Zions Bancorporation NA

NASDAQ:ZION

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen. And thank you for your patience. You joined Zions Bancorporation's Fourth Quarter 2017 Earnings Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time [Operator Instructions]. As a reminder, this conference maybe recorded.

I would now like to turn the call over to your host, Director of Investor Relations, Mr. James Abbott. Sir, you may begin.

[James Abbott, Director of Investor Relations]

Thanks Latif, appreciate it. And I would clarify that the conference call is being recorded. And good evening to all of you. We welcome you to this conference call to discuss our 2017 fourth quarter earnings. For our agenda today, Harris Simmons, Chairman and Chief Executive Officer, will provide brief overview of key strategic and financial objectives. After which Paul Burdiss, our Chief Financial Officer, will provide an update 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; Ed Schreiber, Chief Risk Officer; and other Zions executives who are available to address your questions during the question-and-answer session.

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

The earnings release, the related slide presentation and this earnings call, contain several references to non-GAAP measures, including pre-provision net revenue and the efficiency ratio, which are common industry terms used by investors and financial services' analysts. Certain of these non-GAAP measures are key inputs into Zions' management compensation and are used in strategic goals that have been and may continue to be articulated to investors. Therefore, 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. During the question-and-answer session of the call, we ask you to limit your questions to one primary and one related follow-up question to enable other participants to ask questions.

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

[Harris Simmons, Chairman and Chief Executive Officer]

Thank you, James. And we welcome all of you to our call today to talk about our fourth quarter and full year results. I am going to go through a few of the slides, beginning with the deck we’ve provided to you. On slide three are some highlights for the quarter.

At a high level, we were really pleased with the performance of both quarter and the year. We established some very specific financial targets back in early 2015 that included some goals for 2017. We achieved those goals and today the Company is substantially more profitable. We eliminated considerable amount of inefficiency, and we've transformed a lot of our operations to be simpler and easier for both our employees and customers. But we are not finished. Our culture of identifying ways to simplify and streamline is firmly established around the company, and we plan to deliver continuous improvement in operational and financial efficiency in quarters and years to come, while investing in areas that we expect should result in a healthy rate of revenue and earnings growth.

Looking specifically at the quarter, we experienced continued strong growth in earnings per share, up about 33% from the year ago period, if adjusted to exclude a couple of items that were directly related to the change in the federal tax law. We were pleased with loan growth, which increased 5% over the year ago period, which compares to about 2.2% for large domestic commercial banks. We were able to push the efficiency ratio down to 61.6%. But is excluding the larger charitable contribution that we detail on slide three, it would have been actually just under 60% for the quarter.

For the full year, efficiency ratio was 61.7%. Again, is excluding the larger charitable contribution and the expense associated with the Hurricane Harvey, which we detailed last quarter.

A quick note about the contribution, the charitable contribution. We contribute several million dollars per year as part of our contribution to our communities. And we expect to make additional contributions in 2018 and beyond, outside of this unusually large contribution. And this large contribution and fourth quarter will displace some of the expenditures that we would otherwise be making in 2018 in succeeding year. So we’ll be doing portions through our income statement and a portion through the foundation. But in combination, we don’t expect to be ramping up our charitable contribution spending, we simply front-end loaded some of that back into 2017.

We remained disciplined with the pricing of funding. Our so called deposit beta or the increase in the cost of deposits expressed as a percentage of the increase and the cost of federal funds rate, was only 3% during the quarter. And our funding beta, which includes the cost of borrowings, was 14%; the combination of those two factors led to healthy increase in sustainable net interest income, up approximately 10% over the prior year fourth quarter.

With regard to credit quality, we've remained pleased with continued strong improvement, including a 9% linked quarter decline in classified loans and 12% linked quarter decline in non-performing assets, including loans that are 90 days or more past due, and only 11 basis points of annualized net charge-offs.

Loans outside of the oil and gas loan portfolio experienced another remarkably good year with only two 100s of a percent or 2 basis points of loan losses as a percentage of average loans if you exclude the single commercial credit that was subject to a department of justice investigation in the first quarter, or 9 basis points if you include that credit.

On slide four, our adjusted pre-provision net revenue reflect steady improvement, up 19% from the year-ago quarter. And it's a previously referenced larger charitable contributions excluded pretax pre-provision net revenue, increased 25% from a year-ago quarter. Some of the growth is due to the benefits of securities purchases, which we do not expect to be as significant contributor to growth over the foreseeable future. However, we do expect continued moderate loan growth and customer related fee income growth, combined with continued expense discipline, which should contribute to further positive operating leverage. And if the Federal Open Market Committee continues to raise the federal funds rate, we would expect further improvement in our pretax pre-provision net revenue. Although, that benefit is not included in our guidance or outlook.

As we’ve mentioned in the past, the rate of growth seems likely the slow. Although, we still expect the strong rate of growth.

Turning to slide five, I've already highlighted the efficiency ratio in my earlier comments. But visually, this represents all the work we've done since 2014 to improve the profitability of the Company. We expect to push to achieve an efficiency ratio below 60% for the full year 2019, excluding the possible benefits of rate increases.

