ZION - Zions Bancorp

[PlanMaestro]

Some of you know my optimism on this idea but for the rest:

 

* Great deposit franchise, that competes with BAC and WFC in cost of funds.

* Presence in high growth states.

* Better credit ratios than the Big 4 and similar capital ratios.

* No mortgage hangover. No Europe. No derivatives.

* Strength in commercial lending.

* Non-TARP warrants with dilution protections that expire in 2020.

* Cheap.

 

They've done a couple of stupid things in the past (an expensive acquisition in Texas and investing in TruPS CDOs).  But the core of their problems were Construction and Development loans. Since they have operations in California, Arizona and Nevada you can imagine the difficulties but also the strength of its pre-provisions earnings to have survived them.

 

And now this:

 

http://www.prnewswire.com/news-releases/federal-reserve-does-not-object-to-zions-2012-capital-plan-142560175.html

 

Today the Federal Reserve formally notified Zions Bancorporation (Nasdaq: ZION) that it does not object to Zions' Capital Plan, submitted pursuant to the Federal Reserve's 2012 Capital Plan and Review (CapPR).  Key elements of Zions' Board-approved Capital Plan include:

 

Redemption in its entirety ($1.4 billion) of Zions' TARP (Troubled Asset Relief Program) preferred equity in 2012.  This redemption is expected to occur in two installments of $700 million each; Zions expects to redeem the first $700 million after receipt of U.S. Treasury approval; Zions expects to apply to the U.S. Treasury for such approval within the next week.  The second $700 million installment is also contingent on (1) maintenance of adequate Parent Company liquidity; (2) return of $500 million of capital from Zions' subsidiary banks to the Parent in the second half of 2012, which requires primary bank regulator approval; and (3) no material deterioration in the Company's overall condition.

 

[fenris]

Not so cheap anymore?

 

What do you think the fair value is (hard price or P/B)?

[vinod1]

I am not able to find any warrants. Could you please post a symbol?

 

Thanks

 

Vinod

[PlanMaestro]

ZIONW

 

They are not part of TARP, they were issued as part of a capital raise, but they still have some dilution protections.

[MrB]

The data I'm looking at shows the div threshold as 1 cent which is great, but exercise at $36.63 which puts the cost at 2.18x BV, which strikes me as expensive?

 

[PlanMaestro]

The data I'm looking at shows the div threshold as 1 cent which is great, but exercise at $36.63 which puts the cost at 2.18x BV, which strikes me as expensive?

 

Hi MrB.

 

The book value per share you are using is tangible common equity right? In other words subtracting TARP and other preferreds plus goodwill, right? I think TCE (around $19 per share) as a valuation tool might be misleading in this situation but I am open to other interpretations. Book value including those is $37.9 per share.

 

Their capital plan is to reduce the expensive financing that they are pre-paying (including TARP). Historic PTPP is higher than $1 billion ($5.4 per share) and growth potential is higher than the Big 4. The warrants have gone up quite a bit the last 2 days though. Not as cheap as a few days ago.

[vinod1]

ZIONW

 

They are not part of TARP, they were issued as part of a capital raise, but they still have some dilution protections.

 

Thank you!

 

Just taking a first cut at a quick and dirty valuation in a couple of different ways

 

1. PTPP of $900 million. Given its loan mix I think normalized loan loss should be about 0.5%  (old nomal) to 0.75% (new normal) or about $200 - $300 million. Pre Tax of $600-$700 million or about $2 to $2.5 EPS at a rough diluated share count of about 200 million (including warrants for example). IV would be about $25.

 

2. Assuming it can earn about 1% on its assets (its average during 2001-2006 is 1.2%) and it estimates that Durbin has a $50 million pretax impact. So I see 1% ROA as more likely case. If we apply to its current assets of $53 billion we get $2.7 EPS or IV of about $30.  Or assume as above but esimate for 2-3 years out and when its asset base grows to about $60 billion, we have an EPS of $3 or IV of about $35.

 

It needs to use its cash flow for TARP repayment so I would not expect any large share repurchases in the next 1-2 years. I can see why it is attractive on its own but compared to other big bank alternatives, it does not seem to be as attractive. As you mention it does have a different risk profile. I certainly plan to keep an eye out if it becomes cheaper.

 

Am I missing anything obvious?

 

Thanks

 

Vinod

[PlanMaestro]

Am I missing anything obvious?

 

I would not say obvious, but a couple of points:

 

1. Growth: this is a bank that will earn 12-15% ROE, return that is closer to 20% over tangible equity, while growing above the national GDP (let's say 4-6% real, 6-8% nominal). It is not going to be priced at TBV or BV for too long. The Big4, with the exception of maybe Citigroup that doesn't have the low cost deposit franchise, are more restrained in their ability to grow above GDP.

