Jan 26, 2010
Operator
Ladies and Gentlemen, welcome to today’s Zions Bancorporation fourth quarter 2009 earnings conference. This call is being recorded.
Now for opening remarks and introductions, I’d like to turn the call over to James Abbot.
James Abbott
Thanks Anthony and good evening everyone. We welcome you to this conference call to discuss our fourth quarter 2009 earnings.
I would like to remind you that we will be making forward-looking statements and actual results may differ materially. We encourage you to review the disclaimer in the press release dealing with forward-looking information, which applies equally to statements made in this call.
We will be referring to several schedules in the press release during this call. If you do not yet have a copy of the press release, it is available at www.zionsbancorporation.com and can be easily downloaded and printed.
We will limit the length of this call to one hour, which will include time for you to ask questions. During the Q-and-A section, we ask you limit your questions to one primary and one follow-up question to enable other participants to ask questions.
I will now turn the time over to Harris Simmons, Chairman and Chief Executive Officer. Harris
Harris Simmons
Thank you very much, James and good afternoon or good evening depending on your location. We’re delighted to have you with us today to talk about our fourth quarter results.
We will join others who have reported this quarter and generally in commenting that market conditions for our banking subsidiaries are starting in many cases to show some signs that are encouraging to us, but obviously it remains a very fragile recovery that we were in and we expect that we will continue to see some stress over the next couple of quarters or so. As you likely have seen, we reported a fourth quarter net loss to common shareholders of $1.26 per share.
We believe that 2009 represents the trough in earnings for this credit cycle and we expect to see an improvement in profitability as we progress through 2010. While the economic environment remains fragile, there are signs that emerging it’s stabilizing somewhat.
We’re consequently increasingly confident that loan losses have likely peaked and we believe we’re on the down slope through net charge-offs and for provision expense for our loan loss reserves. It’s unlikely that such items will decline in a straight line from the peak and certainly there remain some key areas that we’re monitoring and working to reduce our risk profile, but in general we believe the credit cost will be significantly less in 2010 than they were in 2009.
As we noted in the press release, net charge-offs declined significantly compared to the prior quarter, they were down 23%. We did recover most of our exposure on the Flying J loan.
We typically don’t mention loans by name, but this one has been publicly reported and so we would note that we sold our note to a third party and recovered about $0.83 on the dollar. Excluding that recovery, net charge-offs declined about 13%.
During 2009, we built the allowance for credit losses by more than $900 million or about $4.75 per share. The allowance for credit losses to loans equaled 4.25% and exceeded our fourth quarter annualized net charge off ratio by a comfortable margin.
Although, non-accrual loans increased modestly in the fourth quarter, the composition of these credits is much less concentrated in construction loans that typically have had much higher severity of loss rates and is more concentrated in loans that are better secured or often have better cash flows and thus typically have a lower loss severity. During the quarter, we resolved about 25% of our September 30, balance of classified assets, which about 70% resulted in a favorable resolution.
In other words, without charge off or charge down and that said is a rate that is very similar to the rate we experienced in third quarter. So we’re seeing a lot of these problems being worked out as we go through time here.
However, classified loan levels were relatively flat with the prior quarter as loans were downgraded during the quarter to offset those being resolved. With the stabilization of classified loans, we believe the need to build the reserve in 2010 should be quite modest, if this trend continues.
We’re also pleased with the continued improvement in our equity ratios with our tangible common equity increasing to 6.1% from 5.8% in the prior quarter and our Tier 1 risk based capital ratio of 10.27%. During the full year 2009, we raised nearly $1 billion of Tier 1 capital through various capital transactions.
We announced tonight that we expect to amend our second and third quarter 10-Q’s primarily to reflect the higher tangible common equity value described to the value of the conversion feature we added to approximately $1.2 billion subordinated debt back in June. We’ll discuss this issue later in the call, but the reassessment of the accounting treatment is expected to result in approximately $173 million of additional tangible common equity in the June quarter and subsequent quarters roughly similar amounts, but should also resulted in modestly lower earnings in the future.
Our core pretax, pre-credit cost earnings remained strong at about $940 million annualized in the fourth quarter. This excludes the non-cash amortization of discount on the subordinated debt.
This is moderately lower than in the prior quarter due to the decline in loan balances and the newly issued senior notes, which occurred late in September. Our average demand deposit account balance growth remains strong rising an annualized 25% from the prior quarter.
This is consistent with the trends that we’ve experienced over the last several quarters rising about 30% since the year ago period. We believe this is partially attributable to low absolute interest rates and the FDIC guarantee on demand deposits.
