Zions Bancorporation, National Association
Q2 2011 Earnings Call Transcript

Published: 18 Jul 2011

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by and welcome to the Zions Bancorporation Second Quarter 2011 Earnings Call. This conference is being recorded. I would now like to turn the time over to James Abbott. Please go ahead.

[James Abbott:]

Good evening and thank you, Huey. We welcome to this conference call to discuss our second quarter 2011 earnings. I would like to remind you that during this call, we will be making forward-looking statements. 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 the call. If you do not yet have a copy of the release, it is available at zionsbancorporation.com. We will limit the length of this call to one hour, which will include time for you to ask questions. [Operator Instructions] With that, I will now turn the time over to Harris Simmons, Chairman and Chief Executive Officer. Harris?

[H. Simmons:]

Thank you very much, James, and welcome to all of you. We wish you a good evening as you join us here. We are very pleased with the continuing progress that the company is making as we return it to full strength. The last couple of quarters have been very positive for us and bode well for what the rest of the year holds in store. Our major driver this quarter's improvement in earnings was yet another strong improvement in credit quality metrics. In fact, it was probably the most broad improvement of credit trends that we've seen cycle to date. We experienced improvement in classified loans, in delinquencies, in nonaccrual loans, in inflows to accruals, in net charge-offs, loss severity rates, reserve coverage of problem credits and charge-off levels. So a lot of good progress continues on the credit front. We were also particularly encouraged to post a moderate increase in the loan portfolio, in balances outstanding, which we'd projected throughout the quarter at various investor conferences. The various affiliate bank pipelines remain at healthy levels, and most of the banks expect to continue modest growth through the second half of the year. However, we're certainly cognizant of the recent softening in some of the macroeconomic indicators, which could temper loan growth. Macroeconomic trends within our footprint during the second quarter were similar to the national economy. Some of the national economy, slowed somewhat. Rental income for all the major property types improved in the majority of our markets. Cap rates continue to exhibit some of the promising trends that we've noticed during the last several months. Vacancy rates also improved across majority of our property types in our footprint. All of these factors should facilitate further problem credit resolution and improving loan growth as we go forward. So with that brief overview, I'll ask Doyle Arnold to review the quarterly performance. Doyle?

[Doyle Arnold:]

Thanks, Harris. Good afternoon, everyone. As noted in the press release, Page 1, we have posted net income applicable to common shareholders of $29 million or $0.16 per diluted common share for the quarter. As we've done previously, we also presented the earnings in a way that excludes a couple of noncash items related to the sub debt amortization and conversion into preferred stock; and the FDIC loan discount accretion, which we believe is useful to longer-term oriented investors, as we don't expect those 2 income expense items to be with us into perpetuity. On that basis, earnings improved to $0.45 per share from $0.29 per share in the prior quarter. There are also a few small items that we can call noise that are in the numbers, but they net to a fairly immaterial number. For the rest of our agenda today, I'll highlight 4 key topics

[Operator:]

[Operator Instructions] Our first questioner in queue is Ken Zerbe with Morgan Stanley.

[Ken Zerbe:]

Regarding your TruPS CDO portfolio, I know you said the market is far from liquid. But obviously you are able to sell some into the market now. Can you just address your willingness or appetite to continue to sell the TruP CDOs as I guess the market permits?

[Doyle Arnold:]

Very hard to predict. I think where we can -- clearly those are perceived and maybe actual source of risk on the balance sheet. And I think it's safe to say that we would -- we're continuing to look for opportunities to reduce risk on the balance sheet where it can be done at reasonable cost. So this is something we'll continue to look at. But I don't have a target amount or even a guidance amount. But it is something that we will continue to look at.

[Ken Zerbe:]

I know it's hard to answer. The other question I had just in terms of the core NIM. Your guidance is stable for the next several quarters. Can you just talk about the drivers of how you get there? Obviously, your comments about competition such in C&I pricing that remains challenging, and that you're seeing some asset yield compression. Do you have enough deposit room? Or is there -- to reduce your deposit costs or are there other factors that we may consider in terms of how you get to stable core NIM?

