CarMax Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2024

There are 15 speakers on the call.

Operator

Hello, and welcome to the Prosperity Bancshares Inc. First Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. As a reminder, this conference is being recorded. I would now like to hand the call to Charlotte Rasche.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' Q1 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.

Speaker 1

E. Timanus, Jr, Chairman Asobek Osmanov, Chief Financial Officer Eddie Safady, Vice Chairman Kevin Hannigan, President and Chief Operating Officer Executive Vice President. David Executive Vice President. David will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmanov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality.

Speaker 1

Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10Q and 10 ks and other reports and statements we have filed with the SEC. All forward looking statements are expressly qualified in their entirety by these cautionary statements.

Speaker 1

Now let me turn the call over to David Zalman.

Speaker 2

Thank you, Charlotte. I'd like to welcome and thank everyone listening to our first quarter 2024 conference call. We are excited to announce that on April 1, 2024, we completed the merger of Lone Star State Bancshares Inc. And Lone Star Bank, headquartered in Lubbock, Texas. The operational integration is scheduled for late October 2024 when Lone Star customers will have full access to our 288 full service locations.

Speaker 2

We welcome the Lonestar customers and associates to Prosperity and we'll work hard to win your trust. Prosperity continues to focus on long term relationships and our customer success while maintaining strong asset quality and earnings and a fair return to shareholders. Prosperity maintained a high tangible equity to tangible asset ratio of 10.33% for the Q1 of 2024, while sharing earnings with our shareholders. Prosperity repurchased 567,000 692 shares of common stock during the Q1 of 2024 in addition to the quarterly dividend. In 2023, Prosperity's total capital return to shareholders from dividends and share repurchases was $278,000,000 For the 3 months ended March 31, 2024, the net income was $110,000,000 or $1.18 per diluted common share compared with 95,000,000 dollars or $1.02 per diluted common share for the 3 months ended December 31, 2023.

Speaker 2

The change was primarily due to higher interest income and lower FDIC assessments. For the 3 months ended March 31, 2024, the annualized return on average assets was 1.13% and the annualized return on average tangible equity was 12.06% and the efficiency ratio was 49%. The loans were $21,265,000,000 at March 31, 2024, an increase of $84,000,000 or 40 basis points, 1.6 percent annualized 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, 2023. The loans excluding warehouse purchase program loans and loans acquired in the merger of First Bank shares increased $115,000,000 or 60 basis points or 2.4 percent annualized during the Q1 of 2024.

Speaker 2

Our deposits appear to have stabilized and core deposits have increased modestly. Deposits were $27,176,000,000 at March 31, 2024, a decrease of $4,300,000 from the $27,180,100,000 at December 31, 2023. Deposits increased $171,000,000 or 60 basis points compared with the $27,004,000,000 at March 31, 2023. Deposits excluding public fund deposits increased $109,000,000 during the Q1 with no broker deposits purchased. The net interest margin on a tax equivalent basis was 2.79% for the 3 months ending March 31, 2024 compared with 2.75 percent for the 3 months ended December 31, 2023.

Speaker 2

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 percent for the Q1 of 2024. Our non performing assets totaled $83,000,000 or 24 basis points of quarterly average interest earning assets at March 31, 2024, compared with $72,000,000 or 21 basis points of quarterly average earning assets at December 31, 2023. Our non performing assets are higher than our historical levels primarily due to acquired loans. We expect to reduce our non performing assets ratio to a more normal level within a year.

Speaker 2

The $2,400,000,000,000 Texas economy is now the 8th largest economy in the world, larger than Russia, Canada, Italy and others. Texas is the top state for Fortune 500 headquartered companies currently at 55 and was named the 2023 State of the Year for Best in Nation Business Climate and Job Row. Texas added 369,600 non farm jobs in 2023, the most in the nation. We believe the Texas and Oklahoma economy should outperform most other states. As previously mentioned, the merger of Lone Star State Bancshares was completed on April 1, 2024, and the operational integration is scheduled for late October 2024.

Speaker 2

We're excited to have the Lonestar Associates on the Prosperity team. We continue to have active conversation with other bankers regarding potential acquisition opportunities and hope to continue to grow through thoughtful mergers and acquisitions. Overall, I want to thank all our associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity, and we'll continue to work hard to help our customers and our associates succeed and to increase shareholder value. Thank you again for your support of our company.

