Q4 2019 Earnings Call
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I would now like they had the conference over to director of Investor Relations James Abbott.
Thank you Sir and good evening, we welcome you to this conference call to discuss our 2019 fourth quarter and full year earnings for our agenda today Harris Simmons, Chairman and Chief Executive Officer will provide a brief overview of key strategic and financial performance figures after which Paul Burdiss, Our Chief Financial Officer will provide.
Additional detail on Zions financial condition wrapping up with our financial outlook additional executives with us in the room today include Scott Mclean, President and Chief operating 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 from the press release for the slide deck dealing with forward looking information, which applies equally to the statements made during this call a copy of the full earnings release as well as a supplemental slide deck are available at Zions Bancorporation Dot com.
We will be referring to the slides during this call.
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.
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 disclosures a full reconciliation of the difference between these measures and GAAP financials is provided within the published documents and participants are encouraged to carefully review this reconciliation.
We intend to limit the length of this call. The 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 ill now turn the time over the Harris.
Thanks, very much Jameson, we welcome all of you to our call today to discuss our 2019 fourth quarter and full year results.
Slide three is a summary of several key highlights which I'll cover the next few slides and so I'm going to me right slide four.
Slide four shows a time series of the bottom line earnings per share results, we reported earnings per share of 97 cents.
As noted on the slide in the fourth quarter of 2019, there were three items adversely affected the earnings per share figure.
Net 17 cents.
Also show shown as the adjusted pre provision net revenue.
Which is noted already excludes the impact of $37 million of non interest expense related to severance and restructuring charges.
However, the PPNR number also includes the positive impact of the derivative valuation gain on client related interest rate swaps in the 10 million dollar adverse impact associated with the resolution of a self identified operational issue.
Moving to slide five efficiency ratio is of course, a function of both revenue and expense.
With a relatively quick change and the trajectory of interest rates in mid 2019 of the expectation is such a change would create a revenue headwind.
We took action to adapt quickly on the expense front in order in order to actively manage your profitability.
Three months ago in conjunction with our third quarter earnings release, a plan to cut about 5% of our staff positions.
On a number of other positions that were not yet filled.
We also said that the resulting reduction in salaries and benefits would be roughly proportional to the number of positions eliminated and that.
Reductions should be reflected in our financial results beginning in the first quarter of 2020.
Well content will continue to work to reduce a variety of cost and execute on plans weve.
Now it's to realign certain branches during 2020.
In short we've tried hard to respond to a rapidly changing business environment.
Interesting freight environment.
I believe these efforts should help to offset some of the interest rate related revenue challenges, we expect 2020.
Turning to slide six.
One of the Zions strengths is a sizable portfolio of noninterest bearing deposits, which account for more than 40% of total deposits.
During the fourth quarter average on noninterest bearing deposits increased and annualize several of the half percent.
Average total deposits increased an annualized 10.5%.
The cost of deposits declined six basis points, which equals 12% linked quarter improvement relative to our third quarter total cost of deposits.
Going now to slide seven.
Credit costs remained low.
Consistent with my comments last quarter credit losses have been somewhat episodic within our loan portfolio attributable to problem specific to a small handful of borrowers unique circumstances.
Net charge offs for the full year were a modest eight basis points generally consistent with our expectations for the year.
Non accrual loans and loans 90 days past due continue to show improvement.
Our nonperforming assets plus loans 90 days past due expressed as a percentage of loans and other real estate owned 51 basis points.
Four basis points lower than the year ago period.
Our improved risk management and credit performance has been key factors and an improvement in our debt ratings in recent months.
Due largely to the strong credit quality of loan portfolio, resulting in part from a shift in recent years and the portfolios composition to what we believe is less risky credit profile.
And do tour reduced risk profile generally.
We have been able to reduce our capital ratios to a level closer to that of our peers.
We're pleased to have repurchased more than 3% or outstanding shares in the fourth quarter and more than 12% of our shares during 2019.
In addition to a substantial buyback program during the.
Past few quarters Weve also been delivering an annualized common dividend dividend yield of nearly 3%.
Our common equity tier one capital ratio remained strong at 10.2%.
Next let me step step back from a financial data and update you on just one of the variety of strategic initiatives, we have underway and Thats digital delivery.
