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Zions Bancorp NA  (NASDAQ:ZION)
Q3 2018 Earnings Conference Call
Oct. 22, 2018, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for your patience. You've joined Zions Bancorporation's Third Quarter 2018 Earnings Results Webcast. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Director of Investor Relations, James Abbott. Sir, you may begin.

James Abbott -- Director-Investor Relations

Thank you, Latif, and good evening everyone on the call. We welcome you to this conference call to discuss our 2018 third quarter earnings. For our agenda today, Harris Simmons, Chairman and Chief Executive Officer, will provide a brief overview of the key strategic and financial objectives, after which Paul Burdiss, our Chief Financial Officer, will provide additional detail on Zions' financial condition and wrapping up with our financial outlook for the next four quarters.

Additional executives with us today include Scott McLean, President and Chief Operating Officer; Ed Schreiber, Chief Risk Officer; and Michael Morris, our Chief Credit Officer.

Referencing slide 2, I would like to remind you that during this call we will be making forward-looking statements although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck dealing with forward-looking information which applies equally to statements made during this call. A copy of the full earnings release as well as a supplemental slide deck are available at zionsbancorporation.com. We will be referring to the slides during this call.

This earnings release, the related slide presentation in this earnings call contain several references to non-GAAP measures, including pre-provision net revenue and the efficiency ratio, which are common industry terms used by investors and financial services analysts. The use of such non-GAAP measures are believed by management to be of substantial interest to the consumers of these financial disclosures and are used prominently throughout the disclosures. A full reconciliation of the difference between such measures and GAAP financials is provided within the published document and participants are encouraged to carefully review this reconciliation.

We intend to limit the length of this call to one hour. During the question-and-answer section of the call, we ask you to limit your questions to one primary and one related follow-up question to enable other participants to ask questions.

With that, I will turn the time now over to Harris Simmons. Harris?

Harris Simmons -- Chairman & Chief Executive Officer

Thank you very much, James, and we welcome all of you to our call today to discuss our 2018 third quarter results. The results of the quarter were strong relative to the year-ago results. Slide 3 is a summary of several key highlights. At a high level, perhaps most importantly, we are pleased with a strongly positive operating leverage with non-interest expense nearly flat relative to the prior year while net revenues have increased to the mid-single digit range.

Much of what we are doing is designed to push the tremendous operating leverage that we've experienced during the past 3.5 years into future years. Loan growth was relatively healthy in a quarter that can often have a slowness due to seasonal reasons. We are encouraged with our deposit costs exhibiting relatively low increase compared to benchmark rates and we are encouraged with further growth in average non-interest-bearing deposits, something that's not easily accomplished when interest rates are rising.

Our credit quality profile continues to improve at a rapid rate, remarkably the trailing 12-month net charge-off ratio was only 100th of a percentage point or 1 basis point. Finally, relative to the prior quarter, we increased the dollars of capital returned to shareholders. While we intend to further reduce the capital ratios to better reflect the risk profile of the Company, we still have one of the very strongest capital levels within the regional bank space with a common equity Tier 1 ratio of 12.1%.

Before we dig into the numbers, within the theme of simplification and streamlining I'd also like to note that we completed our merger of the holding company with and into the Bank, reducing organizational complexity and eliminating duplicate of regulatory oversight.

On slide 4, you can see the improvement of earnings rising to $1.04 per share from $0.72 per share in the year ago period. Although we don't provide the so-called core EPS figure, we do highlight some items that affected the earnings per share that we view as episodic or not sustainable in the long run, which are listed on the slide. Graphically, the GAAP result are the darker blue bars while the adjusted result is shown in the light blue bars.

Much of the variance is due to the continued improvement in credit quality, including interest recoveries, effective net interest margin as well as negative provisions for credit losses. We benefited particularly from the relatively rapid improvement in the quality of loans to the oil and gas sector. We still have some expected benefit left from that source, but we're nearing the end of that favorable impact.

Earnings per share for the third quarter of 2018 continued the trend of strong growth. By my calculations, if one eliminates the effect of interest recoveries, negative provisions for loan losses and if you hold the tax rate constant with the year-ago period, our EPS growth was in the high teens relative to the third quarter last year.

Slide number 5 highlights two quick key profitability metrics, return on assets and return on tangible common equity. We are happy to see the return on assets at about 1.3% even after adjusting for items and for the return on tangible common equity to expand -- to exceed 14%. We continue to work hard to further strengthen these measures and with higher capital distributions we expect the return on tangible common equity to continue to strengthen.

Pre-provision net revenue, as depicted on slide 6, has performed particularly well, rising 16% over the past year and nearly doubling since we embarked on our efficiency initiative in late 2014. Adjusted for the items noted on the slide, our pre-provision net revenue increased 15% from the year-ago quarter. We have said and continue to expect the pre-provision net revenue growth rate to be in the high single-digits without giving consideration to additional interest rate increases by the Federal Open Market Committee.

We are seeing momentum in several areas of revenue growth, including several areas of lending such as residential mortgage, owner occupied properties and municipal lending, and trust and wealth management, and other select areas within fee income. Meanwhile, costs, both interest-bearing liability and non-interest-bearing expense have been relatively well contained.

On slide 7, you'll see the strong credit trends depicted on the chart on the right with classified loans declining a very strong 37% from the year-ago period and 17% from the prior quarter. Improvement in oil and gas loans was a major reason for the improvement. For the third quarter, we experienced net credit recoveries of $1 million or about 1 basis point of loans annualized. Net charge-offs for the last four quarters were only 1 basis point of average loans. We expect a low overall rate of net charge-offs in the months ahead assuming current economic conditions remain generally stable.

