Zions Bancorporation 2013 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Zions Bancorporation is a regional banking organization providing commercial, real estate, consumer, deposit, investment banking, wealth management, and other financial services through subsidiary banks operating across ten Western and Southwestern states. This unaudited Form 10-Q covers the three months ended March 31, 2013, with comparisons to the three months ended March 31, 2012 and the December 31, 2012 balance sheet.
Key Financial Metrics
| Metric | Q1 2013 | Comparable Period | Change |
|---|---|---|---|
| Total interest income | $484.7 million | $518.9 million | Down $34.1 million |
| Net interest income | $418.1 million | $437.5 million | Down $19.4 million |
| Taxable-equivalent net interest income | $422.3 million | $442.3 million | Down $20.0 million |
| Net interest margin | 3.44% | 3.69% | Down 25 basis points |
| Provision for loan losses | $(29.0) million | $15.7 million | $44.7 million favorable swing |
| Noninterest income | $121.2 million | $111.8 million | Up $9.4 million |
| Noninterest expense | $397.3 million | $392.4 million | Up $5.0 million |
| Net income | $110.4 million | $89.4 million | Up $21.0 million |
| Net earnings applicable to common shareholders | $88.3 million | $25.5 million | Up $62.8 million |
| Diluted earnings per share | $0.48 | $0.14 | Up $0.34 |
| Operating cash flow | $210.3 million | $248.1 million | Down $37.8 million |
| Total assets at period end | $54.1 billion | $55.5 billion at Dec. 31, 2012 | Down $1.4 billion |
| Total loans | $37.8 billion | $37.7 billion at Dec. 31, 2012 | Up $97.2 million |
| Total deposits | $44.5 billion | $46.1 billion at Dec. 31, 2012 | Down $1.6 billion |
Reported net income benefited from lower credit costs, reduced interest expense, lower preferred stock dividends, and lower other real estate expense. Preferred stock dividends declined to $22.4 million from $64.2 million, primarily because of the prior-year redemption of TARP preferred stock and other preferred-stock changes.
Comprehensive income was $149.6 million, compared with $109.9 million in the prior-year quarter, including $39.3 million of other comprehensive income. Total shareholders’ equity increased to $6.35 billion from $6.05 billion at December 31, 2012.
Material Changes Versus Prior Comparable Period
- Net interest income declined because loan and available-for-sale securities yields fell and a larger share of liquidity was invested in low-yielding money market assets. Average loans increased 1.9%, but the average yield on loans excluding FDIC-supported loans declined 43 basis points.
- Credit performance improved materially. Net loan and lease charge-offs declined to $17.8 million from $54.5 million, and the annualized net charge-off ratio fell to 0.19% from 0.59%.
- The allowance for loan losses declined to $841.8 million from $896.1 million at year-end, while the allowance ratio declined to 2.23% from 2.38% of loans.
- Nonperforming lending-related assets declined to $684 million from $746 million at December 31, 2012; the ratio to loans and other real estate owned declined to 1.80% from 1.96%.
- Noninterest income increased primarily from higher service charges, capital markets and foreign exchange income, dividends and investment income, and loan sales and servicing income. Equity securities gains declined to $2.8 million from $9.1 million.
- Noninterest expense increased modestly. Higher write-downs of the FDIC indemnification asset and higher salaries and employee benefits offset lower other real estate expense, credit-related expense, and FDIC premiums.
- Total deposits declined $1.6 billion, largely reflecting a $1.2 billion decrease in noninterest-bearing deposits following the expiration of temporary unlimited insurance coverage for certain transaction accounts. The net loan-to-deposit ratio increased to 84.9% from 81.6%.
- The Company issued $171.8 million of Series G preferred stock, receiving $168.8 million net of costs, and issued approximately $19 million of 2.75% senior notes due May 2016.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects net interest income to remain generally stable over the next year relative to Q1 2013, although quarterly results may be volatile. Loan repricing, lower benchmark rates, and competitive loan pricing are expected to continue pressuring margins; loan growth and debt refinancing or reduction are expected to offset much of that pressure.
- Management expects credit costs to remain low for the next several quarters, assuming no significant economic downturn. It expects moderate growth in commercial and industrial and construction and land development loans, while FDIC-supported loans are expected to continue declining through paydowns and payoffs.
- Noninterest expense is expected to remain generally stable, with further reductions in credit-related costs offset by higher salary and software expenses.
- The Company remains asset-sensitive to interest rates. Its models indicate that a 200-basis-point decline in market rates, subject to a zero floor, would reduce rate-sensitive income by approximately 2% over one year. Modeling is highly dependent on assumptions regarding deposit repricing, deposit attrition, loan prepayments, and customer behavior.
- Investment securities included significant valuation uncertainty. At March 31, 2013, available-for-sale Level 3 securities had fair value of approximately $1.06 billion versus amortized cost of approximately $1.66 billion. The Company recorded $10.1 million of net credit-related impairment losses, primarily related to bank and insurance trust-preferred CDOs.
- The bank and insurance trust-preferred CDO portfolio remains exposed to bank failures, deferrals, restructurings, illiquidity, changes in discount rates, and model assumptions. The Company reported 183 deferring banks and used a weighted-average assumed loss rate of 54% on deferring collateral.
- The $1.16 billion notional total return swap with Deutsche Bank covers certain trust-preferred CDO credit risk. The Company expects quarterly costs of approximately $5.4 million while the transaction remains outstanding. A counterparty failure or termination would increase risk-weighted assets by approximately $3 billion and could reduce risk-based capital ratios by approximately 6% on a relative basis.
- Subsequent to quarter-end, the Company issued $126.2 million of Series H preferred stock and redeemed $285 million of trust-preferred securities. It also announced an increase in the quarterly common dividend from $0.01 to $0.04 per share.
- Legal matters include overdraft-fee litigation, claims related to customer relationships with alleged telemarketers, Meridian-related litigation, and governmental investigations involving anti-money-laundering and payment-processing practices. The estimated range of reasonably possible losses in excess of accrued amounts was $0 to $80 million for matters that could be estimated, but this is not the maximum potential exposure.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2013, with no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify whether loan growth and improving credit metrics offset continued loan-yield compression and the 25-basis-point decline in net interest margin.
- Review the sustainability of the negative loan-loss provision, lower charge-offs, declining nonaccrual loans, and management’s assumption that credit costs will remain low.
- Assess deposit stability following the expiration of temporary unlimited transaction-account insurance and monitor the 84.9% net loan-to-deposit ratio.
- Evaluate the valuation sensitivity, impairment risk, and cash-flow assumptions for the trust-preferred CDO and other Level 3 securities.
- Monitor the cost, collateral requirements, counterparty exposure, and regulatory-capital effects of the Deutsche Bank total return swap.
- Reconcile GAAP earnings with management’s non-GAAP measures, particularly income before taxes excluding convertible subordinated debt discount amortization and tangible return on tangible common equity.
- Confirm the effect of the May 2013 preferred-stock issuance, trust-preferred redemption, and common-dividend increase on capital, liquidity, and future interest expense.
- Review the status and potential financial impact of disclosed litigation, regulatory investigations, and anti-money-laundering matters.