Good day, ladies and gentlemen, and thank you for your patience. You've joined Zions Bancorporation's first quarter 2019 earnings results webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. Should you require any additional assistance during the call, please press star then zero on your touchtone telephone. As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Director of Investor Relations, James Abbott. Sir, you may begin.
Thank you, Lateef. We welcome you to this conference call to discuss our 2019 first quarter earnings. For our agenda today, Harris Simmons, Chairman and Chief Executive Officer, will provide a brief overview of key strategic and financial performance. After which, Paul Burdiss, our Chief Financial Officer, will provide additional detail on Zions' financial condition, wrapping up with our financial outlook for the next four quarters. Additional executives with us in the room today include Scott McLean, President and Chief Operating Officer, Ed Schreiber, Chief Risk Officer, and Michael Morris, Chief Credit Officer. Referencing slide two, I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck dealing with forward-looking information, which applies equally to statements made during this call.
A copy of the full release, earnings release, as well as the supplemental slide deck, are available at zionsbancorporation.com. We will be referring to the slides during this call. The earnings release, the related slide presentation, and this earnings call contain several references to non-GAAP measures, including the pre-provision net revenue and the efficiency ratio, both of which are common industry terms used by investors and financial services analysts. The use of such non-GAAP measures are believed by management to be of substantial interest to the consumers of these financial disclosures. A full reconciliation of the difference between such measures and GAAP financials is provided within the published documents. Participants are encouraged to carefully review this reconciliation. We intend to limit the length of this call to one hour.
During the question and answer session of the call, we ask you to limit your questions to one primary and one related follow-up question to enable other participants to ask questions. With that, I will now turn the time over to Harris Simmons.
Thank you very much, James, and we welcome all of you to our call today to discuss our first quarter results. The results of the quarter were fundamentally quite favorable compared to the year ago results. Slide three is a summary of several of the key highlights for the quarter, which we will address in detail in subsequent slides. On slide four, you can see the earnings per share results for the last several quarters. In the first quarter of 2019, we reported earnings per share of $1.04. By way of comparison, in the first quarter of last year, we reported $1.09, although there were a couple of items worth noting. First, we experienced a $47 million negative provision for loan losses a year ago. That amounted to $0.17 per share.
Additionally, in the first quarter of last year, we recovered interest income on four large loans where the recovery per loan was more than a million dollars. And those recoveries added $0.04 per share to the year ago results with no comparable large interest recoveries this year. So excluding those two items in the year ago period, earnings per share would have increased 18%. To be fair, many of the larger banks, including Zions, had a modest tailwind related to the elimination of the FDIC insurance surcharge expense this quarter. In the year ago quarter, that surcharge amounted to about $0.02 per share, whereas the surcharge didn't occur in the first quarter of 2019. Turning to slide five, on the left side, you will see adjusted pre-provision net revenue or PPNR, which increased approximately 8% over the same period a year ago. The chart on the right is new.
As you are aware, a new accounting standard for loan loss allowances, CECL or current expected credit losses, is expected to go into place to take effect in the first quarter of 2020. Paul Burdiss will address that a bit more later in this call. But we are concerned, as we suspect many of you are, about the comparability of results arising from the new standard across banks. In this chart, we are presenting a calculation that we have been using to measure the performance of our company and set up compensation calculations for our employees for quite some time. It is pre-provision net revenue less current period actual net charge-offs. We have expressed this pre-tax number here on a per share basis.
Assisted by a strong 7% reduction in diluted shares and further improvement in net charge-offs, PPNR less net charge-offs per share increased 18% over the year ago period and 128% from the end of 2014. Allow me to transition to a discussion of strategy for the next few moments. Just last week, we announced by way of a press release our successful implementation of what we call Release Two of our Future Core project. That is a project wherein we are replacing all of our core loan and deposit systems. This Release Two milestone completes the conversion of our loan systems that are within the scope of the project. This is really a tremendous accomplishment that has required years of planning and intense work to execute it.
The modern technology that we're implementing will serve us for years to come and will allow us to more nimbly adapt digital offerings and to reliably serve our customers. As we've said in the past, but it's worth repeating, a major strategic initiative for the company is the development of technology that enables us to stay highly competitive with large national banks, small and emerging financial technology companies, and community banks. We are simultaneously working to maintain our non-interest expense growth rate in the low single digits, made possible in part by continued simplification and automation. On slide six, you can see some of the key technology investments we are making. Approximately the number of customers, deposits, or assets held by such customers, and a rough timeframe for completing those projects. The green check marks represent completed projects.
I'll conclude my prepared remarks with slide seven, which is a list of our key objectives for 2019 and 2020, and our commitment to shareholders. This has been updated to reflect some new initiatives that should set our course for the next several quarters. First, over the next several quarters, we expect to continue to deliver positive operating leverage, resulting in high single-digit PPNR growth through the actions listed on the page. This assumes no changes to interest rates by the Federal Open Market Committee. Second, we have continued to take steps to dampen potential volatility in our earnings, both with regard to credit as well as interest rate risk. We have talked extensively in the past about how our credit risk profile has changed. Furthermore, we are actively adjusting our interest rate risk profile to move towards a more neutral stance, as Paul will discuss in more detail later.
