Zions Bancorporation, National Association (ZION) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies, and gentlemen and welcome to the Zions Bancorporation’s Fourth Quarter 2015 Earnings Results Webcast Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to James Abbott, Director of Investor Relations. Please go ahead.

Thank you, and good evening. We welcome you to this conference call to discuss our fourth quarter 2015 earnings. Our primary participants today will be Harris Simmons, Chairman and Chief Executive Officer; Scott McLean, President and Chief Operating Officer; and Paul Burdiss, Chief Financial Officer. I would like to remind you that during this call we’ll be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in this press release dealing with forward-looking information which applies equally to statements made in this call. A full copy of the earnings release will be -- as well as a supplemental slide deck are available at zionsbancorporation.com. We’ll be referring to the slides during this call. We intend to limit the length of this call to one hour, which will include a question-and-answer session. During that time we ask you to limit your questions to one primary and one related follow-up question to enable other participants to ask questions. I will now turn the time over to Harris Simmons.

Thank you, James, and welcome to all of you who are on the call today to discuss our fourth quarter and full year 2015 results. There is obviously a lot of focus on energy and we’ll talk about energy as we get further into the presentation, but I wanted to talk about a variety of things that we think are actually working very nicely before we get to that. From Slide 3 and the related slides that we’ve distributed, we’ve tried to highlight some of the initiatives that are working well and are within our expectations. I’ll touch on a few of these in my remarks here, but as an overarching comment, I would want to say that I’m quite encouraged with the positive operating leverage that we achieved in the quarter. The positive revenue trajectory, the stable expense levels, and the solid progress that we’ve made on the technology projects that we’re pursuing. We are highly focused on improving the profitability and growth profile of the Company and we made very tangible progress in 2015 towards those goals. Additionally, despite the weakness in energy commodity prices, we were able to maintain strong overall asset quality metrics and we experienced an encouraging improvement in the rate of loan growth compared to the prior quarter during the fourth quarter here. On Slide 4, we display our loans and deposits. Relative to the third quarter, we experienced improved loan growth in the fourth quarter of $536 million or about 5% annualized. Excluding the effects of expected energy loan attrition loan growth was more than $700 million or about 8% annualized. We were pleased with growth in areas that are targeted for growth specifically non-energy commercial and industrial and consumer loans. Deposit growth shown in the chart on the right has been a strong story for Zions for quite some time and the source of that growth has come primarily from the most viable source, which is non-interest bearing deposits. The value of those deposits should increase as rates rise and should lead to a strong increase in earnings if and when interest rates further increase. Thus far, we’ve been able to hold deposit rates quite flat. Turning to Slide 5, the most significant source of revenue for Zions is net interest income, which equals about 78% of the fourth quarter net revenue. Although a portion of the increase from the prior quarter was driven by interest income recoveries that may not occur in the first quarter of 2016, we expect the interest rate increase in December will offset that factor. Also, driving net interest income higher was the increase in both loans and securities, as well as a material reduction in the interest paid on debt. Accordingly, we expect we will experience similar if not slightly higher net interest income in the first quarter of 2016. On Slide 6, we’re encouraged with the results from the initiatives we’ve made to grow fee income. Managed fee income increased 4% from the 2014 year and we’re targeting a stronger growth rate in 2016. Managed fee income is defined by us as income sources we manage directly and excludes the effect of dividends, securities gains and losses, and other similar sources. The most significant increase in 2015 was from treasury management, which increased 13%. It also happens to be our strongest contributor to total fee income. Some of the headwinds include loan fees, which were down due in part to soft demand for energy lending, as well as overdraft fees, which is attributable at least in part to strengthening consumer balance sheets. On Slide 7, we have the cost savings initiative scorecard graph, with the bar on the left illustrating the commitment to achieve $120 million of gross cost savings by the end of 2017. The bar on the right illustrating the cost saves that were accomplished in 2015. We remain on-track to achieve the targeted cost reductions by 2017 having already realized more than half of the goal by the end of 2015. We’re encouraged with the achievement of holding non-interest expense to less than $1.6 billion in 2015. Additionally, our commitment is to hold that line item adjusted for certain restructuring costs to below $1.6 billion in 2016. We expect benefits in 2016 to include the simplification of operations that are due in part to the charter consolidation. Moving to Slide 8, we have achieved a portion of another key measure of our commitment to shareholders, which was to reduce the efficiency ratio to 70% or below for the second half of 2015. We’re encouraged with this achievement, and we are reiterating our commitment to achieve an efficiency ratio in 2016 of 66% or better, as well as those other targets that we first communicated on June 1st of last year. On Slide 9, we’re satisfied with the progress we have made on our technology projects. The general ledger transition and new reporting tool conversion are complete. The credit approval workflow system software is installed in most of our banks with the completion scheduled for the spring of this year. The same is true for the enterprise loan operations. We are tracking to a spring completion. Regarding our core systems replacement project, which we’ve dubbed FutureCore where we’ve partnered with Tata Consultancy Services we are expecting the consumer loan system to rollout later this year with commercial lending tracking for 2017 and the deposits module scheduled for 2018. In summary, we are making significant investments to provide a very strong technology foundation for our future. These are investments that will simplify our operating environment and give us the ability to be highly competitive in an industry where technology is obviously playing an increasingly important role. Finally as noted in the press release, the consolidation of our seven subsidiary banks to a single national bank charter was completed on December 31st. We’ll continue to emphasize our locally oriented leadership structure and the power of our strong local brands in each market we serve, but we’ll find some additional efficiency from this consolidation of charters. We’re very optimistic about the future operational and financial performance for Zions. With that brief overview, I’ll turn the call over to Paul Burdiss to review the financial results. Paul?

