Zions Bancorporation, National Association (ZION) Q4 2011 Earnings Report, Transcript and Summary

Doyle L. Arnold - Vice Chairman, Chief Financial Officer and Executive Vice President H. H. Simmons - Chairman, Chief Executive Officer, President, Member of Executive Committee and Chairman of Zions First National Bank James R. Abbott - Senior Vice President of Investor Relations & External Communications Kenneth E. Peterson - Chief Credit Officer and Executive Vice President

Craig Siegenthaler - Crédit Suisse AG, Research Division Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division William Christian Stulpin - Raymond James & Associates, Inc., Research Division Ken A. Zerbe - Morgan Stanley, Research Division Leanne Erika Penala - BofA Merrill Lynch, Research Division Joe Morford - RBC Capital Markets, LLC, Research Division Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division John G. Pancari - Evercore Partners Inc., Research Division Kenneth M. Usdin - Jefferies & Company, Inc., Research Division Robert S. Patten - Morgan Keegan & Company, Inc., Research Division Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Good day, ladies and gentlemen, and welcome to Zions Bancorporation Fourth Quarter Earnings Conference Call. As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. James Abbott. Sir, you may begin.

Good evening, and we welcome you to this conference call to discuss our fourth quarter 2011 earnings. I would like to remind you that during this 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 and 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 one 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?

Thank you all very much for joining us this evening. We are overall quite pleased with the progress you saw this quarter on asset quality. And we expect continued improvement in the first quarter, particularly with respect to net charge-offs but also with other asset quality metrics. As you've seen in the release, our nonperforming assets declined 16%, and within that number, other real estate owned declined a strong 25%, so we're very pleased with that. Additionally, a favorable resolutions with nonaccrual loans such as payoffs and upgrades equaled 1.8x the number of unfavorable or the volume of unfavorable resolutions such as charge-offs. A year ago, that ratio was 1.4x. Quarterly new inflows and declassified loans declined an additional 8% after declining an unusually strong 20% last quarter. Annualized, declassified loan inflows equaled $1.3 billion, which compares to the end-of-period balance of $2.1 billion. And we expect classified loans to continue to decline over at least the next few quarters. Our allowance for credit loss ratio to annualized net charge offs remains at one of the highest levels in the industry at 3 years, and this is despite a $95 million sequential quarter reduction in the allowance for current loss balance. Loan balances grew $427 million. However, we note that the average balance grew at a much more moderate pace of $113 million. Customers borrowed significantly in the latter weeks of the quarter and paid down about $200 million of these balances in the first week of January, so we're inclined to focus on the average balance growth. Nevertheless, the increase on average balances is an improvement from the prior quarter's modest decline of $56 million. The greatest challenge of the quarter is evident in the net interest income line, which declined by 1.8% compared with the prior quarter. The decline was caused by loan and pricing activity, due to both maturities of loans that were brought to several years ago at higher rates, as well as adjustable rate loans that reached reset dates. For these same reasons, we expect pressure on loan rates throughout 2012 and perhaps into 2013, depending on what happens with the yield curve. However, there are 2 positive developments that should help provide some support for net interest income during 2012: First, given a moderate strengthening in customer sentiment and stronger pipelines and continued production momentum, stronger loan growth in 2012 should support net interest income; secondly, loan pricing appears to be firming across most categories in loan sizes. Net, we believe that net interest income should be relatively stable during the next year. As we look into 2012, despite a challenging revenue environment, we do expect to see growth in earnings per share. Some of you look at earnings excluding reserve releases. With the continued improvement in asset quality, that number should rise in 2012, primarily driven by declines in net charge-offs. Finally, my remarks, I just want to point out that Zions is participating in the Federal Reserve Capital Plan Review 2012 process, and we timely submitted our capital plan, stress test results and related documentations required on January 9. While we feel comfortable with our submission and results, we consider that filing and the subsequent Federal Reserve review currently underway to be part of an ongoing regulatory process that won't be complete until we were in the outcome of the Federal Reserve review on March 15. Therefore, we will not comment or speculate on the outcome of that review prior to announcing them on or shortly after March 15. So with that brief overview, I'll ask our Chief Financial Officer and Vice Chairman, Doyle Arnold, to review the quarterly performance. Doyle?

