Zions Bancorporation 2017 Form 10-K Summary
Business context and reporting period
Zions Bancorporation is a Utah-based financial holding company operating a commercial bank through seven regionally branded banking units across 11 western and southwestern states. The filing covers the fiscal year ended December 31, 2017, with fourth-quarter information presented on an unaudited basis. The Company operated 433 branches and had 10,083 full-time equivalent employees at year-end.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net interest income | $2.065 billion | $1.867 billion | +11% |
| Noninterest income | $544 million | $516 million | +5% |
| Total revenue | $2.609 billion | $2.383 billion | +9% |
| Provision for loan losses | $24 million | $93 million | -74% |
| Noninterest expense | $1.649 billion | $1.585 billion | +4% |
| Net income | $592 million | $469 million | +26% |
| Net earnings applicable to common shareholders | $550 million | $411 million | +34% |
| Diluted earnings per common share | $2.60 | $1.99 | +31% |
| Net interest margin | 3.45% | 3.37% | +8 bps |
| Return on average assets | 0.91% | 0.78% | Improved |
| Return on average common equity | 7.7% | 6.0% | Improved |
| Return on average tangible common equity | 9.0% | 7.1% | Improved |
Revenue growth was driven primarily by loan and securities growth and higher short-term interest rates. Adjusted pre-provision net revenue was $992 million, up from $820 million, and the adjusted efficiency ratio improved to 62.3% from 65.8%.
- Year-end assets increased 5% to $66.288 billion.
- Net loans and leases increased 5% to $44.780 billion; loan growth was strongest in 1-4 family residential, commercial and industrial, municipal, and owner-occupied commercial lending.
- Total deposits declined 1% to $52.621 billion, while the loan-to-deposit ratio increased to 85.1% from 80.1%.
- Common equity increased 3% to $7.113 billion; total shareholders’ equity was $7.679 billion.
- Net cash provided by operating activities was $928 million. Investing activities used $3.919 billion, principally for loan growth and investment securities purchases, while financing activities provided $2.802 billion.
- Long-term debt declined 28% to $383 million. Federal funds and other short-term borrowings increased to $4.976 billion from $827 million, including $3.6 billion of short-term FHLB borrowings at year-end.
Credit quality, capital and liquidity
- Net charge-offs declined to $73 million from $132 million, and the net charge-off ratio improved to 0.17% from 0.31%.
- Nonaccrual loans declined to $414 million from $569 million, and total nonperforming assets declined to $418 million from $573 million. Nonperforming assets were 0.93% of loans, leases and OREO, compared with 1.34%.
- The allowance for loan losses declined to $518 million from $567 million; the total allowance for credit losses, including the reserve for unfunded commitments, was $576 million.
- Oil and gas-related loans declined 9% to $1.973 billion, while total oil and gas credit exposure remained approximately $3.9 billion. Classified oil and gas credits and related charge-offs decreased materially.
- Basel III capital ratios remained strong: CET1 was 12.1%, Tier 1 risk-based capital was 13.2%, total risk-based capital was 14.8%, and Tier 1 leverage was 10.5%. The Company and subsidiary bank exceeded well-capitalized thresholds.
- The Company stated that it complied with its modified Liquidity Coverage Ratio requirement and internal liquidity policies. Available additional FHLB and Federal Reserve borrowing capacity was approximately $14.7 billion at year-end, supported by $25.6 billion of pledged loans.
Material changes versus the prior comparable period
- Profitability improved substantially as net interest income increased $198 million and the loan-loss provision decreased $69 million, partly offset by a $64 million increase in noninterest expense.
- Average securities increased 52% to $15.7 billion, while average money market investments declined 59% to $1.5 billion. Average loans and deposits each increased 3%.
- Wholesale funding increased significantly to support balance-sheet growth and securities purchases, increasing funding-cost and liquidity sensitivity.
- The Company repurchased 7 million common shares for $320 million, increased common dividends declared to $0.44 per share from $0.28, and redeemed all outstanding Series F preferred stock for approximately $144 million.
- Customer-related fee income increased 3% to $485 million, but loan sales and servicing income declined 29% because the Company stopped selling servicing-released mortgage loans to Freddie Mac and did not repeat certain 2016 servicing-asset valuation gains.
- Noninterest expense included a $12 million charitable foundation contribution associated in part with the Tax Cuts and Jobs Act. The Act also generated a provisional noncash $47 million tax charge from remeasurement of deferred tax assets.
- The Company implemented the first phase of its core transformation project in 2017; the commercial and construction lending-system phase was expected to be completed in 2019. Capitalized project costs totaled $148 million at year-end.
Guidance, outlook, risks and unusual items
Management expects moderate net interest income growth in 2018, assuming no further Federal Funds rate increases and a generally stable securities portfolio. The stated areas of focus include mid-single-digit loan growth, mid-single-digit customer-related fee-income growth, low-single-digit growth in adjusted noninterest expense, high-single-digit annual PPNR growth, further efficiency-ratio improvement, continued technology investment, and increased returns on capital.
The Company announced a proposed merger of the Parent into ZB, N.A. and intended to seek an FSOC determination that the resulting organization is not systemically important. Completion requires regulatory and shareholder approvals, and the filing provides no assurance that the restructuring or FSOC application will succeed.
- Primary credit risks include concentrations in commercial real estate, construction and land development, oil and gas-related lending, and geographically concentrated western-state markets.
- The Company remains asset-sensitive, but modeled interest-rate results depend heavily on deposit repricing, deposit migration, prepayment and competitive-pricing assumptions. A parallel 200-basis-point rate increase was modeled to increase first-year net interest income by 5.4%.
- Cybersecurity, technology replacement, operational execution, vendor management, regulatory compliance and model risk remain significant risks.
- Legal matters included several early-stage lawsuits and governmental or regulatory matters. For matters where a meaningful estimate was possible, reasonably possible losses were estimated at $0 to approximately $20 million in excess of accrued amounts; this range was not a maximum exposure.
- Remaining prohibited private equity investments totaled approximately $3 million, with $4 million of related unfunded commitments. The Company received an extended transition period to dispose of eligible investments.
- Goodwill totaled $1.014 billion. The 2017 impairment test found no impairment, although future declines in reporting-unit performance, market values or economic conditions could require a charge.
Investor verification checklist
- Verify the sustainability of net interest margin expansion and the effect of increased FHLB and other wholesale borrowings on funding costs.
- Track loan and deposit growth, particularly the rising loan-to-deposit ratio and the decline in year-end deposits.
- Reassess oil and gas, commercial real estate and geographically concentrated credit exposures as economic and collateral conditions change.
- Confirm whether credit-quality improvement and low provision expense persist after the 2017 decline in criticized, classified and nonaccrual loans.
- Review the final tax effects of the Tax Cuts and Jobs Act and any subsequent deferred-tax-asset adjustments permitted by SAB 118.
- Monitor execution, cost and regulatory implications of the core transformation project and proposed Parent-to-bank merger.
- Review capital-plan approvals, dividend increases and remaining share-repurchase capacity, all of which remain subject to regulatory and board conditions.
- Evaluate the potential financial and reputational impact of pending litigation, cybersecurity events and other regulatory proceedings.