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Zions Bancorp. (ZION - Analyst Report) reported third-quarter 2013 adjusted earnings per share of 44 cents, beating the Zacks Consensus Estimate by a penny. Moreover, this compares favorably with 34 cents earned in the prior-year quarter.  

Better-than-expected results were driven by lower operating expenses, partially offset by a decline in the top line. Moreover, continued improvement in credit quality, strong capital ratios as well as higher deposits and loans were the tailwinds. However, profitability ratios were a mixed bag.

After considering certain non-recurring items, Zions’ net income applicable to common shareholders was $209.7 million, up from the year-ago earnings of $62.3 million.

Behind the Headlines

Zions’ total revenue came in at $595.6 million, down 6.1% from $634.2 million in the previous year quarter. However, total revenue surpassed the Zacks Consensus Estimate of $563.0 million.

Net interest income decreased 5.2% year over year to $415.5 million. Additionally, net interest margin was 3.22%, down 36 basis points (bps) from 3.58% in the prior-year quarter.

Non-interest income was $122.2 million, down 2.4% from $125.2 million in the year-ago quarter.

Non-interest expenses decreased 6.2% year over year to $370.7 million. The decrease was mainly due to fall in occupancy costs, equipment, software and furniture expenses, other real estate expenditure, provision for unfunded lending commitments, advertising costs, Federal Deposit Insurance Corporation (FDIC) premiums, other expenses as well as amortization of core deposit and other intangibles. These factors were however partially offset by increase in salaries and employee benefits as well as professional and legal services.

Credit Quality

Credit quality showed a consistent improvement in the reported quarter. The ratio of nonperforming lending-related assets to net loans and leases and other real estate owned fell 83 bps year over year to 1.40%.

Further, net loans and lease charge-offs decreased 77.5% year over year to $8.7 million as of Sep 30, 2013.

The allowance for credit losses as a percentage of net loans and leases was 2.30%, down 47 bps year over year. Moreover, recovery of the provision for loan losses was $5.6 million, compared with the recovery of $1.9 million in the year-ago quarter.

Loans and Deposits

Total loans, including FDIC supported loans, were $38.3 billion, which nudged up from $37.3 billion in the prior-year quarter. Total deposits increased 4.3% from the last year quarter to $45.7 billion.

Profitability and Capital Ratios

Zions’ capital ratios were strong while profitability ratios were a mixed bag. As of Sep 30, 2013, Tier 1 leverage ratio was 10.63% versus 11.05% in the previous quarter. Likewise, Tier 1 risk-based capital ratio was 13.04% compared with 13.49% as of Sep 30, 2012.

The annualized return on average assets declined to 0.80% from 0.82% in the prior-year quarter. However, as of Sep 30, 2013, tangible common equity ratio increased to 20.34% from 7.02% in the prior year quarter.

Expectation for Other Banks

SVB Financial Group (SIVB - Analyst Report) is scheduled to report earnings on Oct 24. The Earnings ESP for the company is 0.00%. This, along with its Zacks Rank #2 (Buy), does not conclusively indicate an earnings beat this announcement.

Bank of Hawaii Corporation (BOH - Snapshot Report) is scheduled to report earnings on Oct 28. The Earnings ESP for the company is 0.00% and it carries a Zacks Rank #3 (Hold). So the chance of beating the Zacks Consensus Estimate is dim for this company as well.

Another bank in the same region BofI Holding, Inc. (BOFI - Snapshot Report) is scheduled to report earnings on Nov 5. It has the same combination of Earnings ESP and the Zacks Rank as Bank of Hawaii, which weakens the possibility of an earnings beat.

Our Viewpoint

Zions remains well positioned for loan and deposit growth, given its well-diversified portfolio. Moreover, cost containment efforts are expected to boost the bank’s overall growth, going forward.

However, the still low interest rate environment and regulatory pressure are the concerns.

Zions currently carries a Zacks Rank #2 (Buy).

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