Hello, and welcome to the Prosperity Bancshares, Inc. First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to hand the call to Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares First Quarter 2024 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H. E. Tim Timanus Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. David will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

Thank you, Charlotte. I'd like to welcome and thank everyone listening to our first quarter 2024 conference call. We are excited to announce that on April 1, 2024, we completed the merger of Lone Star State Bancshares Inc. and Lone Star Bank, headquartered in Lubbock, Texas. The operational integration is scheduled for late October 2024 when Lone Star customers will have full access to our 288 full-service locations. We welcome the Lone Star customers and associates to Prosperity, and we'll work hard to win your trust. Prosperity continues to focus on long-term relationships and our customer success while maintaining strong asset quality and earnings and a fair return to shareholders. Prosperity maintained a high tangible equity to tangible asset ratio of 10.33% for the first quarter of 2024, while sharing earnings with our shareholders. Prosperity repurchased 567,692 shares of common stock during the first quarter of 2024 in addition to the quarterly dividend. In 2023, Prosperity's total capital return to shareholders from dividends and share repurchases was $278 million. For the three months ended March 31, 2024, the net income was $110 million or $1.18 per diluted common share compared with $95 million or $1.02 per diluted common share for the three months ended December 31, 2023. The change was primarily due to higher interest income and lower FDIC assessments. For the three months ended March 31, 2024, the annualized return on average assets was 1.13% and the annualized return on average tangible equity was 12.06% and the efficiency ratio was 49%. Loans were $21.265 billion at March 31, 2024, an increase of $84 million or 40 basis points, a 1.6% annualized from the $21.181 billion at December 31, 2023. Loans increased $1.931 billion or 10% compared with the $19.334 billion at March 31, 2023. Loans, excluding warehouse purchase program loans, and loans acquired in the merger of First Bancshares, increased $115 million or 60 basis points or 2.4% annualized during the first quarter of 2024. Our deposits appear to have stabilized and core deposits have increased modestly. Deposits were $27.176 billion at March 31, 2024, a decrease of $4.3 million from the $27.180 billion at December 31, 2023. Deposits increased $171 million or 60 basis points compared with the $27.004 billion at March 31, 2023. Deposits, excluding public fund deposits, increased $109 million during the first quarter with no broker deposits purchased. The net interest margin on a tax equivalent basis was 2.79% for the three months ending March 31, 2024, compared with 2.75% for the three months ended December 31, 2023. Based on our models, we believe our net interest margin should continue to improve to a more normalized level as our bond portfolio and loan portfolio reprice. Our average net interest margin from 2012 to 2022 was 3.37% compared with our net interest margin of 2.79% for the first quarter of 2024. Our nonperforming assets totaled $83 million or 24 basis points of quarterly average interest-earning assets at March 31, 2024, compared with $72 million or 21 basis points of quarterly average earning assets at December 31, 2023. Our nonperforming assets are higher than our historical levels, primarily due to acquired loans. We expect to reduce our nonperforming assets ratio to a more normal level within a year. The $2.4 trillion Texas economy is now the eighth largest economy in the world, larger than Russia, Canada, Italy and others. Texas is the top state for Fortune 500 headquartered companies currently at 55 and was named the 2023 State of the Year for Best in Nation business climate and job growth. Texas added 369,600 nonfarm jobs in 2023, the most in the nation. We believe the Texas and Oklahoma economy should outperform most other states. As previously mentioned, the merger of Lone Star State Bancshares was completed on April 1, 2024, and the operational integration is scheduled for late October 2024. We're excited to have the Lone Star associates on the Prosperity team. We continue to have active conversations with other bankers regarding potential acquisition opportunities and hope to continue to grow through thoughtful mergers and acquisitions. Overall, I want to thank all our associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity, and we'll continue to work hard to help our customers and our associates succeed and to increase shareholder value. Thank you again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results that we achieved. Asylbek?

