UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 001-12307
ZIONS BANCORPORATION, NATIONAL ASSOCIATION
(Exact name of registrant as specified in its charter)
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UNITED STATES OF AMERICA | 87-0189025 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One South Main Salt Lake City, Utah | 84133 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (801) 844-7637
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ý | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
| | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | Trading Symbols | Name of Each Exchange on Which Registered |
Common Stock, par value $0.001 | ZION | The NASDAQ Stock Market LLC |
Warrants to Purchase Common Stock (expiring May 22, 2020) | ZIONW | The NASDAQ Stock Market LLC |
Depositary Shares each representing a 1/40th ownership interest in a share of Series A Floating-Rate Non-Cumulative Perpetual Preferred Stock | ZB/A | New York Stock Exchange |
Depositary Shares each representing a 1/40th ownership interest in a share of Series G Fixed/Floating-Rate Non-Cumulative Perpetual Preferred Stock | ZB/G | New York Stock Exchange |
Depositary Shares each representing a 1/40th ownership interest in a share of Series H 5.75% Non-Cumulative Perpetual Preferred Stock | ZB/H | New York Stock Exchange |
6.95% Fixed-to-Floating Rate Subordinated Notes due September 15, 2028 | ZBK | New York Stock Exchange |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Common Stock ($0.001 par value) outstanding at April 30, 2019 | 182,565,329 shares |
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Table of Contents
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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
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PART I. | FINANCIAL INFORMATION |
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Statements in this Quarterly Report on Form 10-Q that are based on other than historical information, or that express the Bank’s expectations regarding future events or determinations, are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:
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• | statements with respect to the beliefs, plans, objectives, goals, targets, commitments, designs, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Zions Bancorporation, National Association and its subsidiaries (collectively “Zions Bancorporation, N.A.,” “the Bank,” “we,” “our,” “us”); and |
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• | statements preceded by, followed by, or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “target,” “commit,” “design,” “plan,” “projects,” and the negative thereof and similar words and expressions. |
Zions Bancorporation, National Association is the successor to Zions Bancorporation by merger of Zions Bancorporation into ZB, N.A. on September 30, 2018. References to “Zions Bancorporation, N.A.,” “the Bank,” “we,” “our,” and “us” are intended to refer to Zions Bancorporation and its subsidiaries for periods prior to the merger and to Zions Bancorporation, National Association, and its subsidiaries for periods on and after the merger.
These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, including without limitation, future financial and operating results. Actual results may differ materially from those presented, either expressed or implied, including, but not limited to, those presented in Management’s Discussion and Analysis. Important risk factors that may cause such material differences include, but are not limited to:
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• | the Bank’s ability to successfully execute its business plans, manage its risks, and achieve its objectives, including its operating leverage; |
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• | the impact of acquisitions, dispositions, and corporate restructurings; |
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• | increases in the levels of losses, customer bankruptcies, bank failures, claims, and assessments; |
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• | the ability of the Bank to retain and recruit executives and other personnel necessary for their businesses and competitiveness; |
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• | changes in local, national and international political and economic conditions, including without limitation the political and economic effects of the fiscal imbalance in the United States (“U.S.”) and other countries, potential or actual downgrades in ratings of sovereign debt issued by the United States and other countries, and other major developments, including wars, military actions, and terrorist attacks; |
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• | changes in financial and commodity market prices and conditions, either internationally, nationally or locally in areas in which the Bank conducts its operations, including without limitation rates of business formation and growth, commercial and residential real estate development, real estate prices, agricultural-related commodity prices, and oil and gas-related commodity prices; |
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• | changes in markets for equity, fixed income, commercial paper and other securities, commodities, including availability, market liquidity levels, and pricing; |
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• | changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition; |
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
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• | the rate of change of the Bank’s interest-sensitive assets and liabilities relative to changes in benchmark interest rates; |
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• | changes in fiscal, monetary, regulatory, trade and tax policies and laws, and regulatory assessments and fees, including policies of the U.S. Department of Treasury, the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (“FDIC”), the Securities and Exchange Commission (“SEC”), and the Consumer Financial Protection Bureau (“CFPB”); |
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• | changes in consumer spending and savings habits; |
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• | inflation and deflation; |
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• | increased competitive challenges and expanding product and pricing pressures among financial institutions; |
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• | legislation or regulatory changes which adversely affect the Bank’s operations or business; |
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• | the Bank’s ability to comply with applicable laws and regulations; |
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• | costs of deposit insurance and changes with respect to FDIC insurance coverage levels; |
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• | any impairment of our goodwill or other intangibles, or any adjustment of valuation allowances on our deferred tax assets (“DTAs”) due to adverse changes in the economic environment, declining operations of the reporting unit, or a change to the corporate statutory tax rate or other similar changes if and as implemented by local and national governments, or other factors; |
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• | the impact of rules and regulations on our required regulatory capital and liquidity levels, governmental assessments on us, the scope of business activities in which we may engage, the manner in which we engage in such activities, and the fees we may charge for certain products and services; |
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• | uncertainties related to the application of the National Bank Act of 1863, 12 U.S.C. 38 (the “National Bank Act”) and OCC regulations to the Bank’s corporate affairs as more fully described under “Risk Factors” in our 2018 Annual Report on Form 10-K; |
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• | changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (“FASB”) or regulatory agencies; |
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• | risks and uncertainties related to the ability to obtain shareholder and regulatory approvals when required, or the possibility that such approvals may be delayed; |
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• | new legal claims against the Bank, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies, or changes in existing legal matters; |
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• | economies of scale attendant to the development of digital and other technologies by much larger bank and non-bank competitors, and the possible entry of technology “platform” companies into the financial services business; |
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• | the Bank’s ability to develop and maintain secure and reliable information technology systems, including as necessary to guard against fraud, cybersecurity and privacy risks; and |
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• | the Bank’s implementation of new technologies. |
Except to the extent required by law, the Bank specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.
GLOSSARY OF ACRONYMS |
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ACL | Allowance for Credit Losses | ASC | Accounting Standards Codification |
AFS | Available-for-Sale | ASU | Accounting Standards Update |
ALCO | Asset/Liability Committee | ATM | Automated Teller Machine |
ALLL | Allowance for Loan and Lease Losses | bps | basis points |
Amegy | Amegy Bank, a division of Zions Bancorporation, National Association | CB&T | California Bank & Trust, a division of Zions Bancorporation, National Association |
AOCI | Accumulated Other Comprehensive Income | CFPB | Consumer Financial Protection Bureau |
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
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CLTV | Combined Loan-to-Value Ratio | NSB | Nevada State Bank, a division of Zions Bancorporation, National Association |
COSO | Committee of Sponsoring Organizations of the Treadway Commission | OCC | Office of the Comptroller of the Currency |
CRE | Commercial Real Estate | OCI | Other Comprehensive Income |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | OREO | Other Real Estate Owned |
DTA | Deferred Tax Asset | OTTI | Other-Than-Temporary Impairment |
EaR | Earnings at Risk | PAGA | Private Attorney General Act |
ERM | Enterprise Risk Management | PEI | Private Equity Investment |
EVE | Economic Value of Equity at Risk | PPNR | Pre-provision Net Revenue |
FASB | Financial Accounting Standards Board | ROC | Risk Oversight Committee |
FDIC | Federal Deposit Insurance Corporation | ROU | Right-of-Use |
FDICIA | Federal Deposit Insurance Corporation Improvement Act | RULC | Reserve for Unfunded Lending Commitments |
FHLB | Federal Home Loan Bank | S&P | Standard and Poor's |
FTP | Funds Transfer Pricing | SBA | Small Business Administration |
GAAP | Generally Accepted Accounting Principles | SBIC | Small Business Investment Company |
HECL | Home Equity Credit Line | SEC | Securities and Exchange Commission |
HTM | Held-to-Maturity | TCBW | The Commerce Bank of Washington, a division of Zions Bancorporation, National Association |
IMG | International Manufacturing Group | TDR | Troubled Debt Restructuring |
LIBOR | London Interbank Offered Rate | Tier 1 | Common Equity Tier 1 (Basel III) |
Municipalities | State and Local Governments | Topic 842 | ASU 2016-02, “Leases” |
NASDAQ | National Association of Securities Dealers Automated Quotations | U.S. | United States |
NBAZ | National Bank of Arizona, a division of Zions Bancorporation, National Association | Vectra | Vectra Bank Colorado, a division of Zions Bancorporation, National Association |
NIM | Net Interest Margin | Zions Bancorporation, N.A. | Zions Bancorporation, National Association |
NM | Not Meaningful | Zions Bank | Zions Bank, a division of Zions Bancorporation, National Association |
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Bank has made no significant changes in its critical accounting policies and significant estimates from those disclosed in its 2018 Annual Report on Form 10-K.
