James Richard Abbott - SVP-Investor Relations & External Communications Harris H. Simmons - Chairman & Chief Executive Officer Doyle L. Arnold - Vice Chairman & Chief Financial Officer Scott J. McLean - President.

Joseph Morford - RBC Capital Markets LLC Jennifer Demba - Suntrust Robinson Humphrey, Inc. Paul J. Miller - FBR Capital Markets & Co. Kenneth Michael Usdin - Jefferies LLC Erika P. Najarian - Merrill Lynch, Pierce, Fenner & Smith, Inc. Ken Zerbe - Morgan Stanley & Co. LLC Dave Rochester - Deutsche Bank Securities, Inc.

David Eads - UBS Securities LLC John Pancari - Evercore Partners, Inc. (Broker) Kevin James Barker - Compass Point Research & Trading LLC Steven Alexopoulos - JPMorgan Securities LLC Gary Peter Tenner - D. A. Davidson & Co. Geoffrey Elliott - Autonomous Research LLP.

Good day, ladies and gentlemen, and welcome to Zions Bancorporation First Quarter 2015 Earnings Conference Call. This call is being recorded. I will now turn the time over to James Abbott. Sir, you may begin..

Thank you, Sayyed, and good evening. We welcome you to this conference call to discuss our first quarter 2015 earnings. Our primary participants today will be Harris Simmons, Chairman and Chief Executive Officer; Doyle Arnold, Vice Chairman and Chief Financial Officer; and Scott McLean, President.

I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release dealing with forward-looking information, which applies equally to statements made in this call.

A copy of the full earnings release is available at zionsbancorporation.com. We intend to limit the length of this call to one hour, which will include time for you to ask questions. During that Q&A section, we ask you to limit your questions to one primary and one follow-up related question to enable other participants to ask questions.

I will now turn the time over to Harris Simmons..

Thanks very much, James, and I want to welcome all of you to the call today. Results for the first quarter 2015 were I think generally in line with our expectations and also those of, I think, most of the analyst community.

Credit costs and operational expenses were somewhat better than expected, while revenue and loan growth experienced softer performance than were expected. I want to turn right to the energy lending for just a moment and highlight how we've been managing that portfolio. It's probably the business that many of you are focused on right now.

In the late fall, we were early to initiate the process of reviewing our energy loans and reaching out to all of our energy-related clients. We've completed the borrowing base redetermination of about one-fifth of our portfolio of exploration and production credits. We found that on a weighted average basis, the borrowing base declined by about 12%.

A few experienced an increase in the borrowing base due to factors such as the development of additional reserves, while most experienced declines as one with generally expect after a sharp reduction in the commodity price.

We downgraded several credits and we know of several cases where we've reduced our loan grade before others and a bank syndicate have reduced the grades of the same loans, and therefore our results of classified energy credits may not be comparable to peers until later in the cycle.

Most of the energy credits are held at our affiliate, Amegy Bank and as mentioned in the release, we have added significantly to Amegy's allowance for credit losses in the last two quarters. As I mentioned in the earnings release, we are very encouraged with the response from the energy industry.

Active oil drilling rigs have declined by 53% in the last six months and there's been a significant amount of capital raised by the industry, including both public and private equity offerings as well as subordinated debt, which has resulted in reduced senior bank lines of credit.

Many of our energy services clients have aggressively cut costs and are rightsizing their businesses with the current operating environment. Several private equity sponsors have raised additional capital that will be used to support existing portfolio companies by either reducing leverage and/or taking market share.

On a macro level, the rate of oil inventory that's been building very quickly maybe showing early signs of moderating, which is likely a factor in oil prices increasing in the last few days. We expected as the borrowing base redetermination process is completed in the next few weeks, we're likely to experience further downgrades.

This shouldn't come as a surprise as we've been highlighting this since early December. In the prior cycle, our historical losses on energy credits were very modest with an annual peak loss of about 1% despite a classified energy loans ratio of approximately 20% of total energy loans.

We talk about expenses just for a moment before I turn the time over to Doyle Arnold. We're highly focused on expense control and we're very pleased with that performance in the first quarter coming in low our own budget and I think below most estimates.

As technology advances, we expect to be able to reduce certain labor-intensive tasks, primarily in the back office, but also in the way customers interact with us such as through mobile banking.

We're still fine-tuning our outlook for cost savings that should come from the initiative to overhaul and upgrade our technology systems and expect to provide you with an outlook within the next two to three months.

We're still comfortable with our outlook of approximately $1.6 billion annually and kind of core operating expenses and continue to look aggressively for redundancies or ways to improve efficiency within our system.

Finally, as many of you are aware, we recently announced both the retirement of Doyle Arnold, our Chief Financial Officer and Vice Chairman, and the hiring of Paul Burdiss, who will be taking over the role of CFO.

