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Zions Bancorporation (ZION) Q2 2019 Earnings Call Transcript

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Zions Bancorporation (NASDAQ: ZION)
Q2 2019 Earnings Call
Jul 22, 2019, 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 Zion Bancorporation's second-quarter 2019 earnings results conference call. [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 of Investor Relations

Thank you, Latif, and good evening. We welcome you to this conference call to discuss our 2019 second-quarter earnings. For our agenda today, Harris Simmons, chairman and chief executive officer, will provide a brief overview of key strategic and financial performance. After which, Paul Burdiss, our chief financial officer, will provide additional detail on Zions' financial condition, wrapping up with our financial outlook for the next four quarters.

Additional executives with us in the room today include Scott McLean, president and chief operating officer; and Ed Schreiber, chief risk officer. Referring to 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 this forward-looking information, which applies equally to statements made in this call. A copy of the full earnings release as well as the supplemental slide deck are available at zionsbancorporation.com.

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We will be referring to the slides during this call. The earnings release, the related slide presentation and the earnings call contain several references to non-GAAP measures, including the 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 documents, and participants are encouraged to carefully review this reconciliation.

We intend to limit the length of this call to one hour. [Operator instructions] I will now turn the time over to Harris Simmons.

Harris Simmons -- Chairman and Chief Executive Officer

Thanks very much, James. We welcome all of you to our call today to talk about our second quarter. I'm going to go to Slide 3 and start there. That's a summary of several key highlights.

The results for the quarter were favorable in most areas compared to the year ago results. One of the several positive results in the quarter is the robust loan growth we experienced, which was up 7% over the prior-year period and up 2% over the first quarter of 2019. This was the fourth-consecutive quarter of reasonably strong loan growth and the second-greatest growth for the bank since the recession. We expect to continue to achieve broad-based loan growth and fee income growth through small business, middle market and capital markets activities.

Another highlight in the quarter was noninterest expense. Adjusted noninterest expense was up only 1% compared to the year-ago period and down 2% when compared with the first quarter of 2019. We're continuing to reap the benefits of several years of focusing on efficiency. We remain highly focused on collecting and implementing simple, easy, fast and safe ideas to improve our business, ideas generally -- generated largely by our employees.

And we continue to improve our operations through some -- a lot of these ideas and help limit the growth of operating expenses. However, the quarter also included some challenges, most significantly on our net interest margin, which was impacted more than we expected due to the sudden downward shift in yield curve. Later, Paul will discuss this subject in more detail. As published in our slide deck that accompanies this earnings calls, we've reduced our revenue and earnings outlook for the next four quarters to reflect our best estimate of the impact of these macroeconomic changes.

However, it's worth emphasizing that our ability to be precise in forecasting net interest income can be quite limited particularly given how swiftly the rate environment changed. We are taking steps to blunt the effect of this more difficult rate environment through a heightened focus on both interest-bearing deposit pricing and noninterest expense control. Specifically, with regard to expense control, we expect to maintain noninterest expense in the second half of 2019 that is consistent with the first half of the year. Slide 4 shows earnings per share results for the last several quarters.

In the second quarter of 2019, we reported $0.99 of earnings per share compared to $0.89 per share in the second quarter last year. In the second quarter of 2019, we had about a net $0.02 per share of items that lowered our reported earnings per share. Adjusted for these items, earnings per share increased 13% over the prior year. Turning to Slide 5.

On the left side is adjusted pre-provision net revenue, or PPNR, which continued to show growth of approximately 9% over the same period a year ago and 3% growth when compared with the prior quarter, which is somewhat lower expectations primarily as a result of the interest rate environment. On the right side, we're presenting pre-provision net revenue less current period net charge-offs on a per-share basis, which increased 10% over the prior year. As noted, when we introduced this metric, when the new loan loss accounting standard goes into effect in 2020, we're concerned, and in speaking with you, I believe that many of you are as well, that the results across companies will be generally incomparable. Therefore, we present this metric as a simple way to compare across the industry.

For our financial goals, we have long been committed to achieving stronger revenue growth and expense growth, also referred to as positive operating leverage. You can see evidence of that in our results. However, in a period of falling interest rates, our ability to achieve positive operating leverage becomes more difficult. Nevertheless, the message remains the same, over the long-term horizon, we plan to continue to improve the operating efficiency of the company even as we continue to invest in the business.

Slide 6 shows some of the key technology objectives going forward, the completion of the loan systems conversion. As we announced last quarter, all of the loans that were expected to be on our new system are there, and our attention is now on the deposit side. We're enhancing digital experiences for our customers while simultaneously remaining focused on maintaining the low-single-digit growth rate in our noninterest expense. I'll conclude my prepared remarks with Slide 7, which is a look at our key objectives and our commitment to shareholders.

