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Zions Bancorporation (NASDAQ:ZION)
Q4 2017 Earnings Conference Call
January 22, 2018, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Thank you for your patience. You've 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 a question-and-answer session and instructions will be given at that time. Should you require any additional assistance during the call, please press * then 0 on our touchtone telephone. As a reminder, this conference may be 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. I appreciate it. I would clarify that the conference call is being recorded. 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 a 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 section.

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 on our website 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 1 hour. During the question-and-answer section of the call, we ask you to limit your questions to one primary and one related follow-up question to enable other participants to ask questions. With that, I will now turn the time over to Harris Simmons.

Harris Simmons -- Chairman, CEO, and Chairman of Zions First National Bank

Thank you, James. We welcome all of you to our call today to talk about our fourth quarter and full-year results. I'm going to go through a few of the slides at the beginning of the deck we've provided to you. On Slide 3 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've eliminated a 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're 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 orders in 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 with excluding the larger charitable contribution that we detail on Slide 3, it would've been actually just under 60% for the quarter. For the full year, the efficiency ratio was 61.7%. Again, of excluding the larger charitable contribution and the expense associated with Hurricane Harvey, which we detailed last quarter.

A quick note about the charitable contribution. We contribute several million dollars per year as part of our contribution to our communities. We expect to make additional contributions in 2018 and beyond, outside of this unusually large contribution. This large contribution in the fourth quarter will displace some of the expenditures that we would otherwise be making in 2018 and the succeeding years. We'll be doing a portion through our income statement and a portion through the Foundation but in combination, we don't expect that ramping up our charitable contribution spending is simply a front-end loaded seller 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 in the cost of federal funds rate was only 3% during the quarter. Our funding beta, which includes the cost of borrowings, was 14%. The combination of those two factors led to a healthy increase in sustainable net interest income of approximately 10% over the prior year fourth quarter.

With regard to credit quality, we remained pleased with the continued strong improvement, including a 9% linked quarter decline in classified loans, 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 2/100ths 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 a subject to a Department of Justice investigation in the first quarter, or 9 basis points if you include that credit.

On Slide 4, our adjusted pre-provision net revenue reflects steady improvement, up 19% from the year-ago quarter and if the previously referenced larger charitable contribution is excluded, pre-tax, pre-provision net revenue will increase 25% from the year-ago quarter. Some of the growth is due to the benefits of securities purchases, which we do not expect to be a 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. If the federal open market committee continues to raise the federal funds rate, we would expect further improvement in our pre-tax, 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 to slow, although we still expect a strong rate of growth.

Turning to Slide 5, 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 of below 60% for the full year 2019, excluding the possible benefits of rate increases.

Slide 6 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 the revaluation of the deferred tax asset, return on assets increased to 1.07%. Return on tangible common equity was 7.4%. Again, excluding those two items, it would've been approximately 10.9%. We're encouraged by the continued improvement and remain focused on achieving competitive returns on our assets relative to peers.

Moving to Slide 7, 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 in the oil and gas portfolios. All told, that 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've made some improvements to the 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 or 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 swept several billion dollars of customer funds off the balance sheet to asset managers. Over the course of the next few months, in quarters we expect that some of that will return to our balance sheet. It should be a 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, Harrison. Good evening, everyone. I'll begin on Slide 8. For the fourth quarter of 2017, Zions reported net earnings applicable to common shareholders of $114 million, or $0.54 per diluted share. Harris detailed a 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 have 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 9 depicts the recent trend in net interest income, which continued 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 included 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've 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 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 represents 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 takeaway from this chart is the relatively balanced growth across the loan portfolio. Commercial and industrial, owner-occupied, and home equity loans all increased in the mid-single-digit range, which 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 rate. We expect oil and gas loans to stabilize or possibly increase somewhat and although we don't expect the 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 3 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 2 basis points of yield headwind due to reduced benefit from loans purchased from the FDIC. New loan production for the fourth quarter was a few basis points higher than the yield on the 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 deposits 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 15% funding beta.

Reflected in the lower left is the change in the mix of earning assets. As a result of this mixed shift, we experienced about 3 basis points of margin headwind during the past year due to a 2 percentage point lower concentration of loans relative to earning assets. The securities yield declined slightly. This was primarily due to higher premium amortization on the SBA or small business administration 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 pre-payments, 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 the yield on the 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 dates. We have detailed the effect of interest rate swaps and floors on the loan portfolio so that you may better understand the possible reaction and timing of the yield on a 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 the net interest margin.

