Zions Bancorporation, N.A. — Q3 2014 Form 10-Q Summary
Business context and reporting period
Zions Bancorporation provides banking and related financial services through eight community and regional banks operating across 11 western and southwestern states. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, with comparisons to the 2013 periods and December 31, 2013 balance-sheet data.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net interest income | $416.8 million | $415.5 million | $1.250 billion | $1.264 billion |
| Net interest margin | 3.20% | 3.22% | 3.27% | 3.37% |
| Noninterest income | $116.1 million | $122.2 million | $379.2 million | $368.6 million |
| Noninterest expense | $438.5 million | $370.7 million | $1.243 billion | $1.220 billion |
| Net income | $95.9 million | $111.5 million | $316.6 million | $304.9 million |
| Net earnings applicable to common shareholders | $79.1 million | $209.7 million | $259.8 million | $353.4 million |
| Diluted earnings per share | $0.40 | $1.12 | $1.36 | $1.90 |
| Net cash from operating activities | $198.2 million | $273.0 million | $337.2 million | $762.8 million |
- Total assets were $55.5 billion at September 30, 2014, compared with $56.0 billion at December 31, 2013.
- Loans and leases were $39.7 billion, up from $39.0 billion at year-end 2013. Deposits were $46.3 billion, down modestly from $46.4 billion.
- Allowance for loan losses was $610.3 million, and the reserve for unfunded lending commitments was $79.4 million. Net loan and lease charge-offs were $11.0 million in Q3, or 0.11% annualized of average loans.
- Nonaccrual loans were $307.2 million, compared with $406.6 million at December 31, 2013. Total nonperforming lending-related assets were $335 million, or 0.84% of loans, leases and other real estate owned.
- Long-term debt declined to $1.114 billion from $2.274 billion at year-end 2013. Cash and due from banks were $588.7 million at September 30, 2014.
- Shareholders’ equity increased to $7.322 billion from $6.465 billion, primarily due to common-stock issuance, net income and improved accumulated other comprehensive income.
- Regulatory capital ratios remained strong: Tier 1 common 11.86%, Tier 1 risk-based 14.43%, total risk-based 16.28%, and tangible common equity 9.70%.
Material changes versus comparable periods
- Q3 net earnings applicable to common shareholders fell 62% year over year, primarily because Q3 2013 included a $125.7 million preferred-stock redemption benefit. Q3 2014 also included $44.4 million of debt-extinguishment costs.
- Net interest income was broadly stable in Q3, but the margin declined to 3.20% from 3.22% year over year and 3.29% in Q2 2014. Lower loan yields, reduced FDIC-supported loan income and increased lower-yielding money-market investments pressured the margin.
- Credit costs improved materially. The provision for loan losses was a negative $54.6 million in Q3 2014 versus a negative $5.6 million in Q3 2013, reflecting reserve releases from improved credit quality and portfolio-mix changes.
- Noninterest expense rose 18.3% in Q3, driven by debt extinguishment costs, higher salaries and benefits, employee growth and severance. Noninterest income declined 5.0%, primarily because fixed-income securities gains became a $13.9 million loss.
- Loan growth was concentrated in commercial and industrial, commercial real estate term, residential mortgage and home-equity loans. Construction and land-development loans declined $447 million through conversions, syndications and participations.
- On July 28, 2014, the company issued approximately 17.6 million common shares for $525 million, adding approximately $516 million after costs.
Guidance, outlook, risks and unusual items
- Management expects credit costs to remain low in the foreseeable future absent a significant economic downturn, but expects reserve releases to become a less important earnings source as credit improvement slows and loan growth resumes.
- Management expects continued pressure on loan yields and net interest margin from competitive pricing, lower benchmark rates and growth in lower-yielding residential mortgages. Lower debt costs and loan growth are expected to offset part of this pressure.
- The company expects to remain asset-sensitive and plans to deploy up to $1.2 billion of cash into short- to medium-duration agency mortgage-backed securities to meet heightened liquidity requirements. The shift may modestly reduce asset sensitivity.
- The Volcker Rule required divestiture of certain investments. At September 30, approximately $51 million of prohibited private-equity and other investments remained, with a July 21, 2015 disposal deadline; management did not expect a material financial-statement impact.
- During Q3, the company sold $239 million par amount of CDO securities at a $19 million loss and recorded approximately $5 million of gains on $37 million of CDO paydowns. No Q3 credit-related OTTI was recorded.
- CDO valuations remain sensitive to default, deferral, prepayment and discount-rate assumptions. The CDO portfolio had $932 million of par amount and $605 million of carrying value at September 30, 2014, including $158 million of pretax unrealized losses.
- FDIC loss-sharing agreements for the principal commercial acquired-loan portfolios expired by September 30, 2014. FDIC-supported/PCI loans declined to $190 million from $350 million at year-end, and the FDIC indemnification asset fell to $0.8 million from $26.4 million.
- Material contingencies include ongoing litigation and governmental investigations involving alleged telemarketing-related practices, potential money laundering and payment processing. The estimated range of reasonably possible losses for certain matters was $0 to approximately $50 million beyond accrued amounts, excluding matters for which an estimate was not possible.
- Basel III capital rules became effective for the company January 1, 2015, with additional phase-in requirements through 2019. Management stated that the company and subsidiary banks would meet fully phased-in capital requirements based on September 30, 2014 conditions.
Most important facts for investors to verify
- Whether reserve releases continue to support earnings and how results perform when releases diminish.
- Future net interest margin trends, including the effects of loan pricing, interest rates, debt reductions and the planned securities purchases.
- Exposure to Level 3 CDO valuations, unrealized losses, deferrals and potential additional sales losses.
- Post-expiration performance and credit losses of the FDIC-supported/PCI loan portfolio.
- Execution and costs of new lending, deposit and reporting systems, including planned staff reductions and elevated technology spending.
- Progress under the company’s capital plan and compliance with Basel III and liquidity requirements.
- Developments in the disclosed litigation, regulatory investigations and potential losses beyond recorded accruals.