Next, we expect further growth in earnings and improvement in our profitability. There's been some discussion by industry observers, some of whom think the banking industry is approaching peak earnings. I won't comment on the industry, but we don't think that Zions is at peak earnings. We also believe we have some further room to optimize our capital ratios as supported by our internal stress tests. The decision on the magnitude, timing, and form of capital return is a board-level decision, and we'll update you on any of those decisions as appropriate. Finally, as noted in my 2018 letter to shareholders that was recently published on our website, we are intending to invest materially in enhancing the branch experience, not with coffee and donuts, but with highly trained bankers who can solve problems that small businesses experience.
With that overview, I'm going to turn the time over to Paul Burdiss to review our financial statement in more detail. Paul?
Thank you, Harris, and good evening, everyone. Thank you for joining us. I will begin on slide eight. This highlights two measures of profitability, return on assets and return on tangible common equity. As Harris noted in his comments pertaining to our earnings per share, there were some notable items in the year-ago period, namely the negative provision for credit losses and interest recoveries on loans previously charged off. These served to elevate the profitability ratios as well. Excluding these two items, the return on assets in the year-ago quarter would have been approximately 1.17%, and return on tangible common equity would have been approximately 12.5%. We are generally pleased with the recent trends in balance sheet profitability.
Although the rate of improvement has slowed from the successes achieved in 2015 through 2017, we expect positive operating leverage to combine with solid credit performance and continued strong capital returns to result in further expansion of balance sheet profitability. On slide nine, for the first quarter of 2019, Zions net interest income increased 6% from the prior-year period, up $34 million to $576 million. Excluding the interest recoveries recognized in the first quarter of 2018 that were detailed earlier in this presentation, net interest income increased about 8.5%. We did experience a moderate benefit from the higher interest rate environment, which I will discuss later in more detail, but much of the growth in net interest income is attributable to balance sheet growth.
Breaking down the net interest income by both rate and volume, on slide 10, you can see our average loan growth of 5% relative to the year-ago period. Although not listed on the slide, the period-end growth in the first quarter relative to the fourth quarter was an annualized 7.6%. Shifting the discussion to deposits, given the recent increases in short-term interest rates, we are pleased with the performance of our deposit portfolio. Average deposits increased 4% from the year-ago period. Importantly, average non-interest bearing deposits were relatively stable, decreasing only 0.8% from the year-ago period. Relative to the prior-quarter, average non-interest bearing deposits declined about 4%, and period-end non-interest bearing deposits declined a more tempered 1.6%. We believe that some, but likely not all, of the decline in non-interest bearing deposits is explained by seasonality.
The most valuable deposits are those which are generated through strong relationship banking, and the strength of our banking relationships is demonstrated through continued growth in deposit balances combined with a relatively modest increase in deposit cost. Our cumulative increase in the cost of total deposits since the third quarter of 2015, that is immediately preceding the first rate hike by the Federal Reserve, has been only 33 basis points, or a deposit repricing beta relative to the federal funds rate of about 15%. When compared to the prior-quarter, our deposit costs increased eight basis points, or about a 36% of the change in the fed funds rate, which is fairly similar to what we saw in the previous-quarter. Examining loan growth a bit closer. Slide 11 depicts year-over-year period-end loan growth by portfolio type, with the size of the circles representing the relative size of the portfolio.
For nearly all loan categories, we are reporting solid and consistent growth. You will also find our current growth outlook for each loan portfolio type on slide 11. Slide 12 breaks down key rate and cost components of our net interest margin. The top line is the loan yield, which increased to 4.93%, up 14 basis points from the prior quarter and 52 basis points from the year ago quarter, when adjusted for the aforementioned interest recoveries. That improvement is consistent with a portfolio that has nearly 50% of loans indexed to either prime or short-term LIBOR. Relative to the prior quarter, the yield on securities increased 11 basis points to 2.57%.
A primary factor driving the increase in securities yield is new securities being added in the 3% area during the quarter and premium amortization remaining stable relative to the prior quarter, which was modestly accretive to the yield of the overall investment portfolio. With the recent decline in yields at the five-year point of the curve, we expect security reinvestment to be slightly less accretive going forward. Cash flow from the portfolio, the investment portfolio, continues to be about $200 million per month. This is important because even as rates have moved higher, cash flow from the portfolio remains comparable to levels we experienced several quarters ago. This demonstrates some level of success in our efforts to limit duration extension risk in the securities portfolio.
The cost of total funds, which includes all deposits and borrowed funds, increased 13 basis points from the prior quarter, while the cost of interest-bearing funds increased by 17 basis points over the same period. When compared to the prior year, these increases are 34 basis points for total funds and 54 basis points for interest-bearing funds, respectively. This differential in the cost of total borrowed funds versus interest-bearing funds demonstrates the value of non-interest-bearing demand deposits in a higher interest rate environment. These elements combined to result in a net interest margin of 3.68% for the quarter, which increased one basis point from the prior quarter. Year-over-year, if excluding the seven basis points of interest recoveries from the prior period, the net interest margin expanded 19 basis points, resulting in a net interest margin beta of approximately 20% over the prior year.
As noted previously, one of the more substantial drivers of this margin expansion is the increasing value of non-interest-bearing deposits in the higher rate environment. Because of the nature of our deposits, being operating accounts for businesses and households, we expect our non-interest-bearing deposits to remain a competitive advantage. I will also highlight that the spread on average interest-earning assets shown on page 15 of the earnings release, if adjusted for the previously discussed seven basis points in interest recoveries recognized in the prior year period, has decreased by three basis points from the prior period. The difference between the slight net interest spread compression and the net interest margin expansion is due to the contribution from non-interest-bearing sources of funds.
