Prosperity Bancshares Inc (PB) 2018 Q4 法說會逐字稿

Good day, and welcome to the Prosperity Bancshares Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

At this time, I'd like to turn the conference over to Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' Fourth Quarter 2018 Earnings Conference Call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay at the same location for the next few weeks.

I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Chairman and Chief Executive Officer; H.E. "Tim" Timanus, Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Eddie Safady, President; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Bob Benter, Executive Vice President; and Bob Dowdell, Executive Vice President.

David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by David Hollaway, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities including asset quality. Finally, we will open the call for questions.

During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Allison. Before we begin, let me make the usual disclaimers.

Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K, and other reports and statements we have filed with the SEC.

All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2018 conference call.

For the fourth quarter of 2018, we showed impressive annualized returns on average tangible common equity of 15.8% and on average assets of 1.47%. Our net income was $83.3 million for the 3 months ending December 31, 2018, compared with $67.1 million for the same period in 2017, an increase of $16.1 million or 24%. Our net income per diluted common share was $1.19 for the 3 months ending December 31, 2018, compared with $0.97 for the same period in 2017, an increase of 22.7%.

Our loans at December 31, 2018, were $10,370,000,000, an increase of $349 million or 3.5% compared with $10,021,000,000 at December 31, 2017. Our linked quarter loans increased $77.4 million or 80 basis points, 3% annualized from the $10,293,000,000 at September 30, 2018.

Our Dallas/Fort Worth market saw double-digit loan growth for 2018, followed closely by our Central Texas and Central Oklahoma markets. Although our Houston market had record loan production in 2018, it also experienced sizable paydowns and payoffs, much of which was recognized in the fourth quarter. Our nonperforming assets totaled $18,956,000 or 10 basis points of quarterly average interest-earning assets at December 31, 2018, compared with $37.4 million or 19 basis points of quarterly average interest-earning assets at December 31, 2017.

Our asset quality continues to improve as the nonperforming assets at December 31, 2018, reflected a 49.4% decrease compared with their level at December 31, 2017. Prosperity's asset quality is one of the best in the nation. I always say you will like us in the good times, but you will love us in the bad times.

Deposits at December 31, 2018, were $17,257,000,000, a decrease of $564 million or 3.2% compared with $17,821,000,000 at December 31, 2017. This was primarily due to lower municipal deposits compared with the prior year. However, average noninterest-bearing deposits increased $303 million or 5.7% during 2018. Our linked quarter deposits increased $522 million or 3.1% from $16,734,000,000 at September 30, 2018. This change was primarily due to seasonality.

As we've indicated in prior quarters, we continue to have conversations with other bankers regarding potential acquisition opportunities. We remain ready to enter into a deal when it is right for all parties and is appropriately accretive to our existing shareholders.

Overall, we're very excited that Prosperity Bank has once again been ranked in the Top 10 of Forbes Best Banks in America for 2019. We are very proud that the bank is the only bank in the country to have been ranked in the Top 10 every year from 2014 to 2019.

Texas and Oklahoma continue to experience strong employment and population growth, with many companies moving to the states because of favorable tax environments and business-friendly political climates.

I would like to thank all of our customers, associates, directors and shareholders for helping build such a successful bank. Thanks again for your support of our company.

Let me turn over our discussion to David Hollaway, our Chief Financial Officer, to discuss some of the specific financial results we achieved. David?

Thank you, David. Net interest income before provision for credit losses for the 3 months ended December 31, 2018, was $157.2 million compared to $156.05 million for the same period in 2017. For the full year 2018, net interest income before provision for credit losses was $629.6 million compared to $616.9 million for 2017, an increase of $12.7 million or 2.1%. And I would note here going forward, we project our loan discount accretion should run about $1.5 million per quarter.

The net interest margin on a tax equivalent basis was 3.15% for the quarter ended December 31, 2018, compared to 3.20% for the same period in 2017. Additionally, the net interest margin on a tax equivalent basis of 3.15% was unchanged on a linked-quarter basis. However, excluding the purchase accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended December 31, 2018, was 3.10% compared to 3.09% for the quarter ended September 30, 2018.

