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Zions Bancorp  (NASDAQ:ZION)
Q4 2018 Earnings Conference Call
Jan. 22, 2019, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

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 may be recorded.

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

James R. Abbott -- Director of Investor Relations

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 today in the room today include Scott McLean, President and Chief Operating Officer; and 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 earnings release as well as a supplemental slide deck are available at zionsbancorporation.com.

The earnings release, the related slide presentation in 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 document and participants are encouraged to carefully review this reconciliation.

We intend to limit the length of this call to one hour. During the question-and-answer 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 H. Simmons -- Chairman and Chief Executive Officer

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 some of the results for full-year 2018. The results for the quarter were strong relative to the year-ago results. Slide 3 is a summary of several key highlights, which we will address in some detail in subsequent slides.

Slide 4 shows earnings per share on a GAAP basis. They've doubled from the year-ago quarter. The year-ago fourth quarter had a couple of items that reduced the results substantially, which we've called out on the slide. Additionally, we're of course subject to a much lower corporate tax rate in the year-ago period. Even adjusting for those factors, we were able to accomplish strong double-digit EPS growth.

Turning to slide 5, we've 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 a strong 14% and 13% if adjusted to exclude the charitable contribution in 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're very pleased with the 18% increase in per share 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 or an 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 quantitative factors improved from the prior quarter. 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 a turn in the credit cycle although we are 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, which you have to focus on is the comparability of results across companies is 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 the dollar amount of loans where the subject company's total debt exceeded four times the company's earnings before interest, taxes and depreciation or EBITDA. At the time the 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 are 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 median. This isn't the line of business for us. Some of that loans in that bucket were not originated as leveraged, but are there today because of the recent recession in the oil and gas industry, which reduced cash flows for those borrowers. As cash flows for the energy industry improved, our exposure to loans with debt to EBITDA of more than four times should decline from current levels.

In recent years, we've been talking frequently about the strategic importance of our long-term technology investments, all during a time when we have been keeping our expenses relatively flat. On slide 8, you can see the key investments we're 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 the slide and note that our future core program to 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 roll-out. 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 of 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 to roll-out for our digital business and mortgage loan application software will represent a significant improvement of 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 workhorse 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've 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 in the 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 returns of capital to shareholders, we've increased the payout ratio, which is defined as payouts to common shareholders as a percentage of earnings applicable to common shareholders, from approximately 20% of earnings a few years ago to more than 140% in the fourth quarter of 2018. We view an increase in balance sheet leverage is appropriate, particularly given the reduction of the risk profile of the company.

Since 2009, which was 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 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. It is this reduction of risk that 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'll 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 additional detail. Paul?

Paul E. Burdiss -- Chief Financial Officer

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 1.3%, even after adjusting for infrequent items and a 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, up $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 to 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 a total deposit repricing 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 have also continued to experience attrition of some of our larger loans, some of which has -- was intentional to reduce loans that were not meeting our profitability requirements and reallocate that 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 one-to-four family and home equity loans, 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 essential 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 sentiment. But as noted earlier, there are competitive forces generally outside of the banking industry that causes 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 yield, which increased to 4.79%, up 8 basis points from the prior quarter. Recall in the prior quarter, about 2 basis points of loan yield 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 repricing beta over 50%, which is consistent with a portfolio that has about half of its loans 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 reduced 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've 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 prepayments and therefore difficult to accurately forecast. But assuming stability there, the yield of 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 target Fed funds rate. These elements combined 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 more 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 industrywide loan growth accelerates, perhaps then we might expect 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 may be decelerating. As with 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 as 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 change are listed on this page. For the full year, customer-related fee income increased by more than 3% to $501 million. We continue 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 a 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 rates 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 a larger-than-usual charitable contribution of $12 million, the core adjusted non-interest expense increased about 3.7%, which was 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 were 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 and did 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 bank surcharge that was designed to drive the deposit insurance fund to a reserve ratio of 1.35%. The large bank FDIC surcharge was eliminated in the fourth quarter because 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 have 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 taxes 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, 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.

