Business Context and Reporting Period
Zions Bancorporation, National Association, provides banking and related financial services through subsidiary banks operating across 11 Western and Southwestern states. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, with comparisons to the corresponding 2013 periods and balance-sheet comparisons to December 31, 2013.
Financial Highlights
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total interest income | $463.2 million | $493.2 million | $930.8 million | $978.0 million |
| Net interest income | $416.3 million | $430.7 million | $832.7 million | $848.8 million |
| Noninterest income | $124.9 million | $125.1 million | $263.2 million | $246.4 million |
| Income before taxes | $189.5 million | $126.1 million | $346.9 million | $297.1 million |
| Net income | $119.6 million | $83.0 million | $220.8 million | $193.4 million |
| Net earnings applicable to common shareholders | $104.5 million | $55.4 million | $180.7 million | $143.7 million |
| Diluted earnings per common share | $0.56 | $0.30 | $0.97 | $0.77 |
| Taxable-equivalent net interest margin | 3.29% | 3.44% | 3.30% | 3.44% |
- Second-quarter common earnings increased approximately 89%, while six-month common earnings increased approximately 26% year over year.
- Noninterest expense declined 10.0% in the second quarter to $406.0 million and 5.3% for the first six months to $804.1 million.
- The second-quarter effective tax rate was 36.9%, compared with 34.2% in the prior-year quarter, partly reflecting a $2.3 million accrual for interest related to income-tax examinations.
- Net cash provided by operating activities was $12.4 million in the quarter and $139.0 million year to date. Investing activities provided $1.18 billion in the quarter and $1.25 billion year to date, while financing activities used $1.15 billion and $1.18 billion, respectively. Cash and due from banks increased $209.0 million year to date to $1.38 billion.
Financial Position, Debt and Liquidity
- Total assets were $55.1 billion at June 30, 2014, compared with $56.0 billion at December 31, 2013. Total loans increased to $39.6 billion from $39.0 billion, led by commercial and industrial, residential, commercial real estate construction and home-equity lending.
- Total deposits declined to $45.7 billion from $46.4 billion, primarily because a large institutional deposit was not renewed and certain foreign deposits declined. Core deposits represented 97.1% of consolidated deposits, and the net loan-to-deposit ratio was 86.8%.
- Long-term debt declined to $1.93 billion from $2.27 billion. The company redeemed $255 million of senior notes during the first six months and repaid $105.9 million of subordinated notes at maturity in May.
- Remaining 2014 maturities included approximately $75 million of subordinated debt and $240.6 million of senior notes in September. Additional optional redemptions totaled $44.3 million.
- The company reported approximately $17.8 billion of additional borrowing capacity from the Federal Home Loan Bank and Federal Reserve systems, supported in part by $23.4 billion of pledged loans.
- Total shareholders’ equity increased to $6.70 billion from $6.46 billion. Reported ratios included a 10.45% Tier 1 common ratio, 14.90% total risk-based capital ratio, 10.46% tangible equity ratio and 8.60% tangible common equity ratio.
Material Changes Versus Prior Comparable Period
- The $49.1 million increase in quarterly common earnings was driven primarily by the absence of $40.3 million of prior-year debt-extinguishment costs, a $32.4 million larger negative provision for loan losses, lower interest expense, lower preferred dividends and reduced other expense.
- These benefits were partly offset by a $30.0 million decline in interest income, higher income taxes, increased salaries and benefits, and lower loan-sale and servicing income.
- Net interest margin fell 15 basis points year over year to 3.29%, primarily because of lower yields and the continued runoff of higher-yielding FDIC-supported and purchased credit-impaired loans.
- The allowance for loan losses declined to $675.9 million from $746.3 million at year-end 2013. The reserve for unfunded lending commitments increased to $95.5 million from $89.7 million.
- Credit quality improved: nonperforming lending-related assets declined to $379 million from $452 million at year-end, and classified loans declined to $1.3 billion from $1.4 billion at March 31, 2014.
- Investment securities declined to $4.13 billion from $4.33 billion. The company recorded $5.0 million of second-quarter fixed-income securities gains, primarily from CDO paydowns, and no second-quarter net impairment loss on investment securities.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued pressure on loan yields and net interest margin from competitive pricing, low benchmark rates and growth in lower-yielding residential mortgages. It expects modest commercial and industrial and residential mortgage growth, less growth or possible reduction in commercial real estate term loans, and modest growth in commercial real estate construction loans.
- Management expects credit costs to remain low absent a significant economic downturn, but noted that earnings benefit from allowance releases is not sustainable indefinitely.
- The FDIC loss-sharing agreements for acquired loans were expiring during 2014; the final significant commercial agreement was scheduled to expire September 30, 2014. FDIC-supported/PCI loans declined to $251 million from $350 million at year-end.
- The company canceled a total return swap covering a CDO portfolio. The cancellation increased regulatory risk-weighted assets by approximately $0.9 billion and contributed to a decline in the Tier 1 common ratio during the quarter.
- The Volcker Rule requires disposal of certain prohibited CDO and private-equity holdings by July 21, 2015. Management reported approximately $56 million of prohibited private-equity investments and expected no material effect from required sales.
- The Federal Reserve did not object to the company’s resubmitted 2014 Capital Plan after the original plan failed to meet the minimum projected post-stress Tier 1 common ratio. On July 28, 2014, the company issued $525 million of common stock, adding approximately $516 million net of expenses; the pro forma Tier 1 common ratio was approximately 11.6%.
- Material risks include interest-rate and liquidity risk, commercial real estate and construction exposure, valuation uncertainty for Level 3 CDO securities, regulatory capital and Basel III implementation, cybersecurity and operational risk, and ongoing litigation and governmental investigations. The estimated range of reasonably possible legal losses, in excess of accrued amounts, was $0 to approximately $50 million for matters where an estimate was possible.
Important Facts for Investors to Verify
- Whether the capital raise and resulting approximately 11.6% pro forma Tier 1 common ratio were reflected in subsequent-period regulatory filings and whether the underwriters exercised their additional-share option.
- The sustainability of earnings as FDIC-supported/PCI loan accretion and allowance releases continue to decline.
- Subsequent trends in net interest margin, loan growth, deposit balances and the net loan-to-deposit ratio.
- Realized gains or losses from subsequent CDO and prohibited private-equity sales, including differences between modeled fair values and sale proceeds.
- Expiration of FDIC loss-sharing coverage and any resulting effect on credit costs, the FDIC indemnification asset and noninterest expense.
- Developments in the Reyes and Meridian litigation, governmental investigations, and any material changes to accrued or reasonably possible losses.
- The company’s final Basel III capital treatment, including whether it elects to continue excluding specified accumulated other comprehensive income items from regulatory capital.