[H. Simmons:]

I think that the -- what was Chairman Mao's phrase, the correlation of forces, remains much as it has been in the prior quarters. If we have -- obviously, a buildup in cash balances is a depressing effect. Any loan growth is a positive effect. The decline in nonperforming assets is a positive effect. There's -- if you noticed, I think the decline in interest, in deposit cost of 4 basis points and the decline in loan yields of 4 basis points exactly offset each other this quarter. So we would expect that to be probably a continuation of that very small amount or change on both sides of the balance sheet in the next quarter or 2. James, you want to add anything to that or any major thing?

[James Abbott:]

On core NIM, obviously, I think implicit in my remarks is the fact that we would expect the reported NIM to be quite a bit higher this quarter.

[H. Simmons:]

I'll just jump in and say I think the pricing pressure we're seeing tends to be -- I don't think it's really across the board. It tends to be on larger, very high-quality kinds of deals. And so we're not seeing that kind of pricing stress uniformly. And It's clearly there on larger deals, less so on kind of small middle market credits.

[James Abbott:]

This is James. I'll just interject that in terms of pricing, loan pricing on owner-occupied which is a core business for us of course, loan yield was about 5.6% on a incremental production basis. So we're still getting very, very healthy yields on a lot of the production. But in the larger corporate deals, to Harris' point, there is more pricing pressure there than in other areas. Although if you talk to lenders, they'll tell you that there's still pricing pressure even on the smallest deals.

[Operator:]

Our next questioner in queue is Todd Hagerman with Sterne Agee.

[Todd Hagerman:]

Just want to follow up on your comments on the loan growth. You mentioned that a good portion of the growth this quarter came through existing customers. I'm just curious as I look at the 1- to 4-family portfolio, the energy portfolio and the SBAs within C&I, was there anything in the way of purchased loans that may have influenced the balances to any degree this quarter?

[Doyle Arnold:]

Well, I think the comment about existing customers was primarily targeted at C&I. I believe that's what I was referencing there. Clearly some of the home mortgages were new, et cetera. There were no major loan purchases. There were included in the C&I growth was on syndication or participations, but no portfolio purchases, would that be a fair way to describe it? Did I address your question?

[Todd Hagerman:]

Yes, that's very helpful. And just as a follow-up to that, I'm just curious given kind of the sluggishness in the economy and demand, for all intents and purposes remains fairly weak if you will, is the company in a position in terms of thinking about, perhaps alternative kind of asset purchases, other loan purchases to help improve the yield, or are you saying those kinds of transactions or deals being presented at this time?

[Doyle Arnold:]

We do occasionally see distressed portfolios that we have looked at. we, by and large, decided to focus on further reductions in our own level of classified and other weaker quality assets. So we've not really gone there except in very one-off cases. And no, we're not considering any bulk purchases of other portfolios. We've seen a few here and there, but we're pretty determined to stick to customer relationship lending within our territory. And the portfolios that I've seen tend to be portfolios of leases that are nationwide or some other things that are nationwide where there's no relationship with a big chunk of the portfolio. And that's not the direction we're headed.

[Todd Hagerman:]

And that's consistent within the energy portfolio as well, correct?

[H. Simmons:]

Yes.

[Doyle Arnold:]

Yes. Is there a question behind that question?

[Todd Hagerman:]

No, again just with the improving demand and again just kind of the Amegy's kind of historical lead role within those relationships that, given kind of the drivers within the energy sector and some of the volatility we've seen, whether or not there are other opportunities that have presented themselves outside of kind of your existing customer relationships.

[Doyle Arnold:]

No, I mean, that's some of the -- when I mentioned syndications and participations, a lot of that would be at Amegy and it would -- a lot of that would be energy-related in one way or another. But it's not -- again it's not portfolio kinds of purchases and that's not something we're considering.

[H. Simmons:]

In any case, we're selling pieces off. I mean, we're auctioning. So it's works both ways. But I think it's very consistent with what we've been before. And I'll also just say this point in the cycle, we're not getting antsy to go out and do anything particularly aggressive.

[Operator:]

Our next questioner in queue is Ken Usdin with Jefferies.

