Zions Bancorporation NA

NASDAQ:ZION

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined Zions Bancorporation's Fourth Quarter 2018 Earnings Results Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded.

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

[James Abbott, IR]

Good evening and thank you, Latif. We welcome you to this conference call to discuss our 2018 fourth quarter earnings. For our agenda today, Harris Simmons, Chairman and Chief Executive Officer, will provide a brief overview of key strategic and financial objectives; 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; Ed Schreiber, Chief Risk Officer.

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

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. 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 these.

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 1 hour. During the question-and-answer section of this 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 now over to Harris Simmons.

[Harris Simmons, Chairman and CEO]

Thanks very much, James, and welcome to all of you who’ve joined us on the call today to discuss our 2018 fourth quarter results and results for full year 2018. The results for the quarter were strong relative to a year ago results.

Slide 3 is a summary of several key highlights which we will address in some detail on subsequent slides. Slide 4 shows earnings per share on a GAAP basis, they've doubled from a year ago quarter. The year ago fourth quarter had a couple of items that reduced the results substantially which we called out on the slide. Additionally, we are of course subject to much lower corporate tax rate from the year ago period. Even adjusting for those factors, we are able to accomplish strong double-digit EPS growth.

Turning to Slide 5, we delivered on our commitment to produce strong positive operating leverage for the year, with full year non-interest expense up only slightly compared to the prior year, while full year revenue increased 7%. As such, adjusted pre-provision net revenue increased to strong 14% and 13% if adjusted to exclude the charitable contribution of 2017 that we called out in previous earnings reports. For the quarterly results as shown on this slide, adjusted pre-tax pre-provision net revenue increased 18% over the same period a year ago and about 13% if adjusted to exclude the aforementioned charitable contribution.

Perhaps, most notably, the 13% increase in PPNR produced an 18% increase on a per share basis, due primarily to $670 million worth of common stock repurchases completed during the year. We are very pleased with the 18% increase in per share of PPNR for the year.

On Slide 6, you'll see the strong credit trends depicted on the chart on the right classified loans declining 38% from the year ago period and 11% from the prior quarter. Improvement in oil and gas loans was a major reason for the improvement. For the fourth quarter, we experienced net credit recoveries of $8 million on annualized 7 basis points of loans. We realized net loan recoveries of 4 basis points for the full year.

Credit recoveries equaled $21 million for the quarter and $85 million for the year. Recoveries may remain a beneficial factor over the next few quarters, although we expect the oil and gas credit recovery cycle to subside. Non-performing assets plus loans 90 days past due declined 42% from the year ago period and equaled only 57 basis points.

Our allowance for credit loss actually increased 1 basis point from the prior quarter. As noted in the release, the qualitative factors improved from the prior quarter, but due to a variety of broad macroeconomic and political factors, we increased the qualitative portion of the allowance. We are not seeing any substantive indicators of return in the credit cycle, although we're exercising caution in our lending activities generally, so that we will be well prepared for any downturn that might materialize.

We currently expect a low overall rate of gross and net charge-offs in 2019, and relatively stable problem loan ratios assuming economic conditions similar to what we experienced in recent months.

One broad industry topic that has been generating a lot of recent attention with investors is leveraged lending. One of the issues in discussing this, you have to focus on is the comparability of results across companies as there are varying definitions of such loans.

Slide 7 shows the result of a survey done by Moody's that included 38 regional banks, including Zions. Moody's asked each bank to provide a dollar amount of loans where the subject company’s total debt exceeded 4 times the company's earnings before interest, taxes and depreciation or EBITDA. At the time this survey was conducted, June 30th data was provided by the participants. It was measured as a percent of the Moody's definition of tangible common equity, which isn’t quite the same as the way we present our tangible common equity. But regardless, the results were comparable to the other 37 banks.

You can see that Zions’ exposure is more than one-third less than the peer average and about one-fifth less than the peer media. This is in the line of business for us. Some of the loans in that bucket were not originated as leveraged, but are there today because of the recent session in the oil and gas industry, which reduced the cash flows for those borrowers. As cash flows for the energy industry improve, our exposure to loans with debt-to-EBITDA of more than 4 times to decline from current levels.

In the recent years we have been talking frequently about the strategic importance of our long-term technology investments, all during a time when we've been keeping our expenses relatively flat.

On Slide 8, you can see the key investments we are making in our core operating systems, customer-facing digital technologies and how they will improve the experience for our largest customer segments.

To highlight a few I'd begin at the bottom of slide and note that our FutureCore programs replace our three loan systems and deposit system represents a generational investment and it is progressing very nicely.

By the first half of this year, all of our loans will have been converted to our new modern platform.

