Apr 21, 2009
Executives
Clark Hinckley – Director, Investor Relations Harris Henry Simmons - Chairman of the Board, President & Chief Executive Officer Doyle L. Arnold - Vice Chairman & Chief Financial Officer Gerald J.
Dent – Executive Vice President Credit Administration [H. Walter Young – Senior Vice President Corporation Finance] [W.
David Hemingway – Capital Markets & Investments]
Analysts
Ken Zerbe – Morgan Stanley Steven Alexopoulos – J. P.
Morgan Joe Morford – RBC Capital Markets James Abbott – FBR Capital Markets & Co.
Greg Ketron – Citigroup Brian Foran – Goldman Sachs Jennifer Demba – SunTrust Robinson Humphrey Brian Klock – Keefe, Bruyette & Woods Kenneth Usdin – Bank of America Merrill Lynch Anthony Davis – Stifel Nicolaus & Company, Inc.
Operator
Welcome to the first quarter 2009 Zions Bancorporation’s earnings conference call. My name is Isha and I will be your operator for today.
At this time all participants are in listen only mode. We will conduct a question-and-answer session towards the end of this conference.
(Operator Instructions) I would now like to turn the call over to Mr. Clark Hinckley, Director of Investor Relations.
Clark Hinckley
We welcome you to our quarterly conference call. I would like to remind you that during this call we will be making forward-looking statements and that actual results may differ materially from those statements.
We encourage you to review the disclaimer in the press release dealing with forward-looking information which applies equally to statements made in this call. We will be referring in the course of our call to several schedules that are in the press release.
If you do not yet have a copy of the press release it is available as an Adobe Acrobat file on our website at www.ZionsBancorporation.com. It can be easily downloaded and printed.
I’ll now turn the time over to Harris Simmons, our Chairman and Chief Executive Officer.
Harris Henry Simmons
The most significant driver of the loss we experienced this quarter was the non-cash impairment of goodwill of nearly $634 million. All of this relates to our 2005 acquisition of Amegy Bank of Texas.
The impairment charge primarily reflects declines in market values of peer banks in Texas and the weak economic outlook in that state with the decline in energy prices that we’ve seen in recent months. This impairment represents just over half of the total goodwill related to Amegy.
Amegy Bank’s financial performance actually remains pretty strong despite weakening economic conditions in Texas and we don’t expect that we’ll need to recognize additional impairment unless conditions weaken substantially further. We also recognized significant impairment and valuation losses on securities including securities purchased from Lockhart Funding as previously disclosed.
These fair value marks were driven by a continued decline in the market capitalization of banks which underlie our trust preferred CDOs combined with higher discount rates reflecting continued uncertainty surrounding the marketability of securities. It’s notable that none of the Lockhart securities which were purchased this quarter or for that matter others that we have previously purchased have ever missed a payment and they continue to pay on schedule something we expect will continue to be the case.
Gross OTTI securities losses were down about a third from the fourth quarter while net recognized securities OTTI losses dropped to roughly 75% in the first quarter. We also recognized valuation losses as noted on the securities purchased from Lockhart in an amount equal to $182 million.
This is the last quarter in which we expect to meaningfully discuss Lockhart as we expect that its remaining assets will be fully consolidated during the second quarter with very little in additional valuation losses or capital impact. The provision for loan losses increased about $12 million from the previous quarter and net charge offs actually decreased about $28 million as compared to the fourth quarter.
We expect that both the provision and losses will remain elevated for a few quarters but that our losses will continue to be well below industry levels. Finally we are pleased that our balance sheet remains very strong in terms of both liquidity and capital.
We have about $3 billion of cash and short term investments and sufficient unused borrowing capacity to replace about one third of our total deposits on very short notice. We have sufficient cash at the parent company level to meet our needs for about two years.
Our TCE ratio even after the losses this quarter is about 5.26% and regulatory capital ratios remain high and we believe that the volume of TCE ratio this quarter was larger than we are likely to see in the future. So from a balance sheet perspective we believe we have ample capacity to absorb the losses that would be reflected in a prolonged recession if necessary.
For all the challenges we’re seeing in this environment there is some good news in the quarterly results. In addition to maintaining strong capital and liquidity we’ve eliminated about half of the entire goodwill on the books in the last two quarters.
We’ve essentially liquidated Lockhart and for the first time in several quarters we’ve seen both the provision and net charge offs level off. With that brief introduction to our results this quarter I’ll ask our Chief Financial Office and Vice Chairman Doyle Arnold to review the quarterly performance.
Doyle Henry Simmons
I think the total results for the quarter were a loss of $832 million or $7.29 a share. As Harris mentioned $5.55 and $634 million of that was the non-cash goodwill impairment charge related to Amegy where we basically wrote down a little over 50% of the goodwill associated with the purchase of Amegy.
I would just emphasize that that was entirely due to the decline in the market values of other banks in Texas during the quarter and also the lack of any M&A activity in Texas not due to any fundamental decline in current or expected performance of Amegy. Harris has already hit the other high points I think or low points if you will, but I would emphasize that Lockhart, this is the last we’re going to see valuation losses of any kind related to Lockhart.
