Cullen/Frost Bankers Inc (CFR) 2018 Q1 法說會逐字稿

Welcome to the Cullen/Frost First Quarter Earnings Call. I would now like to turn today's call over to Mr. Greg Parker, Executive Vice President and Director of Investor Relations. Mr. Parker, you may begin.

Thank you. This morning's conference call will be led by Phil Green, Chairman and CEO; and Jerry Salinas, Group Executive Vice President and CFO. Before I turn the call over to Phil and Jerry, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Please see the last page of the text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available at our website or by calling the Investor Relations department at (210) 220-5234. At this time, I'll turn the call over to Phil.

Thank you, Greg. Good morning and thanks for joining us. Today, I'll review first quarter results for Cullen/Frost and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up to your questions.

In the first quarter, Cullen/Frost earned $104.5 million, or $1.61 per diluted common share, which represents a 26% increase compared to the same quarter last year. The solid first quarter results represent a great start to 2018. Besides the excellent earnings, our return on average assets reached 1.36% in the first quarter, which is the highest quarterly total in 9 years. In addition, the Board has declared a second quarter cash dividend of $0.67 per common share, which is an increase of 17.5%. We were happy to share our improving performance with our shareholders. As we talked about in previous quarters, we've been focused on delivering consistent organic growth in our business, and we've been succeeding. First, we'll look at our loan portfolio where we focused on generating growth while maintaining our quality standards. We continue to build momentum as we entered 2018.

During the first quarter, average loans were $13.3 billion. This represents an increase of more than $1.2 billion, or 10% over the first quarter last year. C&I loans grew 9.6% and commercial real estate loans grew 10.1%. So we had good balance. Our provision for loan losses fell to $6.9 million in the first quarter, compared to $8.1 million in the fourth quarter. Nonperforming assets totaled $136.6 million in the first quarter and it was a drop of 13% from the total of $157.3 million in the fourth quarter. Potential problem loans totaled $55 million and that was our lowest level in 3 years and it levels prior to the energy downturn. Net charge-offs in the first quarter of 2018 were $12.4 million and compared with $7 million in the previous quarter and $7.9 million in the first quarter of 2017. The largest charge-off was $6 million resulting from liquidation of the credit we reported last quarter that had ceased operations. Net credit was not related to energy.

About 1/3, or $5 million of our gross charge-offs for the quarter, represented tactical dispositions of credits, which either occurred in the first quarter or have -- or expected to be completed in the second quarter. First quarter annualized net charge-offs represent 38 basis points of our average loans, which is above the rate we expect for the rest of the year. Overall delinquencies for accruing loans at the end of the first quarter were 88 basis points of period-end loans, a number well within our standards and comparable to what we've experienced in the past 2.5 years. Total problem loans, which we define as risk grade 10 and higher, decreased 9% compared to the fourth quarter and were down 25% from a year ago.

And finally, outstanding energy loans at the end of the first quarter totaled $1.4 billion or 10.7% of total loans. And this represented growth of 6.2% versus the prior year, primarily from increased customer activity. So the increase in this segment over the last year has been roughly in line with the overall portfolio growth. However, the percentage of energy loans in our portfolio remains well below our peak of more than 16% in 2015. In general, across Texas, we continue to hear from our customers who are optimistic about their prospects. In responding to this optimism, we've been focused on steady and sustainable organic growth through a competitive product mix and a strong value proposition. Average total deposits in the first quarter rose to $26.4 billion, up by 2.4%, from $25.8 billion in the first quarter of last year.

In consumer banking, our value proposition and award-winning customer service continue to attract customers. Same-store sales growth from new account origination is up almost 8% compared with the first quarter of 2017. 21% of our account openings come from our online channel, which includes our Frost Bank mobile app.

The consumer loan portfolio reached $1.59 billion by the end of the first quarter. Total period-end consumer loans grew by 10.6%, or $153 million, compared to the same time in 2016. So it continue to be a growth -- growing in line with the rest of the portfolio.