Speaker 2

Let me turn over our discussion to Asobek Osmanov, our Chief Financial Officer, to discuss some of the specific financial results that we achieved. Asselbeck?

Speaker 3

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended March 31, 2024 was 238 $200,000 compared to $237,000,000 for the quarter ended December 31, 2023 $243,500,000 for the same period in 2023. The net interest margin on a tax equivalent basis was 2.79% the 3 months ended March 31, 2024 compared to 2.75% for the quarter ended December 31, 2023 and 2.93% for the same period in 2023.

Speaker 3

Excluding course accounting adjustments, the net interest margin for the 3 months ended March 31, 2024 was 2.76% compared to 2.71% for the quarter ended December 31, 2023 and 2.91% for the same period in 2023. The Q1 increase in net interest margin was primarily due to repricing to higher yielding earning assets. Non interest income was $38,900,000 for the 3 months ended March 31, 2024 compared to $36,600,000 for the quarter ended December 31, 2023 $38,300,000 for the same period in 2023. Non interest expense for the 3 months ended March 31, 2024 was $135,800,000 compared to $152,200,000 for the quarter ended December 31, 2023 $123,000,000 for the same period in 2023. Beginning the Q2 of 2024, we expect the run rate for non interest expense to be in the range of $141,000,000 to 143,000,000 dollars 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 Q2 2024.

Speaker 3

Additionally, during the Q2 expect one time merger related cost of $6,000,000 to $8,000,000 and additional FDIC special assessments of approximately $3,000,000 to 5,000,000 dollars Further, 2nd quarter results will include purchase accounting provision expense related to the Lonestar acquisition. The efficiency ratio was 49.1% for the 3 months ended March 31, 2024 compared to 55.6% for the quarter ended December 31, 2023 43.7% for the same period in 2023. The bond portfolio metrics at threethirtyonetwenty 24 have modified duration of 4.1 and projected annual cash flows of approximately $2,100,000,000 And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Mr. Timanus?

Speaker 3

Thank you, Asselbeck.

Speaker 4

Our non performing assets at quarter end March 31, 2024,

Speaker 2

totaled $83,811,000

Speaker 4

which is 39 basis points of loans and other real estate. This is compared to $72,667,000 or 34 basis points at December 31, 2023. This represents a 15.34% increase. Since March 31, 2024, dollars 7,425,000 of non performing assets have been removed or put under contract for sale. The March 31, 2024 non performing asset total was comprised of $81,510,000 in loans, dollars 97,000 in repossessed assets

Speaker 2

and $2,204,000

Speaker 4

in other real estate. Net charge offs for the 3 months ended March 31, 2024 were $2,143,000 compared to net charge offs of $19,133,000 for the quarter ended December 31, 2023.

Speaker 2

This is a 16,990,000

Speaker 4

dollars decrease on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended March 31, 2024. Also, there was no addition to the allowance during the quarter ended December 31, 2023. No dollars were taken into income from the allowance during the quarters ended March 31, 2024 December 31, 2023. The average monthly new loan production for the quarter ended March 31, 2024 was $308,000,000 compared to $300,000,000 for the quarter ended December 31, 2023.

Speaker 4

Loans outstanding at March 31, 2024 were approximately $21,265,000,000 compared to $21,181,000,000 at December 31, 2023. The March 31, 2024 loan total is made up of 41% fixed rate loans, 28% floating rate loans and 31% variable rate loans. I will now turn it over to Charlotte Rasche.

Speaker 1

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

Operator

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

Speaker 5

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

Speaker 2

Well, it's a good question. We have to ask ourselves that all the time. As you know, it was very difficult closing the Lone Star transaction. First, it was held up by the DOJ, took quite a while. We spent a lot of money trying to get out of there and then we had a time getting it from the FDIC approved until now.

Speaker 2

But we thought about it a lot. I don't it was hard. I think things have changed in Washington. There's no question about it. It is hard to get deals done.

Speaker 2

You probably really have to think about the deals you want to do. But the answer to the question is yes. We're still into the M and A world and we'll probably still do more. It's just I think that it will be more it will be really thoughtful before we determine the transaction that we want to do. I don't know that people can just do all the transactions that they used to do.

Speaker 2

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 and A.