Thanks, Harris. Good afternoon, everyone. As first and few -- a little overview, as noted in the release, we posted net income applicable to common shareholders of $44.4 million or $0.24 per diluted common share for the 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 amortization, when it converts into preferred, et cetera, and also the FDIC-assisted loan discount accretion. We think this adjusted number is useful to longer-term investors as we do not expect those income and expense items to be with us in perpetuity. On that basis, earnings were $0.30 a share, down from $0.40 per share last quarter. There were a number of significant items that occurred during the fourth quarter that are worth noting. Within noninterest income, we recorded $12 million of OTTI on securities this quarter, which included about $5 million of OTTI that was taken to adjust model default probabilities in the medium term, not the near term. We made those probabilities in years 2 through 5, a bit more conservative than they have been. I would note that our model has been particularly conservative lately in predicting near term or one-year default probabilities, so we didn't adjust those, and we continue to be predicting a bit more in the way of defaults than are actually occurring in the near term. Secondly, as we've previously discussed, the Durbin Amendment processed about $8 million. I believe our previous estimate had been $9 million but we currently estimate it was about $8 million in the quarter, and that is found in the Other Service Charges line item on the income statement. We do expect that service charges and deposit fees will increase somewhat as we move through 2012 and attempt to reevaluate some of our other pricing for services in the consumer and other space. Within noninterest income, there are a couple of things -- I'm sorry, noninterest expense, there are a couple of things worth noting. The salary and benefits line item, you'll note, increased overall by about $3 million. However, as we mentioned in the release, there was a $6 million expense related to employee benefits -- accrual for employee benefit expense that will not recur and actually related to a prior period. Legal and professional expense line item included about $3.5 million related to consulting and professional service expenses incurred in our capital plan and stress test preparation for the CCAR 2012 exercise. Because of our first official submission under the Dodd-Frank Act, we hired a couple of outside advisers and have consulted with previous participants to get their insight and expertise. And that again is an expense that we don't think will recur. Additional increases in this line were related primarily to seasonal increases and should decline somewhat in the first quarter. And in the other noninterest expense line, there was -- we accrued about $7 million for potential loss contingencies -- excuse me, for litigation extending from several legal matters, including several that are similar to those that have occurred at a number of other banks. Put that $7 million in perspective by comparison, we had accrued a total of $3 million for legal expenses through the first 3 quarters of 2011. And therefore, the full year total is about $10 million. As you can probably appreciate the timing of such accruals are somewhat episodic, and the dollar amount per situation can change from time to time so it's very hard to guide to a number for 2012. Also included in that line item, the other noninterest expense is the amortization of the FDIC indemnification asset which was about $13 million this quarter. Now I'd like to turn the page -- turn to credit and refer you to Page 12. And I'll add a couple of details to Harris' other comments where he'd indicated that we've had significant improvement in credit quality. If you'll note on the first line on Page 12, nonaccrual loans declined from $1,039,000,000 to $886 million or about a 15% decline. And then as Harris mentioned, the next line, other real estate owned, was down about 25%. Scanning on down the page, nonaccrual loans plus accruing loans past due 90 days or more were down from $1,169,000,000 to $1,004,000,000, so about a $165 million decline. The very last line, classified loans, came down by a bit over $300 million, similar to the pace of the prior quarter as we've continued to push aggressively to resolve problems. The one line that was a little more sticky is not on that page, it's, I don't believe, it's on another page that relates to the reserve. But net charge-offs were down but by a lower percentage. We do expect to see a somewhat larger drop in net charge-offs in the first quarter than they -- the kind of the gradual decline of about $10 million we've seen in the last couple of quarters, and we think there's a really good chance that, that number will be down significantly. Essentially throughout 2012, including the last couple of quarters, we were pushing very aggressively to resolve problem situations and got through a lot of those, and we'll continue to work down the problem loans but we think that the net charge-off number is likely to decline meaningfully in the first quarter compared to the third and fourth quarters of last year. The NPA, or nonperforming asset, resolution rate set a recent high at 31% at the beginning, NPA balances plus quarterly inflows. And of the more than $450 million of NPAs resolved, nearly 70% were resolved favorably such as through payoffs, paydowns or upgrades. Loss severity for the trailing 12 months generally continues to improve from about 10% of total classified loans to just a hair over 8% of classified loans. Construction, both residential and commercial and commercial real estate -- excuse me, construction and C&I business loan loss severity improved. Term commercial real estate loan severity was stable, and owner-occupied loan loss severity was slightly higher. But again, this was one of the areas that we're working particularly hard to address problems situations and work down classified assets. Turning now to some of the revenue drivers on Page 11, the preceding page. You'll see the change in loan balances by type. We experienced, on the first line, particularly strong growth in C&I loans, up about 6% sequentially or $607 million. As Harris mentioned, we did experience some attrition, a couple of hundred million in the first quarter in total loans. So it looks like there were some window dressing that may have gone on, on the part of some of these customers near quarter end. But based on what is -- as Harris mentioned were strong pipelines, we would expect some continued growth in this category in the first quarter. These new C&I loans are priced on average relatively neutral to our overall NIM, and