Slide six depicts two key profitability metrics, return on assets and return on tangible common equity. Return on assets was 74 basis points in the fourth quarter of 2017 compared to 88 basis points a year ago. However, excluding the larger charitable contribution and revaluation of the deferred tax asset, return on assets increased to 1.07%. Return on tangible common equity was 7.4%, but again excluding those two items, it would have been approximately 10.9%. We’re encouraged by the continued improvement and remained focused on achieving competitive returns on our assets relative to peers.

Moving to slide seven. We experienced 5% year-over-year growth in loans held for investment despite continued attrition in the national real estate portfolio, as well as the term commercial real estate, the oil and gas portfolios. All told attrition was about $550 million or more than a percent of loan growth.

We are comfortable with our loan concentrations. The economy is generally strong. We're optimistic that the new tax policy will be helpful to generate growth and we made some improvements in origination process, all of which should contribute to continued moderate loan growth.

Deposits declined slightly, about 1% over the past year, which is almost entirely due to large dollar deposits rather than middle market or small business to personal accounts. Loan growth outpaced deposit growth over the past year by $2.7 billion, which we funded with incremental wholesale borrowings. We expect to remain disciplined around deposit pricing. We've experienced some pressure on larger dollar deposits, but the majority of our deposits are smaller accounts, both for personal and for business accounts. And therefore, not likely to be as price sensitive in our opinion, as the larger deposit customers are.

We sweep several billion of customer funds off the balance sheet to asset managers over the course of next few months and quarters, we expect that some of that will return to our balance sheet should be source of funding for earning asset growth.

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. I'll begin on slide eight. For the fourth quarter of 2017, Zions reported net earnings applicable to common shareholders of $114 million or $0.54 per diluted share. Here is detail of the couple of key items, so I won’t repeat them here. I will add that we are pleased with the financial performance of 2017, and note that we've successfully delivered on our financial commitment made to you on June 1, 2015.

Let me make a few comments about revenue. Nearly 80% of our revenue comes from net interest income. Slide nine depicts the recent trend in net interest income, which continue to demonstrate substantial growth in the fourth quarter relative to the prior year period. Net interest income increased $46 million or nearly 10%. Interest income increased approximately $60 million, of which approximately two-thirds came from loans and one-third resulted from the investment portfolio.

With respect to revenue drivers, I'll discuss earning asset volume first then transition to rates. Although, we don't have a slide on this, as we discussed in the recent past, we do not expect investment portfolio growth, which has been a meaningful contributor to pre-provision net revenue growth over the past several years to contribute significantly to growth in net interest income. The investment portfolio has now grown to the appropriate size relative to the size of our balance sheet.

Slide 10 is a graphical representation of our loan growth by type relative to the year ago period. The size of the circles represent the relative size of the loan portfolios and the circles are ordered by size, left to right, from smallest to largest portfolios respectively. Total loan growth, including the effects of the declining oil and gas portfolio and the national real estate loan portfolio, was 5%. The key take away from this chart is relatively balanced growth across the loan portfolio. Commercial and industrial owner occupied and home equity loans all increased in the mid single digit range, while we experienced strong growth in one to four family and municipal loans.

We experienced general stability in construction and land development and term commercial real estate loans. As expected, we experienced declines in oil and gas loans and national real estate loans.

Shown at the bottom right is our expectation for loan growth by product type. We are comfortable with our commercial real estate concentrations and plan to grow commercial real estate loans at rates which are generally consistent with the overall mid single digit loan growth rates.

We expect oil and gas loans to stabilize or possibly increase somewhat. And although, we don't expect national real estate portfolio to increase in 2018, we do expect the decline to be relatively minimal compared to prior years.

Slide 11 breaks down key rate and cost components of our net interest margin. The top line is loan yield, which increased three basis points from the prior quarter to 4.30%, and increased 11 basis points over the year ago period. Meanwhile, relative to the year ago quarter, we experienced about two basis points of deal headwind due to reduced benefit from loans purchased from the FDIC.

New loan production for the fourth quarter was up two basis points higher than the yield on our portfolio. Without future rate hikes, we expect the yield on the loan portfolio to remain generally stable from the current level. Favorable factors include the December rate hike and new loan production, while adverse factors include the tax effect on municipal loans and income from loans purchased from the FDIC back in 2009.

Harris touched on our deposit and funding costs earlier. But to expand a bit on his comments, the average cost of total deposit increased to 13 basis points from 10 basis points a year ago. During which time, the average federal funds rate has increased 75 basis points, or a so called deposit beta of about 4%. Interest expense, which includes both deposits and borrowings expressed as a percentage of total deposits and borrowings rose 26 basis points from 15 basis points or a 14% funding beta.

Reflected in the lower left is the change in the mix of earning assets. As a result of this mix shift, we experienced about 3 basis points of margin headwind during the past year due to 2 percentage point lower concentration of loans relative to earning assets.

The security deal declined slightly. This was primarily due to higher premium amortization on the SBA or small business association loans, administration securities. For those of you who have followed the Company for some time, you've heard us discuss that the SBA securities have a high premium relatively associated with them; and that as the economy improves, we would expect a higher rate of premium amortization due to higher prepayments, which did occur during this past quarter.

More broadly, we have been reinvesting cash flow from our investment portfolio into securities with a marginally higher yield than the average portfolio yield. Therefore, all else equal, we would expect yield and securities portfolio to increase slightly over the longer term.