On the commercial side, new loan opportunities are up by 4% compared with last year. This represents strong C&I opportunities of growth, which offset a decline in commercial real estate opportunities. You could also see this in the level of commitments booked during the first quarter, which were down by 30% versus a year ago because of lower new commercial real estate and energy commitments, while C&I commitments were up by 8%. The reduced energy commitments is understandable as we continue to prune this portfolio in search of only the best opportunities. The reduction in CRE commitments is reflected of an extremely strong first quarter last year. I'm not concerned with our prospects for either CRE or C&I. In fact, if you looked at our current weighted pipeline versus the first quarter, commercial real estate stands at $553 million versus $227 million in the first quarter, while the weighted C&I pipeline stands at $569 million versus $322 million in the first quarter. Our strategy of building our core loan portfolio, which we define as loan relationships under $10 million in size, continues to help provide steady, sustainable organic growth. For the first quarter, new commitments under $10 million accounted for 51% of commitments booked, up from 44% in the first quarter of last year. It's fitting that our quarterly earnings would surpass the $100 million mark for the first time in the first quarter of our 150th anniversary year. From the very beginning, Frost has charted a course for success through steady progress. Our focus on sustainable organic growth is possible only by building long-term relationships with customers and offering them an outstanding value proposition. We succeed by helping our customers succeed and by making people's lives better in the areas where they do business. As we grow, we welcome new voices to our organization and yesterday, Jarvis Hollingsworth, a partner in the Bracewell LLP, law firm in Houston, was elected to serve on our board. Jarvis is a great fit with our culture, and he will be a great addition as we move forward and will provide valuable insight about the Houston market and support as we work hard to develop that critical market for us. We always say we aren't in business to win awards and yet we take third-party customer service awards very seriously when we win them because they recognize the professionalism and skill of Frost employees. We learned this week that for the ninth consecutive year, Frost was the top-rated bank in customer service in Texas in the J.D. Power survey. I'd like to acknowledge the hard work and dedication that everyone at Frost has shown as we celebrate these achievements and look ahead to the future.

Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.

Thank you, Phil. I'll make a few general comments about the Texas economy before I provide some additional information about our financial performance for the quarter and close with our guidance for full year 2018. The Texas economy is expanding with robust growth and historically low unemployment. According to the Dallas Fed, Texas employment grew 3.5% in the first quarter, with growth up in nearly all sectors. The Texas unemployment rate in March was 4%. That's the fourth consecutive month of 4% unemployment, a near 4-decade low and lower than the national average of 4.1%. Tight labor markets are challenging Texas businesses to find qualified workers. Because of the labor shortage, Texas wages are rising. The Dallas Fed has revised its 2018 Texas job growth estimate upward to 3.4%. According to recently released statistics from the U.S. Census Bureau, population growth in Dallas/Fort Worth and Houston is higher than any of the top 20 U.S. metro areas in the country. During the first quarter, Dallas/Fort Worth employment grew 3.2% annualized. Growth was broad-based, led by increases in construction and mining, professional and business services and financial activities. Labor remains tight despite the large population increase in North Texas. According to the U.S. Census Bureau, 4 of the nation's fastest-growing counties, numerically, are in the Dallas/Fort Worth Metroplex. March unemployment was a low 3.6% in both Dallas and Fort Worth. Houston's economic outlook is positive and improving, although Dallas Fed analysts caution that some of the recent strong growth could be attributed to a prolonged rebuilding boost following Hurricane Harvey. Houston jobs are increasing 3.9% annualized in 2018, with the biggest gains in professional and business services. Houston's unemployment rate was 4.7% in March. The Austin economy remains the state's fastest-growing major metro area with extremely low unemployment. Austin jobs grew at a robust 4.9% annualized in the first quarter. Growth is mostly broad-based with strong increases in construction and mining at 14.8%; professional and business services at 14.2%; and trade, transportation and utilities at 9.1%. Austin's unemployment rate in March was 3%, the lowest among all major Texas metro areas. For Texas as a whole, the Dallas Fed projects 3.4% job growth in 2018.

Now moving to our financial performance. Much of the following information I will be discussing is on a taxable-equivalent basis. Given our high level of tax-exempt income and the reduction in the corporate tax rates in 2018, the as-reported numbers for the fourth quarter of 2017 and the first quarter of 2018 are not comparable. As such, for these purposes, if I'm disclosing a taxable equivalent yield or ratio, I'll be comparing the first quarter actual numbers to a fourth quarter adjusted number, assuming a 21% corporate tax rate.

