Q1 2024 Prosperity Bancshares Inc Earnings Call

Operator: Hello and welcome to the Prosperity Bancshares Inc. first quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad, and to withdraw from the question queue, please press star, then 2. As a reminder, this conference is being recorded. I would now like to hand the call to Charlotte Rasche. Please go ahead.

Hello, and welcome to the prosperity Bancshares, Inc. First quarter 'twenty 'twenty four earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on your telephone keypad and to withdraw from the question queue. Please press Star then two as a reminder, this conference is being recorded.

I would now like to hand, the call to Charlotte Rashi. Please go ahead.

Charlotte M. Rasche: 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 Tomanis, Jr., Chairman, Asylbek Osmonov, Chief Financial Officer, Eddie Safdie, Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Maze Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President.

Charlotte M. Rasche: Thank you.

Charlotte M. Rasche: Good morning, ladies and gentlemen, and welcome to prosperity Bancshares' first quarter 2024 earnings conference call.

Charlotte M. Rasche: 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.

David E. Zalman: Hey, Tim to manage junior chairman.

So back out Manav, Chief Financial Officer Eddie.

David E. Zalman: Eddie Saturday, 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.

Charlotte M. Rasche: David will start 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 Tomanas, 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 disclaimer. 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.

David E. Zalman: David will lead off with a review of the highlights for the recent quarter. He will be followed by also backups Manav, who will review some of our recent financial statistics and Tim to manage it well.

David E. Zalman: I'll discuss our lending activities, including asset quality.

Speaker Change: Finally, we will open the call for questions.

Speaker Change: Before we begin let me make the usual disclaimers.

Speaker Change: 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.

Speaker Change: Really 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 to impress severity bancshares filings with the Securities and Exchange Committee.

Charlotte M. Rasche: Additional information concerning factors that could cause actual results to be materially different from 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 FCC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now, I turn the call over to David Zalman. Thank you, Charlotte

Speaker Change: Including forms 10-Q, and 10-K and other reports and statements we have filed with the FCC.

Speaker Change: All forward looking statements are expressly qualified in their entirety by these cautionary statement.

Speaker Change: Now, let me turn the call over to David Zalman. Thank you Charlotte I would like to welcome and thank everyone listening to our first quarter 2024 conference call. We are excited to announce that on April one 2024, we completed the merger of Lone Star State Bancshares, Inc, and Lone Star Bank.

David E. 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 1st, 2024, we completed the merger of Lone Star State Bankshares, 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 Lone Star customers and associates to Prosperity and will work hard to win your trust.

Speaker Change: Headquartered in Lubbock, Texas.

David E. Zalman: The operational integration is scheduled for late October 2024, when Lonestar customers will have full access to our 288 full service locations. We welcome the lone star customers and associates to prosperity, and we will work hard to win their trust.

David E. Zalman: 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 its 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.

David E. Zalman: 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 three 3%.

David E. Zalman: For the first quarter of 2024, while sharing earnings with our shareholders prosperity repurchased 567692 shares of common stock during the first quarter of 2024. In addition to the quarterly dividend.

David E. Zalman: The 2023, Prosperities total capital return to shareholders from dividends and share repurchases was $278 million.

David E. Zalman: For the three months ended March 31, 2024, 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.

David E. Zalman: For the three months ended March 31, 2021 for the net income was $110 million or $1 18 per diluted common share compared with $95 million or dollar to per diluted common share for the three months ended December 31, two.

David E. Zalman: 23.

David E. Zalman: The change was primarily due to higher interest income and lower FDIC assessments.

David E. Zalman: Yeah.

David E. Zalman: 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%.

David E. Zalman: 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 12.0% to 6% and efficiency ratio was 49%.

David E. Zalman: The loans were $21,265,000,000 at March 31, 2024, an increase of $84,000,000 for 40 basis points, a 1.6% annualized increase from the $21,181,000,000 at December 31, 2023. The loans increased $1,931,000,000, or 10%, compared with the $19,334,000,000 at March 31, 2020. The loans, excluding warehouse purchase program loans and loans acquired in the merger of first bank shares increased $115 million or 60 basis points or 2.4% annualized during the first quarter of 2024. Deposits appear to have stabilized, and core deposits have increased modestly.

David E. Zalman: The loans were 21.265 billion at March 31, 2024, an increase of $84 million.

David E. Zalman: Our 40 basis points or 1.6% annualized from the 21.181 billion at December 31 2023.

David E. Zalman: The loans increased $1 billion $931 million or 10% compared with the $19 billion 334 million at March 31 2023.

David E. Zalman: The loans, excluding warehouse purchase program loans.

David E. Zalman: And loans acquired in the merger at first bankshares increased $115 million or 60 basis points or two 4% annualized during the first quarter of 2024.

David E. Zalman: Our deposits appear to have stabilized and core deposits have increased modestly the pause.

David E. Zalman: Deposits were $27,176,000,000 at March 31, 2024, a decrease of $4.3 million from the $27,180,000,000 at December 31, 2023. Deposits increased $171 million, or 60 basis points, compared with the $27.4 billion at March 31, 2023. Deposits excluding public fund deposits increased $109 million during the first quarter with no broker deposits. 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.

David E. Zalman: <unk> were 27.176 billion at March 31, 2024, a decrease of $4 $3 million from the $27.180 billion at December 31 2023.

David E. Zalman: Deposits increased $171 million or 60 basis points compared with a $27 billion 4 million at March 31 2023.

David E. Zalman: Deposits, excluding public fund deposits increased $109 million during the first quarter with no broker deposits purchased.

David E. Zalman: The net interest margin on a tax equivalent basis was $2 seven 9% for the three months ending March 31, 2024, compared with $2 seven 5% for the three months ended December 31 2023.

David E. Zalman: 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 non-performing assets total 83 million, or 24 basis points of quarterly average interest earning assets at March 31, 2024, compared with 72 million, for 21 basis points of quarterly average earning assets at December 31st, 2023. These are higher than our historical levels, primarily due to acquired loans. We expect to reduce our non-performing asset ratio to a more normal level within a year.

David E. Zalman: 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.

David E. Zalman: Our average net interest margin from 2012 to 2022 was $3 three 7% compared with our net interest margin of 279% for the first quarter of 2024.

David E. Zalman: 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.

David E. Zalman: Our 21 basis points of quarterly average, earning assets at December 31, 2023.

David E. Zalman: Our nonperforming assets.

David E. Zalman: Our 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.

David E. Zalman: 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 the Nation Business Climate and Job Growth. Texas added 369,600 non-farm jobs in 2023, the most in the nation.

David E. Zalman: The $2 four trillion dollars, Texas economy is now the eighth largest economy in the world larger that Russia, Canada, Italy, and others, Texas as a top state for Fortune 500 headquartered companies currently at 55 and was named the 2023 state of the year for <unk>.

David E. Zalman: Best in nascent business climate and job growth.

David E. Zalman: <unk> added 369600 non farm jobs in 2023, the most in the nation, we believe that Texas, and Oklahoma economies should outperform most other states.

David E. Zalman: We believe the Texas and Oklahoma economies 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 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.

David E. Zalman: As previously mentioned.

David E. Zalman: The merger of Lone Star State Bancshares was completed on April one 2024, and the operational integration is scheduled for late October 2024.

David E. Zalman: We're excited to have the lowest our associates on the prosperity team.

David E. Zalman: We continue to have active conversations with other bankers regarding potential acquisition opportunities and hope to continue to grow through the thoughtful mergers and acquisitions.

David E. Zalman: 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 will 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 disc.

David E. Zalman: 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. Now, I will turn our discussion over to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results that we achieved.

David E. Zalman: <unk> to also back us Manav, our chief financial officer to discuss some of the specific financial resort results that we achieved hasselbeck. Thank you. Mr. Zalman. Good morning, everyone net interest income before before provision for credit losses for the three months ended March 31, 2024 was too high.

Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone.

Asylbek Osmonov: Net interest income before provision for credit losses for the three-month end of 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-exempt basis was 2.79% for the three-month-ended March 31, 2024 compared to 2.75% for the quarter-ended December 31, 2023 and 2.93% for the Excluding purchase account 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 burning assets.

