ZIONS BANCORPORATION, N.A.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GAAP to NON-GAAP RECONCILIATIONS
This Form 10-K 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 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 the
non-GAAP financial measures presented in this Form 10-K and a discussion of the
reasons for which management and investors use these non-GAAP measures.
Return on Average Tangible Common Equity ("ROTCE") - this schedule also includes
"net earnings applicable to common shareholders, excluding the effects of the
adjustments, net of tax" and "average tangible common equity." ROTCE 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 about performance because they present measures of
those assets that can generate income.
Schedule 1
RETURN ON AVERAGE TANGIBLE COMMON EQUITY (NON-GAAP)
Year Ended December 31,
(Dollar amounts in millions) 2019 2018 2017
Net earnings applicable to common shareholders (GAAP) $ 782
- 1 4
Net earnings applicable to common shareholders,
excluding amortization of core deposits and
intangibles, net of tax (non-GAAP) (a) $ 782 $ 851 $ 554
Average common equity (GAAP) $ 6,965 $ 7,024 $ 7,148
Average goodwill and intangibles (1,014) (1,015) (1,019)
Average tangible common equity (non-GAAP) (b) $ 5,951
14.2 % 9.0 %
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 provide additional useful information about the levels
of tangible assets and tangible equity 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.
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ZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES
Schedule 2
TANGIBLE EQUITY RATIO, TANGIBLE COMMON EQUITY RATIO, AND TANGIBLE BOOK VALUE PER
COMMON SHARE (ALL NON-GAAP MEASURES)
(Dollar amounts in millions, except per share December 31,
amounts) 2019 2018 2017
Total shareholders' equity (GAAP) $ 7,353 $ 7,578 $ 7,679
Goodwill and intangibles (1,014) (1,015) (1,016)
Tangible equity (non-GAAP) (a) 6,339 6,563 6,663
Preferred stock (566) (566) (566)
Tangible common equity (non-GAAP) (b) $ 5,773 $ 5,997 $ 6,097
Total assets (GAAP) $ 69,172 $ 68,746 $ 66,288
Goodwill and intangibles (1,014) (1,015) (1,016)
Tangible assets (non-GAAP) (c) $ 68,158 $ 67,731 $ 65,272
Common shares outstanding (thousands) (d) 165,057 187,554 197,532
Tangible equity ratio (non-GAAP) (a/c) 9.3 % 9.7 % 10.2 %
Tangible common equity ratio (non-GAAP) (b/c) 8.5 % 8.9 % 9.3 %
Tangible book value per common share (non-GAAP) (b/d)
$31.97 $30.87 Efficiency Ratio and Adjusted Pre-provision Net Revenue - this schedule also includes "adjusted noninterest expense," "taxable-equivalent net interest income," "adjusted taxable-equivalent revenue," "pre-provision net revenue ("PPNR"), and "adjusted PPNR." The methodology of determining the efficiency ratio may differ among companies. Management makes adjustments to exclude certain items as identified in the subsequent schedule which it believes allows for more consistent comparability among periods. Management believes the efficiency ratio provides useful information regarding the cost of generating revenue. Adjusted noninterest expense provides a measure as to how well the Bank is managing its expenses, and adjusted PPNR enables management and others to assess the Bank's ability to generate capital to cover credit losses through a credit cycle. Taxable-equivalent net interest income allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. 28 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Schedule 3 EFFICIENCY RATIO (NON-GAAP) AND ADJUSTED PRE-PROVISION NET REVENUE (NON-GAAP) (Dollar amounts in millions) 2019 2018 2017 Noninterest expense (GAAP) (a)$ 1,742 $ 1,679 $ 1,656 Adjustments: Severance costs 25 3 7 Other real estate expense, net (3) 1 (1) Amortization of core deposit and other intangibles 1 1 6 Restructuring costs 15 2 4 Pension termination-related expense - - - Total adjustments (b) 38 7 16 Adjusted noninterest expense (non-GAAP) (a-b)=(c) $ 1,704$ 1,672 $ 1,640 Net interest income (GAAP) (d)$ 2,272 $ 2,230 $ 2,065 Fully taxable-equivalent adjustments (e) 26 22 35 Taxable-equivalent net interest income (non-GAAP) (d+e)=(f) 2,298 2,252 2,100 Noninterest income (GAAP) (g) 562 552 544 Combined income (non-GAAP) (f+g)=(h) 2,860 2,804 2,644 Adjustments: Fair value and nonhedge derivative loss (9) (1) (2) Securities gains, net 3 1 14 Total adjustments (i) (6) - 12 Adjusted taxable-equivalent revenue (non-GAAP) (h-i)=(j)$ 2,866 $ 2,804 $ 2,632 Pre-provision net revenue (non-GAAP) (h)-(a)$ 1,118 $ 1,125 $ 988 Adjusted pre-provision net revenue (non-GAAP) (j-c) 1,162 1,132 992 Efficiency ratio (non-GAAP) (c/j) 59.5 % 59.6 % 62.3 % Bank OverviewZions Bancorporation, National Association and its subsidiaries (collectively "Zions Bancorporation, N.A .," "the Bank," "we," "our," "us") together comprise a bank headquartered inSalt Lake City, Utah with assets of$69 billion , net revenue (net interest income and noninterest income) exceeding$2.5 billion . We operate as a collection of great community banks that emphasizes local authority and responsibility for results. We are focused on the communities in our footprint and banking businesses and their owners and executives in those communities, where relationships are particularly important. Our experienced bankers develop long-lasting relationships with our customers by providing valuable advice and award-winning service; such relationships are further enhanced by digital products our customers desire. Building such relationships is essential to maintaining our deposit franchise, which currently provides us with one of the lowest costs of deposits in the industry, and to maintaining an overall high customer satisfaction relative to peers. We are a consistent national and state-wide leader of customer survey awards in small and middle-market banking, as well as a national leader in SBA lending and public finance advisory services. While we serve several important customer segments in our markets, our strategy is especially focused on four key areas: Small Business, Commercial, Affluent, and Capital Markets. Small Business and Commercial are segments where our local operating model is very impactful and valued by our customers, and we continue to invest in the capabilities that differentiate us from our competitors. We are making strategic investments in Affluent and Capital Markets to deepen our relationships with our core customers, while also improving noninterest income contribution. To enable the execution of our strategy, we are investing in five key areas: •Our employees and building their capabilities •Technologies that customers value most and that will make us efficient •Simplifying how we do business at all levels of the company 29 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES •Maintaining effective risk management practices to ensure judicious risk taking •Advanced enterprise data and analytics to support local execution Our strategic objectives include: •Achieving revenue growth that is competitive with the industry without incurring excessive risk while maintaining a cost structure that results in an efficiency ratio that is competitive with our peers. This includes improving our profitability ratios relative to peers and over the long term driving superior PPNR growth. •We are focused on revenue initiatives, including simplifying underwriting processes, simplified and fast account opening, and superior digital product delivery to enable faster and safe small business customer growth. We are developing our capabilities in capital markets, wealth management, mortgage and retail banking to increase noninterest income. •We are committed to expense control and are simplifying our operations in a continual and systematic way. As operations are simplified, many such processes can be automated and as such we are investing significantly in technology that is expected to reduce delivery costs over time. •Competing effectively against the largest banks with a combination of technology and service. •We have developed, and continue to develop, our digital delivery capabilities. •We are consolidating our multiple core operating systems onto a single operating system for commercial loans, certain retail loans, and all deposits, referred to as our "Core Transformation Project ." We believe this will give us an advantage over other large regional banks by allowing us to more quickly adopt emerging digital products. •We continue to invest in high-impact areas to maintain customer satisfaction results that are superior to peers. We are embarking on an initiative to provide even greater levels of service by increasing our investment in our business bankers and branch staff. This investment is expected to result in a key differentiator between our bank and other large banks, especially for small business customers who report that two of the top three key factors in determining the bank they use are (1) the convenience of the location of the branch and (2) access to an account officer. •We believe that our long-term success depends upon the success of the local communities we serve. We strive to make significant, long-term, business and philanthropic investments that will benefit our communities. •We strive to maintain a strong risk management profile to be a positive outlier (i.e., superior performance relative to peers) in the event of an economic downturn. 30 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES RESULTS OF OPERATIONS Executive Summary Net Earnings Applicable to Adjusted PPNR Common Shareholders Diluted EPS (in millions) Efficiency ratio (in millions)
[[Image Removed: zions-20191231_g2.jpg]][[Image Removed: zions-20191231_g3.jpg]][[Image Removed: zions-20191231_g4.jpg]][[Image Removed: zions-20191231_g5.jpg]] The decline in net
Although earnings for 2019 The increase in adjusted We continue to strive for earnings applicable to
were lower when compared PPNR was primarily the improvements to our efficiency
common shareholders from with 2018, diluted EPS result of increased ratio.
2018 to 2019 was primarily increased as a result of interest income due to
due to a negative the Bank repurchasing $1.1 loan growth and limiting
provision for 2018 that billion, or 23.5 million growth of noninterest
did not recur in 2019, and shares, which was 12.5% of expense.
an increase in noninterest outstanding shares as of
expense. December 31, 2018.
In addition to the metrics shown above, the Bank's net interest margin ("NIM")
decreased 7 basis points ("bps") for the full year of 2019 versus 2018, which
was largely attributable to the low interest rate environment (see
"Interest-Earning Assets, Interest-Bearing Liabilities and Net Interest Margin"
for more information on the NIM).
Asset quality remained relatively stable in 2019. Total criticized and
classified loans increased $217 million , or 19%, and $105 million , or 15%,
respectively, from historically low levels in 2018, while nonaccrual loans
decreased $9 million , or 4%, during this same period. Net loan and lease
charge-offs, expressed as a percentage of average loans held for investment, was
0.08% in 2019, compared with net recoveries of 0.04% in 2018.
Specifically, the financial performance of 2019 relative to 2018 reflects:
•Moderate net interest income growth resulting from loan growth;
•A reduction in the overnight federal funds rate by 75 bps, which resulted in
net interest margin compression;
•Modest noninterest income growth due to continued focus on this source of
revenue; we experienced notable successes such as generating strong growth in
capital markets and foreign exchange fees related to arranging interest rate
hedges for our loan customers, loan syndication arrangement fees, and foreign
exchange fees. Wealth management and trust fees increased as a result of
increased corporate and personal trust revenue;
•Excluding the severance and restructuring charges of $37 million in the fourth
quarter of 2019, a slight increase in noninterest expense while we remain
focused on expense controls and continue to invest in technology and
simplification initiatives. We delivered on our commitment to limit adjusted
noninterest expense growth in 2019 to only a slight increase relative to our
2018 results. Adjusted noninterest expense increased $32 million , or 2%, to $1.7
billion in 2019;
•An increase in the provision for credit losses to $39 million in 2019 from
$(40) million in 2018. The 2019 provision increased due to loan growth,
stabilizing credit quality, and increased net charge-offs (mainly due to a few
larger isolated charge-offs). During 2018, strong improvements in credit quality
and net recoveries resulted in a negative provision;
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ZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES
•Average deposit growth of $1.9 billion , or 4%, was very strong during the
second half of 2019, which accounted for over 90% of the annual growth.
Although net earnings applicable to common shareholders decreased by 8% over the
prior year, earnings per diluted share increased by 2% due to the repurchase of
$1.1 billion , or 23.5 million shares, of Bank common stock during 2019.
Areas Experiencing Challenges in 2019
While 2017 and 2018 experienced increases in short-term interest rates, 2019
experienced a declining interest rate environment. The relatively flat yield
curve and low interest rate environment put pressure on our NIM. For the last
several years we have been focused on achieving positive operating leverage and
improving our profitability; however, in a period of falling interest rates, our
ability to achieve these objectives becomes more difficult.
Although loan growth was generally consistent with the targeted levels we had
established for 2019, we continued to experience a high level of competition
during the year. Some of this competition came from nonbank financial
institutions such as debt funds, debt capital markets, and covenant-light
structures.
Average loan growth of $2.8 billion , or 6%, exceeded average deposit growth of
$1.9 billion , or 4%. Consequently, on an average basis throughout 2019, we
relied more on wholesale funding to finance incremental balance sheet growth,
increasing our funding cost.
Noninterest income from customer-related fees increased 3% in 2019, compared
with 2018. While we experienced strength in capital markets and foreign exchange
fees and wealth management and trust fees, our other customer-related fees
declined or were relatively flat.
Focus for 2020
In 2020, we are focused on the ongoing initiatives related to Bank profitability
and returns on- and of-equity. Major areas of emphasis include the following:
•Manage our interest rate risk profile to move toward a more neutral
interest-rate sensitive position and to protect net income against further
declines in interest rates;
•Achieve broad-based loan growth (i.e., a low- to mid-single digit growth rate)
within acceptable concentration limits;
•Achieve similar, or improve upon, growth rates in noninterest income,
emphasizing customer-related fee income;
•Maintain adjusted noninterest expense at 2019 levels or lower while continuing
to invest in enabling technologies, which will help ensure long-term success in
an increasingly competitive marketplace;
•Manage noninterest expense growth linked to revenue growth, profitability and
digital delivery strategies.
•Implement technology upgrades and digital strategies to enhance automation and
simplification of front, middle and back office processes; and
•Maintain top quartile credit risk profile and superior risk management posture
leading to increasing returns of capital.
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ZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES
Schedule 4
KEY DRIVERS OF PERFORMANCE
Change
Driver 2019 2018 better/(worse)
(In billions)
Average net loans and leases $ 48.3 $ 45.4 6 %
Average money market investments 1.3 1.4 (1)
Average total securities 15.2 15.6 (2)
Average noninterest-bearing deposits 23.4 23.8 (2)
Average total deposits 55.1 53.2 4
(In millions)
Net interest income $ 2,272 $ 2,230 2 %
Provision for credit losses 39 (40) NM
Noninterest income 562 552 2
Customer-related fee income 525 508 3
Noninterest expense 1,742 1,679 (4)
Net interest margin 3.54 % 3.61 % -7 bps
Nonaccrual loans 1 $ 243 $ 252 4 %
Ratio of net charge-offs to average loans and leases 0.08 % (0.04) % -12 bps
Ratio of nonperforming assets to loans and leases and other real estate owned 1
0.51 % 0.55 % 4 bps
Ratio of total allowance for credit losses to loans and leases outstanding
1.14 % 1.18 % 4 bps
1Includes loans held for sale.
Net Interest Income
Net interest income is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities and is
more than three-quarters of our revenue. Net interest income is derived from
both the volume of interest-earning assets and interest-bearing liabilities and
their respective yields/rates.
Net interest income was $2.3 billion during 2019, an improvement of $42 million ,
or 2%, compared with $2.2 billion during 2018. For both 2019 and 2018,
taxable-equivalent net interest income was $2.3 billion , compared with $2.1
billion in 2017. The tax rate used for calculating all taxable-equivalent
adjustments was 21% for both 2019 and 2018, and 35% for 2017. The slight
increase in net interest income is due to loan growth, noninterest-bearing
deposit stability and disciplined deposit pricing, partially offset by decreases
in benchmark interest rates. We are not assuming any further changes in
benchmark rates in our forecasts. However, because of lower overnight benchmark
federal funds rates, which decreased several times during 2019, partially offset
by loan growth and the benefit of our noninterest-bearing deposits, we expect
net interest income to decrease at a moderate pace in 2020 when compared with
2019, if current conditions persist.