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended March 31, 2024, was $238.2 million compared to $237 million for the quarter ended December 31, 2023, and $243.5 million for the same period in 2023. The net interest margin on a tax equivalent basis was 2.79% for the three months ended March 31, 2024 compared to 2.75% for the quarter ended December 31, 2023, and 2.93% for the same period in 2023. Excluding purchase accounting adjustments, the net interest margin for the three months ended March 31, 2024, was 2.76% compared to 2.71% for the quarter ended December 31, 2023, and 2.91% for the same period in 2023. The first quarter increase in net interest margin was primarily due to repricing to higher-yielding earning assets. Noninterest income was $38.9 million for the three months ended March 31, 2024, compared to $36.6 million for the quarter ended December 31, 2023, and $38.3 million for the same period in 2023. Noninterest expense for the three months ended March 31, 2024, was $135.8 million compared to $152.2 million for the quarter ended December 31, 2023, and $123 million for the same period in 2023. Beginning in the second quarter of 2024, we expect the run rate for noninterest expense to be in the range of $141 million to $143 million. The expected increase is based on the acquisition of Lone Star State Bank on April 1, 2024, and Prosperity Bank's annual merit increase in the second quarter 2024. Additionally, during the second quarter 2024, we expect one-time merger-related costs of $6 million to $8 million and an additional FDIC special assessment of approximately $3 million to $5 million. Further, second quarter results will include purchase accounting provision expense related to the Lone Star acquisition. The efficiency ratio was 49.1% for the three months ended March 31, 2024, compared to 55.6% for the quarter ended December 31, 2023, and 43.7% for the same period in 2023. The bond portfolio metrics represent a modified duration of 4.1 and projected annual cash flows of approximately $2.1 billion. With that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Mr. Timanus?

Thank you, Asylbek. Our nonperforming assets at quarter end March 31, 2024, totaled $83,811,000, which is 39 basis points of loans and other real estate. This is compared to $72,667,000 or 34 basis points at December 31, 2023. This represents a 15.34% increase. Since March 31, 2024, $7,425,000 of nonperforming assets have been removed or put under contract for sale. For March 31, 2024, the nonperforming asset total was comprised of $81,510,000 in loans, $97,000 in repossessed assets, and $2,204,000 in other real estate. Net charge-offs for the three months ended March 31, 2024, were $2,143,000 compared to net charge-offs of $19,133,000 for the quarter ended December 31, 2023. This is a $16,990,000 decrease on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended March 31, 2024. Also, there was no addition to the allowance during the quarter ended December 31, 2023. No dollars were taken into income from the allowance during the quarters ended March 31, 2024, and December 31, 2023. The average monthly new loan production for the quarter ended March 31, 2024, was $308 million compared to $300 million for the quarter ended December 31, 2023. Loans outstanding at March 31, 2024, were approximately $21.265 billion compared to $21.181 billion at December 31, 2023. The March 31, 2024 loan total is made up of 41% fixed rate loans, 48% floating rate loans, and 31% variable-rate loans. I will now turn it over to Charlotte Rasche.

Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.

Today's first question comes from Peter Winter with D.A. Davidson.

First, I just want to congratulate you guys on closing Lone Star. I can't imagine the level of frustration just given how long it took to close. But I was just wondering, given that experience, are you still interested in bank M&A or kind of on pause for a little while?

It's a good question, and we constantly reassess that. The closure of the Lone Star transaction was quite challenging. It faced delays from the DOJ, which took a significant amount of time, and we incurred considerable expenses trying to expedite it. Then we dealt with obtaining FDIC approval, which also took time. We have thought about this extensively, and the landscape in Washington has certainly changed. Completing deals has become more difficult, and it's important to carefully consider which deals to pursue. However, we remain engaged in the M&A space and expect to pursue further opportunities. Moving forward, we will be more deliberate in our transaction decisions, as it seems that the current environment may not support the same level of activity as before. Nevertheless, we still have a strong interest in M&A.

Got it. And then just separately, it's nice to see the increase in net interest income sequentially. I'm just wondering, can you talk about what the impact with Lone Star is in the second quarter to net interest income and just kind of your outlook in the second half of the year?

