Zions Bancorporation, National Association (ZION) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Zions Bancorporation Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. And now, my pleasure to turn the call over to Mr. James Abbott. Sir, the floor is yours.

Thank you, Hewey, and good evening. We welcome you to this conference call to discuss our third quarter 2012 earnings. Our primary participants today will be Harris Simmons, Chairman and Chief Executive Officer; and Doyle Arnold, Vice Chairman and Chief Financial Officer. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release dealing with forward-looking information, which applies equally to statements made in this call. A copy of the earnings release is available at zionsbancorporation.com. We intend to limit the length of this 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.

Thank you very much, James, and welcome to all of you. We're reasonably encouraged with the third quarter's results, with many of the metrics improving compared to the prior periods. The most notable accomplishment of the quarter, as you might imagine, was the completion of our repayment of the -- our TARP preferred stock obligation and redemption of that stock, which is encouraging to us. Good to have that chapter behind us. Looking at the fundamentals, at a high level, we saw further strengthening of loan growth during the quarter. Our core net interest income declined, but at a slower rate than in the prior quarter, and our noninterest expenses also declined. Credit quality improved pretty materially in almost all categories and geographies. And finally, our capital improved, with tangible common equity increasing more than $100 million over the past 3 months. Looking at loan growth, we experienced more than $360 million of growth in our C&I portfolio. It's about 14% annualized, up from $225 million last quarter. We also saw strong growth in our 1-4 family loan portfolio, about 16% annualized, and moderate growth at about 6% annualized in terms CRE. There's some offset in our owner-occupied and construction development portfolios. But overall, we certainly are pleased to see some of the major categories strengthening in a way that we're very pleased with. Geographically, Utah and Idaho showed the strongest growth, with solid performances from Texas, Arizona and Colorado. It's difficult to be precise about where our loan growth goes from here. There's much uncertainty about the business landscape as we have today. But we believe we'll continue to see moderate loan growth over the next year. We have construction commitments that have been growing somewhat and the equity going in first, and so we do expect that we'll see some strengthening in some of those balances, for example. Looking at net interest income, the core net interest income declined about $5 million compared to the prior quarter, which is a slower rate of decline than the most recent few quarters. In the past 6 months, our core net interest income has experienced some particularly strong headwinds, and we note that the recent roughly 10-basis-point drop in 3-month LIBOR will produce some pressure on net interest income further in the fourth quarter. But our analysis of rate resets on both loans and securities points to moderating pressure over the next 12 to 18 months from that source. Our guidance since January has been for core net interest income to be stable to slightly lower over the course of the year ahead, and we continue to believe that we should be able to generate enough loan growth over the next 12 months to offset most of the pressure inherent in our earning asset base. One of the drivers of an improving net interest income will be an improvement in small business lending, which is a core element of our customer base. Nationally, small businesses have been slower than some larger businesses to emerge from recession. However, more small business customers have indicated an improvement in sentiment compared to just a few months ago, although the economic and political uncertainty, the fiscal cliff, et cetera, could certainly create an adverse change in that modest improvement. Credit quality is something we continue to be very pleased with. I'm particularly encouraged with the drop in OREO expenses to nearly 0. And while this may not be sustained, there is a positive trend in collateral values within many of our markets, which is leading to gains on sale of some of our foreclosed real estate relative to book values. You can also see the effects of this and the improvement in the effective yield on FDIC-supported loans and in the 20% linked-quarter decline in gross charge-offs. So those are some of the highlights. I'll turn the time over to Doyle Arnold to review the quarterly financial performance. Doyle?

