) reported adjusted third quarter 2012 earnings of 46 cents per
share, substantially ahead of the Zacks Consensus Estimate of 32
cents. Also, this compares favorably with the prior-quarter
earnings of 40 cents a share.
After considering non-cash effects of the discount
amortization on convertible subordinated debt as well as
additional accretion on acquired loans and discount amortization
pertaining to redemption of remainder of Troubled Asset Relief
Program (TARP) preferred stock, Zions' third-quarter net income
came in at $62.3 million or 34 cents per share. This was also
higher than the last quarter earnings of $55.2 million or 30
cents per share.
Zions' results benefited from growth in net interest income,
decrease in operating expenses and lower preferred stock
dividends as a result of repayment of the remaining TARP money in
the quarter. However, these positives were partially offset by
fall in non-interest income. Further, continuously improving
credit quality, growth in average deposits and loans were among
On September 26, Zions' redeemed the remaining $700
million of its Fixed Rate Cumulative Perpetual Preferred Stock,
Series D, issued to the U.S. Department of the Treasury as part
its participation to the TARP. With this redemption, the company
completed the full repayment of $1.4 billion in TARP fund.
Performance in Detail
Zions' total revenue was $634.2 million, down 1.1% from $641.3
million in the previous quarter. Yet, total revenue substantially
surpassed the Zacks Consensus Estimate of $557.0 million.
Net interest income increased 2.8% sequentially to $444.2
million. The growth was mainly attributable to lower interest
expenses. However, net interest margin inched up 1basis points
(bps) from the last quarter's level to 3.63%.
Non-interest income stood at $119.2 million, decreasing 3.1%
from $123.0 million in the prior quarter. The fall was primarily
attributable to lower trust and wealth management income, capital
markets and foreign exchange income along with reduced dividends
and other investment income, net gains on fixed income securities
and noncredit-related losses on securities not expected to be
sold (recognized in other comprehensive income).
Non-interest expense was $395.0 million, 1.7% lower than
$401.7 million in the previous quarter. The decline was mainly a
result of significantly lower other real estate expense,
provision for unfunded lending commitments, as well as fall in
salaries and employee benefit expenses. However, these were
partly mitigated by increases in net occupancy costs, credit
related expenses, advertising expenditure and Federal Deposit
Insurance Corporation (FDIC) premiums.
Credit quality continued to show marked improvement during the
third quarter, with the ratio of non-performing lending-related
assets to net loans and leases and other real estate owned
dropping 30 bps sequentially and 120 bps year over year to
Net loan and lease charge offs were $38.6 million as of
September 30, 2012, down nearly 11.0% from $43.3 million as of
June 30, 2012 and 62.1% from $101.9 million as of September 30,
2011. Net-charge offs decreased mainly in commercial and
industrial loans and home equity credit line loans.
Allowance for credit losses as a percentage of net loans and
leases stood at 2.77% at the end of the quarter, down from 2.92%
at the end of the prior-quarter and 3.40% at the end of the
year-ago quarter. Provision for loan losses was benefit of $1.9
million, compared with provisions of $10.9 million in the
prior-quarter and $14.6 million in the year-ago quarter.
Loans and Deposits
Zions witnessed a surge in its loan portfolio in the reported
quarter. Loans and leases, excluding FDIC supported loans, were
$36.6 billion, up 1.1% from $36.2 billion in the previous
quarter. The augmentation largely came from commercial and
industrial loans, 1-4 family residential loans and term
commercial real estate loans. Moreover, average loans and leases
excluding FDIC supported loans inched up 1.1% to $36.5 billion,
from $36.1 billion in the prior quarter.
Average deposits for the quarter inched up 1.2% to $43.5
billion from $42.9 billion in the prior quarter. The increase was
primarily due to the higher level of average non-interest-bearing
The ratio of loans to deposits stood at 84.9% as of
September 30, 2012, marginally up from 85.4% as of
June 30, 2012.
Profitability and Capital Ratios
Zions' profitability and capital ratios exhibit a modestly
cautious approach. As of September 30, 2012, tier 1 leverage
ratio was 11.04% versus 12.31% in the previous quarter and 13.48%
in the year-ago quarter. Likewise, tier 1 risk-based capital
ratio was 13.46% compared with 15.03% as of June 30, 2012 and
16.10% as of September 30, 2011.
The annualized return on average assets improved to 0.82% in
the reported quarter, rising from 0.70% in the prior quarter, but
marginally declining from 0.84% in the prior-year quarter. As of
September 30, 2012, tangible common equity ratio climbed to
7.17%, from 6.91% in the prior quarter and 6.90% in the year-ago
Book value per share as of September 30, 2012 stood at $26.05,
up from $25.48 as of June 30, 2012 and $24.78 as of September 30,
We believe that Zions remains well positioned for loan and
deposit growth considering its well diversified portfolio.
Moreover, the company's cost control efforts will drive future
growth. Entire repayment of the TARP dues without diluting its
shareholders value and its preparation to meet the Basel III
requirements has boosted the company's profile.
However, we remain concerned about the prevailing low interest
rate environment, sluggish economic growth, Zions'
asset-sensitive balance sheet, losses related to CDO exposure and
Zions currently retains a Zacks #3 Rank, which translates into
a short-term Hold rating. One of its peers,
City National Corp.
) retains a Zacks #2 Rank (a short-term Buy rating).
CITY NATIONAL (CYN): Free Stock Analysis
ZIONS BANCORP (ZION): Free Stock Analysis
To read this article on Zacks.com click here.