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Cullen/Frost Bankers (NYSE:CFR)
Q1 2018 Earnings Conference Call
April 26, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Greg Parker -- Executive President and Director, Investor Relations

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 or 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 on our website or by calling the Investor Relations department at 210-220-5234.At this time, I'll turn the call over to Phil.

Phillip D. Green -- Chief Executive Officer and Chairman

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 for 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. 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 nine 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 on 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 a 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.Non-performing 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 three years, and at 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. And that credit was not related to energy.About a third of $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 expect to be completed in the second quarter. First-quarter annualized net charge-offs represent 38 basis points of 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, that number well within our standards and comparable to what we've experienced in the past 2 1/2 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 the 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 continued to attract customers. Same-store sales growth for new account origination is up almost 8% compared with the first quarter of 2017. Twenty-one percent 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 continues to be 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 growth, which offset a decline in commercial real estate opportunities. You can 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 are understandable, as we continue to prune this portfolio in search of only the best opportunities. The reduction in CRE commitments is reflected off an extremely strong first quarter last year. I'm not concerned with our prospects for either CRE or C&I.In fact, if you look 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, continued 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.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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-four-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, four 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 the 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 cost. 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. 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 the municipal portfolio was pre-refunded 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 were 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 the 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 the 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.

Phillip D. Green -- Chief Executive Officer and Chairman

Thank you, Jerry. Now we will open up the call for questions.

Questions and Answers:

Operator

[Operator instructions]. Your first question is from the line of John Pancari with Evercore ISI.

John Pancari -- Evercore ISI -- Analyst

Can you give a little bit of color on 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? Thanks.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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.

Phillip D. Green -- Chief Executive Officer and Chairman

We've done that pretty consistent with the change in the Fed's rate in terms of [Inaudible] timing.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

Right.

John Pancari -- Evercore ISI -- Analyst

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

Jerry Salinas -- Chief Financial Officer and Executive Vice President

I guess what I'd say as far as the betas are concerned, what we're doing is we're comparing what alternative non-bank 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 if there are future rate increases, we will continue to move up, deposits and really look at what market rates are doing. And I would say maybe the 35% beta we had, it would be something in that area potentially a little higher.

Again, depending on what we're seeing in the outside.

John Pancari -- Evercore ISI -- Analyst

Right, right. All right, thanks, Jerry. 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 macrowise that you flagged for Texas -- is that something that could drive loan growth for the bank above that 10% level? Thanks.

Phillip D. Green -- Chief Executive Officer and Chairman

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

John Pancari -- Evercore ISI -- Analyst

OK, great. Thanks, Phil.

Operator

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

David Feaster -- Raymond James -- Analyst

Hey, good morning, guys. 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 the strategy that allows you to outperform?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

I'm shocked and surprised there's competition. 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. We keep track of our declines over the time.

And if you look at the declines we had in the first quarter, they were up from probably where they were last four years or five years, and those declines I'm talking about are all structured. 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 and so our declines were higher as things get more competitive. As far as why we're doing well, 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, if you look at 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 excellent awards, and our relationship managers get great awards, they are great people.

They're disciplined in calling. They are 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 as we've said about half of our growth year over year was coming from this core part for 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. We're competitive, we'll compete. We've got one of the lowest costs of funds any bank in the country.

We see people that have great character and great businesses that we won. If someone wants to compete with us, bring it on, we'll compete.

David Feaster -- Raymond James -- Analyst

That's good. That's a 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 to 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, kind of keeping rate -- margins flat here?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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.

David Feaster -- Raymond James -- Analyst

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

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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 community 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, it's pretty well, we're pretty conservative, we don't take any sort of credit risk in the investment portfolios, so not a lot of alternatives but for now we're continuing that community strategy.

David Feaster -- Raymond James -- Analyst

OK, thanks, guys.

Operator

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

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Hey, good morning, guys. So if you look at the loan loss reserve going down around 8 basis points on a linked-quarter basis is now at 112 basis points of that. I know a couple years ago it was as high as 140 basis points 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 in the 1% area?

Phillip D. Green -- Chief Executive Officer and Chairman

I wouldn't expect that, Brady. It's formula-driven. And so it's going to be driven mainly based on what happens with the classifications and specific allocations for credits. It's been going down because energy has been improving and also our historical charge-off numbers drive a lot of the formula to be improving.

