Zions Bancorporation N.A (ZION) — Q4 2018 Earnings Call Transcript

Good evening and thank you, Latif. We welcome you to this conference call to discuss our 2018 fourth quarter earnings. For our agenda today, Harris Simmons, Chairman and Chief Executive Officer, will provide a brief overview of key strategic and financial objectives; after which Paul Burdiss, our Chief Financial Officer, will provide additional detail on Zions' financial condition, wrapping up with our financial outlook for the next four quarters. Additional executives with us in the room today include Scott McLean, President and Chief Operating Officer; Ed Schreiber, Chief Risk Officer. Referencing Slide 2, I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck dealing with forward-looking information, which applies equally to statements made during this call. A copy of the full earnings release as well as a supplemental slide deck are available at zionsbancorporation.com. The earnings release, the related slide presentation, and this earnings call contain several references to non-GAAP measures, including pre-provision net revenue and the efficiency ratio, which are common industry terms used by investors and financial services analysts. The use of such non-GAAP measures are believed by management to be of substantial interest to the consumers of these financial disclosures and are used prominently throughout these. A full reconciliation of the difference between such measures and GAAP financials is provided within the published documents, and participants are encouraged to carefully review this reconciliation. We intend to limit the length of this call to 1 hour. During the question-and-answer section of this call, we ask you to limit your questions to one primary and one related follow-up question to enable other participants to ask questions. With that, I will now turn the time over to Harris Simmons.