Accounting and Reporting Developments
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This new standard significantly changes how entities will measure credit losses for virtually all financial assets. The standard replaces today’s “incurred loss” approach with an “expected loss” model for instruments such as loans and held-to-maturity (“HTM”) securities that are measured at amortized cost. The standard requires credit losses relating to available-for-sale (“AFS”) debt securities to be recorded through an allowance rather than a reduction of the carrying amount and replaces the historically required other-than-temporary impairment (“OTTI”) analysis. It also changes the accounting for purchased credit-impaired debt securities and loans. The standard retains many of the current disclosure requirements in U.S. generally accepted accounting principles (“GAAP”) and expands other disclosure requirements. The new guidance is effective for calendar year-end public companies beginning January 1, 2020.
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Our implementation team, led jointly by Credit, Treasury, and the Corporate Controller’s group, has developed models to meet the new standard that are being validated. We have started to analyze the results of our models. Next steps include establishing and testing controls, further challenging model results, and finalizing the qualitative allowance process and disclosures.
Based upon our modeling-to-date, we expect more volatility in the credit loss estimate and less comparability among banks when this new standard becomes effective. Comparability will be impacted by, among other items, varying expectations for macroeconomic trends over the near term and loan portfolio composition differences, including expected loan lives. The impact at adoption of this standard is dependent upon the nature and characteristics of our assets in scope of the guidance, macroeconomic conditions and forecasts, as well as other management judgments.
GAAP to NON-GAAP RECONCILIATIONS
This Form 10-Q presents non-GAAP financial measures, in addition to GAAP financial measures, to provide investors with additional information. The adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures are presented in the following schedules. The Bank considers these adjustments to be relevant to ongoing operating results and provide a meaningful base for period-to-period and company-to-company comparisons. These non-GAAP financial measures are used by management to assess the performance and financial position of the Bank and for presentations of Bank performance to investors. The Bank further believes that presenting these non-GAAP financial measures will permit investors to assess the performance of the Bank on the same basis as that applied by management.
Non-GAAP financial measures have inherent limitations, and are not required to be uniformly applied by individual entities. Although non-GAAP financial measures are frequently used by stakeholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP.
The following are non-GAAP financial measures presented in this Form 10-Q and a discussion of the reasons for which management uses these non-GAAP measures:
Return on Average Tangible Common Equity – this schedule also includes “net earnings applicable to common shareholders, excluding the effects of the adjustment, net of tax” and “average tangible common equity.” Return on average tangible common equity is a non-GAAP financial measure that management believes provides useful information to management and others about the Bank’s use of shareholders’ equity. Management believes the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income.
RETURN ON AVERAGE TANGIBLE COMMON EQUITY (NON-GAAP)
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| | Three Months Ended |
(Dollar amounts in millions) | | March 31,
2019 | | December 31,
2018 | | September 30,
2018 | | March 31,
2018 |
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Net earnings applicable to common shareholders (GAAP) | | $ | 205 |
| | $ | 217 |
| | $ | 215 |
| | $ | 231 |
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Adjustment, net of tax: | | | | | | | | |
Amortization of core deposit and other intangibles | | — |
| | — |
| | — |
| | — |
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Net earnings applicable to common shareholders, excluding the effects of the adjustment, net of tax (non-GAAP) | (a) | $ | 205 |
| | $ | 217 |
| | $ | 215 |
| | $ | 231 |
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Average common equity (GAAP) | | $ | 7,005 |
| | $ | 6,938 |
| | $ | 7,024 |
| | $ | 7,061 |
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Average goodwill and intangibles | | (1,014 | ) | | (1,015 | ) | | (1,015 | ) | | (1,016 | ) |
Average tangible common equity (non-GAAP) | (b) | $ | 5,991 |
| | $ | 5,923 |
| | $ | 6,009 |
| | $ | 6,045 |
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Number of days in quarter | (c) | 90 |
| | 92 |
| | 92 |
| | 90 |
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Number of days in year | (d) | 365 |
| | 365 |
| | 365 |
| | 365 |
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Return on average tangible common equity (non-GAAP) | (a/b/c)*d | 13.9 | % | | 14.5 | % | | 14.2 | % | | 15.5 | % |
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Tangible Equity Ratio, Tangible Common Equity Ratio, and Tangible Book Value per Common Share – this schedule also includes “tangible equity,” “tangible common equity,” and “tangible assets.” Tangible equity ratio, tangible common equity ratio, and tangible book value per common share are non-GAAP financial measures that management believes provides additional useful information about the levels of tangible assets and tangible equity between each other and in relation to outstanding shares of common stock. Management believes the use of ratios that utilize tangible equity provides additional useful information to management and others about capital adequacy because they present measures of those assets that can generate income.
TANGIBLE EQUITY RATIO, TANGIBLE COMMON EQUITY RATIO, AND TANGIBLE BOOK VALUE PER COMMON SHARE (ALL NON-GAAP MEASURES)
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(Dollar amounts in millions, except per share amounts) | | March 31,
2019 | | December 31,
2018 | | September 30,
2018 | | March 31,
2018 |
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Total shareholders’ equity (GAAP) | | $ | 7,588 |
| | $ | 7,578 |
| | $ | 7,553 |
| | $ | 7,644 |
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Goodwill and intangible | | (1,014 | ) | | (1,015 | ) | | (1,015 | ) | | (1,016 | ) |
Tangible equity (non-GAAP) | (a) | 6,574 |
| | 6,563 |
| | 6,538 |
| | 6,628 |
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Preferred stock | | (566 | ) | | (566 | ) | | (566 | ) | | (566 | ) |
Tangible common equity (non-GAAP) | (b) | $ | 6,008 |
| | $ | 5,997 |
| | $ | 5,972 |
| | $ | 6,062 |
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Total assets (GAAP) | | $ | 69,195 |
| | $ | 68,746 |
| | $ | 66,731 |
| | $ | 66,481 |
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Goodwill and intangible | | (1,014 | ) | | (1,015 | ) | | (1,015 | ) | | (1,016 | ) |
Tangible assets (non-GAAP) | (c) | $ | 68,181 |
| | $ | 67,731 |
| | $ | 65,716 |
| | $ | 65,465 |
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Common shares outstanding (thousands) | (d) | 182,513 |
| | 187,554 |
| | 192,169 |
| | 197,050 |
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Tangible equity ratio (non-GAAP) | (a/c) | 9.64 | % | | 9.69 | % | | 9.95 | % | | 10.12 | % |
Tangible common equity ratio (non-GAAP) | (b/c) | 8.81 | % | | 8.85 | % | | 9.09 | % | | 9.26 | % |
Tangible book value per common share (non-GAAP) | (b/d) | $ | 32.92 |
| | $ | 31.97 |
| | $ | 31.08 |
| | $ | 30.76 |
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Efficiency Ratio and Adjusted Pre-Provision Net Revenue – this schedule also includes “adjusted noninterest expense,” “net interest margin,” “adjusted taxable-equivalent revenue,” “pre-provision net revenue (“PPNR”),” and “adjusted PPNR.” The methodology of determining the efficiency ratio may differ among companies. Management makes adjustments to exclude certain items as identified in the subsequent schedule which it believes allows for more consistent comparability among periods. Management believes the efficiency ratio provides useful information regarding the cost of generating revenue. Adjusted noninterest expense provides a measure as to how well the Bank is managing its expenses, and adjusted PPNR enables management and others to assess the Bank’s ability to generate capital to cover credit losses through a credit cycle. Net interest margin allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources.
Adjusted Pre-Tax Pre-Provision Net Revenue per Share – this schedule uses “adjusted pre-provision net revenue” as calculated in the efficiency ratio, which is divided by the weighted average diluted shares for the period. As mentioned previously, Management believes that adjusted PPNR enables management and others to assess the Bank’s ability to generate capital to cover credit losses through a credit cycle. Dividing this amount by the weighted average diluted shares outstanding provides a shareholder’s perspective of PPNR growth.
