Good day, welcome to the Prosperity Bancshares fourth quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal our conference specialist by pressing the star key followed by 0. 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. To withdraw your question, please press star then 2. Please note, this event is being recorded. At this time, I'd like to turn the conference over to Charlotte Rasche. Please go ahead.
Thank you. Good morning, ladies and gentlemen, welcome to Prosperity Bancshares fourth quarter 2018 earnings conference call. This call is being broadcast live over the internet at prosperitybankusa.com, and will be available for replay at the same location for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. Here with me today is David Zalman, Chairman and Chief Executive Officer, H.E. Tim Timanus, Jr., Vice Chairman, David Hollaway, Chief Financial Officer, Eddie Safady, President, Randy Hester, Chief Lending Officer, Merle Karnes, Chief Credit Officer, Bob Benter, Executive Vice President, and Bob Dowdell, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by David Hollaway, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality.
Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Allison. 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, as such, may involve known and unknown risks, uncertainties, and other factors, which may cause the actual results, performance, or achievements of Prosperity Bancshares to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC.
All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.
Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2018 conference call. For the fourth quarter of 2018, we showed impressive annualized returns on average tangible common equity of 15.8%, and on average assets of 1.47%. Our net income was $83.3 million for the three months ending December 31, 2018, compared with $67.1 million for the same period in 2017, an increase of $16.1 million, or 24%. Our net income per diluted common share was $1.19 for the three months ending December 31st, 2018, compared with $0.97 for the same period in 2017, an increase of 22.7%. Our loans at December 31st, 2018, were $10,370,000,000, an increase of $349 million, or 3.5%, compared with $10,021,000,000 at December 31st, 2017. Our linked quarter loans increased $77.4 million, or 80 basis points, 3% annualized from the $10,293,000,000 at September 30, 2018.
Our Dallas-Fort Worth market saw double-digit loan growth for 2018, followed closely by our Central Texas and Central Oklahoma markets. Although our Houston market had record loan production in 2018, it also experienced sizable paydowns and payoffs, much of which was recognized in the fourth quarter. Our non-performing assets totaled $18,956,000, or 10 basis points of quarterly average interest-earning assets at December 31st, 2018, compared with $37.4 million, or 19 basis points of quarterly average interest-earning assets at December 31st, 2017. Our asset quality continues to improve as the non-performing assets at December 31st, 2018 reflected a 49.4% decrease compared with their level at December 31st, 2017. Prosperity's asset quality is one of the best in the nation.
I always say, "You will like us in the good times, but you will love us in the bad times." Deposits at December 31st, 2018 were $17,257,000,000, a decrease of $564 million or 3.2% compared with $17,821,000,000 at December 31st, 2017. This was primarily due to lower municipal deposits compared with the prior year. However, average non-interest-bearing deposits increased $303 million or 5.7% during 2018. Our linked quarter deposits increased $522 million or 3.1% from $16,734,000,000 at September 30, 2018. This change was primarily due to seasonality. As we've indicated in prior quarters, we continue to have conversations with other bankers regarding potential acquisition opportunities. We remain ready to enter into a deal when it is right for all parties and is appropriately accretive to our existing shareholders.
Overall, we're very excited that Prosperity Bank has once again been ranked in the top 10 of Forbes America's Best Banks for 2019. We are very proud that the bank is the only bank in the country to have been ranked in the top 10 every year from 2014 to 2019. Texas and Oklahoma continue to experience strong employment and population growth, with many companies moving to the States because of favorable tax environments and business-friendly political climates. I would like to thank all of our customers, associates, directors, and shareholders for helping build such a successful bank. Thanks again for your support of our company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer, to discuss some of the specific financial results we achieved. David?
Thank you, David. Net interest income before provision for credit losses for the three months ended December 31st, 2018, was $157.2 million, compared to $156.05 million for the same period in 2017. For the full year 2018, net interest income before provision for credit losses was $629.6 million, compared to $616.9 million for 2017, an increase of $12.7 million or 2.1%. I would note here, going forward, we project our loan discount accretion should run about one and a half million per quarter. The net interest margin on a tax equivalent basis was 3.15% for the quarter ended December 31st, 2018, compared to 3.20% for the same period in 2017. Additionally, the net interest margin on a tax equivalent basis of 3.15% was unchanged on a linked quarter basis.