Moving to the top half of the slide, let me highlight a number of significant new customer-facing digital technologies that are in various stages of rollout. Treasury Internet Banking or TIB 2.0 as we call it is the primary online communication tool that 8,000 of our largest commercial customers utilize. We believe we are top in the industry in providing treasury management products for our clients and this upgrade even further enhances our digital capabilities that touch customers with approximately $10 billion of our $24 billion in non-interest-bearing deposits.

Next, the rollout for our digital business and mortgage loan application software will represent a significant improvement in the customer experience and how we process these types of loans on an end-to-end basis. In the case of mortgage the digital application will give us the ability to pull down our customers’ income tax forms along with bank statements. These are two of the biggest customer pain points today.

Finally, in early 2020 we will replace our online mobile banking systems which touch over 600,000 retail customers and 125,000 small business customers. This system is a workhost for us and we believe our new offering will position us well relative to our major competitors and close number of gaps that exist today. Each of these technology investments are foundational and focused directly on our most important customer segments and the benefit should be long-lasting.

Slide 9 is a list of our key objectives for 2019 and 2020 and our commitment to shareholders. We believe we can continue to deliver strong positive operating leverage as we deploy technology and continue to implement many of the thousands of ideas we have collected from employees on how to better operate in a simple easy and fast manner. We expect that such positive operating leverage will allow the pre-provision net revenue to grow at a rate of high single-digits without the help from additional rate hikes.

We are firmly committed to demonstrating superior credit quality relative to our peers which has been the Bank's primary source of earnings volatility in the past.

Regarding returning capital to shareholders we have increased the payout ratio which we just find as payouts to common shareholders as a percentage of earnings applicable to common shareholders from approximately 20% of earnings a few short years ago to more than 140% in the fourth quarter of 2018. We view an increase in balance sheet leverage as appropriate, particularly given the reduction of the risk profile of the company.

Since 2009, which is probably the year of peak stress for most banks and certainly for Zions, the total assets of the company increased 34%, while the risk-weighted assets increased only 4%. Our changing asset mix was the primary contributor. We replaced CDOs with government agency mortgage-backed securities. We have replaced land development loans with municipal loans and residential mortgages.

Outside of asset concentrations we have rooted out risk in many different areas within operational risk. This reduction of risk allows us to reduce our capital from the current level. The decision on the magnitude, timing and form of capital return is a Board level decision and we will update you as appropriate.

With that overview, I'm going to turn the time over to Paul Burdiss to review our financials in a little bit additional detail. Paul?

[Paul Burdiss, CFO]

Thank you, Harris, and good evening everyone. As Harris said, this is a good quarter in our opinion and a solid year on many fronts. I'll begin on Slide 10. This highlights two key profitability metrics: return on assets and return on tangible common equity. We are encouraged to report the return on assets at about 1.2% even after adjusting for infrequent items and the return on tangible common equity to again exceed 14%.

We expect positive operating leverage to combine with solid credit performance and continued strong capital returns to result in further expansion of balance sheet returns.

On Slide 11, for the fourth quarter of 2018, Zions’ net interest income continued to demonstrate solid growth relative to the prior period of $50 million to $576 million or 10%. In some of the prior quarters, we have called out interest recoveries that were greater than $1 million per loan, but we did not have any such recoveries in either the year ago quarter or the fourth quarter of 2018.

With respect to the revenue components, I'll start with the balance sheet volume and move to rate in just a moment.

Slide 12 shows our average loan growth of 4.2% relative to the year ago period. Although not listed on the slide, the period end growth in the fourth quarter relative to the third quarter was an annualized 8%. Average deposits increased 3.6% from the year ago period and increased an annualized 5% from the prior quarter.

Average non-interest-bearing demand deposits increased 1% from the year ago period and 5% from the prior year annualized -- prior quarter annualized. Thus far we've been able to achieve this growth of deposit balances with a relatively modest increase in deposit cost. Our cumulative increase in the cost of total deposits since the third quarter of 2015, which was immediately preceding the first rate hike by the Federal Reserve has been only 25 basis points or total deposit re-pricing beta of about 12% over that period.

This speaks to the quality of our deposit franchise. We have a favorable mix of relationship-based operational deposits as we look at the stratification of deposits by size, for example, deposit customers with less than $5,000 with us or our customers with more than $50 million with us, we see very low cumulative deposit betas in this rising rate environment for customers with balances of less than $5 million. And that represents about three quarters of our total deposit base.

