Apr 22, 2013
Executives
James R. Abbott - Senior Vice President of Investor Relations Harris H.
Simmons - Chairman, Chief Executive Officer, President, Member of Executive Committee and Chairman of Zions First National Bank Doyle L. Arnold - Vice Chairman and Chief Financial Officer
Analysts
Josh Levin - Citigroup Inc, Research Division Craig Siegenthaler - Crédit Suisse AG, Research Division Thomas LeTrent - FBR Capital Markets & Co., Research Division Brian Foran - Autonomous Research LLP Gaston F. Ceron - Morningstar Inc., Research Division Brad J.
Milsaps - Sandler O'Neill + Partners, L.P., Research Division Ken A. Zerbe - Morgan Stanley, Research Division John G.
Pancari - Evercore Partners Inc., Research Division Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division John V.
Moran - Macquarie Research David Rochester - Deutsche Bank AG, Research Division David Rochester - FBR Capital Markets & Co., Research Division
Operator
Good day, ladies and gentlemen and welcome to Zions Bancorp. First Quarter 2013 Earnings Conference Call.
[Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to James Abbott.
James R. Abbott
Thank you, Jamie, and good evening. We welcome you to this conference call to discuss our first quarter 2013 earnings.
Our primary participants today will be Harris Simmons, Chairman and Chief Executive Officer; and Doyle Arnold, Vice Chairman and Chief Financial Officer. I would like to remind you that during this call, we will be making forward-looking statements although actual results may differ materially.
We encourage you to review the disclaimer in the press release dealing with forward-looking information, which applies equally to statements made in this call. A copy of the earnings release is available at zionsbancorporation.com.
We intend to limit the length of this call to 1 hour which will include time for you to ask questions. During the Q&A section, we ask you to limit your questions to 1 primary and 1 related follow-up question to enable other participants to ask questions.
I will now turn the time over to Harris Simmons.
Harris H. Simmons
Thanks very much, James, and we want to welcome all of you to the call this afternoon. We are generally quite pleased with the first quarter results that you've all seen.
Many of the trends were strong either on a relative basis such as loan growth on an absolute basis such as net charge-offs. Net charge-offs ratio this quarter, as we look around, looks like it's among the lowest in the industry.
Additionally, we received, during the quarter, permission from the Federal Reserve to move forward with the majority of our numerous requests to improve our capital structure and cost. We've already announced the call of the Series B Trust preferred stock and we'll announce further actions imminently.
We're hopeful that we'll be able to continue to improve our return on equity in 2013, as these actions are executed and they should reduce the cost of our capital and financing structure in material ways. Finally, last week, we announced an increase in our dividend to an annualized $0.16 per share from $0.04 per share.
We've indicated to investors in the past that while our primary goal is to use capital generation to reduce high cost capital, we hope to modestly increase the dividend and so we've now begun that process. Let me touch upon a couple of fundamental highlights for the quarter.
First, with respect to loan growth and net interest income, loan growth in the first quarter is typically a little weaker than in other quarters. We tried to be very transparent about what we were seeing as we went through the quarter, indicating that loans have declined by more than $100 million in early January.
March was a strong month, pulling the company to a positive $148 million for the quarter as reported in our earnings release. I say strong, at least relative to what you're seeing from some other banks, I guess, these days.
Our lenders report to us that they remain positive about loan growth prospects, pipelines generally remain pretty strong. Commercial customers seem to be generally more optimistic than they were 6 months ago and production volume was up 14% in the first quarter of 2013, compared to what we saw in the same quarter a year ago.
However, as I noted in the press release, we saw further pricing pressure on loans. Beginning in February and continuing in March, some of the nation's largest banks cut prices on most loan types in most of our markets.
Pricing had been fairly stable for most of 2012, at least on middle-market loans. But if this pricing pressure continues, it will likely result in roughly stable net interest income in 2013, despite our expectations for continued loan growth, which we had hoped would translate into positive growth and net interest income.
Those of you who follow us closely know we think a lot about convexity. And while it's unclear when interest rates will rise, we are one of a very limited number of banks that are significantly asset-sensitive.
Not only do we expect earnings to increase when rates rise, we expect to be able to avoid the significant haircut to equity that many banks may likely experience due to their heavy concentrations of mortgage-backed securities. As you know, we have virtually no exposure to that type of product.
In the credit quality front, as I said, we continue to be pleased with credit loss performance. In the release, press release, we noted the continued improvement in gross charge-offs, although net charge-offs also declined because recoveries are volatile at this point in the cycle.
We're watching gross charge-offs carefully. Our annualized net charge-off ratio was only 19 basis points during the quarter.
We're very happy with that. Our nonperforming asset ratio expressed as a percentage of loans and other real estate owned declined at a continued strong rate and we expect to see further general improvement in that ratio in the quarters ahead.
Finally, a note about capital, I'd highlight the fact that our Tier 1 Common capital ratio climbed above 10%, which was a nice milestone. And with that overview, I'm going to ask Doyle Arnold to review the quarterly financial performance in a little more detail.
