Zions Bancorporation, N.A. — First-Quarter 2024 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 separately managed affiliate banks across 11 Western and Southwestern states. The filing reports unaudited results for the three months ended March 31, 2024, compared primarily with the three months ended March 31, 2023 and, for balance-sheet items, December 31, 2023.
Key Financial Metrics
| Metric | Q1 2024 | Comparable period | Change |
|---|---|---|---|
| Net earnings applicable to common shareholders | $143 million | $198 million | Down 28% |
| Diluted EPS | $0.96 | $1.33 | Down $0.37 |
| Net interest income | $586 million | $679 million | Down 14% |
| Net interest margin | 2.94% | 3.33% | Down 39 bps; up from 2.91% in Q4 2023 |
| Provision for credit losses | $13 million | $45 million | Down $32 million |
| Noninterest income | $156 million | $160 million | Down 3% |
| Noninterest expense | $526 million | $512 million | Up 3% |
| Income before income taxes | $203 million | $282 million | Down 28% |
| Effective tax rate | 24.6% | 27.7% | Down 310 bps |
| Adjusted PPNR | $242 million | $341 million | Down 29% |
| Efficiency ratio | 67.9% | 59.9% | Higher, indicating weaker operating efficiency |
Interest income increased 15% to $1.054 billion, but interest expense increased 94% to $468 million. Higher deposit funding costs more than offset higher loan and securities yields. The yield on interest-earning assets was 5.25%, while the cost of total deposits rose to 2.06% from 0.47%.
- Loans: Loans and leases increased 3% year over year and 1% from December 31, 2023, to $58.1 billion. Growth was concentrated in consumer 1-4 family residential mortgages and term CRE loans.
- Deposits: Total deposits were $74.2 billion, down 1% from year-end but up 7% year over year. Customer deposits excluding brokered deposits were $69.9 billion. Noninterest-bearing deposits represented 33.9% of total deposits, down from 35.0% at year-end and 49% in Q1 2023 on an average basis.
- Credit quality: Net charge-offs were $6 million, or 0.04% of average loans, compared with zero in Q1 2023. Nonperforming assets rose to $254 million, or 0.44% of loans and leases and OREO, from $228 million, or 0.39%, at year-end. Classified loans increased 6% year over year.
- Allowance: The allowance for credit losses was $736 million, or 1.27% of loans, versus $678 million and 1.20% a year earlier. The increase reflected portfolio-specific risks, particularly CRE, and modest credit deterioration.
- Cash flow: Operating activities provided $261 million and investing activities provided $53 million. Financing activities used $321 million, primarily because of a $724 million decrease in deposits, $71 million of common and preferred dividends, and $35 million of share repurchases. Cash and due from banks ended at $709 million.
- Debt and liquidity: Total borrowed funds averaged $7.2 billion, down 45% year over year. Outstanding BTFP borrowings were $3.0 billion at March 31, 2024, with $1.5 billion maturing December 31, 2024 and $1.5 billion maturing January 15, 2025. Total available liquidity was $41.6 billion, equal to 130% of estimated uninsured deposits.
- Capital: The common equity tier 1 ratio was 10.4%, the total risk-based capital ratio was 12.9%, and the Tier 1 leverage ratio was 8.4%. Management stated that the Bank exceeded Basel III capital requirements and remained well-capitalized.
Material Changes Versus Prior Comparable Period
- Net income applicable to common shareholders declined $55 million, primarily because of lower net interest income and slightly higher operating expenses.
- Net interest income declined $93 million as average interest-earning assets fell $2.2 billion and average interest-bearing liabilities rose $6.0 billion. Average interest-bearing deposits increased $12.0 billion, while average borrowed funds declined $6.0 billion.
- Customer-related noninterest income remained stable at $151 million. Higher capital markets fees offset lower loan-related fees and income.
- Noninterest expense increased $14 million. Deposit insurance and regulatory expense increased $16 million, including a $13 million accrual related to an updated FDIC special assessment estimate. Technology, telecom, and information processing expense increased $7 million.
- Technology spending decreased 3% to $117 million as capital investment in the core banking-system replacement declined while related amortization increased.
- Shareholders’ equity increased 2% from year-end to $5.8 billion, and accumulated other comprehensive loss improved by $83 million to negative $2.6 billion. The AOCI loss primarily reflects unrealized losses on fixed-rate investment securities.
- The Bank repurchased 890,167 common shares for $35 million during the quarter and paid a common dividend of $0.41 per share. In April 2024, the Board declared another $0.41 quarterly common dividend.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide explicit quantitative earnings or revenue guidance. Management highlighted sequential improvement in NIM, loan growth, low net charge-offs, and expected completion of substantially all remaining core deposit-system migrations by late summer 2024. A second affiliate-bank conversion was completed in April 2024.
- Interest-rate risk: Management expects deposit repricing and migration from noninterest-bearing accounts to higher-cost products to remain important. Under modeled scenarios, a parallel 100-basis-point increase in rates would increase 12-month net interest income by 3.7%, while a 100-basis-point decrease would reduce it by 3.3%.
- CRE exposure: CRE loans totaled $13.6 billion, or 23% of total loans. Multi-family CRE totaled $3.9 billion, with approximately 36% maturing within 12 months. Office CRE totaled $1.9 billion, with approximately 32% maturing within 12 months; its classified loan ratio was 7.6% and nonaccrual ratio was 1.4%.
- Liquidity and deposits: Estimated uninsured deposits were $32.0 billion, or 43% of total deposits. The loan-to-deposit ratio was 78%. The BTFP ceased offering new advances in mid-March 2024, increasing the importance of other contingent funding sources.
- Securities valuation: HTM and AFS securities had $1.642 billion of gross unrealized losses at March 31, 2024. Management stated it did not intend to sell securities with unrealized losses and did not expect to be required to sell them before recovery of amortized cost.
- Regulatory risk: The Bank had $87.1 billion of assets at quarter-end and is not currently subject to proposed rules applicable to banks with at least $100 billion of assets, but management expects the Basel III Endgame proposal could become relevant if finalized and if the Bank exceeds that threshold.
- Legal matters: The filing identifies litigation involving medical-product manufacturers and a foreign-transaction-fee case scheduled for trial in October 2024. For matters with estimable exposure, the aggregate reasonably possible loss range was zero to approximately $10 million in excess of amounts accrued; the filing states that this is not a maximum loss estimate.
- Unusual items: The quarter included a $13 million FDIC special-assessment accrual and a $4 million valuation loss associated with an equity investment. These items affected reported expenses or noninterest income but were excluded or adjusted in certain non-GAAP measures.
Most Important Facts for Investors to Verify
- Whether deposit migration and elevated deposit costs continue to pressure NIM and net interest income.
- Trends in CRE criticized, classified, nonaccrual, and maturing loans, particularly multi-family and office exposures.
- Whether nonperforming assets and the allowance for credit losses continue to increase.
- The repayment or refinancing of the $3.0 billion of BTFP borrowings due in late 2024 and early 2025.
- The sustainability of available liquidity relative to uninsured deposits as deposits and funding markets change.
- The effect of proposed capital rules if assets approach or exceed $100 billion.
- Progress, cost, and operational risk associated with completing the core banking-system conversion.
- The treatment and potential economic effect of the large AOCI securities loss, including the $1.5 billion after-tax unrealized loss related to securities transferred from AFS to HTM.
- Resolution and potential exposure from the disclosed legal proceedings.