Zions Outpaces on Lower Expenses

Zacks

Zions Bancorp.(ZION) reported its first-quarter 2012 earnings per share of 33 cents, surpassing the Zacks Consensus Estimate of 26 cents. Also, this compared favorably with the prior-quarter earnings of 30 cents.

After considering non-cash effects of the discount amortization on convertible subordinated debt as well as additional accretion on acquired loans and accelerated amortization of discount on $700 million redemption of Troubled Asset Relief Program (:TARP) preferred stock, Zions’ first-quarter net income came in at $25.5 million or 14 cents per share. This was slightly below the prior-quarter earnings of $44.4 million or 24 cents.

The sequential improvement was a result of higher non-interest income and lower operating expenses partially offset by fall in net interest income.However, continuous improvement in credit quality, and increases in average deposits were the positives for the company.

Behind The Headlines

Zions’ total revenue was $549.3 million as against $560.2 million in the previous quarter and $558.0 million in the previous-year quarter. Total revenue was below the Zacks consensus Estimate of $565.0 million.

Net interest income was $442.3 million, down 4.2% sequentially but up 4.4% on a year-over-year basis. The sequential fall was mainly due to revised rates on long-term loans and increased discount amortization on subordinated debt that converted into preferred stock.

Net interest margin declined 13 basis points (bps) quarter over quarter to 3.73% and 3 bps year over year from 3.76%. The sequential decline was a result of lower loan yields.

Non-interest income stood at $107.0 million compared with $98.3 million in the prior quarter and $134.1 million in the prior-year quarter. The sequential rise was mainly driven by unrealized gains on non-marketable equity securities partially offset by lower other service charges, commissions and fees.

Non-interest expense for the first-quarter was $392.4 million, down 7.7% from $425.0 million in the previous quarter and 3.9% from $408.4 million in the year-ago quarter.The sequential dip was caused by cumulative impact of lower credit costs partially mitigated by higher salaries and employee benefits

Credit Quality

Credit quality continued to improve during the first-quarter, with the ratio of nonperforming lending-related assets to net loans and leases and other real estate owned dropping to 2.79% compared with 2.83% in the previous quarter and 4.54% in the year-ago quarter.

Net loan and lease charge offs were $55 million as of March 31, 2012, down 43% from $95 million as of December 31, 2012 and 62.3% from $146.0 million as of March 31, 2011. Net-charge offs decreased mainly in the commercial real estate and owner occupied real estate-secured commercial loans.

Allowance for credit losses as a percentage of net loans and leases stood at 3.03% at the end of first-quarter as against 3.10% at the end of the prior-quarter and 3.97% at the end of the year-ago quarter.

However, provision for loan losses was $15.7 million compared with credit provision of $1.5 million in the prior-quarter and provision of $60.0 million in the year-ago quarter.

Balance Sheet

Zions witnessed a slight reduction in its loan portfolio in the reported quarter. Reduction in loans and leases, excluding Federal Deposit Insurance Corporation (:FDIC) supported loans, was $35.9 billion, down $490 million from $36.4 billion in the previous quarter. Total loans and leases excluding FDIC supported loans was $36.1 billion, almost in line with prior-quarter.

Average total deposits for the quarter inched up 0.4% to $42.4 billion from $42.2 billion in the prior quarter. The increase was primarily due to the higher level of average non-interest-bearing demand deposits.

Profitability and Capital Ratios

Zions’ profitability and capital ratios show cautious approach.As of March 31, 2012, tier 1 leverage ratio declined to12.16% from 13.40% in the previous quarter and13.14% in the year-ago quarter. Likewise, tier 1 risk-based capital ratio was 14.81% down 132 basis points sequentially and 65 basis points year over year.  

The annualized return on average assets improved to 0.69% in the reported quarter from 0.67% in the prior quarter and 0.42% in the prior-year quarter. As of March 31, 2012, tangible common equity ratio was 6.89% slightly up from 6.77% in the prior quarter but down from 7.01% in the year-ago quarter.

Book value per share as of March 31, 2012 stood at $25.25 compared with $25.02 as of December 31, 2011 and $24.93 as of March 31, 2011.

Conclusion

We are impressed with Zions’ turnaround, as well as improved credit quality. Moreover, the cost control efforts of the company are expected to drive future growth. The company has also redeemed its $700 million U.S Treasury TARP dues. However, the prevailing low interest rate environment, difficult economic conditions and persistent regulatory challenges along with an asset-sensitive balance-sheet can affect the Zions’ performance in future.

Zions currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Similarly, one of its peers,CVB Financial Corp. (CVBF) retains a Zacks #2 Rank (a short-term ‘Buy’ rating).

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