics and increased selectivity. Noninterest expenses are expected to increase approximately 11% year-over-year, with 3% of that growth attributed to higher 2023 pension expense and almost 2% due to higher FDIC expense. Fourth quarter expenses are projected to increase 3%, as we observed pressures related to investments in technology and risk management in addition to third quarter modernization gains that are not expected to repeat.

While we are not offering 2024 guidance, we are mindful of the need to mitigate expense pressures as we recognize the new funding paradigm in the industry. These pressures are largely concentrated in the need for selective ongoing strategic investments, in addition to investments to further enhance risk management and regulatory compliance. We are in the process of evaluating cost reduction opportunities, with the objective of keeping 2024 costs only modestly higher than 2023. This assumes no change in pension expense, which will be determined largely by year-end rates and market performance. Prudent expense management remains a priority as we work to balance our expense base commensurate with our earnings power. Strong profitability is expected to further grow our capital position in excess of our 10% target.

Share repurchases remain paused, considering the ongoing volatility within unrealized AOCI losses and subject to further regulatory clarity. In all, it was a solid quarter of a strong deposits, liquidity, fee income and credit. We believe we are in great shape as we look to finish out the year and prepare for 2024. Now, I’ll turn the call back to Curt.

Curt Farmer: Thank you, Jim. Slide 16 summarizes our differentiated value proposition. As a leading bank for business, with strong wealth management and retail capabilities, our tenured colleagues deliver value-added industry expertise to our blue-chip customer base, while our highly regarded approach to credit has historically outperformed our peers. Complementing our commercial loan expertise, our relationship model is exemplified by a product set tailored to meet our customer needs, enhancing revenue and retention. Our deposit profile has long been a strength with a focus on commercial operating deposits and a consistent retail base. With new products already in the market and additional efforts underway to expand small business and payments, we expect this core funding source to be even more compelling.

Finally, we remain committed to running an efficient organization, and we’ll be taking steps to offset expense pressures while leveraging investments designed to enhance productivity and optimize resources. Before we open the line to questions, I just want to comment on what a remarkable quarter we think this was for our company. After the significant industry disruption this past spring, once again, our relationship-based model has proved resilient. We’re very proud to see a return to deposit growth, especially when the H8 data shows declines across the industry. Our liquidity is in great shape. We repaid significant FHLB advances, and our loan-to-deposit ratio puts us in a very favorable position. Credit remains strong, and fee income continued to perform at near-record levels.

During this disruptive time, we have taken care of our customers, we’ve borne back deposits, we’ve added new relationships, and still exceeded profitability expectations. As I shared on our prior calls, throughout our almost 175-year history, we have managed through a number of challenges, and I’m confident in our ability to navigate this environment. We remain focused on our core strategy, enhancing efficiency, managing risks, protecting returns and positioning for organic growth. With the uncertain economic landscape and being just under $86 billion in assets, I feel very good about Comerica’s position. We’re proud of our colleagues to the performance we delivered. We appreciate your time this morning. And now operator, we’d be happy to take some questions.

Operator: Certainly. [Operator Instructions] Our first question today is coming from Jon Arfstrom from RBC Capital Markets. Your line is now live.

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Q&A Session

Jon Arfstrom: Thanks. Good morning, everyone.

Curt Farmer: Good morning.

Jon Arfstrom: Hey. Good morning. Curt, question for you just on one of the last comments you made about deposit growth. You mentioned that you’re adding and bringing back customer deposits. Can you talk about the extent of what you brought back, and why these clients are coming back, and kind of the extent of it and what’s left to bring back?

Peter Sefzik: Hey, Jon. This is Peter. So, yeah, the bringing back clients, I would say a lot of that has occurred probably in our middle market businesses. So, if you look back to pre-SEB, and Jim mentioned this, for example, middle market California, corporate banking, we’re back to pre-SEB levels in those businesses, but that’s true in a couple of other businesses as well. Environmental services has that sort of results, and middle market overall, I think has performed really well. A lot of our new deposit growth, I would say would be in middle market, small business, business banking. We’re really being aggressive on trying to attract granular deposits, small business deposits. We’re making a lot of investments there in people and product.

And so, that’s the success that we’ve had. I think as the year has gone on, our customer base and prospects have continued to have a lot of confidence in our name and our success. And while all the banks were challenged between March and April, I think we’ve proven to be pretty resilient through this.

Jon Arfstrom: How rate sensitive are those deposits? Or is this kind of, call it, relationship gathering?

Peter Sefzik: I think it’s a little bit of both. I think some of it is providing confidence overall that occurred early in the year. But certainly, you’re attracting some of it with interest-bearing rates that we’re being competitive on. And I think we talk a little bit about what we’re seeing on our deposit betas here today. But — so it’s a little bit of both. I think some of it’s product investment that we’ve made to make it easier for our customers to manage their liquidity. But we’re certainly doing what we need to do to be competitive with other banks on the interest rate environment.