Over the long term, we expect to continue to deliver positive operating leverage. In the near term, we expect healthy loan growth, continued fee income growth and solid expense control. As I previously noted, the declining interest rate environment -- environmental kinds of limits -- the declining interest rate environment limits, though it doesn't eliminate, our ability to achieve positive operating leverage in the near term. In years past, we've provided a great detail regarding the improvement in our credit risk profile.

We expect to be a positive outlier with superior credit quality in any economic downturn that may develop. Specifically to the second quarter, we experienced a single $8 million charge-off, which we don't see as indicative of a more broad-based credit situation. Our net charge-off ratio was just 1 basis point of loans over the last 12 months and continue to be very acceptable during the second quarter. We continue to believe we have further room to optimize our capital ratios as supported by our stress testing, which we disclosed on our website on June 21.

We have substantially increased the return of capital over the last five quarters, equaling 174% of earnings during the second quarter. The decision on additional capital return is a board level decision, and we'll continue to share that information as it becomes available. As we've been saying, our common equity tier one ratio was moving down closer to peer median levels and we expect to continue to bring that down to just above peer median and maintain it at that level. 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. As Harris mentioned, our financial performance this quarter was solid. However, the quickly changing interest rate environment, specifically the inverted yield curve and related expectation for falling short-term rates, is creating revenue headwinds, which we are working to manage through. I'll begin on Slide 8, which highlights two measures of profitability: return on assets and return on tangible common equity.

As Harris highlighted, we expect to continue to actively manage the areas that we can control, including loan growth, fee income growth, expense control and balance sheet leverage, to improve balance sheet profitability. On Slide 9, for the second quarter of 2019, Zion's net interest income increased 4% from the prior-year period, up $21 million to $569 million. While not at the same year-over-year growth rate as the prior quarter due in part to recently lower short-term interest rates and the inverted curve, much of the growth in net interest income can be attributed to loan growth. The 14-basis-point decline in the net interest margin was more than we had anticipated when we spoke in April.

I'll describe this in a little more detail later. But at a high level, about half of that decline in the quarter was due to lower loan yields, and about half was due to deposit costs and funding mix. Slide 10 breaks down net interest income by both rate and volume. You can see that our average loans grew 7% over the year-ago period.

Average loan growth in the second quarter was also strong relative to the first quarter, increasing about 9% on an annualized basis. Over the prior-year period, yield on loans increased 28 basis points. However, relative to the prior quarter, the yield on loans declined 8 basis points. This is attributable to a couple of dominant factors: first, the recent decline in short-term rates; and secondly, lower rates on new loans relative to maturing loans.

This compression could be attributed to several factors, including competitive forces, as well as credit quality differences. We continue to maintain our discipline on underwriting standards and have even tightened standards somewhat in select areas as we continue to prepare to be a positive outlier during the next economic downturn. This improvement in portfolio composition embedded in our book has adversely impacted our loan yields over time, but importantly has translated to much stronger performance in our stress test results. This has supported the reduction in the amount of common equity supporting the company, therefore, facilitating the repurchase of about 10% of our company's common stock over the past year.

For average total deposits, we are reporting growth of 3% over the prior-year period. We experienced a similar 3% annualized growth rate when compared to the first quarter. Although not shown on this page, average noninterest-bearing deposits decreased $550 million or about 2% from the year-ago period, which is to be expected during a rising rate environment. We generate deposits through strong relationship banking, which is evident in the continued growth in deposit balances with a relatively modest increase in deposit cost.

While that has been a benefit to us in the past, and as we have discussed previously, this also means that it may be more difficult to reduce our cost of deposits as rates decline. When compared to the prior quarter, our cost of total deposits increased 6 basis points with most of this due to exception pricing activity on our strongest relationships. The increase was a little less than the change we reported in the first quarter of 2019 and is generally consistent with our expectations and public comments over the past several months. Slide 11 depicts the key net interest margin components.

Our net interest margin was down 14 basis points relative to the first quarter as loan yields reacted relatively quickly to lower interest rates, while customer expectations regarding deposit rates have yet to recognize the lower-rate environment. Additionally, our funding mix has become somewhat more weighted toward relatively expensive wholesale funding. While the interest rate environment presents a significant challenge to the net interest margin, we remain focused on profitable balance sheet growth. Turning to loan growth.

Slide 12 depicts the year-over-year period-end loan growth by portfolio type, with the size of the circles representing the relative size of a portfolio. For nearly all categories, we are reporting solid and consistent growth. Our growth outlook for each portfolio is unchanged and shown here on Slide 12. Interest rate sensitivity is reported on Slide 13.

As we have discussed previously, we have been working for the past year or so to protect net interest income in the event of falling interest rates. Over the past quarter, market expectations of the path of short-term rates have incorporated multiple rate cuts by the Federal Reserve. Hedges are much less effective when falling rates have already been priced into the cost of the hedge. Although we continue to look for opportunities to decrease our risks to falling interest rates, we have paused adding swaps at rates that already incorporate multiple rate reductions.