Schedule 5
INTEREST-EARNING ASSETS, INTEREST-BEARING LIABILITIES AND NET INTEREST MARGIN
2019 2018
(Dollar amounts in millions) Average Amount of Average Average Amount of Average
balance interest 1 rate balance interest 1 rate
ASSETS
Total interest-earning assets$ 64,942 $ 2,709 4.17 %$ 62,440 $ 2,503 4.01 % Total interest-bearing liabilities 37,675 411 1.09 34,453 251 0.73 Impact of net noninterest-bearing sources of funds 0.46 0.33 Net interest margin$ 2,298 3.54 %$ 2,252 3.61 % The NIM was 3.54% and 3.61% for 2019 and 2018, respectively. When comparing 2019 with 2018, higher interest rates and a greater concentration of loans in the earning asset mix led to an increase in earning asset yield, which was more than offset by an increase in deposit rates and a modestly greater reliance on higher-cost borrowed funds. 33 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Funding loan growth with wholesale borrowings negatively impacted the NIM relative to deposit funding, although it was accretive to net interest income. Noninterest-bearing demand deposit accounts are a significant benefit to NIM. The net impact of noninterest-bearing sources of funds on the NIM increased to 0.46% in 2019, compared with 0.33% in 2018. Average interest-earning assets increased$2.5 billion from 2018, with average rates improving 16 bps. Average interest-bearing liabilities increased$3.2 billion while average rates increased 36 bps over the same period. [[Image Removed: zions-20191231_g6.jpg]] [[Image Removed: zions-20191231_g7.jpg]] Our average lending portfolio increased$2.8 billion to$48.3 billion , an increase of 6%. The average balance of our investment securities portfolio decreased$0.4 billion , while the year-end balance decreased$1.1 billion . The loan growth was funded through a mix of deposits, securities run-off and wholesale borrowings. Interest expense increased$160 million , compared with 2018 results, attributable to both an increase in the cost and quantity of deposits and wholesale funding. Interest expense on deposits increased$119 million on$31.7 billion of average interest-bearing deposits. Average loans increased$2.8 billion due to widespread growth in essentially all loans categories, with average commercial loans accounting for over half of the growth. Yields on average balances increased by 7 bps, 16 bps, and 18 bps in the commercial, CRE and consumer portfolios, respectively. The commercial loan growth was in municipal, commercial and industrial, and owner-occupied loans, where our yields are generally lower than commercial real estate ("CRE"), but higher than consumer. The federal funds target rate decreased three times in 2019 after increasing four times in 2018. A portion of our variable-rate loans were not affected by these changes primarily due to longer reset frequency, or because a substantial portion of our variable-rate interest-earning assets are tied to longer-term rate indices, which rates were impacted by a relatively flat yield curve for much of 2018 and 2019. Also, our earning assets generally reprice more quickly than our funding sources. We expect moderate loan growth during 2020, which may not be as strong as we experienced in 2019. 34 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES [[Image Removed: zions-20191231_g8.jpg]] [[Image Removed: zions-20191231_g9.jpg]] Average noninterest-bearing demand deposits provided us with low-cost funding and comprised 42% of average total deposits, which totaled$55.1 billion in 2019, compared with 45% of average total deposits, which totaled$53.2 billion , for 2018. Average interest-bearing deposits increased 8% in 2019, compared with 2018. During 2019 theFederal Reserve decreased the overnight benchmark federal funds rate by 75 bps, while the rate paid on the Bank's interest-bearing deposits increased 34 bps. We are actively monitoring and managing deposits, and have been reducing deposit rates since mid-2019, as benchmark federal funds interest rates have decreased. Our cost of total deposits during 2019 increased 21 bps relative to 2018, and we expect the cost of deposits to decline in 2020 due to ongoing efforts to better align deposit costs with lower market rates, assuming no further benchmark interest rate increases. 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 36 bps. The average balance of long-term debt increased$701 million compared with 2018, while the average rate decreased 152 bps. During 2019 the Bank issued$500 million of senior notes with an interest rate of 3.35% and$500 million of subordinated notes with an interest rate of 3.25%. Overall interest expense on long-term debt increased$18 million . The Bank has used short-termFederal Home Loan Bank ("FHLB") borrowings to fund some of its balance sheet growth during the past couple of years. Average short-term debt grew$0.2 billion and the rate paid increased 43 bps. Further changes in short-term borrowings will be primarily driven by loan growth, deposit growth and the level of long term debt as we do not expect significant decreases in investment security balances. The spread on average interest-bearing funds was 3.08% in 2019 and 3.28% in 2018, respectively. The spread on average interest-bearing funds for these periods was affected by the same factors that had an impact on the NIM. Interest rate spreads and margin are impacted by the mix of assets we hold, the composition of our loan and securities portfolios and the type of funding used. Our estimates of the Bank's interest rate risk position are highly dependent upon a number of assumptions regarding the repricing behavior of various deposit and loan types in response to changes in both short-term and long-term interest rates, balance sheet composition, and other modeling assumptions, as well as the actions of competitors and customers in response to those changes. Further detail on interest rate risk is discussed in "Interest Rate and Market 35 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Risk Management" on page 64. Refer to the "Liquidity Risk Management" section beginning on page 69 for more information on how we manage liquidity risk. Schedule 6 Net Interest Margin and Interest Rate Spreads in 2018 vs. 2017 2018
2017
(Dollar amounts in millions) Average Amount of Average Average Amount of Average
balance interest 1 rate balance interest 1 rate
ASSETS
Total interest-earning assets$ 62,440 $ 2,503 4.01 %$ 60,874 $ 2,227 3.65 % Total interest-bearing liabilities 34,453 251 0.73 32,932 127 0.38 Impact of net noninterest-bearing sources of funds 0.33 0.18 Net interest margin$ 2,252 3.61 %$ 2,100 3.45 % The NIM was 3.61% and 3.45% for 2018 and 2017, respectively. When comparing 2018 with 2017, changes in asset mix resulted in higher average loans, lower average securities and money market investments, and higher average interest-bearing deposits and wholesale borrowings balances to fund overall balance sheet growth. The expansion of NIM reflected a higher loan yield with only a moderate increase in funding costs. Average interest-earning assets increased$1.6 billion from 2017, with average rates improving 36 bps. Average interest-bearing liabilities increased$1.5 billion and average rates increased 35 bps over the same period. [[Image Removed: zions-20191231_g10.jpg]] [[Image Removed: zions-20191231_g11.jpg]] Our average lending portfolio increased$1.9 billion to$45.4 billion , an increase of 4%. The average balance of our investment securities portfolio decreased$0.1 billion , while year-end balances decreased$0.5 billion . The net earning asset growth was funded through a mix of deposits and wholesale borrowings. Interest expense increased$124 million compared to 2017 results, mainly due to both an increase in the cost and quantity of deposits and wholesale funding. Interest expense on deposits increased$76 million on$29.4 billion of average interest-bearing deposits. The increase in the average loan portfolio was due to growth in 1-4 family residential, commercial and industrial, and municipal lending. Yields on average balances increased by 43 bps, 45 bps, and 20 bps in the commercial, CRE 36 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES and consumer portfolios, respectively. Much of the consumer growth was in consumer 1-4 family residential, where our yields are generally lower than on commercial loans. [[Image Removed: zions-20191231_g12.jpg]] [[Image Removed: zions-20191231_g13.jpg]] Average noninterest-bearing demand deposits comprised 45% of average total deposits, which totaled$53.2 billion in 2018, compared with 46% of average total deposits, which totaled$52.2 billion , for 2017. Average interest-bearing deposits increased 3% in 2018, compared with 2017. During 2018 theFederal Reserve increased the overnight benchmark federal funds rate by 100 bps, while the rate paid on the Bank's interest-bearing deposits increased 25 bps, implying a deposit beta of 25%. Including wholesale borrowings, the rate paid on interest-bearing liabilities increased 35 bps. The average balance of long-term debt increased$118 million compared with 2017, while the average rate decreased 58 bps. During 2018, the Bank issued$500 million of senior notes with an interest rate of 3.5%. Overall interest expense on long-term debt increased$4 million . Average short-term debt grew$466 million and the rate paid increased 88 bps. The spread on average interest-bearing funds was 3.28% in 2018 and 3.27% in 2017, respectively. The spread on average interest-bearing funds for these periods was affected by the same factors that had an impact on the NIM. Refer to the "Liquidity Risk Management" section beginning on page 69 for more information on how we manage liquidity risk. 37 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Schedule 7 AVERAGE BALANCE SHEETS, YIELDS AND RATES 2019
2018
(Dollar amounts in millions) Average Amount of Average Average Amount of Average
balance interest 1 rate balance interest 1 rate
ASSETS
Money market investments $ 1,346 $ 32 2.41 % $ 1,360 $ 29 2.12 %
Securities:
Held-to-maturity 706 26 3.69 781 28 3.56
Available-for-sale 14,389 340 2.36 14,712 328 2.23
Trading account 147 6 4.45 109 4 3.97
Total securities 15,242 372 2.45 15,602 360 2.31
Loans held for sale 89 3 2.90 53 2 4.63
Loans and leases 2
Commercial 24,990 1,215 4.86 23,333 1,118 4.79
Commercial real estate 11,675 597 5.11 11,079 549 4.95
Consumer 11,600 490 4.22 11,013 445 4.04
Total Loans and leases 48,265 2,302 4.77 45,425 2,112 4.65
Total interest-earning assets 64,942 2,709 4.17 62,440 2,503 4.01
Cash and due from banks 610 549
Allowance for loan losses (501) (495)
Goodwill and intangibles 1,014 1,015
Other assets 3,506 3,060
Total assets $ 69,571 $ 66,569
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Saving and money market $ 26,852 $ 160 0.60 % $ 25,480 $ 81 0.32 %
Time 4,868 94 1.94 3,876 54 1.38
Foreign - - - - - -
Total interest-bearing deposits 31,720 254 0.80 29,356 135 0.46
Borrowed funds:
Federal funds purchased and other short-term
borrowings 4,719 111 2.36 4,562 88 1.93
Long-term debt 1,236 46 3.69 535 28 5.21
Total borrowed funds 5,955 157 2.64 5,097 116 2.27
Total interest-bearing liabilities 37,675 411 1.09 34,453 251 0.73
Noninterest-bearing deposits 23,361 23,827
Total deposits and interest-bearing
liabilities 61,036 411 0.67 58,280 251 0.43
Other liabilities 1,004 699
Total liabilities 62,040 58,979
Shareholders' equity:
Preferred equity 566 566
Common equity 6,965 7,024
Total shareholders' equity 7,531 7,590
Total liabilities and shareholders' equity $ 69,571 $ 66,569
Spread on average interest-bearing funds 3.08 3.28
Impact of net noninterest-bearing sources of
funds 0.46 0.33
Net interest margin $ 2,298 3.54 $ 2,252 3.61
Memo: total cost of deposits 0.46 0.25
1 Taxable-equivalent rates used where applicable. See "GAAP to Non-GAAP
Reconciliations" on page 27 for more information regarding taxable-equivalent
net interest income.
2 Net of unearned income and fees, net of related costs. Loans include
nonaccrual and restructured loans.
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2017 2016 2015
Average Amount of Average Average Amount of Average Average Amount of Average
balance interest 1 rate balance interest 1 rate balance interest 1 rate
$ 1,539 $ 19 1.23 % $ 3,664 $ 21 0.59 % $ 8,252 $ 23 0.28 %
776 31 3.95 675 30 4.40 581 30 5.08
14,907 313 2.10 9,546 184 1.93 5,181 100 1.93
64 2 3.75 83 3 3.76 64 2 3.46
15,747 346 2.20 10,304 217 2.11 5,826 132 2.26
87 3 3.56 140 5 3.36 125 5 3.61
22,116 964 4.36 21,748 913 4.20 21,419 903 4.22
11,184 504 4.50 11,131 472 4.24 10,178 454 4.46
10,201 391 3.84 9,183 351 3.83 8,574 334 3.91
43,501 1,859 4.27 42,062 1,736 4.13 40,171 1,691 4.21
60,874 2,227 3.65 56,170 1,979 3.53 54,374 1,851 3.40
786 675 642
(548) (601) (607)
1,019 1,027 1,035
2,985 2,779 2,601
$ 65,116 $ 60,050 $ 58,045
$ 25,453 $ 39 0.15 % $ 25,672 $ 37 0.15 % $ 24,619 $ 38 0.16 %
2,966 20 0.69 2,333 12 0.49 2,274 10 0.43
- - - 128 - 0.28 379 1 0.18
28,419 59 0.21 28,133 49 0.18 27,272 49 0.18
4,096 44 1.05 456 1 0.27 235 - 0.14
417 24 5.79 703 37 5.18 1,016 69 6.75
4,513 68 1.49 1,159 38 3.25 1,251 69 5.51
32,932 127 0.38 29,292 87 0.30 28,523 118 0.41
23,781 22,462 21,366
56,713 127 0.22 51,754 87 0.14 49,889 118 0.20
624 625 592
57,337 52,379 50,481
631 756 983
7,148 6,915 6,581
7,779 7,671 7,564
$ 65,116 $ 60,050 $ 58,045
3.27 3.23 2.99
0.18 0.14 0.20
$ 2,100 3.45 $ 1,892 3.37 $ 1,733 3.19
0.11 0.10 0.10
39-------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Schedule 8 analyzes the year-to-year changes in net interest income on a fully taxable-equivalent basis for the years indicated. For purposes of calculating the yields in these schedules, the average loan balances also include the principal amounts of nonaccrual and restructured loans. However, interest received on nonaccrual loans is included in income only to the extent that cash payments have been received and not applied to principal reductions. In addition, interest on restructured loans is generally accrued at reduced rates. Schedule 8 ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATE 2019 over 2018 2018 over 2017 Changes due to Changes due to (In millions) Volume Rate1 Total changes Volume Rate1 Total changes INTEREST-EARNING ASSETS Money market investments $ -$ 3 $ 3 $ (2) $ 12 $ 10 Securities: Held-to-maturity (3) 1 (2) - (3) (3) Available-for-sale (7) 19 12 (4) 19 15 Trading account 1 1 2 2 - 2 Total securities (9) 21 12 (2) 16 14 Loans held for sale 1 - 1 (1) - (1) Loans and leases2 Commercial 81 16 97 55 99 154 Commercial Real Estate 30 18 48 (5) 50 45 Consumer 25 20 45 32 22 54 Total loans and leases 136 54 190 82 171 253 Total interest-earning assets 128 78 206 77 199 276 INTEREST-BEARING LIABILITIES Interest-bearing deposits: Saving and money market 5 74 79 (1) 43 42 Time 15 25 40 8 26 34 Total interest-bearing deposits 20 99 119 7 69 76 Borrowed funds: Federal funds purchased and other short-term borrowings 3 20 23 4 40 44 Long-term debt 26 (8) 18 6 (2) 4 Total borrowed funds 29 12 41 10 38 48 Total interest-bearing liabilities 49 111 160 17 107 124 Change in taxable-equivalent net interest income$ 79 $ (33) $ 46 $ 60 $ 92 $ 152 1 Taxable-equivalent rates used where applicable. 2 Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. In the analysis of interest changes due to volume and rate, changes due to the volume/rate variance are allocated to volume with the following exceptions: when volume and rate both increase, the variance is allocated proportionately to both volume and rate; when the rate increases and volume decreases, the variance is allocated to rate. 40 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Provision for Credit Losses Schedule 9 TOTAL ALLOWANCE AND PROVISION FOR CREDIT LOSSES (In millions) December 31, 2019
At year end: Allowance for loan and lease losses $ 495 $ 495 $ - - % Reserve for unfunded lending commitments 59 57 2 4 Total allowance for credit losses $ 554 $ 552 $ 2 - % For the year ended: Provision for loan losses $ 37 $ (39)$ 76 NM Provision for unfunded lending commitments 2 (1) 3 NM Total provision for credit losses $ 39 $ (40)$ 79 NM The allowance for credit losses ("ACL") is the combination of both the ALLL and the reserve for unfunded lending commitments ("RULC"). The ALLL represents the estimated probable losses inherent in the loan and lease portfolio as of the balance sheet date. The RULC represents the estimated reserve for potential losses associated with off-balance sheet commitments. Changes in the ALLL and RULC, including changes in net charge-offs, are recorded in the provision for loan and lease losses and the provision for unfunded lending commitments in the income statement, respectively. The ACL increased$2 million to$554 million atDecember 31, 2019 , compared with$552 million atDecember 31, 2018 . The slight increase in the ACL from the prior year period is primarily due to loan growth, partially offset by recent default and loss rates that are lower than long-term averages. The provision for credit losses, which is the combination of both the provision for loan losses and the provision for unfunded lending commitments, was$39 million in 2019, compared with$(40) million in 2018. 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. See Note 6 of the Notes to Consolidated Financial Statements and "Credit Risk Management" on page 54 for more information on how we determine the appropriate level for the ALLL and the RULC. OnJanuary 1, 2020 , we adopted Accounting Standards Update ("ASU") 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its subsequent updates, often referred to as the Current Expected Credit Loss ("CECL") model. Upon adoption of the ASU, Zions recorded the full amount of the ACL for loans and leases of$526 million , compared with$554 million atDecember 31, 2019 , resulting in an after-tax increase to retained earnings of$20 million . The impact of the adoption of CECL for our securities portfolio was less than$1 million . As a result of this new accounting standard, we expect our allowance for credit losses will become more volatile primarily because, under the new process, the allowance is subject to economic forecasts that may change materially from period to period. For more information see "Critical Accounting Policies and Significant Estimates" on page 75. Noninterest Income Noninterest income represents revenues we earn for products and services that have no associated interest rate or yield. Growing noninterest income is a key strategic priority, and several strategic initiatives are underway to support this effort. Specifically, we are working to leverage our focus on commercial and small business customers to accelerate sales of capital markets products and wealth advisory services. Noninterest income accounted for 20% of net revenue during both 2019 and 2018. For 2019, noninterest income was$562 million , compared with$552 million in 2018 and$544 million in 2017. During 2019, we experienced strong growth in capital markets and 41 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES foreign exchange fees driven by income from customer interest rate swap activity, loan syndication arrangement fees and foreign exchange fees, followed by growth in our wealth management and trust fees, while experiencing declines in commercial account fees. We believe a subtotal of customer-related fees provides a better view of income over which we have more direct near-term control. It excludes items such as dividends, insurance-related income, mark-to-market adjustments on certain derivatives, and securities gains and losses. Schedule 10 presents a comparison of the major components of noninterest income for the past three years. Schedule 10 NONINTEREST INCOME Percent Percent (Dollar amounts in millions) 2019 Amount change change 2018 Amount change change 2017 Commercial account fees$ 121 $ (1) (1) %$ 122 $ (4) (3) %$ 126 Card fees 92 (2) (2) 94 (2) (2) 96 Retail and business banking fees 78 - - 78 - - 78 Loan-related fees and income 75 1 1 74 2 3 72 Capital markets and foreign exchange fees 78 20 34 58 9 18
49