2: Timing: There are not the same pressures to reserve more without the legal mortgage hangover and the good credit/capital ratios. ZION most probably will show its earnings potential, but not capital distributions, sooner than others.

 

Despite these comments I agree that after the run-up, on a just reverse to the mean thesis without considering growth or deposit franchise, other banks look cheaper (Bank of America for a start). One reason that I liked ZION was that the warrants using a Black and Scholes model, with all its faults, had a much lower implied volatility than other TARP warrants. Not sure if that is the case anymore.

 

 

 

[PlanMaestro]

Zion pays half TARP

 

http://www.zacks.com/stock/news/72179/zions-partly-repays-tarp-dues

 

Zions’ repayment was financed by the proceeds from the recent $300 million senior notes offering, in addition to other funds from available resources. Last week, the company had announced the pricing of its fixed-rate senior unsecured notes, which the company offered with a maturity date of March 27, 2017 and a coupon rate of 4.50%.

[PlanMaestro]

Zions announces paying the other half of TARP in the second half of the year.

 

http://finance.yahoo.com/news/Zions-Bancorporation-Reports-prnewstmp-21205358.html?x=0&.v=1&c=1

 

* Starting to replace expensive financing that has positive earnings impact (BofA watchers!)

* TCE ratio increased to 6.89% from 6.77%

* TCE increased to $19.39 from $19.14 per share

* some NIM and loan generation pressure

* beats earnings but not by much

* credit ratios, specifically charge-offs, trending great

* capital ratios doing very good considering TARP retirement

 

Update: Management becoming more optimistic on recovering more than book value on the heavily discounted TruPs CDOs with a positive impact in capital ratios over time.

 

[PlanMaestro]

The top part of this is -- it's basically now 2 broad categories, are performing and nonperforming CDOs. Notice the performing CDOs have a par value of just under $1.5 billion and a carrying value of just over $1 billion. None of these securities has ever missed a payment despite the severe trauma the banking system experienced, and we feel reasonably confident that we're going to get most of the discount in this portfolio back over time based on our cash flow modeling and so forth. This represents a potentially significant potential benefit to our book value and tangible common equity ratios. We recovered all of it that would be accretive to tangible common equity by about 7% to 8%.

 

The nonperforming CDOs which are -- you can see there about -- just over -- just under $1.1 billion of nonperforming with a carrying value of $200 million, fall onto 2 categories: Those that have experienced credit impairment or OTTI recently, mainly within the last 12 months; and those that have experienced it in the past, but not within the last 12 months.

 

We expect to see some of this discount in the nonperforming CDOs accrete back into equity. But if there's impairment to be taken in the future, we would expect most of it to come out of the $200 million of unrealized loss in those that have experienced credit impairment within the last 12 months, even as the OCI mark on other CDOs may improve.

[PlanMaestro]

The data I'm looking at shows the div threshold as 1 cent which is great, but exercise at $36.63 which puts the cost at 2.18x BV, which strikes me as expensive?

 

The price of the warrants is right again. Same as the end of last year with a much higher stock price. Remember, they are not TARP.

[PlanMaestro]

Harris Simmons at the Morgan Stanley conference. Expects that since trust preferreds will not count as capital under Basel III it will accelerate pre-payments of the the trups underlying the CDOs that they own. The CDOs are heavily discounted in Zions' balance sheet and should recover closer to par value. They also expect to simplify the capital structure, retiring expensive senior debt, converts, subordinated debt, and trups thanks to the liquidity that they, and all banks, are enjoying.

 

http://cc.talkpoint.com/morg007/061212a_mc/

http://www.snl.com/Cache/1001166707.PDF?D=&O=PDF&IID=100501&Y=&T=&FID=1001166707

[PlanMaestro]

Adjusted for the noncash effects in the second quarter of the discount amortization on conversion of subordinated debt and additional accretion (net of expense) on acquired FDIC-supported loans, net earnings applicable to common shareholders were $72.9 million or $0.40 per diluted share for the second quarter of 2012, compared to $40.5 million or $0.22 per diluted share for the first quarter of 2012.

 

 

[dcollon]

Planmaestro,

 

The improvement in credit was impressive.  Specifically the q to q decline in non-accruals (-9%), 90 day + (22%), 30-60 day (16.7%).  I could keep going.  They appear to be doing a very nice job of managing the bank.  They have a great deposit franchise and are growing loans (hopefully responsibly).

 

In my opinion, this company should not be trading at a discount to TBV. 

 

 

[PlanMaestro]

Well, I guess we are alone on this. The warrants are at their lows and the common plunged even after beating both revenues and earnings.

 

All capital ratios are improving even after paying 1/2 TARP. Also their loan mix strength – no residential mortgage overhang and strength in commercial loans – should show soon in their earnings power. Paying the other half of TARP should increase annual earnings by $0.26 per share and there is potential for further improvements by retiring other types of hybrid capital. Not to mention the shadow book value of those heavily discounted CDOs.