Speaker 5

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

Speaker 3

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

Speaker 2

I would also say, Peter, that the net interest margin did show the improvement. It probably would have showed more improvement this quarter, but the regulators are requiring most banks to keep more liquidity on their books. And in the past, we always had a line of credit because we and we borrowed in front of what our run off of our $2,000,000,000 in bonds that rolled off every year. We also just organic growth of 2% to 4% in deposits gave us almost another $1,000,000,000 So we would always borrow in advance not leave a lot of money on the sidelines. And in today's world, the regulatory agencies really are pushing to keep more liquidity on hand.

Speaker 2

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 5

Just if I could follow-up, just when is the outlook then going forward on the margin? You've given us some guidance in the Q1. I'm just wondering what the outlook is?

Speaker 2

I think we're right there. I mean, I think that everything that we had said, we're still on course to do what we said we would do.

Speaker 3

I agree. And with the addition of Lone Stars, I think the projection is so you increased our NIM projection a little few points higher than we project them. So that's been NIM accretive.

Speaker 2

I'll just be glad to get back to where we were unless you're more.

Speaker 3

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

Speaker 2

Just looking in the short term though, I think that we're the goals we had given to you guys in 6 months being somewhere around 3% and a little bit better than that at year end. So think everything that we said seems to be going into direction that we gave guidance for in the previous earnings announcement. So I think the model again, something can always change, but I think that we're on course.

Speaker 5

Thanks, David.

Operator

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

Speaker 6

Hey, good morning guys. Thanks for taking my questions. Just a few on Lonestar, maybe for Assel Bakker. I think you guys had talked about kind of a day 2 provision addition. I know this is going back like a year of around, I want to say $12,000,000 I just want to see if that holds.

Speaker 6

And then what the accretable yield addition will be as it relates to Lonestar. Again, I think things have changed. Appreciate the margin guidance, but we're just looking for those. Thanks.

Speaker 3

Michael, related to Lonestar, we're still working on the valuation of their loan portfolio. And I would say we're getting the preliminary, but it's subject to change as we finalize. I think day 2 accounting could be between $8,000,000 to $12,000,000 I know we provided guidance between $10,000,000 to $12,000,000 but I think it could be between only $8,000,000 to $12,000,000 So it might be decreasing, but we're working toward that on the day 2 provision. On our accretable yield, it was also a preliminary number, but I think initially it will be around between $1,500,000 to $2,000,000 fair value income on loans per quarter. That's what we estimated that's going to be $10,000,000 to $9,000,000 to $12,000,000

Speaker 6

Okay. That's very helpful. And maybe just a follow-up. I think Kevin's in the room. I was asked the warehouse question, came in a little bit better this quarter.

Speaker 6

Just wanted to kind of see the outlook maybe for the Q2 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? Thanks.

Speaker 7

Yes. It's been moving around, Michael. For Q1, it started off pretty bad and rallied really nicely in late February and throughout March to pull that average up probably $60,000,000 or $70,000,000 more than we were thinking when we talked back in January. I'd say for Q2, I'd peg a number of around $900,000,000 on average for the quarter. Through last night, we're somewhere in the 8.70s, 8.73, 8.74 average so far for the quarter.

Speaker 7

Rates have ticked up. I might have gone a little higher than 900%, but with this ticked up, I think 900% is probably a safe average number.

Speaker 3

And Mike, I said Okay.

Speaker 2

That's helpful. Yes.

Speaker 3

No, I just want to correct. When I say yes, for the loan starts at $1,500,000 to $2,000,000 that's annualized would be only $6,000,000

Speaker 2

to $8,000,000 not $12,000,000 I said.

Speaker 3

I was thinking about total loan start that will be $6,000,000 to $8,000,000 annualized.

Speaker 6

Got it. Okay, helpful. And then maybe just finally for me, Subak, I appreciate the expense guide for the Q2. But as those cost savings are realized, I think more in earnest than the 4th once you get past operational conversion. Is it plausible that $0.0906 would kind of stay in that, I think you said $1.41 to $1.43 range kind of through the end of the year.

Speaker 6

Is that fair balancing the kind of the puts and takes on the cost savings with just normal expense growth? Thanks.

Speaker 3

Yes, I would agree. I think that right now sitting and we project now our cost, I think $141,000,000 to $143,000,000 quarterly, I would say throughout the year will be good guidance unless something changes.

Speaker 6

Great. Thanks for taking my questions.

