Zions Bancorp Swings to Loss on Sale of CDOs

Zions Bancorp. in Salt Lake City reported a second-quarter loss after selling the remainder of its portfolio of collateralized debt obligations.

The $58.4 billion-asset company said Monday that it lost $1.1 million, compared with a profit of $104.5 million a year earlier. It lost one cent per share, compared with earnings per share of 56 cents a year earlier.

Zions recognized a one-time pretax loss of $137 million tied to the CDOs, which the company has been selling to reduce its risk profile. Excluding that loss, net earnings would have been $83.4 million, the company said.

Its net interest income rose almost 2%, to $424 million, year over year even as the net interest margin fell 11 basis points, to 3.18%. Loans and leases were $39.4 billion, up about 1% from a year earlier. 

Zions increased its government agency residential mortgage-backed securities portfolio by $583 million and increased its interest rate swap portfolio by $438 million in the quarter as part of an effort to improve yields on interest-bearing assets.

Zions, widely considered one of the more asset sensitive regional banks, said in June it would buy more short-term mortgage-backed securities to improve its margin and revenue.

Noninterest income totaled $421,000, down from $124.8 million a year earlier. Excluding losses from the CDO sales, fee income would have been $137 million, Zions said.

Noninterest expenses fell less than 1%, to $404.1 million, as other noninterest expense fell mostly from insurance recoveries. Salaries and employee benefits increased from an annual incentive stock awards and variable compensation accruals driven by changes in the company’s stock price.

The company’s efficiency ratio improved to 71.4% from 73.3% a year earlier. Zions previously announced that it would close almost two dozen branches and lay off up to 7% of its staff to reduce its costs and improve efficiency. 

The company sought to address its exposures in the energy sector.

Overall net loans and leases fell $156 million during the second quarter as energy-related loans declined $284 million on a linked-quarter basis. Loan balances, excluding energy-related credits, increased $128 million during the second quarter compared with a $25 million increase during the first quarter.

"Although the effects of the energy price decline are not yet fully manifest, we are encouraged with ... the strength of the capital markets in recapitalizing a substantial number of energy companies and other factors – including strong portfolio management by our energy lending team," Chairman and Chief Executive Harris Simmons said in a press release.