Thank you, Harris, and good afternoon everyone. I’ll begin on Slide 10. For the fourth quarter of 2015, Zions reported net earnings to common shareholders of $88 million or $0.43 per share. Relative to the third quarter, net interest income increased about 5.5%. Adjusted for recoveries of interest income and a linked-quarter increase in income from loans purchased from the FDIC, net interest income increased just under 3%. Actively managed non-interest income, which excludes investment-related items and securities gains and losses increased slightly from the prior quarter and as Harris noted earlier, increased about 4% for the full year 2015 when compared to the full year of 2014. At just over $400 million, non-interest expenses were higher in the fourth quarter when compared to the third quarter due in part to elevated levels of expenses in certain categories as detailed in the press release, which accompanies this call. We are encouraged by the efforts of our teammates to manage our cost of doing business. Our collective efforts allowed Zions to realize our goal of adjusted non-interest expense of less than 1.6 billion for 2015. Turning to the provision for loan and lease losses, we had expected a moderate build in the reserve for energy loans, partially offset by continued reserve release in the rest of the portfolio. Although throughout most of the quarter, we expected the provision for loan losses to be in line with the third quarter result, the decline in the price of oil near the end of the quarter resulted in a moderately higher provision. The energy loan portfolio continues to perform about as we had expected. As we progress through 2016, we expect quarterly provisions to be moderately higher than the fourth quarter results. The key driver of our expectation for an elevated provision in 2016 is the lower prevailing energy prices, actual results may therefore vary from expectations if energy prices remain volatile. Finally, I would like to highlight the return on tangible common equity. Although we're working to drive shareholder returns to a much higher level, I'll point out that our efforts over the past year have resulted in a better than 100 basis point increase in shareholder returns when compared to the same period a year ago, while capital levels have actually increased slightly during the period. Turning to Slide 11, I'll address some of the drivers of the net interest income beginning with volume. Details of our investment portfolio are shown here on Slide 11. We have been adding securities to our investment portfolio for the past year or so, reflecting the need for a permanent high-quality liquid asset position in order to manage our balance sheet liquidity more effectively in light of the recently established liquidity coverage ratio rules. Our efforts to build out the investment portfolio are expected to add revenue in the current and downside economic environments, when compared to holding liquidity in the form of cash. During the fourth quarter we added $1.5 billion to our investment securities portfolio on average when compared to the third quarter. In light of a general market expectation for rising short-term rates, we're exercising caution with respect to the impact on overall balance sheet interest rate sensitivity, as we purchase fixed rate investments and duration extension risk inherent in the investment portfolio. The securities we are adding are relatively short in duration, just over three years. The duration of the entire securities portfolio is estimated to be 2.9 years to-date. If rates were to rise 200 basis points across the curve, our models indicates that the duration of the portfolio would extend only slightly to about 3.1 years. As expected, the addition of these fixed-rate investments reduced Zions’ asset sensitivity somewhat as shown in the table at the bottom-right of the page. Worth nothing, the deposit beta assumptions employed in our slow case are in fact faster than we are seeing in the market today or in plain language, our slow scenario model assumes faster deposit re-pricing than we're currently observing in the market. So the improvement in the net interest income from the December rate hike could and likely will be higher than that shown in the table on the Slide 11. On Page 12, we breakdown year-over-year loan growth. Overall, we're encouraged with our fourth quarter loan growth despite some headwinds, as Harris mentioned earlier. Compared to the prior quarter, period end loans grew at a little over 5% annualized. Net commercial and industrial loan growth for the last year was about 6% when excluding the effect of energy loan attrition. It is important to note that we have accomplished this growth without an adverse change in our underwriting standards. Year-over-year net churn commercial real estate growth was about 8% when removing the effect of national real estate portfolio. Residential mortgage continues to be a major focus for growth across our geographic footprint. The other category experienced healthy growth from various subcategories such as home equity and municipal lending. The two portfolios that have been in decline for the past year or more of a national real estate portfolio and the energy portfolio, the national real estate portfolio represents about 6% of loans and the attrition here resulted in a drag of just over 1 percentage point to the overall growth of the loan portfolio during the past year. The rate of decline is slowing for this portfolio and it currently accounts for less than 50% of tangible common equity. The energy portfolio attrition is well-documented as we have discussed this regularly during the past year, and our outlook remains consistent. As we expect continued attrition as our clients actively work through the current environment for energy prices. To summarize, our outlook on loan growth for the next 12 months is for a slightly to moderately increasing portfolio, which would be in the low-to-mid single-digit rate of growth range. Another key component of net interest income, which is the yield or rate on the portfolio and loan production can be found on Slide 13. The slide based on key components of our net interest margin. The top-line is the loan yield, which increased 6 basis points in the second quarter to average 4.24%. As described in the press release, it was a recovery of interest income of about $8 million, included in the fourth quarter loan yield, excluding this recovery the loan yield on the portfolio declined about 2 basis points from the prior quarter. The securities portfolio yield declined slightly this quarter, largely due to the change in composition of the portfolio, as we had new bonds within our guidelines for duration and extension risk. As the bottom of the chart is aligned depicting our cost of funds as a percentage of earning assets which continues to be quite low and declined slightly from the prior quarter due to the reduction of high cost subordinated debt. The net interest margin increased to 3.23%, a 12 basis point increase from the third quarter. If adjusted for the income recovery, the net interest margin would have been about 3.18%. This increase is largely attributable to the change in earning asset mix, more loans and securities in the fourth quarter and less cash, as well as the previously mentioned, reduction of high cost subordinated debt. Slide 14 provides more detail on loan yields, specifically the coupon, our new loan production versus the total portfolio, which we believe is helpful in understanding the risk to the future yield on loans in the current interest rate environment. The yellow line reflects the GAAP yield on the portfolio. The primary reason for its increase is the previously mentioned interest recoveries. Importantly, the weighted average coupon of loan portfolio has been stable over the past couple of quarters. The coupon of course excludes the effect of amortizing fees, discounts and premiums. The yield on new production also stabilized in the fourth quarter, as we saw the yield on larger loans improve somewhat in December, reflective of the move in LIBOR. Although, our loan officers are seeing some pricing pressure in the smaller loan space, our production coupons have been stable. Turning to credit quality on Slide 15, I'll be brief and say that we continued to experience generally strong credit quality performance in most geographies and segments, with a notable exception of energy-related loan which are included in our C&I segment. Our reserve for credit loss is quite strong at just under 1.7% of loans, which is nearly two-times our non-performing assets and over a decade worth of charge-offs based on the fourth quarter annualized results. Despite the increase in classified energy-related loans are just under -- I'm sorry, just over $76 million from the prior quarter level. Overall, classified loans increased to only $45 million or 3% in the fourth quarter. Non-performing assets declined slightly from the prior quarter. Net charge-offs declined due to recoveries, which were $32 million for the fourth quarter of 2015. Gross charge-offs were relatively stable when compared to prior quarter. Our outlook for 2016 net charge-offs is between 30 and 35 basis points of average loans. The majority of these charge-offs are expected to be energy-related. With that, I'll turn the call over to Scott to discuss energy lending and the Houston market more broadly.

