Steven Alexopoulos: Got it. Okay. And then for my follow-up. So on the margin, I know it came in a little bit weaker this quarter, a lot of moving pieces of all-wholesale funding, et cetera. For you, Glenn do you think this is a bottom for the margin this quarter? And how do you think about NIM trending before we get any rate cuts and then maybe if we do get rate cuts? Thanks.
Glenn MacInnes: So Steve, I think margin will be relatively flat quarter-over-quarter. Net interest income will improve quarter-over-quarter. But I think the margin where we are right now, [3.35%] (ph) will probably be relatively flat. I do in our forecast and the assumptions that I laid out before, whether it’s loan growth or the investment portfolio, the repricing stuff. I do think that our margin will get to like the [3.45%] (ph) ish by the end of the year, somewhere around there. Potential upside, depending on how quick we can reduce deposit costs but that’s how we’re thinking of it right now. So you can think about a full year average margin somewhere around [3.41%, 3.42%] (ph) — just look at the full year.
Steven Alexopoulos: Got it. And I know you said in response to Mark’s question, whether cuts happen or not very material. But in a cut scenario given Interlink some of the higher cost deposits you have, do you — would that benefit the margin incrementally towards the end of the year if we get rate cuts, is that we should think about?
Glenn MacInnes: Yes, it would. I mean I think right now, we see deposit costs, like I said, peaking in the second quarter between the second and third quarter and then coming down. A big driver of that, I talked about this on the last call, is of our $60 billion in deposits, about 20% are sort of had the same characteristic of Interlink. So they reprice pretty quickly. So those are things like public funds, those are things like Interlink and there is some other products there. So you can think about $12 billion that I would consider sort of high data products right now, but then they reprice down pretty quickly. So that would be the first tranche to go with the Fed cuts. We think that the deposit beta on the way down is say, 20-plus percent on the way down.
So I think — and that’s reflective of like a three month pipeline that the core deposits have to cycle through. And so you will see that when the Fed starts cutting, you will see that our deposit costs come down. The other thing I would point out is we’re starting to see the industry pull back a little, and we’ve reduced — if I look at our CD rates, for example, we had $2.2 billion come due in the first quarter. That repriced higher by 43 basis points. As I look forward, there’s another $2 billion in the second, another $2 billion in the third quarter, those are going to be neutral. By the third quarter it might even be accretive to us because one, we reduced our rate and we’ve also reduced the term. And so I think that the drag from the CDs repricing will be behind us beginning in the second quarter.
Steven Alexopoulos: Okay. Got it. Thanks for taking my questions.
John Ciulla: Thanks Steve.
Operator: Your next question comes from the line of Casey Haire with Jefferies. Please go ahead.
Casey Haire: Great. Thanks good morning everyone. I wanted to touch on expenses. So you guys kept the guide, which implies a decent ramp from the current run rate. I know you guys still have to fully run rate Ametros. I’m just wondering if that is conservative or just some color on what’s the expense pressure there, if — for the midpoint of the guide?
John Ciulla: Yes. Thanks Casey. I think you are right. We got a full year — the full quarter of Ametros moving forward. So it just annualized. I think we are keeping — I guess, to answer your question upfront, it’s a conservative number. But it’s a conservative number based on the fact that we’re building out our program and our work streams to make sure, as we move towards $100 billion that we continue to invest in areas where we think it’s important to make sure that we’re beefing up our control functions and compliance and others. We’re also continuing to invest in treasury payment capabilities, digital channels to make sure that we’re giving our clients all of the experiences that they deserve. We’ve talked often about the fact that we are starting from a mid-40s efficiency ratio, a full 10% lower than most of our peers.
And I think a lot of folks will need to continue to invest, particularly the ones in the $50 billion to $100 billion category. And we think that low starting point of efficiency gives us some flexibility. Do we have opportunities to either switch up timing of expenses? We do. Do we have opportunities to continue to look at the makeup of our business. We talked intensively over eight quarters about while we liked all of the various business lines we had that there were some that had maybe were too small to really help us, and we would reposition capital. And you saw us do that with mortgage warehouse and you saw what Glenn talked about moving the payroll finance and factoring balances to held-for-sale and us moving away from that business. We do have other opportunities to continue to refine our business and reallocate capital that would also give us some relief on cost pressures.
So I think it’s a realistic number given our plan as we move forward. I would say, it’s conservative in that we do have levers to pull should the top line not play out the way we think it will.
