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Zions Bancorporation (NASDAQ:ZION)

Annual Shareholder Meeting

May 24, 2013 3:00 pm ET

Executives

Harris H. Simmons - Chairman, Chief Executive Officer, President, Member of Executive Committee and Chairman of Zions First National Bank

Thomas E. Laursen - Executive Vice President, General Counsel and Secretary

Harris H. Simmons

If we could ask everyone to take your seats, we'll begin our meeting. We'd like to welcome you to Zions Bancorporation's 48th Annual Meeting of Shareholders. Before we begin, we'd respectfully request that you turn off all of your cell phones and pagers and recording devices, other electronic devices.

Rules of conduct for the meeting were distributed at the door. If you need a copy, raise your hand. We'll get you one.

With that, we'll bring the meeting to order. I'm Harris Simmons, I'm the Chairman, President and Chief Executive Officer of the company. Sharing the platform with me today is Tom Laursen, who's our General Counsel and Secretary of the Meeting.

Mr. Laursen, you have affidavits of the Notice of the Mailing and of the meeting today?

Thomas E. Laursen

[indiscernible]

Harris H. Simmons

Thank you very much. The notice and affidavits will be filed with the minutes. The meeting has been legally called and a quorum is present. A copy of last year's minutes has been made available to each of you. Do we have a motion to approve them? Then moved. Is there a second? Then moved and seconded. Any discussion? All in favor say aye.

[Voting]

Opposed?

Our directors who are here with us today are -- we have all the Board Members with us. I ask them to stand as I read their names. Jerry Atkin, Don Cash, Patricia Frobes, David Heaney, Roger Porter, Stephen Quinn, L. E. Simmons, Steven Wheelwright and Shelley Thomas Williams. Thank you.

Many of the principal officers of the Corporation and its subsidiaries are also here today and I may call on some of them later to help answer your questions.

We also have representatives from Ernst & Young present. They will also be available to respond to appropriate questions.

Mr. Brent Marriott and Ms. Paula Eldridge have been appointed Inspectors of Election. Neither is a nominee for the Office of the Director.

We'll now proceed with the formal business of the meeting. The first item of business is the election of directors for vacancies created by expired terms of office. The following persons have been nominated for terms of one year: Jerry C. Atkin, R. Don Cash, Patricia Frobes, J. David Heaney, Roger B. Porter, Stephen D. Quinn, Harris H. Simmons, L. E. Simmons, Steven C. Wheelwright and Shelley Thomas Williams. Shareholder Rob Brough will present this resolution.

Mr. Brough, would you state your name and the fact of your ownership -- stock ownership for the record?

Unknown Shareholder

Mr. Chairman, name my is Rob Brough. I am a shareholder of record. I move the following resolution: Resolve that each of the following persons be nominated for Director of the company for a term of one year: Jerry C. Atkin, R. Don Cash, Patricia Frobes, J. David Heaney, Roger B. Porter, Stephen D. Quinn, Harris H. Simmons, L.E. Simmons, Steven C. Wheelwright and Shelley Thomas Williams.

Harris H. Simmons

Thank you very much, Mr. Brough. Is there a second for the motion?

The Board recommends voting for these nominees were not aware of any shareholders who have complied with the company's procedures for making any additional nominations. Accordingly, the nominations are closed. The proposal is now open for discussion. Is there any discussions?

There being none, shareholders who have not yet voted on the nominees may do so by marking an appropriate entry after item #1 on the ballot.

Proposal #2 is to ratify the appointment of Ernst & Young LLP as the company's independent auditors. Shareholder Jevin Sadler will present this resolution. Mr. Sadler, would you please state your name and the fact of your stock ownership for the record?

Unknown Shareholder

Mr. Chairman, my name is Jevin Sadler. I am a shareholder of record. I move the following resolution: Resolve to ratify the appointment of Ernst & Young LLP as the company's independent auditors for fiscal 2013.

Harris H. Simmons

Thank you very much, Mr. Sadler. I'd also note, Jevin was an employee here. He's just been accepted to Columbia's Business School and will be leaving us. We wish you well with that.

Is there a second on the motion?

The Board recommends a vote for this proposal. The proposal is now open for discussion. Is there any discussion?

Being no further discussion, shareholders who have not yet voted who wish to change their vote on this proposal may do so by marking an appropriate entry after item #2 on the ballot.

The next item on the agenda is a vote on a nonbinding advisory basis to approve the 2012 compensation paid to the company's executive officers named in the proxy statement.

Shareholder Gloria Wilkinson will present this resolution. Ms. Wilkinson, please state your name and the fact of your stock ownership for the record.

Unknown Shareholder

Mr. Chairman, my name is Gloria Wilkinson. I'm a shareholder of record. I move the following resolution: Resolve that the shareholders approve the 2012 compensation of the named executive officers as disclosed in the proxy statement, pursuant to the compensation disclosure rules of the SEC, including the compensation discussion and analysis, the compensation tables and related material.