Wealth management and trust fees 60 5 9 55 8 17 47 Other customer-related fees 21 (6) (22) 27 5 23 22 Customer-related fees 525 17 3 508 18 4 490 Dividends and other income 34 (9) (21) 43 3 8 40 Securities gains, net 3 2 200 1 (13) (93) 14 Total noninterest income$ 562 $ 10 2 %$ 552 $ 8 1 %$ 544 Customer-related fees increased by$17 million , or 3%, from 2018 to 2019. Capital markets and foreign exchange fees increased by$20 million as a result of an$11 million increase in income from arranging interest rate hedges for our loan customers, a$4 million increase in loan syndication arrangement fees and a$3 million increase in foreign exchange fees. Wealth management and trust fees increased by$5 million , or 9%, as a result of increased corporate and personal trust revenue. Other customer-related fees decreased by$6 million , or 22%, primarily as a result of the sale of a minor business in the first quarter of 2019. Dividends and other income decreased by$9 million primarily due to valuation adjustments on client-related interest rate swaps during 2019. As a result of the decline in interest rates during 2019 and increased client activity during the year, these client-related interest rate swaps significantly increased in value, resulting in the Bank having a larger exposure to the clients and a$9 million valuation adjustment in 2019, compared with a valuation adjustment of$1 million in 2018. Dividends and other income also decreased during 2019 due to a$3 million gain on venture capital investments in 2018 that did not recur in 2019 and a$3 million decrease in dividends from theFederal Reserve resulting from a decline in ourFederal Reserve stock held and a decline in the 10-yearTreasury , partially offset by a$3 million increase in other miscellaneous income. Noninterest Expense Noninterest expense increased by$63 million , or 4%, from 2018 to 2019. Adjusted noninterest expense increased by$32 million , or 2%, over the same period. This 2% increase is within our previously communicated growth rate of low single-digit percentage range relative to the prior year. See "GAAP to Non-GAAP Reconciliations" on page 27 for more information regarding the calculation of adjusted noninterest expense. We have developed a culture that continually seeks to streamline and make more simple and efficient processes required to operate the Bank. As part of our focus on noninterest expenses, inOctober 2019 , we announced a 5% workforce reduction that occurred in the fourth quarter of 2019. We also announced the closure of multiple branches beginning in the fourth quarter of 2019, including 12 branches scheduled to close during 2020. As a result of this reduction in staffing, we recognized$22 million of severance and$15 million of other restructuring-related costs 42 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES primarily related to centralizing our office space inUtah and the closure of certain branches across our footprint. In 2018 we successfully completed the merger of the holding company with, and into, the bank subsidiary. The consolidation of the holding company into the bank reduced duplicative regulatory examinations and certain regulatory requirements. We remain focused on expense control efforts, while continuing to invest in technology initiatives. Schedule 11 presents a comparison of the major components of noninterest expense for the past three years. Schedule 11 NONINTEREST EXPENSE Percent Percent (Dollar amounts in millions) 2019 Amount change change 2018 Amount change change
2017
Salaries and employee benefits
7 %$ 1,070 $ 64 6 %$ 1,006 Occupancy, net 133 1 1 132 3 2 129 Furniture, equipment and software, net 135 9 7 126 (4) (3)
130
Other real estate expense, net (3) (4) (400) 1 2 (200) (1) Credit-related expense 20 (5) (20) 25 (4) (14) 29 Professional and legal services 47 (5) (10) 52 (5) (9) 57 Advertising 19 (7) (27) 26 4 18 22 FDIC premiums 25 (25) (50) 50 (3) (6) 53 Other 225 28 14 197 (34) (15) 231 Total noninterest expense$ 1,742 $ 63 4$ 1,679 $ 23 1$ 1,656 Adjusted noninterest expense$ 1,704 $ 32 2 %$ 1,672 $ 32 2 %$ 1,640 Schedule 12 SALARIES AND EMPLOYEE BENEFITS Percent Percent (Dollar amounts in millions) 2019 Amount/quantity change change 2018 Amount/quantity change change 2017 Salaries and bonuses$ 953 $ 58 6 %$ 895 $ 46 5 %$ 849 Employee benefits: Employee health and insurance 83 6 8 77 8 12 69 Retirement 49 4 9 45 7 18 38 Payroll taxes and other 56 3 6 53 3 6 50 Total benefits 188 13 7 175 18 11 157 Total salaries and employee benefits$ 1,141 $ 71 7 %$ 1,070 $ 64 6 %$ 1,006 Full-time equivalent employees at December 31 10,188 (13) - 10,201 118 1 10,083 Salaries and employee benefits increased by$71 million , or 7%, in 2019, compared with 2018. Salaries and employee benefits increased due to a$33 million increase in base salaries resulting from salary merit increases, a$22 million increase in severance expenses primarily from the previously announced reduction in staffing levels, a$6 million increase in employee medical costs, and a$4 million increase in retirement expenses. These increases were partially offset by a$7 million decrease in incentive compensation. Salaries and employee benefits increased by$64 million , or 6%, in 2018, compared with 2017. Salaries and employee benefits increased in 2018 primarily due to a$29 million increase in base salaries resulting from salary increases related to the Tax Cuts and Jobs Act, merit increases and increased headcount, and a$19 million increase in incentive compensation, of which$7 million relates to the Tax Cuts and Jobs Act. The remaining$16 million increase was primarily a result of an$8 million increase in the Bank's medical plans and a$7 million increase in the Bank's contribution to the employee 401(k) plan, as a result of improved financial performance. Furniture and equipment expense increased$9 million , or 7%, in 2019, primarily from increased amortization expense related to capitalized technology costs from the successful implementation of our commercial and 43 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES consumer loan systems. Furniture and equipment expense decreased by$4 million in 2018, primarily due to decreased software maintenance expense, partially offset by increased amortization of capitalized software. Professional and legal services decreased$5 million from 2018 to$47 million in 2019. The decrease was primarily a result of lower consulting fees related to our simplification and technology initiatives. The$5 million decrease in 2018 from 2017 was for the same reason. Advertising expense decreased by$7 million to$19 million for 2019. This decrease was mainly due to lower sponsorships. Advertising expense in 2018 was$4 million higher compared with 2017, primarily due to increased media expense.FDIC premiums were$25 million in 2019, compared with$50 million in 2018. This decrease was primarily due to the elimination of theFDIC surcharge for large banks because the requiredDeposit Insurance Fund reserve ratio had been met and the Bank issuing unsecured debt which results in lowerFDIC premiums. Other noninterest expense increased$28 million to$225 million in 2019, compared with$197 million in 2018. This increase was due to a$13 million impairment related to centralizing our office space inUtah and the closure of certain branches across our footprint, and$10 million of customer reimbursements made by the Bank to remedy a self-identified operational issue. Other noninterest expense decreased$34 million from 2017 to 2018 as a result of a one-time$12 million charitable contribution made at the end of 2017 and a decrease in employee and operational expenses resulting from the Bank's simplification and efficiencies initiatives. InOctober 2018 , we announced the termination of the defined benefit pension plan subject to obtaining necessary regulatory approval. Completion of this termination is expected in 2020. Plan participant benefits will choose to receive an annuity or a lump-sum payment. The elimination of the plan is expected to result in a onetime charge of approximately$10 million to$15 million , likely toward the middle of 2020, in addition to the reclassification of an approximate$17 million loss out of AOCI into earnings. The current estimate of this expense is subject to change depending upon a number of factors including plan performance, participant elections between lump-sum distribution options and an annuity option, and market competitiveness in the annuity bid process. Branch closing costs and other efficiency-related cost accelerations will be recognized in the next several quarters. Excluding the severance, branch closing, and other efficiency-related cost acceleration expenses, adjusted noninterest expense for 2019 experienced a 2% increase relative to the prior year. We expect 2020 expenses to be the same as, or slightly reduced from, 2019 results, excluding the expected pension termination expense, severance and other restructuring expenses. Income Taxes Income tax expense was$237 million in 2019,$259 million in 2018, and$344 million in 2017. Our effective income tax rates were 22.5% in 2019, 22.7% in 2018, and 36.8% in 2017. The income tax rates for all tax years were reduced by nontaxable municipal interest income and nontaxable income from certain bank-owned life insurance ("BOLI"). The income tax rates for 2019 and 2018 were positively impacted by the decrease in the corporate federal income tax rate to 21% from 35% due to the Tax Cuts and Jobs Act, which was effectiveJanuary 1, 2018 . This rate benefit was partially reduced by the nondeductibility ofFDIC premiums, certain executive compensation and other fringe benefits as enacted by the new tax law. The tax rate for 2017 was impacted by a one-time$18 million benefit to tax expense related to the reevaluation of state tax positions, an excess tax benefit of$9 million from the implementation of a new accounting guidance related to share-based compensation, and a net DTA write-off of$47 million through income tax expense associated with the decrease in the federal income tax rate from the passage of new legislation. The Bank continued to invest in technology initiatives, low-income housing and municipal securities during 2019, 2018 and 2017, generating tax credits and nontaxable income that benefited the tax rate each year. 44 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES We had a net DTA balance of$37 million atDecember 31, 2019 compared with$130 million atDecember 31, 2018 . The decrease in the net DTA resulted primarily from the decrease in unrealized losses in OCI related to securities, an increase in deferred loan fees and accelerated tax deductions on certain technology initiatives and depreciable property during 2019. We did not record any valuation allowance for GAAP purposes as ofDecember 31, 2019 . Note 20 of the Notes to Consolidated Financial Statements discloses information about the Bank's evaluation of its DTA, including any potential additional valuation allowances. Preferred Stock Dividends and Redemption Preferred stock dividends were$34 million during both 2019 and 2018, which was a$6 million decrease from$40 million in 2017. Preferred stock dividends decreased beginning in 2018 as a result of the completion of a tender offer on our$144 million of Series F preferred stock during 2017. Preferred dividends are expected to continue at$34 million for 2020. See further details in Note 14 of the Notes to Consolidated Financial Statements. BUSINESS SEGMENT RESULTS We manage our operations and prepare management reports and other information with a primary focus on geographical area. Our banking operations are managed under their own individual brand names, includingZions Bank ,Amegy Bank ("Amegy"),California Bank & Trust ("CB&T"),National Bank of Arizona ("NBAZ"),Nevada State Bank ("NSB"),Vectra Bank Colorado ("Vectra"), andThe Commerce Bank of Washington ("TCBW"). Performance assessment and resource allocation are based upon this geographical structure. Most of the lending and other decisions affecting customers are made at the local level. The accounting policies of the individual segments are the same as those of the Bank. We allocate the cost of centrally provided services to the business segments based upon estimated or actual usage of those services. We also use an internal Funds Transfer Pricing ("FTP") allocation system to report results of operations for business segments. This process is continually refined. The operating segment identified as "Other" includes certain nonbank financial service subsidiaries, centralized back-office functions, and eliminations of transactions between segments. See Note 22 of the Notes to Consolidated Financial Statements for more information on the Other segment, and more performance information including net interest income, noninterest income, and noninterest expense by segment.. During 2019, our banking operations experienced improved financial performance when compared with 2018. Common areas of financial performance experienced at various levels of the segments include: • Increased loan balances across all geographies; •Continued strong or improvements in credit quality; and •Growth in customer deposit balances across almost all segments. 45 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Schedule 13 shows selected financial information for our business segments. Ratios are calculated based on amounts in thousands. Schedule 13 SELECTED SEGMENT INFORMATION Zions Bank Amegy CB&T (Dollar amounts in millions) 2019 2018 2017 2019 2018 2017 2019 2018 2017 KEY FINANCIAL INFORMATION Total average loans$ 13,109 $ 12,643 $ 12,481 $ 12,235 $ 11,358 $ 11,021 $ 10,763 $ 10,033 $ 9,539 Total average deposits 15,870 15,410 15,986 11,627 11,160 11,096 11,522 11,268 11,030 Income before income taxes 364 353 301 282 353 209 287 272 236 CREDIT QUALITY Provision for credit losses$ 18 $ 8 $ 20 $ 9 $ (80) $ 20 $ 7 $ 15 $ (5) Net loan and lease charge-offs 9 1 35 19 (17) 40 10 4 1 Ratio of net charge-offs to average loans and leases 0.07 % 0.01 % 0.28 % 0.16 % (0.15) % 0.36 % 0.09 % 0.04 % 0.01 % Allowance for credit losses$ 144 $ 136 $ 130 $ 182 $ 189 $ 247 $ 75 $ 79 $ 69 Ratio of allowance for loan losses to net loans and leases, at year-end 1.10 % 1.08 % 1.04 % 1.49 % 1.66 % 2.24 % 0.70 %
0.79 % 0.72 %
Nonperforming lending-related assets
$ 60 $ 79 $ 236 $ 49 $ 48 $ 47 Ratio of nonperforming lending-related assets to net loans and leases and other real estate owned 0.65 % 0.52 % 0.67 % 0.49 % 0.69 % 2.07 % 0.45 %
0.45 % 0.47 %
Accruing loans past due 90 days or more
$ 2 $ 1 $ 7 $ 5 $ 9 $ 19 Ratio of accruing loans past due 90 days or more to net loans and leases 0.02 % 0.09 % 0.08 % 0.02 % 0.01 % 0.06 % 0.05 % 0.09 % 0.20 % NBAZ NSBVectra TCBW (Dollar amounts in millions) 2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017 KEY FINANCIAL INFORMATION Total average loans$ 4,774 $ 4,608 $ 4,267 $ 2,630 $ 2,394 $ 2,357 $ 3,109 $ 2,924 $ 2,644 $ 1,194 $ 1,118 $ 926 Total average deposits 5,002 4,931 4,762 4,512 4,286 4,254 2,853 2,761 2,756 1,094 1,092 1,107 Income before income taxes 111 97 90 52 41 35 52 44 44 38 34 27 CREDIT QUALITY Provision for credit losses$ 2 $ 8 $ (8) $ (1) $ 1 $ (11) $ 3 $ 6 $ 1 $ (1) $ 2 $ 2 Net loan and lease charge-offs - - (1) (3) (4) (3) 2 - 2 - - - Ratio of net charge-offs to average loans and leases - % - % (0.02) % (0.11) % (0.17) % (0.13) % 0.06 % - % 0.08 % - % - % - % Allowance for credit losses$ 37 $ 35 $ 28 $ 16 $ 15 $ 11 $ 30 $ 29 $ 24 $ 9 $ 11 $ 9 Ratio of allowance for loan losses to net loans and leases, at year-end 0.78 % 0.76 % 0.66 % 0.61 % 0.63 % 0.47 % 0.96 % 0.99 % 0.91 % 0.75 % 0.98 % 0.97 % Nonperforming lending-related assets$ 14 $ 18 $ 17 $ 27 $ 18 $ 17 $ 11 $ 20 $ 10 $ 4 $ 4 $ 6 Ratio of nonperforming lending-related assets to net loans and leases and other real estate owned 0.29 % 0.39 % 0.38 % 1.00 % 0.72 % 0.72 % 0.35 % 0.66 % 0.36 % 0.33 % 0.37 % 0.58 % Accruing loans past due 90 days or more $ -$ 1 $ - $ - $ - $ -$ 1 $ - $ - $ - $ - $ - Ratio of accruing loans past due 90 days or more to net loans and leases - % 0.02 % - % - % - % - % 0.03 % - % 0.01 % - % - % - % 46
-------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION ,NATIONAL ASSOCIATION AND SUBSIDIARIES Zions Bank Zions Bank is headquartered inSalt Lake City, Utah , and is primarily responsible for conducting operations inUtah ,Idaho , andWyoming . If it were a separately chartered bank, it would be the largest full-service commercial bank inUtah and the 4th largest inIdaho , as measured by domestic deposits in these states.Zions Bank's income before income taxes increased by$11 million , or 3%, during 2019. Net interest income increased by$30 million , which was partially offset by a$10 million increase in the provision for credit losses and a$9 million increase in noninterest expense. The loan portfolio increased by$178 million during 2019, which consisted of increases of$72 million and$115 million in commercial and CRE loans, respectively, and a decrease of$9 million in consumer loans. The ratio of allowance for loan losses to net loans and leases increased slightly to 1.10% atDecember 31, 2019 from 1.08% atDecember 31, 2018 . Nonperforming lending-related assets increased$18 million , or 26%, from the prior year. Deposits increased by 7% from 2018 to 2019.Amegy Bank Amegy Bank is headquartered inHouston, Texas . If it were a separately chartered bank, it would be the 8th largest full-service commercial bank inTexas as measured by domestic deposits in the state.Amegy's income before income taxes decreased by$71 million , or 20%, during 2019. The decrease in income before income taxes is mainly due to a$89 million increase in the provision for credit losses, partially offset by increases of$6 million and$8 million in net interest income and noninterest income, respectively. The credit quality ofAmegy's loan portfolio improved during 2018, mainly due to improvements in the oil and gas-related portfolio, which led to$80 million negative provision for credit losses in 2018. Credit quality remained strong in 2019. The ratio of the ALLL to net loans and leases decreased to 1.49% atDecember 31, 2019 from 1.66% a year earlier. During 2019, nonperforming lending-related assets decreased$19 million , or 24%.Amegy has been able to achieve strong loan portfolio growth, resulting in a$770 million increase from the prior year. During 2019, commercial, consumer, and CRE loans increased by$474 million ,$235 million and$61 million , respectively. Deposits increased by 2% from 2018 to 2019.California Bank & Trust California Bank & Trust is headquartered inSan Diego, California . If it were a separately chartered bank, it would be the 16th largest full-service commercial bank inCalifornia as measured by domestic deposits. Its core business is built on relationship banking by providing commercial, real estate and consumer lending, depository services, international banking, cash management, and community development services. CB&T's income before income taxes increased by$15 million , or 6%, during 2019 primarily from an increase in net interest income due to loan growth. CB&T's loan portfolio increased by$310 million in 2019 from the prior year. During 2019, commercial, CRE and consumer loans increased by$156 million ,$93 million and$61 million , respectively. The credit quality of CB&T's loan portfolio continues to be strong, as the ratio of the ALLL to net loans for 2019 was 0.70%. Deposits increased by 5% from 2018 to 2019.National Bank of Arizona National Bank of Arizona is headquartered inPhoenix, Arizona . If it were a separately chartered bank, it would be the 7th largest full-service commercial bank inArizona as measured by domestic deposits in the state. NBAZ's income before income taxes increased by$14 million , or 14%, during 2019 due to increased net interest income from loan growth and improved fee revenue. The loan portfolio increased during 2019 by$117 million , composed of increases in CRE and consumer loans of$110 million and$38 million , respectively, and a decrease in commercial loans of$31 million . The credit quality of NBAZ's loan portfolio remained strong during 2019. The ratio of ALLL to net loans and leases was 0.78% atDecember 31, 2019 . Deposits increased by 4% from 2018 to 2019. 