Operator

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

Speaker 8

Hey, good morning guys. Congrats again on the deal close. Just wanted to go back to your comments on the margin. You gave a lot of good color on the accretion and the 6 to 24 month look. There are a lot of moving parts of the deal coming in.

Speaker 8

And just with everything baked in, what do you think is a good range for the NIM for 2Q at this point?

Speaker 3

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

Speaker 8

Okay. 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?

Speaker 7

Go ahead Kevin. Yes. Longer term, yes. We are still building a little cash as David said at the onset for regulatory purposes. They'd like to have a little higher cash.

Speaker 7

We're getting closer on that cash build, but longer term that's the use of the bond proceeds. We pay down the debt if it's not being chewed up by loan growth.

Speaker 8

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

Speaker 2

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

Speaker 3

$1,500,000,000 to $2,000,000,000 I think that's the range we're working on right now.

Speaker 9

Okay.

Speaker 8

And then switching to capital real quick. I think you've only been above a TC ratio of 10% for more than 1 quarter, maybe once that I can remember, and that was about 5 years ago, right before you announced another deal. So I was curious, it sounds like you're still interested in deals. What do you think your prospects are over the next year at this point, just given where rates are and whatnot? What are the conversation levels like today?

Speaker 8

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 2

There's quite a few questions in there. I'll try to take the first one. There still are conversations. We had conversations going even working trying to close through Lonestar. I would say, we did sometimes you just get frustrated with all the hard work that you have and you wonder should you keep doing it.

Speaker 2

But the truth of the matter is, yes, we are we'll continue. We'll probably start pursuing it more than we had. I think we want to get Lonestar done and we still even right now with Lonestar we're trying to get it put together talking about the operational integration and we'll start working harder on some of the deals that we have been working on. But the odds are good that we will be able to enter into something. I don't think there's any question about that.

Speaker 2

It's just again, I think before we do something, we just really want to be thoughtful what we do and it does it's accretive to the bank, to the shareholders and it adds to the value of our franchise. So those are just the considerations that we're looking at.

Speaker 8

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

Speaker 2

Okay. The buyback, we do have a lot of money now. I think things have stabilized. Everybody after the Silicon Valley deal and the Signature Republic, I think everybody was worried about everything. I think things are becoming more stable right now.

Speaker 2

People are starting to feel better. And with that, I think if our stock price becomes if it goes down, you saw how many shares we bought in the Q1 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 we'll use it when we think it's a real opportune time to buy our stock back.

Speaker 6

All right, great. Thanks guys.

Operator

Thank you. The next question comes from Catherine Mealor with KBW. Please go ahead.

Speaker 10

Thanks. Good morning.

Speaker 2

Good morning. Good morning.

Speaker 10

Just a follow-up on the dynamics between building the excess cash and borrowings. Do you see do you maybe a follow-up on just the margin outlooks. You still believe that even with having to hold a little bit more liquidity, you still see a path in your margin towards the end of this year to still get back near that 3% range? Or is that margin a little bit lower, but the balance sheet is maybe a little bit bigger, so NII maybe ends up the same, but it's a balance between those 2?

Speaker 2

I'll start off and say yes, but Asselbeck may want to correct me.

Speaker 3

No, I think the guidance stays at 3% because of 2 dynamics. First of all, we're still repricing our securities from 2% to $5.40 we're getting on the cash with excess cash we're having. That dynamic is still working out. And also with the addition of Lone Star, as I mentioned, that helps us. So I think with those things, I think 3 should be still reasonable, assuming, but it's a wildcard as a deposit, right?

Speaker 3

So how we manage deposit. But so far, we're able to manage deposits. If it continues as we go, I think 3 should be still the guidance we stick by end of

Speaker 2

the year. Yes. I mean, I

Speaker 11

think that's

Speaker 2

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

Speaker 4

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

Speaker 10

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 3

Yes. So this is the model is on the static balance sheet with no rate changes.

Speaker 2

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

Speaker 3

That's correct, because we are very neutral positioned.

Speaker 2

And if interest rates went up 100 basis points, actually our it would improve by 5 basis points, 4 basis points. That's correct.

Speaker 10

Great. 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 for everybody. How are you thinking about growth for the back half of the year?

Speaker 2

Kevin, do you want to?

Speaker 7

Yes. We said 3% to 5 First quarter was a bit challenging. We squeaked out a little bit of growth. April has been equally challenging. So we haven't seen any spurt in growth rates.