Slide 13 typically resides in the appendix, but I wanted to highlight in my prepared remarks because some investor interest in the hedging we are doing to protect against a decline in short-term interest rates. As we announced three months ago, we've begun to moderate our asset sensitivity position as the recent trend of increasing short-term rates matures. You'll see that we added $3 billion of interest rate floors and $700 million of interest rate swaps during the quarter. As with other balance sheet composition changes undertaken over the past several years, such as capital distributions and moving cash into investment securities, we expect to change our interest rate positioning at a measured pace. Finally, we expect that if short-term interest rates remain relatively stable, the net interest margin should be likewise relatively stable, driven by factors such as longer maturity loan repricing and securities portfolio cash flow reinvestment.
The key risk to this outlook remains deposit flows and pricing. Next, a brief review of non-interest income on slide 14. Non-interest income, and specifically customer-related fees, remains a focus for us, and we experienced growth in loan fees earned from sales of interest rate swaps, which help our customers manage their interest rate risk, letters of credit, and wealth management services. However, that income was offset by declines in some categories of deposit fees, including the effect of higher earnings credit rates on commercial customer deposit balances. Additionally, we experienced a modest decline in service charges on certain retail and small business products. Before we discuss non-interest expense, which is on slide 15, I would like to note a key change in the presentation of our financial results.
This quarter and going forward, we have moved the provision for unfunded lending commitments, which previously was reported as non-interest expense, up closer to net interest income to be right next to the allowance for loan losses, thus presenting a combined allowance for credit losses and netting that against net interest income. As a result, the provision for unfunded lending commitments is no longer in our non-interest expense line. Noting that, non-interest expenses increased to $430 million from $419 million in the year ago quarter. As depicted on this slide, we reported an increase in compensation, much of which is due to increased profitability and very good credit quality. Also in the first quarter of 2019, we increased some key benefits to employees, which are detailed more thoroughly in Harris' letter to shareholders, and all of which are designed to appropriately reward our team for significantly improved financial performance.
Notably, it is worth mentioning that FDIC insurance premiums are down when compared to last year, as the FDIC surcharge for large banks has been eliminated. This results in a roughly $6 million reduction for Zions, which I discussed in last quarter's call. Looking forward on non-interest expense, we are reiterating our expectation for slight growth, which can be interpreted as growth in the low single-digit % rate change range. Turning to slide 16, the efficiency ratio was 60.2% compared to the year ago period of 61.3%. The efficiency ratio calculations have some seasonality to them, in that there are more days of interest income in the second half of the year than the first, and of course, the seasonal expense increased in the first quarter of each year related to payroll taxes and stock-based compensation. We remain committed to continued improvement in our efficiency ratio in 2019.
Regarding credit quality, as seen on slide 17, we continue to report improvement in most of our credit indicators, including a strong decline from the year ago figures in classified loans, non-performing assets, and the net charge-off picture. Even as the gross charge-off picture as seen on page 13 of the earnings release, is quite strong. Compared to the prior quarter, we reported a slight bump up in classified loans attributable to one credit. Outside of that, we continue to experience improvement in oil and gas classifieds and general stability in the other categories. Non-performing assets, plus 90 days past due, improved by 7% versus the prior quarter, and net charge-offs for the quarter was zero. The allowance for loan losses ratio as a percentage of loans was largely stable with the prior quarter, with most of the provision attributable to increase in loans.
Looking ahead, we are on schedule to be compliant with the new current expected credit loss accounting standard, also known as CECL, which will be effective at this time next year. Based upon our modeling, we expect more volatility in the credit loss estimate and less comparability among banks when this new standard becomes effective. This expected decrease in financial performance transparency will be impacted by, among other items, varying expectations for macroeconomic trends over the near term and loan portfolio composition differences, including expected loan lives. Zions will be in a position to disclose more in the coming quarters, including estimated financial impacts from the adoption of CECL. Finally, on slide 19, we depict our financial outlook for the next 12 months relative to the first quarter of 2019. We increased our outlook for loan growth somewhat to moderately increasing, given the recent strength in net loan additions.
Otherwise, there are no significant changes to our outlook from that which was and has been reported throughout the first quarter of 2019. This concludes our prepared remarks. Lateef, would you please open the line for questions? Thank you.
Yes, sir. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the question queue, please press the pound key. Again, to ask a question, press star one at this time. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Kenneth Zerbe of Morgan Stanley. Your line is open.
Great. Thanks. Good evening, guys.
Ken?
Hi, Ken.
was just hoping to actually stay on the loan growth topic. Paul, I know you just at the very end of your prepared remarks mentioned, sounds like the improved outlook was due to what you've already seen. I was hoping you could actually talk about what you're seeing in 2Q in terms of loan growth. I also want to make sure I just understand. Your outlook is moderately increasing, which is better than what it was before, and that applies for the next 12 months. It seems that your loan growth outlook should be kind of better than on an already higher first quarter balance. Is that the right way of thinking about it?
Well, I'll start, I'll ask Scott and maybe Harris to chime in. First of all, with respect to the second quarter, it's so early in the quarter, it's really hard for us to make any meaningful commentary on that topic. As you point out, we have through the language that we're using, we've tried to telegraph a, I would say, kind of a slight increase or improvement in our loan growth outlook relative to what we saw in the prior quarter. As I said in my prepared remarks, That's largely because of the engagement and the strength that we're seeing in net loan portfolio additions. Scott, would you like to add to that?