On the right side of the page is a table depicting the percentage of loans that have a shorter term, medium term and longer term interest rate reset base. We have detailed the effective interest rate swaps and floors on the loan portfolio so that you may better understand the possible reaction and timing of yield on the loan portfolio to rising short term rates versus rising longer term rates.

Overall, our net interest margin should be relatively stable in the first quarter of 2018 relative to the fourth quarter as we expect some benefit from the December 2017 increase and the Fed funds target rate to help. However, this will be offset by the effect of tax reform and its impact on the municipal loan and securities portfolio yield, which we estimate to be about 3 basis points of headwind to net interest margin.

On slide 12, we show the model effect on net interest income in a rate environment that is 200 basis points immediately higher across the curve relative to the current level. This would generate 5% increase in net interest income, which assumes a 36% deposit beta.

On the right shows the comparison of this rate rising environment versus the last time we experienced that tightening where the beginning of the ten lines on a quarter immediately before the Fed began to raise rates. For Zions, deposits have been less sensitive so far this cycle as compared to the last, up only 3 basis points relative to the 150 basis points move by the Federal Reserve, as compared to about 25 basis points of higher deposit costs at a comparable point in the prior cycle for a similar move by the Federal Reserve.

We have a very granular deposit base with a very high ratio of small balance accounts from small and medium sized businesses and a very granular portfolio of consumer deposits. We expect that the increase in our cost of deposits may remain low for the near term.

Turning to slide 13 and non-interest income. Total non-interest income was $139 million, up from $128 million a year ago. Beginning with customer related fees shown on this slide, we experienced a 9% increase to $127 million from $118 million a year ago. Most lines experienced a favorable improvement relative to the year ago period. Treasury management fees, which are included in deposit service charges, increased about 6% from a year ago period with card and loan fees increasing each about 4%.

However, retail deposit service charges declined slightly due in part to lower non-sufficient funds and overdraft fees. We've experienced strong performance in wealth management, which includes trust businesses and certain capital markets products.

Non-interest expense on slide 14 increased to $417 million from $404 million in the year ago quarter. If adjusted for items such as severance, provision for unfunded lending commitments and other similar items, non-interest expense increased to $450 million from $395 million in the year-ago period. Furthermore, if one excludes the $12 million incremental contribution for the charitable foundation, as Harris discussed, the adjusted non-interest expense would have been up by only about 2% from the year ago period.

A few notable points; salaries and employee benefits increased $13 million from the year ago period; this is mostly explained by the substantial improvement in profitability this year versus the last year; and this results in higher profit sharing and incentive compensation pay to employees; relative to the prior quarter, occupancy declined about $6 million; you may recall in the third quarter of 2017, we accrued for estimated property damage associated with Hurricane Harvey in Houston; and as mentioned in the press release, other non-interest expense increased from the prior quarter and year ago quarter due to the larger contribution to the charitable foundation.

Slide 15 depicts the overall credit quality metrics of our loan portfolio. Harris provided some high level comments earlier, and so I will echo his remarks. We are encouraged with the meaningful improvement in classified loan, non-performing assets and net charge-offs. Much of the improvement came from the oil and gas portfolio and we remain optimistic that we will continue to see further favorable changes due to oil and gas credit measures. Although, not shown in this slide, we have materially and substantially improved the weighted average risk rate on both the commercial real-estate and the commercial loan portfolios during the past five years. And we remain disciplined on our commercial and on our consumer loan underwriting criteria. As such, we expect the manageable credit costs, while much of the provision for credit losses will cover these incremental loan growth.

Slide 16 is a visual representation of the former tax structure with the federal statutory rate of 35% and our state's statutory rate of about 4.8% pretax or about 3% after tax. And this is presented alongside on our effective tax rate. And the third bar for 2017 excludes items such as the expense associated with the revaluation of the deferred tax assets taken in the fourth quarter and benefits to state tax expense in the first half of the year and reduced tax expenses due to the exercise investing of stock based compensation, which is known as ASU 2016-09.

On the right side is a representation of what we expect will be the statutory and effective tax rate for 2018 and beyond, with one important caveat. Some of the states in which we do business maybe evaluating their tax structure in reaction to the change in the federal tax law. And thus, we may experience a change to the state tax rate. Nonetheless, we feel comfortable giving an outlook that the 2018 effective tax rate is likely to be between 24% and 25%.

On slide 17 is a list of our key objectives for 2018 and 2019 and our commitment to shareholders. We are fully committed to continuing to achieve positive operating leverage. We have three years behind us in our effort to materially improve profitability and grow earnings. We remain committed to further improvement and simplification of our operational processes. We expect to continue to experience improvement in the efficiency ratio and that pre-provision net revenue will increase at a rate in the high single-digits.

This outlook assumes the impact from the change in the tax law on municipal loans and securities and at the higher salaries and bonuses paid to many of our employees. And also contemplates the effect of the December 2017 increase and the Fed funds rate. Although, it does not assume any further increases in net or other benchmark interest rates.

We expect to continue to invest significantly in technology improvements, which includes the substantial overhaul to our core systems. Back in 2015, we indicated that we are going to be targeting much more substantial returns on capital that could be seen then and we are tracking well towards those goals, although there is still room for improvement.