Questions and Answers:

Operator

Yes, sir. (Operator Instructions) Our first question comes from the line of Dave Rochester of Deutsche Bank. Your line is open.

Dave Rochester -- Deutsche Bank -- Analyst

Hi, good afternoon guys.

Harris H. Simmons -- Chairman and Chief Executive Officer

Hi, Dave.

Dave Rochester -- Deutsche Bank -- Analyst

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

Harris H. Simmons -- Chairman and Chief Executive Officer

Dave, I'll start out and ask my partners here to way in. With respect to the -- I think kind of what you referred to as the NIM beta, that is any NIM expansion related to the change in our underlying rates. That's approximately right. I did say in my prepared remarks that we were expecting a few basis points. I think I quoted that 22% sort of NIM beta related to the change in underlying of that Fed funds target. That has been our experience over 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 costs to drift marginally upward over the course of the next several quarters as sort of reflecting a 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 -- Analyst

Perfect, thanks. And just one -- just switching to loans, real quick, just a small one. In your table, that the heat map in the back, I mean, it looked like it was a 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 run-off in C&I and energy and the strength in California. It looked like California was really strong for you guys. Maybe if you can just give an overarching comment on that too that would be great?

Scott J. McLean -- President and Chief Operating Officer

Sure, Dave. This is Scott McLean. And for the quarter -- the linked quarter, the bottom half of that slide, 22, energy did have a soft quarter. It really is related to the softness that the top half of that page indicates. They've had a book, 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 are the kind of moves we make as we watch our commercial clients. So -- but other than that -- and there are 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, you know, the top half of the page, and it really is borne 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 see kind of $600 million there.

The muni lending, a $400 million; the home-related lending of over almost $700 million; just good solid balance, and so we continue to be pleased with that. The other thing that isn't showing up quite as much this quarter as it did in the third quarter and the second quarter, but our four smaller affiliates, Arizona, Nevada, Colorado, and Washington, that 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 -- Analyst

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

Scott J. McLean -- President and Chief Operating Officer

No, I mean...

Paul E. Burdiss -- Chief Financial Officer

There were a couple of larger deals, but nothing really stands out. So...

Dave Rochester -- Deutsche Bank -- Analyst

Okay.

Paul E. Burdiss -- Chief Financial Officer

I think it's also -- was helped by just slower paydowns.

Dave Rochester -- Deutsche Bank -- Analyst

Okay.

Paul E. Burdiss -- Chief Financial Officer

So that was all.

Dave Rochester -- Deutsche Bank -- Analyst

Great, thanks guys.

Scott J. McLean -- President and Chief Operating Officer

Thank you.

Operator

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

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks, good evening. Just had a question; on slide 18 the loan growth or loan balance commentary that you have, that you talked -- 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 actually written that in your outlook. Has the competition from the non-banks gotten worse or how's that changing? Thanks.

James R. Abbott -- Director of Investor Relations

This is James, Ken. We sort of -- I would describe it is, this is fairly consistent with what we saw or 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, us versus some other banks, I suppose, but it's a consistent pressure.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Okay, understood. And then just maybe a question for Harris. In terms of capital return, I know you said it is a Board decision in terms of when you announce that. I guess first of all, when does the Board meet that when we might hear some sort of outcome of that around capital return, but also b) just given where your stock is, given how much of 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? Thanks.

Harris H. Simmons -- Chairman and Chief Executive Officer

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

Ken Zerbe -- Morgan Stanley -- Analyst

Will do.

Harris H. Simmons -- Chairman and Chief Executive Officer

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

Ken Zerbe -- Morgan Stanley -- Analyst

Okay, all right, thank you.

Harris H. Simmons -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Jennifer Demba -- SunTrust -- Analyst

Thank you. Good afternoon. Just curious about the process improvements that Zion 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 can give us examples of what we're looking at?

Scott J. McLean -- President and Chief Operating Officer

Sure. Jennifer, this is Scott McLean, how are you? I would say -- we probably all have a different gauge 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 size opportunities that is providing a really nice source of expense reduction. It's 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, we've -- when it comes to 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, it's adopting common practices.

