Zions Bancorporation, National Association (ZION) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Zions Bancorporation First Quarter 2016 Earnings Webcast. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference call over to James Abbott, Director of Investor Relations. Please go ahead.

Thank you, Abigail, and good evening. We welcome you to this conference call to discuss our 2016 first quarter earnings. Our primary participants today will be Harris Simmons, Chairman and Chief Executive Officer; Scott McLean, President and Chief Operating Officer; and Paul Burdiss, Chief Financial Officer. 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 in 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. We intend to limit the length of this call to one hour, which will include a question-and-answer section. 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 now turn the time over to Harris Simmons.

Thank you very much, James, and we want to welcome all of you to our call this afternoon to discuss our first quarter results. I'm going to talk about some information on the accompanying slides, just some opening comments here. On Slide 3 are some highlights for the quarter. We are pleased with the continued trend of strong increases in pre-provision net revenue, which is a result of solid net interest income growth and adjusted net interest expense levels that are in line with our stated expense initiatives. Another item that appears to be an emerging trend in the last six months is stronger loan growth. In the first quarter, loans increased at an annualized rate of 7.6%, accelerating from the prior quarter's rate of 5.3%. It was one of the best first quarter growth rates Zions has posted in the last decade. We achieved positive operating leverage for the third consecutive quarter and we're tracking well on the efficiency initiative that we announced last summer, with the efficiency ratio falling to 68.5%. Although there will be much discussion about energy lending on this call, which only comprises about 6% of our loan portfolio, the other 94% of our loan portfolio continues to perform extremely well, and energy is a manageable situation for us. Of note, although the earnings per share only increased $0.01 per share over the prior year period, the change in the provision for credit losses between those two quarters is equal to about $0.12 per share. So, although energy concerns will be with us for 2016, that effect is fairly transitory compared to the improving trend in underlying financial performance over the course of the last year. If we turn to Slide 4, our pre-provision net revenue has improved by 21% over the past year. This positive operating leverage has been driven by holding adjusted non-interest expense growth of 2.5%, while adjusted revenue has increased nearly 8% over the same period. We expect to continue to post continued strong momentum in this area over the next couple of years. On Slide 5 we display our loans and deposits. Relative to the fourth quarter we experienced an acceleration in the first quarter with loans held for investment increasing, as previously noted, 7.6% annualized, after posting a healthy 5.3% annualized growth rate in the prior quarter. We remain pleased with growth in areas that are targeted for growth, specifically non-energy commercial and industrial and consumer loans. Deposits declined modestly, about 1%, from the prior quarter, which is somewhat common for a first quarter for us, and the year-over-year improvement of 3.7% is similar to the performance in first quarters over the, approximately, the last decade. Moving to Slide 6, we're well on our way to achieving another key measure of our commitment to shareholders, which is to reduce the efficiency ratio to 66% or better for the full year 2016. We're encouraged with the improvement from the prior quarter to 68.5% in the first quarter, which included a couple of significant seasonal expense items. Advancing to Slide 7, excluding energy loans, credit quality is really solid across the Company by various loan types and geographies. Total classified loans increased to 3.7% from 3.4% in the prior quarter, but aside from energy, classified loans declined slightly to 2% of total loans. Non-performing assets, expressed as a percentage of loans and OREO, increased to 1.3% from 0.9% in the prior quarter. However, if one excludes energy credits, the non-performing asset to loan ratio is only 0.7%. On the topic of losses, substantially all the losses in the first quarter were attributable to energy loans. We'll have some further discussion on that later. But the takeaway here is that the energy situation is quite manageable and the overall provision and loss rates remain in line with industry averages. On Slide 8, this is a repeat of a slide we produced for our Investor Day back in February, but it helps to visually show the various initiatives that we're tracking to help improve the operating performance of the Company. I'm pleased with the progress made in several of these areas in a relatively short period of time, and most initiatives are tracking to the targeted budgets and timelines. Similarly, Slide 9 has a summary of the key financial performance metrics that we are targeting and we feel very good about the progress we've made and expect that, with continued discipline, that we'll meet or exceed these goals. With that overview, I'll turn the call over to Paul Burdiss, our Chief Financial Officer, to review the financial results.

