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The stringent clauses of the Volcker Rule weighed on Zions Bancorp. (ZION - Analyst Report), as the company reported its first earnings miss in the past twelve months. After the market closed on Jan 27, Zions came out with fourth-quarter 2013 adjusted earnings per share of 42 cents, missing the Zacks Consensus Estimate by a penny. Moreover, this compared unfavorably with 44 cents earned in the prior-year quarter.  

The reported quarterly loss did not come as a surprise as the company had briefed about the anticipated loss owing to the final provisions of the Volcker Rule in one of its recent regulatory filings.

Further, for the full year 2013, Zions’ adjusted earnings came in at per share of $1.78 versus $1.52 in 2012. However, earnings for the year missed the Zacks Consensus Estimate of $2.35.

Results suffered due to a decline in the top line and higher expenses. Capital as well as profitability ratios deteriorated in the reported quarter. Nevertheless, higher recoveries and growth in loans and deposits were the tailwinds for the quarter. Further, credit quality was a mixed bag.

After considering the one-time pre-tax impairment charges on collateralized debt obligation securities (CDOs) as well as debt extinguishment costs of $222 million, Zions’ net loss applicable to common shareholders was $59.4 million, compared with net earnings of $35.6 million in the year ago quarter.

Behind the Headlines

Zions’ total revenue came in at $458.9 million, down 16.9% from $634.2 million in the previous year quarter. Moreover, total revenue lagged the Zacks Consensus Estimate of $545.0 million.

For 2013, total revenue came in at $2.3 billion, down 7.3% from $2.5 billion in 2012. However, total revenue surpassed the Zacks Consensus Estimate of 2.2 billion.

Net interest income decreased marginally year over year to $432.0 million from the prior-year quarter figure of $430.0 million. Additionally, net interest margin was 3.33%, down 14 basis points (bps) from 3.47% in the prior-year quarter.

Non-interest loss was $31.1 million compared with non-interest income of $54.2 million in the year-ago quarter. The loss was mainly due to net impairment losses on investment securities, fair value and non-hedge derivative loss and net fixed income securities losses.

Non-interest expenses increased 21.6% year over year to $494.8 million. The year-over-year increase was primarily due to an additional debt extinguishment cost of $80.0 million.

Credit Quality

Credit quality reflected a mixed scenario in the reported quarter. The ratio of nonperforming lending-related assets to net loans and leases as well as other real estate owned fell 81 bps year over year to 1.15%.

However, net loans and lease charge-offs increased 1.9% from the prior-year quarter to $19.2 million as of Dec 31, 2013.

The allowance for credit losses as a percentage of net loans and leases was 2.14%, down 52 bps year over year. Moreover, recovery of the provision for loan losses was $30.5 million, compared with the recovery of $10.4 million in the year-ago quarter.

Loans and Deposits

Total loans, including FDIC supported loans, were $39.0 billion, up 3.7% from $37.7 billion in the prior-year quarter. Total deposits increased nearly 1% from the last year quarter to $46.4 billion.

Profitability and Capital Ratios

Zions’ capital ratios as well as profitability ratios deteriorated. As of Dec 31, 2013, Tier 1 leverage ratio was 10.48% versus 10.96% in the previous quarter. Likewise, Tier 1 risk-based capital ratio was 12.72% compared with 13.38% as of Dec 31, 2012.

The annualized loss on average assets was 0.30% against a return of 0.43% in the prior-year quarter. Moreover, as of Dec 31, 2013, tangible loss on common equity was 5.45% compared with a return of 4.07% in the prior-year quarter.

Performance of Other Banks

Among other banks, BancorpSouth, Inc. (BXS - Analyst Report) and SVB Financial Group (SIVB - Analyst Report) beat the Zacks Consensus Estimate. However, Westamerica Bancorp. (WABC - Analyst Report) missed the Zacks Consensus Estimate.

Our Viewpoint

Despite the Volcker Rule exerting pressure on Zions’ quarterly earnings, we remain optimistic as the company will in compliance with the requirements dispose risky CDOs from its portfolio. Subsequent to this, in the forthcoming quarter, we expect to see improved capital ratios and a stronger balance sheet.

However, the top line will remain compressed owing to the prevalent low interest rates and sluggish economic growth.

Currently, Zions carries a Zacks Rank #3 (Hold).

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