Regarding returns of capital, we have increased that amount to a level above the peer median and we view a moderate increase of balance sheet leverage as appropriate, particularly given the reduction of the risk profile of the company. Unless it is often enquire as to the appropriate level of capital and we have responded that the stress testing results are the primary driver and you can see our company run media stress test result on our Web site.

But to highlight a single number, our post stress common equity tier one ratio was 9.9%, and well above the 4.5% minimum regulatory threshold. A second consideration is where we rank within our peer group. For various reasons, we believe it is important to remain somewhat stronger than the peer median with respect to capital. We recognize that the peer median is likely to decline over time. And so while the peer-median analysis is a relative threshold for us, the stress test is an absolute threshold.

Now moving to slide 18 and our outlook. We are maintaining an outlook for loan growth at moderately increasing, which is to be interpreted as an annual growth in the mid-single digits. We expect net interest income to increase moderately over the next 12 months. We assume no additional rate hikes in this outlook. Although, we do incorporate into our view, the December 2017 rate hike. Additional increases in short-term rates are expected to improve net interest income.

We posted a net provision for credit loss, which includes both funded and unfunded commitments of minus $12 million in the fourth quarter. Asset quality continued to outperform our expectations and that credit costs have been lower than expected, a trend which may continue. However, our base case scenario calls for a modest provision for credit losses over the next several quarters that is greater than zero. In other words, we may experience reserve release as credit quality continues to improve, which may be offset by reserves for new loans and off course ongoing net charge offs.

Customer-related fees, we expect, which are defined in our press release and exclude dividend income and securities gains and losses, should increase slightly from the level reported in the fourth quarter. As I mentioned earlier, fee income remains the key focus for the company. Although, the outlook recognized is that the fourth quarter 2017 level was relatively strong.

Excluding the effect of the $12 million contribution to the Company's charitable foundation, we expect adjusted non-interest expense for 2017 to be slightly higher than the 2017 level. To be clear as shown on page 21 of the earnings release, adjusted non-interest expense was $1.640 billion, less the $12 million contribution, one would arrive at a base rate of $1.628 billion. From which we would expect an increase in the low single digit rate of growth for the full year 2018.

Excluding stock based compensation, the effective tax rate for full year 2018 is expected to be between 24% and 25% as stated earlier. Preferred dividends are expected to be approximately $34 million over the next four quarters, and diluted shares may fluctuate due to both share repurchases and the dilutive effect from the outstanding warrants. The dilutive effect of the warrants is predominantly dependent upon the future price of the stock. You may see in the appendix further sensitivities on the effected warrants on diluted shares outstanding.

This concludes our prepared remarks. Latif, would you please open the line for questions? Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Kevin Barker, Piper Jaffray. Your question please.

[Kevin Barker, Piper Jaffray]

You made a quick comment about the securities yield bouncing back higher. Could you walk through that again and some of the reasons why you're starting to see securities yields go back up given we saw quite a bit of decline in the fourth quarter?

[Paul Burdiss, Chief Financial Officer]

The decline in the fourth quarter was really related to prepayments we're experiencing on our SBA securities. And as noted in my prepared remarks and as you know, those have a relatively high premium attached to them. So relatively minor changes in prepayments can lead to, I will say relative to the other types of securities, disproportionate changes in yield. So all other things equal, the point that I was trying to make was that the securities that we're buying today actually have a higher yield than the securities that are coming off.

And so over time, my point was again with similar duration and extension risk kind of characteristics, the yield on the securities that we're buying today have a higher yield than the yield the securities are coming off. And so therefore over time, again all other things equal, we would expect the securities portfolio yield to creep up over time.

[Kevin Barker, Piper Jaffray]

And then also in your guidance for fee income, I noticed you're seeing slightly increasing for customer facing fees. Now, fee income as a whole, has been growing at roughly a 5% clip over the last couple of years. Was there a reason why you're seeing maybe a slight decline there? Or is it just related to the customer fees, in particular.

[Paul Burdiss, Chief Financial Officer]

Well, the item there was really related to core fees. And as I tried to say in my prepared comments, the fourth quarter came in pretty strong. And so because specifically that page is a fourth quarter to fourth quarter view, that's really I think what that comment reflects. I will say over time, we are clearly continued to target mid single digit growth in our core fee income.

[Operator]

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

[Steve Moss, B. Riley]

I was wondering, you just discussed that commercial real estate growth we saw this quarter. Where are you seeing that from here?

[Harris Simmons, Chairman and Chief Executive Officer]

Could you repeat that?

[Scott McLean, President and Chief Operating Officer]

Commercial real estate growth this quarter…

[Harris Simmons, Chairman and Chief Executive Officer]

Where you see it going from here you're saying?

[Steve Moss, B. Riley]

Where you seeing it from here, where are you seeing those sources of growth and where do you know -- or should we expect similar trends in the future here?

[Scott McLean, President and Chief Operating Officer]

This is Scott McLean. I would just say that the portfolio, commercial real estate portfolio in general last year declined as you can see. But we did start to see a pick-up in the fourth quarter and we anticipate growth that should be consistent with the rest of the portfolio throughout 2018. And really we're seeing it across the franchise. And it’s predominantly CRE term as opposed to construction, which is consistent with the mix of our portfolio currently.