We assessed the impact of Lone Star on our financials, and our analysis indicates that it will positively affect both our margin and net interest income. We expect it to contribute a few basis points to our margin. Overall, we believe that Lone Star will have a beneficial long-term effect as our assets and theirs are repriced.

I would also mention that the net interest margin showed improvement. It likely would have improved more this quarter, but regulators are requiring most banks to maintain higher liquidity on their books. In the past, we consistently had a line of credit because we borrowed in advance of the runoff from our $2 billion in bonds that mature each year. Additionally, organic growth of 2% to 4% in deposits provided us with nearly another $1 billion. We would typically borrow in advance and not leave much cash idle. However, regulatory agencies are now emphasizing the need for higher liquidity. If we didn't have to focus on building that up, we could have reduced our loans and borrowings, resulting in a higher margin.

Could you provide an update on the margin outlook going forward? You've already shared some guidance for the first quarter, and I'm curious about what's expected next.

I believe we are in a good position and still on track to achieve what we committed to.

I agree. And with the addition of Lone Star, I think the projection is we increased our NIM projects a little few points higher than we projected. So that's been NIM accretive.

I’d just be glad to get back to where we were like more...

So I think the guidance we provided for 24 months, 3.30% I think we can maybe estimate about 3.40% to 3.50% in 24 months.

Just looking at the short term, I believe we set a goal of around 3% for six months and slightly better by year-end. Everything we mentioned appears to be aligning with the guidance we provided in the previous earnings announcement. While circumstances can always change, I feel we are on the right track.

The next question comes from Michael Rose with Raymond James.

Just a few on Lone Star, maybe for Asylbek. I think you guys had talked about kind of a day 2 provision addition. I know this is going back like a year of around, I want to say $12 million. I just want to see if that holds. And then what the accretable yield addition will be as it relates to Lone Star, again, I think things have changed. I appreciate the margin guidance, but was just looking for those?

We are still finalizing the valuation of Lone Star's loan portfolio. We are at a preliminary stage, and this is subject to change. The day 2 accounting could fall between $8 million and $12 million. Although we initially provided guidance of $10 million to $12 million, it now seems we might be closer to the lower end of that range. As for the accretable yield, our preliminary estimate suggests it will be around $1.5 million to $2 million in fair value income on loans per quarter, which we anticipate will total between $9 million and $12 million.

Okay. That's very helpful. And maybe just a follow-up. I think Kevin is in the room, I was asked the warehouse question came in a little bit better this quarter. Just wanted to kind of see the outlook maybe for the second quarter now that we're entering kind of a more seasonal pattern, but understanding that mortgage rates have gone up and there's a lack of supply?

Yes, it's been moving around, Michael. For Q1, it started off pretty bad and rallied really nicely in late February and throughout March to pull that average up probably $60 million or $70 million more than we were thinking when we talked back in January. I'd say for Q2, I'd peg a number of around $900 million on average for the quarter. Through last night, we're somewhere in the 870s, $873 million, $874 million average so far for the quarter. Rates have ticked up. I might have gone a little higher than $900 million, but with this tick-up, I think $900 million is probably a safe average number.

I just want to correct myself. For the loan starts of $1.5 million to $2 million, the annualized figure would be between $6 million and $8 million, not $12 million, which I previously stated. I just want to clarify that.

I was thinking about total.

For Lone Star that will be $6 million to $8 million annualized.

Got it. Okay. Helpful. And then maybe just finally for me. Asylbek, I appreciate the expense guide for the second quarter. But as those cost savings are realized, I think more in earnest in the fourth once you get past operational conversion, is it plausible that noninterest expenses would kind of stay in that think you said $141 million to $143 million range kind of through the end of the year. Is that fair balancing the kind of the puts and takes on the cost savings with just normal expense growth?

Yes, I would agree. I think that right now, sitting in project now cost, I think, $141 million to $143 million quarterly, I would say, throughout the year, will be good guidance unless something changes.

The next question comes from Dave Rochester with Compass Point.