Noninterest income was $29.1 million for the 3 months ended December 31, 2018, compared to $29.2 million for the same period in 2017. And for the full year 2018, noninterest income was $116 million compared to $116.6 million for the full year 2017. Noninterest expense for the 3 months ended December 31, 2018, was $80.8 million compared to $81.1 million for the same period in 2017. And for the full year 2018, noninterest expense was $326.2 million compared to $313.1 million for 2017, an increase of $13.1 million or 4.2%.

The efficiency ratio was 43.2% for the 3 months ended December 31, 2018, compared to 43.8% for the same period last year and 43.5% for the 3 months ended September 30, 2018. And for the full year 2018, the efficiency ratio stood at 43.7% compared to 42.8% in 2017. The bond portfolio metrics at 12/31/2018 showed a weighted average life of 4.05 years, an effective duration of 3.59 and projected annual cash flows of approximately $1.8 billion.

And with that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Mr. Hollaway. Our nonperforming assets at quarter end December 31, 2018, totaled $18,956,000 or 18 basis points of loans and other real estate compared to $16,777,000 or 16 basis points at September 30, 2018. This is a 13% increase from September 30, 2018, but as David Zalman previously indicated, it's a significant decrease from December 31, 2017.

The December 31, 2018, nonperforming asset total was made up of $17,151,000 in loans, 0 in repossessed assets and $1,805,000 in other real estate. Of the $18,956,000 in nonperforming assets, $2,249,000 or 12% are energy credits, all of which are service company credits. Since December 31, 2018, $1,817,000 or 9.59% of the nonperforming assets had been removed from the list or under contract for sale. But as we always say, there can be no assurance that those under contract will close.

Net charge-offs for the 3 months ended December 31, 2018, were $556,000 compared to net charge-offs of $1,318,000 for the 3 months ended September 30, 2018. $1 million was added to the allowance for credit losses during the quarter ended December 31, 2018, compared to $2,350,000 for the quarter ended September 30, 2018.

The average monthly new loan production for the quarter ended December 31, 2018, was $248 million compared to $277 million for the quarter ended September 30, 2018. Loans outstanding at December 31, 2018, were $10,370,000,000 compared to $10,293,000,000 at September 30, 2018. The December 31, 2018, loan total is made up of 39% fixed-rate loans, 37% floating rate and 24% variable-rate loans.

I'll now turn it over to Charlotte Rasche.

Thank you, Tim. At this time, we are prepared to answer your questions. Allison, can you please assist us with questions?

(Operator Instructions) Our first question today will come from Dave Rochester of Deutsche Bank.

Your guidance on the NIM for this past quarter was in that 3.14% to 3.17% range. You guys came right in line with that this quarter. Was just wondering how you're thinking about the progression of the NIM from here, just given the flatter rate environment, if you expect that range might drift a little bit lower over time. And then if you happen to have the level of securities reinvestment rates now given this new rate backdrop, that'd be great.

This is Dave Hollaway. Yes. You're right on the call we made last quarter. And I don't think we're going to change that much. Even with this flatter yield curve, we still -- looking forward on that margin. I think we will have a little bit of pick-up as we move forward. And again, I'll just reiterate. It's the dynamics of our balance sheet. If we're able to continue to grow our loan portfolio with higher yields and on our security side to -- specific to your question. I think the last time we talked, we were giving around 3.5% in the new stuff that we buy. With the yield curve flattening a little bit, we're still able to get about roughly 3.25%, which is still pretty good for us. So if those 2 dynamics continue to play going forward, we're still pretty positive on the margin. And I always just add again and maybe there will further discussion as we get into it, but the wildcard's always the funding, where would that be at the end of the day. And again, I would point out the deposit at the rehab, again, have been a core-funded bank where most of our money is in the lower type interest rate accounts or noninterest-bearing accounts. We should be able to manage that pretty well going forward. One of the things we're working hard on is to try to mitigate the borrowings that you see on the balance sheet. Where you saw peak in mid-last year, we brought it down because of the deposit flows here and is something we're going to try to concentrate on as we go forward. It's obviously, when you look at the big picture, we don't want to borrow from the Federal Home Loan Bank, which, I guess, if you went overnight, it's 2 70. We should be able to look at what we can do on the deposit side and be a little bit better than that.

Yes, okay. And I guess you mentioned the higher loan yields. Where are you seeing new loan yields now with the new rate backdrop?

Yes, when we look at this past month, just on -- again, this is on average, so some higher, some lower. But it was about 5, in the 5 60, 5 65 range on average.