It is important to note that we currently have over $2 billion of interest rate swaps on the books. Also, after quarter end, we increased the notional value of interest rate floors meant to protect against very low rates. We currently have $7 billion of interest rate floors with a strike price of 1%. Next, a brief review of noninterest income on Slide 14.

Customer-related fees were up a solid 4% from the year-ago period due largely to strength in lending activity and sales of capital markets products. Noninterest expense remains controlled. As shown on Slide 15, noninterest expense grew less than 1% to $424 million from $421 million in the year-ago period. Key drivers of the change were an increase in salary and benefits of about 3%; an increase of all other line items with the exception of FDIC insurance premiums of about 2%; and a decline of FDIC insurance premiums of $8 million, with the primary contributor being the elimination of the FDIC surcharge.

Excluding this change, total noninterest expense increased about 2%. Looking ahead on noninterest expense, we expect to uphold our focus on expense controls and streamlining bank operations while investing in technology and people to enable controlled -- continued business growth. We are reiterating our expectation for slight noninterest expense growth, which can be interpreted as growth in the low-single-percentage rate change. Although with headwinds on revenue in the near term, we are working even harder to further limit expense growth.

Turning to Slide 16. The efficiency ratio was 59% compared to the year-ago period of 60.9%. We continue to expect our efficiency ratio will be well below -- will be below 60% for the full year of 2019. As seen on Slide 17, credit quality continues to be remarkable with the trailing 12-month net charge-off ratio of only 1 basis point.

Compared to the prior quarter, classified loans increased $41 million. The increase is attributable to a few unrelated credits rather than any adverse trend. Oil and gas classifieds now stand at about 2%, and there is general stability in the other broad categories. Net charge-offs for the quarter were $14 million, of which about $8 million was related to a single larger credit as mentioned by Harris earlier.

While the dollar value has increased, the allowance for loan loss as a percent of loans was slightly lower when compared to the prior-year period. The linked-quarter increase in the provision for credit losses was largely attributable to the net charge-offs previously mentioned, loan growth and a modest increase in the qualitative portion related to general economic conditions. We continue to work toward compliance with the new CECL accounting standard, which will become effective early next year. I expect that Zions will be in a position to disclose more in the coming months, including an estimated financial impact from the adoption of CECL.

Finally, on Slide 18, we depict our financial outlook for the next 12 months relative to the second quarter of 2019. We have reduced our outlook for net interest income to stable to slightly decreasing, but I will caution you that net interest income is becoming increasingly difficult to predict in the current rate environment. Over the past several quarters, we have generally provided net interest income outlooks, which have not incorporated changes in short-term rates. However, due to the recent dramatic changes in the interest rate environment, we are incorporating into our outlook the shape of the current yield curve, which would imply at least 50 basis points of short-term rate decreases by the FOMC.

Our net interest income outlook also assumes a modest decline in our securities portfolio balances. Further down the page, and as we have said previously, we will work carefully to manage noninterest expenses to reflect overall revenues. Otherwise, our outlook remains relatively unchanged from that which was reported throughout the second quarter of 2019. This concludes our prepared remarks.

Latif, would you please open the line for questions?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of John Pancari of Evercore. Your question, please.

John Pancari -- Evercore ISI -- Analyst

Good afternoon.

Paul Burdiss -- Chief Financial Officer

Hi, John.

John Pancari -- Evercore ISI -- Analyst

On the NIM front, just given your NII outlook of stable to slightly down from here, what does that imply in terms of your net interest margin trajectory? I know you're here at 3.54%. How should we think about how that progresses through the back half and then into 2020? Thanks.

Paul Burdiss -- Chief Financial Officer

Well, John, I think you know we're kind of reluctant to provide a lot of specific guidance on the sort of net interest margin because there are so many things that impact that. So I would rather ask you to focus on net interest income. And again, I'll reiterate that that net interest income outlook incorporates sort of the forward curve, which is at least two rate cuts.

John Pancari -- Evercore ISI -- Analyst

OK. All right. And then secondly, around the expense commentary. I hear you on the focus on the positive operating leverage.

But you indicated that it gets, in this environment, difficult to achieve that but you remain committed. So could you talk about the magnitude of positive operating leverage that you believe you can achieve given this tougher backdrop? I know you're digging a lot deeper on expenses. So I want to get an idea how much leverage we should expect for 2020, for example. Thanks.

Paul Burdiss -- Chief Financial Officer

Well, I'll start here so that -- OK. John, the issue that we have -- the issue that I have personally in creating that outlook is that the -- again, the interest rate environment is changing so quickly. The revenues are just getting a little harder to predict. And so while we do have hedges on for falling rates, when the yield curve inverts and rates fall, revenues get a little harder to predict.

