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Zions Bancorp. (ZION)

Q4 2010 Earnings Call

January 24, 2011 5:30 pm ET


James Abbott - Senior Vice President of Investor Relations & External Communications

Kenneth Peterson - Chief Credit Officer and Executive Vice President

Doyle Arnold - Vice Chairman, Chief Financial Officer and Executive Vice President

W. Hemingway - Chief Investment Officer and Executive Vice President of Capital Markets & Investments

H. Simmons - Chairman, Chief Executive Officer, President, Member of Executive Committee and Chairman of Zions First National Bank


Jennifer Demba - SunTrust Robinson Humphrey Capital Markets

Craig Siegenthaler - Crédit Suisse AG

Christopher Nolan - CRT Capital Group LLC

Joe Morford - RBC Capital Markets, LLC

John Pancari - Evercore Partners Inc.

Erika Penala - Merrill Lynch

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Marty Mosby - Guggenheim Securities, LLC

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Good day, ladies and gentlemen, and welcome to the Zions Bancorporation Fourth Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to your host, James Abbott.

James Abbott

Thanks, John, and good evening. We welcome you to this conference call to discuss our fourth quarter 2010 earnings results. I would like to remind you that during this call, we will be making forward-looking statements and that 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 this call. And if you do not yet have a copy of the press release, it is available as an Adobe Acrobat file at

We will limit the length of this call to one hour, which will include time for you to ask questions. During the Q&A section, we ask you to limit your questions to one primary and one follow-up question to enable other participants to ask questions.

I will now turn the time over to Harris Simmons, Chairman and Chief Executive Officer. Harris?

H. Simmons

Thank you very much, James, and thanks to all of you who are listening in. We are generally quite pleased with the events of the fourth quarter. The big story this quarter is a strong improvement in credit quality. That's a trend that's been developing since really back in the spring of last year, but certainly accelerated toward the end of the year. We made some very strong efforts during the fourth quarter to resolve a significant amount of problem credits. As a result, we were able to reduce classified loans by over $1 billion, a 23% reduction over the three-month period of the fourth quarter.

Due to the new disclosures required by the SEC regarding our allowance for credit losses, which will show up in our 10-K and subsequent filings, we are disclosing our classified loan balances this quarter and expect to continue doing so going forward. If you're not familiar with the definition of a classified loan, we have included a definition in the footnote at the end of the text in the press release. We'd note that the classified loans that we're reflecting here are, in large part in fact, over 2/3 of them, are actually current. And yet these are the population of commercial and real estate credits primarily in which we see continuing stress. But that number is coming down rather dramatically during the fourth quarter.

Most of these loans were resolved in a manner favorable to the company and the shareholders through, for example, payoffs and paydowns, upgrades to passed grades, which together greatly exceeded charge-offs. Notably, we didn't do any bulk sales of problem credits at deep discounts to achieve this reduction in problem credits. And other credit quality metrics showed similar improvement including non-performing loans, other real estate owned balances and expenses attributable to other real estate owned.

We did experience a slightly higher level of net loan charge-offs compared to the prior quarter, largely reflective of the number and dollar amount of problem loans that we resolved. While we don't expect to experience as rapid a decline in classified loans in the first quarter as we did in the fourth quarter, we expect to continue to see significant improvement. We also expect net charge-offs to decline significantly in the first quarter. A lower level of classified loans, together with our expectation that loan quality will continue to improve, our expectation of a lower-level of loan charge-offs going forward, obviously, have favorable implications for the likely amount of loan loss provision that we may have to make in future quarters.

As we look at various macroeconomic trends within our footprint, we remain quite encouraged with various markets data emerging from our major markets. Specifically, we are seeing some continuing signs that rental income is stabilizing across our footprint. And in some cases, we're seeing increases in rental rates, particularly in the Houston, Orange County and San Diego markets. Vacancy trends are improving across majority of our property types in our footprint. And further, we are pleased with continued steadiness in cap rates during the last several months. All of these factors should facilitate faster problem credit resolution and improving loan growth.

Finally, I'd like to note the emerging growth in commercial and industrial loans, which increased to the 5% annualized rate compared to the prior quarter. Production volume and particularly, C&I volume, increased significantly. And we expect an even stronger first quarter as our pipelines continue to strengthen.

So with that overview, on the credit front, I'm going to ask Doyle Arnold, our Vice Chairman and Chief Financial Officer, to review the rest of the numbers. Doyle?

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