to the extent we can fund these loans with existing cash, which is quite doable. The loan growth would be accretive -- will be quite accretive to the net interest margin. Importantly, pricing on our C&I production, new loans, had increased a few basis points over the prior couple of quarters, so the growth that we saw this last quarter didn't come as a result of any slackening of pricing discipline. And to answer a question that we've heard some analysts have been asking our peers regarding purchase loan activities, we're both a syndicator of loans and a buyer of syndicated loans, and the 2 more or less offset each other, not perfectly. But going to the bottom line, about 1/3 of the company's linked quarter C&I loan growth was driven by an increase in our net syndicated loan portfolio, which means about 2/3 of the growth was unrelated to syndications. If you go down a few lines on the commercial real estate, the construction and development portfolio declined about $200 million or 8% sequentially. $60 million of the decline was due to conversions into term CRE, and you can see the term CRE category, the next line, did grow modestly to $7.9 billion. So some but not all of the growth in term CRE is explained by completion of construction projects, and they had leased up and were rolled into [indiscernible]. A small $13 million of the decline in construction and development was due to net charge-offs, but the large majority either paid off or paid down during the quarter. New production and draws on construction and development lines continues to increase, was up for the fourth consecutive quarter. By way of a reminder, about 2/3 of the construction and development portfolio is for commercial buildings, and most of the property types are experiencing healthy improvement in cap rates, moderate improvement in occupancy rates and generally stable effective rents. And those trends, of course, are supportive of credit quality and loan growth both in the C&D and term CRE portfolios. Turning to Page 15. We break out the major drivers of the net interest margin. We've detailed the major NIM changes in the release. But to summarize, deposit inflows remain quite strong during the quarter and were up on average $800 million -- in excess of $800 million. But anecdotally, if you flip back to Page 9, you can see the total period -- the quarter end to quarter end deposits grew by $1.5 billion, of which $1.2 billion was DDA and most of that was commercial. We saw the same year-end pattern in deposits as in loans, namely a strong run-up in the month of December in deposits, followed by a significant reversal in the first week of January. Significantly, it didn't reverse by any means all of that run-up but some hundreds of millions went out in the first week of January. So we, again, see indicators of some window dressing perhaps on the part of commercial customers. On the asset side, average loans, as Harris I think mentioned, increased $114 million. Average securities declined $471 million, driving an increase in average cash balances of more than $1 billion. The decline in securities was essentially the result of a decision to sell or runoff the $700 million of short-term treasuries that the parent company here owned and parked the money in cash, both were at very low yields, but and therefore it didn't materially affect the NIM. But the net result from the -- attributable to the increase in cash on the balance sheet was a decline in the NIM of approximately 8 basis points. Aside from that, the NIM declined an additional 5 basis points, which is attributable to 2 factors: First, adjustable-rate loan caps from loans originated several years earlier are resetting to lower rates as the repricing index is lower now than when those loans were booked. Secondly, maturing loans, many of which have rate floors, were replaced with new loans at lower coupons or lower floors compared to the loans originated when spreads were higher. We think the NIM will be under pressure for an extended period from those forces by approximately 2 to 4 basis points per quarter as we look at the maturity and repricing schedule of the loans. However, it doesn't take too much loan growth at current pricing to offset that. So if and as loan growth strengthens and we're able to trade cash for loans and affect the pickup, the net interest income should offset this pricing pressure. And as Harris noted, we do -- it does seem to be the case that new loan pricing has roughly stabilized in recent months. Finally, our balance sheet does remain quite asset-sensitive, where an upward parallel shift in the yield curve of 200 basis points would result in an increase in net interest income of more than 10%. We, of course, are not forecasting an immediate parallel increase of 200 basis points, but that will give you an illustration of just how asset-sensitive we are. Shifting to a discussion of capital. GAAP tangible common equity ratio declined to 6.77% from 6.9%. That's entirely due to the buildup in deposits, which drove the buildup in cash balances. If the balance sheet size had simply remained static compared to the third quarter, the TCE ratio would have improved to about 7.0%. And we give you in the schedules attached to the released the regulatory capital ratios, which were relatively stable, Tier 1 common, we estimate at 9.55%, essentially unchanged versus 9.53% in the prior quarter. And we're estimating our Basel III Tier 1 common ratio fully phased in at roughly 7.9%. So that's kind of some -- it's the end of the quick tour through the balance sheet and income statement. In terms of what to expect in the coming quarter or a few quarters, we do expect continued improvement in credit quality, including significant reduction in net charge-offs in the first quarter compared to the fourth quarter. This should allow us to keep the provision very low. We look for net interest income to be relatively stable. We think OTTI should remain relatively low. We are not aware of any assumption changes at this point that we're likely to make that would affect that, and so far we have had no exposure to any bank failures so far this quarter. There'd only been 3, mostly very small ones nationwide, we had exposure to none. Noninterest operating expenses will be up a bit in the first quarter due to normal seasonal trends. Things like FICA, tax, everybody will be paying that in the first quarter. There'll also be a modest couple of million dollar increase, I believe, in pension costs for this year. But on the other hand, noninterest credit-related expenses should continue to decline as we go through the year. With that, operator, we will pause for a minute to let people log in for questions, and be pleased to start taking questions.

