Zions Bancorporation, National Association (ZION) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Zions Bancorporation Third Quarter 2011 Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now, I would like to introduce your host for today, James Abbott.

Good evening, and thanks, John. We welcome you to this conference call to discuss our third quarter 2011 earnings. I would like to remind you that during the call, we will be making forward-looking statements, and that 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. We will be referring to several schedules in the press release during this call. If you do not yet have a copy of the press release, it is available at zionsbancorporation.com. We will limit the length of the call to 1 hour, which will include time for you to ask questions. [Operator Instructions] I will now turn the time over to Harris Simmons, Chairman and Chief Executive Officer. Harris?

Thanks very much, James, and pardon my voice, I'm catching a cold here. So we're pleased to have all of you to be joining us on the call. Overall, we're actually quite encouraged by the considerable progress on asset quality improvement made during the quarter. We believe this progress is likely to continue despite some of the weaker global and national economic indicators that we saw in the late summer. One of the internal indicators that is particularly encouraging to me is the inflows into classified loans. Those inflows dropped 20% from the prior quarter's rate, continuing a trend that we've seen for a number of quarters now. We also had a somewhat higher resolution rate of nonperforming assets compared to prior quarters, having results more than 27% of our nonperforming assets. The resolutions continued to be strongly skewed to favorable revolutions. About 3/4 of all resolutions or upgrades paydowns, payoffs, et cetera, as opposed to only about 1/4 of the resolutions resulting in loss. We believe that these trends will continue and problem credits and credit losses will continue to decline in the fourth quarter. I know many of you are closely watching revenue trends, and we're happy to report that our core net interest income was generally stable at about $1.9 billion annually. The results exceeded consensus expectations on this front despite a modest decline in loan balances. We continue to work towards the goal of generating moderate loan growth, but we are also working to strike a careful balance with the pricing we use to achieve such growth. We also continue to reduce risk by reducing select loan types, particularly acquisition and development loans. Most of the compression in the core net interest margin during the quarter was due to an accumulation of cash balances. We saw some quite strong deposit growth during the quarter. With a moderate amount of loan growth that we are targeting the next few quarters, we believe the core net interest income should remain relatively stable, although the margin may experience a very modest amount of compression if cash balances continue to climb. Also, with regard to Operation Twist, we would expect a very moderate decline in net interest income over a one-year horizon. I'll let Doyle elaborate further on that point in a few minutes here. With that overview, I'll ask Doyle Arnold, our Vice Chairman and CFO, to review the quarterly performance.