Yeah. Ken, I'd just add that if you look at slide 22, basically our year-over-year growth rate's running kind of mid-fives. The first quarter annualized is a bit faster. We've been guiding towards mid-single digit loan growth for three, four years now, sometimes it's going to be kind of three and a half to four, sometimes it may get up to six to seven. I think it's still very much in the band that we've talked about. The growth that we're seeing really is very consistent with the previous two quarters and the last three or four years. Basically, 40%-50% of it's coming from C&I. We're seeing some CRE growth, but the CRE portfolio really hasn't grown much if you go back 15 to 18 months.
Really solid growth from one to four family, that generally makes up about 20%-25% of our growth rate. We're also seeing really nice growth across all our affiliates, depending on the quarter. I would say more consistent growth coming from our four smaller affiliates than we've seen historically. Just good balanced growth.
All right. That's perfect. Oh, go ahead.
You can see here that, I guess two other sub-portfolios. Municipal has been growing nicely over the last two years as a result of the strategic initiative we've had there and should continue to grow. Again, it's really a nice yielding loan type and really high credit quality where ancillary business is starting to flow from it. Our energy portfolio, recall that it went from about $3 billion in outstandings down to about $2 billion, a little less than $2 billion. We're now back up about $300 million, and we're very happy with that loan growth. The energy portfolio is about $2.3 billion. The mix has shifted significantly. Oilfield services was about 45% at the peak. It's now about 22%. Our energy services term loans, which is where we had the greatest loss rate, they're now less than $400 million.
It's a really good mix shift there, and most of our new fundings are going into reserve base and midstream.
Just my related follow-up. Can you just talk a little bit about your outlook for deposit price increases now that the Fed is largely done raising rates?
Ken, I'll start with that and allow, again, Scott or Harris to jump in. We're really excited about the performance of our portfolio over the course of this rate cycle. That being said, we have seen a modest acceleration in deposit repricing over the last couple of quarters. My expectation is with the flatness of the curve, and with the Fed appearing to be sort of on pause maybe indefinitely here as it relates to rate increases, the further we get away from the event of Fed tightenings, my expectation is that the pressure that we've been seeing on deposit pricing will begin to abate over the next couple of quarters.
Got you. Okay, perfect. Thank you very much.
Sure.
Thank you. Our next question comes from the line of Dave Rochester of Deutsche Bank. Your line is open.
Hey, good afternoon, guys.
Hey, Dave.
Hi.
Just on the outlook slide, you guys have mentioned here your efforts to reduce payoff activity. Was just wondering what steps you guys are taking on that front and if that was what helped the growth this quarter versus maybe a pickup in origination activity.
Yeah. Dave Rochester, this is Scott McLean. We did see a higher success rate in retaining CRE term loans as opposed to them being refinanced into the secondary market. Michael Morris, you may recall the number, but I think it was a $300 million-$400 million sort of benefit during the quarter. Nice progress. We really haven't seen that kind of progress on that front, but we got a little more aggressive in marketing to those more earlier in the renewal process.
Okay, great. That's good color. I know you said it's early in 2Q, but are you continuing to see momentum in the loan pipeline heading into 2Q at this point, just given what you're seeing so far that's sort of locked in to close?
Again, it's too early to comment, but we really, since the third quarter of last year, late second quarter of last year, all the way through the end of the year and through the first quarter, we're just seeing good balanced growth. We anticipate that to continue.
Okay, great. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Ken Usdin of Jefferies. Your line is open.
Thanks. Good afternoon, guys.
Good afternoon, Ken.
Paul, wondering if you can talk a little bit more about the hedging strategies that you discussed in the deck and earlier. How much way through your planned hedging program are you, and can you talk a little bit about whether you're either benefiting from putting on those hedges now or have to amortize a little bit of cost, and is that baked into your outlook? Thanks.
Yeah. Ken, I'll start with the second part. With the flatness of the curve, there's clearly no benefit to putting hedges on today. In fact, it's a very modest immaterial, which is why I didn't say it. You're kind of a modest reduction in net interest income. With respect to the program itself, we do not have a. The ALCO, that is, the Asset Liability Management Committee, doesn't have a specific target in mind other than the expectation is we will, in the near term at least, continue to work down that interest sensitivity. Specifically, as I said on the call, we're particularly concerned with falling interest rates. When you consider the behavior of our deposit pricing over the course of the last couple of years, you can see where in a decline in rates, the deposits could floor out pretty quickly.
Our concern, of course, is that we become very asset sensitive in a falling rate environment, which is why you saw, in addition to the swaps, why you saw us put $3 billion of rate floors on, because effectively, that would be offsetting the impact of the deposit pricing in a falling rate environment. I would say-
Okay
we're kind of trying to be a little more specific to answer your question. I'd say we're still pretty early on in the hedging process with a lot more to come.
Okay. A follow-up on the mix of the balance sheet. You mentioned in the outlook, slightly declining securities portfolio balances. Up till now, you've been funding using the deposit growth to fund both loans and securities. Are you now at the point where you'll remix a little bit more on the asset side, just funding loan growth more incrementally with securities rather than necessarily paying up for more deposit growth? Just want to understand how you're thinking about that. Thanks.