Thanks, Harris. Good afternoon, everyone. As noted in the release, we posted net income applicable to common of $62.3 million or $0.34 per diluted common share for the quarter. As we exclude the noncash expense associated with sub debt amortization from our modified sub debt, revenue from FDIC loan discount accretion and the onetime preferred dividend associated with the accretion and the remaining discount on the TARP preferred stock and earnings available to common was $0.46 a share. To give you an idea of what the run rate would've been for the quarter, if we exclude the regular TARP dividend of about $9 million for the quarter, which will not be present in the fourth and future quarters, earnings available to common would have been $0.51 per share, which translates into a return on financial common equity of approximately 10%. Turning to revenue drivers. As Harris noted earlier, we were reasonably pleased with the amount of loan growth, which was relatively broad-based. Origination volumes for new loans as well as renewals increased about 5% from the prior quarter and increased about 17% from the year-ago period. And the pipelines for our various affiliate banks remain fairly healthy. Turning from volume to rate, if we hold product mix constant, the coupon yield on loan production declined at a relatively similar pace compared to the prior quarter. And our experience was fairly consistent with the national data regarding commercial loan pricing. Lenders are indicating that the competitive environment, that's our lenders, that is, are indicating that the competitive environment for larger and middle-sized loans is beginning to show signs of stability. However, small business price competition has increased somewhat in recent weeks, and there are a relatively small number of customers that are qualified to borrow, making the marketplace a bit of a borrower's market right now. Let me take a couple of minutes to run through some growth statistics on different bank subsidiaries in our franchise. Zions Bank, which covers Utah and Idaho, grew loans held for investment by nearly $120 million, driven predominantly by C&I. Growth was partially offset by declines in commercial real estate and the continued planned decline in owner-occupied and CRE loans held in our National Real Estate Group. Amegy Bank, which is predominantly a Houston-based bank, with some prevalence in Dallas and San Antonio, experienced growth of more than $80 million, up from approximately $30 million in the prior quarter. The growth came from commercial and consumer loans, and again, partially offset by continued declines in both categories of commercial real estate, that is construction and term. National Bank of Arizona experienced pretty strong growth across the board, some commercial businesses to commercial real estate to residential mortgage. Vectra Bank, our Colorado subsidiary, also experienced solid loan growth across all 3 major loan types. The 2 affiliates that experienced meaningful attrition in loan balances were California Bank & Trust, which saw an organic decline in commercial loans and loans supported by FDIC assistance. Declines were partially offset by organic growth in commercial real estate and a bit of consumer loan growth. And the other bank experiencing attrition was our Nevada State Bank subsidiary, and that market is, as many of you know, still very slow to emerge from the recession. Harris referenced some of the loan growth rates by product type on Page 10 of the release, so I'll be brief in my comments on that. But I'll hit some of the highlights. C&I growth has been coming from a diverse group of industries. Energy remains a strong component, and we're seeing strengthening in manufacturing and consumer goods and services after long declines in both of those categories. The industries that are still detracting from C&I growth rate are construction-related businesses and some professional services firms. Net syndication and participation loans declined about $200 million compared to the prior quarter to about $1.5 billion in total. As we've discussed in the past, the decline in owner-occupied loan portfolio is largely attributable to a decision made several quarters ago as a part of our concentration risk management efforts. That decision was to selectively reduce certain aspects of our exposure in our National Real Estate business. Much of this is in the SBA 504 loan product. We expect additional attrition in this portfolio before it stabilizes, probably starting around the middle of next year, middle of 2013. Construction development loans were down just over $140 million, which was somewhat unexpected. We've highlighted in the past few months that we've booked several hundred million dollars of new loan commitments for construction and development lending, which we expect will begin to fund over the next several months. However, payoffs this quarter were stronger than anticipated, resulting in a net decline in the portfolio. We still expect those new commitments to fund, but may be offset by higher attrition in the fourth quarter. Within consumer lending, residential first mortgage loans grew at about 4% in the quarter, which is a rate that is comparable to the prior quarter. That growth was fairly widespread across the footprint. Turning now to the net interest margin on Page 14, you'll notice that the GAAP NIM was stable. But the core NIM, which adjusts for items such as the sub -- modified sub debt conversion cost and the accretion on acquired loans, that core NIM actually declined about 12 basis points, and we give you that reconciliation between the GAAP and the core on Page 15 of the release. Let me begin by addressing the yield in the securities portfolio, which declined to 3.4% -- from 3.8% last quarter. As we mentioned in the last quarter's call, the second quarter included some catch-up income. If normalized for that, the securities yield decline would have been about 25 basis points. While we do not have a large MBS portfolio that's subject to refinancing risk, we do have securities where the underlying collateral consists of SBA and municipal loans, both of which are subject to rates resetting. For example, dealing with [ph] 2007, that had a fixed rate for the first 5 years, is resetting this year, that is, in 2012, at lower rates. Same phenomenon that we've talked about in our -- some of the parts of our loan portfolio. We expect that the securities portfolio yields will be under some additional modest pressure over the next few quarters. Turning to loan yield. That declined 13 basis points to 4.94% from 5.07% last quarter again excluding FDIC-supported loans. This compression was attributable to the same factors that we've discussed in the past, which are adjustable rate loans resetting to lower rates, driven by a lower repricing index today compared to several years ago when the loans were booked and maturing loans that we'll replace with new loans at lower coupons and floors. Recall when these loans were last originated, most had rate floors at higher levels and/or wider spreads with relative -- relevant benchmark index in the current market repricing. A third factor is a continued mix shift towards lower-yielding residential mortgage loans held for investment, which warrants noting that while mortgages are incrementally dilutive to the NIM, the income from those mortgages is accretive to net interest income, basically converting 0 earning cash into mortgages. As we highlighted back