[Kenneth Usdin:]

Doyle, I was just wondering if you can just expand upon at this point in the cycle, you're starting to see loan growth get a little bit better, and yet deposits are still really coming indoor at a great pace. Can you characterize where the deposits are coming from, new customers, existing customers, different parts of business? And what you expect to happen over time? Do you expect to see deposits get drawn as credit comes back? Because it still seems that we're just getting both. You're getting great amount of deposits and yet the loan growth is starting to come back.

[Doyle Arnold:]

Well, the biggest amount of deposit growth remains in commercial noninterest-bearing transaction accounts, commercial checking accounts, as it has been for many, many quarters now. And there are -- as you know, treasury management is something that we have placed great emphasis on for a number of years now. So we do continue to add customers and shows up in increased customer accounts in those kinds of categories. But I think it's fair to say that the bulk of the increase in balances from existing customers who are just piling up more and more cash, it's very much related to the fact that I think there's no other investment alternative that reasonably safe where they can earn anything. They are -- the profitability has improved among a number of our customers. So they are generating cash and they appear to be reluctant to deploy it in the continued economic and policy uncertainty that's out there, probably things you've been reading about and hearing about from others. We are seeing a few businesses. I mean as well, we have seen better growth in C&I. We've also seen a smaller decline in -- I mean, some of the net growth is the fact that we've reduced the construction and development portfolio from a peak of, I think, over $8 billion 3.5 years ago to about $2.7 billion today. And you're beginning to get to a point where that's a little bit more of a steady state, with, in fact, I think our best guess is it's probably what's left, 2/3 of it, has been originated post-crisis in this new production, new projects that are in construction today. So I don't -- things are better. There's not doubt about it, but they don't feel like they're accelerating right now.

[Kenneth Usdin:]

My second question is can you walk us through in the circumstance that Deutsche Bank were to be downgraded, given what's going on across the pond would there be any ramification on the swaps? And how would that work, if so?

[Doyle Arnold:]

Well, we now have the right to renew or cancel the swap every quarter from here on out. We prepay the first year's worth and that was that. So it's $5.3 million roughly of pretax expense every quarter. And if for any reason we decide that Deutsche Bank's rating is not worth keeping them behind the total return swap, we can cancel it. The impact of canceling it would be roughly about a $4 billion increase in risk-weighted assets, which would be about a 10% increase in risk-weighted assets or I think a little over $40 billion. So you can kind of apply that to regulatory capital ratios, and they would adjust accordingly. David, you want to...

[David Blackford:]

My only other comment would be we also -- and there are triggers, I won't go into details. But within the agreement, there are triggers wherein they would have to pledge collateral if they got downgraded to protect us if in fact that would happen. Those are the 2 issues, the one Doyle just talked about, the fact that we have the right to claim collateral under certain conditions.

[Operator:]

Our next questioner in queue is Marty Mosby with Guggenheim Partners.

[Marty Mosby:]

I wanted to comment just go through the kind of core earnings exercise. But if we looked at the reported $0.16 and we adjust for the debt conversion, we're right around $0.50 per quarter now. We have Durbin coming up and swap expense coming online. But we got some loan growth and deposit growth. Hopefully that kind of hold that $0.50 in line. If we look at credit-related expenses, right about $35 million worth of foreclosure OREO kind of expenses that were on the income statement, how fast can we see some of those starting to move down?

[Doyle Arnold:]

I think they've already moved down a bit, and we would expect them to continue to trend down. I don't have a forecast to give you. But there are -- most of those -- I think those 3 different lines that we break out for you on the income statement, the other real estate, the credit-related and the unfunded commitments. So I've already told you the unfunded commitments probably average around 0 to the loan portfolio growth becomes slightly positive. But it could be slightly negative for a while, i.e. a negative contra expense if credit quality continues to improve, which we think it will. OREO is, I mean, gosh, look at it. It's come down from $40 million to $45 million down to $120 million. I think that the general trends should be that it continues to come down, but I don't have a read on the pace. And maybe the other one that's a little bit stuck is the other credit-related expense. But even that, which is appraisals and other things like that, that should begin to decline as we get further down into the pile. You got anything else you want to say, Ken or James?