There will be a few million, no more than $5 million, I think associated with the clean up of Lockhart and as a result of the Moody’s downgrade of Zions today I think after the markets close, and some of you may have seen it, the expectation that Lockhart will be fully consolidated is now a certainty. It is now very definitely in a liquidation mode.
This is the last quarter that we will be talking about Lockhart in any meaningful way. With that I’m going to turn to Page 14 of the schedules attached to the press release.
This is the consolidated balance sheet and in the March 31 column I want to call to your attention a new subcategory of loans, it should be about a third of the way down the page, there’s a line item under Loans called FDIC Supported Assets $836.5 million. These are loans that were acquired in association with Alliance Bank, a failed bank in Southern California.
That is the fair value of those loans. There is no loan loss reserve associated with those loans.
They have been fully marked to our estimated fair value which includes our estimated loss on the portfolio in its entirety net of the expected loss sharing recoveries from the FDIC. As we’ll discuss later about an eighth of those loans are non-accruing but again they are booked at fair value with no loan loss reserve but with 80% below a certain threshold of 95% above that threshold loss sharing by the FDIC.
Net of that addition loan growth for the quarter despite continued effort to originate loans was actually negative due to pay downs and charge offs of existing loans. In the Liability section note the very strong performance of DDA.
It increased over $800 million period end to period end since year end and a bit over $1 billion since a year ago. Total deposits grew about $2 billion during the period with growth in most of the positive categories and then finally I’ll note that a little further down the page Federal Home Loan Bank advances and other borrowings declined from $2 billion to a rather de minim is $429 million.
That’s down from over $5 billion at the end of June of 2008. The company if you take into account the money market investments is now in a net long position of several billion dollars has paid off essentially all wholesale short term borrowings and has unused borrowing capacity at the FED and the Federal Home Loan Banks in total equal to about a third of the total deposit base.
We have consciously in this uncertain environment built up a very liquid position something we will talk more about again when we come to the margin which did suffer because of that decision on our part. On the next page, Consolidated Statement of Income, I will simply note under non-interest income that both fair value non-hedged derivative income as well as equity securities, gains and losses showed meaningful improvement quarter-over-quarter.
The two biggest impacts were obviously valuation losses on securities purchased and OTTI. The valuation losses on securities purchased really came from two parts as noted in the press release.
They’re are about $182 million associated with the purchase from Lockhart Securities of triple A and double A rated securities that were deeply downgraded by Moody’s late in the quarter. That was $182 million as I said and the rest of it $19 million was a voluntary repurchase on part of the company and several of its subsidiaries of all auction rate securities of various types held by it customers that had been sold to those customers.
The securities were purchased at PAR and we booked them at estimated fair value which was a slight haircut. Since there are no more such securities to repurchase and since Lockhart is for all intents and purposes behind us we do not expect a continuation of this kind of loss in future quarters.
As I said the loss in the second quarter is probably going to be on the order of magnitude of $4 million or $5 million to wrap up Lockhart during the quarter. The impairment losses on investment securities has been changed in its presentation in accordance with the new guidance out of the FASB again I guess it actually came out after the end of the quarter but with adoption during the first quarter allowed and then recasting of prior years’ results also allowed.
So we show the gross impairment losses of $131.9 million significantly improved as Harris mentioned from $196.5 million in the prior quarter. We net out of that the liquidity discount of $82 million so the income statement impact is $49 million from the OTTI this quarter.
The remainder of that goes to OCI and we will turn to that page in a moment. In non-interest expense note that salaried employee benefits is actually down $5 million from the same quarter last year because of FICA patterns during the course of the year.
That’s the best comparison that that number is actually down and the FTE count is approximately flat from the same quarter last year despite the fact that we’ve done two acquisitions during that period. Other real estate expense which spiked up last quarter to $40 million is down to $18.3 million this quarter.
That’s important because that line is sort of a rough and ready measure of how realistic we’re being about the carrying values of things that go into OREO. If it takes us longer to dispose of them it costs more, we have to take further haircuts after a property has gone into OREO.
That’s where it shows up and that number is still higher than we would like. It doesn’t indicate that OREO is being fairly realistically valued.
Note also then that FDIC premiums increased from a run rate of $5 million to $6 million to $14 million this quarter. The expectation is that the run rate going forward will be about $15 million per quarter for the remainder of this year and that excludes the impact of any possible one time assessment from the FDIC.
I guess the latest information is that if there is such an assessment it might be in the range of 10 basis points. That would be about $41 million for us and as I said, that’s outside the run rate.
Turning to Page 16 the Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income. As I mentioned the new FASB pronouncements with regard to fair value of securities permitted or required, I forget which, reclassifying prior results upon adoption.
This $137.5 million increase in retained earnings and a corresponding decrease in OCI reflects the re-categorization of those two item from OTTI losses taken starting in the fourth quarter of 2007 through the fourth quarter of 2008. It’s essentially taking that liquidity discount and putting back into retained earnings.
The other items there, note there’s a $96.3 million negative and a $28 million positive. The net of those two numbers is $65.5 million.