On Slide 12, we show the modeled 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 a 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 fed tightening where the beginning of the trend lines are 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 point 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 but 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 the 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 the 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 included to $415.00 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 last year. This results in higher profit sharing and incentive compensation paid 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. As mentioned in the press release, increased from the prior quarter and year-ago quarter due to the larger contribution to the charitable contribution.

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 loans, non-performing assets, and net chargeoffs. Much of the improvement came from the oil and gas portfolio and we remain optimistic that we will continue to see further, favorable changes to the oil and gas credit measures.

Although not shown on the side, we have materially and substantially improved. The weighted average risk grade on both the commercial real estate and the commercial loan portfolios during the part five years. We remain disciplined on our consumer loan underwriting criteria. As such, we expect manageable credit costs, while much of the provision for credit losses will cover the incremental loan growth.

Slide 16 is a visual representation of the former tax structure with a federal statutory rate of 25% and our state statutory rate of about 4.8% pre-tax, so about 3% after tax. This is presented alongside our effective tax rate in the third bar for 2018, excludes items such as the expense associated with the revaluation of the deferred tax assets taken in the fourth quarter. Benefits to state tax expense in the first half of the year and reduced tax expenses due to the exercise of 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 taxes rates for 2018 and beyond, with one important caveat. Some of the states in which we do business may be 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 rates. Nonetheless, we feel comfortable giving an outlook that the 2018 effective tax return is likely to be 25 and 25%. On Slide 17 is a list of our key objectives for 2018 addition 2018, 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 laws and securities and the higher salaries and bonuses paid to many of our employees. It also contemplates the effect of a December 2017 increase and a fed funds rate, although it does not assume any further increases in that or other benchmark interest rates.

We expect to continue to invest significantly in technology improvements, which includes a substantial overhaul to our core systems. Back in 20915, we indicated that we were going to be targeting much more substantial returns on capital that could be seen then and we are tracking well toward those goals, although there is still room for improvement. Regard 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 is appropriate, particularly given the reduction of the Rousse portfolio and company. Investors often inquire as to the appropriate level of capital and we have responded that the stress testing results are the primary driver. You can see our company-run, mid-year stress test results on our website.

But to highlight a single number, our post-stress Common Equity Que-on 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 thresholding.

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 rate in the mid-single digits. We expect net-interest income to increase moderately over the next 12 months. We assume no additional ratable hikes in this outlook, although we do incorporate into our view the December 2017 rate view hike. Additional increases in short-term rates are expected to improve net-interest income. We posted a net provision for credit lost, which includes both funded and unfunded commitments of minus $12 million in the fourth quarter. Asset quality continued to outperform our expectations and thus credit costs have been lower than expected, a trend which main continue. However, our best-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, of course, I'm going net chargeoffs.

Customer-related fees, which are defined in our press release and exclude dividend income and security loans from losses, should increase slightly from the level represented in the fourth quarter. As I mentioned earlier, fee income remains a key focus for the company, although the outlook recognizes 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 2018 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 $1,640,000,000. Plus, the $12 million contribution, one would arrive at a base rate of $1 billion, $628 million, from which we would expect an increase in the low, single-digit rate of growth for the full year of 2018.

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

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

Questions and Answers:

Operator

Yes, sir. Ladies and gentlemen, if you have a question at this time, please press * then 1 on your touch-tone telephone. Again, that's *1 on your touchtone telephone to ask a question. If your question has been answered or you wish to remove yourself from the question queue, please press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Kevin Barker, Piper Jaffray. Your question, please?

Kevin Barker -- Piper Jaffrey -- Analyst

Thank you. 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 that go back up, given we saw quite a bit of decline in the fourth quarter.

Paul Burdiss -- Chief Financial Officer

This is Paul. 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 of the 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. At the 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 of securities that are coming off and so therefore over time, again all things equal, we would expect the securities portfolio yield to creep up over time.

