Zions Bancorporation Reports Earnings Of $0.65 Per Diluted Common Share For Second Quarter 2008
Las Vegas, Nev.
July 18, 2008
Nevada State Bank's parent company, Zions Bancorporation (Nasdaq: ZION) ("Zions" or "the Company") today reported second quarter net earnings applicable to common shareholders of $69.7 million, or $0.65 per diluted common share, compared to $155.6 million or $1.43 per diluted common share for the second quarter of 2007. The return on average common equity was 5.53% compared to 12.50% for the second quarter of 2007.
Second Quarter 2008 Key Performance Highlights Compared to First Quarter 2008
"In what continues to be a turbulent and difficult environment in which a number of financial institutions have posted losses, we are pleased that our banks continue to be profitable and well-capitalized,"said Harris H. Simmons, chairman and chief executive officer. "Our core business is strong, our balance sheet remains healthy, and our net credit costs remain very reasonable compared to the industry even as we continue to strengthen our reserves."
Year-to-date net earnings applicable to common shareholders were $174.0 million, or $1.63 per diluted common share, compared to $305.3 million, or $2.78 per diluted common share for the same period in 2007. The return on average common equity for the first six months of 2008 was 6.86% compared to 12.38% for the first six months of 2007.
On-balance-sheet net loans and leases were $41.9 billion at June 30, 2008. Excluding the $897 million of loans from Lockhart, this represents an increase of approximately $1.1 billion or 10.7% annualized from $39.9 billion at March 31, 2008, and an increase of approximately $4.2 billion or 11.4% from $36.8 billion at June 30, 2007. The $897 million of loans resulted from the purchase of certain securities from Lockhart Funding LLC, an off-balance sheet commercial paper conduit sponsored by Zions Bank. The purchase of these securities was required by the Liquidity Agreement between Lockhart and Zions Bank when MBIA Inc. was downgraded below AA-. These securities were backed by loans originated or underwritten by Zions Bank and at June 30, 2008 are reflected on the Company's balance sheet primarily as owner occupied commercial loans. Organic loan growth during the quarter was concentrated primarily in commercial lending and secondarily in commercial term real estate loans, principally at Zions Bank and Amegy Bank of Texas. Construction and land development loans declined over $300 million in California, Arizona and Nevada during the quarter, partially offset by growth in Texas.
Average core deposits for the second quarter of 2008 increased $0.3 billion or 3.7% annualized to $32.4 billion compared to $32.1 billion for the first quarter of 2008 and increased $1.6 billion or 5.0% compared to $30.9 billion for the second quarter of 2007. Average core deposit growth for the quarter was concentrated in money market, savings, and noninterest-bearing demand deposit accounts. Average total deposits for the second quarter of 2008 increased $0.2 billion to $36.8 billion or 2.0% annualized compared to $36.6 billion for the first quarter of 2008, and increased $0.8 billion or 2.3% compared to $36.0 billion for the second quarter of 2007. Average noninterest-bearing demand deposits for the second quarter of 2008 were $9.1 billion compared to $9.0 billion for the first quarter of 2008 and $9.6 billion for the second quarter of 2007.
Net Interest Income
The net interest margin was 4.18% for the second quarter of 2008 compared to 4.23% for the first quarter of 2008 and 4.53% for the second quarter of 2007. The decreased net interest margin for the second quarter of 2008 was driven by the increase in nonperforming assets during the quarter. The effect of commercial paper purchased from Lockhart on the net interest margin was a reduction of approximately 9 basis points for the second quarter of 2008 and 11 basis points for the first quarter of 2008.
Net interest income for the second quarter of 2008 decreased $1.7 million or 1.4% annualized to $484.7 million compared to $486.5 million for the first quarter of 2008, and increased $15.4 million or 3.3% compared to $469.3 million for the second quarter of 2007. Taxable-equivalent net interest income for the second quarter of 2008 decreased $2.0 million or 1.6% annualized to $490.6 million compared to $492.5 million for the first quarter of 2008, and increased $14.5 million or 3.1% from $476.1 million for the second quarter of 2007.
