Zions Bancorporation Reports Earnings of $0.35 Per Diluted Common Share for Third Quarter 2011

SALT LAKE CITY, Oct. 24, 2011 /PRNewswire/ -- Zions Bancorporation (Nasdaq: ZION) ("Zions" or "the Company") today reported third quarter net earnings applicable to common shareholders of $65.2 million or $0.35 per diluted common share, compared to $29.0 million or $0.16 per diluted share for the second quarter of 2011. Excluding the noncash effects of the discount amortization on convertible subordinated debt and additional accretion on acquired loans, net earnings were $74.8 million or $0.40 per diluted share for the third quarter of 2011, compared to $82.4 million or $0.45 per diluted share for the second quarter of 2011.

Third Quarter 2011 Highlights

• Net interest income increased 13% from the second quarter, primarily due to the significant decline in subordinated debt conversions this quarter. Core net interest income was approximately $468 million, a slight increase from the second quarter.
• Nonperforming lending-related assets declined 16% to $1.3 billion from $1.5 billion at June 30, 2011.
• Classified loans decreased 12% to $2.4 billion from $2.7 billion at June 30, 2011.
• Net charge-offs declined 9% to $102 million from $112 million in the second quarter.
• Commercial and industrial loans increased 2.2% while FDIC-supported loans and construction and land development loans declined 9.2% compared to the second quarter, resulting in net loan attrition of 0.3%.
• Accumulated other comprehensive income (loss) decreased by $84 million primarily due to declines in the fair values of CDO securities that did not affect earnings. These declines resulted from the effects of recent higher levels of volatility and increased credit spreads in fixed income securities markets.
• The estimated Tier 1 common to risk-weighted assets ratio was 9.49% compared to 9.36% in the second quarter.

"We are pleased with the continued steady improvement in credit quality and the stability of our net interest income," said Harris H. Simmons, chairman and chief executive officer. Mr. Simmons continued, "While loan demand softened somewhat for us compared to the prior quarter, we continued to experience growth in several categories as payoffs and paydowns in the construction portfolio resulted in a modest decline in the overall portfolio." Mr. Simmons concluded, "We expect continued improvement in credit quality in the near term despite the uncertain economic environment. We have observed continued competitive pricing pressures particularly with respect to larger commercial credits. While the recent flattening of the yield curve may have a modest adverse impact on our net interest income, we are considerably more sensitive to changes in short-term rates than to long-term rates."

Net Interest Income

Net interest income increased 13% to $471 million for the third quarter of 2011, compared to $416 million for the second quarter of 2011. The increase was primarily due to lower interest expense resulting from the significant decline in subordinated debt conversions during the quarter. Core net interest income, adjusted for discount amortization on convertible subordinated debt and accretion on acquired loans, was approximately $468 million during the third quarter of 2011, which increased slightly from $467 million for the second quarter of 2011. The net interest margin increased to 3.99% in the third quarter of 2011, compared to 3.62% in the second quarter of 2011, primarily due to the same changes previously discussed. The core net interest margin was 3.97% in the third quarter, compared to 4.07% in the second quarter. Approximately 6 basis points of the decline were attributable to an increase in average cash-related balances to $5.5 billion for the third quarter, compared to $4.8 billion for the second quarter.

Asset Quality

Nonperforming lending-related assets declined approximately 16% to $1.3 billion at September 30, 2011 from $1.5 billion at June 30, 2011. Nonaccrual loans declined approximately 16% to $1.1 billion at September 30, 2011 from $1.3 billion at June 30, 2011. Additions to nonaccrual loans declined to $233 million during the third quarter of 2011, compared to $263 million during the second quarter of 2011. Nonaccrual loans that are current as to principal and interest were approximately 39% of the balance at September 30, 2011, compared to 38% at June 30, 2011. Other real estate owned declined approximately 15% to $203 million at September 30, 2011, compared to $239 million at June 30, 2011.

The ratio of nonperforming lending-related assets to net loans and leases and other real estate owned decreased to 3.43% at September 30, 2011, compared to 4.06% at June 30, 2011.

Classified loans decreased approximately 12% to $2.4 billion at September 30, 2011, compared to $2.7 billion at June 30, 2011. Classified loans at June 30, 2011 were also down 12% from March 31, 2011. Approximately 72% of classified loans were current as to principal and interest for the third quarter of 2011, compared to 69% for the second quarter of 2011.  

Net loan and lease charge-offs were $102 million for the third quarter of 2011, compared to $112 million for the second quarter of 2011. Net charge-offs declined in commercial real estate and consumer loans.  

The provision for loan losses was $14.6 million for the third quarter of 2011, compared to $1.3 million for the second quarter of 2011. Although actual credit trends continue to improve, the Company increased the portion of its provision related to national economic conditions in light of reported weaker economic data and fiscal uncertainty in Europe. The allowance for credit losses was $1.3 billion, or 3.40% of net loans and leases at September 30, 2011, compared to $1.3 billion, or 3.63% of net loans and leases at June 30, 2011.

As of September 30, 2011, additional troubled debt restructurings identified from the Company's review of modified loans under new accounting guidance effective this quarter amounted to approximately $21 million, or 3% of the approximate $738 million total of troubled debt restructurings.

Loans

Net loans and leases of $36.7 billion at September 30, 2011 decreased approximately $100 million or 0.3% from $36.8 billion at June 30, 2011, compared to a $278 million increase during the second quarter of 2011. Increases in commercial and industrial loans, primarily at Amegy Bank, were offset by decreases in construction and land development and FDIC-supported loans. FDIC-supported loans in the aggregate continue to perform better than previously forecasted.