Now we have been able to offset a lot of that through balance sheet growth and loan growth in particular this quarter. So getting to your question specifically around positive operating leverage, I feel like we have enough levers internally to manage expenses to reflect the overall revenue environment. And that's kind of what I tried to say in the comments, and I stick to that.

Harris Simmons -- Chairman and Chief Executive Officer

Yes. I would just add, I guess to reiterate what I said in my remarks, which is that I would expect second-half expenses to be reasonably flat to the first half. And we think that that is achievable. Some of this will get into kind of the pace at which we're thinking around projects, including some technology projects.

We have some -- a major technology project that we're not going to change the trajectory on. It's -- it would be really damaging to the long-term success of that to do it. But there are some -- there may be some smaller things that we can find ourselves working at delaying. And as always, some of this can be somewhat self-correcting through incentive compensation programs, which are intended to reflect success when we have success and weakness when there's weakness.

So I have reasonable amount of confidence through the rest of the year. And we'll have to see as we get there kind of where we are with both interest rates and expenses as we go to 2020. But I -- there's a lot of focus on expense control around here right now.

John Pancari -- Evercore ISI -- Analyst

Got it. Thanks, Harris.

Harris Simmons -- Chairman and Chief Executive Officer

Thanks.

Operator

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

Ken Usdin -- Jefferies -- Analyst

Thanks. Good morning guys. Good afternoon, I should say. Paul, can you elaborate a little bit on just the deposit cost side? You mentioned you're still seeing the price increases and the mix.

Total deposit costs you said were up 6 basis points this quarter. How does that trend from here in terms of what you could see near term? Do you start to see some of that pressure come off? Maybe you can help us understand that trajectory.

Paul Burdiss -- Chief Financial Officer

Yes, thanks for your question, Ken. There's a couple of comments that I'll make. First of all, with an increasing mix in wholesale deposit -- or wholesale funding, I will note -- while you didn't specifically asked this, I will note, and you saw in our financials that the cost of wholesale borrowings were actually down this quarter. And so while they're expensive overall, on a relative basis, they do react more quickly to market rates.

And so we have seen that. So to the extent rates are falling, I expect the cost of those wholesale borrowings to fall relatively quickly. Now specifically to your question around customer deposits, my comments were really around expectations. We're really a little bit backward-looking in that we have continued to see deposit price increases even as short-term rates fall.

As you know, one-month LIBOR was actually down this quarter relative to the last. And the point that I was trying to make in those prepared remarks was we're in this interesting transitory period where we've got very quick reaction on the loan side to changes in market rates, but the deposit rates kind of haven't quite caught up. I will say absolutely and unequivocally, we are very focused on deposit cost as it is one of the key levers that we have to manage overall balance sheet profitability. As we have said this quarter and in previous quarters, much of the deposit cost increase has come through very targeted exception pricing for our clients.

And so we are absolutely reviewing that and looking for opportunities to manage that much more tightly. The other final piece I'll make -- I'll say about deposits is that we have moved some off-balance sheet client funds onto our balance sheet. Those have shown up in the form of deposits, but those deposits come at a higher rate, but are also relatively indexed to overall market rates. And I would expect to see those deposit rates come down as well.

Ken Usdin -- Jefferies -- Analyst

OK. And my follow-up to that is then just as you work on -- work through the exception pricing, I guess how do you start to get the sense when that price increase has worked its way through, meaning how long do you anticipate that lag being between the LIBOR roll and then the lag on the deposits and being able to start to roll those lower?

Scott McLean -- President and Chief Operating Officer

Ken, this is Scott McLean. Most of -- I think as Paul was trying to indicate, most of the exception price deposits are indexed nightly, and it's a fairly large percentage. So it'll adjust pretty quickly. Much -- it'll adjust pretty quickly.

Ken Usdin -- Jefferies -- Analyst

OK.

Harris Simmons -- Chairman and Chief Executive Officer

It's really -- and at the end of the day, for larger depositors, it's really a function of competitive conditions. It's certainly much less so for smaller depositors, and we continue to see the greatest pressure being with the larger depositors.

Ken Usdin -- Jefferies -- Analyst

Understood. All right. Thanks, guys.

Harris Simmons -- Chairman and Chief Executive Officer

Thank you.

Scott McLean -- President and Chief Operating Officer

Thank you.

Operator

Thank you. Our next question comes from Peter Winter of Wedbush Securities. Your question, please.

Peter Winter -- Wedbush Securities -- Analyst

Good afternoon. Commercial real estate, the loan growth has been very strong the last two quarters, and it's an area that you've highlighted that you're being a little bit more cautious on. So I was wondering if you could talk about the growth there.

