ZIONS BANCORPORATION, NATIONAL ASSOCIATION quarterly report, Q3 FY2022

Zions Bancorporation, N.A. — Form 10-Q Summary

Business context and reporting period

Zions Bancorporation, National Association is a commercial bank headquartered in Salt Lake City, Utah, operating through seven regional bank divisions across 11 Western and Southwestern states. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022, with comparisons primarily to the corresponding 2021 periods.

Key financial metrics

Metric	Q3 2022	Q3 2021	Change
Net interest income	$663 million	$555 million	+19%
Net interest margin	3.24%	2.68%	+56 bps
Noninterest income	$165 million	$139 million	+19%
Noninterest expense	$479 million	$429 million	+12%
Provision for credit losses	$71 million	$(46) million	Unfavorable $117 million
Net income	$217 million	$240 million	-10%
Net earnings applicable to common shareholders	$211 million	$234 million	-10%
Diluted EPS	$1.40	$1.45	-3%
Efficiency ratio	57.6%	59.8%	Improved

For the nine months ended September 30, 2022, net interest income was $1.8 billion, net income was $623 million, net earnings applicable to common shareholders were $601 million, and diluted EPS was $3.96, compared with $893 million and $5.43, respectively, for the prior-year period.

Average loans and leases were $53.0 billion in the quarter, up 4% year over year; excluding PPP loans, average loans increased 12%.
Total loans and leases were $53.9 billion at September 30, 2022, up $3.1 billion from December 31, 2021.
Total deposits were $76.0 billion, down 8% from December 31, 2021. Noninterest-bearing deposits represented 51.5% of period-end deposits.
The loan-to-deposit ratio was 71%, compared with 61% at December 31, 2021.
The allowance for credit losses was $590 million, or 1.10% of net loans excluding PPP loans.
Net charge-offs were $27 million, or 0.21% annualized of average loans excluding PPP loans, versus net recoveries of $1 million in Q3 2021.
Operating cash flow for the first nine months was $976 million, compared with $463 million in the prior-year period. Net cash provided by investing activities was $1.95 billion, while financing activities used $2.98 billion.
Long-term debt was $647 million, down from $1.01 billion at year-end 2021, primarily due to redemption of $290 million of senior notes. Short-term borrowings were $5.36 billion, compared with $903 million at year-end 2021.
Available liquidity included $4.6 billion of cash and money market investments and $24.2 billion of investment securities. Additional FHLB and Federal Reserve borrowing capacity was $15.9 billion.
Basel III capital ratios remained above regulatory requirements: common equity tier 1 was 9.6%, tier 1 leverage was 7.5%, and total risk-based capital was 12.0%.

Material changes versus comparable periods

Higher market interest rates and a favorable shift from money market investments toward securities and loans increased net interest income and NIM, despite a $57 million year-over-year reduction in PPP-loan interest income.
Customer-related noninterest income increased 3% to $156 million, led by capital markets, foreign exchange, commercial account, card, and wealth management fees. Loan-related fees declined because more residential mortgage production was retained rather than sold, and retail and business banking fees declined following changes to overdraft and nonsufficient-funds practices.
Noninterest expense rose primarily because salaries and benefits increased $27 million due to inflationary wage pressure, competitive labor markets, higher headcount, and incentive compensation. FDIC insurance and regulatory expense also increased.
The provision for credit losses shifted from a $46 million benefit in Q3 2021 to a $71 million expense, reflecting loan growth and economic scenarios incorporating a higher probability of recession.
Credit quality metrics improved overall: nonperforming assets declined to $151 million from $272 million at December 31, 2021, and the nonperforming-assets ratio declined to 0.28% from 0.53%. Classified loans also decreased $432 million year over year.
Total shareholders’ equity declined to $4.7 billion from $7.5 billion at year-end 2021. Accumulated other comprehensive loss increased to $3.14 billion, primarily from interest-rate-related unrealized losses on fixed-rate available-for-sale securities and derivatives. Management stated it did not intend to sell securities with unrealized losses.
During Q3, the bank repurchased 888,092 common shares for $50 million. In October 2022, the board authorized up to an additional $50 million of repurchases for Q4 and declared a $0.41-per-share quarterly common dividend.
In July 2022, Nevada State Bank acquired three Northern Nevada branches, including approximately $430 million of deposits and $95 million of commercial and consumer loans.
In October 2022, the bank transferred approximately $9.0 billion of amortized-cost, pass-through mortgage-backed securities from available-for-sale to held-to-maturity, reflecting a change in management’s intent.

Guidance, outlook, risks, contingencies, and unusual items

Management did not provide formal earnings guidance in the filing. It expected deposit costs for September 2023 to be approximately 0.63% absent additional Federal Reserve rate hikes, with further increases possible if rates rise.
Management estimated that latent interest-rate sensitivity could increase Q3 2023 net interest income by approximately 10% versus Q3 2022 excluding PPP loans, and that forward-curve rate movements could add approximately 4% to the latent sensitivity level. These estimates are model-dependent and not guarantees.
Primary risks include economic slowdown, inflation, rising interest rates, deposit migration and funding costs, credit losses, commercial real estate exposure, securities valuation declines, market volatility, cybersecurity, regulatory changes, the Russia-Ukraine conflict, and climate-related developments.
The bank had approximately $20.3 billion of loans, unfunded commitments, and securities referencing LIBOR and expected remaining customers to transition to alternative reference rates before June 2023.
Unfunded lending commitments and letters of credit totaled $29.7 billion at September 30, 2022. The reserve for unfunded lending commitments was $49 million.
Legal matters included borrower-related litigation, deposit-fee class actions, and proposed settlements. The estimated range of reasonably possible losses in matters for which an estimate was available was $0 to approximately $10 million above recorded accruals; the filing cautioned that this range does not represent maximum exposure.
Unusual items included prior-year losses on an SBIC investment in Recursion Pharmaceuticals, current-period valuation losses on an equity investment, and significant unrealized losses recognized in other comprehensive income rather than earnings.
Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether deposit runoff continues and how quickly deposit pricing increases as interest rates rise.
Whether the $71 million quarterly credit-loss provision and higher charge-offs represent normalization or the beginning of broader credit deterioration.
The impact of the $9.0 billion securities transfer on future liquidity, interest-rate sensitivity, AOCI, and unrealized losses.
The sustainability of the 3.24% NIM and management’s modeled 2023 interest-rate sensitivity.
The effects of higher short-term borrowings, lower deposits, and the 71% loan-to-deposit ratio on funding costs and liquidity.
The effect of unrealized securities and derivative losses on tangible common equity, which was 3.7% at September 30, 2022, despite regulatory capital ratios remaining above requirements.
Progress and potential costs associated with the LIBOR transition, pending litigation, proposed settlements, and the core banking-system conversion.