[Kenneth Peterson:]

I would just add, Marty, that historically when property prices are rising 20% so take this with a grain of salt, but that other credit-related expense line item was about $2 million per quarter. So we probably won't go back to that level, but you could see it down into the single digits at some point down the line.

[Marty Mosby:]

And this is the first quarter that we really had a provision number close to 0, which would obviously be less than we would think. So we're getting a benefit from that. Kind of compare that to our kind of normal of $60 million per quarter, just as a rule of thumb. Maybe we're adding $0.20 into our number this quarter. Whereas, Doyle, when you mentioned the asset sensitivity, if you kind of run that through the numbers, you kind of offset that with a potential margin improvement once we get the rate rise. So the timing of the usually lower provision being matched with hopefully rates going up at some point, kind of how do you see those two things because in size they kind of match up with each other?

[Doyle Arnold:]

Timing is everything as someone once said. The other thing I'll point out to you is that our cost of capital is rather high. The reported cost of sub debt is rather high. Once the sub debt conversions taper off, and I do think that's likely to happen, the cost of the remaining sub debt will begin to drop significantly back to just more normal amortization level. The coupon is 5.5% to 6%. We basically mark it to market at around $0.50 on the dollar. So the normal amortization would take that up to around 11% or 12%, but it's 22% this quarter because of conversions. Knock it down to 11% or 12%, you got a drag there. TARP dividends are $70 million after-tax annually.

[H. Simmons:]

That's the cash expense.

[Doyle Arnold:]

That's the cash expense. And there's a little bit of amortization of the, I guess, the equity component of it. And when you got some expense in preferred, that becomes callable middle of next year. So there, you can't just look at the expense items. You got to look at the capital and funding structure as well.

[Operator:]

Our next questioner in queue is Joe Morford with RBC Capital Markets.

[Joe Morford:]

Just wondered if you could talk a bit more about the type of growth you're seeing in Amegy's energy portfolio and the type of pricing or spreads you're getting on that, and kind of what expectation you have for the portfolio going forward.

[H. Simmons:]

Well, it's been -- it hasn't been solely in energy. It reflects the fact the Texas economy is simply adding more jobs than any place else in the country. But certainly, a slug of it is energy-related as we've seen additional activity there. It's been both production, some service-related credits. Pricing has -- and this is just sort of anecdotal for me is I've looked at deals. Pricing is maybe a little tighter than it had been kind of a year ago. But we're still seeing reasonable pricing on the kinds of credits we're doing. I think we're also seeing, in selected areas, quality real estate opportunities, fully leased or almost fully leased office building. We have a construction loan there with a heavy credit tenant. And we're also seeing a little bit across the board in C&I. So the general Texas economy is resulting in opportunities and energy a little bit in real estate and C&I.

[Doyle Arnold:]

For the person taking the transcript, that was Ken Peterson, our Chief Credit Officer speaking last there.

[Joe Morford:]

And I guess my follow-up would just be any other comments about any of the other regions and some of the growth trends you're seeing or lack of growth. And also you'd talked in past or this quarter, you were expecting to see less in the way of CRE paydowns into that play out.

[H. Simmons:]

I just note, we said 6, 9 months ago that we were likely to see some increased focus on 1- to 4-family residential here, and you see some of that in our numbers. We simply think that there's been some opportunities there with prices having come off and a lot of other lenders who've had heavier doses of that, probably less aggressive than they've been in some other product categories. So we've added there, incrementally, I'd say just about economies in some of the states, I mean, the Utah economy, because this is still large part of our business in Utah, Idaho. The economy here continues to improve. The unemployment rate is now down. I think it's roughly 7%. We're seeing reasonable job growth here. And a lot of -- we have seen a lot of corporate location announcements. I think the sort of the sentiment here is reasonably, this is pretty positive about what the next 2 or 3 years might hold in terms of growth in the Utah economy. California, probably, we all read about California. There are challenges there, and probably will be for the next 2 or 3, 4 years. Talked about Texas. Arizona, Nevada, they're going to be slow for a while. And we are seeing some commercial loan growth in Arizona and we're going to focus on that. We're seeing some, some -- and their volumes have been recently stable for the last year as a result, in part, of a little better commercial loan growth there. So kind of spotty. Texas really has been best driver of loan growth. Utah is looking like it could kind of chip in, in the second half. Other places still probably kind of...