Sure. Our securities portfolio exists, as I've discussed previously, first to manage liquidity and second to manage interest rate risk. Our priority is ensuring that we have an investment securities portfolio that is adequate to maintain liquidity on the balance sheet. All that being said, obviously, there is a cost to liquidity, we're measuring or monitoring that very closely. As loan growth has really begun to exceed deposit growth, we're going back and looking at our investment portfolio and really ensuring that it is of the appropriate size. My expectation certainly is that the portfolio will not grow from here, and in fact, will likely, on either an absolute or a relative basis, will decline a little bit.
Okay. Thanks, Paul.
Yeah. Thank you.
Thank you. Our next question comes from John Pancari of Evercore. Your question, please.
Good afternoon.
Hey, John.
On the margin side, I know that you had indicated for your expectation for net interest income to be moderately increasing. Given that outlook, can you talk about how that plays out in terms of the margin trajectory from here? I believe you had previously expected some stability here on out, but clearly you've got the swap impact and the impact of the curve. I wanted to get an idea of how you're thinking about the trajectory of the margin from here.
Sure. On the interest rate hedging, as I said, we're really not seeing a benefit. Certainly not seeing a benefit. We're really not seeing a detraction from the margin either, at least in the current environment. All that being said, in my prepared remarks, I mentioned net interest margin stability as we see some kind of repricing in the loan portfolio and especially in the securities portfolio. The key to that outlook is deposit pricing and deposit flows. So long as we can continue to maintain appropriate share of non-interest-bearing demand deposits, and so long as the interest-bearing portion of those deposits remains priced consistently with our expectations.
Importantly, as long as we don't get seriously out of whack in the balance of loan growth and deposit growth, kind of all of those are implied assumptions in that margin stability, and there's probably more risk to the downside than the upside in the current environment.
Got it. Okay. That's helpful.
All that being said, sorry John, if I could. All that being said, we are really focused on growth in net interest income and growth in revenue. We don't specifically manage to the margin, as you know. We're far more concerned with revenue growth than the margin, which is a kind of an indication of relative profitability.
Got it. Okay. Separately on the expense side and the efficiency ratio. I know you indicated you're expecting continued improvement and positive operating leverage as well. Can you talk about how you think about it for full year 2019? Are you still expecting below 60% range? Then long term, I know you'd indicated mid-50s. Is that still a fair assumption? What do you think about the timing until when you can get into that mid-50 range? Thanks.
Sure. Well, in 2018, as you know, we did report an efficiency ratio that was below 60%, in my prepared remarks, I mentioned that we're expecting continued improvement. You glue those pieces together, and you can see that our expectation is for an efficiency ratio that's below 60% in 2018. I absolutely think that it's achievable to get into the mid-50s. We don't have, nor have we put out a kind of a timeframe associated with that. We're really focused on, as we think about our plans and our forecasts, we're really focused on positive operating leverage and the degree to which we can increase that leverage absolutely affects the timeline that we will be able to achieve that efficiency ratio outcome.
Okay, thanks, Paul.
Yeah, thank you.
Thank you. Our next question comes from Brad Milsaps of Sandler O'Neill. Your line is open.
Hey, good afternoon.
Hi, Brad.
Scott, I was curious if you'd maybe offer a little more color on the loan growth, specifically in Texas. Looks like that was your really big driver this quarter. I know you talked a little bit about the CRE, but just any additional color for Texas specifically, and what are the chances that you can kind of keep that type of growth rolling in that market?
Absolutely, Brad. Keeping that kind of loan growth at that pace would be unrealistic and uncharacteristic with how Amegy has grown historically. I would just hit that really quickly. It is about a little less than $600 million of growth during the quarter. Basically, if you look back at Amegy for the last 12-15 months, there was very little growth in Texas. Texas was still coming out of the energy downturn and kind of the malaise, the post-Hurricane Harvey malaise, which was the fall of 2017. All of those clouds have cleared off, and Houston, which is where about 70% of the loan growth in Texas comes from, really is performing quite well. Amegy is benefiting, too, from its many years of investment in Dallas-Fort Worth and San Antonio and Austin.
30% of growth is coming from those markets now, and those economies are doing well. If you just kind of step back, C&I growth during the quarter was about $300 million. About a third of it was energy, a third was municipal. Then they had a couple of larger transactions, really four to be precise, that could have, quite frankly, closed in the fourth quarter, and for a collection of unrelated reasons, ended up closing in the first quarter. So there is a little bit of a timing thing there. The CRE growth that you see in Texas, you can see all of this on slide 22, about $170 million of growth. It is mainly coming through construction loans that were originated about a year ago.
From a historical context standpoint, the CRE portfolio in Texas is still about what it was in December of 2016, almost three years ago. So it looks like a lot of growth in one period, but over an extended period of time, is equivalent to where that portfolio has been.
Great. That is helpful. Just as my follow-up, Paul, the decline in DDA was pretty consistent with what you guys typically see in the first quarter. Anything in your mind that those dollars wouldn't come back in the fold as you kind of progress through 2019, given where rates are now? Just kind of curious, any thoughts on the DDA as you kind of move back to the seasonally stronger quarters for you guys?
Yeah, sure. I would say that the DDA decline was probably a little bit more than what would be expected from just seasonality. Our ALM models would indicate that over time, we would expect to see a little less DDA and a little more interest-bearing deposits. It's really hard for me, based on this one quarter, to discern a trend. I would only say that, look, versus last year and certainly over the last several years, our DDA has continued to be strong at well over 40% of our total deposits. Based on that experience, I'm expecting continued strength there.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Erika Najarian of Bank of America. Your line is open.