[Operator Instructions] Our first question comes from John Pancari from Evercore Partners.

Doyle, in your margin outlook that you provide, the 2 to 4 basis points per quarter, can you talk about the plans for the excess liquidity sitting on the balance sheet, the $8 billion that you had at the end of the quarter?

Well, the plans for the $8 billion are not to do -- not to go out and buy a bunch of securities with it. And since it all results from customer deposits, we're not going to encourage customers to leave. So the likelihood and what we'd like to do is use that to fund what does appear to be some beginnings of a little greater loan demand and loan growth that we're seeing out there. But that, of course, will take time. But as we look around the other opportunities, we continue to price very, very low non-relationship CDs and other non-relationship deposit accounts, and to not have anything on the balance sheet that isn't core customer-related to the greatest extent possible. But we're not going to go out and buy mortgage-backed securities or very long dated treasuries at these historically extremely low interest rates and then get caught on the wrong side when the Fed, at some point, inevitably, will begin to tighten.

John, this is James. I would just comment, I've talked to a number of relationship managers across the company, that most of them are responding that the loan growth that they're seeing is a function of natural loan demand as opposed to just fighting and scrapping for market share at all costs. And so there is some natural organic demand and that's encouraging. So that will hopefully help draw down some of the cash balances.

Okay. And then the other thing is these customers, a lot of this is commercial DDA buildup and if and as we're seeing gains or a bit of a recovery in the economy, we would expect some of those customers to start putting those balances to work in their companies as opposed to parking them in insured deposit accounts.

I would just also add, the $8 billion figure, about $1 billion of that is really float. I mean, it's -- so there's a significant piece of that, that's actually just always going to be there for any bank. And the other thing I'd just add is that we do expect that there are going to be greater constraints on the ability to deploy cash. We're going to have to have higher liquidity standards going forward. And so some portion of that, I expect, will be more permanent than it's been in the past.

I guess one final thing I forgot to note. We have about $1.4 billion that is earmarked one way or another to -- for TARP repayment. And so exiting TARP would reduce those cash balances by that amount, reduces total balance sheet size by that amount, and improve net earnings to common by $70 million a year.

One final thing that needs to be taken into consideration is the fact that we have unlimited insurance on DDA up until December 31 of this year. And we show that we've got a lot of excess DDA balances, which we believe are coming from corporations that are here just because it's easy, and they've got unlimited FDIC insurance, so that too will soft -- as that money gets to the end of the year, expect some of that will leave and it will reduce the cash balances.

And that's a significant number. I mean, depending on how we try to estimate that, we come up to something like $3 billion to $5 billion of that is commercial customers who were here several years ago and are still here and have that much more in their checking accounts than they did then.

Okay, that's helpful. And then just quickly, how much of cash at the parent did you have at the end of the quarter?

About $1 billion.

Our next question comes from Brian Klock from Keefe, Bruyette. Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division: Just a quick follow-up on John's question about parent company cash. Doyle, I guess how much capacity do you have at the bank's upstream capital? And does that include the ability to redeem some of the preferred, or do you still have preferred that you can redeem?

You mean preferred at the banks? Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division: At the banks, right.

I think over time that there is excess capital at the banks. I think withdrawing it requires regulatory approval, and we have had preliminary discussions with the regulators about the appropriate amount and pace and constraints on withdrawing it. I think with the -- until -- there are probably some constraints on that still, from concerns about the possibility of the double dip and the regulators were certainly part of the stress testing. It's not just overall capital of the company but capital under stress at the individual banks. And we've laid that all out for the regulators and showed them what we think, but it's going to be up to them to decide what they think. I will just point out that, which I think you're all aware, we did upstream $100 million in the fourth quarter by redeeming some -- from our Nevada State Bank subsidiary, by redeeming some of their preferred stock, or that the parent had sent their way. And we would expect that we'll do more of that at a very measured pace as we go through 2012. Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division: All right. And really, I guess, with the pace of your classified assets cleaning up and improving, I guess give you more capacity to upstream capital and carry, right?

I would think it would over time, yes. Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then just one real quick question, thanks for the color around the C&I growth. I would imagine that some of that syndicated credit growth was within the Amegy franchise. But can you give us an idea on the C&I growth, how much of it came from your different subsidiaries or your different regions?

You're correct. The strongest was Amegy, followed by Zions Bank. I'm not sure who was in third place. Do you happen to have that information, James?

Yes. I would say 75% of it was those 2 banks. Very strong selling from Amegy in terms of that volume. And that was by far the strongest in terms of C&I growth.

We're not fumbling -- we can get back to you with the other rather than hold up. We're not finding the right page here. But that's the bulk of it. There was -- there was a little bit of growth just about everywhere as you kind of -- and there was basically none of the banks showed net shrinkage in C&I.

Our next question comes from Ken Zerbe from Morgan Stanley.

Doyle, you mentioned that you're talking how sensitive your NIM is to loan growth. What loan growth assumptions are you making in terms of your 2 to 4 basis point NIM compression assumption?

Well, the 2 to 4 -- I mean you could -- the 2 to 4 basis points a quarter was the compression that results from older loans resetting or repricing as we go through 2012. So it would take an equivalent -- roughly an equivalent amount of reduction in funding costs, or it would take -- if you wanted to offset all of it with loan growth at a 300 basis point spread over cash, you can figure it's probably $500 million, $600 million a quarter if you had to do it all that way, but the reality is it will be probably -- we think it's quite feasible to see it offset by a combination of those 2 things.

So just to be clear, though. So that's the loan aspect of it. Do you guys have any expectations for all-in NIM compression, given a set level of loan growth?