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
EFFICIENCY RATIO (NON-GAAP) AND ADJUSTED PRE-PROVISION NET REVENUE (NON-GAAP)
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(Dollar amounts in millions) | | Three Months Ended | | Year Ended |
| March 31,
2019 | | December 31,
2018 | | March 31,
2018 | | December 31,
2018 |
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Efficiency Ratio | | | | | | | | |
Noninterest expense (GAAP) | (a) | $ | 430 |
| | $ | 420 |
| | $ | 419 |
| | $ | 1,679 |
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Adjustments: | | | | | | | | |
Severance costs | | — |
| | 2 |
| | — |
| | 3 |
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Other real estate expense, net | | (1 | ) | | — |
| | — |
| | 1 |
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Amortization of core deposit and other intangibles | | — |
| | — |
| | — |
| | 1 |
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Restructuring costs | | — |
| | — |
| | — |
| | 2 |
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Total adjustments | (b) | (1 | ) | | 2 |
| | — |
| | 7 |
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Adjusted noninterest expense (non-GAAP) | (a-b)=(c) | $ | 431 |
| | $ | 418 |
| | $ | 419 |
| | $ | 1,672 |
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Net interest income (GAAP) | (d) | $ | 576 |
| | $ | 576 |
| | $ | 542 |
| | $ | 2,230 |
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Fully taxable-equivalent adjustments | (e) | 6 |
| | 6 |
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| 5 |
| | 22 |
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Net interest margin (non-GAAP)1 | (d+e)=f | 582 |
| | 582 |
| | 547 |
| | 2,252 |
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Noninterest income (GAAP) | g | 132 |
| | 140 |
| | 138 |
| | 552 |
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Combined income (non-GAAP) | (f+g)=(h) | 714 |
| | 722 |
| | 685 |
| | 2,804 |
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Adjustments: | | | | | | | | |
Fair value and nonhedge derivative income (loss) | | (3 | ) | | (3 | ) | | 1 |
| | (1 | ) |
Securities gains (losses), net | | 1 |
| | 2 |
| | — |
| | 1 |
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Total adjustments | (i) | (2 | ) | | (1 | ) | | 1 |
| | — |
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Adjusted taxable-equivalent revenue (non-GAAP) | (h-i)=(j) | $ | 716 |
| | $ | 723 |
| | $ | 684 |
| | $ | 2,804 |
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Pre-provision net revenue (PPNR) (non-GAAP) | (h)-(a) | $ | 284 |
| | $ | 302 |
| | $ | 266 |
| | $ | 1,125 |
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Adjusted PPNR (non-GAAP) | (j-c) | 285 |
| | 305 |
| | 265 |
| | 1,132 |
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Efficiency ratio (non-GAAP) | (c/j) | 60.2 | % | | 57.8 | % | | 61.3 | % | | 59.6 | % |
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Adjusted PPNR per share | | | | | | | | |
Adjusted PPNR (non-GAAP) | (k) | $ | 285 |
| | $ | 305 |
| | $ | 265 |
| | $ | 1,132 |
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Diluted shares (in thousands) | (l) | 195,241 |
| | 199,048 |
| | 210,243 |
| | 206,501 |
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Adjusted PPNR per share (non-GAAP) | (k)/(l) | $ | 1.46 |
| | $ | 1.53 |
| | $ | 1.26 |
| | $ | 5.48 |
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RESULTS OF OPERATIONS
Executive Summary
The Bank reported net earnings applicable to common shareholders of $205 million, or $1.04 per diluted common share for the first quarter of 2019, compared with net earnings applicable to common shareholders of $231 million, or $1.09 per diluted common share for the first quarter of 2018. The financial performance in the first quarter of 2019 reflects consistent net interest income, moderate balance sheet growth, solid expense control, continued strong credit quality, and progress on key technology and process simplification initiatives, partially offset by a slight decline in customer-related fees. During the first quarter of 2019, the Bank successfully implemented the second phase of its three-phase multi-year project to replace its core loan and deposit systems. With this milestone reached, we now have substantially all our retail, commercial, and commercial real estate (“CRE”) loans on a new modern core platform.
Net income decreased by $25 million from $238 million in the first quarter of 2018 to $213 million in the first quarter of 2019 due the provision for credit losses moving from a large negative provision to a small positive provision, an $11 million increase in noninterest expense, and a $6 million decrease in noninterest income, partially offset by a $34 million increase in net interest income and a $9 million decrease in income taxes.
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Net interest income increased from the first quarter of 2018 to the first quarter of 2019 primarily from loan growth and increases in short-term interest rates, partially offset by an increase in interest expense. The provision for credit losses increased from $(47) million in the first quarter of 2018, which was primarily due to oil and gas-related credit quality improvement, to $4 million in the first quarter of 2019, reflecting loan growth and generally stable credit quality in the total loan portfolio.
When comparing the first quarter of 2019 to the first quarter of 2018, customer-related fees decreased by $3 million, or 2%, primarily due to a decrease in service charges and fees on deposit accounts. Salaries and employee benefits increased $18 million during this same time period due to increases in base salaries from annual salary merit increases and headcount, increased 401(k) plan contributions, increased employee medical expense and a decline in deferred salaries. FDIC premiums decreased by $7 million from the first quarter of 2018 to the first quarter of 2019, positively impacting net income.
Adjusted PPNR of $285 million for the first quarter of 2019 was up $20 million, or 8%, from the first quarter of 2018. The first quarter of 2018 included $11 million of interest income recoveries of at least $1 million per loan, while there were no such recoveries in the first quarter of 2019. Adjusted for these interest income recoveries, the increase in adjusted PPNR would be 12%. The increase in PPNR reflects operating leverage improvement resulting from moderate loan growth and increases in short-term interest rates, partially offset by increased interest expense and noninterest expense primarily from increased salaries and employee benefits. See “Noninterest Expense” for a more detailed discussion regarding the increased salary and employee benefits expense. The Bank’s efficiency ratio was 60.2% in the first quarter of 2019 compared with 61.3% in the first quarter of 2018 and 57.8% in the fourth quarter of 2018. The Bank is committed to further improvement of the efficiency ratio in 2019. See “GAAP to Non-GAAP Reconciliations” on page 6 for more information regarding the calculation of adjusted PPNR.
Our average loan portfolio increased $2.3 billion, or 5%, since the first quarter of 2018. We have seen widespread growth across most products and geographies, with particular strength in construction, 1-4 family residential loans, and all categories of commercial loans. Asset quality has continued to improve during the past several quarters. Credit quality in the oil and gas-related portfolio continues to strengthen and it has remained strong in the rest of the lending portfolio. Overall, from the first quarter of 2018 to the first quarter of 2019, criticized, classified, and nonaccrual loans declined by $306 million, $294 million, and $153 million, respectively.
We continue to focus on the return on- and of- capital. Return on average tangible common equity was 13.9% for the first quarter of 2019, down 160 basis points (“bps”) from the same prior year period, and our return on average assets decreased by 19 bps during the same period, primarily as a result of the negative provision in the first quarter of 2018. Regarding the return of capital, during the first quarter of 2019, the Bank repurchased 5.5 million shares of common stock for $275 million, which is equivalent to 2.9% of common stock outstanding as of December 31, 2018. Dividends per common share were $0.30 in the first quarter of 2019, compared with $0.20 for the first quarter of 2018. In April 2018, the Bank announced that its board of directors declared a regular quarterly dividend of $0.30 per common share, payable May 23, 2019 to shareholders of record on May 16, 2019. Additionally, the Board approved a plan to repurchase $275 million of common stock during the second quarter of 2019. The share repurchases have resulted in higher returns being provided to shareholders. For example, while adjusted PPNR increased 8% from the first quarter of 2018, adjusted PPNR per share increased 16% from the same prior year period. See “GAAP to Non-GAAP Reconciliations” on page 6 for more information regarding the calculation of adjusted PPNR per share. See “Capital Management” on page 30 for more information regarding the Bank’s stress testing and capital planning.
