Zions Bancorp. (ZION) Q2 2012 Earnings Call July 23, 2012 5:30 pm ET Executives James R. Abbott - Senior Vice President of Investor Relations & External Communications Harris H. Simmons - Chairman, Chief Executive Officer, President, Member of Executive Committee and Chairman of Zions First National Bank Doyle L. Arnold - Vice Chairman, Chief Financial Officer and Executive Vice President Analysts Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division John G. Pancari - Evercore Partners Inc., Research Division Paul J. Miller - FBR Capital Markets & Co., Research Division Ryan M. Nash - Goldman Sachs Group Inc., Research Division Kenneth M. Usdin - Jefferies & Company, Inc., Research Division Ken A. Zerbe - Morgan Stanley, Research Division Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division Arjun Sharma David Rochester - Deutsche Bank AG, Research Division Joe Morford - RBC Capital Markets, LLC, Research Division Stephen Scinicariello - UBS Investment Bank, Research Division Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division Marty Mosby - Guggenheim Securities, LLC, Research Division Presentation Operator
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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 this press release -- in the press release dealing with forward-looking information, which applies equally to statements made during this call. A copy of the earnings release is available at zionsbancorporation.com. We will limit the length of this 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.Harris H. Simmons Good afternoon, good evening to all of you. Thank you for joining us today to review our second quarter earnings. We were encouraged with a variety of elements of the quarter's results with the exception of the effects of the current interest rate environment on all banks, while things continue to improve. We're pleased with the significant progress with regard to credit quality, virtually all of the major indicators of credit quality continue to improve and did so in a meaningful fashion this quarter. We're also able to generate a healthy degree of loan growth, and we can see that continuing in the early innings of the third quarter. And our current expectation is for that growth to continue into the foreseeable future. Finally, noninterest expense, as related operations were generally stable. We had a slight increase from the prior quarters, which is ascribable to the provision for unfunded loan commitments, which in turn, is primarily due to an increase in loan commitments by about $400 million during the quarter. And I think that help sets the stage for some further improvement in loan growth and will help to stabilize revenue and eventually to help us increase revenue. Offsetting some of the positive news was a decline in net interest income, which was largely expected due to pressures on new loan yields, compared to maturing reprising loan yields. Additionally, the decline in loans late in the first quarter adversely affected net interest income in the second quarter.
Our guidance has been, for net interest income, to be stable to slightly lower over the course of the year and in the course of the coming year. One of the drivers of growing net interest income will be an improvement in small business lending, which is a-- recently a significant part of what we do.The smallest differences in our economy are still reasonably slow to emerge from -- with recession. Some of the indicators of their optimism are flagging somewhat and we're not currently expecting strength in this segment in the third quarter. We were still seeing quite a lot of strength from middle market and larger-sized commercialist borrowers, and some improvement in consumer lending as well. I'm encouraged by the improvement in all the major areas of credit risk. As I indicated the -- first of all, nonaccrual and classified loan inflows dropped significantly in the second quarter, a sign that the balance sheets and cash flows of our customers are improving at a healthy pace. Secondly, the past due, nonaccrual and classified loans, other real estate-owned and TDRs all improved materially compared to the prior quarter. It should support our expectation for continued reduction in net charge-offs. Finally, net charge-offs declined meaningfully. As you've seen in the release, it fell to an annualized 47 basis points, assisted by both an 8% sequential order decline in gross charge-offs as well as a 19% increase in recoveries. Based on the strength of our affiliate banks' earnings, which were an annualized $543 million after-tax in the second quarter and the aforementioned continued improvement in credit quality, we remain quite comfortable about our prospects for redeeming the final $700 million installment of TARP preferred stock in the second half of the year. This will result in further earnings per share savings of about $0.26 annually.
So with that brief overview, I'm going to turn the time over to our Vice Chairman and Chief Financial Officer, Doyle Arnold, to review in a little more detail the quarterly performance. Doyle?Doyle L. Arnold Thank you, Harris. Good afternoon, everyone. Good evening to those of you on -- in the Eastern Time zone. As noted in the release, we posted net income applicable to common shareholders of $55.2 million or $0.30 per diluted common share for the quarter. As we've done in past quarters, we've also presented to you the earnings in a way that excludes the noncash sub debt amortization costs and the FDIC loan discount accretion. We believe this information is useful to longer-term-oriented investors as we don't expect those income and expense items to be with us in the perpetuity. And on that basis, the earnings available to common were $0.40 per share. Read the rest of this transcript for free on seekingalpha.com