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Zions Bancorp. (ZION - Analyst Report) reported adjusted fourth quarter 2012 earnings of 44 cents per share. This was 10.0% ahead of the Zacks Consensus Estimate of 40 cents.
After considering certain non-recurring items, Zions’ fourth-quarter net income came in at $35.6 million or 19 cents per share. This was significantly below the prior quarter earnings of $62.3 million or 34 cents per share.

On a sequential basis, results were negatively impacted by lower top line and a rise in operating expenses. However, continuously improving credit quality, stable capital and profitable ratios as well as growth in deposits and loans were among the highlights

Behind the Headlines

Zions’ total revenue was $552.4 million, down 12.9% from $634.2 million in the previous quarter. Yet, total revenue surpassed the Zacks Consensus Estimate of $547.0 million.

Net interest income inched down 1.9% sequentially to $430.0 million, mainly attributable to lower interest income. Also, net interest margin dipped 11 basis points (bps) from the last quarter’s level to 3.47%. The fall reflects both increases in cash equivalents and other low-yielding assets, along with lower yields on resetting or maturing older loans.

Non-interest income stood at $54.2 million, plunging 56.8% from $125.2 million in the prior quarter. The decrease was largely due to the higher other-than-temporary impairment (OTTI), partly offset by increased gains on CDO securities.

Non-interest expense reached $407.0 million, rising 3.0% sequentially. The jump was primarily a result of significantly higher other real estate expense, legal and professional services and other expenses. However, these were partially offset by decline in salaries and employee benefit expenses and provision for unfunded lending commitments.

Asset Quality

Credit quality continued to show marked improvement during the fourth quarter, with the ratio of nonperforming lending-related assets to net loans and leases and other real estate owned dropping 27 bps sequentially and 87 bps year over year to 1.96%.

Net loan and lease charge offs were $18.9 million as of Dec 31, 2012, down 51.1% from $38.6 million as of Sep 30, 2012 and 80.1% from $94.8 million as of Dec 31, 2011. Net-charge offs decreased mainly in commercial and commercial real estate-related loans.

Allowance for credit losses as a percentage of net loans and leases stood at 2.66% at the end of the quarter, down from 2.77% at the end of the prior quarter and 3.10% at the end of the year-ago quarter. Provision for loan losses was benefit of $10.4 million, compared with benefit of $1.9 million in the prior-quarter and a benefit of $1.4 million in the year-ago quarter.

Loans and Deposits

Loans and leases, excluding FDIC supported loans, were $37.1 billion, which edged up 1.1% from $36.7 billion in the previous quarter. The hike largely came from commercial and industrial and 1-4 family residential loans. Moreover, average loans and leases inched up 0.3% sequentially to $36.7 billion.

Average deposits for the quarter inched up 3.3% from the last quarter to $44.9 billion. The increase was primarily due to the higher level of average non-interest-bearing demand deposits.

The ratio of loans to deposits stood at 83% as of Dec 31, 2012, marginally down from 86% as of Sep 30, 2012.

Profitability and Capital Ratios

Zions’ profitability and capital ratios exhibit a modestly cautious approach. As of Dec 31, 2012, tier 1 leverage ratio was 10.95% versus 11.05% in the previous quarter and 13.40% in the year-ago quarter. Likewise, tier 1 risk-based capital ratio was 13.35% compared with 13.49% as of Sep 30, 2012 and 16.13% as of Dec 31, 2011.

The annualized return on average assets fell to 0.43% in the reported quarter from 0.82% in the prior quarter and 0.67% in the prior-year quarter. As of Dec 31, 2012, tangible common equity ratio fell to 4.07% from 7.02% in the prior quarter and 5.38% in the year-ago quarter.

Book value per share as of Dec 31, 2012 stood at $26.73, up from $26.05 as of Sep 30, 2012 and $25.02 as of Dec 31, 2011.

Our Viewpoint

We believe that Zions remains well positioned for loan and deposit growth considering its well diversified portfolio. Moreover, the company’s cost-control efforts will drive future growth. Complete repayment of the TARP dues without diluting its shareholders value as well as ratings upgrade by Moody’s Investors Service – the rating arm of Moody's Corp. (MCO - Analyst Report) – enhanced the company’s financial profile.

However, we remain concerned about the prevailing low interest rate environment, sluggish economic growth, Zions’ asset-sensitive balance sheet, losses related to CDO exposure and regulatory pressures.

Zions currently retains a Zacks Rank #3 (Hold). Other west banks that are worth considering include Central Valley Community Bancorp (CVCY - Snapshot Report) and Western Alliance Bancorporation (WAL - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy).

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