Nonperforming assets were $697.4 million at June 30, 2008 compared to $434.3 million at March 31, 2008 and $95.4 million at June 30, 2007. This increase is being driven primarily by deterioration in residential real estate acquisition, development and construction exposures in the Southwest, and by some weakening in Utah residential construction and commercial and industrial portfolios. The Company has not seen meaningful deterioration in credit quality in other major loan types or geographies. The ratio of nonperforming assets to net loans and leases and other real estate owned was 1.66% at June 30, 2008 compared to 1.09% at March 31, 2008 and 0.26% at June 30, 2007.
Net loan and lease charge-offs for the second quarter of 2008 were $67.8 million or 0.67% annualized of average loans. This compares with $50.8 million or 0.52% annualized of average loans for the first quarter of 2008 and $8.7 million or 0.10% annualized of average loans for the second quarter of 2007. The increase in charge-offs largely was driven by declining collateral values on residential acquisition, development, and construction loans in the Southwest and in Utah.
The provision for loan losses was $114.2 million for the second quarter of 2008 compared to $92.3 million for the first quarter of 2008 and $17.8 million for the second quarter of 2007. The provision for the second quarter of 2008 was 1.13% annualized of average loans and was $46.4 million in excess of net loan and lease charge-offs. The combined provisions for loan losses and unfunded lending commitments were $115.9 million for the second quarter of 2008, $95.9 million for the first quarter of 2008, and $19.0 million for the second quarter of 2007.
The allowance for loan losses as a percentage of net loans and leases was 1.31% at June 30, 2008, 1.26% at March 31, 2008, and 1.03% at June 30, 2007. The total allowance and reserve for credit losses (allowance for loan losses plus the reserve for unfunded lending commitments) was $575.8 million at June 30, 2008 compared to $526.4 million at March 31, 2008 and $401.5 million at June 30, 2007.
The Company recognized other-than-temporary impairment ("OTTI") during the second quarter of 2008 of approximately $38.8 million pretax, or $0.22 per diluted share, compared to $46.0 million of impairment and valuation losses during the first quarter of 2008. Approximately $28.7 million of the amount resulted from write-downs of two ABS CDOs and one bank and insurance income note initially deemed to have OTTI this quarter. The remaining $10.1 million resulted from write-downs of six REIT trust preferred CDOs and one bank and insurance income note for which OTTI had previously been recognized. OTTI for the two bank and insurance income notes amounted to $3.4 million this quarter. As of June 30, 2008, approximately $3.8 million of fair value remained on bank and insurance income notes. The impairment for the quarter was based on an ongoing valuation review of the investment securities portfolio.
On June 23, 2008, Zions Bank purchased $787 million of securities from Lockhart. The purchase was pursuant to the Liquidity Agreement that Zions Bank provides for Lockhart and resulted from an investment downgrade by Moody's Investor Service on MBIA Inc., which insured the securities. The purchases comprised the entire remaining small business loan securitizations created by Zions Bank and held by Lockhart. No gain or loss was recognized on these purchases. Upon dissolution of the securitization trusts (including $87 million of related securities owned by the Parent), the Company recorded $897 million of loans on its balance sheet including $23 million of premium. After this purchase, Lockhart held approximately $862 million of securities at June 30, 2008.
The Company has also purchased asset-backed commercial paper ("CP") from Lockhart and held approximately $493 million of this CP on its balance sheet at June 30, 2008, which was down from $1,227 million at March 31, 2008 and $710 million at December 31, 2007. The amount of Lockhart commercial paper included in money market investments on the Company's average balance sheet was approximately $1,091 million for the second quarter of 2008, $1,202 million for the first quarter of 2008, and $763 million for the fourth quarter of 2007. These purchases were made to provide liquidity to Lockhart due to ongoing contraction and disruptions in the markets for asset-backed CP.
Noninterest income for the second quarter of 2008 was $72.4 million compared to $111.0 million for the first quarter of 2008 and $141.3 million for the second quarter of 2007. The amount for the second quarter of 2008 includes impairment losses on securities of $38.8 million compared to $46.0 million of impairment and valuation losses in the first quarter of 2008. Fair value and nonhedge derivative income decreased $23.6 million during the quarter, primarily because of decreases in the fair value of nonhedge derivatives due to decreasing spreads between LIBOR and prime rates. Net equity securities gains decreased $18.2 million compared to the first quarter mainly because of $8.2 million of net losses on venture capital investments during the quarter and the $12.4 million Visa gain included in the first quarter. Net of related minority interest of $5.7 million, income taxes and other expenses, the venture capital losses decreased net income for the quarter by approximately $1.8 million, or $0.02 per diluted common share.
