Zions Bancorporation Q2 2010 Earnings Call Transcript

Zions Bancorporation (ZION)

Q2 2010 Earnings Call Transcript

July 19, 2010 5:30 pm ET

Executives

James Abbott – SVP, IR and External Communications

Harris Simmons – Chairman, President and CEO

Doyle Arnold – Vice Chairman and CFO

Ken Peterson – EVP and Chief Credit Officer

Analysts

David Rochester – FBR Capital Markets

Bob Patten – Morgan Keegan

Brian Foran – Goldman Sachs

Craig Siegenthaler – Credit Suisse

Steven Alexopoulos – JPMorgan

Ken Zerbe – Morgan Stanley

Brian Klock – Keefe, Bruyette, and Woods

Todd Hagerman – Collins Stewart

Jennifer Demba – SunTrust Robinson Humphrey

Brian Zabora – Stifel Nicolaus

Jason Goldberg – Barclays Capital

Joe Morford – RBC Capital Markets

Presentation

Operator

Good day ladies and gentlemen and thank you for standing by, and welcome to the Zions Bancorporation second quarter 2010 earnings conference call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) And as a reminder, this conference is being recorded.

I would now like to turn the time over to James Abbott. Sir, please go ahead.

James Abbott

Good evening and thank you. We welcome you to this conference call to discuss our second quarter 2010 earnings.

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 the statements made in this call. We will be referring to several schedules in the press release during this call. If you do not yet have a copy of the press release, it is available as an Adobe Acrobat file at zionsbancorporation.com and can be easily downloaded and printed.

We will limit the length of this call to one hour, which will include the time for you to ask questions. During the Q&A section we will 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?

Harris Simmons

Thanks very much, James, and welcome all of you. This quarter is one in which we have continued to see some progress generally in credit quality trends, but it remains somewhat choppy in terms of the economy and the outlook for the economy in the near term.

We're seeing decidedly improved trends in some of our markets, Utah, Texas, perhaps most notably, but contain challenges in some of the southwestern markets, Nevada most especially, and California, Arizona as well.

We view the quarter as one in which we made reasonably good progress on credit quality and we believe our visibility continues to improve in that area. We were able to reduce non-accrual loans for the first time since the financial crisis began, and we believe that the improvement will continue into the third quarter, as other measures of problem credits also declined at encouraging rates during the quarter.

This quarter wasn't without its challenges, as loan balances continued to decline at a strong rate. Though the largest portion of that decrease came in construction and land development elements of the portfolio where we are actually encouraged to see them coming down and reducing our exposure in those areas.

We are encouraged with a significant increase in gross loan originations and renewables compared to the first quarter, but it wasn't enough to offset paydowns, and to a smaller extent charge-offs, and we expect that net loan growth is going to remain a challenge in the near term, and particularly as a result as we've indicated before, the continued shrinkage in the construction and development portfolio.

Turning to our results, there were several noisy items that obscure some positive trends which we'll review on this call. We reported a loss of $0.84 per share to common shareholders in the second quarter. Net income before taxes fell to a loss of a $136 million, which was down $44 million from the first quarter. This decline can be primarily attributed to the conversion of subordinated debt into preferred stock, which was a $49 million increase in expense from the second quarter compared to the prior quarter.

As we said in the prior quarter's call, we didn't expect to add significantly to the allowance for credit losses and during the quarter we note that the ratio, the allowance for credit losses to total loans only increased 6 basis points compared to a 24 basis point increase last quarter, an increase of more than 200 basis points in 2009.

As you are aware, we raised about $600 million of capital during the quarter, which is responsible for a significant improvement in our GAAP and regulatory capital ratios. Looking back at what has been accomplished during the past several quarters, the tangible common equity ratio increased 160 basis points from March 31, 2009 through the end of the second quarter of this year despite absorbing $1.5 billion of that charge-offs, $339 million of securities impairments, including both OCI and OTTI, $168 million of other real estate owned expense and enhancing the allowance for credit losses ratio by 200 basis points or the equivalent of $850 million.

With these actions, our capital ratios have moved above the peer median. We remain pleased with the performance of our core deposit franchise, which we continue to believe is among the best in the industry. Average noninterest bearing demand deposit balance growth remained very strong, rising an annualized 25% from the prior quarter. It is up 25% compared to the year-ago level.

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