Gentlemen, and thank you for your patience. You've joined Zions Bank Corporation's 3rd Quarter 2018 Earnings Results Webcast. As a reminder, this conference may be recorded. I would now like to turn the call over to your host, turn to Director of Investor Relations, James Abbott. Sir, you may begin.
Thank you, Latif, and good evening, everyone on the call. We welcome you to this conference call to discuss our 2018 Q3 earnings. For our agenda today, Harris Simmons, Chairman and Chief Executive Officer, will provide a brief overview of key strategic and financial objectives. After which, Paul Burdes, our Chief Financial Officer, will provide will detail on Zions' financial condition, wrapping up with our financial outlook for the next four quarters. Additional executives with us today include Scott MacLean, President Chief Operating Officer Ed Schreiber, Chief Risk Officer and Michael Morris, our Chief Credit Officer.
Referencing Slide 2, 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 earnings release as well as a supplemental slide deck are available at zionsbancorporation.com. We will be referring to the slides during this call. In this earnings release, the related slide presentation and this earnings call contain several references to non GAAP measures, including pre provision net revenue and the efficiency ratio, which are common industry terms used by investors and financial services analysts.
Are in the range of $1,000,000,000. The use of such non GAAP measures are believed by management to be of substantial interest to the consumers of these financial disclosures and are used prominently throughout the A full reconciliation of the difference between such measures and GAAP Financials is provided within the published participants are encouraged to carefully review this reconciliation. We intend to limit the length of this call to 1 hour. During the question and answer section 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 turn the time now over to Harris Simmons.
Participants. Thank you very much, James, and we welcome all of you to our call today to discuss our 2018 Q3 are in the range of $1,000,000. The results of the quarter were strong relative to the year ago results. Slide 3 is a summary of several key highlights. At a high level, perhaps most importantly, we're pleased with the strongly positive operating have increased in the mid single digit range.
Much of what we are doing is designed to push the tremendous operating leverage that we've experienced during the past three and a half years and the future years. Loan growth was relatively healthy in a quarter that can often have a slowness due to seasonal reasons. We're encouraged with our deposit costs exhibiting a relatively low increase compared to benchmark rates. And we're encouraged with further growth in average are not interested in non
interest bearing deposits, something
that's not easily accomplished when interest rates are rising. Our credit quality profile continues to improve at a rapid rate. Remarkably, the trailing 12 month net charge off ratio was only
are in the range of 1 100th of a
percentage point or 1 basis point. Finally, relative to the prior quarter, we increased interested in the company's earnings release and earnings release and earnings release. While we intend to further reduce the capital ratios to better reflect the risk profile of the company, we still have one of the very strongest capital levels within the regional bank space with a common equity Tier 1 ratio of 12.1%. Before we dig into the numbers, within the theme of simplification and streamlining, I'd also like to note that we completed our merger of the holding company with and into the bank, reducing organizational complexity and eliminating duplicative regulatory oversight. On Slide 4, you can see the improvement of earnings rising to $1.04 per share from $0.72 per share in the year ago period.
Are not sustainable in the long run, which are listed on the slide. Graphically, the GAAP result is the darker blue are the darker blue bars, while the adjusted result is shown in the light blue bars. Much of the variance is due to continued improvement in credit quality, including interest recoveries that affect the net interest margin as well as negative provisions for credit losses. Quarter. We've benefited particularly from the relatively rapid improvement in the quality of loans to the oil and gas sector.
We still have some expected benefit left from that source, but we're nearing the end of that favorable impact. Earnings per share for the Q3 of 2018 continue the trend of strong growth. By my calculations, if one eliminates the effect of interest recoveries, negative provisions for loan losses and if you hold the tax rate constant with the year ago period, our EPS growth was in the high teens relative to the Q3 in the same period last year. Slide number 5 highlights 2 key profitability metrics, return on assets and return on tangible common equity. We're happy to see the return on assets at about 1.3% even after adjusting for items and for the return on tangible common equity to expand participants are encouraged to exceed 14%.
We continue to work hard to further strengthen these measures and with higher capital distributions, we expect the return on tangible common equity to continue to strengthen. Participating in the call. Pre provision net revenue is depicted on Slide 6 has performed particularly well, rising 16% over the past year are nearly doubling since we embarked on our efficiency initiative in late 2014. Adjusted for the items noted slide. Our pre provision net revenue increased 15% from the year ago quarter.
We have said and continue to participating in the Federal Open Market Committee. We're seeing momentum in several areas of revenue growth, including several areas of lending, such as residential mortgage, owner occupied properties and municipal lending. Meanwhile, costs, both interest bearing liability and non interest bearing expense, have been relatively well contained. On Slide 7, you'll see the strong credit trends depicted on the chart on the right with classified loans declining a very strong 37% from the year ago period and 17 in the same period last year. Improvement in oil and gas loans was a major reason for the improvement.
