Overview - Zacks Investment Research



Zions Bancorporation |(ZION – NASDAQ) |$30.84 | |

Note: FLASH REPORT; more details to come, changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 2Q13 Earnings

Previous Edition: 1Q13 Earnings Update, May 15, 2013

Flash Update (earnings update to follow)

On Jul 22, 2013, Zions declared 2Q13 earnings results. The company reported adjusted earnings of $0.44 per share, surpassing the Zacks Consensus Estimate of $0.42. However, this compared unfavorably with 1Q13 earnings of $0.49.

Better-than-expected results were aided by top-line growth, partially offset by a rise in operating expenses. Moreover, continuously improving credit quality, capital ratios as well as stable deposits and loans were the tailwinds. However, profitability ratios deteriorated.

After considering certain non-recurring items, net income applicable to common shareholders was $55.4 million or $0.30 per share. However, this lagged 1Q13 earnings of $88.3 million or $0.48 per share.

Behind the Headlines

Total revenue was $618.4 million, up 2.0% from $606.0 million in 1Q13. Moreover, total revenue surpassed the Zacks Consensus Estimate of $551.0 million.

Net interest income increased 3.0% sequentially to $430.7 million. The increase was mainly due to the better-than-expected performance of FDIC-supported loans and reduced interest expense. Additionally, net interest margin remained stable at 1Q13 level of 3.44%.

Non-interest income was $125.2 million, up 3.2% from $121.2 million in 1Q13. The increase was largely attributable to reduced other-than-temporary impairment (OTTI) on collateralized debt obligation (CDO) securities compared to 1Q13.

Non-interest expenses reached $451.7 million, rising 13.7% sequentially. The increase was mainly due to higher debt extinguishment cost, increase in provision for unfunded lending commitments and professional and legal services, partially offset by lower salary and employee benefit expense.

Asset Quality

Credit quality continued to improve during 2Q13. The ratio of nonperforming lending-related assets to net loans and leases and other real estate owned dropped 23 bps sequentially and 95 bps year over year to 1.57%.

Further, net loan and lease charge-offs were $5.7 million as of Jun 30, 2013, down 68.2% from 1Q13 and 86.9% from 2Q12. Net charge-offs decreased mainly in commercial and industrial, owner occupied, and term commercial real estate loans.

The allowance for credit losses as a percentage of net loans and leases was 2.40% at the end of 2Q13, down 10 bps sequentially and 51 bps year over year. Moreover, the recovery of the provision for loan losses was $22.0 million, compared with the recovery of $29.0 million in 1Q13 and a provision of $10.9 million in 2Q12.

Loans and Deposits

Loans and leases, excluding FDIC supported loans, were $37.8 billion, which nudged up from $37.3 billion in 1Q13. The increases largely came from commercial and industrial, construction and 1-4 family residential loans. Moreover, average loans and leases inched up 1.1% sequentially to $37.5 billion.

Average deposits inched up 1.0% from 1Q13 to $45.0 billion. The rise was primarily due to the higher level of average non-interest bearing demand deposits.

Profitability and Capital Ratios

Zions’ capital ratios showed improvement while profitability ratios declined. As of Jun 30, 2013, tier 1 leverage ratio was 11.76% versus 11.55% in 1Q13. Likewise, tier 1 risk-based capital ratio was 14.32% compared with 14.08% as of Mar 31, 2013.

However, the annualized return on average assets declined to 0.61% from 0.83% in 1Q13. As of Jun 30, 2013, tangible common equity ratio also declined to 5.73% from 9.37% in 1Q13.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON ZION.

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

Zions Bancorporation is a financial services company comprising a collection of banks in selected high-growth markets. The company operates under a community banking model, offering its services through local banking identities using local management teams, and provides a full range of traditional banking services, as well as small business administration lending, public finance advisory and electronic bond trading.

Trend of Broker Opinions: Broker sentiment on the stock remains skewed toward the neutral side, with 61.1% of the firms in the Digest group rating the stock neutral, 33.3% rating it positive and the remaining 5.6% rating it negative. Target prices provided by the firms range from a low of $20.00 to a high of $30.00 per share. The average came in at $24.91, implying a negative return of 7.6%.

