Zions Bancorporation Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.27.14 | About: Zions Bancorporation (ZION)

Zions Bancorporation (NASDAQ:ZION)

Q4 2013 Earnings Call

January 27, 2014 5:30 pm ET

Executives

James R. Abbott - Senior Vice President of Investor Relations

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

Doyle L. Arnold - Vice Chairman and Chief Financial Officer

Analysts

David Rochester - Deutsche Bank AG, Research Division

Kenneth M. Usdin - Jefferies LLC, Research Division

Joe Morford - RBC Capital Markets, LLC, Research Division

Keith Murray - ISI Group Inc., Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Erika Najarian - BofA Merrill Lynch, Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Operator

Welcome to the Zions Bancorporation Fourth Quarter Earnings Call. This call is being recorded. I would now turn the call over to James Abbott. Please go ahead.

James R. Abbott

Good evening, and thank you, Patrick. We welcome you to this conference call to discuss our fourth quarter 2013 earnings. Our primary participants today will be Harris Simmons, Chairman and Chief Executive Officer; and Doyle Arnold, Vice Chairman and Chief Financial Officer.

I would like to remind you that during this call, we will be making forward-looking 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 the 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] With that, I will turn the time over to Harris Simmons.

Harris H. Simmons

Thank you very much, James, and we welcome all of you to the call today. It's been a very eventful quarter for Zions Bancorporation. We are pleased with the loan growth we've seen. This was the strongest quarter in terms of loan growth that we've experienced since the second quarter of 2008. So that's quite notable. We're also encouraged that loan pricing on new production improved, albeit very modestly compared to the prior quarter. Credit quality improved significantly during the past year. Noncurrent assets, which include nonperforming assets plus loans that are 90 days or more past due and still accruing, improved by nearly 40%, including a 13% improvement in the fourth quarter.

Additionally, I'm pretty happy to report that during the last year, the dollar amount of tangible common equity has increased 14%, approximately $500 million, and a fair amount of that is attributable to the value of the CDO portfolio improving, particularly during the fourth quarter. Zions has been in the news a lot lately regarding our CDO portfolio and the issuance and related implications of the Volcker Rule and the amendment or revision to it which was issued in January. Just last week, we announced our intent to sell a meaningful portion of our portfolio in an effort to materially reduce risk. And we believe that, that action will be materially beneficial to our capital ratios, particularly under a severe economic scenario in our stress tests.

On the capital front, our GAAP common equity capital ratios increased compared to the prior quarter, with the tangible common equity rising to 8.0% from 7.9% despite the loss in the quarter. This is primarily attributable to the improvement in fair value of the CDO securities. Our Tier 1 common equity ratio under Basel I declined to 10.2% from 10.5%, predominantly due to the growth in loans, but also due to the decline in retained earnings from the 2 charges mentioned in the earnings release. We estimate that our Basel III common equity Tier 1 ratio will be comparable to the Basel I version at approximately 10.2%.

And finally, just a brief comment about credit quality. I continue to be very encouraged with the results that we are seeing there. Our net charge-offs are among the lowest of our peer bank group, and our gross charge-offs are significantly below many of our peers' net charge-offs. This quarter, net charge-offs were only 20 basis points on average loans on an annualized basis. We're also pleased to see that the nonperforming asset ratio has fallen to 1.15% of total loans and real estate owned. That's a level that we haven't seen since 2007. So there's been a fair amount of noise, but a lot of underlying strengthening.

And with that overview, I'll ask Doyle Arnold to review the quarterly financial performance. Doyle?

Doyle L. Arnold

Thanks, Harris. Good afternoon, good evening everyone. As noted in the release, the net income available to common for the full year was $294 million or $1.58 per diluted common share. For the fourth quarter, we posted a net loss applicable to common shareholders of $59.4 million or a loss of $0.32 per diluted common share. In the third quarter, we posted earnings of $209.7 million or $1.12 per common share. Of course, that quarter was -- included some unusual items related to the call of the Series C preferred stock and some other things that really inflated those earnings above what might be a normal run rate.

This quarter, there are 2 significant items which I'll review here. And you can refer to last quarter's earnings release, the call transcript or SEC filings for the items in the third quarter. Of course, the CDO impairment charges were the most significant. I will set those aside just for the moment, come back to them later and discuss the other one that was related to the successful tender for $250 million of subordinated debt. This resulted in debt extinguishment charges of about $80 million, some of which related to the tender premium itself and the rest was attributable to accelerated discount amortization. Most of this debt, the $230 million par of the $250 million par amount had been significantly modified in 2009 to give the holders the option to convert to preferred stock. And thus, at the time, the carrying value of the debt was reduced significantly to reflect both the market pricing of the debt at that time. That was back in 2009, as well as the value of the so-called beneficial conversion feature. That is the right to convert to preferred. All of these we've discussed in great detail in the last several years of filings and conference calls if you need more color.

