Good day, ladies and gentlemen, and welcome to the Zions Bancorporation third quarter 2014 earnings call.[Operator instructions.] I would like to turn the call over to your host, James Abbott. Please go ahead.

Good evening, and thank you. We welcome you to this conference call to discuss our third quarter 2014 earnings. Our primary participants today will be Harris Simmons, Chairman and Chief Executive Officer; Doyle Arnold, Vice Chairman and Chief Financial Officer, Scott McLean, President; and Michael Morris, Executive Vice President and Chief Credit Officer. 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 dealing with forward-looking information, which applies equally to statements made in this call. A copy of the earnings release is available at zionsbancorporation.com. We intend to limit the length of this call to one hour, which will include time for you to ask questions. During the Q&A section, we ask you to limit your question 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 the call today. We’ve taken a number of actions to reduce risk in our balance sheet over the past several years, including several significant actions taken during the third quarter, which I’ll mention in a moment. As is noted in our release, we also issued $525 million of common equity in the third quarter, in response to the CCAR process, and that, in combination with our retained earnings, has resulted in our tier one common equity rising to nearly 12%, from 10.5% last quarter. The allowance for credit losses, really another form of capital, equaled 1.7% of loans, which is still stronger than most of our peers, despite having one of the lowest loan loss rates in recent quarters. In addition to increasing our common equity, we’ve significantly reduced the debt carried of the balance sheet. Since 2018, debt has averaged approximately $4.4 billion, which is equal to about 100% of tier one common equity for the same period. This quarter, we reduced debt to $1.3 billion, or just 24% tier one common at September 30. As noted in the press release, the reduction of debt in the third quarter will reduce interest expense by more than $50 million annually. With respect to credit risk, Zions’ net loan losses have been among the best of the large U.S. commercial banks for several quarters now, and nonperforming assets continue to fall. They’re now just 0.8% of loans in real estate owned. I expect that this improvement will likely place Zions in the top quartile of nonperforming asset ratios among our peers, once all of the banks have reported. Not particularly visible to most of you on the call, but of equal importance, we have significantly upgraded our risk and credit management practices, and will…

Thanks, Harris. Good evening everyone. Let me first note that I’m toward the tail end of a very persistent cold, and the most persistent part of it is an occasional cough, so I apologize in advance, and I may ask James to stand by to pinch hit if things get out of control, but hopefully not. So for the third quarter of 2014, we posted net earnings to common shareholders of $79 million, or $0.40 per diluted common share, as noted in the press release. This compares to earnings applicable to common of $104 million or $0.56 per diluted common share for the second quarter. We’ve highlighted for you in the release a few of the larger items that caused noise in the results, I think all of which we’ve talked about, and some of which we’ve previously quantified for you. First of all, there was the expense related to debt extinguishment from the successful tender for $500 million of senior debt in September. That hurt earnings by about $0.14 per share. We sold additional CDO securities during the quarter at a small loss. The net impact was about $0.06 per share. Somewhat offsetting those were the negative provisions for credit losses, both the on balance sheet loans and the unfunded commitment reserve, which together totaled about $0.22 per share. Similar adjustments for prior periods are detailed in the release and in our 10Qs. Harris already highlighted several of the key risk reduction actions that we took during the quarter, and many of you watched the press releases throughout the quarter regarding our equity issuance, debt extinguishment, and with this release, you can see the details about some other risk-reducing actions that also were taken. Commercial construction loan commitments have declined by more than $700 million, as compared to commitments…

[Operator instructions.] Our first question comes from Joe Morford with RBC Capital Markets.

I guess I was curious a little bit about the purchase of the jumbo loans this quarter and just kind of some of the motivations behind that and the type of institution you bought them from. And it sounds like growth won’t be as residential heavy going forward, but should we be expecting any purchase activity going forward?

First of all, I’ll note that the loans were very high quality jumbo ARMs in our western footprint. The preponderance of them were in California, but there were others that were scattered around all our other states. None of them was out of footprint. They were purchased from another banking institution, and the motivation predominantly was to balance off the reduction in earning assets that came from our focused attempt to reduce commercial C&D commitments and outstandings. And by the way, what we participated out was also high quality, but fares less well under stress testing. So it was an attempt to rebalance the risk profile of the portfolio without materially impacting current and future earnings, and we think we accomplished that.