Additionally, as you can see from the allowance ratios, we are still maintaining a strong coverage of non-performing assets and other problem credit metrics. We continued to adjust upward our qualitative factors to reflect stressors that can be observed in the economy generally, such as the implementation of tariffs, higher interest rates and the effect that they may have on certain borrowers, and higher oil and gas prices which may reduce profit margins for certain commercial businesses and drag on consumer spending, etc. Quantitatively, however, we have not seen a credit deterioration within the various portfolio types.

Slide 8 is a list of our key objectives for 2018 and 2019 on our commitment to shareholders. We presented this slide in prior earnings calls and industry conferences throughout the year so I'll avoid reading the slide to you, but I'm pleased with the progress we've made on so many of these initiatives, all of which set us up to increase our return of capital to shareholders. We increased that rate from about 20% of earnings to more than 110%. We view an increase of balance sheet leverage is appropriate, particularly given the reduction in the risk profile of the Company.

The decision on the magnitude, timing and form of capital return is a Board level decision and to pre-empt the question, the Board meets later this week to discuss, among other things, capital returns such as share buybacks and common stock dividends.

With that overview, I'll turn the time over to Paul Burdiss to review our financials in additional detail. Paul?

Paul Burdiss -- Chief Financial Officer

Thank you, Harris, and good evening, everyone, and thank you for joining us. I'll begin on slide 9. For the third quarter of 2018, Zions' net interest income continued to demonstrate growth relative to the prior period. Excluding interest recoveries as detailed on this slide, net interest income increased $40 million to $562 million, up approximately 8%.

With respect to the revenue components, I'll start with volume and move to rate in just a moment. Slide 10 shows our average loan growth of 3.5% relative to the year-ago period. Although not listed on the slide, the period-end growth in the third quarter relative to the second quarter was an annualized 5% with strength weighted toward the end of the quarter.

Average deposits increased about 3% from the year-ago period and increased an annualized 5% from the prior quarter. Thus far, we've been able to achieve this growth of balances with a relatively modest increase in deposit cost. This speaks to the granularity and overall quality of our deposit franchise as we discussed in detail at our Investor Day this past March.

Examining loan growth a bit closer, slide 11 depicts our year-over-year period-end loan balance growth by portfolio type, with the size of the circles representing the relative size of the portfolio. For most categories we experienced solid and consistent growth. There are three areas where we've experienced slight attrition.

In the commercial real estate space, loan growth was adversely impacted by slight attrition in the term CRE and national real estate portfolios of about $240 million. Within non-oil and gas C&I loans, relative to the prior quarter we experienced an annualized attrition rate of about 4% on our larger loans, that is loans with balances greater than or equal to $5 million, while experiencing annualized growth rate of about 4% on our smaller loans.

The incremental competitive pressure on larger commercial loans seems to be coming from capital markets activity and some loosening of credit standards among competitors, including unregulated senior debt funds. We experienced relatively consistent growth trends in 1-4 family and home equity loans, and experienced a slight uptick in the growth rate of owner occupied, which are generally small business loans underwritten based upon the cash flows of the borrower and secured by real estate.

Oil and gas loans have increased moderately, resulting primarily from a relatively strong increase in upstream and midstream loans while oilfield services declined slightly. Municipal loan growth has also continued to be strong during the past year. To repeat what I mentioned on last quarter's call, we've hired staff to help us grow in this area, which is focused on smaller municipalities and essential services of those cities. We've maintained strong credit quality standards and feel comfortable with the growth and expect growth to remain strong in this area.

Although we are optimistic in the near term about the growth of loans based upon the relatively strong economic backdrop and improvement in small business loan growth and review of pipelines, we are also seeing some factors that may result in some growth pressures, including debt funds and capital markets that are highly competitive for pricing and for term, which affects our larger loans, and underwriting standards that are softening within loans remaining in the banking industry as noted in the recent additions of the senior loan officer survey, and the pricing that may not satisfy our risk reward appetite. Therefore, we are modifying our 12-month outlook for loan growth to slightly to moderately increasing.

Slide 12 breaks down key rates and cost components of our net interest margin. The top line is loan yield, which increased to 4.71%, of which about 2 basis points are related to the previously mentioned interest recoveries. The yield excluding interest recoveries has increased about 40 basis points over the past year, which is a loan yield change of slightly more than 50% relative to the change in the fed funds rate.

Relative to the prior quarter, the yield on securities increased slightly. The shorter duration of the investment portfolio in combination with new security purchases, which were accretive to the yield of the portfolio helped lift the yield overall in the investment portfolio. While the premium amortization is very difficult to forecast, assuming stability in that area, we expect the yield on the securities portfolio to move higher at a moderate pace over the next several quarters and years based upon the yield of the securities we are purchasing.

The cost of total deposits and borrowed funds increased 5 basis points in the quarter to 0.45% or 45 basis points resulting in a funding beta of about 30% for the year-over-year figure. As a reminder, in this case beta refers to the change in the cost of deposits and borrowings relative to the change in the cost of the fed funds target rate. The total year-over-year deposit beta was about 21%, relative to the prior quarter it was 29%. Cumulatively, since the beginning of the rising rate environment we've experienced a total deposit beta of about 11%. These elements combined to result in a net interest margin of 3.63% for the quarter, which increased 7 basis points from the prior quarter and 18 basis points from the year-ago period.

Excluding interest recoveries in excess of $1 million per loan, that ended net interest margin beta was 21% over the prior year and 26% over the prior quarter. We believe it is reasonable to expect deposit competition to intensify somewhat over the next several quarters. And if so, the net interest margin beta, if I can use that term, may be modestly less sensitive when compared to the recent quarter.