However, excluding the purchase accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended December 31st, 2018, was 3.10%, compared to 3.09% for the quarter ended September 30th, 2018. Non-interest income was $29.1 million for the three months ended December 31st, 2018, compared to $29.2 million for the same period in 2017. For the full year 2018, non-interest income was $116 million, compared to $116.6 million for the full year 2017. Non-interest expense for the three months ended December 31st, 2018, was $80.8 million, compared to $81.1 million for the same period in 2017. For the full year 2018, non-interest expense was $326.2 million, compared to $313.1 million for 2017, an increase of $13.1 million or 4.2%.
The efficiency ratio was 43.2% for the three months ended December 31st, 2018, compared to 43.8% for the same period last year and 43.5% for the three months ended September 30th, 2018. For the full year 2018, the efficiency ratio stood at 43.7%, compared to 42.8% in 2017. The bond portfolio metrics at 12/31/2018 showed a weighted average life of 4.05 years, an effective duration of 3.59, and projected annual cash flows of approximately $1.8 billion. With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?
Thank you, Mr. Hollaway. Our non-performing assets at quarter end December 31st, 2018, totaled $18,956,000, or 18 basis points of loans and other real estate, compared to $16,777,000, or 16 basis points at September 30th, 2018. This is a 13% increase from September 30th, 2018.
As David Zalman previously indicated, it's a significant decrease from December 31st, 2017. The December 31st, 2018 non-performing asset total was made up of $17,151,000 in loans, $0 in repossessed assets, and $1,805,000 in other real estate. Of the $18,956,000 in non-performing assets, $2,249,000 or 12% are energy credits, all of which are service company credits. Since December 31st, 2018, $1,817,000 or 9.59% of the non-performing assets have been removed from the list or under contract for sale. As we always say, there can be no assurance that those under contract will close. Net charge-offs for the three months ended December 31st, 2018 were $556,000 compared to net charge-offs of $1,318,000 for the three months ended September 30th, 2018. $1 million was added to the allowance for credit losses during the quarter ended December 31st, 2018 compared to $2,350,000 for the quarter ended September 30th, 2018.
The average monthly new loan production for the quarter ended December 31st, 2018 was $248 million compared to $277 million for the quarter ended September 30th, 2018. Loans outstanding at December 31st, 2018 were $10,370,000,000 compared to $10,293,000,000 at September 30th, 2018. The December 31st, 2018 loan total is made up of 39% fixed rate loans, 37% floating rate, and 24% variable rate loans. I'll now turn it over to Charlotte Rasche.
Thank you, Tim. At this time, we are prepared to answer your questions. Allison, can you please assist us with questions?
Certainly, thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today will come from Dave Rochester of Deutsche Bank. Please go ahead.
Hey, good morning, guys.
Morning.
Your guidance on the NIM for this past quarter was in that three fourteen to three seventeen range. You guys came right in line with that this quarter. Was just wondering how you're thinking about the progression of the NIM from here, just given the flatter rate environment, if you expect that range might drift a little bit lower over time. Then if you happen to have the level of securities reinvestment rates now, given this new rate backdrop, that'd be great.
This is Dave Hollaway. Yeah. You're right on the call we made last quarter. I don't think we're going to change that much. Even with this flatter yield curve, we still looking forward on that margins. I think we'll have a little bit of pickup as we move forward. Again, I'll just reiterate, it's the dynamics of our balance sheet. If we're able to continue to grow our loan portfolio with higher yields and on our security side, specific to your question, I think the last time we talked, we were getting around 3.5% on the new stuff that we buy. With the yield curve flattening a little bit, we're still able to get about roughly three and a quarter, which is still pretty good for us. If those two dynamics continue to play going forward, we're still pretty positive on the margin.
I always just add again, maybe there'll be further discussion as we get into it, the wild card's always the funding, where will that be at the end of the day? Again, I would point out the positive that we have, again, have being a core funded bank where most of our money is in the lower type interest rate accounts or non-interest bearing accounts, we should be able to manage that pretty well going forward.
One of the things we're working hard on is to try to mitigate the borrowings that you see on our balance sheet, where you saw it peak in mid-last year, we brought it down because of the deposit flows here. It's something we're going to try to concentrate on as we go forward because it's obviously, when you look at the big picture, we don't want to borrow from the Federal Home Loan Bank, which I guess if you went overnight, it's 270. We should be able to look at what we can do on the deposit side and do a little bit better than that.