Areas of focus for 2019
In 2019, we are focused on ongoing initiatives related to Bank profitability and returns on- and of-equity. While our profitability and returns on equity in the first quarter of 2019 compared to the first quarter of 2018 have remained consistent when adjusted for the provision for credit losses and interest income recoveries, our capital distributed as a percentage of net earnings applicable to common shareholders increased to 161% from 67% for the same periods.
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
We are committed to achieve positive operating leverage and a high single-digit annual percentage growth for PPNR, and achieved an 8% growth from the first quarter of 2018 to the first quarter of 2019. We continue to implement technology upgrades and process simplification to ensure current and future performance.
We are also focused on reducing potential earnings volatility and are actively adjusting our interest rate risk profile to move towards a more neutral interest-rate sensitive position and to protect against a decline in interest rates. During the first quarter of 2019, we added approximately $3 billion of interest rate floors and $700 million of interest rate swaps. See “Interest Rate and Market Risk Management” on page 24 for further information regarding our interest rate risk management and Note 7 of the Notes to the Consolidated Financial Statements for further information regarding our use of derivative instruments. See “Areas of focus for 2019” in our 2018 Annual Report on Form 10-K for a discussion of the major areas of emphasis in 2019.
Net Interest Income
Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income increased to $576 million in the first quarter of 2019 from $542 million in the first quarter of 2018. The $34 million, or 6%, increase in net interest income was primarily due to a $73 million increase in interest and fees on loans, resulting from increases in short-term interest rates and generally wide-spread loan growth, partially offset by an increase in interest expense.
Interest income in the first quarter of 2018 was positively impacted by $11 million of interest income recoveries of at least $1 million per loan, while there were no such recoveries in the first quarter of 2019. Adjusting for these interest income recoveries, net interest income would have increased by $45 million, or 8%.
Interest expense increased $52 million from the first quarter of 2018 to the first quarter of 2019 due to higher interest rates paid and an increase in deposits and long-term debt, partially offset by a decrease in short-term borrowings.
Net Interest Margin and Interest Rate Spreads
The net interest margin (“NIM”) was 3.68% and 3.56% for the first quarters of 2019 and 2018, respectively, and 3.67% for the fourth quarter of 2018, and reflects a higher loan yield with only a moderate increase in funding costs. Excluding the effect of the previously mentioned interest income recoveries, the NIM would have been 3.49% for the first quarter of 2018. The NIM for the first quarter of 2019, compared with the same prior year period, benefited from increases in short-term interest rates. The NIM has benefited from the stability of noninterest-bearing demand deposits in a rising interest rate environment.
Average interest-earning assets increased $1.9 billion from the first quarter of 2018 to the first quarter of 2019, with average rates improving 44 bps. Adjusting for the interest income recoveries in the first quarter of 2018, the yield on interest-earning assets would have increased 51 bps from the same prior year period. Average interest-bearing liabilities increased $2.2 billion in the first quarter of 2019 compared with the first quarter of 2018. The average rate on interest-bearing liabilities increased 54 bps from the first quarter of 2018 to the first quarter of 2019 due to rising interest rates and increased rates paid on deposits and long-term debt.
The average loan portfolio increased $2.3 billion, or 5%, between the first quarter of 2018 and the first quarter of 2019. Most of this growth was in construction, 1-4 family residential loans, and all categories of commercial loans. The average loan yield increased 42 bps over the same period, with increases in the average rates for commercial, CRE, and consumer loans of 35 bps, 64 bps, and 36 bps, respectively. Benchmark interest rates have increased several times during the last couple of years, which has had a positive impact on NIM and spreads, as our earning assets generally reprice quicker than our funding sources. A portion of our variable-rate loans were not affected by these changes primarily due to having longer reset frequencies, or because a substantial portion of our earning assets are tied to longer-term rate indices. The longer-term rates were impacted by a relatively flat yield curve during the last several quarters. Over the next four quarters, we expect moderate total loan growth.
Average AFS securities balances decreased $0.2 billion from the first quarter of 2018 to the first quarter of 2019. Yields on average AFS securities increased by 31 bps over the same period, and was primarily a result of
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
reinvesting principal cash flows from fixed-rate securities at higher rates and rising market interest rates on variable-rate securities.
Average noninterest-bearing demand deposits were generally stable and provided us with low cost funding and comprised approximately 43% and 45% of average total deposits for the first quarters of 2019 and 2018, respectively. Average total deposits were $53.9 billion for the first quarter of 2019 compared with $52.0 billion for the first quarter of 2018. Average interest-bearing deposits were $30.7 billion in the first quarter of 2019, compared with $28.6 billion for the same prior year period. The daily average benchmark Federal Funds target rate increased from 1.54% to 2.50% between the first quarter of 2018 and the first quarter of 2019, or 96 bps, while the rate paid on the Bank’s average interest-bearing deposits increased 47 bps, implying a deposit beta of 49%, and the rate paid on total average deposits increased 28 bps. We refer to “deposit beta” as a measure of the changes in rates paid to customers compared with changes in the average benchmark interest rates.
We have been selectively increasing deposit pricing in certain markets and with certain clients, but we have not generally experienced significant pressure to broadly increase deposit rates. Although we consider a wide variety of sources when determining our funding needs, we benefit from access to deposits from a significant number of small to mid-sized business customers, which provide us with a low cost of funds and have a positive impact on our NIM. Including wholesale borrowings, the rate paid on interest-bearing liabilities increased 54 bps. Further information regarding deposit assumptions is discussed in “Interest Rate and Market Risk Management” on page 24.
Average short-term borrowings decreased $0.4 billion compared with the same prior year period and the average interest rate paid increased by 103 bps as a result of rising short-term interest rates. Between the March 31, 2018 and March 31, 2019, we issued $1.0 billion of senior long-term debt which reduced the amount of short-term borrowing needed.
The spread on average interest-bearing funds was 3.22% and 3.32% for the first quarters of 2019 and 2018, respectively. The spread on average interest-bearing funds for these periods was affected by the same factors that had an impact on the NIM. While the spread on average interest-bearing funds decreased, the NIM still expanded as a result of the increasing value of noninterest-bearing deposits in a higher-rate environment. Because of the nature of our deposits being operating accounts for businesses and households, we expect our noninterest-bearing deposits to remain a competitive advantage. The spread on average interest-earning assets for the first quarter of 2019 decreased by 3 bps, if adjusted for the previously discussed $11 million interest recoveries recognized, or 7 bps, in the prior year period.
Interest rate spreads and margin are impacted by the mix of assets we hold, the composition of our loan and securities portfolios and the type of funding used. Additionally, as interest rates increase, our noninterest-bearing deposits become more valuable. In the first quarter of 2019 our noninterest-bearing sources of funds contributed 46 bps to the margin compared with 24 bps in the first quarter of 2018. We expect the mix of interest-earning assets to continue to change over the next four quarters primarily due to moderate-to-strong growth in 1-4 family residential, municipal, commercial and industrial, and owner-occupied loans, and stable-to-moderate growth in oil and gas and commercial real estate loans.
Our estimates of the Bank’s interest rate risk position are highly dependent upon a number of assumptions regarding the repricing behavior of various deposit and loan types in response to changes in both short-term and long-term interest rates, balance sheet composition, and other modeling assumptions, as well as the actions of competitors and customers in response to those changes. Although the federal funds target rate has increased 150 bps during the past couple of years, we have not experienced significant migration of our noninterest-bearing demand deposits which we attribute to the operating nature of many of our deposit accounts. Further detail on interest rate risk is discussed in “Interest Rate and Market Risk Management” on page 24.
The following schedule summarizes the average balances, the amount of interest earned or incurred, and the applicable yields for interest-earning assets and the costs of interest-bearing liabilities that generate taxable-equivalent net interest income.