Jon Arfstrom: Okay. Jim, one for you. You are kind of dancer on this in terms of you’re talking about betas moderating and we still have this down net interest income sequentially and down margin. But the way things sit today, if the Fed is done, what’s your best guess on NII inflection for the company?

Jim Herzog: Yeah. Thanks, Jon, and good morning. I do feel like the pathway on that inflection point is becoming a little bit more on the focus, even though there is still some degree of uncertainty. I would say right now, our base case is that we’ll probably hit a trough in Q1, but whether or not that’s the inflection point, and again, that is the base case, and more importantly, what that upward slope of the line will be from there, really depends on a lot of things, as you know. A lot of uncertainty out there, deposit betas, the Fed stays higher for longer, how do betas respond. And just as importantly, if rate cuts occur, how much is there in terms of a deposit pricing lag, monetary policy. Loan volume, we do anticipate growing at some point in ’24.

That’s certainly a variable loan pricing is out there. It’s a variable. We think that the new funding paradigm commands wider spreads or higher yield, but it remains to be seen if the market will accept that. So, a lot of variables out there, but I’ll just circle back and say at this point, we think the trough is likely to be Q1, then a little bit of a slope up from there.

Jon Arfstrom: Okay. All right. Thank you. I appreciate it.

Curt Farmer: Thanks, Jon.

Operator: Thank you. Next question is coming from Ebrahim Poonawala from Bank of America. Your line is now live.

Curt Farmer: Ebrahim, good morning.

Ebrahim Poonawala: Good morning. Maybe Jim, first for you, looking at the Slide 10 rate sensitivity, when we look at — so it looks like, obviously, you’ve not added any new swaps this year. When we look at the trajectory of the swaps and the outlook, is the jack from the swaps fully baked into as we look into the third quarter and fourth quarter outlook incrementally? Does it get worse or does it just level off if rates don’t change? And just give us a sense, do you expect any additional changes around balance sheet mix going into next year and whether or not you’re thinking about protecting eventually against rate cuts or not?

Jim Herzog: Yeah. Ebrahim, you were cutting out a little bit, but I think I got the gist of the question. We are relatively interest neutral is how I think of it right now. We do have some swaps that will mature over the next five quarters, but we also have a number of forward starters that are coming onto the books over the next five quarters also. And so, based on the amount of forward starters that are coming on, I think we have more forward starters coming on than maturing swaps, I don’t see a need to go out and acquire any more swaps. Now, we’ll continue to monitor how the balance sheet responds and noninterest-bearing deposits respond, which have an impact in that sensitivity equation. But for now, I feel really comfortable that we’re well prepared for a drop in rates should they occur.

Ebrahim Poonawala: And I guess maybe just a separate question on credit quality. Maybe if we can unpack the three areas that you called out on CRE leveraged loans and tech, like how do you expect the losses to evolve within those three buckets? And any impact on your sort of auto exposure when we think about the UAW strike? And if that gets prolonged, if we could see some negative migration or losses?

Melinda Chausse: Yeah, Ebrahim, thank you. This Melinda. I’ll just make some overarching comments around credit, just to reiterate what both Curt and Jim said. We’re really proud of the quarter. Credit continues to hold up really, really well. As you can see on Slide 11, we did have an increase in our criticized assets. We absolutely projected that we would continue to see normalization. That is exactly how it’s playing out. The majority of the increase in criticized this quarter came from that commercial real estate book. And as of right now, we do not really see a lot of lost content in that commercial real estate portfolio. Just as a reminder, we’re very heavily concentrated in construction financing with very strong borrowers and sponsors.

Very low loan to cost is really how we underwrite, and it’s predominantly multi-family and industrial. So, the industrial segment is holding up incredibly well. We don’t have any criticized assets in industrial. Multi-family is really where we’re seeing some of the migration. And that’s, again, expected just given what the right environment has done, just as well as a bit of oversupply in certain markets. So, there is some rent leveling out and starting to feel a little bit of rent concessions. We have no delinquencies, no past dues in this portfolio. Our sponsors are stepping up as we would’ve expected them to based on their historical performance, and they are covering shortfalls. So, I do not expect to see losses coming through the commercial real estate portfolio.

But cautionary, we are continuing to build a reserve there. So, our coverage ratio is up to 1.58 this quarter, which I think is up 5 basis points or 6 basis points from last quarter. The charge-offs that we did see this quarter, there is no concentration. It was very granular business banking, TLS, middle market, but they’re very small in nature. So, I’m not really seeing any themes as of right now in terms of like where lost content would come from. Leverage would be one that it would be very possible, just again because of the elevated rate environment and the cumulative impact of the 500 basis points interest burden on those borrowers. Automotive production, we’ve got about $1 billion in automotive production loans. Obviously, we’ve been in this business for many, many decades, and we’ve been through many cycles with this customer base.

