Operator: Welcome to Zions Bancorporation's Second Quarter Earnings Call. This call is being recorded.
I will now turn the time over to James Abbott.
James R. Abbott - SVP, IR and External Communications: Thank you, Jamie and good evening. We welcome you to this conference call to discuss our second quarter 2013 earnings. Our primary participants today will be Harris Simmons, Chairman and Chief Executive Officer; and Doyle Arnold, Vice Chairman and Chief Financial Officer. I would like to remind you that during this call, we will be making forward-looking statement, although actual results may differ materially.
We encourage you to review the disclaimer in the press release, dealing with forward-looking information, which applies equally to statements made in this call. A copy of the earnings release is available at zionsbancorporation.com.
We intend to limit the length of this call to one hour, which will include time for you to ask questions. At this time, we have cleared the queue and you will need to re-queue if you have already hit star one. During the Q&A section, we ask you to limit your questions to one primary and one related follow-up question to enable other participants to ask questions.
With that I will now turn the time over to Harris Simmons. Harris?
Harris H. Simmons - Chairman, President and CEO: Thanks very much, James and we welcome all of you to the call this afternoon or evening depending on where you are. We are encouraged with the second quarter's results which included positive performance in areas of loan growth, credit quality, capital levels and costs.
Talking first about loan growth, we enjoyed a stronger loan growth in the past several quarters along with solid improvement in loan production volumes. We experienced strong growth and commitments including more than $600 million increase in unfunded commitments during the quarter which is often a sign of customer optimization. Indeed conversations with our relationship managers suggest that customer optimization has improved compared to late 2012. So, we do think the environment is getting better that way.
Loan pricing remains competitive although the yield on our overall production was pretty stable compared to the prior quarter, and this trend was confirmed by recent reports from our relationship managers, suggesting that pricing today is not significantly worse than a quarter ago. As we've mentioned on prior calls and at conferences, the loan pricing pressure comes predominantly from the largest loans. The pricing on smaller loans, although down in the last six months, has been much more stable than the pricing of larger credits.
In fact, small loan pricing is declining at a rate that's about a third the rate of decline of large loans, and that's important for us because smaller loans account for about two-thirds of our total production and a similar amount of our overall portfolio. Nevertheless, because we are still experiencing adjustable rate loans resetting lower and real estate loans refinancing at elevated speeds we do expect further pressure on loan yields perhaps to a lesser degree today than we did three months ago given the rise we are seeing in five year and 10 year benchmark interest rates.
On the credit front, we continue to enjoy declining credit costs. So, with net charge-offs reaching the lowest point since the beginning of the crisis several years ago at 6 basis points of average loans that includes the effect significant recoveries this quarter. The earnings release provides statistics on the strong rates of improvement in classified loans and non-performing assets. But I might add that non-performing asset inflows declined, showing improvement of about 10% compared to the first quarter and the loss severity rates also improved both of which bode well for further improvement in credit quality ratios for the next several quarters.
As we stated regularly, Zions is significant asset sensitive, not only do we expect earnings to increases from rates rise. We expect to be able to avoid the significant haircut equity that many banks might be expected to experience due to their heavier concentrations in loan types that have longer durations or securities with negative convexity.
I would note that our tangible common equity per share increased in the second quarter by about 2% from $0.42 per share compared to the prior quarter. Our accumulated other comprehensive income improved by $32 million compared the prior quarter and has improved by more than $200 million during the past year.
Probably with respect to capital, our Tier 1 common equity capital ratio remains above 10% under Basel I. Although, we haven't yet finalized our calculation of the fully phased-in Basel III Tier 1 common ratio, we currently expect to be approximately 9.2% as of June 30, 2013 on a fully phased-in basis, assuming we opt out of the AOCI inclusion in regulatory capital ratios.
So, with that general overview, I'll turn the time over to Doyle Arnold and ask him to review our quarter financial performance in little more detail. Doyle?
Doyle L. Arnold - VC and CFO: Thanks Harris. Good evening, everybody. First brief overview as noted in the release, we posted net income applicable to common shareholders of $55.4 million or about $0.30 per diluted common share for the quarter. In the prior quarter, we reported EPS of $0.48 a share.
The most significant item, that adversely affected or impacted EPS this quarter when compared to the prior quarter is the $0.14 per share impact from the tender offer for $258 million of our expensive senior notes as well as the redemption of our 8% Series B trust preferred issue. Although these debt extinguishment costs impacted earnings this quarter in combination with the issuance of lower cost debt and other securities during the quarter, we made significant progress toward our previously and stated goal of reducing interest expense on our cost of preferred capital going forward.
On the revenue side of the equation the income from the FDIC insured loans was meaningfully higher than in the prior quarter and added about $0.03 per share to earnings. The negative provision for credit costs, including for both funded and unfunded loan commitments benefited EPS by about $0.06 per share in the second quarter as compared to $0.12 per share benefit in the prior quarter. And additionally securities gains and losses including OTTI netted to a loss of about $3 million or a penny a share similar to the prior quarter's level.