Doyle?
Doyle L. Arnold
Thank you, Harris. Good evening, everybody.
Starting off with a brief overview, as noted in the release, we posted net income applicable to common shareholders of $88.3 million or $0.48 per diluted common share for the quarter. That compares to $0.19 per share in the prior quarter.
A couple of significant items are worth pointing out that tend to really move the needle on the EPS number from quarter-to-quarter. For the first quarter, the one we're reporting on today, the provision for credit losses was a negative $35 million, even though we are maintaining our conservative posture on reserving for credit losses.
Even so, we reduced the provision or reduced the ALLL with the provision of minus $29 million, and the provision for unfunded lending commitments came down by $6 million. Together, the $35 million total, we've added about $0.12 per share to earnings compared to prior quarter's negative $9 million ACL, which would have been about $0.03 a share.
Additionally, securities gains and losses for the quarter, including OTTI, netted to a loss of only about $4 million this quarter or $0.01 a share compared to the prior quarter's net loss of $74 million or $0.25 a share from securities-related charges. Combined, these 2 groups account for about $0.33 per share improvement compared to the prior quarter with a partial offset due to a decline in net interest income.
The net interest income decline largely was attributable to a reduced day count in the first quarter compared to the fourth. Now turning to some of the individual drivers of the results.
I'll begin with the revenue drivers. Average loans increased $413 million compared to the fourth quarter of last year, a bit over 1% quarter-over-quarter.
We pay a bit more attention to average loans because of the variability with end-of-period loan balances and it's the number that actually drives earnings. But I note that end-of-period loan balances increased $148 million, including FDIC-supported loans and loans held for sale.
We saw the usual rundown right after year end in loans but then it stabilized by the end of January, and then a lot of this loan growth came from late February till the end of the quarter. And as Harris noted, we've tried to keep you up-to-date as the quarter went on.
I will note that the loan growth thus far has continued in the first 3 weeks of April up through last Friday. Let me draw your attention to the loan table on Page 10 of the release.
Commercial and industrial loans do tend to have some seasonal trends and while they grew nearly 4% in the fourth quarter, the growth slowed in the first quarter to a rate of 2%. Note that the loan portfolio in the first quarter a year ago actually shrank at a rate of nearly 2%.
So this was quite a favorable swing, with which we are pleased. The growth was predominantly in Texas, California, and to a modest degree, in Utah.
Line utilization rates on revolving C&I do remain pretty weak. And in fact, they declined further to 31.8% compared to 33.1% at the end of the fourth quarter.
As has been mentioned in some of the earnings calls by other banks, we've, as Harris noted, have seen some evidence of reemergence of pricing pressure this quarter. We noticed this most particularly on larger loans.
On the smaller loans, the pricing, while under a little bit pressure, is holding up better. Turning to construction and development loans, these increased by about $100 million or 5% sequentially.
As we discussed previously, both in IR meetings and in previous quarterly calls, new construction commitments have been fairly strong for several quarters, as we increased our exposure to commercial construction projects when pricing terms and covenants have been some of the best our bankers have seen in their careers. These loans are now beginning to get into the funding stage after the equity has gone into the project.
Because there's still a large significant amount of outstanding unfunded commitments in this category, we expect outstanding balances to continue to grow in 2013. However, because of concentration limits that we've adopted as part of our portfolio risk management, we are being disciplined about the new loans we make.
And in fact, our commitments declined in the first quarter, after 5 consecutive quarters of expansion. And this pullback also coincides with the general softening in pricing terms and covenants as we observed some others getting more aggressive.
Term CRE declined at 5 of our banks during the quarter, leading to the decline in the overall balance of just over $50 million. This was primarily driven by elevated prepayments, new production volume remains healthy and was one of the few types to see an increase in production compared to the fourth quarter.
After several strong quarters, consumer lending declined slightly due partly to seasonal factors in home equity and credit cards but we do expect to see further growth in the year from this category broadly defined. Residential mortgage, mortgages increased by $60 million or 1.3%, and that's a better first quarter performance than the year-ago period which declined by 1.1%.
If you want to turn to Page 14, now we'll discuss the margin and net interest income. The NIM declined by 3 basis points compared to the prior quarter.
One of the smaller declines we've had lately. The securities yields declined in part due to fewer dollars of -- we'll call them catch-up payments on CDOs.
In other words, when banks that are behind on interest payments come current, there's a bump in yield during that quarter. We do expect such catch-up payments to continue as we still have exposure to just over 180 banks that are still deferring.
Parenthetically, that's down from about 270 at the peak. Of the remaining 180 odd, there are about 2/3 of those who are well-capitalized and profitable.
So we expect more deferring banks, not all of them certainly, but more of them to continue to come current over future quarters. But the quarterly rate is likely to vary and be somewhat unpredictable.
Therefore, there will be a little bit of volatility associated with the securities yield for the next number of quarters. Additional pressure on securities yield can be ascribed to accelerated premium amortization on certain SBA loans.
