ZIONS BANCORPORATION, NATIONAL ASSOCIATION quarterly report, Q2 FY2021

Zions Bancorporation, National Association — Q2 2021 Form 10-Q

Business Context and Reporting Period

Zions Bancorporation is a commercial bank headquartered in Salt Lake City, Utah, serving customers through seven separately managed affiliate banks across 11 Western and Southwestern states. The filing covers the quarter and six months ended June 30, 2021, with comparisons primarily to June 30, 2020 and December 31, 2020. The financial statements are unaudited.

Key Financial Metrics

Metric	Q2 2021	Comparable period
Net earnings applicable to common shareholders	$345 million	$57 million in Q2 2020
Diluted earnings per share	$2.08	$0.34 in Q2 2020
Net interest income	$555 million	$563 million in Q2 2020
Net interest margin	2.79%	3.23% in Q2 2020
Noninterest income	$205 million	$117 million in Q2 2020
Noninterest expense	$428 million	$430 million in Q2 2020
Provision for credit losses	Negative $123 million	$168 million expense in Q2 2020
Return on average common equity	18.6%	3.3% in Q2 2020
Return on average tangible common equity	21.6%	3.8% in Q2 2020

For the six months ended June 30, 2021, net income was $676 million, net earnings applicable to common shareholders were $659 million, and diluted EPS was $3.98, compared with $80 million, $63 million, and $0.37, respectively, in the first six months of 2020.
Average interest-earning assets increased 14% year over year to $80.9 billion, but lower rates and portfolio mix reduced the asset yield by 55 basis points to 2.86%.
Average deposits were $74.6 billion, up from $63.0 billion, while the average cost of total deposits fell to 0.04% from 0.15%.
Total assets were $87.2 billion at June 30, 2021, compared with $81.5 billion at December 31, 2020. Total deposits were $76.1 billion, up 9% from year-end.
Net loans and leases were $51.4 billion, down from $53.5 billion at year-end. Excluding PPP loans, loan balances declined primarily because of weak demand and mortgage refinancing activity.
Total allowance for credit losses was $574 million, down from $695 million at March 31, 2021 and $914 million at June 30, 2020. Net loan recoveries were $2 million in Q2 2021 versus $31 million of net charge-offs in Q2 2020.
Nonperforming assets were $308 million, or 0.60% of net loans and leases and OREO, compared with $371 million, or 0.69%, at December 31, 2020.
Shareholders’ equity was $8.0 billion. CET1 capital was 11.3%, Tier 1 risk-based capital was 12.1%, and total risk-based capital was 14.2%; the bank met Basel III capital requirements.
Long-term debt was $1.3 billion and short-term borrowings were $741 million at June 30, 2021. No FHLB or Federal Reserve borrowings were outstanding.
Net cash provided by operating activities was $283 million for the first six months of 2021. Net cash used in investing activities was $5.5 billion, principally reflecting increased money market investments and purchases of available-for-sale securities. Financing activities provided $5.2 billion, mainly from deposit growth.

Material Changes Versus Prior Periods

Profitability improved substantially, primarily because of the $123 million release of credit-loss provisions and higher noninterest income.
Noninterest income rose $88 million, or 75%, driven largely by a $63 million unrealized gain from the IPO of Recursion Pharmaceuticals, an SBIC investment. Customer-related fees increased 7% to $139 million.
Net interest income fell 1% and net interest margin contracted 44 basis points because of lower rates, reduced loan balances, and the growth of low-yielding money market investments.
Adjusted noninterest expense increased 4% to $419 million. Higher salaries and benefits and technology-related professional and legal services costs more than offset the absence of the $28 million pension termination expense recorded in Q2 2020.
PPP loan balances declined to $4.5 billion at June 30, 2021 as loans were forgiven. Since program inception, Zions processed more than $10 billion of PPP loans for approximately 77,000 customers.
The bank purchased $2.6 billion of available-for-sale securities during the quarter and expects purchases to exceed runoff over the next several quarters while deploying excess liquidity.
During Q2 2021, the bank repurchased 1.7 million common shares for $100 million and redeemed $126 million of Series H preferred stock. In July 2021, the board approved up to $125 million of additional common share repurchases for Q3.
Accumulated other comprehensive income declined to $175 million from $325 million at year-end, primarily because of unrealized losses on available-for-sale securities related to interest-rate changes.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management indicated that excess liquidity will continue to be deployed selectively into high-quality, liquid securities while remaining mindful of market risk. Loan demand remained constrained by economic uncertainty and abundant market liquidity.
The Recursion Pharmaceuticals gain is unrealized and will be marked to market until the shares are sold. The shares were subject to a minimum 180-day IPO lock-up, creating potential equity-market volatility. A related $9 million success-fee accrual was recorded.
Interest-rate sensitivity increased as deposit growth funded money market investments. Management reported estimated first-year net interest income sensitivity of negative 4.7% under a 100-basis-point decline and positive 11.7% under a 100-basis-point increase in rates, based on stated modeling assumptions.
Zions had approximately $37 billion of loans, unfunded commitments, and securities referencing LIBOR, plus more than $18 billion of LIBOR-referenced interest-rate derivatives. It planned to eliminate new LIBOR originations by the end of 2021 and identified AMERIBOR as its preferred replacement index, while also evaluating SOFR and BSBY.
At June 30, 2021, unfunded lending commitments totaled $25.7 billion. The reserve for unfunded lending commitments was $39 million.
Troubled debt restructurings increased to $458 million from $311 million at year-end, including $128 million of nonaccruing TDRs.
Material legal matters included litigation involving alleged assistance in Ponzi schemes and alleged fraudulent practices of borrowers. Management estimated reasonably possible losses, in excess of amounts accrued, ranging from zero to approximately $40 million for matters that could be meaningfully estimated; the range excludes matters for which estimation was not possible.
Management stated that there were no material changes to the risk factors disclosed in the 2020 Form 10-K. COVID-19 effects, economic conditions, credit quality, interest rates, LIBOR transition, cybersecurity, regulatory matters, and legal proceedings remain important risks.
Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material change in internal control over financial reporting during the quarter.

Most Important Facts for Investors to Verify

Whether the large Q2 earnings increase is sustainable after excluding the credit-loss release and the $63 million unrealized SBIC investment gain.
Future net interest margin performance given the 2.79% Q2 margin, low interest rates, substantial money market balances, and deposit repricing assumptions.
Loan growth prospects as PPP forgiveness and mortgage refinancing reduce balances and core commercial demand remains subdued.
Credit quality trends, including the adequacy of the $574 million ACL, rising TDRs, and exposures to commercial real estate and economically sensitive industries.
Changes in the fair value of the Recursion investment after the lock-up period and the related success-fee accrual.
Execution, legal costs, and benefits associated with the core loan and deposit system replacement project.
Progress and contractual risks associated with the transition of approximately $37 billion of LIBOR-referenced assets and commitments and more than $18 billion of related derivatives.
Potential outcomes and additional loss exposure from the disclosed litigation and governmental matters.