Yeah. Okay. I guess you mentioned the higher loan yields. Where are you seeing new loan yields now with the new rate backdrop?
Yeah, when we looked at this past month, again, this is on average, so some higher, some lower, but it was about in the 560-565 range on average.
Great. Then I guess just switching to expenses, you guys came in a little bit better than guidance on this area as well. How are you thinking about the trend this year? In terms of tech spend and organic expansion of the platform, what are you thinking about?
Yeah. Again, looking at all those things, the checklist, you've heard me say at least we've been running in that $81 million-$82 million range per quarter.
You saw that we came in a little lighter this quarter. I would tell you, again, with the tech spend and the things that we do, also with the relief from the FDIC assessment and that surcharge and that, which was a reduction. When you put that all in, what I would tell you is, I'll probably change that range, where we'd say $80 million-$81 million. What I would point out on that as we make that change, is in this first quarter, we'll probably be at the lower end of that range, then we get out to the quarters beyond that, we'll probably be at the upper end of that range.
Okay, great. That's great color. Thanks, guys.
Sure thing.
Our next question will come from Jennifer Demba of SunTrust. Please go ahead.
Thank you. Good morning.
Good morning.
Morning.
David, you had about 3% loan growth last year. Do you think there's any reason you could do better than that this year? Would pay-downs maybe subside?
This is David Zalman, I do think. We were headed to where we thought we would be, the 5% or 6%. We had one loan that was $80 million in size just in the Houston market that paid off in the fourth quarter. I will say that what we did see is a slower, I would say, the first 15 or 20 days of January. I think really a lot of that had to do with all the political chaos going on in Washington and people to where they were. Having said that, we had a management meeting where we meet quarterly, and most of the management committee that represents all different parts of the states of Texas and Oklahoma felt very positive with what they had in the pipeline. In fact, Houston had probably more in the pipeline than they've ever had in a long time.
If we can get that funded, I still feel pretty good that we should be in that 5% range.
Okay. Could you talk about the bond portfolio, what the loss on the bond held to maturity, unrealized loss on that is, and would you think about restructuring the bond portfolio at this point?
I think what I'm showing, Dave, and I might be looking at it wrong, but I'm showing a total loss out of a $9.4 billion book value at $243 million. Historically, we've really not bought and traded the bond portfolio. Again, we usually have a very short duration of around 3.6 years, we usually It would definitely make our numbers look better. Anybody can do the math. If you're making 1% more on your portfolio on $9 billion, that's $90 million a year before taxes. That would help. On the other hand, historically, we've not done that. I put one caveat, if we ever did a very large deal or something like that, it may make sense that you have that opportunity for an adjustment when you have a big deal. Again, historically, and looking forward, my gut feeling is we wouldn't do that.
Again, I would never rule it out if there's some kind of big consolidation or we merge with somebody else or something.
Okay, thank you. One more question. The NIM guidance that David Hollaway just talked about, David, what kind of rate environment does that assume? Were you assuming no rate hikes or one or two rate hikes in 2019?
Yeah. It's a two-part answer there. One that's assuming maybe one more rate hike. What I would tell you is if they would raise rates more than once, that's still beneficial to us. Our margin would even expand a little bit more than what I'm saying. We're in a unique position where rising rates help us. The reason you don't see more of the margin sticking is, it's constantly raising these rates, it keeps resetting itself. I would tell you, if they don't raise rates in the next 12 months or they do it once, that guidance holds. If they want to raise rates one time and hold, that's still pretty good. What do you think, David?
Yeah.
It looks good either way.
I just want to be clear, I think, Dave has been very clear, Basically, if there's no rate increases at all, we still see, in my opinion, significant increases in net interest margin over 12, 24, and 36 months with no rate increases. With rate increases, we even see a bigger margin expansion.
It's just, again, the dynamics of that cash flow coming in, That's why you look out over the 12 and 24 months.
I think the net interest margin also, when you look at what our cost of funds were just six months ago when we were paying 60 basis points for a CD, Today you're paying maybe 2% for a 12-month CD. I think the cost of funds really went up a lot faster than I think a lot of people even anticipated. Even though there were some interest rate increases on the loan side, again, our balance sheet doesn't move as fast as the others do. I still think the biggest plus and the biggest and best story of our company is the repricing that we have going forward over a period of time. I think that's the best story we have.