Thanks very much, James, and welcome to all of you who’ve joined us on the call today to discuss our 2018 fourth quarter results and results for the full year 2018. The results for the quarter were strong relative to a year-ago results. Slide 3 is a summary of several key highlights which we will address in some detail on subsequent slides. Slide 4 shows earnings per share on a GAAP basis, they have doubled from a year-ago quarter. The year-ago fourth quarter had a couple of items that reduced the results substantially which we called out on the slide. Additionally, we are of course subject to a much lower corporate tax rate from the year-ago period. Even adjusting for those factors, we were able to accomplish strong double-digit EPS growth. Turning to Slide 5, we delivered on our commitment to produce strong positive operating leverage for the year, with full year non-interest expense up only slightly compared to the prior year, while full year revenue increased 7%. As such, adjusted pre-provision net revenue increased to a strong 14% and 13% if adjusted to exclude the charitable contribution of 2017 that we called out in previous earnings reports. For the quarterly results as shown on this slide, adjusted pre-tax pre-provision net revenue increased 18% over the same period a year ago and about 13% if adjusted to exclude the aforementioned charitable contribution. Perhaps, most notably, the 13% increase in PPNR produced an 18% increase on a per share basis, due primarily to $670 million worth of common stock repurchases completed during the year. We are very pleased with the 18% increase in per share of PPNR for the year. On Slide 6, you'll see the strong credit trends depicted on the chart on the right classified loans declining 38% from the year-ago period and 11% from the prior quarter. Improvement in oil and gas loans was a major reason for the improvement. For the fourth quarter, we experienced net credit recoveries of $8 million on annualized 7 basis points of loans. We realized net loan recoveries of 4 basis points for the full year. Credit recoveries equaled $21 million for the quarter and $85 million for the year. Recoveries may remain a beneficial factor over the next few quarters, although we expect the oil and gas credit recovery cycle to subside. Non-performing assets plus loans 90 days past due declined 42% from the year-ago period and equaled only 57 basis points. Our allowance for credit loss actually increased 1 basis point from the prior quarter. As noted in the release, the qualitative factors improved from the prior quarter, but due to a variety of broad macroeconomic and political factors, we increased the qualitative portion of the allowance. We are not seeing any substantive indicators of return in the credit cycle, although we're exercising caution in our lending activities generally so that we will be well prepared for any downturn that might materialize. We currently expect a low overall rate of gross and net charge-offs in 2019 and relatively stable problem loan ratios assuming economic conditions similar to what we experienced in recent months. One broad industry topic that has been generating a lot of recent attention with investors is leveraged lending. One of the issues in discussing this, you have to focus on is the comparability of results across companies as there are varying definitions of such loans. Slide 7 shows the result of a survey done by Moody's that included 38 regional banks, including Zions. Moody's asked each bank to provide a dollar amount of loans where the subject company’s total debt exceeded 4 times the company's earnings before interest, taxes and depreciation or EBITDA. At the time this survey was conducted, June 30th data was provided by the participants. It was measured as a percent of the Moody's definition of tangible common equity, which isn’t quite the same as the way we present our tangible common equity. But regardless, the results were comparable to the other 37 banks. You can see that Zions’ exposure is more than one-third less than the peer average and about one-fifth less than the peer median. This is in the line of business for us. Some of the loans in that bucket were not originated as leveraged but are there today because of the recent recession in the oil and gas industry, which reduced the cash flows for those borrowers. As cash flows for the energy industry improve, our exposure to loans with debt-to-EBITDA of more than 4 times will decline from current levels. In the recent years, we have been talking frequently about the strategic importance of our long-term technology investments, all during a time when we've been keeping our expenses relatively flat. On Slide 8, you can see the key investments we are making in our core operating systems, customer-facing digital technologies and how they will improve the experience for our largest customer segments. To highlight a few, I’d begin at the bottom of the slide and note that our FutureCore programs replace our three loan systems and deposit system, representing a generational investment, and it is progressing very nicely. By the first half of this year, all of our loans will have been converted to our new modern platform. Moving to the top half of the slide, let me highlight a number of significant new customer-facing digital technologies that are in various stages of rollout. Treasury Internet Banking or TIB 2.0 as we call it, is the primary online communication tool that 8,000 of our largest commercial customers utilize. We believe we are top in the industry in providing treasury management products for our clients, and this upgrade even further enhances our digital capabilities that touch customers with approximately $10 billion of our $24 billion in non-interest-bearing deposits. Next, the rollout for our digital business and mortgage loan application software will represent a significant improvement in the customer experience and how we process these types of loans on an end-to-end basis. In the case of mortgage, the digital application will give us the ability to pull down our customers’ income tax forms along with bank statements. These are two of the biggest customer pain points today. Finally, in early 2020, we will replace our online mobile banking systems which touch over 600,000 retail customers and 125,000 small business customers. This system is a workhorse for us, and we believe our new offering will position us well relative to our major competitors and close a number of gaps that exist today. Each of these technology investments is foundational and focused directly on our most important customer segments, and the benefit should be long-lasting. Slide 9 is a list of our key objectives for 2019 and 2020 and our commitment to shareholders. We believe we can continue to deliver strong positive operating leverage as we deploy technology and continue to implement many of the thousands of ideas we have collected from employees on how to better operate in a simple, easy, and fast manner. We expect that such positive operating leverage will allow the pre-provision net revenue to grow at a rate of high single digits without the help from additional rate hikes. We are firmly committed to demonstrating superior credit quality relative to our peers, which has been the Bank's primary source of earnings volatility in the past. Regarding returning capital to shareholders, we have increased the payout ratio, which we define as payouts to common shareholders as a percentage of earnings applicable to common shareholders from approximately 20% of earnings a few short years ago to more than 140% in the fourth quarter of 2018. We view an increase in balance sheet leverage as appropriate, particularly given the reduction of the risk profile of the company. Since 2009, which is probably the year of peak stress for most banks and certainly for Zions, the total assets of the company increased 34%, while the risk-weighted assets increased only 4%. Our changing asset mix was the primary contributor. We replaced CDOs with government agency mortgage-backed securities. We have replaced land development loans with municipal loans and residential mortgages. Outside of asset concentrations, we have rooted out risk in many different areas within operational risk. This reduction of risk allows us to reduce our capital from the current level. The decision on the magnitude, timing, and form of capital return is a Board level decision, and we will update you as appropriate. With that overview, I'm going to turn the time over to Paul Burdiss to review our financials in a little bit more detail.