Great. And then I guess, just switching to expenses. You guys came in a little bit better than I think guidance on this area as well. How are you thinking about the trend this year? And in terms of tax spend and organic expansion to the platform, what are you thinking about?

Yes. Again, looking at all those things, the checklist you've heard us -- you've heard me say at least, we've been running in that $81 million to $82 million range per quarter. You saw that we came a little lighter this quarter. I would tell you, and again, with the tax spend and the things that we do also with the relief from the FDIC assessment and that surcharge in that, that was reduction. But when you put that all in, what I would tell you is I'll probably change that range where we'd say $80 million to $81 million. But what I would point out on that as we make that change is in this first quarter, we'll probably be at the lower end of that range, and then we get out to the quarters beyond that, we'll probably be at the upper end of that range.

Our next question will come from Jennifer Demba of SunTrust.

David, you had about 3% loan growth this year -- last year. Do you think there's any reason you can do better than that this year when paydowns maybe subside?

This is David Zalman. I do think -- I mean, we were headed to where we thought we would be, the 5% or 6%. We had one loan that was $80 million in size just in the Houston market that paid off in the fourth quarter. But I will say that what we did see is a slower -- I would say the first 15 or 20 days of January. I think really a lot of that had to do with all the political chaos going on in Washington and people to where they were. But having said that, we had a management meeting where we meet quarterly, and most of the management committee that represents all the different parts of the states of Texas and Oklahoma felt very positive of what they had in the pipeline. In fact, the -- Houston had probably more in the pipeline than they've ever had in a long time. So we can get -- if we can get that funded. I still feel pretty good that we should be in that 5% range.

Okay. And could you talk about the bond portfolio, what the loss on the bond held to maturity and realized loss on that is? And would you think about restructuring the bond portfolio at this point?

I think the -- what I'm showing, David, I might be looking at it wrong, but I'm showing a total loss out of a $9 billion -- $9.4 billion book value at $243 million. And historically, we've really not bought and traded the bond portfolio. We usually -- again, we usually have a very short duration of around 3.6 years, and so we usually -- I mean, it would definitely make our numbers look better. I mean, anybody can do the math. If you're making 1% more on your portfolio on $9 billion, that's $9 million a year before taxes, so that would help. On the other hand, historically, we've not done that. But I put one caveat: If we ever did a very large deal or something like that, it may make sense that you have that opportunity for an adjustment when you have a big deal. So again, historically, and I would -- looking forward, my projecting is we wouldn't do that. But again, I would never rule it out if there's some kind of big consolidation or we can merge with somebody else or something.

Okay. One more question. The NIM guidance that David Hollaway just talked about. David, what kind of rate environment does that assume? Were you assuming no rate hike or 1 or 2 rate hikes in '19?

Yes. It's 2-part answer there. One, that's assuming maybe one more rate hike. But what I would tell you is if they would raise rates more than once, that's still beneficial to us. Our margin would even expand a little bit more than what I'm saying. We are in the unique position where rising rates help us. But the reason you don't see more of the margins sticking is it's constantly raising these rates. It keeps resetting itself, but if -- I would tell you if they don't raise rates in the next 12 months when they do it once, that guidance holds. But if they want to raise rates one time and hold, that's still pretty good. What do you think, David?

I just want to be clear, I think what David -- and Dave has been very clear, but basically, if there is no rate increases at all, we still see, in my opinion, significant increases in net interest margin over 12, 24 and 36 months with no rate increases. With rate increases, we even see a bigger margin expansion.

It took again the dynamics of that cash flow coming in, and that's why you look out over the 12 and 24 months.

I think the net interest margin also, I mean, when you look at what our cost of funds were just 6 months ago when we were paying 60 basis points for a CD, and today, you're paying maybe 2% for a 12-month CD, I think the cost of funds really went up a lot faster than I think a lot of people even anticipated. So even though there were some interest rate increases on the loan side, again, our balance sheet doesn't move as fast as the others do. But I still think the biggest plus and the biggest and best story of our company is the repricing that we have going forward over a period of time. I think that's the best story we have.

Our next question will come from Brady Gailey of KBW.

So TCE and capital levels just continue to grow here given the profitability and the lower level of organic growth. David, maybe just update us on the buyback. Is that something you're considering? And then just a little more color on M&A. I know when we've talked about it in the past, it's been more of an issue of the type of banks that you guys want to buy just aren't out there for sale. Is that still the case or -- and do you think you'll be active this year on the M&A front?