Well, we're not trying to focus on the NIM compression all-in because it is so crazy right now with this $1 billion of cash coming in, in one quarter and then some -- hundreds of millions of it coming -- going out in the first week of the next quarter. That's the biggest...

Yes, totally understandable. I guess of the 13 basis points, 8 is the cash impact so you can certainly set that aside. It's more of the 5 basis points of your other security or loan and earning asset-related compression...

And it was mostly all driven by the loans and the repricing of older loans and resetting of older floors. So and it's kind of that 5 that you should compare to the 2 to 4 that we outlined as being -- and it varies -- we've tried to schedule out the maturity resets of the loans for the next 4 quarters. James has actually mucked around and done that, and it kind of varies between 2 and 4 per quarter depending on which quarter you're in. If every loan that matured in quarter 2 reset at today's spreads, what would the -- and all of that, that would result in, depending on the quarter, 2 to 4 basis points per quarter from that. And we're saying we think that the current spreads over a matched maturity cost of funds are kind of in the 3.25% over range. So if you -- it doesn't take a lot of loans. If you were going to offset, totally the impact of that little bit of compression with loan growth, you can calculate it out, just do 3% over earning of the cash and you get to about $600 million a quarter that it would take. But I'm saying that's not the only source of how you offset it. There's funding costs, I believe, are still drifting down a little bit, and there's a little more room to go there too. But we had a -- it was a bit larger reset impact in the fourth quarter than we expect to see over the next few, at 5 basis points compared to 2 to 4.

Okay, now that helps. And then just very quickly on the expense guidance of up in the first quarter. Does that adjust for sort of the unusual expense items that you had this quarter? Or is that...

No, not necessarily...

Or just in absolute, it's going to be up...

We're expecting mostly about kind of a salary and benefit line have some -- usually picks up in the first quarter because you're starting a new year with everybody, all the FICO and Medicare accruals and all that stuff. Anything I'm missing here, James? We weren't trying to say that we expect it to go up notwithstanding the $15 million of kind of one-off items that we broke out for you.

Okay. So we [indiscernible]...

It would be in addition to that, yes. We weren't trying to say it's going to go up even in addition to that.

Our next question comes from Steven Alexopoulos from JPMorgan. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Maybe I'll start, I just wanted to clarify, the loan payoffs that you're saying you saw here in the first quarter, were these the same customer that borrowed from you in the fourth quarter?

No. No, no, no. These are the older loans that had fixed rates. Some of them would've been things like 5/1 ARMs, and back in time had some commercial mortgages, 5-year resets, et cetera.

I want to make sure we got your question... Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: No, I think I got you. So the rate reset higher and people basically paid these off essentially. I'm just trying to get at...

No. The margin compression was due to loans that maybe were 5/1 ARMs or 3/1s that were made in 2006, 2007, that came up to the end of that -- when rates were quite a bit higher. And they came to the reset. And they reset at a much lower rate because the break to which -- the index is lower. Spread stayed the same, the index was lower, so the overall rate comes down. So that's one issue. That's what drove a lot of the 5 basis point compression. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: But Doyle, I wasn't asking for that. I'm asking for -- no, I'm asking for you referenced the loan payoffs early in the first quarter?

Yes. What I think that was, people just drawing down on lines and for whatever reason to show more cash on their balance sheet or whatever and then repaying -- paying them back down. I mean, we haven't done it in customer-by-customer analysis, but there was a big increase in deposits, there was a big increase in loans. And the 2 may not have been unrelated. If the customer drew down on their loan and held the cash on deposit with us for whatever reason, I haven't tried to see if that's tightly linked. But we saw a big run-up in December of both loans and a lot of it commercial and commercial DBA balances. And in each case, somewhere between, I don't know, probably 30%, 40% of the increase got reversed out in the first week of January. Lines got paid back down, cash, the DDA balances went back down. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Got you. Just one other follow-up question. With NII expected flat in 2012, the lower provision benefit is now basically in the earnings run rate. Any plans to cut cost in 2012 to improve profitability from where it is?

Do you want to talk, Harris, you want to...

Well, just ongoing programs. I mean, we've continued to close down some branches. We've closed about 10 offices this past year. We got several others kind of on the drawing board. We don't see a big across-the-board kind of cut. We actually, back in 2009, quite dramatically cut some of the kind of core operating costs. And I think it is getting tougher to do that. I think where you're going to see costs coming down is in OREO expense credit costs. Those are the areas where we've really seen major increases, and they will continue to come down. But I think it's something we continue to work at but as we go along, we're quite focused on activities, branches, et cetera, that aren't making long-term sense as we look forward. So but we're not going to be reporting today a big project, if you will.

Our next question comes from Chris Stulpin from Raymond James. William Christian Stulpin - Raymond James & Associates, Inc., Research Division: Regarding your C&I loan growth, Doyle, you mentioned roughly 1/3 was from syndicated relationships of syndicated loans. What has that ratio been typically in the past, or has it fluctuated greatly?

