Zions Bancorporation N.A (ZION) — Q4 2017 Earnings Call Transcript

Thanks, Latif. I appreciate it. And 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 session. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck dealing with forward-looking information, which applies equally to statements made during this call. A copy of the full earnings release, as well as a supplemental slide deck, are available at zionsbancorporation.com. We will be referring to the slides during this call. The earnings release, the related slide presentation and this earnings call contain several references to non-GAAP measures, including pre-provision net revenue and the efficiency ratio, which are common industry terms used by investors and financial services analysts. Certain of these non-GAAP measures are key inputs into Zions' management compensation and are used in strategic goals that have been and may continue to be articulated to investors. Therefore, the use of such non-GAAP measures is 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. Participants are encouraged to carefully review this reconciliation. We intend to limit the length of this call to one hour. During the question-and-answer session of the call, we ask you to limit your questions to one primary and one related follow-up question to enable other participants to ask questions. With that, I will now turn the time over to Harris Simmons.

Thank you, James. We welcome all of you to our call today to talk about our fourth quarter and full year results. I am going to go through a few of the slides, beginning with the deck we’ve provided to you. On slide three are some highlights for the quarter. At a high level, we were really pleased with the performance of both the quarter and the year. We established some very specific financial targets back in early 2015 that included some goals for 2017. We achieved those goals and today the Company is substantially more profitable. We eliminated 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 are not finished. Our culture of identifying ways to simplify and streamline is firmly established around the company, and we plan to deliver continuous improvement in operational and financial efficiency in quarters and years to come, while investing in areas that we expect should result in a healthy rate of revenue and earnings growth. Looking specifically at the quarter, we experienced continued strong growth in earnings per share, up about 33% from the year-ago period, if adjusted to exclude a couple of items that were directly related to the change in the federal tax law. We were pleased with loan growth, which increased 5% over the year-ago period, which compares to about 2.2% for large domestic commercial banks. We were able to push the efficiency ratio down to 61.6%, but excluding the larger charitable contribution that we detail on slide three, it would have been actually just under 60% for the quarter. For the full year, the efficiency ratio was 61.7%. Again, this is excluding the larger charitable contribution and the expense associated with Hurricane Harvey, which we detailed last quarter. A quick note about the contribution, the charitable contribution. We contribute several million dollars per year as part of our contribution to our communities. And we expect to make additional contributions in 2018 and beyond, outside of this unusually large contribution. This large contribution in the fourth quarter will displace some of the expenditures that we would otherwise be making in 2018 in the succeeding year. 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, up approximately 10% over the prior year fourth quarter. With regard to credit quality, we've remained pleased with continued strong improvement, including a 9% linked quarter decline in classified loans and a 12% linked quarter decline in non-performing assets, including loans that are 90 days or more past due, and only 11 basis points of annualized net charge-offs. Loans outside of the oil and gas loan portfolio experienced another remarkably good year with only two one-hundredths of a percent or 2 basis points of loan losses as a percentage of average loans if you exclude the single commercial credit that was subject to a department of justice investigation in the first quarter, or 9 basis points if you include that credit. On slide four, our adjusted pre-provision net revenue reflects steady improvement, up 19% from the year-ago quarter. Excluding the previously referenced larger charitable contributions pretax pre-provision net revenue increased 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 as significant a 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 pretax pre-provision net revenue. Although, that benefit is not included in our guidance or outlook. As we’ve mentioned in the past, the rate of growth seems likely to slow. Although, we still expect the strong rate of growth. Turning to slide five, I've already highlighted the efficiency ratio in my earlier comments. But visually, this represents all the work we've done since 2014 to improve the profitability of the Company. We expect to push to achieve an efficiency ratio below 60% for the full year 2019, excluding the possible benefits of rate increases. Slide six depicts two key profitability metrics, return on assets and return on tangible common equity. The return on assets was 74 basis points in the fourth quarter of 2017 compared to 88 basis points a year ago. However, excluding the larger charitable contribution and revaluation of the deferred tax asset, return on assets increased to 1.07%. Return on tangible common equity was 7.4%, but again excluding those two items, it would have been approximately 10.9%. We’re encouraged by the continued improvement and remained focused on achieving competitive returns on our assets relative to peers. Moving to slide seven. We experienced 5% year-over-year growth in loans held for investment despite continued attrition in the national real estate portfolio, as well as the term commercial real estate and the oil and gas portfolios. All told attrition was about $550 million or more than a percent of loan growth. We are comfortable with our loan concentrations. The economy is generally strong. We're optimistic that the new tax policy will be helpful to generate growth, and we made some improvements in origination process, all of which should contribute to continued moderate loan growth. Deposits declined slightly, about 1% over the past year, which is almost entirely due to large dollar deposits rather than middle market or small business 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. Therefore, we believe they are not likely to be as price sensitive, as the larger deposit customers are. We sweep several billion of customer funds off the balance sheet to asset managers. Over the course of the next few months and quarters, we expect that some of that will return to our balance sheet to 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?