That’s a result of new fair value marks on securities and then the next line, the negative $49.9 million is the after tax impact on capital of the $82.9 million non-credit related losses or liquidity discount related to the OTTI expense on the prior page. So the $82.9 million is $49.9 million after tax.
The next couple of pages present the same kind of detail that we’ve shown you in the past with regard to the securities portfolio. There are again two schedules.
The first one on Page 17 gives you the highest current rating and the one on Page 18 gives you the lowest current rating as of quarter end and reflects all of the downgrades that were done very late in the quarter by Moody’s. The PAR value I would just note on the first column is not the face value of the security, but it’s the remaining value that full payment of the security on its terms would give us.
In some cases it’s already below face value because of pay downs and so forth. I’m not going to go through these schedules in detail.
I will just note that in our Investor presentations last quarter we gave various stress test assumptions that would result in OTTI charges ranging from $150 million to $450 million. This quarter we actually realized $131.9 million although under the new accounting treatment $82.9 million of that was non-credit related and didn’t go to the income statement.
So I mentioned this is down from the $196 million in the fourth quarter. One of the primary drivers of these marks is the market value of the underlying banks in our bank trust preferred CDO portfolio because as those market values become depressed it increases the default probability of those banks or alternatively reflects increased default probability and as you know during the first quarter bank stock prices pretty much across the board fell dramatically.
Any improvement going forward in bank stock prices could have the affect of lowering the default probability on the banks in our securities which would in turn translate to lower OTTI going forward. I would simply note in terms of actual defaults the actual rate of bank failures thus far in 2009 is consistent with or probably even somewhat lower than the default rate that’s assumed in our CDO valuations.
Turning to Page 19, Credit Quality, I will note first of all that non-accrual loans did increase significantly this quarter. Other real estate owned less so and then there’s a new line item on this page also called FDI supported assets of $106.9 million.
That’s the portion of the $800 and some odd million that I mentioned earlier on the balance sheet that is currently non-accrual so it’s a subset of that $800 million. Again it’s carried here at fair value as estimated at the time of the close.
The increase in NPLs, the biggest single driver was construction and land development loans. That was about $260 million of the total increase including the biggest single pot was $160 million of those kinds of loans in Nevada and Arizona.
There was some uptick in non-residential CRE NPLs but I don’t have the specifics for you yet today. We just know there was some uptick there.
Owner occupied commercial loans. These are commercial loans, small business loans that are collateralized as a secondary source of repayment by owner occupied real estate.
That contributed $87 million of the increase in NPLs and our loss experience on these loans remains very good. I guess it’s fair to say the continued weakness in credit quality as Harris mentioned is likely to result in provisions and losses remaining somewhat at these historically high levels.
The provision this quarter was up slightly from the prior quarter and the charge offs were down from the prior quarter. That’s an encouraging sign the fact that charge offs were down but clearly the NPL increase is somewhat troubling and I would note in terms of looking at reserve adequacy at a couple of things.
First of all reserve coverage of total loans increased quite sharply from 1.65% to 2.03% but coverage of non-performing loans excluding FDIC assets slipped somewhat to about 58%. It’s important to remember that given the nature of our loan portfolio as we’ve tried to point out in Investor presentations a lot of loans go non-accrual that never go to total loss unlike a lot of portfolios that are heavily consumer driven.
Our non-accrual loans, the vast bulk of those in terms of dollars are analyzed under FAS 114 and are basically then carried at an estimated fair value without an associated reserve. For those loans which are the bulk of the non-accrual loans that are collateralized by real estate that FAS 114 analysis is done based on collateral value.
Essentially what that means is that a recent appraisal or a new appraisal is obtained to value the property. If it’s less than the loan balance the loan is charged down based on that new appraisal and an additional haircut ranging from 12% to 20% is taken to allow for the time and expenses of disposition and any further declines in value.
There are a lot of the most problematic loans that have already been haircut outside of the ALLL if you will and the same process is done with OREO. Again it is valued based on a recent appraisal with a haircut to that appraisal to allow for further disposition expenses.
Important to keep that in mind when you look at overall reserve adequacy when you’re talking $1.5 billion numbers and haircuts of 12% to 20% plus charge downs that have already been taken. Finally I would note that accruing loans past due 90 days or more at $88 million declined about a third from the prior quarter.
At 21 basis points of net loans and losses it’s back to a level where it was a year ago. I’d also point out that it’s about 80% lower than the comparable number for the average of the top 50 banks, at least where they were at the end of year end.
We don’t know what the numbers were at the end of this quarter. Again that reflects the portfolio composition difference.
Let me just see if there are any other comments on credit quality trend. I don’t think so.
We’ll save them for your questions. We just have seen continued weakness in credit across many credit types and most geographies now reflecting the continued economic weakness and therefore would expect that loan losses will remain below industry average our provision will probably continue to substantially exceed losses for the next few quarters until it’s more clear exactly how this is recession is going to unfold.
Loan balances by loan type, I don’t think there’s a whole lot to talk about frankly on this page. Net loans were down.
Most categories were down except for term CRE which was up but decline in the CRE construction largely offset that and some of that just reflects a completion of construction and roll into a mini-perm loan after it’s contemplated in the original underwriting. Again you can see we’ve broken out separately the FDIC supported assets.