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, 2019 | | Three Months Ended
March 31, 2018 |
(Dollar amounts in millions) | Average balance | | Amount of interest 1 | | Average yield/rate | | Average balance | | Amount of interest 1 | | Average yield/rate |
ASSETS | | | | | | | | | | | |
Money market investments | $ | 1,268 |
| | $ | 9 |
| | 2.73 | % | | $ | 1,495 |
| | $ | 6 |
| | 1.70 | % |
Securities: | | | | | | | | | | | |
Held-to-maturity | 829 |
| | 8 |
| | 3.72 |
| | 789 |
| | 7 |
| | 3.54 |
|
Available-for-sale | 14,724 |
| | 90 |
| | 2.49 |
| | 14,948 |
| | 80 |
| | 2.18 |
|
Trading account | 107 |
| | 1 |
| | 4.52 |
| | 102 |
| | 1 |
| | 4.00 |
|
Total securities 2 | 15,660 |
| | 99 |
| | 2.57 |
| | 15,839 |
| | 88 |
| | 2.25 |
|
Loans held for sale | 63 |
| | — |
| | 1.70 |
| | 51 |
| | — |
| | 3.94 |
|
Loans and leases 3 | | | | | | | | | | | |
Commercial | 24,427 |
| | 304 |
| | 5.05 |
| | 23,040 |
| | 267 |
| | 4.70 |
|
Commercial real estate | 11,335 |
| | 148 |
| | 5.31 |
| | 11,065 |
| | 128 |
| | 4.67 |
|
Consumer | 11,409 |
| | 121 |
| | 4.30 |
| | 10,759 |
| | 105 |
| | 3.94 |
|
Total loans and leases | 47,171 |
| | 573 |
| | 4.93 |
| | 44,864 |
| | 500 |
| | 4.51 |
|
Total interest-earning assets | 64,162 |
| | 681 |
| | 4.31 |
| | 62,249 |
| | 594 |
| | 3.87 |
|
Cash and due from banks | 554 |
| | | | | | 592 |
| | | | |
Allowance for loan losses | (499 | ) | | | | | | (523 | ) | | | | |
Goodwill and intangibles | 1,014 |
| | | | | | 1,016 |
| | | | |
Other assets | 3,353 |
| | | | | | 3,032 |
| | | | |
Total assets | $ | 68,584 |
| | | | | | $ | 66,366 |
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Savings and money market | $ | 26,021 |
| | 35 |
| | 0.54 | % | | $ | 25,296 |
| | 12 |
| | 0.19 | % |
Time | 4,674 |
| | 22 |
| | 1.90 |
| | 3,280 |
| | 8 |
| | 1.00 |
|
Total interest-bearing deposits | 30,695 |
| | 57 |
| | 0.75 |
| | 28,576 |
| | 20 |
| | 0.28 |
|
Borrowed funds: | | | | | | | | | | | |
Federal funds purchased and other short-term borrowings | 5,289 |
| | 33 |
| | 2.57 |
| | 5,707 |
| | 22 |
| | 1.54 |
|
Long-term debt | 880 |
| | 9 |
| | 4.08 |
| | 383 |
| | 5 |
| | 5.83 |
|
Total borrowed funds | 6,169 |
| | 42 |
| | 2.78 |
| | 6,090 |
| | 27 |
| | 1.81 |
|
Total interest-bearing liabilities | 36,864 |
| | 99 |
| | 1.09 |
| | 34,666 |
| | 47 |
| | 0.55 |
|
Noninterest-bearing deposits | 23,221 |
| | | | | | 23,417 |
| | | | |
Other liabilities | 928 |
| | | | | | 656 |
| | | | |
Total liabilities | 61,013 |
| | | | | | 58,739 |
| | | | |
Shareholders’ equity: | | | | | | | | | | | |
Preferred equity | 566 |
| | | | | | 566 |
| | | | |
Common equity | 7,005 |
| | | | | | 7,061 |
| | | | |
Total shareholders’ equity | 7,571 |
| | | | | | 7,627 |
| | | | |
Total liabilities and shareholders’ equity | $ | 68,584 |
| | | | | | $ | 66,366 |
| | | | |
Spread on average interest-bearing funds | | | | | 3.22 | % | | | | | | 3.32 | % |
Impact of net noninterest-bearing sources of funds | | | | | 0.46 |
| | | | | | 0.24 |
|
Net interest margin | | | $ | 582 |
| | 3.68 |
| | | | $ | 547 |
| | 3.56 |
|
Memo: total cost of deposits, annualized | | | | | 0.43 |
| | | | | | 0.15 |
|
Memo: total deposits and interest-bearing liabilities | $ | 60,085 |
| | 99 |
| | 0.67 |
|
| $ | 58,083 |
| | 47 |
| | 0.33 |
|
| |
1 | Rates are calculated using amounts in thousands and taxable-equivalent rates used where applicable. The taxable-equivalent rates used are the rates that were applicable at the time of each respective reporting period. |
| |
2 | Quarter-to-date interest on total securities includes $31 million and $33 million of taxable-equivalent premium amortization, as of March 31, 2019 and March 31, 2018, respectively. |
| |
3 | Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. |
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Provision for Credit Losses
The provision for credit losses is the combination of both the provision for loan losses and the provision for unfunded lending commitments. Note 6 of our 2018 Annual Report on Form 10-K and “Credit Risk Management” on page 19 contains information on how we determine the appropriate level for the allowance for loan and lease losses (“ALLL”) and the reserve for unfunded lending commitments (“RULC”).
The provision for credit losses was $4 million in the first quarter of 2019, compared with $(47) million in the first quarter of 2018, which was primarily due to oil and gas-related credit quality improvement. The increase from the first quarter of 2018 to the first quarter of 2019 reflects loan growth and generally stable credit quality in the total loan portfolio. Classified and nonaccrual loans in the total portfolio declined by $294 million and $153 million, respectively, from the first quarter of 2018 to the first quarter of 2019. During the first quarter of 2019, there were zero net charge-offs, compared with net charge-offs of $5 million during the first quarter of 2018.
The provision for loan losses was $2 million during the first quarter of 2019, compared with $(40) million during the first quarter of 2018. This increase was primarily as a result of the previously mentioned loan growth and qualitative adjustments.
During the first quarter of 2019, we recorded a $2 million provision for unfunded lending commitments, compared with a $(7) million provision in the first quarter of 2018. This increase was primarily due to increased unfunded lending commitments and generally stable credit quality. From quarter to quarter, the provision for unfunded lending commitments may be subject to sizable fluctuations due to changes in the timing and volume of loan commitments, originations, fundings, and changes in credit quality.
The allowance for credit losses (“ACL”), which is the combination of both the ALLL and the RULC, increased $32 million, when compared with the first quarter of 2018. This was mainly due to the loan growth and increases in qualitative adjustments described previously.
Noninterest Income
Noninterest income represents revenues we earn for products and services that have no associated interest rate or yield. We believe a subtotal of customer-related fees provides a good view of income over which we have more direct control. It excludes items such as dividends, insurance-related income, mark-to-market adjustments on certain derivatives, and securities gains and losses. For the first quarter of 2019, noninterest income decreased $6 million, or 4%, compared with the first quarter of 2018, primarily due to a $3 million decrease in customer-related fees, a $2 million decrease in dividends and other investment income, and a $2 million decrease in other noninterest income. The following schedule presents a comparison of the major components of noninterest income.
NONINTEREST INCOME
|
| | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Amount change | | Percent change |
(Dollar amounts in millions) | 2019 | | 2018 | |
| | | | | | | |
Service charges and fees on deposit accounts | $ | 40 |
| | $ | 42 |
| | $ | (2 | ) | | (5 | )% |
Other service charges, commissions and fees | 54 |
| | 55 |
| | (1 | ) | | (2 | ) |
Wealth management and trust income | 13 |
| | 12 |
| | 1 |
| | 8 |
|
Loan sales and servicing income | 5 |
| | 6 |
| | (1 | ) | | (17 | ) |
Capital markets and foreign exchange | 8 |
| | 8 |
| | — |
| | — |
|
Customer-related fees | 120 |
| | 123 |
| | (3 | ) | | (2 | ) |
Dividends and other investment income | 9 |
| | 11 |
| | (2 | ) | | (18 | ) |
Securities gains, net | 1 |
| | — |
| | 1 |
| | NM |
|
Other | 2 |
| | 4 |
| | (2 | ) | | (50 | ) |
Total noninterest income | $ | 132 |
| | $ | 138 |
| | $ | (6 | ) | | (4 | ) |
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Customer-related fees decreased $3 million, or 2% from the first quarter of 2018 to the first quarter of 2019 primarily from a $2 million decrease in service charges and fees on deposit accounts. The decrease in service charges and fees on deposit accounts was largely attributable to an unfavorable impact from the earnings credit rate associated with noninterest-bearing demand deposits and softness in retail and small business service charges.
