Zions Bancorporation, National Association — First-Quarter 2011 Form 10-Q
Business context and reporting period
Zions Bancorporation reported unaudited consolidated results for the three months ended March 31, 2011, with comparative results for the three months ended March 31, 2010. The company provides commercial, real estate, consumer, wealth-management and related banking services through subsidiaries in ten Western and Southwestern states.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total interest income | $552.4 million | $580.1 million | Down $27.7 million |
| Net interest income | $423.9 million | $455.3 million | Down $31.4 million |
| Provision for loan losses | $60.0 million | $265.6 million | Down $205.6 million |
| Noninterest income | $134.1 million | $107.6 million | Up $26.5 million |
| Noninterest expense | $408.4 million | $389.1 million | Up $19.2 million |
| Net income applicable to controlling interest | $52.8 million | $(60.2) million | Returned to profit |
| Net earnings applicable to common shareholders | $14.8 million | $(86.5) million | Returned to profit |
| Diluted earnings per common share | $0.08 | $(0.57) | Improved |
| Reported net interest margin | 3.76% | 4.03% | Down 27 basis points |
| Core net interest margin | 4.06% | 4.26% | Down 20 basis points |
| Net cash provided by operating activities | $269.2 million | $670.5 million | Down $401.3 million |
Amounts are in millions except per-share data. Core net interest margin and income before taxes excluding debt-conversion effects are non-GAAP measures.
- Total assets were $50.8 billion at March 31, 2011, compared with $51.0 billion at December 31, 2010 and $51.7 billion at March 31, 2010.
- Total loans were $36.7 billion, down 0.5% from year-end 2010 and 6.2% from March 31, 2010. Construction and land-development loans declined 41.6% year over year to $3.0 billion.
- The allowance for loan losses was $1.35 billion, or 3.69% of net loans, compared with 4.06% a year earlier. Net charge-offs were $141.5 million, compared with $227.1 million in Q1 2010.
- Nonaccrual loans declined to $1.39 billion from $2.37 billion a year earlier. Total nonperforming lending-related assets were $1.68 billion, or 4.54% of net loans and other real estate owned, versus 7.04% a year earlier.
- Deposits were $40.6 billion at quarter-end. Noninterest-bearing demand deposits increased year over year, while higher-cost time and brokered deposits declined. Brokered deposits were $294 million, or 0.7% of total deposits.
- Long-term debt was $1.91 billion, down from $2.02 billion at March 31, 2010. The company reported $949.1 million of cash and due from banks and approximately $5.6 billion of consolidated cash and interest-bearing deposits.
- The consolidated net loan-to-total-deposit ratio was 90.0%, and approximately $13.1 billion of additional Federal Home Loan Bank and Federal Reserve borrowing capacity was available.
- Capital ratios improved: Tier 1 common to risk-weighted assets was 9.32%, Tier 1 risk-based capital was 15.46%, total risk-based capital was 17.77%, tangible equity was 11.36%, and tangible common equity was 7.01%.
Material changes versus the prior comparable period
- The company moved from a $86.5 million common-shareholder loss to $14.8 million of common-shareholder earnings. The principal drivers were the lower loan-loss provision, lower investment-security impairment, higher other noninterest income and lower other real estate expense.
- Net interest income declined because of lower loan balances and yields and higher accelerated amortization of convertible subordinated-debt discounts. The reported margin also included a 36-basis-point negative effect from accelerated discount amortization and an 11-basis-point effect from regular discount amortization.
- Average loans declined 7.6% year over year, while average money-market investments increased 102.7% as loan balances contracted faster than deposits and other funding sources.
- Credit trends improved, including lower criticized, classified, nonaccrual and past-due loans. Management changed commercial and commercial-real-estate loss-migration assumptions to use up to 60 months of historical loss data, increasing the modeled allowance by approximately $63 million relative to the prior methodology.
- Investment-securities impairment losses fell to $3.1 million from $31.3 million. However, available-for-sale Level 3 securities had approximately $799 million of pretax unrealized losses in accumulated other comprehensive income.
Outlook, management commentary, risks and unusual items
- Management expected credit costs, net charge-offs and criticized or classified loans to remain lower over the next several quarters, supported by continued reductions in higher-loss construction and land-development exposures. The filing does not provide formal earnings or revenue guidance.
- Management expected continued efforts to preserve and augment capital, with higher capital requirements and preparation for eventual repayment of TARP preferred stock taking priority over higher dividends, share repurchases or expansion.
- Approximately $138.5 million of convertible subordinated debt was subsequently elected for conversion into preferred stock. The company estimated approximately $61.4 million of pretax accelerated discount amortization in Q2 2011, creating a material near-term earnings and margin headwind.
- The company recorded an $18.9 million FDIC remittance in other noninterest income related to loans acquired in a failed-bank transaction. It also recorded a $13.1 million write-down of the FDIC indemnification asset, partly offset by higher accretion income on FDIC-supported loans.
- The company maintained a $1.16 billion notional total-return swap covering bank and insurance trust-preferred CDOs. The swap transfers credit risk but does not qualify for hedge accounting; future CDO impairment could therefore reduce earnings and regulatory capital without a corresponding offset.
- Material risks include commercial and residential real estate deterioration, further CDO defaults or valuation declines, interest-rate and deposit repricing risk, liquidity and funding-market access, regulatory and Basel III capital requirements, litigation, FDIC loss-sharing estimates, and changes in accounting guidance.
- Management stated that litigation reserves were adequate and that current proceedings were not expected to materially affect consolidated results, while noting that adverse outcomes could materially affect a particular reporting period. Disclosure controls were reported effective as of March 31, 2011.
Important facts for investors to verify
- Whether the expected Q2 2011 debt conversion occurred and how the estimated $61.4 million accelerated amortization affected earnings, capital and net interest margin.
- Whether credit improvement continued, particularly in commercial real estate, construction and land development, nonaccrual loans, charge-offs and allowance coverage.
- Actual performance and valuation changes in the Level 3 trust-preferred CDO portfolio and the related total-return swap.
- Whether loan growth offsets ongoing runoff, and whether the reported 4.06% core net interest margin stabilizes despite debt-discount amortization and low interest rates.
- Progress toward reducing TARP preferred stock and the effect of the scheduled increase in its dividend rate from 5% to 9% in 2013.
- Changes in deposit composition, brokered funding, borrowing capacity and parent-company liquidity.