Zions Bancorporation 2016 Q2 Form 10-Q Summary
Business Context and Reporting Period
Zions Bancorporation is a financial holding company headquartered in Salt Lake City, Utah, providing banking and related services through seven separately managed brands across 11 Western and Southwestern states. The unaudited filing covers the three and six months ended June 30, 2016, with comparisons to the corresponding 2015 periods and December 31, 2015 balance-sheet amounts. Following the December 31, 2015 consolidation of subsidiary banks into ZB, N.A., operations continued under the existing local brands.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net interest income | $464.8 million | $423.7 million | $917.7 million | $841.1 million |
| Provision for loan losses | $34.5 million | $0.6 million | $76.6 million | $(0.9) million |
| Noninterest income | $125.7 million | $(4.7) million | $242.5 million | $112.7 million |
| Noninterest expense | $381.9 million | $399.0 million | $777.5 million | $792.0 million |
| Net income | $113.9 million | $14.0 million | $204.4 million | $106.0 million |
| Net earnings applicable to common shareholders | $90.6 million | $(1.1) million | $169.4 million | $74.2 million |
| Diluted earnings per common share | $0.44 | $(0.01) | $0.82 | $0.36 |
| Net interest margin | 3.39% | 3.18% | 3.37% | 3.20% |
| Efficiency ratio, non-GAAP | 64.5% | 71.1% | 66.5% | 71.5% |
| Adjusted PPNR, non-GAAP | $211.5 million | $160.4 million | $393.6 million | $311.3 million |
- Loans and leases totaled $42.5 billion at June 30, 2016, compared with $40.6 billion at December 31, 2015. Loan growth was concentrated in commercial real estate term loans, residential loans, and commercial and industrial loans.
- Total deposits were $50.3 billion, broadly stable versus $50.4 billion at year-end 2015. The loan-to-deposit ratio increased to 84.5% from 80.7%.
- Investment securities increased to $10.3 billion from $8.2 billion at December 31, 2015, primarily reflecting purchases of agency and mortgage-backed securities to increase high-quality liquid assets.
- Shareholders’ equity increased to $7.6 billion from $7.5 billion. Tangible common equity was $5.9 billion, and the tangible common equity ratio was 10.05%.
- Long-term debt declined to $698.7 million from $812.4 million at year-end. The company repaid or redeemed $115 million of long-term debt during the first six months.
- Operating cash flow was $234.6 million for the first six months, compared with $173.8 million in the prior-year period. Cash and due from banks declined by $238.1 million during the first six months to $560.3 million, primarily because of investment-security purchases, loan growth, preferred-stock redemption, and debt repayment.
- At June 30, 2016, the company reported approximately $3.2 billion of consolidated cash, interest-bearing deposits, and security resell agreements, compared with $7.4 billion at December 31, 2015. Management stated that it complied with its internal liquidity policy and exceeded modified LCR requirements.
Material Changes Versus Prior Comparable Periods
- Second-quarter common earnings improved substantially from a loss of $1.1 million in Q2 2015 to $90.6 million. The prior-year period included an approximately $137 million pretax loss from the sale of the remaining collateralized debt obligation portfolio.
- Net interest income increased 9.7% in Q2 and 9.1% for the first six months, supported by loan growth, deployment of lower-yielding money-market assets into securities, and lower long-term debt expense.
- Noninterest expense decreased $17.1 million in Q2 and $14.5 million year to date, aided by lower compensation expense and efficiency initiatives. Full-time equivalent employees declined to 10,064 from 10,265 at June 30, 2015.
- Provision for loan losses increased materially because of deterioration in the oil and gas-related portfolio. Second-quarter net charge-offs were approximately $38 million, including $37 million from oil and gas-related loans, compared with $11 million overall in Q2 2015.
- Nonaccrual loans rose to $533.8 million from $349.9 million at December 31, 2015. Total nonperforming assets increased to $556 million from $357 million, and the nonperforming-asset ratio increased to 1.30% from 0.87%.
- Oil and gas-related credit exposure declined to $4.4 billion from $4.8 billion at year-end and $5.3 billion a year earlier, but classified and nonaccrual metrics deteriorated. Management stated that further deterioration remained possible.
- Preferred stock declined by $118.9 million following a tender offer, with an aggregate cash payment of $126.1 million and a one-time $9.8 million reduction to earnings applicable to common shareholders.
- Accumulated other comprehensive income improved to $23.7 million from a $54.6 million loss at year-end, primarily because of higher fair values of available-for-sale securities.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management targets adjusted 2016 noninterest expense below $1.58 billion. First-half adjusted expense was $780.3 million, and management stated that it remained on track to exceed 80% of its targeted gross expense reductions by year-end 2016.
- The company targets an efficiency ratio below 66% in 2016 and in the low 60s by fiscal year-end 2017. Management expects annual gross pretax cost savings of $120 million from operational initiatives by year-end 2017.
- Management expects the quarterly provision for credit losses to remain stable relative to Q2, assuming no significant adverse change in market conditions. The filing notes that oil and gas price volatility could produce additional credit deterioration.
- Management expects an effective tax rate of approximately 34% to 36% for the next six months.
- The company expects to continue purchasing short- to medium-duration agency securities to build its HQLA position. It expects these actions to reduce asset sensitivity over time but noted that competitive loan pricing and low interest rates may pressure loan yields and net interest margin.
- The Federal Reserve did not object to the 2016 capital plan. The plan included an increase in the quarterly common dividend to $0.08 per share beginning in Q3 2016, up to $180 million of common-equity repurchases, and up to $144 million of preferred-equity repurchases. The board subsequently approved a $45 million third-quarter stock buyback.
- Material contingencies include the Reyes payment-processing class action settlement, expected to range from $37.5 million to $37.75 million and subject to court approval; a related Department of Justice inquiry; other governmental inquiries; and civil litigation relating to EB-5 investment-program banking relationships. The company estimated reasonably possible litigation losses of up to approximately $20 million above accrued amounts for matters where a meaningful estimate was possible, but stated that this range does not represent maximum exposure.
- The filing identifies broad risks involving oil and gas prices, commercial real estate, interest rates, liquidity, deposit flows, regulatory capital, legal proceedings, cybersecurity, technology, competition, and changes in banking and accounting regulations.
- The company adopted several accounting updates in 2016 without material impact. It expects the future credit-loss standard, ASU 2016-13, to have a material impact but was still evaluating the amount.
Most Important Facts for Investors to Verify
- Whether oil and gas-related credit deterioration, classified loans, nonaccrual loans, and charge-offs stabilize or require additional provisions.
- Whether the company achieves its stated 2016 expense and efficiency-ratio targets while continuing to invest in technology and HQLA securities.
- The sustainability of the 3.39% Q2 net interest margin, given competitive loan pricing, low rates, deposit repricing, and securities-premium amortization.
- The effect of continued preferred-stock redemptions, common-stock repurchases, and dividend increases on regulatory capital and tangible common equity.
- The final approval, insurance recovery, and cash impact of the Reyes settlement and the status of the Department of Justice and other legal inquiries.
- The effect of declining cash and short-term investments, higher loan-to-deposit leverage, and increased pledged collateral on liquidity flexibility.
- Future implementation effects of the expected-loss accounting standard and any changes in regulatory capital, liquidity, FDIC assessment, or Volcker Rule requirements.