Zions Bancorporation 2015 Form 10-K Summary
Business context and reporting period
Zions Bancorporation is a Utah-based financial holding company providing commercial and retail banking, mortgage, wealth management, treasury, capital markets and related services across 11 Western and Southwestern states. The filing covers the fiscal year ended December 31, 2015, with fourth-quarter information included. The Company operated 450 branches and had 10,200 full-time-equivalent employees at year-end.
On December 31, 2015, the Company consolidated its seven subsidiary bank charters and certain subsidiaries into a single national bank, ZB, N.A., while retaining its regional brands and local management structure.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net interest income | $1,715.3 million | $1,680.0 million | +2% |
| Noninterest income | $377.1 million | $508.6 million | -26% |
| Total revenue | $2,092.4 million | $2,188.6 million | -4% |
| Provision for loan losses | $40.0 million | $(98.1) million | Higher provision |
| Noninterest expense | $1,600.5 million | $1,665.3 million | -4% |
| Net income | $309.5 million | $398.5 million | -22% |
| Net earnings applicable to common shareholders | $246.6 million | $326.6 million | -24% |
| Diluted earnings per share | $1.20 | $1.68 | -29% |
| Net interest margin | 3.19% | 3.26% | -7 basis points |
| Return on average assets | 0.53% | 0.71% | Down |
| Return on average common equity | 3.75% | 5.42% | Down |
Year-end assets were $59.7 billion, net loans and leases were $40.7 billion, deposits were $50.4 billion, and shareholders’ equity was $7.5 billion. Loans increased 1.5%, while deposits increased 5.3%. The consolidated loan-to-deposit ratio was 80.7%.
Long-term debt declined 25% to $817 million. The Company repaid or redeemed approximately $288 million of long-term debt during 2015 and issued no new long-term debt. Cash and due from banks ended at $798 million, compared with $842 million in 2014.
Cash flow from operating activities was $535.2 million. Investing activities used $2.65 billion, primarily because of $5.51 billion of available-for-sale securities purchases and net loan funding. Financing activities provided $2.07 billion, primarily from a $2.53 billion increase in deposits, partially offset by debt repayments, preferred stock redemption and dividends.
Capital remained strong: the Basel III CET1 ratio was 12.22%, Tier 1 risk-based capital was 14.08%, total risk-based capital was 16.12%, and the Tier 1 leverage ratio was 11.26%. The Company stated that it met applicable Basel III capital requirements and that its subsidiary bank exceeded well-capitalized thresholds.
Material changes versus the prior comparable period
- Net income declined primarily because the Company sold its remaining collateralized debt obligation portfolio, approximately $574 million at amortized cost, and recorded a net loss of approximately $137 million.
- Noninterest income also reflected the CDO loss, falling to $377.1 million from $508.6 million.
- Net interest income improved by $35.3 million, helped by lower interest expense following debt reductions and higher securities income, but the net interest margin declined because of lower loan yields, declining FDIC-supported loan income and competitive pricing.
- The Company purchased approximately $4.8 billion of high-quality liquid assets, principally agency mortgage-backed securities, increasing the securities portfolio substantially and supporting liquidity requirements.
- Oil and gas-related credit exposure declined approximately 17% to $4.8 billion, but oil and gas loan quality deteriorated. Nonaccrual oil and gas loans increased to $66.2 million, or 2.5% of that portfolio, from $16.6 million, or 0.5%.
- Nonperforming lending-related assets increased to $357 million from $326 million, and the ratio increased to 0.87% from 0.81%. Classified loans increased to $1.4 billion from $1.1 billion.
- Gross charge-offs increased to $138.9 million from $106.2 million, although net charge-offs decreased to $38.7 million from $42.2 million because recoveries increased.
- The Company reduced preferred equity by approximately $176 million through a Series I tender offer. The common dividend increased from $0.04 to $0.06 per share beginning in the second quarter.
- Adjusted noninterest expense was $1.58 billion, below management’s $1.6 billion target. The adjusted efficiency ratio improved to 70.7% for the year from 73.5%.
Guidance, outlook, risks and unusual items
Management targeted an adjusted efficiency ratio in the low 60% range by 2017 and committed to an efficiency ratio below 66% and adjusted noninterest expense below $1.6 billion in 2016. It also targeted annual gross pretax cost savings of $120 million by 2017; more than half had been achieved by year-end 2015. Management’s longer-term objective was to achieve double-digit returns on tangible common equity.
For 2016, management expected slight-to-moderate loan growth, continued deployment of excess cash into higher-yielding liquid securities, additional fee-income growth, possible further reductions in preferred equity or debt, and continued operating efficiencies. Management expected further deterioration in oil and gas credits but described expected losses as manageable; credit quality in other portfolios was expected to remain relatively stable.
- Energy prices were a major credit risk. Management expected further oil and gas downgrades and had increased the allowance related to that portfolio by approximately $74 million during 2015.
- Regional concentration is significant: approximately 80% of 2015 net interest income and 77% of year-end assets related to Utah, Texas and California.
- Interest-rate risk remains important. The Company is asset-sensitive, but prolonged low or negative rates could pressure net interest income. Results depend heavily on assumptions about deposit repricing, migration and prepayments.
- Liquidity regulations require increased holdings of lower-yielding high-quality liquid assets. The Company believed it would meet the modified Liquidity Coverage Ratio requirement effective January 1, 2016.
- Goodwill totaled approximately $1.0 billion. No impairment was recorded for 2015, but the Company was evaluating potential first-quarter 2016 impairment risk for Amegy because of the decline in energy prices.
- The Company had approximately $203 million of net deferred tax assets and concluded that no additional valuation allowance was required. Realization depends on future taxable income and other tax-planning factors.
- Remaining prohibited private-equity investments under the Volcker Rule totaled approximately $18 million, with $7 million of related unfunded commitments. The Company expected to dispose of them by the applicable deadline.
- Material legal matters included a putative class action, governmental inquiries involving anti-money-laundering and payment-processing practices, and litigation concerning an EB-5 investment program. The estimated range of reasonably possible losses for certain matters was $0 to approximately $60 million above accrued amounts, excluding matters for which a meaningful estimate was not possible.
Most important facts for investors to verify
- Assess recurring earnings excluding the approximately $137 million CDO sale loss and determine whether the improvement in net interest income offsets margin compression.
- Review oil and gas exposure, criticized and classified loans, nonaccrual trends, charge-offs, and allowance adequacy under further energy-price declines.
- Compare management’s 2016 efficiency, expense, loan-growth and return targets with reported quarterly results.
- Confirm the effect of the single-charter consolidation on operating costs, controls, segment reporting and regulatory capital.
- Evaluate liquidity after the $3.8 billion increase in available-for-sale securities and the resulting interest-rate, prepayment and market-value exposure.
- Monitor Amegy goodwill for impairment and the realizability of the $203 million deferred tax asset.
- Review regulatory approvals and capital-plan constraints affecting dividends, preferred-stock redemptions, debt actions and share repurchases.
- Follow developments in the disclosed litigation and governmental inquiries, including potential losses not included in the stated $60 million range.