Combined, these changes have an impact of about 50 basis points to the portfolio. The decline in such yields looks fairly significant but because the securities are such a small percentage of the overall earning asset base, the decline pressured the NIM by only about 3 basis points.
Other factors impacting the NIM included an increase in income from FDIC-covered loans due to faster prepayments than previously modeled, and a decline in cash-earning assets. Net interest income declined by about $12 million sequentially, although 3/4 of that decline is attributable to the usual seasonality, that is the reduced day count in the first quarter.
Second quarter net interest income will be positively impacted by 1 extra day of interest, plus about $4 million less interest from the Series B Trust-preferred shares that we have announced. It's being called as of May 3.
We also, as I've mentioned, anticipate some continued loan growth this quarter, although the effects of that will be somewhat offset by pricing pressure. Turning to noninterest income, which you can find back on the income statement, Page 9, I believe it is.
Yes. The noninterest income benefited by a significantly lower amount of OTTI on CDOs, but we still experienced some on a default of a single security during the quarter.
However, we also saw an improvement in the AOCI mark which would -- shows up on the balance sheet by nearly $40 million after tax, which resulted primarily from another improvement and credit risk spreads that we observed in the few trades that took place. Compared to a year ago now, the AOCI has improved by approximately $170 million, primarily again due to the improvement in CDO valuations.
As noted, trading, however, remains very light and the quarterly change in the AOCI is likely to remain volatile until real liquidity returns to the market. Fairly minor item but for those of you trying to keep your models taken down nicely, the other noninterest income line increased by about $3 million from the prior quarter, which is essentially a credit recovery from an FDIC-insured asset, though we would not expect that to be a run rate item going forward.
If you want to turn to Pages 11 and 12, talk a little more about credit. As Harris commented, we've continued to see a strong improvement in credit quality including nonperforming assets and gross charge-offs.
As a result, our credit loss model indicated a negative provision driven by several things. Loss severity on classified loans, one of the most significant drivers of the model, improved by 14% compared to year end.
The term CRE loss severity improved by an even stronger 24%. Nonaccrual inflows declined by more than 40% from the prior quarter, to approximately $400 million annualized run rate, which compares favorably to the actual balance of $589 million at quarter end.
OREO inflows also declined significantly by about 40%, to an annualized rate of $75 million. And favorable resolutions hit a new high of 74% of total resolution.
So in short, we're seeing both improvements in both the sort of the volume of problem loans, the inflows of new problem loans, the resolution of problems and a reduction in the loss severity in problems. But otherwise, things are really bad.
Just kidding. I mean, the credit quality continues to churn along nicely.
A comment on capital. Harris already mentioned the Tier 1 Common Ratio which, on a Basel I basis, increased to 10.06%.
The GAAP tangible common equity also increased strongly to about 7.5% from 7.1% in the prior quarter, driven not only by the retained earnings but by the improvement in the AOCI mark and the reduction in the denominator. That is in total tangible assets due to the runoff of some of the cash that was deployed at year end due to the -- and runoff of deposits.
With that, we'll stop talking about the last quarter and try to give you, as we usually do, a little guidance about the next few quarters. Loan growth.
We observed continued strength in loan pipelines in many parts of the franchise. We've have an increase in commitments in the last 6 months.
And know that our commercial customers are reporting somewhat more optimistic outlook. Therefore, I think we expect continued moderate loan growth over the coming years.
And as I noted, we've continued to have loan growth in the first 3 weeks of the current, that is the second quarter. Net interest income, we expect to be relatively stable, at least in the next few months.
This outlook does not contemplate accelerated discount amortization or unusual items, just the kind of the run rate of net interest income. Noninterest income, we expect the less volatile components of noninterest income such as service fees to continue a modest upward trend.
If we had unusual items related to investment banking, things calling -- tendering for debt, calling securities, et cetera, those one-time items are not included in that outlook. But again, the core drivers on an ongoing basis should continue to improve.
Turning to noninterest expense, salaries and benefits are likely to taper down somewhat during the year due to the usual seasonal factors, social security payments and things like that in the first quarter, which tend to decline through the rest of the year. We also expect continued improvement in credit-related noninterest expenses and FDIC premiums.
We expect the FDIC indemnification asset, this is the asset related to loans acquired and acquisitions of failed banks back in 2009. We expect that asset to continue for about another year at material levels although perhaps not as great as the first quarter's $20 million.
After that, the other noninterest expense line should run into the area of $60 million a quarter. Therefore, while there's some moving pieces, we expect expenses to remain stable or possibly continue to improve slightly.
Provision for credit losses. We expect the provision expense to remain low or even negative over the next several quarters, barring some change in the economic outlook.
Continued reduction in problem credits and the ongoing improvement in loss severity rates have the potential to result in a negative premium in future quarters as it was in the last couple of quarters, although loan growth will moderate this to some degree. Preferred stock dividends will increase in the second and third quarters as we begin accruing for the Series G shares that we issued a couple of months ago.