And I just want to take a moment and with all of you on the line to express my appreciation to Doyle for an enormous amount of hard work and a lot of thoughtful action and support over the last nearly 15 years.

He's been a great part of the team and a great friend, and we're really going to miss Doyle and wish him the very best as he works on his golf game among other things, needs a lot of work..

Need to work..

And at the same time, I really want to welcome Paul Burdiss.

I think most of you know, Paul came most recently from SunTrust and before that, from Comerica, in a treasurer role at both institutions and also with an Investor Relations role at Comerica, and brings a lot of very strong skills and experience to the company, and we're really looking forward to working with Paul and welcome him to our team.

So, with that, I'll – I'm going to turn the call over to Doyle. Doyle's going to stay on as CFO through the filing of the 10-Q, as I think most of you know, and then we'll turn that role over to Paul. But as said, this will be Doyle's siren song. And so, Doyle, go ahead..

first, there are seasonal factors such as non-sufficient fund charges, which are generally weaker in the first quarter and lower loan origination fees due to seasonally lighter origination volume in the first quarter; second, because of lower fees on unfunded loan commitments.

Fee income remains a major initiative for us, we've talked about for a while now. And we've added increased discipline to help further increase this source of revenue. But I think you've heard this from others and you're aware that driving growth in fee income is definitely a challenge in this environment.

Turning now non-interest expense, the decline in NIE to $397 million from $423 million in the prior quarter reflects a drop in various costs, some of which, as I mentioned, is due to CCAR-related expenses. There was also a large legal accrual in the fourth quarter that came after our initial earnings release, but before we filed the 10-Q.

But other declines are due to concerted effort across the company to reduce cost, as Harris mentioned earlier. The three major line items, I'll discuss here and then I'm sure you'll have additional questions later. First, salaries and benefits increased by about $5 million from the prior quarter.

This increase is primarily a result of the seasonal increase in employee benefits related to Social Security taxes and Federal unemployment tax. Second item is professional and legal services, decreased $15 million from the fourth quarter. Again, mainly due to a seasonal decrease in consulting expenses related to the company's CCAR process.

We expect this item to be lower for the full-year 2015, compared with the full-year 2014, partially due to the CCAR 2016 submission schedule being pushed back by a quarter. But also because we don't believe we'll need to spend comparable amounts in the future now that a lot of our CCAR infrastructure is more developed and in place.

So we hope more incremental improvement from here on rather than major builds from scratch. We'll continue to employ outside consultants to some degree, however, working on the technology projects for a continued period or a considerable period. Turning to the technology initiatives. Progress on these initiatives has been very good.

We remain within our announced implementation timeframe of five years to seven years and are still on the projected path to come in line with the previously disclosed $300 million area of total expenses for these projects, which includes both internal labor and external or incremental costs, but does not net any potential cost savings.

So that's the kind of the gross spend labor level. With regard to external labor or so-called incremental costs, we expect that number to be approximately $30 million to $35 million per year through 2018 and then tapering-off thereafter.

We do expect to realize cost savings along the way, which we expect to announce – we'll start to announce some of those over the next two months or three months.

Such savings should reduce the impact to the income statement from the gross cost of the technology initiatives; and those initiatives, I remind you are – we think are critical to our long-term efforts to control and reduce expenses relative to assets and revenue. Finally, the other non-interest expense line.

There was a significant change to $58 million from $75 million in the last quarter. I already mentioned a large legal accrual during the quarter. That was a one-time event that increased those costs.

But in addition to that, we've been successful at reducing a number of smaller line items, PR, travel, and whatnot, that get rolled into that line as part of the expense control efforts.

Cutting through all of that, we expect that this other non-interest expense line will range between kind of in the $60 million to low-$60 million area in the near term per quarter, best estimate now. A few comments on the balance sheet. Page nine.

The growth in the balance sheet's largely driven by deposits, which continued to grow in the first quarter by $275 million. However, on the asset side, money market investments declined by more than $250 million, while securities increased $550 million approximately.

Most of the securities growth was in Ginnie 5/1 ARMs and Fannie 10-year fully amortizing residential MBS, with a duration of a bit over three years; and we think given their term, limited duration extension risk.

This is consistent with the purchases we've made in the previous couple of quarters in which we expect to continue for the foreseeable future as we deploy cash incrementally into HQLA-type securities.

Over time, these purchases will moderately reduce the natural asset sensitivity of the company, but we will expect it will still be one of the more asset-sensitive banks within the industry due to our duration profile. As most of you are aware, as I mentioned, these securities qualify as high-quality liquid assets.

So there's no change in going from cash to them in our LCR calculations. And as it pertains to liquidity coverage ratio, we calculate that we're already in excess of the required 100% ratio under the modified LCR rules that apply to banks of our size.

