Zions Bancorporation, N.A. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Zions Bancorporation, N.A. is a commercial bank headquartered in Salt Lake City, Utah, serving customers through seven separately managed affiliate banks across 11 Western and Southwestern states. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the same periods in 2020 and to December 31, 2020 for balance-sheet data.
Key financial metrics
| Metric | Q3 2021 | Comparable period |
|---|---|---|
| Net earnings applicable to common shareholders | $234 million | $167 million in Q3 2020 |
| Diluted EPS | $1.45 | $1.01 in Q3 2020 |
| Net income | $240 million | $175 million in Q3 2020 |
| Net interest income | $555 million | $555 million in Q3 2020 |
| Net interest margin | 2.68% | 3.06% in Q3 2020 |
| Provision for credit losses | Negative $46 million | Positive $55 million in Q3 2020 |
| Noninterest income | $139 million | $157 million in Q3 2020 |
| Noninterest expense | $429 million | $442 million in Q3 2020 |
| Effective tax rate | 22.8% | 18.6% in Q3 2020 |
| Adjusted efficiency ratio | 59.8% | 62.2% in Q3 2020 |
For the first nine months of 2021, net earnings applicable to common shareholders were $893 million, diluted EPS was $5.43, net interest income was $1.655 billion, and net income was $916 million, compared with $230 million, $1.38, $1.665 billion, and $255 million, respectively, in the first nine months of 2020.
- Average interest-earning assets increased 14% year over year to $83.2 billion, but the lower-rate environment reduced asset yields and compressed NIM.
- Customer-related fees rose 9% to $151 million in Q3, supported by transaction volume, new-client activity, and deeper existing relationships.
- Total loans and leases were $50.7 billion at September 30, 2021, down from $53.5 billion at December 31, 2020, mainly because of PPP loan forgiveness and lower residential mortgage balances.
- Total deposits were $77.9 billion, up 12% from year-end 2020. Noninterest-bearing demand deposits represented 50.3% of total deposits.
- Allowance for credit losses was $529 million, down from $917 million at September 30, 2020. The ratio to net loans and leases, excluding PPP loans, was 1.11%.
- Net loan and lease recoveries were $1 million in Q3 2021, compared with $52 million of net charge-offs in Q3 2020.
- Nonperforming assets were $324 million, or 0.64% of net loans and leases and OREO; nonaccrual loans were $323 million.
- Total assets were $88.3 billion at September 30, 2021, compared with $81.5 billion at December 31, 2020.
- Cash and money market investments totaled approximately $11.9 billion, while investment securities totaled $21.2 billion. Together, they represented 38% of total assets.
- Long-term debt was $1.020 billion, down 24% from December 31, 2020, primarily because of the maturity of $281 million of senior notes. Short-term borrowings were $579 million.
- Net cash provided by operating activities was $463 million for the first nine months of 2021. Investing activities used $6.573 billion, primarily for money market and available-for-sale securities purchases; financing activities provided $6.164 billion, primarily from deposit growth.
- Common equity tier 1 capital was 10.9%, Tier 1 leverage was 7.6%, and total risk-based capital was 13.6% at September 30, 2021. Management stated that the bank met all Basel III capital adequacy requirements.
Material changes versus prior comparable periods
- Quarterly earnings improved substantially, primarily because of the negative credit-loss provision, improved credit quality, lower noninterest expense, and higher customer-related fees.
- Net interest income was unchanged despite a 38-basis-point decline in NIM, as average interest-earning assets grew by $10.1 billion.
- Noninterest income declined 11%, mainly because of a $28 million negative mark-to-market adjustment on the bank’s SBIC investment in Recursion Pharmaceuticals. Customer-related fees increased despite the decline in total noninterest income.
- Noninterest expense declined 3%; the prior-year period included a $30 million charitable foundation contribution associated with PPP lending activity. Salaries and benefits increased 6% due primarily to incentive compensation, profit sharing, and wage pressure.
- PPP loan balances declined to $3.1 billion from $5.6 billion at year-end 2020. During Q3, $1.5 billion of PPP loans were forgiven, and PPP-related interest income was $63 million.
- Shareholders’ equity decreased to $7.8 billion from $7.9 billion at year-end 2020. Retained earnings increased, but share repurchases, the preferred-stock redemption, and lower AOCI offset that growth.
- During Q3, the bank repurchased 5.8 million common shares for $325 million. Year-to-date repurchases totaled 8.5 million shares for $475 million.
Guidance, outlook, commentary, risks, and unusual items
- Management did not provide formal numerical earnings guidance in the filing. It expects investment-security purchases to exceed runoff in the near term and continues evaluating opportunities to deploy cash and money market investments into higher-yielding, low-to-medium-duration assets.
- Management seeks to balance current income, asset sensitivity to rising rates, and liquidity needed for loan growth or changes in deposit trends. The balance sheet became more asset-sensitive; modeled first-year net interest income increased 12.4% under an immediate parallel 100-basis-point rate increase, but declined 5.8% under a 100-basis-point decrease.
- The bank expects to discontinue new LIBOR-referenced loan originations by the end of 2021. Approximately $36 billion of loans, unfunded commitments, and securities referenced LIBOR at September 30, 2021, while LIBOR-referenced derivatives had notional amounts exceeding $17 billion. Management identified AMERIBOR as its preferred replacement index but expects multiple alternative rates to be used.
- COVID-19-related economic improvements and stronger credit quality drove significant reductions in the allowance for credit losses. Future provisions remain sensitive to economic forecasts, portfolio composition, and credit migration.
- The Recursion Pharmaceuticals investment remained subject to mark-to-market volatility and a minimum 180-day lock-up period following its April 2021 IPO.
- At September 30, 2021, unfunded lending commitments totaled $26.1 billion, including $25.2 billion of commitments to extend credit and $883 million of letters of credit.
- Management disclosed material litigation and governmental matters, including claims involving alleged Ponzi schemes and alleged borrower fraud. The estimated aggregate range of reasonably possible losses for certain matters was $0 million to approximately $40 million above accrued amounts, excluding matters for which a meaningful estimate was not possible.
- Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether deposit growth remains durable and whether excess liquidity can be redeployed without further material NIM compression.
- The sustainability of the unusually favorable negative credit-loss provision and whether credit losses normalize as pandemic-related support fades.
- Future mark-to-market gains or losses and liquidity restrictions related to the Recursion Pharmaceuticals and other SBIC investments.
- Progress, costs, and operational risks associated with the core banking-system replacement and the LIBOR-to-alternative-rate transition.
- Changes in commercial real estate, commercial, TDR, nonaccrual, and other criticized-loan exposures.
- The effect of share repurchases and dividends on tangible common equity, regulatory capital, and future per-share earnings.
- Developments in disclosed litigation and the potential for losses above the estimated range.