Nevertheless, we are encouraged that our demand deposit growth rate has significantly exceeded that of the industry. Importantly, our customer base has organically increased since the beginning of this credit cycle.
The number of business customers increased about 18% since 2007. With that overview, I’ll now ask our Chief Financial Officer and Vice Chairman, Doyle Arnold to review the quarterly performance.
Doyle.
Doyle Arnold
Thanks, Harris and good afternoon or good evening, everyone. I’m going to start with a discussion of the amendments to which Harris referred.
If you’re not aware, this afternoon in addition to filing our earnings release, we filed a separate 8-K as such that our second quarter and third quarter 2009, Forms 10-Q will be amended. We have not yet filed those amendments and will do so within the next week or two we believe, but we have incorporated the results of amending and restating second and third quarter earnings capital, etc., into this release and restated all prior periods.
Let me explain, why and how this is being done. As some of you may be aware it’s fairly common practice for the SEC from time-to-time to review and comment on the financial statements of a publicly traded company and shortly after the beginning of this year, in January, the SEC submitted to us a comment letter with questions regarding the accounting treatment of the subordinated debt exchange that we completed in June of 2009.
As a result of these questions, we initiated a detailed review of that transaction with a specific view toward how to value, what is called the beneficial conversion feature. As you may recall, we added to the sub debt the right to convert to Series A or Series C preferred stock either option at the choosing of the holder and those options are called the beneficial conversion feature.
Because of this review, we now believe that we should have accounted for the transaction differently than we did at the time and as Harris mentioned ultimately, this result in a significant increase in the equity of the company and while modestly reducing perspective earnings subsequently. Essentially a larger value attributed to that feature will result in larger amortization expense than previously indicated as we go forward.
Without going too much depth in the prepared remarks, I’ll try to describe the main thing that we think we did incorrectly and how it will be corrected. We originally assigned a value to this beneficial conversion feature based on the change in the subordinated debt prices prior to and after announcement of the transaction or the difference between $0.66 and $0.71 par.
We now believe that it’s more accurate to use the difference between the prices of the subordinated debt on the commitment date that’s the accounting term, you may think of it as the closing date. It’s essentially when we no longer have the right to modify or terminate the offer.
Anyway, the price of the debt on that date and the price of the more valuable of the preferred shares on that date, which were our preferred C-shares, because that’s in the money instrument that the note holders most likely would have elected to convert into. So to illustrate the sub notes we’re trading at 71% of par on that date and the preferred C-shares we’re trading at about $.99.
This difference of 28% should have been the intrinsic value of the option and on $1.2 billion results in an after tax amount of $201 million, not the $45 million previously reported, and as I mentioned this amount is recorded as a discount on the subordinated debt and is amortized back to par over the life of the securities and therefore earnings in future periods will be a bit lower than under the prior accounting interpretation. Just to clarify a point, this is in addition to recording the debt at a discount due to the price differential between the market value of the sub debt and its par value, which was the difference between the $0.71 and par or about 29%.
The current interpretation has been reviewed extensively by specialists within Ernst & Young and as we believe it to be accurate. However, the SEC has not yet had a chance to review our corrected accounting treatment.
Now let’s shift to the quarterly results. As noted in the release we posted a net loss applicable to common shareholders on a GAAP basis of $176.5 million or $1.26 per diluted common share.
James has suggested that we try something different this time that I’ll not walk you page by page through the highlights of the financials, but rather we group things into a few major themes. So I won’t be doing that this time.
If you don’t like this, take it up with James and we’ll regroup and do it a different way next time, but hopefully this will help us get through the call quickly. I’m going to highlight three key areas, revenue, credit, and capital and then we will turn to your questions.
First, the revenue drivers, the GAAP net interest margin, which you can find on Page 22 declined to 3.81% from 3.91% in the previous quarter, the adverse impact of subordinated debt amortization and total 28 basis points. In addition, the NIM was pressured by more than 30 basis points due to the level of non-accrual assets and interest reversals as loans moved into non-accrual status.
Core NIM was just about flat perhaps down one or two basis points, primarily due to the issuance of senior notes in late September, which had about eight points of negative impact in the fourth quarter, a loss of swap income compared to the third quarter, about seven basis points and to a lesser degree the excess cash balances about two. Takeaway is that the underlying dynamics of the lending business is still producing higher spreads and we have also been active in reducing costs on interest bearing deposit accounts, which declined 27 basis points during the quarter to 94 basis points.
The other key component of revenue is our earning asset base average loans declined $1 billion, due to weak loan demand as well as payoffs on construction loans. Construction loans declined by about $560 million, commercial business loan demand remains weak, although the balance did decline less than in the previous few quarters.