Speaker 7

So if we said 3% to 5% for the year, I'd say we're probably on the lower end of the 3% to 5 I don't know if you agree, David.

Speaker 2

Yes, I do. I mean, it's when you turn on CNBC and you see unemployment so low and inflation just the economy is so good. But when you really squeeze down, you talk to some of your customers, you see that your commercial customers are pulling back, waiting to see what interest rates are going to do. I think the when you talk to some of our customers are in wholesale, they see slowdowns in trying to get their supply chains are full. And so they're not able to sell as much.

Speaker 2

So they're concerned. And even when you

Speaker 4

talk to a lot of our customers

Speaker 2

who works sometimes on the plants on the Gulf Coast, you can talk to them and they're like 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, don't think it's as good as everybody says it is either.

Speaker 10

Very helpful.

Speaker 7

I'd just add one of the things we've got that maybe is a little wind at our back potential is our unfunded commitments on unfunded portions of construction loans are still running somewhere in the $1,600,000,000 range, I think $1,600,000,000 to $1,650,000,000 So we still have a lot of fundings. 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 growth through just unfunded commitments finally funding up.

Speaker 10

All right. Perfect. Thank you for all the color.

Operator

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

Speaker 9

Hey, good morning.

Speaker 3

Good morning, Brandon.

Speaker 7

So saw that we had

Speaker 9

some non interest bearing outflows in the Q1. So could you just characterize what you're still seeing within your deposit mix? And when do you think those DDA balances will stabilize?

Speaker 2

Let me get my crystal ball here on the table and I'll ask it. But from what we can tell Brandon, it does seem to be stabilizing. But again, to give exact dates and how much it will go down, we just it would be unrealistic for me to come up with that number. All I can tell you is from what we see, We're still You're still seeing in the bank where some of your non interest bearing deposits and your lower interest bearing deposits are moving sometimes more to money market accounts and to CDs. So you're still seeing that transition.

Speaker 2

I think that will continue. But for the most part, we think it is stabilizing, bearing that there is no bank that get announced some bank deal failure or something like that. We do think that we're on the road to stabilization.

Speaker 3

I agree. And as we mentioned earlier, our core deposit that excluding public funds has increased in the Q1. But what we see dynamics like Mr. Zama mentioned that some people taking their non interest bearing to putting into CDE, which are special CDE programs we have. So we're not losing customers, just repricing.

Speaker 3

So we're still seeing lag effect on that on those deposits. But overall, we feel good where we are on deposit at currently. But on

Speaker 2

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

Speaker 3

Oh, you're at 14% now. 14%.

Speaker 2

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

Speaker 3

Yes, it's continued to grow, but being a short term, I mean, we can reprice it within.

Speaker 8

If you

Speaker 3

look at our CD portfolio, 65% get repriced within the 6 months and 90% within a year. So it's very short term duration for those CDs.

Speaker 4

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 going back 6, 9 months ago. There's still a lot of rate competition, but the insurance issue has waned a bit. So that has resulted in some stabilization of deposits.

Speaker 9

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

Speaker 3

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

Speaker 9

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

Speaker 3

Yes. We do. It's a static model.

Speaker 9

Okay, got you. Okay. Okay. And then just lastly, sorry if I missed this, but I think you referenced the step up in NIM, but could you share the step up in NII in the second quarter just helpful just given the noise around the deal?

Speaker 3

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

Speaker 2

You got to do some of your own work, Brandon. We can get back to them on that. Yes, we'll

Speaker 7

get back.

Speaker 9

Okay. I'll stay back. Thank you.

Operator

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

Speaker 11

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

Speaker 7

I don't know if

Speaker 2

I understood the question exactly, but my gut, I think what you're asking is, will our commercial customers take money out and put it somewhere else with things slowing down? I would think if rates this is just my feeling, usually when rates come down, the customer is not using their money. They're not pushing it, trying to find something to do with it every minute. They leave more in their accounts. I would think as interest rates come down, you're probably you'll probably have an easier time with commercial customers keeping their balances up.

Speaker 2

I think as interest rates stay where they're at right now or even higher and they can see that they can get 4% or 5% somewhere. They're really trying to work that. But again, I think that if your short term interest rates come down, it'd probably be easier on us.