And then just a question on the C&I portfolio. There was some growth this quarter, but as I recall, maybe in one of your intraquarter updates, you talked about possibly seeing some outsized paydowns and maybe pulling back in the energy area. So just wondered if you could talk about just trends in the C&I portfolio in general, and perhaps any change in utilization rates as well.

I’m going to let James start with that one.

Basically, I would characterize it as we had a mixed quarter from some of the banks. Typically, Amegy, for example, has a very strong C&I quarter on a very regular basis, but Amegy did experience some paydowns this quarter due to some companies that were either issued debt in the public markets and replaced bank debt, or sold the companies outright and so forth. So that was one of the sources of pressure. Zions Bank in Utah had really strong growth in C&I, actually. About $117 million. So you really had kind of mixed results from the various different banks. On the owner occupied side, which includes some of the small business lending, it was just a soft quarter in general, and a lot of that was driven by Zions Bank continuing. As you know, they have the national real estate group, and that continues to run down, primarily due to supply. Just a lack of supply coming from that particular market right now, with liquidity being as robust as it is across the industry.

And any change in utilization rates that you could pick up at all?

No change in utilization rates. I believe it’s 33%, which is unchanged from the prior quarter.

Our next question comes from Ken Zerbe from Morgan Stanley.

Maybe just start off, in terms of the construction portfolio, obviously big reduction this quarter. But now that you’re past the CCAR client information date, I guess, the September 30 date, I know you said you still wanted to be active in construction, but you also said you wanted to not hold a lot of construction. Like, where do we go from here? Do we see absolute reductions in construction over the next several quarters? Or do you feel that you have a little leeway where you don’t need to do that?

I don’t foresee major reductions from here, but neither should you expect to see major growth in the on balance sheet portion, certainly not until we get another CCAR result and see just how this portfolio does fare. But I do believe that, as I said in my remarks, and I think Harris as well, this is a business that we think we do very well, we certainly want to remain active in, and even grow from the standpoint of client relationships, etc. But in a stress test world, the growth has to be more of an originate and syndicate, originate participate a portion of it model. We can’t keep as much of it on our balance sheet as we maybe historically have.

And then my second question, in terms of the qualitative reserve, I think you said that was kind of slow in terms of its release. Can you just quantify some of that? How much do you feel that you have that’s excess qualitative reserves? And how much was actually released this quarter?

The answer to your first question is zero. If I thought I had excess, I would have released more, by definition. The answer to the second is I’m not sure the exact number, but I think the majority of the release was driven by credit quality metric improvements and the volume of loans. And the third contributor might have been some adjustment in the qualitatives.

It was about a 60-40 split, Ken, about 60% of the reserve release was quantitative and 40% was the qualitative portion of the release, which is actually not that different from the composition of the reserve overall.

Our next question comes from John Pancari with Evercore.

Question on the loan growth. So it sounds like you’re not going to be buying anymore production or ramping up purchases in resi mortgages from here. Can you talk to us about total loan growth, because you just implied that construction should be somewhat muted, although not declining incrementally, so how should we think about total loan growth balances, all that being said, in the coming quarters.

Well, very crudely put, on page ten, if you look at the numbers there, construction and land development declined by $450 million, and one to four family increased by $300 million, but $100 million of that was our own production. So if you zero out the C&D shrinkage and zero out the purchase, you basically are adding about $200 million to this quarter’s loan growth, and your back end of the $300 million or $400 million a quarter that I think is consistent with our guidance of whatever we’ve been saying, moderate? You know, add that up over the course of a year and you’re somewhere in a $1.5 billion range? This was a one-time, at least that’s the way we’re conceiving of it now, rebalancing of the on balance sheet portfolio.

Right. So the need to replace the runoff in C&D with the purchase, like you did this quarter, you don’t feel like you’re going to have that need next quarter? Because the majority of the C&D runoff has occurred?

Well, it wasn’t runoff, it was actual participations and syndications sold, with some conversion to term, which goes on all the time. But trying to actually bring the totals down materially by increased participations was a one-time thing. Using participations to keep it from growing back, rapidly, if you will, is something that we’ll do, but we’re not at the present time trying to further shrink the on balance sheet part of C&D.

And then my last one, kind of back to Ken’s question, on the reserve, with it sitting here around 154 basis points currently, what would you view as a good bottom longer term with your reserve ratio, just given what you’re seeing right now on your credit front?