Hi, good afternoon.
Erika.
Hi. I just wanted to go back to the statement during prepared remarks about Zions earnings haven't peaked, and I just wanted to unpack that a little bit and sort of expand that beyond the 12 months look. When you gave us a guide for revenues and expenses, I think that clearly the curve outlook keeps changing, and I'm wondering if your statement is supported by business growth that you're seeing or your ability to change your expense base relative to the revenue outlook.
Well, I'll start with that, invite Harris and Scott to join in. As I said, this is Paul, we are really focused on positive operating leverage. To the extent our revenues exceed expenses in terms of growth, we will absolutely continue to see improved profitability. Your question was, do we have the ability to sort of change our expenses relative to revenues? I think we've demonstrated that over the last three or four years. We have absolutely, while making a massive investment in the business, have been continuing to report controlled expenses and expense growth that is lower than revenue growth. That has been a tightly managed process here, and my expectation is we'll continue to be able to achieve that.
Yeah, I'd just add that I think if we look at the economy and the markets we operate in, we're just not seeing any real signs of slowdown. The one maybe exception to that would be just construction trades is really tight. I was in Denver the other day, and there was a fair amount of discussion about the impact that's having, just kind of slowing things down. That's maybe kind of a high-class problem because I think it's probably acting as a governor on the kind of growth that can get you into trouble, too. Fundamentally, the economy across the Western U.S. is pretty strong. I also think that we have the benefit of not having probably quite as much pressure on
Funding loan growth as some others do. We're in pretty good liquidity situation, and I think that gives us a little more room probably to see some loan growth without having it create too much pressure on the deposit side. I'd just add those to the mix and we're going to keep very focused on the expense side. I do think that, the fee income piece of the puzzle, looking across the industry, that's clearly proving to be a challenge across the whole regional sector. We're no exception, but I think we probably have a little less drag that's going to come from consumer fee income, deposit fee income on the consumer side, because it's just not as big a piece of our picture. I think that's, in my mind, one of the great challenges the industry generally has.
I'm a little more optimistic in terms of what we can do on the fee income side, than I might otherwise be. We add it all up, and we also think that credit quality is just really good and you can't stay at zero in terms of net charge-offs for forever, but we've been there now for about for a year. We just don't see a lot of change in that picture. I think that the provision drag is going to be pretty modest here for the next two to three quarters.
Got it. My follow-up question is, on the concept of not much pressure on funding loan growth. On the other side of that, as we think about those securities reinvestment, Paul, could you give us a sense on the reinvestment strategy? Also the yield that you're looking at right now in terms of reinvestment?
Yeah. We have been really disciplined, as we've talked about a lot over the last couple of years, and quarters. I think we've been really disciplined in where we are investing along the curve. We have an investment portfolio that is relatively short. We don't have any 30-year paper in there. It's a maximum of 15-year final maturity with respect to the MBS that we hold. That's continuing. The going on yields of the portfolio in the first quarter were kind of in the 3% range. It's probably a little south of that now, given sort of what's happened with respect to the curve. As I mentioned on the call, the fact that the cash flow within the portfolio has been really consistent here for the last several or many quarters is indicative of the, I would say, the way we're managing the duration extension risk.
Because the duration is relatively short and because the cash flows have been proven to be predictable, we will continue to reinvest at the prevailing rate, which we think is important as we're thinking about tightly managing that portfolio and being able to extract liquidity out of it if need be. Also kind of reinvesting at the prevailing rate.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Peter Winter of Wedbush Securities. Your line is open.
Thanks very much. Could I ask, just given your prior comments about the economy and credit, you have increased the share buyback last couple of quarters. I'm just wondering, given a positive outlook, would you continue to look to accelerate the buybacks?
Well, obviously, to the extent we have a little stronger loan growth, that could actually change our thinking somewhat. As we said in our remarks, it's really a board decision, and it's one that we are going to always be very careful about getting out over our skis until we have that conversation with the board. We said that we think that we still have some room to optimize our capital ratios, but kind of the timing and that is something we just look at every quarter. I'm not going to speculate further.
Okay. Paul, just my question to you. You're certainly a little bit more positive on the outlook on deposit costs, just given the flattening yield curve and the Fed on hold. I'm just wondering if you could be a little bit more specific what you're looking for in terms of deposit increase on the interest bearing deposits, both in the second quarter and kind of second half of the year, where we think it would slow even more.
I appreciate your question. However, it's really hard for me to be a lot more specific than I have been. As I've noted in the past, we've had some modest increases in what I'll call sort of the board rates. Really where we are managing tightly the deposit pricing is largely through exception pricing. It's really, as we've seen over the last kind of year, six months a year, where we've really seen a lot of pressure is in the larger average balance sort of deposits. That's where we've seen a lot more deposit beta, if you will. Most of our deposits, particularly DDA, are operating accounts. Very granular, very small sort of average deposit size. It's hard to put a specific basis point expectation on it, which I think is what you're asking for.
What I can really say qualitatively is that. Where we've seen pressure is in these very large depositor balances. Fortunately, on a relative basis, we just don't have a lot of those. The vast majority of our deposit composition is from relationship-based operating accounts.
I would just add to that, Peter, this is Scott, that we do have a moderately sized bucket of customer deposits that are off balance sheet. They're being swept into overnight money market funds. We may see some growth in our own interest-bearing liabilities that just comes from. Instead of paying the FHLB or broker deposits, you may see those balances come down, and what we think of as wholesale deposits coming up. To the extent we can move those client balances back on balance sheet at rates that are less than, and we can, less than what we're paying brokerage deposits or the FHLB, you'll see us do that.