So, I don't know, Jerry, you got any comments on that?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

Yes, Brady, I would probably say, if you look at our historical numbers you're right, we are back again 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 that used 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 need down. So I guess from my end, if we move down from the one-twelfth, I wouldn't be overly surprised.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

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

Jerry Salinas -- Chief Financial Officer and Executive Vice President

I'll take the 9.5% to 10%, how about that?

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

That's fair. That's fair.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

[Inaudible] did come in at 9.5%, and we do have the impact of those tax benefits associated with those option exercises that kind of flowed through there and they can have an impact on the effective tax rate. So somewhere in that 9.5% to 10% is kind of what we're modeled.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

OK. All right, that's helpful. And then finally for me, I know you all had the issue with the commercial lockbox in 1Q with unauthorized access. Did anything really come of 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?

Phillip D. Green -- Chief Executive Officer and Chairman

I think that right now the things we're experiencing are just costs associated with this. Anything that happens, first of all, it's embarrassing and we have a story to happen. The key things to keep in mind, we found it wasn't course systems and it was an ancillary system. We fixed it and stopped it and we're in the process of notifying people involved in which were required.

One thing you learned by going through some like that 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 got cost associated with it. I think we'll see some more cost in the second quarter associated with that. We had some in the first quarter and there's just a lot of moving parts to it but I'm proud of our people, handle and proud how the institutions handle it.

And I think that's the main impact that we're seeing right now.

David Rochester -- Deutsche Bank -- Analyst

All right, great. Thanks for the color and congrats on a nice quarter.

Operator

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

David Rochester -- Deutsche Bank -- Analyst

Hey, good morning guys. I was just wondering if you guys had made any other adjustments to the earnings credit rate after the March hike. And if you'd seen any competitors moving May rates?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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.

David Rochester -- Deutsche Bank -- Analyst

OK. 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 whatnot? 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?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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 fund if we needed to but right now what we're looking at and based on our projections, we're getting pretty close to funding with deposit growth.

David Rochester -- Deutsche Bank -- Analyst

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?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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 those dollars and 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 keep, I think, $350 million of that as a potential investment opportunity. So we're still kind of looking at that.

Obviously, our guys, as I said, in the investment area continue to look at what's out there and what's available to us. I wouldn't be surprised if, given the right opportunity, we wouldn't use up a little of that liquidity.

David Rochester -- Deutsche Bank -- Analyst

OK. And then 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.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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 and the dividend that we have, it has a little bit of an impact in that capital ratio.

So between the growth that we're projecting in the loan portfolio this higher dividend rate we do see a little bit of potential planned decrease in those capital ratios, nothing significant but at this point, we like erratic capital 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 a thing that we've said.

We want to be in a position where we can take advantage of the growth opportunities. As Phil said, we're in some really great strong markets between Houston and Dallas. In North Texas office and we just want to have the capital to be able to take advantage of that growth and potentially deploy it that way.

Phillip D. Green -- Chief Executive Officer and Chairman

One thing, I was really pleased with the dividend increases. We increased 7.5% but our payouts have gone to 40% or maybe a little bit below, maybe has three handles on it now. And that puts us back the payout ratio where we were before the crisis, which is more of a longer-term payout for us. So we've 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 sort of little bit below 40%.

So we've got the opportunity to use it for growth, hope we have a use for it but also as Jerry said, we've got some ability to take advantage in the event that we see an opportunity with buybacks to support our shareholders.

David Rochester -- Deutsche Bank -- Analyst

Yes. OK. Great. Thanks, guys.

Operator

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

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good morning. 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 it all with tax reform now building capital faster. And if there's anything specific you're looking for geographically.

Phillip D. Green -- Chief Executive Officer and Chairman

Jennifer, we're always interested in knowing what's going on out there, right. I mean, there could be an opportunity it makes sense just like Western did at one time. I think it's going to be infrequent. 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 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, we really haven't changed our view, it's let's grow the business first and then if something comes up, we'll always listen but it's not driving us.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thanks so much.

Operator

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

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. 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 assets 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 about loan growth.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

Well, just to make sure I understand your question, I guess from the taking in the investment portfolio which is the other big piece of the earning assets. In our plan really on the investment portfolios is for the most part but 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, it just gives us an ability to invest in any sort of excess liquidity if you will. We talked about maturities in calls that we have on the muni portfolio, so we replacing those will 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, if you're saying that the earning asset growth matches the loan growth at a high single-digit, I'd say no, not but what we expect.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

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

Jerry Salinas -- Chief Financial Officer and Executive Vice President

Yes. Fair.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Understood. And I'm sorry if I missed this one. 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?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

I think that the thing that you need to make sure that you consider, like we said, is on the deposit betas. Really, what we're doing is we're comparing our rates to alternative non-bank products. So there could potentially be some betas that could be higher than what I described. I would say I think it threw out a number of 10 basis points as a potential increase with the next hike.