The debt that was extinguished had a weighted average pretax cost for GAAP purposes of about 20% relative to the amortized cost amount of $192 million. And that, again, is related to the amortization of those discounts and features that I mentioned earlier. A related action was the issuance of $250 million of subordinated debt in September and November to prefund the November tender offer which had a weighted average cost of about 6%. Because of the timing, the full cost of the new issuance and the cost savings from the debt extinguishment was not fully reflected in the fourth quarter numbers, but will be for the first quarter of 2004.

James R. Abbott

'14.

Doyle L. Arnold

2014, yes, a decade here or there. We expect the net reduction of interest expense to be approximately $6 million in the first quarter relative to the interest expense on debt in the fourth quarter. The primary economic benefit to tendering for the debt early is not only the interest savings, but the ability to reduce idle cash balances at the parent company. We have a risk management practice of maintaining between 18 and 24 months of cash for any and all expected principal, interest and dividend payments, so-called time to required funding. And this practice is designed to greatly reduce liquidity and market access risk. By extinguishing this debt, which had less than 18 to 24 months left to maturity, we no longer need to hold idle cash to meet that liquidity objective. Further, to prevent the need for future tenders and associated tender premiums, much of the debt that we've issued in the last year or 2 has included a call feature at par, generally 2 years in advance of the maturity date, which is a practice that we plan to continue whenever market conditions make it possible.

Turning now to the CDO portfolio, as Harris discussed briefly earlier, and as many of you are aware, the situation with the regulatory treatment and, therefore, the accounting treatment for the bank trust preferred CDO securities has been quite volatile. In response to the initial Volcker Rule publication on December 10, we determined and announced that we could be required to take impairment charges on most of this portfolio in a press release, an 8-K. I think on about December 19, we quantified that on a pro forma basis for you. However, as most of you probably know, the situation became increasingly uncertain over subsequent days and weeks as various parties clamored for a change in the rule's applicability to bank TruPS CDOs. Meanwhile, we were in the midst of preparing our CCAR 2014 submission, which we had to prepare based on the application of the Volcker Rule to our CDO portfolio as it was announced originally. In addition to the immediate GAAP effects of the Volcker Rule, as it was initially issued and as we described on December 16, there were quite severe impacts on stress losses attributable to that portfolio. This is because basically under the Volcker Rule, future declines in value that would be projected under very low probability but severe economic stress scenarios would now all go through OTTI and impact regulatory capital ratios. In previous year's stress tests using pre-Volcker accounting treatment for the CDO securities, a meaningful amount of such hypothetical value declines under severe stress primarily impacted -- or at least partially impacted only our estimate of unrealized loss on the securities that would be captured in AOCI and had a lesser impact on impairment charges that went through the income statement. And the latter is the driver of changes to regulatory capital. Therefore, we would have had to hold more risk capital against a very low probability stress outcome, while in the meantime, market prices for the securities had recovered significantly relative to a couple of years ago or even a few quarters ago. While we still expect further recovery in value of the CDOs, this may occur over several years. While the additional capital required against immediate 9 quarter stress losses, hypothetical stress losses, would have to be held now. For some of the CDOs then, it was more capital efficient to sell rather than continue to hold the securities. Hedge fund and other buyers that appear to be active in the CDO market did not have the capital considerations of the 9 quarter stress testing process or regulatory risk weightings. Ultimately, the Volcker Rule was modified, as you probably know, and a large number of our CDO securities, including substantially all of the bank -- mostly bank trust preferreds, were grandfathered and thus would provide the necessary time to allow fair values of such securities to rise to their amortized cost. However, these TruPS CDOs would still be a source of significant, albeit reduced capital strain under severe stress tests. Therefore, having already selected prior to December 31, the bulk of the securities that we felt would be capital efficient to sell based on the original Volcker Rule, despite the issuance of the Interim Final Rule, we elected to continue with our plan to sell a portion of the securities portfolio. Let me see here, further, the sale of the selected high-risk security should position the company to cancel the total return swap since the portion of the portfolio and risk covered by it will be much smaller after completions of the sales. Canceling the TRS will add approximately $22 million to annual pretax earnings per -- whenever canceled, perhaps in the third -- beginning in the third quarter of 2014. Additionally, we expect that the sales of the securities and related tax refunds using carryback treatment for ordinary losses generated by the sale of securities will add a few hundred million dollars of cash to the parent company, thus relieving the need to finance -- to refinance a like amount of maturing debt. Assuming an opportunity cost of 4% on the debt that we don't have to replace, that could be well north of $10 million in annual interest cost savings, perhaps in the -- roughly in the vicinity of $15 million, 1-5, not 5-0, $15 million of pretax savings. I expect there'll be follow-up questions on CDOs, so I'm going to move on to a few other topics now and leave that discussion.

Next, I'll move to a review of some of the key revenue drivers. If you want to turn to Page 16 of the press release, average loans held for investment increased $442 million compared to the prior quarter. End-of-period loan balances increased $795 million, excluding FDIC-supported and held-for-sale loans. As Harris mentioned, that was the strongest growth we've seen in a quarter in a number of years.