Shown on slide eight we're enhancing digital experiences for our customers with a goal of being quite competitive for the best providers financial services products banks and non banks alike.
By remaining focused on continuous improvement in streamlining our processes, thereby keeping noninterest expense under control.
We continue to make solid progress, notably in small business and consumer digital account opening of small business and mortgage digital loan application processes.
Additionally, we're on track to significantly enhance our online consumer and small business mobile platforms. Later this year.
Our core replacements.
I shouldn't remains on track and I've noticed that at least a couple of other of our peers have recently announced they would be embarking on some form of core systems replacement projects.
We'll spend a significant amount of time on our core systems replacement and our other technology technology initiatives earned at our Investor day in just two weeks.
Well that overview I'm going to turn the time over to Paul Burdiss to review our financials in additional detail Paul.
Thank you hear us and good evening, everyone. Thanks for joining us I'll begin on slide nine which highlights two measures the balance sheet profitability return on average assets and return on average tangible common equity as noted the fourth quarter results were adversely impacted by the severance and restructuring charges and the resolution of an operational issue and positively impacted.
By a derivative valuation gain on customer related interest rate swaps combined these factors adversely impacted return on average assets by about 20 basis points and return on average a tangible common equity by about 200 basis points, we remain focused on continuing to improve balance sheet profitability.
On slide 10, looking at the chart on the left Zions net interest income declined slightly compared to the prior year period, while average earning assets increased by 3% during that timeframe the yield on earning assets decreased by 17 basis points and the cost of interest bearing liabilities increased by.
Two basis points, leading to a decline in the rate spread of 19 basis points in a decline in the net interest margin of 21 basis points.
Net interest income was down 3% over this period as the decline in net interest margin was somewhat offset by balance sheet growth.
Turning to a linked quarter view, the net interest margin compressed two basis points relative to the third quarter at the lower interest rate environment continued to impact loan and securities yields and also led to lower borrowing costs. The waterfall chart on the right depicts the elements that resulted in the linked quarter charge.
Change in net interest margin.
Within the loan yields bar about half was portfolio churn, sometimes referred to as the front book and back book, while the other half was due to the change in benchmark interest rates.
The funding side, the net interest margin impact of the cost of funds decline was evenly mix between the cost of deposits and the cost of wholesale funds.
As Harris noted pellets in the quarter included the growth of deposits and the decline in the cost of average deposits.
While our cost of funds increased three basis points over the year ago period. It decreased a solid 14 basis points from the third quarter of 2019 from 57 basis points to 57 basis points from 71 basis points or about a 20% improvement in cost.
This was primarily due to lower rates paid on all interest bearing liabilities. In addition to a favorable mix shift as solid deposit growth made it possible to reduce wholesale borrowings.
We expect that the net interest margin will compress further during the next couple of quarters, reflecting the forward curve and our best estimate of loan yields deposit costs balance sheet turn and other factors.
Slide 11 highlights a key component of net interest income loan and deposit growth and break them down by both rate and volume average loans grew 5% over the year ago period.
Average loans in the fourth quarter were essentially flat to the prior quarter.
As we've noted previously it is not unusual to observe a quarterly ebb and flow to balance sheet growth due to several factors including customer demand.
The balance of loan growth.
And pay offs.
And seasonality.
Over the prior year period, the yield on loans decreased 23 basis points and relative to the prior quarter to yield on loans decreased 19 basis points as I noted in the discussion of the previous slide about half of the linked quarter compression in loan yields was due to movement in benchmark interest rates and the other half can be contribute.
Continued attributed to the churn of the portfolio, where new yields are 15 to 20 basis points less than maturing loan yields.
Shifting to funding average total deposits increased five basis points over the prior year period by percentage point, sorry, five percentage points over the prior year period, and a solid 10 percentage points annualized growth rate when compared to the prior.
Quarter.
As I noted last quarter, maintaining this rate of growth in deposits will be difficult, especially with seasonal factors typically seen in the first few months of year. Nevertheless, we expect moderate deposit growth to accompany our loan growth for 2020 .
Slide 12 is a new slide and shows the changes in our investment portfolio size and yield and changes in our borrowed funds position size and yield as I've mentioned on previous calls we reevaluated the on balance sheet liquidity needs, a few quarters ago and in conjunction with that analysis elected to bring down the size.