A big chunk of those are CRE type assets but they do have this loss coverage from the FDIC. Net interest margin did decline significantly this quarter.
The net spread between loan rates and deposit costs actually remained quite stable during the quarter. This decline primarily reflects two things, five basis points of it was due to the increase in nonperforming assets but the bigger chunk of it was the significant increase in average balances in money market instruments during the quarter after again we built liquidity and as you can see on line one the substantial decline in the earnings rate on those instruments down from 1.27% to 0.46%.
This reflected a conscious decision on the part of the company to build liquidity and if the outlook remains stable in terms of funding and other uncertainties we can take actions to drain some of this liquidity out of the company in the next quarter or two. Not saying that we will, we’re going to wait and see who things unfold but it is somewhat reversible by design.
Finally Page 22, Capital Ratios, we show you some of the key ratios here. I would note the tangible common equity ratio did decline from 5.89% to 5.26%.
The various actions related to Lockhart including the fair value mark and the increased assets accounted for 21 basis points of that decline and that’s a one time event. It doesn’t happen again.
The FDIC assisted acquisition of Alliance Bank accounted for about 10 basis points. We think that given the likelihood that we don’t have Lockhart type impacts and auction rate securities type impacts going forward that his is the largest basis point decline by some margin that we’re likely to see.
I would also point out that this is very much in line with the kind of stress testing numbers that we put on the board in various Investor conferences during the first quarter. Regulatory capital ratios also declined in the quarter but remained well above the levels of a year ago.
The fact that the risk based capital measures declined a bit more than TCE primarily reflects the rating agency downgrade of CDO securities which shifted them to a much higher risk rating category. Risk rated assets actually increased by nearly $5 billion during the quarter while the balance sheet didn’t grow at all.
It was a reflection of downgrades of securities to in some cases the junk status which takes them in some cases to a dollar for dollar capital against risk weight status. Again given that a lot of these securities have already been downgraded that far the likelihood of this kind of incremental impact going forward strikes us not all that high.
As I mentioned Lockhart Funding should be all wrapped up by the end of the second quarter. The wrap up should have relatively little low single digit basis point impact on capital.
We’ve talked about Alliance Bank but just to recap it operated five branches in Southern California. We acquired at face value $923 million of loans and about $1 billion of deposits but about I don’t know about 40% of those or so were non-core and have been running off as we re-price them.
The core deposits have in fact been quite stable and we’ve seen at least one or two customers bring significant balances back to the bank that they had taken out earlier. The loans have been marked to substantially less than the $923 million as noted.
Purchase accounting resulted in $17 million of goodwill and $5.5 million of CDI and we expect that cost cutting including consolidating two of the acquired branches will substantially improve the performance and that it will contribute about $20 million to pre-tax income this year. Some of you saw the news that we also were the winning bidder on a smaller bank in Nevada, five branches along the Interstate 80 corridor in Northern Nevada.
It’s only about $250 million of deposits and $130 million of loans. Again we acquired the whole bank and a very rich deposit base of about 30% DDA but with loss sharing from the FDIC and we expect this one to be accretive to earnings almost immediately.
It won’t be a lot because it’s not very big but it’s a very nice little transaction. In summary loan growth we continue to actively try to originate loans but in the current economic environ pay downs and other reductions and charge offs are likely to continue to offset originations.
We do expect residential construction and land development balances to continue to decline as they’ve done during recent quarters and net loan growth of other types will be fairly tepid at best. Deposit growth, was very encouraging during the first quarter particularly the DDA balances.
Some of that is seasonal. We typically see a run up in DDA balances just prior to tax payment time.
The checks are all out there in the mail and we don’t yet have a good read on where those balances will settle out after April 15th. Tax payments are made but the DDA balances held up quite nicely through the first half of April.
As I mentioned we may start to manage down broker deposits and some of the other discretionary funding that we use to build up excess liquidity if conditions remain reasonably stable and we also expect that we may have the opportunity to bid on additional sale of small banks in our footprint and augment deposits and loans that way. As noted earlier the liquidity significantly impacted the margin.
We do have the ability to manage the liability side of that equation to improve it somewhat over time and loan deposit spreads have been fairly stable. I guess the best expectation since we really haven’t started draining much of that excess liquidity out at this point is margin relatively stable in the second quarter and then we’ll see in quarters after that.
I’ve mentioned Lockhart, it won’t be an issue going forward. Other securities, we’ve adopted the new accounting standards on OTTI.
It does reduce the impact of OTTI on earnings but does not reduce the impact on tangible common but finally does have a favorable impact on key regulatory capital ratios. If bank stock prices kind of trade within a range we might anticipate somewhat continued more modest levels of OTTI in the next couple of quarters rather than $200 million or so like fourth quarter.
We think again the combination of all these things, this is probably the noisiest quarter we’re going to report to you. We certainly hope so.
There are a lot of things in here that are highly unlikely to recur again or cannot recur again because the underlying condition is completely behind us. I think corollary to that is the kind of erosion of the capital ratios that you saw here or at that kind of rate is not likely to persist.
