Zions Bancorporation, National Association (ZION) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined the Zions Bancorporation's Third Quarter 2018 Earnings Results Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the call over to our host, Director of Investor Relations, James Abbott. Sir, you may begin.

Thank you, Latif, and good evening everyone on the call. We welcome you to this conference call to discuss our 2018 third 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 over the next four quarters. Additional executives with us today is Scott McLean, President and Chief Operating Officer; Ed Schreiber, Chief Risk Officer; and Michael Morris, our Chief Credit 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 release as well as the slide deck are available at zionsbancorporation.com. We will be referring to the slides during this call. This 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 our disclosures. 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 turn the time now over to Harris Simmons. Harris?

Thank you very much, James and we welcome all of you to our call today to discuss our 2018 third quarter results. The results of the quarter were strong relative to the year-ago results. Slide 3 is a summary of several key highlights. At a high level, perhaps most importantly, we are pleased with the strongly positive operating leverage with noninterest expense nearly flat relative to the prior year while net revenues increased in the mid single-digit range. Much of what we're doing is designed to push the tremendous operating leverage that we've experienced during the past 3.5 years and the future years. Loan growth was relatively healthy in a quarter that can often have a slowness due to seasonal reasons. We are encouraged with our deposit costs exhibiting relatively low increase compared to benchmark rates. More encouraged was further growth in average non-interest bearing deposits, something that’s not easily accomplished when interest rates are rising. Our credit quality profile continues to improve at a rapid rate remarkably trailing 12 month net charge-offs ratio was only 100% to percentage or 1 basis point. Finally, relative to the prior quarter we increased the dollars of capital return to shareholders. While we intend to further reduce the capital ratios to better reflect the risk profile of the company, we still have one of the very strongest capital levels within the regional bank space with a common equity Tier 1 ratio of 12.1%. Before we dig into the numbers, within the famous simplification and streamlining I would also like to know that we completed our merger of the holding company with and into the Bank, reducing organizational complexity and eliminating duplicate regulatory oversight. On Slide 4, you can see the improvement of earnings rising to a dollar four per share from $0.72 per share and year-ago period. Although we don't provide the so-called core EPS figure, we do highlight some items that affected the earnings per-share that we view as episodic, we are not sustainable in the long run which were listed on the slide. Graphically the GAAP result is the darker blue -- are the darker blue bars. While the adjusted result is shown in the light blue bars. Much of the variance is due to continued improvement in credit quality including interest recoveries, expect the net interest margin as well as negative provisions for credit losses. We benefited particularly from the relatively rapid improvement in the quality of loans to the oil and gas sector. We still have some expected benefit left from this [source], but we are nearing the end of that favorable impact. Earnings per share for the third quarter of 2018 continued the trend of strong growth by my calculations, if one eliminates the effective interest recoveries, negative provisions for loan losses and a few hold the tax rate constant with the year-ago period. Our EPS growth was in the high teens relative to the third quarter last year. Slide number 5, highlights two key profitability metrics, return on assets and return on tangible common equity. We are happy to see the return on assets at about 1.3% even after adjusting for items and for the return on tangible common equity to expand to exceed one -- to exceed 14%. We continue to work hard to further strengthen these measures and with higher capital distributions, we expect the return on tangible common equity to continue to strengthen. Pre-provision net revenue as depicted on slide six has performed particularly well rising 16% over the past year and nearly doubling since we embarked on her efficiency initiative in late 2014. Adjusted for the items noted on the slide, our pre-provision net revenue increased 15% from the year-ago quarter. We were said and continue to expect the pre-provision net revenue growth rate to be in the high single digits without giving consideration to additional interest rate increases by the federal open market committee. We're seeing momentum in several areas of revenue growth including several areas of lending such as residential mortgage, owner-occupied properties and municipal lending. In trust and wealth management and other select areas within fee income. Meanwhile, costs, both interest bearing liability and non-interest bearing expense have been relatively well contained. On Slide seven you'll see the strong credit trends depicted on the chart on the right with classified loans declining a very strong 37% from year-ago period and 17% from the prior quarter. Improvement in oil and gas loans was a major reason for the improvement. For the third quarter, we experienced net credit recoveries of $1 million or about one basis point of loans annualized. Net charge-offs for the last four quarters were only 1 basis point of average loans. We expect the low overall rate of net charge-offs in the months ahead assuming current economic conditions remain generally stable. Additionally, as you can see from the allowance ratios we're still maintaining strong coverage of nonperforming assets and other problem credit metrics. We continued continue to adjust upward our qualitative factors to reflect stressors that can be observed in the economy generally such as the implementation of tariffs, higher interest rates and the effect that they may have on certain borrowers and higher oil and gas prices which may reduce profit margins for certain commercial businesses drag on consumer spending et cetera. Quantitatively, however, we've not seen a credit deterioration within the risks portfolio types. Slide 8 is a is a list of our key objectives for 2018 and 19 and our commitment to shareholders. We presented this slide in prior earnings calls, and industry conferences throughout the year. So I will avoid reading the slide to you. But I'm pleased with the progress we've made on so many of these initiatives all of which set us up to increase our return of capital to shareholders. We increased that rate from about 20% of earnings to more than a 110%. We' view an increase of balance sheet leverage is appropriate, particularly given the reduction of the risk profile of the company. The decision on the magnitude timing and form of capital return as a board level decision and to preempt the question of the board meets later this week to discuss among other things capital returns, such as share buybacks and common stock dividends. With that overview, I will turn the time over to Paul Burdiss to review our financials and additional detail. Paul?