For the Q3, we experienced net are in the range of $1,000,000 or about 1 basis point of loans annualized. Net charge offs for the last 4 quarters were only 1 basis point of average loans. We expect a low overall rate of net charge offs in the months ahead, assuming current economic conditions remain generally stable. Additionally, as you can see from the allowance ratios, we're still maintaining strong coverage of nonperforming assets and other problem credit metrics. We continue to adjust upward our qualitative factors to reflect stressors that can be observed in the economy generally such as the implementation of tariffs, higher interest rates and the effect that they may have on certain borrowers and higher oil and gas prices, which may reduce profit margins for certain commercial businesses and drag on participants are spending, etcetera.
Quantitatively, however, we have not seen a credit deterioration within the various portfolio types. Slide 8 is a list of our key objectives for 2018 2019 and our commitment to shareholders. We've presented this slide in prior earnings calls and at industry conferences throughout the year, so I'll avoid reading the slide to you. I'm pleased with the progress we've made on so many of these initiatives, all of which set us up to increase our participants will be conducting a reconciliation of capital to shareholders. We've increased that rate from about 20% of earnings to more than 110%.
We view an increase of balance sheet leverage as appropriate, particularly given the reduction of the risk profile of the company. In the discussion of the magnitude, timing and form of capital return is a Board level decision. And to preempt the question, the Board meets later this week to discuss, among other things, capital returns, such as share buybacks and common will be conducting
a review of stock dividends.
With that overview, I'll turn the time over to Paul Burdiss to review our financials in additional detail. Participating. Paul?
Thank you, Harris, and good evening, everyone. Thank you for joining us. I'll begin on Slide 9. For the Q3 of 2018, Zions' net and investors will be participating in the Q4 of 2018 Earnings Results Webcast. At this time, all participants will be participating in the Q4.
Excluding interest recoveries as detailed on the slide, net interest income increased $40,000,000 to are $562,000,000 up approximately 8%. With respect to the revenue components, I'll start with volume in the range of $0.05 per share in just a moment. Slide 10 shows our average loan growth of 3 point in the range of 0.5% relative to the year ago period. Although not listed on the slide, the period end growth in the 3rd quarter relative in the Q2 was an annualized 5% with strength weighted toward the end of the quarter. Average deposits increased about 3% from the year are in the range of $0.05 from the prior quarter.
Thus far, we've been able to achieve this growth are with a relatively modest increase in deposit cost. This speaks to the granularity and overall quality of our deposit franchise as we discussed in in detail at our Investor Day this past March. Examining loan growth a bit closer, Slide 11 depicts are year over year period end loan balance growth by portfolio type, with the size of the circles representing the relative size of the portfolio. For most categories, we experienced solid and consistent growth. Participants are in the term CRE and National Real Estate Portfolios of about 240,000,000 within non oil and gas C and I loans relative to the prior quarter, we experienced an annualized attrition rate participating in the participants are experiencing annualized growth rate of about 4% on our smaller loans.
The incremental competitive pressure on larger commercial loans seems to be coming from capital markets activity and some loosening of credit standards among competitors, including unregulated senior debt We experienced relatively consistent growth trends in 1 to 4 family and home equity loans and experienced a slight uptick in the growth rate of owner occupied, which are generally small business loans underwritten based upon the cash flows of the borrower and encouraged by real estate. Oil and Gas loans have increased moderately, resulting primarily from a relatively strong increase in upstream and mid on last quarter's call, we've hired staff to help us grow in this area, which is focused on smaller municipalities and essential services of those cities. We've maintained strong credit quality standards and feel comfortable with the growth and expect growth to remain strong in this area. Although we are optimistic in the near term about the growth of loans based upon the relatively strong economic backdrop, in improvement in small business loan growth and review of pipelines, we are also seeing some factors that may result in some growth and a pricing that may not satisfy our risk reward appetite. Therefore, we are modifying our 12 month outlook for loan growth to slightly to moderately increase.
Slide 12 breaks down key rates and cost components of our net interest margin. The top line is loan yield, which increased to 4.71 percent, participants have increased about 40 basis points over the past year, which is a loan yield change of slightly more than 50% participants are
in the range of $1,000,000 relative to
the prior quarter, the yield on securities increased slightly. The shorter duration of the investment portfolio in combination with new security purchases, which were accretive to the yield of the portfolio helped lift the yield overall in the investment portfolio. While the premium amortization is very difficult to forecast, assuming stability in are in that area, we expect the yield on the securities portfolio to move higher at a moderate pace over the next several quarters years based upon the yield of the securities we are purchasing. The cost of total deposits and borrowed funds increased 5 basis points in the quarter to 0.45 are in the range of $1,000,000 or 45 basis points resulting in a funding beta of about 30% for the year over year figure. As a reminder, in this case, Beta refers to the change in the cost of deposits and borrowings relative to the change in the cost of the Fed Funds target rate.