[Doyle Arnold:]

I think, the other comment, I think is that I don't think there's any place in the company where we're continuing to see just dramatic declines at this point. The worst case is about flat.

[H. Simmons:]

Flat in Nevada.

[Doyle Arnold:]

In Nevada, maybe still a little bit of decline there, particularly outside the residential 1- to 4-families that they've done there in the last couple of quarters. At the other end of the spectrum, Texas, as Harris said, has the strongest economy followed by the intermountain west.

[Operator:]

Our next questioner in queue is Chris Stulpin with Raymond James.

[William Stulpin:]

Within loans, do you have a runoff amount for this quarter and the last quarter as well? I'm trying to see if any kind of trends are developing there as far as runoff within your loan portfolio?

[Doyle Arnold:]

What do you mean by runoff, please? You mean the...

[William Stulpin:]

I guess last quarter's balance, maybe when you add in production then you see where this quarter came out. I'm basically trying to see what the difference is.

[Doyle Arnold:]

Broadly speaking, most of the loan officers that we've -- that I talked to have suggested that there has not been an increase in the prepayment speed. The production volume for the quarter was a few hundred million higher, about $400 million or so higher than it was last quarter and you saw the loan growth. So that also would be another way of triangulating the fact that prepayment speeds haven't changed a lot. if you look at or you can't, we have our internal portfolios to talk about. Look at the PPR speed of various different assets, and those did not change at all really compared to the prior quarters. Not much change in payoffs, paydown rates, but a little bit -- it's about actually about a 20% increase in production volume this quarter compared to the prior quarter.

[Operator:]

Our next questioner in queue is Steven Alexopoulos with JPMorgan.

[Steven Alexopoulos:]

Maybe first on the loan growth, Doyle. Could you break out the dollar amount of loan growth that came from the energy book in the second quarter? And then maybe talk about the types of mortgages that you held that drove the 1- to 4-family. Are these fixed-rate mortgages?

[Doyle Arnold:]

James is looking up the first part. I'll start on the second part of your question. The mortgage growth came in California, Texas, Colorado. And I think the fourth state was ...

[Kenneth Peterson:]

It was Nevada.

[Doyle Arnold:]

It was Nevada, yes. And none of it's, with the exception a little bit of Nevada, it's all variable rate. In California, it's jumbos. We're finding good opportunities for relationship lending there. I mean in general, we've just found the pricing to be acceptable and the relationship opportunity's good. There are just so much carnage in that market, and so many -- the bigger players are distracted by problems that we found ways to do a little bit of good.

[Kenneth Peterson:]

They tend to be 5/1 ARMs, 7/1 ARMs.

[Doyle Arnold:]

That's the bulk of it.

[Kenneth Peterson:]

Some kind of shorter-term fixed rate for amortizing kinds of deals.

[Doyle Arnold:]

You have a comment on energy, James?

[James Abbott:]

Energy portfolio at Amegy anyway was up about $100 million linked quarter from about $1.6 billion to about $1.7 billion outstanding.

[H. Simmons:]

Let's see how that compares to the prior quarter, I think.

[James Abbott:]

Well, the prior quarter's $1.6 billion in total.

[Doyle Arnold:]

But the growth, is it accelerating?

[James Abbott:]

Oh, I have to catch with that.

[Steven Alexopoulos:]

Maybe just as a follow-up on the margin because you're guiding to a stable core NIM. But with the cost of interest-bearing deposits at 51, how much lower can that realistically go? And should we assume that you assume no negative impact from the reappeal of Reg Q?