47 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION ,NATIONAL ASSOCIATION AND SUBSIDIARIES Nevada State Bank Nevada State Bank is headquartered inLas Vegas, Nevada . If it were a separately chartered bank, it would be the 5th largest full-service commercial bank inNevada as measured by domestic deposits in the state. NSB focuses on serving small and mid-sized businesses as well as retail consumers, with an emphasis on relationship banking. In 2019, NSB's income before in taxes increased by$11 million , or 27% due to improvement in net interest income from loan growth. NSB's loans increased by$205 million during 2019, including increases of$200 million in commercial loans and$32 million in CRE loans, while consumer loans decreased by$27 million . The credit quality of NSB's loan portfolio remained stable during 2019. Nonperforming lending-related assets increased$9 million , or 50%, from the prior year. The ratio of the ALLL to net loans and leases decreased to 0.61% atDecember 31, 2019 . Deposits increased by 11% from 2018 to 2019.Vectra Bank Colorado Vectra Bank Colorado is headquartered inDenver, Colorado . If it were a separately chartered bank, it would be the 13th largest full-service commercial bank inColorado as measured by domestic deposits in the state. In 2019,Vectra's income before income taxes increased by$8 million , or 18%. During 2019, total loans increased by$101 million , including$57 million in commercial loans,$26 million in CRE loans, and$18 million in consumer loans. The credit quality ofVectra's loan portfolio was strong, and the ratio of ALLL to net loans and leases was 0.96% atDecember 31, 2019 . Deposits increased by 8% from 2018 to 2019.The Commerce Bank of Washington The Commerce Bank of Washington is headquartered inSeattle, Washington . It operates inWashington underThe Commerce Bank of Washington name and inPortland, Oregon , under TheCommerce Bank of Oregon name. Its business strategy focuses on serving the financial needs of commercial businesses, including professional services firms. TCBW has been successful in serving the greaterSeattle /Puget Sound andPortland regions without requiring extensive investments in a traditional branch network. It has been innovative in effectively utilizing couriers, bank by mail, remote deposit image capture, and other technologies. TCBW's income before income taxes increased$4 million , or 12%, during 2019. The loan portfolio increased by$134 million , including increases of$134 million in commercial loans and$7 million in consumer loans, offset by a decrease of$7 million in CRE loans. Deposits increased by 5% from 2018 to 2019. 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. Schedule 7, which we referenced in our discussion of net interest income, includes the average balances of our interest-earning assets, the amount of revenue generated by them, and their respective yields. 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. Average interest-earning assets were$64.9 billion in 2019, compared with$62.4 billion in the previous year. Average interest-earning assets as a percentage of total average assets were 93% and 94% in 2019 and 2018, respectively. Average loans were$48.3 billion in 2019 and$45.4 billion in 2018. Average loans as a percentage of total average assets were 69% in 2019, compared with 68% in 2018. 48 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Average money market investments, consisting of interest-bearing deposits and federal funds sold and security resell agreements, decreased by 1% from 2018. Average securities decreased by 2% from 2018. Average total deposits increased by 4%; average total loans also increased by 6% in 2019 when compared with 2018. AVERAGE OUTSTANDING LOANS AND DEPOSITS (at December 31) [[Image Removed: zions-20191231_g14.jpg]] Investment Securities Portfolio We invest in securities to actively manage liquidity and interest rate risk, in addition to generating revenue for the Bank. Refer to the "Liquidity Risk Management" section on page 69 for additional information on management of liquidity and funding. The following schedule presents a profile of our investment securities portfolio. The amortized cost amounts represent the original cost of the investments, adjusted for related accumulated amortization or accretion of any yield adjustments, and for impairment losses, including credit-related impairment. The estimated fair value measurement levels and methodology are discussed in Note 3 of the Notes to Consolidated Financial Statements. 49 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Schedule 14 INVESTMENT SECURITIES PORTFOLIO December 31, 2019 December 31, 2018 Estimated Estimated (In millions) Amortized fair Amortized fair Par Value cost value Par Value cost value Held-to-maturity Municipal securities$ 592 $ 592 $ 597 $ 774 $ 774 $ 767 Available-for-sale U.S. Treasury securities 25 25 25 40 40 40U.S. Government agencies and corporations: Agency securities 1,301 1,301 1,302 1,395 1,394
1,375
Agency guaranteed mortgage-backed securities 9,406 9,518 9,559 10,093 10,236
10,014
Small Business Administration loan-backed securities 1,414 1,535 1,495 1,871 2,042 1,996 Municipal securities 1,175 1,282 1,319 1,178 1,303 1,291 Other 25 25 25 25 25 21 Total available-for-sale debt securities 13,346 13,686 13,725 14,602 15,040
14,737
Money market mutual funds and other - - - - - - Total available-for-sale 13,346 13,686 13,725 14,602 15,040 14,737 Total investment securities$ 13,938 $ 14,278 $ 14,322 $ 15,376 $ 15,814 $ 15,504 The amortized cost of investment securities atDecember 31, 2019 decreased by 10% from the balance atDecember 31, 2018 . The investment securities portfolio includes$340 million of net premium as ofDecember 31, 2019 , down from$438 million in the prior year, that is distributed across various asset classes as illustrated in the preceding schedule. Premium amortization for 2019 was approximately$120 million , compared with approximately$129 million in 2018. For more information on the accounting for premiums and discounts for investment securities see Note 5 to the Consolidated Financial Statements. As ofDecember 31, 2019 , under the GAAP fair value accounting hierarchy, 0.2% of the$13.7 billion fair value of the AFS securities portfolio was valued at Level 1, 99.8% was valued at Level 2, and there were no Level 3 AFS securities. AtDecember 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 the Notes to Consolidated Financial Statements for further discussion of fair value accounting. Schedule 15 presents the maturities of the different types of investments that we owned, using contractual maturities, and the corresponding average yields as ofDecember 31, 2019 based on amortized cost. See "Liquidity Risk Management" on page 69 and Notes 1, 5 and 7 of the Notes to Consolidated Financial Statements for additional information about our investment securities and their management. 50 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Schedule 15 MATURITIES AND AVERAGE YIELDS ON SECURITIES AtDecember 31, 2019 After five but Total securities Within one year After
one but within five years within ten years After ten years (Dollar amounts in millions) Amount Yield1 Amount Yield1 Amount Yield1 Amount Yield1 Amount Yield1 Held-to-maturity Municipal securities $ 592 3.7 %$ 101 3.2 %$ 215 3.3 %$ 156 4.3 %$ 120 4.2 % Available-for-saleU.S. Treasury securities 25 1.5 25 1.5 - - - - - -U.S. Government agencies and corporations: Agency securities 1,301 2.6 21 2.8 97 2.4 442 2.6 741 2.6 Agency guaranteed mortgage-backed securities 9,518 2.4 - - 66 1.6 1,235 1.8 8,217 2.4Small Business Administration loan-backed securities 1,535 3.0 - - 21 2.4 178 2.7 1,336 3.0 Municipal securities 1,282 2.6 76 2.0 534 2.2 569 2.8 103 3.4 Other 25 6.7 - - - - 10 9.5 15 4.8 Total available-for-sale 13,686 2.5 122 2.0 718 2.2 2,434 2.3 10,412 2.5 Total investment securities$ 14,278 2.5 %$ 223 2.6 %$ 933 2.4 %$ 2,590 2.4 %$ 10,532 2.6 % 1 Taxable-equivalent rates used where applicable. 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. Schedule 16 summarizes our exposure to state and local municipalities: Schedule 16 MUNICIPALITIES December 31, (In millions) 2019 2018 Loans and leases$ 2,393 $ 1,661 Held-to-maturity - municipal securities 592 774
Available-for-sale - municipal securities 1,319 1,291
Trading account - municipal securities 107 89 Unfunded lending commitments 200 144
Total direct exposure to municipalities
AtDecember 31, 2019 , no municipal loans were on nonaccrual. A significant amount of the municipal loan and lease portfolio is secured by real estate and 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. 51 -------------------------------------------------------------------------------- Table of ContentsZIONS 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 atDecember 31, 2019 andDecember 31, 2018 . Loans Held for Sale Loans held for sale were$129 million atDecember 31, 2019 , compared with$93 million atDecember 31, 2018 , and are generally commercial loans and consumer mortgage and small business loans to be sold in the secondary market. As ofDecember 31, 2019 , the majority of the loans held for sale consisted primarily of consumer mortgage loans. Loan Portfolio As ofDecember 31, 2019 andDecember 31, 2018 , net loans and leases accounted for 70% and 68% of total assets, respectively. Schedule 17 presents our loans outstanding by type of loan as of the five most recent year-ends. The schedule also includes a maturity profile for the loans that were outstanding as ofDecember 31, 2019 . However, while this schedule reflects the contractual maturity and repricing characteristics of these loans, in a small number of cases, we have hedged the repricing characteristics of our variable-rate loans as more fully described in "Interest Rate Risk" on page 64. Schedule 17 LOAN AND LEASE PORTFOLIO BY TYPE AND MATURITY December 31, 2019 December 31, One year One year or through five (In millions) less years Over five years Total 2018 2017 2016 2015 Commercial: Commercial and industrial$ 3,280 $ 8,967 $ 2,513 $ 14,760 $ 14,513 $ 14,003 $ 13,452 $ 13,211 Leasing 24 202 108 334 327 364 423 442 Owner-occupied 335 1,378 6,188 7,901 7,661 7,288 6,962 7,150 Municipal 118 337 1,938 2,393 1,661 1,271 778 676 Total commercial 3,757 10,884 10,747 25,388 24,162 22,926 21,615 21,479 Commercial real estate: Construction and land development 753 1,327 131 2,211 2,186 2,021 2,019 1,842 Term 1,568 4,062 3,714 9,344 8,939 9,103 9,322 8,514 Total commercial real estate 2,321 5,389 3,845 11,555 11,125 11,124 11,341 10,356 Consumer: Home equity credit line 40 86 2,791 2,917 2,937 2,777 2,645 2,417 1-4 family residential 3 69 7,496 7,568 7,176 6,662 5,891 5,382 Construction and other consumer real estate - 4 620 624 643 597 486 385 Bankcard and other revolving plans 281 85 136 502 491 509 481 444 Other 5 109 41 155 180 185 190 187 Total consumer 329 353 11,084 11,766 11,427 10,730 9,693 8,815 Total net loans and leases$ 6,407 $ 16,626 $ 25,676 $ 48,709 $ 46,714 $ 44,780 $ 42,649 $ 40,650 Loans maturing: With fixed interest rates$ 692 $ 3,507 $ 6,279 $ 10,478 With variable interest rates 5,715 13,119 19,397 38,231 Total$ 6,407 $ 16,626 $ 25,676 $ 48,709 52
-------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES As ofDecember 31, 2019 , net loans and leases were$49 billion , reflecting a 4% increase from the prior year. The increase is primarily attributable to new loan originations. Loan portfolio growth during 2019 was widespread across loan products and geographies. Of the significant increases within the portfolio, municipal loans increased$732 million , term CRE increased$405 million , consumer 1-4 family residential loans increased$392 million , commercial and industrial loans increased$247 million , and commercial owner-occupied loans increased$240 million . The growth in the overall loan portfolio was primarily atAmegy and CB&T. We expect moderate total loan and lease growth during 2020, primarily in municipal, consumer 1-4 family residential, commercial and industrial, and commercial owner-occupied. We expect stable to moderate growth in oil and gas and CRE loans, partially offset by a moderate decline in the National Real Estate ("NRE") loan portfolio. Loans serviced for the benefit of others decreased to$3.5 billion during 2019 from$3.9 billion in 2018. Other Noninterest-Bearing Investments During 2019, the Bank decreased its short-term borrowings with the FHLB by$3.5 billion . This decrease required a reduced investment in FHLB activity stock, which consequently decreased by$140 million during the year. Aside from this decrease, other noninterest-bearing investments remained relatively stable as set forth in the following schedule. Schedule 18 summarizes our other noninterest-bearing investments. Schedule 18 OTHER NONINTEREST-BEARING INVESTMENTS December 31, (In millions) 2019 2018 Bank-owned life insurance$ 525 $ 516 Federal Home Loan Bank stock 50 190 Federal Reserve stock 107 139 Farmer Mac stock 47 54 SBIC investments 154 132 Non-SBIC investment funds 12 12 Other 3 3
Total other noninterest-bearing investments
Premises, Equipment and Software,Net Net premises, equipment and software increased$18 million , or 1.6%, during 2019. In 2017, we implemented the first phase of our core lending and deposit systems replacement project, which replaced the Bank's primary consumer lending systems. During the first quarter of 2019, we successfully implemented the second phase of this project by replacing the Bank's primary commercial and CRE lending systems. With this milestone reached, we now have substantially all our in-scope retail, commercial and CRE loans on a new modern core platform. We are well underway with the project to convert our deposit servicing system by 2022. The total core replacement project spend amount is comprised of both capitalized amounts and amounts that are expensed as incurred. The useful life for most of the capitalized costs is 10 years. The following schedule shows the total amount of costs capitalized, less accumulated depreciation, by phase for the core replacement project. Schedule 19 CAPITALIZED COSTS FOR THE CORE REPLACEMENT PROJECT December 31, 2019 (In millions) Phase 1 Phase 2 Phase 3 Total Total amount capitalized, less accumulated depreciation$ 54 $ 83 $ 61 $ 198 53
-------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Deposits Deposits, both interest-bearing and noninterest-bearing, are a primary source of funding for the Bank. Average total deposits increased by 4% during 2019, compared with 2018, with average interest-bearing deposits increasing by 8% and average noninterest-bearing deposits decreasing by 2.0%. The average interest rate paid for interest-bearing deposits was 34 bps higher in 2019 compared with 2018. Demand, savings, and money market deposits were 91.7% and 92.0% of total deposits atDecember 31, 2019 , andDecember 31, 2018 , respectively. AtDecember 31, 2019 andDecember 31, 2018 , total deposits included$2.3 billion and$2.2 billion , respectively, of brokered deposits. See Notes 12 and 13 of the Notes to Consolidated Financial Statements and "Liquidity Risk Management" on page 69 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 aRisk 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") policies and 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 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. The Board of Directors, through the ROC, is responsible for approving the overall credit policies relating to the management of the credit risk of the Bank. In addition, the ROC oversees and monitors adherence to key credit policies and the credit risk appetite as defined in the Risk Appetite Framework. Additionally, the Board has established the Credit Risk Committee, chaired by the Chief Credit Officer and consisting of members of management, to which it has delegated the responsibility for managing credit risk for the Bank and approving changes to the Bank's credit policies. Centralized oversight of credit risk is provided through credit policies, credit risk management, and credit examination functions. Our credit policies place emphasis on strong underwriting standards and early detection of potential problem credits in order to develop and implement action plans on a timely basis to mitigate any potential losses. These formal credit policies and procedures provide the Bank with a framework for consistent underwriting and a basis for sound credit decisions at the local banking affiliate level. Credit examinations related to the ACL are reported to both the Audit Committee and the ROC. Our credit risk management function is separate from the lending function and strengthens control over, and the independent evaluation of, credit activities. In addition, we have a well-defined set of standards for evaluating our loan portfolio, and we utilize a comprehensive loan risk-grading system to determine the risk potential in the portfolio. Furthermore, the internal credit examination department, which is independent of the lending function, periodically conducts examinations of the Bank's lending departments and credit activities. These examinations are designed to review credit quality, adequacy of documentation, appropriate loan risk-grading administration, and compliance with credit policies. New, expanded, or modified products and services, as well as new lines of business, are approved by the New Initiative Review Committee. 54 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Our credit risk management strategy includes diversification of our loan portfolio. We attempt to avoid the risk of an undue concentration of credits in a particular industry or collateral type or with an individual customer or counterparty. Generally, our loan portfolio is well diversified; however, due to the nature of our geographical footprint, there are certain significant concentrations primarily in CRE and oil and gas-related lending. We have adopted and adhere to concentration limits on leveraged lending, municipal lending, oil and gas-related lending, and various types of CRE lending, particularly construction and land development lending. All of these limits are continually monitored and revised as necessary. Our business activity is primarily with customers located within the geographical footprint of our banking affiliates. As we continue to monitor our concentration risk, the composition of our loan portfolio remained relatively unchanged from the prior year. Total commercial loans remained at 52% of the total portfolio atDecember 31, 2019 and 2018. CRE loans remained at 24% of the total portfolio atDecember 31, 2019 and 2018. Consumer loans also remained at 24% of the total loan portfolio atDecember 31, 2019 and 2018. Schedule 20 LOAN AND LEASE PORTFOLIO DIVERSIFICATION December 31, 2019 December 31, 2018 (Dollar amounts in millions) % of % of Amount total loans Amount total loans Commercial: Commercial and industrial$ 14,760 30.3 %$ 14,513 31.0 % Leasing 334 0.7 327 0.7 Owner-occupied 7,901 16.2 7,661 16.4 Municipal 2,393 4.9 1,661 3.6 Total commercial 25,388 52.1 24,162 51.7 Commercial real estate: Construction and land development 2,211 4.5 2,186 4.7 Term 9,344 19.2 8,939 19.1 Total commercial real estate 11,555 23.7 11,125 23.8 Consumer: Home equity credit line 2,917 6.0 2,937 6.3 1-4 family residential 7,568 15.6 7,176 15.4 Construction and other consumer real estate 624 1.3 643 1.4 Bankcard and other revolving plans 502 1.0 491 1.0 Other 155 0.3 180 0.4 Total consumer 11,766 24.2 11,427 24.5 Total net loans and leases$ 48,709 100.0 %$ 46,714 100.0 % Government Agency Guaranteed Loans We participate in various guaranteed lending programs sponsored byU.S. government agencies, such as the SBA,Federal Housing Authority ,Veterans' Administration ,Export-Import Bank of the U.S . and theU.S. Department of Agriculture . As ofDecember 31, 2019 , the principal balance of these loans was$580 million , and the guaranteed portion of these loans was$433 million . Most of these loans were guaranteed by the SBA. 55 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES The following schedule presents the composition ofU.S. government agency guaranteed loans. Schedule 21U.S. GOVERNMENT AGENCY GUARANTEES December 31, Percent December 31, Percent (Dollar amounts in millions) 2019 guaranteed 2018 guaranteed Commercial$ 555 74 %$ 537 75 % Commercial real estate 18 78 14 79 Consumer 7 100 9 100 Total loans$ 580 75 %$ 560 76 % Commercial Lending The following schedule provides selected information regarding lending concentrations to certain industries in our commercial lending portfolio. Schedule 22 COMMERCIAL LENDING BY INDUSTRY GROUP December 31, 2019 December 31, 2018 (Dollar amounts in millions) Amount Percent Amount Percent Retail trade$ 2,606 10.3 %$ 2,434 10.0 % Real estate, rental and leasing 2,401 9.5 2,636 10.9 Manufacturing 2,160 8.5 2,145 8.9 Healthcare and social assistance 1,916 7.5 1,695 7.0 Finance and insurance 1,837 7.2 2,036 8.4 Wholesale trade 1,639 6.4 1,527 6.3 Transportation and warehousing 1,454 5.7 1,328 5.5 Mining, quarrying, and oil and gas extraction 1,429 5.6 1,206 5.0 Utilities 1 1,411 5.6 1,163 4.8 Public administration 1,189 4.7 806 3.4 Construction 1,158 4.6 1,194 4.9 Hospitality and food services 983 3.9 1,005 4.2 Professional, scientific, and technical services 950 3.7 859 3.6 Other services (except Public Administration) 890 3.5 887 3.7 Other 2 3,365 13.3 3,241 13.4 Total 25,388 100.0 % 24,162 100.0 %
1 Includes primarily utilities, power, and renewable energy. 2No other industry group exceeds 3.5%.
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Commercial Real Estate Loans
Selected information indicative of credit quality regarding our CRE loan
portfolio is presented in the following schedule.
Schedule 23
COMMERCIAL REAL ESTATE PORTFOLIO BY LOAN TYPE AND COLLATERAL LOCATION
(Dollar amounts in millions) Collateral Location
% of
As of Utah / total
Loan type date Arizona California Colorado Nevada Texas Idaho Wash-ington/Oregon Other 1 Total CRE
Commercial term
Balance outstanding 12/31/2019 $ 1,211 $ 2,995 $ 545 $ 659 $ 1,580 $ 1,411 $ 428 $ 515 $ 9,344 80.9 %
% of loan type 13.0 % 32.0 % 5.8 % 7.1 % 16.9 % 15.1 % 4.6 % 5.5 % 100.0 %
Delinquency rates: 2
30-89 days 12/31/2019 0.1 % 0.1 % - % 0.2 % - % 0.1 % - % 0.2 % 0.1 %
12/31/2018 - % - % - % 0.2 % - % 0.1 % - % - % - %
? 90 days 12/31/2019 - % 0.1 % - % - % - % - % - % 0.2 % - %
12/31/2018 - % 0.1 % 0.2 % - % 0.4 % 0.1 % - % - % 0.1 %
Accruing loans past due
90 days or more 12/31/2019 $ - $ - $ - $ - $ - $ - $ - $ - $ -
12/31/2018 - - 1 - - - - - 1
Nonaccrual loans 12/31/2019 - 3 - - 3 6 - 4 16
12/31/2018 2 8 - 1 8 6 - 13 38
Residential construction and land development
Balance outstanding 12/31/2019 $ 67 $ 260 $ 58 $ - $ 196 $ 146 $ 11 $ 22 $ 760 6.6 %
% of loan type 8.8 % 34.2 % 7.6 % - % 25.8 % 19.2 % 1.5 % 2.9 % 100.0 %
Delinquency rates: 2
30-89 days 12/31/2019 - % 1.2 % - % - % - % - % - % - % 0.4 %
12/31/2018 - % - % - % - % - % - % - % - % - %
? 90 days 12/31/2019 - % - % - % - % - % - % - % - % - %
12/31/2018 - % - % - % - % - % - % - % - % - %
Accruing loans past due
90 days or more 12/31/2019 $ - $ - $ - $ - $ - $ - $ - $ - $ -
12/31/2018 - - - - - - - - -
Nonaccrual loans 12/31/2019 - - - - - - - - -
12/31/2018 - - - - - - - - -
Commercial construction and land development
Balance outstanding 12/31/2019 $ 147 $ 271 $ 51 $ 98 $ 279 $ 413 $ 146 $ 46 $ 1,451 12.5 %
% of loan type 10.1 % 18.7 % 3.5 % 6.7 % 19.2 % 28.5 % 10.1 % 3.2 % 100.0 %
Delinquency rates: 2
30-89 days 12/31/2019 - % 0.4 % - % - % - % 0.2 % - % - % 0.1 %
12/31/2018 - % 0.4 % - % - % - % - % - % - % 0.1 %
? 90 days 12/31/2019 - % - % - % - % - % - % - % - % - %
12/31/2018 - % - % - % - % - % - % - % - % - %
Accruing loans past due
90 days or more 12/31/2019 $ - $ - $ - $ - $ - $ - $ - $ - $ -
12/31/2018 - - - - - - - - -
Nonaccrual loans 12/31/2019 - - - - - - - - -
12/31/2018 - - - - - - - - -
Total construction and
land development 12/31/2019 $ 214 $ 531 $ 109 $ 98 $ 475 $ 559 $ 157 $ 68 $ 2,211
Total commercial real
estate 12/31/2019 $ 1,425 $ 3,526 $ 654 $ 757 $ 2,055 $ 1,970 $ 585 $ 583 $ 11,555 100.0 %
1No other geography exceeds
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Approximately 9% of the CRE term loans consist of mini-perm loans as of
December 31, 2019 . For such loans, construction has been completed and the
project has stabilized to a level that supports the granting of a mini-perm loan
in accordance with our underwriting standards. Mini-perm loans generally have
initial maturities of three to five years. The remaining 91% of CRE loans are
term loans with initial maturities generally of 5 to 20 years. The stabilization
criteria for a project to qualify for a term loan differ by product type and
include criteria related to the cash flow generated by the project,
loan-to-value ratio, and occupancy rates.
Approximately $158 million , or 7%, of the commercial construction and land
development portfolio at December 31, 2019 consists of acquisition and
development loans. Most of these acquisition and development loans are secured
by specific retail, apartment, office, or other projects.
Underwriting on commercial properties is primarily based on the economic
viability of the project with heavy consideration given to the creditworthiness
and experience of the sponsor. We generally require that the owner's equity be
injected prior to bank advances. Remargining requirements (required equity
infusions upon a decline in value or cash flow of the collateral) are often
included in the loan agreement along with guarantees of the sponsor. Recognizing
that debt is paid via cash flow, the projected cash flows of the project are
critical in the underwriting because these determine the ultimate value of the
property and its ability to service debt. Therefore, in most projects (with the
exception of multi-family and hospitality construction projects), we require
substantial pre-leasing/leasing in our underwriting and we generally require a
minimum projected stabilized debt service coverage ratio of 1.20 or higher,
depending on the project asset class.
Within the residential construction and development sector, many of the
requirements previously mentioned, such as creditworthiness and experience of
the developer, up-front injection of the developer's equity, principal
curtailment requirements, and the viability of the project are also important in
underwriting a residential development loan. Significant consideration is given
to the forecasted market acceptance of the product, location, strength of the
developer, and the ability of the developer to stay within budget. Progress
inspections by qualified independent inspectors are routinely performed before
disbursements are made.
Real estate appraisals are ordered in accordance with regulatory guidelines and
are validated independently of the loan officer and the borrower, generally by
our internal appraisal review function, which is staffed by licensed appraisers.
In some cases, reports from automated valuation services are used or internal
evaluations are performed. A new appraisal or evaluation is required when a loan
deteriorates to a certain level of credit weakness.
Advance rates (i.e., loan commitments) will vary based on the viability of the
project and the creditworthiness of the sponsor, but our guidelines generally
limit advances to 50% for raw land, 65% for land development, 65% for finished
commercial lots, 75% for finished residential lots, 80% for pre-sold homes, 75%
for models and homes not under contract, and 75% for commercial properties.
Exceptions may be granted on a case-by-case basis.
Loan agreements require regular financial information on the project and the
sponsor in addition to lease schedules, rent rolls and, on construction
projects, independent progress inspection reports. The receipt of this financial
information is monitored, and calculations are made to determine adherence to
the covenants set forth in the loan agreement.
The existence of a guarantee that improves the likelihood of repayment is taken
into consideration when analyzing CRE loans for impairment. If the support of
the guarantor is quantifiable and documented, it is included in the potential
cash flows and liquidity available for debt repayment, and our impairment
methodology takes this repayment source into consideration.
When we modify or extend a loan, we also give consideration to whether the
borrower is in financial difficulty, and whether we have granted a concession.
In determining if an interest rate concession has been granted, we consider
whether the interest rate on the modified loan is equivalent to current market
rates for new debt with similar risk characteristics. If the rate in the
modification is less than current market rates, it may indicate that a
concession was granted and impairment exists. However, if additional collateral
is obtained, or if a guarantor exists who has the
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capacity and willingness to support the loan on an extended basis, we also
consider the nature and amount of the additional collateral and guarantees in
the ultimate determination of whether a concession has been granted.
In general, we obtain and consider updated financial information for the
guarantor as part of our determination to extend a loan. The quality and
frequency of financial reporting collected and analyzed varies depending on the
contractual requirements for reporting, the size of the transaction, and the
strength of the guarantor.
Complete underwriting of the guarantor includes, but is not limited to, an
analysis of the guarantor's current financial statements, leverage, liquidity,
global cash flow, global debt service coverage, contingent liabilities, etc. The
assessment also includes a qualitative analysis of the guarantor's willingness
to perform in the event of a problem and demonstrated history of performing in
similar situations. Additional analysis may include personal financial
statements, tax returns, liquidity (brokerage) confirmations, and other reports,
as appropriate.
A qualitative assessment is performed on a case-by-case basis to evaluate the
guarantor's experience, performance track record, reputation, and willingness to
work with us. We also utilize market information sources, rating, and scoring
services in our assessment. This qualitative analysis coupled with a documented
quantitative ability to support the loan may result in a higher-quality internal
loan grade, which may reduce the level of allowance we estimate. Previous
documentation of the guarantor's financial ability to support the loan is
discounted if there is any indication of a lack of willingness by the guarantor
to support the loan.
In the event of default, we evaluate the pursuit of any and all appropriate
potential sources of repayment, which may come from multiple sources, including
the guarantee. A number of factors are considered when deciding whether or not
to pursue a guarantor, including, but not limited to, the value and liquidity of
other sources of repayment (collateral), the financial strength and liquidity of
the guarantor, possible statutory limitations (e.g., single action rule on real
estate) and the overall cost of pursuing a guarantee compared with the ultimate
amount we may be able to recover. In other instances, the guarantor may
voluntarily support a loan without any formal pursuit of remedies.
Consumer Loans
We have mainly been an originator of first and second mortgages, generally
considered to be of prime quality. We generally hold variable-rate loans in our
portfolio and sell "conforming" fixed-rate loans to third parties, including
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation, for which we make representations and warranties that the loans
meet certain underwriting and collateral documentation standards.
We are engaged in Home Equity Credit Line ("HECL") lending. At both December 31,
2019 and December 31, 2018 , our HECL portfolio totaled $2.9 billion . The
following schedule describes the composition of our HECL portfolio by lien
status.
Schedule 24
HECL PORTFOLIO BY LIEN STATUS
December 31,
(In millions) 2019 2018
Secured by first deeds of trust
$ 2,917 $ 2,937 AtDecember 31, 2019 , loans representing less than 1% of the outstanding balance in the HECL portfolio were estimated to have combined loan-to-value ratios ("CLTV") above 100%. An estimated CLTV ratio is the ratio of our loan plus any prior lien amounts divided by the estimated current collateral-value. At origination, underwriting standards for the HECL portfolio generally include a maximum 80% CLTV with high credit scores at origination. Approximately 89% of our HECL portfolio is still in the draw period, and approximately 18% of those loans are scheduled to begin amortizing within the next five years. We regularly analyze the risk of borrower default in the event of a loan becoming fully amortizing and the risk of higher interest rates. The analysis indicates that the risk of loss from this factor is minimal in the current economic environment. The ratio of net charge-offs to average 59 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES balances at year-end 2019 and 2018 was 0.02% and (0.02)%, respectively. See Note 6 of the Notes to Consolidated Financial Statements for additional information on the credit quality of this portfolio. Nonperforming Assets Nonperforming assets as a percentage of loans and leases and other real estate owned ("OREO") decreased to 0.51% atDecember 31, 2019 , compared with 0.55% atDecember 31, 2018 . Total nonaccrual loans atDecember 31, 2019 decreased to$243 million from$252 million atDecember 31, 2018 , primarily in the term CRE loan portfolio. The largest total decrease in nonaccrual loans occurred atAmegy . The balance of nonaccrual loans can decrease due to paydowns, charge-offs, and the return of loans to accrual status under certain conditions. If a nonaccrual loan is refinanced or restructured, the new note is immediately placed on nonaccrual. If a restructured loan performs under the new terms for at least a period of six months, the loan can be considered for return to accrual status. See "Restructured Loans" and Note 6 of the Notes to Consolidated Financial Statements for more information on nonaccrual loans. 60 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES The following schedule presents our nonperforming assets: Schedule 25 NONPERFORMING ASSETS (Dollar amounts in millions) December 31, 2019 2018 2017 2016 2015 Nonaccrual loans: Loans held for sale $ -$ 6 $ 12 $ 40 $ - Commercial: Commercial and industrial 110 82 195 354 164 Leasing - 2 8 14 4 Owner-occupied 65 67 90 74 74 Municipal - 1 1 1 1 Commercial real estate: Construction and land development - - 4 7 7 Term 16 38 36 29 40 Consumer: Real estate 52 55 68 49 59 Other - 1 - 1 1 Nonaccrual loans 243 252 414 569 350 Other real estate owned: Commercial: Commercial properties 5 2 3 2 5 Developed land 1 - - - - Land 1 - - - 1 Residential: 1-4 family 1 2 1 2 1 Developed land - - - - - Land - - - - - Other real estate owned 8 4 4 4 7 Total nonperforming assets$ 251 $ 256 $ 418 $ 573 $ 357 Ratio of nonperforming assets to net loans and leases1 and other real estate owned 0.51 % 0.55 % 0.93 % 1.34 % 0.87 % Accruing loans past due 90 days or more: Commercial$ 9 $ 7 $ 17 $ 18 $ 7 Commercial real estate - 1 2 13 22 Consumer 1 2 3 5 3 Total$ 10 $ 10 $ 22 $ 36 $ 32 Ratio of accruing loans past due 90 days or more to net loans and leases1 0.02 % 0.02 %
0.05 % 0.08 % 0.08 %
1Includes loans held for sale.
Restructured Loans
Troubled debt restructurings ("TDRs") are loans that have been modified to
accommodate a borrower who is experiencing financial difficulties, and for whom
we have granted a concession that we would not otherwise consider. TDRs
decreased $49 million , or 24%, during 2019, primarily due to payments and
payoffs. Commercial loans may be modified to provide the borrower more time to
complete the project, to achieve a higher lease-up percentage, to sell the
property, or for other reasons. Consumer loan TDRs represent loan modifications
in which a concession has been granted to the borrower who is unable to
refinance the loan with another lender, or who is experiencing economic
hardship. Such consumer loan TDRs may include residential mortgage loans and
home equity loans.
