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Zions Marginally Lags Estimates

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Zions Bancorp. (ZION - Free Report) reported fourth-quarter 2011 earnings per share of 30 cents, slightly below the Zacks Consensus Estimate of 33 cents. This also lags the prior quarter’s earnings of 40 cents.

However, after considering non-cash effects of the discount amortization on convertible subordinated debt and additional accretion on acquired loans, Zions reported fourth-quarter net income of $44.4 million or 24 cents per share. Though this compares unfavorably with the prior quarter’s net income of $65.2 million or 35 cents per share, it was significantly better than the prior-year quarter’s net loss of $110.3 million or 62 cents per share.

The results in the quarter were negatively impacted by lower top line due to the challenging economic environment and higher operating expenses. However, continuous improvement in credit quality, stable capital ratios and advancement in loan demand were the positives for Zions.

Performance in Detail

Zions reported total revenue of $561.7 million, down from $591.6 million in the prior quarter but up from $520.1 million in the year-ago quarter. Total revenue missed the Zacks Consensus Estimate of $580.0 million.

Net interest income for the reported quarter inched down 1.8% sequentially but grew 13.5% year over year to $461.9 million. The sequential fall was mainly due to rate resets on longer-term loans.

Net interest margin decreased 13 basis points (bps) quarter over quarter but increased 37 bps year over year to 3.86%. The decline was mainly attributable to increase in average cash-related balances.

Non-interest income stood at $98.3 million compared with $121.0 million in the prior quarter and $113.2 million in the prior-year quarter. The sequential drop was mainly attributable to a fall in other service charges, commission and fees due to the impact of Durbin Amendment.

Non-interest expense increased 4% sequentially but dipped 4% year over year to $425.0 million. The sequential rise was primarily due to higher salaries and employee benefits expenses and provision for unfunded lending commitments. However, these were partially offset by lower Federal Deposit Insurance Corporation (FDIC) premium and credit related expenses.

Credit Quality

Credit quality continued to improve during the third quarter, with the ratio of nonperforming lending-related assets to net loans and leases and other real estate owned standing at 2.83% (down 60 bps sequentially and 208 bps year over year).

Net loan and lease charge offs were 1.03% of average loans, down 8 bps sequentially and 174 bps year over year. Allowance for loan losses as a percentage of net loans and leases stood at 3.83% at the end of fourth quarter as against 3.13% at the end of the prior quarter and 3.92% at the end of the year-ago quarter.

Similarly, provision for loan losses was a credit of $1.5 million compared with a provision of $14.6 million in the prior quarter and $173.2 million in the year-ago quarter.

Balance Sheet

Zions witnessed growth in its loan portfolio during the quarter, with an increase in commercial and industrial loan along with commercial real estate loan. These were partly mitigated by a decline in construction and land development, commercial owner occupied and FDIC-supported loans. Total loans at the end of the quarter improved 1.2% from the prior quarter and 1.1% year over year to $37.3 billion.

Average total deposits for the quarter inched up 1.9% from the prior quarter to $42.4 billion. The increase was primarily due to the higher level of average non-interest-bearing demand deposits.

Profitability and Capital Ratios

Zions’ profitability and capital ratios continued to show stability during the fourth quarter. As of December 31, 2011, tangible common equity ratio declined to 6.77% from 6.90% in the prior quarter and from 6.99% in the year-ago quarter.

As of December 31, 2011, Tier 1 leverage ratio and Tier 1 risk-based capital ratio improved to 13.39% (from 12.56% as of December 31, 2010) and 16.10% (from 14.79% as of December 31, 2010), respectively. The annualized return on average assets was 0.67% in the reported quarter as against 0.84% in the prior quarter and a negative 0.56% in the prior-year quarter.

Book value per share as of December 31, 2011 stood at $25.02 compared with $24.78 as of September 30, 2011 and $25.12 as of December 31, 2010.

Our Viewpoint

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. Though the company’s return to profitability can be viewed as a step towards getting an approval for repaying the TARP dues, it would be required to meet Basel III capital requirements before making the repayment. Moreover, the company’s near-term outlook remains cautious due to sluggish loan demand as well as persistent legal and regulatory challenges.

Zions currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Similarly, one of its peers,City National Corp. retains a Zacks #3 Rank (a short-term ‘Hold’ rating).

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