I would say, overall, they are very resilient. This particular pool has been relatively stressed, honestly, from 2019 on. You had the 2019 tariff, then you had COVID, then you had chip shortages and supply chain disruption. But we really haven’t experienced losses in this sector. So, we’re watching the UAW strike very closely. The longer it goes on, there will be more impact to the portfolio. We’re very well reserved, but again, we have a lot of experience managing through this, and we have a very, very strong customer base that knows how to do this. So, hopefully, I hit all of your questions, but happy to follow up.

Ebrahim Poonawala: No, that is comprehensive. Thank you so much.

Melinda Chausse: You’re welcome.

Operator: Thank you. Next question is coming from John Pancari from Evercore ISI. Your line is now live.

John Pancari: Good morning.

Curt Farmer: Good morning, John.

John Pancari: On the expense growth commentary for 2024, I know you indicated — the objective is for — keep expense growth modestly higher versus 2023. Can you — it looks like the Street is out there modeling maybe 3% to 4% or so year-over-year. Can you maybe help us think about what modestly higher could mean? What’s a reasonable pace of growth to assume as you’re looking at the initiatives playing out that you’re reviewing? Thanks.

Curt Farmer: John, this is Curt. I’ll start, and I’m going to ask Jim to add in some more color commentary. First of all, maybe just from a backdrop standpoint, as you and others on the call are aware, ’21 and ’22 were really record years of performance for our company across the board, revenue growth, loan growth, liquidity, really a great performance from a ROE standpoint. In fact, at the end of 2022, performed in the mid 20% range on ROE. And we were able to do all that and maintain a very low efficiency ratio. As Jim mentioned, and I think I did as well in my comments, I do think that we and the whole industry are in this period of transition and sort of recalibration as we’re looking at lower NII really based on the funding dynamics.

And then, the second thing I’d say here is just that there are some anomalies in our 2023 numbers. We certainly have a pension impact that others maybe do not have. Everyone has the FDIC components. So, when you factor that out, the rate of growth in 2023 over ’22 is not quite as high as might appear. That said, we are committed to managing expenses and managing efficiently as a company, and as you just said, a more modest growth in expenses ’23 over ’24. But I want to be careful here and just caution that we have been in a new investment — or net investment focus of the company. We’ve been doing a lot of things the last two years that we believe are driving revenue growth for us, helping us on the client acquisition side, a lot of investment in payments, treasury management, wealth management, capital markets.

We’ve expanded into some new markets, Southeast and Colorado, a lot of focus on small business. So, we’ve got a lot of initiative under underway, and I want to keep our focus on those because we believe those are the right things for our company long term, and once we get beyond sort of the period of time that we’re in right now. But having said all that, we are going to strike the right balance and we’ve proven over time in our history that we know how to manage expenses well, and we are looking at sort of what levers we have. We typically provide some guidance at our fourth quarter call. We can go into some more details at that point. But we are working on some initiatives we believe will help us reduce expenses and offset some of what we, I think, is really sort of more near-term pressure versus longer-term pressure.

Jim, what would you add to that?

Jim Herzog: The only thing I would add is, we — to reemphasize Curt’s comments, we do recognize the new funding paradigm, the new profitability equation, and I do think there’s a lot of work to be done and we’re committed to getting that work done. And I think we’re going to make significant progress for 2024, but I don’t view it as a one and done deal either. I think this is probably going to play out for some period of time, but we have to continue on the cost reduction initiatives to make sure that we can fund the necessary investments. So, something we’ve done before. We know how to do. We’re committed to. There was a pivot in the industry that’s occurred over the last few months, and we’re going to have to adjust to that, but we do recognize that. So, fully committed to getting it done, and we’ll be sharing more at some later point in time, as Curt said.

John Pancari: Okay. Thank you. Appreciate all that detail. And then, separately, I guess when it comes to capital, more specifically, capital deployment, maybe can you talk about what would you need to see to sort of be willing to ramp up buybacks here? Just want to get your updated thoughts on the potential for deployment. Thanks.

Jim Herzog: Yeah, John, I would say the number one factor for me is the uncertainty. That would be the uncertainty in the general economy and geopolitical events and so on, but also uncertainties related to interest rates and AOCI. We did take a step up this quarter as the whole industry did. And I’d like to see a better line of sight in terms of where that’s going before we turn on share repurchase. I would say capital rules are something we’re watching also. I would say that’s more of a secondary factor. We’re well below $100 billion, but we do want to be prepared in case things changed in the economy with, whether it be monetary policy or anything else that may catapult us towards $100 billion faster than we’re expecting.

But the uncertainty is really the key factor there. I will note that even without share repurchase, we do have one of the stronger common dividends in the industry. So, we do feel like we’re returning capital to shareholders. But I would love to buy at these prices also. We think the share price is a fantastic buy and very attractive. The idea of buying back those shares is very attractive. But certainly for this year, we are on pause and then we’ll assess the uncertainty factors as we get into 2024.