Thank you, Harris. Good evening, everyone. I'll begin on slide eight. For the fourth quarter of 2017, Zions reported net earnings applicable to common shareholders of $114 million or $0.54 per diluted share. Here is detail of the couple of key items, so I won’t repeat them here. I will add that we are pleased with the financial performance of 2017 and note that we've successfully delivered on our financial commitment made to you on June 1, 2015. Let me make a few comments about revenue. Nearly 80% of our revenue comes from net interest income. Slide nine depicts the recent trend in net interest income, which continues to demonstrate substantial growth in the fourth quarter relative to the prior year period. Net interest income increased $46 million or nearly 10%. Interest income increased approximately $60 million, of which approximately two-thirds came from loans and one-third resulted from the investment portfolio. With respect to revenue drivers, I'll discuss earning asset volume first, then transition to rates. Although we don't have a slide on this, as we discussed in the recent past, we do not expect investment portfolio growth, which has been a meaningful contributor to pre-provision net revenue growth over the past several years to contribute significantly to growth in net interest income. The investment portfolio has now grown to the appropriate size relative to the size of our balance sheet. Slide 10 is a graphical representation of our loan growth by type relative to the year-ago period. The size of the circles represent the relative size of the loan portfolios and the circles are ordered by size, left to right, from smallest to largest portfolios respectively. Total loan growth, including the effects of the declining oil and gas portfolio and the national real estate loan portfolio, was 5%. The key takeaway from this chart is relatively balanced growth across the loan portfolio. Commercial and industrial owner-occupied and home equity loans all increased in the mid-single digit range, while we experienced strong growth in one-to-four family and municipal loans. We experienced general stability in construction and land development and term commercial real estate loans. As expected, we experienced declines in oil and gas loans and national real estate loans. Shown at the bottom right is our expectation for loan growth by product type. We are comfortable with our commercial real estate concentrations and plan to grow commercial real estate loans at rates which are generally consistent with the overall mid-single-digit loan growth rates. We expect oil and gas loans to stabilize or possibly increase somewhat. 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 three basis points from the prior quarter to 4.30%, and increased 11 basis points over the year-ago period. Meanwhile, relative to the year-ago quarter, we experienced about two basis points of headwind due to reduced benefit from loans purchased from the FDIC. New loan production for the fourth quarter was up two basis points higher than the yield on our portfolio. Without future rate hikes, we expect the yield on the loan portfolio to remain generally stable from the current level. Favorable factors include the December rate hike and new loan production, while adverse factors include the tax effect on municipal loans and income from loans purchased from the FDIC back in 2009. Harris touched on our deposit and funding costs earlier, but to expand a bit on his comments, the average cost of total 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 14% funding beta. Reflected in the lower left is the change in the mix of earning assets. As a result of this mix shift, we experienced about 3 basis points of margin headwind during the past year due to a 2 percentage point lower concentration of loans relative to earning assets. The security deal declined slightly. This was primarily due to higher premium amortization on the SBA or small business association loans, administration securities. For those of you who have followed the Company for some time, you've heard us discuss that the SBA securities have a high premium relatively associated with them; and that as the economy improves, we would expect a higher rate of premium amortization due to higher prepayments, which did occur during this past quarter. More broadly, we have been reinvesting cash flow from our investment portfolio into securities with a marginally higher yield than the average portfolio yield. Therefore, all else equal, we would expect yield and 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 base. We have detailed the effective interest rate swaps and floors on the loan portfolio so that you may better understand the possible reaction and