Zions Bancorporation, N.A. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Zions Bancorporation is a financial holding company headquartered in Salt Lake City, Utah, providing banking and related services across 11 western and southwestern states through seven branded banking segments. The filing covers the unaudited three months ended March 31, 2016, compared primarily with the three months ended March 31, 2015 and December 31, 2015 balance-sheet amounts.
Following the December 31, 2015 consolidation of subsidiary banks into ZB, N.A., the company continued operating under its existing local brands and geographic segments.
Key financial metrics
| Metric | Q1 2016 | Comparable period |
|---|---|---|
| Total assets | $59.2 billion | $59.7 billion at Dec. 31, 2015 |
| Loans and leases | $41.4 billion | $40.6 billion at Dec. 31, 2015; $40.2 billion at Mar. 31, 2015 |
| Total deposits | $49.9 billion | $50.4 billion at Dec. 31, 2015 |
| Net interest income | $452.8 million | $417.3 million in Q1 2015 |
| Net interest margin | 3.35% | 3.22% in Q1 2015 |
| Net income | $90.4 million | $92.0 million in Q1 2015 |
| Net earnings applicable to common shareholders | $78.8 million | $75.3 million in Q1 2015; $88.2 million in Q4 2015 |
| Diluted EPS | $0.38 | $0.37 in Q1 2015; $0.43 in Q4 2015 |
| Provision for loan losses | $42.1 million | $(1.5) million in Q1 2015 |
| Noninterest income | $116.8 million | $117.3 million in Q1 2015 |
| Noninterest expense | $395.6 million | $393.0 million in Q1 2015 |
| Adjusted PPNR | $182.1 million | $150.9 million in Q1 2015 |
| Adjusted efficiency ratio | 68.5% | 71.9% in Q1 2015 |
Operating cash flow was $222.8 million, compared with $88.8 million in Q1 2015. Investing activities provided $136.1 million, primarily reflecting net reductions in money-market investments and investment-security sales exceeding purchases, while loan growth used $808.4 million of cash. Financing activities used $639.4 million, primarily because deposits declined by $486.2 million and short-term borrowings declined by $114.8 million. Cash and due from banks ended at $517.8 million.
Long-term debt was $802.4 million, down from $812.4 million at December 31, 2015 and substantially below the prior-year level, reflecting tender offers, early calls, and maturities. Total shareholders’ equity was $7.6 billion. The tangible common equity ratio was 9.92%, and Basel III common equity tier 1, tier 1 leverage, and total risk-based capital ratios were 12.13%, 11.44%, and 15.97%, respectively.
Material changes versus comparable periods
- Net interest income increased $35.5 million year over year, supported by loan growth, a $4.3 billion increase in the investment-securities portfolio, deployment of lower-yielding money-market balances, and lower borrowing costs.
- Net interest margin improved 13 basis points to 3.35%. The average yield on total interest-earning assets increased to 3.51%, while the average cost of interest-bearing liabilities declined to 0.31% from 0.45%.
- Loans increased $769 million, or 1.9%, during the quarter, with particular strength in commercial and industrial and commercial real estate term loans.
- Credit costs increased sharply. The allowance for loan losses rose to $611.9 million, while the total allowance for credit losses, including unfunded commitments, was $680.9 million.
- Nonaccrual loans increased to $541.8 million from $349.9 million at year-end 2015. Nonperforming assets increased to $552 million from $357 million, and the nonperforming-asset ratio rose to 1.33% from 0.87%.
- Oil and gas-related loans were the principal source of deterioration. Oil and gas-related nonaccrual loans were $286 million, or 10.8% of that portfolio, versus 2.1% one year earlier. The company recorded $36 million of oil and gas-related net charge-offs and increased the related allowance for credit losses by approximately $67 million.
- Noninterest income was broadly stable, but dividend and other investment income declined to $4.6 million from $9.4 million, primarily because of lower private-equity investment income and write-downs.
- Noninterest expense increased 0.7%, mainly because of seasonal compensation, restricted-stock accruals, bonuses, and technology investment. Full-time-equivalent employees declined by 263 year over year.
- The effective tax rate declined to 31.4% from 35.7%, aided by the release of uncertain state tax positions.
Guidance, outlook, commentary, and risks
- Management maintained a 2016 target for adjusted noninterest expense below $1.58 billion, revised from $1.60 billion to reflect the reclassification of bankcard rewards expense. Management stated that Q1 results were consistent with the revised target after considering seasonal expenses.
- Management expects an efficiency ratio below 66% in 2016 and in the low 60s by year-end 2017. It also expects to achieve approximately 80% of its $120 million gross pretax cost-savings target by the end of 2016.
- Management expects continued loan growth in residential mortgages and commercial and industrial loans, offset partly by runoff in the National Real Estate and oil and gas-related portfolios. Commercial real estate construction and land-development commitments are expected to remain constrained.
- The company expects to continue purchasing short- to medium-duration agency mortgage-backed securities to build high-quality liquid assets and meet liquidity requirements. It exceeded the modified liquidity coverage requirement, which required a buffer covering 70% of modeled 30-day cash outflows.
- Management expects further downgrades in the oil and gas portfolio, particularly among oilfield-services borrowers, and noted that future energy-price volatility could cause additional credit deterioration.
- Liquidity remained compliant with internal policy. The company targeted a parent-company liquidity buffer covering 18 to 24 months of stressed cash outflows and maintained a minimum policy limit of 12 months. Available additional Federal Reserve and FHLB borrowing capacity was approximately $17.1 billion.
- The company launched an April 2016 tender offer for up to $120 million of certain preferred stock, subject to expiration and completion conditions. It also submitted its 2016 capital plan and stress-test results to the Federal Reserve and expected a regulatory response near the end of Q2.
- Material legal matters included a class-action case involving alleged telemarketing practices, Department of Justice and other governmental inquiries concerning customer activities and payment processing, and litigation related to an EB-5 investment program. Management estimated reasonably possible losses of $0 to approximately $60 million above accrued amounts for matters where a meaningful range could be estimated; this range excludes matters for which estimation was not possible.
- Other risks include interest-rate sensitivity, oil and gas and commercial real estate concentrations, deposit outflows, regulatory and capital requirements, litigation, cybersecurity, technology implementation, and changes in accounting or tax rules.
Important facts for investors to verify
- Trend and ultimate loss severity of oil and gas-related nonaccrual, classified, and criticized loans, including the effect of borrowing-base redeterminations and energy prices.
- Adequacy of the $611.9 million allowance for loan losses and $680.9 million total allowance for credit losses as nonperforming assets and charge-offs increase.
- Whether loan growth, securities purchases, and deposit trends support the company’s projected net interest margin and liquidity profile.
- Progress toward the below-66% efficiency-ratio target and the revised $1.58 billion adjusted expense target.
- Completion and financial effect of the preferred-stock tender offer, the Federal Reserve’s 2016 capital-plan decision, and future capital distributions.
- Developments in the disclosed legal proceedings and governmental inquiries, including potential losses beyond accrued amounts.
- Impact of agency mortgage-backed-security purchases, premium amortization, interest-rate movements, and deposit repricing on earnings and capital.