Manav: $38 2 million compared to $237 million for the quarter ended December 31, 2023, and $243 5 million for the same period in 2023.

Manav: The net interest margin on a tax equivalent basis was $2 seven 9% for the three months ended March 31st 2024 compared to 2.75% for the quarter ended December 31, 2023, and 293% for the same period in 2023.

Manav: Excluding purchase accounting adjustments the net interest margin for the three months ended March 31, 2024 was 2.76% compared to $2 seven 1% for the quarter ended December 31st 2023, and $2, 91% for the same period in 2023.

Manav: The first quarter increase in net interest margin was primarily due to reprice into higher yielding earning assets.

Asylbek Osmonov: Non-interest 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. Non-interest 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 non-interest expense to be in the range of $141 to $143 million.

Manav: 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.

Manav: Noninterest expense for the three months ended March 31st 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.

Manav: Beginning of 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 one 2024, and prosperity banks annual Merit increase.

Asylbek Osmonov: 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 of 2024. Additionally, during the second quarter of 2024, we expect one-time merger-related costs of $6-8 million and additional FDIC special assessments of approximately $3-5 million. In addition, the second quarter result will include purchase accounting provision expense related to the Lone Star acquisition. The efficiency ratio was 49.1% for the three-month-ended March 31, 2024, compared to 55.6% for the quarter-ended December 31, 2023, and 43.7% for the same period in 2023.

Manav: In the second quarter 2024.

Manav: Additionally, during the second quarter of 2024, we expect one time merger related cost of $6 million to $8 million and additional FDIC special assessment of approximately $3 million to $5 million.

Manav: Further second quarter results will include purchase accounting provision expense related to the Lone Star acquisition.

Manav: The efficiency ratio was 49, 1% for the three months ended March 31st 2024, compared to 55, 6% for the quarter ended December 31, 2023, and 43, 7% for the same period in 2023.

Asylbek Osmonov: The bond portfolio metrics at 3-31-2024 have a modified duration of 4.1 and projected annual cash flows of approximately $2.1 billion. And with that, I will turn over the presentation to Tim Tumanis for some details on loans and asset quality. Thank you.

Manav: The bond portfolio metrics at 331, 2024 have modified duration of 4.1 and projected annual cash flows of approximately $2 1 billion.

Manav: And with that let me turn over the presentation to Tim to manage for some details on loans and asset quality with Humana.

Tim Tomanis: Thank you, Asylbek. Non-performing assets. Headquarter on March 31st, 2024, totaled $83,811,000, which is 39 basis points, of loans and other real estate. This is compared to $72,667,000, which is 34 basis points at December 31st, 2023. This represents a 15.34% increase.

Tim: Thank you also back.

Tim: Our nonperforming assets at quarter end March 31, 2024.

Tim: Totaled $83 million $811000, which is 39 basis points of loans and other real estate.

Tim: This is compared to $72 million $667000.

Tim: 34 basis points at December 31, 2023.

Tim: This represents a 15.34% increase.

Tim Tomanis: Since March 31, 2024, $7,425,000 of non-performing assets have been removed or put under contract for sale. The March 31st 2024 non-performing asset total was comprised of $81,510,000 in loans, $97,000 in repossessed assets, and $2,204,000 in other real estate.

Tim: Since March 31, 2024, $7.425 million of nonperforming assets have been removed or put under contract for sale.

Tim: The March 31, 2024, nonperforming asset total was comprised of $81.510 million in loans.

Tim: $97000 in repossessed assets.

Tim: And $2 million $204000.

Tim: Other real estate.

Tim Tomanis: Net charge-offs for the three months ended March 31st, 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 31st, 2024. Also, there was no addition to the allowance during the quarter ended December 31st, 2023. No dollars were taken into income from the allowance during the quarters ended March 31st, 2024, and December 31st, 2023.

Tim: Net charge offs for the three months ended March 31 2024.

Tim: Were $2 million $143000.

Tim: Compared to net charge offs of $19 million $133000 for the quarter ended December 31 2023.

Tim: This is a $16 million $990000 decrease on a linked quarter basis.

Tim: There was no addition to the allowance for credit losses during the quarter ended March 31 2024.

Tim: Also there was no addition to the allowance during the quarter ended December 31 2023.

Tim: No dollars were taken into income from the allowance during the quarters ended March 31, 2024 and December 31 2023.

Tim Tomanis: The average monthly new loan production for the quarter ended March 31st, 2024 was $308 million, compared to $300 million for the quarter ended December 31st, 2023. Loans outstanding at March 31st, 2024 were approximately $21.265 billion, compared to $21.181 billion at December 31, 2023. The March 31st, 2024 loan total is made up of 41% fixed rate loans and 28% floating rate loans. 31% variable rate loan. I will now turn it over to Charlotte Rasche.

Tim: The average monthly new loan production for the quarter ended March 31 2024.

Tim: Was $308 million compared to $300 million for the quarter ended December 31, two.

Tim: 2023.

Tim: Loans outstanding at March 31, 2024 were approximately 21 $265 billion compared to 21 $181 million at December 31 2023.

Tim: The March 31, 2024 loan total.

Is made up of 41% fixed rate loans.

Tim: 28% floating rate loans, and 31% variable rate loans.

Tim: I will now turn it over to Charlotte Rasche.

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

Charlotte M. Rasche: Thank you Tim at this time, we are prepared to answer your questions our call operator will assist us with questions.

Operator: Thank you very much. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Today's first question comes from Peter Winter on DA Davidson. Please go ahead.

Charlotte M. Rasche: Thank you very much to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

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

Peter J. Winter: Good morning. 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. I was just wondering, given that experience, are you still interested in bank M&A or kind of on pause for a little while?

Good morning.

Peter J. Winter: First I just wanted to congratulate congratulate you guys are closing Lonestar I can't imagine the level of frustration just given how long it took to come.

Peter J. Winter: Lowe's, but.

Peter J. Winter: I was just wondering given that experience or are you still interested in bank M&A or kind of on pause for a little while.

David E. Zalman: Well, it's a good question. We have to ask ourselves that all the time.

Speaker Change: Well that's a good question, we have to ask ourselves at all the time.

David E. Zalman: As you know, it was very difficult to close the Lone Star transaction. First, it was held up by the DOJ, and it 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. You know, we thought about it a lot. I don't think it was hard. I think things have changed in Washington. There's no question about it.

Speaker Change: It was very difficult to closing the lone star.

Speaker Change: Transaction.

Speaker Change: First it was held up.

Speaker Change: By the Doj took quite a while we spent a lot of money.

Speaker Change: Trying to get it out of there and then than we had at <unk>.

Speaker Change: <unk> getting it from the FDIC approved until now but.

Speaker Change: We thought about it a lot I don't it.

Speaker Change: It was hard I think things have changed in Washington, There is no question about it.

David E. Zalman: 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 in the M&A world, and we'll probably still do more. It's just, I think that it'll be more thoughtful before we, you know, determine the transactions that we want to do. You know, I don't know that people can just do it. 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&S.

Speaker Change: It is hard to get deals done.

Speaker Change: Probably really have to think about the deals you want to do but the answer to the question is yes, we are still we're still.

Speaker Change: We're still into the M&A World and will probably still do more it's just I think that it will be more it would be really thoughtful before we.

Speaker Change: Determined the transactions that we want to do.

Speaker Change: Don't know that people can get to do.

Speaker Change: All of the transactions that they used to do I don't know that that the climate is even right for that right now.

Speaker Change: The answer is still yes. We look we are we are interested in M&A.

Speaker Change: Got it.

Speaker Change: And then just separately, it's nice to see the increase.

Peter J. Winter: And then just separately, it's nice to see the increase in net interest income sequentially. I'm just wondering what the impact of Lone Star will be on net interest income in the second quarter and just kind of your outlook for the second half of the year.

Speaker Change: Net interest income sequentially I'm, just wondering can you talk about what the impact.