Line usage rates for commercial loans have declined to about 39% from the recent peak of 44% in the September 2008 quarter. Again, although in the last three months of the year, usage appears to have leveled off.
We did extend $1.7 billion of new credits or draws on previous lines during the quarter as evidence that we’re actively lending, but charge-offs and pay downs etc. continue to work the total portfolio down and I think that’s a common theme you’ve heard throughout the industry so far this earnings reporting season.
The core components of non-interest income can be found on Page 14, such as service charges on deposit accounts and other service charges remain fairly stable. However, the overall non-interest income remains volatile due to changes in items like fair value and non-hedge derivative income and OTTI.
If you have questions on those items we’ll address them in the Q-and-A or you can contact us after this call. Finally, the other temporary impairment of the CDO portfolio was significantly higher than we have previously expected and continues to prove difficult to forecast.
In part, we had several bank failures very late in the quarter to which we had exposure as well as some deferrals late in the quarter and those drove the OTTI up, a little more than we had expected. I’ll say overall, our estimate of fair value in OCI now appear to us to be a lot more stable and we have increased confidence in our valuation models.
We note as we discussed in more detail on Page six of the text that most of the OTTI taken through income this quarter came from the original BBB and A rated bank CDOs and most of the OTTI had already been reflected in tangible equity through OCI. Moving to credit quality, as Harris mentioned we’re encouraged by the lower level of net charge-offs.
Gross charge-offs also declined, but somewhat more modestly. We provided a new chart on Page 21 to give you net charge-offs by loan type, something that many of you have asked for, so you can see the detailed quarterly same level of detail as we give you the other credit numbers there.
We believe that a key take away from this page is that by examining the concentration of losses and non-accrual loans you can see the shift we’ve been talking away from losses in high severity loans like commercial real estate, residential real estate, construction and development into loan types with lower loss severity rates. Construction loan losses accounted for just under half the total charge-offs, which is down from about 70% of the total a year ago.
You can see that total commercial real estate charge-offs declined $52 million for the quarter and construction and land development were down by a much larger amount. Construction losses declined 36% sequentially and loss relative to non-accrual construction loans has improved significantly.
We are still experiencing a relatively moderate increase on owner occupied loans, which account for 22% of total loans, 24% of non-accruals, but only 9% of quarterly net charge-offs. The loss rate is growing, in fact it was just under 1.25% annualized for the most recent quarter, but growing at a more modest pace than we saw in the previous quarter.
Term commercial real estate loans, which account for 18% of total loans, experienced an increase in the loss rate similar to the prior quarter’s rate. Net charge-offs from this portfolio were approximately 3.1% annualized.
Note that a portion of the higher levels of loss from within this portfolio are due to credits in the gaming industry that were real estate collateralized and we had only a few exposures to that industry and we think there’s stabilization occurring both within that industry and in the rest of our exposure. Within the C&I portfolio, which accounts for 25% of loans, net losses excluding the large recovery that Harris mentioned were only slightly higher than the prior quarter of a net charge off rate of about 3.0%.
Relatively stabilizing rate of change in the last two quarters is we think is somewhat a light at the end of the tunnel. Finally, I’ll note that the actual dollars lost to consumer charge-offs declined for the second straight quarter looking at this point like the peak may have been the June 2009 quarter.
On the top of Page 21, non-accrual loans by type, I’ll note that construction loans now account for 39% of non-accruals down from 51%, just two quarters ago. The largest increases in NALs came from the owner occupied portion of the portfolio, which accounts for two thirds of the link quarter increase in non-accruals.
While there’s some risk in this portfolio, I’d note that the long history of loss content including the present within the portfolio and with the loss content in recent months running at only a fraction of C&I or construction. The next largest increase in non-accruals came from Amegy Bank, which also has had lower loss rates emerging thus far in the cycle.
Restructured loans increased significantly for both accruing and non-accruing loans. The accruing, but restructured balance increased $91 million as loans have seasoned and equal about one half of 1% of loans excluding the FDIC guaranteed loans.
We’re tracking the performance of these restructured loans and in the future, we’ll be able to provide you meaningful statistics on redefault rates, but so far those redefault rates are very low and we believe we’ve been cautious on restructuring and subsequently allowing a loan to return to performing status, and there for we do not expect higher redefault rates in the future. Non-accrual, but restructured loans increased to $192 million and such loans account for 15% of non-accrual loan totals.
The overall economic stabilization maybe contributing to some favorable trends within the non-accrual and OREO categories, you can look on Page 19, total non-performing loans actually declined slightly, OREO declined slightly, non-accruals were up slightly. Within non-accruals, we experienced total new NALs of about $860 million, similar to the prior quarter.