We haven't specifically tried to look at that in the past because the question hadn't particularly come up. I doubt if it's a whole lot different. I will note that the percentage of our total loans that are accounted for by syndicated loans has been pretty constant quarter-to-quarter for a while. It's not... William Christian Stulpin - Raymond James & Associates, Inc., Research Division: Over the years.

Yes, over the last couple of years, I mean. But as far as -- it's kind of hard to even answer the question because we've had slight net loan growth or net loan shrinkage over the last few quarters, so the percentage of that change that came from syndicated probably isn't very meaningful. But in terms of our total overall activity, it's roughly a constant portion of the balance sheet. William Christian Stulpin - Raymond James & Associates, Inc., Research Division: Okay. Fair enough. And I guess my follow-up question, you mentioned that pricing has improved slightly. I was kind of surprised by that given the commentary I heard from other peers within your market that said it's still very intense. And I get the impression that you're having more banks entering your market, or at least more banks participating in growing loans within your market, given the arguably recovering economy. Can you speak about the pricing within your market?

Well, I can speak to overall. I mean, we did -- I wouldn't get too fixated on this uptick of a couple -- a few basis points. But if I look back over the last 6 months, the all-in spread over matched maturity cost of funds kind of all originations of all kinds month-to-month-to-month-to-month has been fairly stable now in the 300 to 350 range, given our mix of loans. That's 300 to 350 over matched maturity cost of funds. That is down very sharply from where it was 2 years ago, 18 months ago, when it got up over 500. But it does seem to have come back to kind of the floor level where it was pre-crisis. And the rest of it is just, I think, anecdotally what James and we're hearing by talking to a number of our relationship officers, it's not that it's gotten better, it's just stopped getting brutally worse each quarter. It's somewhat more stabilized. Probably the area that we're hearing a little bit of increases is would probably be the result of some of the larger European banks perhaps shying away from the U.S. market to some degree, and that's allowing the U.S. banks to price a little bit better on some of those types of credits. That's probably the predominant area. On your small and middle market, you're seeing fairly stable pricing linked quarter. In most markets, I would comment that Nevada is still experiencing price weakness, and Nevada had generally a weak performance across their loan portfolio as a result of that not wanting to cave in on pricing. So but that the -- they're struggling, the market is struggling significantly, so that's probably a little color for you.

Our next question comes from Jennifer Demba from SunTrust.

This is Jennifer Demba. I have a question about Durbin. Can you talk to us about strategy you're looking at to offset Durbin? And is the service charge run rate a good one going forward?

One of the benefits of having 8 banks is that we kind of have 8 different strategies for offsetting that. We've left that to the banks, and they are, in fact, going to be doing different things. I mean we're look at various combinations of what others have done, monthly service charges, higher minimum balances, other things. But it all doesn't necessarily have to come out of the same consumers that -- or the fee erosion from Durbin came from. Now the $8 million reflects very little offset. We do expect that over the course of 2012 offset some of that, not all, somewhere between 1/3 and 2/3 probably, or where the banks have identified strategies. Harris, do you want to comment any further on that or...

No, I think that's, I think, where we are.

Okay. It should get a little better as time goes on.

Okay. Second question. Can you just talk in general about what you're seeing in the real estate market in Nevada and Arizona?

I'll let Ken Peterson, the Chief Credit Officer, talk about that.

Nevada and Arizona, in particular, it's is still pretty flat. Very few opportunities. And that's not where we're seeing the opportunities in the commercial real estate. We are seeing some growth and opportunities in the coastal regions of California. We're seeing some in Texas and a little bit in Colorado. But not a whole lot of green shoots coming out of the 2 desert states.

But at the same time, we're not seeing a re-deterioration of credit quality.

I think we have worked through most of our problems there, it's pretty flat. We're looking at a lot of different areas for opportunities. The commercial real estate is not our real growth opportunity at this point in the market in those states.

I would also add that we also -- I mean, we've seen stability in loan outstandings in those 2 target markets. But it's coming as a result of some growth in C&I and some consumers. So there's -- they're not continuing to shrink but it's -- we're having to offset some CRE shrinkage to stand still.

Just a couple of little things to add. Vacancy rates in Las Vegas basically flat quarter-over-quarter. Vacancy rates in Phoenix improving somewhat. Cap rates actually are a pretty good story in both markets. Cap rates are coming down fairly significantly in both markets and have been for a while, from about 9% or so a couple of years ago to about 7%, 7.5%. That's still 150 basis points over other more established -- or not more established, but over more healthy markets like Los Angeles. Rent growth is still very, very anemic.

Our next question comes from Craig Siegenthaler from Credit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: The Nevada State dividend, I think that really came from more of a position of kind of capital and reserve strength probably more than earnings power. But I'm wondering, can you talk about what other subs you have that are in a position to dividend capital up this year?

