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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, and welcome to the Prosperity Bancshares, Inc. First Quarter 2024 Earnings Conference Call. [Operator Instructions]. 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 team 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 will 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 3 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 3 months ended December 31, 2023. The change was primarily due to higher interest income and lower FDIC assessments. For the 3 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%. The 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. The loans increased [indiscernible] or 10% compared with the $19,334 billion at March 31, 2023.
The 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 [indiscernible] at December 31, 2023. Deposits increased $171 million or 60 basis points compared with the [ $27.4 ] million 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 3 months ending March 31, 2024 compared with 2.75% for the 3 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 road. 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 3 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 3 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 [indiscernible] adjustments, the net interest margin for the 3 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 3 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 3 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 onetime merger-related costs of $6 million to $8 million and 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 3 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 at [indiscernible] modified duration of 4.1 and projected annual cash flows of approximately $2.1 billion. And 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 [indiscernible] or 34 basis points at December 31, 2023. This represents a 15.34% increase. Since March 31, 2024, [indiscernible] of nonperforming assets have been removed or put under contract for sale. For March 31, 2024, nonperforming asset total was comprised of [indiscernible] million in loans, $97,000 in repossessed assets and [indiscernible] in other real estate. . Net charge-offs for the 3 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 [indiscernible] 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.
[Operator Instructions] 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?
Well, it's a good question. We have to ask ourselves that all the time. As you know, it was very difficult closing the Lone Star transaction. First, it was held up by the DOJ took quite a while. We spent a lot of money trying to get it out of there. And then we had a time getting it from the FDIC approved until now. But -- we thought about it a lot. I don't -- it was hard. I think things have changed in Washington. There's no question about it. It is hard to get deals done. You probably really have to think about the deals you want to do. But the answer to the question is, yes, we're still into the M&A world, and we'll probably still do more. It's just -- I think that it will be more -- it will be really thoughtful before we determine the transaction that we want to do.
I don't know that people can just do all the transactions that they used to do. I don't know that the climate is even right for that right now. But the answer is still yes. We are interested 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?
Peter, we looked at our impact of Lone Star on our book and from the -- I'll talk about a little bit margin. When we run our models, it's accretive to the margin and net interest income. So I think it's going to be a few basis points on margin. So -- but considering Lone Star will be positive in the long term as the assets repriced ours and theirs.
I would also say, Peter, that the net interest margin did show the improvement. It probably would have shown a more improvement this quarter, but the regulators are requiring most banks to keep more liquidity on their -- on their books. And in the past, we always had a line of credit because we borrowed in front of what our runoff of our $2 billion in bonds that rolled off every year. We also just organic growth of 2% to 4% of deposits gave us almost another $1 billion. So we would always borrow in advance, not leave a lot of money on the sidelines. And in today's world, the regulatory agencies really are pushing to keep more liquidity on hand.
And again, if we wouldn't have had to do that and build that up, building that up, we would have paid our loan down and our borrowings down and our margin would have been somewhat higher.
Just if I could follow up. Just -- what is the outlook then going forward on the margin? You've given us some guidance in the first quarter. I'm just wondering what the outlook is?
I think that we're on -- we're -- I think we're right there. I mean I think that everything that we had said, we're still on course to do what we said we would do.
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 [indiscernible].
I'd just be glad to get back to where we were like more .
So I think the guidance we provided the 24 months, [indiscernible] I think we can maybe estimate about 340 to 350 in 24 months.
Just looking in the short term, though, I think that we're -- the goals we had given to you guys in 6 months being somewhere around 3% and a little bit better than that at year-end. So I think everything that we said seems to be going in the direction that we gave guidance for in the previous earnings announcement.
So I think the model, again, something can always change, but I think that we're on course.
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?
Michael, related to Lone Star, we're still working on the valuation of their loan portfolio. And I would say we're getting the preliminary, but is subject to change as we finalize I think day 2 accounting could be between $8 million to $12 million. I know we provided guidance between $10 million to $12 million, but I think we could be between only $8 million to $12 million. So it's -- might be decreasing, but we're working towards that on the day 2 provision.