Dividends and other investment income decreased by $2 million primarily as a result of increases in the market values of the Company’s Small Business Investment Company (“SBIC”) investments in the first quarter of 2018 that did not reoccur in the first quarter of 2019. Other noninterest income decreased $2 million primarily due to a decrease in credit valuation adjustments on client-related derivatives, partially offset by a gain on the sale of a minor product line.
Noninterest Expense
Noninterest expense increased by $11 million, or 3%, from the first quarter of 2018 to the first quarter of 2019. As discussed subsequently, adjusted noninterest expense also increased 3% over the same period. The Bank remains focused on expense control efforts, while continuing to invest in technology and process simplification initiatives. As previously mentioned, during the first quarter of 2019, the Bank successfully implemented the second phase of its three-phase multi-year project to replace its core loan and deposit systems, upgrading its commercial loans core system. The Bank continues to work on upgrading its primary deposit system. This 3% increase is within our targeted growth rate of low single-digit percentage range relative to the prior year.
The following schedule presents a comparison of the major components of noninterest expense.
NONINTEREST EXPENSE
|
| | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Amount change | | Percent change |
(Dollar amounts in millions) | 2019 | | 2018 | |
| | | | | | | |
Salaries and employee benefits | $ | 287 |
| | $ | 269 |
| | $ | 18 |
| | 7 | % |
Occupancy, net | 33 |
| | 31 |
| | 2 |
| | 6 |
|
Furniture, equipment and software, net | 32 |
| | 33 |
| | (1 | ) | | (3 | ) |
Other real estate expense, net | (1 | ) | | — |
| | (1 | ) | | NM |
|
Credit-related expense | 6 |
| | 7 |
| | (1 | ) | | (14 | ) |
Professional and legal services | 11 |
| | 12 |
| | (1 | ) | | (8 | ) |
Advertising | 5 |
| | 5 |
| | — |
| | — |
|
FDIC premiums | 6 |
| | 13 |
| | (7 | ) | | (54 | ) |
Other | 51 |
| | 49 |
| | 2 |
| | 4 |
|
Total noninterest expense | $ | 430 |
| | $ | 419 |
| | $ | 11 |
| | 3 |
|
Adjusted noninterest expense 1 | $ | 431 |
| | $ | 419 |
| | $ | 12 |
| | 3 |
|
1 For information on non-GAAP financial measures see “GAAP to Non-GAAP Reconciliations” on page 6
Salary and employee benefits expense was up $18 million in the first quarter of 2019, compared with the first quarter of 2018. In the first quarter of 2019, we increased some key benefits to employees which are designed to appropriately reward our employees for significantly improved financial performance. The increase in salaries and employee benefits was primarily due to a $6 million increase in base salaries resulting from annual salary merit increases and employee headcount, a $3 million increase in the Bank’s contribution to the employee 401(k) plan as a result of an increased matching contribution and higher profit sharing, and a $2 million increase in incentive compensation. The remaining $7 million increase was primarily a result of an increase in share-based compensation and employee medical expenses, and a decline in deferred salaries.
These increases in noninterest expense were partially offset by a $7 million decrease in FDIC premiums due to the elimination of the FDIC surcharge for large banks because the required Deposit Insurance Fund reserve ratio has been met.
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Adjusted noninterest expense for the first quarter of 2019 increased $12 million, or 3%, to $431 million, compared with $419 million for the same prior year period. To arrive at adjusted noninterest expense, GAAP noninterest expense is adjusted to exclude certain expense items, which are the same as those items excluded in arriving at the efficiency ratio (see “GAAP to Non-GAAP Reconciliations” on page 6 for more information regarding the calculation of the efficiency ratio). We expect adjusted noninterest expense for 2019 to experience an increase in the low single-digit percentage range relative to the prior year.
Income Taxes
Income tax expense for the first quarter of 2019 was $61 million compared with $70 million for the same prior year period. The effective income tax rates were 22.3% and 22.7% for the first quarters of 2019 and 2018, respectively. Note 13 of the Notes to Consolidated Financial Statements contains additional information about the factors that influenced the income tax rates and information about deferred income tax assets and liabilities. The effective tax rate for 2019 is expected to be approximately 23%, including the effects of stock-based compensation.
Preferred Stock Dividends
Preferred stock dividends have been consistent over the past year and were $8 million and $7 million during the first quarters of 2019 and 2018, respectively.
BALANCE SHEET ANALYSIS
Interest-Earning Assets
Interest-earning assets are those assets that have interest rates or yields associated with them. One of our goals is to maintain a high level of interest-earning assets relative to total assets while keeping nonearning assets at a minimum. Interest-earning assets consist of money market investments, securities, loans, and leases.
Another goal is to maintain a higher-yielding mix of interest-earning assets, such as loans, relative to lower-yielding assets, while maintaining adequate levels of highly liquid assets. As a result of this goal we redeployed funds from lower-yielding money market investments, in addition to using wholesale borrowings, to purchase agency securities.
For information regarding the average balances of our interest-earning assets, the amount of revenue generated by them, and their respective yields, see the average balance sheet on page 12.
Average interest-earning assets were $64.2 billion for the first three months of 2019, compared with $62.2 billion for the first three months of 2018. Average interest-earning assets as a percentage of total average assets were 94% for both the first three months of 2019 and 2018.
Average loans were $47.2 billion and $44.9 billion for the first three months of 2019 and 2018, respectively. Average loans as a percentage of total average assets for the first three months of 2019 were 69%, compared with 68% in the same prior year period.
Average money market investments, consisting of interest-bearing deposits, federal funds sold, and security resell agreements, decreased by 15% to $1.3 billion for the first three months of 2019, compared with $1.5 billion for the first three months of 2018. Average securities decreased by 1% for the first three months of 2019, compared with the first three months of 2018.
Investment Securities Portfolio
We invest in securities to actively manage liquidity and interest rate risk, in addition to generating revenue for the Bank. Refer to the “Liquidity Risk Management” section on page 28 for additional information on management of liquidity and funding. The following schedule presents a profile of our investment securities portfolio. The amortized cost amounts represent the original cost of the investments, adjusted for related accumulated amortization or accretion of any yield adjustments, and for impairment losses, including credit-related impairment. The estimated fair value measurement levels and methodology are discussed in Note 3 of our 2018 Annual Report on Form 10-K.
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
INVESTMENT SECURITIES PORTFOLIO
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
(In millions) | Par value | | Amortized cost | | Estimated fair value | | Par value | | Amortized cost | | Estimated fair value |
Held-to-maturity | | | | | | | | | | | |
Municipal securities | $ | 764 |
| | $ | 764 |
| | $ | 762 |
| | $ | 774 |
| | $ | 774 |
| | $ | 767 |
|
Available-for-sale | | | | | | | | | | | |
U.S. Treasury securities | 40 |
| | 40 |
| | 40 |
| | 40 |
| | 40 |
| | 40 |
|
U.S. Government agencies and corporations: | | | | | | | | | | | |
Agency securities | 1,408 |
| | 1,407 |
| | 1,398 |
| | 1,395 |
| | 1,394 |
| | 1,375 |
|
Agency guaranteed mortgage-backed securities | 10,245 |
| | 10,384 |
| | 10,284 |
| | 10,093 |
| | 10,236 |
| | 10,014 |
|
Small Business Administration loan-backed securities | 1,762 |
| | 1,919 |
| | 1,877 |
| | 1,871 |
| | 2,042 |
| | 1,996 |
|
Municipal securities | 1,154 |
| | 1,270 |
| | 1,283 |
| | 1,178 |
| | 1,303 |
| | 1,291 |
|
Other debt securities | 25 |
| | 25 |
| | 22 |
| | 25 |
| | 25 |
| | 21 |
|
Total available-for-sale | 14,634 |
| | 15,045 |
| | 14,904 |
| | 14,602 |
| | 15,040 |
| | 14,737 |
|
Total investment securities | $ | 15,398 |
| | $ | 15,809 |
| | $ | 15,666 |
| | $ | 15,376 |
| | $ | 15,814 |
| | $ | 15,504 |
|
The amortized cost of investment securities at March 31, 2019 remained stable from the balances at December 31, 2018. Approximately 34% of the investment securities are floating rate as of March 31, 2019.
The investment securities portfolio includes $411 million of net premium that is distributed across various asset classes as illustrated in the preceding schedule. Premium amortization for the three months ended March 31, 2019, was approximately $31 million, compared with approximately $33 million for the same period in 2018, reducing the yield on securities by 86 bps compared with a 89 bps impact for the same period in 2018.