Speaker 7

Yes. Manav, this is Kevin. I think most of that has already occurred. They were using excess money to pay down lines of credit. So we saw unfunded commitments rising through this period of time as they took DDA balances and paid off loans.

Speaker 7

And then to the extent they still had excess money, they were calling one of us asking for a special rate or some kind of rate bump. Bump. It's not all the way over yet, but I don't think it's going to accelerate from here unless something really odd happens.

Speaker 2

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 11

Got it. Yes, that's helpful. I was thinking about it more from the point of view of if we get fewer rate cuts this year, do people just put their money elsewhere, but yes, the color you gave is helpful. And maybe to follow-up on the loan growth question, is it just a function of rates? Is it a lot more pressure that you're seeing on the economy too?

Speaker 11

And the reason I ask is because a lot of your peers are looking for a major inflection in loan growth in the back half of the year, even without too many rate cuts. So I was just hoping to get some more color from you on what you're seeing on the loan growth side.

Speaker 7

Yes. We agree back I'd say back half, but and that would be to get us to that 3% to 5% range. And it might all I'm saying is it might towards the lower side of the range based upon what we're seeing today. But I think it could be more back half related and a lot of this is related to rates. A lot of new construction in particular, call it, multifamily or whatever else, retail, it's hard to pencil these things out at these rates.

Speaker 7

If you're going to charge them any kind of premium, you're getting 8.5% or 9%. It takes so much equity to make that deal pencil out to our underwriting that people are just waiting. It's either put in 50% or 40%, 50%, 52%, 55% equity to make the deal work and then your return on equity kind of gets so muted and your return on costs are not that great. People are just holding off. I mean, we still see a trickle as, hey, somebody wants to build with a strip center every now and then and they've got it pre leased.

Speaker 7

And we're doing a little bit of it, but not as much as we were.

Speaker 2

In general too, I think banks might say they want to have a lot of loan growth, but most of the majority of the banks have a pretty high loan to deposit ratio right now. And with the emphasis on liquidity and from the regulatory agencies, I think all banks are going to have to monitor how much growth they really do want to have in loans and have liquidity unless the dynamics change where we start having organic growth in deposits. But those are all going to have to be taken into consideration and that really determines a lot of the turf right there basically. I don't know if I'm being very clear.

Speaker 11

That's helpful. And I was surprised by the stress and focus on liquidity even for a bank of your size. So maybe if I can just follow-up on the liquidity point, is it do you have to keep a certain level of cash on your books or eventually can you move that out to other sources of HQLA like treasuries or Ginnys?

Speaker 2

I think basically they want it's crazy because in a bank like ours, we have $16,000,000,000 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 they are becoming more insistent and I think that they're really going to really want you to keep that cash overnight on hand. So it's crazy, but it is what it is.

Speaker 11

Great. Thank you.

Operator

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

Speaker 12

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 and maybe grow as a concentration as well?

Speaker 7

I don't see it growing to a much larger percentage of our total loan book than it is now. The growth in the quarter was one particular transaction. It was large. It was to a customer that keeps I think 100 and $50,000,000 on deposit with us.

Speaker 2

It's as much borrowed on deposits as they can borrow.

Speaker 7

It's 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 the growth in the energy book. Right.

Speaker 4

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

Speaker 7

Particular. We remain particular. Right.

Speaker 12

Okay. That's good color. Thanks. And then going back to the question on DDAs, if we look at average versus end of period, it feels like you had some good growth in DDAs going into March. Was there anything unique about that?

Speaker 12

Or is that the type of pace you think that potentially we could start seeing resume?

Speaker 7

Yes. I was going to say earlier in that overall discussion, but I kept my mouse shut for a change, pretty odd. We did see a pickup in DDA and deposits in March. It continued through tax day. And then like every year tax day, it takes a pretty good sized dip.

Speaker 7

So we were feeling great right up to 16th. And then we woke up to a whole lot of money flowing out of DDA at the bank to make tax payments. And we were looking back at it this morning. It's not abnormal as to what it has been in other Aprils, in other periods of time. And we when we looked, we excluded the COVID period because everything was still wonky then.

Speaker 7

So we look back over a bunch of years to say is that typical of April or not and it's been pretty typical. We'll see whether it returns the way it has 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 2

Yes. Historically, it does recover usually, but again it happens in the primarily in the last quarter of the year in that write offs. We have a really good Q1 usually, then we kind of second quarter's kind of middle and then third quarter

Speaker 4

is our tough quarter with us.

