Zions Bancorporation 2016 Form 10-K Summary
Business context and reporting period
Zions Bancorporation is a $63.2 billion financial holding company headquartered in Salt Lake City, Utah, operating through ZB, National Association and seven locally managed banking brands across 11 Western and Southwestern states. The filing covers the fiscal year ended December 31, 2016; fourth-quarter information is provided within the annual filing. The company operated 436 branches and employed 10,057 full-time-equivalent employees at year-end.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net interest income | $1,867.3 million | $1,715.3 million | +9% |
| Noninterest income | $515.6 million | $357.2 million | +44% |
| Total revenue | $2,383.0 million | $2,072.5 million | +15% |
| Provision for loan losses | $92.8 million | $40.0 million | +132% |
| Noninterest expense | $1,585.3 million | $1,580.6 million | Flat |
| Net income | $469.1 million | $309.5 million | +52% |
| Net earnings applicable to common shareholders | $411.3 million | $246.6 million | +67% |
| Diluted earnings per common share | $1.99 | $1.20 | +66% |
| Net interest margin | 3.37% | 3.19% | +18 bps |
| Return on average common equity | 5.95% | 3.75% | +220 bps |
| Tangible return on average tangible common equity | 7.07% | 4.55% | +252 bps |
Year-end assets were $63.2 billion, net loans were $42.6 billion, deposits were $53.2 billion, and common equity was $6.9 billion. Long-term debt declined to $534.9 million from $812.4 million. Net cash provided by operating activities was $596.1 million, while investing activities used $3.4 billion, primarily for investment securities and loan growth; financing activities provided $2.8 billion, principally from deposit growth.
Capital remained strong: the year-end CET1 ratio was 12.07%, Tier 1 risk-based capital was 13.49%, total risk-based capital was 15.24%, and the Tier 1 leverage ratio was 11.09%. The company stated that it met applicable Basel III requirements and exceeded well-capitalized thresholds.
Material changes versus the prior comparable period
- Net earnings improved substantially, primarily because 2015 included a $136.8 million pretax loss from the sale of the remaining collateralized debt obligation portfolio. Excluding that item, management estimated that common earnings increased by approximately $80 million.
- Net interest income benefited from redeploying lower-yielding money market investments into loans and securities, higher average loan balances, reduced long-term debt, and lower funding costs.
- Average securities increased 78% to $10.3 billion, while average money market investments declined 55% to $3.7 billion. The company purchased approximately $7.0 billion of high-quality liquid assets during 2016.
- Net loans increased 4.9% to $42.6 billion, led by commercial real estate term loans, consumer 1-4 family residential loans, and non-oil-and-gas commercial and industrial lending.
- Noninterest income increased primarily through customer-related fees, credit and debit card activity, cash management, wealth management, interest-rate swap fees, and loan sales and servicing.
- Noninterest expense was essentially flat despite increased technology investment, FDIC premiums, and employee benefit costs. The adjusted efficiency ratio improved to 65.8% from 70.4%.
- Credit performance weakened mainly in the oil and gas portfolio. Net charge-offs increased to $131 million from $39 million, nonaccrual loans increased to $569 million from $350 million, and nonperforming lending-related assets increased to $573 million from $357 million.
- Total oil and gas-related credit exposure declined 19% to $3.9 billion, but oil and gas-related nonaccrual loans increased to $294 million from $66 million.
- Preferred equity declined by $119 million through tender offers, common stock repurchases totaled $90 million, and quarterly common dividends increased from $0.06 to $0.08 per share.
Guidance, outlook, commentary, risks and unusual items
- Management targeted low-single-digit to mid-single-digit loan growth in 2017, with growth concentrated in non-oil-and-gas commercial and industrial loans, CRE term loans, and consumer residential lending. National Real Estate and oil and gas-related balances were expected to continue declining, but more slowly.
- Management expected 2017 noninterest expense to increase 2% to 3% while continuing significant technology investment, and remained committed to achieving an adjusted efficiency ratio in the low 60s.
- Management expected 2017 provision expense to be broadly consistent with 2016, despite anticipated lower oil and gas charge-offs, because charge-offs in other portfolios were expected to normalize.
- The Core Transformation Project, covering replacement of loan, deposit, and reporting systems, was delayed; the first of three phases was expected to be completed in mid-2017. Capitalized project costs were $93 million at year-end.
- The company remained asset-sensitive, meaning modeled net interest income generally benefits from rising rates. However, deposit behavior assumptions were being revised because actual deposit growth differed from modeled runoff assumptions. Under the fast deposit-repricing scenario, the modeled EVE decline for a 200-basis-point rate increase was 10.7%, exceeding the company’s internal 10% risk-capacity limit.
- The company became subject to the modified Liquidity Coverage Ratio in 2016 and reported compliance. It also maintained substantial liquidity buffers and approximately $17.1 billion of available additional FHLB and Federal Reserve borrowing capacity.
- Long-term debt maturities included approximately $152 million due in March 2017. The company had $500 million of short-term FHLB borrowings outstanding at year-end.
- Remaining prohibited private equity investments under the Volcker Rule totaled approximately $6 million, with approximately $4 million of related unfunded commitments. The company pursued disposition or an applicable compliance extension.
- Material risks include oil and gas and commercial real estate concentration, regional economic exposure, credit deterioration, interest-rate and deposit-model risk, liquidity and capital requirements, regulatory changes, technology implementation, cybersecurity, litigation, goodwill impairment, and realization of the $250 million net deferred tax asset.
- Legal matters included a Department of Justice inquiry into payment-processing practices and two civil suits involving customer relationships and alleged fraudulent schemes. Management estimated reasonably possible losses for certain matters at $0 to approximately $20 million above accrued amounts, excluding matters for which a meaningful estimate was not possible.
- The 2016 annual goodwill impairment test identified no impairment. Goodwill totaled approximately $1.0 billion.
Most important facts for an investor to verify
- Whether oil and gas-related nonaccrual loans, classified credits, charge-offs, and total exposure continue to decline.
- Whether provision expense and net charge-offs outside the energy portfolio normalize as management expects.
- Progress and spending on the Core Transformation Project, including the mid-2017 phase-one target and the $93 million capitalized balance.
- Actual deposit repricing, migration, and runoff compared with the company’s interest-rate and liquidity models.
- Compliance with internal interest-rate risk limits, the modified LCR, Basel III capital requirements, and future capital-conservation-buffer requirements.
- Completion of planned common and preferred stock repurchases or redemptions and the sustainability of the $0.08 quarterly common dividend.
- Resolution and potential financial impact of the outstanding Department of Justice inquiry and civil litigation.
- Realization of the $250 million net deferred tax asset and continued support for the carrying value of $1.0 billion of goodwill.