Speaker Change: With Lonestar is in the second quarter, two net interest income and just kind of your outlook.

Speaker Change: In the second half of the year.

David E. Zalman: Peter, we looked at our, you know, impact of Lone Star on our book, and from there, I'll talk about a little bit of margin. When we run our models, it's accretive to the margin and net interest income. So I think there's going to be a few base points on margin, but considering Lone Star will be positive in the long term as the assets reprice ours and theirs.

Speaker Change: Peter we looked at our impact of Lone Star on our book and from there I'll talk about a little bit margin when we run our models.

Speaker Change: Accretive to the margin and net interest income so.

Speaker Change: I think it's going to be a few based upon the margin so but considering our lone star will be positive in the.

Speaker Change: Long term as the assets reprice ours and theirs.

David E. Zalman: I would also say, Peter, that the net interest margin did show improvement. It probably would have shown more improvement this quarter, but the regulators are requiring most banks to keep more liquidity on their books.

Speaker Change: I would also say Peter that the net interest margin did show the improvement it probably would've shell.

More improvement this quarter, but the regulators.

Speaker Change: Ah requiring most banks to keep more liquidity on on their own.

Peter J. Winter: And in the past, you know, we always had a line of credit because then we borrowed in front of our runoff of our $2 billion in bonds that rolled off every year. And we also just had organic growth of 2 to 4% in deposits gave us almost another billion. So we would always borrow and advance, not leave a lot of money on the sidelines. And in today's world, regulatory agencies are really 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.

Speaker Change: And their books and in the past you know, we always had a line of credit because we.

Speaker Change: We borrowed in front of what our run off of our $2 billion in bonds that wrote off every year and we also just organic growth of two 4% of deposits gave us an almost another 1 billion. So we would always borrow in advance not leave a lot of money on the sidelines in today's world.

Speaker Change: 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 building that up we would have paid our loan down and our borrowings down in our margin would have been somewhat higher.

David E. Zalman: Just like a 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.

Speaker Change: So just if I could follow up.

Speaker Change: Just what is the outlook going forward on the margin you've given us some guidance.

Speaker Change: In the first quarter.

Speaker Change: I'm just wondering what the outlook is.

Asylbek Osmonov: I think we're, I think that we're on, I think we're I think that everything that we had said, we're still on course to do what we said we would.

Speaker Change: I think I think that we're on.

I think we're right there I mean, I think that everything that we had said we are still on course to to do what we said we would do I agree and with the addition of lone Star's I think the projection is so we increased our NIM projections a little bit.

David E. Zalman: I agree, and with the addition of Lone Stars, I think the projection is that we increased our NIMH projection a few points higher than we projected, so that's been NIMH-creative. I'd just be glad to get back to where we were, much more. So I think the guidance we provided, the 24-month, 3-30, 3-40, I think we can maybe estimate about...

Speaker Change: Points higher than where project them. So that's been.

NIM accretive obviously be glad to get back to where we were much more so.

Speaker Change: So I think the guidance we've provided that they had 24 months 333.

Speaker Change: 340, I think we can maybe they estimate about 342015 to 24 months.

Peter J. Winter: Just looking in the short term, though, I think that we're, the goals we had given to you guys in six months are somewhere around 3% and a little bit better than that a year in. So I think everything that we said seems to be going in the direction that we gave guidance for in previous earnings announcements. So I think the model, again, something can always change.

Speaker Change: But just looking at the short term, though I think that where it goes we had given to you guys. It is six months being somewhere around 3% and a little bit better than that at year end. So I think everything that we said mhm seems to be going into the direction that we gave guidance for in previous in the previous earnings.

Speaker Change: The announcements.

Speaker Change: The model again, something can always change, but I think that we're on course.

Michael Rose: Thank you. The next question comes from Michael Rose with Raymond James. Please go ahead.

Speaker Change: Got it.

Speaker Change: Thanks, David.

Speaker Change: Thank you. The next question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Just a few on Lone Star, maybe for Asylbek. I think you guys had talked about kind of a day two provision addition. I know this is going back to a year of around, I want to say, $12 million.

Michael Rose: Hey, good morning, guys. Thanks for taking my questions just a few on on Lone Star.

Michael Rose: Maybe for also Bakken I think you guys had talked about.

Kind of a day two provision.

Provision addition, I noticed you've gone back like a year of around <unk>.

Michael Rose: I want to say $12 million. So just wanted to see if that holds and then.

Michael Rose: 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 we're just looking for it. Thanks.

Michael Rose: What the what the Accretable yield addition will be as it relates to Lone Star again, I think things have changed I appreciate that.

Michael Rose: Margin guidance, but we're just looking for those.

Asylbek Osmonov: Michael, related to LoanStar, we're still working on the valuation of their loan portfolio, and I would say we're getting the preliminary estimates, but it's subject to change as we finalize. I think day two accounting could be between $8 million and $12 million. I know we provided guidance between $10 million and $12 million, but I think we could be between only $8 million and $12 million. So it might be decreasing, but we're working toward that on the day two provision.

Michael Rose: Yeah.

Speaker Change: 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 finalized I think day to account and it could be between $8 million to $12 million I know when you provided guidance between 10 to 12, but I think it could be between only $8 million to $12 million. So it might be decreased.

Speaker Change: But we're working towards that.

Speaker Change: On the day two provision on Accretable yield was also preliminary number but I think initially it will be around.

Asylbek Osmonov: On our credible 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 estimate, and that's going to be between 10 to $9 to $12 million.

Between one five to 2 million.

Speaker Change: Fair value income on loss per quarter, that's what we estimate and that's going to be.

Speaker Change: Tend to what the 9% to $12 million.

Kevin J. Hanigan: Okay, that's very helpful. Maybe just to follow up, I think Kevin's in the room. I was asked if 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.

Speaker Change: Okay, that's very helpful.

Maybe just as a follow up I think kevin's in the room I was asked the warehouse question came in a little bit better.

Speaker Change: 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 I understand and then mortgage rates have gone up and there's a lack of supply.

Kevin J. Hanigan: Yeah, 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 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. You know, through last night, we were somewhere in the $870s, $873, $874 average so far for the quarter. Rates have ticked up. I might have gone a little higher than $900, but with this, it ticked up.

Kevin J. Hanigan: Yes, it's been moving around Michael.

Kevin J. Hanigan: For Q1, it started off pretty bad and rally really nicely in.

Kevin J. Hanigan: Late February and throughout March.

Kevin J. Hanigan: All that average up.

Speaker Change: Probably 60 or $70 million more than than we were thinking.

Speaker Change: When we talked back in.

Speaker Change: January.

Speaker Change: Say for Q2.

Speaker Change: I'd peg a number of around 900 million on average for the quarter you got.

Speaker Change: Through last night.

Speaker Change: Somewhere in the 870 873 874.

Speaker Change: Average so far for the quarter rates have ticked up I might have I might have gone a little higher than 900, but with this ticked up.

Speaker Change: 900, probably to say safe average number.

Asylbek Osmonov: [inaudible] So I just want to correct when I said for the loan starts at 1.5 to 2 million, that the annualized would be only six to eight million, not twelve million. I said, I was gonna say, how far out are you taking it? I was thinking about the total of a loan start that will be six to eight million annualized.

Speaker Change: And Michael.

Yes.

Michael Rose: So I just wanted to correct when I say, yes for the loan size of one $5 million to $2 million annualized would be only $6 million to $8 million or $12 million I said siler, etc.

Michael Rose: Yes, yes, because they help or how do you take that.

Michael Rose: I was thinking about total.

Michael Rose: But lone star that will be six to 8 million annualized.

Michael Rose: Got it. Okay, helpful.

Speaker Change: Got it Okay helpful. And then maybe just finally for me also Mark I appreciate the expense guide for <unk>.

Asylbek Osmonov: 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 non-interstitial expenses would kind of stay in that, I think you said 141 to 143 range kind of through the end of the year? Is that fair balancing the kind of puts and takes on the cost savings with just normal expense growth? Thanks. Yeah, I would do that.

Speaker Change: The second quarter, but as those cost savings are realized.