Curt Farmer: Jim, I would add that while we have been cautious on RWA and managing down some aspects of our loan portfolio, that’s not sort of our long-term perspective — our long-term objective. We do want to grow, again, as a company. We see opportunities to grow really based on sort of how the economy plays out as we get into 2024. And that’s always the first place we want to use our capital is around the loan growth equation. And then, secondly, John, I think you are aware that we’ve done a good job over the course of the last three or four years of leveraging buybacks. And so, we do think it’s an important tool, but again, sort of balancing between the two will be really important.

John Pancari: Makes sense. Thanks so much, Curt.

Operator: Thank you. Next question is coming from Steven Alexopoulos from JPMorgan. Your line is now live.

Curt Farmer: Good morning, Steve.

Steven Alexopoulos: Hey, good morning, everyone. So, I want to go back to your response to Jon Arfstrom, his question where you said NII would likely bottom in the first quarter. Maybe Jim, from a NIM view, do you see NIM following the same trajectory maybe stepping down in 4Q then 1Q and then we bottom there?

Jim Herzog: Good morning, Steve. Thanks for the question. I mean, as always, I’ll put my disclaimer out there that we’re not a big NIM percentage shop. The lumpiness of our commercial business model offer results in a NIM percentage that doesn’t necessarily correlate with income. So, one that I am always hesitant to comment on. I’ll just say in general that I do expect NIM percentage to improve as we bring down cash and purchase funds over the next quarter. So, I do think we’ll see some positive traction there. And I do think it’s fair to — in a very general way, to say if we see net interest income troughing in Q1, that’s likely the trough for NIM also. So, we’ll continue to keep an eye on that. But that’s what I would say big picture.

Steven Alexopoulos: Okay. And then Jim, given the comments that you’re fairly neutral now in terms of ALCO positioning, if rates stay higher for longer, I know you don’t like commenting on this, but I’m going to ask you anyway, directionally speaking, if we bottom in the first quarter, how do you think we trend through the year? Assuming no cuts, assuming that the Fed just stays really on hold, do you think directionally NIM trends favorably through the year?

Jim Herzog: That’s going to depend on some of those variables that I mentioned early on. Loan growth, loan spread, pricing, those are all big factors. But I do think that if we do stay higher for longer and QT continues, that does have the potential to put pressure on NIM. It’s not our base case. It’s not what the forward curve is saying, higher for longer. But we haven’t been in this situation in a long time as an economy and an industry, so it’s really hard to say. But we will see some of the continued deposit pressures if we do stay higher for longer, I believe.

Curt Farmer: Jim, I do think that we have been very successful on the overall pricing side, on the lending side, obviously, taking into account sort of full relationships and doing the right thing by our customers. And so, I think there’s a chance for us to offset some of that just by pricing discipline and potentially loan growth in 2024.

Jim Herzog: Yeah. As I mentioned earlier — thanks, Curt. I mean, we do feel like we have the right to ask for the proper pricing relative to our cost of funds. And to the extent there is less liquidity in the economy, the deposit pricing cost of funding goes up. And I would expect to recover a piece of that or perhaps all of it in our pricing equation. But again, we’ll see what the market allows and what we can demand from it.

Steven Alexopoulos: I know one of the factors is noninterest-bearing levels, right, which were down again this quarter. But I’m curious, are you seeing customers still optimize and move balances out in search for higher yield, or is it just back to spending cash?

Jim Herzog: Steven, that’s actually one of the areas of encouragement to me. I mentioned the deposit betas had really moderated in recent weeks. I would also say the same is true of noninterest-bearing deposits. If I looked month by month since the disruption in the spring, the decline in noninterest-bearing deposits has slowed up every month and it was essentially flat from August to September. I’m not saying it will always continue to be flat, but I do think that these corporate treasurers manage their own cash levels. They’re starting to hit that floor where they need a certain amount of cash to run their businesses and we’re really seeing a slow up as a result. We think they’ve squeezed that orange about as much as they can.

Now, could there be a little bit more to go? Yes, it’s possible. But we do think that the trend is our friend in this case, and we’re really seeing a flattening out of the noninterest-bearing decline. So, I don’t see a lot of decline occurring at this point in time, probably a little bit more, but I’ve seen — I think we’re well past the worst of it.

Steven Alexopoulos: If I could squeeze one final one in. I hear all the comments around moderating expense growth in 2024. But if we step out, if we look at this quarter, revenues down 9% year-over-year, expenses were up 11% year-over-year. We know why. But earnings are down 30%. As you guys think about the next year, are there levers to pull to start generating more meaningful operating leverage? Or is it just a tough environment and you have to just wait for the yield curve to improve and other things? Or do you sense we need to do more here and there’s other levers we could pull to get at least earnings heading into a more favorable direction? Thanks.

Curt Farmer: Well, Steven, I would just say in general, as a company, we are always committed to delivering positive operating leverage. Short term, that’s a bit more challenging as you just outlined for us for all the reasons that we know. But two things there. One, first and foremost, we are focused on top-line revenue growth, and we believe we’ve got great momentum there with the things I outlined to you previously, whether it’s product expansion and capabilities, treasury management, capital markets, et cetera. We continue to add talent in many other areas. We just had a very successful list out of a wealth management team in Southern California and the expansion into the Southeast, but also just adding depth in the existing markets that we operate in.