Congrats again on the deal close. Just wanted to go back to your comments on the margin. You gave a lot of good color on the accretion and the 6- to 24-month look. There are a lot of moving parts of the deal coming in. And just with everything baked in, what do you think is a good range for the NIM for 2Q at this point?

For 2Q, I think what we see in the past few quarters, our margin accelerating. So I would say probably sitting right now with the information we have another 4 to 5 basis points increase in margin in the second quarter.

Okay. And is the idea to continue to run the securities book down and use that liquidity to fund either loan growth or reduction on the borrowing side?

Yes. Longer term, yes, we are still building a little cash, as David said at the onset for regulatory purposes. They'd like to have a little higher cash. We're getting closer on that cash build. But longer term, that's the use of the bond proceeds. We paid down the debt if it's not being chewed up by loan growth.

Yes. And then how much cash do you guys think you need ultimately?

It's a work in progress. I think what makes the regulators happy. But our gut is somewhere around ...

$1.5 billion to $2 billion, I think that's the range we're working on right now.

Okay. And then switching to capital real quick. I think you've only been above a TCE ratio of 10% for more than one quarter, maybe once that I can remember, and that was about 5 years ago, right, before you announced another deal. So I was curious, it sounds like you're still interested in deals. What do you think your prospects are over the next year at this point? Just given where rates are and whatnot, what are the conversation levels like today? And do you still think you need to build capital from here to do a potential deal? Or can you just maintain these ratios here and maybe start returning a little bit more capital through a more regular buyback?

There are quite a few questions in there. I'll address the first one. We are still having conversations and continue to engage with Lone Star. It can be frustrating after putting in so much effort, but the reality is that we will continue our pursuit and likely ramp up our efforts. We aimed to finalize the Lone Star deal, and even now we are focused on operational integration while also working on other potential deals. The likelihood of entering into something new is strong, and I don't have any doubts about that. However, we want to be very thoughtful about our decisions to ensure they are beneficial for the bank, the shareholders, and enhance the value of our franchise. Those are the factors we are considering.

And in terms of the buyback, what do you think about that?

We currently have a significant amount of capital and believe that the situation has stabilized. Following the Silicon Valley deal and Signature going public, there was a lot of uncertainty. However, confidence is returning. If our stock price decreases, as demonstrated by the number of shares repurchased in the first quarter, we are prepared to continue buying back our stock. We recognize that having substantial capital is a fortunate position to be in, and we plan to utilize it at an opportune moment for stock buybacks.

The next question comes from Catherine Mealor with KBW.

I would like to follow up on the relationship between accumulating excess cash and borrowings. Can you provide an update on your margin outlook? Do you still feel that, despite needing to maintain a bit more liquidity, there is a way for your margins to approach the 3% range by the end of this year? Or is it possible that the margin may be slightly lower while the balance sheet expands? In that case, net interest income would remain comparable, but it would be a trade-off between the two factors.

I'll start off and say yes, but Asylbek may want to clarify.

No, I think the guidance stays as pretty because of 2 dynamics. First of all, we're still repricing our securities from 2% to 5%, we're getting on the cash with the excess cash we're having. That's dynamic still working out. And also with the addition of Lone Star, as I mentioned, that helps us. So I think with those things, I think 3% should be still reasonable assuming, but a wild card is a deposit, right? So how we manage deposits. But so far, we are able to manage deposits. So if it continues as we go, I think 3% should be still the guidance we stick by end of the year.

Yes. I mean, I think that's true. I mean the deposits do seem to have stabilized and again or something like that change or there was some another black swan out there that happened that, that can always change the dynamics. So just keep that in mind.

Yes. I think finalization of the cash build up has been taken into consideration in the margin aspect. So that's in there, that's built in there.

That's great. And that 3% too is also without any rate cuts. And it might be easier to get there if we see some rate cuts. Is that a way to think about that?

Yes. The model is based on the static balance sheet without any rate changes.

But again, even if it changes our model shows it would be just a few basis points, a couple of basis points. I mean even if it went down even 200 basis points, which I don't think it is, it still would only be 3 or 4 basis points is a difference than what we're modeling.