in January, 2012 is not going to be a particularly good year for NIM, and we noted that it would take a significant amount of loan growth to offset that effect. But we also said that as we enter 2013, the pressure should begin to subside to a more moderate level. Assuming a static balance sheet, we estimate that the NIM will be subject to ongoing pressure due to rate resets and new originations at current market levels, which are significantly lower than 3 to 5 years ago. However, because a fair amount of that resetting, refinancing volume is behind us, the pressure on the net interest income over the next 1 to 2 years should be lower than we've experienced over the last several quarters. We're also mindful of a recent fairly sharp decline in LIBOR. Roughly 10 basis points lower than the third quarter average is where it is today. If it stays there, that is likely to cause 2 to 4 basis points of NIM pressure in the fourth quarter. Potential offsets to the NIM compression include loan growth, moderate -- modest reduction in the cost of interest-bearing deposits, or in the case of the fourth quarter of 2012, the decline in the average cash balance, which served as the source of the TARP redemption, which, itself, should lift the NIM by about 4 basis points, all else being equal. Finally, I again note that our balance sheet remains quite asset-sensitive. Turning now to noninterest income. There are 2 items probably worth highlighting. First is that dividend in other investment income decreased compared to the prior quarter. Last quarter had some unusually large equity gains or gains in equity investments, primarily in Amegy, primarily attributable to the energy sector. Those gains were a bit more normal levels this quarter. It's also notable that gains from cash principal payments on our CDO portfolio exceeded the OTTI from that portfolio this quarter as principal paydowns and payoffs occurred on previously written-down securities. We expect such gains to continue, although they will likely be sporadic. I will note that in the fourth quarter, i.e., in the last couple of weeks, we have received cash principal paydowns from the BankAtlantic TruPS payoffs, which will result in a gain in the mid-single-digit millions on those securities. On a related note, we saw an improvement in the AOCI mark by just over $40 million after tax, which was supported by improvement in the risk spreads on riskier assets, further decline in the number of banks deferring interest payments and a continued increase in the number of banks coming current on their payments. A total of 58 banks in our CDOs, that were previously deferring at one point have now come current and have stayed current on payments. While we generally expect the value of the CDOs to improve over the long term, we caution that the path to improvement is likely to be somewhat volatile. Turning now to credit. Let me summarize that virtually all the ratios that was in the release and others that we track, all improved significantly compared to the prior quarter. Not shown in the release, for example, are the NPA inflows, favorable resolutions versus unfavorable resolution rates and the loss severity rates, all of which compared meaningfully -- all of which improved meaningfully compared with the prior quarter. Also, as you're aware right now, the loan regulator's [ph] chief accountant recently provided some interpretive guidance for banks whose consumer borrowers had filed for Chapter 7 bankruptcy. The guidance states that banks should charge down effective loans to their collateral values and reclassify them as troubled debt restructured loans, even if, as is the case in the many -- in a number of cases, even if the borrower is current with principal and interest payments and have not requested any modifications to loan terms. The company did not implement that guidance this quarter. We'll be trying to assure that we're doing this consistently for all 3 regulators who have to oversee us, but we have made some preliminary estimates. We estimate that only about $31 million of our loans' principal balance will be affected by this guidance if implemented. And we think, because of this limited amount, we expect that any charge-offs taken would be in the single-digit millions and should not affect the provision for loan losses. By single-digit millions, I mean not more than $7 million and probably rather less than that is our current estimate. No adjustments were made to the -- in the third quarter results pending completion of our analysis. Finally, looking at capital GAAP tangible common equity ratio, improved to 7.2% from 6.9%, in part due to retained earnings but also the previously mentioned in accretion in the AOCI mark and a moderate decline in assets due to our TARP redemption. Estimated common equity Tier 1 ratio increased by 6 basis points from 9.84%. Okay, some guidance for the future. As we potentially stare an election and fiscal cliff and other uncertainties in the face, I do this with a bit of trepidation, but we'll do the best we can. For loan growth, we see continued strength in our loan pipelines, had an increase in commitments in the last 6 months, and our customer's feeling a bit more optimistic. We do expect continued moderate loan growth over the next year or so. That loan growth does not, at this point, appear to be strengthening. But it seems to be holding fairly steady. Despite very expected loan growth, we're probably going to see a moderate amount of pressure on core net interest income, in part due to the new headwind of lower LIBOR rates as well as continued rate resets and the refinancing of older loans. Noninterest income, we expect the less-volatile components of noninterest income, such as service fees, to continue a modest upward trend. While we don't have much income that comes from mortgage banking, we are experiencing a slightly elevated level of revenue from that source, which could subside when the current refi boom fades. However, it's such a small component of our income that it's not likely to move the needle on your models. It's there in [ph] our CDO portfolio and OTTI, in general, that should remain low. As fewer banks are failing, more are recovering, and our model is already quite conservative at predicting bank failures. Offsetting this trend may be faster bank prepayments of trust preferred securities, which has the effect of converting cash to the senior tranches that we own, potentially improving AOCI and fixed income gains there. But it removes excess spread from the mezzanine tranches, potentially resulting in additional OTTI. Net or on balance we expect these 2 effects to be accretive to tangible common equity over time. For additional information on this phenomenon, you might want to again look at our recent investor relations slide decks for sensitivity analysis on this point. Noninterest expense in the near term should continue to be relatively stable. We expect that provision expense to remain low, continued reduction in problem credits, the ongoing improvement in loss severity rates has the potential to result in negative provision. However, continued loan growth may offset that and keep the provision somewhere around zero or very low. Regarding preferred stock dividends, as we've already guided, the preferred stock dividend in the fourth quarter should be approximately $23 million given effective [ph] full repayment of TARP in the third quarter. With that, let's open up the line for questions, please.