Thanks very much.
Our next question will come from Brady Gailey of KBW. Please go ahead.
Hey, good morning, guys.
Morning.
Morning.
TCE and capital levels just continue to grow here given the profitability and the lower level of organic growth. David, maybe just update us on the buyback. Is that something you're considering? Just a little more color on M&A. I know when we've talked about it in the past, it's been more of an issue of the type of banks that you guys want to buy just aren't out there for sale. Is that still the case, and do you think you'll be active this year on the M&A front?
Well, I don't think that everything you're saying is the case. I think there are banks out there that we would like to do deals with. Sometimes it takes longer than people anticipate. I think looking forward that. You asked a couple of questions. Let me start off on the first part. You were talking about really the capital and would we really be looking at buying our own stock back. I think historically, we've not used our capital to buy our own stock back unless the market has just fallen out at the bottom of it. I think that if the price went down significantly, we would be a buyer of our own stock. Again, for the most part, we've used our capital for dividend increases. I think you've seen double-digit dividend increases every year, and we also use the other part of the money for acquisitions.
I think that's something that we will continue doing. That'll primarily be our focus. I really feel you should use the money to build assets, not just buy your own stock back unless it's just really underpriced. That's that. Going forward on the mergers and acquisitions, we are out there. I think that we're talking with larger banks, and we're talking with some other banks that may be $600 million or $700 million in size if it's in our own market. I think that we're looking at all of that. The pricing definitely made a difference last year. About mid-year, in the third quarter, our price was probably $77 or $78 a share, and all bank stocks were up dramatically, and then came the fourth quarter and bank stocks dropped 20% or more.
Some of the deals that you're talking about, when you're talking about pricing, especially on some of these larger deals, that really gets attention. There was kind of some cold water poured on it because the stock prices went down so much you couldn't expect to pay the same amount when your stock price is not as high. Going forward, I don't think that there's any question. I've always said this, and I still believe this, that we'll run out of money before we run out of deals. It's just a matter of time that that's what we do. Again, we're still looking. We'll continue to look, and I think we'll find something when it fits everybody and it's accretive to the bottom line.
David, you talk about looking at some larger deals. Prosperity is now $23-ish billion in assets. How big of a deal would you consider? From a geography point of view, obviously Texas and Oklahoma would make sense for y'all. Outside of those kind of home state, would you look to kind of the broader southeast as a possibility?
We've looked at a number of different states where the banks have been larger in size at $10 billion or $10 billion plus. We're looking at all of that stuff. Our focus is still primarily. Obviously, you'd like to build on the markets that you're in. You just have better cost savings. We're not opposed to looking at other markets. If we go into another market, I don't know that we would go into another state and necessarily buy a $1 billion or $2 billion bank. We'd go if we knew that we would become at least fifth in size in that state within a reasonable period of time, and we knew that we could. We would look at that. We've looked at banks in a number of different states this last year.
All right, great. Thanks, guys.
Our next question will come from Peter Winter of Wedbush Securities. Please go ahead.
Good morning.
Morning.
I wanted to ask about the monthly loan production. It has moderated each quarter this year, and I'm just wondering what some of the drivers are and how you think about that going forward.
Peter, this is Tim Timanus. The average for the whole year 2018 was $288 million a month, the average for the calendar year 2017 was $286 million a month. We were a little bit higher on the average in 2018 and 2017, although not significantly so. I don't think there are significant economic issues that cause a moderation. I think primarily it's a result of competitive issues. Rightly or wrongly, a lot of our competitors do non-recourse lending, and we have not chosen to submit our shareholders to that in a significant way. I'm not saying we wouldn't ever do it on a particular transaction if there's enough equity and there's good collateral, but it's not our way of doing things, and we don't think it's in the best interest of our shareholders. That has played a big role in the numbers that you see.
For example, we just recently lost a fairly sizable loan to construct an apartment project. We approved it with the type of recourse that we thought we needed to support the credit, and it turned out that the developers found somebody to do it on a completely non-recourse basis. Well, we hope it works out for all concerned, but it's not prudent in our opinion. It's just the way the market is right now. The fundamentals of the economy are still decent, I don't think it's an overall economic issue. I think it's primarily a competitive issue.
