Zions Bancorporation Reports Earnings Of $1.12 Per Diluted Common Share For Third Quarter 2013

SALT LAKE CITY, Oct. 21, 2013 /PRNewswire/ -- Zions Bancorporation (NASDAQ: ZION) ("Zions" or "the Company") today reported third quarter net earnings applicable to common shareholders of $209.7 million or $1.12 per diluted common share, compared to $55.4 million or $0.30 per diluted share for the second quarter of 2013, and $62.3 million or $0.34 per diluted share for the third quarter of 2012. In the third quarter, the Company redeemed the entire $800 million par amount of its Series C preferred stock that had a carrying value of $926 million, which increased net earnings applicable to common shareholders by $126 million after-tax, or $0.68 per diluted common share.

Third Quarter 2013 Highlights

• The Company completed several debt and equity transactions this quarter that continued the Company's efforts to reduce its cost of capital and debt financing. The redemption of the Series C preferred stock, along with issuances this year of replacement preferred stock, will result in a net reduction in preferred stock dividends of approximately $26 million annually, or $0.14 per share. 
• Credit quality showed continued improvement, with gross charge-offs and nonperforming lending-related assets declining 35% and 11%, respectively, compared to the prior quarter. This continued improvement resulted in a third quarter negative provision for loan losses of $6 million.
• Loans and leases held for investment, excluding FDIC-supported loans, increased $142 million compared to the prior quarter to $37.9 billion at September 30, 2013. Average loans and leases, excluding FDIC-supported loans, increased $300 million.
• Net interest income decreased primarily as a result of lower income from FDIC-supported loans.

"We are encouraged with the cumulative progress made in reducing the cost of our capital, and expect that this will contribute to future improvement in our return on equity," said Harris H. Simmons, chairman and chief executive officer. "Net loan growth, although not significantly different from the industry, was disappointing despite an increase in production volume and unfunded lending commitments over the prior quarter, as prepayment activity remained high. Nevertheless, the strength of our funding base continued to improve, with average noninterest-bearing deposits reaching 40% of average total deposits."

Loans

Loans and leases held for investment, excluding FDIC-supported loans, increased $142 million on a net basis from the prior quarter to $37.9 billion at September 30, 2013. The increases were predominantly in moderate duration 1-4 family residential loans (primarily in Texas, Utah, Nevada, and Colorado) and multi-family construction loans (primarily in Texas, California and Nevada). Commercial and industrial loans – a source of strong growth over the past several quarters – were relatively unchanged compared to the prior quarter. Decreases in term commercial real estate, commercial owner occupied, and commercial leasing, partially offset increases in other loan categories. Average loans and leases, excluding FDIC-supported loans, increased $300 million to $37.8 billion during the third quarter of 2013, compared to $37.5 billion during the second quarter of 2013. Unfunded lending commitments at September 30, 2013 increased by approximately $458 million during the third quarter of 2013 to a total of $16.7 billion, compared to a $606 million increase during the second quarter of 2013.

Deposits

Average total deposits for the third quarter of 2013 increased $0.6 billion, or 1%, to $45.6 billion, compared to $45.0 billion for the second quarter of 2013. This increase was driven by noninterest-bearing demand deposits, which increased $0.6 billion to an average of $18.2 billion in the third quarter from $17.6 billion in the second quarter. The ratio of average loans to average deposits was 84% for the third quarter, unchanged from the second quarter.

Debt and Shareholders' Equity

The Company completed the following debt and equity transactions during the quarter, excluding those in its medium-term note program:

1. On August 2, 2013, the Company issued an additional $5.9 million of its Series A Non-Cumulative Perpetual Preferred Stock wherein dividends are payable quarterly at the greater of three-month LIBOR plus 0.52% or 4.0%. 

2. On August 13, 2013, the Company issued $195.2 million of its Series J Fixed/Floating Non-Cumulative Perpetual Preferred Stock. Dividends are payable semiannually at 7.20% to September 15, 2023, at which time the interest rate resets to three-month LIBOR plus 4.44%.

Net of commissions and fees, the proceeds from these preferred stock issuances added approximately $196 million to shareholders' equity and Tier 1 capital.   

3. On September 12, 2013, the Company issued $87.9 million of fixed/floating rate subordinated notes. Interest is payable quarterly at 6.95% to September 15, 2023, at which time it resets to three-month LIBOR plus 3.89%. Net proceeds were $85.9 million.

4. On September 15, 2013, the Company redeemed all of its outstanding $800 million par amount of 9.5% Series C preferred stock at 100% of the $25 per depositary share redemption amount. The weighted average dividend rate on all of the preferred stock issued in 2013 to fund this redemption was 6.23%. The redemption reduced preferred stock by its carrying value of $926 million, with the difference from the par amount, or $126 million, relating to the beneficial conversion feature. This beneficial conversion feature had been transferred over several quarters from common stock to preferred stock as holders of convertible subordinated debt exercised rights to convert to the Series C preferred stock. The total beneficial conversion feature of $203 million was included in common stock when the subordinated debt was modified in 2009 to convertible subordinated debt. The $126 million portion of the total redemption was recorded as a preferred stock redemption that increased net earnings applicable to common shareholders in the third quarter.

