Q2 2019 Earnings Call
Good day, ladies and gentlemen, and thank you for your patience Youve joined Zions Bancorporation second quarter 2019 earnings results Conference call.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.
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As a reminder, this conference maybe 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 Letif and good evening, we welcome you to this conference call to discuss our 2019 second 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.
Additionally, executives with us in the room today include Scott Mclean, President and Chief operating Officer, and Ed Schreiber Chief Risk Officer.
Referring to 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 this forward looking information, which applies equally to statements made in this call a copy of the full earnings release as well as the supplemental slide deck are available as I ends bancorporation Dot com.
We will be referring to the slides during this call.
The earnings release, the related slide presentation, and the 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 such 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 to one hour during the Q in a 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.
I'll now turn the time over to Harris Simmons.
Hi, Thanks, very much James we welcome all of you to our call today to talk about our second quarter.
I'm going to go to slide three.
I'll start there that's a summary of several key highlights.
The results for the quarter were favorable in most areas compared to the year ago results. One of the several positive results in the quarters and robust loan growth we experienced.
Which was up 7% over the prior year period and up 2% over the first quarter of 2019.
This was the fourth consecutive quarter.
Reasonably strong loan growth in the second greatest growth for the bank since the recession.
We expect to continue to achieve broad based loan growth income growth through small business middle market and capital markets activities.
Another highlight in the quarter was noninterest expense.
Adjusted non interest expense was up only 1% compared to the year ago period, and down 2% compared with the first quarter of 2019.
We're continuing to reap the benefits of several years of focusing on efficiency, we remain highly focused on collecting and implementing.
Simple easy fast safe ideas to improve our business ideas generally generated largely by our employees.
And we continue to continue to improve our operations.
Through something a lot of these ideas.
Ill limit the growth of operating expenses.
However, the quarter also included some challenges most significantly our net interest margin.
Which was impacted more than we expected due to the sudden.
Downward shift in the yield curve.
Later, Paul will discuss this subject in more detail as published in our slide deck that accompanies this earnings call Weve reduced our revenue and earnings outlook for the next four quarters to reflect our best estimate of the impact of these macroeconomic changes.
However, it's worth emphasizing that our ability to be precise and forecasting net interest income can be.
Quite limited.
Particularly given how swiftly the rate environment.
Changed.
We are taking steps to blunt the effect this more difficult rate environment through heightened focus on both.
Interest bearing deposit pricing and noninterest expense control.
Specifically with regard to expense control, we expect to maintain non interest expense in the second half of 2019 that is consistent with the first half of the year.
Slide four shows earnings per share results for the last several quarters in the second quarter.
2019, we reported 99 cents of earnings per share compared to 89 cents per share in the second quarter last year.
In the second quarter of 2019, we had about a net two cents per share of items that lowered our reported earnings per share adjusted for these items earnings per share increased 13% over the prior year.
Turning to slide five.
On the left side as adjusted pre provision net revenue or PPNR.
Which continued to show a growth of approximately 9% over the same period a year ago.
And 3% growth when compared with the prior quarter.
Which is somewhat lower expectations, primarily as a result of the interest rate environment.
On the right side setting are present in pre provision net revenue less current period net charge offs on a per share basis, which increased 10% over the prior year.
As noted when we introduced this metric when the new loan loss accounting standard goes into effect in 2020.
We're concerned and speak with you.
I believe that many of you are as well.
The results across companies will be generally and comparable.
Therefore, we present this metric as a simple way to compare.
Across the industry.
For our financial goals, we have long been committed to achieving stronger revenue growth and expense growth falls also referred to as positive operating leverage.
You can see evidence of that in our results.
However, in a period of falling interest rates, our ability to achieve positive operating leverage becomes more difficult.
Nevertheless, the message remains the same over the long term horizon, we plan to continue to improve the operating efficiency efficiency of the company.
Even as we continued to invest in the business.
Slide six shows some of the key technology objectives going forward since the completion of.
The loan systems conversion.
As we announced last quarter all of the loans that were expected to be on our new system are there and our attention is now on the deposit side.
We are enhancing digital experiences for our customers while simultaneously.
Remaining focused on maintaining a low single digit growth rate in our non it non interest expense.
I'll conclude my prepared remarks, with slide seven which is our key objectives and our shareholders.
