Zions Bancorporation 10-Q Summary
Business Context and Reporting Period
Zions Bancorporation, National Association and subsidiaries provide banking and financial services through eight regional banks across 11 Western and Southwestern states. This unaudited Form 10-Q covers the three months ended March 31, 2015, with comparisons to March 31, 2014 and December 31, 2014.
Key Financial Metrics
| Metric | Q1 2015 | Comparable period |
|---|---|---|
| Total assets | $57.6 billion at March 31, 2015 | $57.2 billion at December 31, 2014 |
| Loans and leases | $40.2 billion | $40.1 billion at December 31, 2014 |
| Total deposits | $48.1 billion | $47.8 billion at December 31, 2014 |
| Net interest income | $417.3 million | $416.5 million in Q1 2014 |
| Net interest margin | 3.22% | 3.31% in Q1 2014 |
| Noninterest income | $121.8 million | $138.3 million in Q1 2014 |
| Noninterest expense | $397.5 million | $398.1 million in Q1 2014 |
| Net income | $92.0 million | $101.2 million in Q1 2014 |
| Net earnings applicable to common shareholders | $75.3 million | $76.2 million in Q1 2014 |
| Diluted earnings per common share | $0.37 | $0.41 in Q1 2014 |
| Operating cash flow | $88.8 million provided | $130.3 million provided in Q1 2014 |
| Long-term debt | $1.09 billion | $1.09 billion at December 31, 2014 |
Average loans increased 2.7% year over year to $40.2 billion, while average interest-earning assets increased to $53.1 billion. The average loan yield declined to 4.21% from 4.51%, reflecting lower benchmark rates, repricing, competitive pressure and growth in lower-yielding loans. The company reported a 35.7% effective tax rate.
Shareholders’ equity was $7.45 billion at March 31, 2015. Reported capital ratios included a Basel III Common Equity Tier 1 ratio of 11.95%, Tier 1 leverage ratio of 11.75% and total risk-based capital ratio of 16.22%. The company stated that it met applicable Basel III capital requirements on both the 2015 phase-in and fully phased-in bases.
Material Changes Versus Prior Periods
- Common earnings declined modestly year over year, but diluted EPS fell more sharply because average common shares outstanding increased from 185.1 million to 202.9 million.
- Net interest income increased slightly despite a 9-basis-point decline in net interest margin. Lower interest expense, primarily from reduced long-term debt, offset lower interest income.
- Noninterest income decreased $16.5 million, chiefly because fixed-income securities gains declined from $30.9 million to a $0.2 million loss. The prior-year result included substantial CDO sales gains.
- Salary and employee-benefit expense increased $10.1 million, or 4.3%, despite a decline of 127 full-time-equivalent employees. Other noninterest expense declined $14.2 million, mainly because of lower FDIC indemnification-asset write-downs.
- Loans increased 0.3% from year-end, and deposits increased $275 million. The loan-to-deposit ratio was 83.5%, compared with 83.7% at year-end and 84.2% a year earlier.
- The allowance for loan losses increased to $620.0 million from $604.7 million at year-end, while the reserve for unfunded lending commitments increased to $82.3 million from $81.1 million.
Credit, Liquidity, Debt and Unusual Items
- Credit quality weakened during the quarter, primarily in energy-related lending. Nonaccrual loans increased to $382.1 million from $306.6 million at year-end, and nonperforming lending-related assets increased to $399 million from $326 million. The ratio of nonperforming lending-related assets to loans and other real estate owned rose to 0.99% from 0.81%.
- Energy-related credit exposure was approximately $5.84 billion, including $3.39 billion of loans and leases and $2.45 billion of unfunded commitments. Oil and gas-related nonaccrual loans increased to $65 million from $17 million, and classified energy-related credits increased to $295 million from $134 million.