That’s a question I’m just not going to answer. I have to follow GAAP, and it will be what it will be. But there’s nothing on the credit quality metric outlook that causes me to think that that reserve coverage ratio, whichever one you want to look at, has to go back up. And aim, the pressures are for slight further reductions, at least in the next quarter or two. At some point, it has to end, but I don’t know when.

Our next question comes from Dave Rochester from Deutsche Bank

I was just wondering if you had any updated thoughts on where you stand on the LCR, and how much excess liquidity you guys think you have right now that you can reduce over time?

On a consolidated basis, we think we pass the LCR on a fully phased in basis, with a little bit of room to spare. And some banks, we have a lot of excess liquidity. At others, we’re probably a little short. So there, over time, needs to be some rebalancing there. I think rather than give you a precise number, with the kind of loan growth that I described, I don’t see the LCRs being a material constraint on loan growth in the near to medium term. But there’s no question but what we and everybody else are going to be managing permanently to a larger cash and HQLA high quality liquid asset kind of securities portfolio than we might have been historically.

And then how much cash do you guys have at the parent at this point?

A lot [laughter]. I think over $900 million.

And any other thoughts about paying down borrowings or anything like that?

Yes, we’re looking at the appropriate use of that cash and certainly some of it, as I mentioned, we have some very expensive subdebt maturing in the first quarter of next year, which we’ll certainly want to pay off. When I say very expensive, it has an effective GAAP interest expense cost of over 20%. It’s the last of the modified subdebt. But beyond that, I think we’ll wait for the CCAR resubmission and capital plan to come together and then tell you what, if anything, we’re going to do with some of that cash. There are a number of potential ways to use that to benefit the shareholders.

Our next question comes from Paul Miller from FBR Capital Markets.

We have just one question. You mentioned that you were executing on organic growth initiatives. Would you be able to outline some of those?

Well, that was specifically with regard to fee income. I believe we have commented on them a number of times. There’s nothing really new. Harris, do you want to talk about that? Or turn it over to Scott McLean?

We’re seeing good growth in commercial cards. We’re seeing revenue increasing there at a pretty good clip. We continue to see growth in our treasury management income. Mortgage banking is something we’re focused on doing more of, but it’s obviously a tough market to be actually gaining traction in. But we expect that through the cycle we’ll be doing more of that. And wealth management has been another area of focus for us. So those are some of the really primary areas. I think that probably one of the risks on the horizon for anybody who’s really heavily consumer oriented is going to be overdraft income, and so we’re not trying to push that pedal any further. We think that that’s probably not going to be a growth area. Service charges on deposit accounts generally is not going to see a lot of growth, but some of these other areas, we think there’s some good growth potential in them.

Doyle, this is Scott. I would think Harris summarized it well. I would just add to that that we’re seeing the benefit of much stronger product development at the corporate level, and then these products being delivered locally. Treasury management, which represents about 30% of our fee income, is a good example of that. Credit card represents about 20% of our fee income, and it is a really good example of that too, where the product is being developed much more effective centrally, and then coordinating the delivery at the local level. Mortgage, we’re going through that today, and we think there’s a lot of opportunity for a community bank model like us to have really good, strong mortgage fee income potential.

For those of you who don’t recognize it, that last voice was that of Scott McLean, who was CEO of Amegy Bank, and we drafted Scott early this year to become president of Zions Bancorp.

Our next question comes from Geoffrey Elliott from Autonomous Research.

A bit of a bigger picture question. How do you think about the pros and cons of running the structure with the multiple subsidiaries and banking charters? And what could prompt you to reexamine that?

Well, I guess I’d say that we see a lot of pros given our mix of business, which is very heavily oriented toward small to middle market kinds of businesses. And it’s a really good model of relationship management. The need and the opportunity is really to figure out how we get more cost out of this, particularly with what we deliver centrally, and we’re very focused on that. That’s one of the reasons we’re investing in some of these technology projects that will allow us to take some additional cost out and operate a lot of the back office much more consistently across the enterprise. But it is something that we continue to study and be very focused on how we do this in a way that preserves the best of what we think this model delivers in the way of… And what we’re trying to do locally, but gets us more cost savings. There’s still opportunity on the cost side, I think for sure. I’ve noted to some folks recently that… I mean, one measure of how composition of our balance sheet differs from others is if you look at small business loans, it’s a big part of what we do. If you look at the total loans, from $100,000 to $1 million in size… I’d go up further than that, but that’s the limit of a call report and what it captures in the way of small business lending. But using that as a proxy, we make 50% as much of that kind of credit available to clients across our footprint as JPMorgan Chase does across the United States of America. And for that kind of business, we actually think that having this very community bank like structure has been a great help, in helping us to gain market share and up into the middle market kinds of companies that we serve in a lot of these markets. We’ve got really good reputational kind of scores, in local surveys, etc. But we know that that has to be accompanied by a cost structure that works, and that’s what we’re working on.