Over the long term, we expect to continue to deliver positive operating leverage.
In the near term, we expect healthy loan growth continued fee income growth and solid expense control.
As I previously noted the declining interest rate environment.
Environmental.
Kind of limits.
The declining interest rate environment, it limits, though it doesnt eliminate our ability to achieve positive operating leverage in the near term.
Hi in years past, we provide a great detail regarding improvement in our credit risk profile, we expect to be a positive outlier superior credit quality in any economic downturn that may develop.
Specifically to the second quarter, we experienced a single $8 million charge off which we don't see as indicative of a more broad.
Based credit situation.
Our net charge off rate ratio was just one basis point of loans over the last 12 months and.
Continue to be very acceptable during the second quarter.
We continue to believe we have further room to optimize our capital ratios as supported by our stress testing, which we disclosed on our web site on June 20 Onest.
We have substantially increased return of capital over the last five quarters equaling a 174% of earnings during second quarter.
The decision on additional capital return as a board level decision and we will communicate continue to share that information as it becomes available.
As we've been saying our common equity tier one ratio was moving down closer to peer median levels.
And we expect to continue to bring that down to just above peer median and meat and maintain maintain it at that level.
Well that overview I'll turn the time over to Paul Burdiss to review, our financials and additional detail Paul.
Thank you Harris and good evening, everyone as Harris mentioned, our financial performance. This quarter was solid however, the quickly changing interest rate environment, specifically, the inverted yield curve and related expectation for falling short term rates is creating revenue headwinds, which we are working to manage through.
I'll begin on slide eight which highlights two measures of profitability return on assets and return on tangible common equity.
As Harry has highlighted we expect to continue to actively manage the areas that we can control, including loan growth fee income growth expense control and balance sheet leverage to improve balance sheet profitability.
On slide nine for the second quarter of 2019.
Science net interest income increased 4% from the prior year.
Period up 21 million to $569 million, while not at the same year over year growth rate as the prior quarter due in part to recently lower short term interest rates and the inverted curve.
Much of the growth in net interest income can be attributed contributed to loan growth.
The 14 basis point decline in the net interest margin was more than we had anticipated when we spoke in April .
Ill describe this in a little more detail later, but at a high level about half of that decline in the quarter was due to lower loan yields and about half was due to deposit costs and funding mix.
Slide 10 breaks down net interest income by both rate and volume you can see that our average loans grew 7% over the year ago period.
Average loan growth in the second quarter was also strong relative to the first quarter, increasing about 9% on an annualized basis.
Over the prior year period.
Yield on loans increased 20 basis points, however, relative to the prior quarter the yield on loans declined eight basis points. This is attributable to a couple of dominant factors first the recent decline in short term rates and secondly, lower rates on new loans relative to maturing loans. This compression could be attributed contributed to several factors, including competitive forces as well as.
Credit quality differences, we continue to maintain our disciplined underwriting standards.
And have even tighten standards somewhat in select areas as we continue to prepare to be a positive outlier. During the next economic downturn this improvement in portfolio composition.
Embedded in our book has adversely impacted our loan yields over time, but importantly has translated to much stronger performance in our stress test results. This has supported a reduction.
In the amount of common equity supporting the company, therefore, facilitating the repurchase of about 10% of our company's common stock over the past year.
For average total deposits, we are reporting growth of 3% over the prior year period, we experienced a similar 3% annualized growth rate when compared to the first quarter.
Although not shown on this page average non interest bearing deposits decreased $550 million or about 2% from the year ago period, which is to be expected during a rising rate environment.
We generate deposits through strong relationship banking, which is evidenced in the continued growth in deposit balances with a relatively modest increase in deposit cost.
Well that has been a benefit to us in the past and as we have discussed previously. This also means that it may be more difficult to reduce our cost of deposits as rates decline.
When compared to the prior quarter, our cost of total deposits increased six basis points.
With most of this due to exception pricing activity on our strongest relationships.
The increase.
With a little less than the change we reported in the first quarter of 2019 and is generally consistent with our expectations and public comments over the past several months.
Slide 11 depicts the key net interest margin components. Our net interest margin was down 14 basis points relative to the first quarter as loan yields reacted relatively quickly to lower interest rates, while customer expectations regarding deposit rates have yet to recognize the lower rate environment.
