Zions Bancorporation 2017 Q2 Form 10-Q Summary
Business context and reporting period
Zions Bancorporation is a Salt Lake City-based financial holding company operating commercial banking and related financial services through seven regional brands across 11 Western and Southwestern states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. The company had 202.2 million common shares outstanding as of July 31, 2017.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Net earnings applicable to common shareholders | $154 million | $91 million | +69% |
| Diluted earnings per share | $0.73 | $0.44 | +$0.29 |
| Net income | $168 million | $114 million | +47% |
| Net interest income | $528 million | $465 million | +13.5% |
| Net interest margin | 3.52% | 3.39% | +13 bps |
| Noninterest income | $132 million | $126 million | +4.8% |
| Noninterest expense | $405 million | $382 million | +6.0% |
| Provision for loan losses | $7 million | $35 million | Lower by $28 million |
| Effective tax rate | 32.3% | 34.5% | Down 2.2 percentage points |
For the six months ended June 30, 2017, net earnings applicable to common shareholders were $283 million, or $1.34 diluted EPS, compared with $169 million, or $0.82 diluted EPS, in the prior-year period. Net interest income was $1.017 billion versus $918 million, and noninterest income was $264 million versus $242 million.
- Adjusted pre-provision net revenue was $268 million in Q2 and $481 million year to date, compared with $211 million and $393 million, respectively, in the comparable 2016 periods.
- The adjusted efficiency ratio improved to 59.8% in Q2 from 64.6% and to 62.8% year to date from 66.5%.
- Total assets were $65.4 billion at June 30, 2017, versus $63.2 billion at December 31, 2016.
- Net loans increased to $43.7 billion from $42.6 billion at year-end 2016. Deposits decreased to $52.4 billion from $53.2 billion.
- Total shareholders’ equity was $7.7 billion. Tangible common equity was $6.2 billion and the tangible common equity ratio was 9.57%.
- Basel III common equity Tier 1, Tier 1 leverage and total risk-based capital ratios were 12.29%, 10.53% and 15.10%, respectively.
Cash flow, debt and liquidity
- Operating activities provided $576 million of cash during the first six months of 2017, compared with $202 million in the prior-year period.
- Investing activities used $3.053 billion, principally reflecting purchases of investment securities and net loan growth.
- Financing activities provided $2.221 billion, primarily from $2.015 billion of net short-term borrowings, partly offset by lower deposits, debt repayments, preferred stock redemption, dividends and common stock repurchases.
- Cash and due from banks totaled $481 million at June 30, 2017, down from $737 million at December 31, 2016.
- Short-term FHLB borrowings were $3.4 billion at quarter-end, compared with $500 million at year-end 2016. Long-term debt was $383 million, down from $535 million.
- Management stated that the company complied with its liquidity policy and modified LCR requirements. It maintained a policy buffer of highly liquid assets designed to cover at least 12 months of stressed parent-level cash outflows.
- The company had approximately $14.9 billion of additional FHLB and Federal Reserve borrowing capacity, secured in part by approximately $24.6 billion of pledged loans.
Material changes versus comparable periods
- Profitability improved materially, driven by higher net interest income, a lower credit-loss provision and increased noninterest income.
- Net interest income benefited from loan and securities growth, higher short-term rates, asset-mix changes and approximately $15 million of loan interest recoveries included in the quarter’s loan yield increase.
- Average interest-earning assets increased by $5.3 billion year over year, while average securities increased substantially as the company shifted funds from lower-yielding money-market investments into securities and loans.
- Credit quality improved overall. Nonperforming assets declined to $490 million, or 1.12% of net loans and leases plus OREO, from $573 million, or 1.34%, at December 31, 2016. The allowance for loan losses declined to $544 million from $567 million.
- Oil and gas-related loans declined 19.8% year over year to $2.1 billion, while total oil and gas credit exposure was approximately $3.9 billion. Criticized and classified oil and gas credits improved, although the portfolio remained a significant risk concentration.
- Noninterest expense rose due to higher FDIC premiums, occupancy and technology-related costs. Adjusted noninterest expense increased 3.6% year over year in Q2 and 4.0% year to date.
- The company repurchased approximately 2.2 million common shares for $90 million during the first six months and redeemed $144 million of Series F preferred stock.
- Total accumulated other comprehensive loss improved from $122 million at year-end 2016 to $49 million, largely due to unrealized gains on available-for-sale securities.
Guidance, outlook, commentary and risks
- Management targeted a fiscal-year 2017 efficiency ratio in the low 60s and adjusted noninterest expense growth of approximately 2% to 3%. The year-to-date efficiency ratio of 62.8% was described as consistent with that objective.
- Management expected net interest income to increase moderately over the following 12 months and customer-related fee income to increase moderately from Q2 levels.
- The company expected the investment securities portfolio as a percentage of assets to remain generally stable over the next several quarters.
- Management implemented the first release of the TCS BαNCS core servicing system in May 2017 and expected approximately $2 million of quarterly amortization related to capitalized development costs. A subsequent release will address commercial and construction lending systems.
- The Federal Reserve did not object to the company’s July 2017–June 2018 capital plan, which authorized up to $465 million of common stock repurchases and approximately $140 million of common dividends. The planned quarterly dividend path was $0.12 in Q3 2017, $0.16 in Q4 2017, $0.20 in Q1 2018 and $0.24 in Q2 2018, subject to board approval and business conditions.
- Key risks include interest-rate movements, deposit pricing and attrition, loan and securities portfolio credit quality, commercial real estate and oil and gas concentrations, liquidity and wholesale funding dependence, regulatory capital and liquidity requirements, technology and cybersecurity risks, competition, legal matters and changes in economic or fiscal conditions.
- Legal matters included a Department of Justice inquiry and several civil actions involving payment processing, depositor relationships and alleged Ponzi-scheme-related activity. The company estimated reasonably possible losses of $0 million to approximately $20 million above accrued amounts for matters where a meaningful estimate was possible, while noting that the range excludes matters for which loss estimates could not be made.
- The company stated that no material changes occurred in the risk factors disclosed in its 2016 Form 10-K and that disclosure controls were effective as of June 30, 2017.
Most important facts for investors to verify
- Whether net interest income growth and the 3.52% net interest margin are sustainable after separating recurring rate and balance-sheet effects from the approximately $15 million of loan recoveries.
- Progress toward the 2017 efficiency-ratio and adjusted-expense targets as technology investments, FDIC premiums and occupancy costs continue.
- Trends in oil and gas, commercial real estate and commercial loan credit quality, including criticized, classified, nonaccrual and troubled-restructured loans.
- Deposit stability and the effect of increased FHLB and other short-term borrowings on liquidity, funding costs and net interest margin.
- Capital-plan execution, including planned dividends, common-stock repurchases and the effect of preferred-stock redemptions.
- The eventual impact of the expected-loss accounting standard, which management anticipated could materially affect the financial statements when adopted in 2020.
- Developments in the disclosed DOJ inquiry and civil litigation, including any amounts accrued and potential losses outside the disclosed estimated range.