Turning now to little bit of commentary on revenue drivers I'll begin by noting that average loans held for investment increased by $419 million compared to the prior quarter or roughly 1%. We paid more attention to average loans because of the variability period imbalances and because it's the number that actually drives earning. In the period loan balances actually increased by a bit more $471 million.
Let me draw your attention to the loan table on Page 11 of the release, the pages are numbered on the upper left corner of the table.
C&I loans grew by nearly $400 million in the second quarter. The growth was broad-based both geographically and by industry. Interestingly, for the first time in quite a while line utilization rates on revolving C&I loans experienced an increase over the prior quarter. They were about 33.2% compared to 31.8% at the end of the first quarter.
Commercial commitments grew at an annualized rate of about 8% and accounted for more than half of total linked quarter commitment growth. Within C&I, smaller loan originations grew at a significantly stronger rate than the larger loans. In fact, the loans above $10 million in commitment size, we actually had a net decline in origination in each of the past three quarters, in part due to a very competitive and off times unattractive pricing environment for those larger loans.
I will give you a couple of benchmarks here to give you a perspective on the pricing pressure. Gross yields on our large loan production that is new loans in the quarter declined nearly 12% during the past six months, while yields on smaller loans have only decline by about 2%. Our production in our loan portfolio itself, are as you know, skewed towards smaller loan sizes.
As I like to say, our address is One Main Street, not One Wall Street. Construction and development loans increased about $150 million, or about 7% sequentially. As we'd discussed previously new construction commitments have been fairly strong for several quarters. During a period when pricing, terms and covenants generally were pretty good. Those loans are now in their funding stage after the equity has gone into the project. We expect this category to continue to grow through the remainder of 2013. We also did extend net new commitments in the second quarter, which was about a third of the linked quarter growth in total commitments.
On the other hand, owner-occupied loans and term CRE loans, each declined during the quarter for a combined $148 million of reduction, about 90% of this decline is attributable to the continued reduction in our national real estate portfolio, which is split between the two categories, that is roughly 60% owner-occupied and 40% term CRE. The national real estate portfolio declined at an annualized rate of 14% and we expect it to continue to decline, particularly as long as community banks have abundant liquidity and need the earning assets on their balance sheet, and therefore stopped or reduced the quality of loans that fit the criteria which we will buy, that they're offering for sale.
Excluding the effects of the NRE portfolio, the owner-occupied loan portfolio would have increased slightly while the term CRE portfolio would still have declined modestly. On each of these types pricing was stable to moderately better in the second quarter when compared with the first quarter with the only exception being on the largest loan sizes.
Consumer lending improved with balances rising about $105 million which is partly attributable to the seasonality on residential mortgage and credit card businesses. FDIC supported loans continued the very steady decline of about $50 million per quarter that you've witnessed for a number of quarters now. As it pertains to interest income and indemnification expense related to this loan book we currently believe that the current expected cash flow supporting appreciable income will be approximately $100 million over the next five years, although about 95% of that will be realized by the end of 2015.
The indemnification asset amortization expense, I cannot say that very fast, which is a subcomponent of other non-interest expense should amount to about $51 million and will be exhausted by the end of 2014.
Turning now to the net interest margin on Page 15 of the release, you'll note that the NIM was absolutely flat or stable compared to the prior quarter as reported. However, the NIM did benefit from a significant increase in income from the FDIC covered loans, as I mentioned, due to faster prepayments and better performance than previously modeled. This improvement equaled about 7 to 8 basis points of NIM support.
For the third quarter we currently expect this benefit to revert back to a level similar to the first quarter. Although we ceased providing a core net interest income number, we did commit to giving you the components, so that you could continue to calculate it. The additional accretion is found on the table on the bottom of Page 11, equaling $28.4 million, discount amortization on subordinated debt was at $12.2 million. Adjusting net interest income for these factors, there was about a $4 million linked quarter increase, which was explained by an additional day of interest income in the second quarter and/or the growth in average loans.
In summary, we think that at the end of the analysis, net interest income was pretty stable, which is consistent with the outlook we've been giving you. Loan yields declined 12 basis points sequentially, which was attributable to the resetting of five-year adjustable-rate loans or loans with similar interest rate characteristics as well as new production at spreads that reflect the competitive marketplace and also reduce risk profile of customers i.e. reduced risk equals lower spread to index.
Securities yields increased slightly due primarily to the re-performance of some of the nonperforming or taking payment in kinding of some of our CDOs as long as the economy continues to remain fairly steady and slowly improve, we expect such re-performances to continue.
Turning now to noninterest income, fairly straightforward quarter, not a whole lot to comment on, outside of the usually volatile gains, losses on securities we recognized about $2 million of income related to legal settlements and the sale of other assets. Those numbers are not particularly repeatable. We had a stronger quarter for service charges and loans fees, due largely to a 17% linked quarter increase in loan production volume and 8% annualized net increase in total commitments.
I think we detailed the CDO developments pretty well in the release. In summary, we're generally pleased with the way valuation is improving and the steady rate at which the Bank collateral making up those CDOs is re-performing.
