ZIONS BANCORPORATION, NATIONAL ASSOCIATION quarterly report, Q1 FY2023

Business Context and Reporting Period

Zions Bancorporation, National Association is a commercial bank headquartered in Salt Lake City, Utah, operating through seven separately managed banking divisions across 11 Western and Southwestern states. This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparisons primarily to the three months ended March 31, 2022 and, for balance-sheet items, December 31, 2022.

Key Financial Metrics

Metric	Q1 2023	Comparable period	Change
Net interest income	$679 million	$544 million	Up 25%
Net revenue	$839 million	$686 million	Up 22%
Provision for credit losses	$45 million	$(33) million	$78 million unfavorable change
Noninterest income	$160 million	$142 million	Up 13%
Noninterest expense	$512 million	$464 million	Up 10%
Net income	$204 million	$203 million	Up 1%
Net earnings applicable to common shareholders	$198 million	$195 million	Up 2%
Diluted EPS	$1.33	$1.27	Up $0.06
Net interest margin	3.33%	2.60%	Up 73 basis points
Efficiency ratio	59.9%	65.8%	Improved
Net cash provided by operating activities	$221 million	$288 million	Down $67 million

Balance Sheet, Credit, Debt and Liquidity

Total assets were $88.6 billion at March 31, 2023, compared with $89.5 billion at December 31, 2022.
Loans and leases increased 1% from year-end to $56.3 billion and increased 10% from Q1 2022. Growth was concentrated in consumer 1-4 family residential mortgages, commercial real estate term loans, commercial and industrial loans, and consumer construction loans.
Total deposits declined 3% from year-end to $69.2 billion and 16% from Q1 2022. Estimated uninsured deposits were $31.4 billion, or 45% of total deposits, versus 53% at December 31, 2022. Brokered deposits increased to $5.4 billion from $0.9 billion at year-end.
The loan-to-deposit ratio was 81%, compared with 78% at December 31, 2022 and 62% in Q1 2022. Borrowed funds were $12.8 billion, consisting primarily of secured borrowings, compared with $1.9 billion at March 31, 2022.
Total available liquidity was $32.3 billion, including $29.0 billion of remaining collateralized borrowing capacity, cash and due from banks of $0.6 billion, and interest-bearing deposits of $2.7 billion. Management stated that available liquidity exceeded uninsured deposits without requiring securities sales.
The Bank did not access the Federal Reserve discount window or Bank Term Funding Program during the quarter, except for a $1 million overnight operational test of the BTFP.
Total shareholders’ equity was $5.2 billion. Basel III common equity tier 1, tier 1 risk-based, total risk-based, and tier 1 leverage ratios were 9.9%, 10.6%, 12.4%, and 7.8%, respectively; management stated that the Bank exceeded well-capitalized requirements.
The allowance for credit losses increased to $678 million from $636 million at year-end and $514 million in Q1 2022. The ACL-to-net-loans ratio was 1.20%.
Net loan and lease charge-offs were zero, compared with $6 million in Q1 2022. Nonperforming assets were $173 million, or 0.31% of net loans and leases and OREO, versus $149 million and 0.27% at year-end.

Material Changes Versus the Prior Comparable Period

Higher market interest rates and a shift in earning-asset mix toward loans increased interest income and lifted NIM to 3.33% from 2.60%, despite a 3% decline in average interest-earning assets.
Interest expense increased sharply to $241 million from $11 million, reflecting higher deposit costs and substantially greater borrowings.
Customer-related noninterest income was stable at $151 million. Commercial treasury management, foreign exchange, and capital markets fees offset lower retail and business banking fees following changes to overdraft and nonsufficient-funds practices.
Noninterest expense rose $48 million, primarily from a $27 million increase in salaries and employee benefits, an $8 million increase in deposit insurance and regulatory expense, and higher technology and other operating costs.
The provision for credit losses changed from a $33 million benefit in Q1 2022 to a $45 million expense in Q1 2023 because of deterioration in economic forecasts and loan growth, despite generally stable credit quality and zero net charge-offs.
The effective tax rate increased to 27.7% from 20.4%, primarily due to a discrete item affecting the reserve for uncertain tax positions.
After-tax other comprehensive income was $192 million, compared with a $1.3 billion loss in Q1 2022, primarily reflecting changes in investment securities and derivative valuations.

Guidance, Outlook, Management Commentary, Risks and Unusual Items

Management expected near-term NIM of approximately 3.0% because of the funding-mix change late in the quarter, partly offset by continued improvement in earning-asset yields.
Management estimated that latent and emergent interest-rate sensitivity could reduce Q1 2024 net interest income by approximately 8% compared with Q1 2023, assuming the forward rate curve at March 31, 2023.
The Bank modeled a 3.3% increase in 12-month net interest income under a parallel 100-basis-point rate increase, but sensitivity would decline to approximately 2.0% under a higher deposit-beta assumption.
The Bank expected to complete the transition of nearly all USD LIBOR swaps to SOFR during Q2 2023. More than 70% of loans referencing LIBOR had already moved to an alternative index at March 31, 2023.
The Bank transferred approximately $10.7 billion fair value of mortgage-backed securities from AFS to HTM in Q4 2022. At March 31, 2023, total HTM and AFS securities had $1.5 billion of gross unrealized losses, primarily attributable to interest-rate changes; management stated it did not intend to sell identified securities with unrealized losses.
Management did not expect to repurchase common shares during Q2 2023 because of increased macroeconomic uncertainty. The Bank repurchased 0.9 million shares for $50 million in Q1 2023 and paid a $0.41 per-share common dividend.
Moody’s downgraded the long-term issuer rating to Baa2 from Baa1 and the short-term debt rating to P2 from P1 in April 2023, while maintaining a stable outlook. The other disclosed ratings remained investment grade.
Key risks include deposit outflows and higher funding costs, dependence on secured borrowing capacity, interest-rate and securities valuation volatility, commercial real estate deterioration, broader effects from bank failures or systemic stress, economic slowdown or recession, regulatory changes, cybersecurity, litigation, and potential disruption from the U.S. debt-ceiling negotiations.
Material legal matters included pending medical-product-related litigation and a foreign-transaction-fee class action. Management estimated reasonably possible losses for certain matters at zero to approximately $5 million above accrued amounts, while noting that the range excludes matters for which a meaningful estimate was not possible.

Most Important Facts for Investors to Verify

Whether deposit balances, uninsured deposits, brokered deposits, and borrowing levels stabilize or continue to shift toward more expensive funding.
Whether reported NIM converges toward management’s approximately 3.0% near-term estimate and how deposit betas affect earnings.
Whether the provision for credit losses and ACL remain adequate as economic forecasts change, particularly for commercial real estate, office properties, and commercial borrowers.
Whether nonperforming assets, classified loans, and charge-offs remain controlled as the loan portfolio grows.
The carrying values, unrealized losses, duration, pledging status, and liquidity value of the HTM and AFS securities portfolios.
Whether capital ratios remain comfortably above regulatory requirements after deposit stress, balance-sheet growth, dividends, and any future capital actions.
The effect of the Moody’s downgrade, LIBOR-to-SOFR transition, and any changes in access to FHLB, FRB, GCF repo, or BTFP funding.
Potential outcomes and accruals related to pending litigation and other regulatory or governmental inquiries.