Zions Bancorporation, N.A. — Q3 2023 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. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods and, where relevant, December 31, 2022.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Comparable Period |
|---|---|---|
| Net earnings applicable to common shareholders | $168 million | $211 million in Q3 2022 |
| Diluted EPS | $1.13 | $1.40 |
| Net interest income | $585 million | $663 million |
| Net interest margin | 2.93% | 3.24%; 2.92% in Q2 2023 |
| Provision for credit losses | $41 million | $71 million |
| Noninterest income | $180 million | $165 million |
| Noninterest expense | $496 million | $479 million |
| Efficiency ratio | 64.4% | 57.6% |
| Net charge-offs | $14 million; 0.10% annualized | $27 million; 0.20% annualized |
| Effective tax rate | 23.2% | 21.9% |
For the first nine months of 2023, net earnings applicable to common shareholders were $532 million, or $3.57 diluted EPS, compared with $601 million, or $3.96 diluted EPS, in the prior-year period. Net interest income was $1.855 billion versus $1.800 billion, while noninterest income was $529 million versus $479 million. Noninterest expense increased to $1.516 billion from $1.407 billion.
Interest income rose substantially with higher rates and loan growth, but funding costs increased faster. Q3 interest income was $1.010 billion, up from $707 million, while interest expense increased to $425 million from $44 million. Average loans and leases rose 8% to $57.0 billion, while average interest-bearing liabilities rose 26% to $52.3 billion.
At September 30, 2023, total assets were $87.3 billion, loans and leases were $56.9 billion, and total deposits were $75.4 billion. Shareholders’ equity was $5.3 billion, including accumulated other comprehensive loss of $3.0 billion. Long-term debt was $540 million, down from $651 million at December 31, 2022, primarily after redemption of $128 million of senior notes.
Operating cash flow for the first nine months was $1.130 billion, compared with $976 million in the prior-year period. Investing activities provided $1.632 billion, while financing activities used $2.719 billion, primarily reflecting a $6.071 billion decrease in short-term borrowings, partly offset by a $3.747 billion increase in deposits. Cash and due from banks ended at $700 million.
Liquidity improved materially. Total available liquidity was $43.6 billion, including $41.2 billion of remaining secured borrowing capacity, compared with $21.1 billion at December 31, 2022. Available liquidity equaled 140% of estimated uninsured deposits of $31.2 billion.
Basel III capital ratios strengthened: common equity tier 1 was 10.2%, tier 1 risk-based was 10.9%, total risk-based was 12.8%, and tier 1 leverage was 8.3%. Management stated that the Bank exceeded applicable capital requirements and was well-capitalized.
Material Changes Versus Prior Comparable Period
- Q3 diluted EPS declined 19% to $1.13 as lower net interest income and higher operating costs more than offset the lower credit-loss provision.
- Net interest income declined 12% year over year because higher asset yields were offset by sharply higher deposit and borrowing costs. The NIM stabilized sequentially, increasing from 2.92% in Q2 to 2.93% in Q3.
- Total deposits increased 5% from December 31, 2022 and 1% from June 30, 2023. The mix shifted substantially from noninterest-bearing demand deposits to interest-bearing savings, money market, and time deposits.
- Loans and leases increased 2% from year-end to $56.9 billion, led by consumer and commercial real estate growth. Commercial real estate represented 23% of total loans.
- The allowance for credit losses increased to $738 million from $636 million at year-end and $590 million a year earlier, primarily due to deterioration in economic forecasts. The ACL-to-loans ratio was 1.30%.
- Nonperforming assets increased to $219 million, or 0.38% of loans and leases, from $149 million, or 0.27%, at year-end. The increase primarily reflected two Southern California suburban office CRE loans totaling $46 million.
- Technology, telecom, and information-processing expense increased 17% year over year, reflecting application software, maintenance, and amortization costs related to the core loan and deposit system replacement project.
- Deposit insurance and regulatory expense increased 54% to $20 million in Q3. Management estimated that the proposed FDIC special assessment could result in approximately $80 million of expense when the rule is finalized.
- Accumulated other comprehensive loss improved from $3.112 billion at year-end to $3.008 billion, although AOCI declined by $105 million after tax during Q3 because of higher interest rates and lower AFS securities values.
- The Bank repurchased $50 million of common stock during the first nine months, all during Q1. Management did not repurchase shares in Q2 or Q3 and did not expect to repurchase shares in Q4 2023.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management described Q3 results as reflecting sequential customer-deposit growth and stabilization of the NIM. Strategic actions included increasing deposit growth, shifting toward higher-yielding loans, reducing lower-yielding securities and money-market positions, expanding liquidity, managing hedges, controlling expenses, and strengthening capital.
- Management expects latent interest-rate sensitivity to reduce Q3 2024 net interest income by approximately 2% relative to Q3 2023. Based on the forward curve at September 30, 2023, cumulative emergent sensitivity was expected to produce an approximately 2% reduction; these are not formal earnings forecasts.
- Management expects substantially all remaining affiliate conversions under the core deposit-system replacement project to be completed in 2024. Capitalized project costs were $295 million at September 30, 2023.
- Interest-rate risk is highly dependent on deposit migration and deposit-beta assumptions. Under adjusted assumptions considered more realistic by management, modeled earnings-at-risk for a parallel 200-basis-point rate increase was 1.4%, versus 8.9% under historical assumptions.
- Key risks include deposit volatility, higher funding costs, further interest-rate changes, economic slowdown or recession, commercial real estate deterioration, bank-industry contagion, reduced market liquidity, cybersecurity and operational risks, regulatory changes, geopolitical conflicts, and potential government funding disruptions.
- The proposed Basel III Endgame and long-term-debt rules would generally apply to banks with at least $100 billion of assets. Zions had $87.3 billion of assets at quarter-end but expects it could become subject to the framework in future years; management estimated approximately $3.5 billion of incremental debt could be required if the proposal were enacted and the Bank exceeded the threshold.
- During the first nine months, loans modified for borrowers experiencing financial difficulty totaled $243 million, including $232 million accruing and $11 million nonaccruing. Principal forgiveness was less than $1 million.
- Material litigation disclosed includes two cases involving alleged borrower fraud in medical-product transactions and a Nevada case involving foreign transaction fees. The estimated aggregate range of reasonably possible losses for certain matters was zero to approximately $5 million in excess of amounts accrued, excluding matters for which a meaningful estimate was not possible.
- Credit ratings remained investment grade, but Moody’s downgraded the long-term issuer rating to Baa2, S&P assigned a negative outlook, and Fitch downgraded the short-term debt rating to F2.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether deposit growth and the shift toward higher-cost funding stabilize or continue to pressure NIM and profitability.
- The final FDIC special-assessment rule and its actual expense impact, compared with management’s preliminary estimate of approximately $80 million.
- Trends in office CRE criticized, classified, nonaccrual, delinquency, and charge-off metrics, particularly the approximately $630 million of office CRE maturing within 12 months.
- Whether the $738 million ACL adequately reflects future economic conditions and potential CRE or consumer-credit deterioration.
- The sustainability of the $43.6 billion liquidity position, including access to FHLB, Federal Reserve, GCF, and BTFP facilities and the level of outstanding borrowings.
- The effect of higher rates, deposit betas, deposit migration, and hedge positions on future net interest income.
- Progress, costs, and execution risks related to the core banking-system replacement and 2024 affiliate conversions.
- Future capital distributions, share repurchases, regulatory capital requirements, and the potential implications of the $100 billion asset threshold.
- Developments in disclosed litigation, regulatory matters, credit ratings, and broader banking-system conditions.