On the credit front, you can look at Pages 12 to 14. Harris has already commented on the generally strong improvements, but I'll add that nonaccrual loan inflows declined nearly 10% from the prior quarter to about $380 million annualized rate which compares favorably to a non-accrual loan balance of $516 million at quarter end. Basically the lower inflows bode well for continued future reductions in non-accrual.
OREO inflows declined nearly 20% to an annualized rate of about $63 million. We resolved about 25% of total non-performing assets during the quarter. The overwhelming majority ended up going our way, i.e. favorable resolutions reached a new high at 79% of total resolutions.
Turning now to capital, we were generally pleased with the result of our various offerings during the quarter, locking in a significant amount of long-term preferred equity at an average rate of – dividend rate of less than 6%, as well as redeeming the higher cost Series B trust preferred securities, and we also retired about 50% of our very high cost September 2014 maturity senior debt via a tender offer. And the subscription rate on that tender was much higher than we had originally hoped for and planned for. So we are pleased with that outcome. Both of those redemptions should lead to significantly reduced net interest costs in the quarters going forward.
The estimated common equity Tier 1 ratio on Basel I basis as Harris was mentioning, was largely unchanged from the prior quarter.
As far as Basel III numbers go we are still fine tuning our estimates, as Harris mentioned but we currently believe that the Tier 1 common ratio will be roughly 9.2% if it were fully phased in today. Also note that we've not yet made any decision about opting in or opting out of the AOCI treatment. For us with the CDO portfolio that decision is a bit more complicated than it might be for some other regional banks and also thinking about the total return swap or TRS. So we've not yet nearly completed that research.
Second and fairly unique to Zions, I will point out that, there was a change made by the Federal Reserve between the notice of proposed rulemaking and the final rule regarding the treatment of trust preferred securities will differentially impact us. And will result in the deduction from Tier 1 capital not common equity Tier 1 but Tier 1 of any amount above approximately $450 million of the amortized cost of our banking insurance trust preferred CDOs securities. If fully phased in today, this would – and I would emphasis that fully phased in, it would result in a reduction of more than $1 billion of Tier 1 capital.
Assuming that we issue an additional $200 million of perpetual preferred shares and subsequently call all of the Series C shares, which is about $800 million, Zions would have about $1 billion of non-common Tier 1 equity and it has about $1.4 billion of bank and insurance trust preferred CDOs today and therefore we would yield up to 10% bucket plus above that $1 billion. There is – those securities are paying down and we project them to continue to pay down over the next coming quarters. So, we actually do expect that impact to be mitigated over time through those pay downs and/or through dispositions (on) some of the securities as liquidity returns to that market.
Finally wrapping up with a bit of outlook guidance; with regards to loan growth, with continued strength in loan pipelines and the increase in commitments in the last six months and our customers feeling a bit more optimistic we expect continued moderate loan growth over the one year horizon. We expect therefore that, excluding the somewhat volatile interest income from FDIC supported loans, we would expect net interest income to be fairly stable, at least in the next few months or few quarters, with some continued pressure on loan yields being offset by the loan growth that I just mentioned.
Noninterest income, we would expect the less volatile components of noninterest income such as service fees to continue at a moderate upward trend, and with regard to noninterest expense, we think they're generally under control, but I will point out a couple of things that we mentioned in the earnings release, first we've hired a number of consultants from several firms to help us upgrade our stress testing and capital planning processes to prepare for – to get up to so called CCAR standards. It was a little over $3 million in the second quarter and we would expect, continued similar amounts at least through the next couple of quarters and then begin to taper off of probably in the middle of 2014, depending upon the results of our CCAR stress test at the end of this year.
Second, as we also disclosed in some detail in the press release, we've decided to go ahead and launch a major upgrade to our core loan and deposit systems and accounting systems. We've been studying this for probably a couple of years now, thoroughly vetting different alternatives and different vendors and we have pulled the trigger to go forward on those project although there are a number of off ramps or we can turn them off or scale them back if we don't like what we are seeing as we phase it in. But we will – this will require the hiring of some additional staff in addition to the vendor and other professionals and thus salaries and benefits in professional services are likely to increase from the current levels.
We believe that much of the incremental cost can be offset by reduced so called environmental costs such as credit related noninterest expenses and regulatory assessments and FDIC premiums and the like. As an additional offset to these expenses as discussed earlier, we expect the FDIC indemnification expense to continue for about another year, averaging about $13 million per quarter at which time the other noninterest expense line should run in the area of $60 million per quarter, (indiscernible) is down somewhat from where it has been.
With regard to provision for credit costs we expect the provision expense to remain low or negative for additional quarters. Continued reduction in problem credits and the ongoing improvement in loss severity rates have the potential to result in a negative provision as it has been in the last three quarters even with some modest loan growth.