I project the trend to be up. I think that you really probably need to do the modeling yourselves on what 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 for example with the trigger treasury or what's happening with money market funds but obviously the guidance we've given it's going to go up we're not ready to give specific guidance on how much.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Understood, but it sounded like you're not seeing anything significantly ominous on the market side, that looks very different today versus three months or four months ago?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

That's a fair statement.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Perfect. And just separately, could you talk about what do you think from an ROA perspective the banking on as you think about over the next year or two. I read your annual shareholders letter in terms of talking about doing right by the customer which is kind of a influence your deposit pricing strategy. Just trying to understand as you think about over the next year or two, what's the optimal ROA or ROE that you can hit?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

We don't and never have said what our ROE 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 we went through these cycle. Look, we were glad our ROA was above here but we were way below what we thought it would be in a normalized environment.

And we've begun to get some normalization, the two things that need to be normalized is one is rates. And the second thing was loan-to-deposit ratio would gotten down to the 40s and it was in the high-70s before the crisis. So those two things, normalization interest rates are given our assets sensitivity. And the higher efficiency of our balance sheet or call it as loans pickup as a percentage of the asset base, both of those things are going add operating leverage to the company and they're going to drive a higher ROAs.

So well, I don't have a target, we definitely have a target for higher ROAs then where we are today and I think you could do your own math with regard to the level of that operating leverage but we believe it's here and we were starting to see it now.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

That's helpful. Thanks for taking my questions.

Operator

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

Brett Rabatin -- Piper Jaffray -- Analyst

Hi, good morning guys. Wanted to get maybe just few line items, if you have them handy before that queue is out? Would you happen to have the interesting expense for the quarter and then the average interest-bearing funds as well?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

I'm sure. Give me just a second here.

Brett Rabatin -- Piper Jaffray -- Analyst

And then maybe the other item.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

I'm sorry?

Brett Rabatin -- Piper Jaffray -- Analyst

I'm sorry, go ahead.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

You said you wanted interest expense?

Brett Rabatin -- Piper Jaffray -- Analyst

Yes.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

Total interest expense for the quarter is $13.578 million.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. And then the average interest-bearing funds?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

For the balance for the quarter?

Brett Rabatin -- Piper Jaffray -- Analyst

Correct.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

$15.457 billion.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. And then maybe one last one, kind of ending-period securities?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

I want to make sure what I gave you there with the total interest-bearing deposits, cause that's what you're looking forward wasn't it?

Brett Rabatin -- Piper Jaffray -- Analyst

Actually, that number is kind of low. Interest-bearing funds in total.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

Sure. If you want that, that's $16.742 billion.

Brett Rabatin -- Piper Jaffray -- Analyst

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

Jerry Salinas -- Chief Financial Officer and Executive Vice President

Sure the ending, so it's going to be roughly -- I'm looking at two accounts here -- so $11.077 billion if you will.

Brett Rabatin -- Piper Jaffray -- Analyst

OK, OK. Great. Thanks for all those numbers. I guess my question is just around you guys talked about the great Texas economy and unemployment is really low and as I look at last year your expense growth was about 5% and it's going kind of been trending about that for the past two years.

I'm just curious thinking about expense growth this year if you expect anyway to pressures to maybe, was that number a little higher? or if you can give us maybe any color on an issue that you have in place and how that might affect expenses this year?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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 effect in going forward.

I think the overall guidance that I've given, for expense growth 2018 to 2017 and 2018 has been in that around the 5% area and that still kind of what the guidance that we're getting but there's a lot of pressure, don't be mistaken.

Phillip D. Green -- Chief Executive Officer and Chairman

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

Brett Rabatin -- Piper Jaffray -- Analyst

OK. 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 SIFI, 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-officewise or can you give us maybe any color on how you're viewing may be the recent easing in regulatory constraints?

Phillip D. Green -- Chief Executive Officer and Chairman

First of all, while we're glad there's some changes in tone that we're hearing and we've seen a lot of change on the regulatory front in terms of the impact on us. So I'd say, no impact right now. We are encouraged by some other 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's the way it was going to be if you want anything bipartisan. It was always going to have something that you don't like in there, but it's going to be best you can get, I think, politics is the art of the possible. So hope that we see progress on that out of the House and we get that bill passed. I think that it might have some marginal impact for us.

