Zions Bancorporation, N.A. — 2022 Second-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 across 11 Western and Southwestern states through seven separately managed affiliate banks. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, with comparisons primarily to the same 2021 periods and December 31, 2021.
Key financial metrics
| Metric | Q2 2022 | Comparable period |
|---|---|---|
| Net interest income | $593 million | $555 million, Q2 2021 |
| Net interest margin | 2.87% | 2.79%, Q2 2021 |
| Noninterest income | $172 million | $205 million, Q2 2021 |
| Noninterest expense | $464 million | $428 million, Q2 2021 |
| Provision for credit losses | $41 million | $(123) million, Q2 2021 |
| Net income | $203 million | $354 million, Q2 2021 |
| Net earnings applicable to common shareholders | $195 million | $345 million, Q2 2021 |
| Diluted EPS | $1.29 | $2.08, Q2 2021 |
| Adjusted PPNR | $300 million | $290 million, Q2 2021 |
| Efficiency ratio | 60.7% | 59.1%, Q2 2021 |
For the six months ended June 30, 2022, net income was $406 million, net earnings applicable to common shareholders were $390 million, and diluted EPS was $2.56, compared with $676 million, $659 million, and $3.98, respectively, in the prior-year period.
- Average interest-earning assets increased 4% to $84.0 billion, while average deposits increased 8% to $80.9 billion.
- Loans and leases totaled $52.4 billion at June 30, 2022, up $1.5 billion from year-end 2021. Excluding PPP loans, loans grew approximately 10% year over year to $51.8 billion.
- Total deposits were $79.1 billion, down 5% from December 31, 2021 and down $3.3 billion from the prior quarter. The loan-to-deposit ratio was 66%.
- The allowance for credit losses was $546 million, or 1.05% of net loans excluding PPP loans. Second-quarter net charge-offs were $9 million, or 0.07% of average loans excluding PPP loans.
- Nonperforming assets were $201 million, or 0.38% of loans and leases and OREO, compared with 0.53% at December 31, 2021. Nonaccrual loans declined to $201 million from $271 million.
- Total assets were $87.8 billion and total shareholders’ equity was $5.6 billion at June 30, 2022.
- Cash provided by operating activities was $804 million for the first six months. Net cash provided by investing activities was $3.3 billion, while financing activities used $4.1 billion.
- Long-term debt was $671 million, down from $1.0 billion at year-end 2021, primarily due to the redemption of $290 million of senior notes.
- Available liquidity included $4.1 billion of cash and money market investments and $26.2 billion of investment securities. Additional FHLB and Federal Reserve borrowing capacity was $19.0 billion, with no such borrowings outstanding.
Material changes versus prior comparable periods
- Net interest income increased 7%, supported by higher average earning assets, a more favorable asset mix, and rising interest rates. Securities interest income rose $54 million, partly offsetting a $24 million decline in loan interest and fees as PPP balances declined.
- PPP loans continued to run off: $0.6 billion was forgiven during the quarter versus $2.3 billion in Q2 2021, and remaining unamortized PPP fees declined to $11 million from $137 million a year earlier.
- Customer-related noninterest income increased 11% to $154 million, but total noninterest income fell 16% because Q2 2021 included a substantial unrealized SBIC investment gain, principally related to Recursion Pharmaceuticals.
- Noninterest expense increased 8%, primarily because salaries and benefits rose 13% amid higher incentive compensation, inflationary wage pressure, labor-market competition, and increased headcount.
- The provision for credit losses changed from a $123 million benefit in Q2 2021 to a $41 million expense in Q2 2022, reflecting loan growth and less favorable economic forecasts, including a higher probability of recession.
- Accumulated other comprehensive income declined by $2.0 billion during the first six months, primarily because rising rates reduced the fair value of fixed-rate AFS securities. Total shareholders’ equity fell 25% from year-end, although management stated that these unrealized AOCI losses did not affect regulatory capital ratios.
- Common shares outstanding declined to 150.5 million, primarily from repurchases. The bank repurchased approximately 0.9 million shares for $50 million during Q2 and 1.7 million shares for $100 million during the first six months.
Guidance, outlook, commentary, risks, and unusual items
- Management expects the securities portfolio to decline modestly in the near term and expects deposit costs to rise as customers migrate from noninterest-bearing deposits to interest-bearing products. The modeled cost of total deposits for June 2023 was approximately 0.38% before additional Federal Reserve rate hikes.
- Based on the June 30 forward curve, management expected latent interest-rate sensitivity to add approximately 15% to Q2 2023 net interest income excluding PPP, with emergent sensitivity adding approximately 8% to the latent level.
- Beginning in Q3 2022, reductions in the rate and frequency of overdraft and nonsufficient-funds fees were expected to reduce customer-related noninterest income by approximately $5 million per quarter relative to then-current activity.
- The bank had $24.9 billion of loans, unfunded commitments, and securities referencing LIBOR, plus $11.0 billion of LIBOR-referenced derivatives. Management expects customers to migrate voluntarily or under fallback provisions before June 2023.
- Key risks include inflation, recession, rising interest rates, deposit runoff and repricing, securities valuation declines, credit deterioration, commercial real estate exposure, cybersecurity, operational and technology risks, regulatory changes, the Russia-Ukraine conflict, and legal and compliance matters.
- Unrealized losses on AFS securities totaled $2.7 billion at June 30, 2022. Management reported no AFS impairment and stated it did not intend to sell identified securities with unrealized losses.
- Legal matters included several investor and customer-fee cases. The filing estimated reasonably possible losses of $0 million to approximately $10 million in excess of accrued amounts for matters that could be meaningfully estimated, while noting that this range excludes matters for which a meaningful estimate was not possible.
- In July 2022, the Nevada State Bank division acquired three Northern Nevada branches and related accounts, including approximately $430 million of deposits and $95 million of commercial and consumer loans.
- The board declared a quarterly common dividend of $0.41 per share payable in August 2022 and approved a plan to repurchase up to $50 million of common shares during Q3 2022.
Important facts for investors to verify
- Whether loan growth and higher rates offset deposit repricing, deposit attrition, reduced fee income, and the anticipated decline in the securities portfolio.
- Whether credit losses and nonaccrual trends remain favorable as economic forecasts deteriorate and commercial, consumer, and commercial real estate balances grow.
- The effect of the $2.1 billion AOCI loss and securities unrealized losses on tangible common equity, market value, liquidity, and future capital actions, notwithstanding management’s statement regarding regulatory capital treatment.
- The sustainability of Q2 customer-related fee growth after the planned overdraft and nonsufficient-funds fee changes.
- Execution and potential costs of the core banking-system replacement, technology investments, LIBOR transition, and newly acquired Nevada branches.
- Subsequent filings for changes in interest rates, deposit balances, credit quality, securities values, litigation outcomes, capital ratios, dividends, and share repurchases.