- Net loan recoveries were $16.9 million, compared with net charge-offs of $7.9 million in Q1 2014. Management recorded a negative provision for loan losses of $1.5 million and expects modestly positive provisions for the full year, but warned that continued low oil prices could cause further credit deterioration and materially affect profitability.
- Cash and due from banks declined to $720.9 million from $841.9 million at year-end. Consolidated cash, interest-bearing deposits and security resell agreements declined to $8.9 billion from $9.2 billion as the company invested in securities, funded loan growth and repaid debt.
- The company purchased approximately $666 million of short- to medium-duration agency pass-through securities during the quarter to improve yields and increase high-quality liquid assets. Management expects additional HQLA purchases.
- Available borrowing capacity from the Federal Home Loan Banks and Federal Reserve was approximately $16.5 billion. Core deposits represented approximately 97.3% of consolidated deposits, and the company stated that its modified liquidity coverage ratio was at least 100%.
- Long-term debt maturities during the remainder of 2015 included approximately $223 million of subordinated and convertible subordinated notes. The company also gave notice to redeem $19 million of senior notes on May 30, 2015.
- Approximately $79 million of remaining held-to-maturity CDO securities were reclassified to available-for-sale securities because of stress-test results and Basel III risk-weighting considerations. No income-statement gain or loss was recognized.
- The company recorded no credit-related other-than-temporary impairment on investment securities in Q1 2015. However, Level 3 trust-preferred CDO securities had fair value of $438 million and remained sensitive to default rates, deferrals, prepayments and discount rates.
Guidance, Outlook and Management Commentary
- Management expects moderate loan and lease growth in 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 modest downward pressure on loan yields and net interest margin from competitive pricing, lower benchmark rates and residential mortgage growth. Lower interest expense from debt maturities and loan growth may partly offset the pressure.
- The company expects to remain asset-sensitive to rising rates, although continued purchases of agency securities are expected to reduce that sensitivity over time. Interest-rate modeling showed estimated first-year net interest income increases of 8.0% to 10.8% under a 100-basis-point rate increase, depending on deposit repricing assumptions.
- The company’s 2015 capital plan received no objection from the Federal Reserve. The plan authorized an increase in the quarterly common dividend to $0.06 per share beginning in Q2 2015 and up to $300 million of preferred-equity reduction, subject to market conditions and regulatory capital considerations.
- Volcker Rule divestiture requirements applied to approximately $33 million of prohibited private-equity investments and approximately $8 million of related unfunded commitments. The company expects to dispose of the remaining prohibited investments before the extended deadline.
Risks, Contingencies and Legal Matters
- Principal risks include energy-sector credit deterioration, commercial real estate concentrations, interest-rate and deposit-repricing assumptions, securities valuation risk, liquidity and capital requirements, regulatory changes, competition, cybersecurity and operational risk.
- The company had $17.5 billion of unfunded lending commitments, including $16.5 billion of commitments to extend credit and $945.6 million of standby letters of credit and commercial letters of credit.
- Management identified material litigation and governmental inquiries involving alleged telemarketing-related banking activity, anti-money-laundering practices and payment processing. The estimated range of reasonably possible losses for matters where an estimate was possible was $0 to approximately $50 million in excess of accrued amounts; this is not the company’s maximum exposure.
- Management stated that disclosure controls and procedures were effective as of March 31, 2015 and that there were no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether energy-related classified and nonaccrual loans continued to increase after March 31, 2015, particularly as borrowing-base redeterminations were completed.
- Whether provisions for credit losses became positive and whether the allowance remained adequate relative to energy exposure and nonperforming assets.
- The sustainability of net interest margin given lower loan yields, competitive pricing, deposit migration and additional HQLA purchases.
- The timing and terms of the planned $19 million senior-note redemption and potential reduction of up to $300 million of preferred stock.
- Realized gains or losses from future sales or valuation changes in the Level 3 trust-preferred CDO portfolio.
- Developments in the disclosed governmental inquiries and litigation, including any loss accruals or settlements beyond the estimated range.