Harris H. Simmons

Thank you very much, Ms. Wilkinson. Is there a second on the motion?

The board recommends a vote for this proposal. The proposal is now open for discussions. Is there any discussion?

There being no further discussion, shareholders who have not yet voted or who wish to change their vote on this proposal may do so by marking an appropriate entry after item #3 on the ballot.

Item #4 is to establish the preference of our shareholders regarding the frequency of the nonbinding advisory vote on executive compensation. The options available to shareholders are to hold a vote annually, every 2 years or every 3 years. Shareholders may also abstain from voting on this proposal.

Shareholder Michelle Dupee will present this resolution. Ms. Dupee, would you state your name and the fact of your stock ownership for the record?

Unknown Shareholder

Mr. Chairman, my name Michelle Dupee. I am a shareholder of record. I move the following solution: Resolve so the frequency option that receives the highest number of votes cast in response to this resolution will be determined to be the frequency preferred by shareholders for the company's shareholder nonbinding vote to approve executive compensation.

Harris H. Simmons

Thank you, Ms. Dupee. The Board of Directors recommends that the advisory vote on executive compensation be held annually. The proposal is now open for discussion. Is there any discussion?

There being none, shareholders who have not yet voted or who wish to change their vote on this proposal may do so by marking an appropriate entry after item #4 on the ballot.

The final item on the agenda is a proposal made by shareholder Gerald Armstrong requesting that the Board of Directors establish a policy requiring that its Chairman be independent as defined by the New York Stock Exchange and NASDAQ rules and -- for definitions rather, and an individual who has not previously served as an executive officer of the company.

I know Mr. Armstrong is not here. I believe his representative is here. Would you like to present the resolution to make a brief statement regarding it?

Unknown Attendee

Mr. Chairman, my name is Lori Evertson and I represent Gerald Armstrong. Resolution: That the shareholders of Zions Bancorporation request its Board of Directors to establish a policy requiring that the Board's Chairman be an independent director as defined by the rules of the New York Stock Exchange and National Association of Securities Dealers, and who has not previously served as an executive officer of Zions Bancorporation. This policy should not be implemented to violate any contractual obligation and should specify: A, how to select a new independent Chairman, if the current Chairman ceases to be independent during the time between Annual Meetings of Shareholders and B, that the compliance is excused if no independent director is available and willing to serve as that Chairman.

I have a statement. The proponent of this proposal is a long-term shareholder of Zions Bancorporation. Having owned shares since 1971, I've presented this proposal last year's Annual Meeting of KeyCorp where it received a majority vote of its shareholders and has been recommended by the governance with consultants.

When only one person serves as the Chairman of the Board, President and Chief Executive Officer, that person may be accountable only to that person. The proponent believes that the greater accountability is beneficial to good business practices and could have prevented the 2008 problems, which caused earnings to slide and dividends to be reduced to just a $0.01 a share per quarter. The proponent believes that it should be apparent that the person serving as Chairman, President and CEO was likely a part of the problem, which he has failed to correct, and the additional leadership could have created accountability and improved performance. Thank you.

Harris H. Simmons

Okay, thank you. Is there a second on the motion?

Well, the Board recommends a vote against this proposal. The Board's reasons for recommending the vote against the proposal are explained in the proxy materials. In summary, the Board believes that the company and its management received substantial independent oversight due to the company's corporate governance guidelines, strong emphasis on Board independence and the appointment of an independent presiding lead director with clearly defined responsibilities. The proposal was adopted. Our view is that it will unnecessarily unlikely restrict, to the detriment of the company and its shareholders, the board's ability to select the most qualified person to provide leadership to the board as circumstances involved over time. The proposal is now open for discussion. Is there any other discussion?

There being no further discussion, shareholders who have not yet voted or who wish to change their vote on this proportional may do so by marking an appropriate entry after item #5 on the ballot. I'd like anybody who has not yet turned in a ballot and wishes to do so to raise your hand.

Is there anyone in need of a ballot? Okay. Or who wishes to change a vote, et cetera? If not, I declare the polls closed.

And I'll take just a few minutes and just go over a little bit of a progress report in terms of what were some of our priorities and the environment we're operating in. If I can -- there we go. I think Tom Laursen wrote this slide. I don't know if I'm changing this or -- here we go.

The company, as you know, we refer to ourselves as a reflection of rate banks and it's really is a great group of people that I get to work with in this organization.

More than 70% of our assets are located in the markets of Utah, Texas and California and predominantly along the coast of California, particularly in Southern California. But we have 8 great banks operating throughout the Western United States with nearly 500 branch locations and about $53 billion -- $54 billion currently of total assets.

We think that our structure as a locally managed banks with a lot of strong central oversight gives us a lot of advantages in terms of having very strong management teams right there in the markets amongst the customers we serve, make them highly responsive to customers, but still subject to a lot of controls and checks and balances to make sure that things go well. We think that we have a better model than most community banks in terms of the range of products and the lending limits and the other capabilities that we have in areas such as treasury management and ancillary kinds of banking products.