Examining loan growth a bit closer, Slide 13 depicts year-over-year period end balance growth by portfolio type with the size of the circles representing the relative size of the portfolios. For most categories, we experienced solid and consistent growth. There are three areas we've experienced slight attrition. In the commercial real estate space, loan growth was adversely impacted by slight attrition in the term CRE and national real estate portfolios of about $235 million over the prior year. We've also continued to experience attrition of some of our larger loans, some of which was intentional to reduce loans that were not meeting our profitability requirements and reallocate capital elsewhere, and some of which has been due to the incremental competitive pressure on larger commercial loans, which appears to be coming from debt funds, debt capital markets and covenant light structures and asset-based lending perhaps from other banks. Pressures that we noted in the last quarter have continued.

We experienced relatively consistent growth trends in our 1-4 family and home equity loan which have been growing in the mid to high single-digits for quite some time and we are pleased with the continued growth of owner-occupied loans which have been growing in the mid to high single-digits year-over-year for the past six quarters.

As a reminder, owner-occupied commercial loans are generally small business loans underwritten based upon the cash flows of the borrower and include real estate in the collateral package. Oil and gas loans have increased 16% over the prior year, primarily from a relatively strong increase in exploration and production loans. Importantly, our oilfield services loans are now less than 1% of total loans, and are down about $500 million from the 2014 year end figure.

Municipal loan growth has also continued to be strong during the past year. As noted on previous calls we've hired staff to help us grow in this area, which is focused on smaller municipalities and the central services of those cities.

We've maintained strong credit quality standards and feel very good about the risk and return profile of this portfolio. We are optimistic in the near term about the growth of loans based upon the relatively strong economic backdrop, improvement in small business and owner-occupied loan growth and a review of lender assessment. But as noted earlier, there are competitive forces generally outside of the banking industry that caused us to keep our outlook at slightly to moderately increasing. Our organization is aligned in our view of the trade-off between loan growth and incremental risk. We would rather maintain our underwriting standards and accept less loan growth and we believe investors will be rewarded in the longer term for this discipline.

Slide 14 breaks down key rate and cost components of our net interest margin. Top-line is loan yields, which increased to 4.79%, up 8 basis points from the prior quarter. Recall in the prior quarter, about 2 basis points of loan yields were related to the previously mentioned interest recoveries. We are looking at our loan beta, or a change in loan yield relative to change in the federal funds rate and we calculate a re-pricing beta of about 50%, which is consistent with a portfolio that has about half of its loan indexed to either PRIME or short-term LIBOR. And we show this in the appendix on Slide 24.

Relative to the prior quarter the yield on securities increased 18 basis points to 2.46%. About 8 basis points of the linked-quarter increase is attributable to reduce premium amortization relative to the prior quarter. The remainder is primarily due to older securities with lower yields running off and using that cash flow to buy new securities at higher yields. The shorter duration of the portfolio is helpful. Recall, we built a portfolio that has almost no net convexity in our models and therefore we believe duration extension risk is limited.

Cash flows, therefore, remain generally stable as rates rise, allowing us to reinvest cash flows at the new money yield of about 3.25% in the current environment, which compares favorably to the 2.5% yield of the overall portfolio. As a reminder, premium amortization is highly dependent upon prepayment and therefore difficult to accurately forecast but assuming stability there the yield on the securities portfolio should move higher at a moderate pace over the near term, all other things equal.

The cost of total deposits and borrowed funds increased 9 basis points in the quarter to 0.54%, resulting in a funding beta of about 30% for the year-over-year and linked-quarter figures.

As a reminder, in this case, beta refers to the change in the deposit costs and borrowings relative to the change in the cost of the target -- I’m sorry change in the target Fed funds rate. These elements combine to result in a net interest margin of 3.67% for the quarter, which increased 4 basis points from the prior quarter and 22 basis points from the year ago period. The net interest margin beta or the rate of change in the net interest margin relative to changes in the Fed funds target rate was 22% over the prior year.

One of the most substantial drivers of this margin expansion is the increasing value of our non-interest bearing deposits in the higher rate environment. Because of the nature of most of our deposits being operating accounts for businesses and households, we expect our non-interest-bearing deposits base to remain a competitive advantage.

As we have noted in prior public appearances, if the economy remains strong and industry wide loan growth accelerates, perhaps then we might expect the deposit competition to intensify somewhat. If that becomes the case, our net interest margin beta may be somewhat less sensitive to rate increases when compared to prior periods.

Additionally, we’ve begun to discuss a moderation of our asset sensitive position as the rising rate cycle maybe decelerating, as of other balance sheet composition changes, such as capital distributions and moving cash into securities, we are unlikely to move quickly and aggressively, but rather make any such changes at a measured pace.

Finally, we expect that if the Federal Reserve remains on-hold with interest rates, the net interest margin should be relatively stable over the near-term, driven by factors already highlighted in my comments.

