Zions Bancorporation, N.A. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2015. Zions provides banking and related financial services through subsidiary banks serving 11 Western and Southwestern states. Management planned to merge its seven subsidiary banks into a single bank charter, expected to occur after December 31, 2015, while retaining regional brands.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total interest income | $456.2 million | $460.3 million | $1.360 billion | $1.391 billion |
| Net interest income | $425.4 million | $416.8 million | $1.266 billion | $1.250 billion |
| Provision for loan losses | $18.3 million | $(54.6) million | $17.3 million | $(109.7) million |
| Noninterest income | $130.8 million | $116.1 million | $253.1 million | $379.2 million |
| Noninterest expense | $396.1 million | $438.5 million | $1.198 billion | $1.243 billion |
| Net income | $101.0 million | $95.9 million | $207.0 million | $316.6 million |
| Net earnings applicable to common shareholders | $84.2 million | $79.1 million | $158.4 million | $259.8 million |
| Diluted EPS | $0.41 | $0.40 | $0.77 | $1.36 |
- Taxable-equivalent net interest margin was 3.11% in Q3 2015 versus 3.20% in Q3 2014 and 3.18% in Q2 2015.
- The adjusted efficiency ratio improved to 69.5% from 73.0% in Q3 2014 and 71.4% in Q2 2015.
- Average tangible return on tangible common equity was 6.05%, compared with 6.19% in Q3 2014.
- Cash flow provided by operating activities was $386.4 million for the first nine months, versus $351.9 million in the prior-year period. Investing activities used $1.494 billion, primarily reflecting purchases of investment securities.
- At September 30, total assets were $58.411 billion, loans were $40.113 billion, deposits were $48.920 billion, long-term debt was $944.8 million, and shareholders’ equity was $7.638 billion.
- Loan-to-deposit ratio was 82.0%, down from 83.7% at December 31, 2014. Available liquidity included approximately $16.2 billion of additional Federal Home Loan Bank and Federal Reserve borrowing capacity.
- Basel III capital ratios included CET1 of 12.16%, Tier 1 leverage of 11.63%, Tier 1 risk-based capital of 14.41%, and total risk-based capital of 16.46%.
Material changes versus comparable periods
- Q3 net income increased 5.3% year over year, while common earnings increased 6.5%. Year-to-date common earnings declined primarily because of the second-quarter 2015 loss on the sale of the remaining collateralized debt obligation portfolio.
- Net interest income increased 2.1% in Q3 despite lower loan yields. Lower interest expense from debt reductions was the principal benefit, while the margin was pressured by increased cash and securities balances and lower loan yields.
- Noninterest expense declined 9.7% in Q3, primarily because the company recorded no debt-extinguishment cost, compared with $44.4 million in Q3 2014. Year-to-date expense declined 3.6%.
- Noninterest income increased in Q3 because Q3 2014 included $13.9 million of fixed-income securities losses. Year-to-date noninterest income declined substantially because 2015 included approximately $137 million of realized losses on CDO sales, compared with gains in 2014.
- Loans were broadly stable from year-end, while commercial real estate construction and land-development loans, residential loans, and municipal loans increased. Commercial and industrial and owner-occupied commercial loans declined.
- Nonperforming assets increased to $372 million from $326 million at December 31, 2014; the nonperforming-assets ratio rose to 0.92% from 0.81%. Nonaccrual loans increased to $359 million from $307 million.
- Energy-related credit deterioration was the principal credit concern. Q3 energy loan net charge-offs were $16.9 million, compared with none in Q2. Classified energy loans increased to $441.4 million, and energy-related nonaccrual loans increased to $84.5 million.
- The allowance for loan losses decreased to $596.4 million from $604.7 million at year-end, while the reserve for unfunded lending commitments increased slightly to $81.4 million.
Guidance, outlook, commentary, risks and unusual items
- Management expected slight-to-moderate loan growth for the remainder of 2015, with continued growth in commercial and industrial lending and less growth in commercial real estate. Construction and land-development commitment growth was expected to remain limited.
- The company was targeting an adjusted efficiency ratio of 70% or less in the second half of 2015, 66% or less in 2016, and the low 60s by 2017. It also targeted adjusted noninterest expense below $1.6 billion in 2015 and 2016 and gross pretax cost savings of $120 million annually by 2017.
- Management continued purchasing short- to medium-duration agency securities to build high-quality liquid assets; Q3 purchases were approximately $1.6 billion at amortized cost. The company expected continued purchases, which could reduce asset sensitivity and pressure margins.
- Management expected modest margin pressure from competitive loan pricing, lower benchmark rates, and growth in lower-yielding residential mortgages, partially offset by lower debt costs, loan growth, securities purchases, and interest-rate swaps.
- Approximately $122 million of subordinated and convertible subordinated notes were scheduled to mature on November 16, 2015. The company also announced a $180 million tender offer for certain preferred stock and depositary shares, with potential 2016 preferred-dividend savings of approximately $10 million.
- The company expected to complete the subsidiary-bank mergers after December 31, 2015. Risks include implementation delays, technology failures, cost overruns, loss of key personnel, control weaknesses, customer disruption, regulatory scrutiny, and litigation.
- Additional risks include energy-price volatility, commercial real estate exposure, interest-rate and deposit-repricing uncertainty, regulatory and capital requirements, cybersecurity, and legal proceedings. Management estimated reasonably possible litigation losses of $0 to approximately $50 million beyond accrued amounts for matters where a range could be estimated; this does not represent maximum exposure.
- The remaining $24 million of prohibited private-equity investments under the Volcker Rule and approximately $8 million of related unfunded commitments were expected to be disposed of or addressed before the applicable deadline.
Most important facts for investors to verify
- Whether energy-related classified and nonaccrual loans, charge-offs, and allowance levels continued to worsen after September 30, 2015.
- Whether the planned bank-charter consolidation and technology initiatives were completed on schedule and achieved the projected cost savings without control or customer-service issues.
- Whether the company met its adjusted expense, efficiency-ratio, loan-growth, and margin objectives.
- The outcome of the $180 million preferred-stock tender offer and any subsequent preferred-equity reductions.
- Debt maturities, refinancing costs, liquidity capacity, and compliance with Basel III and the modified liquidity coverage requirement effective January 1, 2016.
- The status and ultimate exposure from the Reyes class action and governmental inquiries concerning anti-money-laundering and payment-processing practices.
- The sensitivity of earnings and capital to interest-rate changes, deposit migration, mortgage prepayments, securities valuations, and further energy-price declines.