Zions 2Q14 Earnings Call Notes

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This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Zion not committing more capital to construction loans

“We are hearing from our lenders that some of the other large bank competitors in our markets are backing away from the loan type that receives the most significant losses in the stress test, in this case, the construction and land development category. So, we probably are not alone in this redirection of capital allocation. Although Zions construction and development loan balances grew in the second quarter, commitments declined. Our loan growth outlook remains unchanged on the whole and that is for slightly to moderately increasing loan volumes.”

NPAs below 1% for the first time since 2007

“Non-performing assets improved by about 14% from the prior quarter and equaled 95 basis points of loans and REO the first time it’s fallen below 1% since 2007.”

Experiencing loan growth in July and expect that to continue

“We are experiencing loan growth in July and expected to continue based on reports from various lending groups.”

Loan demand is there

“we are constraining loan growth in some cases by self imposed risk concentration limits particularly on some types of commercial real estate loans. If we did not have these risk management limits, but we do, loan growth rates would be stronger as there is demand out there.”

We probably will have gains on CDOs from these prices, but losses on original price. Still we may sell anyways because it can improve our capital ratios

“Our models also indicate that we should end up recognizing values greater than amortized cost on non-performing CDOs, but it’s substantially less than the par value of those CDOs. And the realization of that income would likely take many – being many years in the future assuming we continue to hold them for that long. Although we may hold these securities to realize some of the gains I just described, we may also elect to sell some of them from time-to-time in order to maximize our capital ratios under the stress testing process, a well-defined benefit today in exchange for a less certain benefit sometime in the future.”

The Fed doesn’t give out all the methodology of the stress tests…

“while the Fed does not provide a breakdown between construction and development and term and owner-occupied, we and investment banks and consultants have all tried to estimate what that breakdown might be. And it looks like that construction and development are maybe doubled or more, the loss rates that the Fed published is for overall CRE, which makes it pretty painful from a capital utilization standpoint relative to as I mentioned pricing that has actually come down over time.”

300 extra personnel hired just for compliance

“we have added something over 300 full-time equivalent staff…it would appear you have got another maybe another couple of years of continued heightened expectations. Well, not having to add as much staff to meet those expectations, just redeploy them into addressing the current year’s level of top concerns is they are expressing to us in the industry.”

We’re going to pay off the debt

“Our current expectation, Ken, is that we will pay-off that debt, the senior debt in September and the additional two tranches of sub-debt in the latter half of next year as they mature. And that the total amount of unsecured debt issued by the parent would come down over that time period, but probably we may issue small amounts of senior debt during that process, but the net amount of debt should come down. We are basically going to pay it off.”

We agree with JPM that deposits are going to flow out

“I will refer you to the CFO of JPMorgan Chase, who laid out pretty explicitly what she thinks is going to happen, but I think kind of we are directionally in the same place she is, which is that the Fed will drain a lot of liquidity out of the system and that rates may rise. When rates rise, they may rise faster than people are expecting and a lot of this, I don’t know, we have laid out some modeling assumptions about how much of our non-interest bearing DDA would have – would flow out and be replaced by interest bearing funds, but it’s – and I think we are being more conservative on that front than a lot of peers and more explicit in publishing what we are modeling. “