We also have the local feel and particularly in terms of having management teams here in the markets close to customers that really differentiates us from our peers.

We're in a part of the country where we are exposed to stronger economic growth, generally, than has been the case around the country. We've seen job creation in the footprint that we serve that over the last 10 years of about 11.4%, that's a full 8 percentage points higher than you have seen across the United States generally. And if you look at the weighted average footprint we have, this is just weighted by deposits, relative to peers and the trading symbol -- ticker symbols along the bottom represent pretty good sample of peer banks and a couple of larger banks that operate in the market that we serve. If you look at the projected growth, and in this case, I think we're using the last 3 years growth rate and rate debt by your deposits in each market, and we think that we have one of the best footprints in the industry.

Looking at 2012 results, net income was $350 million compared to $324 million in 2011. Net earnings applicable to common shares was $179 million compared to $153 million and earnings per share equaled $0.97 compared to $0.83 the year before. A major milestone last year, we repaid -- we fully repaid the $1.4 billion of the company's TARP funds. And we notably did that without having to raise a lot of additional common equity which we've counted as a great win.

We saw a great improvement in credit quality during those past year. Net loan losses decreased 66% from $456 million to $155 million in 2012. Loans that are on non-accrual status were -- other real estate owned, foreclosed real estate combined decreased 29% compared to 2011.

If you look at our net interest margin, it remains quite strong compared to our peers. One of the reasons for this is that our average non-interest-bearing deposits was about 35% of total deposits, one of the highest ratios of non-interest-bearing funds to total funding in the industry. We've had soft loan growth. That's plagued the entire industry and it certainly been the case here in 2012. I think that following this very substantial financial downturn, the great recession, as many are calling it, a lot of behaviors have changed, certainly among the consumers. The consumers are paying down debt, they're not borrowing as much. A lot of companies have accumulated a lot of cash and so we're still waiting to see a rebound in the same loan demand. And that's a challenge, it has been the last year and it remains so currently.

We've seen a continued strengthening in capital levels. Our Tier 1 Common Ratio increased to 9.8% from 9.6% a year earlier. It's currently at the end of the first quarter was just over 10% so we continue to build capital to a level that is, we think, quite strong.

Total reserves held against potential loan losses remains one of the highest levels among peers, at 2.6% at year end. I'll show you some more information on that in just a minute.

If you look at the balance sheet, we have about in the left-hand side here, about 70% of our balance sheet is in loans. Really and amazing, 17% of our balance sheet is in cash. And balance was held primarily at the Federal Reserve Bank. This also includes repurchase agreements. But it's extremely liquid and very, very safe. And it reflects a view I'll talk about in just a few minutes, about the risk of rising interest rates.

On the right-hand side of the slide here, you see the composition of our liabilities. As indicated, substantial portion of those liabilities, of those total liabilities are in, that's referred to as DDA, that's demand deposit accounts or checking accounts, and that's the most valuable form of funding you could have because not only is it non-interest-bearing, but generally you're providing services where we can generate some fee income from it as well.

And then in the equity section, you'll see that 80% of our total equity as in common stock. We have 20% of the equity is in preferred.

We have a balance sheet that is characterized by a strong focus on business banking and the bars you see on the left-hand chart here is representing C&I, which is Commercial and Industrial lending. Owner occupied, these our loans to businesses for you to facilitate the real estate needs, there's mortgages on a warehouse or some other type of real estate used by the business.

And then CRE is Commercial Real Estate. These are current commercial real estate deals. You can see that we are, the green bars here, generally have a higher proportion of those kinds of loans than do our peers. Now on the right hand the right-hand side, you'll see some of the areas that we generally lag.

On the far right, you see other columns, which includes home equity credit lines and other kinds of consumer debt. And then consumer 1 to 4 family, next to it. These are 1 to 4 family mortgages and we've -- that's a smaller proportion relative to our peers of our total business. So we tend to be quite commercially focused and especially as you get outside of State of Utah, that becomes the case.

We have a balance sheet, as I said, that is actually highly liquid. We have a strong deposit base. We see the improvement in the way we fund all of our assets going back over several years. Back in 2007, we had a lot of assets that were off balance sheet, that were funded with commercial paper. That's all gone away. We are now really pretty simple structure. It's deposits and it's a little bit of long-term debt with a lot of capital.

And in the deposit category, again very strong demand deposit component to that. You see this number relative to peers, the green bars here were really in quite good shape relative to the composition of further deposits, held-in-demand deposits in peer institutions. If you look at credit risk, the charts here with the green bars are shown on the left-hand slide, the nonperforming assets and the loans that are pass due 90 days or more that are still accruing interest. That number has come down quite dramatically. And then the ratio, which is on the right-hand side -- right-hand axis of that left-hand chart, you can see that, that nonperforming asset ratio has also come down significantly over the last 2 or 3 years. We're very similar at this point to where our peers are. We're actually outperforming peers at this point is in loan losses. And you see that on the right-hand chart here. And you can see that for us and for the industry, that's the industry generally, as reflected as the industry, our peers, the yellow line there, and the orange line is our performance. We're now down to a point that it's really about where we were before this great recession hits this economy.

