Zions Bancorp Not Looking So Hot

Jul.20.10 | About: Zions Bancorporation (ZION)

On Monday, Zions Bancorp (NASDAQ:ZION) reported second quarter 2010 net loss of $135.2 million or 84 cents per share, compared with a net loss of $86.5 million or 57 cents in the prior quarter and a net loss of $23.8 million or 21 cents in the prior-year quarter. The loss was substantially higher than the Zacks Consensus Estimate of a loss of 54 cents.

Zions’ results suffered due to continued weakness in loan demand and increase in non-interest expense. These were partially offset by an improved credit quality and increase in net interest income.

Total net interest income for the reported quarter inched up 0.6% from the prior quarter, but declined 8.5% year over year to $583.7 million.

Net interest margin (NIM) slashed 45 basis points (bps) over the prior quarter and 52 bps on a year-over-year basis to 3.58%. NIM reduced 0.12% for the discount amortization on the modified subordinated debt and an additional 0.52% for the accelerated discount amortization due to the conversion of $116.6 million of modified subordinated debt. This was partially offset by an increase of 0.8% in NIM due to interest income of the accretion on acquired loans.

As a result of continued weakness in loan demand, total loans at the end of the quarter decreased 2.6% from the prior quarter and 8.0% year over year to $38.1 billion. Average total deposits for the quarter upped 0.9% from the prior quarter to $42.2 billion. Average non-interest bearing deposits increased 6.2% from prior quarter, on an annualized basis, to $13.3 billion.

Non-interest income was $109.4 million compared with $107.6 million in the prior quarter and $612.7 million in the prior-year quarter.

Non-interest expense leaped 10.6% from the prior quarter and 2.6% year-over-year to $430.4 million. The increase was attributable to higher other real estate expenses, FDIC premiums and provision for unfunded lending commitments. Efficiency ratio deteriorated significantly to 81.45% from 68.44% in the prior quarter and 37.72% in the prior-year quarter.

Credit quality improved during the quarter, with the ratio of nonperforming lending-related assets to net loans and leases and other real estate owned ending the period at 6.59% of related assets (down 44 bps from the prior quarter but up 167 bps year over year), while provision for loan losses of $228.7 million was down 13.9% from the prior quarter and 70.0% year over year. Net charge-offs were 2.63% of average loans (up 35 bps from the prior quarter but down 67 bps year over year).

Tangible common equity ratio rose to 6.86% from 6.30% in the prior quarter and 6.00% in the year-ago quarter. The increase was primarily due to the impact of equity transactions and secondarily to reductions in the balance sheet.

The annualized return on average assets deteriorated to a negative 0.87% in the reported quarter as compared with a negative 0.47% in the prior quarter and 0.38% in the prior-year quarter. Book value per share as of June 30, 2010, was $26.63 compared with $26.89 as of March 31, 2010 and $33.89 as of June 30, 2009.

Stock Update

During the second quarter, Zions raised $615.0 million as capital as a result of issuances under its common equity distribution program, sale of Series E perpetual preferred stock and sale of common stock warrants.

While Zions’ deposit growth remains satisfactory and credit quality continues to improve, its net interest margin and decline in demand for loans remain causes of concern. The company has been successful in enhancing capital ratios and making efforts on the cost control front by reducing the cost of debt through the equity exchange program in exchange for debt. While the near-term outlook remains cautious based on deteriorating credit metrics primarily in the construction portfolio, we believe that the company is well poised to drive growth in the future.