Yeah, I would just jump in and say, Tim, you hear all the media and everything, but really when you look, fundamentals are still out there. We still have a very strong economy when you look at 108,000 job growth in Houston, and you have Dallas and Austin. Houston is growing 300 jobs a day. Dallas is over 300 jobs a day. Austin is probably 150 a day. The fundamentals, in my opinion, look good. You may not have a 3% or 4% GDP, and there may be some downward trend in that, but I think from a psychological standpoint, fundamentals are good. This thing could turn around and still be a good positive year for a lot of people, really.
I'm just curious if the thinking is that the competitive environment's going to persist, I'm just wondering if it just makes it challenging to hit that loan growth target in 2019 of 5%.
Tim feels strongly. I think competitive pressures it does make a difference, but I think the economy, in my opinion, makes a bigger difference. Fundamentals are good and growing. There's plenty of business for everybody, I think. That's just me. Tim, you may want to.
I agree completely. The competitive issue, it comes and goes within sometimes a fairly short period of time. Some of these institutions that will make the kinds of loans that create an issue for us typically only do that for a certain period of time, and then their boat is loaded, so to speak, and they move on to more conventional types of lending. I don't think it's reasonable to assume that competition is going to continue just consistently to be such that we can't deal with it. Having said that, it hasn't gone away. It's not going to go away tomorrow. We've always had competition. As I say, the way the competition approves loans, it changes over time. It comes, and it goes. We've dealt with it before, and we'll deal with it again.
Yeah, I don't know that I've ever been in banking where it hadn't been extremely competitive. I think it's always been like that, and it will always be like that. As Tim said, you may have certain banks that are really trying to build a bucket or something, but for the most part, it's always been very competitive. Loans are really based more on the fundamentals of the economy than anything else, I think, growing.
That's great color. Can I ask one more question on deposits? Obviously, you guys have a very good deposit franchise, and if I look at your interest-bearing deposit costs, you're at the lower end of the Texas peers. I'm just wondering, are you seeing any pressure where there's more migration into interest bearing, or you need to increase deposit costs a little bit faster in 2018 to stay competitive?
We really raised interest costs, I think, in the last quarter. I mentioned before, of course, we don't have much in CDs left, 12% or something like that. You could open the paper, and you can see some of the competitors paying. You'll see some outliers out there paying 3%. I don't even have to tell you they are. You probably see them in your paper in New York City. They're everywhere. For the most part, I think that we're paying a very competitive rate on the CD side. Having said that, we could be 25 to 50 basis points off from somebody else, but again, we're not going to get every deal. I don't want to underestimate it. It's very competitive out there. Again, we're trying to reach the customers, and I think we're paying a very fair price.
Even our money market accounts today, we're now paying, what, 1.25% on 200,000 plus, where just not long ago, we were paying, gosh-
90 or 80.
Before that, we weren't even
Zero.
six months ago, maybe 30 or 40 basis points up. I think we've really increased the interest rates that we pay, probably more so at a bigger chunk than I've ever seen in a long time.
That's what happened a couple of quarters ago. I guess it was when we did this last quarter, you saw us raise our rates because we were lagging way behind the peer group, you can't be that far out and then expect your deposits to grow. I think we normalized that somewhat when we did it. Yeah, when we look forward, direct answer to the question, we look forward, we can't just be naive and say we're not going to ever look at our pricing on deposits. On the other hand, if you're core funded, you should be able to manage that. If you have to move it, you're not moving it like you would if you're borrowing all your money that's all in CDs, basically.
Again, I think Peter's right. You're seeing a lot of people moving their money where they might've been, and they weren't watching it as much. As you start getting some rates out there where people are seeing they can put their money back in time at 2% or two and a half or something like that, they're definitely considering that. I think you'll continue to see that.
I think it's important to point out that most of the upward pressure on deposit rates has come from dollars that are already earning interest, not from the large non-interest bearing deposits that we have. There are a lot of reasons for that, but primary reason is the loan relationships that we have that those non-interest bearing dollars are tied to
Up to this point in time, the migration has not been that much from non-interest bearing into interest bearing. It's been from interest bearing into higher rates. It continues, and we deal with it on a daily basis.
I think you'll continue to deal with it as rates rise. Of course, I don't know that rates are going to go up very much anymore for a while, but you certainly saw a big rise, and it's something we have to deal with.
Right.
I think we have.
Great. Thanks for all the color. Very helpful.