Thank you, Harris and good evening, everyone thank you for joining us. I will begin on Slide 9. For the third of 2018 Times net interest income continued to demonstrate growth relative to the prior period. Excluding interest recoveries as detailed on the slide net interest income increased $40 million to $562 million, up approximately 8%. With respect to the revenue components, I'll start with volume and move to rate in just a moment. Slide 10 shows our average loan growth of 3.5% relative to the year-ago period. Although not listed on the slide, the period and growth in third quarter relative to the second quarter within annualized 5%, with strength weighted towards the end of the quarter. Average deposits increased about 3% from the year-ago period and increased and annualized 5% from the prior quarter. Thus far, we've been able to achieve this growth of balances with a relatively modest increase in deposit costs. This speaks to the granularity and overall quality of our deposit franchise as we discussed in detailed at our Investor Day this past March. Examining loan growth a bit closer, Slide 11 depicts our year-over-year period and loan balance growth by portfolio type with the size of the circles represent representing the relative size of the portfolio. For most categories, we are -- we experienced solid and consistent growth. There are three areas where we've experienced slight attrition. In the commercial real estate space, loan growth was adversely impacted by slight attrition in the term CRE and national real estate portfolios of about $240 million/ Within non-oil and gas C&I loans relative to the prior quarter we experienced an annualized attrition rate of about 4% on our larger loans that is loans with balances, greater than or equal to $5 million, while experience an annualized growth rate of about 4% on a smaller lot. The incremental competitive pressure on larger commercial loans seems to be coming from capital markets activity and some listening of credit standards among competitors including unregulated senior debt funds. We experienced relatively consistent growth trends in one to four family and home equity loans and experienced a slight uptick in the growth rate of owner-occupied which are generally small business loans underwritten based upon the cash flow of the borrower and secured by real estate. Oil and gas loans have increased moderately, resulting primarily from a relatively strong increase in upstream and midstream loans, while oilfield services declined slightly. Municipal loan growth has also continued to be strong during the past year. To repeat what I mentioned on last quarter's call, we’ve hired staff to help us grow in this area, which is focused on smaller municipalities and essential services of those cities. We've maintained strong credit quality standards and feel comfortable with the growth and expect growth to remain strong in this area. Although we are optimistic in the near-term about the growth of loans based upon a relatively strong economic backdrop, an improvement in small business loan growth and review of pipeline, we're also seeing some factors that may result in some growth pressures including debt funds and capital markets that are highly competitive for pricing and for term, which affects our larger loans and underwriting standards that are softening within loans remaining in the banking industry as noted in the recent additions of the senior loan officer survey. Enterprise pricing that may not satisfy our risk reward appetite. Therefore we are modifying our 12-month outlook loan growth to slightly to moderately increasing. Slide 12 breaks down key rate and cost components of our net interest margin. The top line is loan yield, which increased to 4.71% of which about 2 basis points are related to the previously mentioned interest recoveries. The yield excluding interest recoveries has increased about 40 basis points over the past year, which is a loan yield change of slightly more than 50% relative to the change in the fed funds rate. Relative to the prior quarter, the yield on securities increased slightly. The shorter duration of the investment portfolio in combination with new security purchases which were accretive to the yield of a portfolio help invest the yield overall in the investment portfolio. While the premium amortization is very difficult to forecast, assuming stability in that area, we expect the yield on the securities portfolio to move higher at a moderate pace over the next several quarters and years based upon the yield securities we are purchasing. The cost of total deposits and borrowed funds increased 5 basis points in a quarter to 0.45% or 45 basis points resulting in a funding beta of about 30% for the year-over-year figure. As a reminder, in this case beta refers to the change in the cost of deposits and borrowings relative to the change in the cost of the fed funds target rate. The total year-over-year deposit data was about 21% relative to the prior quarter was 29%. Cumulatively since the beginning of the rising rate environment, we’ve experienced a total deposit beta of about 11%. These elements combined to result in a net interest margin of 3.63% for the quarter, which increased 7 basis points from the prior quarter and 18 basis points from the year-ago period. Excluding interest recoveries in excess of $1 million per loan, that ended net interest margin beta was 21% over the prior year and 26% over the prior quarter. We believe it is reasonable to expect deposit competition to intensify somewhat over the next several quarters. And if so the net interest margin beta, if I can use that term, maybe modestly less sensitive when compared to the recent quarter. Next a brief review of noninterest income on Slide 13. Customer related fees increased 2.5% over the prior year to $125 million. The primary source of income that increased and decreased are listed on the page we continue to work hard to increase our fee income, although the fees from treasury management, our influence to agree. To a degree by deposits and market rates for earnings credit applied to those balances. which in a rising rate environment creates slight headwind in our fee income trend. Similarly, the fee income realized from mortgage banking activity tend to be a little countercyclical slowing and possibly decreasing the economy strengthens due to the effects of higher rates and refinancing activity. Noninterest expense on Slide 14 increased to $420 million from $413 million in the year-ago quarter. However, adjusted noninterest expense which is just for items such as severance, provision for unfunded lending commitments and other similar items noninterest expense was very stable at 416 million versus $414 million in the year-ago period. A portion of the increase relates to additional compensation that we announced in conjunction with the Tax Cut and Jobs act which will be paid to most employees making less than $100,000 per year. These items account for about $3 million increase over the year-ago quarter. With the holding company merger in the rearview mirror along with other items in the professional and legal line item, we experienced a slight decline in that line items and we expect the quarterly level to remain a bit lower than it had been during the past year or so. Also, as noted on the slide we had a one-time adjustment to our FDIC deposit insurance costs in the third quarter, assuming the deposit insurance fund reaches 1.35% and the insurance surcharge is removed and considering our issuance of $500 million of senior unsecured debt late in the third quarter and the movement of other unsecured debt out of the holding company and into the Bank, as the Bank and HoldCo is now merged. This would result all of these things combined would result in a lower insurance costs relative to other two -- other secured funding. And as a result, we expect our FDIC insurance expense in the fourth quarter in all of those cases to be about $7 million. Turning to Slide 15, the efficiency ratio was 58.8% compared to the year-ago period of 62.3%. We reiterate our commitment to achieve an efficiency ratio below 60%, while the full-year 2019 excluding the possible benefits of rate increases. Finally on Slide 16, this depicts our financial outlook for the next 12 months relative to the third quarter of 2018. In the interest of opening the line up for questions, I won't read the rest of the slide to you, but we will be happy to take questions about any of the these items. This concludes our prepared remarks. Latif, would you please open the line for questions. Thank you.