[Steve Moss, B. Riley]

And if we were to get another rate hike in March, what would you expect the benefit to the margins to be?

[Scott McLean, President and Chief Operating Officer]

Well, we provide a lot of disclosures around this. So that I can't answer that so that I don't have to answer that question directly, because the answer is because of the effect on the margin is dependent somewhat on also the shape of the curve. And so you can see on the slides that I referenced -- we’ve got about, if I remember right, 40% of our loans in the near term are impacted by the change in rate. Obviously, changes in deposit rates are going to be heavily influenced on the change in the net interest margin. So all that together net-net, you're looking at probably a couple of basis points improvement in the margin.

[Operator]

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

[Brad Milsaps, Sandler O'Neill]

Harris, I was just curious in 2015 you guys laid out the multiyear efficiency goals, and now it's kind of the primary targets for management and kind of how your incentives are structured. Just kind of curious obviously you still have those efficiency targets out there in the out years [indiscernible], what else is kind of the big driver for you guys? And as a follow-up to that, you've commented in the past that given where rates have been and the amount of capital banks that had have to hold maybe the old measures of returns for banks shouldn't apply anymore. Just kind of curious now what you might be thinking about kind of returns for the industry you guys are now above 1% ROA, still have a lot of capital, but just any additional color in that regard would be helpful?

[Harris Simmons, Chairman and Chief Executive Officer]

Sure. Well, I think in terms of the kind of measures that we're going to be looking at, and I think when we -- if you go back two to three years ago, we -- it was important to focus on something like efficiency ratio. We were way out of the middle to third way in terms of where we should have been probably in -- we've made a lot of progress as we've demonstrated in – we’ve shown some of the slides here. I think as we get little closer to where the industry is, our focus internally is very much on continuing to work at reducing costs, making -- really making everything we do as efficient as we possibly can.

I expect that in terms of the efficiency ratio, we will in 2018 see incremental improvement over 2017. It will be at a slower pace as you can -- the obvious. We can't continue the same kind of trend that we earlier -- the same of pace of improvement, but we'll see further improvement. I am quite confident. And internally I think our focus is shifting more towards, how can we grow pretax pre-provision net revenue, which I expect that growth rate to be in the high single digits, somewhere thereabouts. And it's a focus on operating leverage and growth of PPNR, and we're working on a lot of internal initiatives that I think will help us continue the trajectory that we've been on. And again not at same pace we – there was a lot of low hanging fruit and that becomes tougher as time goes on, but there's still a lot of opportunity.

As far as capital goes, as Paul mentioned, we've continued to ramp up the payout. And when we announced the merger -- our intent to merge the holding company into the bank, it triggered some questions from some investors as to whether that was going to create a sort of a one-time major adjustment in capital. And we I think communicated to everybody that wasn't our intent. It's really continued to work towards rightsizing capital in a disciplined and orderly way. And certainly looking at what's happening in terms of the economic environment and what's happening to capital levels in the industry generally.

And with the focus on our own risk profile, I do expect that it will be more focused on our own stress test results that will be a big driver, and we are doing a lot of things internally to produce this sort of - to incorporate those results into how we incentivize structure and pricing and other things and like I expect it will be really good for shareholders. We want to be sure that out on the frontlines that everybody's incentives are aligned in terms of trying to create the best possible structure that protects the bank while also providing pricing that generates adequate return.

So I guess I'm giving a little just a window into how we are thinking about it, we don’t have any specific goals that we are going to communicate today in terms of what's going to happen our capital levels except that I expect that will continue kind of right size as the balance sheet grows and we continue to pay out capital at somewhat accelerated pace.

[Operator]

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

[Ken Usdin, Jefferies]

Paul, I was just wondering if you can elaborate a little bit more on the drivers of expense growth. First I guess how would you define low single, you help us kind of understand the ranges for the mid you were talking about, but in terms of off of that 16 to 28 days? How would you just help us understand what you consider low single?

[Paul Burdiss, Chief Financial Officer]

Ken, we are publicly not super specific there; however, if you and kind of open up the Zions Bancorp or another story, you can see the last year we used a similar return where we are talking about slightly increase and you may recall that expenses increased kind of depending higher measuring it kind of 2% to 3% once you factor in that charitable contribution we discussed. So Ken I'd say it's kind of the net ballpark hopefully that's helpful.

[Ken Usdin, Jefferies]

Yes, and in that 2% to 3% issuing a ballpark. I guess how are you weighing just ongoing programs in terms of the tax spend and then anything incremental on top of what you did in the fourth quarter? And do you have any thought about do you accelerate some of the tech projects? Or do you just keep everything on that long-term seven year plan than you’ve had it on for a long while?

[Scott McLean, President and Chief Operating Officer]

Ken, it's Scott McLean. Let me respond to that part of it. When you look at the expense growth which Paul has just described qualitatively, you described a bit more quantitatively. We -- there are lot of moving parts, we are finding ways to save money all the time based on our simplification initiatives and Harris described, but clearly employment cost is primary driver of the number. And I would just say that we are adding bankers and growth areas particularly number of our strong fee income areas like municipal finance, mortgage, wealth and just to mention a few.