Well, I don't think that everything you're saying is the case. I mean, I think there are banks out there that we would like to do deals with. Sometimes it takes longer than people anticipated, but I mean, I think looking forward that -- you asked a couple of questions. Let me start off on the first part you were talking about, really the capital and would we really be looking at buying our own stock back. I think, historically, we have not used our capital to buy our own stock back, unless the market has just fallen out at the bottom of it. I think that if the price went down significantly, we would be a buyer of our own stock, but again, for the most part, we've used our capital for dividend increases. I think you've seen double-digit dividend increases every year, and we also use the other part of the money for acquisitions. And I think that's something that we will continue doing. And that'll primarily be our focus. I really feel you should use the money to build assets, not just buy your own stock back, unless it's just really underpriced, so that's that. Going forward on the merging and acquisitions, we are out there. And I think that we're looking -- we're talking with larger banks and we're talking with smaller banks that maybe $600 million or $700 million in size if it's in our own market. So I think that we're looking at all of that. The pricing definitely made a difference last year. About mid-year or the third quarter, our price was probably $77 or $78 a share, and all bank stocks were up dramatically. And then came the fourth quarter and bank stocks dropped 20% so -- or more so. So some of the deals that you're talking about, you're talking about pricing especially on some of these larger deals that really gives attention. I think there was kind of some cold water poured on it because the stock prices went down so much you couldn't expect to pay the same amount when your stock price is not as high. But going forward, I don't think that there's any question. I've always said this, and I still believe this, that we'll run out of money before we run out of deals. It's just a matter of time. That's what we do, but again, we're still looking. We'll continue to look in. I think we'll find something when it fits everybody and it's accretive to the bottom line.

David, you talk about looking at some larger deals. I mean, Prosperity is now $23-ish billion in assets. And how big of a deal would you consider? And then from a geography point of view, obviously, Texas and Oklahoma would make sense for you all, but outside of those kind of home state, would you look to kind of the broader southeast as a possibility?

We've looked at a number of different states where the banks have been larger in size at $10 billion or $10 billion-plus. So I mean, we're looking at all of that stuff. I mean, our focus is still primarily -- we would like to be -- obviously, you'd like to build on the markets that you're in. You just have better cost savings. But again, we're not opposed to looking at other markets, but again, if we go into another market, we really want it to be -- I don't know that we would go into another state and necessarily buy a $1 billion or $2 billion bank. We would want to be -- we'd go if we knew that we would become at least fifth in size in that state within a reasonable period of time where we knew that we could but we would look at that. And we've looked at banks in a number of different states this last year.

Our next question will come from Peter Winter of Wedbush Securities.

I wanted to ask about the monthly loan production. It has moderated each quarter this year, and I'm just wondering what some of the drivers are and how you think about that going forward.

Peter, this is Tim Timanus. The average for the whole year 2018 was $288 million a month, and the average for the calendar year 2017 was $286 million a month. So we were a little bit higher on the average in '18 than '17, although not significantly so. I don't think there are significant economic issues that cause a moderation. I think primarily, it's a result of competitive issues. Rightly or wrongly, a lot of our competitors do nonrecourse lending, and we have not chosen to submit our shareholders to that in a significant way. I'm not saying we wouldn't ever do it on a particular transaction if there's enough equity and there's good collateral. But it's not our way of doing things, and we don't think it's in the best interest of our shareholders. So that has played a big role in the numbers that you see. For example, we just recently lost a fairly sizable loan to construct an apartment project. We approved it with the type of recourse that we thought we needed to support the credit, and it turned out that the developers found somebody to do it on a completely nonrecourse basis. Well, we hope it works out for all concerned, but it's not prudent in our opinion. So it's just the way the market is right now. The fundamentals of the economy are still decent. So I don't think it's an overall economic issue, I think it's primarily a competitive issue.

Yes, I would just jump in and say, Tim, I -- you hear all the media and everything, but really, when you look, fundamentals are still out there. I mean, we still have a very strong economy when you look at 108,000 job growth in Houston and you have Dallas and Austin. I mean, Houston is growing 300 jobs a day. Dallas is over 300 jobs a day, Austin's probably 150. So the fundamentals in my opinion look good. I mean, you may not have a 3% or 4% GDP, and there may be some downward trend in that, but I think from a psychological standpoint, fundamentals are good and this thing could turn around and still be a good positive year for a lot of people, really.