We expect that dividend in the second quarter to be about $27 million, and we expect to issue additional preferred stock in the next few weeks and months, so there could be a further increase in the third quarter as well. Excluding the effect of any call of the Series C preferred shares, which are callable, I believe it's September 15.
And if that call is completed, we would expect then preferred dividends to drop materially in the fourth quarter. With that, I think we will give you, ladies and gentlemen, a moment to queue up your questions.
And then, operator, we'll start responding to those questions.
Operator
[Operator Instructions] The first question comes from Josh Levin from Citi.
Josh Levin - Citigroup Inc, Research Division
I'd like to ask for some more of your thoughts and details on the competitive landscape. You said it was the larger banks who are being more aggressive on pricing structure for loans.
Why do you think that's the case? Do larger banks have a cost advantage relative to the midsized banks?
Or are they more desperate? Or something else altogether?
Harris H. Simmons
Desperate. You're not going to draw us into that cost advantage.
James R. Abbott
And how much extra capital they have to hold.
Doyle L. Arnold
The answer is, I mean, that's -- I understand that the big banks are blaming the small banks for this and the regional banks like us are blaming the big banks. We're, of course, right.
But I can only speculate. I do note that the mortgage-related activity is a really big deal for several of the -- at least of the very largest banks and it's pretty well-known that the refi boom was a very large source of earnings for those banks last year and that, that party is ending pretty rapidly.
So I would speculate that looking anywhere and everywhere, I probably would be too, to replace that. And that means any loan type other than mortgages as a place to go.
But beyond that, I can't speculate. I don't know if you got any other color, James, on...
James R. Abbott
Well, Josh, I would just add that we -- that the area that we saw the most decline in our production was on the larger credits and that's -- we had heard that the larger banks, the big 4, had been very stable for the past 9 months or so and we started hearing in February, March timeframe, that there was a renewed level of competition. We started seeing it in our own production numbers as well.
So there was some competitive pricing pressure on the small loans that we've originated. It's 5 basis points or so, 10 basis points compared to the prior quarter.
But on the larger deals, it's been closer to 25 basis points of pressure.
Josh Levin - Citigroup Inc, Research Division
Okay. And a separate question.
You noted that you're very asset-sensitive. Obviously, you have a lot of deposits right now.
When you think about your asset sensitivity and you model it, how are you assuming deposits behave in terms of how quickly they would run off the balance sheet or how much of a rise in rates you'd have to pass through on the deposit side?
Doyle L. Arnold
We've -- I mean, that's probably more time -- a longer discussion than we have time for here. In our IR roadshows and in our 10-K and Q, we tried to describe that.
But we have basically incorporated into our analysis, something like $8 billion of deposits running off and/or being replaced with current market rate funds in a rising rate environment. And the asset sensitivity that we're reporting is after incorporating that kind of assumption.
James R. Abbott
That's just the DDA.
Doyle L. Arnold
That's just on the -- yes. So you want to amplify it briefly, James, without getting to the whole thing?
James R. Abbott
I mean, we have a -- I think, without getting into all kinds of assumptions within the model, it's probably not an apples-to-apples comparison to what's being disclosed in the industry but...
Doyle L. Arnold
Is there a specific -- I'll give you one chance to ask a specific question about that, and then we probably ought to move on to another question. Josh, is there one particular point you want to ask us about?
Josh Levin - Citigroup Inc, Research Division
Maybe I'll follow up with James offline later.
Operator
The next question comes from Craig Siegenthaler from Crédit Suisse.
Craig Siegenthaler - Crédit Suisse AG, Research Division
If we dig a little deeper on the competition point here, and I'm wondering, can we isolate the impact from the floor run off from the changes in rates and also the competitive pressures you're seeing? So I'm really looking for, out of the 11 basis points of consolidated loan yield decline sequentially, what roughly came from the removal of floors?
Doyle L. Arnold
Well, I think, most of the decline, you would have -- of the 11 basis points that you would've seen in the first quarter had nothing to do with the pricing on new loans because it takes a while for just new loan pricing to move the needle on close to $40 billion of existing loans. So most of that 11 basis points is the result of the things we've talked about previously.
And the 2 are, one you've already mentioned, the floors, the expiry and inability to replace in the money floors and that has been running at about 4 or 5 basis points a quarter. Although we haven't tried to do that calculation on the first quarter yet specifically, but I think it's about the same.
And the other is the rate reset on 5-year reset loans that were made in -- now in 2008. But we had -- as we've talked about a number of times, kind of in the late 2006 through the first half of 2008 before the collapse, we had a pretty peak -- well, we had peak volume of origination of owner-occupied commercial loans with 5-year resets, and those are all now resetting at a 150-odd basis points below.
The spreads are the same, rates have just come down. So we're -- and that's another 5 basis points or so.
Those probably are the 2 pressures that drove this quarter. The rate reset, we should be tapering off on the end of money floors.