So, we are adding bankers in our faster growing and fee income areas and we are adding just basic commercial bankers and small business bankers across the franchise so that would be the primary driver there and then the secondary driver would be on a technology cost as you noted and our future core project the replacement of our long systems it's very long system, our three long systems and two deposit systems.

It's just one of numerous technology projects its probably been the one we talked about most but we're quite spending 20% to 25% of our tax spend this year on advancing our digital capabilities and so there is technology in general is a fundamental driver of the expense number as well. And I would say the comparative 5 or 6 years ago, the investments we're making on the technology side are much more offensive and forward leaning, we're five to six years ago there were much more defensive just trying to keep the shop running appropriately.

[Operator]

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

[Marty Mosby, Vining Sparks]

Paul, wanted to ask you about how -- when you look at that by 20, dilutive impact of the warrant, it looks like you kind curve into there is may be diminishing increase as the stock price goes higher. And over the last year share count even though you accelerated share repurchase over last two quarters is still going up because of the impact of these warrants. Is that the goal and expectation that that share count can start now that go down as the impact from higher stock prices becomes a little less?

[Paul Burdiss, Chief Financial Officer]

Well, I know your first point you got a very sharp eye Marty although I would say that that curve is probably not overly pronounced. I would describe there is more linear then curve but it is slightly curved. So as I said in my prepared remarks depending upon the kind of continued reaction of our share price to again some pretty significantly improved fundamentals you have over the last couple of years. All other things equal obviously, if the share price doesn’t move from here then we would expect the share repurchases to have much more direct impact on diluted shares outstanding. It's just what we have been experiencing off course is a share price increase that has been -- that is exceeded our ability under our capital plan to go out and buy back stock.

[Marty Mosby, Vining Sparks]

And then the other thing that’s really just much more of a suggestion as we -- you were highlighting Investor Day coming up here shortly. That with the technology spend that you're talked about, there has been such a significant project. They've really been able to talk about because you don’t see those expenses in the short run, they really get capitalized and then they kind run out overtime. But to really kind outline, one, what are the benefits that you're beginning to see and how that they start to really kick in? And then two how much we kind behind the scene capitalizing eventually is going to start amortize as the systems going to play?

[Scott McLean, President and Chief Operating Officer]

Marty, it's Scott. It’s a great point and we do plan on focusing on that as well as our simplification initiatives is well on Investor Day. Thanks to many subjects we will talk about.

[Operator]

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

[Geoffrey Elliott, Autonomous Research]

The decision to move away from the holding company structure to something simpler, could you talk a bit about how you made that decision and in particular on timing why announced when there is a legislative process underway that could result in significantly reduced regulation one a way until you see the outcome of that and then decided dropping the whole curve as the bank think to do?

[Harris Simmons, Chairman and Chief Executive Officer]

Sure. I would say that the process began about a year and a half ago, and as we were made the decision to consolidate the various charters that we had -- we had I think we call seven different banking subsidiaries and that required a holding company. Once we consolidated the charters I guess I sort of asking myself the question in the name of simplifying life. I ask myself what was the benefit in having a bank holding company. And particularly as we look at our presence and perspective mix of businesses and operations, what can be done in a bank? What can’t be done in a bank? And frankly, virtually everything we're doing operationally in terms of business lines of business can be done in a bank.

Now in times past there were some things that you could do some of which are now prohibited by the Walter rule for example and also we've been winding down some of those investments and but you know the likelihood that we're going to find ourselves underwriting the equities and we're engaging in merchant banking and you know there's a domestic commercial bank. There's precious little in my view that you can really do with a holding company that you can't do in a bank, and that small set of things that you can do in a holding company are probably best left to very-very large companies.

And so that was the mindset as we set about investigating the opportunity, I can that I probably spent more time working on this legislation than any banker in America and so I mean I talked to a lots of Congressmen I think I know business landscape pretty well. And I'm highly in favor of the legislation and I think that I hoped that the Crapo bill will pass. But it's sort of dawn on us that it couldn't deliver one thing that merging a holding company into the bank could deliver and that was eliminating duplicate regulator altogether so the Crapo bill, they set the threshold at $250 billion will certainly be helpful to a lot of banks in terms of you know being subject to the Fed's stress test their models etc, but should still have in our case the OCC and the federal reserve coming in and performing examinations.

And I think most anyway you cut it, we said there's a lot of overlap in what they're doing and so that's fundamentally where we said we think that this is ultimately what the you know the right thing to do because it will give us good supervision, regulation, but it won't give us duplicate regulation every time we turnaround, which we've been seeing increasingly in recent years. So, that's fundamentally the reason behind it.

[Operator]

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

[Steven Alexopoulos, JP Morgan]

I'd like to start regarding the corporate tax rate coming down for your commercial customers. I'd imagine that as cash flows improve on a net basis, you might see upgrades and the need for reserve. I'd love to hear your thoughts on this, and if that could have a material impact on credit quality?

[Harris Simmons, Chairman and Chief Executive Officer]

Yes, the jury out on that, obviously, and there's also speculation among some of our -- some of the larger borrowers in the economy which as you know we don't generally lend to our clients particularly on the commercial side are some kind of small business and smaller and middle markets. There's some of those may take extra cash either coming from offshore otherwise to use that to pay down debt. I am not personally -- I don't think we're expecting a big effect of that on our core client base, nor are we expecting because again our clients look different than the much larger clients, nor are we expecting a material change in the credit quality. Although there's a lot yet to be seen I think as the effect of the tax legislation shakes through the economy.