Finally I want to comment on preferred stock dividends. They are expected to increase in the third quarter to approximately $31 million to reflect the full quarter of dividends on the Series H shares that we issued in May. In the fourth quarter we expect the dividend to drop to a level more near $22 million and that is a number that includes our contemplated issuance of an additional $200 million of preferred basically prior to the fourth. So, that most of that cost would be in the fourth quarter. During 2014 and the foreseeable future, we would after that and after our expected call of Series C anticipate a full-year preferred dividend rate of around $60 million per year or slightly higher and a little bit of variation dependent upon the exact coupon or coupons that we achieve on the last $200 million of preferred that we expect to issue this year.
With that, I will pause and ask the operator to open up lines for questions and we got about little over half an hour to try to take as many of your questions as we can.
Operator: Josh Levin, Citi.
Josh Levin - Citigroup: So, if you look at the expenses, if you back out the $40 million asset debt extinguishment cost, they around $411 million during the quarter. I just want to list the puts and takes, how do you see that $411 number trending over the next few quarters?
Doyle L. Arnold - VC and CFO: Do you want to comment, James?
James R. Abbott - SVP, IR and External Communications: Well, Josh, I think with the core systems replacement project, we'll begin to ramp up gradually, but it's always -- it's in effect at this point. We signed the contracted and work has begun. So, that can start -- it will start to appear to at this point official. The other credit related cost that are partial offset to that continue to define and we continue to see good performance on inflows and outflows of problem credit, so we're happy with that direction, and so there is just puts and takes. But I think it will – and then the FDIC indemnification asset of course is underneath the driver of that $411 million that you mentioned, and that will be fairly quickly tapering down. We have about $51 million of expense to go before that's gone and that will be gone by the end of the third quarter of 2014.
Doyle L. Arnold - VC and CFO: I would just comment that the only significant thing that we've kind of changed here is this core project and if you – and these are just rough ballpark numbers at this time, but if you take $200 million and say a third of that is capitalized or less, you know you are at kind of $130 million, $140 million a year – over five years. So you are talking $25 million per year or $6 million per quarter, and that's ramping, that won't all pop-up instantly. It will ramp up over some number of quarters probably several. So, I don't think you are – you are not looking at any significant spike up in total expense, and as we noted were credit related cost and legal settlements and professional or legal services and FDIC premiums should still trend down. So, I don't think you are looking at significant ramp-up in non-interest expense if any over the next year or so.
Josh Levin - Citigroup: Then on the loan growth side, you guys sounded more optimistic than a lot of your peers which have been dying back expectation. What do you attribute the difference is it just mostly the fact that the small business is more optimistic than large business right now?
Harris H. Simmons - Chairman, President and CEO: If you look at kind of what differentiates us from some of our peers it is that we are more small and middle market business-oriented and that's where we're seeing a lot of the activity. We have missed out on a number of larger deals, because we won't match the pricing that some of the bigger banks are drawing out there on those deals. So I've not had a chance to listen to the color and the commentary from many of our peers, but the probably is what distinguishes us.
Doyle L. Arnold - VC and CFO: Our production on the small business really increased in the second quarter it was nice 25% or so percent jump in terms of total volume coming out of the smaller sized loans of new production, compared to the production that we saw in the first quarter.
Harris H. Simmons - Chairman, President and CEO: That's not an annualized, 25% annual growth rate that's just a jump in the new originations.
Operator: Ken Zerbe, Morgan Stanley.
Ken Zerbe - Morgan Stanley: The first question I had is just on the FDIC supported loan income that you are getting. I think I got most of your comments that you mentioned that the $50 million of amortization runs off by the end of the third quarter '14. But should we expect that number which I guess was in net $6.6 million this quarter. it seems that you have basically twice as much income as amortization over the next two years is this a number that should run as sort of a zero to net positive benefit for the next few quarters, and then a more material positive in the back half of '14 and then into '15, how should we think about the net impact there?
Doyle L. Arnold - VC and CFO: By George, I think he's got it. No, I mean that's pretty much it. We were trying to highlight a couple of things. One is that, it was unusually large benefit this quarter and there will still be a benefit next quarter, it just won't be as large, and yes, the expense kind of runs out before the benefit does which will run for another year. So, I think you've got it about right. Anything else, James?
James R. Abbott - SVP, IR and External Communications: That's it. We do expect in this third quarter of this year. So, next quarter, next reporting quarter we expect the revenue number to decline to about the $20 million area, maybe $21 million, $22 million. So, it will be a fairly significant drop, but then you're right after the indemnification asset expense is exhausted, the revenue remains for a considerable period of time there a year, year and half before it will come to an end. Pre-tax benefit is about $50 million to capital. If you want to look at it instead of earnings stream and accretion to capital, that would be another way to think about it.
Ken Zerbe - Morgan Stanley: Then just one last thing on the CDO, in the section where you were talking about CDOs, you said you had a $4.3 million loss on the sale of six CDOs? Should we read anything into that in terms of the market is becoming a little more liquid, that you might try to sell some of the TruPS a little bit or is that just kind of one-off?
Doyle L. Arnold - VC and CFO: I don't think the market is not yet liquid enough that we're likely to sell material amounts unless we see further improvement, but I mean, one of the things that motivated us to do that was, we did want to kind of test the pricing on a variety of tranches at different points in waterfall, that were directly securities that owned to kind of further validate our pricing of the whole portfolio. So we selected six securities that were representative of very different parts of our risk exposure and generally, I would just say those prices tended to validate exactly what we've been doing.
