Zions Bancorporation 10-Q Summary
Reporting period: Three and six months ended June 30, 2015; comparative periods are the three and six months ended June 30, 2014, with balance-sheet comparisons to December 31, 2014. Zions provides banking and related services through seven regional banks across 11 Western and Southwestern states. The financial statements are unaudited.
Financial condition and performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $423.7 million | $416.3 million | $841.1 million | $832.8 million |
| Net interest margin | 3.18% | 3.29% | 3.20% | 3.30% |
| Net income | $14.0 million | $119.6 million | $106.0 million | $220.8 million |
| Net earnings applicable to common shareholders | $(1.1) million | $104.5 million | $74.2 million | $180.7 million |
| Diluted earnings per common share | $(0.01) | $0.56 | $0.36 | $0.97 |
| Noninterest income | $0.4 million | $124.8 million | $122.2 million | $263.2 million |
| Noninterest expense | $404.1 million | $406.0 million | $801.6 million | $804.1 million |
| Net cash from operating activities | $85.0 million | $13.4 million | $173.8 million | $143.7 million |
- Total assets were $58.4 billion at June 30, 2015, up from $57.2 billion at December 31, 2014.
- Loans and leases were $40.0 billion, slightly below $40.1 billion at year-end. Deposits increased to $48.9 billion from $47.8 billion, primarily from a $1.0 billion increase in noninterest-bearing demand deposits.
- Shareholders’ equity increased to $7.5 billion from $7.4 billion. The tangible common equity ratio was 9.58%; Basel III CET1, Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 12.00%, 11.65%, 14.26%, and 16.32%, respectively.
- Long-term debt declined to $1.05 billion from $1.09 billion. The company had $228.9 million of subordinated and convertible subordinated notes maturing in September and November 2015.
- Cash, interest-bearing deposits, and security resell agreements totaled $9.7 billion at June 30, 2015. Management reported approximately $16.3 billion of additional FHLB and Federal Reserve borrowing capacity and compliance with the modified liquidity coverage requirement ahead of its 2016 applicability.
- The efficiency ratio improved to 71.4% from 73.3% in the prior-year quarter; the six-month ratio was 71.8% versus 73.4%.
Material changes versus the prior comparable period
- Results were materially reduced by the sale of the remaining collateralized debt obligation portfolio. Zions sold approximately $574 million at amortized cost and recognized a pretax loss of approximately $137 million, largely reclassifying losses previously recorded in accumulated other comprehensive income. Excluding this item, second-quarter common earnings were $83.4 million, or $0.41 per diluted share, versus $104.5 million, or $0.56, in Q2 2014.
- Fixed-income securities gains declined by $143.5 million in Q2 and $174.6 million for the first six months, while total interest income declined by $8.0 million and $27.1 million, respectively.
- Net interest income increased despite margin compression, mainly because of lower interest expense from reduced long-term debt and growth in securities and deposits. The company’s taxable-equivalent net interest margin declined 11 basis points year over year in Q2.
- The provision for loan losses was $0.6 million in Q2 2015 versus a $54.4 million benefit in Q2 2014; the six-month provision was a $0.9 million benefit versus a $55.0 million benefit in the prior year.
- Nonperforming assets rose to $386 million from $326 million at year-end, and the ratio of nonperforming assets to loans, leases, and other real estate owned increased to 0.96% from 0.81%. Classified loans increased to $1.3 billion from $1.1 billion.
- Salaries and employee benefits increased 5.2% in Q2 despite a reduction of 271 full-time-equivalent employees to 10,265. Other noninterest expense declined primarily because of $9.2 million of insurance recoveries and lower FDIC-related asset write-downs.
Guidance, outlook, commentary, and risks
- Management expects slight-to-moderate loan growth during the remainder of 2015, with growth concentrated in commercial and industrial lending and somewhat less growth in commercial real estate. Construction and land-development commitments will remain constrained.
- Management expects continued margin pressure from competitive pricing, lower benchmark rates, and growth in lower-yielding residential mortgages, partly offset by loan growth, purchases of agency mortgage-backed securities, interest-rate swaps, and lower future debt expense.
- Zions purchased approximately $834 million of short-to-medium duration U.S. agency pass-through securities during Q2 and expects to continue deploying cash into high-quality liquid assets.
- Efficiency targets are less than or equal to 70% in the second half of 2015, 66% in 2016, and the low 60% range in 2017. Adjusted noninterest expense is targeted below $1.6 billion in 2015 and 2016, with a slight increase in 2017.
- The company announced restructuring initiatives, including consolidating seven bank charters into one, centralizing risk and non-customer-facing operations, establishing a chief banking officer role, and continuing technology investments. Regulatory approval is required, and completion was expected within six to 12 months.
- Energy-related credit exposure was approximately $5.5 billion, including $2.9 billion of primarily oil and gas loans. Oil and gas-related loans declined to $2.9 billion, or 7.2% of total loans. Classified energy-related credits increased to $325 million, and management expects some further energy-credit downgrades.
- Management identified CRE and energy lending as significant concentration risks. Future credit quality remains sensitive to oil and gas prices, reduced drilling activity, real estate conditions, economic conditions, interest rates, deposit behavior, and regulatory changes.
- The company held approximately $25 million of private equity investments prohibited under the Volcker Rule, plus approximately $7 million of related unfunded commitments. The divestiture deadline had been extended to July 21, 2016, with a possible further extension to 2017.
- Management estimated reasonably possible legal losses of up to approximately $50 million above accrued amounts for matters that could be estimated; matters that cannot be estimated are excluded from this range. The filing identifies litigation and governmental inquiries involving alleged telemarketing-related banking activity, anti-money-laundering practices, and payment processing.
- The Federal Reserve did not object to the 2015 capital plan, which permits a $0.06 quarterly common dividend, continued preferred dividends, and up to $300 million of preferred-equity reduction. Timing and method remain undecided.
Important facts for investors to verify
- Whether the reported adjusted Q2 earnings of $83.4 million are a sustainable representation of operating performance after the CDO disposal.
- Trends in energy-related classified, nonaccrual, and criticized loans; borrowing-base redeterminations; charge-offs; and allowance adequacy.
- Progress, implementation costs, regulatory approval, and realized savings from the one-charter restructuring.
- Loan growth, net interest margin, deposit costs, and the effect of continued agency mortgage-backed securities purchases and interest-rate hedges.
- Liquidity and capital after the $228.9 million of 2015 debt maturities and any preferred-stock redemption or reduction.
- Resolution and potential financial impact of the disclosed litigation and governmental inquiries, including losses beyond the estimated $50 million range.
- The effect of Volcker Rule divestitures and any additional capital or liquidity requirements under Basel III and related regulations.