Next, a brief review of non-interest income on slide 13. Customer-related fees increased 2.5% over the prior year to $125 million. The primary source of income that increased and decreased are listed on the page. We continue to work hard to increase our fee income although the fees from treasury management are influenced to a degree by deposits and market rates for earnings credits applied to those balances, which in a rising rate environment create a slight headwinds in our fee income trend.

Similarly, the fee income realized from mortgage banking activity tends to be a little counter cyclical, slowing and possibly decreasing as the economy strengthens due to the effects of higher rates on refinancing activity.

Non-interest expense, on slide 14, increased to $420 million from $413 million in the year-ago quarter. However, adjusted non-interest expense, which adjusts for items such as severance, provision for unfunded lending commitment and other similar items, non-interest expense was very stable at $416 million versus $414 million in the year-ago period. A portion of the increase relates to additional compensation that we announced in conjunction with the Tax Cuts and Jobs Act, which will be paid to most employees making less than $100,000 per year. These items account for about a $3 million increase over the year-ago quarter.

With the holding company merger in the rearview mirror along with other items in the professional and legal line item, we experienced a slight decline in that line item and we expect the quarterly level to remain a bit lower than it had been during the past year or so. Also, as noted on the slide, we had a one-time adjustment to our FDIC deposit insurance cost in the third quarter.

Assuming the deposit insurance fund reaches 1.35% and the insurance surcharge is removed and considering our issuance of $500 million of senior unsecured debt late in the third quarter and the movement of other unsecured debt out of the holding company and into the Bank as the Bank and the HoldCo is now merged, this would result -- all of these things combined would result in a lower insurance costs relative to other secured funding and as a result we expect our FDIC insurance expense in the fourth quarter in all of those cases to be about $7 million.

Turning to slide 15, the efficiency ratio was 58.8% compared to the year-ago period of 62.3%. We reiterate our commitment to achieve an efficiency ratio of below 60% for the full-year 2019, excluding the possible benefits of rate increase.

Finally on slide 16, this depicts our financial outlook for the next 12 months relative to the third quarter of 2018. In the interest of opening the line up for questions, I won't read the rest of the slide to you, but we will be happy to take questions about any of these items. This concludes our prepared remarks. Latif, would you please open the line for questions? Thank you.

Questions and Answers:

Operator

Yes, sir. (Operator Instructions) Our first question comes from the line of Dave Rochester of Deutsche Bank. Your line is open.

Dave Rochester -- Deutsche Bank -- Analyst

Hi, good afternoon guys. Just a question on capital. Now that you guys are effectively out of that stock, you got more clarity and control over where capital levels go from here. I know you talked about bringing the CET1 ratio down to just above peer levels in the next six quarters or so. It seems like that would imply a decent step up in the buyback going forward, especially if loan growth is maybe not a solid mid-singles in terms of growth going forward. Is that a fair statement and any rough sense as to what that means in terms of dollars over the next year?

Harris Simmons -- Chairman & Chief Executive Officer

Well, it's certainly a fair idea, you've done the math appropriately I think, Dave. We're simply reluctant to be too specific about it because our Board hasn't met and I don't want to front-run them. But it would certainly be our view that kind of target is still achievable and that's the discussion that we will be having with the Board here at the end of this week.

Dave Rochester -- Deutsche Bank -- Analyst

Okay, that's fair, I appreciate that. And then I guess some of your peers have talked about reducing ratios over time as well and are talking about lower levels from where they are today and I know your discussions have talked about based on where your peer capital ratios are today, and so if we're talking about lower peer ratios over the next six to eight quarters, are you guys still thinking about walking your ratios down as well versus the targets that you have been talking about over the last quarter or so, does that makes sense?

Paul Burdiss -- Chief Financial Officer

Yes. So, I guess I'll answer it by saying fundamentally we are not going to determine what our capital ratios ought to be primarily by looking at where peers are. We are going to continue to do a lot of -- to do stress-testing. We expect to do that actually probably quarterly and let that inform the discussions we're having with the Board and to the extent that the results can lead us there, that's one thing, but we're not going to be chasing peers, it's not a race to the lowest possible capital ratio necessarily, it's trying to have the right amount.

I think especially this quarter we probably should be at least in the cycle, since it's hard to know maybe where we are, kind of in uncharted waters, in terms of what these recoveries looked like, but we certainly don't want to go into a downturn and -- kind of behind the pack. And so, that's how we're thinking about. We really fundamentally going to use kind of stress-testing to inform how we discuss it with the Board. But I think at the present time, we see enough room to get down to pretty close to where kind of the peer median is.

Dave Rochester -- Deutsche Bank -- Analyst

Okay. Great, thanks guys.

Operator

Thank you. Our next question comes from the line of John Pancari of Evercore. Your line is open.

John Pancari -- Evercore -- Analyst

Good afternoon. On the loan growth front and in terms of your guidance and I know that you softened it a bit there, could you give us just a little more clarity around what you are actually seeing that's driving you to push that lower, like what type of competitive pressures on terms and pricing and then what types of portfolios you are seeing that happens? Thanks.

Harris Simmons -- Chairman & Chief Executive Officer

I'll just give you an example that I heard just a couple of -- obviously in the last week over in Colorado. I heard -- this is being told about $30 million commercial real estate deal that went to the CMBS market, it's 10 years interest-only, covenant light kind of deal and it's just not -- that's not where we're going to play. So that would be an example. I don't know, Michael, if you have any other comment.

Michael Morris -- Chief Credit Officer

Well, sometimes you know with owner occupied you don't really know what the industries are that are growing, but owner occupied is a focus for the company. We like what comes with it in terms of ancillary business and relationships. So I think we're very pleased to see that category grow.

John Pancari -- Evercore -- Analyst

Okay.