timing of yield on the loan portfolio to rising short-term rates versus rising longer-term rates. Overall, our net interest margin should be relatively stable in the first quarter of 2018 relative to the fourth quarter as we expect some benefit from the December 2017 increase and the Fed funds target rate to help. However, this will be offset by the effect of tax reform and its impact on the municipal loan and securities portfolio yield, which we estimate to be about 3 basis points of headwind to net interest margin. On slide 12, we show the model effect on net interest income in a rate environment that is 200 basis points immediately higher across the curve relative to the current level. This would generate 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 that tightening where the beginning of the ten lines on a quarter immediately before the Fed began to raise rates. For Zions, deposits have been less sensitive so far this cycle as compared to the last, up only 3 basis points relative to the 150 basis points move by the Federal Reserve, compared to about 25 basis points of higher deposit costs at a comparable point in the prior cycle for a similar move by the Federal Reserve. We have a very granular deposit base with a very high ratio of small balance accounts from small and medium-sized businesses and a very granular portfolio of consumer deposits. We expect that the increase in our cost of deposits may remain low for the near term. Turning to slide 13 and non-interest income. Total non-interest income was $139 million, up from $128 million a year ago. Beginning with customer-related fees shown on this slide, we experienced a 9% increase to $127 million from $118 million a year ago. Most lines experienced a favorable improvement relative to the year ago period. Treasury management fees, which are included in deposit service charges, increased about 6% from 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 increased to $450 million from $395 million in the year-ago period. Furthermore, if one excludes the $12 million incremental contribution for the charitable foundation, as Harris discussed, the adjusted non-interest expense would have been up by only about 2% from the year-ago period. A few notable points; salaries and employee benefits increased $13 million from the year-ago period; this is mostly explained by the substantial improvement in profitability this year versus the last year; and this results in higher profit sharing and incentive compensation pay to employees; relative to the prior quarter, occupancy declined about $6 million; you may recall in the third quarter of 2017, we accrued for estimated property damage associated with Hurricane Harvey in Houston; and as mentioned in the press release, other non-interest expense increased from the prior quarter and year-ago quarter due to the larger contribution to the charitable foundation. Slide 15 depicts the overall credit quality metrics of our loan portfolio. Harris provided some high-level comments earlier, and so I will echo his remarks. We are encouraged with the meaningful improvement in classified loans, non-performing assets, and net charge-offs. Much of the improvement came from the oil and gas portfolio, and we remain optimistic that we will continue to see favorable changes due to oil and gas credit measures. Although not shown in this slide, we have materially and substantially improved the weighted average risk rate on both the commercial real estate and the commercial loan portfolios during the past five years. We remain disciplined in our commercial and consumer loan underwriting criteria. As such, we expect manageable credit costs while much of the provision for credit losses will cover these incremental loan growth. Slide 16 is a visual representation of the former tax structure with the federal statutory rate of 35% and our state's statutory rate of about 4.8% pretax or about 3% after tax. This is presented alongside our effective tax rate. The third bar for 2017 excludes items such as the expense associated with the revaluation of deferred tax assets taken in the fourth quarter, and benefits to state tax expense in the first half of the year and reduced tax expenses due to the exercise investing of stock-based compensation, which is known as ASU 2016-09. On the right side is a representation of what we expect will be the statutory and effective tax rate for 2018 and beyond, with one important caveat. Some of the states in which we do business may evaluate their tax structure in reaction to the change in the federal tax law. Thus, we may experience a change in the state tax rate. Nonetheless, we feel comfortable giving an outlook that the 2018 effective tax rate is likely to be between 