As of March 31, 2019, under the GAAP fair value accounting hierarchy, 0.3% of the $14.9 billion fair value of the AFS securities portfolio was valued at Level 1, 99.7% was valued at Level 2, and there were no Level 3 AFS securities. At December 31, 2018, 0.3% of the $14.7 billion fair value of AFS securities portfolio was valued at Level 1, 99.7% was valued at Level 2, and there were no Level 3 AFS securities. See Note 3 of our 2018 Annual Report on Form 10-K for further discussion of fair value accounting.
Exposure to State and Local Governments
We provide multiple products and services to state and local governments (referred to collectively as “municipalities”), including deposit services, loans, and investment banking services, and we invest in securities issued by the municipalities.
The following schedule summarizes our exposure to state and local municipalities:
MUNICIPALITIES
|
| | | | | | | |
(In millions) | March 31,
2019 | | December 31,
2018 |
| | | |
Loans and leases | $ | 1,774 |
| | $ | 1,661 |
|
Held-to-maturity – municipal securities | 764 |
| | 774 |
|
Available-for-sale – municipal securities | 1,283 |
| | 1,291 |
|
Trading account – municipal securities | 133 |
| | 89 |
|
Unfunded lending commitments | 159 |
| | 144 |
|
Total direct exposure to municipalities | $ | 4,113 |
| | $ | 3,959 |
|
At March 31, 2019, one municipal loan with a balance of approximately $1 million was on nonaccrual. Most of the municipal loan and lease portfolio is secured by real estate, equipment, or is a general obligation of a municipal entity. See Note 6 of the Notes to Consolidated Financial Statements for additional information about the credit quality of these municipal loans.
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Foreign Exposure and Operations
Our credit exposure to foreign sovereign risks and total foreign credit exposure is not significant. We also do not have significant foreign exposure to derivative counterparties. We had no foreign deposits at March 31, 2019 and December 31, 2018.
Loan Portfolio
For the first three months of 2019 and 2018, average loans accounted for 69% and 68%, respectively, of total average assets. As presented in the following schedule, the largest category was commercial and industrial loans, which constituted 31% of our loan portfolio at March 31, 2019.
LOAN PORTFOLIO
|
| | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
(Dollar amounts in millions) | Amount | | % of total loans | | Amount | | % of total loans |
Commercial: | | | | | | | |
Commercial and industrial | $ | 14,758 |
| | 31.0 | % | | $ | 14,513 |
| | 31.0 | % |
Leasing | 312 |
| | 0.7 |
| | 327 |
| | 0.7 |
|
Owner-occupied | 7,754 |
| | 16.3 |
| | 7,661 |
| | 16.4 |
|
Municipal | 1,774 |
| | 3.7 |
| | 1,661 |
| | 3.6 |
|
Total commercial | 24,598 |
| | 51.7 |
| | 24,162 |
| | 51.7 |
|
Commercial real estate: | | | | | | | |
Construction and land development | 2,343 |
| | 4.9 |
| | 2,186 |
| | 4.7 |
|
Term | 9,187 |
| | 19.3 |
| | 8,939 |
| | 19.1 |
|
Total commercial real estate | 11,530 |
| | 24.2 |
| | 11,125 |
| | 23.8 |
|
Consumer: | | | | | | | |
Home equity credit line | 2,884 |
| | 6.1 |
| | 2,937 |
| | 6.3 |
|
1-4 family residential | 7,294 |
| | 15.3 |
| | 7,176 |
| | 15.4 |
|
Construction and other consumer real estate | 636 |
| | 1.3 |
| | 643 |
| | 1.4 |
|
Bankcard and other revolving plans | 489 |
| | 1.0 |
| | 491 |
| | 1.0 |
|
Other | 175 |
| | 0.4 |
| | 180 |
| | 0.4 |
|
Total consumer | 11,478 |
| | 24.1 |
| | 11,427 |
| | 24.5 |
|
Total net loans | $ | 47,606 |
| | 100.0 | % | | $ | 46,714 |
| | 100.0 | % |
Loan portfolio growth during the first three months of 2019 was widespread across loan products and geographies with particular strength in total commercial real estate, commercial and industrial, consumer 1-4 family residential, and municipal loans. The growth in the loan portfolio was primarily at Amegy Bank (“Amegy”) and National Bank of Arizona (“NBAZ”).
Other Noninterest-Bearing Investments
During the first three months of 2019, the Bank decreased its short-term borrowings with the Federal Home Loan Bank (“FHLB”) by $1.25 billion. This decrease also led to a decline in FHLB activity stock, which consequently decreased by $50 million during the year. Aside from this decrease, other noninterest-bearing investments remained relatively stable as set forth in the following schedule.
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
OTHER NONINTEREST-BEARING INVESTMENTS
|
| | | | | | | |
(In millions) | March 31,
2019 | | December 31,
2018 |
| | | |
Bank-owned life insurance | $ | 518 |
| | $ | 516 |
|
Federal Home Loan Bank stock | 140 |
| | 190 |
|
Federal Reserve stock | 131 |
| | 139 |
|
Farmer Mac stock | 51 |
| | 54 |
|
SBIC investments | 139 |
| | 132 |
|
Non-SBIC investment funds | 11 |
| | 12 |
|
Other | 3 |
| | 3 |
|
Total other noninterest-bearing investments | $ | 993 |
| | $ | 1,046 |
|
Premises, Equipment, and Software
Net premises, equipment, and software increased $1 million, or 0.1%, during the first three months of 2019. In 2017, the Bank implemented the first phase of our core lending and deposit systems replacement project, which replaced the Bank’s primary consumer lending systems. During the first quarter of 2019, the Bank successfully implemented the second phase of this project by replacing its primary commercial and commercial real estate lending systems. With this milestone reached, we now have substantially all our retail, commercial and commercial real estate loans on a new modern core platform. The Bank is well underway with the project to convert its deposit servicing system by 2022. The total core replacement project spend amount is comprised of both capitalized amounts and amounts that are expensed as incurred. The useful life for most of the capitalized costs is 10 years. The following schedule shows the total amount of costs capitalized, less accumulated depreciation, by phase for the core replacement project.
|
| | | | | | | | | | | | | | | |
| March 31, 2019 |
(In millions) | Phase 1 | | Phase 2 | | Phase 3 | | Total |
Capitalized costs for the core replacement project | | | | | | | |
Total amount capitalized, less accumulated depreciation | $ | 61 |
| | $ | 88 |
| | $ | 39 |
| | $ | 188 |
|
Deposits
Deposits, both interest-bearing and noninterest-bearing, are a primary source of funding for the Bank. Average total deposits for the first three months of 2019 increased by 4%, compared with the first three months of 2018, with average interest-bearing deposits increasing by 7% and average noninterest-bearing deposits decreasing by 1%. The average interest rate paid for interest-bearing deposits was 47 bps higher during the first three months of 2019, compared with the first three months of 2018.
Demand, savings, and money market deposits were 91% and 92% of total deposits at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, total deposits included $2.6 billion and $2.2 billion, respectively, of brokered deposits.
See “Liquidity Risk Management” on page 28 for additional information on funding and borrowed funds.
RISK ELEMENTS
Since risk is inherent in substantially all of the Bank’s operations, management of risk is an integral part of its operations and is also a key determinant of its overall performance. The Board of Directors has appointed a Risk Oversight Committee (“ROC”) that consists of appointed Board members who oversee the Bank’s risk management processes. The ROC meets on a regular basis to monitor and review Enterprise Risk Management (“ERM”) activities. As required by its charter, the ROC performs oversight for various ERM activities and approves ERM policies and activities as detailed in the ROC charter.
Management applies various strategies to reduce the risks to which the Bank’s operations are exposed, including credit, interest rate and market, liquidity, and operational risks. These risks are overseen by the various management
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
committees of which the Enterprise Risk Management Committee is the focal point for the monitoring and review of enterprise risk.
Credit Risk Management
Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risk arises primarily from our lending activities, as well as from off-balance sheet credit instruments. For a more comprehensive discussion of credit risk management, see “Credit Risk Management” in our 2018 Annual Report on Form 10-K.