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If a nonaccruing restructured loan performs for at least six months according to
the modified terms, and an analysis of the customer's financial condition
indicates that we are reasonably assured of repayment of the modified principal
and interest, the loan may be returned to accrual status. The borrower's payment
performance prior to, and following, the restructuring is taken into account to
determine whether a loan should be returned to accrual status.
Schedule 26
ACCRUING AND NONACCRUING TROUBLED DEBT RESTRUCTURED LOANS
December 31,
(In millions) 2019 2018
Restructured loans - accruing
$ 153 $ 202 In the periods following the calendar year in which a loan was restructured, a loan may no longer be reported as a TDR if it is on accrual, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time of the modification or restructure). See Note 6 of the Notes to Consolidated Financial Statements for additional information regarding TDRs. Schedule 27 TROUBLED DEBT RESTRUCTURED LOANS ROLLFORWARD (In millions) 2019 2018 Balance at beginning of year$ 202 $ 226 New identified troubled debt restructuring and principal increases 48 142 Payments and payoffs (84) (131) Charge-offs (10) (7) No longer reported as troubled debt restructuring - (20) Sales and other (3) (8) Balance at end of year$ 153 $ 202 Allowance for Credit Losses In analyzing the adequacy of the ALLL, we utilize a comprehensive loan grading system to determine the risk potential in the portfolio and also consider the results of independent internal credit reviews. To determine the adequacy of the allowance, our loan and lease portfolio is broken into segments based on loan type. 62 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES The following schedule shows the changes in the allowance for loan losses and a summary of loan loss experience: Schedule 28 SUMMARY OF LOAN LOSS EXPERIENCE (Dollar amounts in millions) 2019 2018 2017 2016 2015 Loans and leases outstanding (net of unearned income)$ 48,709 $
46,714
$ 48,265 $
45,425
$ 495 $
518
37 (39) 24 93 40
Charge-offs:
Commercial 57 46 118 170 111
Commercial real estate 4 5 9 12 14
Consumer 17 18 17 16 14
Total 78 69 144 198 139
Recoveries:
Commercial 25 68 46 43 55
Commercial real estate 6 9 14 14 35
Consumer 10 8 11 9 10
Total 41 85 71 66 100
Net loan and lease charge-offs 37 (16) 73 132 39
Balance at end of year $ 495 $
495
0.08 % (0.04) % 0.17 % 0.31 % 0.10 %
Ratio of allowance for loan losses to net loans
and leases, on December 31, 1.02 % 1.06 % 1.16 % 1.33 % 1.49 %
Ratio of allowance for loan losses to nonaccrual
loans, on December 31, 204 % 201 % 129 % 107 % 173 %
Ratio of allowance for loan losses to nonaccrual
loans and accruing loans past due 90 days or
more, on December 31, 196 % 193 % 122 % 101 % 159 %
Schedule 29
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
At December 31,
2019 2018 2017 2016 2015
(Dollar amounts in % of total Allocation of % of total Allocation of % of total Allocation of % of total Allocation of % of total Allocation of
millions) loans allowance loans allowance loans allowance loans allowance loans allowance
Loan segment
Commercial 52.1 % $ 341 51.7 % $ 331 51.2 % $ 371 50.6 % $ 420 52.9 % $ 454
Commercial real
estate 23.7 101 23.8 110 24.8 103 26.6 116 25.5 114
Consumer 24.2 53 24.5 54 24.0 44 22.8 31 21.6 38
Total 100.0 % $ 495 100.0 % $ 495 100.0 % $ 518 100.0 % $ 567 100.0 % $ 606
The total ALLL remained stable during 2019, primarily as a result of loan
growth, offset by recent default and loss rates that are lower than long-term
averages.
The RULC represents a reserve for potential losses associated with off-balance
sheet commitments and standby letters of credit. The reserve is separately shown
in the balance sheet and any related increases or decreases in the reserve are
shown separately in the statement of income. At December 31, 2019 , the reserve
increased by $2 million , compared with December 31, 2018 , for reasons described
previously for the change in the ALLL.
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See Note 6 of the Notes to Consolidated Financial Statements for additional
information related to the ACL and credit trends experienced in each portfolio
segment.
Interest Rate and Market Risk Management
Interest rate and market risk are managed centrally. Interest rate risk is the
potential for reduced net interest income and other rate-sensitive income
resulting from adverse changes in the level of interest rates. Market risk is
the potential for loss arising from adverse changes in the fair value of
fixed-income securities, equity securities, other earning assets, and derivative
financial instruments as a result of changes in interest rates or other factors.
As a financial institution that engages in transactions involving an array of
financial products, we are exposed to both interest rate risk and market risk.
The Bank's Board of Directors is responsible for approving the overall policies
relating to the management of the financial risk of the Bank, including interest
rate and market risk management. The Board has established the Asset Liability
Committee ("ALCO") consisting of members of management, to which it has
delegated the responsibility of managing interest rate and market risk for the
Bank. ALCO establishes and periodically revises policy limits and reviews with
the ROC the limits and limit exceptions reported by management.
Interest Rate Risk
Interest rate risk is one of the most significant risks to which we are
regularly exposed. In general, our goal in managing interest rate risk is to
manage balance sheet sensitivity to reduce net income volatility due to changes
in interest rates.
Over the course of the last several years, we have actively reduced the level of
asset sensitivity through the purchase of short-to-medium duration agency
pass-through securities and funding these purchases by reducing money market
investments and increasing short-term borrowings. This repositioning of the
investment portfolio has increased current net interest income while dampening
the impact of lower rates on net interest income contraction. We anticipate
moderately lower net interest income in a falling rate environment as our assets
reprice more quickly than our liabilities.
Additionally, during 2019 we've expanded our use of interest rate derivatives to
further reduce asset sensitivity through purchased interest rate floors (which
were subsequently rolled into receive-fixed interest rate swaps) and additional
receive-fixed interest rate swaps, designated as cash flow hedges of pools of
floating-rate loans. We also use receive-fixed interest rate swaps designated as
fair value hedges of fixed-rate debt to further manage our interest rate risk
profile. For more information on derivatives designated as qualifying cash flow
and fair value hedges, see Note 7 - Derivative Instruments and Hedging
Activities.
The schedule below presents all derivatives utilized in our asset liability
management ("ALM") activities that are designated in qualifying hedging
relationships as defined by GAAP as of December 31, 2019 and December 31, 2018 .
The schedule includes the notional amount, fair value, and the weighted-average
strike rate for each category of interest rate derivatives, shown by maturity
for the next five years.
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Schedule 30
ASSET LIABILITY MANAGEMENT DERIVATIVE POSITIONS
December 31, 2019
Contractual Maturity
Matured
(Dollar amounts in millions) Total Active 2020 2021 2022 2023 2024 Thereafter in 2019
Cash flow hedges
Net fair value1 $ 47 $ - $ - $ 27 $ 8 $ 13 $ - $ -
Total notional amount 3,588 438 50 2,400 300 400 - 200
Weighted-average fixed-rate 2.05 % 1.56 % 1.81 % 2.06 % 2.35 % 2.35 % - % 1.62 %
Fair value hedges
Receive-fixed interest rate swaps
Net fair value1 $ 10 $ - $ 10 $ 9 $ - $ - $ (10) $ -
Total notional amount 1,500 - 500 500 - - 500 -
Weighted-average fixed-rate 2.39 % - % 2.99 % 2.46 % - % - % 1.70 % - %
Total ALM interest rate derivatives
Net fair value1 $ 57 $ -
5,088 438 550 2,900 300 400 500 200
December 31, 2018
Contractual Maturity
Matured(Dollar amounts in millions) Total Active 2019 2020
2021 2022 2023 2024 Thereafter in 2018
Cash flow hedges
Net fair value1 $ (8) $ (1) $ (6) $ (1) $ - $ - $ - $ - $ -
Total notional amount 688 200 438 50 - - - - 450
Weighted-average fixed-rate 1.59 % 1.62 % 1.56 % 1.81 % - % - % - % - % 1.20 %
Fair value hedges Receive-fixed interest rate swaps Net fair value1 $ 5 $ - $ -$ 5 $ - $ - $ - $ - $ - Total notional amount 500 - - 500 - - - - - Weighted-average fixed-rate 2.99 % - % - % 2.99 % - % - % - % - % - % Total ALM interest rate derivatives Net fair value1$ (3) $ (1) $ (6) $ 4 $ - $ - $ - $ - $ - Total notional amount 1,188 200 438 550 - - - - 450 1Fair Values shown in the schedule above are presented net, with both positive and negative fair values reported in a single amount for each line. Values exclude the effects of collateral settlements for centrally cleared derivatives. Interest Rate Risk Measurement We monitor interest rate risk through the use of two complementary measurement methods: net interest income simulation, or Earnings at Risk ("EaR"), and Economic Value of Equity at Risk ("EVE"). EaR analyzes the expected change in near term (one year) net interest income in response to changes in interest rates. In the EVE method, we measure the expected changes in the fair value of equity in response to changes in interest rates. EaR is an estimate of the change in total net interest income that would be recognized under different interest rate environments over a one-year period. This simulated impact to net interest income due to a change in rates uses as its base a modeled net interest income that is not necessarily the same as the most recent quarter's or year's reported 65 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES net interest income. Rather, EaR employs estimated net interest income under an unchanged interest rate scenario as the basis for comparison. The EaR process then simulates changes to the base net interest income under several interest rate scenarios, including parallel and nonparallel interest rate shifts across the yield curve, taking into account deposit repricing assumptions and estimates of the possible exercise of embedded options within the portfolio (e.g., a borrower's ability to refinance a loan under a lower-rate environment). The EaR model does not contemplate changes in fee income that are amortized into interest income (e.g. premiums, discounts, origination points and costs, etc). Our policy contains a trigger for a 10% decline in rate-sensitive income as well as a risk capacity of a 13% decline if rates were to immediately rise or fall in parallel by 200 bps. As ofDecember 31, 2018 the EaR declined by 12% for a 200 bps decline in rates. This trigger violation informed our decision to move to a less asset-sensitive position throughout 2019. As ofDecember 31, 2019 the EaR declined by 9% for a 200 bps decline in rates. EVE is calculated as the fair value of all assets minus the fair value of liabilities. We measure changes in the dollar amount of EVE for parallel shifts in interest rates. Due to embedded optionality and asymmetric rate risk, changes in EVE can be useful in quantifying risks not apparent for small rate changes. Examples of such risks may include out-of-the-money interest rate caps (or limits) on loans, which have little effect under small rate movements but may become important if large rate changes were to occur, or substantial prepayment deceleration for low-rate mortgages in a higher-rate environment. Our policy contains a trigger for an 8% decline in EVE as well as a risk capacity of a 10% decline if rates were to immediately rise or fall in parallel by 200 bps. Exceptions to the EVE limits are subject to notification and approval by the ROC. Estimating the impact on net interest income and EVE requires that we assess a number of variables and make various assumptions in managing our exposure to changes in interest rates. The assessments address deposit withdrawals and deposit product migration (e.g., customers moving money from checking accounts to certificates of deposit), competitive pricing (e.g., existing loans and deposits are assumed to roll into new loans and deposits at similar spreads relative to benchmark interest rates), loan and security prepayments, and the effects of other similar embedded options. As a result of uncertainty about the maturity and repricing characteristics of both deposits and loans, we also calculate the sensitivity of EaR and EVE results to key assumptions. As most of our liabilities are comprised of indeterminate maturity and managed rate deposits, the modeled results are highly sensitive to the assumptions used for these deposits, such as checking, savings and money market accounts, and also to prepayment assumptions used for loans with prepayment options. We use historical regression analysis as a guide for setting such assumptions; however, due to the current low interest rate environment, which has little historical precedent, estimated deposit behavior may not reflect actual future results. Additionally, competition for funding in the marketplace has and may again result in changes to deposit pricing on interest-bearing accounts that are greater or less than changes in benchmark interest rates such as LIBOR or the federal funds rate. Under most rising interest rate environments, we would expect some customers to move balances from demand deposits to interest-bearing accounts such as money market, savings, or certificates of deposit. The models are particularly sensitive to the assumption about the rate of such migration. In addition, we assume certain correlation rates, often referred to as a "deposit beta," of interest-bearing deposits, wherein the rates paid to customers change at a different pace when compared with changes in average benchmark interest rates. Generally, certificates of deposit are assumed to have a high correlation rate, while interest-on-checking accounts are assumed to have a lower correlation rate. Actual results may differ materially due to factors including the shape of the yield curve, competitive pricing, money supply, credit worthiness of the Bank, and so forth; however, we use our historical experience as well as industry data to inform our assumptions. 66 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES The aforementioned migration and correlation assumptions result in deposit durations presented in the following schedule. Schedule 31 DEPOSIT ASSUMPTIONS December 31, 2019 December 31, 2018 Effective Effective duration Effective duration duration Effective duration Product (unchanged) (+200 bps) (unchanged) (+200 bps) Demand deposits 3.2 % 3.0 % 3.6 % 3.0 % Money market 2.1 % 1.7 % 1.6 % 1.5 % Savings and interest-on-checking 2.6 % 2.2 % 2.8 %
2.5 %
As of the dates indicated and incorporating the assumptions previously
described, the following schedule shows EaR, or percentage change in net
interest income, based on a static balance sheet size, in the first year after
the interest rate change if interest rates were to sustain immediate parallel
changes ranging from -100 bps to +300 bps.
Schedule 32
INCOME SIMULATION - CHANGE IN NET INTEREST INCOME
December 31, 2019
Parallel shift in rates (in bps)1
Repricing scenario -100 0 +100 +200 +300
Earnings at Risk (4.6) % - % 3.0 % 6.0 % 8.9 %
1 Assumes rates cannot go below zero in the negative rate shift.
For nonmaturity interest-bearing deposits, the weighted average modeled beta is
32%. If the weighted average deposit beta were to decline to 28%, the EaR in the
-100bps shock would change from -4.6% to -5.1%.
For comparative purposes, the December 31, 2018 measures are presented in the
following schedule.
December 31, 2018
Parallel shift in rates (in bps)1
Repricing scenario -100 0 +100 +200 +300
Earnings at Risk (5.3) % - % 3.4 % 5.1 % 10.1 %
1 Assumes rates cannot go below zero in the negative rate shift.
The asset sensitivity as measured by EaR decreased slightly since December 31,
2018 , due to changes in the investment securities and funding compositions.
The EaR analysis focuses on parallel rate shocks across the term structure of
rates. The yield curve typically does not move in a parallel manner. If we
consider a steepening rate shock where the short-term rate moves -200bps but the
ten-year rate only moves -30bps, the earnings decline is 15% less severe over 12
months compared with the parallel -200bps rate shock.
As of the dates indicated, the following schedule shows our estimated percentage
change in EVE under parallel interest rate changes ranging from -100 bps to +300
bps. For nonmaturity interest-bearing deposits, the weighted average modeled
beta is 32%. If the weighted average deposit beta were to decrease to 28% it
would change the EVE in the -100bps shock from 8.0% to 7.9%. The decrease in EVE
in the down rate shock is a result of the fact that in a very low rate
environment the discount to par on deposits is floored at zero.
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Schedule 33
CHANGES IN ECONOMIC VALUE OF EQUITY
December 31, 2019
Parallel shift in rates (in bps)1
Repricing scenario -100 0 +100 +200 +300
Economic Value of Equity 8.0 % - % 1.1 % 0.4 % (0.6) %
1 Assumes rates cannot go below zero in the negative rate shift.
December 31, 2018
Parallel shift in rates (in bps)1
Repricing scenario -100 0 +100 +200 +300
Economic Value of Equity (2.5) % - % (2.1) % (5.6) % (5.4) %
1 Assumes rates cannot go below zero in the negative rate shift.
The changes in EVE measures from December 31, 2018 are primarily driven by the
behavior of the deposit models. For nonmaturity deposits, the deposit premium
(or discount below par value) is floored at zero in a low-rate environment. With
term rates significantly lower on December 31, 2019 than on December 31, 2018
(e.g., 5 year LIBOR swap is approximately 110bps lower), deposit premium
valuations have approached the floor resulting in minimal downward change in the
-100bps rate shock. Furthermore, during 2019 some deposit model parameters were
updated, which made the premium valuation closer to zero and the negative rate
shock less comparable to the December 31, 2018 value. The positive rate shocks
were less impacted by these model updates.
Our focus on business banking also plays a significant role in determining the
nature of the Bank's asset-liability management posture. At December 31, 2019 ,
$21 billion of the Bank's commercial lending and CRE loan balances were
scheduled to reprice in the next three months. Of these variable-rate loans
approximately 98% are tied to either the prime rate or LIBOR. For these
variable-rate loans we have executed $3.6 billion of cash flow hedges by
receiving fixed rates on interest rate swaps or through purchased interest rate
floors. Additionally, asset sensitivity is reduced due to $237 million of
variable-rate loans being priced at floored rates at December 31, 2019 , which
were above the "index plus spread" rate by an average of 43 bps. At December 31,
2019 , we also had $3.3 billion of variable-rate consumer loans scheduled to
reprice in the next three months. Of these variable-rate consumer loans
approximately $65 million were priced at floored rates, which were above the
"index plus spread" rate by an average of 17 bps. See Notes 3 and 7 of the Notes
to Consolidated Financial Statements for additional information regarding
derivative instruments.
