Zions Bancorporation, N.A. — 2019 Form 10-K Summary
Business context and reporting period
Zions Bancorporation, National Association is a Salt Lake City-based national commercial bank serving primarily 11 Western and Southwestern states through seven locally managed brands. The filing covers the fiscal year ended December 31, 2019; fourth-quarter information is included in the annual filing. The Bank operated 434 branches and had 10,188 full-time equivalent employees at year-end.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net interest income | $2.272 billion | $2.230 billion | +2% |
| Noninterest income | $562 million | $552 million | +2% |
| Total revenue | $2.834 billion | $2.782 billion | +2% |
| Provision for credit losses | $39 million | $(40) million | Unfavorable comparison |
| Noninterest expense | $1.742 billion | $1.679 billion | +4% |
| Net income | $816 million | $884 million | -8% |
| Net earnings applicable to common shareholders | $782 million | $850 million | -8% |
| Diluted earnings per share | $4.16 | $4.08 | +2% |
| Net interest margin | 3.54% | 3.61% | -7 bps |
| Return on average assets | 1.17% | 1.33% | Down |
| Return on average common equity | 11.2% | 12.1% | Down |
- Adjusted pre-provision net revenue was $1.162 billion, up from $1.132 billion, and the adjusted efficiency ratio was 59.5% versus 59.6%.
- Net loans and leases increased 4% to $48.709 billion; average loans increased 6% to $48.265 billion. Total deposits increased 6% to $57.085 billion.
- The allowance for credit losses was $554 million, including a $495 million allowance for loan losses and a $59 million reserve for unfunded commitments.
- Nonaccrual loans were $243 million versus $252 million, and nonperforming assets were $251 million, or 0.51% of loans, leases and other real estate owned.
- Net charge-offs were $37 million, or 0.08% of average loans, compared with net recoveries of $16 million in 2018.
- Cash flow from operating activities was $697 million. Net cash provided by investing activities was $375 million, while financing activities used $981 million, primarily reflecting share repurchases and reduced short-term borrowings.
- Year-end assets were $69.172 billion. Long-term debt increased to $1.723 billion from $724 million, while federal funds and other short-term borrowings declined to $2.053 billion from $5.653 billion.
- Cash, interest-bearing deposits and security resell agreements totaled approximately $1.8 billion at year-end. Investment securities and cash and money market investments together represented approximately 24% of total assets.
- Basel III ratios remained above well-capitalized thresholds: CET1 10.2%, Tier 1 risk-based capital 11.2%, total risk-based capital 13.2%, and Tier 1 leverage 9.2%.
Material changes versus the prior comparable period
- Earnings declined because the $40 million negative credit-loss provision recorded in 2018 did not recur and 2019 expenses increased. Diluted EPS nevertheless rose because the Bank repurchased 23.5 million common shares for $1.1 billion, reducing the diluted share count.
- Interest income benefited from loan growth, but the Federal Reserve’s 75-basis-point reduction in the federal funds rate, higher deposit costs and greater wholesale funding compressed net interest margin.
- Customer-related fee income increased 3% to $525 million, led by capital markets and foreign exchange fees and wealth management and trust fees.
- Noninterest expense included $22 million of severance and $15 million of restructuring-related costs. The Bank announced a 5% workforce reduction and plans to close 12 branches during 2020.
- Accumulated other comprehensive income improved to $43 million from $(250) million, primarily due to higher unrealized investment-security gains.
- The Bank issued $500 million of senior notes and $500 million of subordinated notes in 2019.
Guidance, outlook, commentary, risks and unusual items
- Management expects moderate net interest income pressure in 2020 if current low-rate conditions persist, with moderate loan growth that may be below 2019 levels.
- 2020 targets include low- to mid-single-digit loan growth, similar or improved noninterest-income growth, adjusted noninterest expense at or below 2019 levels excluding pension and restructuring items, and continued technology and digital investments.
- Management expects to maintain a moderately asset-sensitive interest-rate position while moving toward greater neutrality. A 100-basis-point decline in rates was modeled to reduce first-year net interest income by 4.6%; a 100-basis-point increase was modeled to increase it by 3.0%.
- The Bank adopted the CECL credit-loss standard on January 1, 2020. The adoption produced an after-tax increase to retained earnings of $20 million and resulted in a $526 million loan-and-lease allowance under CECL. Future allowance volatility may increase because the model incorporates economic forecasts.
- The defined benefit pension plan is expected to terminate in 2020, subject to regulatory approval. Management estimated a one-time charge of approximately $10 million to $15 million, plus an estimated $17 million reclassification from accumulated other comprehensive income into earnings.
- Key risks include credit concentrations in commercial real estate, construction and land development, oil and gas lending, and geographic exposure to Utah, Texas and California; interest-rate and deposit-cost pressure; LIBOR transition risk; liquidity and funding-market conditions; cybersecurity and technology implementation; regulatory and capital restrictions; litigation; and potential goodwill or deferred-tax-asset impairment.
- Material litigation included claims related to alleged Ponzi schemes and borrower fraud. The filing estimated reasonably possible losses for certain matters at $0 million to approximately $35 million above accrued amounts, but stated that the range excludes matters for which a meaningful estimate was not possible.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management identified no material weaknesses.
Important facts for investors to verify
- Confirm the sustainability of loan and deposit growth and whether wholesale funding remains necessary to support balance-sheet expansion.
- Evaluate the effect of lower interest rates, deposit pricing and hedging activity on net interest margin and net interest income.
- Review commercial real estate, oil and gas, municipal and geographic concentrations, criticized loans, classified loans and future charge-offs.
- Assess the methodology, assumptions and economic sensitivity of the CECL allowance adopted in 2020.
- Track restructuring savings, branch closures, workforce reductions, technology spending and the core deposit-system conversion.
- Review the pension-plan termination costs, litigation developments and the potential impact of the 29.3 million outstanding warrants expiring May 22, 2020.
- Monitor capital distributions against regulatory capital ratios, OCC approval requirements and the $75 million first-quarter 2020 repurchase authorization.