Scott McLean -- President and Chief Operating Officer

Sure. Peter, this is Scott McLean. Thank you for the question. And just a quick comment, we've made pretty much the same comment in the first quarter.

You are seeing growth in the last couple of quarters there. But if you look at the portfolio over the last two and a half, three years, if you go back to, say, December of '16, total CRE at that time was $11.3 billion. We sort of sat right in that range, actually a little shy of that at the end of '17, the end of '18. And so this pickup in '19 is really back -- just about $400 million or $500 million higher than where we were at the end of '16.

So really, we've had this -- when most banks our size and smaller have seen really big increases in CRE, and particularly construction we've been pretty flat, and so -- and this particular increase in the last quarter, two quarters, has mainly been construction loans funding that were made 9 months to 12 months ago.

Peter Winter -- Wedbush Securities -- Analyst

So is there still room then for that to grow?

Scott McLean -- President and Chief Operating Officer

We believe so in the sense that what we basically said is that we expect our overall loan portfolio to grow mid-single digits. And that the CRE portfolio growth would be consistent with that so that the percentage mix would not change materially. And as you know, about 75% of our CRE portfolio, our $11.8 billion CRE portfolio, is term and 25% construction.

Peter Winter -- Wedbush Securities -- Analyst

Great. Thanks very much.

Scott McLean -- President and Chief Operating Officer

Thank you.

Operator

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

Marty Mosby -- Vining Sparks -- Analyst

Thanks. I wanted to focus on kind of the core or in a sense of reporting $0.99, but there's kind of some unusual things that you really haven't, I don't think, highlighted quite extensively. One is you got the $6 million valuation on the customer swap, which was kind of interesting. That's kind of an unusual situation.

And then you've got the $8 million sitting over there in the particular loan that went bad, which significantly increased provisioning for this particular quarter. Neither of those sounds sustainable. And then you've got $3 million of security losses when interest rates are going down, which you shouldn't really have secured. So there's really these three transactions that are floating around behind-the-scenes, which I just want to see if you could address because that represents about $0.08 in EPS when you look at it that way.

Paul Burdiss -- Chief Financial Officer

Marty, this is Paul. I'll provide a little more color. On the credit valuation adjustment, this is related to we've got -- our clients are the counterparty on interest rate swaps that we've sold to them. As the yield curve has sort of flattened and inverted, the value of the swaps to us has increased, that is to say that our clients owe us more on an economic basis for the swaps that we've put on.

And so there's an accounting adjustment where we -- basically, we have to adjust sort of to market every quarter that amount. And so the $6 million that you referenced and that we recognized this quarter was related to the change in the valuation of those client swaps. But it's not, to be really clear, an indication -- any indication of a change in the credit quality of those underlying swaps or underlying customers. It is strictly, I would characterize, a kind of an accounting adjustment related to the increased value of the swaps to us.

So that's number one.

Harris Simmons -- Chairman and Chief Executive Officer

So the whole amount just seems to be to the provision for unfunded commitments almost. And then it's -- I mean it's a reserve against something that hasn't happened yet. It's certainly not something we are expecting losses.

Paul Burdiss -- Chief Financial Officer

No. Right. And it's purely a function of the yield curve and the interest rate environment. Number two was the securities losses.

That was actually related not to our investment portfolio but to our portfolio of equity investments through our SBIC. And so that's a valuation adjustment. As you said, it's pretty infrequent. And some quarters are up and some quarters are down, and this happened to be $3 million.

And I apologize, the third item was?

Marty Mosby -- Vining Sparks -- Analyst

The $8 million on the loss on the -- in the one loan.

Paul Burdiss -- Chief Financial Officer

Oh, sorry, yes, the credit loss. So as I tended to say in my prepared remarks, the -- this was not at all indicative of any sort of underlying trend. It was sort of a one-off loss that we recognized. At least that's the way I would characterize it.

And so I think you're right to say that if your question is implying that the $8 million loss was not indicative of a trend of significantly increasing credit costs, I would absolutely agree with that.

Marty Mosby -- Vining Sparks -- Analyst

And then the shift of focus completely, the drop in yields on your loans from $493 million to $485 million, in conjunction with you putting on all these swaps and floors and things that have some costs, although they're reducing the risk, is somehow that reflected there? Or is it even in the cost on the deposits? There's some innate cost that happens as you put these derivatives on, and some of that's impacting the margin possibly this quarter because you've been doing so much of that in the last six months.

Paul Burdiss -- Chief Financial Officer

Yeah. Not as much in the second quarter. Really, the loan yield decline breakdown, as I've tried to characterize it, or I think we might have it on our slide, it was really -- about half of that was related to the fall in one- and three-month LIBOR, and then about half of that was related to what I would call the portfolio churn. That is the yield of oncoming loans which is just lower than the yield of loans rolling off.

