Ryan Nash: Got it. Maybe to come at net interest income and net interest margin from a little bit of a different perspective. You gave us guidance for the first quarter and NIM is expected to be around 350 for the full year. Maybe David, you were daring talk about how you see it evolving over the course of the year end. When you look out as we think about the declining rate cycle, where do you foresee the net interest margin settling out over time? I know historically, we’ve talked about a 3.6% to 4% range, maybe just a little bit of color on where you see it settling out over the course of the next couple of years? Thank you.
David Turner: Yes. So I think you’re going to see that margin pressure a little bit in the first quarter and slightly in the second quarter. The first quarter has another, call it, $3 billion of received fixed swaps that will become effective that will have some negative carry that hurts us a bit in the first quarter. And then things start to change a bit beginning in the second quarter. So literally, like after the first month. So I think you’ll see a little bit more of a movement in the first quarter and a tiny movement in a second. And then we can start to rebound a bit where we will finish we think for the year in the 3.50% range, I think as things sell down. We had talked about 3.60% to 4%. That 3.60% was predicated on rates really going back down at the very low levels, and that’s the purpose of our whole hedging strategy is because we have lower deposit costs of most everybody.
If we’re going to protect our margin, we have to do it synthetically. And so we have about $20 billion in any given year of received fixed swaps and some other derivatives to help us manage the net interest margin in the 3.60% to 4% range. So you’re likely over time to be kind of in the middle of that. And we think that that’s a possibility in time that things have to settle out. We’ve got to get deposit costs back to tie up with where rates are. But we can probably exit the year in the 3.60% range.
Ryan Nash: Thanks for all the color, David.
Operator: Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.
John Turner: Good morning.
John Pancari: On the operating leverage side, I mean, your guidance implies negative operating leverage unsurprisingly for 2024. But as you look at your trajectory on the revenue front, your assumptions there combined with your expense expectations, how do you view the likelihood of achieving positive operating leverage in 2025. And when do you expect that you could break into a more positive trajectory on a quarterly basis. Thanks.
David Turner: John, so I have a tendency to look at it on an annual basis. And you are right we can’t generate positive operating leverage in ‘24, primarily because of our outperformance in the first two quarters of ‘23, where we were having above 4% margin, which is way above most everybody. And so I think that’s been acknowledged in the marketplace. I do think we can get back at ‘25 to generate positive operating leverage, and we will start trending there towards the back half of the year as we see us bottoming out in terms of – and net interest income and margin in the second quarter, and then we can start to grow from there. We will see what the economy looks like. We will see what loan growth looks like. We think that picks up a bit. And we think the pressure on deposit betas start to go the other way. And as I just mentioned, we can exit with a little stronger margin. So I think positive operating leverage towards the back half is a possibility.
John Turner: And definitely for 2025.
David Turner: And we’re going to get there for 2025.
John Pancari: Okay, great. That’s helpful. And then secondly, around credit, regarding the NPL increase, I know you’ve flagged the downgrade – the risk rating downgrades and some of the higher risk sectors. Maybe can you give us a little bit more color whether – was it concentrated in any one sector? Was there a broader scrub of the loan book that you completed that led you to the multiple of the multiple downgrades? Or is it just episodic and then, I guess, just separately, can you talk about the reserve? I know you built it a bit here. What’s the outlook there as you continue to add from here? Thanks.
John Turner: I’d just say, John, with respect to the increase in NPLs, we’ve called out portfolios that have been under some stress for a number of quarters now. What we saw in the quarter was some migration from criticized classified to non-performing, specifically in senior housing, in transportation and warehousing, transportation, specifically and office and then additionally, manufacturing of consumer discretionary items. So that was our expectation. We have one large technology credit that moved in the third quarter. That is episodic, we believe, is something that we can and believe we will manage through. So when you look at the migration, as we pointed out, we are moving back to more traditional sort of historical levels of non-performing loans, which is somewhere between 80 and 100 to 110 basis points.