Yes, you're correct about Nevada, that was a return of capital, not a return on capital. But we have received dividends on preferred and common stock from California Bank & Trust, expect those to continue. From Zions Bank, expect those to continue -- actually, we have approval for this quarter, I don't know if that one has actually come. And from Amegy Bank, and expect those to continue. And those, of course, are the 3 largest banks that collectively account for 3/4 or more of the franchise from -- it will be a little -- it will be much smaller and a little more episodic from the other banks in 2012. Craig Siegenthaler - Crédit Suisse AG, Research Division: Got it. And then with your comments of $1 billion of liquidity at the holdco, I think you have about $1.4 billion of debt. But how should we think about both debt and dividend coverage at the holding company in terms of the NIM level that you sort of don't want to break through future potential capital actions?

Well, I don't want to go into -- I don't want to outline the whole capital and financing plan that we submitted to the Fed. But there are various components of it including dividends and return of capital from the banks, some financing actions. We've got $255 million of senior notes that were TLGP-guaranteed, for example, maturing in June that need to be refinanced. Our general thinking at this point is that we want to maintain at least 12 months, and preferably a bit more than that, of time to require funding at the parent. But it's going to be hard for you to piece together from that statement what the individual components are. And since they're all under review by the Fed, I'm not going to help you resolve that on this call. There is a path to get there, after March 15.

Our next question comes from Joe Morford from RBC.

Really just 2 clarifications. First, you talked about net interest income being relatively stable over the next year. Just to clarify, do you mean stable with fourth quarter levels or with full year 2011 levels? And also, are you talking about reported or core net interest income?

We were hoping you wouldn't get that -- quite that picky. I think the reference was primarily with regard to the -- it's for the fourth quarter, which was, if you look at net interest income before provision, that was down from the third but it was the second highest. I guess -- and I'm not trying to be cute here. We don't know. One of the -- the first one of the bigger hits to that number on a GAAP basis has been the sub debt conversions, and we won't know and announce until February 15 or thereabouts what the first quarter impact would be. It's right now, the notices that we have a very, very small, but they always are this far in advance. Most of that comes in, in the last few days. But it's based on -- it's basically, that guidance was based on it being similar to what we've been seeing the last couple of quarters, which was kind of $15 million or so.

It's getting to a point where we'd expect that the -- just the mathematics of this results in low levels of conversions.

Joe, I would add that our accountants are quite pleased that the GAAP and non-GAAP measures actually converged this quarter, they were essentially unchanged, which makes every accountant happy. And the arch spread on the sub debt right now is between 1 point and 2 points. So it's not very attractive for anybody playing that game to convert. And it is a fourth quarter '11 to fourth quarter '12 outlook is what we're looking at.

Great. Okay. And then the other was, again not trying to pin you down to anything, but you talked about provision being relatively low. Is that more likely to be a 0 or a low-type number, or could we also see continued modest negative provisions?

I'm not sure I'll let you pin me down because it's going to be what it will be, but if we have no uptick in severity of loss and we have continued reduction in classifieds and, as we have said, meaningfully lower charge-offs this quarter, it's hard to see how you get from -- absent a dramatic change in the economic environment, how you get from there to a significant positive number. So it's probably in near 0 or a little lower.

And our next question comes from Ken Usdin from Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: A few questions for you. Doyle, you talked a little bit before that you still have some room on the deposit pricing side. And I'm just looking at the numbers, you still probably have amongst the highest all-in cost of liabilities among the peer group. And the mix has been improving as well as far as the non-interest-bearing inflows as well. So I'm just wondering, how much lower do you think that all-in cost of funding can go from the 104? And is that -- and even so, that still won't be enough to offset the loan side pressures?

Well, I mean, if you look, for example, at the time of -- time deposits on Page 15 of 84 basis points, I could just tell you that's way above current posted rates. So as those time deposits mature, it's going to reset at numbers between 5 and 30 basis points probably, depending upon balance and term. And so just out of that -- and there's nothing driving anything else higher on this page right now. So I think you can read -- you should read into that a little bit of continued favorable impact of funding costs. I haven't scheduled it out to see kind of, okay, what is it likely to be if everything just rolls off, but it's been coming down a steady kind of mid- to upper mid-single digits per quarter for quite a while. And probably you'll get mid-single-digit basis points decline in the next couple. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Got it. Okay, great. And then second question, and you had mentioned something in the release about a little bit of a pickup in term CRE in California. I'm wondering how much of that growth in the term bucket is still coming out of the construction bucket? And also just if you can give us a broader comment on what, if any, activity you're starting to see in that CRE side of the portfolio?

Most of it is -- I mean, there is some of it that's maturing construction but most of it is not. I don't know the exact breakdown. And I don't know, Ken or Harris, do you want to add color?

I was going to say, it's only $60 million that converted from term -- well from construction in the whole company, not just California, but the whole company was $60 million that converted from construction to term this quarter.

And most of the product that we're seeing is in multi-family in California and elsewhere in the CRE spaces.

The current CRE spaces. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Just a broader comment on that, I mean, do you think you're starting to see the turn of commercial real estate? Is there any major change in terms of project interest and refinancings that you're starting to see from at least a interest level or coming in the door type of thing?

Major would not be a word I'd use in the sentence. We are seeing some, and anecdotal, a little bit even in single-family, in top areas of Southern California. And we're seeing some apartments in Texas and in California. But there's no major rush to jump into real estate that we're seeing on the demand side.

