ZIONS BANCORPORATION, NATIONAL ASSOCIATION quarterly report, Q1 FY2018

Zions Bancorporation, National Association — Q1 2018 Form 10-Q Summary

Business context and reporting period

Zions Bancorporation is a Salt Lake City-based financial holding company operating a commercial bank through seven branded banking units across 11 Western and Southwestern states. The filing reports unaudited consolidated results for the three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017 and December 31, 2017.

Key financial metrics

Metric	Q1 2018	Comparable period
Net interest income	$542 million	$489 million in Q1 2017
Noninterest income	$138 million	$132 million in Q1 2017
Net income	$238 million	$139 million in Q1 2017
Net earnings applicable to common shareholders	$231 million	$129 million in Q1 2017
Diluted earnings per share	$1.09	$0.61 in Q1 2017
Net interest margin	3.56%	3.38% in Q1 2017; 3.45% in Q4 2017
Adjusted pre-provision net revenue	$265 million	$213 million in Q1 2017
Efficiency ratio	61.3%	65.9% in Q1 2017
Total assets at period end	$66.5 billion	$66.3 billion at December 31, 2017
Total loans	$45.1 billion	$44.8 billion at December 31, 2017
Total deposits	$53.0 billion	$52.6 billion at December 31, 2017

Average loans increased 5% year over year to $44.9 billion, led by commercial and industrial, municipal, owner-occupied, and 1-4 family residential lending.
Interest income on loans increased $64 million year over year, supported by loan growth, higher short-term rates, and $11 million of loan interest recoveries.
The provision for loan losses was a $40 million benefit in Q1 2018 versus a $23 million provision in Q1 2017. Net charge-offs declined to $5 million from $46 million.
Noninterest expense was $412 million, down slightly from $414 million. Adjusted noninterest expense increased 2% to $419 million as the company continued investing in technology and process simplification.
The effective income tax rate was 22.7%, compared with 24.5% in Q1 2017, reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act.
Return on average tangible common equity was 15.5%, compared with 8.8% in Q1 2017 and 7.4% in Q4 2017.

Cash flow, debt, liquidity, and capital

Net cash provided by operating activities was $275 million, compared with $380 million in Q1 2017.
Investing activities used $429 million, including a $311 million net cash outflow from loan growth and $28 million of capital expenditures.
Financing activities provided $76 million. Deposits increased $347 million, while common stock repurchases used $122 million and dividends used $49 million.
Cash and due from banks declined to $470 million at March 31, 2018, from $548 million at December 31, 2017. Consolidated cash, interest-bearing deposits held as investments, and security resell agreements totaled $1.7 billion.
Short-term borrowings were $4.9 billion, including $4.5 billion of short-term FHLB borrowings. Long-term debt was $383 million, consisting primarily of subordinated and senior notes.
The loan-to-total-deposit ratio was 85.1%. Approximately $13.3 billion of additional FHLB and Federal Reserve borrowing capacity was available, supported by approximately $24.5 billion of pledged loans.
The company met Basel III capital requirements. Common equity tier 1 capital was 12.2%, Tier 1 leverage was 10.5%, and total risk-based capital was 14.8%.
Total shareholders’ equity was $7.6 billion. Tangible common equity was $6.1 billion and the tangible common equity ratio was 9.26%.

Material changes versus prior comparable periods

Common earnings increased 79% year over year, primarily because of higher net interest income, materially lower credit-loss provisions, loan interest recoveries, modest noninterest income growth, expense control, and the lower corporate tax rate.
Net interest margin expanded 18 basis points year over year, reflecting loan growth, higher earning-asset yields, asset-mix changes, and faster repricing of assets than funding sources.
Credit quality improved. Compared with Q1 2017, criticized loans declined $460 million, classified loans declined $441 million, and nonaccrual loans declined $198 million.
Nonperforming assets declined to $392 million, or 0.87% of loans and leases plus other real estate owned, from $418 million, or 0.93%, at December 31, 2017.
Total allowance for credit losses declined to $524 million from $604 million at March 31, 2017. The allowance for loan losses ratio declined to 1.05% from 1.27%.
Accumulated other comprehensive loss increased to $267 million from $139 million at December 31, 2017, primarily because of a $126 million after-tax decline in unrealized gains on available-for-sale securities.
The company repurchased 2.2 million common shares for $115 million during the quarter. The common dividend increased to $0.20 per share from $0.08 in Q1 2017, and the board approved a further increase to $0.24 per share for Q2 2018.
The company adopted ASC Topic 606, ASU 2016-01, and targeted hedging improvements in 2018. Management reported no material transition impact from the adopted standards.

Guidance, outlook, commentary, and risks

Management expects moderate loan growth and moderate growth in customer-related fees over the next 12 months.
Management expects net interest income to increase at a moderate pace and did not assume additional benchmark interest-rate increases in its forecasts. The securities portfolio is expected to remain relatively stable.
Noninterest expense is expected to increase in the low single-digit percentage range relative to the prior year as the company continues investing in employees and technology.
Management remains comfortable with oil and gas-related and commercial real estate concentrations, while noting continued runoff in the National Real Estate portfolio.
Interest-rate risk remains significant. Under the company’s modeled scenarios, a parallel 200-basis-point rate increase would increase first-year net interest income by 6.0%; a flatter yield-curve scenario would produce a substantially smaller benefit.
Principal risks include credit deterioration, commercial real estate and oil and gas exposure, deposit pricing and funding competition, interest-rate changes, liquidity and regulatory capital requirements, cybersecurity and technology risk, legal proceedings, and changes in economic, tax, accounting, and banking regulations.
Material legal matters include litigation related to California Bank & Trust customer relationships and alleged Ponzi schemes, a California wage-and-hour claim, and litigation involving a bankrupt borrower. The estimated aggregate range of reasonably possible losses for certain matters was approximately $0 million to $15 million in excess of accrued amounts, excluding matters for which a meaningful estimate was not possible.
The filing includes an April 5, 2018 Agreement and Plan of Merger between Zions Bancorporation and ZB, N.A.; the supplied filing text does not provide clear transaction terms or expected financial effects.

Most important facts for investors to verify

Whether loan growth and the 3.56% net interest margin remain sustainable as funding costs and deposit pricing increase.
Whether the unusually favorable negative provision for credit losses and $11 million of loan interest recoveries recur.
Trends in oil and gas, commercial real estate, classified loans, nonaccrual loans, charge-offs, and the allowance for credit losses.
The effect of the $126 million after-tax decline in accumulated other comprehensive income on tangible capital and securities values.
Future deposit growth, brokered-deposit levels, FHLB borrowings, liquidity buffers, and the 85.1% loan-to-deposit ratio.
Final 2018 capital-plan approvals, the continuation of share repurchases, and the planned increase in the common dividend to $0.24 per share.
The terms, regulatory status, and financial implications of the merger agreement referenced in the exhibits.
Potential outcomes and accrued amounts relating to the disclosed litigation and governmental or regulatory matters.