But you're right, to the extent we -- certainly, to the extent we -- if we were to have added a bunch of interest rate swaps at a 75 basis point negative carry this quarter, which we didn't do, but had we done that, that would have absolutely shown up in the loan yield.

Marty Mosby -- Vining Sparks -- Analyst

But you do have some costs related to derivatives that is in your margin right now, which is paying insurance, that then limits the -- your margin's gone up 50 or 60 basis points since rates started rising. You're not going to give all that back because you've actually reduced your asset sensitivity, but it has a cost to it today.

Paul Burdiss -- Chief Financial Officer

You're right, Marty. I don't have that number at my fingertips, but we can certainly get that.

Marty Mosby -- Vining Sparks -- Analyst

OK. Thanks.

Paul Burdiss -- Chief Financial Officer

Yup. 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.

Scott McLean -- President and Chief Operating Officer

Yeah.

Ken Zerbe -- Morgan Stanley -- Analyst

I guess first question just in terms of loan growth, obviously, you've had two quarters in a row of pretty strong loan growth. Your guidance is still unchanged, that is moderately increasing. I get that it's sort of mid-single digits, but it also implies that loan growth is going to slow either back half or over the next 12 months versus kind of pace it has been at recently. Is that a fair assessment that loan growth does slow down from here? And if so, why is that the case? Thanks.

Scott McLean -- President and Chief Operating Officer

Ken, thank you. This is Scott. As we've said before, we sort of run the place on mid-single-digit loan growth, and we think it can work in the kind of 4% to 5% range and it can work in the 6% to 7%, 7-plus percent range. We're not necessarily guiding to slower loan growth.

We've had four really good quarters in a row. Those came off of three moderately flat quarters, but we have really solid growth. And as you know and as you can see, the growth that is coming, consistent with the mix of the portfolio, it's about 50% C&I. CRE, as was noted in the earlier question, is about 25% of our growth right now, but it's coming off of about 2.5% flat years.

And in consumer, our kind of residential mortgage business, both one- to four-family and home equity has been very strong, very consistently strong for the last three years. And we're implementing technology there that we think offer us really continued positive outlook on the mortgage side. So no, we're not necessarily guiding lower. I know the words may imply that, but we feel good about our pipeline.

Harris Simmons -- Chairman and Chief Executive Officer

I think I'd probably just also say, the second quarter was -- it was a strong quarter. I mean it -- and I wouldn't want to signal that we think that we're going to be doing 9% loan growth hereon out, I think it was a strong quarter but it was stronger than what we've seen generally over the last few quarters. And I think we're just saying we think that a moderate loan growth is still probably what we would anticipate. It's hard to project any of this with precision.

That's kind of what it feels like out here.

Ken Zerbe -- Morgan Stanley -- Analyst

Gotcha. OK. And then maybe just a question for Paul. Paul, you mentioned that you were tightening, I guess, underwriting factors in certain areas.

Can you just explain what areas those were and kind of where were you and where are you now in terms of how you're thinking about underwriting?

Paul Burdiss -- Chief Financial Officer

If I could, I'll ask Ed Schreiber, our chief risk officer, to respond to that.

Ed Schreiber -- Chief Risk Officer -- Analyst

This is Ed. So the areas that we've looked at is in -- Scott had talked about the lending that we have in the term real estate where we've really taken a hard look and we have done -- actually, about 18 months or so ago, we've taken a hard look at multifamily and as well as office space. And we've taken a hard look at income-producing properties. And given where the cap rates are, etc., which are still artificially low, we felt that those markets tend to be a little bit overheated, and we've made steps in there to ensure that we're still getting great equity into our deals, etc., and holding to our policy.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Great. Thank you.

Scott McLean -- President and Chief Operating Officer

I'd add to that that we've reported before that based on what Moody's has put out, our leverage portfolio is less than generally our peers'. That data is out there. And that portfolio is actually down a little bit year over year, so we're not seeing any increases in what is generally perceived as higher-risk portfolios.

Harris Simmons -- Chairman and Chief Executive Officer

I guess the other thing I would add is that really the strongest growth we've been seeing in the last -- over the last year has been in our municipal credit portfolio. And these are credits that -- credit score, internally very strong. I mean it's good quality business. They're smaller, they tend to be smaller credits.

And they are -- fundamentally over time have been changing the credit profile of the portfolio in a very positive way. So it's also -- I mean it is a factor in yields because with the growth we've had, these are -- because they're strong credits, you don't get the same margin that you would in a middle-market commercial loan, but the economics of them are still great and strong, and they tend to be very favorably will risk weighted in terms of capital. And that's one of the considerations there, too.

Ken Zerbe -- Morgan Stanley -- Analyst

Gotcha. OK. Sorry, Scott, just because you brought it up, I didn't see the leverage lending exposure in the slide deck. Do you have that right offhand?