Our net interest margin for the first quarter was 3.52%, up 13 basis points from the adjusted 3.39% reported last quarter. We had some positive effects offsetting some negative effects on our net interest margin percentage. But I would summarize by saying the favorable effect of higher yields on earning assets, primarily loans and balances at the Fed and higher loan volumes, were partly offset by higher deposit costs. The taxable equivalent loan yield for the first quarter was 4.65%, compared with an adjusted 4.43% in the prior quarter for an increase of 22 basis points, and was driven by a December prime rate increase, together with increases in LIBOR during the period.

Looking at our investment portfolio. The total investment portfolio averaged $11.84 billion during the first quarter, up about $114 million from the fourth quarter average of $11.72 billion. The taxable equivalent yield on the investment portfolio was 3.36%, up 1 basis point from an adjusted 3.35% last quarter. Our municipal portfolio averaged about $7.67 billion during the fourth quarter, up about $189 million from the previous quarter. During the first quarter we purchased about $279 million in municipal securities with a taxable equivalent yield of about 3.62%. The municipal portfolio had a taxable equivalent yield for the quarter of 4.12%, down 1 basis point from the adjusted 4.13% in the previous quarter. At the end of the quarter -- the first quarter, about 68% of municipal portfolio was prerefunded or PSF-insured. And the duration of the investment portfolio at the end of the quarter was 4.8 years, the same as the previous quarter.

I did also want to mention that the first quarter of 2018 included about $3.7 million in gains on the sale of bank properties that was included in other income. In addition, during the quarter, we made a contribution to our charitable foundation in the amount of $3.7 million that was included in Other Expense. On a linked-quarter basis, I did want to point out the $4.3 million, or 36% increase, in insurance commissions and fees. As a reminder, the first quarter of this year includes contingent income of about $3.4 million that is received primarily based on the performance of the underlying insurance policies. This revenue is typically booked in the first quarter and as such, we would not expect similar revenues in the second quarter. These contingent payments and the seasonality of our employee benefits business have typically made the first quarter the strongest quarter for insurance commissions and fees with the second quarter typically our weakest.

Regarding estimates for full year 2018 earnings, we currently believe that estimates for the second half of the year are low, given our current assumption of another rate hike in June. With that, I'll turn the call back over to Phil for questions.

Thank you, Jerry. And now we'll open up the call for questions.

(Operator Instructions) Your first question is from the line of John Pancari.

Can you give a little bit of color on your -- what you did with your deposit rates for the quarter? Did you push through any incremental price -- rate increases, and on what products? And when did you actually push it through if you did do that?

Our beta for the March -- excuse me, yes, for the March increase was, on total deposits, we had a beta of about 35%, and it's really across most products. Yes, pretty broad-based.

And we've done that pretty consistent with the change in the Fed's rate as far as timing.

That's right.

Got it. Okay. And then the outlook would be, would it -- would the incremental beta stay around that level? Would you continue to expect rate increases after the Fed moves here? And where do you think the cumulative beta gets to ultimately for the bank?

I guess, what I'd say as far as the betas are concerned, what we're doing is, we're comparing what alternative nonbank products are out there for our customers. We certainly believe that we want to provide a fair deal to our customers, as we've said before. And so really what we'll do is, we'll be looking at market conditions as we go forward. But certainly, I would expect that as we -- if there are future rate increases, we'll continue to move up deposits and really look at what market rates are doing, and I would take maybe the rate that we -- the 35% beta that we had and it would be something in that area or potentially a little higher, again depending on what we're seeing in the outside.

Right. Right. All right. And then secondly, just around the loan growth. You're coming in around that 10% level that you've pointed to in the past. Is that 10% still fair to assume in terms of your outlook for loan growth here? Or some of the strengthening macro-wise that you've flagged for Texas, is that something that could drive loan growth for the bank above that 10% level?

John, I think what we've sort of guided to is high single digits, and we'd stay with that. You could have quarters where it's up a little bit higher, or down a little bit below that, but I like to think of us growing sort of high single digits in this economy.

Your next question is from the line of David Feaster with Raymond James.

Could you just talk about what you're seeing on the C&I front? We've heard a lot of banks talk about increased competition in that segment and some pricing pressure there. But it sounds like you guys aren't really seeing that. Could you just talk about your thoughts on C&I growth going forward? And kind of what differentiates your strategy that allows you to outperform?

