On Monday, Zions Bancorp (ZION) reported first quarter 2010 net loss of $86.5 million or 57 cents per share, compared to a net loss of $176.5 million or $1.26 in the prior quarter and a net income of $852.3 million or $7.47 in the prior-year quarter.
The reported quarter included a loss of 23 cents based on taxes and penalties from surrendering certain bank-owned life insurance contracts that got partially offset by a gain of 6 cents on the exchange of non-convertible subordinated debt to common stock. Excluding these, operating loss per share came in at 60 cents, substantially short of the Zacks Consensus Estimate for a loss of 94 cents.
Results were helped by declining loan loss provision and net loan charge-offs, increase in average non-interest bearing demand deposits, decrease in credit-related impairment losses on CDO securities and strong pricing on new loans. However, these were partially offset by a marginal increase in non-performing assets, continued weakness in loan demand and declining book value per share.
Total net interest income for the reported quarter decreased 4.3% from prior quarter and 9.3% year-over-year to $580.1 million. Net Interest Margin (NIM) increased 22 basis points (bps) over prior quarter and 9 bps on a year-over-year basis to 4.03%. The increase was attributable to reduced rates on interest-bearing deposits and an improved funding mix. NIM reduced by 0.13% for the discount amortization on the modified subordinated debt and an additional 0.10% for the accelerated discount amortization due to the conversion of $21.0 million of modified subordinated debt.
Total loans at the end of the quarter decreased 6.6% year-over-year to $39.0 billion. Average total deposits for the quarter decreased 0.7% year-over-year to $41.8 billion due to higher cost of funding sources such as time deposits and brokered money market accounts. Average non-interest bearing deposits increased 3.2% from prior quarter, on an annualized basis, to $12.5 billion.
Non-interest income was $107.6 million compared to $65.9 million in the prior quarter and a loss of $145.3 million in the prior-year quarter. The increase was attributable to unusual items such as lower security impairment losses, which was partially offset by lower fair value and non-hedge derivative income.
Non-interest expense decreased 11.8% from prior quarter but decreased 3.4% year-over-year to $389.1 million. The decline was attributable to the negative provision for unfunded lending commitments, included in the fourth quarter of 2009.
Credit metrics deteriorated drastically during the quarter, with ratio of nonperforming lending-related assets, excluding FDIC-supported assets, to net loans and leases and other real estate owned ending the period at 5.93% of related assets (up 42 bps from prior quarter and 246 bps year-over-year) while net charge-offs deteriorated significantly to 2.37% of average loans (down 61 bps from prior quarter but up 90 bps year-over-year). Provision for loan losses was $265.6 million for the reported quarter, down 32.0% from prior quarter and 10.8% year over year.
Tangible common equity ratio increased to 6.30% from 6.12% in the prior quarter and 5.26% year over year. 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 slimmed to negative 0.47% in the reported quarter as compared to negative 1.37% in the prior quarter and 6.05% in the prior-year quarter.
Stock Update
During the first quarter, Zions added $205.7 million to common equity as a result of issuances under its common equity distribution program and in exchange for the company’s nonconvertible subordinated debt. On Feb 26, 2010, Zions completed the sale of $250 million of common stock that had commenced on Sep 17, 2009.
On Mar 1, 2010, Zions began the sale of another $250 million of common stock under common equity distribution program and sold stock worth $125 million by Mar 30, 2010, whereby 1.37% of outstanding common stock was issued in exchange for $55.6 million of debt. This exchange represented approximately 29% of the non-convertible subordinated debt, leaving $134.6 million of such debt outstanding as of Mar 31, 2010.
Dividend Update
During the reported quarter, Zions board declared a regular quarterly dividend of $0.01 per common share. The dividend was paid on Feb 24, 2010 to shareholders on record as on Feb 10, 2010. The current dividend yield is 0.16%.
While Zions’ net interest margin and deposit growth remain satisfactory, credit quality continues to deteriorate, necessitating relatively high levels of loss provisions. 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 on deteriorating credit quality primarily in the construction portfolio, we believe that the company is well poised to drive growth
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