Jim Herzog: Yeah. Two points I would add on to that, Manan, I mean, we love deposits regardless of loans. I mean, we’re making money on these deposits. We’re not holding capital on them. We love deposits just for what they represent amongst themselves. But having said that, we certainly don’t want to operate in a just-in-time funding capacity for loans. I mean, we want to make sure we’re prepared for when that loan comes. You can’t necessarily turn deposits on, on a dime. But we welcome the deposits. We’re not going to turn them away. We’re making money on them, and they continue to add to the stability of the overall franchise.
Manan Gosalia: Great. And maybe a follow-up there on deposits. As rates start to go down, given your skew to commercial, how should we think about those deposit betas on the way down? If we do get the six rate cuts or even more than that as we get into 2025, do you think the first few rate cuts are more beneficial given your skew to commercial, or should you start to see more momentum in deposit costs coming down as you get into rate cut numbers four, five, and six?
Jim Herzog: Yeah, every cycle is different, so it’s hard to say for sure. But I think in this particular cycle, we could see a little bit of symmetry, or what I might call a LIFO approach, last in, first out. I mean, certainly we saw betas accelerate towards the end of the cycle. And even in the last couple of quarters without Fed hikes, we’ve seen deposits continue to tick up. And so, just as we’ve seen them more accelerated in the second half of this cycle, I think those might be the most sensitive deposits that we can take back down early in the following rate cycle. So, I’m somewhat cautiously optimistic. We are assuming in the outlook about a 60% beta with not too big of a leg following the first rate cut. Having said that, every cycle is different.
And I do recall back in 2019, the Fed cut 50 bps, I believe, in July ’19, and I didn’t see a lot of falling rates in the industry overall. That was a very controlled environment where the economy was still relatively strong. And I continue to think that the reason for the Fed cuts is really going to drive that beta. If it’s a very orderly takedown of rates and the economy continues to be very strong, it may be a little stickier to bring them down. But if the Fed reduces rates because there is a little weakening in the economy, I think that gives banks a little bit more leverage. So, I would just emphasize that every cycle is different. But we do think there is that potential for some significant beta in those first few cuts.
Manan Gosalia: Great. And then, do you have what percentage of your deposits are directly indexed to the Fed fund rate?
Jim Herzog: Most of our deposits are not. We’re very much a relationship-based bank, and many of those are one-on-one conversations with customers. So, we do have some reciprocal deposits that are — you can consider to be somewhat indexed. Obviously, the broker deposits, their time deposits are somewhat indexed, you could consider. But the vast majority of our deposits are not.
Manan Gosalia: Great. Thank you.
Jim Herzog: Thank you.
Operator: Thank you. Next question is coming from John Pancari from Evercore ISI. Your line is now live.
Curt Farmer: Good morning, John.
John Pancari: Good morning. First question, just around the loan growth expectation, the 5% point to point expectation, can you give us a little bit of color where do you see the loan growth drivers coming from? And when do you really see an acceleration there in overall loan growth as you look through 2024? Thank you.
Peter Sefzik: John, this is Peter. So, it’s actually pretty broad-based. I mean, we mentioned this morning we still have a little bit of mortgage banker finance at the end of December that will be working against us a little bit through the year, but then across the rest of our businesses, it’s pretty broad-based. I do think — I think dealer probably has sort of momentum going into 2024 that will continue throughout the year. Our EFS business, I think, is a business that if you kind of look in the appendix we’ve shown has dropped a couple of quarters. I think it’ll probably drop first quarter, but we think it’ll pick up quite a bit going into ’24, but really broad-based across middle market. We feel like we’ve got some really good momentum.
I would tell you that we feel like customer sentiment changed a little bit in the fourth quarter in the right direction. And sort of our informal surveys that we do internally with everything seems to indicate that there’s going to be some more demand as we get into what I would really say the second quarter, to answer your question, probably second and third quarter is where I think we’ll start to see that pickup. I don’t — as we talk about today, our outlook on first quarter is pretty flat to down a little bit. But I think as we get into the middle of the year, we’re getting indications that we’ll start to see some real good loan growth that results in that 5% point to point.
John Pancari: Great. Okay. Thank you. That’s helpful. And then separately, your guidance implies, call it, ballpark about 900 basis points or so of core negative operating leverage based upon the midpoints of the guide. And I’m just wondering if the revenue picture ends up being more pressured than you currently forecast, do you have expense flexibility to improve that operating leverage? I know you set out the $45 million in expense reduction from the recalibration in 2024. Can that recalibration benefit that $45 million? Can that go up if revenue is pressured to a greater degree? Thanks.
Curt Farmer: John, as Jim said in his prepared remarks, that $45 million becomes $55 million on a run rate basis in 2025. And this is an interesting period of time. The whole industry has gone through an inflection in 2023 and somewhat of a recalibration, to use your words. We’ve tried to be thoughtful in terms of balancing the things that we believe are driving revenue for us and will drive revenue for us going forward. That includes some of the products that we’ve invested in, especially, in treasury management, payments, capital markets, wealth management. It also includes the focus on small business, expansion into new markets, into the southeast, and into the mountain west Colorado region. And so, we want to stay focused on those because we’re trying to really play the long game here and try to get beyond sort of the immediate environment that we’re operating in.
And then, secondly, I would say, while we did have some expense initiatives in the quarter, we’re always thinking about additional efficiency opportunities. And again, it’s all about sort of balancing between those two. And so, my hope is that we would see positive operating leverage, really based on overall revenue growth and a return to a more normalized interest rate environment, and hopefully a soft landing on the economy and a lack of further credit deterioration, et cetera. If we don’t see that, then obviously, we’d need to think about what else we can do from an efficiency standpoint.
John Pancari: All right. Thank you. Just regarding that, when do you expect you could break into more of a positive operating leverage trajectory?
Jim Herzog: Yeah. John, it’s Jim. I mean, number one, just to build on Curt’s comments, I do think 2024 is a bit of a transition year, not just for us, but for the whole industry. I think you’re hearing that from some of the other calls, too. We’re in this kind of tweener stage where interest rates continue — or pay rates and deposits continue to edge up a little bit, yet the Fed isn’t raising rates. So, that makes it a really challenging year. I do think things will start to move in the positive operating leverage direction in 2025. We don’t have a complete line of sight into that yet, but I mentioned how we expect net interest income to really have some great momentum as we enter into 2025. And of course, that’s always the goal to have positive operating leverage.