[Operator Instructions] Our first question in the phone queue comes from Erika Penala with Bank of America.

My first question, Doyle, is on the trajectory of the core NIM going forward. Could you -- you mentioned that the spread compression this quarter was the same as last quarter, but could you remind us at where you're originating your current loans at today?

I'll let James have a look. He's got some data, I'm going to -- on that. I'm going to let him look for it. It has been relatively stable, just a very slow downward drift over the last 6 or 7 quarters. So we're not seeing the average spread over mass maturity cost of funds compacting very much.

And Erika, it really does depend on the loan products and type for commercial business loans. We're looking at yields that are in the high 3% range. Small business loans are in the -- actually in high 4s, low 5s still. So it depends on the size and the product type and so forth. Commercial real estate is about -- oh, I'm sorry, residential and real estate is about 3.5% or so in that range. On -- throughout the overall mix for the company, we had about a 4% yield on a coupon basis, not including fee income, of new origin -- on absolute new originations, that's correct.

And just my follow-up question is on the other side of the balance sheet. Could you give us a sense, and even if you -- the long-term debt cost is still relatively high, and clearly, we've been threatened with this lower-rate environment for longer. Is there something you can do over the next 12 to 24 months in terms of calling this or taking this down? Because it's -- I mean, based on our conversations with our fixed-income folks, you could issue 5-year senior in the low 4%, which is significantly lower than what your long-term debt is costing you right now.

We're keenly aware of that. And without making any promises, we've highlighted in a number of investor presentations that we have both capital and debt that was issued during the crisis, kind of in the period 2009 to 2010, that was very expensive. We did our best to, and I think successfully, either kept those maturities fairly short or built call options into them. We do have another large series of preferred stock Series C that becomes callable in September of next year. We have 8% trust preferred just on the $300 million of that that's callable at any time. And then we have both senior and subordinated debt maturing in 2014 and some in 2015 that's very expensive. It doesn't mature until then, but we could tender for it. It's not callable, but we get tender for it. The question there would be whether the premium that would have to be paid for a successful tender is worth the yield pickup. But I'd finally also note that the market, as you kind of indicated, seems to be pricing our debt and investment grade these days, even though one of the agencies still doesn't have us there, although they have indicated that they're going to review that rating here in the fairly near future. So I think things are still moving in the right direction for us to be able to address some of those things at lower cost. I just can't, particularly as we get ready to go in the CCAR exercise, give you much guidance on exactly when and in what order we'll begin to address those things. But we will. We do expect to address them.

Our next questioner in queue comes from the line of Jennifer Demba with SunTrust Robinson.

You mentioned in your guidance, Doyle, that you thought expenses would be flattish over the next few quarters. Is that sort of the result of ongoing credit-related expenses and those improving steadily, being sort of offset by just maybe more incentives as things get a little bit better? Can you kind of describe the dynamics that may be going on within the individual categories?

I think you pretty well laid it out, almost. I mean, I -- basically, I do think that all the credit-related costs will continue to slowly decline. I mean, OREO is not likely to be 0 every quarter, unlike it was this quarter. But the general trend should continue to be down, but there probably will be some offset to that in salary kind of expenses. I think we've done a pretty good job of controlling salary and related expenses. But the general trend there should be very slowly upward, I would think. And the 2 -- I think the 2 roughly offsetting.