Operator: Craig Siegenthaler, Credit Suisse.
Craig Siegenthaler - Credit Suisse: Just to come back to the investment in the loan and deposit system, Doyle, it sounded like you excluded the $67 million that you'll be capitalizing. I'm just wondering, under GAAP accounting, doesn't this get depreciated? Won't you have an increase of depreciation expense of about $2 million a quarter from this?
Doyle L. Arnold - VC and CFO: Well, first of all, you're being much more precise than I was getting it down to $67 million. Yes, this will be amortized, but that won't start until it's placed into service and we don't anticipate the first probably loan system beginning to convert well into year two of this project. So, again you're not going to see anything like an instant jump in that expense.
Harris H. Simmons - Chairman, President and CEO: Also note, mid-2015 or so was when you'd start to see some amortization expense perhaps.
Doyle L. Arnold - VC and CFO: You want to ask a follow-up on that one.
Craig Siegenthaler - Credit Suisse: Yes. Actually I do have a follow-up. Then turning back to the un-capitalized portion, it sounded like – to the answer to your prior question, some or most of that or maybe all of that $6 million you targeted could show up in the third quarter. Is that correct or am I a little early there?
Doyle L. Arnold - VC and CFO: I think it's way early there. I wish we could hire that many people that fast and get on with this. But no, it's going to ramp up a little more slowly than that I believe, maybe a couple of million in the third quarter. The final decision was made all about a month ago or maybe well I guess somewhat like six weeks ago now. So we are beginning to actively recruit. We have hired some people. Some of the project leadership we've been hiring over the course of the first half of this year already. So, some of the more expensive people if you will are already on board and in the numbers. But the rest of it will ramp up over the next few quarters not one quarter.
Harris H. Simmons - Chairman, President and CEO: This is Harris. I would also note that some of – not all of this is incremental spend either. I mean a fair amount of this resource is internal resources that are currently working on other things and I don't want to suggest that there isn't net addition, there certainly will be. But some portion of it. It's a little early to know how much is going to be offsetting – either offset by other projects that were maintaining some of these old systems for example. There are also current costs associated with maintenance of a number of these systems that will – as we put the new into place, will also disappear. So it's, not all new add. There are offsets including some what we expect will be some reasonably significant productivity benefits as we get this in place.
Operator: Erika Penala, Bank of America.
Erika Penala - Bank of America Merrill Lynch: My question is on the capital levels that you mentioned, re-adjustments under Tier 1. Do you think that adjustment that's more important in terms of $1 billion hit that you mentioned Tier 1 capital, is it the absolute level relative to the Basel III hurdle? I mean in other words, even if you unwind the CDO portfolio more slowly that shouldn't really – that impact shouldn't really impact your capital return plans for 2014? Is that a good way to think about it or…
Doyle L. Arnold - VC and CFO: Well, first of all, it's – the impact is essentially entirely in non-common Tier 1, that's kind of one point to make. Two, it is a phase-in overtime. It's actually over five years. Third point I would make is that if the phase-in for the non-globally active or internationally active systemic banks, for this begins in 2015. That will – that period is included in the upcoming CCAR forecast period. So, it could begin to influence the capital decisions in 2014 because it will be within the projection period. But beyond that, we haven't begun to turn or do any analysis on that.
Operator: John Pancari, Evercore Partners.
John Pancari - Evercore Partners: Want to see if you can give us little more color on loan growth in the quarter in terms of the drivers more particularly around C&I, if you can give us some color on the regional breakout, how much that came out of Texas for example, and then little bit more around the types of loans that you are seeing a nice pick in demand?
Doyle L. Arnold - VC and CFO: I'll let James give you some of the color. He's picked up from talking around our franchise?
James R. Abbott - SVP, IR and External Communications: Sure. John the – in terms of the Company's C&I, geographically Zions bank actually had about $120 million worth of net C&I growth. California Bank & Trust also had a very strong quarter at $132 million or $133 million. Amegy was at $23 million positive, so they've had just many, many historically strong quarters and this was a good quarter for them, but not as strong as it has been in some in the past. Nevada and Arizona actually, one point it's probably worth making here is that Nevada seems to have turned the corner. Nevada had net positive loan growth for the quarter. In total, about $39 million, but just the C&I portion of that was about $21 million. So, Dallas Haun our CEO there is leading good improvement in getting more C&I done and relying little bit less on real estate there. I pause there, if you have a follow-up question.
John Pancari - Evercore Partners: That's helpful and then on the commercial real estate side, I know you've been talking about an inflection in that portfolio, and we're starting to see some there. Just want to get a better view of when you expect the material pick there in the growth in the balance particularly given the growth in the commitments that you've seen?