Speaker Change: I think more in earnest in the fourth once you get past operational conversion is it plausible that.

Speaker Change: Non interest expenses would kind of stay in that thank you said $1 41 to $1 43 range kind of through the end of the year is that is that is that fair balancing the kind of the puts and takes on the cost savings with.

Speaker Change: Just normal expense growth.

Michael Rose: Yeah, I would agree. I think that right now, sitting and projecting our cost, I think $141 to $143 quarterly, I would say throughout the year, will be good guidance unless something changes.

Speaker Change: Yeah, I would agree I think that right now sitting on a loop project now of course, I think 141 to 143 quarterly I would say throughout the year all been good guidance unless something changes.

Michael Rose: Great. Thanks for taking my questions.

Speaker Change: Great. Thanks for taking my questions.

David Patrick Rochester: Thank you. The next question comes from Dave Rochester with CompassPoint. Please go ahead.

Thank you. The next question comes from Dave Rochester, with Compass point. Please go ahead.

David Patrick Rochester: Hey, good morning, guys. Congratulations again on the deal close. Just wanted to go back to your comments on the margin. You have a lot of good color on the accretion and the 6 to 24 month look. There are a lot of moving parts in the deal coming in, and just with everything baked in, what do you think is a good range for the NIMM for 2Q?

Hey, good morning, guys and congrats again on the deal close.

David Patrick Rochester: Just wanted to go back to your comments on the margin do you have a lot of good color on the accretion.

David Patrick Rochester: And the 6% to 24 months look.

There are a lot of moving parts of the deal coming in and just with everything baked Jan what do you think is a good range for the NIM for <unk>.

Asylbek Osmonov: For 2Q, I think what we've seen in the past few quarters is the hourly margin accelerating, so I would say probably sitting right now with the information, we have another four to five base point increase in margin in the second quarter. OK.

Speaker Change: At this point.

Speaker Change: For <unk> I think what'd, we see past few quarter, our margin accelerating so I would say probably.

Jan: Sitting right now with the information we have another four to five basis point increase in margin in the second quarter.

David Patrick Rochester: And is the idea to continue to run the securities book down and use that liquidity to fund either loan growth or a reduction in borrowing?

Jan: Okay.

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

Jan: Go ahead, Kevin Yeah longer term, yes, we are still building a little cash as David said at the onset for.

Kevin J. Hanigan: 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 to that cash bill, but longer term, that's the use of the bond proceeds. We pay down the debt if it's not being chewed up by loans. Yeah. And

Kevin J. Hanigan: For regulatory purposes.

Kevin J. Hanigan: That's a little higher cash.

Kevin J. Hanigan: We're getting closer on that cash build but longer term that that's the use of the bond proceeds.

Kevin J. Hanigan: Pay down the debt.

Kevin J. Hanigan: If it's not being chewed up by loan growth and.

Kevin J. Hanigan: And then how much cash do you guys think you need ultimately.

Kevin J. Hanigan: It's a work in progress.

Speaker Change: It's a work in progress.

unknown: Transcripts provided by Transcription Outsourcing, LLC.

Well I think what makes the regulators happy but.

David Patrick Rochester: And then switching to capital real quick, I think you've only been above a TC ratio of 10% for more than one quarter, maybe once that I can remember, and that was about five 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 for the next year at this point, just given where rates are and whatnot?

Speaker Change: Our gut is somewhere around one $5 billion to $2 billion I think that's a range we're working out right now okay.

Speaker Change: 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 five years ago right before you announced another deal.

Speaker Change: So I was curious it sounds like Youre 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. So what are the conversation levels like today.

David Patrick Rochester: You know, what are the conversational 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?

Speaker Change: And do you still think you need to build capital from here.

Speaker Change: 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.

David E. Zalman: There are quite a few questions in there. I'll try to take the first one.

Speaker Change: There's quite a few questions in there I'll try to take the first one.

David E. Zalman: There are still conversations. We had conversations going on, even working, trying to close through Lone Star. I would say, you know, we did. Sometimes you just get frustrated with all the hard work that you have and you wonder whether you should keep doing it.

Speaker Change: They are still our conversations we had conversations going even working trying to coach the lone Star I would say.

Speaker Change: We did.

Speaker Change: Sometimes you just get frustrated with all of the hard work that you have and you're wondering should you keep doing it.

David E. Zalman: But the truth of the matter is, yes, we are, we'll continue, we'll probably start pursuing it more than we have. I think we wanted to get, you know, 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.

Speaker Change: Truth of the matter is yes. We are we will continue we will probably start pursuing it more than than we had I think we wanted to get you know we wanted to get Lonestar 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 will start working harder on some of the deals that we have been working on but the.

Speaker Change: <unk> are good that we will be able to enter into something.

David E. Zalman: 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 about what we do, and 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.

I don't think Theres 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 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.

David Patrick Rochester: In terms of the buyback, what do you think about that?

Okay in terms of the buyback would you think about that.

Speaker Change: Okay.

David E. Zalman: Okay. You know, the buyback, we do have a lot of money now. I think things have stabilized. You know, everybody, after the Silicon Valley deal and the signature in Republic, I think everybody was worried about everything. I think things are becoming more stable right now. People are starting to feel better.

Speaker Change: The buyback, we do have a lot of money now.

I think things have stabilized everybody.

Speaker Change: After the Silicon Valley deal and the signature and Republic, I think everybody was worried about everything I think banks are becoming more stable right now people are starting to feel better and with that.

David E. Zalman: And with that, I think if our stock price becomes, you know, if it goes down, you saw how many shares we bought in the first quarter. And I think that, I think we'll continue to be buyers of our stock too. I think we do have a high-class problem with a lot of capital, but, you know, we'll use it when we think it's a real opportune time to buy our stock back.

Speaker Change: I think if our stock price becomes.

Speaker Change: If it goes down.

Speaker Change: How many weeks shares we bought in the first quarter and I think that.

Speaker Change: We will continue to be buyers of our stock too I think we do that we do have a high class problem with a lot of capital but.

Speaker Change: We will use it when it when we think it's a real opportune time to buyer buying stock back.

David Patrick Rochester: All right, great. Thanks guys. Thank you.

Speaker Change: Alright, great. Thanks, guys.

Unknown Executive: Thank you. The next question comes from Kathryn Mueller with KBW. Please go ahead.

Speaker Change: Thank you. The next question comes from Catherine Mealor with <unk>. Please go ahead.

Charlotte M. Rasche: Thanks, Good morning.

Charlotte M. Rasche: Good morning, good morning.

Unknown Executive: Just a follow-up on the dynamics between building excess cash and borrowings. Do you see? Maybe a follow-up on just the margin outlooks. Do you still believe that even with having to hold a little bit more liquidity, you still see a path for your margin towards the end of this year to still get back near that 3% range? Or is that margin a little bit lower, but the balance sheet's maybe a little bit bigger, so NII maybe ends up the same, but it's a balance between those two.

Charlotte M. Rasche: And just a follow up on the dynamics between building the excess cash and borrowings do you see do you maybe just a follow up on just the margin outlook 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.

Charlotte M. Rasche: Is that margin a little bit lower but the balance sheet Emmanuel to figure. Some NII. If he ends up the same but you know kind of.

Charlotte M. Rasche: Balanced between those two.

Asylbek Osmonov: I'll start off and say yes, but Asylbek may want to correct me. No, I think the guidance stays at three because of two dynamics. First of all, we're still repricing our security from 2% to 540. We're getting on the cash with the excess cash we're having. That's the dynamics 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 three should still be reasonable, assuming, but as a wild card is a deposit, right? So how do we manage deposits?

Speaker Change: I'll start off and say, yes, but also back may want to correct me I think the guidance phase three because of two dynamics first of all we still repricing our securities from 2% to $5 40, we're getting on the cash or the excess cash with having that dynamic still working out and also with the addition of lone star as I mentioned that.

Speaker Change: Helps us so I think with those thing I think three it should be still a reasonable estimate, but it's a wildcard as deposit rates or how is it managed deposit, but so far we're able to manage deposit. So if it continues as we go I think three should be.