Of the securities portfolio simultaneously, we were able to achieve solid growth in deposits. The combination of these two trends allowed us to pay down wholesale borrowings by about $2 billion in the fourth quarter. As a reminder, almost all of the wholesale borrowings are variable rate. These changes in the lower interest rate environment has a lot.
The cost of borrowed funds decreased 20 basis points relative to the prior quarter and 44 basis points from the year year ago period.
Turning to loan growth slide 13 depicts year over year period end loan growth by portfolio type with the size of the circles, representing the relative size of the portfolio municipal loan growth has been a highlight for a couple of years now the marginal credit quality. There is very good with the average new deal being about $4 million and the probability of default.
All being relatively low.
Loan growth across the enterprise also reflects our credit risk appetite and active management of portfolio concentration limits.
On slide 14 customer related fees were up 2% from the year ago period in certain categories are long tenured and deep client relationships enable stable core fee income. This includes commercial account fees card fees and retail in business banking fees, we have greater growth opportunities in search and other segments and have been.
Looking to improve the revenue from these areas, notably we've seen strength in capital markets product sales, which were up 19% from the prior year as well as wealth management and trust fees, which are up 14% from the prior year period.
As shown on slide 15, noninterest expense increased 12% to $472 million from $420 million in the year ago quarter adversely impacted by the previously mentioned $37 million in severance and restructuring costs and $10 million for the resolution.
And operational issue, excluding the impact of these items non interest expense reflects the ongoing efforts to reduce expenses streamline operations and improve overall efficiency with notable reductions in advertising credit related expense and professional and legal services over the prior year period.
During the fourth quarter, we ran a full parallel allowance for credit loss process, one for the incurred loss accounting standard and the other for the new current expected credit loss or Cecil accounting staff standard Slide 16 report the results of that parallel run we have highlighted the various changes that may impact the allowance.
Each of them major loan portfolios with a total estimated impact on the allowance for credit losses at the bottom of the table our day, one impact on the allowance for credit losses, with a 5% reduction associated with the adoption of the new Cecil accounting standard I might add a word of caution here. We've noted many times in the past.
We expect our allowance to become more volatile under the new Cecil process. As it is now subject to economic forecasts that may move materially from quarter to quarter. Therefore, our day one impact in the allowance for credit losses, which will be set at March 31st 2020 may be materially different.
Now I'll turn to the outlook slide on page 17. This is our outlook financial outlook for the next 12 months relative to the fourth quarter 2019.
Our loan growth outlook remains unchanged at moderately increasing our outlook for net interest income remains slightly decreasing incorporating.
Our outlook of the current shape of the yield curve and our continued expectation the balance sheet growth.
We'll be more than offset by the continued churn in the portfolio.
We will continue to actively manage our deposit pricing in the lower rate environment and this may present, some upside opportunity to this outlook.
Regarding customer related fees, we expect slightly increasing customer related fees a year from now when compared to the fourth quarter.
Building on our prior comments related to noninterest expense, we expect the overall level of adjusted non interest expense in 2020 to be consistent with our slightly below adjusted noninterest expense for 2019 as a reminder, the physician elimination announced in October of 2019 will begin to impact the run rate of.
Non interest expense in the first quarter of 2020 also as we have previously disclosed we are in the process of resolving our defined benefit pension plan, which is expected to result in a onetime charge likely toward the middle of 2020 our outlook for adjusted noninterest expense excludes this charge.
Finally regarding capital management, our Cetone ratio has declined to 10.2% from 11.7% a year ago. Our current level of capital is more than sufficient to support the risk on our balance sheet implied by our internal stress testing our cetone ratio remained above the median of our peers.
We continue to believe that remaining stronger than the peer median is important.
Maintaining a risk profile, which we believe compares favourably to peers, while also maintaining relatively strong positions in capital and liquidity is prudent. Therefore, we expect the capital return to shareholders in 2020 will be significantly less than it wasnt 2019, assuming no material change in the macroeconomic environment so different.
Really.
We expect our capital ratios to remain relatively stable throughout 2020, when compared to the levels reported this quarter.
This concludes our premier prepared remarks, Andrew would you open the line for questions. Thank you.
Certainly.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the culinary roster.
No first question comes from the line of Ken Zerbe with Morgan Stanley .
Great. Thanks.
I guess, maybe just to start off.