Another place has to -- another area or theme would be around automation and numerous examples, just taking simple activities and automating them where it can take two, three days out of a process. I'm happy to give you examples, but let's do that offline for over an hour. Those would be probably the two most important common themes. And then the third one would just be on our technology initiatives like the ones that Harris highlighted. We're not customizing our new technologies and that is -- will create a savings ultimately, longer term.

Jennifer Demba -- SunTrust -- Analyst

Great. Thanks, Scott.

Operator

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

Ken Usdin -- Jefferies -- Analyst

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

Harris H. Simmons -- Chairman and Chief Executive Officer

I mean the first thing I'd say is, I just wouldn't look for tax spending to decrease. I mean, we have -- we're spending a lot on this core system replacement. We're about halfway through the total exercise. I mean, we will have the balance sheet there. We expect by the end of February actually. We will be making decisions about that here in the next couple of weeks to go live with the second of three releases of this core systems platform over Presidents Day weekend.

Once we do that we'll have all the loans on. We then have the deposit piece 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's now been in service for the last year.

We'll have the commercial loan piece in service, I would expect by the end of this quarter. And so we'll start amortizing that. And then we have spend on the deposit system and roughly half of that gets expensed and about half of it roughly gets capitalized. But it is -- you know, 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 you're -- 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 spend in technology has continued to increase even as the spend in other areas has been diminished and I think that can run for ways longer. So, that's one of the things that gives us a fair amount of optimism that we'll be able to continue to see some reasonable operating leverage, if the economy holds up in 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 J. McLean -- President and Chief Operating Officer

This is Scott. I would just add to that that many of the systems we're replacing or enhancing are fully depreciated and the expense burden, current year P&L cost is really quite nominal. And so, generally on almost all these technology investments, you're increasing your cost initially. You may be able to have a savings elsewhere such as in FTE, but just the pure technology built-in expense goes up for a 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 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 this spend is that it's building out all the systems that Harris described, many of the systems Harris described and it is largely on our offensive investment.

Ken Usdin -- Jefferies -- Analyst

Understood, Scott. And if I can just follow-up on a point 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 the continued way they've gone, the target of trying to get to 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, you know, some positive operating leverage?

Harris H. Simmons -- Chairman and Chief Executive Officer

Yeah, I think over the next year or two, that would be our objective. And at some point, you know, that kind of compounding catches up with you. And -- but I think if you look at -- it's instructive to look at where we have brought, you know, the efficiency ratio over the last three years from up in the kind of 73%, 74%, down to a number that's now really competitive with all the -- pretty competitive with the peer group. And I guess the point is we don't think we've finished yet and that will help to drive operating leverage here for the next year or two.

Ken Usdin -- Jefferies -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Steven Alexopoulos of JPMorgan. Your question, please.

Steven Alexopoulos -- JP Morgan -- Analyst

Hi, everybody. 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?

Paul E. Burdiss -- Chief Financial Officer

I'm sorry, you mean, you want me to ...

Harris H. Simmons -- Chairman and Chief Executive Officer

Expense growth rate.

Paul E. Burdiss -- Chief Financial Officer

Yeah, you want me to -- we're deliberately, I'm using that language deliberately because we're 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 -- JP Morgan -- Analyst

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

Paul E. Burdiss -- Chief Financial Officer

Yeah.

Steven Alexopoulos -- JP Morgan -- Analyst

You will be at that range again in 2019?

Paul E. Burdiss -- Chief Financial Officer

Sorry. What I said was, that was a little bit over our targeted range of low single-digit to kind of put some guardrails around that.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay. Great. I guess I'm trying to understand, given -- there is a lot of talk on reinvestment technology, if we should be bracing for another 3% or so year on expense growth?

Paul E. Burdiss -- Chief Financial Officer

But it's really important to note though that -- I mean, we've also got, as Scott said, a lot of opportunities to continue to simplify the organization. And we are working really hard, as Harris said, to take the savings that we are creating out of operational efficiencies and invest it 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 H. Simmons -- Chairman and Chief Executive Officer

And I'd tell you too that, I mean part of part of our plan for this coming year is to invest more in people, to build a stronger pipeline of bankers for the future, to -- in training, et cetera. We just think that's critical and we'd probably be spending more there even as -- that we are 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 kind of in this low single-digit kind of range.