Additionally, our funding mix has become somewhat more weighted toward relatively expensive wholesale funding.
While the interest rate environment presents a significant challenge to the net interest margin, we remain focused on profitable balance sheet growth.
Turning to loan growth slide 12 depicts the 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 categories were reporting solid and consistent growth our growth outlook for each portfolio is unchanged and shown here on slide 12.
Interest rate sensitivity is reported on slide 13, as we have discussed previously we have been working for the past year or so to protect net interest income in the event of falling interest rates over the past quarter market expectations for the path of short term rates have been have incorporated multiple rate cuts by the federal reserve.
Hedges are much less effective when falling rates have already been priced into the cost of the hedge.
Although we continue to look for opportunities to decrease our risk to falling interest rates, we have paused, adding swaps at rates that already incorporate multiple rate reductions. It is important to note that we currently have over $2 billion of interest rate swaps on the books.
Also after quarter end, we increased the notional value of interest rate floors meant to protect against very low rates. We currently have $7 billion of interest rate floors with a strike price of 1%.
Next a brief review of non interest income on slide 14 customer related fees were up a solid 4% from the year ago period, due largely to strength in lending activity and sales of capital markets products.
Noninterest expense remains controlled as shown on slide 15, noninterest expense grew less than 1% to $424 million from $421 million in the year ago period key drivers of the change were an increase in salary and benefits of about 3%.
An increase.
All other line items with the exception of FDIC insurance premiums of about 2%.
And a decline of FDIC insurance premiums of $8 million with the primary contributor being the elimination of the FDIC surcharge. Excluding this change total noninterest expense increased about 2%.
Looking ahead on noninterest expense, we expect to uphold our focus on expense controls and streamlining bank operations, while investing in technology and people to enable controlled continued business growth.
We are reiterating our expectation for slight noninterest expense growth.
Which can be interpreted as growth in the low single percentage rate change.
Although with headwinds on revenue.
In the near term, we are working even harder to further limit expense growth.
Turning to slide 16, the efficiency ratio was 59%.
Compared to the year ago period of 60.9%, we continue to expect our efficiency ratio will be well below will be below 60% for the full year of 2019.
As seen on slide 17 credit quality continues to be remarkable with the trailing 12 month net charge off ratio of only one basis point compared to the prior quarter classified loans increased $41 million.
The increase is attributable to a few unrelated credits credits rather than any adverse trend oil and gas classified now stand at about 2% and there is general stability in the other broad categories net charge offs for the quarter were $14 million of which about $8 million was related to a single larger credit as mentioned by Harris earlier, while the dollar value has increased the allowance for loan loss as a percent of loans was slightly lower when compared to the prior year period, the linked quarter increase in the provision for credit losses was largely attributable to the net charge offs previously mentioned loan growth and a modest increase in the qualitative portion related to general economic conditions.
We continue to work toward compliance with the new Cecil accounting standard, which will become effective early next year I expect designs will be in a position to disclose more in the coming months, including an estimated financial impact from the adoption of Cecil.
Finally on slide 18, we depict our financial outlook for the next 12 months relative to the second quarter of 2019, we have reduced our outlook for net interest income to stable to slightly decreasing but I will caution you that net interest income is becoming increasingly difficult to predict in the current rate environment.
Over the past several quarters, we have generally provided net interest income outlooks, which have not incorporated changes in short term rates. However, due to the recent dramatic changes in the interest rate environment, we are incorporating into our outlook. The shape of the current yield curve, which would imply at least 50 basis points of short term rate decreases by the AFFO and see.
Our net interest income outlook also assumes a modest decline in our securities portfolio balances further down the page and as we have said previously.
We will we are carefully to manage noninterest expenses to reflect overall revenues otherwise our outlook remains relatively unchanged from that which was reported throughout the second quarter of 2019. This concludes our prepared remarks Latif would you. Please open the line for questions.
Yes, Sir ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone again, Thats Star one and you touched on telephone to ask a question. If your question has been answered all your wish to remove yourself from the queue. Please press the pound key.
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Our first question comes from the line of John Pancari of Evercore.
Your question please.
Good afternoon.
Hi, John .
On the on the NIM front just right.
Given your Eni outlook to stable to slightly down from here what does that imply in terms of your net interest margin trajectory I know you're here at 354 or how should we think about how that progress is through the back half and then into 2020. Thanks.