24% and 25%. On slide 17 is a list of our key objectives for 2018 and 2019 and our commitment to shareholders. We are fully committed to continuing to achieve positive operating leverage. We have three years behind us in our effort to materially improve profitability and grow earnings. We remain committed to further improvement and simplification of our operational processes. We expect to continue to experience improvement in the efficiency ratio and that pre-provision net revenue will increase at a rate in the high single digits. This outlook assumes the impact from the change in the tax law on municipal loans and securities and at the higher salaries and bonuses paid to many of our employees. It also contemplates the effects of the December 2017 increase in the Fed funds rate, although it does not assume any further increases in net or other benchmark interest rates. We expect to continue to invest significantly in technology improvements, which includes the substantial overhaul of our core systems. Back in 2015, we indicated that we were going to be targeting much more substantial returns on capital than could be seen then. We are tracking well towards those goals, although there is still room for improvement. Regarding returns of capital, we have increased that amount to a level above the peer median and we view a moderate increase of balance sheet leverage as appropriate, particularly given the reduction of the risk profile of the company. Unless it's often enquired 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 media stress test result on our website. To highlight a single number, our post-stress common equity tier one ratio was 9.9% and well above the 4.5% minimum regulatory threshold. A second consideration is where we rank within our peer group. For various reasons, we believe it is important to remain somewhat stronger than the peer median with respect to capital. We recognize that the peer median is likely to decline over time. So while the peer median analysis is a relative threshold for us, the stress test is an absolute threshold. Now moving to slide 18 and our outlook. We are maintaining an outlook for loan growth at moderately increasing, which is to be interpreted as an annual growth in the mid-single digits. We expect net interest income to increase moderately over the next 12 months. We assume no additional rate hikes in this outlook. Although, we do incorporate into our view the December 2017 rate hike. Additional increases in short-term rates are expected to improve net interest income. We posted a net provision for credit loss, which includes both funded and unfunded commitments of minus $12 million in the fourth quarter. Asset quality continued to outperform our expectations, and credit costs have been lower than expected, a trend which may continue. However, our base case scenario calls for a modest provision for credit losses over the next several quarters that is greater than zero. In other words, we may experience reserve release as credit quality continues to improve, which may be offset by reserves for new loans and, of course, ongoing net charge-offs. Customer-related fees, we expect, which are defined in our press release and exclude dividend income and securities gains and losses, should increase slightly from the level reported in the fourth quarter. As I mentioned earlier, fee income remains the key focus for the company. Although, the outlook recognized that the fourth quarter 2017 level was relatively strong. Excluding the effect of the $12 million contribution to the Company's charitable foundation, we expect adjusted non-interest expense for 2017 to be slightly higher than the 2017 level. To be clear, as shown on page 21 of the earnings release, adjusted non-interest expense was $1.640 billion; less the $12 million contribution, one would arrive at a base rate of $1.628 billion. From which we would expect an increase in the low single-digit rate of growth for the full year 2018. Excluding stock-based compensation, the effective tax rate for full year 2018 is expected to be between 24% and 25% as stated earlier. Preferred dividends are expected to be approximately $34 million over the next four quarters, and diluted shares may fluctuate due to both share repurchases and the dilutive effect from the outstanding warrants. The dilutive effect of the warrants is predominantly dependent upon the future price of the stock. You may see in the appendix further sensitivities on the affected warrants on diluted shares outstanding. This concludes our prepared remarks. Latif, would you please open the line for questions? 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 go back up given we saw quite a bit of decline in the fourth quarter?