[Steven Alexopoulos, JP Morgan]

Then an unrelated question on C&I loan growth, Zions Bank saw a $200 million decline quarter-over-quarter but you had nice growth in CB&T. Can you give a little color on each of those?

[Paul Burdiss, Chief Financial Officer]

Yes, there was a lot of activity at quarter end and I just -- in fact I don't have the details. I don't know that we could give you that color at the moment. We may be able to at our Investor Day give you a little more insight.

[James Abbott, Director of Investor Relations]

Steven, this is James, I'll just jump in with a little bit though as it, there've been some loans that have been maturing or being rebooked as they mature from some of our large scale part utility type of deals that are being rebooked in the geographies in which they exist. So, historically for example some alternative energy lending and types of things have been booked within Utah Bank. And that those some of that's being moved to California where it is actually based geographically but -- so there would be some of it.

[Harris Simmons, Chairman and Chief Executive Officer]

There would be a piece of it, but not a great big piece in the fourth quarter.

[Operator]

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

[Ken Zerbe, Morgan Stanley]

Just going back to the efficiency ratio. In the press release, you mentioned the 60% for 2019 as well. Can you just give us a little background -- just remind us, is there any fundamental reason why your efficiency ratio should be sustainably higher than a lot of the other sort of similar sized peers, because a lot of the banks of around your size are coming out with target somewhere like the mid -- call it mid to low 50s give or take just as a technology piece? Does it go down after all of your the future core spending slows? Just trying to understand the farther long term look?

[Harris Simmons, Chairman and Chief Executive Officer]

I guess I -- listen I'd say that, it's hard to speak to where they think they are going to get that kind of additional boost to get some down and to the low 50. So I think as we look at the peer group, which we measure I think which we measure our progress, we're getting to a point where we are closing in on sort of the median. We are at 61.6% for 2017 going into 2018, there are couple of headwinds as noted the lower tax benefit on the legacy municipal, securities and loans portfolio combined with that the bonuses and salary growth that we announced about the end of the year combines throughout 90 basis points that's about 90 basis points of efficiency ratio.

So that's some out of the headwind and we think despite that we're going to get a challenge to somewhere closer to 60 basis points. And I guess it gets incrementally more difficult but I think we get down I think very much within the kind of at least the middle of the pack it's not better overtime than our peer group. I do think but there are couple of things that our headwinds one is the technology stand that we've talked about that's about $35 million roughly going through the income statement annually on replacing core systems off course as Scott mentioned were also spending money on digital etcetera.

The other is that we have a the profile of our commercial loan portfolio is decidedly different from a lot of our peers it is smaller to the medium size of any commercial loan here is decidedly smaller than what you would see in the most of our peers and that's a little more expensive model I think to run but I think it also produces some benefits in terms of that kind of deposit base and we have and traditionally the kinds of loan yields that at the end we will achieve. So I don’t know exactly how to measure that against peers, but I think that's probably a factor. But I think nevertheless we're going to find ourselves very close to where peers are already here within the next 24 months.

[Paul Burdiss, Chief Financial Officer]

If I can just jump in there Ken, I've just as of Friday the peer consensus efficiency ratio for 2019 was about 58.5% so were our goals are not substantially different from that I would tell you and that's consistent with what Harris just said. The top cortile is about 57% so there is not a huge range between the peer groups that we said is planned today.

[Harris Simmons, Chairman and Chief Executive Officer]

And just to continue within that topic I know that couple of other things one is the effective tax while change is going to be about a 90% and that was 90 basis points increase in our efficiency ratio that's number one. And then you refer back to the press release which is Page 4 where we talk about inefficiency ratio that kind of near is 60%. I would note that could be higher or lower and so I would ask you to keep that in mind also and reference to what just what James just said kind of peer group relative.

And it sounds like the peers I think have not been doing necessarily a near-term, but more of our medium and longer term efficiency ratio outlook and just to be really clear that’s not what we provided here. What we're trying to express is that to a continued growth and pro provision of that revenue our efficiency ratio is going to continue to decline and improve.

[Ken Zerbe, Morgan Stanley]

And just as a follow up. After you really -- your slide deck on provision expense obviously has negative this quarter. The way of it reads I know you say modest there, but is it possible you could have either quarter or several quarters where between further oil and gas reserve release and Hurricane Harvey again, you could actually have sort of persistently negative provision at least for some short period during the year?

[Paul Burdiss, Chief Financial Officer]

This is Paul. I would say as frankly its possible, as we said, as we noted here there may be some releases as credit quality continues to improve and we had seen a fairly long line of continued credit quality improvement and charge offs would have been very good until we provide incremental growth, to the extent we have charge offs even that recoveries in some cases that’s absolutely possible.

[Ken Zerbe, Morgan Stanley]

Okay thank you.

[James Abbott, Director of Investor Relations]

And so this is James. We're at the end of about an hour, so we do have few questions to go so its lighting round variety here and we will just pick one primary question and one. Thanks.