Thank you, Harris, and good evening everyone. As Harris mentioned, we believe this quarter has been strong and the year has been solid in many aspects. I'll start by discussing key profitability metrics on Slide 10: return on assets and return on tangible common equity. We are pleased to share that our return on assets stands at approximately 1.2%, even after accounting for infrequent items, and our return on tangible common equity exceeds 14%. We anticipate that positive operating leverage will combine with solid credit performance and robust capital returns, leading to further growth in balance sheet returns. On Slide 11, for the fourth quarter of 2018, Zions’ net interest income showed strong growth compared to the previous period, increasing by $50 million to $576 million, which is a 10% rise. In earlier quarters, we mentioned interest recoveries exceeding $1 million per loan, but we did not see any such recoveries in either the year-ago quarter or in the fourth quarter of 2018. I will discuss the revenue components, starting with balance sheet volume before moving to rate. Slide 12 indicates our average loan growth at 4.2% compared to the same period last year. Although not included on the slide, the period-end growth for the fourth quarter versus the third quarter was an annualized 8%. Average deposits rose by 3.6% year-over-year and an annualized 5% from the prior quarter. Average non-interest-bearing demand deposits increased by 1% year-over-year and 5% annualized from the previous quarter. We have managed to achieve this deposit growth with only a modest rise in deposit cost. Since the third quarter of 2015, right before the first rate hike from the Federal Reserve, the cumulative rise in total deposit cost has only been 25 basis points, representing a total deposit re-pricing beta of approximately 12%. This highlights the quality of our deposit franchise. When we analyze the loan growth further, Slide 13 illustrates the year-over-year balance growth by type of portfolio, with the size of the circles indicating the relative sizes of the portfolios. We have seen solid and consistent growth across most categories, although there are three areas experiencing slight declines. In the commercial real estate sector, loan growth was negatively affected by a minor decline in the term CRE and national real estate portfolios, totaling about $235 million compared to the previous year. Additionally, we have seen some reduction in larger loans, some of which was intentional to shift away from loans not meeting our profitability requirements and reallocate capital, while other reductions have been in response to increased competitive pressure on larger commercial loans from debt funds, debt capital markets, and other lending structures. The pressures we observed last quarter have persisted. Consistent growth trends are seen in our 1-4 family and home equity loans, which have been growing steadily in the mid to high single digits for quite some time. We're also pleased with the continuing growth of owner-occupied loans, which have similarly shown growth 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 evaluated based on the borrower’s cash flows and include real estate as part of the collateral. Oil and gas loans have increased by 16% over the previous year, mainly due to a significant rise in exploration and production loans. Importantly, our oilfield services loans now constitute less than 1% of our total loans and have decreased by about $500 million from the end of 2014. We have also experienced strong growth in municipal loans over the past year. As mentioned in previous calls, we have added staff to help us expand in this area, focusing on smaller municipalities and their central services. We are maintaining stringent credit quality standards and are confident in the risk-return profile of this portfolio. We are optimistic about near-term loan growth due to a favorable economic backdrop and improvements in small business and owner-occupied loan growth. However, we recognize competitive pressures outside the banking industry, leading us to maintain a slightly to moderately optimistic outlook. Our organization is unified in understanding the balance between loan growth and increasing risk. We prefer to uphold our underwriting standards and accept slower loan growth, believing that investors will benefit in the long term from this approach. Slide 14 details the critical rate and cost components affecting our net interest margin. Loan yields grew to 4.79%, an increase of 8 basis points from the prior quarter. In the previous quarter, about 2 basis points of loan yields were linked to mentioned interest recoveries. We are assessing our loan beta, or the change in loan yield relative to changes in the federal funds rate, and estimate a re-pricing beta of around 50%. This aligns with our portfolio, where approximately half of our loans are indexed to either PRIME or short-term LIBOR. The yield on securities rose by 18 basis points to 2.46%, with about 8 basis points of that increase coming from lower premium amortization compared to the