The decline in the fourth quarter was really related to prepayments we're experiencing on our SBA securities. 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 disproportionate changes in yield compared to other types of securities. So, all other things equal, the point that I was trying to make was that the securities that we're buying today actually have a higher yield than the securities that are coming off. Therefore, over time, my point was again with similar duration and extension risk characteristics, the yield on the securities that we're buying today have a higher yield than the yield of the securities coming off. Therefore, we would expect the securities portfolio yield to creep up over time.

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

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. Because specifically that page is a fourth quarter to fourth quarter view, that's really what that comment reflects. I will say over time, we are clearly continuing to target mid-single-digit growth in our core fee income.

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

Could you repeat that?

Commercial real estate growth this quarter…

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

Where are you seeing those sources of growth and should we expect similar trends in the future?

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

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

We provide a lot of disclosures on this topic. I can’t give a direct answer because it depends on the shape of the curve. According to the slides I mentioned, around 40% of our loans in the near term are affected by the rate change. It’s clear that changes in deposit rates will be significantly influenced by the net interest margin. Considering all these factors, you're likely looking at a slight improvement in the margin by a couple of basis points.

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

Sure. Looking back two to three years, we were focused on the efficiency ratio, which was lagging compared to where we should have been. We've made significant progress, as shown in our slides. As we align more closely with industry standards, our internal goal is to keep reducing costs and enhancing efficiency. I believe we will see improvement in our efficiency ratio in 2018, albeit at a slower pace than in 2017. We're shifting our focus to growing pretax pre-provision net revenue, which I expect to grow in the high single digits. We have many internal initiatives underway to support this trajectory, though growth won't occur at the same speed as before, but there are still plenty of opportunities. Regarding capital, we have been increasing our payouts. When we announced the merger, some investors raised concerns about potential capital adjustments. We clarified that our goal is to right-size capital steadily and thoughtfully. We're monitoring the economic environment and capital levels in the industry. Our risk profile will be key, driven by our stress test results, and we are aligning our internal structures and incentives accordingly. This strategy should benefit shareholders, as we aim to ensure everyone is incentivized to maintain a robust structure while providing competitive pricing that yields a satisfactory return. While we don't have specific capital goals to share today, we expect our capital to continue to adjust as our balance sheet expands and we increase our capital payouts.

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

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

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

Ken, it's Scott McLean. Let me respond to that part of it. When you look at the expense growth which Paul described qualitative, he described a bit more quantitatively. We are finding ways to save money all the time based on our simplification initiatives, which Harris described. But clearly employment cost is the primary driver of the number. We are adding bankers and growth areas particularly in a number of our strong fee income areas like municipal finance, mortgage, wealth, and just to mention a few. So, we are adding bankers in our faster growing and fee income areas and we are adding just basic commercial bankers and small business bankers across the franchise, so that would be the primary driver, and then the secondary driver would be on technology costs as you noted and our future core project, the replacement of our long systems is a fundamental driver of the expense number as well. The investments we're making on the technology side are much more offensive and forward leaning. Five to six years ago, those investments were much more defensive just trying to keep the shop running appropriately.

Paul, I wanted to ask you about the dilutive impact of the warrant. It seems like there is a diminishing increase as the stock price rises. Despite accelerating share repurchase over the last two quarters, the share count has still been increasing due to the effect of these warrants. Is the expectation that the share count can start to decrease now that the impact from higher stock prices becomes less significant?

Marty, I know your first point you got a very sharp eye 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 upon the continued reaction of our share price to some significantly improved fundamentals you’ve seen over the last couple of years, all other things equal obviously, if the share price doesn’t move from here then we would expect the share repurchases to have much more direct impact on diluted shares outstanding. What we are experiencing, of course, is a share price increase that has exceeded our ability under our capital plan to go out and buy back stock.

Another point I'd like to suggest, considering the upcoming Investor Day, is related to the technology spending you've mentioned. This is a substantial project that may not show immediate expenses since they are capitalized and will gradually be expensed over time. It would be helpful to outline the benefits you're starting to observe and when they will become apparent. Additionally, could you provide insight into how much is being capitalized behind the scenes that will eventually start to amortize as the systems are deployed?

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

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

Sure. I would say that the process started about a year and a half ago when we decided to consolidate our various charters. We had seven different banking subsidiaries, which required a holding company. Once we consolidated the charters, I began to consider the benefits of having a bank holding company. As we evaluated our presence and mix of businesses and operations, it raised the question of what could be done in a bank that couldn’t be done otherwise. Essentially, everything we are doing operationally can be achieved in a bank. In the past, certain activities were allowable, but many are now restricted by the Volcker rule, and we've been winding down some of those investments. The chances of us underwriting equities or engaging in merchant banking as a domestic commercial bank are slim. There is very little that can be accomplished with a holding company that cannot be done in a bank, and the limited capabilities of a holding company are generally best suited to very large firms. This was the perspective that guided our exploration of the opportunity. I probably dedicated more time to this legislation than anyone else in the banking industry. I spoke with numerous Congressmen and believe I have a solid understanding of the business landscape. I fully support the legislation and hope that the Crapo bill will pass. We realized that merging a holding company into the bank could eliminate duplicate regulation entirely, which is a significant advantage. The Crapo bill sets the threshold at $250 billion, which will benefit many banks in the context of the Fed's stress tests and their models. However, we would still face examinations from both the OCC and the Federal Reserve, which has a considerable amount of overlap in their evaluations. This overlap is fundamentally why we reached our decision.

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

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

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

Yes, there was considerable activity at the end of the quarter, and I don’t have the details right now. I’m not sure we can provide that information at this time. However, we may be able to offer more insight during our Investor Day.

