Zions Bancorporation, N.A. — Q1 2020 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 locally managed banking brands across 11 Western and Southwestern states. This unaudited Form 10-Q covers the three months ended March 31, 2020, and compares results primarily with the three months ended March 31, 2019 and December 31, 2019 balances.
The quarter was materially affected by the COVID-19 pandemic, the 150-basis-point March reduction in the Federal Funds target rate, and stress in oil and gas markets.
Key financial metrics
| Metric | Q1 2020 | Comparable period |
|---|---|---|
| Net interest income | $548 million | $576 million in Q1 2019 |
| Noninterest income | $134 million | $132 million in Q1 2019 |
| Noninterest expense | $408 million | $430 million in Q1 2019 |
| Provision for credit losses | $258 million | $4 million in Q1 2019 and Q4 2019 |
| Net income | $14 million | $213 million in Q1 2019 |
| Net earnings applicable to common shareholders | $6 million; $0.04 diluted EPS | $205 million; $1.04 diluted EPS in Q1 2019 |
| Net interest margin | 3.41% | 3.68% in Q1 2019; 3.46% in Q4 2019 |
| Adjusted pre-provision net revenue | $299 million | $285 million in Q1 2019 |
| Efficiency ratio | 57.7% | 60.2% in Q1 2019; 61.3% in Q4 2019 |
| Average loans | $48.8 billion | $47.2 billion in Q1 2019 |
| Total deposits at March 31 | $57.5 billion | $54.5 billion at March 31, 2019 |
| Allowance for credit losses at March 31 | $777 million | $556 million at March 31, 2019 |
| Total assets at March 31 | $71.5 billion | $69.2 billion at December 31, 2019 |
| Cash and money market investments at March 31 | $2.5 billion | $1.8 billion at December 31, 2019 |
| Long-term debt at March 31 | $1.8 billion | $1.7 billion at December 31, 2019 |
Material changes versus prior comparable periods
- Common earnings declined sharply as the provision for credit losses increased by $254 million year over year to $258 million, reflecting COVID-19 economic uncertainty and prolonged energy-price stress.
- Net interest income decreased $28 million year over year. Lower loan and securities yields, lower securities balances, and increased interest-bearing deposits outweighed loan growth and lower funding costs.
- Average loans grew 3% year over year, with commercial loans representing approximately 67% of the increase. Period-end net loans increased to $49.9 billion from $48.7 billion at December 31, 2019.
- Customer-related fees increased 17% to $143 million, led by higher loan-related fees, mortgage activity, and capital markets and foreign exchange fees.
- Noninterest expense declined 5% year over year, including a $13 million decrease in salaries and employee benefits. Full-time equivalent employees declined from 10,204 to 9,879 following the previously announced workforce reduction.
- Net charge-offs were $7 million, or 0.06% of average loans, versus zero in Q1 2019. Nonaccrual loans increased to $274 million from $243 million at December 31, 2019, and nonperforming assets increased to $280 million from $251 million.
- Shareholders’ equity increased to $7.5 billion from $7.4 billion at December 31, 2019, primarily due to higher accumulated other comprehensive income from increases in the fair value of available-for-sale securities. The Bank repurchased 1.7 million common shares for $75 million.
- Basel III capital ratios remained above applicable requirements, although the CET1 ratio declined to 10.0% from 10.2% at December 31, 2019 and 11.3% at March 31, 2019.
Guidance, outlook, risks and unusual items
- Management expects further net interest margin compression in the following quarters, excluding the effects of Paycheck Protection Program loans, because earning assets reprice faster than funding sources in the low-rate environment.
- Subsequent to March 31, the Bank processed approximately $4.4 billion of SBA Paycheck Protection Program loans for more than 14,000 customers. PPP loans carry a 1% interest rate, and forgiveness or early repayment could accelerate recognition of deferred fees into interest income.
- Approximately 3% of total loan balances had been processed for COVID-19-related modifications or payment deferrals as of April 26, 2020. The filing states that additional requests were expected.
- The Bank identified approximately $5.6 billion, or 11.2% of total loans, in selected industries viewed as particularly exposed to COVID-19. Oil and gas-related credit exposure totaled approximately $4.6 billion, including $2.6 billion of loans and leases and $2.0 billion of unfunded commitments.
- Management expects loan charge-offs to increase in subsequent quarters as the pandemic affects borrowers. CECL adoption on January 1, 2020 increased retained earnings after tax by approximately $20 million; the new methodology is expected to increase allowance volatility.
- Regulatory relief permits delayed recognition of the March 31 CECL capital impact through December 31, 2021, with phased recognition beginning in 2022 and completed by the first quarter of 2025.
- Liquidity was supported by $15.0 billion of investment securities, $2.5 billion of cash and money market investments, $18.2 billion of available additional FHLB and Federal Reserve borrowing capacity, and increased short-term FHLB borrowings. Management stated that liquidity sources were adequate for reasonably foreseeable demands.
- Fitch and S&P revised their ratings outlooks to Negative from Stable, citing COVID-19 disruption and oil and gas exposure. The Bank retained investment-grade ratings.
- The Bank terminated $1.0 billion of fixed-to-floating interest-rate swaps in late March. The resulting $36 million debt basis adjustment will be amortized through the affected debt maturities.
- The defined benefit pension plan termination was expected in mid-2020 and was estimated to generate a one-time charge of approximately $10 million to $15 million, plus an estimated $17 million reclassification from AOCI into earnings. The estimate was subject to change.
- Legal matters included several lawsuits and governmental-related matters. The estimated range of reasonably possible losses for matters where a meaningful estimate was available was $0 million to approximately $35 million above accrued amounts; this range did not represent maximum exposure.
Most important facts for investors to verify
- Whether COVID-19-related payment deferrals, defaults, and charge-offs increase materially beyond the first-quarter levels.
- Whether the $777 million ACL adequately covers deterioration in commercial, CRE, consumer, municipal, hospitality, retail, and energy exposures.
- The pace and sustainability of net interest margin compression, deposit repricing, and the earnings contribution from PPP loan fees.
- Actual PPP loan forgiveness, repayment, credit performance, and related liquidity effects.
- Changes in CET1 and other regulatory capital ratios as CECL deferrals unwind beginning in 2022.
- Liquidity usage, deposit flows, wholesale funding costs, and borrowing capacity if customers draw more heavily on unused commitments.
- Developments in oil and gas markets, commercial real estate conditions, and COVID-19-sensitive industries.
- Progress and costs associated with the pension plan termination, LIBOR contract remediation, and the deposit-system replacement project.
- Developments in the disclosed litigation and regulatory matters, including potential losses beyond the stated estimated range.