Zions Bancorporation, N.A. — 2019 Q3 Form 10-Q Summary
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 Form 10-Q covers the quarter and nine months ended September 30, 2019, with comparisons to 2018 periods and December 31, 2018 balances.
Key financial metrics
| Metric | Q3 2019 | Comparable period |
|---|---|---|
| Net income | $222 million | $223 million in Q3 2018 |
| Net earnings applicable to common shareholders | $214 million | $215 million |
| Diluted earnings per share | $1.17 | $1.04 |
| Net interest income | $567 million | $565 million |
| Net interest margin | 3.48% | 3.63% |
| Noninterest income | $146 million | $136 million |
| Noninterest expense | $415 million | $420 million |
| Efficiency ratio | 57.3% | 58.8% |
| Provision for credit losses | $10 million | $(11) million |
| Average loans and leases | $48.8 billion | $45.4 billion |
For the first nine months of 2019, net income was $633 million versus $658 million in 2018, while net earnings applicable to common shareholders were $608 million versus $633 million. Net interest income increased to $1.713 billion from $1.654 billion, but the provision for credit losses increased to $35 million from a $46 million benefit in the prior-year period.
At September 30, 2019, total assets were $70.4 billion, total deposits were $56.1 billion, shareholders’ equity was $7.5 billion, and loans and leases were $48.8 billion. The allowance for loan losses was $510 million, and the total allowance for credit losses, including unfunded commitments, was $572 million.
Nine-month operating cash flow was $346 million, compared with $825 million in the prior-year period. Investing activities used $603 million, principally reflecting net loan growth, while financing activities provided $439 million. Cash and due from banks increased to $796 million from $614 million at December 31, 2018.
Material changes versus prior periods
- Average loans increased 8% year over year, with growth across commercial, commercial real estate, municipal, and residential lending.
- Net interest margin declined 15 basis points year over year as asset yields and security yields declined and deposit and borrowing costs increased. Management expects additional margin compression if short-term rates continue to fall.
- Customer-related fees rose 11% to $140 million in the quarter, driven primarily by interest-rate swap activity, loan-related fees, and capital markets and foreign exchange fees.
- Noninterest expense decreased 1% year over year, helped by an $11 million reduction in FDIC premiums, partly offset by higher salaries and technology-related costs.
- Nonaccrual loans declined to $233 million from $246 million at December 31, 2018, and nonperforming assets declined to $237 million from $256 million. The net charge-off ratio was 0.01% in Q3 2019.
- The tangible common equity ratio was 8.55%, compared with 8.72% at June 30, 2019 and 9.09% at September 30, 2018. The Basel III common equity tier 1 ratio was 10.4%, and management reported compliance with all capital adequacy requirements.
- The Bank repurchased 18.0 million common shares for $825 million during the first nine months and 6.6 million shares for $275 million during the quarter. Shares outstanding declined to 170.4 million at September 30, 2019.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects moderate loan growth over the next four quarters, somewhat below the recent year-over-year rate, and expects loan growth to remain higher than deposit growth.
- The Bank announced a 5% workforce reduction and plans to close 15 branches. It expects approximately $25 million of severance and related employment costs in Q4 2019, with additional branch-closing and efficiency costs over subsequent quarters.
- Management expects adjusted noninterest expense for 2019 to increase in the low single-digit percentage range, excluding restructuring-related items. Excluding the expected pension termination and restructuring charges, 2020 expenses are expected to be level with or slightly below 2019.
- The defined benefit pension plan termination is expected to produce a one-time charge of approximately $25 million to $30 million, likely in mid-2020, subject to plan performance and participant elections.
- The Bank will adopt CECL on January 1, 2020. Based on its September 30, 2019 parallel run, management estimated an ACL impact ranging from a 15% decrease to a 5% increase, but emphasized that the estimate may change with portfolio composition, economic forecasts, models, and judgments.
- Interest-rate risk remains significant. The Bank converted purchased interest-rate floors into an additional $2.0 billion of receive-fixed swaps during Q3 and had $4.6 billion of qualifying asset-liability management derivatives at quarter-end. Modeled earnings-at-risk for a 100-basis-point decline in rates was negative 4.0%.
- LIBOR may be discontinued after 2021. The Bank has exposure through loans, securities, and derivatives and noted that contract amendments may require counterparty consent and could be costly or difficult.
- Material litigation includes claims relating to alleged Ponzi schemes involving former or current customers and claims concerning alleged borrower fraud. The estimated range of reasonably possible losses for certain matters was $0 to approximately $35 million beyond accrued amounts; matters without a meaningful estimate are excluded, and actual losses could differ materially.
- Subsequent to quarter-end, the Bank issued a $500 million subordinated note bearing 3.25% interest and maturing October 29, 2029. Management stated that the issuance would add approximately 89 basis points to total capital.
Most important facts for investors to verify
- Whether continued rate declines produce further net interest margin compression and pressure on net interest income.
- The final impact of CECL adoption on the allowance for credit losses, retained earnings, capital ratios, and future provision expense.
- Execution and total costs of the 5% workforce reduction, 15 branch closures, core-system replacement, and pension-plan termination.
- Trends in criticized and classified loans, commercial and CRE concentrations, oil and gas exposure, nonaccrual loans, charge-offs, and credit-loss provisions.
- The sustainability of loan growth relative to deposits and the resulting reliance on wholesale funding and borrowed funds.
- The effect of substantial share repurchases and dividends on tangible common equity, regulatory capital, and future capital distributions.
- Developments in the disclosed litigation and governmental matters, including potential losses beyond the estimated $35 million range.
- Progress in replacing LIBOR-linked contracts and managing derivative counterparty and collateral requirements.