 

 

Planmaestro,

 

The improvement in credit was impressive.  Specifically the q to q decline in non-accruals (-9%), 90 day + (22%), 30-60 day (16.7%).  I could keep going.  They appear to be doing a very nice job of managing the bank.  They have a great deposit franchise and are growing loans (hopefully responsibly).

 

In my opinion, this company should not be trading at a discount to TBV.

[dcollon]

Yep...I guess we are.  I attached a couple of notes, in case you haven't seen what some of the brilliant sell side analysts have said.

 

ZION_1.pdf

ZION_2.pdf

[Grenville]

I just skimmed the ZION 2011 10K.

 

I like the low cost deposit base with lots of growth potential. The core bank earnings engine looks to be producing good profitability. Also looks like they will clean up the capital structure.

 

A couple of things stuck out for me though:

 

+ CEO & Chairman Harris Simmons oversaw the investments in the CDOs and the setup of Lockhart SPV and he still remains in charge --> what prevents similar investments in the future

 

+ TRS with Deutche Bank covering 1bln of CDO for regulatory capital

 

+ Foreign branches in Grand Cayman --> (not sure what the purpose is, I haven't come across this with other banks, may not be a big deal)

 

+ "The company holds investments in pre-public companies through various venture capital funds." Only about 48mln, but why is a bank investing in VC

 

+ "Amegy has in place an alternative investment program. These investments are primary directed toward equity buyout and mezzanine funds with a key strategy of deriving ancillary commercial banking business from portfolio companies." --> 71mln but still doesn't sound like something a bank needs to be involved in.

 

[PlanMaestro]

+ CEO & Chairman Harris Simmons oversaw the investments in the CDOs and the setup of Lockhart SPV and he still remains in charge --> what prevents similar investments in the future

 

cat - hot stove - sat - lesson - will never forget

 

+ TRS with Deutche Bank covering 1bln of CDO for regulatory capital

 

Part of minimizing the damage of buying the CDOs of Lockhart SPV. They are well discounted in the balance sheet so I consider these more about navigating the regulatory issues.

 

http://articles.marketwatch.com/2010-07-28/industries/30712822_1_cdos-zions-bancorp-collateralized-debt-obligations

 

Fitch views ZION's recent total return swap (TRS) with Deutsche Bank covering the credit risk of ZION's CDO portfolio as a modest positive for the company. The TRS ensures timely payment of interest and principal payments on the CDO portfolio, thereby substituting Deutsche Bank's credit for the underlying credit of the CDO portfolio for a cost of approximately $20 million per year. The TRS gives ZION relief on its risk-weighted assets, and therefore regulatory capital ratios; however, since the TRS does not qualify for hedge accounting, ZION is still subject to impairment charges on the CDO portfolio, which could still negatively impact the denominator of tangible capital ratios.

 

+ Foreign branches in Grand Cayman --> (not sure what the purpose is, I haven't come across this with other banks, may not be a big deal)

 

$1.6 billion in deposits does not look good,  but this is not exceptional. A few from the phone directory:

 

BANK OF AMERICA TRUST & BANKING CORP (CAYMAN) LTD Company Phone: 949-7888

MERRILL LYNCH BANK & TRUST CO (CAYMAN) LTD Company Phone: 949-8206

ROYAL BANK OF CANADA Company Phone: 949-4600

SCOTIABANK & TRUST (CAYMAN) LTD Company Phone: 949-7666

FIDELITY BANK (CAYMAN) LIMITED Company Phone: 949-7822

 

Subsidiaries from large banks and other corporations in tax havens

http://www.gao.gov/new.items/d09157.pdf

 

"Bailout beneficiaries Morgan Stanley, Citigroup, and Bank of America boast over 300 subsidiaries in the Cayman Islands."

 

+ "The company holds investments in pre-public companies through various venture capital funds." Only about 48mln, but why is a bank investing in VC.

 

I don't like it, and the justification is short in details.

 

" These securities include certain venture capital securities and securities acquired for various debt and regulatory requirements. Nonmarketable venture capital securities are reported at estimated fair values, in the absence of readily ascertainable fair values.

 

+ "Amegy has in place an alternative investment program. These investments are primary directed toward equity buyout and mezzanine funds with a key strategy of deriving ancillary commercial banking business from portfolio companies." --> 71mln but still doesn't sound like something a bank needs to be involved in.

 

Considering the large LBO operations of the large banks, this is miniscule.  They don't need to, but it is small and since Amegy has a strong presence in oil&gas (3rd largest bank in Texas) I am not surprised that it is used as way of gaining long term business.

 

BTW, Amegy was the fully priced acquisition that I mentioned (2.8x BV, 4x TBV) .

