Zions Q3 Earnings Miss on Higher Provisions, Revenues Up

Zions BancorporationZION reported third-quarter 2015 earnings of 41 cents, which lagged the Zacks Consensus Estimate by a penny. However, this compared favorably with the prior-year quarter earnings of 40 cents.

Zions Bancorporation - Earnings Surprise | FindTheBest

Results suffered on the back of elevated provisions for loan losses, partly offset by growth in revenues and a decline in expenses. Moreover, growth in loans and deposits remained strong. However, profitability ratios deteriorated during the quarter.

Net earnings applicable to common shareholders came in at $84.2 million, up from $79.1 million in the year-ago quarter.

Behind the Headlines

Zions' net revenue summed $556.2 million, up 4.4% year over year. However, the figure missed the Zacks Consensus Estimate of $564.5 million.

NII increased 2.1% year over year to $425.4 million. The rise was attributable to lower interest expenses, partly offset by lower interest income. Further, net interest margin (NIM) inched down 9 basis points (bps) to 3.11%.

Non-interest income amounted to $130.8 million, up over 12.7% year over year. The increase was driven by higher other service charges, commissions and fees, loan sales and servicing income, capital markets and foreign exchange as well as net equity securities gains. These were, however, partially offset by a reduction in dividends and other investment income and other costs along with fair value and nonhedge derivative loss.

Non-interest expenses declined 9.7% on a year-over-year basis to $396.1 million. The decrease in expenses was mainly due to lower salaries and employee benefits, other real estate expense, professional and legal services as well as other expenses along with an absence of debt extinguishment cost. However, these were offset by a rise in net occupancy costs, furniture, equipment and software costs and credit-related expense.

Total loans, net of allowance, grew 1.0% year over year to $39.5 billion. Moreover, total deposits rose 5.7% year over year to $48.9 billion.

Credit Quality

Zions' credit quality exhibited a mixed bag during the quarter. The ratio of nonperforming lending-related assets to net loans and leases as well as other real estate owned ascended 8 bps year over year to 0.92%. Moreover, net charge-offs stood at $31 million, up significantly year over year.

Further, provisions for loan losses came in at $18.3 million, compared with the negative provision of $54.6 million in the year-ago quarter. However, allowance for loan losses as a percentage of loans and leases stood at 1.49%, down 5 bps year over year.

Profitability and Capital Ratios

As of Sep 30, 2015, Tier 1 leverage ratio came in at 11.63% and Tier 1 risk-based capital ratio stood at 14.43% under the new Basel III rules effective Jan 1, 2015.

Zions' profitability ratios reflected weakness during the quarter. Return on average assets remained at par on a year-over-year basis at 0.69%. Moreover, as of Sep 30, 2015, tangible return on common equity came in at 6.05% compared with 6.19% in the year-ago quarter.

Our Viewpoint

Zions remains well positioned for future growth based on consistent improvement in loans and deposits, improving credit quality and a larger share of non-interest bearing deposits in total deposits. Also, the company's efforts to restructure balance sheet continue to be impressive.

Nevertheless, we remain apprehensive about mounting expenses, strained margin, an asset-sensitive balance sheet and regulatory restrictions, which are likely to weigh on the company's financials in the near term.

Currently, Zions carries a Zacks Rank #4 (Sell).

Among other Western banks, BofI Holding, Inc. BOFI is scheduled to release its fiscal first-quarter 2016 earnings results on Oct 29. Moreover, SVB Financial Group SIVB and City National Corporation CYN are both expected to report their third-quarter 2015 earnings results on Oct 22.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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