Zions Bancorporation, N.A. — 2020 Second-Quarter 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 regional banking brands across 11 Western and Southwestern states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020, during the COVID-19 pandemic. The bank had 163.98 million common shares outstanding as of June 30, 2020.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Comparable period | Change |
|---|---|---|---|
| Net income | $66 million | $198 million in Q2 2019 | Down $132 million |
| Net earnings applicable to common shareholders | $57 million | $189 million | Down $132 million |
| Diluted earnings per share | $0.34 | $0.99 | Down $0.65 |
| Net interest income | $563 million | $569 million | Down $6 million |
| Provision for credit losses | $168 million | $21 million | Up $147 million |
| Noninterest income | $117 million | $132 million | Down $15 million |
| Noninterest expense | $430 million | $424 million | Up $6 million |
| Adjusted pre-provision net revenue | $300 million | $294 million | Up $6 million |
| Net interest margin | 3.23% | 3.54% | Down 31 basis points |
| Efficiency ratio | 57.3% | 59.0% | Improved |
For the first six months of 2020, net income was $80 million versus $411 million in the prior-year period, while net earnings applicable to common shareholders were $63 million versus $394 million. Net interest income was $1.111 billion, provision for credit losses was $426 million, and diluted earnings per share was $0.37 versus $2.04 in the first six months of 2019.
Total assets were $76.447 billion at June 30, 2020, up from $69.172 billion at December 31, 2019. Net loans and leases were $55.129 billion, including $6.690 billion of PPP loans. Total deposits were $65.684 billion, up from $57.085 billion at year-end 2019. Long-term debt was $1.353 billion, down from $1.723 billion. Shareholders’ equity was $7.575 billion.
Cash, interest-bearing deposits, and security resell agreements totaled approximately $2.4 billion at quarter-end. Investment securities totaled approximately $15.0 billion, representing substantial contingent liquidity. Additional borrowing capacity from the Federal Home Loan Bank and Federal Reserve was approximately $19.1 billion. Management stated that available liquidity was adequate for reasonably foreseeable short- and intermediate-term demands.
The allowance for credit losses was $914 million at June 30, 2020, including an $860 million allowance for loan losses and a $54 million reserve for unfunded lending commitments. Net loan charge-offs were $31 million in the second quarter, and the annualized net charge-off ratio was 0.23%.
Basel III capital ratios remained above regulatory requirements: CET1 was 10.2%, Tier 1 leverage was 8.4%, Tier 1 risk-based capital was 11.2%, and total risk-based capital was 13.5%. The tangible common equity ratio was 7.9%.
Operating cash flow was $398 million for the first six months of 2020. Investing activities used $7.301 billion, primarily because of loan originations, while financing activities provided $6.768 billion, primarily from deposit growth. Cash and due from banks ended the period at $570 million.
Material changes versus prior comparable periods
- COVID-19-related economic deterioration and oil-and-gas stress drove a $168 million second-quarter provision for credit losses versus $21 million in Q2 2019. The allowance for credit losses increased 74% from January 1, 2020.
- Loans increased 13% year over year on average; PPP loans accounted for approximately $5.0 billion, or 84%, of the $5.9 billion increase in average loans.
- The bank processed approximately $7 billion of PPP loans for more than 46,000 customers, including more than 10,000 new customers. PPP loans totaled $6.690 billion at quarter-end.
- Average deposits increased to $63.0 billion from $54.3 billion, substantially reflecting PPP proceeds deposited into customer accounts. Management cautioned that some of this deposit growth may be temporary.
- The net interest margin declined to 3.23% from 3.54% as loan and securities yields fell faster than deposit costs. Management expected continued margin pressure excluding the effect of PPP loans.
- Nonaccrual loans increased to $339 million from $243 million at December 31, 2019, and nonperforming assets increased to $344 million from $251 million. Classified loans increased 92% year over year.
- Troubled debt restructurings increased to $285 million from $153 million at year-end 2019. Approximately 8.5% of total loan balances had been processed for COVID-19-related modifications or payment deferrals at June 30, 2020.
- Adjusted noninterest expense decreased 5% year over year, although reported noninterest expense included a one-time $28 million pension plan termination-related charge.
- The bank repurchased and retired $429 million principal amount of senior notes during the second quarter. It suspended common-share repurchases beginning in the second quarter pending improved earnings visibility.
- Accumulated other comprehensive income increased to $355 million from $43 million at year-end 2019, primarily from unrealized gains on available-for-sale securities.
Guidance, outlook, commentary, risks and unusual items
- Management did not provide formal earnings guidance. It expected net interest margin to remain under pressure over the next several quarters, excluding PPP effects, and anticipated moderately lower net interest income in the low-rate environment.
- Management identified $4.2 billion, or 8.6%, of non-PPP loans in industries considered particularly exposed to COVID-19. Approximately 29% of these balances were modified or deferring payments, and 97% were collateralized.
- Oil-and-gas-related credit exposure was approximately $4.5 billion, including $2.629 billion of loans and leases and $1.916 billion of unfunded commitments. Classified oil-and-gas loans were 8.3%, nonaccrual loans were 2.7%, and the related allowance ratio was 5.7%.
- Key risks include the duration and severity of COVID-19, unemployment, borrower defaults, collateral values, additional credit-loss provisions, lower interest rates, deposit outflows, liquidity demands, oil-and-gas volatility, commercial real estate exposure, cybersecurity, operational disruption, regulatory changes, and the transition away from LIBOR.
- The bank had not funded loans under the Federal Reserve’s Main Street Lending Program as of June 30, 2020. PPP loan forgiveness, changing program terms, and the timing of fee recognition could affect future interest income.
- Legal matters included litigation related to alleged Ponzi schemes, borrower fraud, and PPP agent fees. Management estimated a reasonably possible loss range of $0 to approximately $35 million in excess of accrued amounts for matters where a meaningful estimate was possible, while noting that the range was not a maximum exposure.
- The bank adopted CECL on January 1, 2020, resulting in an after-tax $20 million increase to retained earnings. Management expects greater allowance volatility because CECL incorporates economic forecasts.
- The board approved a $0.34 per-share common dividend for the third quarter of 2020. Management stated that future capital returns, including repurchases, would depend on earnings, business needs, economic conditions, and regulatory approval.
Most important facts for investors to verify
- Whether PPP-related loan and deposit balances, fee income, and customer relationships remain after government forgiveness and repayment activity.
- Whether credit deterioration, loan modifications, nonaccrual loans, TDRs, and charge-offs accelerate as fiscal support expires and borrowers resume payments.
- Whether the $914 million allowance for credit losses adequately covers losses under changing unemployment, real estate, energy-price, and economic forecasts.
- The sustainability of the 3.23% net interest margin and the effect of prolonged low rates on loan yields, deposit pricing, and net interest income.
- Capital and liquidity levels, including the effect of CECL capital-transition rules, dividend payments, suspended repurchases, debt maturities, and potential collateral requirements.
- Exposure to oil and gas, commercial real estate, hospitality, retail, municipalities, and other COVID-19-sensitive sectors.
- Progress in replacing LIBOR-linked contracts and the potential operational, legal, and financial effects of benchmark-rate transition.
- Developments in pending litigation, including PPP fee-related claims and cases involving alleged customer fraud.