We also expect that the addition of the longer duration assets should enhance our stress test results by boosting pre-tax – our pre-provision net revenue in an environment where generally the severe adverse scenario of the Federal Reserve has interest rates falling by more than 50%.

Also, as noted in the release, we moved the remainder of the CDOs that we hold from held-to-maturity to AFS, the remainder of those who weren't already AFS that is, which increases our flexibility in managing that portfolio going forward. Turning to comments on the credit quality, Harris already elaborated on the energy credit portfolio.

I'll just comment that most credit trends outside of energy continue to look very good. It's notable that OREO has fallen to only $17 million from a high of $414 million in 2010.

Although, non-accruals increased somewhat and may increase somewhat further, I would say maybe – probably will increase somewhat further as the energy credit situation plays out. At present, there's still less than 1% of loans and real estate owned, and most of those are still current on payments.

With regard to energy loans, in addition to the reserve that was already in place for such credits, we've increased the allowance for credit losses at Amegy Bank by $55 million in the last six months, which roughly coincides with the timing of when energy prices began to decline.

Finally, capital ratios were largely unchanged relative to the prior quarter. Federal Reserve did not object to our 2015 capital plan, which included the increase in the quarterly dividend that Harris already mentioned, as well as a reduction of up to $300 million in preferred equity.

We're not yet prepared to say much more about that but we'll at the appropriate time. The outlook, comments on the outlook. Our outlook is a reminder; is not for the next quarter, but kind of the general trends over the next four quarters relative to the most recent quarter.

With regard to loan growth, we're maintaining our slight to moderate outlook for loans.

This guidance factors in the growth and non-growth in non-energy loans, but the expectation that energy loan balances will reduce as we go through the borrowing base redetermination process and as the energy industry raises capital and reduces leverage, which is the general trend that we're already seeing out there.

We expect net interest income to increase slightly partially due to loan growth and continued purchases of MBS, and the expected benefit of lower interest expense related to the maturity of the high cost sub debt that matures in the third and fourth quarters of this year in which we expect to pay off that maturity.

These factors we expect to be offset declines in loan yields as discussed earlier, and thus, this part of the outlook does not include the effect of any rate increases that may be announced by the Federal Reserve.

We expect core components of non-interest income such as service fees to increase modestly as we continue to press forward on organic growth and fee income. We generally would reaffirm our expectation of non-interest expenses of approximately $1.6 billion annually.

And finally, with regard to the provision expense, on average, we would probably expect modestly positive provisions for credit losses in the next several quarters, driven by further potential credit re-grading in the energy portfolio offset by a stable to improving credit quality in some other segments and by loan growth.

Finally, just a few personal comments. This will be my last earnings call. I went through the list of those of you on the phone who cover us with James, and I think there are eight or 10 of you who have covered Zions from darn near the whole time I've been here, at least couple of you the entire time.

I'm not going to single you out by name for fear of omitting someone inadvertently, except for Brian Klock, who I'm going to award my bad timing catch-a-falling-knife award for transitioning into coverage in 2008. So, Brian, my sympathies to you. But really to all of you who have kind of been with us through quite an amazing period of time.

I want to thank all of you. I've learnt from you. I've learnt from your questions. Wish you all well. I'm honored to have been at Zions, excuse me, it's kind of choking up here. Plenty of work ahead, but I'm pleased that Zions is – I'm leaving Zions in pretty good shape. Paul Burdiss is with us here.

He's been on board for one week but he's wisely – he's affirmed my judgment of him in the interview. He has wisely invoked his right to remain silent in his first call and shows astute judgment on his part.

But I will tell you, he's a darn quick study and I'm confident that you and Zions will be in really, really great hands and it won't be long before some of you who are trying to – will be trying to remember the name of that old CFO who used to work at Zions.

Who was that old guy? Anyway with that, thank you all again for all the good association for – wasn't 15 years; I count 13.5 years, but some of those were doggy years during the crisis..

It's something like 20. That's probably....

Exactly. So anyway, with that, we'll open up the line for your questions..

Thank you. Our first question comes from Joe Morford from RBC Capital Markets. Your line is open. Please go ahead..

Thanks so much, and Doyle, congratulations on your retirement. Certainly, wish you the best..

Thank you, Joe..

I had a couple of quick questions. First, a clarification on the energy portfolio.

It sounded like you took an additional $30 million of reserves or established additional $30 million reserves this quarter; did you also quantify any specific write-downs that were taken? And related to the downgrade at this point, are they coming more from the E&P book or the services, exposure and how does that compare versus your expectations?.

No, there were no energy-related charge-offs this quarter. Not to say there won't be in future quarters but none, and more of the downgrades came from the serve....

From the reserve..

From the reserve-based....

From the reserve-based portfolio..

...portfolio. We expect probably as we get through the – and those were kind of proactive adjustments on our part.