Next questioner in queue comes from the line of Ken Usdin with Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: I just want to ask about the excess cash balance position. Now that we're past TARP, you made the payback. Can you walk us through -- you still have about, depending on the period end versus the average balance, $7 billion to $8 billion of cash on the balance sheet earning 27, 25 basis points or so. How are you guys thinking through starting to use that and to redeploy that into loans? And what's the trigger for finally starting to kind of move that route?

Well, loan demand would be a good trigger. I mean, it's still not great. It's better than it was, but it's not great. And I don't think that -- I think dramatically cutting rates in some attempt to stimulate loan demand is likely just to cut rates, not achieve any broader objective. So -- and we still remain pretty cautious on deploying any significant amount of that cash into securities instruments with the duration extension risk of any meaningful amount. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: So, Doyle, even though average loan balances were up $400 million or so this quarter, but cash was flat, so I'm kind of talking about just the -- even within what you've got already, it seems like you're letting deposit growth just kind of still accrue onto the balance sheet, so you haven't gotten a -- is there some cash that's trapped that you can't move away? Or is it just that your continued caution will just prevent any type of remixing on the balance sheet?

As we look at where the cash is coming from, it's mostly coming from noninterest-bearing commercial DDA accounts. And we've tried to manage down the amount of and cost of just about everything else.

Almost $600 million this quarter, and that's...

So, darn, our customers keep wanting to leave more money with us. And we're basically paying nothing for that money except the FDIC costs. And the earnings at the Fed roughly offset that. So it is a dilemma. I mean, the -- I think we can't figure out a whole lot more to do to keep deposits from continuing to flow in, particularly when it's commercial customers being conservative, sitting on cash and not deploying it, and they are growing their businesses in this uncertain environment. And that makes -- despite what we said about some businesses turning more optimistic and beginning to grow and borrow, there are still others that are generating a lot of cash and that are, for the time being, sitting on it and putting it on our balance sheet, which we, in turn, put on the Fed's balance sheet. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Yes. And then my -- I'll just make my follow-up on the same topic. Is there a proportion of the balance sheet that you still have to keep in the securities book, because to your point about not wanting to extend in the securities portfolio, couldn't you continue to let that part of the book run down? Or are you already at a level where you need it for liquidity and pledging, et cetera?

Well, we don't -- I mean, cash is more liquid than securities. So I -- the -- David, do you want to comment on that at all?

[indiscernible] I mean, we don't have to have a certain level of securities. I mean, you can see here from the balance sheet that the securities are running down each quarter, that's through maturities or through prepayments. And we've done very little purchasing, because the benefit -- I mean, you all know that a 2-year treasury yields less than 25 basis points, I mean -- which is what the Fed is paying us on our Fed [indiscernible]. There are hardly no interest rate risks. It's a problem we talk about and think about every day, but we're submitted to not getting ourselves caught when the interest rates double, but we're living in [indiscernible].

I think it's also fair to say -- I mean, roughly half of our securities today are also not really a source of liquidity. I mean, the CDOs are -- we absolutely think their money's good in terms of how we have them recurring [ph] values we have on our financial statements. But they're not a source of liquidity in the sense that you can go out and find a buyer immediately. So holding a little more cash in lieu of that is, I think, prudent.

Back on Page 4 of the release, you'll notice just over $2 billion of amortized cost of our securities is in that CDO portfolio. And as Harris said, that remains -- while it's improved a bit, it's -- basically, I would characterize it as still highly illiquid.

Next phone question comes from Joe Morford with RBC Capital.

Just a couple of quick follow-ups. First, I guess, on Erika's question on capital plan and thinking about going into CCAR 2013, is the focus likely to be just on redeeming this higher-cost TruPS and refinancing the Series C? Or is there any chance we might see a dividend increase as well?

They -- the -- I mean, we're -- I guess we are mindful that our shareholders, common shareholders, have been long-suffering. And as the trajectory of earnings continues to improve, I think we do at some point want to deliver modest increases to the dividend. But we do have -- I think our equally high, or if not higher, priority is to increase earnings to common that would be dividend-able in the future by reducing these financing and capital costs. We have a lot of capital and -- capital markets and debt markets actions to do over the next 2 years or so, all with the objection -- objective of cleaning up the capital structure and reducing its costs and the debt structure.