Kevin Barker -- Piper Jaffrey -- Analyst

Okay. Then also in your guidance for fee income, I noticed you were saying slightly increase for customer-facing fees. Now, fee income as a whole has been growing at roughly a 5% clip over the last couple 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. As I tried to say in my prepared comments, the fourth quarter came in pretty strong. And so, because specifically that page is kind of a fourth quarter to fourth quarter view, that's really, I think what that comment reflects. I will say over time we are clearly continuing to target mid-single-digit growth in our core fee income.

Kevin Barker -- Piper Jaffrey -- Analyst

Okay. Thank you for taking my question.

Paul Burdiss -- Chief Financial Officer

Thank you.

Operator

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

Steve Moss -- B. Riley -- Analyst

Good afternoon. I was wondering if you could just discuss the commercial real estate growth we saw this quarter where you see it from here?

Paul Burdiss -- Chief Financial Officer

I'm sorry, could you repeat that?

Scott McLean -- President and Chief Operating Officer

Commercial real estate growth this quarter.

Paul Burdiss -- Chief Financial Officer

I think where you see going from here you say?

Steve Moss -- B. Riley -- Analyst

Yeah. Where you see it from here, where you see the source of the growth and where should we expect some more trends in the future here?

Scott McLean -- President and Chief Operating Officer

This is Scott McLean. I would just say that the 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. Really, we're seeing it across the franchise. It's predominantly CRE term, as opposed to construction, which is consistent with the mix of our portfolio currently.

Steve Moss -- B. Riley -- Analyst

Okay, and if we were to get another rate hike in March, what would you expect the benefit to the margin to be?

Paul Burdiss -- Chief Financial 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. The answer is because of the effect on the margin is dependent somewhat on also the shape of the curve. So, you can see on the slide 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 a heavy influence on the change in the interest margin. So, all that together, net-net, you're looking at probably a couple of basis points improvement in the margin.

Steve Moss -- B. Riley -- Analyst

All right. Thank you very much.

Paul Burdiss -- Chief Financial Officer

Thank you.

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 -- Analyst

Hey, good evening.

Paul Burdiss -- Chief Financial Officer

Hi, Brad.

Brad Milsaps -- Sandler O'Neill -- Analyst

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

Harris Simmons -- Chairman, CEO and Chairman of Zions First National Bank

Sure. Well, I think in terms of the kind of measures that we're going to be looking at, I think to go back to two to three years ago, it was important to focus on something like an efficiency ratio. We were way out of the middle of the fairway in terms of where we should've been probably. We've made a lot of progress as we've demonstrated and as we show on some of the slides here. I think as we get a little closer to where the industry is, our focus internally is very much on continuing to work at reducing costs, 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, albeit as a slower pace, as you can -- it will be obvious. We can't continue the same kind of trend at the same pace of improvement, but we'll see further improvement I'm quite confident.

Internally, I think our focus is shifting more toward how can we grow pre-tax, pre-provision revenue. I expect that growth rate to be in the high single digits or somewhere thereabouts. So, it's a focus on operating leverage and growth of PPNR. We're working on a lot of internal initiatives that I think will help us continue the trajectory that we've been on. Again, not at the same pace. 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. When we announced 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 one-time major adjustment in capital.

We, I think communicated to everybody that wasn't our intent. It's really continued to work toward right-sizing capital in a disciplined, orderly way. 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 a focus on our own risk profile, I do expect that we'll be more focused on our own stress test results. That will be a big driver. We are doing a lot of things internally to incorporate those results into how we incentivize structure and pricing and other things in a way that I suspect will be really good for shareholders. We want to be sure that out on the front lines, that everybody's incentives are aligned in terms of trying to create the best possible structure.

If it protects the bank, also providing pricing that generates adequate returns. So, I guess I'm giving you just a little window into how we're thinking about it. We don't have any specific goals that we're going to communicate today in terms of what's going to happen at capital levels, except that I would expect that they'll continue to kind of right size as the balance sheet grows and we continue to pay out capital at a somewhat accelerated pace.

Brad Milsaps -- Sandler O'Neill -- Analyst

Great, thank you.

Harris Simmons -- Chairman, CEO and Chairman of Zions First National Bank

Thank you.

Operator

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

Ken Usdin -- Jeffries LLC -- Analyst

Hey, thanks very much. Paul, I was just wondering if you could elaborate a little more on the drivers of expense growth. First, I guess, how would you define low single? You've helped us kind of understand the ranges for the mids you were talking about, but in terms of off of that 1628 base, how would you just help us understand what you consider single, low single?