Just last quarter, we had net charge-offs that were 1,900ths of a percent of total loans on an annualized basis. It's 19, we call it, basis points. And that compares to a number, it was actually about 46 basis points for regional banks and larger banks if you were to average their results. So our loan losses now running at a level that's a little less than half of where our peers are.

If you look at classified loans, this is a broader definition of loans that have problems or potential problems. And those numbers have come down, you can see it, if you go back to the second quarter 2010 about $4.9 billion, it's down to about $1.7 billion. But I think perhaps most notably that the loss content in those troubled loans continues to really shrink. And you see that on the right-hand side is the trailing 1-year net losses that are realized on classified loans. And so while the line is shallowing out, the actual loss content is really greatly diminished along the way.

Capital levels, as I said, are strong. Tier 1 common currently a little over 10% puts us about in the middle, just a little slightly stronger than the rest of the pack in terms of our peers. But if you look at the total allowance for credit losses, which is really there to absorb problems in loan portfolio, we're in very, very strong shape. As I said, about 2.6% and in better shape than our peers.

We've been quite conservative in trying to look out over the horizon. We still think this is an economy where there's a lot of risk. We think there's a lot of risk in terms of rising interest rates, which will create some stress for customers, or potentially, unemployment rates continue to be higher than they have typically been. And so we're remaining as conservative as we can, but still within the balance of Generally Accepted Accounting Principles. And as a result, our reserve is starting to come down.

If you look at loss absorbing capital for loans and securities, if you look at our balance sheet, you say, what are the total levels of capital for absorbed losses relative to the loans and securities that will generate most of that loss potentially. We're in very good shape today. The industry is at about 12%. We're at just south of 16. We're nearly 1/3 stronger in terms of loss absorbing capital relative to risk assets.

Another way of looking at our loan loss reserve is looking at it relative to net charge-offs. This on the top goes back to the beginning of 2010. Each quarter, you can see that our level of reserves to charge-offs is continued to strengthen and it's now materially stronger than the peer median level. And down below, on the bottom chart, you can see that same ratio relative to an assortment of peers. So we have a lot of strength between our capital and our loan loss reserves.

One of the -- I mentioned that same loan growth has been a challenge. It's not because we haven't been trying. We've actually been building commitments. These are where we've made commitments to clients to lend money that have grown pretty nicely over the last couple of years. We're up about 23% over the last 2 plus years. The problem is, and you see this in the green area on these slides, this is the actual outstanding loans, haven't grown in nearly the way that the commitments have. And so it love to lend any of you some money.

Net interest margins, which is a significant factor in our revenue picture, are order to about margins. This has been a challenge for the whole industry. We are in a period of interest rates that are lower than we have seen in any of our careers around any of us here at the bank, and I suspect anybody here in the room. What happens as rates come down and remain very low is that loans that were made several years ago as they are repriced, they're repricing at lower levels. And at the meantime, we have deposits, interest rates we pay on deposits are down at levels that are lower than we've ever seen before. Currently, the quarter on interest-bearing deposits, we've paid 23 basis points. So less than a 3/4 of 1% on average, and that includes some old deposit accounts that had higher rates on them that haven't rolled off yet. And so we're getting to a point where you just can't reduce deposit rates further but loan rates continue to compress. We think we've probably seen most of the worst of it and things are starting to kind of stabilize a little bit. But we need to see some loan growth to really offset some of the further margin compression that will naturally take place in this kind of a low interest rate environment.

Nevertheless, if you look at our margins, in the left-hand slide here, we're a little better than the median in terms of our kind of the nominal margin, it was 3.44% in the first quarter. Had we had instead of having a lot of cash and we put it -- and putting it into securities, we'd been about 3.7% would have made quite a difference. I'll talk about in just a minute why we don't do that. But even without doing that, we're looking pretty good relative to our peers.

And if you look at it on a risk-adjusted basis, the reason we have that margin in the first place is to pay us for the risks that we take when we make a loan and take that net interest margin which is simply all of the interest we receive, less the interest we pay out. And if you subtract from that actual loan losses, then we look really exceptionally good compared to peers. And so the right-hand slide is showing marginless loan losses. And there we show as being very, very strong. And again, if we've been putting this a slag of this in the securities as other banks have, we actually believe we'd be the best-in-class in the industry that way.

We've really been focused, nevertheless, on trying to improve our margins further and notably at this point, deposits are costing us less than our long-term debt, even though long-term debt is a fraction of the size of the deposit base. And so we're engaging in a lot of actions this year to refinance both long-term debt to pay off trust preferred securities, and most notably, to refinance preferred stock.