Government Agency Guaranteed Loans
We participate in various guaranteed lending programs sponsored by U.S. government agencies, such as the Small Business Administration (“SBA”), Federal Housing Authority, Veterans’ Administration, Export-Import Bank of the U.S., and the U.S. Department of Agriculture. As of March 31, 2019, the principal balance of these loans was $564 million, and the guaranteed portion of these loans was $427 million. Most of these loans were guaranteed by the SBA. The following schedule presents the composition of government agency guaranteed loans.
GOVERNMENT GUARANTEES
|
| | | | | | | | | | | | | |
(Dollar amounts in millions) | March 31,
2019 | | Percent
guaranteed | | December 31,
2018 | | Percent
guaranteed |
| | | | | | | |
Commercial | $ | 541 |
| | 75 | % | | $ | 537 |
| | 75 | % |
Commercial real estate | 14 |
| | 79 |
| | 14 |
| | 79 |
|
Consumer | 9 |
| | 100 |
| | 9 |
| | 100 |
|
Total loans | $ | 564 |
| | 76 |
| | $ | 560 |
| | 76 |
|
Commercial Lending
The following schedule provides selected information regarding lending concentrations to certain industries in our commercial lending portfolio.
COMMERCIAL LENDING BY INDUSTRY GROUP
|
| | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
(Dollar amounts in millions) | Amount | | Percent | | Amount | | Percent |
| | | | | | | |
Real estate, rental and leasing | $ | 2,639 |
| | 10.7 | % | | $ | 2,636 |
| | 10.9 | % |
Retail trade 1 | 2,514 |
| | 10.2 |
| | 2,434 |
| | 10.0 |
|
Manufacturing | 2,204 |
| | 9.0 |
| | 2,145 |
| | 8.9 |
|
Finance and insurance | 1,876 |
| | 7.6 |
| | 2,036 |
| | 8.4 |
|
Healthcare and social assistance | 1,753 |
| | 7.1 |
| | 1,695 |
| | 7.0 |
|
Wholesale trade | 1,590 |
| | 6.5 |
| | 1,527 |
| | 6.3 |
|
Transportation and warehousing | 1,417 |
| | 5.8 |
| | 1,328 |
| | 5.5 |
|
Construction | 1,277 |
| | 5.2 |
| | 1,194 |
| | 4.9 |
|
Mining, quarrying, and oil and gas extraction | 1,216 |
| | 4.9 |
| | 1,206 |
| | 5.0 |
|
Utilities2 | 1,192 |
| | 4.8 |
| | 1,163 |
| | 4.8 |
|
Hospitality and food services | 1,002 |
| | 4.1 |
| | 1,005 |
| | 4.2 |
|
Professional, scientific, and technical services | 918 |
| | 3.7 |
| | 859 |
| | 3.6 |
|
Other Services (except Public Administration) | 848 |
| | 3.5 |
| | 887 |
| | 3.7 |
|
Other 3 | 4,152 |
| | 16.9 |
| | 4,047 |
| | 16.8 |
|
Total | $ | 24,598 |
| | 100.0 | % | | $ | 24,162 |
| | 100.0 | % |
| |
1 | At both March 31, 2019 and December 31, 2018, 83% of retail trade consist of motor vehicle and parts dealers, gas stations, grocery stores, building material suppliers, and direct-to-consumer retailers. |
| |
2 | Includes primarily utilities, power, and renewable energy. |
| |
3 | No other industry group exceeds 3.5%. |
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Commercial Real Estate Loans
Selected information indicative of credit quality regarding our CRE loan portfolio is presented in the following schedule.
COMMERCIAL REAL ESTATE PORTFOLIO BY LOAN TYPE AND COLLATERAL LOCATION
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollar amounts in millions) | | Collateral Location | | | | |
Loan type | | As of date | | Arizona | | California | | Colorado | | Nevada | | Texas | | Utah/ Idaho | | Wash-ington | | Other 1 | | Total | | % of total CRE |
Commercial term | | | | | | | | | | | | | | | | | | | | | | |
Balance outstanding | | 3/31/2019 | | $ | 1,208 |
| | $ | 2,888 |
| | $ | 610 |
| | $ | 609 |
| | $ | 1,544 |
| | $ | 1,340 |
| | $ | 414 |
| | $ | 574 |
| | $ | 9,187 |
| | 79.7 | % |
% of loan type | | | | 13.2 | % | | 31.4 | % | | 6.6 | % | | 6.6 | % | | 16.8 | % | | 14.6 | % | | 4.5 | % | | 6.3 | % | | 100.0 | % | | |
Delinquency rates 2: | | | | | | | | | | | | | | | | | | | | | | |
30-89 days | | 3/31/2019 | | 0.3 | % | | 0.2 | % | | 0.2 | % | | — | % | | 0.1 | % | | 0.1 | % | | — | % | | 0.3 | % | | 0.2 | % | | |
| | 12/31/2018 | | — | % | | — | % | | — | % | | 0.2 | % | | — | % | | 0.1 | % | | — | % | | — | % | | — | % | | |
≥ 90 days | | 3/31/2019 | | — | % | | 0.1 | % | | — | % | | — | % | | 0.1 | % | | 0.1 | % | | — | % | | — | % | | 0.1 | % | | |
| | 12/31/2018 | | — | % | | 0.1 | % | | 0.2 | % | | — | % | | 0.4 | % | | 0.1 | % | | — | % | | — | % | | 0.1 | % | | |
Accruing loans past due 90 days or more | | 3/31/2019 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | |
| | 12/31/2018 | | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | |
Nonaccrual loans | | 3/31/2019 | | $ | 2 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 5 |
| | $ | — |
| | $ | 15 |
| | $ | 32 |
| | |
| | 12/31/2018 | | 2 |
| | 8 |
| | — |
| | 1 |
| | 8 |
| | 6 |
| | — |
| | 13 |
| | 38 |
| | |
Residential construction and land development | | | | | | | | | | | | | | | | |
Balance outstanding | | 3/31/2019 | | $ | 39 |
| | $ | 327 |
| | $ | 77 |
| | $ | 2 |
| | $ | 208 |
| | $ | 55 |
| | $ | 1 |
| | $ | 8 |
| | $ | 717 |
| | 6.2 | % |
% of loan type | | | | 5.5 | % | | 45.6 | % | | 10.7 | % | | 0.3 | % | | 29.0 | % | | 7.7 | % | | 0.1 | % | | 1.1 | % | | 100.0 | % | | |
Delinquency rates 2: | | | | | | | | | | | | | | | | | | | | | | |
30-89 days | | 3/31/2019 | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | |
| | 12/31/2018 | | — | % | | — | % | | 0.2 | % | | — | % | | 0.7 | % | | — | % | | — | % | | — | % | | 0.2 | % | | |
≥ 90 days | | 3/31/2019 | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | |
| | 12/31/2018 | | — | % | | — | % | | — | % | | — | % | | 0.1 | % | | — | % | | — | % | | — | % | | — | % | | |
Accruing loans past due 90 days or more | | 3/31/2019 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | |
| | 12/31/2018 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | |
Nonaccrual loans | | 3/31/2019 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | |
| | 12/31/2018 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | |
Commercial construction and land development | | | | | | | | | | | | | | | | |
Balance outstanding | | 3/31/2019 | | $ | 142 |
| | $ | 275 |
| | $ | 69 |
| | $ | 85 |
| | $ | 393 |
| | $ | 457 |
| | $ | 164 |
| | $ | 41 |
| | $ | 1,626 |
| | 14.1 | % |
% of loan type | | | | 8.7 | % | | 16.9 | % | | 4.3 | % | | 5.2 | % | | 24.2 | % | | 28.1 | % | | 10.1 | % | | 2.5 | % | | 100.0 | % | | |
Delinquency rates 2: | | | | | | | | | | | | | | | | | | | | | | |
30-89 days | | 3/31/2019 | | — | % | | 1.1 | % | | — | % | | — | % | | 0.3 | % | | 1.1 | % | | — | % | | — | % | | 0.6 | % | | |
| | 12/31/2018 | | — | % | | 0.4 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 0.1 | % | | |
≥ 90 days | | 3/31/2019 | | — | % | | — | % | | — | % | | — | % | | — | % | | 0.2 | % | | — | % | | — | % | | 0.1 | % | | |
| | 12/31/2018 | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | |