Zions Beats On Improved Interest Income

Oct.25.11 | About: Zions Bancorporation (ZION)

Zions Bancorp. (NASDAQ:ZION) reported third quarter 2011 earnings of 40 cents per share, significantly ahead of the Zacks Consensus Estimate of 32 cents. However, this is below the prior quarter’s earnings of 45 cents per share.

However, after considering non-cash effects of the discount amortization on convertible subordinated debt and additional accretion on acquired loans, Zions reported third quarter net profit of $65.2 million or 35 cents per share. This compares favorably with the prior quarter’s net income of $29.0 million or 16 cents per share and the prior-year quarter’s net loss of $80.5 million or 47 cents per share.

The results in the quarter continued to improve owing to the year-over-year growth in net interest income, continuous improvement in credit quality as well as a fall in non-interest expenses. Zions’ capital ratios also showed signs of betterment. However, continued weakness in loan demand and lower non-interest income were the headwinds.

Quarterly Performance

Zions reported total revenue of $591.6 million, down from $544.5 million in the prior quarter but up from $562.1 million in the year-ago quarter. Total revenue also surpassed the Zacks Consensus Estimate of $581.0 million.

Net interest income for the reported quarter improved 13.1% sequentially and 4.1% year over year to $470.6 million. The sequential growth was mainly due to a 41.2% fall in total interest expenses as well as significant decline in subordinated debt conversions.

Net interest margin (NIM) increased 37 basis points (bps) quarter over quarter and 15 bps year over year to 3.99%.

Non-interest income stood at $121.0 million compared with $128.3 million in the prior quarter and $100.2 million in the prior-year quarter. The sequential drop was mainly attributable to fall in service charges and fees on deposit accounts and loan sales and servicing income.

Non-interest expense declined 1.7% sequentially and 10.3% year over year to $409.0 million. The sequential decrease was primarily due to lower salaries and employee benefits expenses, Federal Deposit Insurance Corporation (FDIC) premium and credit related expenses.

Credit Quality

Credit quality continued to improve during the third quarter, with the ratio of nonperforming lending-related assets to net loans and leases and other real estate owned standing at 3.43% (down 63 bps sequentially and 258 bps year over year).

Net loan and lease charge-offs were 1.11% of average loans, down 11 bps sequentially and 139 bps year over year. Allowance for loan losses as a percentage of net loans and leases stood at 3.13% at the third quarter end as against 3.36% at the prior quarter end and 4.07% at the year-ago quarter end.

Zions increased the portion of its provision related to national economic conditions in light of reported weaker economic data and fiscal uncertainty in Europe. Hence, provision for loan losses grew to $14.6 million from $1.3 million in the prior quarter but declined from $184.7 million in the year-ago quarter.

Balance Sheet

Zions witnessed a slight sequential decline in its loan portfolio during the reported quarter, with increase in commercial and consumer loan growth, more than offset by decline in construction and land development and FDIC-supported loans. Total loans at the end of the quarter dropped 0.3% sequentially and 2.2% year over year to $36.8 billion.

Average total deposits for the quarter inched up 1.3% from the prior quarter to $41.4 billion. The increase was primarily due to the higher level of average non-interest-bearing demand deposits.

Profitability and Capital Ratios

As of September 30, 2011, tangible common equity ratio declined to 6.90% from 6.95% in the prior quarter and from 7.03% in the year-ago quarter.

Furthermore, as of September 30, 2011, Tier 1 leverage ratio and Tier 1 risk-based capital ratio improved to 13.60% (from 13.44% as of June 30, 2011) and 16.04% (from 15.87% as of June 30, 2011), respectively.

The annualized return on average assets was 0.84% in the reported quarter as against 0.57% in the prior quarter and a negative 0.36% in the prior-year quarter. Book value per share as of September 30, 2011 stood at $24.78 compared with $24.88 as of June 30, 2011 and $26.07 as of September 30, 2010.

Our Viewpoint

We are impressed with Zions’ significant turnaround, as well as successful enhancement of capital ratios, and believe that the cost control efforts will drive future growth. The company’s return to profitability can be viewed as a step toward getting an approval for repaying the TARP dues. However, the company’s near-term outlook remains cautious as the loan demand is likely to remain weak, with persistent legal and regulatory challenges.

Zions currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, one of its competitors, City National Corp. (NYSE:CYN), retains a Zacks #3 Rank (a short-term ‘Hold’ rating).