Noninterest expense for the second quarter of 2008 was $354.4 million compared to $350.1 million for the first quarter of 2008 and $347.6 million for the second quarter of 2007. While salaries and employee benefits decreased from the first quarter primarily because of reduced payroll taxes and employee-related accrual adjustments, other noninterest expense increased compared to the first quarter mainly because of the $5.6 million reversal of the Visa indemnification accrual during the first quarter.
The efficiency ratio was 63.0% for the second quarter of 2008 compared to 58.0% for the first quarter of 2008 and 56.3% for the second quarter of 2007.
Income tax expense for the second quarter of 2008 included a benefit of $5.9 million due to a state settlement that allowed the Company to reduce its liability and related interest for uncertain tax positions under the provisions of FIN 48.
Tangible equity declined by $46 million at June 30, 2008 compared to March 31, 2008. The Company's tangible equity ratio was 5.97% at June 30, 2008 compared to 6.20% at March 31, 2008 and 6.52% at June 30, 2007. The decrease from the previous quarter is mainly due to loan growth, reduced earnings, and the decrease in OCI. At June 30, 2008, regulatory Tier 1 and total risk-based capital increased to $3,685 million and $5,732 million from $3,646 million and $5,644 million at March 31, 2008, respectively. On a pro forma basis including the effect of the preferred stock issued in early July, regulatory capital ratios are estimated to be approximately flat compared to March 31, 2008.
Weighted average common and common-equivalent shares outstanding for the second quarter of 2008 were 106,711,948 compared to 106,722,000 for the first quarter of 2008 and 109,123,735 for the second quarter of 2007. Common shares outstanding at June 30, 2008 were 107,518,975 compared to 107,139,188 at March 31, 2008 and 108,034,079 at June 30, 2007.
On July 2, 2008, the Company completed a $46.7 million offering of 9.50% Series C Fixed-Rate Non-Cumulative Perpetual Preferred Stock. The amount of the offering sold by the Company's broker-dealer subsidiary was in line with expectations. The stock may be redeemed by the Company after five years. The tangible equity ratio at June 30, 2008 would have been 6.06% if the proceeds of the preferred stock offering were included.
Zions will host a conference call to discuss these second quarter results at 5:30 p.m. ET this afternoon (July 17, 2008). Media representatives, analysts and the public are invited to listen to this discussion by calling 1-800-884-5695 (international: 617-786-2960) and entering the passcode 38253318, or via on-demand webcast. A link to the webcast will be available on the Zions Bancorporation Web site at www.zionsbancorporation.com. A replay of the call will be available from 7:30 p.m. ET on Thursday, July 17, through midnight ET on Thursday, July 24, by dialing 1-888-286-8010 (international: 617-801-6888) and entering the passcode 71581191. 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 high growth markets. Zions operates its banking businesses under local management teams and community identities through over 500 offices and approximately 600 ATMs in ten 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. 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.
Statements in this news release that are based on other than historical data 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. These forward-looking statements are not guarantees of future performance, 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 news release. Factors that might cause such differences include, but are not limited to: the Company's ability to successfully execute its business plans and achieve its objectives; changes in general economic and financial market conditions, either nationally or locally in areas in which the Company conducts its operations, including changes in asset-backed commercial paper markets and valuations in structured securities and other assets; changes in interest rates; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; increased competitive challenges and expanding product and pricing pressures among financial institutions; legislation or regulatory changes which adversely affect the Company's operations or business; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies.
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the 2007 Annual Report on Form 10-K of Zions Bancorporation filed with the Securities and Exchange Commission ("SEC") and available at the SEC's Internet site (http://www.sec.gov).
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.
Nevada State Bank, with assets of $4.0 billion, is the fourth largest commercial bank in Nevada. Established in 1959, it is the oldest state-chartered bank in Nevada with a total of 72 branches statewide. Many of these branches are conveniently located in Smith's Food & Drug Stores, which are open on evenings and weekends. Nevada State Bank is a full-service bank offering a complete range of consumer and business services. For more information on Nevada State Bank, call 702.383.0009 or access www.nsbank.com.