And I do believe that we will continue to drive fee income, and that loan growth will return for us in 2024. We’ll provide more guidance at our fourth quarter earnings call. So, we’re focused there on the revenue side. And then secondly, we are going to be focused on the expenses and we’ve done that historically well as a company. And we are going to be careful to strike the right balance between sort of short-term expense management and sort of the longer-term investment in the company. So, I can’t promise sort of when did that sort of positive operating leverage equation tilt. But it’s our objective and we are very focused on delivering positive operating leverage for the company and for our investors long term.

Steven Alexopoulos: Got it. Thanks for taking my questions.

Operator: Thank you. Next question is coming from Chris McGratty from KBW. Your line is now live.

Curt Farmer: Good morning, Chris.

Chris McGratty: Great. Good morning. Hey, good morning. Jim or Curt, maybe on the $100 billion going back to that, you are about 15% below that. How are you thinking, I guess, within the budget for expenses? Like what needs to be spent to be compliant for $100 billion? I guess what’s already been spent that you could kind of grandfather in? And then also, can you remind us on the pension expense? I think it’s tied to the 10 year, and just remind us the magnitude of how you’re thinking about it? This year was a big year. Thanks.

Curt Farmer: Chris, I’m going to take the beginning of that question on the $100 billion target. And I’ll let Jim address the pension issue. We, obviously, with the significant build-up in deposits, we were getting closer to the $100 billion mark, which we really never thought was maybe a sustainable situation that we had a lot of build-up in liquidity because of sort of stimulus and monetary policy overall. So, that has pulled down as we’ve moderated some on the RWA side of the equation. We are very comfortably right now below that $100 billion mark at $86 billion. And if you just look at organic growth, which has always been our focus as a company, it would take us some time, we think, to get back over the $100 billion mark.

So, it’s important that we are positioned to be over $100 billion in terms of regulatory compliance and what would be required to be a Category IV bank. And we’ve had a project and initiatives underway for some time. We’re probably 40%, 50% through sort of what would be necessary for us to comply in terms of the technology and sort of infrastructure to support that. But we’ve got some time to sort of make that happen. But it is one of the expenses that has applied some additional expense pressure for us sort of longer term. I made some comments previously that I think at one of the investor conferences just around M&A. And just — maybe just to be clear there, nothing has changed for us in that equation. Getting close to $100 billion really does not change whether we would do M&A or not.

We were focused, first and foremost, as I said earlier on organic growth. If the deal came along, it still has to make great strategic sense for us. And again, we think we can sort of manage where we are today and we’ve got some time to sort of evaluate the landscape longer term. But I don’t anticipate any sort of pressure on the $100 billion level at least for the foreseeable next couple of years.

Jim Herzog: Yeah. And I might take that even a step further. Chris, you mentioned 15% below. We do plan on repaying more debt in the fourth quarter. We’ll get the full quarter effect of what we did in the third quarter. So, we do see cash and purchase funds coming down another $4 billion in the fourth quarter on average on an lending basis, more like probably a $1 billion or $1.5 billion. So, we are well below the $100 billion. Now, as AOCI comes back and we make — we have loan growth, we’ll start moving back towards $100 billion, but as Curt said, we’re probably a few years away from that. And I’ll just say that in terms of what we’re focused on in terms of complying with $100 billion as it might impact expenses, we’re only focused on that subsection of the requirements that potentially take more than a couple years to make sure you’re comfortable with.

So those things that have a longer tail to them, we are focused on working on, and that will be one of the expense pressures we have to offset. But we don’t feel like we need to jump into it entirely in terms of getting ready at this point in time. A lot of the requirements, we can wait until we’re a little bit closer to $100 billion. In terms of the pension question, pension counting is one of our favorite topics and a great one to waddle through. A lot of variables there. But interest rates are the key one, market performance in general, but interest rates most specifically. If you go back to our K, we do have a sensitivity in there that shows that for every 25 bps rate change — and the 10 year is a pretty good proxy for our liability and the assets we have offsetting that.

Every 25 bps translates to about $11 million of expense. So obviously, we strike that on 12/31. There’s been a big step up since then. But I would also say there are other variables that are likely to make us come in below what that sensitivity would suggest. Most importantly, we have a number of advertised credits from past actuarial assumptions that we outperformed on. And so we will outperform that sensitivity, but a lot of variables involved there. So, that’s something we’ll have more clarity on as we approach the end of the year.

Chris McGratty: That’s really helpful. Thanks, Jim. Just one final one in terms of the targeted, I guess, level of cash and bonds on the balance sheet. You haven’t reinvested the bonds in the last year. Remind us that, either as the percentage of earning assets or maybe an absolute level, where you could ultimately see those levels shrinking down to?