Thank you, Harris. I'll begin on Slide 10. For the first quarter of 2016, Zions reported net earnings to common shareholders of $79 million or $0.38 per share. Relative to the fourth quarter, net interest income increased about $4 million. Adjusted for fourth quarter recoveries of interest income and income from loans purchased from the FDIC, net interest income increased $17 million or about 4% on a linked-quarter basis. Customer related fees, which is the bulk of non-interest income, were flat to the fourth quarter and improved about 7% from the first quarter of 2015. At just less than $400 million, non-interest expense was slightly lower in the first quarter when compared to the fourth quarter. However, there were several notable items impacting both quarters. First, on salaries and employee benefits. The first quarter included $6 million related to equity grants to retirement eligible employees and $7 million in seasonal payroll taxes, while the fourth quarter included an incentive compensation accrual reversal of $5 million. Additionally, as noted on the fourth quarter earnings call, fourth quarter non-interest expenses included elevated levels of FDIC loss-sharing expense and an elevated legal accrual. We continue to be encouraged by the efforts of our teammates to manage our costs of doing business, our collective efforts allow Zions to remain on track toward our goal of adjusted non-interest expenses at less than $1.6 billion for 2016. Turning to the provision for loan and lease losses, as we conveyed at February's Investor Day, we increased our allowance for credit losses in the first quarter relative to the fourth quarter, reflective of continued stress in our oil and gas portfolio. As we progressed through 2016, we currently expect quarterly provisions to be roughly consistent with first quarter results. A key driver of this outlook is overall market conditions, including the level of volatility of energy prices. Scott will provide more detail on our energy portfolio in just a moment. Slide 11 outlines our recent trend in net interest income, which continued to demonstrate strength in the first quarter. On a year-over-year basis, net interest income was about 8.5% -- was up about 8.5% when compared to the first quarter of 2015, driven by growth in loans and in the investment portfolio. On a linked-quarter basis, net interest income was up at an annualized rate of just under 4%. When controlling [ph] for the $13 million of elevated FDIC related revenues and interest income recoveries reported in the fourth quarter of 2015. The linked-quarter growth rate is closer to 15%. This recent rate of growth in net interest income, while not sustainable over the long term, reflects our focus on improving the profitability of our balance sheet and has been significantly helped by strong loan growth, the movement of cash, the high-quality liquid investments, the maturities of higher-cost wholesale funds, and December's federal funds target rate increase. Looking ahead, net interest income is expected to increase throughout 2016 as loan growth and active management of the investment portfolio impact the size and mix of earning assets. Importantly, our performance objectives assumed a 25-basis-point increase in the federal funds target rate in December of 2016. We remain positioned to benefit from rising rates as shown in the box at the bottom right of Slide 11. Slide 12 provides additional information regarding our active management of the investment portfolio. We continue to add high-quality liquid securities to our investment portfolio in the first quarter, reflecting the need for a permanent, high-quality, liquid asset position in order to manage our balance sheet liquidity more effectively and in light of the liquidity coverage ratio rules. Our efforts to build out the investment portfolio are expected to add revenue in baseline and downside economic environments when compared to holding liquidity in the form of cash. During the first quarter, the available-for-sale investment portfolio increased $1.3 billion on average when compared to the fourth quarter. This average balanced growth was influenced by the $1.1 billion point-to-point increase in available-for-sale securities, as well as the continued impact of purchases we made in the prior quarter. We continue to exercise caution with respect to the impact on overall balance sheet sensitivity, interest rate sensitivity, as we purchased fixed-rate investments, and with respect to duration extension risk inherent in the investment [ph] portfolio. The securities we are adding are relatively short in duration, just over three years. The duration of the entire securities portfolio is about 2.6 years today. And if rates were to rise 200 basis points across the curve, our models indicate that the duration of the portfolio would extend only slightly to 3.1 years. On Page 13 we break down year-over-year loan growth in a slightly different format than we have utilized previously. The size of the bubbles on this chart represents loan portfolio size, while the position against the vertical axis represents year-over-year growth. As shown, Zions is generally growing where we want to grow, while owner-occupied C&I and residential mortgage remain opportunities for additional growth. Compared to the prior quarter, period-end loans grew 7% on an annualized basis, with particular strength in C&I and term CRE. It is important to note that we have accomplished this growth while maintaining our underwriting standards. There are four loan classes that have been in decline this past year or more, and the most substantial rate of decline are in the national real estate portfolio and the energy portfolio, each declining approximately 16% from the prior year-ago period. The national real estate portfolio represents about 5% of loans and the attrition here has resulted in a drag of just over 1 percentage point of the overall growth of a loan portfolio during the past year. We have indicated that we expected the rate of attrition to taper, and that is beginning to happen, recently declining an annualized $276 million as compared to the year-over-year decline of $215 million. On energy, as we move through the spring redetermination on upstream energy products [ph], we expect pay-downs due to reduced borrowing basis. To summarize, our outlook for loan growth for the next 12 months is for an increasing portfolio, which should be in the mid-single-digit rate of growth range. Another key component of net interest income, which is the rate or yields of the portfolio and loan production, can be found on Slide 14. The slide breaks down key components of our net interest margin. The top line is loan yield, which declined 10 basis points from the prior quarter to average 4.14%. As described in the press release, the prior-quarter container recovery of interest income of about $8 million included in the fourth quarter loan yield, as well as elevated income from FDIC supported loans. Excluding these two factors, the yield on the loan portfolio increased somewhat from the prior quarter, lifted by the increase in benchmark rates. However, older loans that were booked at wider spreads are regularly maturing and continued to place slight pressure on loan yields. The securities portfolio improved slightly this quarter, largely due to the changing composition of the portfolio as we add new bonds within our guidelines for duration and extension risk, as well as the increased rates that affected our floating rate securities. At the bottom of the chart is a line depicting our cost of funds as a percentage of earning assets, which continues to be quite low and was stable relative to the prior quarter. The net interest margin increased to 3.35% in the first quarter, a 12-basis-point increase from the prior quarter, primarily driven by the ongoing shift in earning asset composition to a higher concentration of loans and securities and a lower concentration of cash. With that, I'll turn the call over to Scott to discuss our fee income initiative, as well as provide additional detail about our energy portfolio. Scott?