Next, a brief review of non-interest income on Slide 15. Customer-related fees increased 1% over the prior year to $128 million. The primary sources of income that changed are listed on this page.

For the full year customer-related fee income increased by more than 3% to $501 million. We continued to work hard to accelerate fee income growth, although fees from treasury management are influenced to a degree by deposits and by market rates for earnings credits applied to those balances, which in the rising rate environment can create a slight headwind in our fee income trend.

Similarly the fee income realized from mortgage banking activity tends to be countercyclical, slowing and possibly decreasing when the economy is strengthening due to the effect of higher interest rate on refinancing activity.

Non-interest expense on Slide 16 increased to $419 million from $417 million in the year ago quarter. However, adjusted non-interest expense, which adjusts for items such as severance, provision for unfunded lending commitments and other similar items was also very stable at $418 million versus $415 million in the year ago period.

If we make one further adjustment to the year ago period that is the larger than usual charitable contribution of $12 million, the core adjusted non-interest expense increased about 3.7%, which is moderately higher than the outlook we provided to investors a year-ago of low single-digit. But I would note that credit quality performance and revenue growth was stronger than originally modeled, and most of that outperformance has been passed or is being passed on to our shareholders.

As discussed in various public appearances during the quarter, we expect to indeed experience a significant reduction in FDIC insurance costs from the prior quarter and the year ago period. Recall that in the prior quarter, we had a nearly $4 million FDIC insurance expense cumulative adjustment, which was related to the consolidation of our bank charters. And since 2016, we were subject to the large banks surcharge that was designed to drive the deposit insurance fund to our reserve ratio of 1.35%. The large bank FDIC surcharge was eliminated in the fourth quarter because of the deposit insurance fund reserve ratio objective was met and this served to reduce our FDIC insurance expense as compared to the prior quarter by about $6 million.

Turning to Slide 17, the efficiency ratio was 57.8% compared to the year ago period of 61.6%. The efficiency ratio calculations has some seasonality to them and that there are more days of interest income in the second half of the year when compared to the first and of course the seasonal expense increase in the first quarter of each year related to payroll tax and stock-based compensation among other items. We reiterate our commitment to achieve an efficiency ratio of below 60% for the full year of 2019 excluding the possible benefits of rate increases.

Finally on Slide 18, now this depicts our financial outlook for the next 12 months relative to the fourth quarter of 2018. There is no significant change to our outlook from that which was reported throughout the fourth quarter of 2018 as you can see on this slide.

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 Dave Rochester of Deutsche Bank. Your line is open.

[Dave Rochester, Deutsche Bank]

I was just wondering, sorry if I missed this, but if you're thinking about an up 3 basis point to 4 basis point NIM, given hikes as your base case going forward, and especially given in the December hike we just had? And then on your NII guide, we are just wondering if you're assuming that the current flat interest rate curve persists and if we don't get any additional rate hikes just curious what your base case for deposit costs assuming that stable NIM guide that you just gave for that scenario?

[Harris Simmons, Chairman and CEO]

Dave, I’ll start and ask my partners here to weigh in. With respect to the -- I think kind of what you referred to as a NIM beta, any NIM expansion related to the change underlying rates, that's approximately right. I did say in my prepared remarks that we are expecting a few basis points I think I quoted that 22% sort of NIM beta related to the change in underlying that’s on target. That has been our experience in the last couple of quarters, impossible to predict it with a lot of precision as you know. But if kind of loan pricing and composition and deposit pricing and composition behaves, we would expect something that looks kind of like that.

The second part of your question was related to deposit costs. Our base case is that we would expect deposit cost to drift marginally upward over the course of the next several quarters. It’s sort of reflecting and catch-up on the change in rates. But as I said, we believe we have a very strong deposit rate base as it is very relationship-driven, and largely operational in nature. And so the composition of our deposit base we would not expect to change a lot. And likewise, we expect rate on deposits to remain well behaved.

[Dave Rochester, Deutsche Bank]

And just one, switching to loans real quick, just a small one. In your table, the heat map in the back, I mean it was like it was the great loan growth quarter but the drivers were varied a little bit in terms of your markets. So I was just curious what was the driver, the one-off in C&I and energy and the strength in California, looked like California was really strong for you guys, maybe you can just give an overarching comment on that too, would be great?

[Scott McLean, President and COO]

Sure, Dave. This is Scott McLean and for the quarter, the linked-quarter the bottom half of that slide pointing to energy did have a soft quarter. It really is related to the softness that the top half of that page indicates. They had a book of about $150 million book of lower profit business that they were allowing to run down. They've also -- there was one client that we actually moved from C&I to energy largely because that customer's revenues related to energy had actually increased. And so these were kind moves we make as we watch our commercial clients. So, but other than that -- and they're seeing all the same pressure on the high-end of the market that you hear from other banks and that we've reported before.