Joe, we don't – we've not yet completed the reserve and borrowing base redetermination process, so a lot of those were based on the engineering reports from last fall and applying new pricing – current pricing to those reserves and they can proactively judging what may have happened.

Some of that may, depending upon what they did in the way of new drilling in the fourth quarter, new reserves, we'll see.

But they – we expect to keep that reserve base redertermine – reengineering and the borrowing base redetermination by late May, early June and then – and we'll also then start to get new financials from some of the services company.

So there are more adjustments to come, but nothing that we've seen so far, I would say, is off-trend from what we were expecting when we – on our last earnings call..

Joe, this is Scott McLean. I would just echo Doyle's comments.

This process of taking a reservoir analysis that's nearly 6 months old and putting new sensitivity pricing in it is a very imprecise process, but we did this really rigorously across the entire reserve-based portfolio and determined that there was a collection of reserve-based credits that we thought because of the degree that they were advanced and the science related with – associated with their reserves, the level of leverage, et cetera, et cetera, that it warranted downgrades.

And I'll tell you, though, that having completed a portion of our reserve base redeterminations already that we've had about a handful of those redeterminations that have come in more favorably than the sensitivity analysis that we ran, which just simply makes the point of the crudeness of this process when you look at it prior to ....

Yeah..

...the actual redetermination data. On the oil field service side, again, it's not nearly so easy to estimate. I mean, you really have to wait for financial information.

And even though we have lots of anecdotal data and lots of communication with our clients, we'll need to look at March 31 data and then June 30 data and you'll start to see oil field service portfolio is adjusting in grade really in the second quarter and the third quarter, primarily..

I'll add one final amplification. James, correct me if I'm wrong or Scott, but Harris mentioned on average down 12%, there's a wide dispersion around that. I think the worst was down close to 50% and the best was up over 40%.

The median were on these reserve – that we were – that was – they were around in the 10% depending on whether you're talking mean, median, or whatever kind of high single-digits to low double-digits, as Harris mentioned..

The other thing I'd probably mention is just as kind of interesting thing to me, this is Harris, is that delinquencies in that portfolio are negligible..

Yeah..

Less than a quarter of a percent, dramatically less than a quarter of percentage point just more specific. So we are not seeing in the performance in the loans at this point any deterioration that's giving us concern. But just like a weather forecaster with a satellite image of what's coming, I mean, that's why we're grading these loans.

We're really trying to be proactive and do what we, I think, we ought to be doing. But we're not seeing real evidence yet of the kind of deterioration that you might....

Maybe..

Yeah. Next question..

That's very helpful. I was looking as a follow-up to that.

Similarly, any signs of deterioration yet in the non-energy piece in the Amegy book or is that – it's a bit early for that?.

No..

No, the answer is no..

Okay..

No, we're not..

Thanks so much..

Too soon to tell if it's – too early for that..

Okay, thought so. Okay, thanks very much..

Yeah..

Thank you. Our next question comes from Jennifer Demba from SunTrust Robinson. Your line is open, please go ahead..

Hi, Jennifer..

Jennifer?.

If you had your phone on mute, can you unmute your phone, please?.

Why don't we take another question and then we come back to Jennifer if she's having difficulty?.

Can you hear me now?.

Our next question comes from....

Oh, got it. Yes. Okay. Hi, we got you now..

Sorry about that. Doyle, all the best. We're really going to miss you. Congratulations..

Thank you, Jennifer. Miss you, too..

Yeah. So just a follow-up to Joe's question on non-energy loan deterioration specifically in Houston, just curious as to what you're seeing, Scott, in the economy there in Houston right now and in your commercial real estate credits.

Could you just give us a little more color there?.

Sure, Jennifer. On the CRE side, you just have to go through each category, but obviously, we're watching office and multifamily most closely.

The single-family construction, Houston will probably have 25,000 to 30,000 housing starts this year, and just because of the very conservative underwriting that came out of the 2008, 2009 downturn, I think residential will be very manageable in Texas and in Houston, specifically.

Our office exposure is pretty manageable and we really only have a couple of credits that are less than $25 million in total exposure each and in one case, well less but they're with first-tier sponsors and great locations. So our office exposure is I think very manageable and multifamily is really the place where we're watching it closely.

We had very few new originations in multifamily in 2014 and so our vintage component overall is favorable. And most of our multifamily projects that are coming online now are experiencing solid ramp on dynamics..

Okay. Thanks so much for the color. Appreciate it..

Yes..

Yeah.

Thank you. Our next question now comes from Paul Miller from FBR. Your line is open. Please go ahead..

Yeah. Thank you very much. Talking a little bit about your expense controls, now that CCAR is over, what line items can we see materially go down? My guess be personal expenses, but were there also some expenses in the other expense line item? I noticed that was down in the quarter..