Scott McLean -- President and Chief Operating Officer

John, this is Scott, I'd just add the area of our portfolio or activity that is most volatile really is, it's the larger transactions like the CRE credit. The CRE term credit that Harris described and we'll see it in the large energy credits also, we've had experience more pay-offs than we anticipated there, but generally it's just some remaining problem credits that are paying down, so that's actually a good thing.

But as you know, we don't have a big exposure to larger loans, but the exposure we do have it's just more volatile because of the conditions that have been described. If you look at slide 20, though in the deck, what you see is really solid growth year-over-year and then a real bright spot is our smaller affiliates in Colorado, Arizona, Commerce Bank in Washington and Nevada, they represent about 25% of the Company and are producing about 50% of the loan growth. So that's really a healthy thing.

And as Michael noted, by loan type, owner occupied is C&I and collectively that's growing nicely. Our mortgage-related business, whether it's 1-4 family or the HECL portfolio are growing nicely and then we're actually seeing some growth coming from energy again. So, it's a nice mix of loans by type and it's coming broadly across the Company, particularly from our smaller affiliates.

John Pancari -- Evercore -- Analyst

Got it. Thanks, Scott. That's helpful. Now that leads me right into my second question. Given that what can change to get your loan growth back up here because obviously given nothing short of a downturn in the credit cycle, I'm not sure that the competitive environment really changes here. So, if we assume that the competitive environment remains relatively intense, is there any reason to expect your long growth can strengthen from here?

Scott McLean -- President and Chief Operating Officer

I think it's hard to know. The third quarter was a good solid quarter for us and fourth quarter generally is a good quarter. So, it's hard to know. I think the reason we lightened our guidance just a little bit is because of the volatility in these larger loan transactions that are just lumpier and that's I think what we were trying to say.

John Pancari -- Evercore -- Analyst

I get it. Thank you and we favor the better credit anyway, so thank you.

Operator

Thank you. Our next question comes from the line of Ken Zerbe of Morgan Stanley. Your line is open.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks. I guess the first question, in terms of your average balances on the liability side, it looks like you paid down a fair amount of borrowed funds in the quarter, call it, maybe $800 million, $900 million. Can you just remind us like what that is and should that borrowed funds stay relatively constant just given the more moderate pace of asset growth?

Paul Burdiss -- Chief Financial Officer

Yes, this is Paul. We use that as a balancing mechanism for the balance sheet. As we think about overall kind of loan growth and what we're doing with the investment portfolio, that ends up -- and then what deposits are doing and stability and growth of deposits, that ends up being the kind of the balancing component there. So that number is really just going to be, if it makes sense, kind of what it needs to be.

A lot of that, as you know, are home loan bank borrowings. We are becoming more active in the senior note market. You saw that issuance this past quarter and I would expect to see the composition of that funding change over time, similar to what you saw here over the last quarter.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Okay, perfect. And then just as a follow-up question separately, can you just remind us how big is the municipal loan portfolio right now and kind of what are your designs on growth in that over time? Thanks.

Paul Burdiss -- Chief Financial Officer

Yeah. You can see it, actually on slide -- page 12 of our press release. Currently municipal loan portfolio is about $1.5 billion, that's grown from about $1 billion a year ago.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it, OK.

Paul Burdiss -- Chief Financial Officer

And we're going to continue to expect to see growth as we invest in our business.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it, understood. All right, thank you.

Operator

Thank you. Our next question comes from the line of Erika Najarian of Bank of America. Your line is open.

Erika Najarian -- Bank of America -- Analyst

Hi, good morning, good afternoon rather, sorry about that. I just wanted to ask a follow-up question to John's line of questioning. I guess as we think about where the non-banks aren't playing, how would you help us size your portfolio in terms of what you think is a more defensible business from the non-banks, whether it's the municipalities or owner occupied or part of your real estate portfolio?

Harris Simmons -- Chairman & Chief Executive Officer

I guess I'd say that I think we're, relatively speaking, in a pretty good place because we have a -- a significant portion of our portfolio is in generally smaller credits. I mean, we are not a big corporate banking player. So even with these municipal credits, we're trying to focus on kind of smaller municipalities where we think we can actually create a little more value for them and for us.

And so, owner occupied is, a lot of what we do there is kind of small-to-mid size businesses. And that's certainly true, a lot of our C&I portfolio generally and I think those are reasonably -- it's really a pretty good place on deals that are kind of $1 million to $5 million or $6 million or $7 million, they don't tend to find them their way into loan funds, they don't tend to get picked up by online lenders, etc. They really are our competitors, they are largely community banks and other regional banks.

James Abbott -- Director-Investor Relations

Erika, this James Abbott. I'd add that we do have some slides on our Investor Day materials back from March that give you kind of a sense of the size of the commercial loan portfolio, so the small loans versus the medium-size and large-size loans, so that's a resource that you could potential utilized, but we do have a very substantial portion of our C&I portfolio, for example, is loans that are less than $5 million in balance and we did see very good growth of that during the quarter and quarter annualized little over 4% was very strong performance while some of the larger started to decline.

Erika Najarian -- Bank of America -- Analyst

Got it. And then just a follow-up on the color that you provided with regards to margin expectations going forward. We are hearing you loud and clear on the deposit side. I'm wondering if you could give us a sense on what spreads are looking like right now and whether or not sort of the lower burden as a non-SIFI changes your strategy about securities reinvestment.

Paul Burdiss -- Chief Financial Officer

Erika, this is Paul, there's a lot in there. Deposit base, we talked about, maybe don't need to get into that too much more. Loan spreads have been generally behaving, keeping in mind sort of where we operate and your conversation about kind of the average size of loans, that has impacted our ability to defend loan spreads, although I will see the composition of the portfolio has changed a little bit.

