ZION

Business Context and Reporting Period

Zions Bancorporation, National Association filed its Form 10-Q for the quarterly period ended June 30, 2024. The company operates as a commercial bank headquartered in Salt Lake City, Utah, providing banking products and services across 11 Western and Southwestern states through seven affiliate banks. The registrant is classified as a large accelerated filer.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Growth: Diluted EPS increased to $1.28 from $1.11, driven by higher net interest income and a significantly lower provision for credit losses ($5 million vs. $46 million), partially offset by a decline in noninterest income.
• Net Interest Margin: NIM expanded to 2.98% from 2.92%. Yield on interest-earning assets rose 50 basis points to 5.31%, outpacing the 48 basis point increase in the cost of total deposits to 2.11%.
• Deposit Mix: Total deposits decreased 1% to $73.8 billion. Customer deposits (excluding brokered) grew 5% to $69.5 billion, while noninterest-bearing demand deposits declined, shifting the mix toward higher-cost interest-bearing products.
• Expense Management: Noninterest expense remained stable at $509 million. Technology expenses increased $8 million due to software amortization from core system replacements, offset by a $6 million decrease in salaries and benefits due to lower severance costs compared to the prior year.
• Credit Quality: Classified loans increased to $1.3 billion (2.16% of total loans) and nonperforming assets rose to $265 million (0.45%), primarily due to a small number of loans in the commercial and industrial and term commercial real estate portfolios. Net charge-offs were $15 million (0.10% of average loans).

Guidance, Outlook, and Risks

• Outlook: Management expects latent interest rate sensitivity to increase net interest income by 8.3% in Q2 2025 compared to Q2 2024. If rates decline consistent with the forward curve, emergent sensitivity is expected to reduce net interest income by approximately 2.0% from the latent level.
• Technology Initiatives: The bank completed the final phase of its core loan and deposit banking system replacement in July 2024, aiming to improve customer experience and operational efficiency.
• Capital Management: The bank exceeded all Basel III capital adequacy requirements. Common equity tier 1 capital ratio was 10.6%. The bank paid $61 million in common dividends and $11 million in preferred dividends in Q2 2024.
• Risk Factors: Key risks include elevated inflation, economic slowdown, changes in interest rates, regulatory changes, and potential goodwill impairment. The bank maintains a "stable" outlook from Kroll and Fitch, though S&P has a "negative" outlook.
• Legal Proceedings: The bank is involved in various legal proceedings, including two civil cases regarding alleged fraudulent practices of a borrower and an employment arbitration. Management estimates a range of reasonably possible losses from zero to approximately $10 million in excess of accrued amounts for certain matters.

Investor Verification Checklist

• Credit Quality Trends: Verify the trajectory of classified loans and nonperforming assets, specifically within the commercial real estate (CRE) and commercial and industrial portfolios, given the recent increases.
• Deposit Stability: Monitor the shift from noninterest-bearing to interest-bearing deposits and its impact on future funding costs and NIM compression.
• Technology ROI: Assess the operational efficiency gains and cost savings resulting from the completed core banking system replacement.
• Interest Rate Sensitivity: Review the bank's asset sensitivity profile and the effectiveness of its hedging strategies (swaps) in managing net interest income volatility.
• Regulatory Capital: Track the potential impact of the proposed "Basel III Endgame" reforms, as the bank's asset size ($87.6 billion) approaches the $100 billion threshold for large banking organizations.