Business Context and Reporting Period
Zions Bancorporation, National Association, is a regional banking organization serving customers through subsidiary banks across 10 Western and Southwestern states. This unaudited Form 10-Q covers the three months ended March 31, 2014, with comparisons to March 31, 2013 and December 31, 2013 where applicable.
Financial Performance and Position
| Metric | Q1 2014 | Comparable period |
|---|---|---|
| Net interest income | $416.5 million | $418.1 million in Q1 2013 |
| Net interest margin | 3.31% | 3.44% in Q1 2013; 3.33% in Q4 2013 |
| Noninterest income | $138.3 million | $121.2 million in Q1 2013 |
| Noninterest expense | $398.1 million | $397.3 million in Q1 2013 |
| Net income applicable to controlling interest | $101.2 million | $110.7 million in Q1 2013 |
| Net earnings applicable to common shareholders | $76.2 million, or $0.41 diluted EPS | $88.3 million, or $0.48 diluted EPS |
| Operating cash flow | $126.6 million | $202.3 million in Q1 2013 |
- Total assets were $56.1 billion at March 31, 2014, compared with $56.0 billion at December 31, 2013.
- Loans and leases were $39.2 billion, up from $39.0 billion at year-end 2013. Deposits were $46.5 billion, up from $46.4 billion.
- Cash and due from banks increased to $1.34 billion from $1.18 billion. Consolidated cash, interest-bearing deposits and security resell agreements totaled approximately $9.5 billion.
- Long-term debt was $2.16 billion, down from $2.27 billion. The company redeemed $125 million of long-term notes during the quarter.
- Shareholders’ equity was $6.59 billion, including $1.00 billion of preferred stock. Tangible common equity was 8.24% of tangible assets; total risk-based capital was 15.11%.
- Net loan and lease charge-offs were $7.9 million, or 0.08% annualized of average loans, compared with $17.8 million and 0.19% in Q1 2013. The allowance for loan losses was $737.0 million, or 1.88% of loans.
- Nonperforming lending-related assets were $441 million, or 1.12% of loans, leases and other real estate owned, compared with $452 million and 1.15% at December 31, 2013.
Material Changes Versus the Prior Comparable Period
- Common earnings declined 14% year over year, primarily because lower loan yields and reduced FDIC-supported loan income outweighed lower credit costs.
- The provision for loan losses improved to a credit of $0.6 million from a credit of $29.0 million in Q1 2013. Management attributed the change to improved credit quality and lower realized loss rates.
- Noninterest income increased $17.1 million, principally because fixed-income securities gains rose to $30.9 million from $3.3 million. The increase was partly offset by lower loan sales and servicing income, dividends and other investment income, and higher derivative losses.
- Net interest margin declined 13 basis points year over year. Loan yields fell as variable-rate loans reset at lower indices and new loans were originated at lower spreads amid competitive pricing pressure.
- The allowance for loan losses declined from $841.8 million at March 31, 2013, while classified loans increased modestly during the quarter to $1.4 billion from $1.3 billion at December 31, 2013.
- Accumulated other comprehensive loss improved to $145.5 million from $192.1 million at year-end 2013, primarily because of higher investment-security fair values.
Guidance, Outlook, Risks and Unusual Items
- Management expects further decline in the FDIC-supported loan portfolio and related income. This decline is expected to reduce net interest margin by approximately 18 basis points over several quarters, although lower debt costs and modest loan growth may offset some pressure.
- The company expects loan yields and margins to remain under pressure from competitive pricing and low benchmark interest rates. It expects modest net interest income growth excluding the FDIC-supported portfolio effect.
- FDIC loss-sharing agreements for most commercial acquired loans expire during 2014, with the final commercial agreement expiring September 30, 2014. The FDIC indemnification asset was $13.2 million at March 31, 2014 and is expected to decline to a de minimis level by September 30, 2014.
- The company sold or received paydowns on approximately $993 million of CDO par value during the quarter, producing approximately $31 million of net gains. The remaining CDO portfolio had $774 million of carrying value at March 31, 2014 and remained exposed to credit, valuation and liquidity risk.
- The total return swap covering CDO exposure was canceled effective April 28, 2014. Cancellation is expected to increase risk-weighted assets by approximately $1 billion at the end of Q2 2014, absent additional sales or paydowns, and to generate approximately $0.5 million of additional Q2 expense.
- Following Federal Reserve stress-test results, management estimated that an approximately $400 million common equity issuance might be required to obtain a non-objection to the resubmitted 2014 Capital Plan. The resubmitted plan was filed April 30, 2014; the Federal Reserve had up to 75 days to decide.
- Legal matters included putative class actions, governmental investigations involving anti-money-laundering and payment-processing practices, and other proceedings. The estimated range of reasonably possible losses for certain matters was $0 to approximately $50 million in excess of accrued amounts, excluding matters for which an estimate was not possible.
- Basel III capital rules become effective for the company January 1, 2015, with additional phase-in requirements through 2019. Management stated that the company would meet fully phased-in capital requirements if they were effective at March 31, 2014.
Most Important Facts for Investors to Verify
- Whether the Federal Reserve objects to or does not object to the resubmitted 2014 Capital Plan and whether a common equity issuance is required.
- The effect of the canceled total return swap on Q2 risk-weighted assets, capital ratios and regulatory capital planning.
- The pace of FDIC-supported loan runoff, expiration of loss-sharing coverage and decline in related accretion income.
- Performance and valuation of the remaining bank and insurance trust-preferred CDO portfolio, including Level 3 assumptions, unrealized losses and liquidity.
- Whether margin compression from low rates, loan repricing and competitive lending spreads is offset by loan growth and debt repayment.
- Trends in classified loans, nonaccrual loans, charge-offs and allowance releases, noting management’s statement that lower credit costs are not sustainable indefinitely.
- Potential exposure from pending litigation, governmental investigations, Basel III implementation and other regulatory requirements.