Well, I'm shocked and surprised that there is competition. No, you're right, it's very competitive. It's competitive on structure. It's competitive on price. And I think it's getting a little bit worse. If you look at -- we keep track of our declines over time and if you look at the declines we had in the first quarter, they were up from probably where they were over the last 4, 5 years. And those declines that I'm talking about are on structure. So I think people are getting more aggressive, but it's always been bad. But we're growing loans. We're just trying to keep from doing anything stupid, right. And so our declines were higher as things get more competitive.

As far as what lets -- you know why we're doing well? I mean look, I think we should be expected to do well. We're operating in the best markets, I'd argue, in the world. We operate in major markets in Texas. We've got a great value proposition. I mean, look at Greenwich and Associates (sic) [Greenwich Associates] ratings for commercial awards, not just J.D. Power for retail, and we get in -- I think it might have been -- it's over 35 excellence awards. And our relationship managers get great awards. They're great people. They're disciplined in calling. They're accountable for being successful, because we expect them to be, just like we expect the company to be. And so that's been great. I think the other thing that's helped us is that we've had this focus on regaining our balance in core loans versus large deals. We still do large deals, we're good at it. We still do energy deals, we're good at it. But we -- as we've said, about half of our growth year-over-year was coming from this core part of the portfolio, which is under $10 million, and we're good at that and we're focused on it more than we have been in the past. And so that really helps create some consistency with our growth. So it's -- and look, we're competitive, we'll compete. We've got one of the lowest cost-to-funds than any bank in the country. If we're -- if we see people that have great character and great businesses that we want, if someone wants to compete with us, bring it on, we'll compete.

That's good. That's good color. And so just kind of going back to the question on deposit costs. It looks like you've raised your money market rates again. And given your pricing strategy that adequately take care of your customers, could you just talk about your thoughts on the margin going forward? And I guess, whether you think higher deposit betas and deposit costs could largely offset the March hike and potential June hike that you talked about and kind of keeping rates -- margins flat here?

Yes, I guess, what I would say is that our projections are still, going forward through the rest of the year, we're still projecting an upward trend in our net interest margin.

Okay. Okay. And then, I guess, with rising rates and the long end of the curve picking up, has the strategy for your securities book changed at all?

Certainly, we've got a smart group of people in our investment area and they're keeping an eye on that. At this point, we're still sticking with our muni portfolio strategy. That's what still makes sense for us. But again, if we continue to see those rate increases, potentially, we could do something in the mortgage-back area. But again, you know us pretty well. We're pretty conservative and we don't take any sort of credit risk in the investment portfolio, so not a lot of alternatives. But for now we're continuing that muni strategy.

Your next question is from the line of Brady Gailey with KBW.

So if you look at the loan loss reserve, it was down around 8 basis points on a linked-quarter basis. It's now at 1.12%. But I know a couple of years ago it was as high as 1.40% kind of as all the energy stuff was going on. But before the energy stuff, you had a reserve of sub 1%. So I'm just trying to figure out, do you think that over the course of the year, this reserve can continue to release down and possibly get back below the 1% area?

I would expect that, Brady. We've got -- it's formula driven, and so it's going to be driven mainly based upon what happens with classifications and specific allocations for credits. It's been going down because energy has been improving. And also our historical charge-off numbers, that drive a lot of the formula too, have been improving. So -- I don't know, Jerry, you got any comments on the...

Yes. Yes. Brady, I guess, I would say, yes, if you look at our historical numbers, you're right, we began not that long ago before this recent energy crisis, if you will, below 1%. So I think the trend that we're showing is -- I would assume that it continues that way, assuming that credit quality continues to perform well. But as Phil mentioned, it's really formula driven. And we really saw some improvements in those energy credits and the historical loss factors associated with them and really drove the required knee down. And so I guess, from my end, if we move down from the 1.12%, I wouldn't be overly surprised.

All right. And Jerry, I know last quarter we talked about the new tax rate being around 10%. You came a smidge below that at 9.5%. Does 10% still feel like the right number? Or do you think it's closer to 9.5% going forward?

I think I'm going to -- what I'm going to kind of cautious, I'll take the 9.5% to 10%. How about that?

That's fair. That's fair.

