Zions Bancorp. (ZION) reported first quarter 2011 earnings of 29 cents per share, exceeding the Zacks Consensus Estimate of a loss of 17 cents and marking the company’s return to profitability after almost two years. This also shows an improvement from the prior quarter’s loss of 25 cents.
After considering non-cash effects of the discount amortization on convertible subordinated debt and additional accretion on acquired loans, Zions reported first quarter net profit of $14.8 million or 8 cents per share. This compares favorably with the prior quarter’s net loss of $110.3 million or 62 cents per share and the prior-year quarter’s net loss of $86.5 million or 57 cents per share.
Better-than-expected results in the quarter were mainly driven by improvement in net interest income and non-interest income, decline in non-interest expense, and further improvement in credit quality. However, continued weakness in loan demand and fall in deposits remained as headwinds.
Quarterly Performance
Zions reported total revenue of $558.0 million, up from $520.1 million in the prior quarter but slightly down from $562.9 million in the year-ago quarter. Total revenue missed the Zacks Consensus Estimate of $562.0 million.
Net interest income for the reported quarter rose 4.2% sequentially but fell 6.9% year over year to $423.9 million. The sequential rise was mainly due to a 23.1% plunge in total interest expense.
Net interest margin (NIM) increased 27 basis points (bps) quarter over quarter but decreased 27 bps year over year to 3.76%. Primarily, lower accelerated discount amortization level accounted for the sequential improvement.
Non-interest income was $134.1 million compared with $113.2 million in the prior quarter and $107.6 million in the prior-year quarter. The hike was mainly attributable to a large decline in net impairment losses on investment securities.
Non-interest expense dropped 7.9% sequentially but increased 5.0% year over year to $408.4 million. The sequential decline was mainly owing to $23.3 million reduction in provision for unfunded lending commitments and $9.1 million fall in credit related as well as legal and professional expenses, which were partly offset by a $7.7 million rise in salaries and employee benefits expenses.
As a result of continued weakness in loan demand, total loans at the end of the quarter decreased 0.5% from the prior quarter and 6.2% year over year to $36.7 billion.
Average total deposits for the quarter inched down 1.4% from the prior quarter to $40.6 billion, as the company actively worked to reduce excess funding. Average non-interest bearing deposits also declined 0.7% from the prior quarter to $13.7 billion in the reported quarter.
Credit Quality
Credit quality continued to improve during the reported quarter, with the ratio of nonperforming lending-related assets to net loans and leases and other real estate owned standing at 4.54% (down 37 bps from the prior quarter and 247 bps year over year). Provision for loan losses of $60.0 million was down 65.4% from the prior quarter and 77.4% from the year-ago quarter.
Net charge-offs were 1.54% of average loans, down 117 bps sequentially and 75 bps year over year. Allowance for loan losses as a percentage of net loans and leases was 3.69% at the first quarter end as against 3.92% at the prior quarter end and 4.06% at year-ago quarter end.
Profitability and Capital Ratios
As of March 31, 2011, tangible common equity ratio improved to 7.01% from 6.99% in the prior quarter and 6.30% in the year-ago quarter.
During the fourth quarter, Zions increased its Tier 1 capital through issuances of common stock equity. As a result, as of March 31, 2011, Tier 1 leverage ratio and Tier 1 risk-based capital ratio improved to 13.14% (from 12.56% as of December 31, 2010) and 15.37% (from 14.78% as of December 31, 2010), respectively.
The annualized return on average assets was 0.42% in the reported quarter as compared with a negative 0.56% in the prior quarter and 0.47% in the prior-year quarter. Book value per share as of March 31, 2011 stood at $24.93 compared with $25.12 as of December 31, 2010 and $26.89 as of March 31, 2011.
Our Take
We are impressed with Zions’ significant turnaround as well as successful enhancement of capital ratios and believe that the efforts on the cost control front will drive future growth. This is the first step toward getting an approval for repaying the TARP money. However, the company’s near-term outlook remains cautious due to weak loan demand and the impact of legal and regulatory challenges.
Zions’ close competitor, City National Corp. (CYN), is scheduled to announce its first quarter 2011 results on April 21.
Zions currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the company’s business model and fundamentals, we maintain a long-term “Neutral” recommendation on the stock.
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ZIONS BANCORP (ZION): Free Stock Analysis Report
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