On accretable yield, it was also a preliminary number, but I think initially, it will be around between $1.5 million to $2 million fair value income on loans per quarter. That's what we estimated that's going to be $10 million to -- $9 million to $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 [indiscernible] average so far for the quarter. Rates have ticked up. I might have gone a little higher than [ 900 ], but with this tick-up, I think 900s probably a safe average number.
I just want to correct. One -- yes, for the loan start of $1.5 million to $2 million, that's annualized would be on the $6 million to $8 million, not $12 million, I said, I just want to as the [indiscernible] .
I was thinking about total .
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 [indiscernible] 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 to $143 ] 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 point 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 1 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's quite a few questions in there. I'll try to take the first one. There still are conversations. We had conversations going even working, trying to close to Lone Star. I would say we did -- sometimes you just get frustrated with all the hard work that you have and you want to -- should you keep doing it. But the truth of the matter is, yes, we are, we'll continue. We'll probably start pursuing it more than we had. I think we wanted to get -- we wanted to get Lone Star done, and we still -- even right now with Lone Star we're trying to get it put together, talking about the operational integration, and then we'll start working harder on some of the deals that we have been working on. But the odds are good, that we will be able to enter into something. I don't think there's any question about that. It's just -- again, I think before we do something, we just really want to be thoughtful what we do, and it does -- it's accretive to the bank, to the shareholders, and it adds to the value of our franchise. So those are just the considerations that we're looking at.
And in terms of the buyback, what do you think about that?
Okay. The buyback, we do have a lot of money now. I think things have stabilized. Everybody -- after the Silicon Valley deal and the Signature going public, I think everybody was worried about everything. I think things are becoming more stable right now. People are starting to feel better. And with that, I think if our stock price becomes -- if it goes down, you saw how many shares we bought in the first quarter, and I think that I think will continue to be buyers of our stock, too. I think we do have -- we do have a high-class problem with a lot of capital, but we'll use it when we think it's a real opportunity to buy our stock back.
The next question comes from Catherine Mealor with KBW.
Just a follow-up on the dynamics between building the excess cash and borrowings. Do you see -- do you -- maybe a follow-up on just the margin outlook? Do you still believe that even with having to hold a little bit more liquidity, you still see a path in your margin towards the end of this year to still get back near that 3% range? Or is that margin might a little bit lower, but the balance sheet maybe a little bit bigger. So -- it ends up the same, but it's a balance between those 2?
I'll start off and say yes, but Asylbek may want to correct .
No, I think the guidance stays as pretty because of 2 dynamics. First of all, we're still repricing our securities from 2% to [indiscernible] 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 other black swan out there that happened that, that can always change the dynamics. So just keep that in mind. So...
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. So this is -- the model is on the static balance sheet with no 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 .
And if interest rates went up 100 basis points, actually our -- it would improve by 5 basis points, 4 basis points.
That's correct.
Great. And then on growth, I think you had said before about a 3% to 5% growth rate for the year. I know this quarter was supposed to be [indiscernible] has been slow for everybody. How are you thinking about growth for the back 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. I mean it's -- when you turn on CNBC, and you see unemployment so low and inflation, just the economy is so good. But when you really squeeze down you talk to some of your customers, you see that your commercial customers are pulling back, waiting to see what interest rates are going to do. I think the -- we can talk to some of our customers are in wholesale, they see -- they see slowdowns and trying to get the supply chains are full. And so they're not able to sell as much so they're concerned.
And even when you talk to a lot of our customers who works and sometimes on the plants on the Gulf Coast, where you can talk to them. And they're like where they [indiscernible] crews into do turnarounds on these big plants. They're not doing as many this year and they're still laying people off. So I think there is a delay in the economy. I think it will slow down and most business people are watching. I don't think that we're any chance of a recession, but the economy, I don't think it's as good as everybody says it is either.
Very helpful.
I'd just add, 1 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 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 get my crystal ball here on the table, and I'll ask it. But the -- from what we can tell, Brandon, it's -- it does seem to be stabilizing. But again, to give exact dates and how much it will go down, we just -- it would be unrealistic for me to come up with that number. All I can tell you is from what we see it does seem to be stabilizing. But there's still -- you're still seeing in the bank where some of your noninterest bearing deposits and your lower interest-bearing deposits are moving sometimes more to money market accounts into CDs. So you're still seeing that transition. I think that will continue.
