Effective cost control aided Zions Bancorporation’s (ZION) second-quarter adjusted earnings of 57 cents. The figure comfortably beat the Zacks Consensus Estimate of 46 cents, and was much higher than the prior-year quarter figure of 31 cents.
Results benefited from a decline in non-interest expenses, which were however, partly offset by a fall in revenues and increase in provision for loan losses. While profitability ratios were strong, credit quality was a mixed bag and capital ratios deteriorated. Growth in loans and deposits acted as tailwinds for the quarter.
After considering certain non-recurring items, Zions’ net earnings applicable to common shareholders were $104.5 million, up 88.7% from the year-ago quarter.
Behind the Headlines
Zions’ total revenue came in at $588.0 million, down 4.9% from the prior-year quarter, but surpassing the Zacks Consensus Estimate of $543.0 million.
Net interest income (NII) decreased 3.3% year over year to $416.3 million. Additionally, net interest margin (NIM) was 3.29%, down 15 basis points (bps).
Non-interest income was $124.9 million, slightly down from the year-ago quarter. The fall in non-interest income is mainly the result of a decrease in service charges and fees on deposit accounts, capital markets and foreign exchange, dividends and other investment income, loan sales and servicing income, and a 100% fall in noncredit-related losses on securities not expected to be sold and other income. These were, however, nearly offset by rise in other service charges, commissions and fees, wealth management income, net equity securities gains, net fixed income securities gains, and fall in the fair value and non-hedge derivative loss and nil impairment losses on investment securities.
Non-interest expenses decreased 10.1% year over year to $406.0 million. Notably, unlike the reported quarter, non-interest expenses in the prior-year quarter included debt extinguishment cost of $40.3 million.
Total loans, including FDIC supported loans, were $39.6 billion, up 3.8% from the prior-year quarter. Total deposits climbed 1.5% to $45.7 billion from the year-ago quarter.
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 62 bps year over year to 0.95%. However, net loans and lease charge-offs increased 9.1% from the prior-year quarter to $6.20 million.
Allowance for credit losses as a percentage of loans and leases was 1.95%, down 45 bps year over year. Nevertheless, provisions for loan losses increased significantly year over year to $54.4 million.
Profitability and Capital Ratios
Zions’ capital ratios deteriorated but profitability ratios showed improvement. As of Jun 30, 2014, Tier 1 leverage ratio was 11.00% versus 11.75% in the prior-year quarter. Likewise, Tier 1 risk-based capital ratio was 12.96% compared with 14.30% as of Jun 30, 2013.
Return on average assets was 0.87% against 0.61% in the prior-year quarter. Moreover, as of Jun 30, 2014, tangible return on common equity was 9.07% compared with 5.73% in the prior-year quarter.
Our Viewpoint
We believe that consistent improvement in loans and deposits as well as efficient expense management would continue to drive bottom line in the forthcoming quarters.
However, a still low interest rate scenario will persistently 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).
Other Banks
Among other West banks, Westamerica Bancorp. (WABC) reported in-line earnings of 58 cents per share.
Central Pacific Financial Corp. (CPF) is scheduled to report on Jul 24.
Bank of Commerce Holdings (BOCH) is slated to report on Jul 30.
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