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#This is <UNK> <UNK>, I'm the Chief Credit Officer.
I will comment on that briefly.
The term commercial real estate growth that we saw in Q2 was driven partly by slower pay downs, some conversion of construction-to-term loan, and other value-add transactions in the income property space, all of which are well underwritten, safe DCRs, well-defined and lower LTBs, equity and transactions.
It was a little bit unusual but we are very satisfied with the credit quality of that particular portion of the loan growth in CRE.
Jeff, this is <UNK> I would also note that geographically there was really nice dispersion across California, Arizona, Nevada and Washington, with a small, modest amount of growth in Texas on the term side, but the term has been pretty well-balanced across the portfolio.
I will comment briefly on that as well.
The capital markets have backed up a little bit in CMBS.
Borrowers are finding it a little tougher to place CRE terms so, in response the line bankers and the business units facilitating CRE have upped the pricing of the overall coupon.
<UNK>, this is <UNK>, and yes, I think our initiatives are showing nice progress.
Our treasury management activities are still ---+ it's our largest fee income stream, it's about 30% and it is growing in the mid-to-high single-digit rates, which is really good for that business.
Our other bank card products, business card, consumer card are growing at high single-digit rates which we've talked about repeatedly over the last couple of years, basically trying to get the same sort of penetration in our other markets that we currently achieve for those products in Zions First National Bank, our bank in Utah.
And then wealth management, which we've been concentrating on, is growing high single digits.
Mortgage, the fee income component is not growing even though our volume, origination volume was up 30% last year.
Our origination volume will be up about 30% this year, but we are keeping more of that on the books and consequently it's not having the fee-income benefit that we thought it would.
But those would be just some things I would highlight.
It was a modest purchase with a really strong correspondent that we have a lot of respect for.
We are, as you know, still significantly under-weighted on exposure to One to Four Family, and even though we are originating really nice volumes with our mortgage initiative, we thought at least having this as an alternate source is a good thing.
The yields are significantly higher than what we could buy into our investment portfolio, and the credit statistics are on par with our own originations, with yields principally on par with our own originations.
It is just a real nice relationship and we will probably continue it at a very modest pace, but it's clearly not a key driver of our results.
We are going to continue to work that down as we invest.
Obviously deposit ebbs and flows are going to impact that.
It is hard for me to give you a precise number although I will say that despite the very good loan growth we have had in the first half of the year, we continue to be on track with respect to our investment portfolio targets, which is purchasing another $1.5 billion or so over the next two quarters.
If the question is about the cash balance I would expect to continue to whittle that down.
Ultimately as I said in my prepared remarks, I do expect for us to get into a position where we are going to incrementally go out and need to fund loan growth.
When that happens then you can assume that our cash balance has reached sort of its low point and the point that we are most comfortable with.
That's been kind of the focus of a very specific campaign to ---+ that's been focused on home equity lines of credit, so I think you are seeing the results of that kind of marketing push.
This is <UNK>.
Basically, what we said was $1.58 billion for this year, slightly increasing in 2017.
And I think fundamentally we feel we are going to be able to stay fairly close to the $1.58 billion next year as well, so we are continuing to find new ways to reduce expense in light of ---+ and fund those areas that are growing.
I expect we'll have a little more to say about it as we get closer towards the end of the year.
I would agree with what <UNK> just said.
To the extent that it is north of $1.58 billion, it won't be much in excess of that.
Maybe better than it, but I think it's a little early still.
I think it would principally be because we are finding more opportunities to simplify how we do business, and those opportunities we're digging into literally every day.
We have been.
The adoption of common practices and back office activities and middle office activities is just continuing to show us opportunities to reduce cost.
So it will be more related to that than any kind of cresting of previous activities.
Are you asking about the incremental yield of the bonds we're putting on.
There are a couple of things there, one is rate and one is volume.
And I think you can probably look at MBS rates in the marketplace or the 5-year treasury and kind of come up with an estimate of that differential in yield between what we're buying then and what we're buying now.
The other thing I would point out though, and I am sure you have noticed, is that we bought a lot of bonds in the second half of last year.
We did okay in the first quarter.
In the second quarter we really slowed that down.
And we slowed it down because of the shape of the curve.
I think we have been pretty clear about telegraphing our intentions, while we need to continue to put money to work we are going to try to be thoughtful around the timing of those purchases, and I think your question points specifically to any incremental value we may have created there.
So I can't give you a specific dollar amount, <UNK>, but I think it is probably pretty easy to triangulate on when you look at the change in the market and the volume of what we bought over the course of the last year.
We have a very long and successful history in dealing with municipalities and providing credit to the local markets.
This is critically important to what we do as a very locally-oriented bank.
I think we are successful across our footprint, have been for a very long time, decades, and continue to be.