Paul Burdiss -- Chief Financial Officer

Well, Ken, yeah, we are purposefully not super specific there. However, if you open up the Zions Banc Rosetta Stone, you can see last year we used a similar term where we were talking about slightly increasing. You may recall that expenses increased kind of depending on how you're measuring it, kind of 2 to 3% once you factor in that charitable contribution we discussed. So, Ken, I tell you it's kind of in that ballpark. Hopefully that's helpful.

Ken Usdin -- Jeffries LLC -- Analyst

Yeah. And in that 2 to 3% ballpark, I guess how are you weighing the ongoing programs in terms of the tech spend and then anything incremental on top of what you did in the fourth quarter? Do you have any thought about do you accelerate some of the tech projects or do you just keep everything on that long-term 7-year plan that 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 just described qualitatively, you described a bit more quantitatively, there are a lot of moving parts. We're finding ways to save money all the time based on our simplification initiatives that Harris described. But clearly employment cost is the primary driver of the number and I would just say that we are adding bankers in growth areas, particularly a number of our strong fee income areas like municipal finance, mortgage, wealth, just to mention a few. So, we are adding bankers in our faster growing fee income areas. We're adding just basic commercial bankers and small business bankers across the franchise too. So, that would be the primary driver there. Then the secondary driver would be our technology cost, as you noted.

Our future core project, the replacement of our three loan systems and two deposit systems is just one of numerous technology projects. It's probably been the one that we've talked about the most. But we're probably spending 20 to 25% of our tech spend this year on advancing our digital capabilities. Technology in general is a fundamental driver of the expense number as well. I would say that compared to five or six years ago, the investments we're making on the technology side are much more offensive and forward leaning, where five or six years ago they were much more defensive, just trying to keep the shop running appropriately.

Ken Usdin -- Jeffries LLC -- Analyst

Got it. Thanks a lot, guys. Appreciate it.

Operator

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

Marty Mosby -- Vining Sparks -- Analyst

Thanks. Paul, I wanted to ask you about how when you look at that Slide 20, dilutive impact of the warrants, it looks like the line is kind of curving so there's maybe a diminishing increase as the stock price goes higher. Over the last year, the share count, even though you accelerated share repurchase over the last two quarters, it's still going up because of the impact of these warrants. Is it the goal and expectation that share count can start now to go down as the impact from higher stock prices becomes a little less?

Paul Burdiss -- Chief Financial Officer

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

Marty Mosby -- Vining Sparks -- Analyst

And then the other thing is really just much more of a suggestion. As you were highlighting investor day coming up here shortly. With the technology spin that you all have talked about, this being such a significant project, really being able to talk about, because you don't see those expenses in the short run. They really get capitalized and then they get kind of run out over time. But to really kind of outline (1) what are the benefits that you're beginning to see and how did they start to really kick in? Then (2) how much are we kind of behind-the-scenes capitalizing that eventually is going to start to amortize as these systems go into play?

Scott McLean -- President and Chief Operating Officer

Marty, this is Scott. That's a great point. We do plan on focusing on that, as well as our simplification initiatives as well on investor day.

Marty Mosby -- Vining Sparks -- Analyst

Thanks.

Scott McLean -- President and Chief Operating Officer

Just a few of many subjects we'll talk about.

Marty Mosby -- Vining Sparks -- Analyst

Great.

Paul Burdiss -- Chief Financial Officer

Thank you, Marty.

Operator

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

Geoffrey Elliott -- Autonomous Research -- Analyst

Hello. Thank you for taking the question. The decision to move away from the holding company structure to something simpler -- can you talk a bit about how you made that decision and, in particular, on the timing. Why announce it when there's a legislative process on the way that could result in significantly reduced regulation? Why not wait until you see the outcome of that and then decide if prepping the whole co is the right thing to do?