Harris H. Simmons - Chairman, President and CEO: I guess I would comment on a couple of things one is prepayment fees have been pretty high on return of commercial real estate portfolio and the impact from the 5 and 10 year treasury moving higher is not reflected in the second quarter numbers. We may start to see some of that benefit of slower prepayment fees in the third and fourth quarter as they remain up here that would be I hope although the phrase is, hope is short comes to mind. The second thing that I would say on the construction and development. We still continue to see good commitment growth there, it's actually the commitment growth out of the construction and development themes this quarter came from. It was not all multi-family so it was in fact it was far less than half was multi-family it was industrial. It was a strong pick up this quarter for us office some retail and so we are actually seeing a pretty diversified mix of production there. So that's a good story we are happy to see that diversification. So that the growth doesn't concern us there and is actually encouraging. And in terms of balances outstanding we would expect the construction portfolio to continue to grow at a reasonably good pace. Similar to the second quarter as we go throughout the third quarter and fourth quarter.
Operator: Gaston Ceron, Morningstar Equity.
Gaston Ceron - Morningstar Equity: I'm sorry I just wanted to go back to the question or the offsets for the spending project that you detailed. I was also a little confused because. I think in your comments you talked about how some of these can be reduced by, I think you said so-call environment cause and regulatory suspense and FDIC premiums and things like that? I guess what I'm trying to understand is these offsets are they all related to the project meaning the reason that might cost offsets or were some of these going to happen anyway?
Harris H. Simmons - Chairman, President and CEO: No, none of those things is related to the project, those were things that were going to happen anyway and we're just trying to address the question, are we about to see a paraphrase to question that goes, are we about to see a ramp up in expenses after three years of really solid flat expense control by you guys. And the answer I try to get was, no, you're not but yes, there will be some incremental expense from this project that's unavoidable and we want to lay that out there. There will be some offsets directly attributable to this project, but the nature of the phase is that they come towards the back half of the project whereas the spends starts immediately but you can't get the first benefit until you actually turn on the first piece of the first system. And then, the various expense savings then we actually hope some revenue increase occur ramp up over the back half of the project kind of in years three through five to seven.
Gaston Ceron - Morningstar Equity: And then lastly, just on a different subject, you talk about competition and I think you said something that you're not willing to match your pricing offered by some of your competitors. I'm just trying to get some color on how rational or not frankly the competition is being in your view?
Harris H. Simmons - Chairman, President and CEO: I don't want to speculate on their own rationality, I'm just leaving it, we're not trying to match their completion, we're not, I mean there is -- I guess the area is where we're consciously being less competitive or probably large C&I loans and long-term CRE loans, 20, 25 years were the pricing from securities markets and government sponsored entities et cetera is just too thin for us to want to take on that interest rate risk, and that's why despite James' comments about hope, I think that over the rest of this year, we're probably likely to see some continued CRE term declines that will offset the construction and development CRE growth. Partially offset it, just like we did this quarter. I think that's kind of the best outlook for the next couple of quarters.
Harris H. Simmons - Chairman, President and CEO: Remember, we we've made – I think we've been very clear about this too. We've made a strategic decision in this Company, not to let the CRE portfolio grow back to anything like the proportion of the total portfolio that it was in circa 2006 and '07. We will be cautious about letting that growth get too carried away.
Doyle L. Arnold - VC and CFO: I was just going to add, if you look at capital as a scarce resource, which it is, and if you can get more than 100 basis point on smaller loans, it's probably a good trade. There is a little bit of higher cost associated with that – with doing of small loans, because you don't get as many – we have more employees that you could point to and say, well you have more employees, and it does require more infrastructure to do small lending that we do but it's a much, much higher yield.
Operator: Marty Mosby, Guggenheim.
Marty Mosby III - Guggenheim Securities LLC: I wanted to ask you two questions. One is pretty simple. The FASB transactions on the capital side you completed this quarter, I am estimating $0.04 to $0.05 of quarterly positives with most of that kind of showing up as we kind of move into the third and fourth quarters, is that about right?
Doyle L. Arnold - VC and CFO: Some of that's about right. You are probably right there. Some of that is certainly recognized in the second quarter money. But we – for example the trust preferreds were done at the beginning of May so we have got two months under our belt there. We have got another month's worth of benefit to realize on average balance basis. The senior debt was done maybe later in the quarter and so that benefit was not in the second quarter and we will get most of that in the third quarter.
Harris H. Simmons - Chairman, President and CEO: That's right.
Marty Mosby III - Guggenheim Securities LLC: The total amount is about right though about $0.04?
Doyle L. Arnold - VC and CFO: I think it's right yes.
Marty Mosby III - Guggenheim Securities LLC: Then Doyle as you go through this system change and overhaul on the deposit side and then looking at what's your view on doing on both year kind of front ends here. Are you going to be able to take off the shelf a package that you can kind of plugin or (indiscernible) because this project is so long in duration are you really tailoring this and doing a lot of internal work that creates a little bit as you are kind of going through the development process?