I think Rob, we did come in at 9.5% and we do have the impact of those -- the tax benefits associated with those option exercises. They kind of flow through there and they can't have any impact on the effective tax rate. So somewhere in that 9.5% to 10% is kind of what we're modeling.

Okay. All right. That's helpful. Then finally for me, I know you'll had the issue with the commercial lockbox in 1Q with unauthorized access. Did anything really come on that as far as a loss or a regulatory fine or anything? Or do you think there's still a risk of something coming of that?

We've -- I think that right now the things we're experiencing are just costs associated with this. I mean, any time that happens, first of all, it's embarrassing and we're sorry it happened. But the key things to keep in mind is we found it. It wasn't core systems, it was an ancillary system. We fixed it, stopped it, and we're in the process of notifying people involved, which we're required to do. One thing you learn about going through something like that is, it's a process. You don't just jump in and jump out of it. And it's a process you have to go through, and it's got costs associated with it. I think we'll see some more costs in second quarter associated with it. We had some in the first quarter. And there's just a lot moving parts to it. But I'm proud of how our people have handled it. I'm proud how our -- how the institution's handled it. And I think that's the main impact that we're seeing right now, Brady.

Your next question is from the line of Dave Rochester with Deutsche Bank.

I was just wondering if you guys have made any other adjustments to the earnings credit rate after the March hike and if you'd seen any competitors moving their rates?

I think we had a 20% beta on our ECR with that March rate hike. We really haven't seen a lot of movement there, to be quite honest with you. I think the things that we've read and heard is that people are doing it on an exception basis.

Okay. Great. And then switching to the funding side of things. How are you guys thinking about deposit growth this year? Just with the backdrop of rising rates, increased business activity in the market, potentially, more CapEx spending and what not. Are you thinking you can fund your loan growth completely with deposit growth this year? Or are you expecting to deploy some of that excess liquidity into the portfolio?

I think right now, with a 50% loan-to-deposit ratio, I think that for the most part, we're expecting -- we'd be able to fund most of that loan growth with deposit growth. Obviously, we've got something north of $3.5 billion at the Fed. So we've got the liquidity funded if we needed to. But right now, what we're looking at, and based on our projections, we're getting pretty close to funding it with deposit growth.

And any thoughts at all about maybe shifting some of that cash over into the securities book at this point, just given we've got higher rates now? And maybe you can just talk about where you think longer term rates are going to go, as to how that works into that whole strategy?

What I would say on the liquidity, you know us, we're a pretty conservative organization. We've got high capital levels, high liquidity levels. I won't say that we won't reinvest or invest some of that -- those dollars in something, obviously, that we're looking at, especially with the appeal of higher rates. As you recall, we did sell $750 million in treasury securities in the third quarter and we said we'd keep, I think, $300 million, $350 million of that kind of in -- as a potential investment opportunity. So we're still kind of looking at that. Obviously, we're -- our guys, as I've said in the investment area, have continued to look at what's out there and what's available to us. And I wouldn't be surprised if, given the right opportunity, we wouldn't use up a little bit of that liquidity.

Okay. And just one last one on capital. How are you guys thinking about your levels at this point? Your regulatory ratios keep growing. How close are you to your target levels right now? And is there enough cushion there where we should expect to continue to see those ratios grow?

I think that the thing that we've said is that we do have $150 million of stock buyback out there. We've not utilized it at all. We want to be opportunistic and take advantage when we can. So that is out there. Obviously, with this increase in the dividend that we have, it has a little bit of an impact in that capital ratio. So with -- between the growth that we're projecting in the loan portfolio, this higher dividend rate, we do see a little bit potential plan decrease in those capital ratios, nothing significant. But at this point, we like where we're at in capital, it gives us a lot of flexibility. As Phil said, we were able to distribute some of the higher quality earnings back to the shareholders through this increased dividend. We do have a buyback program out there. And it gives us some opportunity for growth. I mean, that's the thing that we've said. We want to be in a position where we can take advantage of growth opportunities. We're -- Phil said, we're in some really great strong markets, between Houston and Dallas, in North Texas, in Austin, and we just want to have the capital to be able to take advantage of that growth and potentially deploy it that way.