[Doyle Arnold:]

Well, it's been coming -- the cost of interest-bearing deposits has continued to drift down 3, 4 basis points a quarter. And part of that is just the fact that some of the growth is not in CDs, but it's in very low cost savings accounts where we're paying 5, 10 basis points, what have you. So I do think there's probably room for a little continued drift down. We're not going to be -- I think it's fair to say we're not big enough to be the market leader on whatever happens on Reg Q. So I don't have a firm hand on what that might be. It's hard to understand why there'd be pressure, given that the whole industry is awash in liquidity to move aggressively on pricing if deposits in this environment don't.

[Operator:]

Our next questioner in queue is Brian Klock with KBW.

[Brian Klock:]

Just thinking about the loan growth of the loan pipeline. You guys are one of the biggest small business lenders in the country. So I would think that some of the margin pressures that others have been talking about you guys may be insulated from. And I guess that I'm kind of wondering how that small business loan pipeline looks for you guys as you head into the second half of the year.

[Doyle Arnold:]

Insulation comes at a variety of R ratings. I'm sure we're at R32, but there is less pricing pressure when you get down and where the, as Harris said, the largest high-quality corporate credits.

[H. Simmons:]

I think it's fair to say in terms of just the pipeline there, it is still -- that's still kind of slow. I mean, we're not seeing a big surge in small business credit demand that qualifies. I mean, the last numbers I've seen here, really it's not getting worse, maybe firming up a little bit. But I don't think that's going to be a source of a lot of growth in the next 3 to 6 months.

[James Abbott:]

Yes, I think most of the indicators, both the national indicators as well as some of the local ones that are done, suggest that small businesses are still struggling. One of the comments from a lender, actually it was a group call that I had very recently with a bunch of other lenders. And they said the small business owner is a lot of times relies on their personal equity to expand the business to some degree. And those equity levels have taken a hit, And so they are still rebuilding themselves. So we're not seeing a tremendous amount of growth out of that. But their commentation -- that's probably not the word. But their comments are that they are feeling much more comfortable about the credit quality of the small business portfolios at this point because balance sheets have healed.

[Brian Klock:]

Your credit quality is still -- the trends are continuing to improve nicely. Your classified loans are down almost 50% year-over-year. Maybe I guess, I know that you guys kind of guided, Doyle, to provisions being low in the second half of the year. I mean, I guess is there kind of way to gauge whether or not is that something that's going to be $10 million, $20 million, $30 million? I mean, should we expect another 2 quarters of $1 million provision, or maybe just give us some kind of -- what does your crystal ball say is a more realistic level or normalized level, if you will, of provision?

[Doyle Arnold:]

Well, what's your crystal ball say is the economic unemployment rate and what not in the -- It's hard to say. Again, I'd say -- I kind of made a comment about the economy only somewhat facetiously because as I noted, we did increase the amount of reserves, that it was driven purely qualitatively by the deteriorating economic outlook as opposed to what we can see in our portfolio based on the historic metrics. Had we not done that, we would have had a negative provision of $35 million, $50 million this quarter. So it's going to be low. I'm not trying to telegraph a negative provision. But I would guess next quarter, it's going to be somewhere around 0, but there could be plus or minus several tens of millions of dollars around that.

[Operator:]

Our next questioner in queue is Jennifer Demba with SunTrust Robinson

[Jennifer Demba:]

Can you just give us a sense of how much Zion is participating in loan syndications today maybe versus 6 months or 1 year, 1.5 years ago? Can you just talk about that activity?

[James Abbott:]

Jennifer, this is James. There's really been no change in terms of a ratio. From a percentage perspective, it's about 7.3% of the portfolio today, when you add up all of the balances of loans purchased and all of the balances of loans where we act as the agent. September of '09 is as far back as my page goes for now, but it was 7.9% back then; and a year ago, it was 7.1%. So it really hasn't changed a whole lot. But on a net basis, we actually had -- it's really been very, very stable there.

[Jennifer Demba:]

Are you seeing fewer phone calls from larger banks as they maybe increased their hold limits?

[Kenneth Peterson:]

Well, I think what we have seen is -- this is Ken Peterson. What we have seen is the larger banks weeding out numbers of their participants and asking for larger positions in the stronger credits with the remaining banks. So while the net may not have changed that much, I think some of the agents are trying to clean up the number of banks they have in any given syndication.