However, we experienced about $310 million of favorable resolutions, which was up from about $255 million last quarter. Correspondingly, unfavorable resolutions dropped to just shy of $400 million from a number above $450 million in the prior quarter.
A similar pattern is evident on other real estate owned. There was a similar in flow of about $150 million during the quarter, but favorable resolutions doubled to $130 million from about $63 million in the prior quarter.
As I mentioned the OREO balance as you can see declined meaningfully. Finally, I’d like to discuss the third topic, capital.
As we’ve already discussed due to the change in accounting treatment for the sub debt modification, we picked up a significant amount of common equity back in the second quarter and third quarter and flowing through to the fourth quarter of this year. Net of commissions, we also issued about $153 million of common stock during the quarter under our ongoing distribution program.
In addition, we resulted in the exchange of $72 million of preferred shares for new common shares and both added to common equity during the quarter. We also experienced an improvement in other comprehensive equity of about $30 million in the quarter due to improvements in spreads in the debt markets.
We were also successful in reducing end of period cash balances by $1.2 billion and the total balance sheet contracted by about $2.2 billion, compared to the last quarter and the smaller denominator, therefore, also helps improve the various capital ratios. Partially offsetting the effects of these items was the $176 million net loss for the quarter, but net-net, the result of these items was an increase intangible common equity, the 6.12% from a revised 5.76% in the third quarter.
For those who don’t remember the original reported amount was 5.43% third quarter and now we are at 6.12%. I’d like to kind of summarize the guidance.
A little bit of guidance for the next few quarters. It appears to us that there are no signs of loan demand at this point rebounding and therefore, we do expect loan balances to continue to decline and we also will try not to let our cash balances with the fed build as those earning assets decline.
So the balance sheet may continue to shrink a bit for the next couple of quarters. We expect the core margin to be stable to improving in the next quarter as the cost of money market accounts at the end of the year remain high relative to benchmark indices.
As a general statement, the balance sheet remains fairly asset sensitive. Turning to credit quality, everything we see says that the trend in gross and net charge-offs should continue to decline, probably be a bit uneven, but we think the trend is now downward and as Harris mentioned, we expect the reserve build to be very modest if any in the first quarter and in future quarters.
We do think that the OTTI charges may remain more elevated for several quarters as previous bank failures have depleted the over collateral station of many of our original A and Triple BBB rated bank CDOs. However, we think the impact on tangible common equity will be relatively modest as we believe it’s already been reflected in other comprehensive income through fair value marks.
We do expect to issue some additional common shares to keep capital ratios reasonably stable until we return to profitability. Therefore, we do expect to announce one more common equity distribution program after the completion of the current one, which has about $27 million remaining in it.
However, we expect the size of that program to be less than the $250 million that the previous ones have been. Beyond that, I’d just note the regulatory and political and economic climate remain highly uncertain and difficult to forecast so, we’re focused on just keeping the capital ratios reasonably in line for the next few quarters.
With that, Anthony, would you open up the line for questions and I think we’re ready for your questions at this point.
Operator
(Operator Instructions) Your first question comes from Ken Zerbe - Morgan Stanley.
Ken Zerbe
First question I had was on non-performing loans and how we should think about the reserve build. I know you said basically reserve build is going to be very modest in first quarter, but if we continued to see the pace of increase in C&I and CRE non-performing loans.
Is that baked into your guidance in any way? Would the reserve build change if the pace of increase in NPLs continues to go up?
Harris Simmons
The comment on reserve bill was predicated more on what we’re seeing in our internal criticized and classified levels, which have flattened. We saw very little increase in the total graded credits as we called them special mention substandard and doubtful during the quarter.
The trend had been beginning to level off the prior quarter, but it was really virtually flat and it’s really those classification levels in combination with loss rates realized out of those levels that drives the reserves. The correlation to non-accruals is actually much looser so that’s what’s driving the comment.
Ken Zerbe
My follow-up unrelated add definitely is in terms of the tough profile, it sounds like you’re sort of backing away from the $50 million of OTTI per quarter and taking that up a little bit. Maybe did you have anything in mind like internally in terms of what you expect for OTTI losses and also if you can comment the difference between sort of the fair value and the carrying value so to speak?
How should we be thinking about that change over time as you reduce your discount rates on the carrying value?
Harris Simmons
We struggled with what to say about the OTTI going forward, other than we’re not sure, but we think the impact on capital is relatively modest. The $100 million was higher than we expected.
I will note that so far this year, there have been nine bank failures we had exposure of one of the nine. We had ascribed 100% default probability at year end to that failure so far we’re essentially un-impacted by bank failures this year.
