Business Context and Reporting Period
Company: Zions Bancorporation, National Association
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Operations: The Company operates a full range of banking and related services through subsidiaries in ten Western and Southwestern states, including Utah, Idaho, California, Texas, Arizona, Nevada, Colorado, New Mexico, Washington, and Oregon. The Company also engages in financial technology and wealth management services.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Interest Income | $455.3 million | $474.8 million |
| Provision for Loan Losses | $265.6 million | $297.6 million |
| Noninterest Income | $107.6 million | ($145.3 million) |
| Noninterest Expense | $389.1 million | $376.2 million |
| Net Loss (Applicable to Common Shareholders) | ($86.5 million) | ($852.3 million) |
| Diluted EPS | ($0.57) | ($7.47) |
| Total Assets | $51.7 billion | $54.5 billion |
| Total Loans (Net) | $37.4 billion | $40.9 billion |
| Total Deposits | $42.1 billion | $43.3 billion |
| Shareholders' Equity | $5.86 billion | $5.58 billion |
Liquidity and Cash Flow: Net cash provided by operating activities was $669.3 million. Net cash used in investing activities was $1.65 billion, primarily due to a decrease in money market investments. Net cash provided by financing activities was $652.8 million, driven by deposit increases and stock issuances.
Material Changes vs. Prior Period
- Significant Loss Reduction: The net loss applicable to common shareholders improved dramatically from $852.3 million in Q1 2009 to $86.5 million in Q1 2010. This improvement is primarily attributed to a $634 million decrease in goodwill impairment charges, a $200.4 million decrease in valuation losses on securities purchased, and a $51.4 million decrease in investment security impairment losses.
- Noninterest Income Recovery: Noninterest income swung from a loss of $145.3 million in Q1 2009 to a gain of $107.6 million in Q1 2010. This was driven by the absence of large valuation losses on securities purchased and a $14.5 million gain on a subordinated debt exchange.
- Loan Portfolio Contraction: Total loans decreased by approximately 6.6% year-over-year to $39.1 billion, reflecting pay-downs, charge-offs, and weak demand for new loans, particularly in commercial construction and land development.
- Nonperforming Assets: Total nonperforming lending-related assets increased to $2.785 billion (7.03% of net loans and OREO) from $1.755 billion in Q1 2009. Nonaccrual loans increased by $666 million year-over-year.
Guidance, Outlook, and Risks
Capital Management: The Company actively bolstered its capital position in Q1 2010. It issued approximately $150 million in common stock under equity distribution programs and exchanged $55.6 million of nonconvertible subordinated debt for common stock, resulting in a $14.5 million gain. The Company also converted $21 million of convertible subordinated debt into preferred stock.
Outlook: Management expects the net interest margin to continue to be adversely affected by the level of nonperforming assets and the amortization of debt discounts related to 2009 debt modification transactions. The Company anticipates taking additional actions in coming months to enhance its capital position, potentially including further capital raises or reductions in risk-weighted assets.
Risks and Contingencies:
- Credit Risk: Continued deterioration in commercial real estate and construction loans remains a primary concern. The Company holds significant FDIC-supported loans (approx. 3.4% of total loans) acquired from failed banks, which are subject to loss-sharing agreements.
- Investment Securities: The Company holds significant amounts of asset-backed securities (CDOs) and auction rate securities. While impairment charges decreased, the portfolio remains sensitive to credit spreads and liquidity conditions. A specific legal proceeding regarding a CDO collateral sale is ongoing.
- Liquidity: While liquidity is adequate, access to external financing markets remains tied to credit ratings. Moody's has indicated that loss of implicit government support could negatively affect ratings.
Investor Verification Checklist
- Capital Ratios: Verify the Company's Tier 1 common equity ratio (7.14%) and Total risk-based capital ratio (13.93%) against regulatory "well-capitalized" standards.
- Nonperforming Assets: Monitor the trend of nonaccrual loans and Other Real Estate Owned (OREO), which increased to $2.785 billion in Q1 2010.
- FDIC Loss Sharing: Review the status of FDIC-supported loans ($1.32 billion) and the estimated recoverable amounts ($275.8 million) under loss-sharing agreements.
- Investment Portfolio Valuation: Assess the fair value and impairment status of Level 3 asset-backed securities, particularly bank and insurance trust preferred CDOs.
- Debt Exchange Impact: Confirm the accounting treatment and future amortization impact of the subordinated debt exchange and conversion to preferred stock.