previous quarter. The remainder mostly results from older securities, which have lower yields, maturing and allowing for the reinvestment into new securities at higher yields. The shorter duration of our portfolio is beneficial. We have structured our portfolio to minimize net convexity, thereby limiting the risks of duration extension. As a result, cash flows are generally stable as rates rise, enabling us to reinvest at a new money yield of approximately 3.25%, which is favorable compared to the overall portfolio yield of 2.5%. Premium amortization is heavily influenced by prepayment activity and can be challenging to forecast accurately. However, assuming stable conditions, we expect the yield on the securities portfolio to rise modestly going forward. The total cost of deposits and borrowed funds increased by 9 basis points this quarter to 0.54%, which reflects a funding beta of around 30% year-over-year and linked quarter. Here, beta refers to the change in deposit costs and borrowings relative to shifts in the Fed funds rate. These factors work together to yield a net interest margin of 3.67% for the quarter, which represents a 4 basis point increase from the previous quarter and a 22 basis point rise from last year. Our net interest margin beta, indicating the rate of change relative to changes in the Fed funds target rate, was 22% over the past year. A significant contributor to this margin expansion is the increasing value of our non-interest bearing deposits in a high-rate environment. Given that many of our deposits are operating accounts for businesses and households, we believe our non-interest-bearing deposit base will continue to be a competitive advantage. As noted in previous discussions, if economic conditions remain robust and loan growth rises across the industry, we may see enhanced deposit competition. This could lead to a somewhat less responsive net interest margin beta compared to earlier periods. Additionally, we have begun contemplating a moderation of our asset-sensitive position as the rate increase cycle may slow, and other balance sheet adjustments, such as capital distributions and reallocating cash into securities, will be made cautiously. Finally, we anticipate that if the Federal Reserve maintains its current interest rates, the net interest margin should remain stable in the near term, influenced by previously mentioned factors. Next, I will provide a brief overview of non-interest income on Slide 15. Customer-related fees rose 1% from last year to $128 million, with the primary income sources listed on the slide. For the entire year, customer-related fee income increased by over 3% to $501 million. We are continuing efforts to boost fee income growth, although fees from treasury management are somewhat affected by deposits and market rates for earnings credits, which can create a slight headwind in our fee income. Similarly, mortgage banking fee income typically decreases during economic upswings due to higher interest rates impacting refinancing activity. On Slide 16, non-interest expense increased to $419 million from $417 million in the previous year’s quarter. However, if we adjust for items such as severance and provisions for unfunded lending commitments, adjusted non-interest expense remained stable at $418 million, compared to $415 million from a year ago. When considering a larger-than-normal charitable contribution of $12 million in the prior year, core adjusted non-interest expense rose by approximately 3.7%, which is slightly higher than the low single-digit growth we had previously forecasted for investors. It's worth mentioning that credit quality performance and revenue growth have surpassed initial expectations, with much of this outperformance being passed on to our shareholders. As addressed in various public forums during the quarter, we anticipate a significant drop in FDIC insurance costs from both the previous quarter and year-ago period. In the prior quarter, we recorded nearly $4 million in FDIC insurance expense adjustments tied to consolidating our bank charters. Since 2016, we had been subject to the large banks surcharge implemented to enhance the deposit insurance fund's reserve ratio to 1.35%. This surcharge was eliminated in the fourth quarter after meeting the reserve ratio objective, allowing for a reduction of about $6 million in our FDIC insurance expense compared to the prior quarter. Turning to Slide 17, the efficiency ratio was 57.8%, a decrease from 61.6% in the same period last year. The efficiency ratio calculations can vary seasonally, as there are more days of interest income in the latter half of the year compared to the first half. We reaffirm our goal of achieving an efficiency ratio below 60% for 2019, excluding potential rate increase benefits. Lastly, on Slide 18, we present our financial outlook for the next 12 months relative to the fourth quarter of 2018. Our outlook has not significantly changed from what was shared throughout the fourth quarter. This concludes my prepared comments. Latif, could you please open the line for questions? Thank you.