I don’t know if the $50 million is right, it’s going to be somewhat volatile I suspect and it could again be higher in some quarters, but I think the overall notion that there could be a couple $100 million more OTTI to come over the next few quarters is not out of line. Again, I think the capital impact from a tangible common equity perspective will be much more modest.
I will note in response to the second part of your unrelated follow-up question, on page six of the press release, we have given you a little bit of additional info on the bank trust preferred, which is a portfolio which is I think $2.2 billion out of $2.7 billion of the total bank and insurance portfolio. We’ve noted a couple things that 86% of the impairment charges came out of the original A and original BBB rated securities.
We’ve inserted the amortized cost values for all of the securities there in the middle of the chart and so, you can see the total OCI I guess, hasn’t been reflected in income is the difference between 807 and 324 on the single A’s and 40 and 15 on the BBBs and what we’re suggesting is, we think most of the future impairments were going to come out of those two differences. There’ll probably be some additional OCI taken along the way, but most of it we think is just going to be converting OCI and OTTI and will be some portion of that difference.
I don’t know if David, you have any other thoughts on that?
David Hemingway
The only other thoughts as far as we’re concerned that, carrying value is the fair value under FASB 157, and they’re synonymous; we’ve recognized that there are trades in the marketplace, which are force trades, which are at different prices, but under the accounting guidance, the carrying value would be synonymous with the fair value.
Operator
Your next question comes from Steven Alexopoulos - JP Morgan.
Steven Alexopoulos
Doyle, putting all of your comments on guidance together, particularly on the reserve, what’s your best guess as to when you’re again profitable and is there any chance it’s not a 2010 event?
Doyle Arnold
Best guess remains sometime in the second half of this year, and I guess is there a chance that it’s not this year? Yes, I don’t know how big a chance.
I would actually guess that the OTTI volatility may be the swing factor in just when GAAP reported net income turns positive. The credit trends we think are reasonably foreseeable at this point, but that’s the one that just from a reported bottom line may swing the difference between it being a third quarter event, a fourth quarter event or maybe a little after that.
Steven Alexopoulos
Just one follow-up, is the reported NIM going to be impacted by the restatement for the debt modification? I don’t know if that runs for the NIM or not?
Doyle Arnold
Yes, it does and that’s what we’ve tried to describe that in the text and it is reflected in the restated NIMs for the, well mostly third quarter because, the second quarter wasn’t impacted much, but restated NIM does have the debt effect for the third quarter and then this announcement for the fourth quarter.
Operator
Your next question comes from John Hecht - JMP Securities.
John Hecht
First question is related to the restructured loans. I wonder if you can characterize the required conditions in order to engage in loan restructuring and maybe characterize the type of modification whether it’s a rate or a maturity change at this point.
David Hemingway
Gerry Dent, our Chief Credit Officer is going to take that one.
Gerry Dent
The majority of our restructures is really relate to rate; however terms also play into the scenario and as far as placing them back on accrual goes we’re really guided by the call reporting instructions from the regulators and by GAAP. In order to place a loan back on accrual we need to have evidence in our file that the borrower has the capability to continue to perform and then also they need to have performed for a period of at least six months if they’re on a monthly amortizing basis and possibly longer if the amortizing basis is a quarterly or a semi annual payment.
John Hecht
Second question mixed related to your asset sensitivity. Can you just give us an updated sense for how many of your loans are through there?
What percentage of your loans are through their floor, and what maybe 100 basis point change in short term rates would do to loans that are through the floor?
Gerry Dent
Our most recent guidance on that was published in a couple of IR Presentations that we did in the fourth quarter. We have not updated those, a significant portion of the new loans we do each quarter have floors on them that are in the money, it changed a lot since that picture.
We’ll update that chart for our hosted IR Conference coming up in about three weeks for those of you either attend or want to dial-in.
Operator
Your next question comes from Joe Morford - RBC Capital Markets.
Joe Morford
First question was really, if you had any color on the loan balances by State, I was just curious if there’s any kind of geographic concentrations where you’re seeing more run off or subside maybe a little better demand at all?
Doyle Arnold
I’m not sure we’re going to be able to respond very well to that question, Joe. Anyhow, we’ll look around near at what we’ve got with us and maybe we’ll come back if we can.
We’ll give you a second question since we couldn’t do that one. It’s like a call for a replay review.
You didn’t use up a time out.
Joe Morford
In the past you’ve said the FDIC deal flow hasn’t been that attractive. I was just curious, if you all actually did bid on any transactions in the past three months and, if you’re current view on these kinds of transactions has changed at all?