Scott McLean -- President and Chief Operating Officer

I don't have it right offhand, although I can look for it. It may have been in the deck that we used in Europe, but we can easily get that. It's been in several of our decks.

Paul Burdiss -- Chief Financial Officer

Yeah. We'll come back to you at the end of the call on that. It's down a little bit from where we last reported it.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Perfect. Thank you.

Operator

Thank you. Our next question comes from the line of Gary Tenner of D.A. Davidson. Your question, please.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good afternoon. I wanted to just ask about the rate sensitivity and deposit beta slide. I think you had highlighted 21% total deposit beta in a 200 basis point cut or easing scenario.

What -- how do you think the beta is playing out initially if you get 25 or 50? Is there a ramp toward that 21% over time? Or do you think out of the gate you are able to cut deposit costs a little more aggressively?

Paul Burdiss -- Chief Financial Officer

Yeah, this is Paul. Just as when rates have gone up, as rates have gone up, there's been a little bit of a ramp effect. My personal expectation is that it would be similar on the way down. However, the difference being that given the sort of rapid change in rate, I would say that we are all really kind of actively monitoring and managing where deposit rates are relative to market rates.

So expectation might be for a little bit of ramp, but I would say we are managing for a better outcome.

Gary Tenner -- D.A. Davidson -- Analyst

OK. Thank you.

Paul Burdiss -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Brock Vandervliet of UBS.

Brock Vandervliet -- UBS -- Analyst

Thanks very much. Following on that question, I saw the 8% downward rate shock analysis for down 200. I know that's down from the first quarter. Based on the forward curve, are you comfortable with your positioning? Are there things you would look to, to add given the opportunity? Or based on your view on rates, you're comfortable.

Paul Burdiss -- Chief Financial Officer

This is Paul. I am comfortable with our positioning given what the market is willing to give us right now. That is to say I'm not willing to put on -- and I think it's true for the committee, our ALCO Committee, that we're just not willing to institutionalize 50 to 75 basis points of rate cuts and kind of fully realize those with certainty as opposed to what may be predicted by the market. Over the course of the last four to five years, I think we have been working down our asset sensitivity.

Five years ago, we were a much more asset-sensitive bank. And I think philosophically, our ALCO committee will continue to work down that asset sensitivity over time. So to the extent that the shape of the curve changes and market expectations change and the levels that which provide the hedges change, we will continue to be active in hedging the balance sheet. And over time, I would expect that asset sensitivity to decline further.

Brock Vandervliet -- UBS -- Analyst

Got it. OK. And I saw a quick reference to increase in qualitative factors around the provision. I don't think you've touched on that.

Was that a material item this quarter? Are you seeing anything new there?

Paul Burdiss -- Chief Financial Officer

I would say no. That was just my kind of attempt to provide a full color and clarity as it relates to the drivers of the allowance.

Brock Vandervliet -- UBS -- Analyst

OK. Thanks for the color.

Paul Burdiss -- Chief Financial Officer

Thank you.

James Abbott -- Director of Investor Relations

Latif, this is James Abbott here. I just wanted to answer a question from earlier on, on the leverage lending. It's about $1.2 billion of leverage loans per the FDIC's definition of what a leverage loan is.

Operator

And our next question comes from the line of Kevin Barker of Piper Jaffray. Your question please.

Kevin Barker -- Compass Point

Thanks. I just wanted to follow up on the operating leverage question earlier and some of your guidance around keeping noninterest expense in line with revenue. Are you saying that you're going to sustain the expense base in line with your revenue no matter what the revenue looks like? Or are you willing to even tweak that depending on the revenue outlook?

Paul Burdiss -- Chief Financial Officer

What I was trying to say, and I'll invite Harris and Scott to add on, what I was trying to say was that we recognize that the revenue outlook has become a little less predictable as the rate environment has changed. It changed very rapidly. And so we are really focused organizationally on managing our expenses to reflect that revenue environment. So that is to say, to the extent revenue does weaken, then we will absolutely go back and take a look at expenses and see where we can manage those more tightly.

Kevin Barker -- Compass Point

OK. And then when you think about the opportunities on the expense side, where do you see areas where you could cut expenses, whether it's branch count or back office or decreasing investment in some of the things that you see out there today?

Scott McLean -- President and Chief Operating Officer

Yeah, I would -- this is Scott. I would just comment, Harris mentioned that we do have a lot of projects under way. The one big technology project, we're not inclined to slow our spend right there because we're on a path to install our new deposit system in about two and a half years. And -- but there is a portfolio of other projects that we could slow down a bit that have a current P&L impact.

And then there's just a variety, just the simple, easy, fast, safe collection of projects that are going on, there's just a big bucket full of smaller expense opportunities that we're working on at any point in time. And then finally, incentive comp is certainly a factor, as Harris noted.