But I would note the top half of the page and it really is just worn out in that bottom half too that if you look at the top half year-over-year it really is good balanced growth between C&I owner-occupied you can see kind of 600 million there. The muni lending of 400 million the home-related lending of over almost 700 million, just gives solid balance. And so, we continue to be pleased with that.

The other thing that’s didn't show up quite as much this quarter as it did in the third quarter and the second quarter that our four smaller affiliates Arizona, Nevada, Colorado and Washington they make up about 25% of the company and they have actually been really producing solid loan growth, probably 35% to 40% of the loan growth of the company up until this quarter when the larger banks kicked in, more in line with what the larger banks have done historically.

[Dave Rochester, Deutsche Bank]

Anything, any specific drivers of the C&I growth in California just for this quarter in that bottom chart?

[Harris Simmons, Chairman and CEO]

There were a couple of larger deals, but nothing, nothing that really stands out, so. I think it also was helped by slower paydowns, so that was the help.

[Operator]

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

[Ken Zerbe, Morgan Stanley]

Just had a question, on Slide 18 the loan growth, or loan balance commentary that you have, it looks like you explicitly called out competition from non-bank lenders, I know you addressed a little bit in your comments, but this is the first time you've actually written that in your outlook. Has the competition from the non-banks gotten worse or how is that changing? Thanks.

[James Abbott, IR]

This is James, Ken, sort of I would describe it as is, this is fairly consistent with what we saw at least what the lenders report to us that they were seeing in the prior quarter and so we're just reiterating the concept here. We -- I'm aware that some other banks have mentioned that in the month of December it wasn't as intense for them. Our folks have reported that it's been fairly similar throughout the quarter. So perhaps some difference between geographies I suppose or us versus some other banks I suppose. But it's a consistent pressure.

[Ken Zerbe, Morgan Stanley]

And then just maybe a question for Harris. And in terms of capital return I know you said it is a Board decision in terms when you announce that. I guess first of all when does the Board meet and when we might hear some outcome of that capital return but also just given where your stock is, given how much the whole market sold off over the last several months, has your thinking about capital return changed? Like could you be more aggressive or would you ask for more aggressive capital -- share buybacks given what’s happened with your stock price?

[Harris Simmons, Chairman and CEO]

Well, first, they meet a week on Friday. So put that on your calendar.

[Ken Zerbe, Morgan Stanley]

We will do.

[Harris Simmons, Chairman and CEO]

I think we may look to be incrementally more aggressive, obviously again conversation we’ll have with the Board and as far as for regulators that's something we take seriously as well. But we think there's some room to do still a fair amount of capital distribution and we’re certainly talking sort of where the market is today relative to where it’s been. So we will take that into account for sure.

[Operator]

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

[Jennifer Demba, SunTrust]

Just curious about the process improvements that Zions has made in the last several quarters and wondering where we are kind of in the innings of that process. How many more internal processes do you think there are that can be improved and if you could give us examples of what we’re looking at?

[Scott McLean, President and COO]

Sure. Jennifer, this is Scott McLean. I would say we probably all have a different take on this but I would say we’re in the early innings, probably somewhere in the third inning. We’ve been at this for three years and there is just a significant number of small to medium sized opportunities that is providing a really nice source of expense reduction. It is not any one big initiative but it's a collection of smaller ones that are allowing us to reduce expense $0.5 million, $1 million at a whack and sometimes more than that. And the way I would characterize them is they are largely related to adopting common practices and where we may have had six different practices in a certain area, in terms of process or technology, we’re adopting one practice across the company. All our affiliates have agreed to that. They feel just fine about it. So adopting common practices, another place -- another area or theme would be around automation and numerous examples of just taking sample activities and automating them where it can take two, three days out of a process. I’d be happy to give you examples but we’ll do offline for over an hour. Those would be probably the two most important common themes. And then the third one, which is on our technology initiatives like the ones that Harris highlighted, we’re not we are not customizing our new technologies and that is -- will create savings ultimately longer-term.

[Operator]

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

[Ken Usdin, Jefferies]

First question just on the tech spend that you have -- or the tech initiatives page that you showed earlier in the deck. It looks like a lot of these things are finally getting to a point were ‘19 we should start to get that full implementation. I was wondering if you can update us on how much that double spend was costing still in '18 and at what point do we start to see that turn into net savings? I know that's been a long tailed discussion, but it seems like with the slide that we should be getting closer to that I wonder if you can help us understand the trajectory?