Well, John I think you know.
We're kind of reluctant to provide a lot of specific guidance on that sort of net interest margin.
Because there are so many things that impact that so I would rather ask you to focus on.
Net interest income and again I'll reiterate that that net interest income outlook.
Incorporates.
Sort of the forward curve, which is at least two.
Two rate cuts.
Okay, Alright, and then secondly around the.
Expense commentary.
I hear you on the focus for the positive operating leverage but you indicated that it gets in this environment.
Difficult to to achieve that but you remain committed so could you talk about.
The magnitude of positive operating leverage that you believe you can achieve given this tougher backdrop I know you're digging a lot deeper on expenses. So wanted to get an idea how much leverage we should expect for.
For 2020 for example, thanks.
Well.
Okay ill start ours is that okay.
John the issue that we have the issue that I have personally in creating that outlook is that the.
Again, the interest rate environment has changed so quickly.
The revenues are just getting a little harder to predict and so while we do have hedges on falling rates.
When the yield curve and inverts and rates fall.
Revenues gets a little harder to predict now we've been able to offset a lot of that through balance sheet growth and loan growth in particular.
This quarter, so getting to your question specifically around positive operating leverage I feel like.
We have enough levers internally.
To manage expenses to reflect to the overall revenue environment and that's that's kind of what I tried to say in the comments Tonight.
I'll stick to that.
I, just I would just add I guess I'd reiterate.
What I said in my remarks, which is that.
I would expect.
Second half expenses to be.
Reasonably flat to the first half and.
So some of this.
We'll get into.
Kind of the pace at which were.
Thinking on projects.
Technology projects, we have some major.
Technology project that we're not going to.
No, we're not going to change the trajectory on its it would be really damaging to the long term success of that to do it but there are some there may be some smaller things that we can.
So that we can.
Find ourselves.
Working at delaying.
And.
As always some of this can be.
Somewhat self correcting through incentive.
Compensation programs, which are intended to reflect.
Success, when we have success and weakness when there's weakness so.
I have a reasonable amount of confidence through the.
Rest of the year and we'll have to see as we get there kind of where we are both.
Interest rates and expenses, we go to 2020, but theres a lot of focus on expense control around here right now.
Got it thanks, Aaron Thanks.
Thank you. Our next question comes from the line of Chen Assistant of Jefferies. Your line is open.
Hi, Thanks, Good morning, guys. Good afternoon, I should say on that Paul can you elaborate a little bit on the just the deposit cost side you mentioned, you're still still are you still seeing the price increases and the mix.
Total deposit cost you said were up six basis points. This quarter, how does that trend from here in terms of what you can see near term do you start to see some of that that pressure come off maybe you can help us understand that trajectory. Thanks.
Yes. Thanks for your question Ken There is a couple of comments that I'll make.
So we first of all with an increasing mix in wholesale deposits or wholesale funding I will note or you didn't specifically ask this I will note and you saw in our financials at the cost of wholesale borrowings were actually down this quarter and so while they're expensive overall on a relative basis. They do react more quickly to market rates and so we have seen that so to the extent rates are falling I expect.
The cost of those wholesale borrowings to fall relatively quickly quickly now specifically to your question around customer deposits My comments were really.
Around expectations for really a little bit backward looking in that we have continued to see.
Deposit price increases even as short term rates fall as you know one month LIBOR was actually down this quarter relative to Alaska in the point that I was trying to make in those prepared remarks was.
We are in this interesting transitory period, where we've got very quick reaction on the loan side to changes in market rates.
But the deposit right rates kind of haven't quite caught up.
I will say absolutely not a clinically we are very focused on deposit costs as it is.
One of the key levers that we have to manage overall.
Balance sheet profitability as we have said this quarter and in previous quarters much of the deposit cost increase has come through very targeted exception pricing for our clients.
And so we are absolutely reviewing that and looking for opportunities to manage that much more tightly.
The other final piece I'll make.
I'll say about deposits is that we have moved.
Some off balance sheet client funds onto our balance sheet those have shown up in the form of deposits.
But those deposits come at a higher rate, but are also relatively indexed to overall market rates and I would expect to see those deposit rates come down as well.
Okay and my on my follow up to that is that just.
As you work on.