There may be some continued erosion with slight OTTI and high levels of provision but probably not as severe as this quarter. In summary while conditions continue to be challenging for us in the industry we’re encouraged by a number of things and I think the main focus now going forward will increasingly shift to that which is driven in part by the underlying economy and that is credit and more away from some of the other noisy things that we’ve talked about on this call and some of the prior ones.
With that I think we’ll turn it over to you guys for questions.
Operator
(Operator Instructions) Your first question comes from the line of Ken Zerbe – Morgan Stanley.
Ken Zerbe – Morgan Stanley
My first question is on the other real estate expense line, is that only related to further marks on your OREO properties? Because I would have thought that would also include workout expenses on troubled loans which would have remained high given the increase in MPAs.
Doyle Henry Simmons
No, it reflects both. The bounce up in the fourth quarter was not driven by expenses, it was driven by some significant write downs of OREO as we had some bids come in on some bulk properties.
We’ve actually by not taking the bulk bids done a little bit better in disposing of them one by one. The volatility I’d say is due to the changes in value but the underlying of maybe $5 million or $6 million probably just reflects expenses.
Ken Zerbe – Morgan Stanley
I did hear your explanation on how the real estate back loans translate into charge offs when they go NPL. So maybe a different way of asking it or looking at it is how much of your charge offs or provisions this quarter related to new NPL formation versus adjustments or other factors such as existing NPL or changes in values?
Doyle Henry Simmons
It’s a hard question to answer as you have phrased it. The NPLs don’t directly drive reserves.
The reserves are driven primarily by our internal classification of loans and since there was no loan growth this quarter, you can deduce that the entire provision was due to downgrades of loans. The NPLs don’t have a reserve associated with them for the most part.
They are charged down to fair value when we do the FAS 114 analysis.
Harris Henry Simmons
I could give you just maybe directionally. During the quarter we had about $545 million of loans in excess of $1 million in size that came into non-accrual.
We had about $173 million of such loans that are greater than $1 million in size that came off. Of that $173 million about $67 million of that was actually the result of charge offs.
I don’t know if that’s helpful.
Ken Zerbe – Morgan Stanley
A little. It is a tough question to answer but just given the size of the NPA increase in the quarter maybe I wasn’t expecting charge offs necessarily to fall as much as they did.
The final question I had, at year end you guys had a net deferred tax asset of about $480 million. Give you had a net loss last year and I’m going to guess you may have another net loss this year, can you just remind us of what it will take for you to reevaluate that DTA and whether or not you might need to impair that.
Doyle L. Arnold
We have evaluated it very carefully and have determined we don’t need a valuation allowance on deferred tax assets. That’s based on income taxes we paid and not the book provision and so yes, we paid substantial taxes in the last two years for the carry backs.
Operator
Your next question comes from Steven Alexopoulos – J. P.
Morgan.
Steven Alexopoulos – J. P. Morgan
Doyle, how far will you let the tangible common equity ratio fall to before you either raise common, you shrink the balance sheet or convert the TARP? How should we be thinking about a lower end of that?
Doyle L. Arnold
We don’t have a target for it Steve. Frankly, it’s going to be a feeling as you go along and also discussed stress testing with the regulators.
I think the interesting thing to me it has deteriorated almost exactly in line with some of the key stress elements that we have laid out there in particular in that scenario that I call the stylized stress test I think and a couple of investor presentations and so has the build up in the loan loss provision. So, in that stress test under some pretty adverse circumstances were something higher than this level of loss but something a bit lower than this level of provision persists for two years, that number stays I believe above 4% and while that’s getting I agree pretty low by historical standards, to get us through this severe period, I think it means that we can make it through.
I do think that’s something we’re going to have to watch very carefully over time and I would just note that every $50 million of common would result in about a 10 basis point increase in that number so it doesn’t take a lot of issuance if we decide that we have to do it to meaningfully move the needle. There are no current plants immediately contemplated.
Steven Alexopoulos – J. P. Morgan
With the provision expense now at a level that exceeds the pre-tax pre-provision line, when you do look at your stress test what’s your best guess as to when you’re profitable again?
Doyle L. Arnold
I think you can probably foresee, we certainly hope so anyway, an end to the OTTI charges before year-end unless the economy takes a deep downturn from here. As we’ve noted our valuation there already incorporates an expectation that about a quarter of the banks that we’re exposed to will fail and as I said we’re clipping along at probably somewhat less than that rate currently.
The key is the credit provision, I think it’s likely to remain pretty high for another couple of quarters. I can’t see out the fourth quarter and beyond.
I would guess fourth quarter is probably the earliest I could see any return to profitability. But, that’s probably just a guess at the moment.
Operator
Your next question comes from Joe Morford – RBC Capital Markets.
Joe Morford – RBC Capital Markets
I guess maybe to ask Ken’s question a different way, could you give us any color on the pace of inflows in to the classified asset category? And, if possible, whereabouts do they stand at quarter end?
Doyle L. Arnold
I don’t think internal classifications, I don’t think is something we disclose because it’s not comparable to what other banks have done but I would say if you look at the NPLs you’re not being mislead by the direction of credit quality indicators generally.