Some of you are holders of some of our preferred stock and my apologies. But that's what we do. I had some myself. We're refinancing some of this very high coupon preferred stock. We've refinanced the Series E that had an 11% coupon. We paid off the $1.4 billion of preferred stock held by the Treasury Department. We've repaid this past year all of the debt that was a program the FDIC offered. I think, probably most banks participated in that, the TLGP debt, which was guaranteed by the FDIC, we paid that off.

We have upstreamed a lot of cash from the subsidiary banks to facilitate all of these repayment. I mentioned we've redeemed the Series E preferred stock. We issued some replacement, Series F, at 7.9%. So far this year, we have taken a variety of steps. We issued $172 million in Series G at 6.3% rate, and you start to see these rates coming down on our preferred.

We've redeemed $285 million of trust preferred that had an 8% coupon. And we issued $126 million of series H, at the 5.75% rate, which we think is very attractive financing at the fixed-for-life kind of a rate. We issued $300 million -- $301 million just a couple of weeks ago at a 5.8% dividend rate, that's fixed for 10 years. And so we're engaged in a lot of financing actions. We have more to go this year. We expect that we will call our Series C preferred debts just shy of $800 million and use a lot of the proceeds and these other preferred issuances to refinance that. We also have some senior debt that we'll be looking at the feasibility and the economics and refinancing some of that. So that's -- we're very active in the markets right now, more so than we've ever been before, and so far executing quite well on that.

As a sense of what we're trying to accomplish, we're really trying to end up with a capital structure that is less complicated than it has been. We did a lot of things kind of within the depths of the crisis to try raise capital in ways that left us a lot of optionality to refinance that at the lower rates that we're now refinancing that. And as we get that finished, we really think that that's going to make a material difference in the return on equity that we have. We have a lot of drag that we're making a lot of money in these subsidy banks. A lot of it is being spent on these preferred dividends, and we're trying to slim that down so that much more is available to common shareholders. Holders, and you can kind of see we're sort of a medium-term target on the right-hand side here at the slide. This is an industry, though, that has raised an enormous amount of capital in the last few years. And it will be -- I don't know if we'll ever see the same kinds of return on equity that we saw half a dozen years ago. That's probably really a thing of the past as a result of Dodd-Frank and -- Act and just higher levels of capital that are being required not only here in the United States but around the world to prevent another systemic kind of event or crisis like we saw in 2008 through 2010.

We think that the next big risk in the industry is rising interest rates. And so we're very focused on what happens when interest rates return to a more historically normal level. We have less in a way of a securities portfolio than most any large bank in the industry.

And so what do we do for liquidity? Well, as I said earlier, we have a lot of cash. And we're holding that in cash because right now, we just don't see a lot of opportunities in the fixed income markets to make any kind of really decent economic spread without taking a lot of what we call interest rate risk, the rate -- risk that rates rise. When rising rates ultimately take hold, the value of fixed income securities where the coupon rate is fixed out in time, including mortgages, is going to -- the value of those securities will plummet. That's just kind of simple bond math.

And so we have a very little way of securities and we have almost no mortgage-backed securities relative to our peers. We have some old legacy securities in very small amounts. But you see up in the top right-hand side of the slide, this MBS, mortgage-backed securities/earning assets, we're just nominal compared to our peers. And in the bottom right-hand side, the cash we have is very, very strong.

We looked at and we've tried to model what do we think the risk is as rates rise. And we think that if you have a -- if you would have a shift in what is called the yield curve, interest rates out over time, the different time mature -- maturities, if those rates at -- were in a parallel fashion across those different maturity dates would arise 300 basis points or 3 percentage points. And to put that in perspective, that would still be lower interest rates when we had, say, in 2006 when people thought that interest rates were actually still pretty low.

By our measure, the industry will lose about 17% or 18% of total equity and the industry gets wiped out in an event like that. In our case, we think it's less than 5%. And in our case, because we're so asset-sensitive, we think that we'll be able to replace that lost market value with -- because we'll have higher levels of net interest income. We'll see expanding margins if that happens. And, in fact, if you look at net interest income in this company, with a 30 -- rather a 300-basis-point increase. You see on the left-hand side here that we think it increases net interest income by about 30%. That's a very, very substantial change with a lot of kind of positive leverage building to an increasing interest rate environment.

The right-hand side is a similar slide that it includes some other what we call rate-sensitive income that will behave the same way. It's a -- what we're going to see is you'll see in our stock price, as everybody starts to worry about higher interest rates or strengthening economy which would produce that, we tend to do well. It's one of the reasons the stock is up about 25 percentage points year-to-date. And to the extent that everybody think it's going to be a prolonged period of very, very low rates, we'll tend to sag a little bit. But we just think it's prudent not to take that kind of a risk a lot of other banks are taking. The Fed has printed a lot of money. And at some point, they're going to have to take that out of the system. And when they do, it will lead to higher rates.

This is kind of the same concept showing a 2-percentage-point increase in rates. What it does, I said 300 [ph], takes us up about 30%. A 2-percentage-point or 200-basis-point increase takes us up almost 20%, we believe. And relative to our peers, we're probably be about 4x as asset-sensitive, is the term we use, as our peers in that kind of scenario which would be a very good thing for us.