Thank you, Paul. On Slide 15 we're pleased to report the continued strength in fee income growth. Because of the seasonality of the results, we think the year-over-year comparison is more relevant. Through the hard work of our employees, we were able to increase customer-related fee income by 7% over the year-ago period. These results have been adjusted to reflect the reclassification of the expense associated with rewards programs such as cash-back from the non-interest expense category to net against our card revenue, which was done to align our accounting approach to be more comparable to the majority of banks within the industry. The areas experiencing the most significant growth in fee -- in customer fees included loan fees, which increased nearly $4 million or 38% from the year-ago period, to equal [ph] $14 million in the first quarter of 2016. Bank card fees increased more than $2 million or 17% to equal nearly $18 million. Treasury management is our largest category of customer related fee income, which increased 3% from the year-ago period to equal about $35 million. Relative to the prior quarter, we experienced an increase in dividends, although there was a valuation adjustment to one of our investments that adversely affected dividends by about $2 million. Transitioning to energy now, obviously is of significant concern to many investors and it's an all-hands-on-deck effort here at Zions to do as much as possible obviously to protect the value of both the principal and the interest of our loans at the same time demonstrating our long-term commitment to our customers. Before we dive in to the numbers though, let me first address something that is the subject of much discussion on the earnings conference calls of other banks with energy exposure, the Shared National Credit Exam results. As you know, this is a regulatory exam and is subject to disclosure restrictions. We have incorporated the vast majority of the results of the Shared National Credit Exam in our first quarter results. And we've incorporated all of the results, the financial results of the quarter would not be materially different. Our grading methodology has been and continues to be consistent with regulatory guidance. As you may know, the Shared National Credit Exam is not final. Some grades of loans where we are a participant bank are in their appeal period. Obviously we downgrade credits based upon the Shared National Credit results where applicable. But if the Shared National Credit results are better than our internal grade, we leave the internal grade in place. So, as investors looking at our financial condition, you're getting a very conservative view of the portfolio. Let me move now to Slide 16. As you can see, our energy loan outstandings, and also from the material in the press release, increased $21 million from the prior quarter, with declines in the services portfolio, offset by some new underwriting and upstream, midstream and downstream, and a handful of defensive draws. Of course, energy loan commitments and balances are down substantially from a year-ago period and we do expect further attrition as we move through the borrowing base redetermination process. We're about 40% through the spring re-determination and we anticipate the average borrowing base of a client to decline by about 12% to 15% relative to the fall redetermination. Also on Slide 16, as you can see on the right side of the slide and the chart on Page 4 of the press release, classified energy loan balances increased by $194 million from the prior quarter to equal 27% of outstanding balances, and non-accrual loans increased by $220 million from the prior quarter to equal 10.8% of loan balances. The increase in both categories was evenly weighted between upstream loans and services: loans to energy services companies. The primary driver of these increases had to do with the severity of the commodity price volatility early in the quarter, a flattening of the NYMEX strip, and a continued uncertain outlook. Turning to Slide 17, we are displaying some new information here to help investors better understand the nature of our unfunded oil and gas commitments. We have just under $400 million of unfunded loan commitments in the criticize category or just under 20% of total commitments. However, and this is very important, about one-half of that $400 million is unavailable to the borrower for various reasons, including borrowing-based restrictions, covenant breaches, or anti-hoarding provisions. During the quarter we experienced six loans that did draw up on their lines, equaling about $55 million of balances, again not something we're happy to see but it is manageable, and as a senior secured lender, we feel good about our loss severity in the event that there is a default on any of these loans. Moving on to Slide 18, it may be helpful to understand that the vast majority of our criticized and classified energy loans, and even non-accrual loans, are still current on their payments. Only 9% of non-accrual loans are past due. Moving to Slide 19, as we all know, in the first quarter there was significant oil and gas price volatility. This volatility, combined with continuing rigorous credit-by-credit review and our top-down regression models, is leaving us to update our outlook for energy loan losses. More specifically, if oil were to hover in the mid-30s area, we currently expect losses in 2016 to be in the $100 million area. Recall, our prior outlook was for a range of $75 million to $100 million for the year. Clearly, prices today are above the mid-$30 range level. However, we always want to be prepared for lower prices. During the second quarter we will be closely monitoring the results of the spring reserve-based redetermination and the actions being taken by our private equity sponsors to better inform our full-year energy loss outlook. We continue to build our energy loss reserve to a level of $214 million, or more than 8% of energy balances. This is a strong reserve, particularly relative to various measures of problem loans and loss expectations. I'm sure we'll have questions about energy lending, but let me step back and look at the objectives we're working towards as a Company. On Slide 20, this is a summary of several items we articulated at our recent Investor Day. We are fully committed to achieving positive operating leverage. And I think at this point, with more than 20% year-over-year growth and PPNR [ph], we can declare that our actions are making a very noticeable difference. We remain committed to the substantial simplification of all operational processes and the upgrading of our technology systems, which will position us with perhaps the most modern loan, deposit, customer information infrastructure in the United States. When complete, this investment will significantly simplify our back-office, provide data on a real-time basis to bankers and customers, improve our new product time to market, and many additional advantages. Regarding the capital with which shareholders have entrusted us, we are targeting much more substantial returns on capital than what we -- than what can be seen today. And we are tracking well against these goals as discussed earlier. Regarding returns of capital, it is premature to discuss capital returns opportunities as we are awaiting the results of the 2016 CCAR. However, we aspire to have a much higher return of capital than experienced in the recent past. Finally, we're absolutely committed to our history of doing business with a local community bank approach. Perhaps the best acknowledgement that our commitment to doing business locally really is a strategic differentiator is the superlative results we received again this year in the nationwide survey conducted by Greenwich Research. As you know, we received more awards for the highest level of national distinction than any other bank in the United States. And we are only one of four banks that have performed at industry-leading levels since the initiation of this survey. Paul, with that, I'll turn the call back over to you to conclude.