I'm just curious if -- the thinking is that the competitive environment is going to persist, and I'm just wondering if it just makes it challenging to hit that loan growth target in '19 of 5%?

Tim feels strongly competitive. I think competitive pressures are -- it does make a difference, but I think the economy in my opinion makes a bigger difference, fundamentals -- if fundamentals are good and growing, there's plenty of business for everybody, I think. That's just me. Tim, you may want to...

I agree completely. And the competitive issue, it comes and goes within sometimes a fairly short period of time. Some of these institutions that will make the kinds of loans that create an issue for us, typically only do that for a certain period of time and then their boat is loaded, so to speak, and they move on to more conventional types of lending. So I don't think it's reasonable to assume that the competition is going to continue just consistently to be such that we can't deal with it. But having said that, it hasn't gone away. It's not going to go away tomorrow, but we've always had competition. And as I say, the way the competition approves loans, it changes over time. It comes and it goes. We've dealt with it before, and we'll deal with it again.

Yes, I don't know that I've ever been in banking where it hadn't been extremely competitive. I think it's always been like that and will always be like that. As Tim said, you may have certain banks that are really trying to build a bucket or something. But for the most part, it's always been very competitive. And it's really -- loans are really based more on the fundamentals of the economy than anything else, I think, growing.

Great color. Can I ask one more question on deposits? Obviously, you guys have a very good deposit franchise. And if I look at your interest-bearing deposit cost, you're at the lower end of the Texas peers. I'm just wondering, are you seeing any pressure where there's more migration into interest-bearing or you need to increase deposit cost a little bit faster in 2019 to stay competitive?

Well, we really raised interest cost, I think, in the last quarter. I mean, really, I mentioned before, of course, we don't have much in CDs left, 12% or something like that. But we, again, were -- I wouldn't say that you could open the paper and you can see some of the competitors paying. You'll see some outliers out there paying 3%. I don't even have to tell you they are -- you probably see them in your paper in New York City. They're everywhere. But for the most part, I think that we're paying a very competitive rate on the CD side, having said that. We still may be -- we could be 25 to 50 basis points off from somebody else, but again, we're not going to get every deal. I don't want to underestimate it. It's very competitive out there, but again, we're trying to reach customers and I think we're paying a very fair price. And even our money market accounts, Dave, we're now paying, what, 1.25% on 200,000-plus, where, just not long ago, we were paying, gosh...

They're about 90 or 80 a year ago (inaudible) a year ago.

Well, before that, I mean, even 6 months ago maybe 30 or 40 basis points. So I think we really increased the interest rates that we pay, probably more so at a bigger chunk than I've ever seen in a long time.

That's what happened a couple of quarters ago when, I guess, it was when we did this last quarter, you saw us raise our rates, because we were way -- we were lagging way behind the peer group. And so you can't be that far out and then expect your deposits to grow. So I think we've normalized that somewhat when we did it. And so yes, when we look forward, direct answer to the question, we look forward -- I mean, we can't just be naïve and say we're not going to look at our pricing or deposits. But on the other hand, if you are core-funded, you should be able to manage that. And if you have to move it, you're not moving it like you would if you're borrowing all your money, it's all in CDs basically.

But again, I think Peter is right. You're seeing a lot of people moving their money where they've might've been. And they weren't watching as much -- as you start getting some rights out there where people are saying they can put their money back in time at 2% or 2.5% or something like that, they're definitely considering that. So I think you'll continue to see that.

I think it's important to point out that most of the upward pressure on deposit rates has come from dollars that are already earning interest, not from the large noninterest-bearing deposits that we have. A lot of reasons for that, but primary reason is the loan relationships that we have that those noninterest-bearing dollars were tied to. So up to this point in time, the migration has not been that much from noninterest-bearing into interest-bearing. It's been from interest-bearing into higher rates. And it continues and we deal with it on a daily basis.

I think you'll continue to deal with it as rates rise. Of course, I don't know that rates are going to go up very much anymore for a while, but we -- you certainly saw a big rise, and it's something we have to deal with, and I think we have.

Our next question will come from Brad Milsaps of Sandler O'Neill.

