Zions Bancorporation 2013 Q3 Form 10-Q Summary
Business context and reporting period
Zions Bancorporation is a regional banking organization operating through subsidiary banks in ten Western and Southwestern states, including Utah, California, Texas, Arizona, Nevada, Colorado, Idaho, Washington, Oregon and New Mexico. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, with comparisons to the same periods in 2012 and to December 31, 2012 for balance-sheet data.
Financial results and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net interest income | $415.5 million | $438.2 million | $1,264.3 million | $1,302.0 million |
| Net interest margin | 3.22% | 3.58% | 3.37% taxable-equivalent | 3.61% taxable-equivalent |
| Noninterest income | $122.2 million | $125.2 million | $368.6 million | $365.7 million |
| Noninterest expense | $370.7 million | $395.0 million | $1,219.7 million | $1,189.0 million |
| Net income | $111.5 million | $109.6 million | $304.9 million | $290.5 million |
| Net earnings applicable to common shareholders | $209.7 million | $62.3 million | $353.4 million | $143.0 million |
| Diluted earnings per common share | $1.12 | $0.34 | $1.90 | $0.77 |
| Net cash provided by operating activities | $272.5 million | $93.6 million | $793.8 million | $602.4 million |
The $209.7 million of Q3 net earnings applicable to common shareholders included a $125.7 million preferred-stock-redemption gain related to the redemption of the Series C preferred stock. Excluding this unusual item, the comparison with the prior period is substantially less favorable.
- Total assets were $55.2 billion at September 30, 2013, compared with $55.5 billion at December 31, 2012.
- Total loans were $38.3 billion, up from $37.7 billion at year-end 2012; growth was concentrated in commercial and industrial, construction and land development, and 1-4 family residential loans.
- Total deposits were $45.7 billion, down from $46.1 billion at year-end 2012. The net loan-to-deposit ratio was 84%.
- Cash and due from banks were $1.4 billion at September 30, 2013. Consolidated cash, interest-bearing deposits and security resell agreements totaled approximately $9.5 billion.
- Long-term debt was $2.3 billion, compared with $2.3 billion at year-end 2012. The company reported $40.3 million of debt-extinguishment costs during the first nine months.
- Total shareholders’ equity was $6.3 billion, up from $6.0 billion at year-end 2012. The tangible common equity ratio was 7.90% and the common equity Tier 1 ratio was 10.47% under then-current regulatory definitions.
Material changes versus the prior comparable periods
- Net interest income declined 5.2% in Q3 and 2.9% for the first nine months, primarily because of lower loan and securities yields and a larger balance of low-yielding money-market investments.
- Net interest margin fell to 3.22% from 3.58% in Q3 2012. Management stated that loan repricing, competitive pricing and low benchmark rates would continue to pressure net interest income.
- The provision for loan losses was a recovery of $5.6 million in Q3 and $56.6 million for the first nine months, compared with provisions of $1.9 million and $24.6 million, respectively, in the prior-year periods.
- The provision for unfunded lending commitments was a $19.9 million recovery in Q3 and a $22.7 million recovery for the first nine months, mainly reflecting revised conversion assumptions and improved credit quality.
- Nonperforming lending-related assets declined to $538 million from $746 million at December 31, 2012. The ratio to net loans and other real estate owned decreased to 1.40% from 1.96%.
- Net loan and lease charge-offs declined to $9 million in Q3 from $39 million in Q3 2012; the annualized charge-off ratio decreased to 0.09% from 0.41%.
- Credit-related investment-security impairment increased to $9.1 million in Q3 from $2.7 million, and was $23.4 million for the first nine months versus $20.3 million in the prior-year period.
- The company issued $800 million of new preferred stock and redeemed all $800 million par value of its 9.5% Series C preferred stock. It also issued debt, redeemed trust preferred securities and repurchased portions of senior notes, resulting in lower funding costs but $40.3 million of debt-extinguishment expense.
Guidance, outlook, risks and unusual items
- Management expected net interest income to decline over the following year relative to the first nine months of 2013, although loan growth, securities purchases and interest-rate swaps could offset part of the pressure.
- Management expected credit costs to remain low for the next several quarters absent a significant economic downturn, but cautioned that earnings benefits from allowance reductions are not sustainable indefinitely.
- Loan demand was described as moderate. Management expected moderate growth in construction and land development and commercial and industrial loans, while FDIC-supported loans were expected to continue declining through paydowns and payoffs.
- The company remained asset-sensitive to interest rates. Modeled interest-sensitive income increased 6.0% to 7.4% under a 100-basis-point rate increase, depending on deposit-repricing assumptions; management emphasized that these models rely on uncertain assumptions about deposit behavior and loan prepayments.
- The investment portfolio included significant illiquid Level 3 trust-preferred CDOs. Available-for-sale Level 3 securities had fair value of approximately $1.1 billion and substantial unrealized losses. Additional defaults, deferrals, wider discount rates or adverse valuation assumptions could produce further impairment or capital pressure.
- The total-return swap covering approximately $1.16 billion of trust-preferred CDOs had a $4.2 million liability at September 30, 2013. Expected ongoing net costs were approximately $5.5 million per quarter while the swap remained in place. A termination could increase risk-weighted assets by approximately $3 billion and reduce risk-based capital ratios by an estimated 5% to 6% relative to the ratio.
- Basel III rules were scheduled to become effective for the company on January 1, 2015, with full phase-in by 2018. Management expected compliance but noted potential effects from deductions related to trust-preferred CDO investments and other capital adjustments.
- Legal matters included settled, but court-approval-dependent, overdraft litigation; ongoing governmental inquiries involving anti-money-laundering and payment-processing practices; and other litigation. The estimated range of reasonably possible losses in excess of accrued amounts was $0 to approximately $60 million, excluding matters for which an estimate was not possible.
- The company was investing in replacement or upgrades of core loan, deposit and accounting systems. Management identified implementation delays, cost overruns, operational disruption, regulatory scrutiny and litigation as potential risks.
- Subsequent to quarter-end, the company issued $162 million of subordinated notes and announced tender offers for up to $250 million of subordinated notes.
Important facts for investors to verify
- Reconcile reported common earnings to recurring operating performance after removing the $125.7 million preferred-stock-redemption benefit.
- Track the trajectory of net interest margin, loan yields, deposit costs and low-yielding liquidity balances.
- Review the sustainability of provision recoveries, declining allowance balances and improving credit metrics.
- Evaluate the valuation, impairment sensitivity and regulatory-capital implications of the trust-preferred CDO portfolio and total-return swap.
- Assess deposit trends, liquidity sources, debt maturities and the effect of refinancing activity on future interest expense.
- Monitor implementation costs and execution risk associated with core-system replacements and CCAR-related stress-testing enhancements.
- Review Basel III phase-in effects, including possible capital deductions related to CDO holdings and the company’s treatment of accumulated other comprehensive income.
- Follow developments in the disclosed legal and governmental investigations, including potential losses beyond accrued amounts.