[Harris Simmons, Chairman and CEO]

I guess I mean the first thing I would say is I just wouldn't look for tech spending to decrease some. We have spending a lot on this core system replacement. We’re about halfway through the total exercise. I mean we will half the balance sheet there, we expect by the end February actually. We would be making decisions about that sure in the next couple of weeks. To go live with the second of three releases of this core systems platform over presence a week. And once we do that we will have all the loans on -- we then have the deposit fees to proceed to -- and that's the most complicated of them and probably represents about half of the total effort. But the spending I mean some of this has been capitalized as we've gone, some of that capitalized spending is now being amortized because the consumer loan portion has now been in service for the last year.

We will have the commercial loan piece in service I would expect by the end of this quarter and so we will start amortizing that and then we have to spend on the deposit system. And roughly half of that gets expensed and about half of it roughly gets capitalized. But it's -- the need to continue to spend on technology is -- I just don’t see an end to it. And every time I thought that maybe I would then there's some the next new thing. And so I do think that in the grand scheme of things it’s one of the things that is producing the ability to keep operating costs reasonably flat. But the total strength in technology has continued to increase even as the spend in other areas has been diminished. And I think if that run for ways longer. So that's one of the things that gives us a fair amount of optimism that we will be able to continue to see some reasonable operating leverage if the economy holds up on short of a recession. I think that's going to work pretty well, but it won't be for a lack of technology spend.

[Scott McLean, President and COO]

This is Scott, I would just add to that. Many of the systems we're replacing or enhancing are fully depreciated and the expense part in current year P&L cost is really quite nominal. And so generally on almost all of these technology investments you are increasing your cost initially. You may able to have a savings elsewhere such as an FTE but just a pure technology, built-in expense goes up for three to five year period depending on how long you are amortizing it. The other thing I would say is that as we look at our total technology and spend on a P&L basis, probably 60%, 70% of it is offensive, it's not just keep the lights on. That number was just the opposite probably five, six years ago. And so the good news about the spend is that it's building out all the systems that Harris described, many of the systems Harris described and it is largely an offensive investment.

[Ken Usdin, Jefferies]

Understood Scott. And if I can just follow up on a point that Harris made. So Harris your point about looking forward, I'm looking at the 2019 and 2020 objectives. And to your point about presuming the economy holds up and a lot of things go with the continued way they've gone that target of trying to get to a high single-digit pre-pre net revenue growth. Do you think you can maintain that magnitude given the point you made about the hope for continued decent positive operating leverage?

[Harris Simmons, Chairman and CEO]

Yes, I think over the next year or two that would be our objective and at some point that pump down catches up with it. But I think if you look at -- its instructive to look at where we've brought the efficiency ratio over the last three years from up in the 73%, 74% down to a number that's now really competitive with little -- pretty compatible with the peer group. And I guess the point is we don’t think we're finished yet, and that will help to drive operating leverage for the next year or two.

[Operator]

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

[Steven Alexopoulos]

I guess to start to follow up on the conversation of the need to reinvest in technology. When we look at the low single-digit expense guidance for 2019, what's the most realistic range that we should be thinking about for 2019?

[Harris Simmons, Chairman and CEO]

We are deliberately -- we are using that language deliberately, because we are trying not to be overly prescriptive around that, because we need some flexibility to take advantage of opportunities as they may come up. But our definition of low single digits I think is consistent with what it has been in the past.

[Steven Alexopoulos]

I mean this year 2018 if we adjust out the charitable contribution, I think while you said you were 3.7%...

[Harris Simmons, Chairman and CEO]

Yes [Multiple Speakers]…

[Steven Alexopoulos]

Will you be at that range again in 2019?

[Harris Simmons, Chairman and CEO]

What I said was that was a little bit over our targeted range of low single-digits to put some guardrail around that.

[Steven Alexopoulos]

I guess I'm trying to understand given is a lot of talk on reinvestment in technology if we should be bracing for another 3% or so year on expense growth or…

[Paul Burdiss, CFO]

But it's really important to note though that, I mean we have also got as Scott said, a lot of opportunity to continue to simplify the organization. We are working really hard, as Harris said, to take the savings that we are creating out of operational efficiencies and invested in technology to ensure that not only are we providing table stakes for our customers, but really starting to be a little more offensive with respect to the products and services that we can offer.

[Harris Simmons, Chairman and CEO]

And I would tell you, I mean part of our plans this coming year is to invest more in people to build stronger pipeline of bankers for the future in training, et cetera, we just think that's critical. And we'd probably be spending more there even that we're finding ways to fund that. I mean I think we're quite optimistic that we can do that while still keeping total non-interest expense in this low single digit range. And I define low single-digit as being where the guardrails on that are, in my mind we're going to spend in part on what revenue growth is looking like too. One of the things that added to this 3.7% growth is just incentive compensation, because if you look at PPNR, forget about the effects of tax reform. I mean PPNR was up about 13% on a real apples-to-apples basis and incentive compensation is going to rise as that happens and that's one of the things, one of the real drivers this year of that 3.7%.