Chief Investment Considerations:

▪ Operations located in high growth markets

▪ Improvement in credit quality

▪ Strong capital levels

▪ Well diversified loan portfolio

▪ Meaningful capital deployment

▪ Solid fee income growth potential

▪ No exposure in the euro-zone

▪ Low interest rate environment

▪ Net interest margin (NIM) to remain under marginal pressure

▪ Weak loan demand

▪ High operating expenses

▪ Asset sensitive balance sheet

Neutral or equivalent outlook – Eleven firms or 61.1%: According to these firms, though improving credit quality and anticipated growth in commercial and industrial (C&I) loans are encouraging, they remain concerned about continued NIM compression, lumpy revenue stream and elevated expenses. Moreover, a persistently low interest rate environment and a weak loan demand are the causes of concern. These firms expect stable net interest income (NII), simplified capital structure, reduction in credit and capital costs as well as an increase in loan growth in the near-to mid term. Moreover, following the Federal Reserve’s approval of certain strategic actions related to Zions’ capital plan, the company announced a 300% hike in its quarterly dividend. The company’s capital deployment plan is expected to boost investors’ confidence in the stock.

Positive or equivalent outlook – Six firms or 33.3%: According to these firms, Zions’ top quality management team, earnings potential, improving credit quality, stable capital position, solid demographic presence as well as strong core-funding base, makes its growth profile well positioned in the longer run. Though maintaining an asset sensitive balance sheet will negatively affect NIM in the upcoming quarters, it will assist the company in improving loan growth. Additionally, these firms believe that Zions will continue focusing on reorganizing and developing new products to mitigate the fall in revenues due to regulatory laws. They also believe that high liquidity will likely account for further deployment of cash flows in higher yielding securities and loans. Moreover, the company’s earnings would be significantly boosted if interest rates rise along with significant restructuring of the balance sheet.

May 15, 2013

Overview [Note: Only highlighted material has been changed.]

Headquartered in Salt Lake City, Utah, and founded in 1873, Zions Bancorp. is a diversified financial service provider, operating a widespread network of over 480 branches approximately. The company’s footprint spans 10 western and southwestern states − Ariz., Calif., Colo., Idaho, Nev., N.M., Ore., Texas, Utah and Wash.

With eight affiliate banks, Zions operates under a community banking model, offering its services through local banking identities using local management teams. The company offers a full range of traditional banking services and is a national leader in small business administration lending, public finance advisory, and electronic bond trading.

Zions operates in a well-developed industry, facing competition from commercial banks, thrifts and credit unions, including institutions that do not have a physical presence in the market footprint but solicit via the Internet and other means. In addition, the company competes with finance companies, mutual funds, brokerage firms, securities dealers, investment banking companies, financial technology firms and various other types of companies. Many of these companies have fewer regulatory constraints and some have lower cost structures. The primary competing factors include pricing, convenience of office locations and other delivery methods, range of products offered, and the level of service delivered. The company has to compete effectively along these parameters to remain successful.

The company manages its operations with its primary focus on geographical area. As of Mar 31, 2013, Zions operated eight community/regional banks in distinct geographical areas.

Investor information and links to subsidiary banks are available at

The firms identified the following factors for evaluating the investment merits of ZION:

|Key Positives |Key Negatives |

|Growth Opportunities |Fundamentals |

|Zions is located in some of the highest-growth markets in the U.S., |Zions has been proactive in issuing stock to maintain its capital ratios. |

|where the population is growing much faster than the rest of the |Thus, there is a continued risk of equity dilution going forward |

|country as a whole |CRE losses will continue to pressure earnings |

|Improvement in deposits and loan will drive the top line |Macro Issues |

|Fundamentals |Unfavorable impact on NIM is likely to flatten the yield curve further |

|Zions’ strategy centers on three key objectives: focusing on |Changes under the Dodd-Frank Wall Street Reform and Consumer Protection Act |

|high-growth markets; taking decisions keeping in mind customer’s local |will significantly weigh on Zions’ top- and bottom-line results |

|needs; and centralizing technology and operations to achieve economies |Persistent low interest-rate environment will put pressure on NIM |

|of scale | |

|Zions’ community banking model will enable it to continue gaining | |

|market share from its larger out-of-state competitors for the | |

|foreseeable future | |

|Superior lending capacity relative to other community banks | |

Note: The company operates on a calendar year basis.

May 15, 2013

Long-Term Growth [Note: Only highlighted material has been changed.]

Zions has one of the most attractive franchises in the banking industry. The company has meaningful market share in several high-growth states including Ariz., Calif., Colo., Nev. and Texas. The attractive demographics within the company's 10-state region are not limited to exceptional population growth and most of its markets have higher per capita income than the national average. The firms believe that in spite of the current troubles and near-term challenges including margin pressure and commercial real estate credit exposure, Zions has considerable growth prospects in the future.

In the long term, the firms believe that Zions has significant value given its footprint, attractive core deposit base and substantial pre-provision earnings power. According to the firms, when capital adequacy is not the primary concern, the investors will expectedly focus on the bank’s normalized earnings power and will be rewarded accordingly.

According to the firms, Zions’ growth will exceed that of its peers, driven by both organic growth and acquisitions. Many small banks in Zions' footprint will find it increasingly difficult to compete in a slower growth, higher cost and more regulatory environment. The firms expect Zions, with its community bank model, to capitalize as an acquirer of choice within its markets over the next several years. Acquisitions played a significant role in Zions’ growth until the end of 2008. The company acquired roughly 30 banks and thrifts over the past several years, along with a handful of insurance brokers and other financial service businesses.

The firms continue to believe that over the longer term, the company will be able to generate above-industry earnings growth and outperform its peers on fundamentals. However, they believe the timing will be longer than the average for the industry.

May 15, 2013

Target Price / Valuation [Note: Only highlighted material has been changed.]

Provided below is a summary of valuations and ratings, as compiled by Zacks Research Digest:

|Rating Distribution |

|Positive |33.3%↑ |

|Neutral |61.1%↓ |

|Negative |5.6%↑ |

|Average Target Price |$24.91↑ |

|Maximum Upside from Current Price |11.2% |

|Minimum Upside from Current Price |-25.8% |

|Upside from Current Price |-7.6% |

|Digest High |$30.00 |

|Digest Low |$20.00 |

|Number of Analysts with target price/Total |18↓/18↓ |

Risks to the valuation include near-term margin pressure, commercial real estate credit exposure, regulatory risk and challenging economic conditions. Other risks to the valuation are deterioration in asset quality, loan and deposit growth, higher-than-expected capital requirements to facilitate TARP repayment, low interest rates environment and higher operating expenses.

Recent Events [Note: Only highlighted material has been changed.]

On May 3, 2013, Zions redeemed 8% Series B trust preferred securities (TruPS) comprising 11.4 million shares having a liquidation value of $285 million. The redemption price of the securities was fixed at 100% of the liquidation amount that equaled to $25 per share. The company paid this redemption price along with the distributions outstanding and due on the securities up to the date of redemption to its shareholders.

On May 3, 2013, Zions issued Series H Fixed-Rate Non-Cumulative Perpetual Preferred stock worth $126.2 million. Further, the shares can be redeemed in whole and not in part beginning Jun 15, 2019. The proceeds from the shares added about $123.1 million to shareholders’ equity, net of commission and fees.

On Apr 22, 2013, Zions declared its 1Q13 earnings results. The company’s adjusted earnings of $0.49 per share surpassed Zacks Consensus Estimate of $0.39. This was also significantly ahead of 4Q12 earnings of $0.21.

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 $0.48 per share. This substantially surpassed net income of $35.6 million or $0.19 per share recorded in 4Q12.

Revenue [Note: Only highlighted material has been changed.]

Net interest income (NII) fell 4.4% year over year (y/y) and 2.8% quarter over quarter (q/q) to $418.1 million in 1Q13. The q/q decline was mainly due to decrease in day count and reduced loan interest rate levels.

Net interest margin (NIM) fell 25 basis points (bps) y/y and 3 bps q/q to 3.44% in 1Q13. The q/q decline is primarily due to reduced loan rates, expiration of in-the-money floors on loans, decrease in day count, and lesser yields on available-for-sale investment securities.

Non-interest income in 1Q13 was $121.2 million, up 8.4% y/y and substantially q/q. The q/q rise was mainly attributable to reduced amount of other-than-temporary impairment (OTTI) on CDO securities.

Outlook

Management expects NII to remain stable in the subsequent quarters. Further, management expects service fees to continue to grow at a modest pace in 2013.