Doyle Arnold
It really hasn’t changed. I mean, the stuff that we’ve seen from an asset standpoint is very undesirable in the markets, where we actually have management depth that we could take on just a lot of problem real estate and if you look back on Page 19, I think you’ll see that our own for example, non-accrual loans have increased about a third since the end of June, about the last time we did those.
So no, we haven’t really been tempted to bid on anything. On a deposits only basis, it’s really rather interesting.
We’re kind of a wash in deposits. We’ve got lots of liquidity as we’ve discussed previously, and we’ve now done two deals where we paid no premium for the deposits.
We served as a paying agent, where the expenses are covered by the FDIC and we’ve booked, I mean we are opening deposit accounts in all of the Barnes Bank branches about as fast as we can open them. Again without incurring any conversion expense and that was our experience in Nevada as well.
So we think, basically we’re getting virtually all of the core deposits with no costs whatsoever doing it this way. So we’ll probably stay based on what we’re seeing and our own issues to deal with as we said we’re going to continue to stay largely on the sidelines for the next quarter or two at least, but we may opportunistically do these paying agent deals or opportunities if they come along.
Joe, I can answer maybe kind of generally your question about loan run-off in various subsidiaries. The largest run-off was in Nevada, but that’s also market where we have the largest proportion of FDIC supported assets, which are running off at a higher rate as we generally work those off, but they’re including those FDIC covered assets we were down annualized in the fourth quarter about 24%.
So that was the most severe in Zions Bank, Utah and Idaho were down about 10% in California were down 11.5% there again including some FDIC, a lot of FDIC covered assets and excluding those, I’m guessing it would have been closer to about 5% or 6%, something like that, Texas down 6.9%, Arizona down 10.2%, Colorado 4%. All those annualized.
Operator
Your next question comes from John Pancari - Macquarie.
John Pancari
Can you talk a little bit about the DTA? Can you just quantify it for this quarter and then just give us your updated view on the need for the allowance?
Harris Simmons
I’ll give you two numbers. The GAAP net DTA, that’s DTAs minus DTLs was $475 million at year end and that’s down from a restated $582 million third quarter and restated $537 million second quarter.
We did not take a valuation allowance against the deferred tax asset. On a regulatory basis, we basically start with the same number, but we did on a consolidated basis have disallowed DTA for regulatory capital purposes of $170 million and I don’t have the breakdown yet by State for those.
John Pancari
How did that $170 million compared to last quarter?
Harris Simmons
Zero.
Doyle Arnold
Last quarter it was zero. I might add that $170 million was reflected in the estimated regulatory capital ratios that are on the very last page of the earnings release, page 24.
John Pancari
Then separately, do you have your dollar amount of TDRs in the quarter and the change in that amount?
Doyle Arnold
On the very bottom of page 19, you have restructured loans and non-accrual $298.8 million, restructured loans accruing $206.7 million.
John Pancari
Then last question is, can you talked a little bit about some of the credit pressure geographically. Can you talk about where you had to funnel capital down on the sub level?
What subsidiaries got the most capital infusions?
Doyle Arnold
That will be available in the call report. Let’s take another question and again we’ll try to come up with an answer before the call is over on that one.
Operator
Your next question comes from Todd Hagerman - Collins Stuart.
Todd Hagerman
Doyle, just wondering, the comment that you made in terms as you were talking about kind of return to profitability if you will, you mentioned just kind of the visibility on credit. I’m just curious kind of from a high level, as you look at the results this quarter, obviously a little bit better than I think what many people would have expected.
I guess in general, if you talk about kind of the favorable versus unfavorable variances in the quarter, was there one or two things that kind of came in much better than expected as you guys kind of went through the credit process again this quarter and gives you more visibility in terms of the credit outlook?
Doyle Arnold
No, I mean I think if you go back to guidance earlier in the quarter that we gave and any commentary and IR conferences, we were saying that we thought that the provision number would probably start with a four, but in any event that would be down materially from the $565 million, I think last period. Of course the provision for loan losses was actually just under $400 million.
The unfunded commitments in reserve increase brought it up to over $400 million. I think net charge-offs were probably a little better than we thought, even excluding the Flying J, if you look at the reconciliations on page 20, there were $61 million of total recoveries up from $7.8 million in the prior quarter and that’s quite an increase even allowing $39 million for Flying J.
So just in general, I guess the stabilization in criticized and classified the fact that within that stabilization, there were declines in Arizona, Nevada, in real estate construction some of the things that had been the major source of loss and the offsetting increases that got you the stability were in things like owner occupied real estate or commercial and some of the loans in Texas that seem to have lower loss content. So it’s kind of those kinds of things that leads us to continue to guide to a general downward trend for both charge-offs and provisions.
