Mike Achary: Yeah, Stephen, this is Mike. I’m happy to chat about that for a minute or two. So our DDA remix definitely is slowing. There’s no doubt that that’s occurring. And support for that I mean, obviously, you can see the numbers. But our percentage of deposits at a DDA moved from 37% last quarter to 36% this quarter. But the rate of decline was really less than half of the previous quarter. So in the fourth quarter, we were down about $600 million. This quarter, we were down only about $230 million or so. So on a percentage basis, that went from 5% to about 2%. So on last quarter’s call, we had talked about looking at the end of the year and suggesting that maybe that DDA percentage would be somewhere around 33%. Obviously, with the way that the remix is slowing, we would look at that number as being probably something closer to 35% or so as of now.
And one additional point that certainly was a significant item, we think is in the month of March, we really saw our first increase in DDA deposits on an average basis in really almost two years. So I think that’s further evidence that that remix is absolutely slowing and could be turning over at some point.
Stephen Scouten: Okay, that’s really helpful. And I guess with that 35%, would that be kind of within the context of assuming three rate cuts? And do you think that would get maybe marginally worse if we were to get no cuts for whatever reason?
Mike Achary: I don’t know that right now, whether we get three rate cuts or zero rate cuts is going to have a real big impact on that number. I think that we see some things in motion again around the slowing of that remix and those numbers beginning to move a little bit in the opposite direction, obviously, in an environment where there are no rate cuts, which is today.
Stephen Scouten: Okay. And then going back to credit briefly, you guys have talked even in your, like, in your release, you talk about credit metrics normalizing. But I guess I’m just kind of curious what that looks like for you because you still only had 15 basis points of net charge-offs and some of these numbers are still historically low. So, what do you feel like that normalization level really looks like for you all?
Chris Ziluca: Yeah. Thanks for the questions. It’s Chris Ziluca. It really is a good question. I think, I guess what I would say is that because we’ve been operating at such historically low levels for both us and also really compared to our peer set, that even normalization would probably be just getting towards maybe peer average. And I think we have a long way to go before we get there from my perspective. But I think we’ve been very successful and very lucky in many respects with all of the liquidity that’s been pumped into the system to allow us to get to the level that we’re at. And so, it wouldn’t surprise me that we would continue to see some level of migration in. Now, reality is that the wildcard is how do peers perform also.
And so if we’re kind of performing in tandem with them, then maybe we don’t get to peer average. So it really is just a matter of, we’ve had such a low level and we continue to try to strive for that, that any sort of movement would probably be considered kind of a normalization.
John Hairston: Stephen, this is John. I’ll just add to that. Just internally, the way we look at this is more outrunning the other hunters versus the bear, if you know what I mean. So what we consider successful through this cycle is remaining in the top quartile in terms of low levels of criticized and NPL credit. And anything below peer median would be a deep surprise and disappointment. So if you kind of look at it that way, that’s sort of the bookends of what our expectations are is somewhere between the first and second quartile. But obviously, top quartile is what we [deem as] (ph) success.
Stephen Scouten: Got it. That’s really helpful. And if I could squeeze in one more maybe, I was just curious what drove, if anything specific, the decline in new loan yields quarter-over-quarter? It’s kind of been trending up at a fairly ratable pace. And looks like this quarter fell down to 7.91% versus 8.15%. So I’m wondering if that’s like a mix issue, maybe more of these single closed mortgages that you mentioned or what kind of drove that decline?
John Hairston: Great question. This is John, I’ll take a wing at it. I think the answer is about half mix, just differences in Q1. And Q1 does typically have a little bit different mix than the other quarters of the year. And then secondly, and this is, I think, going to be the same with our competitors as well, is right now with a rate environment that the news media is talking every day about, when will rates begin to go down, that’s a pretty stark change from a year ago when they were talking about how far will they go up. So when we’re negotiating terms or specifically rate terms with clients, it really is a tailwind to getting better pricing when there’s a thought that rates are going to be flat or higher. In this environment, rates are expected to go down.
So that’s creating a little bit more pushback on rates upon renewal and new deals. And frankly, the competition is also just as interested in getting new business they can to at least hold the loan book flat. And so I think competition is higher. Awareness of what rate direction is happening in the market is a little higher, and I think both of those are driving that down a little bit. But our posture right now, to be clear, is we still want to get as good a rate as we can possibly get and we’re giving up a little volume in order to get a higher rate. As we get later in the year, if rates do indeed stay flat, or the belief is that they’ll still go down, that I think we may see some rate concession across the banks environment, particularly mid-sized bank environment to show growth.