Paul Burdiss -- Chief Financial Officer

Sure. First of all, I would tell you that the process began about a year and a half ago. As we made the decision to consolidate the various charters that we had, we've had, as you recall, 7 different banking subsidiaries. That required a holding company. Once we consolidated the charters, I guess I'm sort of asking myself the question. In the name of simplifying life, I ask myself what is the benefit on having a bank clothing company? Particularly as we look at our present and prospective mix of businesses and operations, what can be done in a bank? What can't be done in a bank? Frankly, virtually everything that we're doing operationally, in terms of lines of business can be done in a bank. Now in times past, there were some things you could do, some of which are prohibited by the Volper Rule, for example.

And also, we've been winding down some of those investments. But the likelihood that we're going to find ourselves underwriting equities or engaging in merchant banking, in a domestic commercial bank, there is precious little, in my view, that you can really do with a holding company that you can't do in a bank. That small set of things that you can do in the 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 tell you I've probably spent more time working on this legislation than any banker in America. So, I've talked to lots of congressmen. I think I know this landscape pretty well. I'm highly in favor of the legislation and I think and hope that the Krapel bill will pass.

But it started to dawn on us that it couldn't deliver one thing that a merging -- a holding company into the bank -- could deliver. That was eliminating a duplicate regulator all together. The Krapel bill -- they set the threshold at $250 billion. Well, certainly, it would be helpful to a lot of banks in terms of being subject to the Fed stress test, their models, etc. But you'd still have both, in our case, the OCC, and the Federal Reserve coming in and performing examinations. I think most any way you cut it, we said there's a lot of overlap in what they're doing. That's fundamentally where we said we think this is all what the right thing to do because it will give us good supervision and regulation, but it won't give us duplicate regulation every time we turn around, which we've been seeing increasingly in recent years. That's fundamentally the reasoning behind it.

Geoffrey Elliott -- Autonomous Research -- Analyst

Great. Thanks very much.

Operator

Thank you. Our next question comes from the line of Steven Alexopoulos of J.P. Morgan. You question please.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hi, everybody. To start, regard the corporate tax rate coming now for your commercial customers, I would imagine that as cash flows improve on a net basis, you might see upgrades and less of a need for a reserve. I'd love to hear your thoughts on this. That could have a material impact on credit quality.

Paul Burdiss -- Chief Financial Officer

Yeah, the jury's still out on that, obviously. There's also speculation among some of the larger borrowers in the economy which, as you know, we don't generally lend to. Our clients, particularly on a commercial side, are smaller business and a smaller end of milli-marketing that some of those may take extra cash, either coming from offshore. Otherwise, you can use that to pay down debt. I am not personally -- I don't think we are 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 see, I think as the effect of the tax legislation shakes up with the economy.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. Then an unrelated question. On CNI loan growth, Zions Banc saw a $200 million decline quarter but you had nice growth in CB&T. Can you give a little color on each of those? Thanks.

Paul Burdiss -- Chief Financial Officer

Yeah, there was a lot of activity a quarter in and frankly, I don't have the detail. I don't know that we can give you that color at the moment. We may be able to, but our investor give you a little more advice.

James Abbott -- Director of Investor Relations -- Analyst

Steven, this is James. I can just jump in with a little bit. So, there have been some loans that have been maturing or being rebooked as they mature from some of our large scale, part utility type of spiels, that are being rebooked in the geographies in which they exist. So, history, for example, some alternative energy and those types of things that have been booked with a Utah bank and some of that has been moved to California, where it's actually based geographically. So, that would be something. There's got to be a piece of it, but not a great, big piece in the fourth quarter.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. All right. We'll get color at the investor day. Thanks.

Operator

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

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks. Just to go back to the efficiency ratio. In the press release, you mentioned the 60% for 2019, as well. Can you guys 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 similar sized peers? Because a lot of the banks of around your size are coming out with targets somewhere in the mid-to-low '50s. Is it just the technology piece? Does it go down after all your core spending slows? Just trying to understand the farther, long-term look. Thanks.

Harris Simmons -- Chairman, CEO and Chairman of Zions First National Bank

Listen, I'd say that it's hard to speak to where they think they're going to get that kind of additional boost to get them down and to the end of the low '50s. I think as we look at the peer group, of which we major are, against which we measure our progress, we're getting to a point where we're closing in on sort of the medium. We were 61.6% for 2017 going into 2018. There are a couple of headwinds, as noted. The lower tax benefit on legacy municipal securities and loan portfolio combined with the bonuses and salary boost that we announced at the end of the year. That's about 90 basis points of efficiency ratio. So, that's somewhat of a head wind. I think despite that, we're going to get it down to somewhere closer to 60. It gets incrementally more difficult, but we'll get down, I think very much within the middle of the pack, if not better over time in our peer group.