The estimated common equity Tier 1 capital ratio was 10.43% at September 30, 2013, compared to 10.03% at June 30, 2013.

Net Interest Income

Net interest income decreased to $416 million for the third quarter of 2013, compared to $431 million for the second quarter of 2013. The net interest margin decreased to 3.22% in the third quarter of 2013, compared to 3.44% in the second quarter of 2013. Net interest income was primarily impacted this quarter by lower income from FDIC-supported loans, which accounted for nearly 95% of the sequential quarterly decline. However, other factors included loan rates resetting at lower levels and lower yields on available-for-sale securities. Interest income from FDIC-supported loans is decreasing as the portfolio is liquidated.

Noninterest Income

Noninterest income for the third quarter of 2013 was $122 million, compared to $125 million for the second quarter of 2013. Loan sales and servicing income decreased primarily due to a lower volume of mortgage refinancing.

Other-than-temporary impairment ("OTTI") on collateralized debt obligation ("CDO") securities increased this quarter compared to the previous quarter.

CDO Investment Securities

During the third quarter of 2013, the Company recognized credit-related OTTI on CDOs of $9 million, compared to $4 million during the second quarter of 2013. The majority of the third quarter OTTI is attributable to the Company further increasing its assumed probabilities of default ("PDs") for bank holding company issuers of trust preferred securities that are still deferring and nearing the end of the allowed five-year deferral period.

The following table provides fair value and other information on the CDOs, stratified into performing tranches without credit impairment and nonperforming tranches at September 30, 2013:

The net unrealized pretax losses in accumulated other comprehensive income ("AOCI") were relatively unchanged from the previous quarter.

The following table shows the changes in fair value and other information on the CDOs from September 30, 2012 to September 30, 2013:

Noninterest Expense

Noninterest expense for the third quarter of 2013 was $371 million compared to $452 million for the second quarter of 2013. The decrease this quarter was due primarily to (1) the debt extinguishment cost of $40 million incurred in the second quarter, (2) the provision for unfunded lending commitments of $(19.9) million, or an increase to net income of $0.07 per share, compared to $3.6 million in the previous quarter, and (3) the amortization of the FDIC indemnification asset, included in other noninterest expense, of $13 million in the third quarter, compared to $22 million in the second quarter. The indemnification asset is being amortized due to the expiration of most FDIC indemnification agreements in the third quarter of 2014. The overall decrease in the provision for unfunded lending commitments resulted primarily from refinements in the process of estimating the rate at which such commitments are likely to convert into funded balances, and from ongoing improvements in credit quality; these factors were partially offset by a moderate increase in unfunded lending commitments.

Asset Quality

Gross loan and lease charge-offs decreased 35% to $23 million in the third quarter of 2013, compared to $35 million in the second quarter of 2013; gross charge-offs declined 61% from $59 million in the third quarter of 2012. Due to a smaller recovery on loans previously charged off, net loan and lease charge-offs increased $3 million to $9 million in the third quarter of 2013, compared to $6 million in the second quarter of 2013.

Nonperforming lending-related assets declined 11% to $538 million at September 30, 2013 from $602 million at June 30, 2013. Nonaccrual loans declined 9% to $472 million at September 30, 2013 from $521 million at June 30, 2013. The ratio of nonperforming lending-related assets to loans and leases and other real estate owned decreased to 1.40% at September 30, 2013, compared to 1.57% at June 30, 2013.

Classified loans, excluding FDIC-supported loans, decreased approximately 13% to $1.4 billion at September 30, 2013, compared to $1.6 billion at June 30, 2013. Approximately 66% of the decline was the result of refinements in the Company's risk grading methodology for certain smaller balance loans. Of the classified loans, 84% were current as to principal and interest for both the third and second quarters of 2013.

The negative provision for loan losses was $6 million for the third quarter of 2013, compared to a negative provision of $22 million for the second quarter of 2013. The negative provision continues to result from the improvement in credit quality. The allowance for credit losses was $882 million, or 2.30% of loans and leases at September 30, 2013, compared to $918 million, or 2.40% of loans and leases at June 30, 2013.

Conference Call

Zions will host a conference call to discuss these third quarter results at 5:30 p.m. ET this afternoon (October 21, 2013). 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 68098093, or via on-demand webcast. A link to the webcast will be available on the Zions Bancorporation website at www.zionsbancorporation.com. 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 475 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, and received 13 "Excellence" awards by Greenwich Associates for the 2012 survey. 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 could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company'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 non-GAAP financial measure previously shown. The adjustments to reconcile from the applicable GAAP financial measure to the non-GAAP financial measure 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 measure 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. This non-GAAP financial measure is 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 this non-GAAP financial measure 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 non-GAAP financial measures are frequently used by stakeholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP.

SOURCE Zions Bancorporation