Manan Gosalia: No, I think you got them. I wanted to follow up on just the deposit costs and balances. I know NIB outflows accelerated maybe a little bit this quarter, but at the same time, the overall cost of deposits was relatively flat. So maybe if you could talk about the trajectory through the quarter of both the NIB balances as well as the cost of deposits. Is there any seasonality there that we need to be considering? And what are you hearing from clients? Are you seeing them take a fresh look at their cash levels in a higher for longer rate environment or the positive trends continuing through the quarter?
Ryan Richards: Yes. No, thank you for that. So, yes, so we did see early in the quarter some seasonality from some of our large commercial deposits that ran off. But most of what you’re seeing there in terms of the change in the DDA balance in the quarter was a migration to interest bearing that we saw in modest ways certainly with a small — smaller relationship balances, but also with our larger relationship balances. We saw — we’ve seen a very nice stabilization in NIM going back for fourth quarters. And we saw I think even through the end of the period where some of that migration was tempered somewhat. We have not ruled out and we have allowed for continued migration that is embedded within our guidance that you’ll see in our materials that would allow for our total deposit beta to scale up from this current level.
So there is some room for maneuver in terms of that migration and still allowing us to hit our guidance as we peer forward in one year time to stable to slightly increasing NII.
Manan Gosalia: Great. Thank you.
Operator: Thank you. Our next question come from the line of John Pancari with Evercore. Please proceed with your questions.
John Pancari : Good morning. And Ryan, welcome.
Ryan Richards: Thanks, John.
John Pancari: On the credit front, on commercial real estate, you added a bit to the reserves. You brought the commercial real estate reserve up to about 4%. Can you maybe discuss your confidence in the adequacy of the loan loss reserve? I know losses are certainly limited, but comparatively, I know that your peer regionals are in the 8% to 10% range around their reserving for commercial real estate. So can you maybe walk through your confidence in the adequacy here, given the trends that you’re seeing and the pressure on the industry? Thanks.
Derek Steward: Well, thanks, John. This is Derek. We’re very confident in the level of reserves that we have. What you can see in the credit portfolio is actually some migration into criticized. That’s what’s the largest driver of the deterioration in the CRE portfolio. A lot of that’s from multifamily, which we’re very comfortable with. We’re comfortable just because of the loan to values that we’ve underwritten, the conservative underwriting that we’ve done over the years, as well as the slower periods of growth that we’ve had compared to peers over the years. We just — with our loss, the losses that we’ve had at 4 basis points and $6 million for the quarter, it continues to be very manageable. We’ll see some challenges probably in the office portfolio over time, but we continue to believe that we’re very well-reserved for what we think are manageable losses in the future.
Scott McLean: Hey, John, this is Scott. I would just add to that that something which I think almost everybody knows about us, our CRE growth coming into this was about half of the regional bank average and depending on what size regional banks you’re looking at. So as you know, since the Great Recession, our theory book have been growing about 3% to 5% a year, which is significantly less than peers. I think the fact that it’s — 80% of the portfolio is termed says that, we have demonstrated cash flow related to a large portion of the book. And then you just look at the low average and medium average loan size, it sort of tells you that the odds of us having guarantor support that can actually make a difference is real. And then finally, and I think compared to some of our peers, we’ve been very disciplined about hold levels. And concentration management, particularly as it relates to hold levels, is really important going into a time like this.
John Pancari: Great, thanks, Scott. I appreciate it. And then separately on the expense side, expense trends can be a little bit better than expected. I even think the outlook was a little bit better. Can you maybe remind us on some of the efforts on the expense front, if you see some incremental gains as you look through the franchise. And then separately, do you see — can you remind us of the expense dynamic tied to the completion of the core system conversion? I believe in year one you might actually get a bump up in those costs before you see efficiencies. So if you can maybe walk through that with us as well. Thanks.
Ryan Richards: Yes, let me start with highlighting, I think it was noted, the year-over-year performance. It was about a year ago this time where a commit was made to bend the expense curve and the backdrop of the revenue environment that we’re in. And we’re — we feel pleased with where we came out on an adjusted basis relative to that last year mark having a very modest 0.4% increase in adjusted expenses. So, it felt like we kept commitments there. And we’re really operating in the spirit of continuous improvement. That wasn’t a one and done. We continue to inventory opportunities moving forward to make sure that we manage those responsibly. And we see opportunities, as you note, as we think about the very good success that Harris highlighted in his remarks on our core financial transformation work and how that’s progressing.
We do see some opportunity in terms of direct implementation expense associated with that going into next year. We have been spending a lot of time internally focusing on where we can bring automation improvements. We’ve been mobilizing a lot of our people internally to drive out manual labor hours out of our work. We see opportunities associated with kind of our facilities, and we’ve shown that we’ve had an ability to realize some economies there with some of the projects we’ve worked on in recent years. And our compensation structure will continue to match the revenue environment and how we trend across that dimension. So I don’t know, Scott, if there’s anything that you would want to add.
Scott McLean: No, Ryan, that was awesome. All of those comments speak to the rigorous discipline we’ve had. This quarter last year, as Ryan noted, we were sitting on about 8% to 10% and year-over-year expense growth when we called that we would be flat to the first quarter of this year. So it wasn’t by accident. There was a lot of rigorous discipline that Ryan noted and that we think will be beneficial going forward. Related to our future core project specifically, we’ve noted that there will be next year in 2025 about a $12 million to $15 million decrease in amortization costs. There will also be, we’ll see some benefit from reduced, what we would call, double staffing that exists in many areas of the bank to help with the conversions.
