Zions Bancorp’s Earnings Triple in Q3

Zions Bancorporation’s earnings more than tripled in the third quarter, rising to $210 million, or $1.12 per diluted share, from $62 million, or $0.34 per share, a year earlier. A preferred stock redemption lifted the latest profit tally by $126 million, or $0.68 per share. We are not changing our fair value estimate or our economic moat rating at this time.

Net interest income fell 5% on a year-over-year basis to $416 million. Negative loan-loss provisioning once again helped earnings, adding nearly $6 million to pretax profits this past quarter. Net interest margin was 3.22%, off 22 basis points sequentially and 36 basis points year over year. Non interest expense dropped 6% to $371 million, helped by $20 million in another type of negative provisioning, for unfunded lending commitments. Quarterly charges are normally booked to maintain this reserve, which is used for potential losses from off-balance-sheet commitments. But a negative provision can be booked when reserves are released due to improvements in credit quality.

The net charge-off/loans ratio moved to an annualized 0.09% from 0.06% in June and 0.41% in September 2012, running below what we consider normalized levels. The credit loss allowance amounted to 2.30% of loans and leases, compared with 2.40% in the second quarter and 2.77% in the year-earlier quarter. Nonperforming lending-related assets fell 36% on a year-over-year basis and 11% sequentially.

We have concerns about loan growth, as this earnings driver has been hurt by lackluster demand and high prepayments. In particular, we were troubled by the nearly flat level of commercial and industrial loans relative to the second quarter. This is the largest category in Zions’ portfolio and one that saw much stronger sequential growth rates in earlier quarters. We think shaky business confidence remains a risk to bank earnings, as the economic uncertainty cast by the U.S. debt negotiations hasn’t completely dissipated.

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