Well, as I mentioned, the biggest change in the other non-interest expense line was the fact that there was a pretty large litigation settlement that we accrued in that line in the fourth quarter of a much smaller number in the first quarter and we think that was a very abnormal expense.

So the bulk of the CCAR-related expenses does show up in the professional and consulting. And it was both help on the stress testing, but also in model validation and flushing out our enterprise risk management. So most of what you're going to see in the way of reduction going forward we think will be in that line. It's CCAR-related..

And then how long will it take to get a lot of those expenses out? Are we talking about six months, nine months, a year?.

Well, the spend on the outside consultants is basically all out.

Now, as I mentioned, I would expect that line for the year to average a bit higher than it was in the first quarter because effectively we made almost no use of consultants for those purposes in the first quarter, while we're awaiting the detailed results of the qualitative exam and whatever MRAs that we get and whatnot because that's what will give us the roadmap for what do we have to fix, build, what have you, for the coming year.

But all indications are that effort will be substantially less than it was in each of the last two years..

Okay. Hey, thank you very much..

Yeah. I would just add that there's a broad category of expenses that are in that other non-interest expense line. There's smaller items that you'll see providing favorable comparisons to this quarter and the previous quarter.

And our salaries and our employment expense, there will naturally be favorable comparisons there as the number of FTEs comes down in the company..

Hey, guys. Thank you..

Yeah..

Thank you. Our next question comes from Ken Usdin from Jefferies. Your line is open, please go ahead..

Hi, Ken..

Hey, everybody. Doyle, best of luck again..

Thank you, Ken..

On the loan side, just wondering post-CCAR, how much more kind of protection against concentration limits do you guys have to work again? So when you talk about slight-to-modest loan growth on the outlook, how much is that related to what you guys are turning away or not doing, and how much is that related to organic improvement and just the natural growth trajectory?.

I think it's fair to say there's a much stronger pipeline for CRE construction and development loans than you're ever going to see in our outstanding balance – I mean, I guess I should say demand.

I mean, there's a lot, very high-quality demand for that product and we're – because the Federal Reserve's models appear to attribute pretty high losses under stress to that kind of portfolio, we have to be very cautious about picking our spots in that portfolio, in particular.

And otherwise try to move further away from that 5.1% number, and we're working on a lot of ways to potentially address that.

Moving the CDO portfolio, the remainder of it to AFS gives us the flexibility to sell that portfolio, the remainder of it, even though we think what's left is of high quality and paying down at par may be prudent to – although we don't know for sure, it may be prudent to sell that as a further risk mitigation given the – and we'd rather use capital to make loans than hold that portfolio if it comes to a choice between the two.

But there is some constraint, particularly on the CRE side at the present time..

Okay.

And as a second follow-up on CCAR, can you talk about just your expected timeframe around calling those preferreds the debt redemptions? And at what point would you just get more comfortable with a bigger buyback ask?.

Well, with regard to the debt, that's pretty calendared in. There are three issues and they all mature in the third or fourth quarter of this year. I forget whether it's two in one or one in two. So those require nothing other than writing a check, and that's the expectation.

With regard to the preferred, the exact timing of any reduction and how we go about it, we'll not – obviously it's within the – the expectation is it's within the CCAR planning horizon, which does go out an extra quarter this year through the capital plan coverage through the second quarter of next year.

I'm not saying it's all going to come at the very end, that's not what I'm trying to telegraph, but we have some flexibility in there. And then with regard to larger buybacks, et cetera, effectively, that's now – whatever the outlook for that might be, it's really a – starts with CCAR 2016, which will be submitted in early April of 2016.

And it really won't become – you won't get the results back until early third quarter, I believe, or maybe the late second quarter. So it's a next big adjustment to our capital plan, unless things were to change dramatically. And we've resubmitted a whole new stress test and capital plan are – you're looking kind of mid-2016..

Okay. Thanks again, and best of luck..

Thank you..

Thank you. Our next question comes from Erika Najarian from Bank of America. Your line is open. Please go ahead..

Hi, Erika..

Yes. Hi, good afternoon. And, Doyle, good luck in lowering that handicap..

Thank you..

I just had a question, and I'm sorry if this is a basic one on the redetermination process.

So if your E&P companies have hedges currently in place under production during the current redetermination process, are you basing any sort of allowance rebasing or credit line reduction based on that current hedge? And will the – you'll just have to – when that hedge rolls off, then that's when you'll reevaluate further?.

Well, the borrowing....

I am trying to see how forward – go ahead, sorry..

The borrowing base in the reserve redetermination are looking out multiple years; and that's a discounted value; and hedges that are in place are taken into account. But generally, they do not last beyond a few quarters to two years..

Got it. And....

