ZIONS BANCORPORATION, NATIONAL ASSOCIATION quarterly report, Q3 FY2020

Zions Bancorporation, N.A. — 2020 Third-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 locally managed banking brands across 11 Western and Southwestern states. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, compared primarily with the corresponding 2019 periods and December 31, 2019 balances. Results were materially affected by the COVID-19 pandemic, government stimulus programs and the low interest-rate environment.

Financial performance and condition

Metric	Q3 2020	Q3 2019	Year-to-date 2020	Year-to-date 2019
Net income	$175 million	$222 million	$255 million	$633 million
Net earnings applicable to common shareholders	$167 million	$214 million	$230 million	$608 million
Diluted EPS	$1.01	$1.17	$1.38	$3.20
Net interest income	$555 million	$567 million	$1.665 billion	$1.713 billion
Provision for credit losses	$55 million	$10 million	$481 million	$35 million
Noninterest income	$157 million	$146 million	$408 million	$410 million
Noninterest expense	$442 million	$415 million	$1.279 billion	$1.270 billion
Net interest margin	3.06%	3.48%	3.23%	3.56%

Total assets were $78.4 billion at September 30, 2020, up from $69.2 billion at December 31, 2019. Total loans and leases were $54.7 billion, including $6.8 billion of PPP loans, versus $48.7 billion at year-end 2019.
Total deposits increased to $67.1 billion from $57.1 billion at December 31, 2019, driven primarily by stimulus-related deposit growth and PPP proceeds. The loan-to-deposit ratio was 82% versus 85% at year-end.
Average Q3 loans increased 13% year over year, but declined 2% excluding PPP loans. Average PPP loans were $6.8 billion. The reported loan yield declined 107 basis points, while the PPP portfolio yield was 3.03%.
Customer-related fees were $139 million in Q3, essentially unchanged year over year. Mortgage origination and sale activity increased loan-related fees by $11 million, partly offset by lower card, retail banking, and capital markets fees.
Adjusted pre-provision net revenue was $267 million, down from $309 million in Q3 2019. Excluding the $30 million charitable contribution related to PPP activity, adjusted PPNR was $297 million. The reported efficiency ratio was 62.2%; excluding the contribution, it was 58.0%.
The allowance for credit losses was $917 million at September 30, 2020, up 74% from $526 million at January 1, 2020. The Q3 annualized net charge-off ratio was 0.38%, compared with 0.01% in Q3 2019.
Nonaccrual loans were $366 million and total nonperforming assets were $372 million, or 0.68% of loans and OREO, compared with 0.51% at December 31, 2019. Troubled debt restructurings increased to $281 million from $153 million.
Shareholders’ equity was $7.7 billion. Basel III ratios included CET1 of 10.4%, Tier 1 risk-based capital of 11.4%, total risk-based capital of 13.7%, and Tier 1 leverage of 8.3%. The bank reported compliance with all capital adequacy requirements.
Cash, interest-bearing deposits and security resell agreements totaled $4.2 billion, while investment securities totaled $15.5 billion; together these represented approximately 25% of total assets. Additional FHLB and Federal Reserve borrowing capacity was approximately $17.6 billion, and no FHLB or Federal Reserve borrowings were outstanding at quarter-end.
Long-term debt was $1.347 billion, down from $1.723 billion at year-end 2019. The decline reflected the repurchase and retirement of $429 million of senior notes during 2020.
Operating cash flow for the first nine months was $548 million, compared with $346 million in the prior-year period. Investing activities used $9.181 billion, primarily for loan growth and securities purchases, while financing activities provided $8.504 billion, mainly from deposit growth.

Material changes versus comparable periods

Q3 net income declined 21% year over year, and common earnings declined 22%, primarily because of higher credit-loss provisions, the $30 million charitable contribution, and lower net interest income.
Net interest income declined $12 million year over year as lower benchmark rates reduced asset yields more rapidly than funding costs. The NIM fell 42 basis points year over year and 17 basis points sequentially.
Credit-loss provisioning increased sharply because of COVID-19-related economic stress and oil-and-gas exposure. Q3 provision expense declined from $168 million in Q2 2020, supporting the sequential improvement in earnings.
Noninterest expense increased 7% year over year on a GAAP basis, but salaries, occupancy, and technology-related expenses generally declined. The principal unusual item was the $30 million charitable contribution; a separate $28 million pension termination expense was recognized in Q2.
The bank adopted CECL on January 1, 2020, resulting in an after-tax $20 million increase to retained earnings. CECL makes the allowance more sensitive to economic forecasts and may increase period-to-period earnings volatility.
The bank suspended share repurchases beginning in Q2 to preserve capital, although it continued paying a $0.34 quarterly common dividend. It repurchased $75 million of common stock in Q1 and declared another $0.34 dividend in October 2020.
During the first nine months, approximately $4.3 billion of loans received COVID-19-related payment deferrals or other modifications. By September 30, less than $300 million, or 0.6% of non-PPP loans, remained actively in deferral.

Outlook, commentary, risks and unusual items

Management expects continued pressure on net interest income and NIM in the low-rate environment, particularly excluding the benefit of PPP fee recognition. No formal quantitative earnings or revenue guidance is provided in the filing.
The bank processed more than $7 billion of PPP loans for over 47,000 customers and had approximately $141 million of unamortized net PPP origination fees at quarter-end. Forgiveness or early repayment could accelerate fee recognition, while the five-year maturity extension lengthens recognition for remaining balances.
Management expects to fund additional Main Street Lending Program loans by year-end but had funded only a limited number as of September 30.
COVID-19 remains the primary risk, including borrower defaults, reduced fee activity, higher credit losses, collateral deterioration, liquidity demands, operational disruption and cybersecurity exposure. Elevated-risk COVID-19 industries represented $4.1 billion, or 8.5%, of non-PPP loans; approximately 98% were collateralized.
Oil-and-gas-related credit exposure was $4.3 billion, including $2.4 billion of loans and $1.9 billion of unfunded commitments. The related classified-loan ratio was 10.6%, the nonaccrual ratio was 3.2%, and Q3 annualized net charge-offs were 3.4%.
The bank had more than $38 billion of assets referencing LIBOR and more than $15 billion of LIBOR-referenced derivatives. LIBOR discontinuation and contract remediation may create operational, legal and financial risks.
Material legal proceedings remain outstanding. The filing estimates reasonably possible losses of approximately $0 million to $35 million in excess of accrued amounts for matters where a range could be estimated, while noting that this range excludes matters for which a meaningful estimate is not possible.
Credit ratings remained investment grade, but Fitch and S&P revised their outlooks to Negative, citing economic disruption from COVID-19 and oil-and-gas exposure.

Important facts for investors to verify

Whether credit quality, nonaccrual loans, classified loans and charge-offs continue to deteriorate as payment deferrals expire and government support declines.
The pace of PPP forgiveness, early repayment and related fee recognition, and the resulting effect on loan yields, net interest income and liquidity.
Whether deposit balances remain elevated and continue to fund loans without a renewed need for higher-cost wholesale borrowings.
The sensitivity of NIM and earnings to prolonged low rates, deposit repricing, loan floors, prepayments and changes in the economic forecast used under CECL.
Exposure to oil and gas, hotels, retail, transportation, entertainment, commercial real estate and other elevated-risk sectors.
The effect of LIBOR transition on loans, derivatives, debt instruments, hedging relationships and customer contracts.
Capital ratios after the CECL regulatory transition period, future dividends, any resumption of share repurchases and potential additional credit provisioning.