That's correct because we are very neutrally positioned.

If interest rates increased by 100 basis points, our improvement would actually be 5 basis points or 4 basis points.

That's correct.

Great. Regarding growth, you mentioned earlier that the expected growth rate for the year is between 3% and 5%. This quarter has been challenging for everyone. How do you view growth for the second half of the year?

Kevin, do you want to?

Yes. We said 3% to 5%. First quarter was a bit challenging. We squeaked out a little bit of growth, April has been equally challenging. So we haven't seen any spurt in growth rate. So if we said 3% to 5% for the year, I'd say we're probably on the lower end of the 3% to 5%. I don't know if you agree, David.

Yes, I do. When you watch CNBC, you see that unemployment is very low and inflation is under control, indicating a strong economy. However, when you speak with some of your customers, particularly in the commercial sector, you notice that they are holding back and waiting to see what happens with interest rates. For example, customers working on plants along the Gulf Coast mention that they are sending fewer crews for turnarounds this year and are still laying off employees. This suggests a lag in the economy; I believe it will slow down, and many business leaders are observing this trend. I don't foresee a recession, but I also don't think the economy is as strong as many claim it to be.

Very helpful.

I'd just add, one of the things we've got that maybe is a little wind at our back potential is our unfunded commitments on unfunded portions of construction loans are still running at somewhere in the $1.6 billion range, I think, $1.6 billion to $1.650 billion. So we still have a lot of fundings. As you know, we require all the equity to go in before we start funding up. So that's been a relatively stable number, but I do think there's some opportunity for growth through just unfunded commitments, finally funding up.

The next question comes from Brandon King with Truist.

So, saw that we had some noninterest-bearing outflows in the first quarter. So could you just characterize what you're still saying within your deposit mix? And when do you think those DDA balances will stabilize?

Let me consult my crystal ball. From what we can observe, it does seem to be stabilizing. However, providing specific dates or predicting how much it will decline would be unrealistic. Based on our observations, it appears to be stabilizing, but there are still shifts happening. Some of the noninterest-bearing deposits and lower interest-bearing deposits are moving into money market accounts and CDs. This transition seems likely to continue. Overall, we believe it is on the path to stabilization, assuming there aren't any announcements of bank failures or similar issues.

I agree. As we mentioned earlier, our core deposits that excluding public funds, has increased in Q1, but what we see dynamics like Mr. Zalman mentioned is that some people are taking their noninterest-bearing to putting it in the CD with specialty programs we have. So we're not losing customers just repricing. So we're still seeing lag effects on those deposits. But overall, we feel good where we are on deposits currently.

But on a percentage of deposits, CDs in our bank, we're probably still at 10% or 12%.

Yes, that's 14%. So that will probably still continue to grow, I don't know.

14%. So that will probably still continue to grow, I don't know.

Yes, it's continued to grow, but being a short term, I mean, we can reprice it within. If you look at our CD portfolio, 65% get repriced in the 6 months and 90% within a year. So it's a very short-term duration for those CDs.

What does appear to have come down is the concern over FDIC insurance. I mean, that could change tomorrow if something came out in the news that disturbed people, but just in my conversations with existing customers and potential new customers, they don't ask about the insurance to the extent that they did going back 6, 9 months ago. There's still a lot of rate competition, but the insurance issue has waned a bit. So that has resulted in some stabilization of deposits.

Okay. And with the NIM outlook, what does that assume from a deposit standpoint?

If you examine our deposits, our period-end deposit cost in March was $142 million. In our model, it slightly increases to around $145 million to $150 million in deposit costs. On the loan side, the blended rate for loans in January, February, and March averaged between 8% and 8.5%. That is what is factored into our model.

Okay. And it stays at that level, I guess, through the rest of the year. Is that kind of what you're assuming?

Yes. We do.

It's a static model.

I don't think we have specific numbers, but let's say...

You need to do some of your own work, Brandon; we can't get you...

The next question comes from Manan Gosalia with Morgan Stanley.

