Zions Bancorporation Reports 2010 Third Quarter Results

SALT LAKE CITY, Oct. 18 /PRNewswire-FirstCall/ -- Zions Bancorporation (Nasdaq: ZION) ("Zions" or "the Company") today reported a third quarter net loss applicable to common shareholders of $80.5 million or $0.47 per diluted share, compared to a net loss of $135.2 million or $0.84 per diluted share for the second quarter of 2010.

Third Quarter 2010 Highlights

• Loan balances declined at a slower pace of 1.2% compared to 2.5% in the second quarter. Excluding construction and land development loans and FDIC-supported loans, loan balances declined 0.2% compared to 0.9% in the second quarter.

• Loan originations and renewals were $2.4 billion, up 33% from $1.8 billion in the second quarter.

• Net interest income, adjusted for the effects of additional accretion on FDIC-supported loans and interest amortization from subordinated debt conversions, was relatively stable compared to the second quarter.

• Nonperforming lending-related assets continued to decline, down 10% to $2.29 billion from $2.55 billion in the second quarter. Additions to nonperforming lending-related assets declined to $426 million from $591 million in the second quarter.

• Excluding FDIC-supported other real estate owned, OREO declined 17% to $304.5 million from $365.0 million at June 30, 2010.

• The tangible common equity ratio increased to 7.03% from 6.86% in the second quarter. The estimated Tier 1 common to risk-weighted assets ratio improved to 8.77% from 7.91% in the second quarter.

"Overall, we are encouraged by the trends exhibited in our third quarter results. Excluding construction and FDIC-supported loans, our loan balances held relatively steady and the core net interest margin performed in line with our expectations. Furthermore, asset quality metrics improved across all major fronts and we generally expect continued improvement into the fourth quarter and beyond," said Harris H. Simmons, chairman and chief executive officer. Mr. Simmons continued, "Additionally, we ended the quarter with record high capital levels."

Loans

Net loans and leases of $37.5 billion at September 30, 2010 decreased approximately $0.5 billion or 1.2% from $38.0 billion at June 30, 2010, compared to a 2.5% decrease from the balances at March 31, 2010. Commercial and consumer loan balances were stable compared to the second quarter. Runoff occurred in construction and land development loans and FDIC-supported loans, which the Company is actively managing downward. Certain FDIC-supported loans have experienced better performance than previous estimates. The expectation of higher-than-expected cash flows from this portfolio results in a higher rate of accretion in loan balances and the recognition of additional interest income. Lower losses on paid-off loans have also contributed to the overall higher expected cash flows. The effect on the financial statements of this higher accretion and the corresponding impact to the FDIC indemnification asset is summarized as follows:

The balance of the FDIC indemnification asset, reflecting the above reduction and other changes in the third quarter, was $233.6 million at September 30, 2010 compared to $243.8 million at June 30, 2010.

Asset Quality

Net loan and lease charge-offs declined to $235.7 million for the third quarter of 2010 from $255.2 million for the second quarter of 2010. Gross charge-offs of $263.7 million included $7.7 million from FDIC-supported loans. Net charge-offs recoverable from the FDIC were $5.7 million. The provision for loan losses declined to $184.7 million for the third quarter of 2010 compared to $228.7 million for the second quarter of 2010. Despite the lower provision and the decline in net charge-offs, the allowance for loan losses as a percentage of net loans and leases was relatively stable, at 4.07% at September 30, 2010 compared to 4.11% at June 30, 2010. The allowance for credit losses was $1,627.9 million, or 4.34% of net loans and leases at September 30, 2010, compared to $1,660.5 million, or 4.37% at June 30, 2010.

Excluding FDIC-supported other real estate owned, OREO declined 17% to $304.5 million at September 30, 2010 compared to $365.0 million at June 30, 2010. OREO expense increased $1.9 million to $44.3 million during the third quarter from $42.4 million in the second quarter. Additionally, $19.2 million of valuation charges and the losses on the sale of OREO were included in net charge-offs, up from $13.4 million in the previous quarter.

Nonperforming lending-related assets declined 10% to $2,293.1 million at September 30, 2010 from $2,547.4 million at June 30, 2010. Nonaccrual loans declined 9% to $1,936.2 million at September 30, 2010 from $2,134.1 million at June 30, 2010. Delinquent loans (accruing loans past due 30-89 days and 90 days or more) declined 18% to $396.9 million at September 30, 2010 from $482.1 million at June 30, 2010. The ratio of nonperforming lending-related assets to net loans and leases and other real estate owned was 6.01% at September 30, 2010 compared to 6.60% at June 30, 2010. The preceding amounts and comparisons include the FDIC-supported assets.