And then I think we’ve — as Harris noted, we’ve seen some real process time improvements at the [teller line] (ph) and on our new accounts platforms, that where we see higher levels of turnover anyway, where we may see some efficiency from that as well.
John Pancari: Okay, great. Thanks, Scott. Thanks, Ryan.
Operator: Thank you. Our next questions come from the line of Steven Alexopoulos with JP Morgan. Please proceed with your questions.
Steven Alexopoulos: Good morning, everybody. First, by the way, thanks for the 9:30 a.m. call. This is a great time slot. Hopefully you keep it. For my question — yes, I won’t ask the question on that, but in terms of the net interest income guidance, this comment in here that there’s upside if short-term rates decline. Most banks are indicating that if short-term rates come down because of the lag on the deposit side, they would think that would pressure NII in the short run, but it seems like you’re saying the opposite here. Could you expand on that?
Ryan Richards: Yes, I would emphasize the near-term nature of that. But what we’re seeing there is, if you think of — look across our — basically our interest-bearing deposits, and you decide that around $50 billion, you think about a third of those being priced pretty near wholesale prices, 4.75% and above. We sort of said as we’ve kind of been making the rounds that we expect to have a good bit of pricing sensitivity on those deposits that can be advantageous to us on the way down. And that would be the near-term headwind if only short-term rates were to move down, not a parallel shift that we think that we could realize.
Steven Alexopoulos: Got it. Okay. That’s helpful. And then for my follow-up, maybe for you, Harris. It was interesting to hear you say that loan demand seemed to turn a corner. But if you look at the consumer side, sentiment is still pretty negative, mostly tied to inflation. But it seems like you’re citing business customers, maybe sentiment’s improving a bit. Can you talk about that? And do we need cuts to see improved pipelines turn into actual improved loans? Thanks.
Harris Simmons: Well, I think what we’re seeing is — I mean, it’s just coming from our kind of frontline lenders are expressing that they’re seeing a little more optimism probably from borrowers. I don’t know that you need cuts that — this really hinges on a quarter point or — that’s what’s doing it so much is just probably a general belief that maybe the economy is not headed into recession, that things are a little more resilient than might have been kind of the sentiment six or nine months ago. So I suspect that’s it. But our comment about maybe improving loan demand coming at us is simply a reflection of what we’re hearing from our lenders. So it’s a little hard to quantify, but that’s what we’re seeing internally.
Steven Alexopoulos: In the past, when you saw an improvement in the pipeline, how long would that typically take to filter through actual loan growth improving?
Harris Simmons: Six months.
Steven Alexopoulos: Okay. All right. Thanks for taking my questions.
Harris Simmons: Yep. Thanks.
Operator: Thank you. Our next questions come from the line of Bernard Von Gizycki with Deutsche Bank. Please proceed with your questions.
Bernard Von Gizycki: Hi. Good morning. You’ve been making investments in your capital markets and wealth management segments to help drive a more sustainable revenue base. Capital markets revenues had a nice uptick in the quarter, driven by the real estate and securities underwriting you mentioned. Do you expect improvement to be driven from these areas or any color you can provide and where the expected improvement will come from?
Harris Simmons: I might just say that we have a very intentional calling effort. We’ve got a lot of bankers engaged in it. I generally expect it’s going to be sort of across the board. And we have — we have some ambitious internal targets and people committed to it. So I don’t think it’s going to be any single category. I think you’re going to see it sort of across the board in capital markets.
Bernard Von Gizycki: And then maybe on the funding side. I know on Slide 11 of your presentation, you note having the $4 billion in broker deposits and $5 billion in borrowings. And you’ve done a nice job of bringing these down over the last several quarters. What are your expectations on further bringing down wholesale borrowing for this year?
Harris Simmons: To speak to that one, I’ve got Matt Tyler, our Treasurer might have a comment about it. Yeah, this is Matt Tyler. I’m the Corporate Treasurer. I mean, it’s really — we’ve seen deposits kind of stabilizing from where after last year and actually we saw this growth after last year, which is why we brought down those broker deposits. Going forward, it’s going to really be a function of what happens with our deposits, what happens with our loan growth. We expect those numbers to continue to come down somewhat, but that depends on how the risk of balance sheet behaves, whether loan growth is superheat comes in very strong, then we’ll probably need to keep more of that wholesale borrowing.
Scott McLean: I would just add to that that, customer deposit is down a little bit in the first quarter, which is, Ryan says, somewhat seasonal. We still got about — we still have about $6 billion in client deposits that are off balance sheet. And so, it’s a pretty conscious decision. We could certainly have shown a $1 billion, $2 billion of customer deposit growth. Borrowings would have come down, overnight borrowings would have come down. And it’s something we don’t — we just try to make very natural decisions, not try to bend the borrowings number or hit a customer deposit growth number just simply through rate mechanics. We try to make the best decision we can about what customers really need and what we’re looking for at any point in time.
Bernard Von Gizycki: Great. Thanks for the color and taking my question.