We need it. The industry needs some relief.

Brett Rabatin -- Piper Jaffray -- Analyst

OK, great. I appreciate all the color.

Operator

[Operator instructions]. Your next question is from the line of Matthew Keating with Barclays.

Matthew Keating -- Barclays -- Analyst

Great, thank you. My question on expenses Jerry, so I guess, obviously, I appreciate that the continued 5% type growth guidance on costs. And so as 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 is given an accounting change? Thanks.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

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 4% and 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 and with a little bit of room there for the potential on the inflation cost on salaries.

Matthew Keating -- Barclays -- Analyst

Thanks. That's helpful. And then maybe for Phil. I know in your annual report, you did mention that I guess for the first time ever you conducted a pretty wide-based employ survey in areas of business strategy, processes and people.

So I'm just curious what some of the findings were made particularly on business strategy and processes of the company might look to change based on those results? Thanks.

Phillip D. Green -- Chief Executive Officer and Chairman

Well. You know the questions with regard to strategy and process et cetera really I asking our people if we're being consistent with their actions against what we say we want to do. And basically, the word we got back was, yes that we are. And so that's good because our culture is critically important for us and we want to make sure that the actions that we're taking and are consistent with that but, as I mentioned in the annual report, we thought lots of opportunities just because we got great feedback from people to make changes and we've been working hard on that to make our employees lives better and I think the change is really been strategic wise at it all.

We haven't really had a lot of process changes, although we're engaging people to continue to engage people and employees to how can we do things better and be smarter. Just to give you an example, I mean some of the things that we did with our maternity benefits, it kind lost our way on that overtime and we need to improve that, we did. Things like vacation policies or just maybe dress codes, maybe just lots of different things when we tweak that really help to make employees lives better and that's really I think for the benefit of it. Because when you take care of your employees, they take care of your customers, right.

And our employees practicing our culture taking care of our employees, actually that's when the magic happens, that's how you get to win nine consecutive J.D. Power awards for customer service not because that's your goal. 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 anything they are taken care of, they are not going to do that well, so we got to do our job of making sure we're honoring them, and that was one of the best things about it.

Matthew Keating -- Barclays -- Analyst

Great. Thanks very much.

Jerry Salinas -- Chief Financial Officer and Executive Vice President

Hey Matt, it's Jerry. One thing on your expense question. I think that looking at the numbers I'd be more comfortable with 4% on a net basis. So bring that --

Matthew Keating -- Barclays -- Analyst

Great. Thanks very much, Jerry.

Operator

And the next question from the line of Steven Alexopoulos with J.P.Morgan.

Alex Lau -- J.P.Morgan -- Analyst

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

Phillip D. Green -- Chief Executive Officer and Chairman

I think it generates more cash flow for them to be able to do it. I've heard consistently that it gives the ability for people to execute on investment plans. I think we've seen transportation is one area that has taken advantage of it, as an example. But I think another thing, and 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 are we going to get labor from, and we've gotta 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 to 600 and some, 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 outstandings, 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 it.

Alex Lau -- J.P.Morgan -- Analyst

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?

Phillip D. Green -- Chief Executive Officer and Chairman

Money market account rates, but competition hasn't been from banks. It's been from just what's available in money funds, and 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 non-bank alternatives are.

Alex Lau -- J.P.Morgan -- Analyst

Got it. Thanks for that. 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 [Audio gap] pay income?

Jerry Salinas -- Chief Financial Officer and Executive Vice President

No.

Alex Lau -- J.P.Morgan -- Analyst

Got it. OK. Thanks for taking my questions.

Phillip D. Green -- Chief Executive Officer and Chairman

Sure.[Audio cutoff]

Duration: 56 minutes

Call Participants:

Greg Parker -- Executive President and Director, Investor Relations

Phillip D. Green -- Chief Executive Officer and Chairman

Jerry Salinas -- Chief Financial Officer and Executive Vice President

John Pancari -- Evercore ISI -- Analyst

David Feaster -- Raymond James -- Analyst

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

David Rochester -- Deutsche Bank -- Analyst

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Brett Rabatin -- Piper Jaffray -- Analyst

Matthew Keating -- Barclays -- Analyst

Alex Lau -- J.P.Morgan -- Analyst

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