Our next question will come from Brad Milsaps of Sandler O'Neill + Partners. Please go ahead.
Hey, good afternoon, guys.
Hey, Brad.
Hey.
Hello.
David, just wanted to follow up a question on the bond portfolio. Looks like you did get about six basis points of yield expansion in that book this quarter. Maybe about half that came from lower premium amortization expense. I know rates were kind of falling throughout the quarter, but lots of times you guys will pre-invest, use the borrowings to kind of get ahead of some of that. Maybe that didn't transpire. Just wanted to see if there's any additional color, maybe why you didn't pick up maybe more yield on the bond portfolio, just kind of given where rates were maybe at the beginning of the fourth quarter.
Yeah, I'll jump in. There was no premeditated plan. I think there was a little volatility early in the quarter. I think our guys sat on the sideline. The other side of it was the deposits. If you looked at our deposit growth coming in, what they were basically doing is the deposits coming in, instead of putting that into the securities portfolio, paying down our borrowings. That's why you saw the borrowings come down. You can look at it's a philosophical thing. You can look at it from two perspectives, keep the high borrowings on and invest it in my bond portfolio, or take those deposits and pay down the high borrowings. We chose the latter.
I think we did that, and this is David Zalman, but we also, again, we don't try to call rates in the portfolio. When the product that we buy, we were getting three and a quarter to three and a half, and it went back to three. We just quit buying for a period of time. Again, doesn't mean that we can't quit buying because we got $1.8 billion rolling off all the time. We try to put part of that in loans and part of it back in. Again, we weren't as aggressive at buying as when rates were going down. We generally become more aggressive when rates are going up or yields are going up.
Got it. I wanted to follow up on expenses as well. David, I appreciate the guidance. You guys do the best job in the business controlling cost. I did want to ask on the personnel side, I guess personnel costs were up about 8% year-over-year. Your headcount was up maybe 19. Is really all that just related to bonuses you gave coming out of the tax law change? That really doesn't seem indicative of kind of what you guys have done historically, but just kind of wanted to check on that growth rate in personnel.
The answer is yes. With the tax act that came into play, that savings we got from that, we determined a year ago to pre-invest in our own people, and that was reflected both ways. Annual salary increases, I think it was 5% then, plus the bonuses in here.
The bottom line is we did see a number of other companies give one-time bonuses, we elected to give right up front 5% across the board plus other bonuses. Rightly or wrongly, we let our people enjoy the tax benefit. They got to be part of it, too. They got the benefits.
I think this won't be exact, because there's a lot of moving parts during the year, but if we wouldn't have had that tax benefit and couldn't have all the resulting deals, I think you would've seen these expenses year-over-year, overall expenses and not focused on one line item, it probably would increase in around 2%-2.5%, which is kind of normal.
We would not have increased expenses like that for our associates, employees, if we wouldn't have. We really wanted them to benefit from the tax deal law. That's the only reason.
I think that's great you did it. I appreciate the extra color.
Our next question will come from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks. Good morning.
Good morning.
Good morning.
Item that I don't think we've really discussed on the income statement is non-interest income, and it's been sort of flat to lower for a few years in a row now. I'm just wondering, are there any items there that you think could generate some upside in 2019? I guess more broadly, what's the outlook for trying to grow that side of your revenue stream?
I'll jump in first. Then I think I'll let David talk about the lines of business. The core fee income that comes from the bank, I don't think there's anything major going on there. As we continue to grow our deposits, add accounts, we'll see some growth there. I think you're spot on to say where you really could make some headway is in these lines of business, whether it be trust, mortgage, and brokerage. I'll let you kind of give your thoughts on that, David.
I think that's right. If anything, you probably saw non-interest income didn't grow. It might've even went down. Eddie may want to talk about this a little bit, but we completely reconfigured our mortgage lending, where so much of it was based on individuals, and individuals, it was just more paid on a commission basis. We really reconfigured that and came to where we could have more of a centralized credit underwriting, and that eventually where people could actually get on our website and fill out an application automatically. We spent a lot of time, and I think I'll let Eddie talk about that a little bit. The other thing I think that we could grow our trust income. I think that's an area that we really like.
Brokerage has really over the years not done as well for us, the brokerage, and I think that's for everybody. That may be something not as good. I think two areas that can continue to grow, and again, we hope brokerage will grow, but again, everybody's in that business. That's probably the mortgage and trust. Eddie, you want to comment on what we did in the trust and how it's completely been rejiggered, and it's taken us about a year to get done, really?
