Zions Bancorporation, N.A. 2018 Form 10-K Summary
Business context and reporting period
Zions Bancorporation, National Association is a Salt Lake City-based commercial bank operating 433 branches across 11 western and southwestern states through seven locally managed banking brands. The filing covers the fiscal year ended December 31, 2018, with comparable 2017 and 2016 results. The former bank holding company merged into ZB, N.A. on September 30, 2018; the bank became the top-level publicly traded entity and is primarily regulated by the OCC.
Financial performance and condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net interest income | $2.230 billion | $2.065 billion | +8% |
| Noninterest income | $552 million | $544 million | +1% |
| Total revenue | $2.782 billion | $2.609 billion | +7% |
| Provision for credit losses | $(40) million | $17 million | Improved |
| Noninterest expense | $1.678 billion | $1.649 billion | +2% |
| Net income | $884 million | $592 million | +49% |
| Net earnings applicable to common shareholders | $850 million | $550 million | +55% |
| Diluted earnings per share | $4.08 | $2.60 | +57% |
| Net interest margin | 3.61% | 3.45% | +16 bps |
| Efficiency ratio | 59.6% | 62.3% | Improved |
Average loans increased 4% to $45.4 billion, while year-end net loans and leases increased 4% to $46.7 billion. Year-end deposits rose 3% to $54.1 billion, and total assets increased 4% to $68.7 billion. Long-term debt increased to $724 million from $383 million, including a $500 million senior note issued in 2018; short-term borrowings increased to $5.7 billion from $5.0 billion.
Cash flow from operating activities was $1.176 billion, compared with $928 million in 2017. Investing activities used $2.706 billion, primarily for loan growth, while financing activities provided $1.596 billion through deposit growth, borrowings, and debt issuance, partially offset by share repurchases and dividends. Cash and due from banks ended at $614 million. Management reported adequate liquidity, $2.4 billion of consolidated cash and certain liquid investments, and approximately $13.8 billion of additional FHLB and Federal Reserve borrowing capacity.
Profitability and capital measures strengthened: return on average assets was 1.33%, return on average common equity was 12.1%, and return on average tangible common equity was 14.2%. Year-end CET1, Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 11.7%, 10.3%, 12.7%, and 13.9%, respectively. The bank exceeded well-capitalized requirements.
Material changes versus the prior comparable period
- Net earnings benefited from higher interest income, loan growth, a 16-basis-point expansion in net interest margin, improved credit quality, and the reduction in the federal corporate tax rate to 21%.
- Credit quality improved materially: nonaccrual loans declined 39% to $252 million, nonperforming lending-related assets declined to 0.55% of loans and OREO from 0.93%, and the bank recorded $16 million of net loan recoveries versus $73 million of net charge-offs in 2017.
- Loan growth exceeded deposit growth, increasing reliance on wholesale funding and raising funding costs. The loan-to-deposit ratio was 86% at year-end versus 85% in 2017.
- Common stock repurchases increased to 12.9 million shares costing $670 million, compared with 7.0 million shares costing $320 million in 2017. Common dividends paid increased to $202 million from $89 million.
- Shareholders’ equity declined modestly to $7.6 billion, primarily because of repurchases, dividends, and a $111 million after-tax decline in accumulated other comprehensive income driven largely by investment securities losses.
- The bank completed its corporate restructuring, ceased being designated a systemically important financial institution, and became exempt from the Federal Reserve’s CCAR process and certain enhanced prudential requirements.
- The bank adopted ASC Topic 606 and other accounting updates in 2018 without a material impact on consolidated financial statements.
Guidance, outlook, commentary, risks, and unusual items
Management targets positive operating leverage, low- to mid-single-digit loan growth, high-single-digit annual PPNR growth, continued efficiency improvement, and increased returns on capital. For 2019, management expects moderate loan growth, continued emphasis on customer-related fee income, controlled expense growth, and a less asset-sensitive interest-rate position. Management does not assume further benchmark rate increases in its forecasts.
Management expects to return surplus capital through dividends and repurchases, subject to earnings, capital needs, economic conditions, and OCC approval. A $275 million common-stock repurchase plan was approved for the first quarter of 2019, and the quarterly common dividend was set at $0.30 per share.
- Interest-rate risk remains significant. A modeled immediate 200-basis-point decline in rates reduced first-year net interest income by 12%, exceeding the bank’s 10% trigger. Management is using rate floors and interest-rate swaps to reduce asset sensitivity.
- Credit risk is concentrated in commercial real estate, construction and development, leveraged lending, oil and gas-related lending, and the bank’s principal markets of Utah, Texas, and California. These three states generated approximately 79% of total net interest income.
- The bank had $21.5 billion of net unfunded commitments to extend credit and $874 million of standby letters of credit at year-end. Approximately $6.4 billion of commitments expire in 2019.
- Management identified legal proceedings and governmental matters, including claims related to alleged Ponzi schemes, employment matters, and other borrower-related litigation. The estimated range of reasonably possible losses, in excess of accrued amounts, was $0 to approximately $50 million for matters where a meaningful estimate was possible; this range is not the maximum exposure.
- The bank plans to terminate its pension plan, subject to regulatory approval, with completion expected in early 2020. Estimated additional expense related to purchasing annuities was $5 million to $15 million, subject to participant elections and market conditions.
- Core technology transformation remains an execution risk. The commercial lending-system phase was deployed in February 2019, while the deposit-system phase remained in preliminary development. Capitalized Core Transformation Project costs totaled $196 million at year-end 2018.
- LIBOR is expected to be discontinued after 2021, creating potential risks for loans, securities, derivatives, funding costs, systems, and fallback provisions.
- Net deferred tax assets were $130 million, and goodwill was approximately $1.0 billion. Management reported no goodwill impairment and no additional valuation allowance on deferred tax assets at year-end.
Important facts for investors to verify
- Whether loan growth continues to exceed deposit growth and how wholesale funding affects net interest margin and liquidity.
- Whether improvements in oil and gas credit quality persist and whether commercial real estate, construction, and geographic concentrations create future losses.
- The sustainability of the 2018 credit benefit, including net recoveries and the negative provision for credit losses.
- Actual 2019 PPNR growth, efficiency-ratio performance, fee-income trends, and expense levels relative to management targets.
- The scale and timing of capital returns, including the $275 million repurchase plan, future dividends, and regulatory approvals.
- Interest-rate sensitivity, deposit repricing behavior, modeled deposit betas, and the effect of hedging actions under falling or flattening rates.
- Progress, costs, and control implications of the Core Transformation Project and other technology initiatives.
- Developments in disclosed litigation, pension-plan termination costs, LIBOR transition planning, and implementation of the expected-credit-loss standard scheduled for 2020.