In the first quarter, earnings per diluted share increased 6.25%, to $1.36, which was at the low end of analyst estimates. Earnings were pressured by slow organic loan growth and a decline in noninterest-bearing deposits.
At the end of the quarter, noninterest-bearing deposits (the cheapest source of funds) were about $9.3 billion, down from $9.5 billion a year ago. This, coupled with a diminishing spread between long- and short-term interest rates, resulted in sequential net interest margin compression of 9 basis points to 4.51%. Zions' management believes that the decline in noninterest-bearing deposits was a normal, seasonal phenomenon rather than a structural issue. To support this assertion, other banks like Fifth Third Bancorp
On a more positive note, credit quality was fine. Nonperforming assets as a percentage of net loans came in at 23 basis points, down from 31 basis points a year ago. Management reiterated that it has no direct subprime or Alt-A mortgage exposure.
Investors should keep an eye out for next quarter's noninterest-bearing deposit levels -- if they can regain their growth this would help Zions avoid using higher-cost money market funds and help shore up net interest margins. I'd also point out that the slow growth isn't such a bad thing. Growth in a low-risk premium environment entails taking on excessive risk, something that would be unwise when the credit cycle turns.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.