Zions Bancorporation 2013 Q2 Form 10-Q Summary
Business context and reporting period
Zions Bancorporation is a regional bank holding company providing banking and financial services through subsidiary banks across ten Western and Southwestern states, including Utah, California, Texas, Arizona, Nevada and Colorado. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods and December 31, 2012 balance-sheet data.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $430.7 million | $426.3 million | $848.8 million | $863.8 million |
| Net interest margin | 3.44% | 3.56% | 3.44% | 3.62% |
| Noninterest income | $125.1 million | $128.7 million | $246.4 million | $240.5 million |
| Noninterest expense | $451.7 million | $401.7 million | $849.0 million | $794.0 million |
| Net income | $83.0 million | $91.5 million | $193.4 million | $180.9 million |
| Net earnings applicable to common shareholders | $55.4 million | $55.2 million | $143.7 million | $80.7 million |
| Diluted earnings per common share | $0.30 | $0.30 | $0.77 | $0.44 |
| Net cash provided by operating activities | $311.1 million | $260.7 million | $521.4 million | $508.8 million |
- Total assets were $54.9 billion at June 30, 2013, down from $55.5 billion at December 31, 2012.
- Total loans were $38.2 billion, up from $37.7 billion at year-end 2012. Loan growth was concentrated in commercial and industrial, construction and land development, and 1-4 family residential loans.
- Total deposits were $45.0 billion, down from $46.1 billion at December 31, 2012. Demand, savings and money-market deposits represented 90.4% of total deposits.
- Long-term debt was $2.17 billion, compared with $2.34 billion at December 31, 2012. The company’s net loan-to-deposit ratio was 84.8%.
- Cash and due from banks totaled $1.18 billion at quarter-end. Consolidated cash, interest-bearing deposits and securities resell agreements totaled approximately $9.4 billion.
- Net loan and lease charge-offs were $6 million in Q2, compared with $43 million in Q2 2012; the annualized net charge-off ratio declined to 0.06% from 0.47%.
- The allowance for loan losses was $813.9 million, or 2.13% of net loans and leases, compared with $896.1 million and 2.38% at December 31, 2012. The reserve for unfunded lending commitments was $104.1 million.
- Nonperforming lending-related assets were $602 million, or 1.57% of loans, leases and other real estate owned, versus $746 million and 1.96% at December 31, 2012.
- Regulatory capital remained strong: common equity Tier 1 was 10.03%, Tier 1 risk-based capital was 14.30%, total risk-based capital was 15.94%, and the tangible common equity ratio was 7.57%.
Material changes versus prior comparable periods
- Q2 common earnings were broadly flat year over year because lower credit costs, interest expense, preferred dividends and taxes largely offset lower interest income, lower investment income and higher operating costs.
- The provision for loan losses shifted to a $22.0 million credit in Q2 2013 from a $10.9 million provision in Q2 2012. For the first six months, the provision was a $51.0 million credit versus a $26.5 million provision in 2012.
- Net interest income increased slightly in Q2 but declined for the first six months. The net interest margin fell to 3.44% from 3.56% in Q2 2012, primarily because of lower loan and available-for-sale securities yields and a greater mix of low-yielding money-market assets.
- Noninterest expense rose 12.5% in Q2, principally because of a $40.3 million debt extinguishment cost, higher salaries, professional fees and other expenses. Professional and legal costs included spending on CCAR, stress-testing and core-system projects.
- The company issued approximately $599 million of preferred stock in the first six months and reduced long-term debt through the redemption of $285 million of trust preferred securities and repurchase of approximately $258 million of 7.75% senior notes.
- Shareholders’ equity increased to $6.86 billion from $6.05 billion at year-end, driven primarily by preferred-stock issuance, earnings and improvement in accumulated other comprehensive income.
- Other comprehensive income improved by $71.6 million in the first six months, largely reflecting higher unrealized values for investment securities, particularly junior CDO tranches.
Guidance, outlook, risks and unusual items
- Management expects net interest income to remain generally stable over the next year relative to the first six months of 2013, although quarterly results may be volatile. Continued loan repricing and competitive pricing pressure are expected to weigh on margins; loan growth and debt refinancing are expected to offset much of the pressure.
- Management expects credit costs to remain stable over the next several quarters absent a significant economic downturn. The allowance methodology was revised to use loss experience from January 2008 through the most recent quarter; management stated that the change did not materially affect the allowance or provision.
- The company remains asset-sensitive to interest rates. A modeled immediate 100-basis-point increase in rates was estimated to increase first-year interest-sensitive income by 7.2% to 8.6%, depending on deposit repricing assumptions. These estimates are highly dependent on uncertain assumptions regarding deposit behavior and loan prepayments.
- The investment portfolio includes significant illiquid, Level 3 bank and insurance trust-preferred CDOs. At June 30, 2013, AFS Level 3 securities had a fair value of approximately $1.09 billion and a pretax unrealized loss of approximately $541 million. Q2 included $4.2 million of net credit-related investment-security impairment, including approximately $3.7 million related to liquidation following a CDO event of default.
- A total return swap covering approximately $1.16 billion of trust-preferred CDOs provided credit-risk mitigation but generated expected future costs of approximately $5.5 million per quarter. If terminated, risk-weighted assets could increase by approximately $2.9 billion and risk-based capital ratios could decline by about 6% on a relative basis.
- FDIC loss-sharing agreements covering acquired loans generally expire in 2014, while certain residential mortgage coverage extends for five additional years. FDIC-supported loans declined to $432 million from $528 million at year-end 2012.
- Basel III rules become effective for the company on January 1, 2015, with full phase-in by 2018. Management believed the company would satisfy fully phased-in requirements based on June 30, 2013 conditions, but the rules may materially affect the treatment of trust-preferred CDO investments and non-common Tier 1 capital.
- The company announced its intent to redeem $590 million of 9.50% Series C preferred stock on September 16, 2013, subject to applicable conditions. It also issued $5.9 million of Series A preferred-stock depositary shares in August and announced a proposed offering of up to approximately $195 million of Series J preferred stock.
- Legal matters include overdraft-fee, telemarketing/payment-processing and Meridian Funds litigation, along with governmental investigations concerning anti-money-laundering and payment-processing practices. The estimated range of reasonably possible losses in excess of accrued amounts was $0 to $50 million, excluding matters for which an estimate was not possible.
- Management identified risks from geographic concentration, prolonged low interest rates, system replacement and accounting-system upgrades, cybersecurity, regulatory changes, litigation and economic conditions in the company’s core markets.
Important facts for investors to verify
- Whether margin pressure and lower loan yields are offset by loan growth, refinancing and deposit-cost management.
- The sustainability of unusually favorable credit results, including the Q2 provision credit, low net charge-offs and declining nonperforming assets.
- Valuation sensitivity, future impairment exposure and liquidity limitations associated with the Level 3 trust-preferred CDO portfolio.
- The effect of Basel III phase-in, potential CDO-related capital deductions and the planned Series C preferred-stock redemption on regulatory capital.
- The timing, cost and execution risk of core loan, deposit and accounting-system replacement projects.
- Expiration of FDIC loss-sharing coverage and the resulting effect on credit losses, accretion income and the FDIC indemnification asset.
- Outcomes and potential exposure from pending litigation, regulatory investigations and the estimated unaccrued loss range.
- The filing states that disclosure controls and procedures were effective as of June 30, 2013, with no material changes in internal control over financial reporting during the quarter.