And I define low single-digit as being (inaudible) the guardrails on that -- in my mind are going to depend in part on where -- what revenue growth is looking like to. One of the things that added to kind of 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 -- that's one of the real drivers this year of that 3.7%.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay, that's helpful.

Paul E. Burdiss -- Chief Financial Officer

And credit performance is really strong as I noted in my comments.

Harris H. Simmons -- Chairman and Chief Executive Officer

Yes.

Steven Alexopoulos -- JP Morgan -- Analyst

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 and do you think those balances can hold in there? Thanks.

Paul E. Burdiss -- Chief Financial Officer

Well, I will say that our models would indicate and as we described in the past, when we talked -- describe our interest sensitivity, our models assume some level of migration out of non-interest-bearing deposits and into other interest-bearing funds. As 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 that, we think the key driver is the relationship major of the deposits and the proportion of operating deposits that we have. I mean, we had a very granular level by customer we can sort of discern what average balances, 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 are operating deposits. Because of the relationship major, because of the operating nature of the deposits, they are just proving to be a little more sticky than even we had expected.

Harris H. Simmons -- Chairman and Chief Executive Officer

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 rates kind of customers. If our growth was really heavy in CRE, you wouldn't -- you just wouldn't see the same kind of 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 a 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.

Paul E. Burdiss -- Chief Financial Officer

I'm going to make one more common just because I'm so excited about the value of our deposit base. I talk about it a lot, you know me. Another really important point is that, as I said in my prepared remarks, we look at a stratification of our deposits by deposit size, that is by sort of customer size, deposit size, we see a real difference in behavior in terms of resiliency of the volume with respect to the required deposit repricing betas, a real difference based on the stratification and the size of the depositors.

And so what we are observing is our very largest depositors, of which on a relative basis we probably have fewer, are much more sensitive to rate 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.

Steven Alexopoulos -- JP Morgan -- Analyst

Great, that's really good color. Thanks for taking my questions.

Paul E. Burdiss -- Chief Financial Officer

Thank you.

Operator

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

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

Thanks. Good afternoon. Just a couple of quick questions, first, and I'm sorry if I missed this, did you mention along the way what your yields were on new loan production for the fourth quarter?

Harris H. Simmons -- Chairman and Chief Executive Officer

Yeah, we mentioned it, but it's probably near five and a quarter, 5.20% GAAP yield some thereabouts.

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

Okay, thank you. 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 does that sort of -- was there any adjustment this quarter that reduced that below what the kind of forward run rate will look like?

Paul E. Burdiss -- Chief Financial Officer

Gary, what I tried to say, there was kind of approximately $6 million, kind of $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.

Scott J. McLean -- President and Chief Operating Officer

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

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

All right, perfect. Thank you.

Harris H. Simmons -- Chairman and Chief Executive Officer

Thank you.

Operator

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

David Long -- Raymond James -- Analyst

Good afternoon, guys.

Harris H. Simmons -- Chairman and Chief Executive Officer

Hi David.

David Long -- Raymond James -- Analyst

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

Paul E. Burdiss -- Chief Financial Officer

Well, historically we have and Harris or Scott, please jump in. But historically where we -- revenues and expenses were not aligned, we've 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.

Harris H. Simmons -- Chairman and Chief Executive Officer

Yes.

David Long -- Raymond James -- Analyst

Okay, got it. 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?

Paul E. Burdiss -- Chief Financial Officer

Well, we -- we price locally. So each of the affiliate banks manage their deposit pricing and we obviously give them internal credit kind of way the opportunity versus what they can earn internally. We -- 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'd want to do, I mean, I think fundamentally we want to make sure that we are protecting the deposit base 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 as doing kind of campaigns in any of the markets where we have branches.

