Zions Bancorp. of Salt Lake City has hit the Texas market with a running start.
It said last week that Amegy Bancorp Inc. of Houston, which it bought Dec. 3, earned more that month and generated more fourth-quarter loan growth than expected - and that interest-margin woes are fading fast.
Observers give much of the credit to retention of Amegy's bankers and customers.
Employee retention was critical, said Jacqueline Reeves of BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc. Zions executives "were very pleased with the people who they have kept" at Amegy, she said.
Amegy still operates under its old name and with its pre-merger chief executive, Paul Murphy, and most of his senior management team - including Joe Argue, executive vice president and chief lending officer, and Steve Stephens, executive vice president for commercial banking.
The Houston company was struggling when the deal was announced last summer. A costly name change in March, from Southwest Bancorp of Texas (24 financial companies had "Southwest" in the name) was hurting employee morale, and the net interest margin was eroding.
But the fourth-quarter results were so good that some analysts said the purchase may be accretive to earnings faster than Zions executives had predicted - maybe this year.
A week ago, on a conference call, Zions' chief financial officer, Doyle Arnold, said Amegy's loan portfolio totaled $5.34 billion at yearend, 9.4% more than three months earlier.
"Annualized, of course, that is over 36% - probably not sustainable, but very pleasant nonetheless," he said.
The growth reflected the strength of the Texas economy and Zions' closing the merger without disrupting Amegy's operations, Mr. Arnold said.
"Keeping the key people out there in front of customers and not trying to bother them with too much merger-related stuff I think has been a help," he said.
Zions spent about $1.5 million in the fourth quarter on severance and "retention payments to people that we want to make sure stay" at Amegy, Mr. Arnold said. All the Amegy-related merger costs in the quarter came to $1.9 million.
Last week analysts also cheered the better-than-expected progress in restructuring Amegy's balance sheet, which is heavy on long-term securities that have been squeezing the net interest margin. Amegy sold $700 million of mortgage-backed securities before the merger.
The shrinking interest margin was one of the main reasons Amegy's management went looking for a buyer early last year. The margin shrank steadily, from 3.97% in the third quarter of 2004 to 3.73% last year's the third quarter - but jumped to 4.44% in the fourth quarter.
"Bringing Amegy's margin up toward that of Zions' is happening more quickly than I had expected," said Scott Siefers of Sandler O'Neill & Partners LP.
The loan growth and margin expansion helped Amegy earn $8.5 million in December alone. If it does that well this year it will beat the 2006 estimate Zions provided last summer by more than 10%.
"If this momentum continues," Mr. Siefers said, Zions "might reach break-even [on the purchase] much more quickly than a lot of investors had anticipated."
Zions, which has $42.8 billion of assets, reported fourth-quarter net income of $128.1 million, 22% more than a year earlier. Per-share earnings of $1.32 were up 17 cents, though 2 cents shy of the average forecast of 16 analysts polled by Thomson Financial. Analysts put operating earnings at $1.37.
For the full year, net income of $480.1 million was up 18%, and per-share earnings of $5.16 were up 69 cents.
Loan growth for the combined Zions-Amegy "was perhaps the highlight of a strong quarter," wrote Christopher Chouinard of Morgan Stanley in a report issued last Wednesday.
Zions' net interest margin was 4.62%, versus 4.59% in the third quarter and 4.43% a year earlier. Noninterest income increased 19% from a year earlier, to $118 million, mainly because of the Amegy acquisition.
In a report issued last Wednesday, Joe Morford of Royal Bank of Canada's RBC Capital Markets wrote, "Based on Amegy's impressive standalone results, it appears that … their customers and employees have embraced the recent merger with Zions."
Last summer Zions estimated that the $1.7 billion stock-and-cash deal would reduce estimated 2006 earnings of $5.53 a share by 22 cents, or 4%.
It said Amegy would start to contribute to earnings in 2007. But "the deal may actually end up being accretive this year." Mr. Morford wrote.
Sometimes banking executives are too optimistic or too conservative in predicting earnings impact, he wrote, but Zions' executives knew Amegy well, "had a pretty good sense of what synergies they could realize, and put out a pretty honest representation of that."
Harris Simmons, Zions' chairman and CEO, said on the Jan. 24 conference call:
"The underlying performance of Amegy itself, forgetting anything we did with it or to it, has been stronger than … [expected]. I think we're on track to achieve everything that we said we would achieve in the way of restructuring and cost cutting and things at Amegy -- and, we hope, without screwing up that which is good at Amegy.
"And so far the evidence is we haven't."