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

Hey, good afternoon, guys.

Hi, Dave.

Just the question on capital. Now that you guys are effectively out of that stock, your got more clarity and control everywhere, capital levels go from here. I know you talked about bringing the CET1 ratio down to just above peer levels in the next six quarters or so. It seems like that would imply a decent step up in the buyback going forward, especially if loan growth is -- maybe not a solid mid-single in terms of growth going forward, is that a fair statement? And any rough sense as to what that means in terms of dollars over the next year?

Well, it's certainly a fair -- you’ve done the math appropriately I think there, I mean, we are simply reluctant to be to specific about it because -- our Board hasn’t and I don’t want to front run them. Now its -- but it would certainly be our view that, that kind of target is still achievable and that’s the discussion that we will be having with the Board here the end of this week.

Okay. That’s fair. I appreciate that. And then, I guess, some of your peers have talked about reducing ratios over time as well and are talking about lower levels than where they are today, and I know your discussions have talked about based on where your peer capital ratios are today. And so if we're talking about lower peer ratios over the next six to eight quarters, are you guys still thinking about walking your ratios down as well versus the targets that you have been talking about in the last quarter or so, that makes sense.

Yes. So I guess I answer it by saying fundamentally we are not going to determine what our capital ratios ought to be primarily by looking at where peers are. We're going to continue to do a lot of -- to do stress testing, we expect to do that actually probably quarterly. And let that inform the discussions we're having with the Board. And to the extent that the results can lead us there, that’s one thing. But we're not going to be chasing peers. It's not a race to the lowest possible capital ratio necessarily. It's trying to have the right amount. And I think especially this -- for we, probably should be at least in the cycle. It's hard to know maybe where we are kind of an uncharted waters in terms of what these recoveries looked like, but we certainly don't want to go into a down turn. In the -- kind of behind the pack and so that's how we are thinking about it. We're really fundamentally going to use kind of stress testing to inform how we discuss it with the Board. But I think at the present time, we see enough room to get down to pretty close to where kind of the peer median is.

Okay, great. Thanks guys.

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

Good afternoon,

Hi, John.

On the loan growth front in terms of your guidance and I know that you softened it a bit there. Could you give us just a little more clarity around what you're actually seeing that that’s driving you to push that lever, like what type of competitive pressures on terms and pricing and then what types of portfolios are you seeing that happen? Thanks.

I will just -- I will give you an example that I’ve heard just a couple of -- obviously in the last week, over in Colorado. I heard -- I was being told about a 3-year, its $30 million commercial real estate deal that went to the CMBS market, it's 10 years interest only, covenant light kind of deal and it's just not -- that’s now what we are going to play. And so that -- that’s -- that would be an example. I don’t know Michael, if you have any other comments about that?

Well, sometimes with owner occupied, you don't really know what industries are that are growing, but owner occupied is a focus for the company. We like what comes with it in terms of ancillary business and relationship/ so. And we're very pleased to see that category grow.

Okay.

John, this is Scott. I just add that I -- the area of our portfolio or activities that’s the most volatile really it's the larger transactions like the CRE term credit, CRE term credit that Harris described. And we'll see at the end of the large energy credits. Also which had experienced more pay offs than we anticipated there. But generally it's just some remaining problem credits that are paying down, so that’s actually a good thing. But as you know, we don’t have a big exposure to larger loans, but the exposure we do have is just more volatile because of the conditions that have been described. If you look at slide 20 in the deck, what you see is really solid growth year-over-year, and a real bright spot is our smaller affiliates in Colorado, Arizona, Commerzbank in Washington and Nevada. They represent about 25% of the company and they’re producing about 5O% the loan growth. So that's really a healthy thing. And as Michael noted, by loan type, owner occupied is C&I and collectively that's growing nicely. Our mortgage related business whether it's one to four family or the HELOC portfolio are growing nicely. And then we're actually seeing some growth coming from energy again, so it's a nice mix of loans by type and it's coming broadly across the company, particularly from our smaller affiliates.

Got it. Thanks, Scott. That’s help. Now that leads you right into my second question. I mean, given that can change? I mean, to get your loan growth back up here, because obviously given nothing -- a short of a downturn in the credit cycle -- I’m not sure that the competitive environment really changes here. So if we assume that the competitive environment remains relatively intense, is there any reason to expect your loan growth can strengthen from here.

I think it's hard to know. The third quarter was a good solid quarter for us and fourth-quarter generally is a good quarter. So it's hard to know. I think the reason we lightened our guidance just a little bit is because of the volatility in these larger loan transactions, they’re just lumpier. And that that's I think what we were trying to say.

I get it. Thank you. And we favor the better credit anyway. So thank you.

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

Great.. Thanks. I guess, the first question in terms of your average balances on the liability side, looks like you paid down a fair amount borrowed funds in the quarter, called maybe $800 million, $900 million. Can you just remind us like what that is. And should that borrowed fund stay relatively constant, just given the more moderate pace of asset growth?

No, yes, this is Paul, Ken. Just -- we use that as a balancing mechanism of the balance sheet as we think about overall kind of loan growth and what we are doing with the investment portfolio, that ends up -- and then what deposits are doing in stability and growth of deposit, that ends up being kind of the balancing component there. So that number is really just going to be, if it makes sense, kind of what it needs to be. A lot of that as you know are home loan bank borrowings, we're becoming more active in the senior note market. You saw that issuance this past quarter. And so I would expect to see the composition of that funding change over time similar to what you saw here over the last quarter.

Got you. Okay. Perfect. And then just as a follow-up question separately, can you just remind us how big is the municipal loan portfolio right now? And kind of what are your designs on growth in that over time? Thanks.

Yes, right. As you can see it actually on Slide -- Page 12 of our press release. Currently municipal loan portfolio is about $1.5 billion. That's grown from about a $1 billion a year-ago.

Got it. Okay.

And we are going to continue to expect to see growth as we invest in that business.

Got it. Understood. All right. Thank you.

Thank you. Our next question comes from the line of Erika Najarian of Bank of America.

Hi. Good morning, good afternoon for other. Sorry about that. Just wanted to ask a follow-up question to John's line of questioning. I guess, as we think about where the non-banks aren't playing, how would you help us size your portfolio in terms of what you think is more -- a more defensible business from the non-banks, whether it's the municipalities or owner occupied or part of your real estate portfolio?

I guess I would say that -- I think we are relatively speaking in a pretty good place, because we have a significant portion of our portfolios in generally smaller credits. I mean, we are not a big corporate banking player. So and even with the municipal -- these municipal credits we are trying to focus on, kind of smaller municipalities where we think we can actually create little more value for them and for us. And owner occupied is a lot of what we do there is kind of small to midsize businesses. And that's certainly true of what our C&I portfolio generally. And I think those are reasonably -- its really a pretty good place on deals that are kind of $1 million to $5 million or $6 million or $7 million. Don't tend to find them their way into loan funds. They don't tend to get picked up by online lenders etcetera. They are really our competitors, they’re largely community banks and other regional banks.

Erika, this is James Abbott. I -- we do have some slides in our Investor Day materials back from March that give you kind of sense of the size of the commercial loan portfolios. So the small loans versus the medium-sized and large-sized loan, so that’s a resource that you could potentially utilize, but we do have a very substantial portion of our C&I portfolio for example is loans that are less than $5 million in balance, And we did see very good growth out of that during the quarter, linked quarter annualized little over 4% was very strong performance, while some of the larger stuff did decline.

Got it. And just a follow-up on the color that you provided with regards to margin expectations going forward. We hear you loud and clear on the deposit side. I’m wondering if you could give us a sense on what spreads are looking like right now and whether or not sort of the lower burden as a non-SIFI changes your strategy about securities or investment?

Yes. Erika, this is Paul. So that is a lot in there. Deposit beta we talked about maybe don’t need to get into that too much more. Loan spreads have been generally behaving, keeping in mind sort of where we operate and your conversation about kind of the average size of loans that has impacted our ability to fund loan spreads. Although I will see the composition of the portfolio exchange a little bit. So for example, if you looking at our portfolio from year-ago, we had more commercial real estate relative to residential mortgage than we do today. And the spread as you know kind of the spread in that just two examples or maybe one combination example, but the spread is very different among this products, residential mortgage having a tighter spread. So while generally on a deal by deal basis, we had some success maintaining into pending spreads, we are seeing a slightly different composition of the portfolio, which is impacting overall loan spreads. As it relates to the size of the investment portfolio, while it's true that we are no longer subject to the LCR, our biggest constraint really is our liquidity stress testing as oppose to the LCR. So I am not forecasting or we’re not predict a big change in the composition or investment portfolio because that liquidity stress testing continues to be a really important part of the way we're managing our balance sheet. So overall as I said in my prepared remarks, we've had -- if I can use the term a pretty decent relative to expectations, a pretty decent net interest margin beta. As you know, we’ve got a slide back in the -- bought back in the appendix that provides a little more detail on the interest sensitivity, particularly, the asset side of the book relative to market rate. And our performance has been very much in line with our modeling and our expectation. Looking ahead again, considering deposit beta is another thing. Maybe we don’t squeeze as many basis points out of a fed tightening as we have over the past kind of year and half. But we expect to continue to for the modest margin expansion as the federal reserve continues to raise rates.

Got it. Thank you.

Okay.

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

Thanks. Good afternoon, guys. Just a follow-up on the deposit side. I noticed you had good year-over-year growth of 3% and non interest bearings were actually stable, so even amidst this, deposit pricing pressure, we are seeing -- can you just give us a little color in terms of where you're getting that incremental growth from and your continued belief in the stability especially of that non-interest-bearing where we are sorting to see that, really come down a lot other peers. Thanks.

Yes. Ken this is Paul. I will start and Harris and Scott can build in. But if you go back to our Investor Day, we talked a lot about the composition of our deposit book. And the fact that it's very granular, very operating in nature. This is -- if you think about deposits in terms of operating deposits and kind of core to core investment deposits, our proportion of those operating deposits is actually pretty high. All that being said, the stickiness of our DDA is actually been sort of a pleasant surprise for me. I want that to sound negative, but our interest rate risk modeling actually anticipates that we will have more migration out of DDA than we’ve experienced. But I think the fact that our DDA has been so sticky really an indication of the strength of the deposit base and kind of overall strength that provides the organization.

And as follow-up, Paul …

All right. Go ahead.

s This is Scott. I would just add to that our ratio of non-interest bearing deposits, the total deposits for decades, several decades has been almost industry-leading we're sitting at 45%. Today most of our peers are in the kind of mid to low 30s, , high 20s, but even before 2008 our relationship of non-interest bearing to interest -- to total deposits was, was very favorable and it's for the reason that Paul described, but I just add some fluctuation to that. About 65% of our 24 day products, which just reinforces the point that these are operating balances of these businesses, And they’re generally smaller businesses and what I would suggest is -- generally these are company -- smaller company and they’re focused totally on how to enhance their gross profit mar margins which maybe 15% to 30% percent as opposed to had to get an extra 25 basis points out of there. They are operating account.

Makes sense. Thanks, Scott and these are the follow-up to that. Can you detail just is it the consumer side versus the corporate that's been growing, because there is also been a lot of talk about the stickiness of consumer not as much of a focus for you guys. But a big part of the bank it is, so what side of the bank is growing into when it comes to deposit for you guys. Thanks.

Yes, it's been -- they’re mostly non personnel, so it's a commercial deposits.

Okay, got it. So it feeds to Scott's point. Thanks a lot.

Right.

Thank you. Our next question comes from the line of Steven Alexopoulos of JP Morgan. Your line is open.

Hey, everybody. Want to start, Paul, -- for Paul at expenses. You did seem to be running at the low end of the 2% to 3% range that you previously talked about. Do you think that’s sustainable going forward?

Look we are and have been really investing in our business. And I’m really proud that -- the organization has really come together and we are creating opportunities to change, if you will, kind of the composition of the way that we're investing in the business. So we are saving money in spot and we're investing money in other spots. As we look ahead and just kind of 2019 and beyond, we are right in the middle of our budgeting process. We are very focused on expense control, we are very focused on positive operating leverage. And so, yes, in the near-term I absolutely think its sustainable.