I'd also just add -- I mean, I -- if we did anything, I think it's likely to be modest. And especially, well, depending on the outcome of, not just the presidential elections but the elections generally and what's likely to happen with the taxation of dividends beginning of the year, because you could see, effectively, a trebling of the tax on dividend, that income. And that would probably play into our board's thinking about it.

That certainly makes sense. So I guess the other question was can -- do you have any updated thoughts about potential deposit outflows related to the TAG guarantee going away at the end of the year? Anything about that?

What we're not seeing or hearing is a great hue and cry among our commercial customers about that topic. So I guess our thinking is beginning to drift in the direction of, particularly depending on what a couple of rating agencies do, that the expiry of the TAG Program may not be a particularly big event.

Hard to think that it won't have some impact, but I -- but so far, we're not getting a lot of feedback through the grapevine that that's something that's much talked about.

Next phone question comes from Paul Miller with FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: Now you talked -- you gave some pretty good color about the different regions and what's doing better, what's not. And I think there's a lot of commentary about both Phoenix and Vegas doing much better in homebuilding. But you kind of listed them as the regions doing the weakest of the 5 that you're in. Can you just add a little more color on that? Because there's been a lot of good commentary media reports about Vegas and Arizona.

Well, I said Arizona was actually pretty strong across the board for us. But you are correct, for us, this quarter, Southern Nevada still remains pretty flat in terms of aggregate -- or the net change in their loan portfolio. I don't -- Harris, do you have any recent color on that?

No. I think across the board in Arizona, we're seeing improvement in growth. But the Las Vegas market is decidedly slower. Paul J. Miller - FBR Capital Markets & Co., Research Division: Is the Vegas market slower? And then -- and the other issue, you said that, and you talked about how the energy loans and a lot of your loan demand that you're seeing is well diversified. Are you bidding a lot of housing-related loans? Are they starting to come through or is that -- they're still being muted?

On the residential side, we are seeing some growth there. Is that's what you mean, Paul? Paul J. Miller - FBR Capital Markets & Co., Research Division: No, I mean the homebuilders. I'm talking about the overall derivative effect of a recovering housing market in those areas. Are you starting to see -- when you guys were picking homebuilding in Vegas, I believe, on the derivatives, are you saying -- are you being -- I'm just wondering how much of this loan demand is related to some of the recoveries of those markets.

I would maybe chime in here. We did see a little bit of -- on the C&I side, businesses would have a construction bent to them. We did see a slight increase in the third month of the quarter. So it's hard to say that 1 month is a trend. It's still down, it's still generally pulling our loan balances down off businesses that have construction-related activities.

Our next questioner comes from Ken Zerbe with Morgan Stanley.

Just a question on NIM here. It's -- I know you guys have been pretty clear in the past about -- I think it was roughly 4 basis points of loan compression from the floors that are resetting, and I know there's a couple other things in the quarter that would have driven it down sequentially. Where are you surprised, in terms of NIM discourse? Let me go out on a limb here and say that the NIM compression was a lot worse than what we were expecting, and I'm trying to figure out what was different such that we either may or may not build in another, say, 12 basis points of compression next quarter, if that makes sense?

Well, I think we pointed out -- we've given you 2 sources that would be ongoing pressures that added up to kind of 8 to 10. And yes, it was a little bit more than that. I mean, the additional cash balances that were there for most of the quarter, that probably accounts for -- on NIM itself...

1 to 2.

Another 1 to 2, so you get close to the total. I don't think there's any other single thing that was a particular driver. And then in terms of net interest income, what we've been saying is that we needed net $400 million to $500 million loan growth on average to sort of offset the known pressures. And we kind of got around the bottom end of that and then almost kept core noninterest income stable. So I don't think we're too far off in our guidance. I mean, I -- when you get down to 1 or 2 basis points, it's kind of hard for us to get it that precise, I'm sorry.

Okay. No, that's fine. Just another question I had, in terms of the CDO portfolio, given some of you expect additional gains, and then I guess I'm thinking like the BankAtlantic in fourth quarter, but also from higher prepayments, you'd have more OTTI. When you think about the net number here -- I mean, is it such that the additional cash principal payment gains might offset the OTTI on a net basis? Or is it just too volatile in Q2 [indiscernible]?

All we said is the effect on income in any given quarter may be either positive or negative from that. They probably won't predictably offset each other in any one direction every quarter. But what we have said is that the net effect on tangible common equity of all this should be positive from those effects, because while you have those 2 somewhat countervailing effects on the income statement, the same phenomenon should be increasing the -- or improving the AOCI mark, as it did this quarter.