Scott J. McLean -- President and Chief Operating Officer

And I'll add, if I could, that rate is not the primary value proposition that we're offering to our customers. It's really about kind of advice and skill. And so, rate will tend to attract hotter money that is provide funding, but not liquidity as you know. And so this is something that we think about very carefully.

David Long -- Raymond James -- Analyst

Got it. Thanks guys. Appreciate the color.

Harris H. Simmons -- Chairman and Chief Executive Officer

Thank you.

Operator

Thanks. Your next question comes from Christopher Spahr of Wells Fargo. Your line is open.

Christopher Spahr -- Wells Fargo -- Analyst

Thank you for taking my call. The comments on the repurchase authorization, the Board meets a week from Friday, when you say more aggressive like more of the same or perhaps more than the $250 million that we saw in the fourth quarter?

Harris H. Simmons -- Chairman and Chief Executive Officer

I'd say that you had to stay tuned. More of the same would only be more aggressive relative to doing less, I guess. So I think I'd really want to wait until the Board have something to say. I don't want to front-run them too much here.

Christopher Spahr -- Wells Fargo -- Analyst

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

Scott J. McLean -- President and Chief Operating Officer

Sure. Let me -- so if you look at slide 8, really the top five sort of horizontal panels are all offensive and I'll skip to sort of the digital business 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, start it at home, work on it in the branch with a banker, complete it in their office, send it in. We've automated a way to take the data and pull it into our loan origination system and then make a decision very quickly.

All of this happens by paper today and there's not an electronic version of it. This 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 a $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've done historically. So, it allows us to create a much more viable mortgage product in our branches. We're very excited about it. So those two particularly are -- all of these are rich with offensive client-building opportunities.

Operator

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

Kevin Barker -- Piper Jaffray -- Analyst

Good morning -- I mean, good afternoon. Could you refer -- sorry, I'm so used to that. In regards to the securities portfolio, it seems like you repriced quite a bit this quarter and you cited some of the premium amortization. Was there any shift in the duration of the portfolio and your expect turnover in that portfolio?

Paul E. Burdiss -- Chief Financial Officer

No, it was really -- a lot of it was related to, as I noted in my prepared comments, kind of a change in the premium amortization due to a change in prepayment. The products that we're 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. And so, all of those philosophical items around the portfolio haven't changed.

Kevin Barker -- Piper Jaffray -- Analyst

Okay. And then in regards to follow-up on the some of the comments around oil loan pickup, and you show a little bit of pick up this quarter compared to what you've seen in previous quarters? We saw some of your competitors also cite a pick up in oil lending as well? Is it primarily due to increasing demand or slowdown in the run-off (inaudible)?

Scott J. McLean -- President and Chief Operating Officer

Yeah, this is Scott again. So, the growth that we've seen year-over-year in energy about two -- really the majority of it is upstream reserve base lending and midstream, both of which we had very low loss content in. Our energy services portfolio saw a 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%. So...

James R. Abbott -- Director of Investor Relations

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

Scott J. McLean -- President and Chief Operating Officer

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

Kevin Barker -- Piper Jaffray -- Analyst

Thank you very much.

Harris H. Simmons -- Chairman and Chief Executive Officer

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 R. Abbott -- Director of Investor Relations

Thank you, Latif and we thank all of you for joining the call today. If you have follow-up questions, please contact me at james.abbott@zionsbancorp.com 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.

Duration: 60 minutes

Call participants:

James R. Abbott -- Director of Investor Relations

Harris H. Simmons -- Chairman and Chief Executive Officer

Paul E. Burdiss -- Chief Financial Officer

Dave Rochester -- Deutsche Bank -- Analyst

Scott J. McLean -- President and Chief Operating Officer

Ken Zerbe -- Morgan Stanley -- Analyst

Jennifer Demba -- SunTrust -- Analyst

Ken Usdin -- Jefferies -- Analyst

Steven Alexopoulos -- JP Morgan -- Analyst

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

David Long -- Raymond James -- Analyst

Christopher Spahr -- Wells Fargo -- Analyst

Kevin Barker -- Piper Jaffray -- Analyst

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