Doyle L. Arnold - VC and CFO: Good question. The answer is more I think towards the former. The system that we are going to implement is a very modern integrated banking system that is used in – probably by I think something like a couple of hundred institutions around the world. Parts of it are used on Wall Street, but we would be the first U.S. implementation of a full integrated system. So, there have to be some customization of that system for U.S. – for the U.S. market. The vendor Tata or TCS is obliged to undertake that on their own nickel, that's not our cost. We will on the other hand have to work with them and incur some costs to basically implement our product set and our operating methods on their system as you would with any platform. But our overall goal here is to minimize the amount of customization that we have to do and pay for as we go through this rollout.
Marty Mosby III - Guggenheim Securities LLC: That's good to hear. My past experiences have been the more you try to develop yourselves, first plugin with an engine that already works really especially as the amount of time you are talking about it. It tends to really increase the risk of the projects. So, that's…
Doyle L. Arnold - VC and CFO: We are keenly aware of that and have had numerous discussions internally about that and we'll institute kind of escalation processes to make sure that customizations requested by our banks as we implement this are vetted at the – at basically, the highest levels of the Company before we go forward. There is a whole lot of reasons to including risk, but also including giving up future flexibility to take ongoing upgrades and whatnot. But, you got to be careful of and therefore, we very much want to avoid as much as customization as we can.
Operator: Jennifer Demba, SunTrust Robinson Humphrey.
Jennifer Demba - SunTrust Robinson Humphrey: So Doyle, can you give some thoughts on how long you've been at credit cost, net charge offs are going to stay unusually low? This is has been a source of upside the group for a while, and I'm just wondering about your opinion on how long your loan losses are going to stay so well?
Doyle L. Arnold - VC and CFO: James has indicated to me, he wants to answer that question, and then I'll reserve the right to ratify or contradict whatever he's got to say. James, your jobs on the line?
James R. Abbott - SVP, IR and External Communications: Jennifer, it's a good question. We actually – I asked the same question of credit administration folks and I said, you know we've had very successful recoveries so far. What is the likelihood that those recoveries will continue? The gross charge-offs are not, I mean they are great, they are at a very good level, but it's not what's driving the 6 basis points. It's the recovery side. And they did a fairly detailed analysis, loan type by loan type and as any analysis, it's not perfect and there are assumptions that were made. But we do think that the recoveries are – we are nearing the end, we're probably in the maybe seventh inning on recoveries. We still have $15 million to $20 million more recoveries per quarter, is the best guess coming out of our credit admin group, for the next couple of quarters, but then it does start to tail down based on when we charged off and how much more exposure we have to those loans. So, if you normalize the recoveries, you are probably back to the 30 basis point to 40 basis point net charge-off range and I think that's fairly consistent with some of the concentration risk metrics we put in place to keep us out of the loan types that cause problems. The stress testing helps us keep an eye on which loan types cost us the most in terms of potential charge-offs or actively avoiding those and just a bit overall better credit quality from our customers.
Harris H. Simmons - Chairman, President and CEO: I think James was spot on and what he described which was what's the likely pattern of net charge-offs if your by credit costs you are really getting to provision or lack thereof I would say, you know basically it is not at all how we get there but net recoveries have driven a lot of the negative provision they kind of numbers are roughly similar orders of magnitude. But the underlying metrics of classified loans and loss severity and what not also continue to improve. So you take away the recoveries, if those begin to vein after another couple of quarters, maybe you are back to something like zero provision for a while. But you are probably not back to a significant positive provision for a couple of more quarters after that and less loan growth begins to pick up more significantly.
Operator: Dave Rochester, Deutsche Bank.
David Rochester - Deutsche Bank Securities: I think I got head faked on in a beat early in the game here, but just a couple of quick ones here at the end. Can you talk about what the all-in one product rate was for the quarter? And if you have and the rates are getting on the large C&I and the smaller C&I loans?
Harris H. Simmons - Chairman, President and CEO: From a rate perspective on various loan types on the C&I, I'll just give you that it was relatively stable versus the prior quarter. It was down 4 basis points. It's in the high 3s. When you look at the all-in yields on the low, on the C&I production, you could talk to other banks out there and find out what loan pricing is on large loans and you will get probably a LIBOR plus 200 and so, that will give you some sort of senses to the fact that we're not doing a lot of large loans.
Doyle L. Arnold - VC and CFO: And I'm not sure what your metric you're asking us to divulge or just talk about on. If you say gross production because that's kind of weird number, because as we calculate, because it includes renewals and totally new loans and what were you asking about (fair) days?
David Rochester - Deutsche Bank Securities: Just the all-in one production rate generally speaking and then you talked about the large C&I rates coming in on the production side a little bit more?
Doyle L. Arnold - VC and CFO: Production -- all-in production rate, you mean the rate on new production or the dollar?
David Rochester - Deutsche Bank Securities: Just on all product types or which you produced in the quarter?
Harris H. Simmons - Chairman, President and CEO: All products types was about 385 and that's the number we've given out historically. So, that makes sense if that's what you're asking us to do. We were 387 last quarter, we were at 385 this quarter.
David Rochester - Deutsche Bank Securities: Then just q quick question for Doyle, on the liquidity side, what do you need to see in the long end of the curve for you to become more interested in ploughing at least a portion of that excess cash into securities?
