Zions Bancorporation, National Association — 2017 Third-Quarter Form 10-Q
Business context and reporting period
Zions Bancorporation is a financial holding company headquartered in Salt Lake City, Utah, operating a commercial bank and financial-services subsidiaries across 11 Western and Southwestern states through seven regional banking brands. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017; comparisons are primarily with the corresponding 2016 periods and December 31, 2016.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Net income | $160 million | $127 million | Up $33 million |
| Net earnings applicable to common shareholders | $152 million | $117 million | Up $35 million |
| Diluted EPS | $0.72 | $0.57 | Up $0.15 |
| Net interest income | $522 million | $469 million | Up 11.3% |
| Net interest margin | 3.45% | 3.36% | Up 9 bps |
| Provision for loan losses | $5 million | $19 million | Down $14 million |
| Noninterest income | $139 million | $145 million | Down 4.1% |
| Noninterest expense | $413 million | $403 million | Up 2.5% |
| Effective tax rate | 34.2% | 33.9% | Up 30 bps |
| Return on average tangible common equity | 9.8% | 7.9% | Up 189 bps |
| Efficiency ratio, non-GAAP | 62.3% | 65.9% | Improved 365 bps |
For the first nine months, net income was $469 million versus $332 million in 2016, and net earnings applicable to common shareholders were $436 million versus $286 million. Diluted EPS was $2.06 versus $1.39. Net interest income increased to $1.539 billion from $1.386 billion, while noninterest income increased to $404 million from $388 million and noninterest expense increased to $1.232 billion from $1.181 billion.
Average loans and leases were $43.8 billion in the quarter, up 3.2% year over year; period-end loans were $44.2 billion, up 3.5% from December 31, 2016. Average deposits were $51.9 billion, up from $50.7 billion in the prior-year quarter, although period-end deposits declined to $52.1 billion from $53.2 billion at year-end. Noninterest-bearing deposits represented 45.8% of average deposits.
At September 30, 2017, total assets were $65.6 billion, shareholders’ equity was $7.8 billion, and the tangible common equity ratio was 9.57%. Basel III common equity tier 1, Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 12.22%, 10.58%, 13.33%, and 14.99%, respectively.
Operating cash flow was $803 million for the first nine months, compared with $415 million in 2016. Investing activities used $3.077 billion, primarily for investment securities and loan growth. Financing activities provided $2.078 billion, including increased short-term borrowings, partially offset by deposit declines, dividends, debt repayment, and share repurchases.
Material changes versus prior periods
- Interest income increased to $557 million from $491 million in Q3 2016, driven by loan and securities growth and higher short-term rates.
- The Company continued shifting assets from lower-yielding money-market investments into loans and investment securities. Average available-for-sale securities increased by $5.5 billion year over year.
- Credit quality improved. Nonperforming assets declined to $468 million, or 1.06% of loans and other real estate owned, from $573 million, or 1.34%, at year-end 2016. Nonaccrual loans were $465 million versus $569 million at year-end.
- The allowance for loan losses declined to $541 million from $567 million at year-end, while the total allowance for credit losses, including unfunded commitments, was $600 million.
- Oil and gas-related loan balances declined 11.6% year over year to $2.046 billion; total oil and gas credit exposure was $3.845 billion. Classified and nonaccrual oil and gas credits also improved, although the portfolio remains a concentration risk.
- Short-term borrowings increased substantially, including $3.3 billion of short-term Federal Home Loan Bank borrowings at September 30, 2017, compared with $500 million at year-end. Long-term debt declined to $383 million from $535 million.
- The Company repurchased 2.5 million common shares for $115 million in Q3 and 4.7 million shares for $205 million in the first nine months. Preferred stock declined to $566 million after the $144 million redemption of Series F preferred stock.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects net interest income to increase only moderately over the next 12 months because the securities portfolio is expected to remain generally stable and no further benchmark-rate increases are assumed.
- Management expects moderate customer-related fee growth and continued strong residential mortgage growth, with moderate growth in commercial real estate and commercial and industrial lending.
- The Company expects adjusted noninterest expense growth of 2% to 3% for 2017 and is targeting a low-60% efficiency ratio for the full year. Year-to-date adjusted noninterest expense was $1.225 billion and the efficiency ratio was 62.6%.
- Hurricane Harvey affected approximately $8 billion of loan balances in the impacted geographic area. The Company recorded $6 million of related noninterest expense and added a $34 million qualitative allowance for potential credit losses.
- The Federal Reserve did not object to the 2017 capital plan, which permits up to $465 million of common-stock repurchases and approximately $140 million of common dividends through June 30, 2018. The planned quarterly common dividend path reaches $0.24 per share in Q2 2018, subject to board approval, earnings, business needs, and economic conditions.
- Liquidity policy compliance was reported throughout the first nine months. The Company targets a parent-level highly liquid asset buffer covering 18 to 24 months of stressed cash outflows and maintains a minimum policy limit of 12 months. Available additional FHLB and Federal Reserve borrowing capacity was approximately $15.1 billion.
- Material risks include interest-rate sensitivity, deposit behavior and pricing, commercial real estate and oil and gas concentrations, credit losses, liquidity and wholesale funding dependence, regulatory capital and liquidity requirements, cybersecurity, legal proceedings, and changes in economic, tax, accounting, and regulatory conditions.
- The Company settled a governmental inquiry into certain historical payment-processing practices for a $3.6 million civil penalty in Q3; the amount had been fully reserved and did not affect third-quarter results. Management estimated reasonably possible litigation losses of up to approximately $20 million beyond accrued amounts for matters where a meaningful estimate was possible, while noting that the range is not a maximum exposure.
- Future adoption of the current expected credit loss standard, effective January 1, 2020, may materially affect the financial statements; the Company had not completed its evaluation.
Important facts for investors to verify
- Reconcile reported GAAP earnings with non-GAAP adjusted PPNR, efficiency ratio, and tangible-equity measures.
- Assess whether the $34 million Hurricane Harvey allowance adequately reflects exposure to affected borrowers and whether additional losses emerge.
- Monitor oil and gas, commercial real estate, and commercial lending concentrations, including classified, nonaccrual, and charge-off trends.
- Track deposit levels, deposit pricing, short-term FHLB borrowings, loan-to-deposit ratio, and compliance with liquidity buffers.
- Confirm that the planned dividend increases and remaining share-repurchase authorization remain consistent with earnings, capital ratios, and regulatory approvals.
- Evaluate the sensitivity of net interest income to interest rates, deposit betas, yield-curve flattening, loan floors, and securities prepayments.
- Review pending litigation, the estimated loss range, and the potential impact of matters for which losses cannot yet be reasonably estimated.
- Assess the eventual capital impact of the expected-loss accounting standard and other pending accounting pronouncements.