Okay, great. And then just one other one for Harris. Given the valuation of Zions stock here and now that you're officially out of CCAR. Do you have an appetite, as we with the board, you're the Chairman of the board obviously to accelerate buybacks and get to the targets more quickly?

Yes, I do. I’m one vote out of -- 11 or rather. So I -- it's -- again, I don’t want to front run that conversation, but I think that I mean clearly valuation is one of the things we need to think about. It's a silver lining to what I am seeing in stock market these days is the fact we’ve got a lot of capital to deal with. So I tell I am thinking about.

Okay, great. Thanks for the color.

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

Thank you. Can you hear me?

Yes. Hi, Jennifer.

Hi. Harris, just wondering if you can talk about the level of lending competition you are seeing and kind of compare and contrast that to what we saw right before the last downturn?

Well, I think there's a whole lot of -- still a lot of liquidity out there, a lot of cash and it's very competitive for earning assets. I don’t know quite how to compare it to before the last downturn. I mean, that was I think clearly more housing kind of driven a lot of demand for developer credit. And so -- and I think there's actually quite a lot of discipline today around that, not only here, but generally I think we see around the industry. So I think in that respect, it's probably fundamentally different, but you are seeing a lot of -- there's been a lot of growth, you see it's not quite so much where we play is in leverage lending, but clearly big players there, using a lot of competitive pressure from hedge funds and loan funds and others that are I think should be maybe of some concern in terms of kind of where the next problems could pop up.

This is Ed Schreiber. I wanted to supplement some of Harris' comments, but more importantly look at our book when you really look at what we've done over the last few years, the balance sheet has been simplified, but more importantly on the credit side, with Michael Morris, the Chief Credit Officer and his staff, we’ve really designed a program here that you've seen and exemplified through the oil and gas cycle, that we are really a big fan about positioning the company as a positive outlier through the next cycle. So if you look at -- really looking at any forecast and I think the way we position the Company from an asset quality perspective is that we are in a good shape and we'd be a positive outlier through this next cycle.

Thank you very much.

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

Hello. Thank you for taking the question. First, just a little clarification. I think in the prepared remarks -- excuse me, in the prepared remarks you touched on the impact of the simplification of the corporate structure on expenses. Can you remind us what the benefit is you expect from that? How do you quantify that?

Yes, I didn't specifically quantify it. Geoff, this is Paul. I didn't specifically quantify it, but what I did say effectively was that we’ve seen some escalation or elevation in the professional services line over the course of the last kind of near-term and that we'd expect that -- maybe the run rate of that to be a little bit lower. That was kind of a key -- I would say the key part of the prepared remarks, I think to deal with what you are describing. Keep in mind that we did not have a lot that happened at the holding company. Nearly all of the assets and essentially all of the operations and all the employees have been at the bank level for some time. So while it does create organizational simplification, my expectation is not that we would see a kind of step wise change in our operating kind of expenses.

And then on the deposit side, I guess you're somewhat unusual in operating separate brands and separate banks, if you like, in different geographies. How much flexibility is that giving you to adjust pricing in different markets and how much variation you are seeing in competition if you kind of compare the main markets you’re in?

Well, we price locally. We -- the pricing decisions about deposits are made by local management teams and they certainly have incentives to try to minimize their funding costs. But -- so we’ve internal transfer pricing as every large -- larger bank would have to compensate them for the funds that they’re raising and they're trying to make spread on both sides of the balance sheet. I don’t know what more I could probably say about it.

Yes, I would -- this is Paul. If I could, I would probably ascribe more value to sort of the local nature of the banks as opposed to the local brand of the banks. Your question was really around the brand, but I think the value is really around the way we run in the autonomy of the local groups and being able to react specifically to what the client needs at a very, very local level, I think is providing a lot of flexibility for us as we are thinking about deposit pricing.

Great. Thanks very much.

Yes.

Thank you. Our next question comes from the line of Christopher Spahr of Wells Fargo. Your line is open.

Thanks for taking the question. With high single-digit PPNR, how low do you think the efficiency ratio can go?

I don’t know, it sounds like a game of limbo.

I will just start out in that.

Scott [indiscernible].

As I said we are really focused not necessarily on efficiency ratio as the -- that sort of the end goal. We are really focused on positive operating leverage. And if we can continue to achieve that, we’re going to continue to see very strong PPNR growth and continue to grind that efficiency ratio lower.

I would make one observation, because we’ve talked a lot about the deposit base and kind of in the loan mix and it is a little different than you find in some of our peers and it is a little more expensive to operate and we'd hope that shows up in the form of the kind of deposit performance we shown here -- you are seeing right now. But that -- so that probably creates a little bit of drag, but I think nevertheless we are -- my hope would be that we find ourselves getting down into the kind of the mid 50s over the next couple of years, that would be just kind of generally my aspiration.