 

http://www.sec.gov/Archives/edgar/data/109380/000119312505137724/dex992.htm

http://www.spegcs.org/attachments/studygroups/2/2009_03_Bus%20Dev%20-%20Amegy%20Bank%20-%20Stephen%20Kennedy.pdf

[Grenville]

Hi Plan,

 

Thanks for your responses and the links.

 

 

[PlanMaestro]

Zions announced on Wednesday that it had repaid its remaining $700 million in federal bailout funds received in November 2008 through the Troubled Assets Relief Program, or TARP, having repaid $700 million in TARP money during the first quarter.

 

The shares trade for just over their reported June 30 tangible book value of $19.65, and for 12 times the consensus 2013 Earnings estimate of $1.75 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $1.15.

 

(plus the hidden TruPs CDO equity)

 

 

 

 

[PlanMaestro]

Zion still not close to showing the earnings potential of its very low cost of funds. TCE up to $20.24 from $19.65. Lots of work to do on that right side of the balance sheet.

 

http://finance.yahoo.com/news/zions-bancorporation-reports-earnings-0-201000410.html

[dcollon]

There was an 8-k filed after the close with some conference slides.  Below are some comments from an analyst that reviewed them.

 

ZION Instant Insight – Slides Look Incrementally Cautious

 

Stock Rating/Industry View: Equal Weight/Neutral

Price Target: USD 25.00

Price (26-Nov-2012): USD 20.71

Potential Upside/Downside: +21%

Tickers: ZION

 

After the close ZION filed an 8-K with slides it intends to use for a conference tomorrow.  Its “One-Year Outlook Summary” slide has several updates.  Net net we view the company’s long-term outlook as more cautious than that offered at our September conference, while its 4Q12 guidance also looks to be below where it pointed to on its 3Q12 earnings call. 

 

With respect to 4Q12 it noted:

a) loan balances are expected to decline in 4Q12 versus 3Q12 due to prepayments.  Still, it noted pipelines remain “strong”;

b) it expects core net interest income to decline 2-3% in 4Q12 due to lower near-term balances and rate pressure from older loans resetting to newer rates (consensus looks to have a 1-2% decline); and

c) it sees $20mn of OTTI in 4Q12 from higher CPR assumptions, however it also expects $10mn+ of gains on CDOs previously written down (see below).

 

Comparing its one-year outlook to what it said at our Sept conference show some language changes including:

a) loans now are expected to be “stable to moderately higher” which is worse than at our conference where it just said “moderately higher”;

b) core net interest income is now expected to be “stable to moderately lower” compared to “stable to slightly lower” in Sept.;

c) loan loss provision should be “very low”, while it previously said improving credit trends with moderate loan loss reserve release;

d) core fee income is expected to be “stable to modestly higher” which compares to “stable to slightly higher”;

e) OTTI on CDOs is expected to be “higher” is a new disclosure (see below);

f) expenses are expected to be “stable” (higher salary offset by reduced credit related NIE), which is worse than prior guidance of “slightly declining”; and

g) preferred dividends are “declining” (no change).

 

With respect to CDOS in 4Q12 it has seen:

a) $100mn on CDOs principal paydowns (of its $2.5bn par exposure), mostly from senior tranches;

b) $10mn on pre-tax gains on CDOs previously written down; and

c) an acceleration in pre-payment speeds which should increase OTTI but improve AOCI.

 

It also noted in 2013 it may redeem Series B TruPS; call Series C preferreds and tender for expensive debt.

 

[dcollon]

 

 

*** WARRANT AUCTION: ZIONS BANCORPORATION ***

 

SELLER:                                  U.S. DEPARTMENT OF THE TREASURY

ISSUER:                                  ZIONS BANCORPORATION (NASDAQ: ZION)

SECURITIES:                            WARRANTS

FORM OF OFFERING:              REGISTERED. PRICING AND ALLOCATIONS

DETERMINED THROUGH MODIFIED DUTCH AUCTION

SOLE BOOKRUNNER:              DEUTSCHE BANK SECURITIES

 

NUMBER OF WARRANTS        5,789,909

EXERCISE PRICE:                    $36.27

EXPIRATION DATE:                  11/14/2018

MINIMUM BID PRICE:                $0.90 

PRICE INCREMENT:                  $0.05

TICKER:                                    NASDAQ: ZIONZ, BLOOMBERG: ZIONZ <Equity>

 

AUCTION OPENING TIME:        8:00AM ET ON THURSDAY, NOVEMBER 29, 2012

SUBMISSION DEADLINE:        6:30PM ET ON THURSDAY, NOVEMBER 29, 2012

 

[PlanMaestro]

ZIONZ is up and trading.

 

Warrant Agreement.

http://www.sec.gov/Archives/edgar/data/109380/000119312512486265/d446224dex41.htm