The total year over year deposit beta was about 21% relative to the prior quarter, was 29%. These elements combined to result in a net interest margin of 3.63% for the quarter, quarter, which increased 7 basis points from the prior quarter and 18 basis points from the year ago period. Excluding interest recoveries in excess of $1,000,000 participants are in the range of $0.05 per loan that ended net interest margin beta was 21% over the prior year and 26 over the prior quarter. We believe it is reasonable to expect deposit competition to intensify somewhat over the next several quarters. And if so, the net interest margin beta, if I can use that term, may be modestly less sensitive when compared to the recent quarter.
Next, a brief review of non interest income on Slide 13. Customer related fees increased at 2.5% over the prior year to $125,000,000 The primary source of income that increased and decreased are listed on the page. We continue to work hard to increase our fee income, although the fees from treasury management are influenced to a degree market by deposits and market rates for earnings credit applied to those balances, which in a rising rate environment create a slight headwind in our fee income trend. Similarly, the fee income realized from mortgage banking activity tends to be a little countercyclical slowing and possibly decreasing as the economy strengthens due to the effects of higher rates on refinancing activity. Noninterest participants are participating in the and other similar items.
Non interest expense was very stable at $416,000,000 versus $414,000,000 in the year ago are participating. A portion of the increase relates to additional compensation that we announced in conjunction with the Tax participants are in the U. S. And Jobs Act, which will be paid to most employees making less than $100,000 per year. These items account for about are in the range of $3,000,000 increase over the year ago quarter.
With the holding company merger in the rearview mirror along with other items in the professional and legal line item, in line with
the results. We experienced a slight
decline in that line item and we expect the quarterly level to remain a bit lower than it had been during the past Also, as noted on the slide, we had a one time adjustment to our FDIC deposit insurance cost in the Q3. Assuming the deposit insurance fund reaches 1.35% and the insurance surcharge is removed participating in the Q3 and the movement of other unsecured debt out of the holding company and into as the bank and the Holdco have now merged. This would result all of these things combined would result in a lower insurance cost to other secured funding. And as a result, we expect our FDIC insurance expense in the 4th quarter in all of those cases, to be about $7,000,000 Turning to Slide 15, the efficiency ratio at 58.8% compared to the year ago period of 62.3%. We reiterate are committed to achieve an efficiency ratio below 60% for the full year 2019, excluding the possible benefit are interested in the results of the Q3.
Finally, on Slide 16, this depicts our financial outlook for the next 12 months relative Q3 of 2018. In the interest of opening the line up for questions, I won't read the rest of the slide to you, but we will be happy will be conducting a question and answer session. This concludes our prepared remarks. Latif, would you please open the line for questions? Thank you.
Please place your line on mute once your question has been stated. Our first question comes from the line of Dave Rochester of Deutsche Bank. Your line is open.
Hey, good afternoon, guys.
Hey, Andy.
Just a question on capital. I mean, now that you guys are effectively Out of that stock, you got more clarity and control over where our capital levels go from here. I know you talked about bringing the CET1 ratio down are in the range of $1,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000,000 to $1,000,000,000,000 to $1,000,000,000,000 to $1,000,000,000,000,000,000,000,000,000,000 maybe not a solid mid singles in terms of growth going forward. Is that a fair statement? And any rough sense as to what that means in terms of dollars over the next year?
Participants are ready to begin. Well, it's certainly a fair you've done the math appropriately, I think, Dave. I mean, we're simply reluctant to be too specific about it because our Board hasn't met and I don't want to front run them. But it would certainly be our view that That kind of target is still achievable and that's the discussion that we'll be having with the Board here at the end of this week.
Okay. That's fair. I appreciate that. And then I guess some of your peers have talked about reducing ratios over time as well are talking about lower levels than where they are today. And I know your discussions have talked about based on where your peer capital ratios are today.
And so if We're talking about lower peer ratios over the next 6 to 8 quarters. Are you guys still thinking about walking your ratios down as well versus the targets that you have been talking about over the last quarter or so,
if that makes sense.
Yes. So I guess I'd answer it by saying, Fundamentally, we're not going to determine what our capital ratios ought to be primarily by looking at where peers are. All participants We're going to continue to do a lot of to do stress testing. We expect to do that actually probably quarterly and let that inform can lead us there. That's one thing, but we're not going to be chasing peers.
It's not a race to the lowest possible Capital ratio necessarily. It's trying to have the right amount. I think especially this
in the
market where we probably should be at least in the cycle. It's hard to know maybe where we are, kind of in uncharted waters in terms of what this
participants are in the kind
of behind the pack. And so That's how we're thinking about it. We're really fundamentally going to use kind of stress testing to inform how we discuss it with the Board. But I think at the present time, we see enough room to get down to pretty close to where kind of the peer median is.
Okay, great. Thanks guys.
Thank you. Our next question comes from the line of John Baccarat of Evercore. Your line is open.