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

Dave, I’ll begin, and I'll ask my partners to contribute. Regarding the NIM beta you mentioned, any NIM expansion related to changes in underlying rates is approximately correct. In my remarks, I indicated that we're anticipating a few basis points, and I mentioned a NIM beta of around 22% related to those underlying changes, which aligns with our expectations. This has been our experience over the past few quarters, though it's difficult to predict with great accuracy. However, if loan pricing and composition along with deposit pricing and composition behave similarly, we would expect results in line with that. As for your second question about deposit costs, our base case suggests that we expect deposit costs to gradually increase over the next several quarters, reflecting a catch-up to rate changes. However, we believe we have a strong deposit rate base that is very relationship-driven and primarily operational. Therefore, we do not anticipate significant changes in the composition of our deposit base, and we expect the rates on deposits to remain stable.

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

Sure, Dave. This is Scott McLean. For the quarter, compared to the previous quarter, the lower section of that slide regarding energy had a weaker performance. This is linked to the declining trends seen in the upper section of that page. They had approximately $150 million in lower profit business that they were allowing to diminish. Additionally, we transitioned one client from commercial and industrial to energy because that customer's revenues linked to energy had actually increased. These adjustments reflect our ongoing assessment of our commercial clients. However, aside from this, they are experiencing the same pressures in the high-end market as we've noted previously and as other banks have reported. It's important to highlight the upper section of the page, which illustrates a solid and balanced year-over-year growth among C&I owner-occupied loans, which stands at around $600 million, municipal lending at $400 million, and home-related lending nearing $700 million, showcasing a strong balance. We remain satisfied with this performance. Another point that was less prominent this quarter than in the previous two quarters is the performance of our four smaller affiliates in Arizona, Nevada, Colorado, and Washington. These affiliates account for about 25% of the company and have been generating robust loan growth, contributing around 35% to 40% of the overall loan growth until this quarter when larger banks began to perform more in line with their historical averages.

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

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

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

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

I have a question for Harris regarding capital return. You mentioned that the decision is up to the Board regarding when to announce it. When does the Board meet, and when can we expect any decisions on capital return? Also, considering the current state of your stock and the overall market decline in recent months, has your perspective on capital return shifted? Are you considering being more aggressive, such as increasing share buybacks, given the circumstances surrounding your stock price?

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

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

Sure. This is Scott McLean. We all have different perspectives on this, but I would say we're still in the early stages, probably around the third inning. We’ve been working on this for three years, and there's a significant number of small to medium-sized opportunities that are helping us reduce expenses. It’s not just one big initiative; rather, it’s a series of smaller ones that are allowing us to cut expenses by $0.5 million, $1 million, or sometimes even more. I would describe these efforts as largely focused on adopting common practices. For instance, where we previously had several different practices in certain areas concerning processes or technology, we are now standardizing to one practice across the company. All our affiliates are on board with this and are quite comfortable with it. Another key area is automation, where we have many examples of activities that can be automated, saving two or three days in a process. I could provide examples, but that would take a while. These themes are among the most significant. Additionally, when it comes to our technology initiatives, which Harris highlighted, we are not customizing our new technologies, and that will lead to long-term savings.

First question regarding the technology spending and the tech initiatives you presented earlier. It appears that many of these projects are nearing full implementation by 2019. Could you provide an update on the costs associated with the double spending in 2018 and when we can expect to see that evolve into net savings? I understand this has been an ongoing discussion, but with the information from the slide, it seems we are getting closer. Can you clarify the expected trajectory?