Also, unlike the last couple of years, that growth occurred fairly steadily throughout the quarter, although the weeks near the end of the year were a bit stronger still. We did see a modest reversal of the loan growth in the first couple of weeks of the first quarter of 2014, but again, nothing as severe as we've seen in the last 2 years. And at this point in January, loans are up a moderate amount relative to year-end, which we view as encouraging. If you recall, last year, we were already down several hundred million for the quarter at this point in time. And we have not seen anything like that kind of a runoff of the loan balances this year.

Our lenders are reporting that small business optimism is starting to improve. And thus, we may see some mix shift away from middle-market loan production toward the smaller business production. Whereas virtually all the C&I loan growth during the past couple of years had come from loans with commitments greater than $5 million where pricing, as you know, is thinner than in small business loans. So even though there are some indications that larger loan growth may be beginning to moderate, an improvement in small business lending would generate a mix that would be favorable to the net interest margin. Again, that's an outlook based on sentiment and optimism, not something we've actually started to see in the numbers yet. Line utilization rates on revolving C&I loans increased slightly relative to the prior quarter to 32.8%, up from 32.2% at the end of the quarter -- prior quarter. And again, that slight -- that uptick, although slight, it's not something that we've seen for quite a few quarters.

Before I leave Page 16, I believe it was, let me discuss the FDIC-supported loans and the income from that source. This is important to our outlook guidance, which is for stable to moderately declining net interest income over the coming year. We continue to experience quite strong performance of the loans in this portfolio. Prepayments continue to remain above our expectations and payoff values are well in excess of the prices we've marked the loans, which generates accelerated income in the yield of FDIC-supported loans. That was an annualized 37% for the fourth quarter or $33.8 million of total interest income. That's from loans that represent just 0.7% of total earning assets.

Just 3 months ago, we expected the total remaining income from this portfolio to be roughly $95 million, the substantial majority of which would be recognized by the end of 2015. Even after the very strong fourth quarter results that I just mentioned, we revised our expectations to an estimate of more than $80 million yet remaining or, in other words, about a $20 million bump in the total expected revenue when factoring in those actual results from the fourth quarter. So while this income has significantly outperformed our expectations in the last few quarters, all good things must eventually end. And we know that this will eventually decline. And it could be fairly rapidly at some point as we come to the kind of the end of the workout periods for those loans. The indemnification asset expense related to this loan book, which is recognized in other noninterest expense, should amount to $23 million and be exhausted between now and the end of this year.

Turning to the margin and net interest income. On Page 16, you'll note that the NIM increased considerably compared to the prior quarter, 11 basis points. Most of which -- most of that increase was attributable to the FDIC-supported loans, about 10 out of the 11 basis points. The growth in the loan portfolio and the slight reduction in cash contributed to the remaining lift in the NIM. Primary offset was the weaker yield on loans held for investment, again excluding the FDIC-supported loans. Although we ceased providing a core net interest income number, we did commit to giving you the components so that you could continue to calculate it. The additional accretion is found in the table at the bottom of Page 12 equaling $28.5 million, and the discount amortization on sub debt was $11.9 million. Adjusting for these factors, there was about a $2 million linked quarter increase in net interest income, marking the third consecutive quarterly increase, although it was slight.

Turning to noninterest income after adjusting for the noise of the securities gains and losses. This is a pretty straightforward quarter with 2 notable items. First was the decline in loan sales and servicing, which is attributable to a drop in mortgage refinancing volume, which shouldn't come as a surprise to any of you. Our refi volume declined 47% sequentially and purchase volume declined 13%. The second item pertains to other noninterest income which dropped by $3 million. However, compared to the prior quarter -- however, that prior quarter included a $4 million gain on the sale of several branches from our California bank. So excluding this onetime third quarter item, other noninterest income was essentially flat.

Looking at noninterest expense. We have guided to a number near $400 million, excluding the debt extinguishment charge. Making the extinguishment charge adjustment, total noninterest expense actually came in at $415 million compared to our guidance. Because of the acceleration of payoffs on FDIC-supported loans, the indemnification asset expense was higher than our expectations by $9 million. That's good news. It just happens to show up as bad news in noninterest expense because it was more than offset by the higher or stronger revenue that I -- from FDIC loans that I discussed previously. The remaining higher cost came from provision for unfunded commitments attributable to strong growth in that area. Most of the increase in professional fees was attributable to consulting and other efforts related to the preparation of our CCAR stress test submission.

I'll wrap up now with an outlook. And that reminder that this outlook is kind of trying to look out over the course of the upcoming year, not just the current quarter and kind of as compared -- so the next 4 quarters, really, as compared to the most recent quarter. We're maintaining our outlook for loan growth to be slight to moderate over the 1-year horizon. Loans have continued to grow, albeit at a more moderate pace in the first quarter than we saw in the fourth quarter. We are hearing that, as I mentioned earlier, that pipelines for larger loan sizes have softened a bit compared to the recent past. And some of our banks are taking on -- are trying to take a more firm stance against pricing erosion. However, as I also noted, we're hearing that small business customers are becoming significantly more optimistic than they were 6 months ago, which may help drive loan growth a bit stronger than we saw in 2013.

