Zions Bancorporation 2011 Q3 10-Q Summary
Business context and reporting period
Zions Bancorporation is a regional banking company providing commercial, real estate, consumer, deposit, wealth-management and related financial services through banking subsidiaries in ten Western and Southwestern states. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net interest income | $470.6 million | $451.9 million | $1.311 billion | $1.321 billion |
| Net interest margin | 3.99% | 3.84% | 3.79% taxable-equivalent | 3.81% taxable-equivalent |
| Provision for loan losses | $14.6 million | $184.7 million | $75.9 million | $678.9 million |
| Noninterest income | $121.0 million | $110.2 million | $383.5 million | $327.2 million |
| Noninterest expense | $409.0 million | $456.0 million | $1.234 billion | $1.276 billion |
| Net income applicable to common shareholders | $65.2 million | $(80.5) million | $109.0 million | $(302.2) million |
| Diluted earnings per share | $0.35 | $(0.47) | $0.59 | $(1.87) |
| Net cash from operating activities | $215.9 million | $372.6 million | $831.4 million | $1.131 billion |
At September 30, 2011, total assets were $51.5 billion, total deposits were $41.4 billion, net loans and leases were $35.6 billion, total loans were $36.9 billion, shareholders’ equity was $6.9 billion, and long-term debt was $1.9 billion. Cash and due from banks totaled $1.1 billion, while consolidated cash and interest-bearing deposits totaled approximately $6.2 billion.
- Allowance for loan losses was $1.149 billion, down from $1.440 billion at December 31, 2010; the reserve for unfunded lending commitments was $98.1 million.
- Net loan and lease charge-offs were $101.7 million in Q3 and $355.4 million for the first nine months, compared with $235.7 million and $718 million, respectively, in the prior-year periods.
- Nonperforming lending-related assets were $1.271 billion, or 3.43% of net loans and leases plus other real estate owned, versus $1.828 billion and 4.91% at December 31, 2010.
- Core deposits increased 2.6%, or approximately $1.0 billion, from December 31, 2010. Brokered deposits declined to $251 million from $435 million at year-end 2010.
- The gross loan-to-total-deposit ratio was 89.1%; approximately $12.9 billion of additional Federal Home Loan Bank and Federal Reserve borrowing capacity was available.
- Capital ratios at September 30, 2011 included tangible common equity of 6.90%, Tier 1 common to risk-weighted assets of 9.53%, Tier 1 leverage of 13.48%, Tier 1 risk-based capital of 16.10%, and total risk-based capital of 18.12%.
Material changes versus prior comparable periods
- Q3 2011 returned to profitability, primarily because the loan-loss provision declined $170.1 million, other real estate expense declined $23.7 million, net interest income increased $18.7 million, and noninterest expense declined $47.0 million in aggregate.
- Year-to-date common earnings improved by $411.2 million from the prior-year loss, principally because the loan-loss provision declined $603.0 million and other real estate expense declined $56.7 million.
- Net interest income increased in Q3 despite lower loan balances, reflecting lower deposit and borrowing costs and a more favorable funding mix. The reported Q3 margin increased to 3.99%, while management’s non-GAAP core margin declined to 3.97% from 4.03%.
- Average loans and leases for the first nine months declined 4.9% year over year, while average money-market investments increased 31.2% as loan demand remained weak.
- Construction and land-development loans declined 41.1% from September 30, 2010. Management reported improvement in criticized, classified, nonaccrual and past-due loans.
- Available-for-sale securities increased to $4.0 billion from $3.3 billion at September 30, 2010. Level 3 available-for-sale securities had $923 million of pretax unrealized losses in accumulated other comprehensive income.
Outlook, commentary, risks and unusual items
- Management expected low credit costs and continued reductions in criticized loans and net charge-offs for the next several quarters, assuming no significant economic downturn. Total loans were expected to remain relatively stable in the fourth quarter, while construction and land-development loans were expected to continue declining.
- Durbin Amendment implementation was expected to reduce annual pretax bankcard fee income by approximately $20 million to $28 million, or $5 million to $7 million quarterly, beginning in Q4 2011.
- Management maintained a slightly asset-sensitive interest-rate position. A 200-basis-point increase in rates was modeled to increase first-year interest-sensitive income by 6.2% under fast deposit repricing and 9.3% under slow repricing.
- The company’s $1.16 billion total return swap transferred credit risk on bank and insurance trust-preferred CDOs to Deutsche Bank but does not offset future OTTI charges for accounting purposes. The company expected approximately $5.3 million of net quarterly costs while the transaction remained outstanding.
- Credit-related investment-security impairment was $13.3 million in Q3 and $21.6 million year to date, including impairment on bank trust-preferred CDOs and other structured securities. Fair values remain highly sensitive to default, prepayment, discount-rate and liquidity assumptions.
- Convertible subordinated debt conversions accelerated noncash discount amortization by $7.5 million in Q3 and $109.8 million year to date. Approximately $562.3 million of convertible subordinated debt remained outstanding at September 30, 2011, with an unamortized discount of $240.8 million.
- The Parent maintained a $0.01 quarterly common dividend and did not expect to increase it until after repayment of TARP CPP preferred stock. Preferred stock dividends were $125.8 million year to date.
- On October 5, 2011, a putative class action was filed concerning overdraft-fee processing at Zions Bank; the company stated that it was still assessing the claims and potential amounts.
- Forward-looking risks include prolonged economic weakness, commercial and residential real-estate conditions, securities-market liquidity and valuations, interest rates, regulatory and capital changes including Basel III, FDIC assessments, litigation, technology failures or security breaches, and the company’s noninvestment-grade senior-debt rating from Moody’s.
Important facts for investors to verify
- Whether the sharp reduction in provisions and charge-offs is sustainable and whether additional credit deterioration could require future reserve increases.
- The sensitivity of Level 3 CDO valuations, accumulated other comprehensive losses and regulatory capital to default, discount-rate and prepayment assumptions.
- The effect of Durbin Amendment fee limits and continued low interest rates on revenue, margins and deposit behavior.
- The remaining cost, termination rights and capital implications of the total return swap and convertible subordinated debt.
- The company’s ability to repay TARP CPP preferred stock while preserving capital and meeting potentially higher Basel III requirements.
- The outcome and potential exposure from the overdraft-fee litigation and other legal or regulatory proceedings.