Thank you, Harris. Good afternoon, everyone. As noted in the press release, we posted net income applicable to common shareholders of $65.2 million or $0.35 per diluted common share for the third quarter. As we've done in the past, we also presented the earnings in a way that excludes the noncash impact of the sub debt conversion amortization, as well as the -- which is negative on earnings, as well as the FDIC loan-to-discount accretion, which is a positive. We believe this is more useful to longer term-oriented investors, as we do not expect those income expense from items to be with us into perpetuity. On that basis, the earnings declined to $0.40 per share from about $0.45 per share last quarter. Most of that difference is due to the higher provision for loan losses made in the third quarter, which we'll discuss a bit more in a minute. So let me quickly hit on some of the drivers of those earnings, and then we'll take your questions. On Page 13, you can see that the credit trends, as Harris mentioned, were quite favorable across almost all loan categories. Despite meaningfully lower classified loans, nonaccrual loans and net charge-offs, we did, however, make a provision of $14.6 million, up from just $1.3 million in the prior quarter. As many of you know, banks' loan loss reserving methodology, including ours, generally starts with a qualitative calculation that drives the majority of the allowance and then takes into account certain qualitative factors. These factors reflect management's judgment about various risks that may not be captured in the quantitative models. And one of our such qualitative factors is one for national economic conditions. In each quarter this year, we have increased that factor, most recently because of the sovereign debt situation in Europe, the impact that it could have to various feedback loops on the U.S., as well as a number of U.S. economic indicators kind of released during the August and September time frames that were weaker than economists had expected. Year-to-date, these increases in the national economic adjustment factors have added more than $100 million to the allowance for loan losses. And in the third quarter, that increase related to the national economic conditions factor. It was $35 million more when compared to the second quarter. So absent that, all else being equal, we would have a negative provision of about $20 million during the quarter. But as we'll discuss, we're still just remaining a bit cautious about the outlook. But I do need to reiterate though that we're not seeing anything in those kind of reports that is yet feeding back to our own credit quality. We've spent much time in recent weeks with our lending teams reviewing existing problem credits and potential resolution in trying to understand if they're seeing any changes in behavior by their customers that would indicate that these global or national concerns are hitting the actual financials of our customers. And generally, we have not found indications that we're about to experience any newfound deterioration of the credit portfolio. Rather, we still have a reasonable degree of confidence that credit quality trends for, at least, the next couple of quarters will continue to show improvement. In short, all signs within our own portfolio point to favorable developments. But this -- the national economic condition is less than crystal clear, and it's -- we think it's important to be vigilant and exercise caution with regard to the allowance. Harris mentioned classified inflows or classified loan inflows, which fell to $357 million in new classified loans, down from $447 million in the prior quarter and from $537 million a year ago. Nonaccrual inflows also declined again, down 11% from the prior quarter to $233 million, and it declined 45% year-over-year. Loss severity, which we measure as loss given classified status, actually averaged slightly lower for the portfolio overall, about -- for the 3 months, about 5.4% of classified loans versus 6.1% in the prior quarter. Residential construction and development loans actually experienced the most meaningful decline, with loss rates now running lower than C&I. Term CRE severity also improved meaningfully and national real estate portfolio, while recovering, does continue to lag the rest of the portfolio in the rate of improvement. There's been a lot of discussion in recent quarters about troubled debt restructuring. A slight increase in this quarter compared to the prior quarter was due to the change in the accounting guidance, which as mentioned in the release, led to a very small increase in TDRs, which was consistent with our guidance in July. Importantly, those we've placed on accrual status, the redefault rate remains extremely low. Now if we shift to revenue on Page 12 of the release, there's a table of loan balances by type. We experienced,again, pretty healthy growth in C&I loans, up 2.2% sequentially. These loans are priced, on average, relatively neutral through our overall NIM. Line utilization rates declined moderately to 35.1% from 36%. But this was basically due entirely to increases in credit lines outstanding, not to large net paydowns. Also, consumer loans increased about 1.5% sequentially, driven primarily by 1-to-4 family residential mortgages, which, for us, are predominantly 5-1 jumbo ARMs, and also with solid spreads to -- relative to incremental funding costs. Despite these gains, we had continued strong runoff in the construction and development portfolio, which was down $280 million or 10% sequentially. A portion of this, about $54 million, was due to conversions to term CRE, and a very small amount, about $17 million, was due to net charge-offs. The large majority are either paid off or paid down. And while new production in line -- draws on lines in, this category remained muted. On Page 16, with regard to the net interest margin, we detailed the NIM changes fairly well on the release. But to summarize, deposit flows particularly into demand deposit accounts remained quite strong during the quarter, while average loans declined slightly, netting to an increase in average cash balances of more than $700 million. Thus, the mix shift in earning assets was the primary reason for the decline with the core NIM. The GAAP NIM expanded because of a much smaller amount of conversions of subordinated debt in the preferred stock in the third quarter. And if you missed our 8-K last week regarding the conversions of sub debt in the fourth quarter, we've added a brief summary in the earnings release indicating that the expected NIM and earnings impact from conversions in the fourth quarter would also be minimal, I think, about $0.025 a share after tax on the $15 million of sub debt that has given us notice that it will convert in a conversion notice made this past, so that's the number for the fourth quarter. Finally, talk about the interest rate risk positioning of the balance sheet. The balance sheet remains quite asset-sensitive. Although we believe there's maybe some misperception among some in the market that the lower long end of the rate curve under Operation Twist is bad for us, we do not believe this will be the case. Zions' earning assets are largely tied to the shorter end of the curve. The duration of our securities portfolio is about one year. We've specifically avoided buying mortgage-backed securities and avoided the payment through the payment -- paying premiums that amortize overnight when prepayments accelerate. So we don't -- we simply don't have a material amount of this risk and we have the lowest exposure, as a percent of our balance sheet, to mortgage-backed securities of all regional banks. And of our loans, about 53% reset or mature within one year, and another 33% approximately reset or mature between 1 and 5 years, which leaves 13% to have a reset maturity beyond 5 years. We invest -- we estimate that the duration on the whole loan portfolio is approximately 1.3 years. With such characteristics locked