Thank you, Paul and I'll start on Slide 17. We've not repeated the table that we have in our earnings release on Page 4 of the earnings release in this -- in the main section of this slide deck, although it can be found in the Appendix, but let me just make some summary comments. As noted in the press release, energy loan outstandings and commitments declined fairly substantially from the prior quarter and from a year ago. We commented that, we believe this would happened throughout 2015, the decline in outstandings was about 450 million compared to a year ago and commitments are down approximately $1 billion since a year ago. Classified energy loan balance has increased by approximately 76 million from the prior quarter and finished at a level that is actually somewhat better than what we would have expected a year ago. Non-accrual energy loans declined from the prior quarter primarily due to net charge-offs, which is not the way you want to reduce that bucket, but it's important to note that the level does not increase much if you adjust for net charge-offs. Turning to Slide 16 -- let's see it's not Slide 16, it is probably Slide 17. Yes, or is it okay, I am sorry. Yes, as we noted since late 2014, we have been extremely active in managing the energy portfolio, including the full attention of our entire executive team reviewing the portfolio frequently on a credit-by-credit basis, plus significant interaction with our customers. Based upon that input along with our models, we are updating our outlook for energy loan losses. As noted previously, these various methodologies led us to estimated energy loan losses of between 75 million to 125 million for the nine quarter period ending the fourth quarter of 2016. That was estimated more than a year ago, based up on oil prices near 50. It is obviously considerably -- the price of oil is obviously considerably lower than that today, with most of that decline occurring during December 2015 and January 2016. So it's appropriate to provide an update to that loss expectation. Assuming $30 per barrel for the next several quarters, we estimate that energy loan losses will be between 75 million and 100 million in 2016. This is on the high-end of the initial range, but it's been driven by the decline in the oil and gas prices relative to the initial expectation. And as Paul just mentioned, we expect total losses for the Company to remain manageable with net charge-offs ranging between 30 and 35 basis points for the entire consolidated portfolio. We continue to build our energy loan loss reserve to a level above 5%, this is a strong reserve, particularly relative to various measures of problem loans and loss expectations that we've reported in the past and that have been reported by our peers. Yes, on Slide 17, we are providing some additional disclosures on trends in the various major types of energy credits with the orange line representing upstream or exploration and production loans, the green line representing energy services and the yellow line representing all other energy-related loans. On the left is the trend in balances outstanding, despite the capital markets being somewhat quiet in the fourth quarter, we still experienced a substantial decline in balances as borrowers continue to sell assets and use cash flow to reduce debt. On the top right is the trend in classified energy loans by subtype, with services increasing during the fourth quarter, while classified E&P companies experienced a decline in that quarter. Non-accruals are shown at the bottom. We expect continued downgrades, but we expect that the situation as noted before will be manageable. On Slide 18, we show an updated view of our exposure to commercial real estate in Texas. The darker left hand side of each bar represents the Houston exposure. The point of this slide really is that Houston CRE portfolio is diversified across a variety of asset types, product categories and we are not concentrated in any one particular area with very minimal exposure to land. Slide 19 is new disclosure for us, which shows the commercial real estate portfolio by cash flow and collateral support. You'll notice that there's very little in the way of tail risk. Property values could decline or cash flow could decline substantially and very few properties would run into substantial trouble. While I'm happy to talk about our exposure to specific product types, there are some keys to our commercial real estate exposure which are worth mentioning. When comparing our Texas exposure today to the 2008 downturn, there are several important factors that position us much more conservatively today. They include first, that our total commercial real estate balances are approximately 1.2 billion less today than they were going into 2008 and our exposure to land is down more than 80% from what we saw going into the previous cycle. Additionally, our mix of construction lending and CRE term lending has shifted much more to CRE term. Generally speaking, the amount of equity required in office and multifamily construction financing is almost double today what it was going into the previous cycle of 2008. With that as a bit of a backdrop Paul I'll turn the call back over to you.