And in the meantime we think there's just almost no downside in terms of rates getting lower. It's kind of hard to imagine that.

So as we look out over the next year, we think that loan balances, challenging environment, we're seeing pricing pressure, everybody is fighting for that, especially large, very high quality credits. We're seeing modest growth. We think the loan balances will be stable to moderately higher.

Net interest income, we think probably stabilizing, helped by some moderate growth in loan balances. We have a lot of money and a lot of cash to lend, as I indicated. The provision for loan losses is going to be very low or negative for the reasons I said. We have a very strong reserve, and loan losses are really declined substantially. And so you can look for a reduction in probably in the loan loss reserve as a result.

Our core non-interest income. These are all kinds of sources of fee income, stable to moderately higher. It's a real priority for us to build additional sources of fee income. And it's one of the great goals we have internally over the next 2.5 years as we get to a permanently higher level of fee income in our total revenue stream. Noninterest expense, probably pretty stable. We're actually -- we're in pretty good shape expense-wise. The problem in this company really is a revenue problem and around the industry. And I just said, we're giving up some revenue in the short term to avoid exposure to a risk that we think could be very substantial. But the actual level of operating expenses relative to assets and some other measures is reasonable relative to our peers. We've been really scrutinizing branches. We've been closing -- actually closed quite a number of branches over the last 4 or 5 years and focused on -- the reason for that is simply that we're seeing a very different need for branches than we're used to. What takes place in the branch is not the kind of transaction volume that we used to see that really sails out anymore. And so we're trying to be judicious in the way we use branches.

Our preferred dividends in the short term is going to be higher because we're doing a lot of pre-financing really of the payoff of this Series C. And so for the next quarter or so, we're actually carrying a lot of additional capital and preferred dividend expense associated with that. We expect that will go way down after the third quarter when we pay off the Series C preferred. Net income available to common will continue to increase in that small measure because of this refinancing.

And so that's a quick overview of the last year and some of the things we're trying to do this year. We have some great people that are really working hard, and I want to thank all of them. Some of them are here in this room. I especially do want to thank the Board of Directors that has been working really hard.

You can probably guess just from what you read in the newspapers about the industry that this is a sort of a tough industry to be governing these days. There's a lot of regulations. There's more regulation that's come up in the last 2 or 3 years than I think I've seen cumulatively in the prior 25. And so we're dealing with a lot of -- internally with a lot of change and challenge and issues that way. And one of the great challenges to make sure that we do what we really do best and that's the focus on customers and meeting their needs. On that score, our people do a superb job. We're in virtually every market we're in, recognized as being a leader. In the Houston market, for example, Greenwich Research Associates, most widely respected market research firm in the industry stated just last year that we're now the leading -- we're recognized in the business community as being the leading middle-market lender in the Houston market, the 6th largest MSA in the United States, past JPMorgan Chase, past all of the established leaders there. We do the same kinds of things in other markets, including here in Utah. And that kind of leadership from our people is just second to none, and I thank them for that.

With that, the meeting is now open for shareholder questions and discussions. Shareholders wishing to ask questions or offer comments should ask for a microphone. If you could state your name, the fact of your share ownership for the record. In order to ensure that everyone has an opportunity to speak, I'd ask that your comments to be limited to 2 minutes as per the rules of conduct for the meeting.

And with that, we'll open it up to any questions you might have. A question here.

Question-and-Answer Session

Unknown Attendee

Again, I represent Mr. Armstrong. This question is a 2-part question. Of the real estate loans that are seriously past due, has foreclosure actions been withheld? If so, how many and what would be the value? And, of the $98 million in other real estate owned, are any properties not being marketed actively? If not, how many and why?

Harris H. Simmons

Well, let me start with -- we have very rapid turnover in our other real-estate-owned portfolio. We are not sitting on properties. I don't have the precise number in my head, but the average rate of turnover would be well within 12 months. We're not letting any grass grow. But we're letting grass grow on the lawns of a few properties, but no grass is growing in terms of our sitting around and waiting for prices to rise. But we've taken losses there. We're getting rid of properties, I think, in a very expeditious way. And we see a high level of turnover. You've read a lot about foreclosure issues in this industry. And I'm really proud to say that we had virtually, essentially none. I can't think of any. We've had no litigation. We were early to provide a -- recognizing that there were people out there having a lot of frustration dealing with a mortgage servicer we've put in place before regulators ultimately required it for some of the largest banks. In advance of that, the concept that if somebody's got a problem, they're being re-initiated for a foreclosure. We let the customer know, here's who you call, we have a single point of contact and we're very sensitive to not sort of forwarding the calls onto someone else to solve. We give them the name of somebody who can look into it, give it a second look, resolve it. And I think we've had virtually no problems. I have a very few, for that matter, very few residential properties in our other real-estate-owned category. So I hope that answers the question.

Okay. Let me see if anybody else has a question before we come back. Yes?

Unknown Shareholder

I noticed in the report that you had to hire a lot of people...

