ZIONS BANCORPORATION, NATIONAL ASSOCIATION quarterly report, Q1 FY2021

Zions Bancorporation, N.A. — Q1 2021 Form 10-Q Summary

Business context and reporting period

Zions Bancorporation, National Association 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 three months ended March 31, 2021, with comparisons primarily to the three months ended March 31, 2020 and December 31, 2020 balance-sheet data.

Management reported an improving credit environment and economic outlook following the COVID-19 pandemic. PPP lending remained significant, while traditional loan demand was weak amid abundant market liquidity and low interest rates.

Financial performance and key metrics

Metric	Q1 2021	Comparable period
Net interest income	$545 million	$548 million in Q1 2020
Noninterest income	$169 million	$134 million in Q1 2020
Income before taxes	$411 million	$16 million in Q1 2020
Net income	$322 million	$14 million in Q1 2020
Net earnings applicable to common shareholders	$314 million	$6 million in Q1 2020
Diluted EPS	$1.90	$0.04 in Q1 2020
Net interest margin	2.86%	3.41% in Q1 2020
Adjusted pre-provision net revenue	$253 million	$299 million in Q1 2020
Efficiency ratio	63.5%	57.7% in Q1 2020

Interest expense declined 77% to $17 million, offsetting much of the 10% decline in interest income.
Net charge-offs were $8 million, or 0.06% of average loans; excluding PPP loans, the annualized ratio was 0.07%.
The provision for credit losses was a benefit of $132 million, compared with a $258 million provision in Q1 2020, reflecting improved economic forecasts and credit conditions.
The allowance for credit losses declined to $695 million from $835 million at December 31, 2020. The allowance-to-loans ratio was 1.30%, or 1.48% excluding PPP loans.
Total assets were $85.1 billion at March 31, 2021, compared with $81.5 billion at December 31, 2020.
Total loans and leases were $53.5 billion, essentially unchanged from year-end. PPP loans increased to $6.5 billion from $5.6 billion.
Total deposits increased to $73.9 billion from $69.7 billion at year-end and $57.5 billion at March 31, 2020. Noninterest-bearing demand deposits were $35.9 billion.
Shareholders’ equity was $7.9 billion. CET1 capital was 11.2%, Tier 1 risk-based capital was 12.2%, and total risk-based capital was 14.5%.
Return on average common equity was 17.4%; return on average tangible common equity was 20.2%.

Cash flow, debt, liquidity, and capital

Operating activities provided $484 million of cash, compared with $153 million in Q1 2020.
Investing activities used $4.0 billion, principally because of increased money market investments and purchases of investment securities.
Financing activities provided $3.5 billion, primarily from a $4.2 billion increase in deposits, partly offset by reduced short-term borrowings, dividends, and $50 million of common-stock repurchases.
Cash and due from banks ended at $576 million. Consolidated cash, interest-bearing deposits held as investments, and securities resell agreements totaled approximately $10.2 billion.
Investment securities totaled $17.4 billion, and cash and money market investments totaled approximately $10.3 billion, together representing about 33% of total assets.
Long-term debt declined to $1.3 billion from $1.3 billion at year-end; the filing reported no FHLB or Federal Reserve borrowings outstanding at March 31, 2021.
Available additional FHLB and Federal Reserve borrowing capacity was approximately $14.7 billion, supported by pledged collateral. PPPLF funding was less than $1 million.
Management stated that available liquidity sources were adequate for reasonably foreseeable short- and intermediate-term demands.