In July 2017 , the Financial Conduct Authority , the authority regulating LIBOR,
along with various other regulatory bodies, announced that LIBOR would likely be
discontinued at the end of 2021. For more information on the transition from
LIBOR see Risk Factors on page 15. We are actively working to address any
impacted contracts but realize that amending certain contracts indexed to LIBOR
may require consent from the counterparties which could be difficult and costly
to obtain in certain limited circumstances. Interest rate and market risk are
managed centrally.
Market Risk - Fixed Income
We engage in the underwriting and trading of municipal securities. This trading
activity exposes us to a risk of loss arising from adverse changes in the prices
of these fixed-income securities.
At December 31, 2019 , we had a relatively small amount, $182 million , of trading
assets and $66 million of securities sold, not yet purchased, compared with $106
million and $85 million , respectively, at December 31, 2018 .
We are exposed to market risk through changes in fair value. We are also exposed
to market risk for interest rate swaps used to hedge interest rate risk. Changes
in the fair value of AFS securities and in interest rate swaps that qualify as
cash flow hedges are included in AOCI for each financial reporting period.
During 2019, the after-tax change in AOCI attributable to AFS securities
increased by $257 million , due largely to changes in the interest rate
environment, compared with a $114 million decrease in the same prior year
period.
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Market Risk - Equity Investments
Through our equity investment activities, we own equity securities that are
publicly traded. In addition, we own equity securities in companies and
governmental entities, e.g., Federal Reserve Bank and an FHLB, that are not
publicly traded. The accounting for equity investments may use the cost, fair
value, equity, or full consolidation methods of accounting, depending on our
ownership position and degree of involvement in influencing the investees'
affairs. Regardless of the accounting method, the value of our investment is
subject to fluctuation. Because the fair value of these securities may fall
below our investment costs, we are exposed to the possibility of loss. Equity
investments in private and public companies are approved, monitored, and
evaluated by the Bank's Equity Investments Committee consisting of members of
management.
We hold both direct and indirect investments in predominantly pre-public
companies, primarily through various SBIC venture capital funds. Our equity
exposure to these investments was approximately $154 million and $132 million at
December 31, 2019 and December 31, 2018 , respectively. On occasion, some of the
companies within our SBIC investments may issue an initial public offering. In
this case, the fund is generally subject to a lockout period before liquidating
the investment, which can introduce additional market risk.
Liquidity Risk Management
Overview
Liquidity refers to our capacity to meet our cash and collateral obligations and
to manage both expected and unexpected cash flows without adversely impacting
the operations or financial strength of the Bank. Sources of liquidity include
both traditional forms of funding, such as deposits, borrowings, and equity and
unencumbered assets, such as marketable loans and securities.
Since liquidity risk is closely linked to both credit risk and market risk, many
of the previously discussed risk control mechanisms also apply to the monitoring
and management of liquidity risk. We manage our liquidity to provide adequate
funds for our customers' credit needs, capital plan actions, anticipated
financial and contractual obligations, which include withdrawals by depositors,
debt and capital service requirements, and lease obligations.
Overseeing liquidity management is the responsibility of ALCO, which implements
a Board-approved corporate Liquidity and Funding Policy. This policy addresses
monitoring and maintaining adequate liquidity, diversifying funding positions,
and anticipating future funding needs. The policy also includes liquidity ratio
guidelines, such as a 30-day liquidity coverage ratio, that are used to monitor
the liquidity positions of the Bank as well as various stress test and liquid
asset measurements for the Bank. The Bank continues to perform liquidity stress
tests and assess its portfolio of highly liquid assets (sufficient to cover
30-day funding needs under stress scenarios). At December 31 2019, our
investment securities portfolio of $14 billion and cash and money market
investments of $2 billion collectively comprised 24% of total assets.
The management of liquidity and funding is performed by the Treasury Department
under the direction of the Corporate Treasurer, with oversight by ALCO. The
Treasurer is responsible for recommending changes to existing funding plans, as
well as to the Bank's Liquidity Policy. These recommendations must be submitted
for approval to ALCO, and changes to the Policy also must be approved by the
Bank's ERMC and the Board of Directors. The Bank has adopted policy limits that
govern liquidity risk. The policy requires the Bank to maintain a buffer of
highly liquid assets sufficient to cover cash outflows in the event of a severe
liquidity crisis. Throughout 2019 and as of December 31, 2019 , the Bank complied
with this policy.
Liquidity Regulation
Upon passage of the Economic Growth, Regulatory Relief and Consumer Protection
Act, the Bank is no longer subject to the Enhanced Prudential Standards for
liquidity management (Reg. YY). However, the Bank continues to perform liquidity
stress tests and assess its portfolio of highly liquid assets (sufficient to
cover 30-day funding needs under the stress scenarios). Although the Bank is no
longer subject to the regulations of the Final LCR Rule, it exceeds the
regulatory requirements that mandates a buffer of securities and other liquid
assets to cover 70% of 30-day cash outflows under the assumptions mandated
therein.
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Liquidity Management Actions
The Bank's consolidated cash, interest-bearing deposits held as investments, and
security resell agreements were $1.8 billion at December 31, 2019 , compared with
$2.4 billion at December 31, 2018 , a decrease of $0.6 billion . During 2019 the
uses of cash were primarily from (1) a net decrease in short-term borrowings,
(2) net loan originations, (3) repurchases of our common stock, and (4)
dividends on common and preferred stock. The sources of cash during this same
period were primarily from (1) a net increase in deposits, (2) a net decrease in
investment securities, (3) the issuance of long-term debt, and (4) net cash
provided by operating activities.
The Bank's core deposits, consisting of noninterest-bearing demand deposits,
savings and money market deposits, and time deposits under $250,000 , were $54.8
billion at December 31, 2019 , compared with $51.2 billion at December 31, 2018 .
Total deposits were $57.1 billion at December 31, 2019 , compared with $54.1
billion at December 31, 2018 . The $3.0 billion increase during 2019 was
primarily a result of a $2.6 billion and $0.4 billion increase in savings and
money market deposits and time deposits, respectively.
During 2019, the Bank issued $500 million of senior notes with an interest rate
of 3.35% and a maturity date of March 4, 2022 and $500 million of subordinated
notes with an interest rate of 3.25% and a maturity date of October 29, 2029 .
The Bank subsequently entered into receive-fixed interest rate swaps for the
notes. The notes and swaps constitute qualifying fair value hedging
relationships. For more information on derivatives designated as qualifying cash
flow and fair value hedges, see Note 7 - Derivative Instruments and Hedging
Activities. At December 31, 2019 , maturities of our long-term senior and
subordinated debt ranged from August 2021 to October 2029 .
The Bank's cash payments for interest, reflected in operating expenses,
increased to $401 million during 2019 from $237 million during 2018 primarily
due to an increase in deposits and long-term debt and an increase in the rate
paid on borrowed funds. Additionally, the Bank paid approximately $260 million
of total dividends on preferred stock and common stock during 2019, compared
with $236 million during 2018. Dividends paid per common share have increased
gradually from $0.20 in the first quarter of 2018 to $0.34 in the fourth quarter
of 2019. In February 2020 , the Board approved a quarterly common dividend of
$0.34 per share.
General financial market and economic conditions impact our access to and cost
of external financing. Access to funding markets for the Bank is also directly
affected by the credit ratings received from various rating agencies. The
ratings not only influence the costs associated with the borrowings, but can
also influence the sources of the borrowings. All of the credit rating agencies
rate the Bank's debt at an investment-grade level. The Bank's credit ratings
improved slightly during 2019 and are presented in the following schedule.
Schedule 34
CREDIT RATINGS
as of December 31, 2019 :
Long-term issuer/senior
Rating agency Outlook debt rating Subordinated debt rating Short-term debt rating
Kroll Stable A- BBB+ K2
S&P Stable BBB+ BBB NR
Fitch Stable BBB+ BBB F1
Moody's Stable Baa2 NR NR
The FHLB system and Federal Reserve Banks have been and are a source of back-up
liquidity and a significant source of funding. Zions Bancorporation, N.A . is a
member of the FHLB of Des Moines . The FHLB allows member banks to borrow against
their eligible loans and securities to satisfy liquidity and funding
requirements. The Bank is required to invest in FHLB and Federal Reserve stock
to maintain their borrowing capacity.
At December 31, 2019 , the amount available for additional FHLB and Federal
Reserve borrowings was approximately $15.3 billion , compared with $13.8 billion
at December 31, 2018 . Loans with a carrying value of approximately $21.5 billion
at December 31, 2019 have been pledged at the FHLB of Des Moines and the Federal
Reserve as collateral for current and potential borrowings compared with $22.6
million at December 31, 2018 . At
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December 31, 2019 , we had $1.0 billion of short-term FHLB borrowings outstanding
and no long-term FHLB or Federal Reserve borrowings outstanding, compared with
$4.5 billion of short-term FHLB borrowings and no long-term FHLB or Federal
Reserve borrowings outstanding at December 31, 2018 . At December 31, 2019 , our
total investment in FHLB and Federal Reserve stock was $50 million and $107
million , respectively, compared with $190 million and $139 million at
December 31, 2018 .
Our AFS investment securities are primarily held as a source of contingent
liquidity. We target securities that can be easily turned into cash through sale
or repurchase agreements and whose value remains relatively stable during market
disruptions. We regularly manage our short-term funding needs through secured
borrowing with the securities pledged as collateral. Interest rate risk
management is another consideration for selection of investment securities. Our
AFS securities balances decreased by $1.0 billion during 2019.
The Bank's loan to total deposit ratio has remained consistent and was 85% at
December 31, 2019 , compared with 86% at December 31, 2018 , indicating higher
deposit growth than loan growth during 2019. In recent years loan growth has
generally outpaced deposit growth. If our operating and investing activities,
including deposit activity, do not provide the loan funding required, the Bank
will rely on more expensive wholesale funding for a portion of its loan growth.
Our use of average borrowed funds (both short- and long-term) increased by $858
million during 2019 as our average deposit growth, decrease in AFS securities,
and operating activities only partially funded loan growth over the period.
During 2019, we paid income taxes of $233 million , compared with $207 million
during 2018.
We may also, from time to time, issue additional preferred stock, senior or
subordinated notes or other forms of capital or debt instruments, depending on
our capital, funding, asset-liability management or other needs as market
conditions warrant and subject to any required regulatory approvals. Management
believes that the sources of available liquidity are adequate to meet all
reasonably foreseeable short-term and intermediate-term demands.
Contractual Obligations
Schedule 35 summarizes our contractual obligations at December 31, 2019 .
Schedule 35
CONTRACTUAL OBLIGATIONS
Over one year
One year or through three Over three years Over five Indeterminable
(In millions) less years through five years years maturity 1 Total
Deposits $ 4,050 $ 556 $ 113 $ - $ 52,366 $ 57,085
Net unfunded commitments to extend credit 6,303 6,873 3,517 6,406 - 23,099
Standby letters of credit:
Financial 471 150 3 7 - 631
Performance 171 19 2 - - 192
Commercial letters of credit 5 - - - - 5
Commitments to make venture and other
noninterest-bearing investments 2 - - - - 47 47
Federal funds and other short-term borrowings 2,053 - - - - 2,053 Long-term debt 3 - 997 131 585 - 1,713 Operating leases, net of subleases 50 84 56 99 - 289 Total contractual obligations$ 13,103 $ 8,679 $ 3,822 $ 7,097 $ 52,413 $ 85,114 1Indeterminable maturity deposits include noninterest-bearing demand, savings and money market. 2Commitments to make venture and other noninterest-bearing investments do not have defined maturity dates. They are due upon demand and may be drawn immediately, or as late as after five years. Therefore, these commitments are shown as having indeterminable maturities. 3The maturities on long-term debt do not include the associated hedges. 71 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES In addition to the commitments specifically noted in Schedule 35, we enter into a number of contractual commitments in the ordinary course of business. These include software licensing and maintenance, telecommunications services, facilities maintenance and equipment servicing, supplies purchasing, and other goods and services used in the operation of our business. Some of these contracts are renewable or cancellable at least annually, and in certain cases, to secure favorable pricing concessions, we have committed to contracts that may extend to several years. We also enter into derivative contracts under which we are required either to receive or pay cash, depending on changes in interest rates. These contracts are carried at fair value on the balance sheet with the fair value representing the net present value of the expected future cash receipts and payments based on market rates of interest. The fair value of the contracts changes daily as interest rates change. See Note 7 of the Notes to Consolidated Financial Statements for further information on derivative contracts. Operational Risk Management Operational risk is the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events. In our ongoing efforts to identify and manage operational risk, we have an ERM department whose responsibility is to help employees, management and the Board of Directors to assess, understand, measure, manage, and monitor risk in accordance with our Risk Appetite Framework. We have documented both controls and the Control Self-Assessment related to financial reporting under the 2013 framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission ("COSO") and the FDICIA. To manage and minimize our operational risk, we have in place transactional documentation requirements; systems and procedures to monitor transactions and positions; systems and procedures to detect and mitigate attempts to commit fraud, penetrate our systems or telecommunications, access customer data, and/or deny normal access to those systems to our legitimate customers; regulatory compliance reviews; and periodic reviews by the Bank's Compliance Risk Management, Internal Audit and Credit Examination departments. Reconciliation procedures have been established to ensure that data processing systems consistently and accurately capture critical data. In addition, the Data Governance department has key governance surrounding data integrity and availability oversight. Further, we have key programs and procedures to maintain contingency and business continuity plans for operational support in the event of natural or other disasters. We also mitigate certain operational risks through the purchase of insurance, including errors and omissions and professional liability insurance. We are continually improving our oversight of operational risk, including enhancement of risk identification, risk and control self-assessments, and antifraud measures, which are reported on a regular basis to enterprise management committees. The Operational Risk Management Committee reports to the ERMC, which reports to the ROC. Key measures have been established in line with our Risk Management Framework to increase oversight by ERM and Operational Risk Management through the strengthening of new initiative reviews, and enhancements to the Enterprise Procurement and Third Party Risk Management. We also continue to enhance and strengthen the Business Continuity and Disaster Recovery programs, Enterprise Security programs, Fraud Risk Oversight, Incident Response Oversight and Technology reporting. Significant enhancements have also been made to governance, technology and reporting, including the establishment of Policy and Committee Governance programs, the implementation of a governance, risk and control solution, and the creation of an Enterprise Risk Profile and Operational Risk Profile. In addition, the establishment of an Enterprise Examination Management department has standardized our response and reporting, and increased our effectiveness and efficiencies with regulatory examination, communications and issues management. The number and sophistication of attempts to disrupt or penetrate our systems, sometimes referred to as hacking, cyber fraud, cyberattacks, or other similar names continues to grow. To combat the ever increasing sophistication of cyberattacks, we have upgraded key detection software and expanded the number of staff and expertise to monitor and manage cyberattacks. In addition, we have elevated our oversight, internal reporting to the Board and respective 72 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES committees. We have also implemented an advisory group made up of cyber industry and academic experts to assist us in better managing this critical risk. CAPITAL MANAGEMENT Overview The Board of Directors is responsible for approving the policies associated with capital management. The Board has established the Capital Management Committee ("CMC"), chaired by the Chief Financial Officer and consisting of members of management, whose primary responsibility is to recommend and administer the approved capital policies that govern the capital management of the Bank. Other major CMC responsibilities include: •Setting overall capital targets within the Board-approved capital policy, monitoring performance compared with the Bank's Capital Policy limits, and recommending changes to capital including dividends, common stock issuances and repurchases, subordinated debt, and changes in major strategies to maintain the Bank at well-capitalized levels; •Maintaining an adequate capital cushion to withstand adverse stress events while continuing to meet the borrowing needs of its customers, and to provide reasonable assurance of continued access to wholesale funding, consistent with fiduciary responsibilities to depositors and bondholders; and •Reviewing agency ratings of the Bank. The Bank has a fundamental financial objective to consistently produce superior risk-adjusted returns on its shareholders' capital. We believe that a strong capital position is vital to continued profitability and to promoting depositor and investor confidence. Specifically, it is the policy of the Bank to: •Maintain sufficient capital to support current needs; •Maintain an adequate capital cushion to withstand future adverse stress events while continuing to meet borrowing needs of its customers; and •Meet fiduciary responsibilities to depositors and bondholders while managing capital distributions to shareholders through dividends and repurchases of common stock so as to be consistent withFederal Reserve guidelines SR 09-04 and 12 U.S.C §§ 56 and 60. Merger ofBank Holding Company into Bank OnSeptember 30, 2018 , the Bank completed the merger ofZions Bancorporation , its former bank holding company, with, and into the Bank, formerly known asZB, N.A. in order to reduce organizational complexity. The restructuring eliminated the bank holding company structure and associated regulatory framework, and resulted inZB, N.A. being renamedZions Bancorporation, National Association , and becoming the top-level entity within our corporate structure. The Bank's primary regulator is now the OCC. The Bank continues to be subject to examinations by theCFPB with respect to consumer financial regulations. Under the National Bank Act and OCC regulations, certain capital transactions may be subject to the approval of the OCC. Stress Testing As a result of theFinancial Stability Oversight Council's action onSeptember 12, 2018 and the merger of the holding company into the Bank, the Bank is no longer considered a systemically important financial institution under the Dodd-Frank Act. The Bank has experienced greater flexibility in the active management of shareholders' equity. The Bank continues to utilize stress testing as the primary mechanism to inform its decisions on the appropriate level of capital and capital actions, based upon actual and hypothetically-stressed economic conditions. The results of our internal stress tests are publicly available on the Bank's website. The timing and amount of capital actions will be subject to various factors, including the Bank's financial performance, business needs, prevailing and anticipated economic conditions, and OCC approval. 73 -------------------------------------------------------------------------------- Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES Common Stock and Common Stock Repurchases Common stock and additional paid-in capital decreased$1.1 billion , or 28%, fromDecember 31, 2018 toDecember 31, 2019 , primarily due to$1.1 billion of Bank common stock repurchases of 23.5 million shares from publicly announced plans at an average price of$46.80 per share. The level of common stock repurchases we executed during 2019 will moderate in the near term as we approach our target capital amounts and ratios. The Bank expects to maintain the appropriate amount of capital to cover inherent risk, while distributing excess capital to shareholders through dividends and share repurchases. The timing and amount of additional common share repurchases will be subject to various factors, including the Bank's financial performance, business needs, prevailing economic conditions, and OCC approval. The magnitude, timing and form of capital return will be determined by the Board. Shares may be repurchased occasionally in the open market, through privately negotiated transactions, utilizing Rule 10b5-1 plans or otherwise. InFebruary 2020 , the Bank announced that the Board approved a plan to repurchase$75 million of common stock during the first quarter of 2020. Schedule 36 CAPITAL DISTRIBUTIONS (Dollar amounts in millions) 2019 2018 2017 Common dividends paid$ 226
1,100 670 320
Total capital distributed to common shareholders $ 1,326
170 % 103 % 74 %
The Bank paid common dividends of $226 million , or $1.28 per share, during 2019,
compared with $202 million , or$1.04 per share, during 2018. In February 2020 ,
the Board of Directors declared a quarterly dividend of 0.34 per common share
payable on February 20, 2020 to shareholders of record on February 13, 2020 . We
paid dividends on preferred stock of $34 million during both 2019 and 2018. See
Note 14 for additional detail about capital management transactions during 2019.
