Zions Bancorporation 2010 Form 10-K Summary
Business context and reporting period
Zions Bancorporation is a Utah-based financial holding company operating eight commercial banks and 495 domestic branches across ten Western and Southwestern states. The company provides commercial and retail banking, mortgage, treasury management, wealth management, capital markets, public finance and SBA lending services. This Form 10-K covers the fiscal year ended December 31, 2010; fourth-quarter information is included but the filing is an annual report.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $2,167.9 million | $2,701.6 million | Down 20% |
| Net interest income | $1,727.4 million | $1,897.5 million | Down 9% |
| Noninterest income | $440.5 million | $804.1 million | Down 45% |
| Provision for loan losses | $852.1 million | $2,016.9 million | Down 58% |
| Noninterest expense | $1,718.9 million | $1,671.5 million | Up 3% |
| Net loss applicable to common shareholders | $(412.5) million | $(1,234.4) million | Improved 67% |
| Diluted loss per share | $(2.48) | $(9.92) | Improved |
| Net interest margin | 3.73% | 3.94% | Down 21 basis points |
| Core net interest margin | 4.12% | 4.07% | Up 5 basis points |
| Net cash provided by operating activities | $1,461.0 million | $1,058.5 million | Up 38% |
At December 31, 2010, total assets were $51.0 billion, net loans and leases were $36.7 billion, deposits were $40.9 billion and long-term debt was $1.9 billion. The allowance for loan losses was $1.44 billion, and the total allowance for credit losses, including unfunded commitments, was $1.55 billion.
Liquidity improved materially. Consolidated cash and interest-bearing deposits increased to approximately $5.5 billion from $2.0 billion, the net loan-to-deposit ratio was 89.8%, and approximately $12.5 billion of additional FHLB and Federal Reserve borrowing capacity was available. Brokered deposits declined to $435 million from $1.6 billion.
Capital ratios strengthened: Tier 1 common capital to risk-weighted assets was 8.95%, Tier 1 risk-based capital was 14.78%, total risk-based capital was 17.15%, and tangible common equity to assets was 6.99%. All subsidiary banks exceeded regulatory “well-capitalized” levels.
Material changes versus the prior comparable period
- The net loss narrowed substantially, primarily because the loan-loss provision declined by $1.16 billion, goodwill impairment fell by $636.2 million to zero, and net investment-security impairment losses declined by $195.1 million.
- Credit quality improved during the second half of 2010. Criticized loans declined 35.3%, nonperforming lending-related assets declined 34.0% to $1.83 billion, and nonaccrual loans declined to $1.53 billion from $2.38 billion.
- Net loan and lease charge-offs declined to $968.9 million from $1.17 billion, but remained elevated at 2.53% of average loans.
- Net loans declined 8.6% to $36.7 billion. Construction and land development loans declined 35.8% to $3.57 billion, or 9.7% of total loans, compared with 13.8% in 2009.
- Average noninterest-bearing deposits increased 20.5%, while average total deposits declined 2.6% as the company reduced higher-cost and excess deposits.
- Common equity issuances added $623.5 million, common stock warrants added $214.6 million, and Series E preferred stock added $138.7 million. Approximately $343 million of convertible subordinated debt converted into preferred stock.
- Noninterest expense increased because of higher other real estate expense, credit-related expense, and costs associated with problem-loan resolution, despite relatively stable salaries, occupancy and equipment expenses.
Guidance, outlook, commentary, risks and unusual items
- Management expected credit costs and net charge-offs to continue declining in 2011 as higher-risk loan categories were reduced, criticized and classified loans declined, and economic conditions stabilized.
- 2011 priorities included further reducing nonaccrual and classified loans, deploying excess liquidity into loans, expanding consumer and residential mortgage lending, increasing SBA lending, controlling expenses and enhancing risk-management technology.
- Management expected most subsidiary banks to be profitable in 2011 and believed this could permit some dividends to the Parent, although Parent cash receipts from subsidiaries and investments did not cover Parent interest and dividend payments in 2010 and might not cover them in 2011.
- The company remained invested in the U.S. Treasury’s $1.4 billion TARP Capital Purchase Program. The 5% preferred dividend is scheduled to increase to 9% in 2013, and TARP restrictions limited common dividends, share repurchases and compensation practices.
- The common dividend was reduced to $0.01 per share per quarter. Share repurchases under the authorized plan remained prohibited while the TARP preferred stock was outstanding.
- Dodd-Frank and Basel III were expected to increase capital, liquidity, regulatory, deposit-insurance and compliance costs. Basel III would phase out trust preferred securities from Tier 1 capital and could constrain dividends, repurchases and compensation.
- The company entered into a $1.16 billion total return swap covering bank and insurance trust-preferred CDOs. The transaction transferred credit risk to Deutsche Bank and reduced risk-weighted assets, but generated a $22.8 million initial loss, a $15.9 million liability at year-end and expected net costs of approximately $5.3 million per quarter after the first year.
- The investment portfolio continued to include significant Level 3 and below-investment-grade CDO exposures. Available-for-sale Level 3 securities had $2.22 billion of amortized cost, $1.46 billion of fair value and a $755 million pretax unrealized loss recognized in accumulated other comprehensive income.
- The company reported a $13.7 million pretax gain from selling substantially all assets of NetDeposit and a $14.5 million gain from exchanging subordinated debt for common stock. It also accrued $8.0 million for an expected Bank Secrecy Act civil money penalty, which was consented to in February 2011.
- Management relied on approximately $540 million of net deferred tax assets without recording an additional valuation allowance, despite the company’s recent losses. Realization depends partly on future taxable income beginning in 2011.
- Material risks include continued weakness in commercial real estate and construction lending, further charge-offs, valuation losses on securities, interest-rate and liquidity risk, adverse rating actions, regulatory restrictions, litigation and compliance costs, and the need for additional capital.
Most important facts for an investor to verify
- Whether credit-quality improvements continued after December 31, 2010, particularly for construction and land development, commercial real estate and criticized loans.
- Whether the company returned to sustainable profitability excluding noncash convertible-debt discount amortization and other unusual items.
- The collectibility and valuation sensitivity of Level 3 CDOs, including assumptions for defaults, recoveries, discount rates and other-than-temporary impairment.
- The remaining TARP preferred balance, potential redemption timing, dividend-rate step-up and related restrictions on common dividends and repurchases.
- Whether Parent liquidity and subsidiary-bank dividend capacity were sufficient to fund Parent debt service, preferred dividends and operating needs.
- The effect of Dodd-Frank and Basel III implementation on regulatory capital, trust preferred securities, liquidity requirements and shareholder distributions.
- Whether the approximately $540 million deferred tax asset remained realizable without a valuation allowance.
- Subsequent developments involving the total return swap, regulatory penalties, litigation, ratings and any additional equity issuance.