Asylbek Osmonov: But so far, we're able to manage deposits. So if it continues as we go, I think three should still be the guidance we stick by by the end of the year. Yeah, I mean, I think that's true. The pauses do seem to have stabilized, but again, if something like that changed or there was some other... Black Swan out there that happened, that could always change the dynamics. So keep that in mind. Yeah, thanks.

Speaker Change: There is still the guidance, we stick by by end of the year, Yes, I mean, I think that's true.

Speaker Change: I mean the.

Speaker Change: The deposits do seem to have stabilized and again, if something like that change or that was some another.

Speaker Change: Black Swan out there that happened that.

Speaker Change: It can always change the dynamics certainly keep that in mind.

Kevin J. Hanigan: Yeah, I think, you know, finalization of the cash buildup has been taken into consideration in the margin, you know, aspect, so. That's in there. That's built in there.

Speaker Change: I think you know.

Speaker Change: Finalization of the cash buildup.

Speaker Change: Has been taken into consideration in the margin.

Speaker Change: Uh-huh aspect so.

Speaker Change: That's in there that's built in there.

Unknown Executive: Okay, 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?

Speaker Change: Okay, that's great and that in that 3% to us also without any rate cuts in it might be easier to get there can we see some rate cuts is that a way to think about that yes. So this is about the model is on a static balance sheet with no rate changes.

Asylbek Osmonov: Yeah, so this is the model on the static balance sheet with no rate changes.

Asylbek Osmonov: 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 will, it still would only be three or four basis points as 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, it would improve by five basis points, four basis points.

Speaker Change: But again, even if it changes our model shows it would be just a few basis points a couple of basis points.

Speaker Change: Even if it went down even 200 basis points, which I don't think it is it still would only be three or four basis points of difference in what we're modeling that's correct because we have a neutrally positioned and if interest rates went up 100 basis points.

Speaker Change: They actually R. R.

Speaker Change: It would improve by five basis points four basis points.

Kevin J. Hanigan: Mm-hmm. That's correct. Great.

Speaker Change: That's correct.

Unknown Executive: Thank you for that. 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 slow, but it's been slow for everybody. How are you thinking about growth for the back half of the year? The Bulletproof Executive, 2013.

Speaker Change: Thank you for that and then on growth I think you had said before about a 3% to 5% growth rate for.

Speaker Change: For the year I know this quarter was supposed to be closed well for everybody. How are you thinking about growth for that for the back half of the year.

Speaker Change: Kevin do you want to.

Kevin J. Hanigan: Yeah, we said three to five. You know, the first quarter was a bit challenging. We squeaked out a little bit of growth. April's been equally challenging, so we haven't seen any spurt in growth, right? So if we said three to five for the year, I'd say we'd probably be on the lower end of that range.

Kevin J. Hanigan: We said three to five.

Kevin J. Hanigan: First quarter was a bit challenging we squeaked out a little bit of growth.

Kevin J. Hanigan: April has been equally challenging so we haven't seen any any spurt in growth rate. So.

Kevin J. Hanigan: If we said three to five for.

Kevin J. Hanigan: For the year I'd say, we'd probably on the lower end of the three to five.

David E. Zalman: I don't know if you agree, David. Yeah, I do, too. When you turn on CNBC and you see unemployment so low and inflation so low, the economy is so good, but when you really squeeze down and 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... You know, when you talk to some of our customers who are in wholesale, they see slowdowns in trying to get their supply chains full, and so they're not able to sell as much, so they're concerned.

Speaker Change: I don't know if you agree David Yes, I do I mean, it's.

David E. Zalman: And when you when you turn on CNBC and you see unemployment, so low and inflation.

David E. Zalman: The economy, there, but when you really.

David E. Zalman: Squeezed down you talked 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.

David E. Zalman: We can talk to some of our customers are in wholesale they see they see slowdowns and trying to get the supply change your pool and so they are not able to sell as much so their concern and even when you talk to a lot of our customers who works sometimes on the plants on the Gulf Coast.

David E. Zalman: And even when you talk to a lot of our customers who sometimes work on the plants on the Gulf Coast, you can talk to them, and they're laying, where they send crews in to 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 in any chance of a recession, but the economy, I don't think it's as good as everybody says it is.

David E. Zalman: Talk to them in their life.

What are the same crews into deep turnarounds on these big plants. They are 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.

David E. Zalman: It slowed down and most business people are watching it I don't think that I don't think that were and any chance of a recession, but the economy I don't think it's as good as everybody says it is either.

Kevin J. Hanigan: Very helpful.

David E. Zalman: Very helpful.

Kevin J. Hanigan: I 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 it somewhere in the billion six range I think billion six to a billion six fifty so we still have a lot of a lot of fundings is as you know we require all the equity go in before we start funding up so That's been a relatively stable number, but I do think there's some opportunity for, for, growth through just unfunded commitments finally funded.

Speaker Change: I'd just add one of the things we've got that baby is with a little wind at our back potential is our unfunded commitments.

Speaker Change: Unfunded portions of construction loans are still running somewhere in the 1 billion six range I think billion 61 billion $6 50. So we still have a lot a lot of fundings as you know.

Speaker Change: We require all the equity to go in before we start funding up so.

Speaker Change: Yes.

Speaker Change: That's been a relatively stable number but I do think there's some opportunity for.

Speaker Change: For.

Speaker Change: Growth through through just unfunded commitments finally funding up.

Unknown Executive: Right, perfect. Thank you for all the color. Thank you.

Speaker Change: Alright, perfect. Thank you for all the color.

Brandon Thomas King: Thank you very much. The next question comes from Brandon King with Truist. Please go ahead.

Speaker Change: Hmm.

Speaker Change: Thank you very much. The next question comes from Brandon King with Truest. Please go ahead.

Brandon Thomas King: So, we saw that we had some non-interest-bearing outflows in the first quarter, so could you just characterize what you're still seeing within your deposit mix and when do you think those BDA balances will stabilize?

Brandon Thomas King: Hey, good morning.

Brandon Thomas King: Hi, Brandon.

So you 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.

Brandon Thomas King: DDA balances will stabilize.

David E. Zalman: Let me get my crystal ball here on the table and I'll ask it but there's you know it from what we can tell Brandon it's it's it does seem to be stabilizing but again to get give exact dates and how much it will go down which is it would be unrealistic for me to come up with that number all I can tell you is from what we see they you know it does seem to be stabilizing where there's still you're still seeing in the bank where some of you're not interested in bearing deposits and your lower interest bearing deposits are moving sometimes more to money market accounts and and to CD so you're still seeing that transition I think that'll continue but but for the most part we think it it is stabilizing Bearing that there's no bank that get announced on bank deal failure or something like that, we do think that we're on the road to stabilization.

Speaker Change: So let me get my Crystal ball here on the table.

Speaker Change: I'll ask it but.

Speaker Change: From what we can tell Brandon it's it does seem to be stabilizing but again to get give exact dates and how much. It will go down which is it would be unrealistic for me to come up with that number all I can tell you is from what we see.

Speaker Change: It does seem to be stabilizing where there is steel.

Still seeing in the bank, where some of your noninterest bearing.

Speaker Change: Deposits and your lower interest bearing deposits our movie sometimes more to.

Speaker Change: Money market accounts and to CD, so you're still seeing that transition I think that will continue.

Speaker Change: For the most part we think it is stabilizing.

Speaker Change: Bearing that there is no banks that get announced and bank deal failure or something like that we do think that we're on the road to stabilization.

Asylbek Osmonov: I agree, and as we mentioned earlier, our core deposit that's excluding public funds increased in Q1, but what we see dynamics, like Mr. Zalman mentioned, that some people are taking their own non-interest bearing funds to put in the CDE, which special CDE programs we have. So we're not losing customers, just repricing, so we're still seeing a lag effect on that. On those deposits. But overall, we feel good where we are on deposit currently. But as a percentage of deposits on CDEs in our bank, we're probably still at 10 or 12 percent. We're at 14 percent now.

Speaker Change: Great.