You work through the exception pricing I guess, how do you start to get the sense when that price increase has worked its way through meeting how how long do you anticipate that lag being between the LIBOR role and then the lag on the deposits and being able to start to roll those lower.
Ken This is Scott client, but most of it.
Thanks, Paul was trying to indicate that most of the exception price deposits are.
Index nightly and and it's a very large percentage so it'll adjust.
It'll adjust pretty quickly much it'll just pretty quickly.
Okay.
Yes, it's it's really and at the end of the day.
For larger depositors, it's really a function of.
Competitive.
Conditions, certainly much less so for for for smaller to foster son.
We continue to see the greatest pressure being with a larger deposit.
Understood all right. Thanks, guys.
Thank you. Thank you.
Thank you. Our next question comes from Peter Winter of Wedbush Securities. Your question. Please.
Hi, good afternoon.
Commercial real estate.
The loan growth has been very strong the last few quarters and that's an area that you've highlighted that you're being a little bit more cautious on so I was wondering if you could talk about the growth there.
Sure Peter This Scott Mclean. Thank you for the question.
And.
Just a quick comment we've made pretty much saying commented in the first quarter the.
You are seeing growth.
In the last couple of quarters, there, but if you look at.
The portfolio over the last.
A two and a half three years. If you go back to say December of 16.
Total fee are you at that time was 11.3 billion.
We sort of set up right in that range actually a little a little shy of that at the end of 17 to end of 18.
And so this pickup in 19.
Is is really back just about four or $500 million higher than where we were at the end of 16. So really we've had this when most banks.
Our size and smaller have seen really big increases in CRT, and particularly construction weve been pretty flat.
And so the end this particular should increase in the last quarter or two quarters has mainly been construction loans funding.
That were made.
Nine months to 12 months ago.
So is there still room.
Then for that to grow.
We believe so in the sense that what we basically said is that we expect our overall loan portfolio to grow mid.
Single digits.
And the CRT portfolio growth would be consistent with that.
So that the percentage mix would not change materially and as you know.
About 75% of our CRT portfolio, our $11.8 billion CRT portfolio.
His term and 25% construction.
Great. Thanks very much.
Thank you.
Thank you. Our next question comes from Marty, mostly Vining Sparks Your line is open.
Thanks.
I wanted to focus on kind of the quarter net sense of.
You know reporting 99 cents, but theres kind of some unusual things that.
We really haven't how think highlighted quite.
Extensively one is you got the 6 million dollar valuation on the customer swap which was.
Kind of interesting Thats kind of an unusual situation and then you've got the $8 million sitting over there.
In the <unk>.
In particular loan that went bad which.
You know significantly increased provisioning for this particular quarter neither of those sounds sustainable and then you've got $3 million. This security losses, when interest rates are going down, which you shouldn't really have secured so there there's really these three transactions.
That are floating around behind the scenes, which I just wanted to see if you could address because that represents about eight cents in EPS. When you look at it that way.
Marty This is Paul I'll provide a little more color on the credit valuation adjustment.
This is related to we've got.
Our clients are the counterparty on interest rate swaps that we sell to them as the yield curve has sort of flattened in inverted the value.
Of the swaps to us.
Has increased that is to say that our clients O us more on an economic basis for the swaps that we put on and so there is an accounting adjustment, where we basically we have to adjust sort of to market every quarter.
That amount and so the $6 million that you referenced that we recognize this quarter.
It was related to the change in the valuation of those clients swaps.
But it is not to be really clear an indication any indication of a change in the credit quality of those underlying.
Underlying swaps or underlying customers.
Strictly I would characterize it kind of an accounting adjustment.
Related to the increased value of the swaps to us.
So thats number one.
Little Analogist seems to me to the provision for unfunded commitments almost eminence.
Yes, it's a reserve against something to add.
As.
Happened yet.
It's.
Certainly not something we are expecting.
Oh losses, no right and it's purely a function of the of the yield curve.
Correct.
Interest rate environment.
Number two was the debt securities losses that was actually related not to our investment portfolio, but two hour.
Our portfolio of equity investments through our FDIC.
And so thats a valuation adjustment as you said, it's pretty infrequent and some quarters are up in some quarters are down and this happened to be.
$3 million and I apologize the third item was.
The $8 billion on that loss and Oh in late October one loan yes. The current loss so as I tend to say in my prepared remarks the.