in the long end of the yield curve, it's not likely to be terribly impactful. In fact, we ran a scenario, an interest rate risk scenario, in which we used the recent lower end of the yield curve throughout the 10-year treasury and related swap rates down to 1.5%. About 70 basis points flatter than what -- or last time I looked, the 10-year treasury is around 2.2%. So that's about 70 bps lighter, which is -- reflects our interpretation of what Operation Twist, if successful, is designed to do. On a static balance sheet, this scenario resulted in a reduction in net interest income of less than 1% over a one-year horizon. So that kind of quantifies what Harris said earlier, it was moderate or modest, I forgot the exact word. So hopefully, that will help provide some clarity on that issue for you. Brief discussion of capital and some of the drivers of capital. Our GAAP tangible common equity ratio declined modestly to 6.90% from 6.95% in the prior quarter, and therefore, the tangible common equity per share also declined slightly. These declines took place despite the positive earnings because of the change in accumulated other comprehensive income or AOCI, which is primarily related to our bank TruP CDO portfolio. I'm going try to walk you through several impacts of what we saw related to credit spreads in the CDO portfolio and whatnot during the quarter, try to give you a better understanding. The fundamental credit quality metrics in this portfolio actually showed continued improvement during the quarter. And no banks in our exposure group failed that we had not previously modeled at or near 100% probability of default. Also during the quarter, we saw more banks prepay their trust preferred securities. That is banks whose trust preferred securities were in our CDO pools, more of them redeemed them, paid them off early for cash. And more deferring banks with, i.e., banks that had not been paying their dividends for the past number of quarters, resumed payment of trust preferred dividends. This -- fundamentally, this is good. This phenomenon accounts for the -- it's reflected in the $13 million of fixed income securities gains that you see on the income statement. We actually got a cash paydown on a CDO security that we had previously written down through income, not through AOCI, several years ago when we bought it out of Lockhart's securities, and we got cash paydown and took a gain related to that. So that's just the -- that's one illustration that we had a lot of other observations of not the -- that TruP -- the CDO's prepaying, but the banks within the CDOs prepaying. However, as we highlighted on the first page of the release, AOCI declined $84 million to a negative $589 million from a negative $504 million in the prior quarter. Well, why is this? This is due to the widening of credit spreads, as the quarter saw predominantly a shift to the risk off trade with all the uncertainty in, again, in Europe with the sovereign debt situation. So that widening of credit spreads leads to a higher discount rate on the future cash flows. At the same time, we increased our prepayment assumptions for the bank and insurance CDOs based on the recent evidence of more prepayments and whatnot. And that, paradoxically, resulted in additional other than temporary impairment because the increased redemptions improves the position of the senior tranches because they get that cash immediately, but it withdraws cash from the junior tranches and makes it less likely that they will recover everything. So it leads to OTTI. But we also -- but the negative mark on AOCI would have been worse but for that increasing prepayments, which partly offsets the impact of the wider credit spreads. If I haven't confused you on that, we'll try to -- we'll save the rest for follow-up questions. Fundamentally, we're pleased with the underlying credit quality of the banks in the CDOs, but discount rates still are quite volatile as news comes and goes out of Europe primarily. Looking at regulatory capital ratios, Tier 1 common improved to 9.49% from 9.36%. At least that ratio is not impacted by the AOCI change, and other regulatory capital ratios also showed continued improvement. We estimate that our Basel III Tier 1 common ratio fully phased in is approximately 7.9%, and that's also been trending upward from when we first started disclosing that number. Finally, just to let you know that we've begun to receive a return of some of the capital from our subsidiary banks that we pushed down to them during the crisis. It's modest, so far, but over time, will add up. Two of our banks, Amegy Bank in Texas and California Bank & Trust, resumed payment of dividends on preferred and common stock to the parent during the third quarter. And last week, Nevada State Bank paid $100 million of cash to the parent to redeem some of the preferred stock that it had previously issued to the parent 2 or 3 years ago during the crisis. Guidance for the next few quarters. Balance sheet, we expect loan balances to continue to be flat to modestly growing in the medium term, with growth in C&I and consumer lending being, at least, partially offset by reductions in CRE and FDIC-assisted loans. Through the first few weeks of the quarter -- of the fourth quarter, net loan balance are demonstrating modest growth on the net basis, and pipelines and production rates generally remain healthy. Then the credit quality, we expect continued improving trend in charge-offs, nonperforming assets, classified loans, potentially all measures of credit quality over the next few quarters. One question that often arises is what's your long-term allowances as a percent of loans? First, we don't target a ratio, but we work constantly of refining our models, both the quantitative and the qualitative. That said, with the quantity of problem loans still quite high relative to our long-term average, we do expect the ratio to continue to fall as classified loans decline. Should there be a negative provision for the company as a whole at some point, perhaps we've actually had negative provisions in several of our banks at different times during the quarter. But it's probably more likely that we'll continue to experience minimal provisions, coupled with a modest amount of loan growth during the next couple of quarters. Net interest income, in the NIM, we expect the core net interest income to increase modestly, and we expect core NIM to remain generally stable during the next several quarters. Two potential caveats to that: If deposit inflows continue to remain strong, driving the loan-to-deposit ratio lower, then the NIM could experience a bit of compression although net interest income would still should experience growth. And secondly, if loan growth really accelerates, we would expect NIM expansion. With regard to fee income, excluding usual volatile items such as gains on securities, fair value impairment losses and securities, we expect core fee income to decline about $5 million to $7 million in the fourth quarter due to the impact of the Durbin Amendment, which may be partially offset by additional deposit service charges. If we continue to see additional pickup in the rate of trust preferred redemptions by banks in our collateral business, that could lead to continued low levels of OTTI, but it would also tend to reduce a larger amount, the negative AOCI and its intended impact on tangible common equity. And finally, we think the tax rate in the fourth quarter should be similar to the third quarter. The primary reason for the fluctuation of the tax rate over the last year is due to the varying amounts of sub debt conversion. It was about half of the sub debt amortization expense is nondeductible for tax purposes, and with fewer, much lower rates of conversion, we would expect much less volatility in that rate. So with that, we will conclude the opening remarks and invite you to queue up your questions, and we'll try to address as many of them as we can in the remaining half hour or so.