Net interest income. On a GAAP basis, including the effect of the expected declines in interest income from FDIC-supported loans, we expect net interest income to decline modestly. FDIC-supported loan income for the fourth quarter was $34 million. And we expect an average of only $12 million per quarter in 2014. In addition, although we're encouraged that new production yields did not decline further in the fourth quarter, we note that the weighted average yield on production this most recent quarter was around 3.8%, while the weighted average yield on the whole existing book is 4.4%. So there is downward pressure on loan yields, on average, even though at the margin, they have stabilized.

Partially offsetting the pressure on the asset side of the balance sheet should be the benefit of extinguishing a significant amount of high cost subordinated debt and reducing other term debt expenses I mentioned earlier.

For the noninterest income, we expect the less volatile components of noninterest income, such as service fees to continue their modest upward trend.

On noninterest expense, we expect a decline in the first quarter due to a lack of debt extinguishment expense and perhaps some relief on the professional and legal services fees. There'll be the usual seasonal increases in health care and payroll taxes, primarily the latter, as well as some increase in salaries related to various projects, such as our core systems upgrade. Beyond the first quarter, we expect expenses to remain relatively stable at around $1.6 billion annually, with increases coming from the core systems upgrade, while offset by a continued reduction in credit-related and deposit insurance expenses. Variables, such as the provision for unfunded lending commitments and the FDIC indemnification asset expense, are difficult to forecast. We expect the provision expense, our provision for loan losses to remain modestly negative for perhaps at least another couple of quarters, although the negative provision probably will come to an end sometime after that if loan growth continues, even if with continued strong credit quality. Preferred dividends should be in the mid-$60 million area for the year 2014.

With that, I will -- I leave in the opening soliloquy and ask the operator to open up the lines for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dave Rochester with Deutsche Bank.

David Rochester - Deutsche Bank AG, Research Division

Given the comments you made on the TRS going away possibly by 3Q, I guess that means this is a part of the capital actions you submitted with your -- the CCAR this year? And do you actually need to complete the sales of those CDOs you marked before you think you can get rid of it?

Doyle L. Arnold

I'm not going to comment on exactly what was or wasn't in our CCAR submission. I'm just going to leave it as -- our expectation is, we will be able to sell it -- or excuse me, cancel it. Yes, and as we've mentioned, canceling it does in part result from de-risking the portfolio in these certain ways that I've described, kind of getting rid of some of the more capital inefficient ones for us to hold. And that does facilitate the potential termination of the TRS. I'm not sure there's -- I'm not sure I'd 100% say, if this, then that. That one is an absolute, both necessary and sufficient condition, but they're pretty strongly linked in our mind.

David Rochester - Deutsche Bank AG, Research Division

Got it. And just one quick follow-up. You mentioned stable loan production rates this quarter, and that they're still lower than the book yield. But the book yield actually held up pretty well this quarter. I was just wondering if you can give any color as to what drove that greater stability this quarter versus what we've seen in the prior few quarters?

Doyle L. Arnold

James, do you want to comment, give any color on that?

James R. Abbott

Yes, we just -- I mean, we had a lower rate of prepayments this quarter. The yield on the production was up about 4 basis points compared to the prior quarter. That's unadjusted for mix, just the overall total production. Production was a little bit stronger than it was in the prior quarter, but nothing to write home about, per se, but both quarters had reasonably good production statistics, so. One of the loan types which is about 1/2 of our production typically is C&I. And the C&I production yield is equaling now roughly the yield on the C&I book. So that's actually helpful and probably a contributor to why the book yield did not decline quite as much.

Operator

Our next question comes from Ken Usdin with Jefferies.

Kenneth M. Usdin - Jefferies LLC, Research Division

I was wondering if you can talk us through your -- the IT projects and in terms of helping us understand -- we're at this $400 million a quarter type of run rate level, and it seems like that's about the right rate to stay for a while. So can you kind of walk us through what still has to kind of come on board? And at what point you can finally start sunsetting some of the other pieces so that we can actually anticipate a decline from that $400 million level or so at some point?

Doyle L. Arnold

Well, for this year, very roughly speaking, the ramp-up of expenses related to the core systems and accounting projects that we've described is still not fully there. I mean, actually the expenses related to those projects will be increasing somewhat this year. But some of the other costs that were noninterest expense, including some of the regulatory expenses and hopefully, that some of the other -- some of the consulting and other costs that were like related to CCAR should -- they won't go away, but they will decline from current levels. And that the goal is to roughly offset those. To have those 2 offset each other, to keep expenses flat to very modestly higher. But the first system sunsetting will not occur until the latter half of 2015. And that's when you will begin to see the savings in the latter half of '15 and then '16 and '17 from the core systems. It will take several years to go through each of the different loan systems to get those savings and consolidate some of the operations, et cetera.

Kenneth M. Usdin - Jefferies LLC, Research Division

Okay. And my follow-up question just relates to earning assets. And to your point that you expect to see slight to moderate growth on the loan side this year, can you talk to us a little bit about what you expect on the deposit side and whether or not you think loans will technically outgrow earning asset growth?

Doyle L. Arnold

So basically, another way to -- let me just sort of rephrase your question, make sure I got it. So you're asking, do we think loans will grow faster than deposits this year for the first time in a number of years? Is that...