[Operator]

Thanks. So the next question comes from Emlen Harmon of JMP Securities. Your line is open.

[Emlen Harmon, JMP Securities]

More I've got queued for you as a couple of parts, so we can do a quick follow up from that. Just in terms of bringing the money market balances on to the balance sheet, how much of that do you plan to relay to drive deposit growth and just what's the potential impact on deposit yields?

[Harris Simmons, Chairman and Chief Executive Officer]

Well, we haven't been very specific about that and it is identified as an opportunity. And we expected to be a significant part of our funding strategy over the course of next several quarters, as we said. But we now had provided specifics with respect to how that may affect over our yields, though I would say, I mean you can kind look at our wholesale borrowings and what is yield is on that, you can see that I think Page 17 in the press release and recognize that we would be bringing these on at a rate which is better than where we borrowing in the wholesale market.

[Operator]

Next question comes from John Pancari of Evercore. Your line is open.

[John Pancari, Evercore]

On the tax benefit just wanted to get your thought on how much of this benefit is likely to accrete to the bottom line and stay there? Or how much would you say that you're putting back in the business or ultimately going to get more competitive with?

[Paul Burdiss, Chief Financial Officer]

I'll take a stab otherwise. I find myself thinking about pretty much like deposit basis I guess. Whole like you can go on to, we're not deliberately going out and using it to try and buy market share. I think overtime the way markets work is that, it will -- a major portion of it probably dissipate end of way. But I think that will take a little bit of time. And so I think will capture most of that benefit 2018 incrementally less as we go along its markets just. This is one of these high class problems that corporate America haven't have the rest of which for very long-time so.

[Operator]

The next question comes from Dave Rochester of Deutsche Bank. Your line is open.

[Dave Rochester, Deutsche Bank]

Just one quick one on expenses. I know you guys mentioned giving some more detail later on the simplification effort. But can you just give an update on whether you still see that as a multiyear opportunity to control expense growth? And are you expecting any rate sensitivity in that expense growth guidance, meaning, if we were to see a bunch of rate hikes? Could that possibly allow for some expense growth for you?

[Scott McLean, President and Chief Operating Officer]

Dave, this is Scott McLean. I just think as we talk more at the Investor Day about the, what simplification is look like in our company. I happen to believe that the -- we're just getting started, we made a lot of really good progress in big areas, but we have a lot of other areas and now there's a lot of energy around this subject has been. And I think we're getting more effective in executing more quickly on creating change, and everyone of those simplification processes -- in many cases, it reduces cost but in some cases it increases revenue, certainly has an impact on customer satisfaction and employee satisfaction. So I think as we talk more about that story and tell that story more appropriately I think you'll -- think most investors will be encouraged by it.

[Dave Rochester, Deutsche Bank]

Great. Thanks and then.

[Scott McLean, President and Chief Operating Officer]

I'm sorry you mentioned the expense growth -- sorry, you know we would have to see really solid core revenue growth coming from things other than just interest rate changes. I think we're driven by a loan deposit pre-income growth, as long as those fundamentals are increasing we'll probably lean into those businesses and in terms of supporting people and technologies. But just getting increased rate benefit I think we'll be very conscious of not spending that away inappropriately.

[Operator]

Next question comes from Chris Spahr of Wells Fargo Securities. Your line is open.

[Chris Spahr, Wells Fargo Securities]

My question is regard to your fee income and this seems to be one of the best core fee income numbers that you put up and I guess in the history of the firm, at least you've been a customer related fee income yet your guidance for next year really hasn't changed that much, and almost implied like a lower level of run rate that you posted in the fourth quarter. So what happened in the fourth quarter that was better than expected? And what can you do to kind of kick start fee income to kind of at least change your outlook on that line?

[Scott McLean, President and Chief Operating Officer]

Sure, thank you. This is Scott. This is where quarter-over-quarter comparisons to get a little out of whack. We felt great about the fourth quarter of this year versus the fourth quarter of last year, but it's really 12 months run rates as we look at and that mid single digit growth rate is what we're still guiding to. But this fourth quarter versus fourth quarter of '16, we just saw you know really strong numbers in those two quarterly comparisons related to our normal workhorse fee income categories like treasury management, bank card. But we saw some really unusual increases in municipal finance, foreign exchange and a number of others that our wealth business that just happened to have really strong 4Q versus 4Q comparisons. Having said all that, I think if we can put up 5% mid single digit growth rate numbers in fee income, these are very basic products. We are not selling investment banking or exotic capital markets activities, and so these are generally businesses that grow kind of mid single digit growth rates.

[Operator]

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

[James Abbott, Director of Investor Relations]

Thank you very much. Appreciate that, everyone joining the call today. We -- as it's been mentioned a couple of times in the call today, we do have an Investor Day coming up on March 1st. It is mentioned on Page 7 of the earnings release. The event is expected to begin at 8 AM Mountain Time, 10 AM Eastern Time. We expect the event to run for several hours, and we'll be webcasting that, although we'd be delighted, if you'd join us in person, sounds more enjoyable. And so please contact [e-mail] or myself directly, or via the phone numbers listed in press release.

Thank you so much for joining us for the call today. And please -- we look forward to seeing you in March if possible or at our next earnings call, next quarter. Thanks so much.

[Operator]

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