Zions Beats Q3 Estimates With EPS of $1.78, Up 20% on Credit Quality

Zions Bancorporation (ZION) reported third-quarter earnings of $1.78 a share, beating the $1.67 estimate and rising 20% from $1.48 a year earlier. Net income applicable to common shareholders was $262 million, above the $241 million estimate. The company pointed to better credit quality, loan growth over the past year and higher fee income. A $0.05 gain tied to the valuation of client interest-rate swaps helped the quarter.

Results versus expectations

The EPS beat was about 6.6% and the net income beat about 8.7%, by our calculation. The quarter included a $10 million net credit valuation adjustment gain on client-related interest-rate swaps, worth $0.05 a share. Without it, EPS would have been about $1.73, still above the estimate. Zions said credit quality was the main driver of the 20% annual EPS gain: net loan charge-offs fell to $3 million from $56 million a year earlier.

Revenue and margins

Net interest income rose 2% from a year earlier to $684 million, and noninterest income grew 4% to $197 million. Customer-related income climbed 18% to $192 million, though the company's figure net of credit valuation adjustments, which strips out the swap gain, was $182 million, up 5%. The net interest margin slipped to 3.23%. Expenses grew faster than revenue, at 5% year over year, so pre-provision net revenue, which is profit before credit costs, fell 1%. Excluding the swap items, the company reported adjusted pre-provision net revenue of $338 million, down 4% from a year earlier.

Why the quarterly comparison looks odd

Q3 EPS of $1.78 is well below the $3.05 reported in the second quarter, a drop of about 42% by our calculation. The second quarter was inflated by $269 million of pre-tax securities gains, mainly from the sale of Visa Class B-1 shares and gains in its small-business investment portfolio. Zions said that excluding $191 million of after-tax gains, second-quarter return on tangible common equity would have been about 17.1% rather than 28.6%. By our calculation, those gains were worth roughly $1.31 a share, which puts underlying second-quarter EPS near $1.74, close to this quarter's result.

Balance sheet, credit and capital

Loan growth came from the past year, not the past three months: balances were essentially unchanged from the second quarter, as CEO Harris Simmons noted. Deposit growth was stronger, with customer deposits growing nearly 10% annualized from the second quarter. Tangible book value per share fell $1.24 from the second quarter even as it rose 13% year over year. Zions also closed its acquisition of Basis Multifamily Finance at the end of July.

Outlook

Management said short- and medium-term interest rates began rising in the last month of the quarter. Simmons said the company's “moderately asset-sensitive balance sheet should produce stronger net interest income,” meaning higher rates should lift what it earns on loans faster than what it pays on deposits. He also said continued improvement in noninterest income is expected to carry into next year. See our reports on the 10-year Treasury yield and on how rising rates hit AGNC's book value for the other side of the rate move.