This was not at all indicative of any sort of underlying trend. It was sort of a one off loss that we recognized at least that's the way I would characterize it and so I think you're right to say that if your question is implying that the $8 million loss was not indicative of a trend of significantly increasing credit costs I would absolutely agree with that.
And then the shift focus completely.
The drop in yields on your loans from 493 to 485.
In conjunction with you putting on all the swaps and floors and things that have.
Some costello the rig reducing the risk is somehow that reflected there or is it even in the cost on the deposits. There's there's some and they cost that happens as you put these derivatives on and some of that's impacting the margin, possibly this quarter because you've been doing so much of that in the last six months, yes, but not as much in the in the second quarter, you know really the loan yield decline breakdown.
As I tried to characterize it or I think we might have it on our slide it was really about half of that was related to the fall in.
One and three month LIBOR.
And then about a half of that was related to what I would call the portfolio churn that is.
Yield of oncoming loans was just lower than the yield of of.
Loans rolling off.
But you are right to the extent, we certainly did he sent we if we were to have added a bunch of interest rate swaps at a 75 basis point negative carry this quarter, which we didnt do but had we done that that would have absolutely shop in the loan yield.
But you do have some costs related to derivatives that as in your margin right now which is paying insurance that then limits the.
So your margins going up 50, or 60 basis points since rates started rising you're not going to give all that back because you've actually.
To reduce your asset sensitivity, but it has a cost to it today.
You're right Marty I don't have that number at my fingertips, but we can certainly get that.
Okay. Thanks.
Yes. Thank you.
Thank you. Our next question comes from the line of Ken Zerbe of Morgan Stanley . Your line is open.
Great. Thanks.
I guess first question just in terms of loan growth, obviously, you've had two quarters in a row of pretty strong loan growth. Your guidance is still unchanged as moderately increasing I get that it's sort of mid single digits, but.
It also implies that loan growth is going to slow either back half or over the next 12 months versus kind of the pace. It has been at recently.
Is that a fair assessment the loan growth does slow down from here and if so why is that the case. Thanks.
Kim Thank you Scott.
You know as we've said before we.
We sort of run the run the place on mid single digit loan growth and we think its work and the kind of 4% to 5% range and it can work in the six to seven seven plus percent range.
We're not we're not.
Necessarily guiding to slower loan growth. We've we've had four really good quarters in a row those came off of free moderately flat quarters, but we have really solid growth and as you know.
And as you can see the growth is coming a consistent with the mix of the portfolio. It's about 50%. So you and I see Ari as was noted in the earlier question is is about 25% of our growth right now, but it's coming off of about two and a half flat years, and then consumer are kind of residential mortgage business. Both one to four family and home equity is continue its been very strong very consistently strong for the last three years and we're implementing technology there that we think.
Offer us really continued positive outlook on the mortgage side so.
No we're not necessarily guiding lower I know the words may imply that but I feel good about our pipeline I think I'd, probably just also say end of the second quarter was it was a strong quarter I mean it.
And I.
I wouldn't want to.
A signal that we think that we can you know that we're going to be doing 9% loan growth from here on out I think it was a strong quarter, but it's it was stronger than what we've seen.
Generally the last few quarters and I think we're just saying we think that.
Yeah.
Moderate loan growth is still probably a.
What we would anticipate it's hard to hard to.
Projected any of this with precision.
That's kind of what it feels like over here.
Got you, Okay, and then maybe just a question for Paul Paul You mentioned that you were tightening.
I guess underwriting factors in certain areas.
Can you just explain what areas those were and kind of where were you on where are you now in terms of how this underwriting.
If I could I'll ask Ed Schreiber, our chief risk officer to respond to that.
And the said so the areas that we've looked at is in Scott to talk about.
The lending that we have into term real estate, where we've really taken a hard look and we have done actually about 18 months or so ago as we've taken a hard look at multifamily and as well as office space and we've taken a hard look at income producing properties and.
Given where the cap rates are et cetera, which are still artificially low we felt that those markets tend to be a little bit overheated and weve made steps in there too.
Ensure that we're still getting great equity into our deals et cetera, and holding to our policy.
All right I'd add to that and I'd add to that that.
We've reported before that based on what Moody's has put out our leverage portfolio is less than generally our peers that data is out there and.