They saw net charge offs jump up a little bit to 22 million, obviously I did not see a related increase in your provision expense can you just provide a little more detail on what drove the higher charge offs in the quarter.
Sure Kevin This is Michael Morris.
Juan.
Modest charge off in Q4 that that drove the overall charge offs for the year.
Beyond that we saw stabilization.
A stronger probability of default metrics around the rest of the portfolio along with other improvements so.
It was not material enough to drive increased shale.
And I would say it was not related to any other segment of the portfolio I would characterize it Michael correct me, if I'm wrong, but I would characterize characterize it as sort of a one off.
Charge off right.
It was there any industry or particular industry within.
Is that a recreation industry.
And Rob.
Yes.
And it was it was a $10.8 million charge off it's kind of came out of the blue.
Got it okay.
Through in the town on walked on a large investment.
We have some others.
Yes so.
Gosh understood Okay.
As Paul noted there is nothing systemic systemic it's not like we have a portfolio these kind of loans et cetera et cetera.
Gotcha, Okay, I'll refrain from asking if it was lift federally legal recreation type.
It was very quickly.
Okay, just fine sorry.
And just.
Sorry, just my follow up question.
R&D expenses I would say you took the severance restructuring charges totally get it.
It seems your guidance is still sort of unchanged or sort of already consensus in the myself already building in so that modest reduction in mind in 20 versus 19 is that just solely a fact that you adjust your guidance back in Threeq Q.
Such that it because I guess I'm just trying to.
Figure out like how meaningful that is going to be in first quarter. When you start to see the benefit from those those restructuring actions.
Yes, the outlook is unchanged because as you said, we had sort of full information by the time.
We reported third quarter earnings towards the end of October .
And so that will the.
Expense reductions that we've undertaken were baked into that outlook that we provided in the third quarter and as it relates to run rate, we are saying kind of flat to slightly decreasing relative to full year adjusted 2019.
And we're seeing that because while.
These reductions are allowing us to continue to make the investments that we think are important to run the business, including continuing to invest in or people.
Okay, great. Thank you very much.
Okay.
Thank you and our next question comes from the line of John Pancari with Evercore.
Good afternoon.
John .
On the NIM I I know you gave the comment that you expect some incremental compression here over the next couple of quarters can you just to help maybe size that up is it similar to the magnitude of the compression that you saw on the.
The fourth quarter of about a couple of Bips is that the the pace that we're looking for and what's the likely.
Driver going to be.
Ongoing modest pressure on the loan book is that where the pressures coming from.
Hi, John as you know, we don't provide specifically.
And so on the net interest margin, we do however, provide an outlook on loan growth and on net interest income, which you see on our outlook slide so.
I don't want to go further than that I will say that the ongoing net interest margin pressure.
I would really be related to the loan portfolio churn that I described in my prepared remarks, and also as I said the opportunity I think is repricing deposits and so TV set we're successful there obviously.
And are able to reprice, our deposits lower that'll have a positive impact.
Okay got it thanks, Paul and then on the loan growth front.
Just wanted to get a little bit more color around what areas of the loan portfolio do you expect to drive the bulk of the growth as you look into 2020 and more specifically regarding the municipal loan book I know you've seen some really good growth there what's your appetite for incremental growth. There do you have a target size so youre willing.
That book reach thanks.
John This is Scott Mclean and.
Our our growth.
Should continue to look like.
The year to date panel.
You see on slide 22.
Basically 50% to 60% coming from C. III, that's where municipal sets.
And we.
We don't feel like we're reaching any limits in terms of our municipal growth. It's been growing rapidly largely because it was coming off was very small base.
But the underwriting procedures were using practices are highly consistent with what we've done for many many years. There we just have leaned into the to the area.
Covering more geography more densely than we have historically.
So.
We see continued growth and municipal.
But but the growth in 2020, it should look like 19, probably 50% to 60%. So you know.
We'll see some modest growth in CRM, but it would probably be low single digits and then consumer.
I think we'll continue to see will represent 20% of our growth plus or minus largely it's largely driven by our wonder for family on home equity.
Businesses I would just note on the fourth quarter being soft.
The four quarters ending in the third quarter of 19, we're all very strong, but if you look back prior to them.
Two or three soft quarters in a row and so we're not especially alarmed by having a.
Soft fourth quarter here.