One thing I was really pleased by with the dividend increase, as you know, we increased to 17.5%, but our payout's gone 40% or maybe a little bit below, maybe it a has 3-handle on it now. And that puts us back to the payout ratio where we were before the crisis, which is more of a longer-term payout for us. So we got to share with our shareholders the better performance, but we've also given ourselves, I think, some more capital flexibility by putting that payout ratio more where you're sort of little bit below 40%. So we've got the opportunity to use it for growth, which is what I hope we use it for. But also, as Jerry said, we've got some ability to take advantage in the event that we see opportunity with buybacks for -- to support our shareholders.

Your next question is from the line of Jennifer Demba with SunTrust.

A question on M&A. We've seen a few Texas deals here year-to-date and just wondering if your stance on M&A has changed at all with tax reform now building capital faster? And if there's anything specific you're looking for geographically?

Jennifer, we're always interested in knowing what's going on out there, right? I mean, there could be an opportunity that makes sense, just like Western did at one time. I think it's going to be infrequent. And so it's not something that I think is a critical part of our business model. The thing I think would make more sense, just brainstorming is something that would be -- if there was something that put us in another market that allowed us to build with organic growth from that place, that probably makes the most sense in terms of the business model as we're prosecuting it today. But really the thing we wake up thinking about every day is it's really not acquisitions, it is how can we continue to grow the business organically and how can we take advantage of the markets that we're in, which are some great markets now to be even larger there and take advantage of what we bring to the table. So acquisitions are really not -- we really haven't changed our view. It's let's grow the business first and then if something comes up, we're always -- we'll always listen. But it's not driving us.

Your next question is from the line of Ebrahim Poonawala with Bank of America, Merrill Lynch.

I just wanted to follow up on the conversation around deposit growth for the year. When I look back over the last 12 months, loans have grown about 10%, deposits have grown 2% to 3%, so as a result the average earning asset is about 4%. Is that the right way to think about how the next 12 months could look? Or is the message that the earning asset growth will be closer to what we are thinking for loan growth?

Well, I guess -- just to make sure I understand your question. I guess, from the -- taking it the investment portfolio, which is the other big piece of the earning assets, our plan really on the investment portfolio is for the most part, that it's just going to grow with the balance sheet. We've got such great opportunities on the loan side that the investment portfolio is really kind of just gives us an ability to invest in any sort of excess liquidity, if you will. We've got -- we've talked about maturities in calls that we have on the muni portfolio, so we'll be replacing those. We'll be making some more purchases because we still haven't completed the purchases that we wanted to accomplish out of the sales of the treasury securities from last year. So we'll be doing some of that. So I think that from an earning asset growth, I don't foresee that you would see -- if you're saying, does the earning asset growth match the loan growth at a high single digits, I'd say, no. That's not what we would be expecting.

Understood. So loan growth will outstep deposit growth similar to what we've seen over the last several quarters. Is that fair?

That's fair.

Understood. And I'm sorry if I missed this, so the margin adjusted for the tax rate went up 13 basis points this quarter. You provided some color around the deposit beta and the outlook. Is that 13 basis points reflective of how we should think about the March rate hike's impact to 2Q and maybe diminishing a little bit, but in that 10 basis points per rate hike range, at least for the next couple of quarters or next couple of rate hikes?

I think that it -- the thing that you need to make sure that you consider is, like we said on the deposit betas, really what we're doing is, we're comparing our rates to alternative nonbank products. So there will be -- there could potentially be some betas that could be higher than what I described. I would say, I think you threw out a number of 10 basis points as a potential increase with the next hike. I would say that -- I project the trend to be up. I think that you will really probably need to do the modeling yourselves on where you think that's going to be. I think a lot of it's going to be dependent on what's happening in those -- with the outside alternatives for deposits. What's happening with -- for example, with the 2-year treasury or what's happening with money market funds is -- but obviously, the guidance we've given is it's going to go up. We're not ready to give specific guidance on how much.

Understood. But it sounded like you're not seeing anything significantly ominous on the market side that looks very different today versus 3 or 4 months ago.

That's a fair statement.

Perfect. And just separately, could you talk about what you think from an ROA perspective, the bank can earn, as you think about over the next year or 2? I read your annual shareholders' letter in terms of talking about doing right by the customers, which has kind of influenced your deposit pricing strategy. Just trying to understand, as you think about over the next year or 2, what's the optimum ROA or ROE that you can hit?