Jim Herzog: Yeah, that’s going to depend on just the overall composition of the balance sheet, how close we are to $100 billion, as it might relate to liquidity rules and debt requirements. But I would see us moving closer towards $14 billion, $15 billion securities, probably closer to $14 billion. So, we have a ways to go. And what that might suggest is we’re likely not going to be buying securities at least for the next couple of years.

Chris McGratty: Great. Thank you.

Curt Farmer: Thank you, Chris.

Operator: Thank you. Next question is coming from Manan Gosalia from Morgan Stanley. Your line is now live.

Curt Farmer: Manan, good morning.

Manan Gosalia: Hey, good morning. I wanted to follow up on your comments on AOCI. I mean, I think you noted that you haven’t added any swaps in the books this year, given that the 10 year is up, another 50 basis points this quarter. How are you thinking about managing AOCI risk here?

Jim Herzog: Well, at this point, we don’t feel like we have to do anything synthetically to manage it. We’re okay with where we’re at based on the burn-off that we see over the next couple of years, and really more importantly, the burn-off over the next five years as we potentially become a Category IV bank. And so, at this point in time, we are comfortable with where we’re at. We do think that as we move closer towards Category IV, we will consider modifying our strategies to maybe shorten the duration of the securities, whether that be with what we purchase or doing something synthetically. But for the time being, we don’t feel compelled to do anything. We’re comfortable with the burnout that we see over the next few years.

Manan Gosalia: Got it. So, as — there’s clearly some volatility on the long end of the curve. Does it make sense to use the same DV01 for AOCI that you saw this quarter and then apply to changes in the 10-year in future quarters to figure out the AOCI risk there?

Jim Herzog: I think that’s a pretty good proxy. Yeah, you can see a little bit of movement one way or the other, but I think it’s a good proxy for future rate changes.

Manan Gosalia: Got it. And then maybe finally, just on the — I think you mentioned a 37% [pull-to-par] (ph) on unrealized losses over the next couple of years. How is that impacted by the rate environment?

Jim Herzog: Well, that 37% considers the curve as it stands today, so not just spot rates, but where the curve is. So, to the extent, the entire curve shifts up or down, that will have an impact on that burn-off. But for now, this obviously contemplates the entire spectrum of the curve.

Manan Gosalia: In the sense that if the curve moves higher, then the pull-to-par will be longer, and if it moves lower, then the pull-to-power will be sooner?

Jim Herzog: That’s right. And we do have a sensitivity on that on Slide 14 in the bottom right, so you can see what 100 bp movement would do one way or the other.

Manan Gosalia: Got it. All right, thank you.

Jim Herzog: Thank you, Manan.

Operator: Thank you. Next question today is coming from Brody Preston from UBS. Your line is now live.

Curt Farmer: Good morning, Brody.

Brody Preston: Hey, good morning, everyone. I just wanted to ask, could you give us a reminder, I think it was the GEAR Up initiative that you had in the past, could you remind me what the — if you happen to know what the total kind of, I guess, expenses you kind of took out of the run rate or kind of like — I’m just trying to remember what you did in the past.

Curt Farmer: Yeah, Brody, I would not go back through all that detail with you. I might just say that in general, that GEAR Up was a combination of expenses, but also some revenue enhancement opportunities that we focused on. Some of that was around capability. Some of it was around pricing strategies, et cetera. And it was not just a single year impact. It was an impact that we — a program we put in place to improve overall efficiency, and what was — at that point a very low rate environment. So, if you’re looking at sort of applicability to today, I mean we’re a bigger company in terms of our overall revenue base as an organization and our expense base as well. And so, we’re going to think about this in a thoughtful way on a go-forward if you’re kind of driving to sort of what expense reductions we might look at and look at things that really minimize anything associated with revenue and customers and really try to focus on areas real estate, sort of our technology spend that we might be more careful with, vacancy rates in terms of headcount, et cetera, and we’ll have more to potentially share as we get into the outlook for 2024.

Brody Preston: Got it. Okay, thank you for that. I wanted to ask a couple of questions to Melinda. Melinda, you said — you talked a little bit about the multi-family and the migration there, that the sponsors have kind of stepped up to cover any shortfalls. When you say shortfalls, do you mean like the multi-family properties that are falling below 1 debt service coverage ratio?

Melinda Chausse: It could be. They are in the process of being leased up and so they’re behind schedule. But the biggest driver right now in the multi-family space in terms of any kind of a shortfall is really because of the rising rate environment. The majority of the loans are floating rates, so they’ve been absorbing the rate increase of 500 basis points over the last four, five quarters. And so there could be a shortfall in an interest reserve that we require during the construction phase or a debt service coverage during the lease up phase as those are going into stabilization.

Brody Preston: Got it. Are there any markets that you look at across your footprint and say maybe there’s new supply coming on that might exacerbate any of these issues? Like any that come to mind in particular?