Material changes versus prior comparable periods

Net earnings applicable to common shareholders rose to $314 million from $6 million, driven principally by the $390 million year-over-year swing in the provision for credit losses.
Net interest income declined 1% despite 20% growth in average interest-earning assets, as lower rates and a shift toward lower-yielding money market investments compressed margins.
Average interest-earning assets increased by $12.9 billion, including $6.1 billion of average PPP loans. Average deposits increased 26%, with average noninterest-bearing deposits up 43%.
Excluding PPP loans, total loans and leases declined approximately 6% year over year, reflecting reduced traditional loan demand.
Noninterest income increased 26%, benefiting from an $18 million positive credit valuation adjustment on client interest-rate swaps and an $11 million gain on the sale of remaining Farmer Mac Class C stock. Customer-related fees declined 7%, primarily from lower interest-rate swap fees.
Noninterest expense increased 7% to $435 million, primarily from higher long-term incentive compensation and PPP-related professional and legal services. Full-time equivalent employees declined to 9,682 from 9,879.
Accumulated other comprehensive income declined to $148 million from $325 million at year-end, primarily because of lower fair values of available-for-sale securities as interest rates changed.
The company repurchased approximately 1.0 million common shares for $50 million during the quarter.

Guidance, outlook, commentary, risks, and unusual items

Management expects net interest margin could continue to compress over the next several quarters excluding PPP effects, due to loan repricing, deposits potentially growing faster than loans, and increased investment in lower-yielding securities and money market assets.
Management expects purchases of investment securities to exceed runoff by similar amounts over the next few quarters while excess liquidity remains elevated.
The PPP was extended through May 31, 2021. Since inception, the company had processed nearly $10 billion of PPP loans for approximately 73,000 customers. PPP-related interest income was $60 million in Q1 2021, including $31 million of accelerated fee recognition.
PPP loans and government-guaranteed loans reduce some credit exposure, but loan forgiveness timing and fee recognition affect reported interest income and portfolio yields.
LIBOR transition remains a significant operational and contractual risk. Approximately $38 billion of loans, unfunded commitments, and securities referenced LIBOR, along with more than $16 billion of LIBOR-referenced derivatives. Management announced AMERIBOR as its preferred replacement index for many new lending contracts beginning in summer 2021.
Interest-rate sensitivity analysis estimated a 9.8% increase in first-year net interest income under an immediate parallel 100-basis-point rate increase and a 4.5% decrease under a 100-basis-point decline, subject to modeling assumptions.
Troubled debt restructurings increased to $414 million from $311 million at year-end, although actively deferred non-PPP loans were not significant at March 31, 2021.
Nonperforming assets declined to $327 million, or 0.61% of net loans and OREO, from $371 million, or 0.69%, at year-end.
The filing identifies litigation and governmental matters with an estimated aggregate range of reasonably possible losses of $0 million to approximately $40 million above accrued amounts for matters where a range could be estimated. The company cautioned that actual outcomes could be materially different and that some matters cannot be meaningfully estimated.
Subsequent to quarter-end, an SBIC investment in Recursion Pharmaceuticals completed an IPO. The filing reported an approximately $56 million unrealized gain as of April 30, 2021, subject to market changes and a 180-day lock-up period.
In April 2021, the board approved a plan to repurchase up to $100 million of common stock during Q2 2021, declared a $0.34 quarterly common dividend, and approved redemption of the Series H perpetual preferred shares, subject to notification requirements.

Most important facts for investors to verify

Whether the unusually large credit-loss benefit is sustainable or primarily reflects a reversal of pandemic-era reserves.
The pace of PPP loan forgiveness, accelerated fee recognition, and the effect of PPP runoff on future net interest income and margins.
Whether deposit growth continues to exceed traditional loan demand and forces further investment in lower-yielding assets.
Trends in the 2.86% net interest margin, adjusted PPNR, and 63.5% efficiency ratio.
Credit migration within commercial, commercial real estate, and consumer portfolios, including the increase in TDRs.
Execution, cost, and contractual risks associated with the LIBOR transition and adoption of AMERIBOR.
Potential volatility from available-for-sale securities, derivatives, and the Recursion Pharmaceuticals investment.
Material developments in the disclosed litigation and whether losses exceed recorded accruals or the estimated $40 million range.