Speaker 2

4th quarter is when we historically have always shown our growth in deposits basically overall for the year.

Speaker 12

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

Speaker 5

top out?

Speaker 3

Yes. I mean, we do see a little bit lag, but what we see that the increase in the rate is decelerating. So this is a very positive. But as we mentioned that we still see some customer moving their non interest bearing deposit to interest bearing deposit, which is driving up the cost. I think there'll be still lag effect, but it's at a smaller pace.

Speaker 3

What are

Speaker 7

we at, 37, 30 gig?

Speaker 3

Yes. So Q1 was cost of deposit was 137 basis points. Beta. Our beta is 37 basis points, yes, for 100 up. So we do expect a little bit increase, but it's at slower pace.

Speaker 9

Okay. Thank you.

Operator

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

Speaker 13

Hey, thanks. Good morning.

Speaker 2

Good morning, Sam. Good morning.

Speaker 13

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?

Speaker 3

I think fee income is, I would say, normal. We saw good uptick in a little bit trust income. We had won good fees on the trust income. I would say it wouldn't be probably nonrecurring related to some oil services we did. But overall fees, I would say, is normal.

Speaker 3

I mean, that's what we expected, nothing unusual.

Speaker 2

Yes. 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 if there's some rule that comes down, of course. Yes.

Speaker 13

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

Speaker 4

Unless we get significantly

Speaker 11

In

Speaker 4

essence, about almost 50% of our non performing assets came from the First Capital acquisition. And we think that that's going to while it may tick up a little more, we think it's more headed towards leveling out. And our people are doing a pretty good job of collecting these and working through some of these non performing assets. So I would be very surprised if it went up dramatically from here.

Speaker 2

And as Randy mentioned to me that 2 of those loans which totaled about $20,000,000 are really acute care centers and they were having a problem with people leasing on and they did get them leased and even during that period of time the investors have about 35% real cash into the deal. So I think as the lease matures and they can get it, they'll be able to get it and sell it out into the secondary market, but that takes a while where they can show some performance because they'll want their money out too.

Speaker 11

So we

Speaker 2

have a couple of bigger larger deals that they're working good. It'll just take us some time to get them out.

Speaker 13

Okay, okay. Good. That's helpful. And then just one smaller item on your deck or in your deck on Slide 15, you highlight the non owner occupied office CRE. It's only about 5 $100,000,000 But just out of curiosity, how was that book performing for you?

Speaker 13

I'm curious if it's any worse than or better than in the other CRE performance. Thanks.

Speaker 7

Over a very long period of time, that's been a pretty good performing book for us and really a lot of other banks. It's those businesses, that's their lifeblood. It's the last thing to go for them. It's they've got to really be in trouble to not keep the real estate going because that's generate 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.

Speaker 7

It's well underwritten and it's rare to see even on a watch list one of those loans.

Speaker 14

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

Speaker 7

It's been a really good book for us.

Speaker 13

The non owner occupied piece, I guess is the question for me.

Speaker 7

Non owner occupied

Speaker 13

piece. Yes, sorry. Yes.

Speaker 7

Yes. Heard that wrong. I'm sorry. It's performed very well. It's been stress tested.

Speaker 7

And I think we all these days stress tests for up 300, but we don't stress test for up 500, 550. We've been pretty fortunate in that book A that it the really low as you know, really low loan to cost lenders, which puts us in a really good position. There's so much equity in these deals. And being in a market where there's been a lot of population growth, a lot of in migration from other states. And so occupancy in those things has been pretty good and it's up until recently, it's driven rents up to help withstand some of the rate increases.

Speaker 7

But it's rare. I think maybe back in January, John, I talked about a deal we had that was coming back in. It was going to be repriced and I thought it was too low. I think we had it at like 8.25% or something. And I'm like, we're going to have to move the rate on this thing.

Speaker 7

And then I got back to the back of the package for the cash flows and realized that it could only get us a $125,000,000 coverage at 8.25 percent. But we were going from like a $560,000,000 on the right date in the quarter. And while we would have loved to go on for 8.5, it would have put some stress on the cash flows. That's as close to a difficult situation as I've seen.

Speaker 13

Okay. Okay, very good. All right. Thank you. Appreciate it.

Speaker 3

Yes.

Operator

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.

Speaker 1

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

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CarMax Q1 2024
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