[Operator Instructions] And we'll take our first question from Ken Zerbe from Morgan Stanley.

Doyle, can you just talk about the cash position that you have? Obviously, it continues to increase. What's your, I guess, ability and willingness to redeploy any of that cash into something a little higher-yielding? And do you really make -- do you also make any assumptions about redeployment of that cash in your guidance for core NIM?

We have a total, as you saw, well over $5 billion of cash. We have roughly $1 billion of that is unencumbered cash at the parent. We're kind of building up that cash to -- for TARP prepayment at some point. So there's no plans to redeploy that into anything long term. It will continue to be parked at the Fed or invested very short-term. With regard to the remainder of the cash at the banks, kind of different reason, but same story. We're very, very wary of reaching very far out the yield curve when rates are at absolutely historic lows, and the tendency on anything within a yield would be for price to go down as soon as rates go up a little bit and potentially for duration to extend as well. So we know it's a short-term, and maybe even a medium-term drag, it's probably going to take a while to work that off. We do model, and we've disclosed this in our 10-Q, that we assume the possibility that several billion dollars of that cash could go away when the unlimited FDIC deposit insurance on transaction accounts goes away at the end of 2012. The vast majority of that cash balance is a build-up in cash, in checking accounts, of existing business customers. And at some point, they will redeploy that cash for us. We don't expect, either in their own businesses or something, I mean, it's very unusual for businesses to be sitting on that much cash. But they're not reinvesting either at the moment. But when they do, we expect a couple of things will happen, loan growth will pick up, and some of that cash will begin to drain away. So we're not going to lock it up in securities, mortgage-backed or otherwise, with long durations in this interest rate environment.

I'm assuming the second part of your question that you do not make any assumption about that in your NIM guidance?

No. I mean, we only -- it's basically predicated. While I said, if the cash balance stays roughly stable, probably the NIM stays roughly stable, if cash builds up, that may further depress the NIM, but not necessarily net interest income.

Understood, okay. And then just to follow-up, you mentioned TARP. Would you like to comment on any of your discussions or at least your current thoughts on TARP prepayment?

Not really, but I think the -- I mean, the basic situation is that we've -- the Fed is reviewing intensely all of our capital and stress-testing models, and they've been doing that for some time. We've not seen any -- or we gave it to them kind of mid-third quarter. We've not heard any feedback that I would characterize as a showstopper, but neither have they completed their review. So -- and they may not, until late enough in this quarter or beyond, that there's -- it's kind of you ran out of your time with holidays and whatnot to do much. On the other hand, particularly kind of with the August, September state of bad news and uncertainty, we were not pressing that issue either to give back a whole lot of capital until the economic situation becomes a little clearer. So no, I don't have any definitive timetable, but I haven't seen any showstoppers, but we're not in a big hurry right now.

Our next question is coming from Scott Siefers from Sandler O'Neill.

Doyle, I wonder if you could just speak generally about overall interest rate positioning? I mean, you guys obviously are one of the most naturally asset-sensitive names out there. But I guess just given the duration that the short end of the curve is likely to stay low, any change in the way you'll keep positioning yourselves? In other words, can you kind of lessen your asset sensitivity? Or do you stick with the same kind of philosophy that you've had?

Well, again, I mean, to lessen the asset sensitivity would involve primarily lengthening the duration of assets, which would be fraught with danger right now. It's tempting to reach for any bit of the yield that you can, but any material impact would come with quite a bit of additional risk. I would just point out because of the characteristics of our balance sheet and the fact that our asset duration is so short, the short end of the curve has been pretty low for a long time. We've been living -- we've been fighting this battle for 2 or 3 years now, and doing so reasonably successfully, I would argue. And we've -- in a way, we positioned ourselves by design or by luck away from the adverse impact of an Operation Twist. And with Operation Twist under way, we're certainly not now going to go out there and lengthen duration, because someday, Operation Twist will go away.

With Twist, we have a good output?

Yes. And it will be quite a twist. Harris or David, do you want to comment?

I just comment on that all. I'll just add that I think one of the great strengths of the company is the fact that we've been able to achieve consistently strong margins relative to a lot of peers without engaging in a lot of kind of carry trade activity. And that's now it's going to, I thinks show itself over the next few quarters because some institutions are going to be in a lot of pressure from a lot of mortgage refinancing that's taking place. We simply don't have that kind of exposure, and that's what's the benefit that comes from not engaging in too much of that game in the first place. I think that it's something we've been pretty committed to for a very long time. And I don't see it changing right now.