So, okay, where they're in place. I mean, they're taken into account for as long as the hedges for the term of the currently known hedge, but no potential future hedges. After that, you're just looking at the forward curve on our price deck..

And that's an industry norm..

Got it.

But just so – so for example, if a client hedges are rolling off in a year, that's taking into account in terms of the current allowance that you're setting aside, if needed?.

It's taken into account in terms of the borrowing base calculation, which would then inform us as to how we feel about the exposure we have against that borrowing base..

So it directly affects the value we place on the reserves and therefore the size of the commitment that we're willing to make, when indirectly, all of that's taken into account in setting the allowance..

Got it. Okay. Thank you and, Doyle, good luck again..

Thank you..

Our next question comes from Ken Zerbe from Morgan Stanley. Your line is open, please go ahead..

Great, thank you. Just a question on the TruPS CDOs. Doyle, I think, you mentioned in prior answer that sort of if push comes to shove and you had to choose between the two.

But aren't we already there, I mean, don't you – you do have to choose whether or not you want to sell these TruPS CDOs, receive capital credit, and take the loss or not to sell them? What exactly are you guys waiting for to make that determination?.

That's a judgment about market conditions and other things, and I think it is a market; it's not a highly liquid market. I'd like you to just defer to us on when to make that judgment and actually make that call.

But clearly, I don't – I mean, your general sentiment that that appears to be – for one thing I'll just tell you the Fed's results are for securities losses, it doesn't say CDO losses there.

One has to make an informed judgment about, is that where they come from, it's – we think that's probably the case, just because look at the rest of our portfolio, it's hard to figure out where else it might be coming from. But it's not a slam – it's just not a slam dunk.

We'll be – and again, there – we think there is zero stress loss in it ourselves, but someone else may not have agreed..

Got it. Okay. Following the question just in terms of the loan growth outlook I think I did hear you refer to the fact that other markets would be stronger and Texas would be a little bit weaker.

But just want to make sure that is the weaker Texas loan growth, is that all energy-related or is it energy obviously going down but also all other loans in Texas also under pressure?.

I would primarily relate the softness obviously to the energy sector. We're seeing – as we noted last quarter, we're seeing pay downs coming in the energy sector that are offsetting the growth in non-energy sectors, the CRE underwriting.

We started slowing down, as I mentioned, in multifamily early last year and likewise in office towards the middle 'til the end of last year. And so those are two pretty large portfolios in Texas and they have both – we've enhanced our approval – we haven't enhanced our approval process, but we're just slowing the underwriting there.

But our middle-market business activity is there; and the upper-end, the small business, continue to do moderately well, they're growing nicely..

I'd just add that for the first few weeks of this quarter, loan growth in the company is actually stronger to Amegy than anywhere else.

But it's the – looking out again our guidance is over the kind of the – looking out the next year and we think we're pretty confident that borrowing base are going to come down as a result of the reserve, reengineering, and the redetermination process.

And that we'll be exercising more caution there as the year – the fact that we're exercising more caution will be reflected in loan growth for the rest of the year there. It's not that Texas is falling off a cliff. It's not..

Not at all. In fact, the 1-4 family business there, there's a little bit of a refinancing boom going on at the moment, has been for the last three, four months. And so we're experiencing that around the company but especially in Texas and so we should see some nice 1-4 family growth there as well..

Great. Thank you very much..

Thank you. Our next question comes from Dave Rochester from Deutsche Bank. Your line is open. Please go ahead..

Hey, good afternoon, guys..

Hey, Dave..

Regarding the cash, you deployed a decent amount of that into securities this quarter.

How much of that are you expecting you'll ultimately shift over to that securities bucket over the next couple of years? Is the goal to shift most of it over to securities over time?.

Yes. Yes. I mean we expect – I mean, we're kind of on close to $2 billion a year net run rate; maybe $1.7 billion to $2 billion. Again, the stuff is short-to-medium duration; so it does pay down, but fairly quickly as well. But that is the goal, yes..

Great. And then, Doyle....

It's to give up the – it's to pick-up the yield but give up the asset sensitivity gradually, and not run significant duration risk by even when we're buying securities by those that have less duration expense than 30-year fixed-rate MBS..

Right. That makes sense. And then, one last one, Doyle.

If the $50 billion threshold, asset threshold were raised, how much excess capital do you think you would have? And then, how could that possibly change how you might opt to grow the loan book whether it would be more growth in construction or anything else, just any comments there?.

Well. I guess, I don't want to say Ollie Ollie in come free because that's not the case. But the gap – but if you look at our stress test results, which are public for the results of our models and our process, we came up with an 8.6% number under what we thought were fairly conservative models, compared to 5.1%.

So there is a very large gap there when you apply over 3% to risk-weighted assets of about $48 billion.

Dave?.

Great. Doyle, once again, real pleasure working with you over the years. Congrats again..