Speaker Change: As we mentioned earlier, our core deposits. That's excluding public funds has increased in the Q1, but what we see dynamics like Mr. Zalman mentioned that some people taking their own noninterest bearing to putting the Cta, which special CDU programs. We have so we're not losing customers just repricing. So we still seeing lag effect on that on those.

Speaker Change: Deposit, but overall, we feel good where we are on deposit.

Speaker Change: Currently, but on a percentage of deposits Cds and our bank, we're probably still at 10 or 12%, 14%, 14%. So that that will probably still continue to grow I don't know, it's continued to grow but being a short term I mean, we can reprice within if you look at our CD portfolio, 65%.

Kevin J. Hanigan: So that will probably still continue to grow, I don't know. Yeah, it continues to grow, but being short-term, I mean, we can reprice it within. If you look at our CDE portfolio, 65 percent get repriced within a six-month, and 90 percent within a year. So it's a very short-term duration for those CDEs.

Speaker Change: Good repriced within the six month and 90% within a year. So it's very short term duration for those.

Brandon Thomas King: What does appear to have calmed 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, you know, going back six, nine 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.

Speaker Change: Cds.

Speaker Change: What does appear to have calmed down.

Speaker Change: Yes.

Speaker Change: Concern over FDIC insurance.

Speaker Change: I mean that could change tomorrow, if something came out in the news that disturbed people.

Speaker Change: But.

Speaker Change: In my conversations with existing customers and potential new customers.

Speaker Change: They don't want to ask about the insurance to the extent that they did going back six nine months ago.

Speaker Change: There is still a lot of rate competition.

Speaker Change: But the insurance issue has waned a bit.

Speaker Change: So that has resulted in some stabilization of deposits.

Speaker Change: Okay, and with the NIM outlook, what does that assume from a deposit standpoint.

Brandon Thomas King: Okay, and with the NIM outlook, what does that assume from a deposit standpoint?

Asylbek Osmonov: So if you look at our deposit, I think in March our period and deposit cost was $142,000. I think in our model, it ticks up a little bit, but it's around $145,000-$150,000 cost of deposit. And on the loan side, I think we put up loans at a blended rate of around $8 to $8.50 on average. So that's what's taken into account in the model.

Speaker Change: So if you look at our deposits I think on March hour.

Speaker Change: Period end deposit cost was 142, I think we in our model as it ticks up a little bit, but it's around 145, <unk> 50 of cost of deposits.

Speaker Change: And on the loan side I think we put out the lowest blended rate in January February March around 8% to 850 on average so that's what's taken into account in the model.

Brandon Thomas King: Okay, and it stays at that level, I guess, through the rest of the year. Is that kind of what you're saying?

Speaker Change: Okay, and it stays at that level I guess.

Speaker Change: The rest of the year is that kind of what youre assuming.

Brandon Thomas King: Yeah, we do. It's a static model. Okay, okay, okay, okay. And then just lastly, sorry if I missed this, but I think you referenced the step-up in NIMH because you shared the step-up in NIAI in the second quarter, just helpful in giving the noise around the deal. I don't think we have specific numbers, but we...

Speaker Change: Yeah.

Speaker Change: We do with the static decided model okay. Okay. Okay. Okay, and then just lastly, sorry, if I missed this but I think you referenced.

Referenced the step up in NIM, but could you shared the step up in NII in the second quarter just helpful. Just given the noise around the deal.

Speaker Change: I don't think it will have a specific numbers, but we.

Brandon Thomas King: You've got to do some of your own work, Brandon; we can't do it all. We can get back to him on that. Okay.

Speaker Change: Let's see you got to do some of your own work brand in Italy.

Speaker Change: Okay.

Speaker Change: Sure.

Speaker Change: Okay.

Speaker Change: We can get back to them.

Speaker Change: Okay.

Brandon Thomas King: Okay, I'll step back. Thank you.

Speaker Change: Okay I'll step back thank you.

Manan Gosalia: Thank you. The next question comes from Manan Gosalia of Morgan Stanley. Please go ahead.

Speaker Change: Thank you. The next question comes from <unk> with Morgan Stanley. Please go ahead.

Manan Gosalia: Hey good morning. You know, 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, or do you know, 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?

Morgan Stanley: Hey, good morning.

<unk>: You know before you put that crystal ball away I have one more in on deposits.

Morgan Stanley: Do you think that with the change in rate expectations and.

Morgan Stanley: The fact that you are.

Speaker Change: Seeing a little bit of a slowdown in loan demand Alright, Hey, you know what.

Speaker Change: Any of your existing customers revisit their surplus cash balances and see if they can put more money to work elsewhere, especially.

David E. Zalman: I don't know if I understood the question exactly, but my gut feeling is, you know, will our commercial customers take money out and put it somewhere else with things slowing down? I would think if rates come down, the customer is not using their money, they're not, they're not, they're not. Transcribed by https://otter.ai, 4 or 5 percent somewhere; they're really trying to work that money. But again, I think that if the short-term interest rates came down, it would probably be easier on us.

Speaker Change: On the on the commercial client side.

Speaker Change: I don't know if I understood. The question exactly but my gut it I think what you're asking is.

Speaker Change: While our commercial customers take money out and put it somewhere else with things slowing down I would think if right. This is just my feeling usually when rates come down.

Speaker Change: The customers not using their money theyre, not theyre not theyre not pushing it.

Speaker Change: Trying to find something to do with it every minute at night, they lean more in their accounts I would think as interest rates come down you are probably.

Speaker Change: Probably we'll probably have an easier time with commercial customers keeping their balances that I think as interest rates.

Speaker Change: Stay where theyre at right now or even higher and I can see that they can get.

Kevin J. Hanigan: Yeah, Manan, this is Kevin. I think most of that has already happened. You know, 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, you know, deviate balances and paid off loans. And then, to the extent that they still had excess money, they were calling one of us, asking for a special rate or some kind of rate bump. It's not all the way over yet, but I don't think it's going to get any worse. I don't think it's going to accelerate from here unless something really odd happens.

Speaker Change: Four 5% somewhere there really trying to work that but again I think that if you are the short term interest rates come down it would probably be easier on US yes. Brian. This is Kevin I think most of that has already occurred.

Kevin J. Hanigan: They were using excess money to pay down lines of credit. So if we saw unfunded commitments.

Speaker Change: Rising through this period of time as they say so.

Kevin J. Hanigan: TVA balances and paid off.

Speaker Change: <unk> loans.

Kevin J. Hanigan: And then to the extent they still have excess money. They were they were calling one of us asking for a special rate.

Kevin J. Hanigan: Some kind of a rate.

Kevin J. Hanigan: It's not all the way over yet, but I don't think it's going to get.

Kevin J. Hanigan: I don't think its going to accelerate from here unless something really.

David E. Zalman: 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.

Speaker Change: I think it's a good point, Kevin we talked about that before most of that has happened already where theyre starting to use our money our money.

Manan Gosalia: Got it, yeah, that's helpful. I was thinking about it more from the point of view of if we get fewer rate cuts this year, will people just put their money elsewhere? But yeah, the color you gave is helpful.

Kevin J. Hanigan: Got it yeah. That's helpful. I was I was thinking about it more from the point of view of if we get fewer rate cuts this year or do people.

Kevin J. Hanigan: But their money elsewhere, but yeah, yeah. That's the color you gave is helpful.

Kevin J. Hanigan: And maybe to follow up on the loan growth question, you know, is it just a function of rates? You know, is there a lot more pressure that you're seeing on the economy too? And, you know, the reason I ask is that a lot of Europeans 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.

Kevin J. Hanigan: And maybe to follow up on the loan growth question.

Kevin J. Hanigan: Is it is it just a function of red <unk> is it.

Kevin J. Hanigan: A lot more pressure that youre seeing on the economy too.

Kevin J. Hanigan: 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 D. R. Even without too many rate cuts. So I was just hoping to get some more color from you on what youre seeing on the loan growth side.

Kevin J. Hanigan: We agree; I'd say the back half, and that would get us to that 3-5% range, and 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.

Speaker Change: We agree back I'd say back half.