I would -- I just add to that, this is Scott, that going back to Steven's questions about the expense growth rate of 2%, 3%, I mean, basically we’re building our plan around that expense trajectory that we’ve talked about and that involves investing actively in the businesses that we are trying to grow and investing actively in technology. And so we are not just sitting back cutting costs everywhere and not investing in the future. We’ve been investing heavily in the future over the last three or four years, both in terms of technology and in terms of businesses we are trying to grow with hiring new bankers etcetera, etcetera.

Thank you.

Thank you. Our next question comes from the line of Steve Moss of B. Riley FBR. Your line is open.

Good afternoon. On the loan growth front with particular on resi and also on oil and gas, just wondering what are your thoughts for growth going forward in both those categories, and also what are you retaining with regard to resi mortgages these days?

Yes, I …

Go ahead, Scott.

Go ahead, Paul. Well, I was just going to say, our mortgage business is very different than the mortgage business you would find at the major mortgage lenders in the country. Our business is basically a private banking business, although we do have a very broad consumer business also, but it basically is -- about 50% of our mortgages are for small business owners, our small business owners, and I think they're going to be -- and they're generally not first time home buyers. So our mortgage volume is down a little bit this year versus last year, but not nearly like the rest of the industry that you read about in the paper every day. So we are pretty bullish on our mortgage business and we retained about, Paul, I think it's about 60%, 70% of what we originate, we are basically retaining everything under 10 years. And we are about to introduce a new online digital application process that we think is going to be a real game changer for us. We are not a big player, but a game changer for us. And that’s in pilot right now, will be rolling out next year. And on the energy book, it's about $2.2 billion in outstandings right now. It got down to about $2 billion, went from $3 billion to $2 billion, that was the contraction. Just in the last couple of quarters it's grown back to about $2.2 billion. And I think 10% to 15% kind of growth in that portfolio would not be unusual at all. It's basically reserve base lending and midstream. There's virtually no growth coming from our services business. And we have contracted -- we’ve consciously held back in that area.

Okay. That's helpful. And then, with regard to securities balances here, I know on EOP basis, they're flat. Just wondering what are your expectations for those balances going forward.

This is Paul. I am not expecting a big change in the size or the composition, although that may change as deposit growth ebbs and flows and loan growth ebbs and flows. But generally speaking I expect that portfolio to remain relatively stable, its overall size.

All right, thank you very much.

Thank you.

Thank you. Our next question comes from the line of Marty Mosby of Vining Sparks. Your line is open.

Thanks. I have three quick questions. One is the warrants that were outstanding were causing some dilution as the stock price was going up. The share count dropped pretty precipitously this quarter, was some of that the benefit of the kind of reversing out of some of that impact?

Some of -- this quarter I think if you look at average share price quarter-over-quarter, even though it maybe went up and went down, I don't know that the average is a whole lot different. I think a lot of the positive impact there -- you are seeing there's the result of the share repurchase activity.

I think in the quarter, Marty, it's about 0.5 million shares is all the difference that you read, but obviously we will have to see what the stock price does in the fourth quarter here, but if it stays where it is, it will be a more substantial improvement on diluted shares.

Okay. And then, Paul, you were talking about the FDIC costs and I was kind of hearing that because you had consolidated and you've done some debt, that maybe your FDIC costs are just going to go down without kind of the surcharge going away. Could you just maybe explain just the number, what it was this quarter, next quarter, and what do you expect it to be kind of as that rolls forward?

Yes, Marty. I probably wasn't as it articulated, I could have been as I went through that part of the prepared remarks, but you are right. There are couple of things impacting FDIC this quarter. The key one is we had sort of this incremental accrual of $3.7 million that shows up in the third quarter, but it was kind of a, if I can use the term, sort of a one-time thing, it's isolated event, it's not going to happen again next quarter. The other aspect is we issued unsecured debt in the third quarter and then we had a little bit of debt that was holding company notes that have now been assumed by the bank. So as you know unsecured debt, it gets a favorable -- very favorable treatment under the FDIC calculator. And so there's also going to be an incremental benefit of that and that’s probably going to be close to a $1 million a quarter. The other big one of course is the FDIC surcharge, that will affect us as it affects everyone else. And just as a reminder, for us that FDIC surcharge is a little under $6 million a quarter.

Perfect. And then the last quick question is, your biggest portfolio is C&I, excluding oil and gas, and it's declining, so it's tough to see the momentum building in the portfolio without one still kind of seeing a modest decline. Almost all of that decline, back on page 20, is coming out of Amegy. So I was just curious what was the loan type or the decisioning around because it was a big number in this quarter, but it was actually it looks like it's been consistent over the past several quarters. So just curious what was causing that decline.

So I will start and then I will ask Scott and Michael and whoever else want to make a comment. Marty, when thinking about C&I, I would also include owner occupied in that. I think owner occupied is a really important aspect. It just, as you know, happens to be secured by commercial real estate, but it's really sort of a commercial loan, disguised as a commercial real estate loan because it's owner occupied. But -- if you combine C&I and owner occupied, there actually had been growth over the course of the last year. So, Scott or Michael, would you like to add anything of that?