[Scott McLean, President and COO]

And credit profile has been really strong, as I noted in my comments…

[Steven Alexopoulos]

Just separately if we look at non-interest bearing deposits, your balances have been far more resilient than just about every peer out there. Are you guys expecting to see a migration out of non-interest bearing this year, or do you think those balances going to hold in there? Thanks?

[Scott McLean, President and COO]

Well, I will say that our models would indicate and as we described in the past and we described our interest sensitivity, our models assume some level of migration out of non-interest bearing deposits and into other interest bearing deposits. You said our deposits have been very resilient, and probably I would say more resilient than our models would have indicated. And when we really peel that back and do the analysis behind it, we think the key driver is the relationship nature of the deposits and the proportion of operating deposits that we have. I mean, we had a very granular level by customer we can discern what average balance is, highs and lows and really measure that against operating needs. And the fact is that we've got a very high proportion of those demand deposits, our operating deposits because of the relationship nature, because of the operating nature of the deposits, they are just proving to be a little more sticky than even we had expected.

[Harris Simmons, Chairman and CEO]

It's also related to our loan growth. I mean where you see our loans growing is in C&I, owner occupied, municipal, home equity and one to four family, those are all really deposit rich customers. If our growth was really heavy in CRE, you just wouldn't see the same balance, DDA balance growth. But one of the nice things is that our DDA balances on average are really growing pretty consistently across the company depending on what time periods you look at. And there's certainly been more pressure in Texas, which you would expect it's just the larger client market and there's been certainly pressure in Utah related to the credit unions but really good solid growth in DDA non-interest bearing across the company.

[Scott McLean, President and COO]

I'm going to make one more comment just because I'm so excited about the value of our deposit base and I talk about it a lot over the years. Another really important point is that as I said in my prepared remarks, so we look at a stratification of our deposits by deposit size and it's by customer size, deposit size. We see a real difference in behavior in terms of resiliency of the volumes with respect to their required deposit repricing betas, a real difference based on the stratification and the size of the depositors. And so what we’re observing is our very largest depositors of which on a relative basis we probably have fewer are much more sensitive to raise and therefore deposit migration is more prevalent there. As I said in my prepared remarks, 75% of our depositors approximately are under $5 million and that's where we’re seeing a lot of stickiness.

[Operator]

Our next question comes from Gary Tenner of D.A. Davidson. Your line is now open.

[Gary Tenner, D.A. Davidson]

Just a couple of quick questions, first and I’m sorry if I missed this. Did you mentioned along the way what your yields where on new loan production for the fourth quarter?

[James Abbott, IR]

We haven’t mentioned it. But it's probably near 5.25, 5.20 GAAP yield something thereabouts.

[Gary Tenner, D.A. Davidson]

And then Paul as you were going through your remarks, you mentioned or you highlighted the FDIC insurance. Is the $6 million a good run rate or did that -- was there any adjustment this quarter that reduced that below what the forward run rate would look like?

[Paul Burdiss, CFO]

What I tried to say there was approximately $5 million to $6 million reduction in FDIC insurance specifically related to the elimination of the deposit insurance fund surcharge, and so I would expect that to continue.

[James Abbott, IR]

And said differently Gary, I think that the number that you’re seeing in the income statement there this quarter is a pretty good run rate.

[Operator]

Our next question comes from the line of David Long of Raymond James. Your line is now open.

[David Long, Raymond James]

Going back to expenses here really quick, if your financial outlook on the revenue side does not materialize here in 2019 at the point where revenue is possibly down. Do you have levers to pull on the expense side to still put up positive operating leverage for the year?

[Paul Burdiss, CFO]

Well, historically we had and Harris or Scott please jump in. Historically, where we revenues and expenses were not aligned, we have absolutely been able to adjust our expenses. The biggest lever we have there is incentive compensation, which is a lever that we have absolutely used over the course of the last couple of years.

[David Long, Raymond James]

And then separately, we’re starting to see banks do some deposit pricing strategies in different regions. Are there any regions where your deposit base may not be as strong or regions where you think there are opportunities to gain share by doing some incentive pricing?