Next questioner in queue comes from Steven Alexopoulos with JPMorgan. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: I know one of the reasons you haven't shown stronger loan growth over the past few quarters has been an unwillingness to match price competition, particularly in markets like California. Are you now being more competitive with price? Is this what's driving loan growth to improve a bit here?

We're trying not to let good customers go over a modest price difference and -- but also trying not to be the price leader on the way down as well. It's a fine balancing act. But yes, maybe we're, at the margin, more determined to keep good customers and not let them get away. But -- and so that probably has some impact on this. But again, as I say, the net effect of all of that on average spreads over mass maturity cost of funds month-to-month has not been very dramatic. It's been very, very incremental.

There's a slide in our last investor presentation, I think, it shows that -- just to match maturity spreads on new production, it's fairly illustrative. And it's pretty flat. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Okay, maybe just to follow up on that earlier comments, you indicated that customers appear more optimistic. It's very different from what we're hearing from some other banks that are less bullish on the loan growth outlook, citing commercial customers pulling back here a bit, given the fiscal cliff. Are you seeing a change in customer behavior across the different banks related to this?

Well, I think the comments were a bit more specific to small business customers. And yes, I mean, when we started putting the script together, I really challenged James on that comment in particular. And -- but he's getting it from a fairly widespread sample of our loan officers with regard to small business. I don't think it applies necessarily to the upper middle market and commercial. So I -- maybe that helps.

Yes, I would just add that the small business lenders as we talked to them around the company have -- when you ask them the question, are things better today than they were 3 months ago, which is different from the question, are things better today than they were 4 years ago, but, no, their comments are fairly consistently unanimous that things seem to be better for the small business customer. They're probably a little bit more bankable today from a balance sheet and earnings perspective, and they are becoming a little bit more optimistic, at least the ones that we're dealing with.

Next questioner in queue comes from John Pancari with Evercore.

Wondered if you could talk a little bit more about the magnitude of the margin compression you expect? I know you indicated you expect some continued pressure, but I'm more specifically wanting to see how you can kind of talk about the benefit of the excess liquidity you have. And as loan growth improves, I have to assume that, that provides Zions with a bit more resiliency to the margin than a lot of the other banks that may not have that benefit of the liquidity sitting on the balance sheet.

We would agree wholeheartedly with that statement. We -- that's part of the being asset-sensitive that -- what we -- if and when the Fed does start to raise rates, I mean, we would expect a couple of things. We would expect deposit rates to [indiscernible] loan repricing in that environment, and we would expect some outflow of that excess liquidity as companies begin to -- the Fed would only be doing that in an environment where economic activity is picking up. And so we would expect a lot of those commercial DDA deposits to begin to flow back out. But we think there's so much of it that we could fund a lot of loan growth without substantial increases in deposit rates, at least, in the early staging of [indiscernible]. By the same token, the fact that we haven't put our mortgage-backed securities or other securities with duration extension risk means that as rates rise, we're not going to have a large pile of what would then become underwater securities that we would be selling at a loss if we needed to generate liquidity. So that's basically the game plan. If the Fed succeeds at keeping rates very low for longer, then it's going to take a while for that to play out. If we see a quicker return over the next year or 2 to economic -- more substantial economic growth, let's say, we -- I think we're very well positioned for that environment.

Well, I guess, also what I was getting at is, barring any move in short-term rates to the upside, just the -- I guess, I wanted to see how you thought about the asset mix shift, just funding loan growth the excess liquidity [indiscernible] earning asset mix shift could provide some stability there.

Well, yes. I mean, we have -- we're earning 25 basis points on that cash. And on -- every loan we put on earns us 400 basis points, plus or minus. So the pickup is 3 75 for every dollar of cash that converts to a loan. That's the basic math. Maybe you're asking that more subtle question than I'm getting. I'll give you one more try.

No, no, that's essentially it. I guess I was just looking for if you could put that into context of the margin compression that you expect through 2013.

Well, yeah, I mean that's -- what we've said is that if can get $400 million to $500 million of average loan growth at kind of current rates consistently, that offsets the margin compression and keeps net interest income stable.

And I would add -- maybe I would add, too, that it's a little bit harder to predict sometimes on margin because, for example, back in January when we first gave guidance about the margin compression in the 4, 5 "basis point per quarter" range, we didn't incorporate in that view a decline in -- a sharp decline in LIBOR rates. So there are a lot of factors at work, sharp decline in residential mortgage pricing as well. So those are some of the considerations that could cause additional pressure. But back at that point in time, we estimated that as you went into 2013, it was 2, maybe, or so basis points per quarter of margin compression throughout 2013. And recent analysis is not suggesting something significantly different than that. And that's, again, on a static balance sheet. It assumes no growth. So...