The rate resets probably have one more quarter. But again in the third quarter, loan volume of that type of loan really dropped third quarter of 2008.
So we should be getting near the end of that period. But we're just kind of telegraphing to you that if this pricing pressure continues, it will start to have an incremental effect on the margin in future quarters.
But I don't think it had much this quarter.
Craig Siegenthaler - Crédit Suisse AG, Research Division
That's helpful, Doyle. And then last quarter in your marketing handout, you put out this nice slide, which showed spread on new business, and the point was really spreads have stabilized really since 2011.
Given your updated comments today and increased competition from larger banks, when you update this again and you show March and April, do you think we'll see a sort of a slide-down kind of below that stabilization point?
Doyle L. Arnold
Have we got it updated yet? No.
I've -- that may -- we haven't actually gotten it done yet, but it wouldn't surprise me if it comes down a bit.
Craig Siegenthaler - Crédit Suisse AG, Research Division
Got it. And just one more.
Is there an impact from the interest rates swap portfolio? I forget if there's -- how that impacts the NIM here.
Doyle L. Arnold
They've all matured.
Harris H. Simmons
Are you just talking about our hedges of swapping...
Craig Siegenthaler - Crédit Suisse AG, Research Division
The pre-fixed [ph] pay float protecting C&I yield. That's all gone, right?
Doyle L. Arnold
Those are almost all gone. There's almost no impact.
Operator
The next question comes from Paul Miller from FBR.
Thomas LeTrent - FBR Capital Markets & Co., Research Division
This is actually Thomas LeTrent on behalf of Paul. Actually, I have a quick follow-up to Craig's question.
Last quarter on the conference call, you guys mentioned that you thought 2% to 3% loan growth for the year would be sort of enough to offset whatever you thought NIM is going to do in the year. With the move down in loan rate, do you think that, that growth rate would need to be a little bit higher or can you give me some more color on that?
Doyle L. Arnold
That was pre this emergence of pricing pressure. So we haven't tried to recalculate it, but it might take a little more than that to offset it if -- for the year.
Maybe I -- what we were saying last year was that it'd probably take $400 million to $500 million to offset the known sources of pressure per quarter. What we said earlier this year, it was probably down to $200 million to $300 million.
We may be back up by a couple of hundred million over that. But good news is it's -- so far, at least, it looks like loan growth maybe a little more robust this year than last year when -- as well.
That's kind of why we're saying maybe that the net interest income outlook is roughly stable.
Thomas LeTrent - FBR Capital Markets & Co., Research Division
Okay, great. And just one quick follow-up.
Have you guys sort of started to see any further stabilization in pricing since the quarter ended?
Harris H. Simmons
Not today. No, I mean, no, we haven't gone back out.
I mean, this information was as of kind a couple of weeks ago, I think when James does a series of internal calls. And we don't update it like weekly.
James R. Abbott
Yes. And, Thomas, I would just add on the net interest income line item, I'm not commenting on margin specifically, but net interest income, we'll have an extra day of interest income for the second quarter plus we will have called this Series B Trust Preferred Securities, which is helpful in the net interest income by about almost $4 million.
So you combine those 2, and that should help offset some of the pressures that we'll naturally feel on that line item in the second quarter from competitive pricing.
Operator
The next question comes from Brian Foran from Autonomous Research.
Brian Foran - Autonomous Research LLP
The NIIs, so I guess to start there, you're stable from this quarter or the relatively stable guidance is from this quarter or full year to full year?
Doyle L. Arnold
Kind of from this quarter.
Brian Foran - Autonomous Research LLP
And then on credit, I mean just as charge-offs continue to come down, as the non-accruals, inflows kind of collapse, any kind of framework we should think about for where both reserves to loans as well as your unfunded commitment could go to over time?
Doyle L. Arnold
Very hard to say. I mean I think -- all I could tell you is we're going to maintain our, I think, our posture of being as conservative as we can.
And GAAP limits are -- places limitations on our ability to be conservative. We're not trying to milk the reserve from earnings; quite the opposite.
But the facts are leading to a decline, and I can't point you -- if you're asking me, do we have a target, ALLL ratio, the answer is no, we don't. And that's the best I can do for you.
Brian Foran - Autonomous Research LLP
And maybe another way to ask it would be, I appreciate that you've got the kind of dual pressures, but some of your peers have already gone much lower still. Is there any reason structurally you would expect over several years, you would be a step change higher than peers or is there just potentially timing differences between you and the industry?
Doyle L. Arnold
I mean, there are some structural issues. But I mean, a lot of it will be just timing.
But a lot of heavily -- consumer lenders only reserve maybe a year's worth of charge-offs as a convention and for that part of the business. And whereas for C&I and commercial real estate, we really try to look at the whole loss emergence period, and -- which is may be closer to 2 years or even beyond in today's environment.
So the fact that we're 80% commercially oriented broadly speaking and less than 20% consumer, whereas some others are much heavier consumer would lead some others to have a lower reserve ratio than us permanently. But not if -- I wouldn't think so if you adjust for composition.