Kenneth M. Usdin - Jefferies LLC, Research Division

Basically, yes. And frankly, yes, do you expect -- because you guys had the possibility of mix shifting for a while on the cash side, but now there's the liquidity stuff, and you're not really building the securities book, so I'm just wondering how should we think about deposits to loans and deposits -- and loans to earning assets?

Doyle L. Arnold

The deposit, I mean I think we saw signs of deposit growth moderating in 2013 and I think we would expect, if the economy continues to slightly improve, I think we would expect to see those signs continue. And our free cash balances for the company as a whole are already down a couple of billion dollars from their peak, which was over 1 year ago, a rough -- kind of a couple of peaks over the course of early 2013, and maybe sometime in 2012. Though they're down a couple of billion dollars and we haven't added a lot of securities. So we are already seeing loan growth begin to absorb some of that. And that's our goal. I mean, securities, we would -- we only consider as a kind of an outlet for free cash that -- for which there is no loan demand, in an environment where [Audio Gap] largely to be unacceptable, and haven't invested a lot in securities. And I think -- I don't think there's any basic change in our stance. With this moderate loan growth, I think we'd probably will continue to absorb some of the excess cash over the course of this year, and not deploy a lot in the securities.

Operator

Our next question comes from Joe Morford with RBC Capital Markets.

Joe Morford - RBC Capital Markets, LLC, Research Division

Really, my question's just a clarification for kind of understanding what really changed, that drove the stronger loan growth this quarter? It sounds like comparable production levels. Is it just that your overall level of paydown activity slowed in the quarter and, what kind of visibility you have towards that, going forward?

Doyle L. Arnold

Yes, that's -- in answer to the first part of your question, the answer is yes. I mean it -- there was a little bit of pickup in originations, but we've had higher than expected prepayment, not on Residential Mortgages, but on other loans for several quarters now and that prepayment rate slowed significantly in the fourth quarter. Hard -- and that, there's a sense that, that was potentially related to the uptick in long term -- longer term rates. Refinancing maybe wasn't as unbelievably attractive as it was in the third quarter and then the second quarter. But it's -- you ask what kind of visibility do we a have, it's cloudy and probably dependent on the further path of long-term rates. If you think they're going to -- despite the kind of coming down from the 3% level since year-end, if you think the trend is stable to drifting upward on long-term rates as the fed tapers, then you should probably expect that prepayments will continue to be lower. And if you're not that -- don't have that rate path in mind, then you might come to a different conclusion.

Joe Morford - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. The other question was just, can you give us a little more color on the improvement in the market values of the CDOs that you've seen, and just some of the liquidity in the market, too, that's giving you the encouragement now to maybe sell some of these?

Doyle L. Arnold

Yes. We -- it was really interesting. I'll give you kind of what we can observe, a little of what we can observe directly, and then what we heard in the way of market color. What we observed directly was we actually put out for bid 2 different, relatively small groups of securities sales in December. One, kind of earlier in the month, and then one which we hadn't originally planned later in the month, but we wanted to validate -- some validation points on what the impact of the Volcker rule was, thinking that it's possible that it would have a negative impact. On the contrary, the prices that we got on 10 or 12 small tranches in late December were higher than what we got on some small tranches in early December. And the market color that we had was that, the Volcker rule actually sparked a lot of interest in an asset class that had sort of been ignored by a number of potential buyers who, because there hadn't been much trading, didn't perceive any ability to deploy much cash, and so had largely stayed out of it. But the possibility that there would be more sales by the current holders of them sparked a lot of interest by buyers, thinking that these -- there is a positive outlook for this particular security class and maybe we can buy enough of it to make it worth our while, to actually do the work and go through our internal processes and get involved in this market. That's what we were hearing from several dealers. That's kind of what we're -- we've heard in some direct calls, so.

Harris H. Simmons

I think combined with the fact that bank failure rates have clearly come way down and seem to be in pretty good control, and so the underlying quality is appearing to be much better than it was, say, 1 year ago.

Doyle L. Arnold

Yes, I think that's right. And again, there, I would draw your attention back to my comments where I tried to distinguish between the fact that bank failure rates are way down, deferrals are way down and by every objective measure, the quality of these securities is improving. But certain classes of holders have to pretend that none of that will continue starting tomorrow morning in a stress test, and that they will be buffeted by an extremely adverse event that has an extremely low probability of occurring. So -- but the -- if you're -- if you don't have to take that into account per se, then you might have a very different outlook on those securities, and I think that's what's going -- appears to be going on in the market.

Operator

Our next question comes from Keith Murray with ISI.

Keith Murray - ISI Group Inc., Research Division

Could you spend a second with an update on asset sensitivity or the duration of your deposits? You guys gave a lot of color on that in the third quarter. Was there any change in the fourth quarter?

Doyle L. Arnold

Not material, not materially, no. And we'll be -- I don't happen to have it in front of me to update, but I think we'll wait, under -- there's been no material change, and I think in the 10-K we'll give a complete kind of breakdown of all of that. We didn't deploy cash into long-dated securities, particularly those with negative convexity. A lot of our loan growth was in C&I loans, which have a relatively modest duration. The balance growth was in DDA, which is -- with a lot of it commercial DDA. So none of the underlying drivers changed materially.