And what sorts of timelines should we be thinking about for seeing these expense benefits?

As I’ve articulated, on a number of occasions with investors, we have several major projects, each of which will ramp its peak spend, and then begin to achieve its savings in a sort of overlapping sequence. As I mentioned, the front end loan system is already developed, and is in the process of implementation, so we built that and began the process of installing it without you noticing the run up in expenses for that one. We’re at the peak spend on the financial reporting and accounting project now, and we’ll be implementing that next year. We’re at the peak spend. That will then taper off, but those savings are going to be in fact reinvested in the core transformation project that we’ve talked about, and so forth. So the goal is to basically keep the expenses in total flat over the next number of quarters. And then the actual reduction comes probably out at least a couple of years from now. I would note that the Federal Reserve is placing renewed emphasis on all banks, if you look at the CCAR 2015 instructions that just came out. Look at the range of practices document that they published last year. They’re focusing ever more intently on the quality of bank systems, noting that many are antiquated and need to be upgraded. They cannot meet the data requirements with the versatility that they expect going forward. I would suggest to you that we’re probably at the front end of more than one bank, particularly regional banks, that will be needing to upgrade their systems over the next few years.

But doesn’t having multiple charters make it harder to have best-in-class systems?

Which is the last question that we’re going to take on that, then we’re going to move on. But the answer is, the charters themselves don’t add that much cost. It’s all in the way one implements it. So historically, yes they have, because we have historically allowed each bank to customize things a lot to the way these systems are implemented and run, to suit its own desires. As a part of this overhaul of the system, we are kind of undoing a lot of that customization, because we have to, to get the data consistency, the risk reporting consistency, in a more efficient way. : So that’s kind of the approach we’re taking. In the interest of time, I need to move on to another question.

Our next question comes from Jennifer Demba with SunTrust Robinson.

Question on expenses. Can you talk about real estate rationalization and what your thoughts are with regard to branches or office space, and what you think you might be doing there over the next six to eight quarters?

I’d start by noting that we’ve reduced, from 2009 to the present time, we’ve reduced the number of branches by about 12.5%, I think is the last number I saw. And that’s a process that continues. We continue to look at branches. And I would note that one of the things I think all banks are wrestling with right now, we’re in this very low interest rate environment, and the nominal value of branches today, in a lot of cases, doesn’t look great, because the value you attribute to deposits is not very significant today. But in a normalized rate environment, and particularly under the new liquidity rules in this industry, we think it’s something everybody’s going to have to be careful about, and kind of this transition to more mobile and digital channel use, and kind of what the role of the branches are. All of that said, we’re continuing, we’ll have some further branch closures in the fourth quarter, some of which haven’t been yet announced. And I don’t have a target in mind, but it’s something that we’re continuing to kind of scrub. And we’re particularly trying to really drill down on how staffing requirements are changing, because the real cost of branches isn’t in the number of locations, or the real estate component of it, so much as it is in the staffing. And so that’s something we’re going to be paying more attention to. So those are some kind of general thoughts, but we’re down. I think at our peak, we were, kind of gross, with acquisitions of banks from the FDIC, etc., back in 2009, the end of 2009, we’re up at well over 500 branches. We’re now down to around 465.

I think we’re pushing 550 if you just take the gross number.

So we’ve actually been doing more than we make a lot of noise about, but it’s a process that continues.

Do you have a sense of what the average square footage is on your branches, or average staffing level?

I have some sense as to the average staffing level. At least I have the data. I don’t have it right here with me, but it’s something that we could probably follow up on. As far as square footage, I don’t have that right available, but it is something that we have generally been reducing. The one exception, we’d had branches in grocery stores. We closed a lot of those. In some cases, we built the freestanding branches, and then tend to, by their nature, they’re smaller ones, but they tend to be a little larger than kind of the in-store kind of footprint. But that’s something that we continue to focus on, is just how much real estate we need.