Casey Haire: Got it. Thanks. And then just wanted to circle back on the loan growth. So if I’m understanding you correctly, CRE is kind of run in place. The loan pipeline is sounds okay. But CRE drove a ton of growth this quarter, it’s 42% of the loans. So that means to hit 5% for the rest of the year. The rest of the portfolio is going to have to average high single-digit pace of growth. It just doesn’t seem like that the pipeline supports that. And just some color there on what buckets you’re looking to grow to pick up the slack for CRE.
John Ciulla: Yes, fair question, Casey. So obviously, as you know, in these businesses, it is an aircraft carrier, right? So you’ll probably see healthy CRE originations in 2Q as well as we sort of work through the pipeline, and we continue to kind of position ourselves and that’s why we said kind of over the next six quarters, you’d see that change in the balance sheet. So I don’t think you’ll see a complete hole, if you will from a commercial real estate perspective. We do have increasing activity in our Sponsor & Specialty business, which has been historically a high growth 10% CAGR growth business over time and you are starting to read about more private equity activity and we’re starting to see people gear up. We have fund banking, which is a lever we can pull and that we are really doing well there from a strategic perspective, not only growing high quality, nice yielding assets, but getting deposits and other elements there.
We have a pipeline in the middle market. We’ve got our ABL and equipment finance businesses and so we’ve got, I think enough levers to pull that when we sit there and look at the profile. We think that to the extent CRE slows in the second half of the year, that we have plenty of levers to pull. You’ve heard me say over and over again, in a normalized environment, we are a 10% commercial growth, and we’ve done it over eight years consistently from a CAGR perspective. This is a unique environment. We’ve seen fits and starts in overall loan demand. And now we are layering on top of that kind of a desire to mute CRE growth compared to the rest but as you said, that high single-digit loan growth in the other categories doesn’t scare us a ton as long as the market cooperates.
And by the way, you know that we’re risk managers first, right? We really feel good about this bank. We’re a bank that has — even with the NIM compression, but really helping NIM at 3.35%. We’ve got a 45% efficiency ratio, a 1.25% ROA and a 18% ROE. And so we are going to make sure that we’re making the right short-term moves even if it means there is a quarter where we fall short. And I think our long-term growth targets and objectives are completely attainable. So our plan — we’re not being blind, Casey, going into saying, hey, we’re going to freeze CRE and we’re going to still have 5% loan growth. I think, you’re going to see CRE kind of taper with respect to its growth trajectory, and we feel pretty confident about the other asset classes and our ability to grow those loans.
Casey Haire: Great. Thank you.
John Ciulla: Thank you.
Operator: Your next question comes from the line of Jared Shaw with Barclays. Please go ahead.
Jared Shaw: Hi, good morning. Maybe just switching over to deposits with DDA balances declining this quarter. Do you think that we’re near the bottom here? Or is there still some more diminishment you expect out of the base? And where do you think deposit growth comes from to hit those targets going forward?
Glenn MacInnes: Yes. So let me – hi Jared, it’s Glenn. So I think — we did see an acceleration in the first quarter of customers sweeping excess cash into money market deposit accounts. But we do — if I look at my forecast, my forecast is basically flattened that out. So I think, I would think of the second quarter, a $10.5 billion on DDA that’s basically flattened out for the year. As far as growth, the drivers and the guidance suggests $3 billion to $4 billion in deposit growth at the low and the high range. So some of the key drivers are going to be in Ametros, obviously, say, $100 million on the low end, $150 million on a high end. HSA between $200 million and $500 million over — on the course of the year. Interlink, I’d probably say, about $1.4 billion will grow between now and the end of the year.
We still continue to see CD growth. We saw $300 million in the quarter. I think for the full year, we are thinking it is probably about $500 million. And then the rest of that would be probably in wholesale funding or the wholesale channels.
Jared Shaw: Okay. That is good color. Thanks. And then — could you just give a little more color on the credit valuation moves that we saw this quarter and what drove that? And how you guys could try to plan that going forward?
Glenn MacInnes: Yes. So that’s driven by — primarily by rates that you saw the reduction last quarter as rates from the third to the fourth quarter came down and then you see it from the fourth quarter to first quarter, sort of a snapback on that. So that’s — it’s pretty much driven by rates. These are — this is the valuation part of our customer derivative book, right? And so there is been some noise back and forth over the last couple of quarters. It’s hard to forecast, you can tie it to rates. And I would say, if rates are stable right now, you’d probably expect it be relatively stable. As rates go down, it could — we could have a little bit of a hit, but nothing like we saw from the third to the fourth quarter where it was $4.3 million from [memory] (ph).