Keith Murray - ISI Group Inc., Research Division

Okay, and then on the credit side, give us a sense of what the recovery pipeline looks like, and any color you could provide around the very small pickup in C&I charge-offs that just -- poised to run in such a low base right now?

Doyle L. Arnold

Well, you're at such a low base that kind of any charge-off now can affect the net amount, and we had -- we kind of had one $7.5 million kind of charge-off that alone, by itself, was almost equal to all of the charge-offs last quarter. So you're just in a volatile -- at a point where any normal C&I charge-off can move -- can double or halve the net charge-off rate, and that's all it was. All of the underlying drivers are fundamentally positive.

Harris H. Simmons

It's hard to say that when we expect the level of net charge-offs to remain quite low through the course of this year. But at those very low levels, you could see some volatility. I mean, it could be 10 basis points, 25 basis points the next quarter. I mean, it's going to bump around, just because you're at a...

Doyle L. Arnold

I think the -- what you -- I would suggest you focus on is the fact that all of the metrics for -- that we disclosed for -- around credit quality other than net charge-offs continue to improve, and we continue to release reserves by providing -- had a negative provision this quarter. We would not have had that had we seen some underlying indicator that the favorable trends were about to reverse. With regard to recoveries, there's not that much in the way of recoveries out there. There will continue to be some. This volatility was driven by a -- 1 or 2 single charge-offs.

James R. Abbott

This is James. I'll just add real quick that from a flow perspective of the inflows into the nonaccruals and classifieds, those are down substantially from the prior quarter's rate and the favorable resolutions, which are payoffs and paydowns as opposed to charge-offs, favorable resolutions on the classified loans were 94% of the total resolutions that we processed this quarter. So it was really a very, very strong quarter from that perspective, and similar types of levels for the non-performing assets as well.

Operator

Our next question comes from Jennifer Demba with SunTrust Robinson.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

The total returns swap cancellation that will come out of noninterest expense?

Doyle L. Arnold

It's a net interest income.

James R. Abbott

Not non-interest income.

Doyle L. Arnold

It is? Okay, I'm sorry. Yes.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Noninterest income?

Harris H. Simmons

Jennifer, it's on the -- the line item that it shows up is the fair value and nonhedged derivative loss. So it was a -- I think it's $5.2 million. And then the line item this quarter shows $5.3 million negative. But it's in the fee income section.

Operator

Our next question comes from Erika Najarian with Bank of America.

Erika Najarian - BofA Merrill Lynch, Research Division

My question is just a follow-up to Ken Usdin's question on the expenses. So as we put together your outlook for the year, it seems like, give or take, we're going to come out to a core efficiency ratio of about 70%. As we look beyond this year, and think about the efficiency improvements that can come out, especially from the IT spending, and some of the CCAR expenses going away, in a revenue backdrop where your loan growth is getting better and the yield curve is steepening, where can we expect your midterm efficiency ratio to settle out to, without assuming any movement on the short end?

Doyle L. Arnold

I don't have a number to give you. Sorry. It's -- there's no reason, long-term, that we should have an efficiency ratio materially different from other regional banks. I'll just leave it at -- wherever they are, is probably where we're going to end up. That the, again, the goal is to kind of keep expenses as flat as we can for the next 1.5 years, while we absorb these very large project expenses and then let the combination of the expense reductions, as we do phase out the old systems in the latter half of '15 into '16, and the effect of rising loan growth and interest rates, impact our asset sensitive position kind of over the same time period. It's -- in my view, it's not just an expense issue. It's also a revenue issue. We could "fix" the efficiency ratio really quickly, by buying several billion dollars of mortgage-backed securities and pumping up the revenue as a number of institutions have done, but we've elected not to do that.

Operator

Our next question comes from John Pancari with Evercore.

John G. Pancari - Evercore Partners Inc., Research Division

Wondering if you can give us a little bit more color on the C&I growth in the quarter, up 5% linked quarter. I know you implied that a lot of the loan progress on the commercial side was from the lower paydowns. So can you just give us an expectation on the real -- where you're seeing the improvement and then, how can we think about the pace of C&I growth going forward? It probably can't stay at the 5% linked quarter pace, I'm assuming.

Doyle L. Arnold

Well, I'd just point out to start, and I'll probably ask James if he has any additional color, but I'll point out, in the release itself, we've noted geographically where the loan growth had come from by, which of our states if -- I would also note that fourth quarter, almost every year is this -- is by margin, the strongest loan growth quarter we have. There's a high degree of seasonality in the pattern of our loan growth. So that's -- so just from that loan, I would say yes, it's probably not sustainable. But I tried to mention, what's interesting is that the growth in the quarter was not just in the last few weeks, like 3 or 4 weeks the way it was last year, and the year before. It occurred rather -- throughout the quarter, with still some noticeable increase in the last few weeks, but not nearly as severe. We would have had a very good quarter if we just cut it off around -- in early December. At the same time, we haven't seen the runoff of the spike up in the first quarter so far. It hasn't continued with strong loan growth but remember, last year, we were down $0.5 billion in the first quarter, and I don't remember the number from 2012 Q1, but it was also hundreds of millions of dollars down. So far, at least, we do not appear to be on a course that's going to get us to a down quarter. It may be flattish, but that would be a huge improvement over the last few years. It's up, not quite $50 million through whatever it was last Friday, just for the -- for -- since year end for the month of January, just to give you a little bit of perspective. So with that, James, you have any color on what, where, when, how?