Joe Morford – RBC Capital Markets
Would you say the pace accelerated this quarter then?
Doyle L. Arnold
Yes it did. I think clearly fourth quarter and first quarter reflect what started happening in the economy about October of last year.
We had I think in both fourth and first quarter we had some significant additional downgrades in Nevada, in Arizona. We also had a fair number of downgrades but to less severe categories in Texas and in Utah.
So, it’s fairly wide spread but also the loss content in a lot of it we still believe is fairly low.
Harris Henry Simmons
About half of the total increase in non-accruals came out of Arizona and Nevada with two thirds of that amount in Nevada. I think as we’ve indicated previously, we felt that Arizona has started to plateau.
We’ve seen that in their charge offs in the first quarter as well as the rate of inflow in to non-performing. Nevada on the other hand, continues to show a greater stress than we’ve seen in the fourth quarter and we think that goes on here for a couple of quarters.
Joe Morford – RBC Capital Markets
I guess just one follow up, can you give us any color on the type of credit problems or downgrades that you were seeing in the Texas market?
Gerald J. Dent
It was primarily in the residential side of commercial real estate with some increase also in the energy sector.
Operator
Your next question comes from James Abbott – FBR Capital Markets & Co.
James Abbott – FBR Capital Markets & Co.
A couple of quick questions on asset deflation, as you re-run appraisals on a lot of properties, two, three, four times by now I’m sure, are you seeing some stabilization in the asset deflation rates at this point? You just mentioned Arizona is looking at some level of stability, maybe you can give us a little bit more color on that?
I think Doyle you also mentioned what the categories of the increases in non-performing assets were and I was wondering if you touched on your commercial business loans just the C&I, not the owner occupied portion but the true C&I loans?
Doyle L. Arnold
I’m going to let Jerry, Chief Credit Officer try to respond.
Gerald J. Dent
With respect to the deflation rates in loan to value, we continue to see decreases in the values that we’re receiving on appraisals. It depends, state-by-state it varies, we have seen some hint of hitting the bottom so to speak in Arizona, we’re starting to see more residential houses being sold but it still is going down pretty much in every state.
At a higher rate in Nevada, less so in Arizona and then not as much in any other states but it is still downward. The second part of your question, if you’d mind repeating that.
Doyle L. Arnold
Your question was on accruals?
James Abbott – FBR Capital Markets & Co.
Yes, basically it’s looking for non-performing assets by loan type and I think there was some comment mentioned on what the owner occupied increase was and also the construction, I think it was a $160 million increase in construction non-accruals, $87 million increase in owner occupied commercial real estate and I don’t know if you mentioned the C&I category directly?
Doyle L. Arnold
There was $260 million of total construction and land development NPL increase of which $160 was in Nevada and Arizona. So, you had $260 plus $87 of the owner occupied, that accounted for well over half of the total NPL increase.
I don’t know if we have the CNI piece. Do you have that Jerry or a rough estimate of it?
Gerald J. Dent
CNI increase?
Doyle L. Arnold
Yes, other than the owner occupied and the NPLs.
Gerald J. Dent
It was about $45 million.
Doyle L. Arnold
$45 million, so then most of the rest will be in non-residential CRE which I mentioned was also up.
James Abbott – FBR Capital Markets & Co.
This will be my final question but, one as we drill in to the construction increase, the $260 million, is that primarily residential construction and I assume it is. If you could give us some color on commercial construction because historically or at least over the last four quarters or so commercial construction has been holding in there okay.
We are hearing that commercial construction is breaking down, so any comments on that?
Doyle L. Arnold
We did see an increase in the commercial construction, this time in fact it exceeded the residential amount during the first quarter. It’s primarily in the retail type properties.
James Abbott – FBR Capital Markets & Co.
How much – actually, you’ve probably got that on your where is Waldo sheet but, how much is your commercial construction portfolio?
Doyle L. Arnold
You mean non-residential commercial?
James Abbott – FBR Capital Markets & Co.
So excluding multifamily?
[H. Walter Young ]
Commercial construction is $4.2 million.
Doyle L. Arnold
But, that includes multifamily. Total commercial construction, that was at year end Walter?
[H. Walter Young ]
March.
Doyle L. Arnold
March was $4.2 million. $700 was multifamily so about $3.5 [billion] total.
Operator
Your next question comes from John Hess – JMC Securities.
John Hess – JMC Securities
I had two questions, one is can you maybe provide some information on early stage delinquency trends if possible?
Harris Henry Simmons
They are up. We can do that by a number of different categories.
John Hess – JMC Securities
I guess the primary consideration would be early stage delinquencies are you seeing them move up at a more rapid rate than you saw in Q4? Then the second part of that would be by category are you seeing shifts in where you’re seeing early stage delinquency problems?
Doyle L. Arnold
I can tell you the 30 to 59 day delinquency on the entire portfolio was 1.59% at the end of the first quarter. I don’t know Jerry if you’ve got the comparables handy here.
I don’t have it right at our finger tips for the prior quarter, we could get that. I think you’ll find it in our call reports or our [inaudible] as well.
