Zions Bancorporation, National Association — 2017 Q1 Form 10-Q Summary
Business context and reporting period
Zions Bancorporation is a financial holding company headquartered in Salt Lake City, Utah. Through seven separately managed banking brands, it provides commercial, consumer, real estate, deposit, wealth-management and related financial services across 11 Western and Southwestern states. The filing reports unaudited results for the three months ended March 31, 2017, compared primarily with the three months ended March 31, 2016 and December 31, 2016.
Key financial metrics
| Metric | Q1 2017 | Comparable period |
|---|---|---|
| Net earnings applicable to common shareholders | $129 million | $79 million in Q1 2016 |
| Diluted earnings per common share | $0.61 | $0.38 in Q1 2016 |
| Net income | $139 million | $91 million in Q1 2016 |
| Net interest income | $489 million | $453 million in Q1 2016 |
| Net interest margin | 3.38% | 3.35% in Q1 2016 |
| Noninterest income | $132 million | $117 million in Q1 2016 |
| Noninterest expense | $414 million | $396 million in Q1 2016 |
| Provision for loan losses | $23 million | $42 million in Q1 2016 |
| Net charge-offs | $46 million; 0.43% annualized | $36 million; 0.35% annualized |
| Adjusted efficiency ratio | 65.9% | 68.5% in Q1 2016 |
| Adjusted pre-provision net revenue | $213 million | $182 million in Q1 2016 |
| Total assets at March 31 | $65.5 billion | $63.2 billion at December 31, 2016 |
| Total shareholders’ equity at March 31 | $7.7 billion | $7.6 billion at December 31, 2016 |
| Tangible common equity ratio | 9.31% | 9.49% at December 31, 2016 |
| Common Equity Tier 1 ratio | 12.22% | 12.07% at December 31, 2016 |
Revenue, profitability and margins
- Net interest income increased 7.9% year over year, primarily from redeploying lower-yielding money-market investments into agency securities and loans and reducing long-term debt expense.
- Average investment securities increased by $6.2 billion year over year, while average loans increased by $1.6 billion. Average loan yields remained 4.14%.
- Taxable-equivalent net interest income was $497 million, compared with $458 million in Q1 2016.
- Noninterest income increased 12.8%, including higher securities gains and investment income. Some of the improvement was driven by gains associated with an equity investment that had experienced post-IPO volatility.
- Noninterest expense rose 4.5%, reflecting higher employee-related costs, occupancy expense and FDIC premiums. Adjusted noninterest expense was $411 million.
- The effective tax rate was 24.5%, compared with 31.1% in Q1 2016. Q1 2017 benefited from a $14 million one-time state tax-position benefit and a $4 million benefit from new stock-compensation accounting guidance.
Cash flow, debt and liquidity
- Operating activities provided $380 million of cash, compared with $207 million in Q1 2016.
- Investing activities used $2.88 billion, primarily due to $3.11 billion of purchases of available-for-sale securities and continued purchases of high-quality liquid assets.
- Financing activities provided $2.33 billion, including a $2.31 billion increase in short-term borrowings and a $241 million increase in deposits. Cash and due from banks ended at $566 million, down from $737 million at year-end 2016.
- Total deposits were $53.5 billion at March 31, 2017, and the consolidated loan-to-deposit ratio was 79.9%.
- Short-term borrowings were $3.14 billion, including $2.5 billion of short-term FHLB borrowings. Long-term debt declined to $383 million from $535 million after $153 million of senior notes matured.
- Management reported compliance with its internal liquidity policy and the applicable modified Basel III liquidity coverage requirements. Approximately $14.5 billion of additional FHLB and Federal Reserve borrowing capacity was available.
Material changes versus prior comparable periods
- Net earnings applicable to common shareholders increased 63%, and diluted EPS increased 61% year over year.
- Net interest income benefited from a substantial shift toward securities and loans; however, the company’s asset sensitivity to rising rates was reduced by funding securities purchases with short-term borrowings.
- Loan balances increased only modestly to $42.7 billion from $42.6 billion at year-end 2016. Annualized loan growth in Q1 was 0.9%, although management expected mid-single-digit loan growth over the following 12 months.
- Oil and gas-related loans declined to $2.1 billion from $2.6 billion in Q1 2016 and represented 4.8% of total loans. Annualized oil and gas net charge-offs declined to 2.72% from 5.45%.
- Nonperforming assets increased to $588 million, or 1.37% of loans and other real estate owned, from $573 million, or 1.34%, at year-end 2016.
- Troubled debt restructurings increased to $298 million from $251 million at year-end 2016.
- Common shares outstanding declined to 202.6 million from 203.1 million at year-end 2016 after approximately $45 million of share repurchases during the quarter. The common dividend was $0.08 per share, compared with $0.06 in Q1 2016.
Guidance, outlook, risks and unusual items
- Management targeted an adjusted efficiency ratio in the low 60% range for fiscal 2017 and adjusted noninterest expense growth of less than 3%. Q1 adjusted expense of $411 million was described as consistent with that objective, despite seasonal first-quarter costs.
- Management expected mid-single-digit loan growth over the next 12 months, partially offset by continued runoff in national real estate and oil and gas-related portfolios.
- Management expected 2017 provision expense to be generally consistent with fiscal 2016 if energy prices remained near current levels.
- The Q1 loan-loss provision included losses from an isolated non-oil-and-gas borrower subject to a government investigation and asset seizure. Net charge-offs increased year over year despite improvement in the energy portfolio.
- Interest-rate risk remains significant. Under management’s modeled scenarios, a sustained immediate 200-basis-point rate increase was estimated to increase first-year net interest income by 2.8% under the fast deposit assumption and 10.3% under the slow assumption. These estimates depend materially on deposit behavior, repricing and prepayment assumptions.
- The company submitted its 2017 capital plan and stress-test results to the Federal Reserve on April 5, 2017. Results were expected to be disclosed in late June 2017.
- On April 27, 2017, the company announced redemption of all outstanding 7.90% Series F preferred stock on June 15, 2017, for approximately $144 million.
- Material legal matters included a Department of Justice inquiry into payment-processing practices and two civil suits involving California Bank & Trust. The company estimated reasonably possible litigation losses of $0 to approximately $20 million above accrued amounts for matters that could be quantified; the estimate excludes matters for which a meaningful range was not possible.
- The company identified approximately $5 million of remaining prohibited private-equity investments under the Volcker Rule and stated that it expected to dispose of them before the applicable deadline.
- The company is evaluating the future expected-credit-loss standard, which it expects could have a material impact on its financial statements, although the amount was not yet determined.
Most important facts for investors to verify
- Whether planned loan growth materializes while commercial real estate and oil and gas exposures continue to run off.
- Whether credit quality and net charge-offs improve beyond the isolated Q1 borrower event, particularly in the energy portfolio and troubled debt restructurings.
- Whether adjusted expense growth remains below 3% and the efficiency ratio reaches management’s low-60% target.
- The effect of increased short-term FHLB borrowings and the expanded securities portfolio on funding costs, liquidity and interest-rate sensitivity.
- The impact of the June 2017 Series F preferred-stock redemption on capital ratios, preferred dividends and common-shareholder returns.
- The ultimate effect and implementation costs of the expected-credit-loss accounting standard.
- The resolution and potential financial exposure from the disclosed governmental inquiry and civil litigation.
- The extent to which Q1 earnings benefited from one-time tax items and volatile securities or equity-investment gains rather than recurring operations.