Zions Bancorp. executives concede they have suffered sticker shock on some possible deals in California over the past year, but they say they will not let the state's economic downturn hamper their plans to grow in the state.

The Salt Lake City company, which holds less than 2% of the state's deposits, is a relative small fry in California. But 32% of its $17.1 billion loan portfolio was originated in the state, and 42% of its $16.9 billion of deposits come from there.

In fact, some analysts have expressed concern that the company's exposure to California's sputtering economy, which is struggling to overcome an electricity shortage and the deflation of the technology bubble, has been dragging its stock performance down over the past few months. On Monday the $24 billion-asset company's stock closed at $55.90, 13% off its 52-week high.

In an interview Thursday, Dale M. Gibbons, Zions' chief financial officer, said its management is "a little concerned about a contraction, as well as the uncertainty" about electrical power in California, but at the same time, "we are comfortable where we are and want to grow."

In the meantime, Zions is busy integrating its most recent acquisition in the state, Eldorado Bancshares in the Orange County suburb of Laguna Hills, into its California Bank and Trust, and the process will not be bloodless.

California Bank and Trust is expected to cut 20% of Eldorado's workforce, or about 85 people, in an effort to save $10 million, said David Blackford, the recently appointed chairman, president, and chief executive officer of California Bank and Trust. It is unclear where the cuts will occur.

The bulk of Zions' California operations came from three of the banks it purchased in the late 1990s, including Sumitomo Bank of California. Since then it has been repositioning its loan portfolio, specifically reducing its syndicated lending exposure - an inheritance from Sumitomo - and making its geographic exposure less weighted towards northern California.

Sumitomo's portfolio included positions in loans to troubled borrowers such as Owens Corning, but Zions says it has put those problems behind it, and starting this quarter it will include a normalized loan provision for its California subsidiary.

The $6.7 billion-asset California Bank and Trust has also tried to keep growth in its real estate portfolio at a minimum, instead raising the percentage of higher-yielding construction loans in the mix.

On June 30, 1999, $1.5 billion of its $1.9 billion real estate portfolio was in "minipermanent" or commercial term loans. Now the mix of the portfolio, which had grown to $2.1 billion by the end of the first quarter, is about 50/50 between construction and commercial term loans, according to Mr. Blackford.

Remixing the California portfolio hasn't kept Zions off the acquisition path in the state - before buying Eldorado in March, Zions bought Regency Bancorp, a Fresno community banking company, in October 1999.

But while the company would like to pursue other acquisitions in the state, Mr. Gibbons said that it has been driven away from some potential targets by their price tags. "There are certainly situations where we haven't done something, and it's solely price-related."

Mr. Gibbons did not identify specific targets. But in an interview in April, Robert Sarver - who retired from his post as head of California Bank and Trust last month - told American Banker that the company planned to look at the prospectus sent out by Pacific Century Financial Corp. of Honolulu when it announced it would put the 20 branches of its Pacific Century Bank of Encino, Calif., up for sale.

This month Pacific Century Financial said it had agreed to sell the branches to U.S. Bancorp for an undisclosed sum.

Analysts who were briefed about Zions' operations during its first investors' day on June 8 were generally upbeat on its future earnings, though they noted pressures from a slowdown in the national economy.

"Investors are struggling with the California economy," and Zions is "susceptible to credit losses," said David George, an analyst at A.G. Edwards & Sons Inc. But at the same time, "the bank has a pretty enviable track record."

The weak spot for Zions will be a fallout in middle-market lending in its core western markets, analysts said.

Major middle-market lenders in the Midwest, like the former Firstar Corp. now U.S. Bancorp, have already reported a rise in nonperforming assets from those portfolios, which have followed regional economic conditions.

"Where we have seen problems in the middle market is in the manufacturing area," said Lynn Reaser, chief economist and senior market strategist at Banc of America Capital Management in St. Louis.

In fact, on Friday the Federal Reserve reported that industrial production fell 8% last month, the eighth monthly drop in a row.

The western states have been buffered from a manufacturing-related slowdown, though some states, like Oregon, have felt the pinch of lower commodities prices. But there is now growing risk among middle-market companies that lend to technology-related companies, particularly in the telecommunications industry.

"The earlier downturn was more among older-economy companies," Ms. Reaser said. While weakness is persisting in that segment of the market, at the same time "it is migrating to technology space," she said.

For now, Zions is reporting very little change in credit quality, with net losses as a percentage of total loans holding steady through April. In Utah it has also regained some of the earnings momentum it lost last year when its deal to buy neighboring First Security Corp. fell apart at the 11th hour. (Wells Fargo & Co. bought First Security in October.)

Zions "might be one of the few regional banking companies where the Street's expectations are probably too low relative to what they actually do," said Lori Appelbaum, an analyst at Goldman Sachs Group Inc.

During the presentations, executives said they expected cash earnings of $3.75 this year. Minus 38 cents for goodwill and 11 cents for core deposits, these expectations are in line with Thomson Financial/First Call analyst consensus estimates of $3.26.


From Our Archive

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.