Likewise. Thank you very much..

Thank you. Our next question comes from David Eads from UBS. Your line is open. Please go ahead..

Hi, guys. Just kind of following up on the redetermination process. You talked about that there's a pretty decent decline in the commitment, and you said mostly it's related to non-reserve-based commitments.

Should we think about that as being mostly the energy services?.

Yes. I'll be happy to give you a couple of examples because they speak to what we talked about in December and then again in January. But just some examples.

We had a number of companies that are supported by sponsors that had classified loans with us, or loans that we had taken to a classification; and they came in proactively based on our negotiations with them to literally pay the loans off.

In one case, a sponsor paid a line of credit off totally to merge this particular company into another portfolio company. So you see that happening. Also you see natural working capital contraction going on. And that can be quite significant in one client whose credit facility was well over $100 million.

You saw a reduction from working capital contraction, a projection of close to 40% of the credit facility. And so that's going to bring outstandings down, commitments down. And so, again, you're seeing proactivity on the part of sponsors. You're seeing....

Seeing others go to the public market..

You're seeing others go to the public markets. A great example of that in our reserve-based portfolio, the commitment that we had that was about $35 million, that was reduced to the low-teens largely because of a significant capital raise in the public subordinated debt markets.

And so, again, what we saw in the last downturn and what we talked about, which is a significant amount of proactive work in the oil field service sector and it's beginning in the reserve-based sector to right size borrowing bases and credit facilities..

That's really helpful there.

And is that kind of what gives you confidence that this kind of proactivity that you do have your arms around what's kind of going on in the services portfolio even before you get the updated financials?.

Without a question. We did a sensitivity analysis on the energy services portfolio in November and December where we took every client, literally every client we knew, their product mix by geography and product, and we stressed their EBITDAs based on geography and product and the history of the company.

We also – again, as we've noted before, we have about six private equity firms that we work with on the energy services side and about six on the reserve-based side. So we don't work with every private equity firm that walks in the door.

These are extremely experienced energy private equity firms; and we watched what they did in the last downturn and they're doing it again at a much quicker rate than they did it in the last downturn..

Great. Thanks a lot..

Thank you. Our next question comes from John Pancari from Evercore. Your line is open. Please go ahead..

Good afternoon, guys..

Hi, John..

Hi. And, Doyle, best of luck. Certainly, end of an era..

Jesus..

Not that you're that old..

The stretcher is waiting right outside the door..

That's all right..

Not the gurney, but the stretcher..

Right, right.

Okay, so back to energy, the – I just want to see, do you have the quantifications of the criticized or classified ratios by oil service versus E&P and the same for the NPL ratio?.

The answer is, we do, yeah. I'm not sure I can do it a cappello. I've got notes in front of me and I bet we can come up with that number as a follow-up item..

Yeah. I'll get it for you, John, here. I'll just work on it for a second..

Yeah, I'd rather not....

Okay. I appreciate it. And then, I guess, getting back to the topic you just discussed, as you continue to – as you complete the assessment of the oil service portfolio, Scott, as you said that you're just getting into finishing that.

Is it fair to assume that the pace of additions to the loan loss reserve could actually accelerate because of the higher inherent loss content of oil service or is that not the way to think about it?.

Yeah. I want to make sure I clarify. We have been continuously looking at the energy services portfolio, but we've not experienced much in the way of downgrades there yet, and we don't anticipate that until, quite frankly, the third quarter and the fourth quarter, but we'll some deterioration in the second quarter.

And so we'll see some additional classifieds and special mention as a result of that, which will attract reserves. But recall too that we have – our qualitative reserve is – I don't know that we've mentioned it on the call yet, but our qualitative reserve and our ACL, we did not reduce it this quarter.

So as we had migration and the quantitative reserve is increased, we've left our qualitative reserve at the same size and actually I think we've built it a bit..

Increase, yeah..

We increased it..

Yeah..

So as we see migration starting to attract more quantitative reserve at some point, we'll pull down on the qualitative reserve. So it's kind of hard to know..

Yeah. The actual total energy-related reserves at Amegy actually built more than the $55 million. That was the net add at Amegy during the quarter. I don't know that I would expect an acceleration.

I forgot exactly what your question was about criticized and classified, but the oil and gas total portfolio criticized is 15.7%, which is inclusive of classified of just over 9%. The upstream portion is higher; the lowest is downstream, another E&P, and kind of services and midstream are in between. If that helps you..

I would just add that we've not seen anything yet that has surprised us. So I know you'd expect us to say that, but we really haven't. And we've actually seen more positives occurring quicker than we would have anticipated or that we saw in the last downturn..

Got it. Got it. And if I could just ask one more topic. On loan growth, I know you indicated slight-to-moderate loan growth.

