Zions Bancorporation 2018 Q2 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 separately managed brands across 11 Western and Southwestern states. The filing covers the quarter and six months ended June 30, 2018; financial statements are unaudited.
Key financial metrics
- Net earnings applicable to common shareholders: $187 million, or $0.89 diluted EPS, compared with $154 million, or $0.73, in Q2 2017 and $231 million, or $1.09, in Q1 2018.
- Six-month results: Net income was $435 million and earnings applicable to common shareholders were $418 million, compared with $308 million and $283 million, respectively, in the first six months of 2017.
- Net interest income: $548 million, up 4% from $528 million in Q2 2017 and up from $542 million in Q1 2018. Net interest margin was 3.56%, compared with 3.52% in Q2 2017.
- Noninterest income: $138 million, up 5% year over year; customer-related fees increased 3% to $125 million.
- Noninterest expense: $428 million, up 6% year over year, primarily due to higher salaries, incentive compensation, headcount, and merit increases. The efficiency ratio was 60.9%, compared with 59.8% in Q2 2017.
- Pre-provision performance: Adjusted pre-provision net revenue was $270 million, up from $268 million in Q2 2017. Return on average tangible common equity was 12.4%, compared with 10.2%.
- Credit costs and asset quality: The provision for loan losses was $5 million, versus $7 million in Q2 2017 and a negative $40 million in Q1 2018. Net loan recoveries were $12 million. Nonperforming assets were $347 million, or 0.77% of loans and OREO, versus $418 million and 0.93% at December 31, 2017.
- Loans and deposits: Loans totaled $45.2 billion at June 30, 2018, up from $44.8 billion at year-end 2017; average loans increased 5% year over year. Total deposits were $53.6 billion, up from $52.6 billion at year-end 2017. The loan-to-deposit ratio was 84%.
- Capital: Total shareholders’ equity was $7.6 billion. Basel III common equity tier 1, tier 1 leverage, tier 1 risk-based, and total risk-based capital ratios were 12.2%, 10.5%, 13.3%, and 14.8%, respectively. The company stated that it met applicable Basel III capital requirements.
- Debt and liquidity: Long-term debt was $383 million, while short-term borrowings were $4.2 billion. Consolidated cash, interest-bearing deposits, and security resell agreements totaled $1.5 billion. The bank had approximately $13.9 billion of additional FHLB and Federal Reserve borrowing capacity.
- Cash flow: Six-month operating cash flow was $438 million. Investing activities used $329 million and financing activities used $189 million, including $248 million of common-stock repurchases and $104 million of common and preferred dividends.
Material changes versus comparable periods
- Quarterly common earnings increased 21% year over year, driven primarily by higher net interest income, lower income taxes, and modestly higher noninterest income.
- The effective tax rate declined to 22.1% from 32.3%, primarily reflecting the reduction in the federal corporate tax rate from 35% to 21% under the Tax Cuts and Jobs Act. The prior-year period included $18 million of state-related tax benefits.
- Interest and fees on loans increased $45 million year over year, while interest expense increased $28 million due to higher deposit and short-term borrowing costs.
- Salaries and employee benefits increased $26 million, including $11 million of higher incentive compensation and $8 million from headcount and merit increases.
- Credit quality improved: criticized, classified, and nonaccrual loans declined by $488 million, $370 million, and $144 million, respectively, from Q2 2017. The allowance for loan losses declined to $490 million from $518 million at year-end 2017.
- Common-stock repurchases totaled 2.1 million shares, or $120 million, during Q2 and 4.3 million shares, or $235 million, during the first six months. Shares outstanding declined to 195.4 million from 197.5 million at year-end 2017.
- Accumulated other comprehensive loss increased to $315 million from $139 million, primarily because of declining fair values of available-for-sale securities in the higher-rate environment.
Guidance, outlook, risks, and unusual items
- Management expects overall loan growth to remain moderate, with growth concentrated in commercial, municipal, CRE, and non-oil-and-gas commercial and industrial lending, partly offset by reductions in the National Real Estate portfolio.
- Management expects moderate growth in customer-related fees and adjusted noninterest expense growth in the low-single-digit percentage range for 2018.
- Management expects moderately higher net interest income in a rising-rate environment, but results depend on deposit pricing, deposit migration, loan and securities prepayments, competition, and the shape of the yield curve. A modeled immediate parallel 200-basis-point rate increase would increase first-year net interest income by 5.8%; a flatter-curve scenario would produce a materially smaller benefit.
- The company intends to reduce capital ratios to levels near or slightly above peer medians over the next six to eight quarters, assuming generally stable economic conditions.
- In July 2018, the board declared a $0.30 quarterly common dividend and approved a $185 million third-quarter share-repurchase plan. These actions remain subject to financial performance, business needs, and economic conditions.
- Zions and ZB, N.A. entered into a merger agreement under which the holding company would merge into the bank. Shareholder approval was scheduled for September 14, 2018. The proposed restructuring is intended to eliminate duplicative regulatory requirements and make the OCC the primary federal banking regulator.
- The company reported a proposed FSOC decision granting relief from designation as a systemically important financial institution, subject to the applicable process and approvals.
- Material risks include interest-rate and deposit-pricing pressure, credit deterioration, commercial real estate and oil-and-gas exposures, regulatory and capital requirements, cybersecurity, litigation, economic conditions, and execution of the proposed restructuring. Management estimated reasonably possible legal losses of approximately $0 million to $15 million above accrued amounts for matters that could be meaningfully estimated; this range is not the company’s maximum exposure.
- New accounting standards may affect future reporting. The company estimated a $200 million to $250 million right-of-use asset upon adoption of the lease standard in 2019 and stated that the expected-loss credit standard, scheduled for 2020 adoption, could have a material impact but remained under evaluation.
Important facts for investors to verify
- Whether the proposed holding-company merger received shareholder and all required regulatory approvals and delivered the expected cost and regulatory benefits.
- Whether moderate loan growth and deposit pricing discipline offset rising funding costs and preserve the 3.56% net interest margin.
- Whether improved credit quality persists, particularly in commercial real estate, commercial and industrial, consumer, and oil-and-gas-related portfolios.
- The sustainability of the lower effective tax rate after the 2018 benefit from federal tax reform and the prior-year one-time state tax benefits.
- The effect of continued share repurchases, dividends, warrant dilution, and planned capital-ratio reductions on capital strength and per-share earnings.
- The eventual impact of the expected-loss credit standard, lease accounting, litigation, and other regulatory or operational contingencies.