Fee Income Aids Zions Q1 Earnings - Analyst Blog

Improvement in non-interest income and effective cost control aided Zions Bancorporation's ZION first quarter 2014 adjusted earnings of 42 cents. The reported figure was in line with the Zacks Consensus Estimate but compared unfavorably with 49 cents earned in the prior-year quarter.

Results benefited from an increased non-interest income and a nearly unchanged non-interest expense. Even so, these were partially offset by a decline in net interest income (NII) and lower benefit from provisions for loan losses. Further, while credit quality was a mixed bag, both capital and profitability ratios deteriorated. Nevertheless, growth in loans and deposits were the tailwinds for the quarter.

After considering certain non-recurring items, Zions' net earnings applicable to common shareholders was $76.2 million, down from $88.3 million in the year-ago quarter.

Behind the Headlines

Zions' total revenue came in at $605.9 million, almost in line with the prior-year quarter figure. Moreover, it surpassed the Zacks Consensus Estimate of $544.0 million.

NII decreased marginally to $416.5 million from the prior-year quarter figure of $418.1 million. Additionally, net interest margin NIM was 3.31%, down 13 basis points (bps).

Non-interest income was $138.3 million, up 14.1% from the year-ago quarter. The year over year improvement was mainly attributable to an almost 100% decline in net impairment losses on investment securities. This reflects the company's consistent efforts to dispose risky collateralized debt obligation securities (CDOs) from its portfolio.
 
Non-interest expenses increased slightly to $398.1 million from $397.3 million in the prior-year quarter.

Total loans, including FDIC supported loans were $39.2 billion, up 3.8% from the prior-year quarter. Total deposits increased 4.6% from the last year quarter to $46.5 billion.

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 68 bps year over year to 1.12%. Further, net loans and lease charge-offs decreased 55.7% from the prior-year quarter to $7.9 million as of Mar 31, 2014.

The allowance for credit losses as a percentage of loans and leases was 2.11%, down 39 bps year over year. However, benefit from provisions for loan losses was $0.6 million, compared with the recovery of $29.0 million in the year-ago quarter.

Profitability and Capital Ratios

Zions' capital ratios as well as profitability ratios deteriorated. As of Mar 31, 2014, Tier 1 leverage ratio was 10.71% versus 11.55% in the previous quarter. Likewise, Tier 1 risk-based capital ratio was 13.16% compared with 14.08% as of Mar 31, 2013.

Return on average assets was 0.74% against a return of 0.83% in the prior-year quarter. Moreover, as of Mar 31, 2014, tangible return on common equity was 6.96% compared with 9.37% in the prior-year quarter.

Our Viewpoint

We believe that consistent improvement in loans and deposits as well as efficient expense management will continue to drive bottom line in the forthcoming quarters. Further, we foresee improvement in credit quality as well.

However, a still low interest rate scenario will continue to pressurize interest income as well as NIM. Moreover, we remain concerned about Zions' asset-sensitive balance sheet, and the stringent regulatory environment.

Currently, Zions carries a Zacks Rank #4 (Sell).

Performance of Other Banks

Among other banks, Hancock Holding Company HBHC and Associated Banc-Corp ASBC beat the Zacks Consensus Estimate. While Hancock delivered a beat aided by a decline in expenses as well as lower provisions, Associated Banc-Corp's earnings were driven by growth in interest income and prudent cost control.

Westamerica Bancorp. WABC reported an in line result, benefited from reduced expenses and lower provisions for loan losses. However, the positives were offset by a decline in top line.