Zions Bancorporation 10-Q Summary
Business context and reporting period
Zions Bancorporation is a regional banking company operating through community banks and related financial-services subsidiaries across ten Western and Southwestern states. This unaudited Form 10-Q covers the three and six months ended June 30, 2010, with comparisons to the corresponding 2009 periods.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total interest income | $583.7 million | $637.7 million | $1.164 billion | $1.277 billion |
| Net interest income | $413.3 million | $493.7 million | $868.6 million | $968.5 million |
| Provision for loan losses | $228.7 million | $762.7 million | $494.2 million | $1.060 billion |
| Noninterest income | $109.4 million | $612.7 million | $217.0 million | $467.5 million |
| Noninterest expense | $430.4 million | $419.5 million | $819.5 million | $795.7 million |
| Net loss applicable to common shareholders | $(135.2) million | $(23.8) million | $(221.7) million | $(876.1) million |
| Diluted loss per common share | $(0.84) | $(0.21) | $(1.42) | $(7.62) |
| Net interest margin | 3.58% | 4.10% | 3.80% | 4.02% |
- Total assets were $52.1 billion at June 30, 2010, compared with $51.1 billion at December 31, 2009 and $52.8 billion at June 30, 2009.
- Total loans were $38.1 billion, down 2.5% from year-end 2009 and 8.0% from June 30, 2009. The allowance for loan losses was $1.564 billion, or 4.12% of net loans.
- Total deposits were $42.0 billion. Noninterest-bearing demand deposits increased to $14.1 billion from $11.1 billion a year earlier. Brokered deposits declined to $481 million from $2.9 billion a year earlier.
- Long-term debt was $1.919 billion and FHLB advances and other borrowings totaled $234 million at June 30, 2010.
- Cash and due from banks were $1.069 billion. Consolidated cash was reported at approximately $5.9 billion, compared with $2.0 billion at December 31, 2009.
- Net cash provided by operating activities was $758.6 million for the first six months. Investing activities used $2.177 billion, while financing activities provided $1.117 billion.
- Controlling-interest shareholders’ equity was $6.422 billion. The company reported a Tier 1 common ratio of 7.91%, Tier 1 risk-based capital ratio of 12.63%, and total risk-based capital ratio of 15.25%; the company and each subsidiary bank exceeded “well capitalized” standards.
Material changes versus prior comparable periods
- Second-quarter common-shareholder losses increased substantially because the prior-year quarter included a $493.7 million gain on subordinated debt modification, a $23.0 million acquisition-related gain, and a $52.4 million preferred-stock redemption benefit.
- The lower loan-loss provision was the primary operating improvement: Q2 provision expense fell $534.0 million year over year, and six-month provision expense fell $566.1 million.
- Net interest income declined 16.3% in Q2 and 10.3% for the first six months, reflecting lower earning-asset balances and yields, nonaccrual loans, and accelerated amortization of convertible subordinated-debt discounts.
- Core net interest margin, a non-GAAP measure, was 4.14% in Q2 2010 versus 4.09% in Q2 2009, while reported margin declined because of approximately $60.5 million of accelerated debt-discount amortization.
- Net charge-offs were $255.2 million in Q2 and $482.3 million for the first six months. Management reported generally improving or stabilizing credit metrics, but credit quality remained a concern.
- Nonperforming lending-related assets declined to $2.547 billion from $2.769 billion at December 31, 2009, but remained above $2.059 billion at June 30, 2009. The ratio to net loans and other real estate owned was 6.60%.
- Other real estate owned increased to $413 million from $305 million a year earlier, and Q2 other-real-estate expense increased $18.7 million year over year.
- The company raised capital through common-stock issuance, Series E preferred stock, common-stock warrants, and debt transactions. During Q2 it sold $142.5 million of Series E preferred stock and issued warrants producing $179.0 million of net common-stock proceeds.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects loan balances, particularly commercial construction, land-development, and commercial-and-industrial loans, may continue to decline because weak demand, pay-downs, and charge-offs exceed originations. Management also expects future net interest margin to remain pressured by nonperforming assets and amortization of debt discounts.
- On July 29, 2010, the company entered into a total return swap covering $1.16 billion of bank and insurance trust-preferred CDOs. The transaction transfers credit risk to Deutsche Bank and is expected to reduce risk-weighted assets by approximately $4 billion and improve pro forma capital ratios. It does not change the accounting for the underlying securities.
- The company expects approximately $35 million of first-year costs from the swap, including an estimated $23 million initial negative valuation and $12 million of structuring costs, followed by approximately $5.3 million of net quarterly costs after the first year while the swap remains outstanding.
- Investment securities included substantial Level 3 exposures. Available-for-sale Level 3 securities had fair value of $1.622 billion and approximately $718 million of pretax unrealized losses in accumulated other comprehensive income. Credit-related OTTI recognized in earnings was $18.1 million in Q2 and $49.3 million for the first six months.
- The company remains exposed to commercial real estate weakness, declining property values, loan losses, nonperforming assets, and additional deterioration in bank and insurance trust-preferred CDOs. CDO valuations depend heavily on management models and assumptions regarding defaults, recoveries, discount rates, and collateral performance.
- The parent’s cash earnings from subsidiaries and investments did not cover interest and dividend payments. Management stated that additional common-equity issuance may be required until profitability returns.
- The common dividend was reduced to $0.01 per share for the dividend declared in July 2010. Preferred dividends were $51.7 million for the first six months.
- Dodd-Frank legislation is expected to increase regulatory requirements, capital and liquidity constraints, deposit-insurance and compliance costs, and litigation or enforcement risk, although the full impact was not yet determinable.
- The company reported no material legal proceedings and stated that disclosure controls were effective as of June 30, 2010.
Important facts for investors to verify
- Whether credit-quality improvements continue and whether nonaccrual loans, commercial real estate delinquencies, charge-offs, and OREO balances decline.
- The adequacy of the $1.564 billion loan-loss allowance relative to $2.271 billion of nonaccrual loans and loans past due 90 days or more.
- The performance, valuation sensitivity, and future OTTI charges associated with the Level 3 trust-preferred and other CDO portfolios.
- The final accounting, costs, collateral performance, counterparty exposure, and capital benefit of the Deutsche Bank total return swap.
- Whether the parent can fund debt service, preferred dividends, and operating needs without sustained external capital raising.
- The effect of accelerated convertible-debt discount amortization on future net interest income and reported margins.
- The effect of Dodd-Frank implementation and potential changes to the regulatory treatment of trust-preferred securities.