So I think that what you're seeing there, <UNK>, is just a continuation of the success that we've had as an organization.
I would add that it is something that we are very focused on trying to step up somewhat and do more of this, particularly with smaller municipalities where we think the risk reward trade-off is quite nice and where, as <UNK> indicates, we have a very long solid track record, so there's some focus there.
The growth you are seeing isn't primarily a result of that push yet, but I'm hoping over the next couple of years you will start to see more of that.
I think the first thing I would say is, clearly the world has changed a lot from the days when you had free rein.
You are posing a hypothetical, I guess I would say clearly we would use everything we've done in building capabilities to stress test in the model to think about risk, particularly in a downturn, to inform how we think about capital.
There are a lot of things we have built risk management-wise here in the last five or six or seven years that I think are actually really useful tools.
I think we would agree that we've got more capital, and we are at the north end of where our peers are.
I would note, that we will always want to be probably, kind of to the strong side so long as we have somewhat higher exposures of commercial real estate and energy.
We know that those are both segments where you can see maybe a little more cyclicality than some other things.
If you took all of the limits off, this wouldn't be a race to the bottom, if you will, in terms of draining the capital.
But we want to thoughtfully try to right-size our capital and grow into it and I think it gives us a lot of flexibility in terms of what we can do.
I hope that is helpful.
We know that we have more preferred than we probably need right now.
That is something we have talked about and that we continue to opportunistically deal with, but on the common equity too we are heavy and that is something that increasingly I think you'll see us working at, it is very much on our minds.
I would say our goal is over the next couple of years to get it up around 10%, and we think that that is doable.
There is some additional reduction in preferred that will help, obviously the cost of preferred is a drag on the ROE.
I would expect that as we continue to see better results through CCAR, that we'll be able to be a little more aggressive in our capital repatriation ask.
And then there is still a lot of operating leverage.
I think it is really important to focus on what we are accomplishing.
If you look at pre-provision net revenue as operating leverage that you see playing out over the last few quarters, it takes not a whole lot of additional work in that area to start to make a real difference.
Finally, I would say that as we get through the energy cycle, and we have got a very strong reserve, we do think that that ---+ I expect we're going to be able to start to lessen the provision as we said earlier, and as we come out the other end, I think short of real deterioration, significant deterioration in the rest of the economy, the other credit metrics around here are very strong, our absolute reserves are strong, and I think one of the competitive advantages we are going to have that will feed into ROEs is going to be a provision when we get through the energy cycle, that is likely to be pretty low and will also help with ROE while we continue to build this operating leverage that I'm talking about.
I would just add to that, the reason we focus so much attention and communication about the positive operating leverage is that we really do believe the basic assumptions about loan growth, redeploying cash, fee income growth, holding expenses flat, the resulting positive operating leverage that we model moves us a long way over a three-year period to a much more representative ROE.
And then depending on what assumptions you want to make about our ability to reduce capital or trim capital, we believe we can get back to the levels <UNK> described with the plan we have in place.
I'd also just note, too, we've clearly been taking some asset sensitivity off the table, but there is still a fair amount there.
In this rate environment, I personally find myself asking, scratching my head and saying is a 775 basis point premium to a risk-free rate, should it continue to go north of that, beyond the 10% to 12% or something like that.
I think ought to all worry about an industry where the expectations ---+ in an industry where you've sort of doubled the common equity over the last decade, a 12% ROE is what used to be a 24% ROE.
That could involve stretching beyond the point that is actually prudent.
That's how I think about it.
Jumbos.
Sure, Brad.
Happy to respond to that.
The other thing that I would note, we don't comment about it enough, but natural gas prices also have rallied significantly since early March.
Recall that they declined quite a bit in the fourth quarter of last year and through the middle of March, oil prices really declined January/February and the first part of March, and then both have really made a very nice recovery since then.
I only note that because recall that in our reserve-based lending activity about 50% of the reserve is ---+ I mean, of the borrowing basis is our natural gas reserves.
You really kind of have to focus on both.
What I would say is that the underwriting that we did in our spring redetermination generally had oil prices around kind of in the mid-to-high $30s, and the sensitivity would have been down in the high $20s, $30-ish.
And so, prices retreated here back to the high $30s, I don't think that would really impact our reserve.
If we saw prices go down into the low $30s, high $20s, then it might change how we would think about it.
But I think there is a lot of room between where we are and that kind of really negative environment because fundamentally, the supply-and-demand curves have improved since six months ago, and that is fundamentally driving the price changes.
That would be my comment.
I think we feel really pretty good about the reserve-based portion of our portfolio, the deficiencies that we experienced in the spring redetermination all have very firm repayment processes associated with them, so we didn't have any big surprises on the reserve-based side in the spring redetermination.