Good afternoon.
Hey, John.
On the loan growth front
And in terms of your guidance, and I know that you softened it a bit there. Could you give us just a little more clarity around what You're actually seeing that's driving you to push that lower. Like what type of competitive pressures terms and pricing and then what types of portfolios are you seeing that happen? Thanks.
Well, I'll just I'll give you an example. I've heard Just a couple of that was the end of last week. Over in Colorado, I heard, it's being told about a $30,000,000 commercial real estate deal that went looking forward to the CMBS market. It's 10 years interest only, covenant light kind of deal and it's just not that's not where we're going to play. And so participants That would be an example.
I don't know, Michael, if you have any other participants are welcome.
Well, sometimes with owner occupied, you don't really know what the industries are that are growing, Owner occupied is a focus for the company. We like what comes with it terms of ancillary business and relationships. So I think we're very pleased to see that category grow.
Okay.
John, this is Scott. I'd just add that I the area of our portfolio activity that's the most volatile really is it's the larger transactions like the CRE credit that the CRE term credit that Harris described. And we'll see it in the large energy credits also. We've had experienced more payoffs than we anticipated there. But generally, it's just some remaining problem credits that are paying down, so that's actually a good thing.
But as you know, we don't have a big exposure to larger loans, but the exposure we do have is just more volatile because of the conditions that have been described. If you look at Slide 20, though, in the participants. What you see is really solid growth year over year, participants are in Colorado, Arizona, are in the line of Commerce Bank in Washington and Nevada. They represent about 25% of the company and they're producing about 50% of the loan growth. So That's really a healthy thing.
And as Michael noted, by loan type, owner occupied is C and I and collectively that's growing nicely. Our mortgage related business, whether it's 1 to 4 family or the HELOC portfolio are growing nicely and then we're actually seeing some growth coming from energy again. All participants It's a nice mix of loans by type and it's coming broadly across the company, particularly from our smaller affiliates.
Participants. Thanks, Scott. That's helpful. Now that leads me right into my second question. I mean, given that, what can change?
I mean, To get your loan growth back up here, because obviously given nothing Short of a downturn in the credit cycle, I'm not sure that the competitive environment really changes here. So if we assume that the competitive environment remains relatively Is there any reason to expect your loan growth can strengthen from here?
I think it's hard to know. The 3rd quarter was a good solid quarter for us and 4th quarter generally is a good quarter. So, it's hard to know. I think the reason we lightened our guidance just a little bit is I think what we were trying to say.
I get it. Thank you. We favor the better credit anyway. So thank you.
Thank you. Our next question comes from the line of Ken Zerbe of Morgan Stanley. Your line is open.
Are ready. Great. Thanks.
I guess first question, in terms of your average balances on the liability side, it looks like you paid down a fair amount of borrowed in the quarter, call it maybe $800,000,000 $900,000,000 Could you just remind us like what that is? And should that borrowed funds stay relatively constant just given the more moderate pace of asset growth?
Yes. This is Paul, Ken. All participants We use that as you know, we use that as a balancing mechanism for the balance sheet. As we think about overall kind of loan growth and what we're doing with the investment
that ends up being the kind of
the balancing component there. So that number is really just going to be, if it makes sense, kind of what it needs participants are in the same store. A lot of that, as you know, are home loan bank borrowings. We are becoming more active in the senior note market. You saw that issuance this past quarter.
And so I would expect to see the composition of that funding change over time, similar to what you saw here over the last quarter.
Got you. Okay. Perfect. And then, just as a follow-up question separately. Can
you just remind us
how big is the municipal loan portfolio right now? And kind of what are your designs on growth in that over time? Thanks.
Yes. Right, you can see it actually on Slide Page 12 of our press release. Currently municipal loan portfolio is about $1,500,000,000 That's grown from about $1,000,000,000 a year ago.
Got it. Okay.
And we're going to continue to expect to see growth as we invest in that business.
Participants Got it. Understood. All right. Thank you.
Thank you. Our next question comes from the line of Erika are in of Bank of America. Your line is open.
Hi, good morning. Good afternoon, rather. Sorry about that. I just wanted to ask a follow-up question to John's line of questioning. I guess, as we think about where the non banks aren't playing, How would you help us size your portfolio in terms of what you think is a more defensible business from the non banks, whether it's the Municipalities or owner occupied or a part of your real estate portfolio?
I guess I'd say that I think we're relatively speaking in a pretty good place because we have a Significant portion of our portfolio is in generally smaller credits. I mean, we're not a big corporate banking player. Participants
are in the queue.
So, and even with these municipal credits, we're trying to focus on kind of smaller municipalities, where we think we can actually create a little more value for them and for us. And so owner occupied is a lot of what we do there is kind of small to midsized businesses. And that's certainly true of a lot of our a pretty good place on deals that are kind of $1,000,000 to $5,000,000 or $6,000,000 or $7,000,000 Don't tend to find them their way into loan funds. They don't tend to get picked off by online lenders, participants are really our competitors there are largely community banks and other regional banks.