Okay, that's helpful. And then I want to ask one additional question. Harris, a few weeks ago, you've made a comment about, I think, it's sort of pulling back in Texas given the competitive dynamic. And you mentioned in the release some of the pressures on pricing, at, I think you said, at the large corporate level. I wonder if you could just kind of expand on your thoughts and sort of update any of the stuff that you're seeing from a competitive dynamic standpoint?

Well, I guess, I think it wouldn't be too different from what we talked last time. I mean, we are growing in Texas. The price pressure is really most severe, I think, at that kind of the larger deals, large investment quality or near investment quality kinds of credits. I keep a running list of all the deals that are going through our senior loan committees side and jotting them on pricing on every one of them and just -- and I'm still seeing kind of on smaller middle market kinds of deals, by and large, still pretty reasonable pricing. When we get into the larger high-quality deals, north of $25 million, $30 million, everybody's going after that business pretty hard. So I -- happily, our sweet spot tends to be a little smaller end of that range, and there are a lot of small business lending, a lot of kind of the smaller end of the middle market, kind of activity that we do, and so far, that's actually held up reasonably well. Not a lot of change in the last quarter.

Yes, Scott. I was just add -- this is James. I would just add that C&I loan yields were down only about 15 as in 1-5 basis points from the prior quarter in terms of our production. So there is some pressure, but we're not dealing with extreme situations on that front. At Zions Bank, where we produce a lot of those smaller SBA loans and are a leader in the country for that, the yield loans, C&I production overall for the quarter was over 5%, so still pretty healthy on some fronts.

And we'll take our next question from John Pancari from Evercore Partners.

Can you talk a little bit about quantification of the margin pressure that you expect here in the fourth quarter then going through 2012? Could it be to the extent that we saw this quarter? And then also, can you just talk a little about the opportunities around the deposit side? It's not just lowering deposit costs, but also may be deflecting some of the deposit growth that you're seeing?

Now with regard to the latter, the last part of your question, I mean, we've already done a great deal of deflecting where it can be done without impairing customer relationships. Again, most of the buildup in deposits is existing commercial customers' DDA balances. And we've -- you only have so many levers to play with there, and it's not clear what the impact would be of changing earnings credit rates in this environment, so we're proceeding very, very cautiously on that front. We're not going to -- we're certainly not going to tell customers, "Take your money and go away." Because the day will come, believe it or not, when we will value their deposits again. So we're not going to commit unnatural acts on that front. In terms of the overall pressures, yes, I think the pressures are basically the ones that we've talked about. There is -- everybody's hungry for earning assets, particularly for high-quality larger loans, so we do expect -- I don't think the pricing pressure will get worse. But I do think the pricing pressure will persist on those loans going forward. But as Harris said, a lot of our production is in the middle market, the smaller business arena. We will -- we're probably not going -- I mean, there's no reason to expect we're going to see an immediate outflow of a lot of these deposits that have come on. That may happen later in 2012, which could strengthen the margin, but not necessarily the earnings. And we do have a -- we continue to have a little bit of room, and we're gradually exercising that on interest-bearing deposits. On Page 16, we sort of give you the breakdown, the average cost of money market accounts being down 5 basis points; time -- small time deposits, 8 basis points; jumbo time, 7 basis points, and so forth. So we do continue to -- as time deposits mature, they're renewing at much lower rates, very low rates, in fact, in this environment, compared to when they were put on 1 to 2 years ago. So those will continue to come down. But -- so I think there's no reason to expect a dramatic change in the margin over the next few quarters.

Okay, [indiscernible]. Secondarily, can you just talk a little bit about your loan growth outlook? I know you mentioned for stable to modest growth. But can you talk about where you're starting to see some pickup in demand? And then also the timing of the remaining runoff or paydowns that you expect in the construction book?

Well, temporally, if you look across time, we saw -- every -- the optimism about loan growth became a lot stronger around the company in the second quarter and it translated into actual growth. We did see continued strong pipelines, but more difficulty converting some of that into core business and drawn lines in the third quarter. We got the sense that businesses did turn more cautious in the third quarter. There seems to be a bit of a renewed note of optimism around the company, and we're starting -- we're seeing a little bit more -- the C&I loan growth continues apace and has for between $200 million and $300 million a quarter, kind of looks like it will be on a similar track. I mean, the swing element has been, as you point out, the C&D runoff. It was -- that's a harder -- that's a little bit harder for us to predict if we really have systems and then ask our customers to input every month where -- what they were expected to pay down and finish. We could do a better job of that. But I think it's already moderated a lot. I would expect it to continue to moderate. There's still not a lot of new construction out there, so things continue to finish and run off, but it's already moderated. I just can't tell you when it's going to turn into a net 0. Across geographically, probably the strongest growth continues to be in Texas. Commercial loans, a lot of them is driven in one way or another, and remains pretty good there. And -- but we don't see strong net negatives kind of anywhere in the franchise at this point. Harris, you've just been around. Is there any particular comment you want to make on as you tour around.