Jared Shaw: Okay. Great. And congratulations on the retirement, looking forward to still talking to you over the next quarter or so.
Glenn MacInnes: Thanks Jared.
Operator: Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia: Hi, good morning. Given the comments on capital and eventually moving that CRE to Tier 1 plus reserve number lower than even 250%. Does that mean that buybacks are off the table for the foreseeable future? Or do you think you could restart once you get to that 11% CET1 level. And as we think about that 11% level as well, should we think about that as a more permanent target now given that you want to eventually get to that 200% number? Or is it just a function of moving up reserves, slowing the CRE loan growth, and then you can bring that CET1 number back down to $10.5 million?
John Ciulla: Yes. I think, for the foreseeable future, 11% is the target, just given the overall dynamics of us and the marketplace and some of the uncertainty from a credit perspective. So I think, we’re unlikely to buy back shares during 2024 unless there is some other specific change. We generate a lot of capital every year, given our profitability metrics. So I do think, as we did from the closing of the MOE 2.5 years ago or just over two years ago for that 11% level and we are moving forward and we’re generating capital, and we don’t have a good internal use of that capital, we will return it to shareholders in the form of dividends or more likely buyback given the fact that we feel comfortable with our dividend level. So I think, you could see that restart as we get into 2025 and as our capital level gets to 11%.
So — that’s kind of our view right now. Obviously, we’ve talked that from M&A perspective, we’re not really focused at all on inorganic growth right now. We would love to do more transactions like the Ametros transactions, which brings low-cost deposits and fees. But right now, our focus is on working through generating and delivering on our guidance, taking care of our customers, making sure we work through credit building capital back up to 11% and then we’ll be back to our normal kind of capital management plan in 2025.
Manan Gosalia: Very helpful. And then thanks for the detail on the rent-regulated multi-family exposure. I see that most balances were originated post-2019. But can you talk about your comfort level with the credits and the level of reserving for the 35% or so that was originated pre-2019? And are there any details that you can share on that portfolio?
John Ciulla: Yes. Those are really small — generally, as we said, granular small balance accounts averaged $3.5 million in exposure. We are seeing kind of — the metrics we actually did a deep dive and try to look at the credit metrics, the performance, the debt service and the LTV comparatively between the ones that were underwritten before and after, and we are not seeing any differentiation in performance. So the entirety of the book is kind of performing with very low levels of classified and criticized assets. I think one of the key points to make, not only on our rent-regulated multi-family but on our multifamily book in general is that we underwrite to in-place market rents. So we are not counting on there being rent increases at the end of the day to ultimately service the debt and that has set us well.
It doesn’t mean that higher — I mean, higher operating costs can’t impact NOI, but we haven’t seen any degradation in the portfolio. So we are looking right now at a similar portfolio construct and performance between pre and post-2019 underwrites.
Manan Gosalia: Got it. And no major degradation in LTVs there either?
John Ciulla: No, we haven’t seen it.
Manan Gosalia: Okay, thank you.
Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.
Daniel Tamayo: Thank you. Good morning guys. Maybe first just changing gears here, looking at the fee income guide. Just curious if there is something in the $97.5 million core number that you did in the first quarter that you expect to moderate? Or do you think that’s a decent number to grow off of in 2024?
Glenn MacInnes: Yes. So I think on that, we were — I think, we still feel good, like I said in the guidance, the $375 million to $400 million. We did have a strong quarter. I think the guidance implies a range of $92 million to $100 million. And some of the tailwinds, if I just sort of break it out, we still will get the benefit — the full year benefit of Ametros, which will add a $1.5 million to $2 million beginning in the second quarter. And then we’ll see increases in loan-related fees, deposit servicing fees and stuff like that throughout the year. Some of the headwinds that we’ll see are – we will see probably lower HSA interchange, which sort of peaks in the first quarter. But I think, all-in-all, we still feel good about the guide. And I would expect that you would expect that it would be in the $98 million, $99 million range.
Daniel Tamayo: Okay. Great, Glenn. Understood. And then maybe just a follow-up on the conversation on deposits. You mentioned you’re budgeting for non-interest bearing to stay relatively flat for the rest of the year. If that were not to be the case, if we did see some kind of decline in those balances as the year progressed. How would you expect to go out and would you go out and fill a void with additional funding via wholesale channels? Or would you — just curious how you would approach that scenario. And if there is a kind of some kind of leverage in the market.
