Zions Beats Estimates

Zions Bancorp. (ZION - Analyst Report) reported second quarter 2011 earnings of 45 cents per share, exceeding the Zacks Consensus Estimate of a loss of 1 cent. This also marks an improvement from the prior quarter’s earnings of 29 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 $29.0 million or 16 cents per share. This compares favorably with the prior quarter’s net income of $14.8 million or 8 cents per share and the prior-year quarter’s net loss of $135.2 million or 84 cents per share.

The results in the quarter continued to improve owing to the year-over-year growth in net interest income and non-interest income, continuous improvement in credit quality and a fall in non-interest expenses. Zions’ capital ratios also showed signs of betterment. However, continued weakness in loan demand remained a headwind.

Further, the Durbin Amendment of the Dodd-Frank Act, which will limit debit card interchange fees, was enacted on June 29. Due to this, Zions anticipates a negative impact on bankcard fees of approximately $35–$40 million pretax, beginning in the fourth quarter of 2011.

Quarterly Performance

Zions reported total revenue of $544.5 million, down from $558.0 million in the prior quarter but up from $522.8 million in the year-ago quarter. Total revenue also surpassed the Zacks Consensus Estimate of $532.0 million.

Net interest income for the reported quarter slipped 1.8% sequentially but inched up 0.7% year over year to $413.2 million. The sequential decline was mainly due to a 10.9% rise in total interest expenses.

Net interest margin (NIM) decreased 14 basis points (bps) quarter over quarter but increased 4 bps year over year to 3.62%. Primarily, a higher accelerated discount amortization level accounted for the sequential fall.

Non-interest income stood at $128.3 million compared with $134.1 million in the prior quarter and $109.4 million in the prior-year quarter. The sequential drop was mainly attributable to a $18.9 million gain on FDIC-supported loans that was recognized in the prior quarter.

Non-interest expense climbed 1.9% sequentially but dropped 3.3% year over year to $416.3 million. The sequential improvement was primarily due to a rise in salaries and employee benefits expenses and increased other non-interest expenses from reductions to the Federal Deposit Insurance Corporation (FDIC) indemnification asset. However, these were partly mitigated by decreases in other real estate owned (OREO) expenses and FDIC premiums.

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 4.06% (down 48 bps sequentially and 254 bps year over year). Provision for loan losses plunged from $60.0 million in the prior quarter and $228.7 million in the year-ago quarter to $1.3 million.

Net charge-offs were 1.23% of average loans, down 31 bps sequentially and 141 bps year over year. Allowance for loan losses as a percentage of net loans and leases stood at 3.36% at the second quarter end as against 3.69% at the prior quarter end and 4.11% at the year-ago quarter end.

Balance Sheet

Zions witnessed a modest sequential growth in its loan portfolio during the reported quarter, with the commercial and consumer loan growth more than offsetting a slight decline in commercial real estate loans. Total loans at the end of the quarter spiked 0.8% from the prior quarter but inched down 3.1% year over year to $36.9 billion.

Average total deposits for the quarter inched up 0.7% from the prior quarter to $40.88 billion. The increase was primarily due to a higher level of average non-interest-bearing demand deposits, which increased 0.7% from the prior quarter to $14.16 billion in the reported quarter.

Profitability and Capital Ratios

As of June 30, 2011, tangible common equity ratio declined to 6.95% from 7.01% in the prior quarter but improved from 6.86% in the year-ago quarter.

Furthermore, as of June 30, 2011, Tier 1 leverage ratio and Tier 1 risk-based capital ratio improved to 13.44% (from 13.14% as of March 31, 2011) and 15.80% (from 15.46% as of March 31, 2011), respectively.

The annualized return on average assets was 0.57% in the reported quarter as against 0.42% in the prior quarter and a negative 0.87% in the prior-year quarter. Book value per share as of June 30, 2011 stood at $24.88 compared with $24.93 as of March 31, 2011 and $26.63 as of June 30, 2010.

Our Take

We are impressed with Zions’ significant turnaround, as well as successful enhancement of capital ratios, and believe that the cost control efforts will drive future growth. The company’s return to profitability can be viewed as a step toward getting an approval for repaying the TARP dues. However, the company’s near-term outlook remains cautious as the loan demand is likely to remain weak, with persistent legal and regulatory challenges.

Zions’ close competitor, City National Corp. (CYN - Snapshot Report), is scheduled to announce its second quarter 2011 results on July 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.

Read the full analyst report on ZION

Read the full analyst report on CYN