James R. Abbott

Well, John, it was really a strong quarter, obviously for C&I, and it was really across the board. I mean, we had -- Nevada had $86 million worth of growth in C&I, for example, and Nevada's a smaller bank for us, and has not had the strongest economy. So that kind of gives you -- put that in context there. California's $127 million worth of growth. Texas, $224 million. So it was really quite strong, and the number of the franchises -- the one, actually, franchise that stands out is the Utah, Idaho franchise, Zions National -- First National Bank or Zions Bank, and that was only up $16 million. So there are -- there, it's -- we weren't firing on maybe all the cylinders, but we were firing on most of the cylinders in the quarter.

Doyle L. Arnold

Before there's a follow-up question on what on earth are we finding to lend to on Nevada, I'd just caution that some of that growth that James articulated is internal participations bought from our own banks in order to kind of, manage liquidity internally. Nevada has a lot of excess deposits at the moment that we're trying to put to deploy.

John G. Pancari - Evercore Partners Inc., Research Division

Okay, all right, that's helpful. And then my follow-up is really around the margin. We just want to get your thoughts around how we should expect the core margin, excluding any purchase accounting-related impacts? How we should expect that to trend in coming quarters? Is it fair to assume ongoing pressure, given the new loans are still coming on well below the book yield?

Doyle L. Arnold

You've got what, 60 basis points of difference between the average yield and the marginal yield. In a loan book that has a, I don't know, kind of an average pricing period of 1.5 years to 2 years. So if you divide -- keep it simple, divide 60 by 8 quarters, you're at 7 to 8 basis points per -- 7.5 basis points a quarter of pressure. If everything stays stable, right where it is, you can calculate yourself that to offset that much pressure on loan growth at 3.8 would take a few hundred million dollars of loan growth to offset it. So the most -- net-net, most of the pressure that we can't offset is in the FDIC-supported loans. That's the -- that's sort of the unmitigatable drag, if you will. The core margin with some modest loan growth, maybe close to stable. It was up 1 or 2 basis points this last quarter. I mean, that's just some high-level math I'm doing on the fly here.

Operator

Our next question comes from Paul Miller with FBR.

Paul J. Miller - FBR Capital Markets & Co., Research Division

You made a comment at the end of your opening statements about loan growth being better at the mid-tier firms versus the large firms, and that some of the bigger banks now are not being as competitive on pricing. Can you add any more color to that?

Doyle L. Arnold

Not a lot. I mean...

Paul J. Miller - FBR Capital Markets & Co., Research Division

I guess the question is, some of the bigger guys were very aggressive on pricing, with the higher yield curve. Is that -- some of that pressure going away?

Doyle L. Arnold

I -- personally, I think it's probably too soon to call a trend or turn there. I hope so, but, I don't know.

Harris H. Simmons

Probably one of the things that will be interesting, Paul, is to see whether the biggest banks start pushing the capital that they're holding in the parent company down to their pricing models. Because when pricing models are based on 7% common equity, and everybody's holding 10, it makes you look like you can push pricing down. I think people are starting to understand that dynamic. I know that we're talking about it. And so you may, at some point, start to see that happen among the biggest banks and, of course, they're the price leaders.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And then, a second question: You have a pretty diverse geographic region. Is there any area that's doing better than others? We know Texas is doing well, but how's Vegas and California for loan growth? I mean, are you seeing the same across all of your banks? Or is one group doing better than the other?

Doyle L. Arnold

We'll let Harris take that, because he's just been around to most of them.

Harris H. Simmons

Well, I'd say that it's -- I mean it still varies. Las Vegas is certainly getting better. That's -- as Doyle said, we've been selling participations to them because they have a lot of liquidity, but they're also seeing better loan production there, small business lending is actually coming along pretty nicely there. We're seeing, certainly in the Arizona market, things have -- not just this past quarter. I -- in fact, I don't know that I've seen the numbers this quarter or I haven't focused on them. But generally speaking, that's a market where we've seen quite a lot of improvement, in terms of production. We've seen good growth in Colorado. So it's kind of across the board. In Utah, Idaho market, which is an important market for us, we have kind of a, some run off portfolio there that is offsetting underlying growth. But beneath that, they're actually seeing some pretty good production. So, I guess we talked earlier about prepayments coming down. I mean, I -- the same factors are in effect there, I think, that are -- that you're seeing with residential mortgage refinancing. I mean, it's -- some point, it kind of runs its course, and I think a lot of that, probably a lot of the steam has gone out of the refi market in the commercial term CRE segment. So hopefully, that bodes well for a little better net growth going forward and...

