Manan Gosalia: Got it. I really appreciate the fulsome onto here. Maybe on the core deposits point, I think you said a little bit earlier that for NIB growth, you could see some more customers leave more depositive if rates go down. How quickly do you think that can happen? Do you think that can happen as soon as you get three or four rate cuts? Or do you need to see rates go down closer to the maybe 3%, 3.5% range before you see that happen?
David Zalman : I think you will see — I don’t think it will be — they’re not going to rush to bring it back in. But every time the rates go down, and I think if you get three or four rate cuts, you’re talking 100 basis points, that would be meaningful. Yes. I mean I think it would. And I think, again, I think we start seeing people moving money back in. I don’t think that you’re ever going to go back to zero deposits. I shouldn’t say never, I sure learned that in my lifetime, but I think what you’re going to see is interest rates probably — again, I don’t think — I don’t even think in the first quarter or the second quarter. Having said this, it changes so fast from quarter-to-quarter. I think you’ll see probably interest rates go down to short-term interest rates. But again, your 5-year and 10-year, I think these are rates that are going to be this is normalization and you’re going to probably see those rates where they’re at or maybe can go up a little bit.
Kevin Hanigan : Last point is, I think this is playing out pretty much the way we thought.
David Zalman : Exactly.
Kevin Hanigan: Let’s just go back to last quarter. I haven’t really read the transcript, and I — I should probably do that before I come into these calls. But I do recall us talking about when rates pause, it is not unusual. In fact, it’s expected that deposit funding cost and mix changes continue for about six months thereafter. And I think we’re all into that process right now. So some of this mix change could go on is another quarter.
David Zalman: Yes, I think I…
Kevin Hanigan: But it’s coming at lower and lower levels. I mean, our total cost of funds went up a whopping 4 basis points last quarter. And so it’s abating, but it’s playing about how it’s played out in prior cycles. So the Fed pauses, and rates continue to go up in the banking system for six months.
David Zalman: I mean your point is well taken. In previous quarters, we actually said that historically, banks had 20% or 30% of their [indiscernible] of deposits. And as rates go up, we would see money lead where we’re at and go into some of these higher rate deals. And that’s exactly what’s happened. And vice versa will happen if rates go back.
Kevin Hanigan : Yes. Well, we’re halfway through it. Let’s hope we’re right about the second half being in — the next quarter being the end of it.
Operator: The next question comes from Jon Arfstrom with RBC Capital Markets.
Jon Arfstrom: Just a follow-up on that. Do you think that within the next couple of quarters, deposit costs really stop going up for you? Is that fair?
David Zalman: I would say absolutely.
Asylbek Osmonov: Yes. If you look at — let’s just look at that.
Jon Arfstrom: t Certainly, overall funding costs.
Asylbek Osmonov: Yes, exactly. If you look at the cost of fund, Jon, I mean, just kind of look at the trends from the Q4 averages to Q1 increased like 41 basis points, increase on the — from second — from first to second, like 46 basis points, and then it increased only 18 basis points. And this time, we only had 3 basis points increased cost of funds. So you can see it’s coming down. Yes, we had significant increases in the first few quarters, but pace of increase is slowing down, especially if you have some rate cuts slowdown or completely go maybe reverse.
Kevin Hanigan: Yes. Obviously, it’s a big part, Jon, of our feelings about our strength of the feelings about our NIM improving. It’s a big component of it, obviously.
Jon Arfstrom : I’ll just one more on deposits. The decline in deposits from a year ago, would you say that’s all rate-driven? And has that stuff gone forever? Or can that start to come back as — assuming rates are stable?
David Zalman : I mean I think that rates — I do think that — I don’t know that it’s all rate-driven. I think for the most part, it is. I think it is. There’s some portion in it, I don’t know what, where we have big accounts that have $20 million to $30 million in the account. And even though the CFO may like us, they have a Board of Directors and the CFO says, “Well, why take any chance if you can go to JPMorgan Chase or Wells Fargo?” So that certainly adds to some impact. But I have noticed as things become more normalized, people aren’t as fearful. I think you will get a good chunk of the money back. I do believe that.
Tim Timanus: I think we’re already seeing that, David. We’ve had a number of customers that initially moved money out nine months to a year ago, really nine months ago when the bank started to fail. They moved money out for fear of insurance, not so much for rates. And most of that money went to treasuries. And for really about one or two months now, we’ve started to see some of that money come back. Not a flood of it. But we started to see some of that money come back from existing customers. So I do think there’s less fear in the market of bank failure. And if I’m right about that, then the competition is really rate driven, not fear of failure. And I think it’s more so rate-driven now.
Kevin Hanigan : Yes. I haven’t looked at it system-wide, Jon, but if you think about the Fed has taken money out of the system, M2 is down. So if you looked across the banking system and knew just how many deposits had left and subtracted out the amount that M2 went down because Fed actions, the rest would have to be rate-driven.
Jon Arfstrom : Right.
Kevin Hanigan : Would have to be. It could be service levels, but largely rate-driven.
Jon Arfstrom: And then just a small one. It looks like it was a PCD loan, but can you touch on the charge-off there? And is there anything left? FirstCapital that might be coming through?
Tim Timanus: Well, number one, all of the FirstCapital issues that we’re aware of — and we believe we are aware of all of them — are fully reserved at this time. So there’s not going to be any surprise loss in there based on what we see.
David Zalman: I do think the — we did, I think, in some of the first loans that we put on, we did — we do ask — usually any time we do a deal, we go with management and what they say. They thought that they — that there was — even though we reserve fully for them, we still put them on the books. They thought that they could be collected. They weren’t collected. And then you had other loans that came back on that we have put back on nonperforming. I don’t think those loans are like the loans that we first put on. We knew these first loans we put on were very challenged. We still — we’re really giving management a chance to believe what they said. And again, it just didn’t work out. So — but again, I don’t think the loans that we have in nonperforming right now, you shouldn’t see those kind of losses the way we charged off those first ones. In my opinion, we should have just charged them off to begin with, not only reserve when we charged them all to begin with.
Jon Arfstrom: Okay. Thanks for the help.
David Zalman: You didn’t ask about the Queen Mary.
Jon Arfstrom: I think you’ve turned the corner.
David Zalman: The Queen Mary is selling in the right direction. We should reach our destiny soon. While the passengers and crew are good spirits.
Operator: The next question comes from Brady Gailey with KBW.
Brady Gailey: I just wanted to hit on average earning assets. As I look at the dynamics that you have loan growth that’s expected to outpace deposit growth, you’re trying to get borrowings down. So bond balances are coming down, and your average earning assets did shrink on a linked quarter basis. So how should we think about the level of average earning assets into 2024? Do you think we could see some continued shrinkage there? Or do you think that will be more stable?