I think in general you’re seeing delinquencies go up in just about every category. In many of them they still remain relatively low by industry standards.
Our [inaudible] portfolio is a little over 50 basis points total delinquency, that’s 30 days and beyond not just 30 to 59. The credit card portfolio is I think about 2.6%, 30 and beyond.
The single family is up above, is about 5.5% as I recall and that’s being driven primarily by Jumbo one-time closed loans, a lot of it in Utah but some in other states. C&I is up to about 3.3% and has been climbing steadily but not at a sharply accelerating rate.
Then, we have seen some uptick discussed in both CRE term and CRE non-residential construction. I don’t happen to have those numbers on the top of my head.
Does that help?
John Hess – JMC Securities
Yes, it just sounds like maybe a year ago we were talking about seeing the rate of increase mostly associated with development or construction loans and it sounds like it’s a little bit more broad in its scope at this point?
Doyle L. Arnold
Yes, the economic downturn that really accelerated early last fall is clearly manifesting itself.
John Hess – JMC Securities
The last question would be it sounds like strategically you’re directing yourselves towards maybe some more FDIC assisted opportunities in your markets. I’m wondering can you characterize for us the marketplace there?
Do you see a big pipeline of opportunities? Can you characterize it, is it a bidding market?
Are there more, or less other players out there than you’d expect at this point in the cycle that would be bidding against you for these assets?
Harris Henry Simmons
No, I think it depends really on the location. One, we acquired [inaudible] up in Northern Nevada, it’s actually the kind of market I love because it’s rural, they’ve got a great deposit base, not overrun by competitors and people trying to get in there but it also means that you don’t have a lot of bidders for what is there.
That situation is going to be different if you’ve got something in Las Angeles County. So, I think it’s really going to be site specific.
We look at these deals one-by-one as they come along in terms of it there’s a fit we’ve been bidding we think very conservatively. We did this past weekend, the economics of it are exceptionally compelling for us and we think it’s a win-win.
We think we’ll probably save the FDIC money from what it would accomplish in liquidating the bank but it is also not expected to have any meaningful negative impact on our capital or losses. It’s really accretive right out of the shoot.
So, it’s the kind of small deal you’ll see that we’re more likely to try and do.
Doyle L. Arnold
Capital though is clearly constrained on doing a lot of these things simply because they do add to the balance sheet size even though the deals themselves are very, very attractive and the risk is very low. Once again, in the case of this bank in Nevada, we big a negative first loss position which means that the FDIC will actually write us a check to close prior to the loss share even kicking in.
So, we’d love to do more of them, there is a pipeline of these things throughout the West. The ones that don’t have a reasonable deposit franchise, we don’t look at very seriously.
If they’ve got a strong deposit franchise and you can get the kind of loss sharing conservatively bid, we’ll try to look at it as long as capital ratios don’t suffer too much for it. We have about a half dozen calls left in the queue.
We’re coming up on one hour and we’re very conscious of the time back on the east coast for those of you who have had a busy week or will have one. I’d like to suggest now if you could we’ll try and take a call from everybody in the queue but try and limit yourself to one question just to keep this time manageable.
Operator
Your next question comes from Greg Ketron – Citigroup.
Greg Ketron – Citigroup
I have a follow up question, I know this has been asked a lot of different ways on the call but, kind of going back to some of the presentations that you guys have put up where you have looked at the loan-to-value in the commercial real estate portfolio and on average it’s been, depending on what class, in the 55% to 65% range. So, obviously as these loans go in to non-performing status you’ve got a good deal of equity to deal with that mitigates some of the loss exposure but, I was wondering if you can provide any color beyond that?
Whether the deals that are going to non-performing loan status and you’re writing them down, are these deals kind of exceptions to that loan-to-value average that you’ve put out there or has the value of the collateral deteriorated well through the 35% which is the buffer you may have had? I’m just trying to get a feel to what kind of loss exposure you’re having on what’s passing in the NPLs.
Doyle L. Arnold
I’ll make a general comment and then turn it to Jerry if he has a specific comment. You’ve got to remember that those 50% and 60% kind of numbers are averages across the whole portfolio, most of which to this day remains performing.
It’s unlikely that someone who has the means is going to walk away from a credit that he still has a lot of equity in. So, I think it’s a fair general statement to say that the problems occur primarily in those credits where the values have declined the most sharply.
You’ve got less loan-to-value coverage and that’s where even if a borrower has the ability to carry, may choose not to if he doesn’t have to. So, the losses come out of the LTV pieces as a general matter.
Jerry?
Gerald J. Dent
I think that pretty well covers it.
Harris Henry Simmons
I think it’s been residential land development where the values of these kinds of things, trying to sell a note in Arizona, Nevada today, you’re probably seeing 85% deterioration or thereabouts. So, even if you had 50%, 60% going in, that’s proved not to be enough and that’s where you’re seeing some loss.
Greg Ketron – Citigroup
That’s where the bulk of the losses are coming from? It’s not as much, or if I can ask the question, it’s not as much of the properties that are already sitting in NPLs, it’s more on the inflows that are coming in?