[Operator:]

Our next questioner in queue is Jack Micenko with FIG.

[Jack Micenko:]

I guess maybe another way to ask it, not just maybe the next quarter but over the next 4, 5 quarters, Doyle, you talked about obviously the qualitative pieces that have been coming up with regards to loan growth. Do think, if you thought or talked about sort of the right size or the reserve-to-loan ratio, can we can think of it maybe that way, and maybe we're...

[Doyle Arnold:]

No, we can't. You know as well as I do, the regulators, I mean, they've been very straightforward. I was just reading before this call the new Basel III update from I don't know, a few weeks ago. And they're very open and transparent that they want an expected loss model like IASB, whatever it is has proposed, that they want the reserve to be more countercyclical. But that's not U.S. GAAP today, and we're caught on the horns of that dilemma as well. But we probably like to see that less volatility in that number as well. And I think it's fair to say that the reserves kind of never again get down to the 1% range that it once was one way or another. But where it will settle out in the very best of times, I wouldn't want to forecast.

[Jack Micenko:]

And then just a follow-up with rates coming down on some of the jumbo product that you did note you are doing in some of the more distressed markets, has your appetite changed over the last 3 months in putting them up on the balance sheet? Or has the 3, 5, 7 kind of paper held up better on the spread side of the jumbo product?

[Doyle Arnold:]

Well, a distressed market doesn't mean distressed borrower, let's be clear on that.

[Jack Micenko:]

Right, right, right.

[Doyle Arnold:]

We're not bending our lending standards to put on new product in California, say. And I assume that's what you're talking about since I wouldn't characterize Texas and Colorado as being distressed markets. We just -- there's just not a lot of people active in the nonconforming jumbo space. And so we're finding good opportunities in California to put on that kind of product. And yes, it's mostly 5 and 7/1 ARM and it's prime product.

[James Abbott:]

We'd continue -- as some of the other portfolios have flattened out in the month of June. Residential mortgage grew, but at a very, very slight rate during the month. So it continues to grow a little bit in a couple of July here so. But I would emphasize that it's very slight.

[Operator:]

Final question comes from Paul Miller with FBR Capital Markets.

[Paul Miller:]

Most of my questions have been answered, but I do have a question about the deposits. If we're not really seeing a lot of loan growth, I mean, why continued growing loan deposits? Why not lower your deposits? A couple of guys have brought this up, but why not push those deposits out the door because you really don't need them?

[Doyle Arnold:]

How do you propose that we push deposits out the door when the growth is primarily balances in DDA accounts for current customers? I don't really want to tell the customers to get the heck out of dodge.

[H. Simmons:]

I mean, we're trying to do that with pricing, clearly, but we're also really trying to manage the place for the long term. And 3 years ago, you would have killed for liquidity. We expect 3 years from now, we might be in the same position again. So the focus is really on making sure that we're holding on to what we view as long-term, core profitable relationship accounts. And sometimes you have to be competitive to hold on to those kinds of accounts. But you want to be in longer-term what you're thinking about it right now. Just in the same way that you could go out and put on a lot of securities, for example, that opportunistically might look great right now, then they look awful years from now. And so we're really trying to think about what does the place look like in terms of years from now.

[Doyle Arnold:]

It's a difficult -- it's a high-class, but difficult problem because it is painful in the short term. We certainly acknowledge that. But as Harris said, we are managing towards the belief that this current set of conditions will not continue indefinitely.

[Kenneth Peterson:]

I'll just comment that you need to remember that the unlimited insurance and checking accounts goes away on January 1, 2013. We're not making forecasts here, but I strongly believe that in January 1, 2013 when this insurance goes away, we won't have $14.4 billion of noninterest-bearing checking accounts.

[James Abbott:]

That will have to be our last question for today. We've jot down the names of those left in the queue, and I will do the best I can to get back to you tonight. It may be late, but I will make the effort. Thank you again all for your time and your work today to look at our company, and we appreciate it. We will be in touch with you shortly.

[Operator:]

Thank you. Ladies and gentlemen this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.