Our next question comes from Ken Usdin with Jefferies.

On loan yield, can you talk to us about how much more rollover you’re seeing, and anticipate seeing, as you look out those next four quarters on the go-to loan yields versus rolloff? And then attached to it is just, is there any rate forecast in your expectations for slight growth in NII?

No rate forecast. So that’s not assuming a significant Fed tightening or increase in rates. I’ll point out that we have, in our investor decks, showed you that gap between the current production and the portfolio average, but I think James can give you a quick summary of it here on the line.

Most of the difference between, as Doyle mentioned in the prepared remarks, was because of a shift in the mix of production this quarter. We had more than double the amount of residential and the loans we’ve purchased counted as production there. That’s why there was a decline in yield. Outside of that, we saw small business loan yields decline a little bit linked quarter. Otherwise, most loan yields were fairly stable, and the line managers report to us that they’re seeing general stability in market pricing. So we probably have about 20 basis points of gap between new production pricing and the book of business. And it turns over in about two and a half, maybe three years. So that’ll give you some stuff to work with.

So back to the first part of your question, the gap is now narrow enough that kind of any swing in interest rates from the Fed could swamp it.

Yeah, a 25 basis point rate hike, our production wouldn’t then [unintelligible] the book of business.

Our next question comes from Steven Alexopoulos from JPMorgan.

Following up on Harris’s earlier comments that debt is now down to 24% of tier one common, where are you targeting that to go to? I’m just trying to get a sense of how much debt gets replaced versus net paid down going forward.

I would say the bulk of the reduction is done at this point, and there are potentially other uses for cash that we’ll wait to talk about those until the appropriate time. But I think clearly the amount of debt we had was a drag on PP&R, on earnings, and unnecessary. And I think at this point, as I said, the biggest change to debt that you could look to is likely the payoff of some subordinated debt with a very high cost next year. And maybe it just gets paid off, maybe we replace some of that with new lower cost debt. Only caveat to that answer would be there’s occasional still noise about the Fed requiring certain levels of debt, of [unintelligible] institutions. Nothing formal, but there’s wars and rumors of wars still abound, from time to time out there. But we’re largely done, I think, with what we plan to do.

Our next question comes from Erika Najarian with Bank of America.

: If they raise the bar from $50 billion to anything higher, does that change your forward outlook for loan growth or expenses?

[laughter] Yes. The answer is probably yes to both, dammit, both.

Our next question comes from Lana Chan with BMO Capital Markets.

Just a quick question on LCR. I guess I’m not sure whether you need to remix the securities portfolio for more HQLA assets?

Our cash is the HQiest of any asset, and we have a lot of that. That aside, the CDOs are clearly the least liquid. They’re not helpful at all, and we commented on continuing to work those down. Kind of in between those two extremes, we will be looking at, without dramatically changing our asset sensitive position in the near term, kind of what’s the right mix of some Ginnies, some Fannies, or other HQLA and not have it all in cash going forward.

Our next question comes from Kevin Barker with Compass Point.

Given where your fee income is right now, and your initiatives to grow it, what percentage of revenue do you think will come from fee income a couple of years down the road?

That’s not something you change overnight, and particularly given that some substantial portions of the total mix are coming from deposit service charges. As I [unintelligible], I think you’re just not going to see much growth in that category across the industry.

The only way to change it quickly would be to acquire something, and acquiring something entails large premiums, and in this environment, it’s going to be organic, therefore it’s going to be incremental. And therefore, it will take a number of years to move the needle by four or five percentage points.

Our next question comes from Gary Tenner with D.A. Davidson.

I was just wondering if you could quantify the amount of the construction book that moved over to term versus what you’ve moved off balance sheet otherwise.

We’ll have to follow up with you on that one. I’m afraid none of us brought that information with us.

Our next question comes from John Moran with Macquarie.

I’m not sure if you mentioned it in the prepared remarks and I just missed it, but if you didn’t, would you mind quantifying what the fully phased in Basel III capital ratio is?

We didn’t, so new question. It’s about 11.6%. It’s just a few basis points below, about 25 basis points or so below the Basel I number.

This ends the Q&A session for today. I’ll turn it back to management for closing remarks.

Thank you everyone for joining. Appreciate your attention here today, and we will be happy to take follow up questions through email or on the phone. You can reach me directly. My information is on the website. Otherwise, we’ll see you at a conference throughout the quarter. Thanks for your time.