Got it alright, thanks, guys appreciate it.
Thank you. Our next question comes from the line of Jennifer Demba with Suntrust.
Thank you good evening.
Two questions first can you just talk about the operational issue you.
Outlined in the nonrecurring items and secondly, other than technology investments and your progress there in strategy. There could you talk about maybe the other topics you're going to focus on on February six at the Investor Day.
Sure Jeff for the Scott.
The operational issue I would just described it as.
As we want it will self identified secondly, as we continue to adopt common practices. We just saw a.
I am disparity and a certain pricing practice that we had that we thought we really just needed to double back in.
Create consistency over a period of time, that's that's all it was.
The dollar amounts larger than we would've liked but we felt like it was the right thing to do so no real story there other than.
Just creating consistency in our practices across the company relative to how we how we price items to our customers.
And.
For the.
Investor Day.
Paul you want to I can at a high level, yes, we are going to talk about technology as you would expect but.
I think the idea this year as it were going to talk about technology in the context of of our business.
And really demonstrate how what kind of how we're going to market and where we're focused on our business how technology is going to support that.
And then of course provide an update on credit and financial outlook.
Thank you.
Thank you Jennifer.
Your next question comes from the line of Erika Najarian with Bank of America.
Hi, Thank you for taking my question.
Yeah, and thinking about the outlook slide is positive operating leverage still possible in full year 2020.
I caught in the remarks Sina potential upside mentioned from.
Essentially pulling more R&D expense lever and potentially also pulling minded deposit cost lever.
Yes ill.
Eric we that we have not commented specifically about positive operating leverage as we have mentioned previously over the sort of the medium and long term as clearly our goal.
Next year will be tough as we outlined in the slide.
While noninterest income will be up.
Net interest income the net interest income was expected to be slightly down and so expenses with expenses sort of flat to down.
In that that brew of revenue as I said I think positive operating leverage.
We'll be tough to achieve in 2020.
Got it thank you.
Thank you.
Our next question comes from the line of Peter Winter with Wedbush Securities.
Thanks.
Kind of a big picture type question I'm, just thinking where we are in the cycle. How are you guys think about the balance between.
Protecting the profitability ratios versus growing the balance sheet.
I guess I'll, just say that.
I think it's a time, where everybody or you have to be.
Just very careful.
That said.
We keep asking ourselves where are we in the cycle because it I mean this has been.
Very.
Unusual cycle.
It's been about as long.
Uh huh.
Flatter yield curve such incidents of respects in terms of the.
At a low growth for very long period of time.
And.
No, we're not seeing anything that suggest to us.
That any thinks about churn suddenly.
We're not seeing anything systematically in our.
Credit metrics for our portfolio that gives us.
And in real pause, but.
No that.
At some point, we're going to see a cycle.
And so trying to let's try to be careful we we certainly establish.
Goals targets internally in terms of where we'd like to see in with loan growth.
Starting with me I am pretty careful about.
Making that sort of the main thing around here is to hit growth targets I think thats system.
It creates a culture, that's not very healthy enough in the financial institution.
Deposits kind of different animal I mean, you can push people got really get deposits.
But loans.
The nature that game as you have to be selective and.
And so.
While we hope to see the kind of low loan growth, we've outlined here expect to see it.
We're going to be careful along the way.
I think we have been last couple of years.
I would just add to that that if you look at the loan categories that are possibly most toxic going into a decline.
Construction lending as an example of.
Our construction loan growth has been really flat really dating back to 2014 and before.
We're up maybe a $300 million in terms of total outstandings in construction loans.
From 12, 14 to 12 nine team.
We're not a big card or auto lender and those are two places where you see a lot of challenges going into a downturn and our leverage portfolio as we've talked about before.
Compared to our peers.
Yes, we're under exposed there relative to our peers. Although you have to always watch that portfolio carefully. So I. Just those are three product categories that you would want to be really concerned about if if you saw a lot of rapid growth and we have an experience that.
I'd just add to that energy, we've we've significantly reduced.
Total exposure to the services sector over the last.
Three or four years and so.
Thanks.
Portfolio has to in terms of its.
Composition has that up to 100% something.
But thats something has become more conservative we think over time so.
That's really helpful.
Just on this loans.
Can you just give an update on customer sentiment and how it compares to maybe last quarter you are seeing an improvement.