We don't and never have said what our ROA targets are. What we've always said is that we have directional targets. And our directional target has always been, particularly when it was lower, as it went through the cycle, we expected -- look, we were glad our ROA was above peer, but we were way below what we thought it would be in a normalized environment. And we've begun to get some normalization. The 2 things that needed to be normalized is: one is rates, and the second thing was our loan-to-deposit ratio had gotten down into the 40s, and it was in the high 70s before the crisis. So those 2 things, normalization interest rates, given our asset sensitivity and the higher efficiency of our balance sheet, I'll call it, as loans pick up, as a percentage of the asset base, both of those things are going to add operating leverage to the company and they're going to drive a higher ROA. So while I don't have a target, we definitely have a target for higher ROAs than where we are today. And I think you can do your own math with regard to the level of that operating leverage, but we believe it's there, and we're starting to see it now.

Your next question is from the line of Brett Rabatin with Piper Jaffray.

Wanted to get maybe just a few line items if you have them handy before the Q is out. Would you happen to have the interest expense for the quarter and then the average interest-bearing funds as well?

Sure. Give me just a second here.

And then maybe the other item.

I'm sorry?

I'm sorry. Go ahead.

You said you wanted interest expense?

Yes.

Total interest expense for the quarter is $13,578,000.

Okay. And then the average interest-bearing funds?

The balance for the quarter?

Correct.

$15,457,000,000.

Okay. And then maybe one last one. Kind of ending-period securities?

You want -- I want to make sure what I gave you there was the total interest-bearing deposits. That's what you were looking for, wasn't it?

Actually, it -- that number was kind of low. Interest-bearing funds in total?

Sure. If you want that, that's $16,742,000,000.

Okay. Great. And if then just the ending-period securities, if you have that as well?

Sure. The ending -- so we had -- it's going to be roughly, I'm looking at 2 accounts here, so [$11,077,000,000,] if you will.

Okay. Okay. Great. I guess, my question is just around -- you guys talked about the great Texas economy and unemployment being really low. And as I look at it last year, your expense growth was about 5% and it's kind of been trending about that for the past 2 years. I'm just curious thinking about expense growth this year. Do you expect any wage pressures to maybe push that number a little higher? Or if you can give us maybe any color on initiatives you have in place as it might affect expenses this year?

So wage pressure is something that we've talked about, yes, now for a few months. It's certainly been in our numbers, especially in Austin, for example. We've had to take care of some specific situations there. You're right with the strong Texas economy. It's just something that we're aware of. It has affected our numbers, will continue affecting going forward. I think the overall guidance that I've given for expense growth '18 to -- '17 to '18, it's been in that, around the 5% area. That's still kind of what the guidance that we're giving. But there is a lot of selling pressure don't be mistaken.

Yes, I think you're right. I mean, Jerry is right. We talk to business all the time and it's -- labor is a big issue in terms of growing your business. Where can you get the skilled labor? And it's affecting wages. We run a business, it's affecting our business. We did move up to $15 an hour minimum wage back in, I guess it was January, February. And so you do all these things to honor your people and be competitive in market. So there's pressure out there.

Okay. And then, maybe the last one for me. Just thinking about the regulatory environment, it seems like it's easing and you guys aren't sissy, but you're over $30 billion. With the changes that are happening, how do you see that affecting you guys? Does it help you in terms of what you're doing back-office wise? Or can you give us maybe any color on how you're seeing -- how you're viewing maybe the recent easing in regulatory constraints?

First of all, while we're glad with some changes in tone that we're hearing, I don't think we've seen a lot of change on the regulatory front in terms of the impact on us. So we -- I'd have to say, no impact right now. We are encouraged by some of the things that are being talked about, I think the Senate bill that got passed was a positive. It's not what everyone would want, but we've always heard that that's the way it's going to be. If you want anything bipartisan, you're always going to have something that you don't like in there, but it's going to be the best you can get. I think in politics is the art of the possible. So I hope that we see progress on that out of the House and we get that bill passed. I think that could -- that might have some marginal impact for us. We need it. The industry needs some relief.

(Operator Instructions) Your next question is from the line of Matthew Keating with Barclays.

My question is on expenses, Jerry. So I guess, obviously, I appreciate the continued 5% type growth guidance on costs. And so is it your view that the accounting change in terms of netting the network costs is going to be largely offset by wage inflation pressures. Is that the right way to think about kind of the expense trajectory this year, given that accounting change?