Some of the firms expect NII to augment at a modest rate in 2Q13 mainly driven by loan growth and redemption of TruPs, partially offset by continuous pressure on core earning asset yields. The firms expect revenues to remain subdued due to constant pressure on NII.

Some of the firms expect NIM to decline in 2Q13 at a rate similar to 1Q13 and experience further decline in 2013 due to reduced interest income on new loans.

Margins [Note: Only highlighted material has been changed.]

In 1Q13, non-interest expense was $397.3 million, up 1.3% y/y but down 2.4% q/q. The q/q decrease was mainly due to decline in the provision for unfunded lending commitments and lowered levels of other real estate expense and legal and professional services, partially offset by a rise in salaries and employee benefits.

Outlook

Management expects operating expenses to remain stable in 2013. Management also expects salaries and benefits expenses as well as credit related non-interest expenses to decline in 2013. Further, management expects quarterly other non-interest expenses to be around $60 million.

Some firms anticipate expenses related to salaries, FDIC and indemnification asset to decline at a moderate rate in 2013.

Earnings per Share [Note: Only highlighted material has been changed.]

The company reported net income applicable to common shareholders of $88.3 million or $0.48 per share in 1Q13 compared with $25.5 million or $0.14 per share in 1Q12 and $35.6 million or $0.19 per share in 4Q12.

Outlook

Some of the firms increased their 2013 and 2014 EPS estimates, reflecting reduction in operating expenses and decline in credit costs, partially offset by decrease in NII.

Balance Sheet/Capital Structure/Other [Note: Only highlighted material has been changed.]

Balance Sheet

Loans and leases, excluding Federal Deposit Insurance Corporation (FDIC) supported loans, came in at $37.3 billion as of Mar 31, 2013, up 3.6% y/y and 0.4% q/q. The q/q increase was mainly driven by a surge in commercial and industrial, construction and land development and 1-4 family residential loans, partially offset by commercial owner occupied, term commercial real estate loan portfolio and home equity line loans.

As of Mar 31, 2013, average loans and leases, excluding FDIC supported loans were $37.1 billion, up 1.1% q/q.

In 1Q13, average total deposits declined 1.0% from 4Q12 to $44.4 billion. The q/q decrease was predominantly due to a fall in average non-interest bearing deposits, partially offset by an increase in average interest bearing deposits.

Total deposits grew 3.2% y/y but declined 3.6% q/q to $44.5 billion as of Mar 31, 2013. The y/y hike was mainly due to a higher level of non interest-bearing demand deposits and interest bearing savings and money market and foreign market. The q/q decline was mainly due to decline in non-interest bearing deposits, interest bearing savings and money market, time deposits and foreign deposits.

Average non-interest-bearing demand deposits were $17.2 billion in 1Q13, down 3.9% q/q. As of Mar 31, 2013, the ratio of average loans to average deposits was 85% compared with 83% as of Dec 31, 2012.

Outlook: Going forward, management expects modest loan growth.

Some firms expect solid loan growth in 2Q13 compared with 1Q13, while anticipating modest loan growth in 2013.

Asset Quality

In 1Q13, nonperforming lending-related assets came in at $684.1 million, declining 33.6% y/y and 8.3% q/q. As of Mar 31, 2013, non-accrual loans were $594.0 million, down 8.0% from $648.0 million as of Dec 31, 2012.

The ratio of nonperforming lending-related assets to net loans and leases and Other Real Estate Owned Expense (OREO) came in at 1.80% in 1Q13, falling 98 bps y/y and 16 bps q/q.

As of Mar 31, 2013, OREO was $89.9 million, down 43.3% from $158.6 million as of Mar 31, 2012 and 8.4% from $98.2 million as of Dec 31, 2012.

Provision for loan losses in 1Q13 was a benefit of $29.0 million versus a provision of $15.7 million in 1Q12 and benefit of $10.4 million in 4Q12. The q/q improvement was mainly due to enhancement in credit quality. This included constant improvement in loss severity from classified loans.

The allowance for credit losses were $942.2 million as of Mar 31, 2013, down 15.2% y/y and 6.0% q/q.