Todd Hagerman
Then just maybe as a follow-up, could you just give a little bit more color in terms of you mentioned kind of the NPA inflow was relatively flat in the quarter, but I’m a little curious in terms of kind of the favorable delta or variance specifically as it relates to the commercial real estate and the C&I bucket?
Gerry Dent
I don’t know if we have a whole lot more detail on that one available to us right now, Todd.
Harris Simmons
We’ll put a plug out for you Todd. We’re actually going to show a little bit of that information at the Investor Day, so we’ll hopefully see you there.
Let me just cover off the previous question. The biggest slug of capital this quarter went into Nevada State Bank, about $100 million.
We also put about $65 million into Texas and we did some other shuffling around converting Tier 2 to Tier 1 or what have you or preferred to common in smaller amounts, but those are the two net inflows or from parent down to subs.
Operator
Your next question comes from Jason Goldberg - Barclays Capital.
Jason Goldberg
With respect to I guess the increase in TDRs correlate somewhat with the improvement that we saw in 90 days past due, I was wondering if those two are correlated and then as a related question just maybe more color in terms of what you’re actually restructuring of these commercial real estate loans and what kind of modifications you’re doing?
Gerry Dent
The majority of the restructures are in the commercial loan arena although a few in the consumer, not very much, so I’d say it’s mainly in the commercial real estate area.
Jason Goldberg
Gerry, the other part of the question is there any correlation between the facts that the restructured loans increased quite a bit in the 90 days past due and accruing came down?
Gerry Dent
No, there will be some correlation there of course. I’m not sure that we could quantify it, but obviously the loans that your best candidates so to speak for a TDR are those loans that are seriously delinquent.
Jason Goldberg
I guess as an unrelated question, you mentioned, you had the majority of the CDO trust preferred CDO hit this quarter was one you recognized in OCI of about $90 million somewhat, yet OCI only improved by $32 million, so I guess we already kind of refilling that unrealized loss bucket tied to those CDOs?
Gerry Dent
Yes, there were some new OCI taken in addition to the OCI that was related to the OTTI that had previously been taken. Yes, there is still some inflow into OCI.
I mean, there was this quarter. James, we’ve got a lot of questions left.
We’ve got about 10 minutes left and then if we try to hold it to an hour, how do you want to do this? Or let it run over a little?
James Abbott
We’ll just go to one question and I’ll call you back if we don’t make it in time.
Operator
Your next question comes from Craig Siegenthaler - Credit Suisse.
Craig Siegenthaler
Just looking at the difference in the growth rates between the C&I non-accruals and net charge-offs. Basically with non-accruals up a lot and charge-offs down, and we know how timing can sometimes be skewed, but I’m wondering; where is the average C&I non-accrual now marked relative to par?
David Hemingway
I don’t know the answer to that, but I’ll find out that most of the non-accrual increase is coming out of that owner occupied portfolio that has very little loss content in it. The loss rate as I mentioned, did tick up this quarter to about just less than 1.25%.
We think there was a little bit of aberration in that, but there’s the non-accrual pick up there does not have as much loss content as you might think.
Craig Siegenthaler
I was actually just referring to C&I within the commercial lending bucket and within that bucket, non-accruals were up and net charge-offs were down with the owner occupied and that bucket the losses did tick up.
David Hemingway
I don’t think right here we have the…
Gerry Dent
Where we don’t have the average reserve balance against the C&I again I can’t help you with that one. It’s actually not something we track.
Not a number we keep track of.
Craig Siegenthaler
Can I just ask one follow-up then, how did the 30 day to 89 day delinquency level trend fourth quarter versus third quarter, overall?
Gerry Dent
30 to 90, the overall 30 above including 90 was also flattening out. I don’t know if we have, do we have, I think, it’s on page 19, fourth line from the bottom, accruing loans 30 to 89 days excluding the FDIC supported assets was down from $571 million to $428 million from quarter-over-quarter.
Was that the number you’re looking for?
Operator
Your next question comes from Erica Pannella - UBS.
Erica Pannella
Just a follow-up on the DTA, so $305 million is allowed in your Tier 1 calculation?
Harris Simmons
Yes.
Erica Pannella
If you return to profitability by the second half of ‘10, but net-net are still unprofitable in 2010? Does that help or does the disallowance just look at full year fiscal profitability?
Harris Simmons
It’s actually for regulatory purposes it’s a quarter-by-quarter calculation. It’s not a full year.