Thank Scott. Slide 20 depicts our outlook for the next 12 months, relative to the most recent quarter. We are maintaining our slightly to moderately increasing outlook for loans, due primarily to factors already discussed earlier in our comments. Over the next four quarters, we expect net interest income to increase from the fourth quarter level. We anticipate continued loan and security growth and additional benefit from December's slight rate increase, which will outpace the headwinds of one fewer day of interest income and no anticipated large interest income recoveries. Our outlook does not include the effective of any future rate increases by the Federal Reserve, although we expect to benefit to annual net interest income of about $100 million for every 100 basis point increase in short-term rates. We expect our quarterly provision that is moderately higher than the fourth quarter of 2015, assuming energy prices remain near current levels. We expect to maintain a strong reserve ratio on energy loans. We expect the non-interest income excluding dividends and securities gains and losses will increase slightly to moderately as we continue to focus heavily on this line items. As a reminder, if dividends from federal agencies namely the Federal Home Loan banks will decline due to a charter consolidation. You may recall we have multiple memberships to several Federal Home Loan banks and we're consolidating those to a single federal home loan bank and due to the FAST Act which is more commonly known as the Highway Spending Bill and its impact on dividends from the Federal Reserve. Non-interest expense as stated previously and we are committed to holding the non-interest expense to less than $1.6 billion for 2016, excluding severance and restructuring costs. The effective tax rate for the quarter was about 4 basis points lower than our typical effective tax rate. This is due primarily to investment tax credits realized this quarter, relating to alternative energy and research and development. We expect our effective tax rate to be closer to 34% in 2016 which may fluctuate somewhat due to how much of our investment in technology projects is eligible for tax credits. We expect preferred dividends to continue to decline, the tender offer completed in the fourth quarter reduces preferred dividends by approximately $10 million annually, although the amounts are uneven. For example assuming no changes to the outstanding preferred equity from today, the first and third quarter dividend rates are expected to be 112, I'm sorry $12 million each and the second and fourth quarters should be approximately $15 million each. This concludes our prepared remarks, Sabrina would you please open the line for questions. Thank you.

Thank you. [Operator Instructions] And our first question comes from the line of Jennifer Demba of SunTrust. Your line is now open.

Could you guys, it’s a very healthy capital ratio. Just wondered if you have any interest in share repurchases once we get through CCAR given your stock has taken quite a hit in the last several weeks?

I would tell you that I would certainly expect so. We have not developed the capital plan that will accompany our submission of our stress test and through the CCAR process, which is just getting underway. But we would expect to be more aggressive than we’ve been, certainly in the last cycle in terms of what we’ll hope to accomplish in the way of capital returns. And that I expect that would be on the table, Jennifer, but obviously that’s we are aboard to contemplate and determine in consultation with the management team here and then it goes through the CCAR process, but that’s what I would sort of expect we will be doing.

And just one additional question on the energy portfolio, Paul, could you just kind of elaborate how much of the reserve you guys have is qualitative versus quantitative for the energy portfolio?

Well Jennifer, I think as you know that’s not something that we typically disclose as Scott said, however we do believe we have a healthy reserve at over 5% of [bank] [ph] loans.

Thank you. And our next question comes from the line of Brad Milsaps of Sandler O'Neill. Your line is now open.

Scott, I was going to see if you give maybe a little more color on the pay downs that you did see in the energy book during the quarter. Just kind of what the nature of those were, are you starting to see any evidence of PE money, other energy companies buying out others, just trying to get a sense of kind of where the pay downs could go and where you’re -- those are stemming from?

Sure Brad, no, good question. Actually the pay downs are coming much more, they are more heavily weighted to the services portfolio, number one. Number two, you’re going to see a natural contraction in the reserve base outstandings as the redetermination came down during the quarter. The borrowing bases were re-determined down we saw some natural payoffs there. But those would be the two primary areas. And we saw continued term amortization, recall that on the services side of our portfolio about 35% of the portfolio is term, it’s amortizing on a little less than a five year basis. And so we’re continuing to see reductions there. And then the last comment I would make is that during the year, we had approximately $140 million of capital contributed by private equity firms and that didn’t all go to support reductions, but it, a portion of it did. And additionally, we saw about 150 million in loan commitments reduce as a result of restructurings that we did. So really it’s across the board and it’s all pretty healthy type reductions that you would anticipate.

Okay. And then just one follow-up, I know you’re using $30 per barrel to drive your charge-offs expectations for the year. Just curious kind of where you guys are in terms of your price deck in terms of and where you are for the redetermination numbers coming in at the end of the year?