By the way, this LIBOR decline down to about 30 basis points or so, that's about as -- that's getting close to its low as it's been in over the last 5 years, going back even pre-crisis. So -- and it's short-term LIBOR, so that repricing effect is not one that continues for a long, long time per se. It's probably worked its way through fairly quickly.

Right, okay. And then there's a different topic. As for now, I'll ask about the loan loss reserve at 253 bps of loans here. I just want to get your thoughts on, long term, where that could normalize out at.

I'll -- I'm going to continue to refer to the regulators, the FASB and the SEC, on that question. I'm aware they're having lots and lots of discussions, and the regulators apparently expressing the point of view that companies should have -- maybe have not been cautious enough about releasing reserves aggressively and that, that can't continue. And -- we don't think they were particularly talking about us when they made those comments. And so we're -- I think we'll continue to just be cautious and follow the trends.

Our next questioner in queue comes from Steve Scinicariello with UBS.

Just given the slightly more optimistic tone on loan growth, I'm just trying to separate how much is really demand-driven from better environmental kind of drivers versus how much is driven by you guys feeling much more comfortable now that TARP is behind you, and you can deploy a lot of this excess liquidity. So just kind of curious maybe how much of this more optimistic tone is demand-driven rather than maybe supply-driven.

None of it's really supply-driven. It's demand-driven. TARP -- having TARP -- having repaid TARP had, I don't think, any impact either way on our willingness to lend. We've for quite some time now been turning over rocks, looking for credit-worthy borrowers who wanted to grow and borrow, and that has not changed. What's changed is a little bit more willingness on the part of the few more borrowers to do so.

Good. No, that's good to hear. And then I was just curious, in that vein, I think you said -- mentioned that total loan commitments were up like $400 million last quarter. Just kind of curious what that might be in the third quarter.

I'm going turn to James, because I don't know.

My [ph] commitments were up a couple hundred million dollars this quarter. Over the last, I think -- year-to-date, I think it's up $1.5 billion. So it's up fairly substantially. Some of the biggest commitment increases came in the prior quarter and the quarter before that. They were in part related to construction loans which, again, we mentioned that we think that will cause some loan growth in that category in the future.

Our next questioner in queue comes from Brian Klock with Keefe, Bruyette & Woods. Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division: Just real quick, I think the -- what's interesting is you guys have a bunch of levers, right? So the excess liquidity is out there that, really it's demand that from customers that can help deploy that. On the capital side and debt side, it's kind of more at your control. I guess what I'm wondering is when you think about your senior debt and the sub debt, the trust preferreds, do you have to wait to CCAR in order to think about tendering for those? Or is that something you think you could do before the CCAR process takes place?

It's a question -- that's a question we're asking ourselves, Brian, and I don't know the answer. It's a [indiscernible]. I mean, it's a good question. I think it's unequivocally true that actions that on net would reduce capital, particularly core Tier 1 kinds of capital, so it would reduce parent liquidity significantly with the -- probably not entertain-able except in the context of the CCAR process upcoming. Whether you could do some things that were -- like we did with earlier this year, with exchanging one piece of preferred for another piece of preferred that were substantially similar, except for a lower cost. Whether you could do some of that is an open question and one that is of interest. Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division: And then maybe just a follow-up on that, can you update us on liquidity that's at the parent company now and then what kind of dividend capacity you can upstream from the subs?

I think the parent has very ample liquidity. I know it's well -- it's in excess of $0.5 billion with the parent kind of where it's been and where we're targeting it. And all the banks are profitable, and most are upstreaming dividends and some -- there's probably still some but smaller than our recent quarter's repatriation of capital from some of the subs still yet to come. So I don't think cash at the parent, per se, is constrained on the common dividend. It's one of the other things we talked about earlier in response to a question. Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division: So it sounds like you've got the ability to access that cash. It's just the matter of working it -- working through the whole CCAR, the regulators.

Right. Cash at the parent is almost $600 million. Actually, it's about $580 million at the end of the third quarter.

And as we -- the net parent cash needs now both for TARP repayment and for TARP dividends are -- they've declined substantially and, as we address some of these other higher-cost things, will continue to decline. So we're feeling pretty good about the parent cash.

And with that, ladies and gentlemen, that does conclude our times for question. I'd like to turn the program back over to Mr. Abbott for any additional or closing remarks.

So again, thank you very much for joining us this afternoon. I'll be happy to take follow-up questions if you have them, and we'll see you at another investor conference or on the next analyst call next quarter. Thanks again.

Thank you, gentlemen. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.