Zions Bancorporation, National Association — Form 10-Q Summary
Business context and reporting period
Zions Bancorporation provides commercial and consumer banking, wealth management, and related financial services through banking subsidiaries across ten Western and Southwestern states. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, with comparisons to the corresponding 2009 periods. Amounts are generally in thousands unless otherwise stated.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net interest income | $451.9 million | $472.2 million | $1.321 billion | $1.441 billion |
| Provision for loan losses | $184.7 million | $565.9 million | $678.9 million | $1.626 billion |
| Net interest income after provision | $267.2 million | $(93.8) million | $641.6 million | $(185.6) million |
| Noninterest income | $110.2 million | $270.7 million | $327.2 million | $738.2 million |
| Noninterest expense | $456.0 million | $434.7 million | $1.276 billion | $1.230 billion |
| Net loss applicable to common shareholders | $(80.5) million | $(181.9) million | $(302.2) million | $(1.058) billion |
| Diluted loss per common share | $(0.47) | $(1.43) | $(1.87) | $(8.87) |
| Net interest margin | 3.84% | 3.91% | 3.81% | 3.98% |
| Core net interest margin | 4.03% | 4.13% | Not clearly provided | Not clearly provided |
| Net cash from operating activities | $372.6 million | $747.7 million | $1.131 billion | $1.262 billion |
At September 30, 2010, total assets were $51.0 billion, net loans and leases were $36.0 billion, total deposits were $41.0 billion, total shareholders’ equity was $6.5 billion, and cash and due from banks was $1.1 billion. The allowance for loan losses was $1.530 billion, or 4.07% of net loans and leases. Long-term debt was $1.919 billion and total borrowings, including FHLB advances and other borrowings, were approximately $2.2 billion.
Regulatory capital improved materially: the tangible common equity ratio was 7.03%, Tier 1 common to risk-weighted assets was 8.66%, Tier 1 risk-based capital was 13.97%, and total risk-based capital was 16.54%. The Company and its subsidiary banks exceeded applicable “well capitalized” standards.
Material changes versus prior comparable periods
- Quarterly net loss applicable to common shareholders improved to $80.5 million from $181.9 million, primarily because the loan-loss provision declined by $381.3 million.
- Year-to-date net loss improved to $302.2 million from $1.058 billion. Major drivers included a $947.3 million reduction in loan-loss provisions, the absence of the $634.0 million goodwill impairment recorded in 2009, and lower securities valuation losses.
- Loans and leases declined 9.0% from September 30, 2009 and 6.6% from December 31, 2009, reflecting paydowns, charge-offs, and weak loan demand. Commercial construction and land-development loans declined particularly sharply.
- Nonperforming lending-related assets declined to $2.293 billion from $2.769 billion at September 30, 2009; the ratio to net loans and leases and other real estate owned decreased to 6.01% from 6.62%.
- Net loan and lease charge-offs declined to $235.7 million in the third quarter and $718.0 million year to date, compared with $381.3 million and $880.5 million, respectively, in the comparable 2009 periods.
- Deposits declined to $41.0 billion as the Company reduced excess liquidity and non-core deposits. Brokered deposits fell to approximately $502 million from $1.608 billion at December 31, 2009 and $2.527 billion at September 30, 2009.
- Total controlling-interest shareholders’ equity increased to $6.495 billion from $5.693 billion at December 31, 2009, mainly due to common and preferred stock issuance and debt conversions, partly offset by losses and dividends.
Guidance, outlook, management commentary, risks, and unusual items
- Management reported signs of stabilization and improvement in several credit-quality measures during the second and third quarters, but stated that loan portfolio quality remained a concern and varied by geography and loan type.
- Management expects construction and land-development loans may continue to decline. Loan originations increased to $2.4 billion in the third quarter from $1.8 billion in the second quarter, but paydowns, charge-offs, and other reductions continued to exceed new originations.
- The Company expects to continue reducing non-core and relationship deposits while preserving the ability to bring deposits back as loan demand improves. Parent liquidity increased to $1.209 billion at September 30, 2010 from $542 million at December 31, 2009.
- Management stated that additional common equity may be raised to cover losses and dividends until the Company returns to profitability. The common dividend was reduced to $0.01 per share per quarter.
- Convertible subordinated debt discount amortization materially affected earnings and net interest margin. The remaining discount was $472.9 million at September 30, 2010, and future conversions could accelerate expense recognition. Holders elected to convert an additional $151.0 million of principal after quarter-end, with approximately $73.3 million of expected fourth-quarter accelerated amortization.
- The Company entered into a $1.16 billion notional total return swap covering bank and insurance trust-preferred CDOs. The transaction transferred credit risk and reduced regulatory risk-weighted assets, but generated a $22.8 million initial derivative loss and $11.6 million of structuring costs in the third quarter. Expected ongoing net costs were approximately $5.3 million per quarter after the first year, subject to conditions.
- Investment securities included substantial Level 3 and trust-preferred CDO exposure. Third-quarter credit-related OTTI charged to earnings was $23.7 million, while $49.4 million of noncredit-related OTTI was recorded in other comprehensive income. Management’s valuation assumptions remain sensitive to defaults, deferrals, projected losses, and discount rates.
- Dodd-Frank legislation may increase regulatory oversight, capital and liquidity requirements, FDIC fees, compliance costs, and restrictions on activities. It also phases out the eligibility of certain trust-preferred securities as Tier 1 capital.
- The Company reported no material expected impact from pending legal proceedings in the ordinary course of business. Management concluded that disclosure controls and procedures were effective as of September 30, 2010.
Most important facts for investors to verify
- Whether credit-quality improvement continues and whether nonaccrual loans, charge-offs, provisions, and commercial real estate losses continue to decline.
- The sustainability of earnings excluding debt-discount amortization, accelerated conversion costs, securities impairment, and other unusual items; GAAP results remained unprofitable.
- Future valuation changes and OTTI exposure in the trust-preferred CDO and other Level 3 securities portfolios.
- The economic cost, accounting impact, and regulatory-capital effects of the total return swap and future Dodd-Frank implementation.
- Parent-company liquidity, access to capital markets, ability of subsidiaries to pay dividends, and the potential need for additional common equity.
- Realization of the approximately $585 million net deferred tax asset, for which management had recorded no valuation allowance.
- Fourth-quarter effects of the announced $151.0 million debt conversion and the estimated $73.3 million accelerated discount amortization.