And particularly, if you're trying to ask more broadly about office and retail and other items, I would echo what Ken said. There's no...

They're one-off opportunities, but again, no major shifts.

Our next question comes from Erika Penala from Bank of America Merrill Lynch.

Just actually one question, I know we're close to closing time. But just wanted to follow up on your answer to Ken Zerbe's question on the expenses. So Doyle, you mentioned $15 million should be taken out of the base, when we're thinking about the expense base in 2012. So are we growing for seasonality from $410 million? And if so, what is sort of the progression over the next 3 quarters? I'm guessing that based off of Harris' comments, it's likely flattish from that level, or could you take it down from first quarter?

Well, again, the other place you're going to -- I would expect you're going to see it continues to come down. There are a couple of lines there, credit-related expenses and OREO expense, which should continue to trend down as problem assets continue to come down. So you almost need to take that out. And ultimately, we'll continue to see some reduction in FDIC insurance premiums, which is another reasonably large item.

Yes. The FDIC insurance premium is now risk adjusted. They are risk-rated, as you may know. And it's tied in part to CAMEL ratings. And it's done bank by bank. And we're not saying what our CAMEL ratings are, let me just say that there's room to improve and they are selectively improving. We've had several individual CAMEL ratings change favorably over the last 6 months at various banks. And we expect that based on trends, more of that will happen. And if and as it happens, that, all else being equal, drives -- it will drive a reduction in FDIC. But kind of back to your question, yes, I would think the run rate of which you're starting is closer to probably 410 in the fourth quarter. The number specifically that will go -- will balance up in the first quarter, is salaries and employee benefits. You can kind of look at what happened first quarter last year compared to fourth quarter, it was up from 207 to 215 there on Page 10. A lot of that was due to the fact that everybody's paying FICA and the accruals for that are reset. And then it's tapers off as more and more people hit the salary caps from which FICA is deducted. So you've got -- yes, you're going to have an uptick in salary and benefits. You've got some line items and had some one-offs of them, and then you've got a couple of other line items that should be stable or to trending favorably during the year.

Got it. And just remind us on your annual expense base or your current run rate, however you'd want to frame it, how much are you incurring currently in terms of credit-related costs in your operating expense base?

Well, we tried to break out that on Page 10, Erika. There's in the noninterest expense line, we break out 3 items that are clearly credit-related.

Oh, I see it, I'm sorry. You're right. That was my mistake.

There's clearly other that's credit-related in salaries and benefits. It's the costs of the work of the people and workout and whatnot. But the intent would be in the salary benefit to -- and we've already done some of this, as the problem loan pile continues to come down, we shifted people 3 years ago from line into workout, and we will be shifting some of those people back from workout into line. But yes, you can see the OREO expense, the other credit-related expenses, these are things like legal fees that are related to credit, appraisals, foreclosure expenses, things of that nature. And then you've got the unfunded lending commitments.

As you can see, and the most significant cost pressure, really, other than credit-related has been -- hasn't been regulatory kinds of imperatives, it's been staffing, stress testing, it's been additional compliance people and all the stuff that's coming out of Dodd-Frank, et cetera. It's been consulting costs around getting all of that work done. So we're focused pretty hard at what we can do, including centralizing additional back-office functions. We've done a lot of the heavy lifting there but there's some additional work we are engaged in. And trying very hard to try to slim down where we can.

Our next question comes from Rob Patten from Morgan Keegan. Robert S. Patten - Morgan Keegan & Company, Inc., Research Division: Erika got most of my questions. I guess the other question I was going to ask is, when you say significant drop in charge-offs, you guys have been declining 10 bps a quarter last couple of quarters, and so you were doing significant, I don't know if your definition is the same as mine, but does that mean double, 20 bps?

I don't know, it just means significant. We'll tell you next quarter. If you're thinking in those terms, you're not going to be thinking in the wrong direction. Robert S. Patten - Morgan Keegan & Company, Inc., Research Division: All right. And then one last real quickie. On the C&I, you guys had a couple of hundred million of attrition in the beginning of first quarter. Is your growth view making that $200 million up and then adding to it? Or are you just thinking to get that back to your growth?

I would hopefully probably get that back and maybe add a little to it over the course of the quarter. But we're so early in the quarter and it's hard to know. But if we stayed where we are right now, average loan growth for the quarter would be up more than it was last quarter. All right. With that, I just want to -- before I let James close it, I just want to let everybody know that while we were doing this call, it started snowing. And we had a lot of -- after a very slow start, we had a lot of snow over the weekend and more coming down now. So we hope -- we know many of you, maybe most of you, are planning to come to our investor conference in a few weeks, and look forward to seeing you, and maybe some of you can stay around and enjoy a little of Utah outdoors with us on Friday.

Thank you, everyone. If you haven't heard about the Investor Day, please feel free to call me or e-mail me and we'll get you on an invitation. And it's on Thursday, February 16. We look forward to seeing you. Thank you, again, and we'll talk to you soon.

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