I think it's still I mean around the markets we're in.
Still pretty good and maybe.
Maybe even getting a little better from workflows.
A quarter ago I mean, it's.
We still hear concerns about labor availability.
Sort of high class problems, if you will.
As opposed to the kinds of challenges that.
That can.
And are really really hurt.
Businesses.
Hi.
I think that.
The economy feels pretty good throughout the west.
Great.
Thanks, a lot.
Thank you.
Thank you.
Our next question comes from the line of Stephen a leg, so pull us with JP Morgan.
Hi, everyone.
I see.
The first ask you so securities portfolio came down quite a bit 2019 telegraph.
Well, how do you think about this in 2020 should we still expect the decline the portfolio.
I wouldn't expect.
A lot of this kind of balance sheet repositioning I'll call. It we really took care of in 2019. So we we are constantly looking at our kind of net liquidity position constantly thinking about the size of the portfolio relative to the size of the balance sheet and.
It's really being driven by our liquidity stress testing.
I don't foresee a big decline from here in the securities portfolio, but as I said were.
Were in such a flat interest rate environment, we're very sensitive to the fact that yeah. The securities portfolio is not a moneymaker for us in a dilutive to the margin and frankly the income.
And so we are managing that portfolio.
Almost completely for liquidity at this point.
Okay.
We are our new yields for new Securities.
Last quarter, we average is about to 45.
Securities we put on.
Okay.
And then finally on expenses, we look at the expense outlook does that include the anticipated benefit from eliminating the defined bench and.
I find benefit pension plan.
Our plan has been close for years and so what's happened is that it's not really for I've been here five years, and it's really not been.
Had a significant impact on our noninterest expenses.
I can think of in any given year over the last five years, because we had closed it kind of 10 years ago.
Two new entrants and its it was no longer as I recall accruing benefits. So this is really sort of an administrative lee.
This is a plan that was waning as it was and so this is sort of an acceleration of the resolution of all the liabilities in the plan.
Okay. It will it and as we've noted previously when we say that expenses will be.
This is stable to slightly decreasing that that would exclude the it's kind of a onetime.
Expense that.
Thanks, Mark that's currently in AOCI on runs through the income statement that's about capacity so.
Okay. Thanks for taking my questions.
Yes. Thank you.
Thank you and our next question comes from the line of Ken Who's been with Jefferies.
Hey, Thanks, good afternoon guys.
Yes, Paul if I could ask another right side of the balance sheet question. You, obviously saw a really nice re mixing into deposits and we're able to lower your.
Your your wholesale debt profile. A first question is just how much more room do you have to remix on the right side of the balance sheet.
Well as we said.
Yeah, we reduced wholesale borrowings here $2 billion in the fourth quarter. So to the extent, we can continue to grow deposits and those deposits are priced correctly.
We continue to change that mix, although my expectation is.
As we said in the outlook the balance sheet will continue to grow.
And that wholesale funding will be an important part of it just kind of that ongoing mix. So in other words I don't I don't see a huge opportunity there unless we get an outsized kind of deposit growth.
Okay and that's my second question, then just related to.
That type of deposit growth the God and the pricing of it can you talk about relative to the 11 or so basis point decline you saw in interest bearing deposit costs are.
How do you see that going from here, meaning how much more ability is there just through.
The pull through of lower rates versus you know you continuing to work with customers on the on the downside of rates as you had on the way up thanks.
Yeah, I believe we continue to have opportunity there when you look at where deposits were.
Year ago versus where they are now.
When you compare that to the absolute level of rates I. My belief is while we won't get deposit rates down as low as they were one or two years ago. I think we still have some room to really manage that exception pricing.
To continue.
Continue to work that that pricing down.
All right one quick follow up just in the slide deck, you mentioned the year over year.
Impact of premium amortization from the SP. A book can you talk about how is that expected to continue Georges or any any outlook for changes in premium amortization I in your forward outlook.
Not a big change on the SB looks book specifically that is.
Just over 10% of our investment portfolio I used to be larger that as an asset class that is declining over time. The other artifact about that asset is that at floating rate and so its prime based.
And so you've got the in that particular case, when you've got kind of a floating rate asset that.
Is experiencing prepayments and a falling rate environment.
He is on that on that book have been.
