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Zions Bancorp. (ZION - Analyst Report) reported adjusted second-quarter 2013 earnings of 44 cents per share, marginally surpassing the Zacks Consensus Estimate of 42 cents. However, this compared unfavorably with the prior-quarter earnings of 49 cents.  

Better-than-expected results were aided by top-line growth, partially offset by a rise in operating expenses. Moreover, continuously improving credit quality, capital ratios as well as stable deposits and loans were the tailwinds. However, profitability ratios deteriorated.

After considering certain non-recurring items, Zions’ net income applicable to common shareholders was $55.4 million or 30 cents per share. However, this lagged the prior-quarter earnings of $88.3 million or 48 cents per share.

Behind the Headlines

Zions’ total revenue was $618.4 million, up 2.0% from $606.0 million in the previous quarter. Moreover, total revenue surpassed the Zacks Consensus Estimate of $551.0 million.

Net interest income increased 3.0% sequentially to $430.7 million. Additionally, net interest margin remained stable at the last-quarter level of 3.44%. The increase in net interest income was mainly due to the better-than-expected performance of FDIC-supported loans and reduced interest expense.

Non-interest income was $125.2 million, up 3.2% from $121.2 million in the prior quarter. The increase was largely attributable to reduced other-than-temporary impairment (OTTI) on collateralized debt obligation (CDO) securities compared to the previous quarter.

Non-interest expenses reached $451.7 million, rising 13.7% sequentially. The increase was mainly due to higher debt extinguishment cost, increase in provision for unfunded lending commitments and professional and legal services, partially offset by lower salary and employee benefit expense.

Asset Quality

Credit quality continued to improve during the reported quarter. The ratio of nonperforming lending-related assets to net loans and leases and other real estate owned dropped 23 bps sequentially and 95 bps year over year to 1.57%.

Further, net loan and lease charge-offs were $5.7 million as of Jun 30, 2013, down 68.2% from the prior quarter and 86.9% from the year-ago quarter. Net charge-offs decreased mainly in commercial and industrial, owner occupied, and term commercial real estate loans.

The allowance for credit losses as a percentage of net loans and leases was 2.40% at the end of the quarter, down 10 bps sequentially and 51 bps year over year. Moreover, the recovery of the provision for loan losses was $22.0 million, compared with the recovery of $29.0 million in the prior quarter and a provision of $10.9 million in the year-ago quarter.

Loans and Deposits

Loans and leases, excluding FDIC supported loans, were $37.8 billion, which nudged up from $37.3 billion in the previous quarter. The increases largely came from commercial and industrial, construction and 1-4 family residential loans. Moreover, average loans and leases inched up 1.1% sequentially to $37.5 billion.

Average deposits inched up 1.0% from the last quarter to $45.0 billion. The rise was primarily due to the higher level of average non-interest bearing demand deposits.

Profitability and Capital Ratios

Zions’ capital ratios showed improvement while profitability ratios declined. As of Jun 30, 2013, tier 1 leverage ratio was 11.76% versus 11.55% in the previous quarter. Likewise, tier 1 risk-based capital ratio was 14.32% compared with 14.08% as of Mar 31, 2013.

However, the annualized return on average assets declined to 0.61% from 0.83% in the prior quarter. As of Jun 30, 2013, tangible common equity ratio also declined to 5.73% from 9.37% in the prior quarter.

Our Viewpoint

Zions remains well positioned for loan and deposit growth due to it well-diversified portfolio. Moreover, the company’s cost-control efforts are expected to drive future growth.

However, the prevailing low interest rate environment, asset-sensitive balance sheet and regulatory pressure remain looming concerns.

Zions currently carries a Zacks Rank #2 (Buy). Other banks that are worth considering include CoBiz Financial Inc. (COBZ - Snapshot Report), Preferred Bank (PFBC - Snapshot Report) and Umpqua Holdings Corporation (UMPQ - Snapshot Report). All these carry a Zacks Rank #1 (Strong Buy).

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