Thanks, Scott. Slide 22 depicts our outlook for the next 12 months relative to the most recent quarter. We are adjusting our loan outlook to increasing, due primarily to factors already discussed in earlier comments. We expect net interest income to increase from the first quarter level as continued growth of loans and investment securities offset possible pressure on loan pricing. Our outlook does not include the effect of the any future rate increases by the Federal Reserve, although we expect to benefit to an annual net interest income of about $75 million to $135 million for each 100-basis-point increase in rates. That's particularly focused on the short end of the curve. We expect a quarterly provision for loan lease losses in 2016 that is roughly consistent with the provision taken in the first quarter of 2016, assuming current market conditions. This incorporates the maintenance of a strong reserve ratio on energy loans, although we expect energy loan balances to continue the declining trend. We expect that non-interest income, excluding dividends and securities gains and losses will increase slightly to moderately as we continue to focus heavily on this area. As stated previously, we have committed to holding non-interest expenses to less than $1.6 billion for 2016 excluding severance and restructuring expenses. The effective tax rate for the quarter was lower than the normal quarterly run rate, which was facilitated in part from the consolidation of our banking charters. We expect our effective tax rate to be in the range of 34% to 35% for the full year of 2016. We expect preferred dividends to continue to decline. As noted last quarter, the preferred tender completed in the fourth quarter will reduced preferred dividends by approximately $10 million in 2016 versus 2015. I expect that you have noticed the preferred tender announced today along with this earnings release. This action if successful is expected to reduce our run rate preferred dividends to an annual level of roughly $45 million. This concludes our prepared remarks. Abigail, would you please open the line for questions?

Thank you. [Operator Instructions] Our first question comes from Ken Zerbe with Morgan Stanley. Your line is open.

Great. Thank you. First question I had. Just in terms of the provision expense. Totally understand that your guidance is for stable the first quarter. First quarter is probably a little bit higher than what I think some people may have been expecting. But help us understand why the provision expense should stay higher given oil has made a pretty sharp improvement from $30 to, call it, the low $40 range. It seems that things should be getting better for your energy portfolio, not necessarily worse.

Ken, this is Scott. Thank you for the question. You know, if you look back at the price of oil and gas that, as we entered the quarter and then even throughout February, it's a very dynamic process, and it's just been in the last 30 days, including the first part of this quarter, that we've seen this rally. And so we're grading loans dynamically, we're evaluating the reserve dynamically. And we just -- it was such a punitive first quarter when you -- from an oil and gas price volatility standpoint, particularly the price of natural gas. The decline there was a fairly new event. And we just felt like the most important thing we could do would be to prepare for those first quarter oil and gas market conditions to continue. As it's turned out, they've not. The last 30 days we've seen a really nice rebound in oil and natural gas prices.

Understood, but I guess phrased a different way, if oil stays at $42, you still feel very -- and you know that for a fact, would you still guide for a provision expense equal to first quarter?

I think -- Ken, this is Harris. I think I'd just say that we're trying to be conservative and, listen, we know that this isn't going to be smooth through the quarters. We've tried to be helpful and giving a little bit of additional guidance in terms of what we think the losses in the portfolio are going to be, so I think that, you know, I think we're still comfortable with their kind of $100 million range this year. And could it come in better than the first quarter? Sure. That is going to, you know, I think bounce the other way too. But that's just kind of our best thinking in terms of where we think losses are going to be and trying to be conservative in terms of what we think could be out there in terms of continued pressure on the reserve if prices remained volatile and things don't continue to heal.

I would also say, in a market like this, you really, you know, we have visibility maybe three to five months out, but we don't have clear visibility all the way to the end of the year, even if prices were to stay at $40. And so I just -- that's why we're going to err on the side of being conservative.

Okay, understood. And just in terms of loan growth, I think it sounded like your guidance was a little bit stronger than what it was last quarter. Does that reflect an improvement in your expectations for future quarters or does your new loan growth guidance just simply reflects the stronger you had in the first quarter?