It’s hard to really tell at this point in time, but if you go back through history, when people begin to expect a rate cut, it’s harder and harder to get new deal rates at the level that you may want. And I think we saw a little bit of that in Q1. But again, about half of it or a little more was mixed.
Stephen Scouten: Really helpful color. Thanks for the time you all.
John Hairston: You bet. Thank you for the question.
Operator: Your next question comes from the line of Ben Gerlinger from Citi. Please go ahead.
Ben Gerlinger: Hey, good afternoon, everyone.
John Hairston: Hi, Ben.
Ben Gerlinger: I was curious, I know you gave a little bit of a tilt in your hand here and guidance on the lower end for expenses. But even if you just take this quarter and annualize it, there’s about a $20 million gap. So it comes up to, like, around [$816 million and then $836 million] (ph). So I was just kind of curious. I get the expenses are probably closer to lower end. But do you think there’d be a little bit of a ramp from here or where should we see that build? Is it technology? Is it potentially staffing or anything you could do to have it be on the lower end of the range or — sorry, below the low end of the range?
Mike Achary: Yeah. Ben, this is Mike. I think the way the trajectory of that will likely work as we kind of go through the year, recall that like many banks, we award raises on April 1st. So you will see a pretty healthy increase in expenses quarter-over-quarter related to those raises. So you’ll have a full quarter’s impact of that in the second quarter. And then from there, I would expect to see kind of modest increases as we go into the third and fourth quarter. And again, that should put us really at the bottom end of the range of 3% to 4%, and maybe a hair even below that 3%. So that’s how we’re kind of thinking about it.
John Hairston: Ben, this is John. I’ll add just to it. Right now, we’re having some really good and impressive success in some areas of the granular deployment balance sheet in loans, particularly in Texas and areas, and particularly Dallas. And so, there’s a bit of a notion that as we get to the back of the year, depending on what the economic environment looks like, we may very well increase our deployment in adding new bankers and a small amount of new facility to continue that momentum, because it simply has been so good. And so there’s a little bit of cushion built in that guidance as we sit down in the event that we do make those investments. And we want to be very transparent about it. Might not happen, given how the economy could change on us, but right now, we feel really, really good about the progress in the range or side of our loan balance sheet.
And we believe, that there’s some good talent out there in different places that may need a distribution disruption by the back half of the year that we’d like to avail ourselves of their assistance.
Mike Achary: And, Ben, if we take the route that John just kind of articulated, obviously we’ll be transparent and modify the guidance accordingly.
John Hairston: That’s not a signal. We’re going to do it. It’s a signal that that explains some of the reason for the range.
Ben Gerlinger: Got you. Okay, that makes a lot of sense. If you just kind of look to your crystal ball here, it seems like growth is a little bit back half the year weighted. I mean, pricing looks to be pretty healthy. Mix shift on deposits is really kind of the only incremental headwind at this point because the cost of deposits are working pretty flat month-over-month when you gave that cadence for the first quarter. Just kind of curious, when you think about an exit of the year, and I get, you might not answer this directly, but is 3.40% achievable in the margin?
Mike Achary: Yeah, that’s a great question. And as we kind of think about our NIM, and if you kind of go back to my earlier comments, under the scenario where there’s a couple of rate cuts, that’s certainly, I think, a possibility. If the zero rate cut scenario happens, then, the 3.40% NIM might be a little bit of a reach, is the way I would kind of think about that.
Ben Gerlinger: Got you. That’s helpful. I’ll step back. Appreciate the time.
Mike Achary: Okay.
John Hairston: Thank you.
Operator: Your next question comes from the line of Brandon King from Truist Securities. Please go ahead.
Brandon King: Thank you. Good afternoon.
John Hairston: Hi, Brandon.
Brandon King: So just a question on the expectation for loan yields. The pace of increase slowed in the quarter to around 6 basis points. And I was wondering, just giving expectations for fixed-rate loan pricing going forward and the commentary around new loan yields, is that a good sort of run rate to expect maybe in the next couple of quarters and particularly, if kind of rates hold from here?
Mike Achary: Yeah, Brandon, this is Mike. And I do think it is, especially if there aren’t any rate cuts from this point forward that we should see some stability on the variable side. But we should still see, as I mentioned earlier, some yield improvement on the fixed rate side as we continue to have those loans repriced as we go through the year.
Brandon King: Okay. And as far as the fixed rate repricing, is that sort of ratable through the year or do you have sort of chunkier repricing impacts in certain quarters?
Mike Achary: Yes. Right. The way we’re looking at it now, it is pretty pro-rata during — across the remaining quarters of the year. And if you look at the last couple of quarters, it’s been amazingly consistent around 12 basis points or so per quarter. It did narrow a little bit in the first quarter to about 9 basis points, but still pretty strong on the size of that portfolio.