That portfolio is actually down a little bit year over year. So.
We're not we're not seeing any increases in what is generally perceived as a higher risk portfolios.
I guess the other thing I would add is that really the strongest growth.
Sensing and last from last years.
Okay.
Credit portfolio and those and these are credits that.
Credit score internally very strong.
Good quality business there are smaller they tend to be smaller credits.
And.
And are they.
Our.
Fundamentally over time have been changing the credit profile of the portfolio in a very positive way so.
Oh, yes, it's a it's also I mean, it's it is a factor.
Neil.
Because the growth we've had these are.
Because there is strong.
Credits.
You don't get the same.
Margin that you would in a middle market commercial loan but.
Oh, the economics of them are still very strong.
They tend to be.
Very favourably risk weighted in terms of capital and that's one of the.
Considerations there too.
Got you, Okay, sorry, Scott just because you brought it up I didn't see the leverage lending your exposure in the slide deck do you have that right off hand.
I don't have it right off hand, although I can look forward. It may have been in the deck that we use in Europe .
Well, we can easily get that it's been in several of our.
Yeah, we'll come back to you at the end of the call on that side, it's down a little bit from where we last reported it.
All right perfect. Thank you.
Thank you. Our next question comes from the line of Gary Tenner of D.A. Davidson Your question. Please.
Thanks, Good afternoon.
I wanted to just ask about the rate sensitivity and deposit beta slide I think you had highlighted 21% total deposit beta and then a 200 basis point.
Hi, or easing scenario.
What how do you think the betas play out.
Initially if you get 25 or 50 is there a ramp towards that 21 over time or do you think out of the gate.
You were able to cut deposit costs, a little more aggressively.
Yes. This is Paul I.
Just as when rates went have gone up as rates have gone up there has been a little bit of a ramp to fact that my personal expectation is that it would be similar on the way down however, the difference being that.
Given the sort of rapid change in rates I would say that we are all really kind of.
Actively monitoring and managing.
Where deposit rates are relative to market rate, so expectation might be for a little bit of a ramp but.
I would say we are managing for a better outcome.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Brock Vandervliet of EUV, Yes.
Your line is open.
Oh, thanks very much.
Following on that question I saw the 8%.
Downward rate shock analysis for down 200.
I know that's down from the first quarter based on the forward curve are you.
Okay comfortable with with your positioning or is are there things you would look to add given the opportunity or.
Based on your view on rates here you're comfortable.
This is Paul.
Hi.
I am comfortable with our positioning.
Given what the market is willing to give US right now that is to say I'm not willing to put on it I think it's too for the committee our Alco Committee that we're just not willing to.
Institutionalize 50 to 75 basis points of rate cuts and kind of fully realize those with certainty as opposed to what may be predicted by the market.
You know.
Over the course of the last four to five years I think you know we have been working down our asset sensitivity five years ago, we were a much more asset sensitive banks.
And I think philosophically, our Alco Committee.
We'll continue to work down that asset sensitivity over time, so to the extent that the shape of the curve changes in market expectations change.
And the levels at which we can provide the hedges change.
We will we will continue to be active in hedging the balance sheet and overtime I would expect that asset sensitivity to decline further.
Got it okay, and I'm, sorry, quick reference to increase and qualitative factors around the provision I don't think you touched on that was that.
Yeah, a material item. This quarter are you seeing anything new there I would say no that was just my kind of attempt to provide a full.
Color and clarity as the as it relates to the drivers of the of the allowance.
Okay. Thanks for the color.
Thank you.
Let's see if this is James Abbott here just wanted to answer a question from earlier on the leverage lending, it's about $1.2 billion of leverage loans per the FDIC is definition, what a leveraged loan is.
Thank you and our next question comes from the line of Kevin Barker of Piper Jaffray. Your question. Please.
Thanks, I just wanted to follow up on the operating leverage a question earlier.
And some of your guidance around keeping <unk> non interest expense in line with revenue or are you, saying that.
You're going to sustain the expense base in line with your revenue.
No matter, what the revenue looks like or are you willing to even tweak that depending on the revenue outlook.
What I was trying to say and all night Harrison Scott to add on what what I was trying to say was that you know we recognize that the revenue outlook has become a little less predictable as the as the rate environment has changed to change very rapidly.
