ZIONS BANCORPORATION, NATIONAL ASSOCIATION quarterly report, Q3 FY2012

Zions Bancorporation 2012 Q3 Form 10-Q Summary

Business context and reporting period

Zions Bancorporation, National Association and subsidiaries provide commercial, consumer, real estate, wealth-management and related banking services through eight community and regional banks operating in ten western and southwestern states. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, with comparisons primarily to the corresponding 2011 periods and December 31, 2011.

Key financial metrics

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Net interest income	$444.2 million	$470.6 million	$1.318 billion	$1.311 billion
Net interest income after provision	$446.1 million	$456.0 million	$1.294 billion	$1.235 billion
Net income	$109.6 million	$108.7 million	$290.5 million	$233.9 million
Net earnings applicable to common shareholders	$62.3 million	$65.2 million	$143.0 million	$109.0 million
Diluted earnings per common share	$0.34	$0.35	$0.77	$0.59
Net interest margin	3.63%	3.99%	3.66%	3.79%
Net cash provided by operating activities	$93.6 million	$215.9 million	$602.4 million	$831.4 million

At September 30, 2012, total assets were $53.1 billion, loans were $37.2 billion, deposits were $43.8 billion, long-term debt was $2.3 billion, and total shareholders’ equity was $5.9 billion. Cash and due from banks totaled $1.1 billion. The net loan-to-deposit ratio was 84.9%, and available additional Federal Home Loan Bank and Federal Reserve borrowing capacity was approximately $13.9 billion.

Credit metrics improved. Nonperforming lending-related assets were $838 million, or 2.23% of loans and other real estate owned, compared with $1.1 billion and 2.83% at December 31, 2011. Nonaccrual loans were $719 million, the allowance for loan losses was $925 million, and net loan and lease charge-offs for the first nine months were $136 million, compared with $361 million in the prior-year period.

Material changes versus comparable periods

Third-quarter common earnings declined modestly despite higher net income, primarily because preferred stock dividends increased and net interest income fell.
First-nine-month common earnings increased 31% to $143.0 million, supported by lower interest expense, lower loan-loss provisions, reduced other real estate expense, lower FDIC premiums and lower other noninterest expense.
Net interest margin declined year over year because loan yields fell and the mix included more low-yielding money market investments; management reported a 3.60% non-GAAP core net interest margin for Q3 2012 versus 3.97% in Q3 2011.
The provision for loan losses was a $1.9 million credit in Q3 2012 versus $14.6 million of expense in Q3 2011, and was $24.6 million for the first nine months versus $75.9 million in the prior-year period.
Noninterest expense fell 3.4% in Q3 to $395.0 million. Other real estate expense declined to $0.2 million from $20.6 million, reflecting lower OREO balances and improved resolution activity.
Loans grew modestly to $37.2 billion from $37.1 billion at year-end 2011. Commercial and industrial, residential and commercial real estate term loans increased, while owner-occupied and construction and land-development loans declined.
Total deposits increased $897 million during the first nine months, led by noninterest-bearing demand and savings/NOW deposits. Brokered deposits declined to $41 million from $204 million at year-end 2011.
The company redeemed the remaining $700 million of TARP preferred stock on September 26, 2012, completing the $1.4 billion redemption. It also issued approximately $578 million of four- to five-year senior notes, $96 million of shorter-term senior notes and $143.75 million of Series F preferred stock.
Total controlling-interest equity declined 15.2% from year-end, largely because of the TARP redemption and dividends, partially offset by earnings, debt-to-preferred conversions and improved accumulated other comprehensive income.

Guidance, outlook, risks and unusual items

Management expected credit costs, classified loans and net charge-offs to remain low for the next several quarters, barring a significant economic downturn.
Management expected net interest income to be stable or slightly lower for several quarters. Competitive loan pricing, lower reference rates and limited loan drawdowns were identified as pressures, while lower nonperforming assets, lower debt service costs and modest loan growth could provide support.
The company expected to remain somewhat asset-sensitive. A prolonged period of historically low interest rates could continue to pressure net interest margin; a 200-basis-point rate increase was estimated to increase first-year interest-sensitive income by 9.6% to 12.1%, depending on deposit repricing assumptions.
Investment securities included significant exposure to bank and insurance trust-preferred CDOs. Available-for-sale Level 3 securities had $1.9 billion of amortized cost and $1.0 billion of fair value, with approximately $809 million of pretax unrealized losses in accumulated other comprehensive income. Valuations depend heavily on modeled default, loss, prepayment and discount-rate assumptions.
The company recognized $2.7 million of net credit-related investment-security impairment in Q3 and $20.3 million for the first nine months. It also recorded $17.0 million of fair value and nonhedge derivative losses for the first nine months, primarily related to the total return swap.
The $1.16 billion notional total return swap covering trust-preferred CDOs had a $5.0 million liability at September 30, 2012. Management expected approximately $5.4 million of subsequent quarterly costs while the arrangement remained in place. Termination could increase risk-weighted assets by approximately $3.3 billion and reduce risk-based capital ratios by approximately 7%.
The company changed its allowance methodology for qualifying troubled debt restructurings in Q3, increasing the allowance by approximately $19 million. It also expected to adopt regulatory guidance in Q4 that could increase nonaccruing TDRs by approximately $30 million and charge-offs by approximately $8 million.
Legal matters included overdraft-fee litigation, a RICO claim, Meridian Funds litigation, and governmental inquiries regarding anti-money-laundering practices and investment products. The estimated range of reasonably possible losses in matters where an estimate was available was $0 to no more than $90 million above accrued amounts; this excluded matters for which an estimate was not possible.
Capital ratios remained above reported regulatory minimums, including a 9.86% common equity Tier 1 ratio, 11.05% Tier 1 leverage ratio, 13.49% Tier 1 risk-based capital ratio and 15.25% total risk-based capital ratio. The company was evaluating the potential effect of proposed Basel III rules.

Most important facts for investors to verify

Whether the improvement in credit quality and lower charge-offs persists, particularly in commercial real estate, construction and land-development loans.
The sensitivity of CDO fair values, accumulated other comprehensive income and regulatory capital to additional bank failures, interest deferrals, default assumptions and wider discount spreads.
The sustainability of net interest income and margin given low interest rates, loan repricing and modest loan demand.
The effect of the TARP redemption, preferred dividends, debt issuance and future subordinated-debt conversions on common earnings, liquidity and capital.
The fourth-quarter accounting impact of the revised TDR guidance and any related charge-offs.
Developments in the disclosed litigation, government investigations and the potential loss range beyond recorded accruals.
The effect of the expiration of temporary unlimited insurance for noninterest-bearing transaction accounts after December 31, 2012 on deposit balances and liquidity.