Total shareholders' equity decreased slightly and was $7.4 billion at
December 31, 2019 , compared with $7.6 billion at December 31, 2018 . This
decrease was primarily a result of $1.1 billion from repurchases of Bank common
stock and $260 million from common and preferred dividends paid. These decreases
were partially offset by net income of $816 million and $293 million from an
increase in the fair value of our AFS securities due largely to changes in the
interest rate environment
During 2017 through 2019, the market price of our common stock was higher than
the exercise price of common stock warrants on our common stock and had a
dilutive effect upon earnings per share. The exercise of the common stock
warrants is cashless as the warrants are settled on a net share basis, and will
increase average basic shares. The impact of the common stock warrants is
already considered in the average dilutive shares. As of December 31, 2019 , the
Bank had 29.3 million ZIONW warrants outstanding with an exercise price of
$33.91 which expire on May 22, 2020 . During 2018, 1.8 million shares of common
stock were issued from the cashless exercise of 5.8 million ZIONZ common stock
warrants which expired on November 14, 2018 .
The following schedule presents the diluted shares from the remaining common
stock warrants at various Zions Bancorporation, N.A . common stock market prices
as of December 31, 2019 , excluding the effect of changes in exercise cost and
warrant share multiplier from the future payment of common stock dividends.
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Schedule 37
IMPACT OF COMMON STOCK WARRANTS
Stock Market Price Diluted
Shares (000s)
$ 30.00 -
35.00 3,251
40.00 6,794
45.00 9,549
50.00 11,754
55.00 13,557
60.00 15,060
65.00 16,332
See Note 14 of the Notes to Consolidated Financial Statements for more
information on our common stock warrants.
Basel III
The Bank is subject to Basel III capital requirements to maintain adequate
levels of capital as measured by several regulatory capital ratios. We met all
capital adequacy requirements under the Basel III Capital Rules as of December
31, 2019 . The following schedule presents the Bank's capital and performance
ratios as of December 31, 2019 , December 31, 2018 and December 31, 2017 . The
Supervision and Regulation section of the 2019 Form 10-K on page 6 and Note 15
of the Notes to Consolidated Financial Statements contain more detail
information about Basel III capital requirements and the Bank's compliance.
Schedule 38
CAPITAL AND PERFORMANCE RATIOS
December 31, December 31, December 31,
2019 2018 2017
Tangible common equity ratio1 8.5 % 8.9 % 9.3 %
Tangible equity ratio1 9.3 % 9.7 % 10.2 %
Average equity to average assets 10.8 % 11.4 % 12.0 %
Basel III risk-based capital ratios2:
Common equity tier 1 capital (to risk-weighted assets) 10.2 % 11.7 % 12.1 %
Tier 1 capital (to average assets, or Tier 1 leverage) 9.2 % 10.3 % 10.5 %
Tier 1 capital (to risk-weighted assets) 11.2 % 12.7 % 13.2 %
Total capital (to risk-weighted assets) 13.2 % 13.9 % 14.8 %
Return on average common equity 11.2 % 12.1 % 7.7 %
Return on average tangible common equity1 13.1 % 14.2 % 9.0 %
1See "GAAP to Non-GAAP Reconciliations" on page 27 for more information
regarding these ratios.
2Based on the applicable phase-in periods.
At December 31, 2019 , Basel III regulatory tier 1 risk-based capital and total
risk-based capital was $6.3 billion and $7.4 billion , respectively, compared
with $6.8 billion and $7.4 billion , respectively, at December 31, 2018 .
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Note 1 of the Notes to Consolidated Financial Statements contains a summary of
the Bank's significant accounting policies. Discussed below are certain
significant accounting policies that we consider critical to the Bank's
financial statements. These critical accounting policies were selected because
the amounts affected by them are significant to the financial statements. Any
changes to these amounts, including changes in estimates, may also be
significant to the financial statements. We believe that an understanding of
these policies, along with the related estimates we are required to make in
recording the financial transactions of the Bank, is important to have a
complete picture of the
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Bank's financial condition. In addition, in arriving at these estimates, we are
required to make complex and subjective judgments, many of which include a high
degree of uncertainty. The following discussion of these critical accounting
policies includes the significant estimates related to these policies. We have
discussed each of these accounting policies and the related estimates with the
Audit Committee of the Board of Directors.
We have included, where applicable in this document, sensitivity schedules and
other examples to demonstrate the impact of the changes in estimates made for
various financial transactions. The sensitivities in these schedules and
examples are hypothetical and should be viewed with caution. Changes in
estimates are based on variations in assumptions and are not subject to simple
extrapolation, as the relationship of the change in the assumption to the change
in the amount of the estimate may not be linear. In addition, the effect of a
variation in one assumption is in reality likely to cause changes in other
assumptions, which could potentially magnify or counteract the sensitivities.
Fair Value Estimates
We measure or monitor many of our assets and liabilities on a fair value basis.
Fair value is the price that could be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. To
increase consistency and comparability in fair value measurements, GAAP has
established a three-level hierarchy to prioritize the valuation inputs among (1)
observable inputs that reflect quoted prices in active markets, (2) inputs other
than quoted prices with observable market data, and (3) unobservable data such
as the Bank's own data or single dealer nonbinding pricing quotes.
When observable market prices are not available, fair value is estimated using
modeling techniques such as discounted cash flow analysis. These modeling
techniques use assumptions that market participants would consider in pricing
the asset or the liability, including assumptions about the risk inherent in a
particular valuation technique, the effect of a restriction on the sale or use
of an asset, the life of the asset and applicable growth rate, the risk of
nonperformance, and other related assumptions.
The selection and weighting of the various fair value techniques may result in a
fair value higher or lower than the carrying value of the item being valued.
Considerable judgment may be involved in determining the amount that is most
representative of fair value.
For assets and liabilities recorded at fair value, the Bank's policy is to
maximize the use of observable inputs and minimize the use of unobservable
inputs when developing fair value measurements for those items where there is an
active market. In certain cases, when market observable inputs for model-based
valuation techniques may not be readily available, the Bank is required to make
judgments about the assumptions market participants would use in estimating the
fair value of the financial instrument. The models used to determine fair value
adjustments are regularly evaluated by management for relevance under current
facts and circumstances.
Changes in market conditions may reduce the availability of quoted prices or
observable data. For example, reduced liquidity in the capital markets or
changes in secondary market activities could result in observable market inputs
becoming unavailable. When market data is not available, the Bank uses valuation
techniques requiring more management judgment to estimate the appropriate fair
value.
Fair value is used on a recurring basis for certain assets and liabilities in
which fair value is the primary measure of accounting. Fair value is used on a
nonrecurring basis to measure certain assets or liabilities (including HTM
securities, loans held for sale, and OREO) for impairment or for disclosure
purposes in accordance with current accounting guidance.
Impairment analysis also relates to long-lived assets, goodwill, and core
deposit and other intangible assets. An impairment loss is recognized if the
carrying amount of the asset is not likely to be recoverable and exceeds its
fair value. In determining the fair value, management uses models and applies
the techniques and assumptions previously discussed.
Investment securities are valued using several methodologies, which depend on
the nature of the security, availability of current market information, and
other factors. Investment securities in an unrealized loss position are
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formally reviewed on a quarterly basis for the presence of other-than-temporary
impairment ("OTTI"). OTTI is considered to have occurred if the instrument's
fair value is below its amortized cost and (1) we intend to sell the security,
(2) it is "more likely than not" we will be required to sell the security before
recovery of its amortized cost basis, or (3) the present value of expected cash
flows is not sufficient to recover the entire amortized cost basis. The "more
likely than not" criterion is a lower threshold than the "probable" criterion.
Notes 1, 3, 5, 7, and 10 of the Notes to Consolidated Financial Statements and
the "Investment Securities Portfolio" on page 49 contain further information
regarding the use of fair value estimates.
Allowance for Credit Losses
The ACL includes the ALLL and the RULC. The ALLL represents management's
estimate of probable losses believed to be inherent in the loan portfolio. The
determination of the appropriate level of the allowance is based on periodic
evaluations of the portfolios. This process includes both quantitative and
qualitative analyses, as well as a qualitative review of the results. The
qualitative review requires a significant amount of judgment, and is described
in more detail in Note 6 of the Notes to Consolidated Financial Statements.
The RULC provides for potential losses associated with off-balance sheet lending
commitments and standby letters of credit. The reserve is estimated using the
same procedures and methodologies as for the ALLL, plus assumptions regarding
the probability and amount of unfunded commitments being drawn.
Although we believe that our processes for determining an appropriate level for
the allowance adequately address the various components that could potentially
result in credit losses, the processes and their elements include features that
may be susceptible to significant change. Any unfavorable differences between
the actual outcome of credit-related events and our estimates could require an
additional provision for credit losses. As an example, if the probability of
default risk grade for all pass-graded loans was immediately downgraded one
grade on our internal risk-grading scale, the quantitatively determined amount
of the ALLL at December 31, 2019 would increase by approximately $90 million .
This sensitivity analysis is hypothetical and has been provided only to indicate
the potential impact that changes in risk grades may have on the allowance
estimate.
Although the qualitative process is subjective, it represents the Bank's best
estimate of qualitative factors impacting the determination of the ACL. We
believe that given the procedures we follow in determining the ACL, the various
components used in the current estimation processes are appropriate. Note 6 of
the Notes to Consolidated Financial Statements and "Credit Risk Management" on
page 54 contains further information and more specific descriptions of the
processes and methodologies used to estimate the ACL.
On January 1, 2020 , we adopted CECL and recorded an ACL for loans and leases of
$526 million , resulting in an after-tax increase to retained earnings of $20
million . The impact of the adoption of CECL for our securities portfolio was
less than $1 million . The ACL, as calculated under CECL, is influenced by the
portfolio composition, credit quality, macroeconomic conditions, and forecasts
at that time, as well as other management judgments. See Note 2 of the Notes to
Consolidated Financial Statements on page 93 for more information on this
guidance and its impact on the Bank.
Accounting for Goodwill
Goodwill is initially recorded at fair value in the financial statements of a
reporting unit at the time of its acquisition and is subsequently evaluated at
least annually for impairment in accordance with current accounting guidance. We
perform this test at the beginning of the fourth quarter annually, or more often
if events or circumstances indicate that the carrying value of any of our
reporting units, inclusive of goodwill, is less than fair value. The goodwill
impairment test for a given reporting unit compares its fair value with its
carrying value. If the carrying amount, inclusive of goodwill, is more likely
than not to exceed its fair value, additional quantitative analysis must be
performed to determine the amount, if any, of goodwill impairment. Our reporting
units with goodwill are Amegy , CB&T, and Zions Bank .
To determine the fair value of a reporting unit, we historically have used a
combination of up to three separate quantitative methods: comparable
publicly-traded commercial banks in the Western and Southwestern states
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("Market Value"); where applicable, comparable acquisitions of commercial banks
in the Western and Southwestern states ("Transaction Value"); and the discounted
present value of management's estimates of future cash flows. Critical
assumptions that are used as part of these calculations include:
•Selection of comparable publicly-traded companies based on location, size, and
business focus and composition;
•Selection of market comparable acquisition transactions based on location,
size, business focus and composition, and date of the transaction;
•The discount rate, which is based on the Bank's estimate of its cost of equity
capital;
•The projections of future earnings and cash flows of the reporting unit;
•The relative weight given to the valuations derived by the three methods
described; and
•The control premium associated with reporting units.
We apply a control premium in the Market Value approach to determine the
reporting units' equity values. Control premiums represent the ability of a
controlling shareholder to change how the Bank is managed and can cause the fair
value of a reporting unit as a whole to exceed its market capitalization. Based
on a review of historical bank acquisition transactions within the Bank's
geographic footprint, and a comparison of the target banks' market values 30
days prior to the announced transaction to the deal value, we have determined
that a control premium ranging from 0% to 15% for the reporting units was
appropriate.
Since estimates are an integral part of the impairment computations, changes in
these estimates could have a significant impact on any calculated impairment
amount. Estimates include economic conditions, which impact the assumptions
related to interest and growth rates, loss rates, and imputed cost of equity
capital. The fair value estimates for each reporting unit incorporate current
economic and market conditions, including Federal Reserve monetary policy
expectations and the impact of legislative and regulatory changes. Additional
factors that may significantly affect the estimates include, among others,
competitive forces, customer behaviors and attrition, loan losses, changes in
growth trends, cost structures and technology, changes in equity market values
and merger and acquisition valuations, and changes in industry conditions.
Weakening in the economic environment, a decline in the performance of the
reporting units, or other factors could cause the fair value of one or more of
the reporting units to fall below carrying value, resulting in a goodwill
impairment charge. Additionally, new legislative or regulatory changes not
anticipated in management's expectations may cause the fair value of one or more
of the reporting units to fall below the carrying value, resulting in a goodwill
impairment charge. Any impairment charge would not affect the Bank's regulatory
capital ratios, tangible common equity ratio, or liquidity position.
During the fourth quarter of 2017, we performed a full quantitative analysis of
the reporting units' fair value as described above. Our evaluation process
determined that the fair values of Amegy , CB&T, and Zions Bank exceeded their
carrying values by 35%, 54%, and 78%, respectively. Additionally, we performed a
hypothetical sensitivity analysis on the discount rate assumption to evaluate
the impact of an adverse change to this assumption. If the discount rate applied
to future earnings was increased by 100 bps, the fair values of Amegy , CB&T, and
Zions Bank would exceed their carrying values by 33%, 52%, and 72%,
respectively.
During the fourth quarter of 2019, we performed our annual goodwill impairment
evaluation, effective October 1, 2019 . The Bank elected to perform a qualitative
analysis to determine if the quantitative analysis performed in prior years as
described above was required. The Bank's qualitative analysis assessed factors
related to each reporting unit to determine if it was more likely than not that
the carrying value of any reporting unit was greater than the unit's fair value.
The qualitative factors considered in our assessment for each reporting unit
included (1) economic, industry and market conditions, (2) regulatory or
political developments that could negatively impact operating costs and overall
financial performance of any of our specific reporting units, and (3) any
changes in management, key personnel, strategy, customers, and any new or
evolving litigation.
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Table of ContentsZIONS BANCORPORATION , NATIONAL ASSOCIATION AND SUBSIDIARIES None of the factors considered in our qualitative assessment gave any indication that the reporting units' fair values decreased during the 2019 fiscal year. Additionally, as evidenced in the Business Segment Analysis section of the MD&A, each reporting unit's key performance metrics remained materially unchanged or improved in 2019, compared with 2017. Considering the improved performance of each reporting unit and the lack of any significant concerns being identified in our qualitative assessment, we concluded that it is more likely than not that the fair value of each reporting unit continues to be greater than its carry amount making further quantitative impairment testing unnecessary. As a result, none of our reporting units were subject to goodwill impairment during 2019 or were determined to be at risk for a potential goodwill impairment in the near future based on information known at this time. RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS Note 2 of the Notes to Consolidated Financial Statements discusses recently issued accounting pronouncements that we will be required to adopt. Also discussed is our expectation of the impact these new accounting pronouncements will have, to the extent they are material, on our financial condition, results of operations, or liquidity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this Item is included in "Interest Rate and Market Risk Management" in MD&A beginning on page 64 and is hereby incorporated by reference.
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