So for example, if you look at our portfolio from a year ago, we had more commercial real estate relative to residential mortgage than we do today. And the spread, as you know, kind of the spreads in that just two examples or maybe one combination example, but the spread is very different among those products, residential mortgage having a tighter spread. So while we're -- generally on a deal by deal basis, we've had some success maintaining and defending spread, we are seeing a slightly different composition of the portfolio, which is impacting overall loan spreads.

As it relates to the size of the investment portfolio. while it's true that we're no longer subject to the LCR, our biggest constraint really is our liquidity stress-testing as opposed to the LCR. So I'm not forecasting or we do not predict a big change in the composition of our investment portfolio because that liquidity stress-testing continues to be a really important part of the way we're managing our balance sheet.

So overall, as I said in my prepared remarks, we've had, if I can use the term, a pretty decent relative to your expectations. a pretty decent net interest margin beta. As you know, we've got a slide deck in the -- back in the appendix to provide a little more detail on the interest sensitivity, particularly the asset side of the book relative to market rates.

And our performance has been very much in line with our modeling and our expectation. Looking ahead, again, considering deposit beta is another thing, maybe we don't squeeze as many basis points out of the fed tightening as we have over the past kind of year and a half. But we expect to continue to -- for the modest margin expansion as the fed reserve continues to raise rates.

Erika Najarian -- Bank of America -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Ken Usdin of Jefferies. Your line is open.

Ken Usdin -- Jefferies -- Analyst

Thanks, good afternoon guys. Just a follow-up on the deposit side. I noticed that you had good year-over-year growth 3% and non-interest bearings were actually quite stable. So even amid this deposit pricing pressure we're seeing, can you just give us a little color in terms of where you're getting that incremental growth from and your continued belief in the stability especially of that non-interest-bearing where we're starting to see that really come down in a lot of other peers. Thanks.

Paul Burdiss -- Chief Financial Officer

Yeah, Ken, this is Paul. I will start and Harris and Scott can build in. If you go back to our Investor Day, we talked a lot about the composition of our deposit book and the fact that it's very granular, very operating in nature. This is if you think about deposits in terms of operating deposits and kind of quote-unquote investment deposits, our proportion of those operating deposits is actually pretty high. All that being said, the stickiness of our DDA has actually been sort of a pleasant surprise for me. I don't want that to sound negative, but our interest rate risk modeling actually anticipates that we will have more migration out of DDA than we have experienced.

But I think the fact that our DDA has been so sticky is really an indication of the strength of the deposit base and the kind of overall strength that it provides for the organization.

Ken Usdin -- Jefferies -- Analyst

And as a follow-up, Paul --

Scott McLean -- President and Chief Operating Officer

Hi, this is Scott. I would just add to that, that our ratio of non-interest-bearing deposits to total deposits for decades, several decades has been almost industry-leading. We're sitting at 45% today, most of our peers are in the kind of a mid-to-low 30s, high 20s. But even before 2008, our relationship of non-interest-bearing to total deposits was very favorable and it's for the reasons that Paul described.

But just to add some punctuation to that, about 65% of our $24 billion in non-interest-bearing deposits in some way touch our treasury management products, which just reinforces the point that these are operating balances of these businesses and they're generally smaller businesses, and what I'd suggest is that generally these are smaller companies and they are focused totally on how to enhance their gross profit margins, which may be 15% to 30% as opposed to how to get an extra 25 basis points out of their operating account.

Ken Usdin -- Jefferies -- Analyst

Makes sense. Thanks, Scott. And just as a follow-up to that, can you detail just is it the consumer side versus the corporate that's been growing because there's also been a lot of talk about the stickiness of consumer, not as much of a focus for you guys, but in a big part of the bank it is. So what side of the Bank is growing when it comes to deposits for you guys? Thanks.

Paul Burdiss -- Chief Financial Officer

Yes, it's been mostly non-personal. So it's commercial deposits.

Ken Usdin -- Jefferies -- Analyst

Okay, got it. So, it feeds to Scott's point. Thanks for that.

Operator

Thank you. Our next question comes from the line of Steven Alexopoulos of JP Morgan. Your line is open.

Steven Alexopoulos -- JP Morgan -- Analyst

Hi, everybody. I want to start for Paul on expenses. You guys seem to be running at the low end of the 2% to 3% range that you previously talked about, do you think that's sustainable going forward?

Paul Burdiss -- Chief Financial Officer

Look we are and have been really investing in our business and I'm really proud that the organization has really come together and we are creating opportunities to change, if you will, kind of the composition of the way that we're investing in the business. So we're saving money in spots and we're investing money in other spots. As we look ahead into kind of 2019 and beyond, we're right at the middle of our budgeting process, we're very focused on expense control, we are very focused on positive operating leverage. And so, yeah, the near term, I absolutely think it's sustainable.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay. Great. And then just one other one for Harris. Given the valuation of Zions' stock here and now that you're officially out of CCAR, do you have an appetite, it's you with the Board, you're the the Chairman of the Board obviously, to accelerate buybacks to get to the targets more quickly?

Harris Simmons -- Chairman & Chief Executive Officer

Yeah, I do. I'm vote out of -- or 11 rather. So I -- I don't want to front-run that conversation. But I think that I mean clearly valuation is one of the things we need to think about. It's a silver lining to what I'm seeing in stock market these days is the fact we've got a lot of capital to deal with. So I tell I'm thinking about.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay, great. Thanks for the color.

Operator

Thank you. Our next question comes from the line of Jennifer Demba of SunTrust. Your line is open.

Jennifer Demba -- SunTrust -- Analyst

Thank you. Can you hear me?