I want to emphasize that I don't anticipate a decrease in technology spending. We have significant expenses related to our core system replacement, which is currently about halfway completed. We expect to halve the balance sheet by the end of February, and decisions regarding this will be made in the next couple of weeks. We are weeks away from launching the second of three releases for this core systems platform. Once that's done, we will have all the loans integrated, and then we can focus on the deposit fees, which is the most complex part and represents about half of the total project effort. Some of the spending has been capitalized as we've progressed, and we're now amortizing some of that, especially since the consumer loan segment has been operational for the past year. We expect to have the commercial loan aspect operational by the end of this quarter, at which point we will begin amortizing that too, while also incurring costs for the deposit system. Approximately half of that will be expensed, and the other half will be capitalized. However, it’s clear that the necessity for ongoing technology spending is relentless. Every time I think it might slow down, there's always something new on the horizon. This ongoing investment in technology is one of the factors contributing to keeping our operating costs fairly stable. Although we've seen reduced spending in other areas, our overall strength in technology continues to rise. I am optimistic that this trend will allow us to maintain reasonable operating leverage as long as the economy holds steady and avoids a recession. This progress will certainly not come at the expense of technology spending.

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

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

Yes, I think over the next year or two that would be our objective, and eventually that pump down will catch up with it. Looking at our efficiency ratio over the last three years, we've improved from around 73% or 74% to a number that's now quite competitive and comparable with our peers. The point is, we don’t believe we're done yet, and this will help drive operating leverage for the next year or two.

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?

We are using that language intentionally because we want to avoid being too rigid, as we need some flexibility to seize opportunities that may arise. However, our definition of low single digits remains consistent with what it has been in the past.

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

Yes.

Will you be at that range again in 2019?

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

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

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

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

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

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

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

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

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?

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

Paul, while you were speaking, you brought up the FDIC insurance. Is the $6 million a sustainable run rate, or was there any adjustment this quarter that lowered it from the expected future run rate?

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

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

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

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

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?

We set prices locally, so each affiliate bank manages their deposit pricing while considering internal credit and weighing opportunities against their internal earnings. The biggest opportunity is likely with Internet money market accounts and other margin activities, including broker deposits. However, we have limits on how much we'll pursue that. Our primary goal is to protect our existing deposit base, ensuring it continues to grow for the right reasons. While there are some actions we could take around the edges, I don’t anticipate launching campaigns in any markets where we have branches.

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

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

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

Going back to Scott's comments about the positive aspects of the initiatives on the slide, could you provide some examples of those positive measures? Most of the examples you've shared seem to focus on expenses. I'm concerned that growth is still behind that of your larger competitors. I'm curious about which areas we might see an increase in growth.

If you look at Slide 8, the top five horizontal panels focus on offensive strategies. I'm shifting to the digital side, specifically the loan application and the digital mortgage loan application. This is an online process that allows clients to initiate a loan application at home, continue it in the branch, and have it completed by the banker in their office, ultimately submitting it electronically. We have automated the process of transferring data into our loan origination system, enabling quick decision-making. Currently, this is all done on paper, as there isn't an electronic counterpart. The digital mortgage loan application, as Harris mentioned, allows us to access customers' tax forms and bank statements from other banks, which is transformative for us. While we don't intend to change the residential mortgage lending market significantly, we don't need to; we've originated about $2.5 billion this year, and we envision that could expand to a $4 billion to $5 billion origination business. This product especially enables us to originate conventional mortgages, which historically hasn't been a large focus for us. It helps us develop a more competitive mortgage product in our branches, and we are very enthusiastic about this opportunity. Both of these aspects provide significant client-building prospects.

Could you explain the recent changes in the securities portfolio? It seems there has been a significant repricing this quarter, attributed to premium amortization. Was there any change in the duration of the portfolio or your expected turnover within it?

No, a lot of it was related to a change in the premium amortization and prepayments. The products we are investing in have remained relatively consistent, and the duration of the portfolio is stable. The extension risk in our models is limited. Importantly, we don't have any 30-year MBS in the portfolio, so all of those philosophical aspects regarding the portfolio haven’t changed.

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

The growth we've observed year-over-year in energy is mainly attributed to upstream reserve base lending and midstream activities, both of which have very low loss counts. Our energy services portfolio experienced a slight increase, although it wasn't significant. Currently, our energy services portfolio accounts for about 22% to 23% of our total portfolio as we enter the downturn, whereas at the end of 2014, it comprised approximately 40%.

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

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

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.