Doyle L. Arnold - VC and CFO: We're just not likely to plough a lot of it into securities, because again, our basic belief is that, as the economy improves, two things will happen. One is that loan production will continue to trend upward and at some point the non-interest-bearing DDA balances that have largely been funding as cash are going to begin to be withdrawn, and for the same reason as companies get more optimistic they will plough first – some will plough their own money into expansion withdrawing their cash balances, others will borrow and our basic businesses is taking deposits and making loans, not taking deposits and buying long dated securities.
Operator: Steven Alexopoulos, JPMorgan.
Steven Alexopoulos - JPMorgan: Doyle, I just wanted to ask – and I don't think you gave this out, but what is the pro forma Tier 1 capital ratio for the final NPR?
Doyle L. Arnold - VC and CFO: Tier 1 as opposed to CET 1?
Steven Alexopoulos - JPMorgan: As opposed to Tier 1 Common.
Doyle L. Arnold - VC and CFO: Yeah, again, if they were fully phased in today, and I want to emphasize that, those numbers would be fairly similar. Kind of in the – that one would also be in the low – well nine to may be a little bit or higher than that depending on exactly where we came out. But as we actually get closer to the date we think that they will divulge, but it would be – that's what – you hit on that's exactly what we are trying to convey that the way that rule was written that's where the most significant impact to us, not on the common equity Tier 1 but on non-common Tier 1.
Operator: Joe Morford, RBC Capital Markets.
Joseph Morford III - RBC Capital Markets LLC: I just I guess just cycling back to just trying to confirm on this guidance for relatively stable net interest income, does include kind of all the capital refinance actions you have done in the planned issuance in the second or the third quarter whatever? Will that $12 million sub-debt amortization start to tail off at some point?
Doyle L. Arnold - VC and CFO: The subordinated debt is called – matures not called but as that matures it will go to zero. But between now and then it actually increases ever so slightly every quarter. It probably goes from $12 million in this quarter to $13 million next quarter and $14 million the quarter after that and so forth.
Harris H. Simmons - Chairman, President and CEO: It was not a straight-line amortization it was, was that the level of yield from assets, yes. It is from asset amortization. So it kind of starts of lower and ends up higher.
Doyle L. Arnold - VC and CFO: The stable net interest income outlook is – we still do based on all the modeling we have done, we still expect a significant amount of – well we have given you what the loan yields are coming on at. You know what the loan yields are on the average balance sheet, so you can see some of the pressure that we are facing there.
Operator: Paul Miller, FBR.
Thomas LeTrent - FBR Capital Markets: This is (Thomas) on behalf of Paul. I know, you guys talked about liquidity on the CDOs, but can you talk a little bit about the pace at which you've seen banks sort of buying back their own TruPS and whether you think the pace of that sort of continues to increase from here as the economy improves?
Doyle L. Arnold - VC and CFO: We've seen the large banks were the TruPS are being phased out as Tier 1, certainly that's picked up. Among the small banks, we did see some uptick over the last year, but it's not consistent and we would actually expect given the final rule does not phase out trust preferred as Tier 1 capital for smaller banks that that rate of redemption might well slow down. Meaning more which, it has mixed impacts on us, but it basically means more cash flow for longer, which means the mezzanine tranches that we own probably do somewhat better than we might have otherwise forecast.
Operator: Ken Usdin, Jefferies.
Kenneth Usdin - Jefferies: James, just the last thing on that front, on the point you just made a little bit ago about where loans are coming on versus where they're coming off. Can you give us an update of kind of where the floors are? How much of the book still have floors against it and how much of that is that burden of the higher versus lower?
James R. Abbott - SVP, IR and External Communications: That's not a number I have on my fingertips right now. My best guess would be about between 10 and 15 basis points of margin support right now, and that's a very significant portion of what we – when we modeled these loans running off or running down or resetting that. That's a big piece of the loans are going away or the floors are is going away.
Kenneth Usdin - Jefferies: So, is it fair to say – do you have a line of sight on at what point you think that cross-over point happens?
Doyle L. Arnold - VC and CFO: You mean at what point the floors are no longer supporting the margin?
Kenneth Usdin - Jefferies: At what point do you kind of get even on what's coming on versus what's coming off? You know that – knowing that you are just still down 12 basis points this quarter, because of the burden, so I'm just wondering kind of how much longer do we have until that – forgetting the spread side of it just on the asset yield side of it, when you get to that bottoming out point naturally?
Harris H. Simmons - Chairman, President and CEO: The models are doing – these are very expensive models and they have got thousands of assumptions in them and every quarter they split out basically sometime different number, and so prior to the pricing competition we say in January, February timeframe, we thought that the margin was soft in the third quarter thereabout. And the models are now looking at a – basically fourth of first quarter trough at this point.
Kenneth Usdin - Jefferies: Thanks a lot guys.
Harris H. Simmons - Chairman, President and CEO: Well thank you for all of you for joining us today. Thanks Jamie for managing the call for us as well. And we will be in touch with you throughout the quarter at conferences and what not, and feel free to give us a call at any time and we'll try to answer your question. Thank you very much.
Operator: Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.