Harris Simmons -- Chairman & Chief Executive Officer

Yeah. Hi, Jennifer.

Jennifer Demba -- SunTrust -- Analyst

Hi. Harris, just wondering if you can talk about the level of lending competition you're seeing and kind of compare and contrast that (inaudible) to the last downturn.

Harris Simmons -- Chairman & Chief Executive Officer

Well, I think there's a whole lot of -- still a lot of liquidity out there, a lot of cash and it's very competitive earning assets. I don't know quite how to compare it to before the last downturn. I mean, that was I think clearly more housing kind of drove, a lot of demand for developer credit. And so -- and I think there's actually quite a lot of discipline today around that, not only here, but generally I think we see around the industry.

So I think in that respect it is probably fundamentally different. But you are seeing a lot of -- there's been a lot of growth, you see it's not quite so much where we play is in leverage lending, but clearly big players here have seen a lot of competitive pressure from hedge funds and loan funds and others that are I think should be maybe of some concern in terms of kind of where the next problems could pop up.

Ed Schreiber -- Chief Risk Officer

This is Ed Schreiber. I wanted to supplement some of Harris' comments, but more importantly look at our book when you really look at what we've done over the last few years, the balance sheet has been simplified. But more importantly on the credit side, with Michael Morris, the Chief Credit Officer and his staff, we've really designed a program here that you've seen and exemplified to the oil and gas cycle that we are really a big fan about positioning the company as a positive outlier through the next cycle. So if you look at -- really looking at any forecast and I think the way we position the Company from an asset quality perspective is that we're in good shape and we would be a positive outlier to this next cycle.

Jennifer Demba -- SunTrust -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from the line of Geoffrey Elliott of Autonomous Research. Your line is open.

Geoffrey Elliott -- Autonomous Research -- Analyst

Hello, thank you for taking the question. First, just a little clarification. I think in the prepared remarks you touched on the impact of the simplification of the corporate structure on expenses. Can you remind us what the benefit is you expect from that, how do you quantify that?

Paul Burdiss -- Chief Financial Officer

Yeah, I didn't specifically quantify it Geoff, this is Paul. I didn't specifically quantify it, but what I did say effectively was that we have seen some escalation or elevation in the professional services line over the course of the last kind of near-term and that we would expect that -- maybe the run rate of that to be a little bit lower. That was kind of a key -- I think the key part of the prepared remarks, I think to deal with what you're describing. Keep in mind that we did not have a lot that happened at the holding company.

Nearly all of the assets and essentially all of the operations and all the employees have been at the Bank level for some time. So while it does create organizational simplification, my expectation is not that we would see a kind of step-wise change in our operating kind of expenses.

Geoffrey Elliott -- Autonomous Research -- Analyst

And then on the deposit side, I guess you're somewhat unusual in operating separate brands and separate banks, if you like, in different geographies. How much flexibility is that giving you to adjust pricing in different markets and how much variation you are seeing competition if you kind of compare the main markets you are in?

Harris Simmons -- Chairman & Chief Executive Officer

Well, we price locally, the pricing decisions about deposits are made by local management teams and they certainly have incentives to try to minimize their funding costs. So, we have internal transfer pricing as every larger bank would have to compensate them for the funds that they raising. They're trying to make spread on both sides of the balance sheet. I don't know what more I could --

Paul Burdiss -- Chief Financial Officer

Yeah. this is Paul. If I could, I would probably ascribe more value to sort of the local nature of the banks as opposed to the local brand of the banks. Your question was really around the brand, but I think the value is really around the way we run in the autonomy of the local groups and being able to react specifically to what the client needs at a very, very local level I think is providing a lot of flexibility for us as we're thinking about deposit pricing.

Geoffrey Elliott -- Autonomous Research -- Analyst

Great, thanks very much.

Operator

Thank you. Our next question comes from the line of Christopher Spahr of Wells Fargo. Your line is open.

Christopher Spahr -- Wells Fargo -- Analyst

Thanks for taking my question. With high single-digit PPNR, how low do you think the efficiency ratio can go?

Scott McLean -- President and Chief Operating Officer

Not it sounds like a game of limbo.

Paul Burdiss -- Chief Financial Officer

I'll just jump in here. As I said we're really focused not necessarily on efficiency ratio as sort of the end goal. We are really focused on positive operating leverage. And if we can continue to achieve that, we are going to continue to see very strong PPNR growth and continue to grind that efficiency ratio lower.

Harris Simmons -- Chairman & Chief Executive Officer

I would make one observation because we've talked a lot about deposit base and loan mix and it is a little different than you find in some of our peers and it is a little more expensive to operate and we hope that shows up in the form of -- the kind of deposit performance we shown here, you're seeing right now, but that -- so that probably creates a little bit of drag, but I think nevertheless we are -- my hope would be that we find ourselves getting down into the kind of the mid 50s over the next couple of years, that would be just kind of generally my aspiration.

Scott McLean -- President and Chief Operating Officer

I would just add to that, this is Scott, that going back to Steven's question about the expense growth rate of 2% to 3%. I mean, basically we are building our plan around that expense trajectory that we've talked about and that involves investing actively in the businesses that we're trying to grow and investing actively in technology. And so we're not just sitting back cutting costs everywhere and not investing in the future. We've been investing heavily in the future over the last three or four years, both in terms of technology and in terms of businesses we're trying to grow with hiring new bankers etc., etc.

Christopher Spahr -- Wells Fargo -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Steve Moss of B. Riley FBR. Your line is open.

Steve Moss -- B. Riley FBR -- Analyst

Good afternoon. On the loan growth front with particular on resi and also on oil and gas, just wondering what are your thoughts for growth going forward in both those categories and also what are you retaining with regard to resi mortgages these days.