Sure.
I mean mortgage, I'm sorry.
On the mortgage side, we have completely revamped our mortgage lending platform and have added some tenured lenders and originators into that. We've been expanding. On the other hand, we also portfolio a lot of the loans that we generate. Perhaps not so much on the non-interest income from the mortgage growth has shown up there, but we're also increasing our interest income by portfolioing a lot of those that we've elected to hold in-house. On the plus side, we do feel that notwithstanding what you're seeing in the market, and a lot of people seeing a decline in that business, that with the talent that we've recently added, as well as the enhanced platforms, that we should see an increase in our mortgage originations.
Can you tell us, Eddie, what the mortgage originations were in 2018 versus 2017?
It's about flat, 2018 over 2017, if you take a combination of portfolio and secondary. By and large, considering all that was going on in the transformation and the transitions and some of the disruption when you're putting in new systems, we felt pretty good about that. We have some really strong talent that's joined us just in the last couple of months, and we feel optimistic about how that will grow in this coming year.
I think it's important to point out that even though the refinances are flat at best because of increased interest rates, mortgage lending has always been a very core part of what we do. Our total loan portfolio is about 24% mortgage loans that we hold in-house at this point in time. With the decent economy that we operate in, we're fairly optimistic that over time we'll increase the revenue for mortgage.
Thanks, you guys.
Again, to ask a question, please press star then one. Our next question will come from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.
Good afternoon, guys.
Morning.
Morning.
Morning. Okay, yeah, it's morning here. Just had one follow-up question. Sorry if you gave or discussed this earlier. In deposits, I guess when we look at it this year in terms of across the board, every deposit category saw a decline, which makes sense given your balance sheet mix and loan to deposit ratio. Do we expect a similar level of decline in deposits in 2018? What I'm trying to get to is how should we think about average earning assets from here on? Should it be relatively flat given this ongoing balance sheet mix, or do we see growth in the overall balance sheet?
Ebrahim, this is David Zalman. Maybe you didn't hear in our past conference calls, I think we said probably a number of different times that we had last year in 2017, with the tax law changes, we had an inordinate amount of municipal deposits that came in. Normally, where we have about $500 million a year come in, we had probably closer to $1 billion. That probably happened because we feel that people thought, well, maybe if they double pay their municipal taxes on their property, that maybe they could get a double deduction. Again, I don't know that is the case, but that was a reason. Basically, I think what you saw this year with the $500 million increase that really came in with seasonality and municipals is more reflective.
That's historically, if you followed us over the last 10 or 20 years, that's always been something that, maybe not 10 or 20 years, but the last 5 years to 10 years, that's always been the amount of money. The year that you saw in 2017 was a fluke, and I think we pretty much told everybody that was a fluke in 2017.
Yeah, it's exactly right. There's the two things that you saw in this past year. One, the book of CDs kept going down until we. Again, I would point this out. It's public funds and the CDs is what you saw. The answer to the question is we absolutely believe we'll grow our deposits coming into the next year. We've historically, outside this past year, in that 2%-4% range. This is what I would tell you. As we track this, we look at this all the time. When we normalize, I like to use this term, when we normalized our rates back in the third quarter, we saw that shrink, I'd call it the shrinking to CDs that you see. That stopped. Once we brought our rates up to the more normal levels, the CDs aren't shrinking anymore.
In fact, our money market accounts have actually begun to increase. That's a reflection of where you're at in rates. It's a fine line of what's the rate you're paying versus how fast you can grow your deposits. I think we'll get in a more normal environment next year.
Yeah, Dave, I don't know how deep you want to get into this, but when you really extract what the money we lost in CDs over a year-over-year basis and take out the public funds, when you call it core deposit growth, you saw pretty good core deposit growth, 4% or 5%.
We saw some, but going forward, I think we'll be fine.
Absolutely. Yeah.
2%-4% deposit growth. Fair to assume that the balance sheet earning assets grow around in that range for the year? Fair?
Yeah, that's right.
Yes.
Got it. Thank you.
Ladies and gentlemen, at this time, we will conclude the question and answer session. I'd like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you, Allison. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate the support that we get for our company. We will continue to work on building shareholder value.
The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.