Harris H. Simmons

Name?

Unknown Shareholder

Oh, excuse me. My name Amos Wright [ph]. I'm a shareholder of record. I noticed in the report that you had to hire a lot of people to deal with regulations. And I'm wondering if the Bancorporation has any good liaison with membership Congress in the states where we have banks that perhaps can help us get rid of something that's unnecessary regulation.

Harris H. Simmons

Well, I appreciate the question. It's -- the first thing I'd say is that this is an industry that has always been highly regulated, and there is a need for a lot of regulation. I mean, we're dealing with vast sums of money and it needs -- we all have an interest as a society and making sure that the industry is well regulated. A number of the new regulations that have been put in place are actually doing a good job of strengthening the industry, higher capital requirements, the requirement that companies conduct stress tests I think is actually a positive thing. It will help us better understand the sources of risk in our portfolios, et cetera. And so I tell people that I think back to the late 1980s, we went through a downturn. It was a really awful time. Ron Hansen [ph] remembers. I referred to it as the Clark's end of my era, of our history. It was highly unpleasant. And yet, it was a time that left us stronger. And I think the recent downturn will leave us stronger, and some of the new regulations will certainly strengthen the industry. There are others that we probably wrestle with in terms of trying to understand whether regulation that was designed for someone with a big trading operation really fits us, et cetera. But the -- I can tell you that, yes, we talked to Congressman and Congresswoman, et cetera. There's not a lot of sympathy for bankers. We've been pretty highly villainized, I think, by the media and others. And we're all doing our best. I think the pendulum eventually will swing back. But in the meantime, yes, we're -- we've had to hire a lot of resources to -- it's been costly. We're spending a lot of money dealing with a lot of new regulation. Ultimately, it was settled out. Everybody else is dealing with the same problems. I don't think it's -- competitively, I don't think it's putting us behind, but it's a challenge. Yes, other questions? Yes, Neil [ph]? Or I meant Kent.

Unknown Shareholder

Mr. Chairman, Kent Mechea [ph]. I'm an owner of record. Does -- do you and the board anticipate any changes in dividend policy over the next year, 2, 3?

Harris H. Simmons

Change in dividends, we just increased the dividend modestly. We are -- there's a new methodology for determining dividends, again, just come out of new regulation where we submit a capital plan every year in conjunction with stress tests and we have to really lay out the anticipated capital actions over the next year. And so I'm not going to comment about future specific actions except to say that's the process. I tell you, we are very intent on making sure the capital is very strong and that we use, in the short term that we're using capital to do some of this refinancing to get the cost of capital down. But I do expect, and especially as the economy gets back to a little more normal level of activity and interest rates, that would be a little higher. Our margins will expand. And so, yes, I'd certainly anticipate that, but that would be inappropriate to announce anything here about anything specific we haven't vetted with the board and regulators. Okay. Other questions? [indiscernible], since I already called your name here.

Unknown Shareholder

I noticed in the reports you've given us that you have, well, $1.2 billion in reserves and that we made 97% -- or $0.97 per share on the stock last year. And in line with what Mr. Mechea said that we had a magnanimous dividend of $0.04 per share. It seems to me that with those reserves, it isn't just a modest increase we need, but we need a major increase in dividends. I was interested very much in hearing your projection on the others and how things are improving. And it seems to me that we're paying out a great deal to management in the manner of bonuses, shares, salary, things like that, that are not warranted until such time as the dividend is increased. Would you comment on that?

Harris H. Simmons

Sure. I mean the first thing I'd say is, and especially [indiscernible] as an old investment guy yourself, we're focused on total shareholder return more than just what the dividend is. And so I think you certainly have seen a pickup in stock price. And so to focus only on dividends, I think, is -- leaves a lot of the story sort of untold. Getting cash back out to shareholders is ultimately, absolutely a very, very high priority for us, but it can take place in a couple of ways. It can take place ultimately in the form of greater share buybacks or dividends. Again, our focus is going to be on total shareholder return, which goes beyond dividends. And that's what I think most intelligent investors are going to focus on. This last year, we've had quite a significant improvement in total shareholder return. And for some of the reasons like I tried to indicate here, I think we see that probably continuing, and especially as we get out of this kind of funk that the economy is in. We've got loan losses very low. We're waiting for kind of the economy to pick up. In the meantime, I'll tell you that we have a very engaged compensation committee. They look at compensation we want to be for virtually all of our people. We want to be very competitive. We've got to retain and crack great people more so now than ever. And so I'm personally mindful of the obligation I have both to shareholders, as well as to making sure that we have the right people in place so that we can deliver returns out over time. But I'm not going to get into any specific individual's compensation. But I'll tell you just philosophically, we have done a lot more really in the last couple of years to put measures in place to make sure employees have compensation at risk. We've had -- all of our senior people have lost a lot of compensation they would otherwise have received the last 3 years because of what happened to this share price and the total return to shareholders. They're pretty mindful of that. And so I hope that gives you some answer to the question. Other questions? Yes?

