The regional lender reported third-quarter earnings of $1.78 a share, against an FMP consensus of $1.64. The chief executive said the gain was "primarily a reflection of improved credit quality." Loans were flat, customer deposits grew, and the shares were little changed after hours.
Zions Bancorporation's quarter was a credit story, and its management said so.
The regional bank reported net earnings to common shareholders of $262 million, or $1.78 a diluted share, for the third quarter, up from $221 million, or $1.48, a year earlier, an increase of about 20%. That compared with a consensus of $1.64 compiled by Financial Modeling Prep. It was below the second quarter's $452 million, or $3.05 a share, which included a large gain on equity securities.
Net loan charge-offs, the loans a bank writes off as uncollectable, were $3 million, compared with $56 million a year earlier.
"Primarily a reflection of improved credit quality," Chief Executive Harris Simmons said of the year-over-year increase in earnings per share.
Shares were little changed in thin extended trading, near Monday's close of $63.14.
What drove the gain
The decline in charge-offs, $53 million, is larger than the $41 million increase in net earnings, by this publication's arithmetic. Charge-offs are not the same as the provision a bank books against future losses, so the two numbers do not map one for one. But together with the chief executive's own explanation, they suggest that credit, rather than growth in the lending business, did most of the work this quarter.
The lending side was flat. Loans were unchanged from the second quarter, which the company attributed to payoffs and competition. Deposits were the brighter spot: customer deposits grew at an annualized rate of nearly 10% from the second quarter. That growth did not come cheaply. Deposit costs rose, the net interest margin slipped to 3.23%, and net interest income came in below some analysts' estimates.
The rate position
Zions describes its balance sheet as "moderately asset-sensitive," meaning its income tends to rise when interest rates go up. Simmons said that should produce stronger net interest income as rates rise. With markets pricing a strong chance of a Federal Reserve rate increase by December and the 10-year Treasury yield closing Monday at 5.15%, according to Treasury data, that positioning would be an advantage if it holds.
The bank also completed its acquisition of Basis Multifamily Finance at the end of July.
Market implications
One reading is that Zions has reached a better place on credit. Charge-offs at very low levels, rising deposits and an asset-sensitive balance sheet heading into a period of possibly higher rates give it a solid footing.
A second reading is that the quality of the beat is low. Earnings rose because losses fell, not because the bank lent more, and charge-offs near zero leave little room for further improvement. Future gains have to come from loan growth or net interest income.
What to watch
Net interest income and margin guidance on the bank's call; loan growth in the fourth quarter; whether charge-offs stay near current levels; deposit costs; and results from other regional lenders. A return to loan growth alongside low charge-offs would show that the earnings gain can outlast the credit cycle.