David, just wanted to follow up a question on the bond portfolio. It looks like you did get about 6 basis points of yield expansion in that book this quarter. Maybe about half that came from lower premium amortization expense. I know with rates were kind of falling throughout the quarter but a lot of times you guys will pre-invest, use the borrowings to kind of get ahead of some of that, maybe that didn't transpire. Just wanted to see if there's any additional color, maybe why you didn't pick up maybe more yield on the bond portfolio just kind of given where rates were maybe at the beginning of the fourth quarter.

I mean, there was no premeditated plan. I think there was a little volatility in the early in the quarter. And I think our guys said on the sideline and the other side of it was the deposits. If you look at our deposit growth coming in, I mean, what they were basically doing is the deposits coming in instead of putting them into the securities portfolio, paying down our borrowings. That's why you saw the borrowings come down. You can look at -- it's a philosophical thing. You can look at it from 2 perspectives. Keep the high borrowings on and invest it in the bond portfolio or take those deposits and pay down the high borrowings. We chose the latter.

I think we did that -- and this is David Zalman. But we also -- again, we don't try to call rates in the portfolio, but when the product that we buy -- we were getting 3.25% to 3.5% and it went back to 3%, we just quit buying for a period of time. So again, it doesn't mean that we can't quit buying because we've $1.8 billion rolling off all the time. We try to put part of that loan and part of it back in. But again, we weren't as aggressive at buying as when rates were going down. We generally become more aggressive when rates are going up or yields are going up.

Got it, got it. And then I wanted to follow up on expenses. Well, Dave, I appreciate the guidance. You guys do the best job in the business controlling cost. I did want to ask on the personnel side. I guess personnel cost were up about 8% year-over-year. Your headcount was up maybe 19. Is really all that just related to bonuses you gave coming out of the tax law change? That really doesn't seem indicative of kind of what you guys have done historically, but just kind of wanted to check on that growth rate in personnel.

Yes. The answer is yes. With the Tax Act that came into play, the savings -- that savings we got from that, we determined a year ago to preinvest in our own people, and that was reflected both ways. Annual salary increases, I think it was 5% and plus the bonuses that we're in.

I mean, the bottom line is we did see a lot of -- a number of other companies give onetime bonuses, but we elected to give a right upfront 5% across-the-board plus other bonuses. So we, rightly or wrongly, we let our people enjoy the tax benefit they got to be part of it too. They got the benefit.

Yes, and I think this won't be exact, but if you -- because there's a lot of moving parts during the year, but if -- we wouldn't have had that tax benefit and then couldn't have -- all the resulting deals, I think you would've seen these expenses year-over-year -- overall expenses are not focused on one line item. It probably would increase in around 2%, 2.5%, which is kind of normal.

Yes. We would not have increased expenses like that for our associates' employees if we wouldn't have gotten -- we really wanted them to benefit from the tax deal law, so that's the only reason.

Our next question comes from Gary Tenner of D.A. Davidson.

I don't think we've really discussed the income statement as noninterest income, and it's been sort of flat to lower for a few years in a row now. I'm just wondering, are there any items there that you think could generate some upside in 2019? And I guess more broadly, what's the outlook for trying to grow that side of your revenue stream?

I mean, I'll jump in first and then I think I'll let David talk about the lines of business. But the core fee income that comes from the bank, I don't think there's anything major going on there. As we continue to grow our deposits, add accounts, you'll some growth there. But I think you're spot on to say where you really could make some headway is in these lines of business, whether it be trust, mortgage and brokerage. And I'll let you kind of give your thoughts on that, David.

I think that's right. If anything, you probably saw noninterest income didn't grow, commodity went down. And Eddie may want to talk about this a little bit. But we completely reconfigured our mortgage lending where so much of it was based on individuals, and individuals -- it was just more paid on a commission basis. We really reconfigured that and came to where we could have a more of a centralized credit underwriting and then eventually where people could actually get on our website and fill out an application automatically. So we spent a lot of time, and I think -- and I'll let Eddie talk about that a little bit. The other thing I think that we could grow, our trust income. I think that's an area that we really like. Brokerage is really -- over the years, has not done as well for us, the brokerage, and I think that's for everybody. So that may be something not as good. But I think 2 areas that can continue to grow, and again, we hope brokerage will grow. But again, everybody's in that business, and that's probably the mortgage and trust. So Eddie, you want to comment on what we did in the trust and how it's completely been refigured and has taken us about a year to get done, really. I mean mortgage, I'm sorry.