Yes, the current price deck is in the low-30s and then obviously it goes up from there. But the current low-end is about $32, our sensitivity case for 2016 drops down to $24, so that’s -- we’ve had about 11 price deck reductions over the last I’d say 12 to 18 months.

Great, thank you.

And you’d see the same sort of conservative nature on the natural gas pricing as well.

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

First question, just in terms of the investing of the cash into securities, could you just walk us through the thinking, like what changed in your minds, I mean, I know we had the rate hike, but it doesn’t seem like security yields would have been all that much higher now versus say a month or five months ago? Why get more aggressive with security purchases? Thanks.

Yes, this is Paul. I assume when you say more aggressive, just there was a slight acceleration in the fourth quarter relative to what we’ve seen previously, is that correct?

I was thinking like the 1.6 billion that I think I saw referenced for the full year.

Okay, yes. I think we’ve been pretty consistent in saying that over the course of two to three years, we would be investing approximately $6 billion of cash into the investment portfolio. And the timing of that may change. So I wouldn’t say that there was any particular view on the yield curve, but we are trying to be somewhat thoughtful about the timing of those investments. But looking forward I would expect to continue kind of in the range or the pace of the purchases that we have been making.

I think it's also just fair to say that I mean we just continued to see growth in deposits, and particularly non-interest bearing deposits and so that’s facilitated a little faster build up.

And then just as the follow-up on Page 16 in terms of the energy loss expectations of 75 million to 100 million over the next four quarters, I know we’ve been in the energy crisis I guess for some time. But just in terms of the path of losses, all right, we’re talking about the losses over the next four quarters though with oil at $30 today, are we more likely going to be look into 2017, obviously we have the reserves build now, but are we more likely to see even higher losses in 2017, I am just trying to understand the default path of the energy companies?

Ken, it’s obviously very difficult to estimate what 2017 would look like. The price decline in the last month has been last 30 day has been very similar to last year, in terms of magnitude and we’re obviously at a different level. And so all that pushed us to say that we would be at the upper-end of the range that we originally stated for 2016, and I think what you’ll look for us what you can look for us to do is mid-year we’ll have a better sense of how long this is going to last and what portion of the ’17, but if, to answer your question very specifically, if prices did stay in this current level through 2017 you’d probably see losses in ’17 of about the same magnitude that we’re suggesting for 2016.

Thank you. And our next question comes from the line of Marty Mosby of Vining-Sparks. Your line is now open.

I wanted to ask you just about as you look at the discount that’s kind of evolved into your stock price, I would say that you’ll calculate the earnings power as a cushion for potential losses. And I just want to make sure I’m getting this right. If we look at pre-tax on our earnings cushion, you have about 125 million per quarter and that would relate to about what you have right now in energy reserves, which represents 5% of the portfolio. So if you look at each quarter, you’re generating in excess of another 5% before you would ever get into a capital, so be it kind of hit, to the capital position versus just reducing earnings. So, just wanted to you to kind of talk a little bit about earnings cushion and the potential losses in energy?

I think you’ve done a very nice job. I think first we start with a very strong capital and strong reserves, not only for energy but across the portfolio. And the rest of the portfolio continues to improve. I mean energy is the only place we’re seeing stress. So, I think we feel like the risk of any real capital need, any external source of capital are going to be very it is just not on the horizon of anything we expect to happen at the present time.

Well, in the guidance we gave on a 30 to 35 basis points of net charge-offs is again very manageable in the sense of our overall capital generation and that assumes a pretty pejorative outlook for the energy sector. So, you do have to -- once you move away from your analysis of energy, you have to look at how energy sits inside our total financial structure. And as you noted and Harris noted it, there is a lot of balance there.

There is a lot incremental capital being generated each quarter just with the earnings power you have now. And then Paul the other I would find to really look at is before the stock price guidance to a discount, such a discount that it is now I thought dividends would be kind of the focus. But once you get this bigger gap, share repurchase becomes so valuable. Has the change in stock price changed the way you would just, not asking about the level that you’ve asked for, but maybe your priority with share repurchase being a bigger priority now where the stock price is relative to maybe year-end?

Again, it could well be -- I mean that’s a yet to have with our Board, but I think we clearly recognize the power of repurchases right now.

Thank you. And our next question comes from the line of Paul Miller of FBR. Your line is now open.

There was an OCC letter CRE exposure and worry -- I think the OCC was a little bit worried about some banks taking exposure there with that concern within are concerned, can you talk that a little bit about how you're dealing with that OCC letter and is it a big concern there at Zions?

We’ll have Michael Morris our Chief Credit Officer, speak to that. Michael?

Sure, well the OCC letter focused a lot on multifamily and a lot on the buildup in community banks, especially in multifamily and we feel very comfortable with our multifamily exposure in all of the markets that we're in with the teams that we have in place, with the equity sponsors that we bank. Our average loan to cost in the construction site is around 60%-65%, so that translates into something less than that in LTV, so 55-60 LTV on projects that are still continuing to lease up and stabilize at rents that were either pro forma or in excessive pro forma. So where we see the pressure coming will be on cap rates as overall yields move up, if they do might not being the favorite asset class that it has been, so that could put some pressure on cap rates which would increase some of the value, but we're watching it carefully and we feel good about our exposure.

And do you think Mike where your level of exposure in that area would it have to decline or it could stay where it is?

We think it can stay where it is and go right into a cycle where there might be a little of softness in rent growth and cap rate increase, but we're comfortable where it is. We don't actually want it to pay-off and go out into the capital markets right into the agency side.