Participants Erica, this is James Abbott. I'd add that we do have some slides in our Investor Day materials from March that give you kind of a sense of the size of the commercial loan portfolio. So the small loans versus the medium sized and large sized So that's a resource that you could potentially utilize. But we do have a very substantial portion of our C and I portfolio, for example, participants are in the range of $5,000,000 in balance. And we did see very good growth out of that during the quarter.
Quarter annualized a little over 4%. It was a very strong performance, while some of the larger stuff did decline.
Got it. And just a follow-up on the color that you provided with regards to margin expectations going forward. We're hearing you loud and clear on the deposit side. I'm wondering if you could give us a sense on what spreads are looking like right now and whether or not sort of the lower burden as a non SIFI
Yes, Erica, this is Paul. So there's a lot in there. Deposit beta, we talked about, maybe don't need to get into that too much more. Loan spreads have been generally behaving, Keeping in mind sort of where we operate and your conversation about kind of the average size of loans, that has impacted are ability to defend loan spreads, although I will say the composition of the portfolio has changed a little bit. So for example, if you look at our portfolio from a year ago, We had more commercial real estate relative to residential mortgage than we do today.
And the spread, as you know, kind of the spread, in That's just two examples or maybe one combination example, but the spread is very different among those products, residential mortgage having a tighter participants So while we're generally on a deal by deal basis, we've had some success maintaining and defending spreads. We are seeing a slightly different composition participants are in the portfolio, which is impacting overall loan spreads. As it relates to the size of the investment portfolio, while While it's true that we're no longer subject to the LCR, our biggest constraint really is our liquidity stress testing as opposed to the LCR. Are in the range of $1,000,000 So I am not forecasting or would not predict a big change in the composition of our investment portfolio, because that liquidity stress participants continue to be a really important part of the way we're managing our balance sheet. So overall, as I said in my prepared remarks, we've had, if I can use the term, a pretty decent relative to expectations, a pretty decent net interest margin beta.
As you know, we've got a slide back in the in the appendix that provides a little more detail on the interest sensitivity, particularly the asset side of the book relative to market rates. And our performance has been very much in line with our modeling and our expectations. Looking ahead, again, considering deposit betas and Maybe we don't squeeze as many basis points out of the Fed tightening as we have over the past kind of year and a half. But we expect to continue to for the have a modest margin expansion as the Federal Reserve continues to raise rates.
Got it. Thank you.
Thank you. Our next question comes from the line of Ken Usdin of Jefferies. Your line is open.
Thanks. Good afternoon, guys. I guess a follow-up on the deposit side. I noticed that you had good year over year growth, 3% and the non interest were actually quite stable. So even amidst this deposit pricing pressure we're seeing, can you just give us a little color in terms of Where you're getting that incremental growth from and your continued belief in the stability, especially of that non interest bearing where we're starting to see that really come down in a lot of other peers?
Thanks.
Participants Yes. Hey, Ken, this is Paul. I'll start and Ken or Scott can kind of fill in. But if you go back to Investor Day, we talked a lot about the composition of our deposit book And the fact that it's very granular, very operating in nature. This is if You think about deposits in terms of kind of operating deposits and kind of investment deposits, our proportion of those operating deposits is actually pretty high.
All that being said, the stickiness of our DDA has actually been sort of a pleasant surprise for me.
I don't want that
to sound negative, but our interest rate risk modeling actually anticipate that we will have more migration out of DDA than we have experienced. But I think the fact that our DDA has been so sticky is really an indication of the strength of the deposit base and the kind of overall strength that that provides with the organization.
As a follow-up, go ahead. This is Scott. I would just add to that, that participants Our ratio of non interest bearing deposits to total deposits for decades, several decades has been almost industry leading. We're sitting at 45% today. Most of our peers are in the participants are in the mid to low 30s, high 20s.
But even before 2,008, our relationship of non interest bearing to interest to total deposits was very favorable and it's for the reasons participants in some way touch our treasury management products, which just reinforces the point that these are operating balances of these businesses and they're generally smaller businesses. And what I'd suggest is that generally, these are company Smaller companies and they're focused totally on how to enhance their gross profit margins, which may be are in the range of 15% to 30% as opposed to how to get an extra 25 basis points out of their operating account.
Makes sense. Thanks, Scott. And just as a follow-up to that, can you detail just is it the consumer side versus the corporate that's been growing, Because there's also been
a lot of talk about
the stickiness of consumer, not as much of a focus for you guys, but in a big part of the bank it is. So What side of the bank is growing when it comes to deposits for you guys? Thanks.
All participants Yes, it's been mostly non personal. So it's commercial deposits.
Comes from the line of Steven Alexopoulos of JPMorgan. Your line is open.