Before you put that crystal ball away, I have one more on deposits. Do you think that with the change in rate expectations and the fact that you're seeing a little bit of a slowdown on loan demand, would any of your existing customers revisit their surplus cash balances and see if they can put more money to work elsewhere, especially on the commercial client side?

I'm not completely sure I understood your question, but I think you're asking whether our commercial customers will move their money elsewhere due to the slowdown. My intuition is that typically when interest rates decrease, customers tend to leave more money in their accounts instead of constantly seeking alternatives. I believe that as interest rates drop, it will likely be easier for us to maintain higher balances with commercial customers. However, if interest rates remain stable or increase, and customers notice they can earn 4% or 5% elsewhere, they will actively seek to utilize that money. Ultimately, if short-term interest rates decrease, it should make things easier for us.

Yes, Manan, this is Kevin. I believe most of that has already happened. They were using extra funds to pay down lines of credit, which led to an increase in unfunded commitments as they used DDA balances to settle loans. If they had extra funds left, they were reaching out to us for a special rate or some sort of rate adjustment. While this isn’t completely over, I don’t expect it to escalate further unless something unusual occurs.

I think it's a good point, Kevin. We talked about that before. Most of that has happened already, where they're starting to use their money on deposit.

Got it. Yes. That's helpful. I was thinking about it more from the point of view of if we get fewer rate cuts this year or do people just put their money elsewhere. But yes, the color you gave is helpful. And maybe to follow up on the loan growth question, is it just a function of rates? Is it a lot more pressure that you're seeing on the economy too? And the reason I ask is because a lot of your peers are looking for a major inflection in loan growth in the back half of the year, even without too many rate cuts. So I was just hoping to get some more color from you on what you're seeing on the loan growth side?

We agree that the latter half of the year might see us achieving a growth rate of 3% to 5%. However, based on current observations, it could lean towards the lower end of that range. The situation seems more related to the back half of the year, particularly due to interest rates. There's significant new construction, especially in multifamily and retail sectors, but it's challenging to make these projects viable at today's rates. When developers aim for any kind of premium, they are facing rates of 8.5% or 9%, which requires substantial equity to meet our underwriting standards. Many are hesitating, requiring 40% to 55% equity just to make the figures work. Consequently, the return on equity diminishes, and the return on costs isn't very appealing, leading to a slowdown in activity. While there are still some projects coming through, like an occasional strip center that is pre-leased, the volume isn't what it used to be.

In general, while banks may express a desire for significant loan growth, most currently maintain a high loan-to-deposit ratio. With the focus on liquidity and regulatory oversight, banks will need to evaluate how much loan growth they genuinely want alongside their liquidity needs, unless there is a shift that brings about organic deposit growth. These factors will need to be carefully assessed, as they play a crucial role in the overall landscape. I hope that clarifies my point.

That's helpful. I was surprised by the emphasis on liquidity even for a bank of your size. Could you elaborate on the liquidity aspect? Do you need to maintain a certain level of cash on your balance sheet, or can that eventually be allocated to other high-quality liquid assets like treasuries or ginnies?

I think essentially, they want it to be clear that in a bank like ours, we have $16 billion in available funds and we can easily access lines of credit at the Federal Home Loan Bank and the Federal Reserve. We have consistently borrowed money due to this position. However, regulators are becoming more insistent, and I believe they really want us to maintain cash on hand overnight. So, while it seems unusual, that is the current reality.

The next question comes from Jared Shaw with Barclays.

I think most of mine were hit, but maybe just a little more detail on energy lending. You had good growth there. What's the appetite for that to continue to grow and maybe grow as a concentration as well?

I don't see it growing to a much larger percentage of our total loan book than it is now. The growth in the quarter was one particular transaction it was large. It was to a customer that keeps, I think, $150 million on deposit with us...

As much borrow for that fund deposits...

It's much more on deposits with us than they borrow. They were making an acquisition and gave us the opportunity to own some money. It was a pretty large deal and accounted for all of the growth in the energy book, all right.

Yes. I think it's safe to say that we're not afraid of energy, but we're trying to be particular.

We are being selective.