No. I think that right. Pipelines are probably better than they were a couple of 3 months ago. I mean, it feels like it's picking back up a little bit, but it's certainly not going to write home about. It's still soft.

And I think I would just add, John, that from some of the conference calls that I've listened to, that there seems to be some of those that are growing C&I at stronger rates tend to be doing so through the syndicated portfolios. And that's not a significant business for us. We saw a little bit of net increase in syndicated loans quarter, maybe $70 million or so, but we're not growing that at a rapid phase in part because I mean, that's part of the size range where there you have the most pricing pressure. So the yields -- those are growing out or aren't giving you same marginal yield that we're getting with more modest growth.

And we'll take our next question from Todd Hagerman from Sterne Agee. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Doyle, the word uncertainty has been used quite a bit by a number of the banks this quarter. And I just -- as I listen to your comments on the CDO portfolio, and in particular, some of the dynamics that we saw this quarter with the prepayments and the risks that you mentioned in terms of the AOCI risk. Can you just talk a little bit in terms of how you -- as you think about the economics of the residual portfolio as it stands today and kind of the risk to kind of capital, if you will, and kind of pro forma capital, how do you weigh now that position in terms of with that uncertainty, the prepayments, the AOCI? When would the decision potentially be made to cut, to sell, do nothing? How are you thinking about it now?

Now? We're certainly not thinking of selling right now. We've been opportunistic. But I mean, the fact is, liquidity just totally dried up in the CDO portfolio again during the third quarter after showing some signs of life in the first and more in the second quarter. The uncertainty, again, a lot of it coming out of Europe, but a pretty steady stream for about 2-month period from late July to late September of negative U.S. economic numbers really hurt that market. And that negativity was reflected in one, drying up liquidity; but two, the higher credit spreads that we applied to the future cash flows. But again paradoxically, just like corporate balance sheets are healing, so are bank balance sheets. We continue -- and that's what's underlying these securities. Let's not forget -- are the balance sheets of individual banks. The average probability of default on our entire exposure pool improved a bit during the third quarter as we measure it, and we -- as I mentioned, we've gotten pretty darn good about nailing those. We had -- I think we had 6 or 7 banks out of the failures in the quarter that we had exposure to. All but one of those, I believe, we've modeled at 100% probability of default and the other one was at 99-point-something. So I'm pretty confident in our model's ability to measure that. The -- and the strengthening of their balance sheets is reflected in the fact that more of them, even smaller ones, felt confident enough in their balance sheet and earnings prospects that they redeemed the trust preferred securities, and others resumed dividend payments. So the fundamental exposures that we have are healing. Now in our own CDO pool, we own both senior tranches and mezzanine tranches. The -- this phenomenon has kind of differential impact on the 2. As banks prepay, it improves the position of the senior tranches, but it can cause additional OTTI in the junior tranches. And the increasing in prepayments also will improve the AOCI marks. And roughly speaking, if it's just due to changes in prepayments, about a one percentage point pickup in the prepayment speeds translates into about $10 million of additional OTTI, but a $40 million improvement in AOCI. So that's a trade we'll take every day. And we think we're probably likely to see more of. And now it just so happens though that because of the turmoil in Europe, the change in the discount rate in the credit spreads, swapped that fundamental phenomenon this quarter. But we're certainly not going to panic because of that and dump a bunch of stuff into a totally illiquid market. We're pretty confident that we understand the dynamics here, and we're going to ride it through. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: That's helpful. And just as a follow-up, as you mentioned the fundamental exposures are improving, which is encouraging. So where does that leave you in terms of the total return swap?

We review it every quarter. It's still in place. It has a -- quite apart from the fundamental dynamics. I mean it has a -- I would argue that the rating agencies have not responded to the improving fundamentals that we are clearly observing. They -- and it's ratings that still drive the classified securities -- the classification of these securities and regulatory and also their risk -- and the risk ratings -- risk weightings of those securities are also not directly the results of the ratings, but heavily influenced by the ratings. So as long as the regulatory classification and risk weighting schemes are based on rating agency ratings that don't reflect the underlying reality of the securities, frankly, the total return swap helps it -- helps us better reflect that reality on our balance sheet and then our classified ratios. And so it has utility from that standpoint. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Okay. So I guess what I'm hearing is it's pretty fair to say that all else being equal, you're not panicking. You're obviously monitoring the situation in Europe very closely. But again, as you look at the economics, and in particular, the corollary with the total return swap, it's basically status quo, at least, for now is what I'm hearing.

That's correct. I just took a poll around the table and nobody's panicked. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: So that's encouraging. We don't want to hear panic in Salt Lake.