But for the most part, we think it is stabilizing, bearing that there's no bank that get announced some bank failure or something like that, we do think that we're on the road to stabilization.
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 that some people taking their noninterest-bearing to putting in the CD with specialty programs we have. So we're not losing customers just repricing. So we're still seeing lag effect on that -- on those deposits. But overall, we feel good where we are on deposit at currently.
But on a percentage of deposits [indiscernible] our bank, we're probably still at 10% or 12% about -- 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 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?
So if you look at our deposits, I think on March, our period-end deposit cost was [indiscernible]. I think we, in our model, it ticks up a little bit, but it's around [ $145 million, $150 million ] cost of deposits. And on the loan side, I think -- we put up loans blended rate in January, February, March, around [indiscernible] on average. So that's what's taking account in the 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.
Okay. Okay. And then just lastly, sorry if I missed this, but I think you referenced the step-up in NIM, but could you share the step-up in NII in the second quarter, just helpful just given the noise around the deal?
I don't think we have specific numbers, but we -- let's see ...
You got to do some of your own work, Brandon -- we can get back to the normal.
The next question comes from Manan Gosalia with Morgan Stanley.
Before you put that crystal ball away, I have 1 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 don't know if I understood the question exactly, but my gut -- I think what you're asking is will our commercial customers take money out and put it somewhere else with things slowing down. I would think if rates -- this is just my feeling, usually, when rates come down, the customers not using their money, they're not -- they're not pushing it, trying to find something to do with it every minute and they leave more in their accounts.
I would think as interest rates come down, you'll probably have an easier time with commercial customers, keeping their balances up. I think as interest rates stay where they're at right now or even higher, and they can see that they can get 4% or 5% somewhere, they're really trying to work that money. But again, I think that if the short-term interest rates come down, it would probably be easier on us.
Yes. Manan, this is Kevin. I think most of that has already occurred. They were using excess money to pay down lines of credit. So we saw unfunded commitments rising through this period of time as they took DDA balances and paid off loans. And then to the extent they still had excess money, they were calling 1 of us asking for a special rate or some kind of rate bumps. It's not all the way over yet, but I don't think it's going to get -- I don't think it's going to accelerate from here unless something really odd happening.
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 money.
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 -- back, I'd say, back half, but and that would be to get us to that 3% to 5% range. And it -- all I'm saying is it might tend towards the lower side of the range based upon what we're seeing today. But I think it could be more back-half related -- and a lot of this is related to rates. -- a lot of new construction in particular, call it, multifamily or whatever else, retail. It's hard to pencil these things out at these rates. If you're going to charge them any kind of premium, you're getting 8.5% or 9%, it takes so much equity to make that deal pencil out to our underwriting that people are just waiting. It's either put in 50% or 40%, 50%, 52%, 55% equity to make the deal work. And then your return on equity kind of gets so muted and your return on costs are not that great, people are just holding off. I mean we still see a [indiscernible] hey, somebody wants to build a strip center every now and then, and they've got it pre-leased, and we're doing a little bit of it, but not as much as we were.
In general, too, I think banks may say they want to have a lot of loan growth, but most of the majority of the banks have a pretty high loan-to-deposit ratio right now. And with the emphasis on liquidity and from the regulatory agencies, I think all banks are going to have to monitor how much growth they really do want to have in loans and have liquidity. -- unless the dynamics change where we start having organic growth in deposits. But those are all going to have to be taken into consideration, and that is really determined the -- a lot of the turf right there, basically. I don't know if I'm being very clear on that.
That's helpful. And I was surprised by the stress and focus on liquidity even for a bank of your size? So maybe if I can just follow up on the liquidity point. Is it -- do you have to keep a certain level of cash on your books? Or eventually, can you move that out to other sources of HQLA like treasuries or [indiscernible]?
I think basically, they want -- it's crazy because in a bank like ours, we have $16 billion in available funds as we can pick up the phone and call those lines are at the Federal Home Loan Bank and also at the Federal Reserve. And so we've always borrowed money because we've always had that position. But the regulators are -- they are becoming more insistent and I think that they're really going to really want you to keep that cash overnight on hand. So it's crazy, but it is what it is.