Hey, everybody. Want to start for fall at expenses. You guys seem to be running at the low end of the 2% to 3% range that you previously talked about.
Do you
think that's sustainable going forward?
Look, we are and have been really investing in our business. I'm really proud of the organization has really come together and we are creating opportunities to change, participants If you will, kind of the composition of the way that we're investing in the business. So we're saving money in spots and we're investing money in other spots. As we look ahead into are in the middle of our budgeting process. We're very focused on expense control.
We're very focused on are on positive operating leverage. And so yes, in the near term, I absolutely think it's sustainable.
Okay, Great. And then just one other one for Harris. Given the valuation of Zions stock here and now that you're officially out of CCAR, do you have an appetite to be with the Board, you're the Chairman of the Board, obviously, to accelerate buybacks and get to the targets more quickly?
Yes, I do. I'm but I'm 1 vote out of 10, so or 11 rather. So I again, I don't want to front run that conversation, but I think that, I mean, clearly, valuation is one of the things we need to think about. It's a silver lining to what I'm seeing in the bank stock are looking
at these
days is the fact we've got a lot of capital to deal with. So I that's how I'm thinking about it.
Okay. Great. Thanks for the color.
Thank you. Our
are.
Hi. Harris, just wondering if you can talk about the level of lending competition you're seeing and kind of compare and contrast that to what we saw right before the last downturn.
Well, I think, look, there's a whole lot of liquidity out there, a lot of cash. It's very competitive earning assets. I I don't know quite how to compare it to before the last downturn. I mean that was, I think clearly more housing kind of driven, a are not only here, but generally what I think we see around the industry. So I think the thing in that respect is probably fundamentally different, but you are seeing a lot of there's been a lot of growth.
You see it's are not quite so much where we play as in leverage lending, but clearly, big players there. There's a lot of participants I think should be maybe some concern in terms of kind of where the next problems could pop participants. This is Ed Schreiber. I wanted to supplement some of Harris' comments, but more importantly, look at in the range of $1,000,000 Our book, when you really look at what we've done over the last few years, right, the balance sheet has been simplified, but more importantly on the credit side with Michael Morris, the Chief Credit Officer and his staff, we've really designed a program in here that you've seen and exemplified through the oil and gas cycle that we're really a big fan about positioning the company as a positive outlier through the next cycle. So if you look at if you're really looking at any forecasting, I think the way we position the company from an asset quality perspective is that we're in good shape and we would be participants will be able to see
a positive outlier through this next cycle.
Thank you very much.
Thank you.
Thank you. Our next question comes the line of Jeffrey Elliott of Autonomous Research. Your line is open.
Hello. Thank you for are taking the question. First, just a little clarification. I think in the prepared remarks, you touched on the impact of the simplification of the corporate structure on expenses, can you remind us what the benefit is you expect from that? How do participants will be
able to quantify that.
Yes. I didn't specifically quantify it. Jeff, this is Paul. I didn't specifically quantify. But What I did say effectively was that we have seen some escalation or elevation in the professional services line, over the course of the last kind of near term and that we would expect Maybe the run rate of that to be a little bit lower.
That was kind of a key I'd say the key part of the prepared remarks, I think, to deal are on what you're describing. Keep in mind that we did not have a lot that happened at the holding company. Nearly all of the assets and essentially all the operations and all the employees have been at the bank level for some time. So while it does create organizational simplification, Yes. My expectation is not that we would see a kind of a stepwise change in our operating kind
of participants.
And then on the deposit side, I guess you're somewhat unusual in kind of operating separate brands in separate banks, if you like, in different geographies. How much flexibility is that giving you to adjust pricing in different markets and how much variation are you seeing in competition if you kind of compare the main markets you're in?
Participants Well, Dave, we price locally. We the pricing decisions about deposits participants are made by local management teams and they certainly have incentives to try to minimize their funding participants So I don't know, we have internal transfer pricing as are raising and they're trying to make spread there's a spread on both sides of
the balance sheet.
I don't know what participants Yes.
I would if I could this is Paul. If I could, I would probably ascribe more value to sort of the local nature of the banks as opposed to the local Brand of the banks. I think your question was really around the brand, but I think the value is really around the way we're run and the autonomy of the local groups and Being able to react specifically to what their client needs at a very, very local level, I think is providing a lot of flexibility for us as we're thinking about deposit pricing.
Great. Thanks very much.
Yes. Thank you. Our next question comes from the line of Christopher Spahr of Wells Fargo. Your line is open.
Thanks for taking the question. With high single digit PPNR, how low do you think the efficiency ratio can go?
I don't know, it sounds like a game of limbo.
