Zions Bancorporation 2014 Form 10-K Summary
Business context and reporting period
Zions Bancorporation is a $57.2 billion financial holding company headquartered in Salt Lake City, Utah. It operates eight commercial banks through 460 domestic branches across 11 Western and Southwestern states, with 10,462 full-time-equivalent employees at December 31, 2014. The filing covers the fiscal year ended December 31, 2014; fourth-quarter results are included in the annual financial statements.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $2,188.6 million | $2,033.7 million | +8% |
| Net interest income | $1,680.0 million | $1,696.3 million | -1% |
| Noninterest income | $508.6 million | $337.4 million | +51% |
| Net income | $398.5 million | $263.5 million | +51% |
| Net earnings available to common shareholders | $326.6 million | $294.0 million | +11% |
| Diluted EPS | $1.68 | $1.58 | +6% |
| Net interest margin | 3.26% | 3.36% | -10 bps |
| Return on average assets | 0.71% | 0.48% | +23 bps |
| Tangible return on average tangible common equity | 6.70% | 7.44% | -74 bps |
| Assets at year-end | $57.2 billion | $56.0 billion | +2% |
| Net loans and leases | $40.1 billion | $39.0 billion | +3% |
| Deposits | $47.8 billion | $46.4 billion | +3% |
| Long-term debt | $1.1 billion | $2.3 billion | -52% |
Cash flow from operating activities was $454.1 million. Investing activities used $1.34 billion, including $1.08 billion of net loan growth and $175.8 million of premises and equipment purchases. Financing activities provided $557.3 million, including $1.49 billion of deposit growth and $526.4 million from common and preferred stock issuance, partly offset by $1.22 billion of long-term debt repayments. Cash and due from banks declined to $845.9 million from $1.18 billion.
- Credit performance improved: nonperforming lending-related assets declined 28% to $326 million, the related ratio fell to 0.81% from 1.15%, and net charge-offs declined to $42 million from $52 million.
- The allowance for loan losses declined to $604.7 million from $746.3 million, while the total allowance for credit losses, including unfunded commitments, was $685.7 million.
- Regulatory capital remained strong: the Basel I Tier 1 common ratio was 11.92%, total risk-based capital was 16.27%, and tangible common equity was 9.48% of tangible assets.
- The net loan-to-deposit ratio was 83.7%. Core deposits excluding brokered deposits represented 97.3% of consolidated deposits, and approximately $16.4 billion of additional Federal Home Loan Bank and Federal Reserve borrowing capacity was available.
- The common dividend was $0.04 per share in each quarter of 2014. The January 2015 dividend declaration maintained the $0.04 quarterly rate, subject to earnings, capital requirements, financial condition, and regulatory approval.
Material changes versus the prior comparable period
- Profitability improved primarily because of a $165.1 million reduction in investment-securities impairment losses, a $75.8 million reduction in debt-extinguishment costs, lower long-term-debt interest expense, and lower preferred dividends.
- Net interest income declined modestly and the margin compressed because of lower loan and available-for-sale securities yields, runoff of FDIC-supported loans, competitive pricing, and lower benchmark rates.
- Noninterest expense decreased 3% to $1.67 billion, but salaries and employee benefits increased 4.8% to $956.4 million because of systems, risk-management, and stress-testing initiatives. Management characterized operating costs as elevated while technology projects continue.
- The Company issued $525 million of common stock, or approximately 17.6 million shares, in July 2014. Common equity increased 17% to $6.37 billion.
- Long-term debt was reduced by approximately $1.2 billion through tenders, early calls, and maturities. The Company estimated that this would reduce 2015 long-term-debt interest expense by approximately $53 million.
- The Company reduced its CDO portfolio by approximately $1.02 billion of amortized cost through sales and paydowns. The remaining CDO portfolio had $592 million of amortized cost and $432 million of carrying value at year-end.
- The 2014 fourth quarter produced $66.8 million of net earnings available to common shareholders, or $0.33 diluted EPS, compared with a $59.4 million loss, or $(0.32) per share, in the 2013 fourth quarter. The 2013 fourth quarter included a significant CDO impairment charge.
Guidance, outlook, risks and unusual items
- Management expects moderate loan growth in 2015, continued emphasis on business and residential mortgage lending, and additional fee-income initiatives. Construction and land-development loan growth is expected to remain constrained.
- Management expects net positive provisions for credit losses in 2015 because the benefit from prior credit-quality improvement is largely exhausted. Energy-related credit quality is expected to deteriorate, although losses were then expected to be modest.
- Energy-related credit exposure was approximately $6.3 billion, including $3.2 billion of oil and gas loans. The Company increased qualitative credit-loss adjustments by approximately $25 million in the fourth quarter because of the sharp decline in oil prices and began selected interim borrowing-base reviews.
- The Company planned to purchase approximately $1.5 billion to $2.0 billion of additional short- to medium-duration agency securities in 2015 to satisfy liquidity requirements and improve returns on excess cash.
- Basel III became effective for the Company on January 1, 2015. Management believed the Company would meet fully phased-in Basel III capital requirements based on year-end 2014 pro forma ratios, including a 11.80% fully phased-in Tier 1 common ratio.
- New liquidity rules require monthly liquidity stress testing beginning in January 2015 and a modified liquidity coverage ratio of at least 100% beginning in 2016. Management stated that current liquidity stress tests indicated compliance.
- The Company remains exposed to commercial real estate, construction and land-development, energy, geographic concentration, interest-rate, liquidity, regulatory, litigation, cybersecurity, model, and technology-implementation risks.
- The Company had $17.6 billion of unfunded lending commitments and $929.4 million of standby letters of credit at year-end. It also had $25 million of unfunded commitments to prohibited private-equity investments subject to the Volcker Rule.
- Long-term debt maturities in 2015 totaled approximately $217 million, and additional optional early redemptions of approximately $27 million were available. The Company reported investment-grade senior-debt ratings from several agencies, while Moody’s rated senior debt Ba1.
- The Meridian Funds litigation was settled in February 2015, with the settlement substantially covered by recorded accruals. The Company estimated reasonably possible legal losses of up to approximately $50 million above accrued amounts for matters where a meaningful range could be estimated; this was not a maximum exposure.
- The filing states that management and Ernst & Young concluded internal control over financial reporting was effective and issued an unqualified audit opinion.
Important facts for investors to verify
- Whether energy-related borrowers, particularly upstream and oilfield-services borrowers, generate higher provisions, charge-offs, or criticized loans as lower commodity prices persist.
- Whether net interest margin stabilizes as high-cost debt is retired, HQLA purchases increase, and low-rate loan repricing continues.
- The outcome of the 2015 CCAR and DFAST processes and any resulting restrictions on dividends, share repurchases, debt redemptions, or capital issuance.
- Actual implementation costs, timing, savings, and operational effects of the new loan, deposit, and accounting systems.
- The carrying value, valuation assumptions, and realized losses of the remaining Level 3 CDO portfolio and prohibited private-equity investments.
- Trends in nonperforming assets, troubled debt restructurings, allowance coverage, and credit quality in the Company’s Utah, Texas, and California markets.
- Subsequent developments in the Reyes litigation, government investigations, regulatory matters, and other legal contingencies.