Speaker Change: And that would be to get us to that 3% to 5% range and that might all I'm, saying is that my 10 towards the lower side of the range based upon what we're seeing today.

Speaker Change: But I think it could be more back half related and a lot of this is related to rates a lot a lot of new construction in particular.

Kevin J. Hanigan: 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. 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 is not that great.

Speaker Change: With multifamily.

Speaker Change: Or wherever else retail.

Speaker Change: It's hard to pencil these things out.

Speaker Change: At these rates, if youre going to charge them any kind of premium you're getting eight five or 9%.

Speaker Change: It takes so much equity to make that deal pencil out to our underwriting.

Speaker Change: People are just waiting.

Speaker Change: The put in 50 or.

Speaker Change: $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 cost is not that great people are just holding off I mean.

Kevin J. Hanigan: People are just holding off. We still see a trickle of, you know, 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.

Speaker Change: Sure.

Speaker Change: Still see it trickles.

Speaker Change: He wants to build a strip center every now and then when they've got a pre leased we're doing a little bit of it but not as much as we were.

David E. Zalman: In general, too, I think banks may say they want to have a lot of loan growth, but most of the majority of 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 will really determine a lot of the ground right there. I don't know if I'm being very clear on that.

Speaker Change: 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 with the emphasis on liquidity and from the regulatory agencies I think all banks are going to have to monitor how much growth I really do want to have the 10 loans and have liquidity and less and less of dynamic change, where we start having organic growth in deposits, but those are all going to have to be taken into consideration in that that are really.

Speaker Change: Determined the.

A lot of it.

Speaker Change: Turf right there basically.

Speaker Change: I don't know if im being very clear on.

Manan Gosalia: 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: do you have to keep a certain level of cash on your books, or can you eventually move that out to other sources of HQLA like Treasuries or Gini? I think basically they want

Speaker Change: No that's helpful and I was I was surprised by that.

Speaker Change: The stress and focus on our liquidity even for a bank of your size. So maybe if I. If I can just follow up on the liquidity point.

Speaker Change: 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 HQ L. A like treasuries or genius.

David E. Zalman: I think basically what they want is crazy because in a bank like ours, we have 16 billion dollars in available funds that 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 becoming more insistent, and I think that they're really going to want you to keep that cash overnight on hand. So it's crazy, but it is what it is.

Speaker Change: 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 or 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 that that position but.

Speaker Change: 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.

Speaker Change: It's crazy, but it is what it is.

Jared David Wesley Shaw: Thank you. The next question comes from Jared Shaw with Barclays. Please go ahead.

Speaker Change: Great. Thank you.

Speaker Change: Thank you. The next question comes from Jared Shaw with Barclays. Please go ahead.

Jared David Wesley Shaw: Hey, good morning. Thanks. 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? Maybe grow as a concentration.

Jared Shaw: Hey, good morning. Thanks, I think most of mine were were hit but maybe just a little more detail on energy lending yet you had good growth there.

Jared Shaw: What's the appetite for that too to continue to grow and.

Jared Shaw: Maybe grow as a concentration as well.

Kevin J. Hanigan: I don't see it growing, um, as a problem, 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 for a customer that kept, I think, $150 million on deposit with us. It's as much on deposit as they can borrow, or as much or more on deposits with us than they borrow. They were making an acquisition and gave us the opportunity to loan them some money. It was a pretty large deal and accounted for all of the growth in energy. Right?

Speaker Change: I don't see it growing.

Speaker Change: But to a much larger percentage of our total loan book than it is now.

Speaker Change: The growth in the quarter was one particular transaction it was large.

Speaker Change: Really keeps I think $150 million on deposit with the features much borrow on deposits.

Speaker Change: Or more on deposits with us and they borrow.

Speaker Change: They were making an acquisition and gave us the opportunity to loan them. Some money. It was it was.

Speaker Change: It was a pretty large deal are accounted for.

All the growth in the energy book right.

Kevin J. Hanigan: Yeah, I think it's safe to say that we're not afraid of energy, but we're trying to be particular.

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

Kevin J. Hanigan: We remain particular. Right. Okay.

Speaker Change: We remain particular right.

Speaker Change: Okay, that's great color, Thanks, and then going.

Jared David Wesley Shaw: Okay, that's a good caller. Thanks. And then going back to the question on DDAs, you know, 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 you think that, potentially, we could start seeing?

Speaker Change: Going back to the question on DTA as you know if we look at average versus end of period. It feels like you had you had some good growth in DDA is going into into March.

Speaker Change: Was there anything unique about about that or is that the type of pace do you think that potentially we could we could start seeing.

Kevin J. Hanigan: Yeah, I was going to say earlier in that overall discussion, but I kept my mouth shut for a change. Pretty odd. We did see a pickup in DDA and deposits in March, and it continued through tax day. And then, like every year, on tax day, it takes a pretty good-sized dip, so we were feeling great, you know, right up to the 16th, and then we woke up to a whole lot of money flowing out of DBA at the bank to make tax payments, and we were looking back at it this morning.

Pretty soon.

Speaker Change: Yes, I was going to say earlier in that overall discussion.

Speaker Change: But I kept my mouth shut for a change pretty odd.

Speaker Change: We did see a pickup in DDA in deposits in March it continued through tax day.

Speaker Change: And then like every year tax day.

Speaker Change: It takes a pretty good size dip so we were feeling great.

Speaker Change: Right up to.

Speaker Change: The 16th.

Speaker Change: And then we woke up to a whole lot of money flowing out of DVA at the bank to make tax payments than we were looking back at it. This morning, it's not abnormal as to what it has been another aprils.

Kevin J. Hanigan: It's not abnormal as to what it has been in other Aprils, in other periods of time, and when we looked, we excluded the COVID period because everything was so wonky then, so we looked back over a bunch of years to say if it was typical of April or not, and it was pretty typical. We'll see whether it returns the way it's typically returned in May or not, but we were a little bit excited, I guess relieved, to see the uptick towards the end of March and into April.

Speaker Change: In other periods of time and we when we looked we excluded the COVID-19 period, because everything can still walk event. So we look back over a bunch of eight years to say is that typical of April or not and it's been pretty typical.

Speaker Change: We'll see whether returns.

Speaker Change: The way it is typically returned and in may or not.

Speaker Change: But we were a little bit.

Speaker Change: Excited I guess relieved to see the uptick towards the end of March and into April.

Kevin J. Hanigan: Yeah, historically, historically, we do recover usually a bit again; it happens in the primarily in the last quarter of the year in that Rothaus, most of it. We have a really good first quarter usually, then we, The second quarter is kind of the middle, and the third quarter is our tough quarter. The fourth quarter is when we historically have always shown our growth in deposits basically overall for the year.

Yeah historically.

Historically, it does recover usually it but again it happens in the primarily in the last quarter of the year isn't that right Hassan that most of them we have a really good.

Hassan: First quarter, usually then we kind of the second quarters kind of middle of the third quarters are tough a tough quarter with us.

Hassan: Fourth quarter is when we historically have always shown our growth in deposits basically overall for the year. So.

Jared David Wesley Shaw: Okay, thanks. And then just finally, for me, you know, as we look at your deposit funding, it's been, it's been great, any uh expectation for where peak cumulative deposit beta is will

Hassan: Okay. Thanks, and then just finally for me.

Sorry.

Look at your deposit funding, it's been it's been great.

Hassan: Any expectation for where peak cumulative deposit betas will oh.

Jared David Wesley Shaw: Yeah, I mean, we do see a little bit of lag, but what we see is that the increase in the rate is decelerating, so this is very positive. But as we mentioned, we still see some customers moving their non-interest bearing deposit to an interest bearing deposit, which is driving up the cost.

Hassan: Top out.

Speaker Change: Yeah, I mean, we do see a little bit lag, but what we see that the increase in their rate is decelerating. So this is a very positive, but as we mentioned that we still see some customer moving their noninterest bearing deposits to interest bearing deposits, which is driving up the cost I think that'll be still lag effect, but it's smaller.