Capital Transactions

During the third quarter of 2010, the Company increased its Tier 1 capital as a result of the following capital actions:  

1. Common stock equity distribution issuances:  From August 18, 2010 to September 14, 2010, the Company sold 3,936,300 shares of common stock for $75.5 million (average price of $19.18).
2. Common stock warrants:  On September 28, 2010, the Company sold 7,000,000 warrants for $36.8 million ($5.25 per warrant) through an online modified Dutch auction. Each warrant can be exercised for a share of common stock at an initial price of $36.63 through May 22, 2020. These warrants are part of the same series of warrants initially sold on May 25, 2010.

Net of commissions and fees, these capital actions added $109.9 million to tangible common equity.

In addition, on September 15, 2010, $54.3 million of convertible subordinated debt was converted into shares of the Company's preferred stock (54,219 shares of Series C and 40 shares of Series A). Accelerated discount amortization on the converted debt increased interest expense by a pretax amount of approximately $27.5 million.

The tangible common equity ratio was 7.03% at September 30, 2010 compared to 6.86% at June 30, 2010. The increase from June 30, 2010 was primarily due to the previously discussed capital transactions, partially offset by operating results and preferred stock dividends during the third quarter. Preferred stock dividends increased during the third quarter primarily because of the new issuance in the second quarter of Series E preferred stock. The estimated Tier 1 common to risk-weighted assets ratio was 8.77% at September 30, 2010 compared to 7.91% at June 30, 2010. The more significant improvement in risk-based capital ratios compared to the tangible common equity ratio is due to the total return swap.

Total Return Swap

As previously announced on July 29, 2010, the Company entered into a total return swap and related interest rate swaps ("TRS") relating to a portfolio of $1.16 billion notional amount of its bank and insurance trust preferred collateralized debt obligations ("CDOs"). This transaction increased the Company's Tier 1 common to risk-weighted assets ratio by 68 bp. The transaction did not qualify for hedge accounting and did not change the accounting for the underlying securities. During the third quarter, the Company incurred a negative initial valuation of $22.8 million, included in fair value and nonhedge derivative income (loss), and structuring costs of $11.6 million, included in other noninterest expense. The negative initial valuation is essentially the amount of the first-year TRS fee.

Deposits

Average total deposits for the third quarter of 2010 decreased $0.5 billion or 1.3% to $41.7 billion compared to $42.2 billion for the second quarter of 2010, as the Company actively worked to reduce excess funding. Average deposit balances fell in the time, foreign and money market categories. Average noninterest-bearing demand deposits for the third quarter of 2010 increased $0.5 billion or 3.5% to $13.8 billion compared to $13.3 billion for the second quarter of 2010, although the end of period balance declined significantly due to active management. The decline in excess funding improved profitability, as such deposits were not necessary to fund loan demand.

Net Interest Income

The net interest margin increased to 3.84% in the third quarter of 2010 compared to 3.58% in the second quarter of 2010. The net interest margin decreased by 12 bp for the discount amortization on the convertible subordinated debt, and by an additional 23 bp (compared to 52 bp in the second quarter) for the accelerated discount amortization when debt holders exercised their options to convert to preferred stock. The net interest margin increased by 16 bp due to the recognition in interest income of the additional accretion on acquired loans. The core net interest margin, adjusted for the amortization and accretion previously discussed, was 4.03% in the third quarter compared to 4.14% in the second quarter, largely due to the increase in average money market investments rising to 11.0% of total interest-earning assets in the third quarter compared to 8.2% in the second quarter.

Investment Securities

During the third quarter of 2010, the Company recognized credit-related net impairment losses on trust preferred CDOs of $23.7 million or $0.08 per diluted share, compared to $18.1 million or $0.07 per diluted share during the second quarter of 2010. The increased impairment is primarily due to assumption changes in prepayment speeds on trust preferred securities, given the adoption of the Dodd-Frank Act, which, among other things, will disqualify trust preferred securities from Tier 1 capital for certain banks. The Company's estimated default probabilities declined significantly for banks that are deferring payment on their trust preferred securities.

CDOs for which the underlying collateral is predominantly bank trust preferred securities comprised $2.2 billion of the $2.6 billion par amount of the bank and insurance CDO portfolio at September 30, 2010. The following table shows the decrease in carrying value at September 30, 2010 of original AAA and BBB rated CDOs compared to June 30, 2010.