Is it fair to assume that it remains in this recent range, so low-single digit 1% to 3% annualized range? Is that fair to assume?.

Yeah. Below 5% probably I don't know, but maybe not down – maybe – hopefully not 1% but somewhere in between 2% to 4%....

Okay..

one question, no follow-up, quick answers..

Thank you. Our next question comes from Kevin Barker, Compass Point. Your line is open. Please go ahead..

Thank you for taking my questions.

On the energy portfolio, what was the peak classified levels that you experienced in the last downturn? And what level of reserves did you put against those, not only on the commercial loans but also on the commercial real estate lending?.

Well, the peak on energy for classifieds was about 20%, and recall that our peak loss rate in any 12-month period was 1%. The aggregate charge-offs to-date in that portfolio through the end of the year from the inception of the business which was in the mid-1990s was about $60 million. The last question you asked, I....

The CRE, we don't know even know..

Yeah..

The composition of the CRE at Amegy was dramatically different. There was a lot more earlier-stage land development residential purposes than there is today. That's all gone for all intents and purposes, so....

Yeah. Specifically, CRE exposure in Texas is about $1 billion – $1.3 billion less today than it was in 2008 and – going into that downturn, and the land exposure was – it peaked at about $985 million in the 2008 time period. It's well less than $200 million today, and most of it's performing very nicely and it's just very old vintage land loans.

And so the bank was not a land lender before, it's just that's the way you've started a construction loan back in that cycle. And so it will....

Not anymore..

(1:02:26) bank loans client process..

Yeah. Okay.

Next question?.

Thank you. Our next question comes from Steven Alexopoulos from JPMorgan. Your line is open. Please go ahead..

Everyone.

I just wanted to follow up on the pricing pressure impacting loan production with the weighted coupon flat this quarter, does that imply that we should expect incremental downward pressure on loan yields coming in 2Q?.

Yes, but again offset we think by the continued securities purchases and loan growth and then in Q3 in addition to those items, you'll have the pay-off of the sub-debt that's very expensive..

Okay. Good luck, Doyle. Thank you..

Hey, Steve, thank you. Some good times we've had..

Thank you. Our next question comes from Gary Tenner from D.A. Davidson. Your line is open. Please go ahead..

Thanks. Hi, guys.

I think you said that as of 12/31, the reserve against energy portfolio was around 1.85% or 1.9%, if memory serves, can you tell us what that is as of March 31?.

Well, yeah, the 1.75% – it was actually 1.75% was the number at December 31. And today, we would estimate that it's about 2.5% or higher. It depends on really how you allocate the qualitative reserve at Amegy in their commercial and industrial portfolio.

But if you were to put half of it into the energy portfolio, you're probably getting close to a 3% reserve ratio at that point..

Okay. Thanks. Doyle, best of luck to you..

Thank you..

Thank you. Our next question comes from Geoffrey Elliott from Autonomous Research. Your line is open. Please go ahead..

You mentioned that you will come back to us in two or three months with some thoughts on the cost saves you could get from technology initiatives.

What sort of process you're going through internally to figure those out? What are sort of areas that you're looking at and how do you think about calculating the type of saves you could realize?.

Well, it's – I'll tell you as we have a number of people involved in putting those numbers together and assessing both the magnitude and the expected timing of benefits we're expecting to see from some of those – from these projects but that's the best I can tell you.

You just – you have to kind of stay tuned but I – we do think in the next two to three months, we'll be able to provide much better information. And both with respect to these savings coming out of these projects and other things that we're focused on..

I would just add to that these projects, as you know, take place over 2000 – really the heavy implementation is late – mid to late this year, 2016, 2017 and even into 2018.

So the process of identifying savings in 2017 and 2018 from technology that's being – continued to being developed today is pretty complicated, although the common – the theme is that we're adopting common practices across the entire company at a rapid pace.

And we're generally focused on trying to accelerate that adoption well in advanced of these new technologies coming in to place..

So the effort involves trying to understand without actually being in a position to do it yet, what some of the, for example, re-engineering of processes, opportunities that will present themselves as we get this stuff in place and then what might the cost savings be as a result of that.

so that we're – when we do come out, it's not just pie in the sky, it's – there's actually a fair amount of thought behind it. And that's what I would say in regard to your, what's the process question, it's – we're actually digging down into this.

Okay?.

Thank you..

Next question? That's it..

I'm sorry. No further questions at this time, sir..

Well, with that, let me once again say thank you to all of you. I was sincere when I said that your questions have been thoughtful, sometimes tough. That's what you're supposed to do, and I've learned from them as well as from answering them most of the time at least and I really do appreciate the association. Wish you all well.

James?.

Thanks very much. That will conclude our first quarter 2015 earnings review and we look forward to seeing you at a future conference or at next earnings conference call in July. Thanks so much..

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day..