Allowance for credit losses, as a percentage of net loans and leases stood at 2.50% as of Mar 31, 2013, declining 53 bps y/y and 16 bps q/q. As of Mar 31, 2013, classified loans, excluding FDIC-supported loans, came in at $1.74 billion, declining 16.3% y/y and 1.7% q/q.

Net loan and lease charge-offs were $17.8 million in 1Q13, down 67.3% y/y and 5.4% q/q. Net charge-offs declined mainly in consumer home equity credit line and term commercial real estate loans.

Outlook: Management anticipates nonperforming asset ratio to improve in the subsequent quarters. Further, management expects provision expenses to decline or become negative in the subsequent quarters.

Some of the firms expect provision for loan losses in the subsequent quarters to trend lower in comparison to 1Q13.

Capital and Financing Actions

As of Mar 31, 2013, tangible common equity per share improved to $21.67 from $19.39 as of Mar 31, 2012 and $20.95 as of Dec 31, 2012. The estimated common equity tier 1 capital ratio was 10.06% as of Mar 31, 2013 compared with 9.71% as of Mar 31, 2012 and 9.80% as of Dec 31, 2012.

On Mar 14, 2013, the Federal Reserve approved certain strategic actions related to Zions’ Capital Plan. However, Zions will be required to re-submit its capital plan after making a few amendments. The capital plan includes redemptions of Series B TruPS, $600 million worth of Series C perpetual preferred stock and $250 million worth of subordinated debt and senior debt. In addition, Zions’ is planning to issue $600 million of additional perpetual preferred stock that includes $171 million of Series G preferred shares already issued in Feb 2013.

Zions had sought to redeem $798 million of Series C shares. Management is also keen for an approval to issue an additional perpetual preferred stock worth $200 million to fully redeem the Series C stock.

On Feb 7, 2013, the company issued $171.8 million of Series G Fixed/Floating Rate Non-Cumulative Perpetual Preferred Stock. The proceeds from the issuance added $168.8 million to shareholders’ equity, net of commissions and fees.

Outlook: The company expects to issue additional preferred stocks in the subsequent quarters.

Some of the firms expect the company to commence with its share repurchase activity next year.

Investment Securities

During 1Q13, the company recognized net credit-related other-than-temporary impairment (OTTI) on CDOs of $10.1 million or $0.03 per share compared with $83.8 million or $0.28 per share in 4Q12. In the reported quarter, OTTI mainly resulted due to a default on CDO.

Preferred Stock Dividend

The company recorded preferred stock dividends of $22.4 million in 1Q13 compared with $64.2 million in 1Q12. Preferred dividends in 1Q12 include $42.6 million related to the TARP preferred stock issued to the U.S. Department of the Treasury. This consists of cash payments of $17.4 million and accretion of $25.2 million, for the difference between the fair value and par amount of the TARP preferred stock when issued.

Outlook: Management expects preferred stock dividends to increase in 2Q13 and 3Q13. Further, management expects preferred dividend to be around $27 million in 2Q13. However, management expects preferred dividends to decline substantially in 4Q13 after the redemption of the Series C preferred shares.

Some of the firms expect preferred dividends to rise in 2014.

Dividend

On Apr 19, 2013, Zions announced a 300% hike in its regular quarterly dividend on its outstanding stock to $0.04 per share. The dividend will be paid on May 30, to shareholders of record as of May 23.

Further, the board of directors declared regular quarterly cash dividends on the company's various perpetual preferred shares. The cash dividends on the Series A, C, F and G shares will be paid on Jun 15, to shareholders of record as of Jun 1.

On Mar 15, 2013, Zions paid regular quarterly cash dividends on the perpetual preferred shares, Series A, C, and F shares to shareholders of record on Mar 1.

On Feb 25, 2013, Zions paid a regular quarterly dividend of $0.01 per share to shareholders of record as of Feb 18. 

May 15, 2013

– The Online Stock Research Community

Discover what other investors are saying about Zions Bancorporation (ZION) at:

ZION profile on

|Coverage Team |11A |

|QCA |Kalyan Nandy |

|Lead Analyst |Kalyan Nandy |

|Senior Analyst |Swayta D.Shah |

|Analyst |Bidisha Biswas |

|Copy Editor |N/A |

|Content Ed. |Swayta D.Shah |

|No. of brokers reported/Total |N/A |

|brokers | |

|Reason for Update |Flash |

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July 22, 2013

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