Well, I think, you know, and this quite ties into the -- your first question with respect to provisions, I mean, the kind of loan growth we're going to, you know, that we've been experiencing also was -- is going to be a factor in thinking about provisions, so it's not just energy. But it's -- loan growth for us has been a little bit of a fickle kind of a thing the last several quarters. What we can tell you is that we have seen quite a lot of consistency over the last six months and so far what we're seeing into the second quarter is encouraging. But it's hard to extrapolate that out very far.

Okay, thank you.

Thank you. Our next question comes from Paul Miller with FBR. Your line is open.

Hey guys. It's Tim Hayes for Paul Miller. Are you seeing any second derivative [ph] from energy? Is this -- is it flowing through to CRE or any other industries and any of your geographies?

We'll have Michael Morris, our Chief Credit Officer, speak to that.

So we're tracking both CRE and consumer very closely. We initiated the same kind of heightened supervision and loan level ground-up analysis of the CRE and the consumer portfolios, and we aren't seeing large noticeable shifts or negative migration patterns. We are especially watchful of our multi-family portfolio in Houston, and we are seeing some rent concessions for longer-term leases. And so that has somewhat of an effect on net effective rents and NOI. But most of our properties are absorbing quite nicely, and office, there is some risk there, but the loan sizes are not significant and the underwriting is very solid with 50% to 55% loan to cost on some of the construction loans where they were done on a little bit of a speculative basis. And we have great sponsors there. And so we have quite a bit of comfort. If we see migration in the CRE book, it will mostly be in the past grade ranges, with maybe a few outliers that go to [inaudible].

I would just add to that, Michael mentioned our office exposure in Houston, but the two -- the only two-spec office buildings we had totaled $36 million. One of them now is experiencing leasing and the other actually was put to bed with the long-term amortization as well. So we don't believe our office exposure is going to be material, although we do have exposure there. I would just comment also that you really have to look at our CRE exposure in Texas relative to what we had in 2008. We have about $1 billion less in total CRE exposure today than we had in 2008. We have significantly pivoted from construction lending to CRE term there, and you can see that in our numbers. We have virtually no Land A and B [ph] and we had close to a billion dollars of it going into the '08 downturn that was principally because, when you did construction loans, then you generally finance phase two and phase three land. And then the final point is that we -- the amount of equity that has gone in to office, multi-family, particularly, is almost double what it was in the cycle leading up to 2008. So, a lot of factors that are very different today than the last cycle we went through.

And Scott, I would only add that, with respect to the consumer portfolio knock on risks there, I would point to Slide 26, which is this surveillance that we have on high oil and gas employment counties and we monitor FICOs, we refresh FICOs every two months, and we haven't seen any negative migration or blips in either FICOs or delinquency rates in consumable.

Great. Thanks for the color. And one more question for me. On margin. Just assuming that rates were to stay where they are today for the remainder of the year, how much more room is there to run with just converting lower-yielding assets to loans? And will this support NIM expansion for the rest of the year?

This is Paul. Thank you for your question. I expect, you know, while we continue to fight loan pricing, I expect that the opportunity to redeploy cash into investment securities and loans will, at a minimum hold the net interest margin stable and perhaps could allow some modest expansion.

Great. Thanks.

Thank you. Our next question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is open.

Hey, good afternoon.

Hello.

Hey, Paul, just to follow up on the last question, in terms of maybe the amount of remixing that you think you [inaudible] to do, just kind of curious, the overall size of the balance sheet, going forward, will we start to see that grow or do you think it kind of stays stable and you continue to remix?

I'd say our current plan is for a relatively stable size of the balance sheet, although I'll say by the time we get to the end of the year it's conceivable that the balance sheet could start to modestly grow. As you know, we've provided outlooks previously on the amount of growth that we expect in the investment portfolio throughout the year, which is kind of roughly probably, from here on out, kind of between $750 million and a billion dollars a quarter. So, depending on deposit growth and depending on our cash position, you could see us either adjust that or adjust the size of the balance sheet moving forward.

Okay, great. And then just one quick follow-up on energy. Just curious if you guys could maybe give us a breakdown of the $100 million or so of expected losses. How would that break down between sort of E&P and service?

Sure. It's probably going to be 70% -- 60%, 70%, oilfield service and the remainder reserve-based.

Great. That's all. Thank you.

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

Hey guys. This is Josh in for Ken. You saw a nice jump in securities yield this quarter, and can you just speak to roll-off versus new money yields and whether you -- whether there are any one-time helpers this quarter you note?

I would note, the biggest -- one of the biggest one-time helpers this quarter is that about 25% of that available-for-sale portfolio is floating rate [inaudible] so we saw a benefit this quarter related to that. As far as the rest, you know, we continue to try to be measured as we think about the, as noted in my comments, the types of bonds we're putting out and the yields with those bonds. So, clearly, the shape of the curve, looking ahead, the shape of the curve will clearly affect the yield of those bonds coming on.

Okay. And then just shifting gears, could you speak to how much more opportunity there could be in tendering for additional preferred in debt?

Well, the tendering question is difficult because, as you know, kind of the more you go after these bonds, the more difficult, they become hard to find. So in our capital plan, in 2015, we had a $3 million tender for preferred, which the announcement today kind of rounds that out for that $300 million, and there's a capital issue and subject to CCAR, I'm really not at liberty to discuss incremental plans with respect to preferred redemptions.

