Zions Bancorporation 2012 First-Quarter Form 10-Q Summary
Business context and reporting period
Zions Bancorporation is a regional banking organization providing commercial, real estate, consumer, wealth-management, and related financial services through banking subsidiaries in ten Western and Southwestern states. This unaudited Form 10-Q covers the three months ended March 31, 2012, with comparisons to March 31, 2011 and selected balance-sheet comparisons to December 31, 2011.
Key financial metrics
| Metric | Q1 2012 | Comparable period |
|---|---|---|
| Net interest income | $442.3 million | $423.9 million in Q1 2011 |
| Net interest income after provision | $426.6 million | $363.9 million |
| Noninterest income | $107.0 million | $134.1 million |
| Noninterest expense | $392.4 million | $408.4 million |
| Net income | $89.4 million | $52.6 million |
| Net income applicable to controlling interest | $89.7 million | $52.8 million |
| Net earnings applicable to common shareholders | $25.5 million | $14.8 million |
| Diluted earnings per common share | $0.14 | $0.08 |
| Net interest margin | 3.73% | 3.76% |
| Core net interest margin | 3.81% | 4.06% |
| Provision for loan losses | $15.7 million | $60.0 million |
| Net loan and lease charge-offs | $54.5 million | $146.0 million |
| Cash provided by operating activities | $248.1 million | $269.2 million |
| Cash used in investing activities | $63.9 million | Cash provided of $28.5 million |
| Cash used in financing activities | $326.4 million | $272.7 million |
Total assets were $52.9 billion at March 31, 2012, compared with $53.1 billion at December 31, 2011. Total loans were $36.6 billion, down 1.5% from year-end and up 0.1% from March 31, 2011. Deposits were $43.1 billion, up from $42.9 billion at year-end. Long-term debt was $2.3 billion, compared with $2.0 billion at year-end.
The allowance for loan losses was $1.01 billion, or 2.76% of net loans. Including the reserve for unfunded lending commitments, total allowance for credit losses was $1.11 billion. Nonperforming lending-related assets were $1.03 billion, or 2.79% of net loans and other real estate owned. The net loan-to-deposit ratio was 84.9%.
Capital ratios at March 31, 2012 included a tangible common equity ratio of 6.89%, Tier 1 common to risk-weighted assets of 9.71%, Tier 1 risk-based capital of 14.83%, and total risk-based capital of 16.76%.
Material changes versus prior comparable periods
- Net earnings applicable to common shareholders increased 72% to $25.5 million, primarily because interest expense declined $47.1 million, the loan-loss provision declined $44.3 million, other real estate expense declined $16.4 million, FDIC premiums declined $13.2 million, and net equity securities gains increased $8.2 million.
- Total interest income declined $28.7 million, reflecting lower loan yields and reduced FDIC-supported loan balances. Average loan balances were broadly stable, but the average yield on loans and leases excluding FDIC-supported loans declined to 5.17% from 5.51%.
- Funding costs improved materially: total interest expense declined to $81.4 million from $128.5 million, and the average rate paid on interest-bearing deposits declined to 0.35% from 0.55%.
- Noninterest income declined $27.1 million, partly because Q1 2011 included an $18.9 million FDIC-assisted transaction gain. Debit-card interchange and other service-fee income also declined.
- Credit trends improved. Net charge-offs fell to $54.5 million from $146.0 million, nonaccrual loans declined to $872.1 million from $891.7 million at year-end, and nonperforming lending-related assets declined 38.7% from March 31, 2011.
- Controlling-interest shareholders’ equity declined to $6.39 billion from $6.99 billion at year-end, primarily because of the $700 million redemption of TARP preferred stock and dividends, partly offset by earnings and improved accumulated other comprehensive income.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected credit costs to remain low over the next several quarters, with continued reductions in criticized and classified loans and net charge-offs absent a significant economic downturn.
- Management expected net interest margin to face pressure from low-yielding liquid assets, competitive loan pricing, lower resets on older loans, convertible-debt discount amortization, and potential reductions in noninterest-bearing deposits after the expiration of unlimited transaction-account insurance at year-end 2012.
- The company redeemed $700 million of TARP preferred stock on March 28, 2012. Its capital plan contemplated redeeming the remaining $700 million during 2012, subject to regulatory approval, liquidity, capital-return, and condition requirements.
- The company issued $300 million of 4.5% senior unsecured notes due 2017 in March 2012 and planned a total of $600 million of senior-debt issuance. It also disclosed a subsequent $100 million issuance on May 1, 2012.
- Subordinated-debt conversions caused $12.2 million of accelerated noncash discount amortization in Q1 2012. Additional conversions expected in May 2012 were expected to produce approximately $16.2 million of pretax accelerated amortization in Q2 2012.
- The company recognized $10.2 million of net credit-related impairment losses on investment securities, primarily trust-preferred CDOs. Available-for-sale Level 3 securities had a fair value of $1.05 billion versus amortized cost of $1.92 billion, producing substantial unrealized losses.
- The $1.16 billion notional total return swap with Deutsche Bank mitigated credit risk on certain trust-preferred CDOs but generated approximately $5.3 million of expected quarterly costs. If terminated because of counterparty nonperformance, risk-weighted assets could increase by approximately $3.4 billion and risk-based capital ratios could decline by approximately 7%.
- Legal proceedings remained subject to significant uncertainty. Management considered accrued liabilities adequate and did not expect currently estimable additional liabilities to materially affect financial condition, although an adverse outcome could materially affect a future period.
- Major risks include commercial and residential real estate conditions, credit deterioration, interest-rate and liquidity risk, market values of Level 3 securities, regulatory capital requirements, FDIC-related programs, litigation, and changes in deposit flows and funding costs.
Most important facts for an investor to verify
- Whether the expected improvement in credit quality and low future credit costs persists, particularly in commercial real estate and construction lending.
- The valuation, cash flows, impairment exposure, and sensitivity of the trust-preferred CDO portfolio and related total return swap.
- Completion and regulatory approval of the remaining TARP preferred-stock redemption and planned capital returns from subsidiary banks.
- Parent-company liquidity after the $700 million TARP redemption, upcoming debt maturities, and additional senior-debt issuance.
- The effect of continued low interest rates, loan repricing, competitive loan pricing, and possible declines in noninterest-bearing deposits on net interest margin.
- The effect of expected subordinated-debt conversions and accelerated discount amortization on second-quarter earnings and capital.
- Whether tangible common equity and regulatory capital ratios remain adequate after capital actions, securities impairments, and any future credit losses.