Zions Bancorporation 2011 Form 10-K Summary
Business context and reporting period
Zions Bancorporation is a financial holding company headquartered in Salt Lake City, Utah. It operates eight commercial banks through 486 domestic branches in ten Western and Southwestern states, with 10,606 full-time equivalent employees at December 31, 2011. Principal activities include commercial and small-business banking, commercial real estate lending, retail banking, mortgage lending, treasury services, wealth management, capital markets, public finance, and SBA lending.
The filing is an annual report for the fiscal year ended December 31, 2011. The requested “2011 Q4” period is reflected through fourth-quarter information where disclosed, but the primary financial statements cover the full year.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $2,254.3 million | $2,167.9 million | +4% |
| Net interest income | $1,772.5 million | $1,727.4 million | +3% |
| Noninterest income | $481.8 million | $440.5 million | +9% |
| Provision for loan losses | $74.4 million | $852.1 million | -91% |
| Noninterest expense | $1,658.7 million | $1,718.9 million | -4% |
| Net income | $322.7 million | $(296.3) million | Returned to profit |
| Net earnings applicable to common shareholders | $153.4 million | $(412.5) million | Returned to profit |
| Diluted earnings per common share | $0.83 | $(2.48) | Improved |
| Net interest margin | 3.81% | 3.73% | +8 bps |
| Core net interest margin | 3.99% | 4.12% | -13 bps |
| Return on average assets | 0.63% | (0.57)% | Improved |
| Return on average common equity | 3.32% | (9.26)% | Improved |
Year-end assets were $53.1 billion, net loans and leases were $37.1 billion, deposits were $42.9 billion, long-term debt was $2.0 billion, and shareholders’ equity was $7.0 billion. Cash and interest-bearing deposits increased to approximately $8.2 billion from $5.5 billion in 2010. The gross loan-to-deposit ratio was 86.9%, and brokered deposits declined to $204 million from $435 million.
Net cash provided by operating activities was $1.10 billion. Investing activities used $2.49 billion, primarily because of increased money market investments and net loan funding. Financing activities provided $1.70 billion, principally from deposit growth. Cash and due from banks increased by $300.2 million to $1.22 billion.
Capital remained strong: the Tier 1 common ratio was 9.57%, Tier 1 leverage was 13.40%, Tier 1 risk-based capital was 16.13%, and total risk-based capital was 18.06%. All subsidiary banks exceeded “well-capitalized” regulatory standards at year-end.
Material changes versus the prior comparable period
- The company returned to profitability, primarily because the provision for loan losses declined by $777.7 million, other real estate expense declined by $67.2 million, net investment-security impairment losses declined by $51.7 million, and net interest income increased by $45.1 million.
- Net loan and lease charge-offs declined to $455.9 million from $983.0 million, while nonperforming lending-related assets declined 41.9% to $1.06 billion. The nonperforming-asset ratio improved to 2.83% from 4.91%.
- Nonaccrual loans declined to approximately $891.7 million from $1.53 billion. Classified loans declined 40% year over year.
- Net loans and leases increased 1.1% despite continued reductions in construction and land development loans. Construction and land development loans declined 35% to $2.28 billion, or 6.1% of total loans, compared with 9.5% in 2010.
- Deposits increased 4.7% at year-end, led by a $2.46 billion increase in noninterest-bearing demand deposits. Core deposits increased 6.8%.
- Core net interest margin declined because of higher low-yielding cash balances and is expected to face additional pressure from loan maturities, repricing, competitive loan pricing, and continued low interest rates.
- Deposit-account service charges declined 12.7%. The Durbin Amendment reduced debit-card interchange revenue; management estimated the annualized interchange-fee rate at approximately $30 million versus $65 million before the rule.
- Subordinated debt conversions continued to increase preferred equity and reduce debt. Approximately $256 million of subordinated debt converted into preferred stock during 2011, with $547 million of convertible subordinated notes remaining at year-end.
- Available-for-sale securities declined to $3.23 billion from $4.21 billion. The portfolio continued to include significant Level 3 trust-preferred CDO exposure, with fair value of approximately $1.08 billion and substantial unrealized losses.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected credit costs to remain low for the next several quarters, absent a significant economic downturn, and anticipated further reductions in criticized loans and net charge-offs.
- Management’s 2012 priorities were to reduce nonaccrual and classified loans, increase loan growth through business and residential mortgage lending, replace lost fee income through product pricing, and control expenses including OREO and other credit-related costs.
- Management expected net interest margin pressure in 2012 from loan resets and maturities, although reduced deposit pricing and loan-volume growth could offset part of the pressure.
- The company remained subject to the U.S. Treasury’s $1.4 billion TARP Capital Purchase Program investment. This restricted common-stock dividend increases and share repurchases and could affect executive compensation, capital access, and the timing of any TARP repayment.
- The company submitted its 2012 capital plan to the Federal Reserve on January 9, 2012. Regulatory approval and stress-test results could affect dividends, repurchases, capital issuance, and repayment of TARP preferred stock.
- Dodd-Frank and Basel III were expected to increase capital, liquidity, compliance, regulatory-fee, and reporting requirements. Final U.S. implementation rules were not yet complete at the filing date.
- The company recorded $33.7 million of credit-related impairment losses on investment securities in 2011. Management used significant assumptions for default probabilities, loss severity, prepayments, discount rates, and recovery timing in valuing Level 3 CDOs.
- The company had a $509 million net deferred tax asset and recorded no additional valuation allowance, relying in part on future taxable income and tax-planning strategies.
- Reported litigation exposure for matters that could be estimated was approximately $3 million to $75 million, including accrued liabilities; the range did not represent maximum exposure. Several putative class actions were in early stages.
- The Deutsche Bank total return swap covering approximately $1.16 billion of trust-preferred CDOs reduced credit exposure and regulatory risk-weighted assets. Expected ongoing net cost was approximately $5.3 million per quarter. Termination could increase risk-weighted assets by approximately $3.4 billion and reduce regulatory capital ratios by approximately 7%.
- On February 15, 2012, holders elected to convert approximately $29.8 million of subordinated notes into preferred stock. The expected first-quarter 2012 pretax accelerated discount amortization was approximately $12.2 million.
Most important facts for an investor to verify
- Whether the improvement in profitability is sustainable after the unusually large reduction in credit provisions.
- Future trends in nonperforming assets, classified loans, construction and land development exposure, charge-offs, and allowance coverage.
- The valuation, cash-flow performance, and sensitivity of the Level 3 trust-preferred CDO portfolio and related total return swap.
- The sustainability of the 9.57% Tier 1 common ratio after full Basel III implementation and any future stress-test requirements.
- The timing and funding of repayment of the $1.4 billion TARP preferred investment and the resulting effect on dividends and share repurchases.
- Whether margin compression, Durbin-related fee reductions, and the expiration of temporary unlimited insurance for noninterest-bearing transaction accounts affect future revenue and liquidity.
- The realizability of the $509 million net deferred tax asset, given the company’s recent cumulative losses and reliance on future taxable income.
- Developments in litigation, regulatory proceedings, FDIC loss-sharing arrangements, and other off-balance-sheet commitments totaling $12.5 billion of unfunded credit commitments plus letters of credit.