Scott McLean -- President and Chief Operating Officer

(multiple speakers) Well, I was just going to say, our mortgage business is very different than the mortgage business you would find at the major mortgage lenders in the country. Our business is basically a private banking business, although we do have a very broad consumer business also, but it basically is -- about 50% of our mortgages are for small business owners and I think they're going to be -- and they're generally not first time home buyers, so our mortgage volume is down a little bit this year versus last year, but not nearly like the rest of the industry that you read about in the paper every day.

So, we're pretty bullish on our mortgage business and we retained about, Paul, I think it's about 60%, 70% of what we originate, we're basically retaining everything under 10 years. And we're about to introduce a new online digital application process that we think is going to be a real game changer for us. We're not a big player, but a game changer for us. And that's in pilot right now, it will be rolling out next year.

And on the energy book, it's about $2.2 billion in outstandings right now, it got down to about $2 billion, went from $3 billion to $2 billion, that was the contraction. Just in the last couple of quarters it's grown back to about $2.2 billion. And I think 10% to 15% kind of growth in that portfolio would not be unusual at all. It's basically reserve base lending and midstream. There is virtually no growth coming from our services business. And we have contracted -- we've consciously held back in that area.

Steve Moss -- B. Riley FBR -- Analyst

Okay, that's helpful. And then, with regard to securities balances here, I know on EOP basis, they're flat. Just wondering what are your expectations for those balances going forward.

Paul Burdiss -- Chief Financial Officer

This is Paul. I'm not expecting a big change in the size or the composition, although that may change as deposit growth ebbs and flows and loan growth ebbs and flows. But generally speaking I expect that portfolio to remain relatively stable, its overall size.

Steve Moss -- B. Riley FBR -- Analyst

All right, thank you very much.

Operator

Thanks you. Our next question comes from the line of Marty Mosby of Vining Sparks. Your line is open.

Marty Mosby -- Vining Sparks -- Analyst

Thanks. I have three quick questions. One is the warrants that were outstanding were causing some dilution that the stock price was going up, the share count dropped pretty precipitously this quarter, was some of that the benefit of kind of reversing out of some of that impact?

Harris Simmons -- Chairman & Chief Executive Officer

Some of that -- this quarter I think if you look at average share price quarter-over-quarter, even though it maybe went up and went down, I don't know that the average is a whole lot different. I think a lot of the positive impact you are seeing there is the result of the share repurchase activity.

Paul Burdiss -- Chief Financial Officer

I think in (inaudible) it's about 1.5 million shares is all the difference that you read, but obviously we'll have to see what the stock price does in the fourth quarter here, but if it stays where it is, it will be a more substantial improvement on diluted shares.

Marty Mosby -- Vining Sparks -- Analyst

Okay. And then, Paul, you were talking about the FDIC costs and I was kind of hearing that because you had consolidated and you've done some debt that maybe your FDIC costs are just going to go down without kind of the surcharge going away. Could you just maybe explain just the number, what it was this quarter, next quarter, and what do you expect it to be kind of as it rolls forward?

Paul Burdiss -- Chief Financial Officer

Yeah, Marty. I probably wasn't as it articulated, I could have been as I went through that part of the prepared remarks, but you're right, there are couple of things impacting FDIC this quarter. The key one is we had sort of this incremental accrual of $3.7 million that shows up in the third quarter, but it was kind of a, if I can use the term, sort of a one-time thing, it's isolated event, it's not going to happen again next quarter.

The other aspect is we issued unsecured debt in the third quarter and then we had a little bit of debt that was holding company notes that have now been assumed by the Bank. So as you know. unsecured debt, it gets favorable very favorable treatment under the FDIC calculator. And so there is also going to be an incremental benefit of that and that's probably going to be close to a $1 million a quarter. The other big one of course is the FDIC surcharge, that will affect us as it affects everyone else. And just as a reminder, for us that FDIC surcharge is a little under $6 million a quarter.

Marty Mosby -- Vining Sparks -- Analyst

Perfect. And then the last quick question is, your biggest portfolio is C&I, excluding oil and gas, and it's declining, so it's tough to see the momentum building in the portfolio without one still kind of seeing a modest decline. Almost all of that decline, back on page 20, is coming out of Amegy. So I was just curious what was the loan type or the decisioning around because it was a big number in this quarter, but it was actually it looks like it's been consistent over the past several quarters. So just curious what was causing that decline.

Paul Burdiss -- Chief Financial Officer

So, I'll start and then I'll ask Scott and Michael and whoever else want to make a comment. Marty, when thinking about C&I, I would also include owner occupied in that. I think owner occupied is a really important aspect. It just, as you know, happens to be secured by commercial real estate, but it's really sort of a commercial loan, disguised the commercial real estate loan because it's owner occupied, but -- if you combine C&I and owner occupied, there actually had been growth over the course of the last year. So, Scott or Michael, would you like to add anything of that?

Scott McLean -- President and Chief Operating Officer

No. I would just -- I would echo what you said, but I would also point to Amegy's growth in owner -occupied. So there has been growth in the Texas market in C&I and we always include owner occupied under the C&I umbrella as Paul mentioned.

Michael Morris -- Chief Credit Officer

And the only thing I'd add to that is that, that portfolio is -- it has more exposure to larger transactions than most of our other portfolios. So in the C&I space, so the volatility, we talked about earlier in the call, Amegy is a place you will definitely see it in that C&I non-oil and gas.

Marty Mosby -- Vining Sparks -- Analyst

All right, thanks.

Operator

Thank you. Our next question comes from the line of (inaudible). Your line is open.