We'll take our next question coming from Ken Usdin from Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: I just wanted to ask a question about interest income and the loan portfolio. Doyle, maybe can you just walk us through -- there's a decent amount of support to the net interest income from the swap, the -- I'm sorry, the loan floors. I'm just wondering, can you just walk us through how the gradation, of how the floors, I guess, mature with loan maturities? And to what extent you're able to replace those with new floors on loans and if there's any pricing differences in terms of new floors as well?

I don't think we've updated that information since the last IR presentations that we did. I would say -- I mean, I'm going to make a statement and I'm going to invite James who may -- or Walter who may have torn into it more than I have to contradict me. But in general, if you go back 18 months ago, we were getting floors on 60% to 70% of new production and they were often at 5% to 5.5%. You pretty much can't talk about floors on larger loans, those with the kind of pricing pressure that Harris described. You can still talk about them on more middle market loans. So we're down to -- I mean, last time we did update this, and I know where we were getting it on 30% to 40% of new production, and they were more typically in the 4%, maybe 4.5% range. Anybody -- I'm seeing head nodding affirmatively here, so I don't think we have information that would be different than that right now.

Yes, I don't have a definitive answer for you, Ken. The last -- I would point out that over a 6-month timeframe, we lost about 3 basis points in net interest margin due to the erosion of floors, so kind of 6 basis points a year is the run rate that it's been running off. It was -- the last time we updated it, which was June numbers, was, I believe, 22 basis points of favorable benefit to the net interest margin. On a related point, somebody asked earlier how much costs the cash is having an impact. It's probably -- last time, we updated that at June, it was over -- it was up 46 basis points. It would be probably around 50 or so basis points of lost net interest margin as a result of the high cash balances. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. And my follow-up question is, turning back to the TARP question. Doyle, do you presume that at the point that you're ready to repay TARP that you'll need to be thinking about what to do with the TruPS portfolio at that point? I mean, do you get the sense that there'll have to be some coincidental strategy or plan? Or is that not even part of the TARP conversation at all?

Well, the TARP conversation has not occurred for the reasons that I'd described earlier. And I don't want to presuppose what those conversations will entail. Or I just -- I have no way to know. And if I did, I wouldn't talk -- I probably wouldn't talk about it here. I'll be saving that for discussion with the Fed. That's where those discussions have to take place. And when we have an action that we're prepared to take, we'll announce it and take it, but that day is not today.

And we'll take our next question from Jennifer Demba from SunTrust Robinson.

Actually, my questions have been covered.

And our next question from Joe Morford from RBC Capital Markets. RBC Capital markets.

The addition to the classifieds and NPL buckets have been coming down nicely. I'd just be curious though where are you still seeing some inflows and what do the issues tend to be?

Now they tend to be in the -- they tend to be on smaller -- on small business loans, some of the SBA-related loans still. There's a little higher level of stress happening, I think, on smaller businesses. That would be the one thing to [indiscernible] that's -- we've got this national real estate portfolio, some in that, although that's coming down. The inflows there are coming down reasonably nicely as well. But where we have them, the inflows are increasingly granular. I can't think of a large, new -- I would say a couple [indiscernible] probably more discussions, but the numbers are way down from what it used to be. I mean, it's -- they tend to stand out these days, and it used to be that you couldn't keep track of them.

Okay. And then with the income statement on Page 11, you've got these 2 line items, other real estate expense and credit-related expense. How much of that is still coming from updated valuation adjustments? And just in general, what pace do you expect these 2 line items to decline from here, given your positive thoughts about the ongoing improvement in credit?

Well, the other real estate expense is due to value declines or after the write-down when we foreclosed and took it into the OREO. The credit-related expense really isn't. It's all the other expenses that are directly related to working out credits and so forth. So we're just trying to give you a breakout of that. I mean, those -- they've been relatively flat for a couple of quarters now. I mean, they should -- as we continue to work down classifieds and have fewer problems to resolve, I would think in 2012, we'll start to see more significant decline in those numbers yet. But those numbers also -- but I don't yet have a real trend forecast to give you.

Joe, the gain and loss ratio this quarter was about the same. The amount of gains that we took in the portfolio are relatively now losses upon sale. It was about the same as it was last quarter. We did have a little bit of...

OREO.

OREO provisions, right. And we did have a little bit more in the way of volume that moved through that portfolio, particularly in Utah Land's bank franchise, there was a little bit more volume there.

And a lot of that was the national real estate group, SBA 504, I think, that Harris was just talking about earlier. But yes, I mean, if you go back precrisis, those numbers would have been low single digits for each of those line items. So over the next couple of years, we'd converge back toward a number more like that.

And we'll take our next question from Brian Foran from Nomura.

It's Brian Foran. As we think about the long-term signs in the balance sheet, in your last conference presentation, in your interest rate risk simulation slide at the back of the presentation, there was a footnote that kind of said in a rising rate scenario, you assume noninterest-bearing shrinks by $5.4 billion and savings shrinks by $0.8 billion. Can you just walk through the methodology to come up with that? And the point of that slide that you're asset-sensitive, even if you have those kind of deposit outflows? Or was the point that an normalized environment, we should really think about the deposit that being much smaller?