Sale of NetDeposit

On September 3, 2010, the Company sold substantially all of the assets of its wholly-owned subsidiary, NetDeposit, to BServ, Inc. (dba BankServ), a privately-owned company headquartered in San Francisco, California. Both companies specialize in remote deposit capture and electronic payment technologies. The Company recognized a pretax gain on the sale of approximately $13.9 million, which was included in other noninterest income.

Noninterest Income

Noninterest income for the third quarter of 2010 was relatively unchanged at $110.2 million compared to $109.4 million for the second quarter of 2010. Increases from the $13.9 million gain on sale of NetDeposit assets and from fixed income securities gains of $6.1 million on the repurchase at par by the underwriter of certain auction rate securities, were offset by the negative $22.8 million valuation of the TRS and the $5.6 million increase in CDO impairment.

Noninterest Expense

Noninterest expense for the third quarter of 2010 was $456.0 million compared to $430.4 million for the second quarter of 2010. The increase included $11.6 million of structuring costs for the TRS and the $15.0 million reduction (compared to $9.0 million in the second quarter) of the FDIC indemnification asset.

Conference Call

Zions will host a conference call to discuss these third quarter results at 5:30 p.m. ET this afternoon (October 18, 2010). Media representatives, analysts and the public are invited to listen to this discussion by calling 1-877-368-2147 (international: 253-237-1247) and entering the passcode 14043091, or via on-demand webcast. A link to the webcast will be available on the Zions Bancorporation website at www.zionsbancorporation.com. A replay of the call will be available from approximately 7:30 p.m. ET on Monday, October 18, 2010, until midnight ET on Monday, October 25, 2010, by dialing 1-800-642-1687 (international: 706-645-9291) and entering the passcode 14043091. The webcast of the conference call will also be archived and available for 30 days.

About Zions Bancorporation

Zions Bancorporation is one of the nation's premier financial services companies, consisting of a collection of great banks in select high growth markets. Zions operates its banking businesses under local management teams and community identities through approximately 500 offices in ten Western and Southwestern states: Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington. The Company is a national leader in Small Business Administration lending and public finance advisory services. In addition, Zions is included in the S&P 500 and NASDAQ Financial 100 indices. Investor information and links to subsidiary banks can be accessed at www.zionsbancorporation.com.

Forward-Looking Information

Statements in this press release that are based on other than historical data or that express the Company's expectations regarding future events or determinations are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events or determinations. These forward-looking statements are not guarantees of future performance or determinations, nor should they be relied upon as representing management's views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this press release. Factors that might cause such differences include, but are not limited to: the Company's ability to successfully execute its business plans and achieve its objectives; changes in general economic and financial market conditions, either internationally, nationally or locally in areas in which the Company conducts its operations, including changes in securities markets and valuations in structured securities and other assets; changes in governmental policies and programs resulting from general economic and financial market conditions; changes in interest and funding rates; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; increased competitive challenges and expanding product and pricing pressures among financial institutions; legislation or regulatory changes which adversely affect the Company's operations or business (including the Dodd-Frank Wall Street Reform and Consumer Protection Act); and changes in accounting policies, procedures or determinations as may be required by the Financial Accounting Standards Board or other regulatory agencies.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Zions Bancorporation's most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission ("SEC") and available at the SEC's Internet site (http://www.sec.gov).

Except as required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

This Press Release presents a “core net interest margin” which excludes the effects of the (1)  discount amortization on convertible subordinated debt; (2) accelerated discount amortization on convertible subordinated debt; and (3) additional accretion of interest income on acquired loans based on increased projected cash flows (hereinafter collectively referred to as the “net interest margin adjustments”). The net interest margin adjustments are included in financial results presented in accordance with generally accepted accounting principles (“GAAP”). Management considers the net interest margin adjustments to be relevant to ongoing operating results.

The Company believes the exclusion of these net interest margin adjustments to present a core net interest margin provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results of the Company and predicting future performance. As a non-GAAP financial measure, the core net interest margin is used by management and the Board of Directors to assess the performance of the Company’s business for the following purposes:

• Evaluation of bank reporting segment performance
• Presentations of Company performance to investors

The Company believes that presenting the core net interest margin will permit investors to assess the performance of the Company on the same basis as that applied by management and the Board of Directors.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.  

SOURCE Zions Bancorporation