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

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

Just going back to the efficiency ratio. In the press release, you mentioned the 60% for 2019 as well. Can you provide some background and remind us if there is any fundamental reason why your efficiency ratio should be sustainably higher than many other similarly sized peers? A lot of banks of your size are targeting the mid to low 50s, primarily due to technology advancements. Will this ratio decrease once your future core spending slows down? I’m trying to get a better understanding of the long-term outlook.

I guess, listen, I'd say that it's hard to speak to where they think they are going to get that kind of additional boost to get some down to the low 50s. Overall, we are getting to a point where we are closing in on the median. We are at 61.6% for 2017 going into 2018. There are a couple of headwinds as noted; the lower tax benefit on the legacy municipal, securities and loans portfolio combined with the bonuses and salary growth that we announced towards the end of the year combines throughout 90 basis points; that's about 90 basis points of efficiency ratio. So, that's some of the headwind. We think despite that we're going to get a challenge to somewhere closer to 60%. I guess it gets incrementally more difficult, but I think we will find ourselves within the kind of at least the middle of the pack if not better over time than our peer group. I do think but there are a couple of things that are headwinds; one is the technology stand that we've talked about that will be about $35 million roughly going through the income statement annually on replacing core systems. Off course as Scott mentioned, we're also spending money on digital, etc. The other is that we have a profile of our commercial loan portfolio that is decidedly different from a lot of our peers; it is smaller to the medium size of any commercial loan here is decidedly smaller than what you would see in most of our peers, and that's a little more expensive model to run but I think it also produces some benefits in terms of that kind of deposit base and we have and traditionally the kinds of loan yields that we can achieve. I don’t know exactly how to measure that against peers, but I think that's probably a factor. Nevertheless, we're going to find ourselves very close to where peers are already here within the next 24 months.

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

Just to continue within that topic, I know a couple of other things. The effective tax will change is going to be about 90%, that was 90 basis points increase in our efficiency ratio. So that’s number one. And then you refer back to the press release which is page 4 where we talk about the inefficiency ratio that 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 kind of peer group relatively. It sounds like the peers I think have not been doing necessarily a near-term, but more of our medium and longer-term efficiency ratio outlook. Just to be really clear that’s not what we provided here. What we're trying to express is that to a continued growth and pro provision of that revenue our efficiency ratio is going to continue to decline and improve.

As a follow up, I noticed that your slide deck on provision expense shows a negative figure this quarter. While you mentioned it’s modest, is there a chance that you could experience one or more quarters where you could have a persistently negative provision due to further oil and gas reserve releases and Hurricane Harvey, at least for a short period during the year?

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

Okay thank you.

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

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

We haven't been very specific about that and it is identified as an opportunity. We expect 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 our yields. I would say, you can look at our wholesale borrowings and what is yield is on that; you can see that I think page 17 in the press release and recognize that we would be bringing these on at a rate that is better than where we are borrowing in the wholesale market.

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

I'll take a shot at it. I'm thinking about the deposit basis. We’re not intentionally using it to increase our market share. Over time, I believe that a significant part of it will likely decrease. However, this process will take some time. I expect that we will realize most of that benefit in 2018, with gradually diminishing returns as time goes on; it's just how the markets operate. This is one of those high-level challenges that businesses in America have been facing for a long time.

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

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

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

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 a 12 months run rate as we look at. That mid-single-digit growth rate is what we're still guiding to. The fourth quarter came in with really strong numbers in our two quarterly comparisons related to our normal workhorse fee income categories like treasury management, bank card. But we saw some really unusual increases in municipal finance, foreign exchange, and a number of others in our wealth business that happened to have really strong 4Q versus the 4Q of '16. Having said all that, I think if we can put up 5% mid-single-digit growth rate numbers in fee income, these are very basic products. We are not selling investment banking or exotic capital markets activities, and so these are generally businesses that grow kind of mid-single digit growth rates.

Thank you very much for joining the call today. As mentioned earlier, we have an Investor Day coming up on March 1st, which is noted on Page 7 of the earnings release. The event is scheduled to start at 8 AM Mountain Time, 10 AM Eastern Time, and is expected to last several hours. We will be webcasting the event, but we would love for you to attend in person if possible. Please reach out to investor@zionsbancorp.com or contact me directly using the phone numbers provided in the press release. Thank you again for being here today, and we look forward to seeing you in March or during our next earnings call next quarter. Thank you.