Brian Foran - Autonomous Research LLP
If I could sneak one last one last in, can you just remind us where the CDO swap stands and what the decision tree is around potentially moving that at some point -- removing that at some point in the future?
Doyle L. Arnold
It's still in place. It costs about $5 million a quarter pretax.
It has the effect of reducing the risk weighting on the assets that it covers from about 400% on average to 20%. And the net effect of that is a several-billion-dollar reduction in risk weightings.
When we put it on, that effect was about $4.3 billion or $4.4 billion, as I recall, due to both OTTI, but also paydowns and other things that changed the underlying risk weighting. And the -- if the TRS weren't there, that $4.4 billion is down to about $3 billion today, and we would expect it to continue to decline.
So the mitigating effect on risk-weighted assets has gone from about 10% down to about 7% and continues to decline. There will be a time when therefore taking it off doesn't result in much increase in risk-weighted capital ratios.
And that's kind of -- that's sort of the decision tree, is when is that number and -- down to the -- a low-enough level that we don't look out of line with other banks and things like that if we would just take it off. And so it is something we continue to debate.
But the fact that we're still there means no decision has been made yet other than to continue for at least another quarter.
Operator
The next question comes from Gaston Ceron from Morningstar Equity.
Gaston F. Ceron - Morningstar Inc., Research Division
Just very quickly here, a little new to the story. I was interested in your comments regarding your increased exposure to commercial construction projects.
You're talking about covenants. I'm -- I'd be curious if you could give any additional color on how you're screening these products as they come in.
I mean you say that the covenants look pretty good from your perspective. I'm curious how you're screening these -- the demand for these products as they come in just to make sure that, obviously, that your portfolio remains as sound as possible.
Harris H. Simmons
Well, yes. It's Harris Simmons talking.
I'd tell you that probably most of the growth has come in multifamily. We are starting to step down the rate at which we are expanding that piece of the portfolio.
And I think we're thinking that we're probably getting to the point that we're reasonably full-up with respect to what we're going to do in that space. We've -- I'd say couple of things about it.
One is we've been really attentive to location. And so we've seen probably more growth, for example, in some of the coastal communities in California, for example, than some other markets where we see just unrelenting demand for this kind of product.
And the other thing I'd say is we've seen structurally much better equity coming into these kinds of deals over the last year and a half than we'd seen in prior parts of this cycle or prior cycles. I mean we're seeing typically 40% plus equity come in -- of the costs coming in to these projects.
So we're pretty comfortable with the quality of what we've been doing, but we're also getting to a point where we're probably starting to kind of ramp it down.
James R. Abbott
Well, and as we noted in our prepared remarks, a number of -- new commitment volume in the first quarter was lower than it has been for the prior several quarters.
Gaston F. Ceron - Morningstar Inc., Research Division
Great, understood. And then just a very quick follow-up on something else.
I realized this is not the biggest part of your noninterest income but -- and I apologize if you mentioned it earlier and I missed it, but just curious what your outlook for your trust and wealth management and capital markets lines are going forward, if you see a kind of steadiness there or any improvement?
Harris H. Simmons
Trust and wealth management should continue to grow incrementally. Not -- no step function due to an acquisition or anything like that.
Capital markets, again, probably slow in modest incremental growth for Zions' direct platform, which we used ourselves for issuing our own preferred stock and debt and other things, and we'll continue to do. So -- but again, no transformational kind of change in those lines.
Operator
The next question comes from Brad Milsaps from Sandler O'Neill.
Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division
Just a follow-up question on the other expense line item. I think, if you look in the release, there was about $9.7 million of increased amortization on the FDIC asset compared to the fourth quarter.
Just curious if there's anything else in that other line item. And then just want to confirm your guidance.
I think you said that could drop to sort of a low $60 million kind of run rate maybe a year from now?
Doyle L. Arnold
James, you want to amplify that?
James R. Abbott
Yes, we had some -- Brad, we had some prepayments in the California acquisitions from the FDIC, and those prepayments caused an increase in the revenue side of the equation but also on the expense side of the equation. So the expenses do fall into other noninterest expense line item.
It's hard to really forecast how that will behave. It's -- it really is prepayment-dependent, and we're getting to the bottom of the pool, but collateral values are improving quite significantly, as you know.
And so that's I think one of the major drivers behind it is people are finally getting back to neutral or above water on their mortgages and are able to prepay them and get financed at a lower rate. We do have another year or so of indemnification asset expense to go.
And at that point, it will dry up.
Harris H. Simmons
Well, it won't dry up totally. There's a little tail that extends for another 5 years.
But most of it, yes.
James R. Abbott
Yes.
Operator
The next question comes from Ken Zerbe from Morgan Stanley.
Ken A. Zerbe - Morgan Stanley, Research Division
Can you quantify the impacts of prepays? Because I'm just trying to go through all the pieces in the NII, and if I did hear you right, you said it's going to be stable again in second quarter versus first quarter.