Well, essentially, Brian, what we did was look at the net increase in DDA balances. That's the bulk of it, from about late 2007 or early -- some time in 2008, about when we had between $9 billion and $10 billion of commercial DDA balances, through the present. And we've added customers during that time but the balance of -- average balances or total balances have grown from little under $10 billion to over $15 billion. We assumed that in a stronger recovering economy, in which unlimited FDIC insurance would go away, that, and in which the Fed would reverse Operation Twist and begin to let rates rise again, that we would see that most of those -- that increase in balances related to customers that were there, say at the beginning of 2008, not -- we took -- we set aside balances from new customers, and said "Okay, those are vulnerable." And in that scenario, those balances would be vulnerable and probably would go away. So if they didn't go away, we would have an even stronger asset-sensitive position than what we have indicated to you, and we'd benefit even more from the scenario that I described. But we actually think that it's more realistic to think that we'll see in this cycle a version, may be even a somewhat exaggerated version, of what we've seen in every other cycle, which is the portion of our balance sheet funded by DDA tends to decline in very strong times, and it gets stronger in the weaker times. So that's the -- so the $5 billion number wasn't just pulled out of the air. There was that degree of analysis behind it. And so we're trying to show you a more conservative realistic asset-sensitive picture. Did I respond to your question?

No, you got me good. I mean, I guess, I'm also thinking also from an industry perspective to try to figure out how much of the deposits are inflated. I mean, when you talk to the customers, is there any potential that, structurally, looks smaller money markets leads to them consolidating more balances with you? Or is there anything that leads you to believe that the deposits might stick around this time? Or as you put it, while the estimate's conservative, do you still view it as realistic?

I mean, there is reason to believe that money market funds may not be as competitive going forward as they were in the past. I would agree with you on that. But we didn't have -- we couldn't think of a way to kind of factor that into the analysis. So we kind of assumed that it would be. And to -- to the extent that they're not a stronger competition, then our analysis would be overly conservative.

If I could sneak in one last follow-up. Is there -- just to get a sense of how much market sensitivity there is in AOCI swings, I'm hesitant to ask about day-to-day updates for the TruPS CDOs, but just as the market [indiscernible] through October could get type of market moving up to October, we've seen -- have a material change to the AOCI you would have printed it for the quarter closed and not 3 weeks later?

I don't -- we don't run that on a daily basis. I don't think we can give you an update. I would intuitively and qualitatively, I think you're right. If we reclosed the quarter today, it would probably be less severe given generally what I'm aware of. But we actually do a pretty careful analysis of looking at lots of data to try to come up with those discount rates. And they were -- I guess they were probably about as wide as we've ever used, maybe the widest we've ever used in this last quarter. And what I've seen would indicate, they probably should have come back in a little bit over the last 2 weeks. But we don't -- we basically true that up in the third month of the quarter. We don't -- when all data's in. We don't try to monitor it every week. So it's a complicated exercise. I mean, we can't do it weekly, frankly.

So we'll take our last question from Steven Alexopoulos from JPMorgan. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Doyle, you made the point that several subs are now paying dividends for the holding company. I'm just wondering, is the business implication from this just more cash at the holding company? Is there something else we should be thinking about?

That's the immediate implication, yes, more cash at the holding company. Yes, I would say, yes, more broadly, I'll just note that it's a little bit unfair. But if you simply added up all the banks this quarter, they were all profitable. And the sum of the net income after tax was almost $150 million. I think it's about $147 million at the bank level. Now there's -- if you look at the net income available to common, it was $65 million or less than half of that. About $44 million of that is preferred dividends that the parent pays on TARP on some rather expensive preferred that we issued during the crisis, the Series E and so forth. There were some losses taken at the parent that -- but there's a -- fundamentally, the earnings engine of the company is running at about a $600 million a year after-tax rate right now. And what's incumbent upon us is to get some of the noise from a lot of expensive funding and capital and whatnot behind us over the next year to start bringing that to the bottom line. And part of that is getting the banks to pay dividends to the parent, to repatriate some of the capital that we pushed down to the parent. We need -- we fundamentally need cash at the parent to repay TARP, and so that's encouraging. And that $600 million is probably, on a long-term run rate, it's exaggerated because there were -- some of the banks had reserve releases, as I mentioned. And -- but fundamentally, the underlying engine of the company is healing pretty nicely right now. It's got a ways to go, but that's the thought I'd like to leave you with. And I think with that, that's probably our last question. I guess Steve, you get a follow-up, if you wanted. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: A short one. Did you bulk sale any loans this quarter?

Not that I'm aware of.

Not of any materials.

No. Okay. James, thanks very much. There are a handful of people left in the queue, and we will get back to you as soon as we can tonight. Thank you for your time, and we will see you at either conferences or on the next earnings call.

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.