James R. Abbott

I'll just mention real quick that we -- just looking at the -- talk about what Harris is mentioning on the prepayments activity, we saw about 70, almost $80 million worth of loan growth out of the commercial, of the term commercial real estate portfolio this quarter. The prepayments on that portfolio were $100 million less than they were in the prior quarter. So if we, just see no change in prepayments, we would have actually had a little bit of attrition, which is what we'd seen for several quarters out of that commercial real estate portfolio. So, it really was just a prepayment activity, the prepayments being dropped from 32% last quarter to about 27% this quarter, and that's just one example, but you see it in the C&I portfolio as well and others.

Doyle L. Arnold

Operator, I think we have a couple left, and we'll try to give short answers and then wrap it up promptly.

Operator

Our next question comes from Brian Klock with Keefe, Bruyette, & Woods.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Just a quick question. I wonder if -- looking at the schedules on Page 4 of the release for the CDOs, I don't think you guys have actually given any more guidance, as far as level of the planned sale for these CDOs. I guess if you just look at the reduction in amortized cost from September to December, and with that, looking at the $220 million pretax impairment charges, it does kind of seem the nonperforming CDOs would be a big portion of what I would -- what took the additional impairments. So is there any way that we should be thinking about the movements within that last fourth quarter for the OTTI and trying to back into a level of, what you guys are planning to sell here?

Doyle L. Arnold

I'm not going to help you at all. We're trying to back into that number. We'll talk about that when we've done what we planned to do. What I will tell you is that, that includes the impairment from several sources, CDOs that we still have to sell per Volcker, or not have to sell, we at least have to -- can no longer say they're AFS, or can't, we can't necessarily recover our amortized cost that comes from a little bit that would've occurred due to a weakness in a particular bank issuer that would've cost some OTTI, had no Volcker, and that's an -- and it's an estimate of -- from CDOs that we may attempt to sell, and -- but I am, for reasons I think you can probably understand, I'm not going to give you the breakdown of that.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Got you, got you. And then just a quick question, the security's portfolio, AFS, looks like you added to that securities portfolio during the quarter?

Doyle L. Arnold

That's a transfer from held-to-maturity on some -- as I mentioned, there are some securities that even after the amendment or with your interim final rule to modify the final rule, that we are not allowed to hold to maturity. We have to sell. So yes, there's some movement that was still required from HTM to AFS. And then there were some sales that we did in the fourth quarter as well.

Harris H. Simmons

And let me just add. If you're looking on Page 9, maybe it's easier for me to point it out on a comparative balance sheet, you'll see that in fact, the accumulated other comprehensive income, as we've stated, went from a negative $384 million to $192 million negative, and the fact of the matter is, that means that the available for sale securities went up. I mean these offset each other. The available for sale securities in the balance sheet are on the books at market value. Since there's been a dramatic increase in the market value, you can see that the securities number went up there. There were not many purchases, it was a change -- that's the change.

Operator

The next question comes from Todd Hagerman with Sterne Agee.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Doyle, just quickly on the expense outlook. You mentioned that on a GAAP basis, expenses would be down year-over-year, and I was wondering -- just wanted -- if you could give a little bit more perspective on the unfunded lending commitments? That's kind of been volatile quarter-to-quarter. The last quarter, I think you had one of your weaker quarters on production, and now we're looking at one of the better quarters. I'm just trying to figure out, just from more of a modeling standpoint, how you're thinking about that with your kind of modest loan growth outlook, in conjunction with the likelihood that the professional's going to come down, and you're looking at kind of a more stable run rate the rest of the year?

Doyle L. Arnold

Well, Todd, I think I mentioned, and trying to go through the expense outlook that I wasn't including a couple of volatile elements, notably the unfunded commitments. I would remind you, I believe it was last quarter, third quarter, that we had a onetime change in the way in which we estimated that provision. We basically switched from using some allowed metrics under Basel rules. There were some -- you can default a certain assumed draw down rates, and we had been using that because of a lack of data. As we accumulated data, we switched over to using our own historical experience. That's what drove the decline last quarter, not a weakness in originations. I think maybe, something like this quarter is more -- is maybe a little strong in the way of originations, but something in the low to mid-single digits might be a reasonable estimate for the unfunded commitment provision, positive, not negative, on -- as a per quarter, for a run-rate basis. Does that help you?

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Yes, I appreciate the clarification. That's very helpful, thanks.

Operator

This ends our Q&A session. I'll turn it back to management for closing remarks.

James R. Abbott

Well thank you very much, Patrick, and thank you, everyone for participating today. If you have any further questions, please feel free to get in touch with me and the information is on the zionsbancorporation.com website and we will see you at a conference or otherwise next quarter.

Doyle L. Arnold

Or our Analyst Day.

James R. Abbott

Well, actually that's true, we have our Analyst Day coming up, February 13. If you are interested in attending, and have not received the invitation, please feel free to contact me as well. Thank you so much, and have a great day.

Operator

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.

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Zions Bancorporation (ZION): Q4 EPS of $0.42 misses by $0.01.(PR)