Sure. On the mortgage side, we have completely revamped our mortgage lending platform and have added some tenured lenders and originators into that. We've been expanding. On the other hand, we also portfolio a lot of the loans that we generate. So perhaps not so much on the noninterest income from the mortgage growth has shown us there, but we're also increasing our interest income by portfolio-ing a lot of those that we've elected to hold in-house. But on the plus side, we do feel that notwithstanding what you're seeing in the market and a lot of people are seeing a decline in that business, that with the talent that we've recently added as well as the enhanced platforms, that we should see an increase in our mortgage originations.

Can you tell us, Eddie, what your -- what the mortgage originations were in '18 versus '17?

It's about flat '18 over '17 if you take a combination of portfolio and secondary, which, by and large, considering all that was going on in the transformation in the transitions and some of the disruption when you're putting in new systems, we felt pretty good about that. But we have some really strong talent that's joined us just in the last couple of months, and we feel optimistic about how that will grow in this coming year.

Yes. Eddie, I think it's important to point out that even though the refinances are flat at best because of increased interest rates, mortgage lending's always been a very core part of what we do. And our total loan portfolio is about 24% mortgage loans that we hold in-house at this point in time. And with the decent economy that we operate in, we're fairly optimistic that over time, we'll increase the revenue from mortgage.

(Operator Instructions) Our next question will come from Ebrahim Poonawala of Bank of America Merrill Lynch.

But just had one follow-up question. I don't know if you gave out -- discussed this earlier, but in deposits, I guess, when we look at it this year in terms of across-the-board, and really deposit category saw a decline, which makes sense given your balance sheet, mix and loan-to-deposit ratio. Do we expect a similar level of decline in deposits in 2019? And what I'm trying to get to is how should we think about average earning assets from here on? Should it be relatively flat given there's ongoing balance sheet mix or do we see growth in the overall balance sheet?

Ebrahim, this is David Zalman. And maybe you didn't hear in our past conference calls, but I think we said probably a number of different times that we had -- last year in 2017, with the tax law changes, we had an inordinate amount of municipal deposits that came in normally where we have about $500 million the year it came in, we had probably closer to $1 billion, and that probably happened because we feel that people thought, well, maybe if they double-pay their municipal taxes on their property, that maybe they could have a -- get a double deduction. And again, that wasn't -- I don't know that, that is the case, but that was the reason. And I think -- so basically, I think what you saw this year with the $500 million increase that really came in with seasonality and municipals is more reflective and that's -- historically, if you followed us over the last 10 or 20 years, that's always been something that, maybe not 10 or 20 years, but the last 5 years to 10 years, that's always been the amount of money that have -- the year that you saw in 2017 was a fluke. And I think we pretty much told everybody that was a fluke in 2017.

Yes. I mean, it's exactly right. The 2 things that you saw in this past year, one, a book of CDs kept going down until -- and again, I would point this out: It's public funds and the CDs is what you saw, but the answer to the question is we absolutely will grow our deposits coming into the next year. We've historically outside this past year in that 2% to 4% range, and this is what I would tell you. As we track, as we look at this all the time, when we normalize, I like to use this term, when we normalized our rates back in the third quarter, we saw that shrinking, I'd call that shrinking to CDs that you see. That stopped once we brought our rates up to more normal levels. The CDs aren't shrinking anymore. In fact, our money market accounts have actually just began to increase. So it is -- that's a reflection of where you are in rates. That's a fine line of what's the rate you're paying versus how fast you can grow your deposits. And so I think we can get into a more normal environment next year.

Yes, Dave, I mean, I don't know how deep you want to get into this, but like, when you really extract what the money we lost in CDs over a year-to-year basis and take out the public funds, when you call core deposit growth, you saw a pretty good core deposit growth 4%, 5%.

Well, we saw some, but 0.4, that, I think, will be fine.

Absolutely. Yes.

2% to 4% deposit growth, so fair to assume that the balance sheet earning assets grow around in that range for the year, fair?

Yes, that's right.

Yes.

Ladies and gentlemen, at this time, we will conclude the question-and-answer session. I'd like to turn the conference back over to Charlotte Rasche for any closing remarks.

Thank you, Allison. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate the support that we get for our company, and we will continue to work on building shareholder value.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.