Thank you. And our next question comes from the line of Erika Najarian of Bank of American. Your line is now open.

My first question is a follow-up to Ken's. Paul you noted the rate of future securities purchases would be similar to what we've seen in the past, but I am calculating 1.5 on average for this quarter as you mentioned and then 6-10 in the previous quarter. Given that this such a powerful NII driver for you, it seems at which -- I just want to get it right, what should we assume for about the levels that of purchases per quarter?

Yes Erica sorry if I misspoke, what I meant to say was that our purchases going forward would be in the range of what you'd experience so you kind of outlined the range of possibilities, but I would expect to continue to make purchases in that range for at least the next four quarters. And then hopefully they would be sort of somewhat reflective of the opportunity that the market gives us, but if we clearly understand the earnings power of those securities additions and are focused on continuing to deliver that. I should also say that those portfolio additions as I said in my slide comments, we're paying special attention to the duration of the bonds we’re putting on and the extension risk. These are typically agency arms, an agency 10-year final maturity pass-throughs which again have we believe more predictable characteristic as it relates to the extension risk on those additions.

And if I could ask are those mostly HQLA and could remind us of what your LCR ratio is at the fourth quarter and how you’d expected it to and how you're managing it for this year?

Right Erica we're particularly mindful of the LCR and the securities that we're putting on we're adding in the context of HQLA, so either level 1 or level 2 in the appropriate proportions. I don't believe we disclosed our LCR, but I will say that we are comfortably in excess of the requirement.

Thank you. And our next question comes from the line of Joe Morford of RBC Capital Markets. Your line is now open.

Just wondered if you could give us a little more color to the drivers to the pick in the loan growth in the fourth quarter and any notable geographic trends you saw and related to that also just curious the run-off that you would expect to see in the national real estate portfolio in 2016?

Sure, yes the growth during the quarter was -- we saw nice wonderful family mortgage growth across the entire franchise as our mortgage initiative is continuing to mature and we think that will continue into the New Year here and then with basically C&I growth just solid C&I growth above and beyond what is running off in the energy portfolio.

And then the run-off?

Yes, and Joe the nature of that C&I, those C&I balances, new balances, it is just normal kind of middle markets small business lending that we did…

Right.

And I think if you look on Slide 26, there is a pretty good depiction by geography and types, you kind of see for this, now that's -- this is year-over-year -- but on the national's real estate it has been on 457 for the year it is -- that space of shrinkage has slowed. So we think we're getting closer to a point where that kind of starts to stabilize.

Yes, by bank Joe, I would just add a little commentary the Zions bank was little right around the $75 million mark in growth from the prior quarter and California Bank & Trust actually had a really strong quarter at more than almost $220 million worth of growth, energy had good growth, obviously not in C&I because of the nature of the energy portfolio there but in the other categories, it was a good quarter there. So in Arizona like $100 million growth there, it’s just a really diversified growth.

And then maybe just a couple of quick housekeeping things, I wondered if you could just in the expense categories just quantify what the litigation accruals for this quarter as well as for those fees paid out on the DIC investment IPO?

We're not going to give you a disaggregation of it impart because we -- it's -- the litigation is ongoing and it's useful stuff not to have to signal what that is in a granular way, so someday we'll come back and answer your question but not right now.

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

I wondered if you could talk about credit, ex-energy and how long you think the positive trends that you are seeing there can continue?

Well I mean, I guess the short answer is until we see the non-energy economies start to really fray, but we're not seeing that we -- and I don't think we're going to venture a guess as to when the cycle really starts to et cetera, we'll actually do that but I think suffice to say that at the moment we continue to see improvement and even in markets like, in a market like Texas the non-energy portfolio remains very healthy. We are looking at a lot of indicators in each of those portfolios to kind of watching for problems and so far it is not really showing up. So, anything Michael you would add to that?

No, I can't add anything to that, all domains consumer, retail, mortgage, small business, large commercial they all continue to perform well and metrics are all solid.

Geoff this is James.

Sorry?

Geoff I was just going to direct you to maybe the Appendix Slide 25 and this might be helpful for you. As you look at -- we haven't broken out a lot of information on past loans grade migration in the past but this is a little bit of the FICO score analysis of what's happening both in -- what we've turned as the high oil and gas employment counties, we're going to create a new acronym here, but -- and then everything else and so this is in our consumer book but you can maybe think about this in terms of how consumers are behaving versus small business which is the bread and butter or a bread and butter business for Zions, but you can kind of see the -- at every point from the year ago period, you are not seeing deterioration of any statistical significance in the consumer book and that's the same story that you'd see if you looked at our small business portfolio and middle market portfolios.

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

Just a couple of more clarifications on credit, so just understanding if the outlook for charge-offs is 30 to 35 basis points, because I calculate that's around 120 million to 145 million or so of charge-offs, and I am just wondering on top of that are you also saying that you'll provide for some loan growth and then is there also potential for additional reserve build, if there is additional deterioration in the energy credits as you mentioned on the slide?

Actually we believe with the provision that we've guided you towards that that should fully cover this level of charge-offs and growth in the portfolio.

Okay, so…

Well again there is quite an assumption there again the quality and the rest of portfolio remains as strong as it is currently or even continues to improve a little bit but.