Shareholders' Equity

Despite positive earnings, tangible common equity per share declined $0.08 to $18.87 at September 30, 2011, as a result of the decrease to accumulated other comprehensive income (loss) previously discussed.

The estimated Tier 1 common to risk-weighted assets ratio was 9.49% at September 30, 2011, compared to 9.36% at June 30, 2011.

Effective September 15, 2011, $16.8 million of convertible subordinated debt was converted into depositary shares each representing a 1/40th interest in a share of the Company's preferred stock. This conversion added 16,811 shares of Series C and 23 shares of Series A to the Company's preferred stock. Accelerated discount amortization on the converted debt increased interest expense by a pretax noncash amount of approximately $7.5 million ($6.1 million after-tax) in the third quarter of 2011, compared to $61.4 million ($50.0 million after-tax) in the second quarter of 2011.  

On October 19, 2011, the Company reported that as of October 18, 2011, holders of approximately $15.0 million of subordinated convertible notes elected to convert their debt into depositary shares of the Company's preferred stock. This anticipated conversion is expected to increase interest expense in the fourth quarter of 2011 due to the accelerated discount amortization on the converted debt by an estimated noncash amount of $5.8 million pretax ($4.7 million after-tax) compared to $7.5 million pretax in the third quarter as previously discussed.

Deposits

Average total deposits for the third quarter of 2011 increased $512 million or 1.3% to $41.4 billion compared to $40.9 billion for the second quarter of 2011. The increase resulted primarily from a higher level of average noninterest-bearing demand deposits for the third quarter of 2011 which were $14.8 billion, compared to $14.2 billion for the second quarter of 2011. The ratio of loans to deposits was 89.1% at September 30, 2011, compared to 89.7% at June 30, 2011.

Investment Securities

During the third quarter of 2011, the Company recognized net credit-related OTTI on CDOs of $13.3 million or $0.04 per diluted share, compared to $5.2 million or $0.02 per diluted share during the second quarter of 2011. The OTTI this quarter resulted primarily from an increase in the Company's assumptions of trust preferred prepayment speeds for small banks in light of observed increases in prepayments. This change resulted in reduced projected cash flows for certain mezzanine tranches and, hence, additional OTTI. The Company's $13.0 million gain on fixed income securities was primarily due to the partial prepayment at par of a predominantly bank trust preferred CDO security on which the Company had previously taken a significant market value adjustment.

Noninterest Income

Noninterest income for the third quarter of 2011 was $121.0 million, compared to $128.3 million in the second quarter of 2011. The decline primarily resulted from the net effect of (1) an $8.2 million increase in credit-related OTTI as discussed previously; (2) fixed income securities gains of approximately $13.0 million as discussed previously; (3) a decrease in dividends and other investment income of $7.9 million because of several miscellaneous gains recognized in the second quarter; (4) a decrease in fair value and nonhedge derivative income due to $5.3 million in total return swap fees that will be recognized on a quarterly basis instead of the initial annual prepayment made in the third quarter of 2010, and $3.5 million lower income from futures contracts used in hedging interest rates; and (5) equity securities gains including $5.5 million from the sale of BServ, Inc. (dba BankServ) stock that the Company acquired when it sold the assets of its NetDeposit subsidiary in September 2010.

Noninterest Expense

Noninterest expense for the third quarter of 2011 was $409.0 million compared to $416.3 million for the second quarter of 2011. Salaries and employee benefits were lower compared to the second quarter of 2011 which included increased compensation expense related to share-based awards and adjustments to benefit-related accruals.

Conference Call

Zions will host a conference call to discuss these third quarter results at 5:30 p.m. ET this afternoon (October 24, 2011). Media representatives, analysts and the public are invited to listen to this discussion by calling 253-237-1247 (domestic and international) and entering the passcode 14824903, 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 24, 2011, until midnight ET on Monday, October 31, 2011, by dialing 855-859-2056 (domestic and international) and entering the passcode 14824903. 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 Western markets. Zions operates its banking businesses under local management teams and community identities through approximately 500 offices in 10 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 private and governmental legal actions or changes in existing private and governmental legal actions; 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 the following non-GAAP financial measures: 1. Net earnings excluding the effects of the discount amortization on convertible subordinated debt and additional accretion on acquired loans, and  2. Core net interest income/net interest margin. These non-GAAP financial measures exclude the effects of the following adjustments:  (i) periodic discount amortization on convertible subordinated debt; (ii) accelerated discount amortization on convertible subordinated debt which has been converted; and (iii) additional accretion of interest income on acquired loans based on increased projected cash flows (net of related expense in 1.).

The identified adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures are included where applicable in financial results presented in accordance with GAAP. The Company considers these adjustments to be relevant to ongoing operating results.

The Company believes that excluding the amounts associated with these adjustments to present the non-GAAP financial measures provides a meaningful base for period-to-period and company-to-company comparisons, which will assist investors and analysts in analyzing the operating results of the Company and in predicting future performance. These non-GAAP financial measures are used by management and the Board of Directors to assess the performance of the Company’s business for evaluating bank reporting segment performance, for presentations of Company performance to investors, and for other reasons as may be requested by investors and analysts. The Company further believes that presenting these non-GAAP financial measures will permit investors and analysts 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 these 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 reported under GAAP.

SOURCE Zions Bancorporation