Got it. Thanks for taking my question.
Good. Thanks, Peter.
Thanks, Peter.
Thank you. Our next question comes from the line of Kevin Barker of Piper Jaffray. Your line is open.
Hi. Just to follow up again on deposits. Do you feel comfortable with the loan deposit ratio getting into the mid to high 90s if that were to occur? What type of environment do you expect that to occur if it did?
I'll start with that and ask Scott and James to join in if they feel like it. I would absolutely be comfortable with the loan deposit ratio in the high 90s. I think, loan deposit ratio is an indication of two things, I think, liquidity and profitability. We can absolutely manage the loan deposit ratio lower by going out and buying money. The loan deposit ratio, I think, again, historically has been viewed as a measure of profitability, but I think it's a little flawed because it doesn't necessarily consider the nature of the deposits you're bringing in. Likewise, as a measure of liquidity, it's also, I would argue, not particularly useful because we can manage liquidity through term funding that is not deposit based. Looking at just the ratio, could I be comfortable with a loan deposit ratio in the 90s, mid-90s? Yeah, I absolutely could.
The most important thing for us is managing and maintaining profitability and liquidity. We have been doing that and we'll continue to do that.
Okay, just to follow up on the expenses. Core expenses were up just under 5% on a year-over-year basis. You expect the growth, it seems like it's going to slow, given your guidance. Can you just give us an idea of the cadence of the year-over-year growth as we move through 2019?
Well, as you look at seasonality of expenses, you always see an uptick in the first quarter, or historically you have, because you've got payroll taxes, and you've got stock-based compensation for retirement eligible employees. There are things like that that happen in the first quarter that don't repeat. So you really need to take that increase in the first quarter and spread it out over the course of the year. That being said, we have a detailed budget and forecast that we believe would support the outlook, which is non-interest expense in that low single digit range.
Okay. Thank you.
Yeah, thank you.
Thank you. Our next question comes from Lana Chan of BMO Capital Markets. Your line is open.
Hi, good afternoon.
Hello.
Paul, can you just give us any color in terms of, just following the last answer and the personnel related seasonal expenses this quarter, how much it added, and how much we should come out in the second quarter?
I think we have enough disclosure in the financials to look at the trend in compensation expense and where you can see that bump up. It's between $5 million and $10 million, but I think you can probably call that out if you look at the trend in that compensation expense line.
Okay. Then, on customer related fees, I think you guys talked about some softness on retail and small business service charges. Is that seasonal, or is that more of an ongoing factor for fees going forward? The $120 million of customer related fees, I want to see if we expect any recovery in that going into the second quarter.
Yeah. Lana, this is Scott. That particular item, retail and small business service charges, has been weak for five years. It is for the industry. It has been for us. We had one year where it increased, and I think it was 2017. Then in latter half 2018 and into 2019, we're seeing some continued softness there. I wouldn't think of it as seasonal, and I wouldn't think of it as an unusual trend. It's actually a trend we've been watching and trying to counter for some time.
Yeah. This is James. One of the things that's consistently down is the non-sufficient funds fees. I think as the credit quality of our customers gets better and better, and technology allows customers to see their balances in a real time fashion, and provides customers tools to be able to manage that type of thing, That's one of the natural fallouts of that, is that we see a little less of that fee, for example.
Okay. Thank you. It's helpful.
Thank you, Lana.
Thanks. Your next question comes from Steve Moss of B. Riley. Your line is open.
Good afternoon. I was wondering if we could get a little further into the leads on the hedging transactions. In particular, wondering what the average term of both the rates of the swaps and the floors are, and what is the rate on the floors?
Yeah. These are, by and large, three-year arrangements. The rate floors are about 100 basis points out of the money, so they're kind of around one and a half.
Okay. My second question, just wondering here, what was the driver of the uptick in 30-day, 90-day delinquencies quarter-over-quarter?
Do you know what that was, Michael?
Sorry, I don't think it was big, obviously. I think there was probably just noise in there.
It would've just been noise or timing. There wasn't anything material.
If there's something material or specific in there, we can certainly get back with that.
Okay, thanks.
Thank you. Our next question comes from Steven, I'm sorry, Alexopoulos of JPMorgan. Your line is open.
Hi, everybody.
Hi.
I'd like to follow up on the offsets to potentially higher deposit costs, which are underlying the stable NIM assumption. The securities yields and new ones are definitely a lever, how much above the current loan portfolio yield are new loans coming into the book?
Well, it gets to loan mix, which we've been talking about for some time, and that's important. It's not just a matter of the new loans coming on and the rate of the new loans, but the composition of the loan portfolio. We've seen better growth, for example, in commercial real estate and some construction. Those generally have better yields than, for example, residential mortgage. It's a combination of those things in addition to the shape of the curve, which I think is kind of what you're describing.
I would just add, Steven, our loan officers do report that there's continued pricing pressure. From quarter to quarter, year over year, a few basis points on at least the major food groups, if you will. Although the yield on new production is higher than the overall portfolio yield, some of the new loans that are coming on are refinancings of existing loans. Because of the improvement in credit quality and other factors, we are seeing some price competition. There is a little bit of yield compression, if you will, every quarter from that factor.