Melinda Chausse: Yeah, I think the market where we’ve seen the most challenge and the most migration, again, reminder though that the migration has been very manageable and criticized loans in the commercial real estate book are still relatively low. But the migration is really concentrated in the California sub — some of the sub-markets, Northern California being the most impacted at this point and then Southern California. So, we’re watching those really, really closely. And again, the customer base there and sponsor base, I would consider, exceptionally strong. And we have tenured colleagues that know how to manage through this. So, we feel really good about our strategy there. We feel really good about the product set. But multi-family has had a tremendous amount of supply come to market and there’s more to come. So I expect that we’ll continue to see some modest level of migration in that portfolio.

Brody Preston: Got it. Okay. And I know it’s a very small portfolio for you guys, but do you happen to have what the reserve is on the office portfolio at this point?

Melinda Chausse: We don’t have a reserve specifically on the asset classes, but we do have coverage ratio for the commercial real estate book as a whole, and it’s 1.58.

Brody Preston: Okay, got it. And Jim, I just wanted to follow up on the swap question, the swap that you said you got forward starting coming on that’ll outpace anything that’s maturing that, that’s all reflected in the ’24 kind of walk up on the swaps book that…

Jim Herzog: Absolutely, it is…

Brody Preston: Okay. Great. I just wanted to make sure. Then just last one for you. I know it’s a smaller portion of the book, but for the true fixed portion, not the swapped floating portion, can you walk us through what the maturity schedule looks like over the next 12 months? And kind of what the yields are that are rolling off versus what current origination yields are right now?

Jim Herzog: Yeah, it’s really a relatively small part of our book, and I don’t see it having a big impact on yields next year. I think somewhere in the appendix, you’d surmise fixed rate loans organically speaking are about 8% of our book. And they have pretty long maturities, up to 12 years on average. So, you don’t see a lot come up for repricing every year. We might see $300 million come up in ’24 to use a kind of an average. And they are priced below our current loan yields. So, there is some opportunity there, but I wouldn’t see fixed rate for pricing having more than a couple of bps of impact on our loan yields next year. But there is a little bit of — there is a favorable impact.

Brody Preston: Do you have any security maturities that are lumpy and lower yielding at any point in the next 12 months?

Jim Herzog: We have our normal, what I’ll consider to be smooth, roll-off of MBSs, and we do have some treasuries maturing over the next 15 months, but I would say those aren’t necessarily lumpy, we see a little bit in most quarters. So, we obviously are going to benefit in 2024 from securities maturing as we redeploy that either in the cash, earning much higher yields, or avoid purchase funds. So, net-net, we will see a benefit from fixed asset repricing next year, a tiny bit from loans. You’ll certainly get a nice lift up from securities. Fixed rate swaps actually go the other direction, but the net benefit will be favorable in 2024.

Brody Preston: Got it. Thank you very much for taking my questions, everyone.

Jim Herzog: Thanks, Brody.

Operator: Thank you. Next question is coming from Ken Usdin from Jefferies. Your line is now live.

Curt Farmer: Good morning, Ken.

Ken Usdin: Hi. Thanks. Good morning. I wanted to ask a question on the loan book, on the business line basis. You’re not under any kind of like dieting, so to speak. But after you got out of Mortgage Banker this year, there’s a couple of these lines that are getting a little smaller over time like tech and life sciences and equity fund. Just wanted to ask like how much of that is environmental? And do you envision taking a harder look at any of the loan categories that you have in terms of what you’re thinking about in terms of future growth opportunities?

Peter Sefzik: Hey, Ken, this is Peter. Yeah, we’ve got some of our businesses that have kind of continued to drift down this quarter and quite candidly probably will into the fourth quarter and maybe even the first quarter. But we don’t really see any additional changes to the lines of business that we’re in. We do feel really good about the portfolio on a go-forward basis. I do think that in the environment with increased expectations around profitability and pricing and just sort of managing our balance sheet, some businesses are impacted more than others. But as we get into next year, we’ll try to get a little more guidance on what we think loan output looks like for 24. But I suspect a few of these businesses that you’ve kind of seen creep down here as of late, probably be another quarter or two before we start to go the other direction.

Overall, with our general portfolio, middle market, business banking, small business, our pipelines there are still pretty good, relatively. It depends on the geography a little bit. And we’re trying to add customers and add new business in that space as we get into the end of the year and into next.

Ken Usdin: Got it. Great, thanks. And my follow-up is just on the expenses. Can you just explain like the kind of the write-back on the modernization this quarter? How does that mechanically work? And then just making sure that we understand that the fourth quarter guide is built on the all-in 3Q number? Thank you.

Jim Herzog: Yeah, Ken, the modernization expenses were actually a net credit because of the real estate gain that you saw in the third quarter that we noted on the expense slide. That was offset by some expenses, but modernization expenses were a net negative $14 million or $14 million credit for the quarter. We would expect that to be a little closer to zero for the fourth quarter. We may have an additional real estate sale that could give us something in the low single digits of millions, but overall I don’t expect modernization to be a big driver of fourth quarter expenses.