Yes, that's why I asked the question because it just seems like if you're saying a 75 to 100 of energy losses than it would seem that you have got about 45 million from other sectors but I'm just trying to understand that breakdown of the reserve bill, the loan growth and then it doesn't seem like to your answer on prior question it doesn't seem like you're seeing much elsewhere as far as lost contents. I was wondering if it was just a summary of those other things and maybe the absence of recoveries?

Yes I guess the other thing what I would probably add is if we saw loan growth and the resets kind of slight to moderate, and clearly as loan growth surprises the upside that would probably push the provision a little bit higher too. So it's -- this anticipates pretty modest loan growth in getting to that kind of a number.

And just a quick follow-up on the fee side, this quarter obviously you had the -- it looks like you had some write-downs in the loan sales line but can you also help us understand how much the impact is of the highway bill and the charter consolidation and did that all show up in fees as well?

Well, yes the point that I was making this is Paul, around the outlook for non-interest income was that these sources of dividends in the past were not going to be there going forward and so for example on Federal Reserve bank stock there's about a $3 million differential there in 2016 relative to 2015 and in federal home loan bank stock it’s kind of in the $5 million to $7 million range. So you're looking at in the aggregate about $10 million of reduced dividends from those sources in '16 versus '15.

And then just should we start from the 124 reported as the base to grow up slightly to moderately increasing?

I would say there were a couple of items in there as you correctly pointed out in your question that averaged the impact of that. I think the right base is probably closer to the third quarter number which is kind of in the 130 range.

Thank you. And our next question comes from the line of Kevin Barker of Piper Jaffray. Your line is now open.

Given that the -- some of the securities buyings that you've done over the last couple of quarters and your expectations over the next several quarters, where do you see your asset sensitivity on 100 and 200 basis point move once you fully complete some of the balance sheet restructuring over the next give it a year or two?

Yes, this is Paul, my expectation is that given our starting point which was as you know we screen very high asset sensitivity, even after taking into consideration the fixed rate asset purchases that we contemplate here over the next year or so, my expectation is that while our asset sensitivity will be reduced we will have converted all of that sort of potential income into actual income. And we will still screen in my opinion on the high-end of asset sensitivity relative to our peers.

When you say high-end do you have an idea of 200 basis point move will be x percentage or 100 basis point move would be, 4% to 6%?

We haven't quantified that, and maybe James and I can work together to figure out what might make sense, but I think if you look at the spread of asset sensitivity around the peers as I said we're still going to be at the high-end of that.

And then you mentioned that the price decks for oil were down at $32 and the stressed impact was I believe you mentioned $24 in your earlier comments. At that level and if we were to see oil near $24 for the next year or two, do you quantify or have some stress impact for energy losses in that scenario?

We actually have four models that we're utilizing at the moment and they cover the full gamut from $20 a barrel up to higher levels and the guidance we're giving for this year fully reflects the potential of a $20 scenario.

Okay.

Which we don't anticipate to happen by the way, but you can't help but study it at that level because we just have a very serious approach to this whole subject.

Yes, so we don't get there, all right thank you.

Thank you. And our next question comes from the line of John Pancari of Evercore. Your line is now open.

Wanted to see if you could just on the oil price sensitivity wanted to see if you can give us what the sensitivity will be if oil was at $20 by the end of '16 and I'm not just asking that just to have you extrapolate, but I understand that it may not be asymmetrical relationship, it might get much worse as prices fall into the 20s and stay there, so just wanted see if you can help us size that up? Thanks.

You know I appreciate the question, but we are -- it is really is a moving target, we’re not going to sort of disclose each one of our scenarios, but suffice it to say that we have evaluated at that level from multiple different approaches. And we believe that again what we’ve forecasted would be well in the range of lower prices.

And I think the question is there going to be a complete cliff in that process and?

There is generally not a complete cliff. I mean the nice thing about the reserve based lending. Is that it is unlike any other type of commercial lending we do, it is made to adjust on a periodic basis. And it works far better than working capital revolvers, receivables and inventory. And the industry E&P companies, they know how to live within their cash flows generally speaking is doesn’t mean they encounter problems, they will encounter problems. But they know how to ratchet back cash flow and it’s fundamentally comes in the form of controlling their CapEx. But they have many other things to control including the cost that they receive from services companies, which are down anywhere from 25% to 35% in 2016. The other thing as you have probably read about is that just lifting cost, pure cash lifting cost. Depending on the company, depending on the reservoir et cetera, et cetera are generally in the $7 to $12 range, pure cash lifting cost. So there is a lot of datapoints to what I just described to you, but because these revolvers are -- the borrowing bases are re-determined every six months through comprehensive engineering we -- they adjust very naturally, so you rarely run into a pure brick wall.

My follow-up is on the commercial real estate portfolio on a linked-quarter basis, the term CRE book was up 4.5%. The first time in a while, you have put out that type of growth in that book. Is that something that is sticky and could you see it continue the growth at that pace or I was just wondering what’s changed that you feel comfortable growing that? Thanks.

This is Michael. I would say that without really digging into the number, that while that growth came from conversion from construction to term. And when that happens it’s a lot easier for that to stick to the books and a lot of easier for us to write near term than it is to go out and originate fresh near-term loans that may not have the kind of risk profile that we want. So we have really put the decelerator on C&D, especially in the multi-family. So a lot of that would be conversion to term, but some of the business units are originating new term. So if we can continue to create a more stabilized CRE portfolio with stabilized income streams.