Can you just make sure we get all the numbers, sort of the pluses and minuses for that?
Doyle L. Arnold
Well, Ken, I think that the amount of prepayment income or the amount that would be attributable to accelerated prepays would be $5 million or $6 million on the revenue side. So if you look at the numbers month by month, that -- we did return back sort of a more normalized level in the month of March.
January and February were very elevated in terms of revenue, and therefore, indemnification asset expense. So I think that, that's your amount and I think it can come back down.
But again, it's very, very hard to predict whether that will happen again in the second quarter or the third.
Ken A. Zerbe - Morgan Stanley, Research Division
Understood, okay. So the $5 million, let's assume it goes away, then you get the positive numbers, then $422 million is a run rate for second quarter.
And then going out, you get the positive benefit from the seasonality. So really full year annualized in '13 is probably -- I mean, is it right to assume sort of a $422 million plus a little bit annualized?
Doyle L. Arnold
Assuming no balance sheet growth? That's probably appropriate.
James R. Abbott
The strongest argument for never doing an assisted acquisition again is accounting for it. And the second strongest argument is explaining the accounting part.
I think it just makes -- it's ridiculous.
Doyle L. Arnold
Nevertheless, it makes a lot of money.
James R. Abbott
[indiscernible] a lot of money. So the strongest argument...
Doyle L. Arnold
So get over it.
James R. Abbott
Yes.
Doyle L. Arnold
Yes, let's not forget that we accrued -- we bought these things at a discount that created $150 million or $120 million of capital common equity without issuing any shares, and it's performed better than -- than we modeled in getting to that number. But it's devilishly confusing, I agree.
Operator
The next question comes from John Pancari from Evercore Partners.
John G. Pancari - Evercore Partners Inc., Research Division
Can you help quantify the annual environmental costs that are in your expense base that are credit-related as of this quarter? How that number went down?
I know the OREO costs were down. But in total, what is annual amount that's in the expense base as of this quarter, and can you remind us where that could go to on a normalized basis?
Doyle L. Arnold
Well, we break out, I don't know, what is it, about 4 or 5 different lines that are credit-related? The OREO I think, speaks for itself.
Credit-related expense, the unfunded lending commitment provision and the FDIC premiums, all of those are still elevated from what I would consider to be a run rate. The FDIC premiums, I haven't -- I can't quantify what -- exactly what they could come down to, but there's at least a few million dollars a quarter there.
There's some in legal and professional expenses. Again, I'm not quite sure how much but a number that could have 2 commas in it.
The unfunded lending commitment provision normally should be it's -- kind of 2 things that could drive that. Loan growth, new commitment growth and then changes in the quality of existing commitments, if there's a downgrade on the line, the unfunded draws also require reserves.
But that's -- that number strikes me -- I mean, there could be some negative provisions from quarter-to-quarter as we continue to see the improvement in credit quality. But normally, that should -- in a growth period, that number ought to be slightly positive each quarter.
Not negative. And, let's see, not sure about the other 2.
OREO, once we work through all of this, ought to -- in a prolonged benign period, ought to be just close to 0. And other credit-related expense, I'm not sure how -- do you have any comment on how elevated that might be, James?
James R. Abbott
Yes, the other?
Doyle L. Arnold
Yes, the credit -- just the line credit-related, $3.5 million.
James R. Abbott
Well, the credit-related is, we mentioned before that we think that -- its lowest point per quarter was about $2 million a quarter. But we've kind of characterized that as unusual because loan prices were going up 20 -- commercial prices were going up 20%.
So in a normal environment, maybe $5 million or so.
John G. Pancari - Evercore Partners Inc., Research Division
Okay, all right. And then on the commercial real estate front, can you just talk about when do you think we can see sustainable turn in commercial real estate balances?
We saw the owner-occupied piece pull back this quarter, but we did see land pick up as you had been guiding to. I guess just give us your overall thoughts given you have so much of a concentration is still in real estate related lending.
When can we see a nice sustainable pickup there in those balances?
Doyle L. Arnold
Well, I would say -- gosh, it's hard to say. We've seen, as we said earlier, pretty good strength in terms of production, but we've seen a lot of prepayment.
And I tend to believe that you'll see it start to -- seeing rates move a little higher, we'll start to [indiscernible] some of the prepayment activity. And in the meantime, you've had increased activity from insurance companies, a healthier CMBS market, etc.
So it's a little hard to say. We're spinning the wheels pretty fast to stay nearly in place, but it's a little higher rate environment, I think would actually be helpful that way.
On the construction side, you're not going to see much in way of land development. I mean, we just don't have a lot of appetite for that at all.
And other kinds of construction, as mentioned, multifamily, that's probably smalling down. We'll see some growth in outstandings.
We'll see as the commitments are drawn down that are out there. But I wouldn't look for that piece of the portfolio to become nearly as significant as it was 5 years ago.