Ken Usdin: Okay. Got it. Right. So that — okay. And then the fourth quarter guide is built on the — aside from the deferred comp that you don’t expect to repeat, the fourth quarter expense guide is built off of the [$555 million] (ph)?

Jim Herzog: That’s right.

Ken Usdin: Yeah. Okay. Got it.

Jim Herzog: Thank you.

Curt Farmer: Thank you, Ken.

Operator: Thank you. Next question today is coming from Brandon King from Truist Securities. Your line is now live.

Curt Farmer: Good morning, Brandon.

Brandon King: Hey, good morning. Just putting the pieces together, how are you thinking about balance sheet growth next year, particularly with earning assets? Are you kind of looking to keep things stable, or could we see some incremental growth?

Jim Herzog: Brandon, it’s Jim. I’ll start off and Peter may want to chime in here. But we’ve been very focused on stabilizing the funding base and the liquidity base in recent months, as you know. We’ve had a lot of success there. We’re actually in better shape than we actually thought we would be back in the spring with the loan-to-deposit ratio of 80%. I think it was right now as being in a period of recalibration. We’re focused on getting the right mix of customers, right mix of businesses, getting the right pricing. And then, we expect this to be at some point — in 2024 to be at a point where we start regrowing loans at a more normal pace again. We’re not quite there yet, but we expect to be there at some point in 2024 with loan growth.

But right now, we’re still going through that period of recalibration, whether it be getting more certainty around our deposit base, getting the right mix in terms of business lines. But we do anticipate some type of balance sheet growth at some point in 2024.

Curt Farmer: Yeah. Brandon, I might just add to what Jim said. I mean, we’re also seeing a lot of, I would say, caution in our customer base. There’s a lot of headline risk, I think you might say, as we go into next year. And Melinda talked a lot about credit, but we’re prepared that it could be a tougher economic environment that we’ll just navigate successfully. We always have as a company really well. So, what that looks like for loan demand, per se, is probably to be determined. I mean, we’ll give some more guidance, as we’ve mentioned, on loans when we get into the fourth quarter call for next year, but we do think we’ll get back to loan growth next year. I think we just don’t know necessarily what that looks like just yet with the environment, with interest rates where they are, and to the extent that we enter a more challenging economic environment, we’ll have to navigate that.

And again, it also depends on business by business what that may look like in geography by geography.

Brandon King: Got it. And then, could you speak to deposit seasonality flows? What are your kind of expectations near term? And just how close do you think we are to maybe a normal seasonality trend?

Jim Herzog: Yeah, Brandon, seasonality has really been a tough one the last couple of years. The typical seasonal trends that we see amongst different business units, whether it be loans or deposits, it’s kind of gone out the window. So, we’re waiting to see whether or not those return back to normal seasonality patterns. We’re in a higher interest rate environment and to what extent a different liquidity environment too in terms of overall liquidity in the economy. So, it remains to be seen if we do return back to those typical patterns that we’ve seen in the past. As I mentioned, we may have a very small bit of seasonality assumed in our outlook, but not a lot. So, we do see some potential for upside there. But frankly, it just feels like the deposit seasonality, much like many other patterns, remains to be seen in this new paradigm as to whether or not we return back to the old normal or not.

Brandon King: All right. That’s all that I had. Thanks for taking my questions.

Curt Farmer: Great. Thank you.

Operator: Thank you. Next question coming from Peter Winter from D.A. Davidson. Your line is now live.

Curt Farmer: Good morning, Peter.

Peter Winter: Good morning. Just going back to the ’24 expense outlook, does that already contemplate some expenses initiatives? Or as you go through the budgeting process, there’s opportunities for maybe some additional expenses versus that guidance?

Curt Farmer: Peter, it’s a bit of both. We haven’t been sitting on our hands, so to speak, and have been looking at opportunities to slow expense growth and to be more prudent. We have some other things that are still in process as we think about sort of the planning process for 2024. So we’ll again have more to share potentially as we get into the fourth quarter earnings call.

Peter Winter: Okay. And then just one housekeeping. Just, what was the end-of-period balance on the Mortgage Banker loans? Just curious how much is left to run off.

Jim Herzog: Yeah, Mortgage Banker, I mean, for the quarter, we were at $900 million, a little bit lower than that for ending, I don’t know…

Peter Sefzik: I think period-end was around $650 million.

Jim Herzog: Yeah, something…

Curt Farmer: Yeah. So but — we’ve communicated there, Peter, that we expect the balances to be pretty minimal by the end of the year. Period-end might be a couple hundred million.

Peter Winter: Yeah. Okay. Thanks.

Operator: Thank you. We’ve reached end of our question-and-answer session. I’d like to turn the floor back over to President, Chairman and Chief Executive Officer, Curt Farmer. Please go ahead.

Curt Farmer: Again, I just would say I’m very proud of our performance for the quarter. Always proud of our colleagues and how they are delivering for our customers every day. And thank you again for your interest in our company, and I hope you all have a great day. Thank you.

Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.