Zions Bancorporation 2013 Form 10-K Summary
Business context and reporting period
Zions Bancorporation is a $56 billion financial holding company operating eight commercial banks through 469 domestic branches in ten Western and Southwestern states. Its principal businesses are commercial and small-business banking, commercial real estate, consumer and residential lending, treasury management, mortgage services, wealth management, public finance, and limited capital-markets activities. This Form 10-K covers the fiscal year ended December 31, 2013; fourth-quarter results are included within the annual filing.
Financial performance and condition
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net interest income | $1,696.3 million | $1,731.9 million | Down 2% |
| Noninterest income | $337.4 million | $419.9 million | Down 20% |
| Total revenue | $2,033.7 million | $2,151.8 million | Down 5% |
| Provision for loan losses | $(87.1) million | $14.2 million | Favorable reduction |
| Noninterest expense | $1,714.4 million | $1,595.0 million | Up 7% |
| Net income | $263.5 million | $348.2 million | Down 24% |
| Net earnings applicable to common shareholders | $294.0 million | $178.6 million | Up 65% |
| Diluted earnings per common share | $1.58 | $0.97 | Up 63% |
Common-shareholder earnings benefited from a $125.7 million preferred-stock redemption benefit and substantially lower preferred dividends. These benefits were partly offset by $120.2 million of debt-extinguishment costs and $165.1 million of net impairment losses on investment securities.
- Net interest margin declined to 3.36% from 3.57%, primarily because excess deposits were invested in low-yielding money-market assets and loan yields declined as loans repriced or matured.
- Net loans and leases increased 3.7% to $39.0 billion; deposits increased modestly to $46.4 billion. The net loan-to-deposit ratio rose to 84.2% from 81.6%.
- Net cash provided by operating activities was $876.6 million. Investing activities used $1.393 billion, primarily because of $1.506 billion of net loan originations. Financing activities used $150.2 million, reflecting debt repayments, preferred-stock redemption, and dividends.
- Long-term debt declined to $2.274 billion from $2.337 billion. The company refinanced or repurchased higher-cost debt, including $258 million of senior notes, $250 million of subordinated notes, and $285 million of trust preferred securities.
- At year-end, cash, interest-bearing deposits, and security resell agreements totaled approximately $9.3 billion. The company reported approximately $16.3 billion of additional Federal Home Loan Bank and Federal Reserve borrowing capacity and complied with its 12-month minimum liquidity policy.
- Common equity was $5.461 billion and preferred equity was $1.004 billion. The tangible common equity ratio was 8.02%, and the Tier 1 common capital ratio was 10.18%.
Material changes versus the prior comparable period
- Asset quality improved materially: nonperforming lending-related assets declined 39% to $452 million, the related ratio fell to 1.15% from 1.96%, and net charge-offs declined to $52 million from $155 million.
- The allowance for loan losses declined to $746 million from $896 million, while the reserve for unfunded lending commitments declined to $89.7 million from $106.8 million.
- Loan growth was concentrated in commercial and industrial, 1-4 family residential, and construction and land-development loans. Commercial and industrial loans increased to $12.5 billion, while FDIC-supported loans declined to $350 million.
- Noninterest income fell largely because of higher investment-security impairment losses and lower dividends and investment income. Noninterest expense increased because of debt-extinguishment costs, higher compensation, consulting, legal, and systems-investment costs.
- The company issued $800 million of new preferred stock and redeemed all $800 million par value of its 9.5% Series C preferred stock. Estimated 2014 preferred dividends were expected to decline to approximately $72 million from $95 million in 2013.
- The common dividend increased during 2013 from $0.01 to $0.04 per share per quarter. The board declared another $0.04 per-share dividend payable in February 2014, subject to applicable conditions.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected loan growth in 2014, particularly from business lending and residential mortgage lending, and planned to increase fee income, reduce nonaccrual and classified loans, and manage noninterest expense.
- Management expected net interest income to decline over the following year because of continued loan-yield pressure, competitive pricing, lower benchmark rates, and the runoff of FDIC-supported loans, although lower debt costs and loan growth could offset part of the pressure.
- Management expected credit costs to remain low for the next several quarters absent a significant economic downturn, but noted that further allowance releases are not sustainable indefinitely.
- In the fourth quarter, the company recorded $137.1 million of pretax impairment related to CDO securities it intended to sell, largely because of the Volcker Rule and a decision to reduce portfolio risk. Total 2013 net investment-security impairment losses were $165.1 million.
- In January and February 2014, the company sold CDO securities with $282 million of amortized cost for $347 million of proceeds, producing a reported first-quarter pretax gain of approximately $65 million.
- The company remained exposed to $1.3 billion of CDO carrying value at year-end and held $358 million of disallowed insurance CDOs that it believed could be held to recovery. The valuation of these securities depends heavily on illiquid-market assumptions, defaults, deferrals, prepayments, and discount rates.
- Basel III capital rules become effective for the company in 2015, with phase-ins through 2018-2019. Management believed the company would meet fully phased-in requirements based on December 31, 2013 conditions, but estimated that the rules could eliminate approximately $628 million of $1.004 billion of noncommon Tier 1 capital if immediately applied.
- The company submitted its 2014 CCAR capital plan and expected to resubmit it after incorporating the Volcker Rule interim final rule and subsequent CDO sales. Dividends, repurchases, capital issuances, and other capital actions remain subject to regulatory non-objection.
- Legal matters included class-action and governmental investigations involving alleged telemarketing, payment-processing, money-laundering, and compliance issues. The company estimated reasonably possible losses of up to approximately $50 million above accrued amounts for matters where a meaningful range could be estimated, but stated that this was not a maximum loss estimate.
- The company is investing significantly in replacement loan and deposit systems and upgraded accounting systems; management identified potential execution risks, including delays, cost overruns, disruptions, and additional regulatory scrutiny.
- Approximately 85% of 2013 net interest income and 77% of year-end assets related to Utah, California, and Texas, creating geographic concentration risk. The company also remained sensitive to interest rates, deposit behavior, real-estate values, credit quality, cybersecurity, regulatory costs, and the realization of its approximately $304 million net deferred tax asset.
Most important facts for investors to verify
- Whether loan growth and fee-income initiatives offset the expected decline in net interest income and continued net interest margin compression.
- The sustainability of low credit costs and allowance releases, including trends in classified loans, nonaccrual loans, troubled debt restructurings, and commercial real estate exposures.
- The realized results of the 2014 CDO sales and the remaining fair value, impairment, regulatory-capital, and liquidity exposure to CDO securities.
- The effect of Basel III, CCAR outcomes, trust preferred securities phase-out, and regulatory approval requirements on dividends, capital raising, and share repurchases.
- Progress, spending, and control implications of the core systems replacement and accounting systems upgrade.
- Developments in the identified legal and governmental matters, including potential losses beyond accrued amounts.
- The company’s ability to realize its deferred tax asset and maintain access to parent-company liquidity through subsidiary-bank dividends.