Harris Henry Simmons
Yes. The good news is that we at least we’re in first position in most all of this.
We don’t have a lot of second mortgage exposure, stuff where it’s totaling disappearing. But, in land development, a lot of the value has disappeared way beyond what we had initially margined in.
Operator
Your next question comes from Brian Foran – Goldman Sachs.
Brian Foran – Goldman Sachs
Do you expect banks of your size to have to be required to undergo a stress test? And, if so, have you been given any indication from regulators as to what timings for that might look like?
Harris Henry Simmons
That’s a good question, I wish I had a definitive answer to it. I think it’s fair to say the regulators have been extremely busy with the 19 elite $100 billion club which process purportedly is coming to an end here shortly.
I guess it’s fair that my expectation is that we will have stress test and capital discussions with our regulators, exactly what the nature of those discussions will be in comparison to those for the larger banks I really don’t know. I expect to start those discussion later this month.
I tried to have them earlier but frankly they’re just not ready for us.
Operator
Your next question comes from Jennifer Demba – SunTrust Robinson Humphrey.
Jennifer Demba – SunTrust Robinson Humphrey
Harris or Doyle, can you give us some qualitative commentary on California? I think previously you guys have indicated that things have kind of bottomed there.
For your portfolio can you kind of tell us what you’re seeing?
Harris Henry Simmons
I’d say that I think we still generally feel that way. I think we’ve seen generally a bottoming in the residential construction portfolio.
We’re seeing a broadening of problems and I’ll get to the unemployment picture in California is as ugly as it is anyplace. So, we’re seeing a broadening in terms of the categories of loans that are seeing some stress.
With that said, if I look at for example, the change in non-performing assets this quarter, I mean California was about 11% of the total, the total increase. So, we’re not seeing the same kinds of problems that we’re seeing particularly in Nevada or Arizona.
So, I think that’s probably still a true statement.
Operator
Your next question comes from Brian Klock – Keefe, Bruyette & Woods.
Brian Klock – Keefe, Bruyette & Woods
Doyle, did you guys talk about the par balance of the securities you took the impairment on, the $132 million of OTTI that you took?
Doyle L. Arnold
The par value of those securities and where they came from?
Brian Klock – Keefe, Bruyette & Woods
Right.
Doyle L. Arnold
No, we didn’t. Can we?
Gerald J. Dent
Not off the top of my head. I mean, all of them are within the non-investment grade which you to have broken out.
Brian Klock – Keefe, Bruyette & Woods
I mean I guess what kind of haircut was that $132 million? If you don’t have it we can catch up later.
Doyle L. Arnold
I think we might have to get back to you on that one. I don’t think we brought that this time.
Operator
Your next question comes from Kenneth Usdin – Bank of America Merrill Lynch.
Kenneth Usdin – Bank of America Merrill Lynch
A quick question on the trust preferred book, can you just give us – Doyle, you mentioned that that loss expectation range earlier and I’m just wondering if that same range still holds or if it has changed at all what would be the drivers of better or worse expectations outside of stock price movement meaning does it have the [inaudible] ratings changed at all and just what’s your general outlook?
Doyle L. Arnold
Do you want to take a crack at that?
W. David Hemingway
I’d thought you’d say that the really the stress change hasn’t changed. I mean the biggest drivers – well, there’s two big drivers, one actual defaults where the FDIC actually closes more banks.
Obviously, that’s a permanent change which we haven’t seen and stock prices going down, some of which we saw in the first quarter caused the probabilities to go up or to increase which causes the prices to go down which is what you’ll see here in these numbers. But, other than what’s been talked about I haven’t seen anything else that would change either the model or the stress test.
Doyle L. Arnold
There’s probably some further deterioration of lease ratings head but the part that appears at least at this time that there’s somewhat of an offset to that and a bounce back of bank stock prices that’s occurred late in the quarter and so far this quarter ex today’s performance. Again, remember that it’s primarily regional and smaller banks like the ABAQ prices not the BIX type prices that are important here.
So, I think we’re still within the range of those stress tests but frankly, we haven’t re-run them since we did all the quarter end reevaluation. Which, with the downgrades, a good place on the 30th of March, the 27th through the 30th of March quite frankly it was hard enough to just get that all factored in and close the books rather than redo the stress testing.
So, we’re going to take I think one more question at this point and then we’ll wrap it up for the evening. Of course, Clark is available to answer questions as well.
Harris Henry Simmons
Again, we thank you all for your attention. As I mentioned, I think this is the nosiest quarter we’re going to throw at you.
Some of the things in this quarter just can’t recur again because the underlying facts are no longer there. I think it’s probably also one of the most disappointing because so many things all got collapsed into this quarter but again, I want you to bear in mind just about everything that happened this quarter are things that we talked about and are within the broad range of things that we have talked about in investor presentations in the past.
We’ve got probably at least a couple more quarters of significant loan loss provisions, maybe a couple more quarters of hopefully not more significant OTTI before we start to see the upturn out of this. So, thank you for your attention, your interest and we will look forward to chatting with some of you at investor conferences in the coming few weeks and all of you again one quarter from now.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Have a great day everyone.