Great. Thanks for the color guys.

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

Good afternoon guys.

Hi, John.

Hi, John.

But to the $100 million loss expectation, could you just give me a little bit more detail on how you got that or why the change. I'm not sure I really get it. You were previously at 75 to 100 if oil remained at $30. What specifically made you bring that higher with oil here at 40 bucks?

Right. This is similar to Ken's question I think in the sense that we, you know, that estimate really is based on our concern about the volatility of the price of oil in January and February and the decline in the price of natural gas. So -- and you may think, well, gee, that was the end of February and now we're in April, but we just -- we don't really pivot that fast and we, you know, that was pretty troubling what we saw in January and February and it could return. We've seen $40 before. We saw it coming down. And so now we're seeing it going up. But we could be back at $30 again. So we're just -- prefer to err on a more conservative side. I would also say on the -- as it relates to oilfield service, the longer this goes, which it's going to go, you know, even if prices improve, there is general understanding in the industry that the oilfield companies will not come back as quickly as the E&P companies do, there are a lot of reasons for that, and so we feel pretty confident that oilfield service will be under considerable stress for the remainder of this year and a fair amount of next year.

Okay. All right, thanks.

…where reserve-based E&P companies may see nice rebound in the second half of the year, we don't think that's going to translate through to oilfield service nearly as quickly.

Right. Okay. All right. And then separately, on the margin, just wanted to get a little bit of additional color on how much the Fed hike actually benefited your loan yields. You know, if you adjust for the FDIC loan impact as well as the loan recoveries that you have had previously in fourth quarter and you adjust for that, by my math, I guess loan yields were up about 3 basis points, is that all that you would expect from the Fed to help your loan yields or is there more coming?

Yeah. You know, that -- as you know, predicting the net interest margin could be really difficult. There are a lot of countervailing things here. Obviously the Federal Reserve rate increase helped us. But as you remember and as we disclosed on our Investor Day, we provided some incremental disclosures around kind of the sensitivity of earning assets to changes in rate. And one of the things I would point out is that we continue to have some level of loans, particularly prime-based loans, that are floored, and so they, for example, because they are at floor rate, would not have enjoyed the kind of the dollar-for-dollar, basis-point-for-basis-point increase with the Fed. And so that, you know, and we've also got some swaps on the book. So those things combined with I would say continued pricing pressure kind of led to that overall net yield improvement.

Okay. All right, thanks.

Thank you. Our next question comes from David Long with Raymond James. Your line is open.

Good afternoon guys.

Hey.

Hey, Paul, can you just confirm, in your 12-month outlook, did you say that assumes no change in short-term rates?

Yeah, I did. We've got in our performance objectives, as we look into 2017, you may recall that we've got an assumption that the target rate for the Fed Funds would increase in December of 2016. But as a practical matter, we're looking ahead for 2016, we do not have another rate increase in there.

Okay. And then my second question, regarding the loan recoveries, you said it was $13 million or so in the fourth quarter. Does that mean you didn't have any of that in the first quarter? And how do you expect that to move through the rest of this year?

Yeah, it was interest recoveries, and there were a couple of items. One was income associated with our FDIC assisted loans and also interest income recoveries from loan recoveries. And those totaled $13 million, different kind of quarter to quarter. As it looks -- as it relates to the remainder of the year, that's not the kind of thing that I would expect to see. And so our outlook would not include any of that.

Okay. Thanks guys.

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

Hi there, it's Geoff Elliott from Autonomous Research. Thank you for taking the question. Just a quick numbers type question, could you break out the provision between energy and non-energy, just for the quarter? Because I'm kind of confused looking at the increase in reserves from 5% to 8% on a $2.6 billion balance of energy loans plus the $36 million of energy-related charge-offs? I'd have thought with that quantum of increase in reserves, the provision would have been higher. So I'm guess there must have been a release elsewhere.

Geoff, I'll -- this is James Abbott, I'll just give you a quick thought, is that we -- one of the things -- one of the things that we did take a look at is our reserve for unfunded lending commitment, so let me start with that, and we made some fine-tuning adjustments based on the way we compute the reserve on that, particularly for smaller business customers that are less than $750,000 in size. So that was part of that allowance for credit losses in the overall portfolio balance. And then we -- the reserve for loans, excluding the energy loan portfolio, which is $2.6 billion. But excluding that, we'd have a reserve to loan ratio of about 1.2% on that book of business. And that would compare to no net charge-offs in the quarter on that portfolio and would also compare to about 70 basis points of non-accrual loans. So it's really pretty strong reserve relative to the current credit quality positioning at that and it's just continued to get better and better, so there's not as much support as there was two or three years ago for keeping that reserve level higher.

And then just to follow up, in the release you used the world stellar to describe the non-energy credit, which is pretty forceful language, so, can you talk about what's so stellar about it?

Well, that we're seeing essentially no charge-offs, not just this quarter, but I mean we're seeing kind of a pattern of that. We're seeing delinquency rates. Almost any major of that, remainder of the portfolio, is looking about as strong as we've seen it right now, about as strong as we've seen it for a very long time.

Great. Thank you very much.

