David Zalman: Our models are still showing that we have plenty in the account.
Asylbek Osmonov: Yes. We have a little bit of a recession in this side.
Stephen Scouten: Okay. Super. That’s great color. Appreciate all the time, guys.
Operator: The next question comes from Manan Gosalia from Morgan Stanley.
Manan Gosalia: Maybe a big picture question on loan growth. I mean it looks like we’re going to get a soft landing. Many of your peers are talking about loan growth reaccelerating in the back half of the year, and it sounds like you’re saying that, too. But you still have all this capital on the books. So why not lean in a little bit more now and get that loan repricing and NIM benefit faster right now, especially if you can put it in some longer-dated loans and lock in some rate?
Kevin Hanigan: Yes. I think we’re thinking about the exact opposite way. We all are still hopeful of a soft landing. I believe that’s a possibility. At today’s rates, it’s really hard to make a lot of things work. By way of example, go back two years ago when we had lower rates. If we were looking at a multifamily construction project, we might have done it at the low 70s loan to hard cost kind of number. And that would produce, call it, a very comfortable 1.25 debt service coverage ratio even under a little bit of stress. Today, that same exact loan, we require somewhere between 50% and 52% equity to get that same kind of comfort at your debt service coverage ratio level. So, we could lean into that, but there’s not many equity players who want to lean into that with us.
They’re just going to wait for a better time and lower rates to do some of these projects. So we’re being cautious, and I think we’re being prudent and cautious at the same time. I think we’ll get our fair share, and I believe we’ll grow at or slightly above the GDP rates. And it just may be a little back-end loaded. As I said, I think that we have some fortune here in the first quarter. Things can always not close for various reasons. But we’ve got some pretty nice deals that are teed up to close, that we’re pretty optimistic that the first quarter is going to be pretty good.
David Zalman: Thanks a lot. Go ahead, Tim.
Tim Timanus: Well, I think the good news is that virtually all of our customers are doing okay. They’re not in financial difficulty. The reason they’re not doing more in the marketplace is they’re waiting to see if rates do go down. And they’re waiting to get a little better handle on exactly where the overall economy is headed. But they, as entities, are in good positions, almost all of them. So if and when the picture is brighter and the cost of doing something is less, I think we have an excellent chance of seeing a lot of good loans come our way.
Kevin Hanigan: And I think to your lean in point, the things we would lean in on are — not to name any names, but banks with a really high loan-to-deposit ratio that may have a customer request or a good long time customer that they would love to do, but maybe they just don’t have the capacity to do as well or as much anymore. We would like to lean into those, where we get a full-blown, hey, we’re going to help you out on this, but we want a full relationship here. We went your deposits, and we want to do a full relationship. I see ourselves leaning into some of those situations when they come up. Those banks, they can raise money and they are raising money, broker deposits, which we’ve chosen not to do. But if you go get a broker deposit at 5% or 5.5% these days and trying to make a loan to a good customer at 8.25% or 8.5%, there’s just not — there’s not much in it once you put up some operating costs and the provision against it.
So those are the opportunities we would lean into.
Tim Timanus: I think that’s absolutely right. I mean, from a competitive standpoint, some banks are just not able to move forward on the loan front in a very aggressive way. We have more flexibility than a lot of banks do in that regard. So if the bank is dragging its feet, so to speak, in giving an approval, we don’t have that problem. We can look at a deal and give somebody an answer and move forward with it.
David Zalman: But also, you have to admit that last year was kind of a strange year. We were cautious. Deposits were leaving the bank, where we probably cut our own loan growth down because we were trying to set up financing dry relationships. We really went back to look just at customers that were customers that could be a deposit customer and a total relationship. So we probably cut ourselves off from a number of deals last year. I think your point is well taken, maybe things do look better. But again, you want to make sure — I don’t think we’re a bank that wants to end up with a 90% loan-to-deposit ratio. We want to have liquidity in the bank. And so you have to grow deposits and loans at the same time, just to think you can grow deposits and not grow — just thinking you can grow the loans and not grow deposits would be — would be a mistake.
I know a lot of people don’t see that, but you need to keep liquidity. If there’s anything we should have learned this last year, that is to have liquidity in the bank. And I don’t believe — again, I’m not judging other bankers. I just don’t believe that broker deposits is true liquidity. That’s not core deposits. And so we’ll keep an eye on both of those things.
Kevin Hanigan: Yes. Look, it served us pretty well, not chasing the deposit side. But we are starting to inflect that our loan-to-deposit ratio limits, I think we have policy limits at 85%. We’re not there yet. But we have stuck to our core deposit franchise. And as I — you look at way more banks than I do, but I look actively at a number of banks, particularly during earnings season that are around our size or in our markets. And we came in at this in a very enviable position, maybe a 62% to 65% loan-to-deposit ratio, we didn’t have to chase deposits to fund loans. We could let some deposits run off and our loan-to-deposit ratio go up and maintain the core deposit franchise underneath it all. And as a result, we come through a quarter where our total funding cost goes up only 4 basis points and now is at — for interest-bearing liabilities, that includes the debt, 2.58%.
I don’t need to tell you where some of the other banks are reporting, but we’re seeing numbers above 3%. We’re seeing numbers above 3.25%. That gives us a 50 to 75 basis points spread to them in this kind of environment because we haven’t chased it. And as I just do look at our overall cost of funds, it’s driven largely now, 37%, almost 38% of our interest-bearing cost is in our debt. And as you know, we’re all — we’re paying down that debt as the bonds — cash flow to us. So we expect $2 billion worth of paydowns in the debt roughly. And that’s meaningful. That was $52 million worth of cost in the first quarter — or in the fourth quarter out of $139 million worth of deposit cost. So we’ve got that to look forward to, which is why we’re so enthusiastic about our prospects for NIM improvement.
David Zalman: I think we’re at a point in time where we were all locking into longer-term assets when rates were so low. I think now, I think your actions that you do right now by buying money and not having core deposits and increasing your rates on all your deposits could be the next mistake. So I think what may not look so good right now may be prudent going into the future.