Asylbek Osmonov: I think there'll still be a lag effect, but it's at a smaller pace. What are we at? 37, 38? Yeah, so Q1 was cost of deposit of 137. I mean, beta. Beta is 37 base points. Yeah, unaccounted for. Up. So we do expect a little bit of an increase, but it's a slower pace.

Speaker Change: Smaller paced at $37 30, I guess, it's all Q1 was cost of deposits was 137 beta beta is 37 basis points Yeah Paul.

Speaker Change: 100 <unk> up.

Speaker Change: So we do expect a little bit increase but at a slower pace.

Jon Glenn Arfstrom: Thank you. The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you. The next question comes from Jon <unk> with RBC capital markets. Please go ahead.

Jon Glenn Arfstrom: 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?

Jon: Good morning.

Jon: Good morning.

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

Asylbek Osmonov: I think the income is, you know, I would say normal. We saw a good uptick in a little bit of trust income, and we had one good fee on the trust income. I would say it wouldn't be probably non-recurring related to some oil services we did, but overall, fees, I would say it's normal. I mean, that's what we expected, nothing unusual.

Jon: I think fee income.

Jon: I would say normal we what we saw good uptick in little bit 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.

Jon: I would say is normal I mean, that's why we expect nothing unusual I mean, 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 it.

David E. Zalman: Yeah, I mean, 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 you know, if there's some new rule that comes down, of course.

Jon: Some rule that comes down of course.

Jon Glenn Arfstrom: Yeah, they don't like fees, that's for sure. [inaudible] 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 you talked a little bit about what you expect to bring those balances down and how material that might be.

Jon: Okay.

Jon: Fees that's for sure.

Jon: Yeah.

Jon:

Tim you talked about bringing down N P. As in you gave us a number and it looks like you've moved.

Jon: Trunk.

Jon: Since quarter end, but you talk a little bit about what you expect for bringing those balances down and how material that might be.

Tim Tomanis: Unless we get significantly surprised in a negative way, I don't see it growing substantially above where it is, and in essence, about 50% of our non-performing assets came from the first capital acquisition, and we think that that's going to happen

Tim: Unless we get significantly surprised in a negative way I don't see it growing substantially above where it is.

Tim: Yeah.

Tim: In essence.

Tim: About almost 50% of our nonperforming assets came from the first capital acquisition.

Tim: And we think that thats going to well it may tick up a little more we think it's it's more headed towards a leveling out and our people are doing a pretty good job of collecting these in and working through some of these nonperforming assets. So I would be very surprised.

Randy D. Hester: And as Randy mentioned to me, that...

Jon Glenn Arfstrom: Okay, good, that's helpful. And then just one smaller item on your deck, or in your deck on slide 15.

Jon Glenn Arfstrom: You highlight the non-owner-occupied office, CRE, it's only about $500 million. But just out of curiosity, how was that book performing for you? And, you know, curious if it's any worse than or better than any other CRE performance. Thanks. Over a very long period of time, that's been a pretty good performing book for us.

Tim: If it went up dramatically from here.

Tim: And as Randy mentioned to me that the.

Tim: Two of those loans, which totaled about $20 million really acute care centers.

Tim: I think we're having a problem people leasing on.

Tim: They did get them leased and and even during that period of time, the investors have about 35%.

Kevin J. Hanigan: Over a very long period of time, that's been a pretty good performing book for us and really a lot of other banks. You know, those businesses, that's their lifeblood. It's the last thing to go for them.

Tim: Real real cash into the deal so I think it is.

Tim: Is this the lease matures and they can get it though there'll be able to get it and sell it out into the secondary market, but that 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.

Kevin J. Hanigan: You know, if they've got to really be in trouble not keeping the real estate going because that generates revenue, they need 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.

Tim: They are working get if you just take us some time to get them out.

Speaker Change: Okay. That's helpful.

And then just one one smaller item on your DUC or in your deck on slide 15, you.

Jon Glenn Arfstrom: It's well underwritten. It's rare to see, even on a watch list, one of those loans. Those are the customers that want to own their building. They don't have a CFO thing, leverage up. They want to own their building and pay it off. You go there, Jon.

You highlight the mom owner.

Part office CRE told me about 500 million, but just out of curiosity, how was that book performing.

Speaker Change: For you.

Speaker Change: I'm curious if it's any worse than.

Jon Glenn Arfstrom: The non-owner-occupied piece, I guess, is the question for me.

Speaker Change: Or better than any other CRE performance. Thanks.

Speaker Change: 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 you know those businesses. That's their lifeblood. That's the last thing to go for them, but it's.

Jon Glenn Arfstrom: Yeah. Yeah. I heard that wrong. I'm sorry.

Kevin J. Hanigan: It's performed very well. You know, it's been stress tested. And, you know, I think we all these days stress test for up to 300, but we don't stress test for up to 500, 550.

Speaker Change: They've got to really be in trouble or not keep the real estate going generate maybe generate all of the other revenue in the business. So.

Speaker Change: And I'm talking about over 2030 40 years, it's been a really good book of business and it's been particularly good here is well underwritten and.

Kevin J. Hanigan: We've been pretty fortunate in that book, A, 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 immigration from other states, and so occupancy in those things has been pretty good.

Speaker Change: It's rare to see even on the watch list one of those loans and those are the customers that they want to own their building. They don't have a CFO, saying leverage up.

Speaker Change: They want to own their building and pay it off.

Speaker Change: It's been a really good book for us.

Speaker Change: Non owner occupied piece I guess is the question for me.

Speaker Change: Yeah, sorry, yeah.

Speaker Change: Yeah, I heard that wrong I am sorry, its performed very well.

Kevin J. Hanigan: And it's until recently driven rents up to help. Transcribed by https://otter.ai Jon, I talked about a deal we had that was coming back in, and it was going to be repriced. And I thought it was too low. I think we had it at like eight and a quarter or something. And I was like, we're going to have to move the rate on this thing. But then I got back to the back of the package for the cash flows and realized that it could only get us 125 coverage at eight and a quarter.

Speaker Change: It's been stress tested and.

Speaker Change: I think we all these days stress tests were up 300.

We don't stress tests were up 500 550.

Speaker Change: Yeah, we've been pretty fortunate in that book.

Speaker Change: The really low as you know really low loan to cost lenders, which puts us in a really good position. There is so much equity in these deals and being in a market where there's been a lot of population growth while in migration from other states.

Speaker Change: So occupancy in those things has been pretty good and it's.

Speaker Change: Up until recently, its driven rents up to help.

Speaker Change: Withstand some of the right rate increases but.

It's rare I think.

Speaker Change: I think maybe back in January John I talked about the deal we had been.

Speaker Change: It was coming back in.

Speaker Change: To be repriced and I thought it was too low I think we had it at like eight in the quarter or something.

Kevin J. Hanigan: But we were going from like a 560 on the rate to eight and a quarter. And while we would have loved to gone for eight and a half, it would have put some stress on the cash flows. That's as close to a difficult situation as I've seen. OK.

Speaker Change: Mike.

Speaker Change: You'll have to move the rate on this thing and then I got back from the back of the package for the cash flows and realize that they can only get us the 125 coverage at eight in the quarter, but we are going from one to $5 60 on the right date in the quarter.

Speaker Change: And while we would have loved to go on for eight and a half it will put some stress on the cash flows that is close to.

Jon Glenn Arfstrom: Okay. Okay. Very good. All right. Thank you. I appreciate it.

Speaker Change: A difficult situation as I've seen.

Speaker Change: Okay, Okay very good.

Speaker Change: Alright, Thank you I appreciate it.

Charlotte M. Rasche: Thank you. 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.

Speaker Change: Thank you.

Speaker Change: Thank you. This concludes our question and answer session I would now like to turn the call back over to Charlotte Rashi for any closing remarks.

Charlotte M. Rasche: 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.

Charlotte M. Rasche: 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.

Operator: The conference is now concluded. Thank you for your participation. You may now disconnect your lines.

Charlotte M. Rasche: Okay.

Speaker Change: The conference has now concluded. Thank you for your participation you may now disconnect your lines.

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