It really is just an oil field service question fundamentally, and how long that will go on, and we believe it will go on into next year even if prices continue to improve.
This is <UNK> again.
We have very well-defined concentration limits by asset class and asset types, and there are some historic assets that have proven not to do so well and we obviously have low concentration limits set for those.
We are not doing anything necessarily to stimulate production in any one of those categories.
We think we might be a little heavy on multi-family so we are tempering production there, both construction and term.
I hope that answers your question.
Selectively, any transaction that has really strong metrics, a solid sponsor, guarantor support, good market, deeper MSA that can prove as a worthy takeout source.
Could be ---+ retail is obviously ---+ the online sales has tempered our belief and we aren't too excited about putting on a lot of new retail.
Industrial is an asset class that is in favor right now to us, especially in the markets that we serve.
Hospitality, we have historically deemphasized, but we do select hospitality transactions.
I would say anything that is horizontal development like A&D, land, lots that aren't associated with homebuilder production And vertical construction are something ---+ is an asset class we are definitely steering away from.
Historically it was in our mix, but today and going forward, it is a relatively small piece of the book.
<UNK>, this is <UNK>, what I tried to convey in my remarks is that we've got some countervailing influences.
One, as I described, is sort of the ongoing grinding of margins that we see and that obviously adversely impacts the net interest margin.
In our case though we are helped by the fact that we continue to deploy cash into our highly liquid investment portfolio, and the result of that obviously is no increase in earning assets, the denominator, but an increase in net interest income.
So net-net that is helpful to the margin.
As I tried to say in the prepared remarks, we are looking at maybe a couple of basis points, we think, over the next couple of quarters, but as you know as an experienced observer of banks that can be pretty hard to predict sometimes.
Sure, <UNK>, this is <UNK>.
We had said $75 million to a $100 million area.
We commented on $125 million today and as you noted our energy net charge-offs were about $75 million through the first half of the year, and we are simply saying we think they will start to go down.
We think they will be less in the second half of the year, but it's very hard to know.
We don't have a clear line of sight right now to those second half of the year charge-offs.
We can see about half of them, and then we are assuming others will materialize so there is an opportunity for a favorable performance relative to the $125 million.
The other comment that I think is really important is how does this fit, as both <UNK> and <UNK> noted in their comments, how does this fit in terms of our overall thoughts about net charge-offs this year.
You recall we guided to 30 to 35 basis points, $125 million to $150 million in net charge-offs, and clearly our energy charge-offs are going to be larger than what we thought, but we've only had $1 million in net charge-offs on the other 94% of the loan portfolio through six months, and we are clearly going to have less charge-offs than we anticipated there.
So we continue to anticipate the same consolidated net charge-off experience that we've guided to, it is just going to be a little more weighted to energy.
I'd just also add, I think, from my perspective anyway, this is <UNK>, the most encouraging thing that I'm seeing is we are not seeing new names popping up.
The list of deals where we expected that we might see some fraying basically a year ago hasn't really fundamentally changed.
Some of the timing and to some extent perhaps even the magnitude in some of these deals has been a little different, but we are not seeing new names coming out of the woodwork and I think that is a big plus in our thinking about it.
It is.
And I would also note that because the vast majority of our charge-offs on the energy side are coming from the oil field service piece, recall that we have significant private equity sponsorship with our 70-some-odd service-based companies, our larger service-based companies that we finance.
To date, last year and through six months this year, they have injected about $250 million of capital into our borrowers.
Just back of the envelope, that would be 15% to 25% in increased equity to those existing deals which generally were 50% equity, 50% debt.
I'm using some broad generalizations here.
We have seen really strong performance from the private-equity funds when you think of 15% to 25% equity injections in an 18-month period.
And with strengthening pricing in oil and gas commodity prices, we believe that will continue.
That's precisely correct, not only are we buying new bonds, which is helpful, but the bonds that we do have are prepaying faster.
There is premium attached to those bonds that's decreasing the yields and that happens as you know, and so there is a little headwind there that we are dealing with, in addition to ongoing grinding tighter of credit spreads.
I think what we are fundamentally referring to there is we have an incentive plan that covers top roughly 450 or so officers in the Company.
That is effectively very closely linked to how we do in terms of cost control and continuing to develop operating leverage, et cetera.
Cost control is kind of a central theme in how we think about payouts under that plan.
Some of you have heard me say before, but I tell all of our people here that every nickel they spend is not coming out of shareholders' money, it is coming out of the wallets of the top 450 people in the Company.
Because to the extent that we don't hit those targets, the funding for that incentive plan is reduced to the point that we do, so there is a very, very tight linkage in that respect.
I just want to thank all of you for your time and for your interest, and we look forward to talking to you the next time we see you or next quarter.
Thanks so much.