All participants I'll just start out and then Scott
and Harris to jump in. As I said, we're really focused not necessarily on the efficiency ratio as the sort of the end goal. All participants We're really focused on positive operating leverage. And if we can continue to achieve that, we are going to continue to see very strong PPNR growth and continue to
I would make one observation because we've talked a lot about the deposit base participants And the loan mix and it is a little different than you find in some of our peers. And all participants It is a little more expensive to operate. And we hope that shows up in the form of the kind of positive performance you're seeing right now. But that so that probably creates a
little bit of drag.
But I think nevertheless, we our My hope would be that we find ourselves getting down into the kind of the mid-50s over the next couple of years. That would be just kind of generally my aspiration.
I would I'd just add to that. This is Scott. Going back to Stephen's questions about The expense growth rate of 2%, 3%. I mean, basically, we are building our plan around that expense are in the range of $1,000,000,000 in the quarter. And that involves investing actively in the businesses that we're trying to grow in the position of the company and investing actively in technology.
And so we're not just sitting back cutting costs everywhere and not participants are investing heavily in the future over the last 3 or 4 years, both in terms of technology and in terms of businesses we're trying to grow with hiring new bankers and etcetera, etcetera.
Thank you.
Thank you. Our next question comes from the line of Steve Moss of B. Riley FBR. Your line is open.
Participants. Good afternoon.
On the loan growth front, with particular on resi and also on oil and gas, just wondering what are your thoughts for growth going forward in both those categories? And also what are you retaining with regard to resi mortgages these days?
Yes, Mike.
Go ahead, Scott.
Go ahead, Paul.
Well, I
was just going to say, our mortgage business is very different than small business owners, and
I think they're going
to be and they're generally not first time homebuyers. So you read about in the paper every day. So we're pretty bullish on our mortgage business and we retain about Paul, I think it's about 60%, 70% of what we originate. We're basically retaining everything under 10 years. And we're about to introduce are going to be a real game changer for us.
We're not a big player, but a game changer for us. And that's in pilot right now, will be rolling out next year. And on the energy book, it's about $2,200,000,000 in outstandings right now. It got down to about $2,000,000,000 went from $3,000,000,000 to $2,000,000,000 that was 10% to 15% kind of growth in that portfolio would not be unusual at all. It's basically reserve based lending and midstream, there's virtually no growth coming from our services business.
And we've contract we've consciously held back in that area.
Okay, that's helpful. And Then with regard to securities balances here, I know on an EOP basis, they're flat. Just wondering what are your expectations for those balances going forward?
Participants This is Paul. I'm not expecting a big change in the size or the composition, although that may change as deposit growth ebbs and flows and loan growth ebbs and flows. But generally speaking, I expect that portfolio to remain relatively stable,
All right.
Thank you very much. Thank you.
Thank you. Our next question comes from the line of Marty Mosby of Vining Sparks. Your line is open.
Thanks. I have three quick questions. One is the warrants that were outstanding were causing some dilution as the stock price was going up.
Quarter, I think if you look at average share price quarter over quarter, even though it maybe went up and went down, I don't know that the average is a whole lot different. I think a lot of the positive impacts you're seeing there is the result of the share repurchase activity. I think when order
party, it's about 1,000,000 shares is all is the difference. But, obviously, we'll have to see what the stock price does in the Q4 here. But if it stays where it is, it will be a more Substantial improvement on the diluted shares.
Okay. And then, Paul, you were talking about have the FDIC costs and I was kind of hearing that because you had consolidated and you've done some debt, that maybe your FDIC costs are just going to go down without kind of the surcharge going away. Could you just maybe explain just the number, what it was this quarter, next quarter and what you expect it to be kind of as that rolls forward?
Yes, Marty, I probably wasn't as articulate as I could have been as I went through that part of the prepared remarks, but you're right. There are a couple of things impacting FDIC this quarter. The key one is we had sort of this incremental accrual $3,700,000 that shows up in the 3rd quarter, but that was kind
of a,
if I can use the term sort of a one time thing, it's isolated event. It's not going to happen again participants are in the Q3. The other aspect is we issued unsecured debt in the Q3, and then we had a little bit of debt that was holding have now been assumed by the bank. So as you know, unsecured debt gets a variable very favorable treatment are under the FDIC calculator. And so there's also going to be an incremental benefit of that.
And that's probably going to be close
to $1,000,000 in the quarter. The other big one, of course, is the FDIC surcharge that will affect us as it affects everyone else. And just as a reminder for us that FDIC surcharge a little under $6,000,000 a quarter.
Perfect. And then the last quick question is Your biggest portfolio is C and I excluding oil and gas and it's declining. So it's Tough to see the momentum building in the portfolio with that one still kind of seeing a modest decline. Almost all of that decline back on Page 20 is coming out of Amogy. So I was just curious what was the loan type or the decisioning around because are in the same quarter, but it was actually it looks like it had been consistent over the past several quarters.
So just curious what was causing that decline?
