Zions Bancorp. (ZION)

Q3 2011 Earnings Call

October 24, 2011 5:30 pm ET


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

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

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


Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

R. Scott Siefers

Ken A. Zerbe - Morgan Stanley, Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Joe Morford - RBC Capital Markets, LLC, Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division



Good day, ladies and gentlemen, and welcome to Zions Bancorporation Third Quarter 2011 Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now, I would like to introduce your host for today, James Abbott.

James R. Abbott

Good evening, and thanks, John. We welcome you to this conference call to discuss our third quarter 2011 earnings. I would like to remind you that during the 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. If you do not yet have a copy of the press release, it is available at zionsbancorporation.com. We will limit the length of the call to 1 hour, which will include time for you to ask questions. [Operator Instructions]

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

H. H. Simmons

Thanks very much, James, and pardon my voice, I'm judging a cold here. So we're pleased to have all of you to be joining us on the call.

Overall, we're actually quite encouraged by the considerable progress on asset quality improvement made during the quarter. We believe this progress is likely to continue despite some of the weaker global and national economic indicators that we saw in the late summer.

One of the internal indicators that is particularly encouraging to me is the inflows into classified loans. Those inflows dropped to 20% from the prior quarter's rate, continuing a trend that we've seen for a number of quarters now.

We also had a somewhat higher resolution rate of nonperforming assets compared to prior quarters, having results more than 27% of our nonperforming assets. The resolutions continued to be strongly skewed to favorable revolutions. About 3/4 of all resolutions or upgrades paydowns, payoffs, et cetera, as opposed to only about 1/4 of the resolutions resulting in loss. We believe that these trends will continue and problem credits and credit losses will continue to decline in the fourth quarter.

I know many of you are closely watching revenue trends, and we're happy to report that our core net interest income was generally stable at about $1.9 billion annually. The results exceeded consensus expectations on this front despite a modest decline in loan balances. We continue to work towards the goal of generating moderate loan growth, but we are also working to strike a careful balance with the pricing we use to achieve such growth.

We also continue to reduce risk by reducing select loan types, particularly acquisition and development loans. Most of the compression in the core net interest margin during the quarter was due to an accumulation of cash balances. We saw some quite strong deposit growth during the quarter. With a moderate amount of loan growth that we are targeting the next few quarters, we believe the core net interest income should remain relatively stable, although the margin may experience a very modest amount of compression if cash balances continue to climb.

Also, with regard to operation twist, we would expect a very moderate decline in net interest income over a one-year horizon. I'll let Doyle elaborate further on that point in a few minutes here.

With that overview, I'll ask Doyle Arnold, our Vice Chairman and CFO to review the quarterly performance.

Doyle L. Arnold

Thank you, Harris. Good afternoon, everyone. As noted in the press release, we posted net income applicable to common shareholders of $65.2 million or $0.35 per diluted common share for the third quarter. As we've done in the past, we also presented the earnings in a way that excludes the noncash impact of the sub debt conversion amortization, as well as the -- which is negative on earnings, as well as the FDIC loan-to-discount accretion, which is a positive. We believe this is more useful to longer term-oriented investors as we do not expect those income expense from items to be with us into perpetuity.

On that basis, the earnings declined to $0.40 per share from about $0.45 per share last quarter. Most of that difference is due to the higher provision for loan losses made in the third quarter, which we'll discuss a bit more in a minute.

So let me quickly hit on some of the drivers of those earnings, and then we'll take your questions.

On Page 13, you can see that the credit trends, as Harris mentioned, were quite favorable across almost all loan categories. Despite meaningfully lower classified loans, nonaccrual loans and net charge-offs, we did, however, make a provision of $14.6 million, up from just $1.3 million in the prior quarter.

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