I've put pressure on the whole portfolio. So as I said that that part of the book is a little over 10% of the investment portfolio, but when you look at a four basis point decline in the yield.
Over half of that was related to the SP a book.
So thats all in incorporated into our outlook and we're not expecting a big change and that trend.
Thanks, Paul.
Okay. Thank you.
Your next question comes from the line of Steve Moss with B. Riley.
Good afternoon.
I wanted ask about the increase in commercial NPL. This quarter, just wondering if that was driven by energy and what are your expectations for the energy book and loan balances you're going forward.
I'll take that Steve Michael.
Decrease mostly is related to commercial loans some.
Some oil and gas, but mostly other non oil and gas commercial.
The outlook is favorable.
Don't see further NPL.
Issues for for 2020.
They're hard to predict as you know.
But we have also we have quite a few nonperforming loans that are actually contractually performing.
So we.
Look at the net number as well and is positive role relative to the industry and our peer group.
Okay. Thanks.
Yes on energy, but did you want to were you asking about energy specifically or yes. Please Scott.
Sure.
Our our commitments and Outstandings are well below our December 14 levels, which is really when that Pete.
And as Harris noted a bit ago, our exposure to services is now less than 20% of outstandings down from about 40% to 43% of Outstandings back then and we're always watching the though.
This portfolio very closely.
I think what's getting a lot of headlines as the equity markets are basically closed to upstream companies CMP companies and.
To the midstream and so that just creates a lot of sort attention.
And the narrative about energy the public debt markets in the private equity markets are open for upstream and midstream companies.
So the capital is certainly certainly flowing and.
Where our upstream and midstream portfolios are there.
Knock on wood, they're performing pretty well right now natural gas is also a really.
Highly visible topic right now price pricing of natural gas will continue to be soft it'll stay and probably the sub two region for a bit here. During the next couple of months three four months potentially.
But that portfolio for us, where we have natural gas in our borrowing bases.
Came through the fall Redetermination in pretty good shape, and we could have some criticized loans.
That have heavier national natural gas exposure.
But we think it's very manageable so were.
And also the $13 million increase in nonperforming.
Loans in Seattle High this quarter did didnt include anything of any material amount in oil and gas energy was the energy Nonperformings were basically flat to last quarter.
Okay. That's helpful and then Jimmy May take one more crack at expenses here.
The quarter increase include that 10 million dollar item just wondering like the you know is there just give me an acceleration of the investment expense coming on that perhaps.
Does it make it a little bit more.
Constructive on the level of expenses level decreasing expenses.
I would say that those two items are are unrelated.
Okay. Thanks.
Thank you.
Your next question comes from the line of Brian Klock, with Keefe Bruyette <unk> Woods.
Hey, good half have good evening gentlemen, an afternoon for you.
Brian .
Yes, I'd have is going to asking about the capital back I know that.
Hey, guys. Your guidance is for the overall level of he wanted to be stable here and you guys have returned a lot of capital.
Over the last few years.
So just looking at your capital ratios that I mean, if he want is still pretty strong, but give me your total capital ratio.
Hey, very strong and I look at you sub 100 basis point cushion between PD, one and your tier one.
So it doesn't look like you need to do anything to add to that capital stack. It does seem like maybe that.
Preferred stock it seems like it's a little bit expensive relative to what some of your their peers have issued at their anything you guys can do it and make that more efficient anything in that preferred stock a part of the the stack that maybe you could.
Refinance out for something cheaper.
We have been Brian you know because you've followed us for a while we have been very active in kind of.
Proactively managing.
Particularly that preferred part of our capital effect, because we recognize it as being relatively expensive extensive so but at this point it would be hard for us to go out and kind of pick anything out of the open market, we really need to wait for the contractual provisions of the preferred before we can manage that anymore close.
Slate.
Got it.
Appreciate it thanks for your time, yet at the in a couple of weeks.
Thank you Ryan.
Thank you and I'm showing no further questions at this time, so with that I'll turn the call back over to director of Investor Relations James Abbott for closing remarks.
Thank you Andrew and thank you for joining everyone. Our next public appearance will be on February six for our Investor day, as Brian plus just alluded to.
That's scheduled to begin in Tenthirty am Eastern time, if you would like to the 10. Please contact me by phone or by email and we look forward to seeing you at that point in time. Thank you again for your attendance today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.