And so we are really focused organizationally on managing managing our expenses.
To reflect that revenue environment. So that is to say to the extent revenue does weaken.
Then we will absolutely go back and take a look at expenses and see where we can manage those more tightly.
Okay, and then when you.
I think about the opportunities on the expense side, where do you see.
Areas, where you could cut expenses, whether its branch count back office.
Or decreasing investment in some of the things that you see out there.
Yes.
Well I would just the Scott I would just comment Harris mentioned that.
We do have a lot of projects underway.
The one big Technology project were not.
Inclined to slow our our spend right there because we're on a path to install our new deposits system.
About two and a half years.
And but there is a portfolio of other projects that we could slow down a bit that have a current PL impact and then there's just a variety just a simple easy fast safe.
Collection of projects that are going on there's just.
A big.
Bucket full of.
Smaller expense opportunities that we're working on at any point in time, and then finally, a incentive comp is certainly a factor as Harris noted.
Thank you.
Thank you. Our next question comes from Steve Moss, a B. Riley FBR your question. Please.
Hi, good afternoon.
Just wondering here with the increase in wholesale funding how much higher do you expect it will go as if loan growth remains strong or will you use securities perhaps to fund some of your loan growth and then also just unrelated thing there and what were your yield on loans for the quarter.
As it relates to the.
Wholesale funds, obviously, that's a function of loan and deposit growth in the most recent quarter clearly we saw loan growth exceeding deposit growth, but we we organizationally I'd say over the last couple of years have really changed.
The way we are approaching the market with respect to garnering deposits and so I remain hopeful that we'll be able to maintain some level of deposit growth.
That will support that loan growth and therefore, the reliance on wholesale funding would be.
Also limited.
As it relates to securities portfolio as I said in my prepared remarks, or maybe as in the outlook slide.
My expectation is that that we could continue to see a modest decline in securities portfolio.
That will be helpful as it relates to.
As it relates to funding loan growth.
James usually hasn't his fingertips, the oncoming loan yield I do not have that on top of my head. So James if you have a great and if not we will get back to you.
I would say, we do have it but yeah, it's not.
I would probably best describe it is that over the last two or three quarters, we've seen a shift from where the back book loans that were maturing and rolling off.
In the front book, the new loans that are coming on.
Has moved from being kind of neutral to somewhat negative and meaning that the old loans rolling off or a higher yield than the new loans coming on part of that is what Harris mentioned with the municipal loans were putting on a decent portion of municipal loans residential mortgage loans all of those have lower loan yields than where they have been in the past and so.
That kind of at the end of the day.
I can give you the exact number but it's.
What's more important is that difference between the front book in the back book and I would say that's in kind of in a 15 basis point area and it has been for the last couple of quarters in that area.
Okay. That's helpful. And then just wondering any updated thoughts on capital targets here and if maybe some of the things you've seen a foreign economy or have an age are impacting your capital thoughts.
Well I'll start and.
Others can join in <unk>, we repurchased $275 million in the second quarter, you saw that consistent with.
I think the pace that we've been on for the last several quarters.
As Aaron said in his remarks.
You know, we set forth probably now a good 12 months ago, we set forth a.
Kind of a target to be at peer median or peer median plots as it relates to the common equity tier one ratio.
And.
There hasn't we haven't seen anything.
It has taken us off pace to achieve that.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from David Long of Raymond James Your question. Please.
Good afternoon, everyone.
Hello.
Did you guys provide additional detail on that $8 million correct that charged off maybe one industry or what geography that was located.
We did we did not I Didnt think it was big enough to call out that sort of detail other than to say.
That we do not believe it was related to any other underlying trend in the portfolio.
Okay got it.
And maybe I am jumping the gun here a bit on c. So it sounds like we'll give some more color maybe next quarter, but at this point has the.
Implications of seasonal impacted your appetite to originate loans in a specific category.
Not not not at this point, but we do think that that.
You know that that's one of the.
Hi, perverse.
Ramifications of Cecil potentially down the road, but.
At this point no.
Okay, great. Thanks, guys.
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 the call today, we appreciate your attendance and we appreciate all of your questions. If there are further questions. We are happy to take them I'll be around throughout the evening and throughout the rest of the week. So thank you for your time and we'll see you again shortly.
Have a good night.
Thank you, Sir 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.
Oh.