So I rather expect that, over time, you'll see more emphasis generally on the commercial categories, some consumer. We'd hope to stabilize commercial real estate, see it maybe grow a little bit, but it's not going to see the kind of growth that we've maybe seen in past cycles or as activity picks up in the economy.
Operator
The next question comes from Todd Hagerman from Sterne Agee.
Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division
Doyle, just wondering, in terms of your capital plan and some of the comments you made on the preferred -- special preferred, if you could just help me unwind, if you will, with the capital plan specifically on the Series C and the commentary in the release about there could be possibly some matched issuances? In other words, I'm just trying to get a sense, as we talked about the Series G or you referenced that, I'm just trying to get a sense just kind of longer term over the next 12 months, kind of the potential timing and how I think about the -- kind of the net savings, if you will, between the matched issuances and the redemptions, if there's a way to think about that, if you will.
Doyle L. Arnold
The -- well, the basic facts are that we're not going to reduce our perpetual preferred outstanding. And the Series C becomes callable, in all or in part, in September.
We'd have to give the notice in mid-August. But we're -- but because the total amount is not going to come down, we have -- that means we have to the do one of 2 things: either issue an advance and have, for whatever we decide to call or -- and/or issue an offer to exchange Series C into an outstanding issue.
But either way, you're going to see some increase in the total amount of preferred outstanding, I mean you already have because we issued Series G. There will be more, and then we -- you know what current -- kind of current rates are.
But order of magnitude, we ought to be able to save at least 3% after-tax and perhaps a bit more than that on the -- hopefully, I think a lot more than that, on the Series C. So you're going to -- you ought to model kind of over a 12-month period -- well, one other fact, the -- it's callable in whole or in part September 15 and every quarter thereafter.
So I would say over your 12-month horizon, you should sort of plan for all of the seed of -- disappear and be replaced by a like amount of cheaper stuff would be the best planning assumption.
Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division
Right. And is any part of that, as in the fall, in the capital plan, does a piece of that have to be approved by the Fed or just -- how is that working with the CCAR process and the plan that was submitted?
Is there anything I should think about just in terms of incremental approvals that are necessary for that, for the Series C?
Doyle L. Arnold
By law, I can't talk about my interactions with supervisors. And once upon a time, I got lulled into a degree of candor for which I got my wrists slapped later, not by the Fed but by another agency.
So I'm just going to beg off on your question. That question, totally, Todd, just stay tuned.
I think things will become clearer over the coming weeks or month or 2.
Operator
Next question comes from John Moran from Macquarie Capital.
John V. Moran - Macquarie Research
So just one kind of maybe one on salaries on the OpEx line. I think, Doyle, you said a couple of million of that is seasonally high.
I think last year, it ran about $5 million high. Is that still a good number to think about there?
James R. Abbott
Well, not immediately, but yes.
Doyle L. Arnold
Well, yes it's -- the incremental -- the uptick in FICA payments and whatnot compared to the fourth quarter was about $5 million. That doesn't all go away in the second quarter.
It kind of tapers off over the year. But a meaningful amount of it goes away each quarter.
As people hit their limit, FICA limits.
John V. Moran - Macquarie Research
Okay, got you. And then maybe just a follow-up to the capital discussion here.
Are there pieces of capital outside of the TRUPs that we know are going away? But are there pieces of the capital stack that could be called not on a dollar-for-dollar basis?
Doyle L. Arnold
No. Not at the present time.
That would include both Tier 1 and Tier 2.
Operator
The final question comes from Dave Rochester from Deutsche Bank.
David Rochester - Deutsche Bank AG, Research Division
Back on the loan pricing, you've given us some good color on this already, but I was just wondering if you could remind us where your all-in loan production rate is now, given the pressure that you were talking about this quarter? I'm just trying to get a sense for how that compares to where the book yield is today?
Doyle L. Arnold
It is -- James is flipping through pages. It is...
James R. Abbott
Let me grab it real quick for you, Dave.
David Rochester - Deutsche Bank AG, Research Division
Are you still at a 4-handle or did you guys dip below that?
James R. Abbott
It was -- and again, it's got mix shift issues. So these are -- but just based on the mix that we produced in the first quarter, not including any fees which are normally amortized or are amortized into your average balance sheet yield, of course.
But just the coupon was about 3.9%. And...
David Rochester - FBR Capital Markets & Co., Research Division
Got you. When you're talking about mix, are you talking about large versus small credits or just by product?
James R. Abbott
Large and small, and also by product.
David Rochester - FBR Capital Markets & Co., Research Division
Are you doing more large credits now -- or this quarter versus prior quarter or...?
James R. Abbott
No, fewer large credits. Syndicated credits declined compared to the prior quarter, and it's just not as attractive of a yield.
Harris H. Simmons
I think we have to wrap it up, James.
James R. Abbott
Yes, thank you for your participation today. Thank you, Jamie, for your hosting the call.
And we appreciate everyone's time. If you have any further follow-up questions, I'll be around throughout the night.
And we'll see you at a conference sometime soon. Thanks.
Operator
Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation.
You may all disconnect. Have a good day.