John Turner: Yes. This is John. So there were no new events. The tail was, with respect to the breach of warranty claims, was a little longer than we anticipated. And as a result, we did incur some additional losses in the quarter. What gives us confidence that we can meet our expectations is the exit rate for the quarter was significantly reduced, which implies that the countermeasures we put in place, the talent that we’ve recruited for our fraud prevention activities, all of that is working and gives us confidence that we can and in fact, meet our $100 million target for the year.
Operator: Our next question comes from the line of Betsy Graseck with Morgan Stanley.
Betsy Graseck: So one question just on how we’re thinking about NII for the full year in relation to loan growth being a little slower. So I just wanted to understand, your NII guide obviously, is the same as it was before. Loan growth expectations, a little slower understandably so. How do I square those things?
David Turner: Well, loan growth, we had talked about being in the back half of the year. So you weren’t going to get a lot of carry from loan growth in our guidance. And so really what we want to see loan growth for the back half of the year is setting us up for 2025, not for 2024. So that was never factored into the guidance that we gave you on NII. We feel good about where we’re positioned from a balance sheet standpoint with basically neutral to short-term rates. And we have a little bit of shape to the curve where we reinvest our securities book and we’re picking up a little over 200 basis points — 235 basis points on that, front book, back book. So that gives us confidence there that we’re going to do pretty well with regards to the NII.
And if you look at the input cost, so our deposit cost, they’ve also started to flatten. If we look at the months of February and March, there was little change in our deposit costs. So our cumulative beta, which is at 43 today, we said would be in the mid-40s. We have a lot of confidence in that. So that’s why we didn’t change our NII guide.
Betsy Graseck: Okay. Got it. That makes a lot of sense. And then just on the securities repositioning that you talked about on Slide 5, is it? Just wanted to understand how you’re thinking about the go forward here. You added some duration, again, makes sense, but wanted to know if you’re thinking of leaning in even more? Like how long will — are you comfortable extending the duration of the securities book is basically the question.
David Turner: Well, our extension duration was only like .12, 12 basis points a year. So negligible. And from our standpoint, especially if you believe the risk of rates going up is very low, i.e., you believe they’re either flat to down, then perhaps taking a little duration risk where we can get compensated for make some sense today. Our duration naturally is declining. So doing a trade to kind of keep it flat to modestly higher than where we are right now, it seems to make sense. And it’s a good use of capital. If we can get a payback, like I said, the one we just did, our payback’s 2.1 years. We’d like it to be less than 3, closer to 2.5 if we can. And so while we won’t commit to doing that, we would look at it. And if we did it, it would be no more than what you just experienced. We want to keep it at a fairly small percentage of our pretax income.
Operator: Our next question comes from the line of John Pancari with Evercore ISI.
John Pancari: On the credit front, saw about a moderate increase in nonperformers in the quarter. However, your loan loss reserve is pretty stable despite the move-in reserves. So — I mean, not performance, so I just want to see if you get a little bit of color on how you’re thinking about the reserves here? And also, maybe if you can give a little bit more color behind the nonperformers.
John Turner: Yes. John, maybe I’ll start. This is John Turner. First of all, we began signaling now a couple of quarters ago, stress in a couple of specific portfolios or industries: office, senior housing, transportation, health care, specifically goods and services, and technology. And the increases that we are seeing in nonaccrual loans and classified loans are largely consistent with the indication that there is stress in those particular industries. In fact, when you look at our nonaccruals, 21% of our — 21 of our nonaccruals — excuse me, 21 credits make up 72% of our nonaccruals, and 18 of those 21 credits are in those 5 sectors that I mentioned. So we did anticipate that we would see some deterioration, and that’s been consistent with our expectations.
The second thing I’d point to is several quarters ago, we began to set the expectation that we would return to pre-pandemic historical levels of credit metrics. And specifically, that would be an average charge-off ratio of about 46 basis points, and nonaccruals of 105 basis points. And again, we are — we have trended back to those ranges, which is consistent with our expectations. With regard to the allowance, we go through the process every quarter to ensure that we’re properly reserved against expectation for loss in those portfolios. Given that we have a very high degree of visibility into the 21 credits that make up 72% of our nonaccruals, you can expect that we feel very good about our reserve position.
John Pancari: Okay. Great. And then separately, on the expense front, I know you mentioned that the first quarter should represent the high watermark on expenses. Is that primarily because of the elevated operating losses? Or do you expect some building efficiencies through the remainder the year, either given the backdrop or given the revenue picture?
