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Zions Bancorp. (ZION - Analyst Report) reported adjusted first-quarter 2013 earnings of 49 cents per share, easily surpassing the Zacks Consensus Estimate of 39 cents. This was also significantly ahead of the prior quarter earnings of 21 cents.

Better-than-expected results were aided by growth in fee income and a decline in operating expenses, partially offset by a fall in net interest income. Moreover, continuously improving credit quality, capital and profitable ratios as well as stable deposits and loans were the tailwinds.

After considering certain non-recurring items, Zions’ net income applicable to common shareholders was $88.3 million or 48 cents per share. This substantially surpassed the prior-quarter net income of $35.6 million or 19 cents per share.

Behind the Headlines

Zions’ total revenue was $606.0 million, up 9.7% from $552.4 million in the previous quarter. Moreover, the total revenue surpassed the Zacks Consensus Estimate of $552.0 million.

Net interest income dropped 2.8% sequentially to $418.1 million. Additionally, net interest margin dipped 3 basis points (bps) from the last quarter’s level to 3.44%. Both the decreases were mainly due to lower yields on loan rate resetting, expiration of in-the-money floors on loans and lower yields on available-for-sale investment securities.

Non-interest income was $121.2 million, up significantly from $54.2 million in the prior quarter. The increase was largely attributable to lower net impairment losses on investment securities.

Non-interest expenses reached $397.3 million, falling 2.4% sequentially. The drop was primarily a result of reduction in the provision for unfunded lending commitments and lower levels of other real estate expenses and legal and professional services costs. These were however partially offset by higher salaries and employee benefits.

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 16 bps sequentially and 98 bps year over year to 1.80%.

Further, net loan and lease charge-offs were $17.8 million as of Mar 31, 2013, down 5.4% from the prior quarter and 67.3% from the year-ago quarter. Net charge-offs decreased mainly in the consumer home equity credit line and term commercial real estate loans.

The allowance for credit losses as a percentage of net loans and leases was 2.50% at the end of the quarter, down 16 bps sequentially and 53 bps year over year. Moreover, the recovery of provision for loan losses was $29.0 million, compared with the recovery of $10.4 million in the prior-quarter and a provision of $15.7 million in the year-ago quarter.

Loans and Deposits

Loans and leases, excluding FDIC supported loans, were $37.3 billion, which nudged up from $37.1 billion in the previous quarter. The increase largely came from commercial and industrial, 1-4 family residential and construction, and land development loans. Moreover, average loans and leases inched up 1.1% sequentially to $37.1 billion.

Average deposits fell 1.0% from the last quarter to $44.4 billion. The fall was primarily due to the lower level of average non-interest bearing demand deposits.

Profitability and Capital Ratios

Zions’ profitability and capital ratios showed improvement. As of Mar 31, 2013, tier 1 leverage ratio was 11.56% versus 10.96% in the previous quarter. Likewise, tier 1 risk-based capital ratio was 14.04% compared with 13.38% as of Dec 31, 2012.

The annualized return on average assets grew to 0.83% from 0.43% in the prior quarter. As of Mar 31, 2013, tangible common equity ratio also improved to 9.37% from 4.07% in the prior quarter.

Other Developments

Last week, Zions announced a 300% hike in its quarterly cash dividend. The company will now be paying a cash dividend of 4 cents per share. The dividend will be paid on May 30, to shareholders of record as of May 23.

In March, the Federal Reserve notified Zions that it had approved of certain strategic actions in its capital plan, which was submitted with regard to the Fed's 2013 Capital Plan and Review. The Fed approved all the strategic actions pertaining to the reduction of cost and quantity of Zions' non-common capital as well as term-debt financing. However, the company will be required to re-submit its capital plan after making a few amendments.

Our Viewpoint

We believe that Zions remains well positioned for loan and deposit growth, given its well-diversified portfolio. Moreover, the company’s cost-control efforts will drive future growth. Additionally, the recent dividend hike and the capital plan approval will enhance investors’ confidence in the stock.

However, we are 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 carries a Zacks Rank #3 (Hold). Other west banks that are worth considering include BofI Holding, Inc. (BOFI - Snapshot Report), CU Bancorp (CUNB - Snapshot Report) and Western Alliance Bancorporation (WAL - Snapshot Report). All these carry a Zacks Rank #2 (Buy).

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