We do think that disallowed DTA for regulatory purposes will tick up again first quarter, when we’re no longer allowed to look back to the remainder of the taxes paid in 2007 that we were not able to reclaim. The numbers probably going to go up to around $300 million, I believe is our estimate for regulatory DTA purposes and then we’ll flatten out and begin to trend down from there as we can look forward four quarters and begin to pickup more quarters that have breakeven to profitable numbers in them.
Erica Pannella
How quickly can you recapture anything that’s disallowed as you report profitable quarters?
Harris Simmons
Every quarter, I mean you eat into it every quarter that you report a profit at that point or can look ahead to a profitable quarter. So the rule for regulatory DTA, as you can look back to taxes paid if you can reclaim them, you can look backwards two years, and ahead four quarters, and that’s every quarter you look ahead a new quarter.
So if you’re looking ahead to a profitable quarter you begin to eat into that disallowed DTA.
Operator
Your next question comes from Bob Patten - Morgan, Keegan. .
Bob Patten
Gerry, just a quick question on the loan sale market, what kind of activity, what kind of discounts you guys are seeing? How active where you in the fourth quarter and do you expect that activity to pickup?
Gerry Dent
As we’ve stated in the past we really haven’t been bulk sailing credits in large amounts, but primarily on a one off basis been selling loans and the total that we’ve sold during the fourth quarter was $204 million, actually $205 million and they were sold at about $0.72 on the dollar.
Bob Patten
Jim, if I’ve only got one question, I just want to ask Gerry about the restructured activity. Did the whitepaper or the CRE guidelines, did that help pickup an activity at all?
Gerry Dent
Pickup an activity as far as TDRs in the whitepaper they’re referring to. Actually, it did have somewhat of an impact because it opened up a couple new avenues that we hadn’t really been using previously, primarily the A note, B note situation, which helps us quite frankly to be able to restructure loans and put them in a position where although they become TDRs.
We have the ability to in the future eliminate the TDR status and of course, that’s for those that we’ve structured into that method is down the road a little ways.
Operator
Your next question comes from Marty Mosby - FTN Financial.
Marty Mosby
A question on deposit growth, we had a lot of non-interest bearing deposit growth, but in total deposit growth we really saw a decline both period end-to-period end and also average-to-average. What’s driving the loss in total deposits?
Can you explain how you might see that going forward?
Doyle Arnold
As we’ve mentioned before, we were selling $2 billion and at the peak nearly $3 billion a night to the Fed and it’s basically a negative spread. So we have consciously runoff more expensive kinds of term CDs that we had put on and when liquidity was scarce aid year and a half ago, some broker deposits, cedars etc., so we have been consciously trying to shrink non-core interest bearing deposits and we’re happy to have the non-interest bearing deposit growth.
It’s really as simple as that.
Marty Mosby
What about pipeline for recoveries and I’ll end with that, thanks.
David Hemingway
You mean loan recoveries?
Marty Mosby
Yes, since we had the $61 million this quarter and $39 million of it related to one loan, how much do you think we might have going forward?
David Hemingway
I think we were positively surprised by the take out the $39 million, the other $25 million or $30 million, I don’t know if there’s a big pipeline yet that we’re counting on for recoveries.
Doyle Arnold
I think it’s too early in the cycle to really be able to say that.
Operator
Your final question comes from Dave Rochester - FBR Capital Markets.
Dave Rochester
So regarding capital, you talked earlier about issuing an additional smaller ATM to keep the capital ratios fairly stable. Is this something that’s been suggested that you do by the regulators, or is this something you just feel is prudent from a capital perspective as well as the holding company and liquidity perspective?
Doyle Arnold
Prudent, it’s not been suggested. Some people probably listening into this call have suggested that we need to do $500 million to $1 billion, that would be more prudent and we’re continuing to disagree with that point of view.
We think we’ll do a little more to make sure that we just don’t want those ratios to get so low that people see a short selling opportunity or otherwise get nervous about us and that’s as simple as that.
Dave Rochester
What’s the liquidity position at this point at the holding company?
Doyle Arnold
I don’t remember the exact number, but after repaying the $295 million maturing senior notes at year end, we ended up with around $550 million of cash at the parent and no major debt maturities now until June of 2012. All right, I think that’s it, Anthony.
Do you want to wrap it up, James?
James Abbott
Sure. Thank you, everyone for joining.
I will be around for further questions or calls for those of you that were in the queue, I will go ahead and give you a call back. We appreciate you joining us today.
We’ll talk to you at our Investor Conference on February 10, 11 and 12. We look forward to having you here.
Doyle Arnold
Thank you all for your attention tonight. See you soon.
Operator
Thank you. This does conclude today’s conference call.
We thank you for your participation.