Sure. Great question, Matt. I think that if you take the accounting change for netting the networking -- network cost out of the interchange fee, you're probably talking about a 4%, 4.5% increase. So if you're going to do an apples to oranges, if you will, sort of calculation, so last year being gross expenses, this year being net expenses, we're probably in that 4% range with a little bit of room there for the -- potentially on the inflation costs on salaries.

That's helpful. And then maybe for Phil. I know in the annual report you did mention that, I guess, for the first time ever you conducted a pretty wide-based employee survey in the areas of business strategy processes and people. So I'm just curious what some of the findings were, maybe particularly on business strategy and processes that the company might look to change based on those results?

Well you know the questions with regard to strategy and processes, et cetera, really asking our people, if we're being consistent with our actions against what we say we want to do. And so -- and basically, the word we got back was, yes we are, and so that's good because our culture is critically important for us. We want to make sure that the actions that we're taking are consistent with that. But we think -- as I mentioned in the annual report, we've found lots of opportunities, just because we got great feedback from people to make changes, and we've been working hard on that to help make our employees' lives better. It really wasn't -- I don't think the changes have really been strategy-wise at all. And we haven't really had a lot of process changes, although we're engaging people -- continue to engage people and employees to how can we do things better and be smarter and we are -- but to just give you an example, I mean, some of the things that we did was, our maternity benefits kind of lost our way on that over time and we needed to improve that, we did. Things like vacation policies or just maybe dress codes. Maybe -- just lots of different things that we tweaked that really helped make employees' lives better. And that's really, I think, the benefit of it because when you take care of your employees, they take care of your customers, right? And we have our employees practicing our culture, taking care of our employees, that's when the magic happens. That's how you get to win 9 consecutive J.D. Power awards for customer service. Not because that's your goal, but it's because you have tremendous people executing a great culture. And that's, as I said in the letter, that's our competitive advantage, is our people executing that. And if they don't feel they're taken care of, they're not going to do that well. So we've got to do our job of making sure we're honoring them. And that was one of the best things about it.

Matt, this is Jerry. One thing on your expense question. I think that looking at the numbers, I'd be more comfortable with a 4% on a net basis. So bring that down a little.

And there is a question from the line of Steven Alexopoulos with JP Morgan.

This is Alex Lau on for Steve. Just back on the strong Texas economy, and you mentioned some customer optimism. Can you touch on how this and lower tax rates have translated into business investments for your clients?

I think to generate more cash flow for them would be able to do it. And we've -- I've heard consistently that it gives the ability for people to execute on investment plans. I think we're seeing transportation is one area that has taken advantage of it, as an example. But I think another thing -- and this really -- we really saw this after the presidential election, was just, I think, a realization by businesses in general that the rate of regulation would change -- would slow, and that has happened. I don't think it's gone down, but at least it hasn't increased a lot. And I think that helped people understand how they could run their business and what the outlook for regulation for their business was. And I think that's helped and that continues to underpin it. I think the things that we hear people worry about is what's the labor situation, where we're going to get the labor from and we've got to figure out a way in the economy to do that. And the other thing is, you hear some worry about tariffs for businesses that are affected by that. We've seen, I think it was steel rebar cost up like $600 and some odd to $900 and some odd dollars. Some of that's probably just reaction to the changes. But one of the things that we've seen too is our lines of credit usage has gone up. So that's really helped our outstanding. So I think that's indicative of people using those lines to take advantage of business opportunities. So that's another place that we're seeing.

Great. That's helpful. And then just briefly on deposit competition. Which segments have you seen kind of the most competition in terms of pricing?

Money market account rates, but competition has been from banks. It's been from just what's available in money funds and we -- before we decided to change rates in July of last year, we were already at the high point of the markets that we compete against. But we weren't in line with what the alternatives were that customers could take advantage of. So as Jerry said, we've been focusing competitively on what those nonbank alternatives are.

Got it. And then just touching on net interest income and NIM. Were there any unusual items kind of impacting it, like maybe higher interest recoveries or increase in (inaudible)to pay income?

No.

There are no further questions. I will now turn the call back over to Phil.

Okay, everyone, thanks for your interest and participation in the call today. We're adjourned.

This concludes today's earnings call. You may now disconnect.