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 1 particular transaction it was large. It was to a customer that keeps, I think, $150 million on deposit with [indiscernible] ...
[indiscernible] on 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, alright.
Yes. I think it's safe to say that we're not afraid of energy, but we're trying to be particular.
Particular -- we remain particularly, right.
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 say earlier in that overall discussion, but I kept my [indiscernible] for a change pretty odd. We did see a pickup in DDA and deposits in March. It continued through tax day. And then like every year, tax day, it takes a pretty good sized dip. So we were feeling great right up to the 16th -- and then we woke up to a whole lot of money flowing out of DDA at the bank to make tax payments. And we were looking back at it this morning. It's not abnormal as to what it has been in other April in other periods of time, and we -- when we looked, we excluded the COVID period because everything was still wonky then.
So we look back over a bunch of years to say is that typical of April or not, and it's been pretty typical. We'll see whether returns the way it has typically returned in May or not. But we're a little bit excited, I guess, relieved to see the uptick towards the end of March and into April.
Yes. Historically, we -- it does recover. Usually, but again, it happens in the -- primarily in the last quarter of the year in that [indiscernible] most of it. We have a really good first quarter usually than we kind of the second quarter kind of middle and the third quarter is a tough quarter with us [indiscernible] the fourth quarter is when we historically have always shown our growth in deposits basically overall for the year. So ...
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 [indiscernible] we'll 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 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 [indiscernible]. So Q1 was a cost of deposits to [indiscernible] 37 basis points year [indiscernible]. 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 1 good fees on the trust income, I would say, it wouldn't be probably nonrecurring related to some old services we did. But overall, fees, I would say, is normal. I mean that's what we expected, nothing unusual.
I mean just -- you have to be cognizant of what the CFPB is always out there and what they're saying. So all of that stuff can change. But there's some rule that comes down, of course.
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 get significantly surprised in a negative way, I don't see it growing substantially above where it is. In essence, about almost 50% of our nonperforming assets came from the First Capital acquisition. And -- we think that's going to -- well, it may tick up a little more. We think it's more headed towards leveling out. And our people are doing a pretty good job of collecting these and working through some of these nonperforming assets.
So I would be very surprised if it went up dramatically from here.
And as Randy mentioned to me, -- 2 of those loans, which total about $20 million are really acute care centers, and they were having a problem people leasing 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 to. So we have a couple of bigger, larger deals that they're working get us take us some time to get them out.
Okay. Okay. Good. That's helpful. And then just 1 smaller item. On your deck or in your deck on Slide 15, you highlight the nonowner-occupied office CRE. It's only about $500 million. But -- just out of curiosity, how was that book performing for you? I'm curious if it's any worse than or better than in the other CRE performance?
Over a very long period of time, that's been a pretty good performing book for us and really a lot of other banks, it's those businesses, that's their lifeblood. It's the last thing to go for them. It's if -- they've got to really be in trouble and not keep the real estate going because that's generate [indiscernible] to generate all the other revenue in the business. So -- and I'm talking about over 20, 30, 40 years, it's been a really good book of business, and it's been particularly good here. It's well underwritten, and it's rare to see even on a watch list 1 of those loans.
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.
Nonowner-occupied piece, I guess, is the question for me? [indiscernible]
Heard that wrong. I'm sorry. It's performed very well. It's been stress tested. And I think we all these days stressed for up [ 300 ], but we don't stress test for up [ 500, 550 ]. We've been pretty fortunate in that book to be really low -- as you know, really low loan-to-cost lenders, which puts us in a really good position. There's so much equity in these deals. And being in a market where there's been a lot of population growth, a lot of in-migration from other states and so occupancy in those things has been pretty good, and it's up until recently, it's driven rents up to help withstand some of the rate increases. But it's rare. I think maybe back in January, Jon, I talked about a deal we had that that was coming back in. It was going to be repriced and I thought it was too low. I think we had like 8.25% something and we're going to have to move the right on this thing. And then I got back to the back of the package to the cash flows and realize that it can only get us a [indiscernible] coverage at 8.25%, but we were going from like a [indiscernible] -- and while we would have loved to go for 8.5, it would have put some stress on the cash flows. That's as close to a difficult situation, as I've seen.
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.