Thank you. Our next question comes from David Eads with UBS. Your line is open.

Hi, good afternoon. Looking at Slide 27 where you give loan growth kind of in great detail, the growth in energy was really, really strong, and just curious if you could give a little color on kind of what the outlook there is in Texas, and then maybe if you have detail on how should the growth came in Houston versus the other parts of the state.

Yeah. This is Scott. There was one large credit that was done there, it was a corporate credit, had nothing to do with energy, had nothing to do really with Texas economy. And it's a large 20-year client of the bank that we were able to move a transaction out of one of the global banks, they were at the end of a syndications process and the loan will pay down pretty quickly actually, will have about half of it amortized by the end of this year, if I remember correctly. They are seeing moderate growth in middle market and one to four-family mortgages, so, middle market commercial lending and one to four-family mortgages, and a portion of this real estate portfolio funded just basically related to construction -- the construction portfolio.

All right -- yeah, go ahead.

And in terms of the outlook, they're -- having gone through these declines before down there, they are -- their risk filters are very well-tuned and have been quite frankly for about two years, but there's a lot of good market share movement that will go on during a period like this. It happens in most other periods like this. And so there will be opportunity. There will also be energy underwriting that'll take place, as the stressed assets are purchased by new acquirers and as companies are put together, merged, so there will be new energy underwriting that probably will begin to manifest itself in the second half of the year.

Maybe just to follow up on that, can you just kind of talk about, if that happens, what your appetite would be for taking on new energy loans right at this part of the cycle?

Well, I would say that our appetite would be, you know, totally based on the normal credit underwriting criteria with again our full risk filters on. But if you were going to underwrite a reserve-based oil and gas transaction, today would be a moderately good time to do that. And so there will be good transactions that have presented themselves and will present themselves. On the oilfield service side, I would say the odds of that happening are much lower. We certainly will not ascribe much value to borrowing, you know, the borrowing basis, etcetera, etcetera, and the equity levels would be very high. The kind of financing we do there would probably generally be receivable-based more than anything else. But the new underwritings in energy will be more reserve-based and midstream than anything else.

Right. Thanks for taking the question.

Thank you. Our next question comes from Marty Mosby with Vining-Sparks. Your line is open.

Thank you. I want to ask a little bit about expenses just to change the subject a little bit. Personnel expenses were about 60% of the composition and year over year it grew about 6%. About half of that was related to I think moving those retirement-based awards up one quarter, so we're still seeing about 3% growth. Do we think that, as we move forward, we should be able to see some of the initiatives kick in and maybe that growth rate begin to slow down a little bit?

Listen, I think you're going to see it pretty flat and perhaps down a little bit. I mean you do have underlying these initiatives, I mean we were clear I think at the outset that those targets are growth targets, not net. And so you have normal kind of merit increases in compensation. We have a little higher incentive compensation accrual here in the first quarter than I think we had a year ago. And all of that's subject to kind of continued performance through the year. So that could be still variable and will be. And I would also note that, I mean, there are some job categories where the -- where wage pressures particularly in IT kind of related areas, I mean there are a few kind of specialized areas where the pressures are very real. So our hope would be to keep those flat to down, I think consistent with -- at the end of the day, we're really keeping an eye on the $1.6 billion and the efficiency ratio number, and that's what I'm most comfortable affirming that I think we're on a pretty strong track to accomplish those goals.

This is Paul. If I could reinforce Harris's comments. We are very focused on the $1.6 billion maximum on non-interest expense. We're very focused on positive operating leverage. We're very focused on achieving our efficiency ratio objectives. So that's -- our focus is on the aggregate. And as Harris said, we've got levers in several of those line items and our expectation is that we'll achieve our target.

The second question I was going to ask is another subject, I'm not asking about the level of capital deployment, but just the approach, back when we were at Investor Day, the stock price, you know, of the industry was very depressed, so you had a big discount to your tangible book value. That pretty much had been eliminated. So as you sit there, if you look at dividends and share repurchase, does the change in stock price level change your objectives in the sense of what you would ask for distributed between dividends and share repurchase?

Go ahead, Harris.

Well, I'm not sure that it would today. But I mean, it's something, you know, we'll think about certainly hard before we -- before we pull any trigger. You know, it's really an exercise in thinking about the path we're on, relative valuation between our company and others in the marketplace, and trying to be careful that the -- and, you know, more to come I guess once we get CCAR results. But I think the major theme would be that we're really certainly very cognizant of the need to ramp up distributions, and then how we do it is going to be a function of what the market looks like, what we look like, etcetera at the time, so.

Thanks. Abigail, it's -- we got about five minutes to go and we have a few questions left in the queue, so we're going to go to the lightning round so we're just going to go one question and then we'll try to be concise in our answers and see if we can get through all of them before we close.

Our next question comes from the line of Joe Morford with RBC Capital Markets. Your line is open.

I was just curious a little more about what has changed on the loan side, you are finally starting to see some good momentum and more consistency, especially like in a quarter that's seasonally soft. Is it the runoff slowing? Are your markets strengthening? Or is it just momentum building on itself? You know, what would you point to?