Kevin Barker -- Compass Point

Thank you.

Operator

Thank you. Our next question comes from Steve Moss of B. Riley FBR. Your question, please.

Steve Moss -- B. Riley FBR -- Analyst

Good afternoon. Just wondering here, with the increase in wholesale funding, how much higher do you expect it will go as -- if loan growth remains strong? Or will you use securities perhaps to fund some of your loan growth? And then also just on a related thing there, what were your yield on loans for the quarter?

Paul Burdiss -- Chief Financial Officer

As it relates to the wholesale funds, obviously, that's a function of loan and deposit growth. In the most recent quarter, clearly we saw loan growth exceeding deposit growth. But we organizationally, I'd say over the last couple of years, have really changed the way we are approaching the market with respect to garnering deposits. And so I remain hopeful that we'll be able to maintain some level of deposit growth that'll support that loan growth.

And therefore, the reliance on wholesale funding would be also limited. As it relates to securities portfolio, as I said in my prepared remarks or maybe it's in the outlook slide, my expectation is that we could continue to see a modest decline in the securities portfolio. That will be helpful as it relates to funding loan growth. James usually has in his fingertips the oncoming loan yield.

I do not have that off the top of my head. So James, if you have it, great. And if not, we'll get back to you.

James Abbott -- Director of Investor Relations

I would -- we do have it. But it's not -- the way I would probably best describe it is that over the last two or three quarters, we've seen a shift from where the back book loans that were maturing and rolling off and the front book of new loans that are coming on has moved from being kind of neutral to somewhat negative and meaning that the old loans rolling off are the higher yield than the new loans coming on. Part of that is what Harris mentioned with the municipal loans. We're putting on a decent portion of municipal loans, residential mortgage loans.

All of those have lower loan yields than where they have been in the past. And so kind of at the end of the day, I could give you the exact number. But it's -- what's more important is, is that difference between the front book and the back book. And I would say that's kind of in the 15-basis-point area, and it has been for the last couple of quarters in that area.

Steve Moss -- B. Riley FBR -- Analyst

OK. That's helpful. And then just wondering, any updated thoughts on capital targets here and if maybe some of the signs you've seen of a slowing economy are having a -- are impacting your capital thoughts.

Paul Burdiss -- Chief Financial Officer

Well, I'll start and others can join in. We repurchased $275 million in the second quarter. You saw that consistent with, I think, the pace that we've been on for the last several quarters. As Harris said in his remarks, we set forth, probably now a good 12 months ago, we set forth kind of a target to be at peer median or peer median plus as it relates to the common equity tier one ratio.

And there hasn't -- we haven't seen anything that has taken us off pace to achieve that.

Steve Moss -- B. Riley FBR -- Analyst

OK. Thank you very much.

Operator

Thank you. Our next question comes from David Long of Raymond James.

David Long -- Raymond James -- Analyst

Good afternoon, everyone. Could you guys provide additional detail on that $8 million credit net charge-off, maybe what industry or what geography that was located in?

Paul Burdiss -- Chief Financial Officer

We did not. I didn't think it was big enough to call out that sort of detail other than to say that we do not believe it was related to any other underlying trend in the portfolio.

David Long -- Raymond James -- Analyst

OK. Got it. And maybe I'm jumping the gun here a bit on CECL, it sounds like you'll give some more color maybe next quarter. But at this point, has the implications of CECL impacted your appetite to originate loans in specific categories?

Harris Simmons -- Chairman and Chief Executive Officer

Not at this point. But we do think that that's one of the perverse ramifications of CECL potentially down the road. But at this point, no.

David Long -- Raymond James -- Analyst

OK. Great. Thanks, guys.

Harris Simmons -- Chairman and Chief Executive Officer

Thank you.

Operator

At this time, I'd like to turn the call back over to James Abbott for any closing remarks. Sir?

James Abbott -- Director of Investor Relations

Thank you, everyone, for joining the call today. We appreciate your attendance, and we appreciate all of your questions. If there are further questions, we are happy to take them. I'll be around throughout the evening and throughout the rest of the week.

So thank you for your time, and we'll see you again shortly. Have a good night.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

James Abbott -- Director of Investor Relations

Harris Simmons -- Chairman and Chief Executive Officer

Paul Burdiss -- Chief Financial Officer

John Pancari -- Evercore ISI -- Analyst

Ken Usdin -- Jefferies -- Analyst

Scott McLean -- President and Chief Operating Officer

Peter Winter -- Wedbush Securities -- Analyst

Marty Mosby -- Vining Sparks -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Ed Schreiber -- Chief Risk Officer -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

Brock Vandervliet -- UBS -- Analyst

Kevin Barker -- Compass Point

Steve Moss -- B. Riley FBR -- Analyst

David Long -- Raymond James -- Analyst

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