No. I would just -- I would echo what you said, but I would also point to Amegy's growth in owner occupied. So there has been growth in the Texas market in C&I and we always include owner occupied under the C&I umbrella as Paul mentioned.

And the only thing I would add to that is that, that portfolio is -- it has more exposure to larger transactions than most of our other portfolios. So in the C&I space -- so the volatility, we talked about earlier in the call, Amegy is a place you will definitely see it in that C&I non oil and gas, exactly, right.

Right. Thanks.

Thank you.

Thank you. Our next question comes from the line of Don Koch with Koch Investments. Your line is open.

Hey, thank you, guys. Just sort of had a bang up quarter. I am just sort of flexed [ph]. I mean it's an outstanding quarter. I am looking at your slides from your Investor Day and your main bank is a little less than the third of total bank assets. Are you finding that there's some kind of fall out. I know historically when you do these consolidations like Regions did and Synovus and the old Barnet and UCBI, it takes several quarters for those Directors to sort of come back to the family and the salary mechanism of individual banks versus one bank all working out. And I mean can you make these statements about why you did so well in the quarter? So, really outstanding, but yet the stock sort ought to be filled.

You broke up in the last phrase there.

And why did -- if I were to be a betting man, I would have bet that the stock in the last quarter would have currently gone up from your phenomenal numbers. I mean, you are knocking the stocks off the ROA and the ROE, but there's such tremendous pressure, downward pressure stock from this consolidation. Do you have any explanation on that?

Well, I don’t know if it was from the consolidation. I would say it's tough enough to manage a bank without having to manage the market.

Right. No, no I understand. I know and it's a guess, but are you seeing any fallout from the individual that were part of these individual banks that you all put together?

No, I mean, listen, I think the -- fundamentally the answer is, no. I mean, we had, we have -- I mean we’ve got enough employees on any given day. We got people get picked off by others, we sometimes pick up other people as well. But there's been very stable kind of in the management ranks of the company has been very stable.

And so they’re paid the same way and the incentives are the same?

Yes, fundamentally there hasn't been a lot of change there. All the front -- the customer facing employees in this Company fundamentally, almost all of them, not totally, but most all of them report to these local market CEOs.

Right.

What we call these affiliate CEOs. And that group has been extremely stable. So, I don't think that that’s -- we just haven't seen the kinds of issues you see going through this. The consolidation was not a huge deal for the customer facing people. Now it had some impact certainly in kind of some back office functions, places like that, but the revenue drivers, we tried to be pretty careful about those.

In fact -- this is James, I will just jump in here. We’ve got just a couple of minutes left. And I'd say, one that Harris, you've said many times in the conference appearances, we made this decision to consolidate because of the feedback we're getting from the frontline employees to helping their lives simpler. Let's just take -- we are not going to be able to make everybody's questions and it looks like because of time, but let's just take two more questions and we will go lightening around for these last two and then we will be at our time limit.

Thank you. Our next question comes from the line of Lana Chan of BMO Capital Markets. Your line is open.

Hi. Good afternoon. Just a follow-up on the capital return discussion. Could you talk about your appetite for acquisitions whether whole bank or loan portfolios or business lines?

Well, I think we've said for some time, we never say never. It's not something that it is not a strategic priority of any sense. We will be opportunistic, I guess, if something was a great fit. But it's not something that we spend a lot of time thinking about.

Thanks, Lana.

Thank you. Our next question comes from Brock Vandervliet of UBS. Your line is open.

Thanks very much, I had of jump off for a while. Harris, I thought I heard you mention 55 or mid 50s, I guess, efficiency ratio, it doesn't seem like that would be necessarily in the near-term anyway top line driven. Are you feeling better about the scope for expense saves here on the back of some of the charter consolidation or vis-à-vis your improvement in terms of your regulatory situation?

Well, when I just talk about mid 50s, I used the word aspirational and I am not suggesting that’s going to happen in the next few quarters. But I think I do think that that's achievable with kind of our business model and with -- if the economy continues to remain reasonably healthy, I think that -- I do think that that’s -- that we will continue to see revenue growth driven by kind of reasonable loan growth. I think we worry a little in the short run about competitive pressures on some of the larger deals as we mentioned. But that's not fundamentally what our major part of this franchise is. And so I think over time as we continue to focus on what I think our sweet spot is, I think it's not an unreasonable kind of goal.

Appreciate the color. Thank you.

Okay. I think -- this is James Abbott. We appreciate -- thank you Latif for hosting the question-and-answer session. Thank you all for joining the call today. Please don’t hesitate to contact me if you have additional questions or comments. My information is on the front of the press release. We look forward to seeing many of you at industry conferences during the balance of the year. And thank you again for your participation and we wish you a good evening.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.