I do think that there are a couple things that are headwinds. One is the technology spend that we talked about. That's about $35 million roughly, going to the income statement annually. Replacing core systems. Of course, Scott mentioned we're also spending money on digital, etc. The other is that we can't have a -- the profile of our commercial loan portfolio is decidedly different from a lot of our peers. If it is smaller, the median size of a commercial loan here is decidedly smaller than what you see in most of our peers. That's a little more expensive model, I think, to run. But I think it could also produce some benefits in terms of the kind of deposit base that we have. Traditionally, the kinds of loan yields that we've been able to 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 our peers are here within the next three or four months.

James Abbott -- Director of Investor Relations

If I can just jump in there, Ken, as a Friday, the peer consensus efficiency ration for 2019 was about 58.5%. So, our goals are not substantially different than that, I would tell you. That's consistent with what Harris just said. The top quartile is about 57%, so there's not a huge range between the peer group, at least as it stands today.

Harris Simmons -- Chairman, CEO and Chairman of Zions First National Bank

Just to continue whipping that topic, I'll note a couple of other things. One is the effect of the tax law change is going to be about a 90-basis point increase in our efficiency ratio, that's No. 1. And then you referred back to the press release, which is page 4 where we talk about an efficiency ratio that's kind of near 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 James just said on kind of a peer group relative thing. It sounds like the peers, I think, have not been doing necessarily a near term, but more of a medium or longer-term efficiency outlook. Just to be clear, that's not what we provided here. What we're trying to express is that through a continued growth and pre-provision net revenue, our efficiency ratio is going to continue to decline and improve.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Okay, no, that definitely helps. Then just as a follow-up, back to your slide desk on provision expense. Obviously, it has a negative this quarter. The way it reads, I know you say m0odest there, is it possible that you could have a quarter or several quarters there between further oil and gas reserve release and Hurricane Harvey. You could actually have sort of persistently negative provision, at least for some short period of the year.

Paul Burdiss -- Chief Financial Officer

This is Paul. I would say algebraically it's possible. As we noted here that there may be some releases as credit quality continues to improve and we have seen a fairly long trend line of continued credit quality improvement and charge-offs, knock on wood, have been very good. So, as we provide for incremental growth, to the extent we have charge-offs or even net recoveries in some cases, that's absolutely possible.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay, thank you.

James Abbott -- Director of Investor Relations

This is James. We are at the end of about an hour. We do have a few questions to go, so we'll just hit the lightning round variety here and we'll just take one primary question and then we'll move on. Thanks.

Operator

Thank you, sir. Our next question comes from Emlon Harmon of JMP Securities. Your line is open.

Emlon Harmon -- JMP Securities -- Analyst

Hey, evening guys. The one I got queued up for you has a couple parts, so we can do it quick. I'll throw them all at you. In terms of bringing the money market balances onto the balance sheet, how much of that did you plan to rely on to drive deposit growth and what's the potential impact on deposit yields?

Scott McLean -- President and Chief Operating Officer

Well, we haven't been very specific about that and it is identified as an opportunity. We expect it to be a significant part of our funding strategy over the course of the next several quarters, as we said. But we have not provided specifics with respect to how that may affect overall yields. Although I would say, I mean, you can kind of look at our wholesale borrowings and what the yield is on that. You can see a bed on, I think it's page 17 of the press release. As recognize that we would be bringing these on at a rate which is better than where we could borrow in the wholesale market.

Operator

The next question comes from John Pacari of Evercore. Your line is open.

John Pacari -- Evercore -- Analyst

Good evening.

Scott McLean -- President and Chief Operating Officer

Hi, John.

John Pacari -- Evercore -- Analyst

On the tax benefit, just wanted to get your thoughts on how much of this benefit is likely to creep to the bottom line and stay there or how much of it would you say that you are putting back in the business or ultimately going to get more competitive with? Thanks.