Okay. That's helpful. I had a follow-up for Harris. You said in your opening comments that you're investing in the branch experience. I think you said more than just coffee and donuts. What are you planning, and will we see this impact expense growth? Thanks.
I don't think you'll see that materially impact expense growth. We are very focused on trying to take the people we have, particularly in our branches, and give them opportunities to develop additional skills and with that, a little bit of additional authority. We hope to, over time, increase the tenure of people we have there. It's tough to say you're a relationship bank, you don't work to do the kinds of things that actually create relationships, which include just having the same people there for a long period of time. Having them trained and qualified to deal with particularly the small to small mid-size kinds of businesses that frequent branches a lot, and particularly in our franchise. That's what we're determined to do.
It's not going to be something that happens overnight. I absolutely believe that it's going to be an investment that will yield returns greater than any cost we put into it, both in terms of morale and in terms of just creating the kind of sticky relationships that we hope we'd have out in our branches. I'd also say it's something that we don't think many of the larger banks are very focused on. Branches have become sort of this necessary inconvenience for a lot of folks. We think about it a little differently, I think.
Okay. Great. Thanks for all the color.
Thanks, Steven.
Thank you. Our next question comes from Christopher Spahr of Wells Fargo. Your line is open.
Thanks. I'd like to ask a question. Just a question on the capital authorization. Should we expect there to be a board meeting, or is it reasonable to expect a board meeting a week and a half from today, or towards the end of next week?
That's reasonable.
The pace of buybacks, seeing as it has picked up the last couple of quarters, would it be reasonable to think if the pace of buyback could actually increase again further? Are you kind of content with the pace that you set for the first quarter?
We'll be announcing something, I expect, by the end of next week, and I'll let it wait until then.
Great. Thank you.
Thanks.
Thanks, Chris.
Thank you. Our next question comes from Brody Preston of UBS. Your line is open.
Thanks for taking the questions. Sneaking in under the line here.
Yeah.
Within the commercial real estate portfolio, I know you mentioned the construction and development is showing some growth from draws that have been in place for a while, the term category seemed to be up pretty consistently in the last four quarters. Is that indicative of your greater comfort and confidence in that segment or better pricing or a bit of both?
This is Michael Morris. I'll respond to that. The C and D growth really is for our premier clients. Most of the C and D growth that you see would not be new-to-bank clients. The CRE term growth would just be a factor of either renewing or, as been mentioned earlier, moving from construction to term loans that are already on the books. Some acquisition of new loans, some new term CRE facilities here and there, not indicative of a major trend or a marketing strategy. It's business as usual, and everything is well within our risk management framework in terms of concentration limits and underwriting.
Got it. Okay. Separately, on the provision line, I see the guidance of modest provisioning, that's been consistently lower than I would've expected, given the recoveries and things. Any further color you would give in terms of the provision, the remainder of the year or the cadence of it that we should be thinking about?
Yeah, I'm going to start. This is Paul. Obviously, there are a lot of accounting rules, most importantly, that we need to think about. This is the largest estimate on our balance sheet, we need to build it loan by loan up every quarter, which is what we do. Our comments are really around expectations of underlying credit trends. We have seen continued improvement in credit trends over the course of the last several years. Maybe the pace of improvement has slowed a little, but the sort of underlying trend of continued improvement feels like it will continue for the foreseeable future. The expectation is that we'll continue to provide for loan growth, that's really what's reflective in the outlook.
Got it. Okay. Thank you very much.
Yeah, thank you.
Thank you. Our next question comes from Brian Foran of Autonomous. Your line is open.
Oh, hi. Good evening.
Brian.
Paul, I just wanted to clarify. I think earlier you were talking about deposits as the key swing factor to NIM, you mentioned there was more downward risk than upward right now. Was that downward risk, are you saying for the NIM there is more downward risk or just for the deposit commentary?
Yeah, that commentary was really, it is sort of come out over the Q&A of the call. I think that the opportunity for upside on interest rates on loans and securities is probably a little more limited, given the shape of the curve and what we are experiencing there. The upside is a little more limited, whereas the downside on the deposit side, that is, the risk of an increase in deposit rates exceeds the risk of increases in the loan yields. That balance is all I was trying to capture with that commentary.
Got it. Harris, I guess that you had made the comment that credit costs don't stay at zero forever, but they could for the next couple of quarters or near zero anyway. As someone who's seen a few cycles, what are the kind of key things you're watching right now to try to gauge, what are you looking for to kind of see the turn coming if and when it eventually does?
It's watching non-performing asset trends, non-accruals, the criticized classified trends. We had a little bit of bump up from one deal that's going to resolve itself this past quarter. I think fundamentally, we're just not seeing any sort of emerging storm clouds in terms of something that would cause us to think that at least gross charge-offs are going to change very materially. The recoveries that obviously kind of plays itself out, and you have less to pick through as you get further away from the energy event of three years ago and et cetera. Fundamentally, if you look at gross charge-offs, they've been in very good shape, and I don't really see that changing, at least as far out as we can really reasonably see, which is probably the next couple of quarters, something like that.
Thank you very much.
Yeah.
Thank you.
Thank you. At this time, I'd like to turn the call back over to James Abbott for any closing remarks. Sir?
Thank you everyone for joining on the first quarter 2019 earnings call. We appreciate your time. I will be around this evening for further follow-up questions if you have them, and throughout the rest of the week, of course. Again, we appreciate your attendance today, and thank you, and we'll see you at the next earnings call or at a conference. Thank you so much.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.