Unknown Shareholder

My name is Kurt Williams [ph], and I'm a shareholder of record. In reading that newspaper article that was printed a couple of weeks ago, it mentioned that the executives have not received salary increases over the past couple of years. And it was as though the executives were being magnanimous, so to speak. We're not taking notice increases in pay. And yet my understanding is that when Zions Bank agreed to take TARP money in the point of $1.4 billion, the stipulations of TARP was that executives could not receive those increases in pay.

Harris H. Simmons

That's actually not correct.

Unknown Shareholder

Okay. Could you help us understand that?

Harris H. Simmons

Now the stipulations under the TARP rules, which we're no longer subject to, were that basically that it limited the forms of compensation to payment of basically cash salary and compensation delivered in the form of stock. And basically we said that -- and you could also pay cash salary in the form of shares, or either pay base salary in the form of shares. But you couldn't pay discretionary annual cash bonuses, for example. And so the practice in the industry and competitively was we had more pay being paid out in shares, as then had previously been the case. But overall compensation levels varied by individual in terms of amount, but they absolutely came down through the crisis. I expect it will pick back up as we try to remain competitive going forward. But it limited the form of compensation, but not the aggregate amount. Did that help?

Unknown Shareholder

[indiscernible] to this because we see some corporations that are paying these huge amounts of executive compensation.

Harris H. Simmons

I'd invite you -- I will just speak personally. I'm very well paid. I'm not nearly as well paid as a lot of my peers are. And if you read the proxy statement, you'll get the detail on that. But I'd tell you, I would be a little personal here, but I worked here from 1981 through 1999 and effectively my family paid all of my compensation, all of my salary and bonuses. I -- the company was paying me. We actually provided a company with a tax benefit in 1999 when my family issued me some options on their shares, gave the company a tax benefit that was larger than my total compensation for almost 20 years. I -- so I can tell you that I, that -- and I'd tell you with respect to the rest of our senior people, they're not overpaid relative to their peers. And we're going to pay them competitively because otherwise we're going to lose them. And they've got a lot of in the company, but at the end of the day, we have to be -- we have to pay people competitively. And people that are in some positions of a lot of responsibility in this industry and others, the fact of the matter is they're well paid and there's a market that establishes that and try to pay attention to that, their performance, the affordability of it. All of these things are considered by our compensation committee to deal with the issue. Any other questions? I think we'll take one more from you, and then we'll...

Unknown Shareholder

Page 28 of the proxy statement discloses that Kenneth E. Peterson, Executive Vice President and Credit Officer, has left his position. It notes that in 2013, Mr. Peterson announced his intent to retire from the company upon expiration of his employment agreement in April of 2013. The company has agreed to pay him certain amount in consideration of assessment of employment and future consulting services. This is surprising as on February 28, 2013, he entered a consulting agreement with Zions. What were his reasons for leaving? What is the amount of the termination pay? Who will replace him? And which members of the Board of Directors conducted the exit interview with him?

Harris H. Simmons

Well, a variety of questions here. I'm not going to get into specifics with respect to the private individual beyond what is laid out in the proxy statement. Mr. Peterson retired, he did some great work for the company, and really help to strengthen the credit organization here. And his work that we really highly value continues to remain, and they're in a consulting capacity and which is also going to be valuable to us. He had regular discussion with the heads of -- well, with a variety of our board members, most particularly with Pat Frobes, who's the Chairman of our Risk Committee. And he has been replaced by -- we've created a new position that encompasses all risk management. Mr. Ed Schriver, [ph] who has a deep background in risk management and has joined the company. And we're delighted to have him with us, and he'll be taking on credit risk and other risk elements under his supervision of the company and selecting a new Chief Credit Officer that will replace Mr. Peterson.

Okay. Anybody else that hasn't had a chance to ask a question? If not, we'll ask the Secretary, Mr. Laursen, to give the results of voting as contained in the report of the Inspectors of Election.

Thomas E. Laursen

Yes. On Proposal 1, the election of directors, the persons nominated to serve as directors have each received 97% or more of the votes cast and have each been elected as directors for a 1-year term.

Proposal 2, the resolution to approve Ernst & Young, has been approved by 99% of the votes cast and has passed.

Proposal 3, the resolution to approve the compensation paid to the company's executive officers has received approximately 98% of the votes cast and has been approved.

On Proposal 4, the resolution to recommend the frequency of the nonbinding advisory vote on executive compensation that has -- in excess of a 1-year option, received 93% of the votes cast. And so that's been approved on a 1-year basis.

Mr. Armstrong's proposal that the Chairman be an independent director received approximately 34% of the votes cast and has failed.

Harris H. Simmons

Okay. Thank you, Mr. Laursen. And a detailed vote will be filed -- in the filing with the SEC here in the next few days.

With that, we conclude our meeting. We thank you for being here. Do we have as a motion to adjourn the meeting? And seconded. All in favor say aye.

[Voting]

Thank you very much, and travel safely.

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