Harris Simmons -- Chairman, CEO and Chairman of Zions First National Bank

I'll take a stab at it. I find myself thinking about it very much like deposit-based. I'm like yes, you've got to hold onto everything you can hold onto. We're not deliberately going on and using it to try and buy market share. I think over time though; the way markets work is that a major portion of it will probably dissipate competitively. But I think that will take a little bit of time. So, I think we'll capture most of that benefit in 2018, maybe incrementally less each year as we go along. Markets adjust. But this is one of these high-class problems that corporate America hasn't had to wrestle with for a very long time.

Operator

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

Dave Rochester -- Deutsche Bank -- Analyst

Hey, good afternoon, guys.

Harris Simmons -- Chairman, CEO, and Chairman of Zions First National Bank

Hey, Dave.

Dave Rochester -- Deutsche Bank -- Analyst

Just one quick one on expenses. I know you guys mentioned giving some more detail later on the simplification efforts, but can you just give an update on whether you still see that a multi-year opportunity to control expense growth? 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 creep? Thanks.

Scott McLean -- President and Chief Operating Officer

Yeah, this is Scott McLean. I just think as we talk more at the investor day at what simplification looks like in our company, I happen to believe that we're just getting started. We've made a lot of really good areas in big areas, but we have a lot of other areas and there's a lot of energy around this subject; has been. I think we're getting more effective at executing more quickly. On creating change and every one of those simplification processes. In some cases, it includes revenue. It certainly has an in 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 most investors will be encouraged by it.

Dave Rochester -- Deutsche Bank -- Analyst

Great, thanks.

Scott McLean -- President and Chief Operating Officer

I'm sorry. You mentioned expense creep. Sorry. 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 loan, deposit, fee, income growth, as long as those fundamentals are increasing, we'll probably lean into those businesses in terms of supporting people and technologies. But just getting increased rage. I think we'll be very conscious of not spending that away inappropriately.

Dave Rochester -- Deutsche Bank -- Analyst

Great. All right, thanks, guys.

Scott McLean -- President and Chief Operating Officer

Thanks.

Operator

The next question comes from Chris Farr of Wells Fargo Securities. Your line is open.

Chris Farr -- Wells Fargo Securities -- Analyst

Thank you for taking the question. My question is with regard to fee income. This seems to be one of the best core fee income numbers that you put up in the history of the firm. At least you didn't -- customer related fee income -- yet your guidance for next year really hasn't changed that much and almost implies a lower level of fun rate and then you would post it in the fourth quarter. So, what happened in the fourth quarter that was better than expected and what can you do to try to kick-start the 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 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-month run rates that we look at. That mid-single-digit growth rate is what we're still guiding to. But this fourth quarter versus fourth quarter of '16, which we just saw really strong numbers in those two quarterly comparisons related to our normal work fee income. Categories like treasury management and bank cards. But we saw some really unusual increases in municipal finance, for example, and an umber of others that are weal business that happen to have really small but strong 5Q versus 4Q comparisons. Having said all that, I think if we can put up mid-single-digit growth rate numbers and fee income. These are very basic products. We're not selling investment baking or exotic capital markets activities and So, these are generally businesses that grow kind of mid-single-digit growth rates.

Chris Farr -- Wells Fargo Securities -- Analyst

Thank you.

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 has been mentioned a couple 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 excepted to begin at 8:00 a.m. mountain time, 10:00 a.m. Eastern time. We expect the event to run for several hours. We will be broadcasting that, although we'd be delighted if you would join us in person. It's always more enjoyable. Please contact investor@zionbancorp.com or myself directly, or the phone number listed in the 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.

Duration: 65 minutes

Call participants:

James Abbott -- Director of Investor Relations

Harris Simmons -- Chairman, CEO, and Chairman of Zions First National Bank

Paul Burdiss -- Chief Financial Officer

Kevin Barker -- Piper Jaffray Companies -- Analyst

Stephen Moss-FBR Capital Markets -- Analyst

Brad Milsaps -- Sandler O'Neill -- Analyst

Kenneth Usdin -- Jefferies LLC -- Analyst

Marty Mosby -- Vining Sparks IBG -- Analyst

Geoffrey Elliott -- Autonomous Research -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Emlon Harmon -- JMP Securities -- Analyst

John Pancari -- Evercore ISI -- Analyst

David Rochester -- Deutsche Bank AG -- Analyst

Chris Farr -- Fargo Securities -- Analyst

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