But I guess Paul, I guess from your perspective from the risk weighting that is applied to commercial real estate exposure and everything. I mean does this imply that you’re more comfortable with the exposure now, as it pertains to your capital ramifications or well that is what I am just trying to get at?

Well, first don’t think we have plenty of capital. But importantly as Michael said, I think what we’re seeing here is a conversion of construction into term CRE. So in the aggregate, I’m not sure that the exit loss profile looks any worse.

And I think it is notable, but I mean if you look at construction, it’s flat over the last year, I mean it came up a little bit, came back down. And total CRE is up 2.3% or something like that. I mean so it is -- I wouldn’t extrapolate from one quarter on the CRE fees.

Okay, all right. Thank you.

Sabrina, we’ve got about five questions left. We’ll have to go to the one question per questioner at this point just to try to, we're already overdue so we are going to try to go through this quickly though.

Sounds, good. Our next question comes from the line of David Darst of Guggenheim Securities. Your line is now open.

So on the 400 million that you had as loss absorbing capacity in the CCAR with CDOs, is there any risk that are in the upcoming CCAR that’s not enough, kind of curious stress level for the energy book?

Well, it is -- I mean the nature of Fed Reserves models as if you don’t really know. I mean we would certainly expect that there would be nominal if any loss showing in the securities portfolio just around at CCAR. And so I think you are thinking about it may be right way, I mean you sort of have $400 million that you could move to another column to C&I for energy for example. But we obviously don’t know, so at the moment we don’t know what the scenario is going to look like it hasn’t been distributed yet and we don’t know how their models work. So I think it would be speculative on our part to say that we have any better understanding than you probably do about what’s going to come out of that model.

Although, this is Paul, I’ll remind you that the operative capital statistic last year was Tier 1 common and the operative statistics this is year is common equity Tier 1. And under the fed’s model last year, we fared much better under the current measure than the former measure.

All right.

And should show a strong level of pre-tax pre-provision net revenue as well coming in, so a better starting point in that way.

Thank you. And our next question comes from the line of Steven Alexopoulos of JPMorgan. Your line is now open.

So my one question is for Scott. Could you give us a sense, what percent of production for your E&P customers which was hedged in 2015, and at what level? And then how is that changing into 2016, both percent hedge and then the new level it will be hedged at? Thanks.

Sure, so the -- let me just sort of give you a broad sense of this. That in -- last year, we indicated that a year ago that generally speaking oil was hedged at around 55% of the current year production and that number is probably about two-thirds of that now for current year production, half to two-thirds. And it’d be similar for gas, the amount of gas hedging was a little less last year than the 55% plus or minus for oil in terms of -- and I am talking about current year production, so it would have been 2015 production, now we’re in 2016, and I am saying that those hedging levels are probably about half of what they were in -- for the 2015 year. And I would also tell you that the way that the borrowing base redeterminations work that is fully taken into account. So, if it doesn’t stop the decline in the borrowing bases, but it's fully taken into account in terms of the present value of the future cash flows.

And what about the level in terms of where it's hedged at for 2016?

The dollar amount?

Yes, on average?

So yes, I don’t have that number, I apologize. Let me go back and see what we said last year, I don’t have that dollar amount. And I don’t -- yes we’ll just take a look back at it.

Thank you. And our next question comes from the line of David Eads of UBS. Your line is now open.

A big part of my question John had and I think more from a qualitative standpoint than a quantitative standpoint, just curious if we’ve seen some bankruptcies failed to recently and I know that every borrower is very-very different. But I am just curious if what have we seen recently would cause any reason to change your expectations when it comes to loss severities when you do see evolve?

On the energy portfolio?

Yes, yes.

Yes. Again these four models that we use are pretty aggressive in terms of the negative assumptions that we use or the very conservative assumptions that we use. So, we believe we have baked that in. I mean it was very different list of assumptions this year than last year and the way we’ve refined our models has been especially helpful.

Thank you. And our next question comes from the line of Terry McEvoy of Stephens. Your line is now open.

Just a quick question, I was wondering if you performed the goodwill impairment evaluation last quarter, last year you did it in October. The reason I ask is about 60% of your billing dollars of goodwill is connected to Amegy?

Yes this is Paul. In accordance with GAAP, we are required as you know to continually monitor the valuation of the relative components of that relative to goodwill. So, yes in fact we have dutifully performed that in the fourth quarter.

Thank you. And our final question comes from the line of Brian Klock of Keefe, Bruyette and Woods. Your line is now open.

So, I’ll save my other questions for the Investor Day in a couple of weeks. But maybe ask another way, so on Page 11 in the income statement the other non-interest expense line item. Obviously, there are some things in there that appear to be non-recurring. How should we think about it sort of normalized level for that? Should it be some sort of maybe the average of the last three quarters or so, or I mean how should we think about what is a normal level for that line item?

Yes Brian, this is James. I think that if you looked at the third quarter’s other non-interest expense line item and use that as a guide, that’s probably a reasonable expectation.

Okay thank you for your help.

Than our normal quarter than this quarter.

Right, Brian at this level I agree with that.

Okay, thank you very much everyone for joining the call today. Thank you, Sabrina for hosting and we appreciate all of your attendance. Please feel free to send additional questions to me and we'll try to get back to you as within a reasonable period of time tomorrow for sure. Thank you again for your time and have a great evening.