Zions Bancorporation, National Association — Q1 2019 Form 10-Q
Business context and reporting period
Zions Bancorporation, National Association is a commercial bank headquartered in Salt Lake City, Utah, serving 11 Western and Southwestern states through seven locally managed banking brands. This unaudited filing covers the three months ended March 31, 2019, with comparisons primarily to the three months ended March 31, 2018 and December 31, 2018. The current registrant succeeded the former Zions Bancorporation through a September 30, 2018 merger.
Financial performance and condition
| Metric | Q1 2019 | Comparable period |
|---|---|---|
| Net interest income | $576 million | $542 million in Q1 2018 |
| Net interest margin | 3.68% | 3.56% in Q1 2018; 3.67% in Q4 2018 |
| Provision for credit losses | $4 million | $(47) million in Q1 2018 |
| Noninterest income | $132 million | $138 million in Q1 2018 |
| Noninterest expense | $430 million | $419 million in Q1 2018 |
| Net income | $213 million | $238 million in Q1 2018 |
| Net earnings applicable to common shareholders | $205 million | $231 million in Q1 2018 |
| Diluted EPS | $1.04 | $1.09 in Q1 2018 |
| Adjusted pre-provision net revenue | $285 million | $265 million in Q1 2018 |
| Efficiency ratio | 60.2% | 61.3% in Q1 2018 |
| Total assets | $69.2 billion | $68.7 billion at December 31, 2018 |
| Total loans | $47.6 billion | $46.7 billion at December 31, 2018 |
| Total deposits | $54.5 billion | $54.1 billion at December 31, 2018 |
| Long-term debt | $1.2 billion | $724 million at December 31, 2018 |
| Shareholders’ equity | $7.6 billion | $7.6 billion at December 31, 2018 |
Average loans increased 5% year over year to $47.2 billion, while average deposits increased 4% to $53.9 billion. Average interest-earning assets increased to $64.2 billion from $62.2 billion. The allowance for loan losses was $497 million, or 1.04% of net loans, and the total allowance for credit losses, including unfunded commitments, was $556 million.
Credit quality remained strong. Net charge-offs were zero, nonaccrual loans were $234 million, and nonperforming assets were $240 million, or 0.50% of net loans and other real estate owned. Criticized, classified, and nonaccrual loans declined year over year by $306 million, $294 million, and $153 million, respectively.
Operating cash flow was negative $42 million, investing cash flow was positive $87 million, and financing cash flow was negative $123 million. Cash and due from banks declined to $536 million from $614 million at year-end. Investment securities and cash and money market investments together represented approximately 26% of total assets. The Bank reported approximately $15.7 billion of additional FHLB and Federal Reserve borrowing capacity.
Basel III capital requirements were met. Common equity tier 1 capital was 11.3%, total risk-based capital was 13.5%, the tangible common equity ratio was 8.8%, and return on average tangible common equity was 13.9%.
Material changes versus prior comparable periods
- Net interest income increased $34 million, or 6%, primarily from loan growth and higher short-term interest rates. Interest expense increased $52 million due to higher deposit and borrowing costs.
- The provision for credit losses shifted from a $47 million benefit in Q1 2018 to a $4 million expense in Q1 2019, materially reducing net income comparability.
- Net income decreased $25 million and diluted EPS decreased $0.05, despite stronger net interest income and adjusted pre-provision revenue.
- Noninterest income decreased 4%, primarily from lower deposit service charges, investment income, and other noninterest income.
- Noninterest expense increased 3%; salaries and employee benefits rose $18 million, partly offset by a $7 million decrease in FDIC premiums.
- The Bank repurchased 5.5 million common shares for $275 million and paid $56 million of common dividends, compared with $115 million of repurchases and $40 million of common dividends in Q1 2018.
- The Bank issued $500 million of senior notes at 3.35%, maturing March 4, 2022, contributing to the increase in long-term debt.
- Accumulated other comprehensive income improved to a loss of $122 million from a loss of $250 million, primarily because of investment-security valuation changes.
Guidance, outlook, commentary, risks and unusual items
- Management expects moderate total loan growth over the next four quarters and anticipates adjusted noninterest expense growth in the low single-digit percentage range for 2019.
- Management is targeting positive operating leverage and high single-digit annual PPNR growth; Q1 adjusted PPNR increased 8% year over year.
- Management intends to continue improving the efficiency ratio and is adjusting interest-rate sensitivity toward a more neutral position. During the quarter it added approximately $3 billion of interest-rate floors and $700 million of interest-rate swaps.
- The second phase of a three-phase core systems replacement was completed, moving substantially all retail, commercial, and CRE loans onto the new platform. Deposit-system conversion is expected to continue through 2022.
- The Bank does not plan to early adopt the current expected credit loss standard, which becomes effective January 1, 2020. Management expects potential material impact, greater credit-loss volatility, and reduced comparability among banks.
- Management expects an effective tax rate of approximately 23% for 2019, including stock-based compensation effects.
- The Board approved a $275 million second-quarter 2019 share repurchase plan and declared a $0.30 per-share quarterly common dividend.
- Key risks include interest-rate and deposit-pricing pressure, credit deterioration in commercial, CRE, oil and gas, and consumer portfolios, liquidity and funding conditions, regulatory and capital changes, cybersecurity and technology implementation, LIBOR transition, and litigation.
- Material legal matters include claims involving alleged Ponzi schemes, employee wage-and-hour claims, borrower fraud, and other proceedings. The estimated range of reasonably possible losses in matters where a meaningful estimate was possible was $0 to approximately $50 million in excess of accrued amounts; this is not the Bank’s maximum exposure.
- Unfunded lending commitments totaled $22.4 billion, including $21.6 billion of commitments to extend credit and $767 million of standby letters of credit and commercial letters of credit.
Important facts for investors to verify
- Whether loan growth and the reported improvement in credit metrics persist as the portfolio expands, particularly in commercial and CRE lending.
- The effect of the January 1, 2020 expected-credit-loss adoption on retained earnings, capital, reserves, and earnings volatility.
- Deposit pricing, deposit beta, noninterest-bearing deposit stability, and the effect of funding-cost increases on net interest margin.
- Execution, costs, and operational risks associated with completing the core deposit-system conversion.
- The sustainability of capital distributions relative to earnings, regulatory capital requirements, and stress-test results.
- Potential outcomes and financial exposure from disclosed litigation and governmental matters.
- LIBOR replacement plans and the effect on loans, securities, derivatives, and other contracts maturing after 2021.