So I'll start and then I'll ask my Scott and Michael and whoever also want to make a comment. Marty, as I'm thinking about C and I, I would also include owner occupied in that. I think owner occupied is a really important aspect. It just happens to be secured by commercial real estate, but it's really sort of a commercial loan disguised as a commercial are in the market. And as you combine C and I and owner occupied, there actually has been growth over the course of last year.
So Scott or Michael, would you like
to add any of that?
No, I would just
I would echo what you said, but
I would also point to Amogy's growth in owner occupied. So there has been growth in the Texas market in C and I, and we always include owner occupied under the C and I umbrella, as Paul mentioned.
The only thing I'd add to that is that, that portfolio is it has more exposure to larger transactions in most of our other portfolios, so in the C and I space. So the volatility we talked about early in the call, Amogy is a place you would definitely see it in the C and I non oil and gas, exactly, right.
Participants. Thank you.
Thank you. Our next question comes from the line of Don Kotsch of Kotsch Investments. Your line is open.
Thank you, guys. You sort of had a bang up quarter. I'm just sort of flexed, I mean, an outstanding quarter. I'm looking at your slide from your Investor Day and your main bank is a little less than a third of total bank assets, are you finding that there is some kind of fallout? I know historically, when you do these consolidations like Regions did and Synovus and the old Barnett and new CBI, it takes several quarters for those directors to sort of come back to the family and the salary mechanism of individual banks versus are ready to take questions.
One bank all working out. And I mean, can you make any statements about why you did so well in the quarter, so really outstanding, participants are in the same store.
It broke up in the last phrase there, but
And why is it If I were to be a betting man, I would have bet that the stock in the last quarter would have sharply gone up from your phenomenal numbers. I mean, You're knocking the stocks off the ROA and the ROE, but there was such tremendous pressure downward pressure from the consolidation. Do you have any explanation there?
Well, I don't know if it was from the consolidation. I'm not I always say it's It's tough enough to manage a bank without having to manage the market too.
Right. No, I understand. I know and as a guest, but Are you seeing any pull out from the individuals that were part of these individual banks that you all put together?
Listen, I think fundamentally, the answer is no. I mean, we've had participants I mean, we've got enough employees that on any given day, yes, we've got people who get picked off by others. We sometimes pick off participants are very stable.
And so they're paid the same way and the incentives are the same?
Yes. Fundamentally, there hasn't been a lot of change there. All the front The customer facing employees in this company fundamentally, almost all of them, not totally, but most all of them report to these local market CEOs.
Right.
What we call these affiliate CEOs. And that group has been extremely stable.
Good.
And so, I don't think that that's We just haven't seen the kinds of issues you see kind of going through this. The consolidation was not a huge deal for the customer facing have had some impact certainly in kind of some back office functions, places like that. But the revenue drivers, we've tried to be pretty careful about those.
This is James. I'll just jump in here. We've got just a couple of minutes left. And I would say one of the Hariffs you've said many times in conference appearances is that made this decision to consolidate because of the feedback we were getting from the frontline employees to help make their lives simpler. Let's just take We're not going to be able to make it to everybody's questions, it looks like, because of time.
But let's just take 2 more questions, and we'll go lightning round for these last 2, and then we'll be at are time limit. Thank you.
Our next question comes from the line of Lana Chan of BMO Capital Markets. Your line is
Hi, good afternoon. Just to follow-up on the capital return discussion. Could you talk about your appetite for acquisitions, whether whole bank or loan portfolios or business lines?
Well,
participants I think we said for some time, you never say never. It's not something that is
it is not a
strategic priority of any sense. Strategic priority of any sense. We'd be very opportunistic, I guess, if something was a participating in the same period. But it's not something that we spend a lot of time thinking about.
Thanks, Lana.
Thank you. Our next question comes from Brock Vandervliet of UBS. Your line is open.
Participants. Thanks very much. I had to jump off for a while. Harris, I thought I heard you mention 55 or mid-50s, I guess, efficiency It doesn't seem like that would be necessarily in the near term anyway top line driven. Are you feeling better about the scope for expense saves here on the back of some of the Charter consolidation or
Well, when I talk about mid-50s, I use the word aspirational and I'm not suggesting that's going to happen in the next few quarters. But I think I do think that that's achievable with kind of our business model. And with if the economy continues to remain reasonably healthy, I think that I do think that that's that we'll continue to see revenue growth driven by participants are in the range of reasonable loan growth. I think we worry a little in the short run about competitive pressures on some of the larger deals, as we mentioned. But that's not fundamentally what our major the major part of this franchise is.
And so I think over time, as we continue to focus on what I where I think our sweet spot is, I participants are not an unreasonable kind of goal.
Appreciate the color. Thank you.
Okay. I think this is James Abbott. We appreciate Thank you, Latif, for hosting the question and answer session. Thank you all for joining the call today. Please don't hesitate to contact me if you have questions or comments.
My information is on the front of the press release. We look forward to seeing many of you at industry participants are participating in the balance of the year. And thank you again for your participation, and we wish you a good evening.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have