Unidentified Participant -- -- Analyst

Thank you, guys. Just sort of had a bang-up quarter. I'm just sort of like I mean -- outstanding quarter. I'm looking at your slides from your Investor Day and your main bank a little less than the third of total Bank assets. Are you finding that there is some kind of fall out. I know historically when you do these consolidations like regions bid and (inaudible), it takes several quarters for those Directors to sort of come back to the family and the salary mechanism of individual banks versus one bank all working out. And I mean can you you make these statements about why you did so well in the quarter? So, really outstanding, but yes (Technical Difficulty).

Harris Simmons -- Chairman & Chief Executive Officer

You broke up in the last phrase.

Unidentified Participant -- -- Analyst

And why did -- if I were to be a betting man, I would have bet that the stock in the last quarter would have currently gone up from your phenomenal numbers. I mean, you're knocking the socks off the ROA and the ROE but there is such tremendous pressure -- downward pressure stock from this consolidation. Do you have any explanation on that?

Harris Simmons -- Chairman & Chief Executive Officer

Well, I don't know if it was from the consolidation. I would say it's tough enough to manage your bank without having to manage the market.

Unidentified Participant -- -- Analyst

I understand. I know and it's a guess. But are you seeing any fallout from the individual that were part of these individual banks that you all put together?

Harris Simmons -- Chairman & Chief Executive Officer

I think fundamentally the answer is, no. We had, we have -- I mean we've got enough employees on any given day. We got people get picked off by others, we sometimes pick up other people as well. But there's been very stable, (inaudible) the management ranks of the company has been very stable.

Unidentified Participant -- -- Analyst

And so they are paid the same way and the incentives are the same?

Harris Simmons -- Chairman & Chief Executive Officer

Yeah, fundamentally there hasn't been a lot of change there. All the front -- the customer facing employees in this Company fundamentally, almost all of them, not totally, but most all of them report to these local market CEOs, but we call these affiliates CEOs. And that group has been extremely stable.

So, I don't think that that's -- we just haven't seen the kinds of issues you see going through this -- the consolidation was not a huge deal for the customer-facing people. It's had some impact certainly in kind of some back office functions, places like that, but the revenue drivers, we tried to be pretty careful about those.

James Abbott -- Director-Investor Relations

In fact, this is James, I'll just jump in here. We've got just a couple of minutes left. And I'd say -- of the Harris, you've said many times in the conference appearances, we made this decision to consolidate because of the feedback we're getting from the front-line employees to helping their lives simpler. Let's just take -- we are not going to be able to make everybody's questions and it looks like because of time, but let's just take two more questions and we'll go lightening around for these last two and then we'll be at our time limit.

Operator

Thank you. Our next question comes from the line of Lana Chan of BMO Capital Markets. Your line is open.

Lana Chan -- BMO Capital Markets -- Analyst

Hi, good afternoon. Just to follow up on the capital return discussion, could you talk about your appetite for acquisitions whether whole bank or loan portfolios or business lines?

Harris Simmons -- Chairman & Chief Executive Officer

Well, I think we've said for some time, we never say never. It's not something that it is not a strategic priority of any sense. We will be opportunistic I guess if something was a great fit. But it's not something that we spend a lot of time thinking about.

Operator

Thank you. Our next question comes from Brock Vandervliet of UBS. Your line is open.

Brock Vandervliet -- UBS -- Analyst

Thanks very much, I had of jump off for a while. Harris, I thought I heard you mention 55 or mid 50s I guess efficiency ratio, it doesn't seem like that would be necessarily in the near term anyway top line-driven. Are you feeling better about the scope for expense saves here on the back of some of the charter consolidation or vis-a-vis your improvement in terms of your regulatory situation?

Harris Simmons -- Chairman & Chief Executive Officer

Well, when I just talk about mid-50s. I used the word aspirational and I'm not suggesting that's going to happen in the next few quarters. But I think I do think that that's achievable with kind of our business model and with -- if the economy continues to remain reasonably healthy, I think that -- I do think that that's -- that we will continue to see revenue growth driven by kind of reasonable loan growth. I think we worry a little in the short run about competitive pressures on some of the larger deals as we mentioned. But that's not fundamentally what our major part of this franchise is. And so I think over time as we continue to focus on what I think our sweet spot is, I think it's not an unreasonable kind of goal.

Brock Vandervliet -- UBS -- Analyst

Appreciate the color. Thank you.

James Abbott -- Director-Investor Relations

Okay. This is James Abbott. We appreciate -- thank you Latif for hosting the question-and-answer session. Thank you all for joining the call today. Please don't hesitate to contact me if you have additional questions or comments. My information is on the front of the press release. We look forward to seeing many of you at industry conferences during the balance of the year. And thank you again for your participation and we wish you a good evening.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.

Duration: 62 minutes

Call participants:

James Abbott -- Director-Investor Relations

Harris Simmons -- Chairman & Chief Executive Officer

Paul Burdiss -- Chief Financial Officer

Dave Rochester -- Deutsche Bank -- Analyst

John Pancari -- Evercore -- Analyst

Michael Morris -- Chief Credit Officer

Scott McLean -- President and Chief Operating Officer

Ken Zerbe -- Morgan Stanley -- Analyst

Erika Najarian -- Bank of America -- Analyst

Ken Usdin -- Jefferies -- Analyst

Steven Alexopoulos -- JP Morgan -- Analyst

Jennifer Demba -- SunTrust -- Analyst

Ed Schreiber -- Chief Risk Officer

Geoffrey Elliott -- Autonomous Research -- Analyst

Christopher Spahr -- Wells Fargo -- Analyst

Steve Moss -- B. Riley FBR -- Analyst

Marty Mosby -- Vining Sparks -- Analyst

Unidentified Participant -- -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Brock Vandervliet -- UBS -- Analyst

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