This is Paul. I can start and ask my partners here to chime in. There are a couple of items. One is, if you go back six months ago, there was a lot of internal operational things that were kind of going on, and I've become convinced after speaking with those on the line that there was a little bit of a distraction. And now that we've got everybody fully engaged and actively out marketing, we're starting to see the benefit of that. I will say, anecdotally, although I haven't necessarily seen the evidence, but anecdotally, we believe that pay-downs, particularly in commercial real estate, are beginning to slow down or have slowed down in this quarter. And so that clearly would be also helpful.

We did -- Joe, this is James -- we did see origination volume in the quarter that was about 20% higher than it was in the year-ago quarter. And that I think supports Paul's comment that there were some distraction and it's really started to improve on that front. But also payoffs were slower.

Yup. Thanks so much.

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

Thank you. Good evening. Could you talk to us about the loan severities you've seen and the energy charge-offs you've experienced over the last three to six months?

Sure, Jennifer. Yeah, this is Scott. Right. And you just mean sort of anecdotally?

Yes, correct.

Yes, yes. So, generally speaking, on the reserve-based side, it's really kind of more of a marking to market, if you will. And on the oilfield service side, the losses there generally have related to private equity firm that may choose not to play forward and kind of forces a situation in the bankruptcy and liquidation. And I think that'll continue to be the trend. I think the losses on the oilfield service side will be lumpier and they will be because they just can't continue, and so that just accelerates the whole realization process, whereas on the reserve-based side, it's going to be kind of dribs and drabs here and there, and I don't think we'll have any real significant large pieces because we have no second lanes and we have no high-yield debt, and generally we had very conservatively underwritten senior pieces.

Thank you.

Thanks so much.

Thank you. Our next question comes from Jack Micenko with SIG. Your line is open.

Hey, good afternoon. How much was the reward card expense re-class and how should we think about the other expense line item on a run rate. It dropped it at around 56 this quarter. How do we -- is that a good run rate now with that expense out, or how should we think about that?

This is Paul. I'll start with your last question first. There's a lot of things that go into that, some of them being highly variable. I can't think of any items in particular that would change that number kind of quarter to quarter. So that's a decent approximation I think for run rate. As it relates to the bank card reclassification of the expenses, that is an annual number of about $20 million.

Twenty-eight?

Two-zero, 20.

Two-zero. All right, thanks guys.

Thank you. Our next question comes from Kevin Barker with Piper Jaffray. Your line is open.

Thank you. Your C&I loan yields went down by 10 basis points this quarter after increasing 15 basis points in the fourth quarter. You mentioned some older loans are putting pressure on that portfolio and some of them are based off of prime versus LIBOR. Could you help us understand like how many loans actually rolled off or matured in the first quarter to cause that big swing in asset yields despite the Fed increase?

Yeah, I think, and we tried to be as transparent about this as possible, the key -- one of the key drivers there of that increase in loan yields in the fourth quarter, which we disclosed then and we disclosed this quarter, were these interest recoveries on loan recoveries, and this elevated loss share [ph] income associated with the FDIC. That was about $13 million in the quarter, wherein, if you're going to do the math, as I think it was John correctly did, that's worth about 13 basis points on the loan yield in the fourth quarter.

Thank you. Our next --

Go ahead, sorry.

Our next question comes from John Moran with Macquarie Capital. Your line is open.

Hey, thanks. I just wanted to revisit the defensive draws [ph]. I think you said there were five or six of them this quarter. Was that more out of the services or the upstream book? And then, what can you guys do to mitigate that or, kind of once it's there, how do you carry it?

Well, first of all, the -- in terms of kind of the second part of your question, in terms of mitigating it, most banks are putting in anti-hoarding provisions and you don't have to wait for the maturity of a transaction to do that. It's generally almost everything in the energy space right now is being amended, renegotiated, etcetera, every six months or so. And so we're having pretty good luck at getting these anti-hoarding provisions in, number one. Secondly, generally speaking, when it's one of our strong private equity firms that's involved, the odds are much less likely that they'll try a defensive draw [ph]. So -- and that's been what we've experienced. And to answer the first part of your question, I mentioned there was about 50 million in defensive draws [ph], one of which is payback or will pay back shortly partially. And it's about 50%, by company it's about 50% upstream, 50% services.

Yeah. By dollar amount it's about $30 million in upstream and $20 million in services.

Services.

Thanks very much.

Thank you. Our next question comes from Terry McEvoy with Stephens. Your line is open.

Thanks. Just a quick question for Paul. When do you get to that $45 million run rate on the preferred stock dividends and can you just help us with the quarterly variability that we typically see?

Yes, I have a schedule here, if you could just hold on just a second. And just as a reminder, that $45 million, that's a 2017 figure. And I don't have that broken out all the way. I'll have to get back to you on the quarterly composition on that one. We'll have James follow up.

I was going to say, I'm happy to follow up. It's roughly $10 million on alternating quarters and $12 million on the other quarters. But I'll get back to you, Terry.

Okay. Thank you.

Thank you. I'm showing no further questions. I'd like to turn the call back to management for closing remarks.

Well, we just want to thank you all for your interest and participation in the call and we look forward to talking to many of you then. Thank you very much.