Okay. That's good color. And then going back to the question on DDAs. If we look at average versus end of period, it feels like you had some good growth in DDAs going into March. Was there anything unique about that? Or is that the type of pace do you think that potentially we could start seeing resume?

Yes, I was going to mention earlier in our discussion that we observed an increase in DDA and deposits in March, which continued through tax day. However, as is typical each year, we experienced a significant dip after tax day. We were feeling positive right up until the 16th, but then we noticed a large outflow of money from DDA at the bank due to tax payments. Looking back this morning, we found that this trend is not unusual compared to other Aprils in the past, although we excluded the COVID period since it was atypical then. We reviewed data from several leap years to determine if this behavior is typical for April, and it seems to be consistent. We will see if the returns follow the usual pattern in May, but we are somewhat excited and relieved to witness the uptick towards the end of March and into April.

Yes. Historically, it does recover. Usually, it happens primarily in the last quarter of the year with most of the write-offs. We typically have a really good first quarter, then the second quarter is moderate, and the third quarter tends to be challenging for us. The fourth quarter is when we have historically shown growth in deposits overall for the year.

Okay. And then just finally for me. As we look at your deposit funding, it's been great. Any expectation for where peak cumulative deposit betas will top out?

Yes. I mean we do see a little bit lag, but what we see that the increase in the rate is decelerating. So this is very positive. But as we've mentioned, that we still see some customers moving their noninterest-bearing deposits to interest-bearing deposit, which is driving up the cost. I think there will be still a lag effect, but it's a smaller pace. Q1 was a cost of deposits to 37 basis points, yes for $100 up. So we do expect a little bit increase, but it's at a slower pace.

The next question comes from Jon Arfstrom with RBC Capital Markets.

We haven't touched on fee income, I guess. So it looks like a pretty typical quarter to me, but anything you would note on fee income trends and expectations from here?

I think fee income is, I would say, normal. We saw a good uptick in a little bit of trust income. We had one good fees on the trust income, I would say, it wouldn't be probably nonrecurring related to some oil services we did. But overall, fees, I would say, is normal. I mean that's what we expected, nothing unusual.

You have to be aware of what the CFPB is saying, as that can impact rules and regulations.

Yes, they don't like fees. That's for sure. Tim, you talked about bringing down NPAs and you gave us a number, and it looks like you've moved a chunk since quarter end, but can you talk a little bit about what you expect for bringing those balances down and how material that might be?

Unless we experience a significant negative surprise, I don't anticipate substantial growth beyond the current level. Nearly 50% of our nonperforming assets resulted from the First Capital acquisition, and while there might be a slight increase, we believe it is more likely to stabilize. Our team is effectively managing collections and addressing these nonperforming assets, so I would be quite surprised if there were a dramatic rise from this point.

And as Randy mentioned to me, two of those loans, which total about $20 million are really acute care centers, and they were having a problem leasing onto them, and they did get them leased. And even during that period of time, the investors have about 35% real cash into the deal. So I think as the lease matures, and they can't get it, they'll be able to get it and sum it out into the secondary market, but that takes a while where they can show some performance because they'll want their money out too. So we have a couple of bigger, larger deals that they're working together to take us some time to get them out.

Okay, that's helpful. I have a smaller question. On Slide 15 of your presentation, you mention the non-owner-occupied office commercial real estate, which is approximately $500 million. I'm curious about how that portfolio is performing. Is it doing better or worse compared to the performance of the other commercial real estate?

Over a long period, that has been a solid performing portfolio for us and many other banks, as those businesses are essential to their operations. It's the last thing they will let go of, unless they are in serious trouble and unable to maintain the real estate, which is often critical for generating revenue across the business. For over 20, 30, or even 40 years, this has been a very successful segment, particularly for us. It's been well underwritten, and it's uncommon to see one of these loans even on a watch list.

Those are the customers that they want to own their building. They don't have a CFO saying leverage up. They want to own their building and pay it all.

It's been a really good book for us.

This concludes our question-and-answer session. I would now like to turn the call back over to Charlotte Rasche for any closing remarks.

Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.