Zions Bancorporation(ZION) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations The bank's Q2 2020 performance was impacted by the COVID-19 pandemic, leading to a large credit loss provision, compressed margins, and strong PPP-driven balance sheet growth Q2 2020 Key Financial Metrics | Metric | Q2 2020 | Q1 2020 | Q2 2019 | | :--- | :--- | :--- | :--- | | Net Earnings to Common Shareholders | $57 million | $6 million | $189 million | | Diluted EPS | $0.34 | - | $0.99 | | Provision for Credit Losses | $168 million | $258 million | $21 million | | Net Interest Margin (NIM) | 3.23% | 3.41% | 3.54% | | Adjusted PPNR | $300 million | $299 million | $294 million | | Efficiency Ratio | 57.3% | 57.7% | 59.0% | - The bank actively participated in the SBA's Paycheck Protection Program (PPP), processing approximately $7 billion in loans for over 46,000 customers, including more than 10,000 new customers, ranking ninth by dollar volume among participating institutions[32] - In response to the COVID-19 pandemic, the bank implemented measures to support employees (remote work, bonuses), customers (loan forbearance, fee waivers), and communities ($30 million in future charitable contributions from PPP fees)[28] - The allowance for credit losses (ACL) was significantly increased by $388 million (74%) since January 1, 2020, reflecting the deteriorating economic outlook[28] Results of Operations Q2 2020 net earnings fell sharply due to a significant credit loss provision, while stable net interest income was offset by lower noninterest income and a one-time expense Consolidated Average Balance Sheets, Yields and Rates (Q2 2020 vs Q2 2019) | (Dollar amounts in millions) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Average Total Loans and Leases | $54,268 | $48,324 | | Average Loan Yield | 3.83% | 4.85% | | Average Interest-Earning Assets | $70,912 | $65,265 | | Liabilities | | | | Average Total Deposits | $63,000 | $54,347 | | Average Cost of Total Deposits | 0.15% | 0.49% | | Average Interest-Bearing Liabilities | $37,913 | $38,312 | | Average Rate on Interest-Bearing Liabilities | 0.34% | 1.20% | | Performance | | | | Net Interest Income (Taxable-equivalent) | $569 | $576 | | Net Interest Margin | 3.23% | 3.54% | - The provision for credit losses was $168 million in Q2 2020, compared to $21 million in Q2 2019, primarily due to expected economic deterioration from the COVID-19 pandemic and stress in the oil and gas sector[69] - Customer-related noninterest fees were stable at $130 million YoY; however, total noninterest income decreased by $15 million, mainly due to a $12 million negative credit valuation adjustment on client swaps and an $8 million decrease in dividends and other income[74][77] - Noninterest expense increased by $6 million YoY, driven by a $28 million pension plan termination-related expense; excluding this, adjusted noninterest expense decreased by $21 million (5%)[79][81] Balance Sheet Analysis Total assets and deposits grew significantly, driven by $6.7 billion in PPP loans, while the investment portfolio remained stable Loan Portfolio Composition (June 30, 2020 vs Dec 31, 2019) | Loan Category | June 30, 2020 ($M) | % of Total | Dec 31, 2019 ($M) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Commercial (ex-PPP) | $25,018 | 45.4% | $25,388 | 52.1% | | PPP | $6,690 | 12.1% | $0 | 0.0% | | Commercial Real Estate | $11,954 | 21.7% | $11,555 | 23.7% | | Consumer | $11,467 | 20.8% | $11,766 | 24.2% | | Total Net Loans | $55,129 | 100.0% | $48,709 | 100.0% | - Total deposits increased to $65.7 billion at June 30, 2020, from $57.1 billion at year-end 2019, primarily from a $7.1 billion increase in noninterest-bearing demand deposits largely due to PPP loan proceeds[185] - The investment securities portfolio increased slightly to an amortized cost of $14.5 billion from $14.3 billion at year-end 2019, composed primarily of U.S. Government agency securities and mortgage-backed securities[91] Risk Elements The bank's risk profile heightened with increased credit risk, particularly in the oil and gas portfolio, a larger ACL, and a shift to a more asset-sensitive interest rate position Oil and Gas-Related Loan Credit Quality | Credit Quality Measure | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Classified loan ratio | 8.3% | 2.2% | | Nonaccrual loan ratio | 2.7% | 0.7% | | Net charge-offs, annualized | 0.0% | 0.5% | | Ratio of ACL to oil and gas loans | 5.7% | 3.1% | Nonperforming Assets | (Dollar amounts in millions) | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Nonaccrual loans | $339 | $243 | | Other real estate owned | $5 | $8 | | Total nonperforming assets | $344 | $251 | | Ratio of nonperforming assets to net loans and OREO | 0.62% | 0.51% | - As of June 30, 2020, approximately 8.5% of total loan balances had been processed for short-term modifications or payment deferrals due to COVID-19, which are not classified as Troubled Debt Restructurings (TDRs)[140] - The bank's interest rate risk profile became more asset sensitive; a parallel +100 bps rate shift was estimated to increase Net Interest Income by 7.6% over one year, compared to an estimated 3.0% increase at year-end 2019[164][167] - Liquidity sources remained robust, with available FHLB and Federal Reserve borrowings increasing to approximately $19.1 billion at June 30, 2020, from $15.3 billion at year-end 2019[190] Capital Management The bank maintained strong capital ratios, suspended share repurchases, and adopted CECL transition relief to preserve its capital position Key Capital Ratios | Ratio | June 30, 2020 | Dec 31, 2019 | June 30, 2019 | | :--- | :--- | :--- | :--- | | Common equity tier 1 capital | 10.2% | 10.2% | 10.8% | | Tier 1 leverage | 8.4% | 9.2% | 9.5% | | Tier 1 risk-based | 11.2% | 11.2% | 11.8% | | Total risk-based | 13.5% | 13.2% | 13.0% | | Tangible common equity ratio | 7.9% | 8.5% | 8.7% | - The bank suspended share repurchase activity beginning in Q2 2020 to maintain capital amidst economic uncertainty, after repurchasing 1.7 million shares for $75 million in Q1 2020[207] - The bank opted into the five-year transition period for the regulatory capital impact of the CECL accounting standard, which improved its CET1, Tier 1 risk-based, and Total risk-based capital ratios by 14 basis points each[210] Financial Statements (Unaudited) This section presents the unaudited consolidated balance sheets, income statements, and cash flows, with accompanying notes detailing accounting policies and financial disclosures Consolidated Financial Statements The statements show total assets of $76.4 billion and net income of $80 million for the first half of 2020, impacted by a $426 million provision for credit losses Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $76,447 | $69,172 | | Loans held for investment, net | $54,269 | $48,214 | | Total Deposits | $65,684 | $57,085 | | Total Shareholders' Equity | $7,575 | $7,353 | Consolidated Income Statement Highlights (in millions) | Account | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Interest Income | $1,111 | $1,145 | | Total Provision for Credit Losses | $426 | $25 | | Total Noninterest Income | $250 | $264 | | Total Noninterest Expense | $837 | $854 | | Net Income | $80 | $411 | Notes to Consolidated Financial Statements Notes detail the adoption of CECL, fair value measurements, loan portfolio credit quality, and derivative hedging activities - The bank adopted ASU 2016-13 (CECL) on January 1, 2020, resulting in an after-tax increase to retained earnings of approximately $20 million[236] - As of June 30, 2020, 99.3% of the $14.2 billion in AFS securities were valued using Level 2 inputs in the fair value hierarchy, with no Level 3 AFS securities[94] - The Allowance for Credit Losses (ACL) stood at $914 million at June 30, 2020, comprising an $860 million allowance for loan losses and a $54 million reserve for unfunded commitments[288] - In late March 2020, the bank terminated $1 billion of fair value hedge swaps with a combined fair value of $36 million, which will reduce the effective interest rate on the related debt through amortization[322] Quantitative and Qualitative Disclosures About Market Risk This section refers to the detailed market risk discussion within the Management's Discussion and Analysis - Disclosures about market risk are provided in the "Interest Rate and Market Risk Management" section of the Management's Discussion and Analysis[387] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal controls - The CEO and CFO concluded that the Bank's disclosure controls and procedures were effective as of June 30, 2020[388] - There were no changes in internal control over financial reporting during Q2 2020 that materially affected, or are reasonably likely to materially affect, internal controls[388] PART II. OTHER INFORMATION Legal Proceedings The company faces litigation related to alleged Ponzi schemes and PPP agent fees, with a reasonably possible loss estimate of up to $35 million - The bank is facing multiple civil suits, including class actions, related to allegations of aiding and abetting Ponzi schemes by former customers (IMG and Rust Rare Coin)[355][359] - Several new class action lawsuits were filed in June and July 2020 alleging the bank wrongly failed to pay agent fees to third parties for PPP loans[359] - The company estimates the aggregate range of reasonably possible losses for certain significant legal matters, for which a loss is not probable, to be between $0 and $35 million in excess of existing accruals[358] Risk Factors A new risk factor details the adverse effects of the COVID-19 pandemic, including heightened credit, market, and operational risks - A new risk factor was added to address the adverse effects of the COVID-19 pandemic, which has created significant economic and financial disruptions[390] - Key risks from the pandemic include increased credit risk (delinquencies, defaults), deterioration in exposed industries like oil and gas and retail, reduced net interest income from lower rates, and heightened operational risks[391][396][397] - The bank's financial assistance programs for customers, such as loan payment deferrals, may adversely affect revenue and could lead to higher defaults and credit losses[395] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under public plans in Q2 2020; shares were acquired from employees to cover taxes related to stock compensation Share Repurchases - Q2 2020 | Period | Total Shares Repurchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Plans | | :--- | :--- | :--- | :--- | | April | 0 | $0.00 | 0 | | May | 10,665 | $30.84 | 0 | | June | 433 | $36.28 | 0 | | Second Quarter | 11,098 | $31.06 | 0 | - All shares repurchased during the quarter were acquired from employees to satisfy tax obligations related to stock compensation plans, not as part of a publicly announced buyback program[400] Exhibits This section lists filed exhibits, including a pension plan amendment, required officer certifications, and Inline XBRL financial statements - The filing includes required CEO and CFO certifications under Rules 13a-15(f) and 15d-15(f) and Section 1350[402] - Exhibit 10.1 is the Sixth Amendment to the Zions Bancorporation Pension Plan, dated June 25, 2020[402]