[Harris Simmons, Chairman and CEO]

Well, we price locally so each of the affiliate banks manage their deposit pricing and we obviously give them internal credit and they weigh the opportunity versus what they can earn internally. Probably the largest opportunity frankly is with Internet money market accounts and things that we can do on the margin, including just broker deposits. But there are limits to how much of that we would want to do. I mean I think fundamentally we want to make sure that we are protecting the deposit base that we have, making sure that we are -- that it's continuing to grow and growing for the right reasons. And on the edges of that there are some things we could do. But I don’t see us doing campaigns and any of the markets where we have branches.

[Scott McLean, President and COO]

And I will add if I could that rate is not the primary value preposition that we're offering to our customers, it's really about advice and skill. And so we're able or tend to attract higher money has provided funding but not liquidity as you know, and so this is something that we think about very carefully.

[Operator]

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

[Christopher Spahr, Wells Fargo]

The comments on the repurchase authorization and the board meets a week from Friday. When you say more aggressive more of the same or perhaps more than the $250 million that we saw in the fourth quarter?

[Scott McLean, President and COO]

I'd say that you have to stay tuned. I guess more of the same or only be more aggressive relative to doing less I guess. So I think I'd really want to wait until late the board has something to say, I don’t want to front run them too much here.

[Christopher Spahr, Wells Fargo]

And then going back to Scott's, talking about some of the offensive benefits of the initiatives that you're doing on the slide or whatever the slide is -- Slide 8. Can you give us some examples of what those offensive measures are? I think most of the examples that you gave are more on the expense side. And what I'm getting at is that the growth still is lagging some of your larger peers. And I'm just wondering like what areas we can expect or might see a pick-up in growth?

[Scott McLean, President and COO]

So if you look at Slide 8 really the top five horizontal panels are all offensive, and I'll shift to the digital -- this loan application and the digital mortgage loan application. Again, this is a online way for a client to start a loan application in the case of a digital business loan application, started at home work on it in the branch where the banker completed in their office, send it in. We've automated a way to take the data and pull it into our loan originations system and then make a decision very quickly. All of this happens by paper today and there is not an electronic version of it. The digital mortgage loan application, again as Harris noted, to be able to take -- to be able to pull down a customer's tax forms and their bank statements with other banks, it is a game changer for us.

And we're not going to change the dynamics of the residential mortgage lending business, but we don't have to. We originated about $2.5 billion this year that we'd like to think of that as $4 billion to $5 billion origination business for us. And this product particularly allows us to originate conventional mortgages, which has not been a large part of what we have done historically. So it allows us to create a much more viable mortgage product in our branches, we are very excited about it. So those two particularly are always are rich with offensive client building opportunities.

[Operator]

Our next question comes from Kevin Barker of Piper Jaffray. Your line is open.

[Kevin Barker, Piper Jaffray]

Could you -- in response to the securities portfolio, it seems like it repriced quite a bit this quarter and you said it from premium amortization. Was there any shift in the duration of the portfolio and your expected turnover in that portfolio?

[Harris Simmons, Chairman and CEO]

No, it was really -- a lot of it was related to as I noted in my prepared comments a change in the premium amortization, change in prepayments. The products that we are investing in have remained relatively consistent, duration of the portfolio is consistent, extension risk is limited in our models as I noted. And importantly -- so for example, we don't have any 30 year MBS in the portfolio. So all of those philosophical, I think around the portfolio haven’t changed.

[Kevin Barker, Piper Jaffray]

And then in regard to the follow up some of your comments around oil, loan pick up when you say a little bit of pick up this quarter compared to what you said in previous quarters, we saw some of your competitors also cite a pickup in oil lending as well. Is it primarily due to increasing demand or a slowdown in the runoff that you've seen there?

[Scott McLean, President and COO]

So the growth that we've seen year-over-year in energy about to -- really the majority of it is upstream reserve base lending and midstream, both of which we have very low loss count, Kevin. Our energy services portfolio saw slight uptick, but it wasn’t anything to really speak of. And as you know, our energy services portfolio now represents about low 20s, 22% 23% of our total portfolio going into the downturn, at the end of 2014 it was about 40%.

[James Abbott, IR]

And Scott, if I can just clarify that’s total oil and gas loans not total loans, the 20% of total oil and gas loans.

[Scott McLean, President and COO]

That’s right, yes. Thank you, James. So we have changed the mix of the portfolio. The portfolio is also sits today an outstanding of about 2.3 billion, down from 3.1 billion at the end of 2014. So we have contracted by about a third and repositioned the portfolio also. And the growth again we are seeing is primarily reserve based and midstream again, which are really solid markets for us.

[Operator]

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

[James Abbott, IR]

Thank you, Latif. And we thank all of you for joining the call today. If you have follow-up questions, please contact me at [e-mail] and I'll be available throughout the evening to return your request. Thank you, and good evening.

[Operator]

Ladies and gentlemen, that does conclude your program. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.