Business Context and Reporting Period
Zions Bancorporation, National Association is a Salt Lake City-based commercial bank operating through seven affiliate banks across 11 Western and Southwestern states. The unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared primarily with the same periods in 2022, and includes balance-sheet comparisons with December 31, 2022.
Key Financial Metrics
| Metric | Q2 2023 | Comparable period |
|---|---|---|
| Net interest income | $591 million | $593 million in Q2 2022 |
| Net interest margin | 2.92% | 2.87% |
| Net income | $175 million | $203 million in Q2 2022 |
| Net earnings applicable to common shareholders | $166 million | $195 million |
| Diluted EPS | $1.11 | $1.29 |
| Noninterest income | $189 million | $172 million |
| Noninterest expense | $508 million | $464 million |
| Provision for credit losses | $46 million | $41 million |
| Efficiency ratio | 62.5% | 60.7% |
- Six-month results: Net interest income was $1.27 billion, net income was $379 million, net earnings applicable to common shareholders were $364 million, and diluted EPS was $2.44, compared with $1.137 billion, $406 million, $390 million, and $2.56, respectively, in the first six months of 2022.
- Loans: Loans and leases totaled $56.9 billion at June 30, 2023, up 9% from the prior-year quarter and 2% from December 31, 2022. Average loans increased 9% year over year to $56.7 billion.
- Deposits: Total deposits were $74.3 billion, up 7% from March 31, 2023 and 4% from December 31, 2022, but down 6% from the prior-year quarter. Estimated uninsured deposits were $30.4 billion, or 41% of total deposits.
- Credit quality: The allowance for credit losses was $711 million, or 1.25% of loans, compared with $546 million, or 1.04%, a year earlier. Net charge-offs were $13 million in Q2, or 0.09% annualized of average loans. Nonperforming assets were $164 million, or 0.29% of loans and OREO.
- Liquidity and funding: Available liquidity totaled $45.4 billion, including $43.2 billion of remaining secured borrowing capacity, compared with $21.1 billion at December 31, 2022. Available liquidity equaled 149% of estimated uninsured deposits.
- Cash flow: For the first six months, operating activities provided $819 million, investing activities provided $1.780 billion, and financing activities used $2.555 billion. Cash and due from banks increased $44 million to $701 million.
- Capital: Total shareholders’ equity was $5.3 billion. Common equity tier 1, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 10.0%, 10.7%, 12.5%, and 8.0%, respectively; the company stated that it exceeded all Basel III requirements.
Material Changes Versus Prior Comparable Period
- Higher asset yields increased interest income substantially, but the benefit was largely offset by sharply higher deposit and borrowing costs. The rate paid on total deposits and interest-bearing liabilities increased to 1.88% from 0.07%.
- Average interest-earning assets declined 2%, while average interest-bearing liabilities increased 27%, reflecting greater reliance on short-term borrowings and federal funds or repurchase agreements.
- Customer-related noninterest income increased 5% to $162 million, led by commercial account fees, treasury management activity, loan syndication, swaps, and other capital-markets income.
- Total noninterest income rose 10%, partly due to a $13 million gain on the sale of a bank-owned property. Fair-value and nonhedge derivative income declined because the prior-year period included a $10 million credit valuation adjustment gain.
- Noninterest expense rose 9%, including $13 million of current-quarter severance expense and a $9 million increase in deposit insurance and regulatory expense.
- Deposit composition shifted toward higher-cost funding: noninterest-bearing demand deposits declined to 38.6% of total deposits from 49.9% at December 31, 2022, while time and brokered deposits increased.
- Shareholders’ equity increased 8% from year-end, and accumulated other comprehensive loss improved to $2.9 billion from $3.1 billion. No common shares were repurchased in Q2, and management did not expect repurchases in Q3.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No formal earnings or balance-sheet guidance is provided in the filing. Management expects latent interest-rate sensitivity to reduce Q2 2024 net interest income by approximately 4% versus Q2 2023; based on the June 30 forward curve, cumulative latent and emergent sensitivity would imply an approximate 3% reduction.
- Management reported that deposit levels stabilized and grew sequentially during Q2 after industry-wide stress and deposit withdrawals in Q1. The company increased deposit pricing, expanded reciprocal and brokered deposit programs, increased liquidity sources, rebalanced hedges, and retained earnings to strengthen capital.
- The FDIC proposed a special assessment related to recent bank failures. Zions estimated a potential impact of approximately $80 million over the proposed assessment period, but had not accrued any amount as of June 30, 2023. The final rule and timing were not yet known.
- In Q2, the company entered into $2.5 billion of pay-fixed swaps to hedge AFS securities and terminated its remaining $500 million fair-value hedge of fixed-rate debt. In July 2023, it entered into an additional $1 billion of pay-fixed swaps hedging fixed-rate commercial loans.
- Principal risks include deposit volatility, uninsured deposit concentration, rising funding costs, interest-rate and securities valuation risk, potential deterioration in commercial real estate and other credit portfolios, bank-industry contagion, regulatory changes, increased FDIC assessments, cybersecurity and operational risks, economic weakness, and legal or governmental proceedings.
- Credit ratings remained investment grade, but S&P changed its outlook to Negative and Moody’s downgraded the long-term issuer rating to Baa2 and the short-term debt rating to P2.
- Management stated that disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether deposit growth remains durable without continued increases in deposit pricing, brokered deposits, or secured borrowings.
- The pace of deposit-cost increases and the resulting effect on net interest margin and net interest income.
- Trends in commercial real estate, office loans, criticized loans, nonaccrual loans, charge-offs, and the adequacy of the $711 million credit-loss allowance.
- The final FDIC special-assessment rule and whether the estimated $80 million exposure changes.
- Available liquidity and borrowing capacity relative to uninsured deposits, including reliance on the FHLB, Federal Reserve, GCF repo program, and BTFP.
- The impact of interest-rate changes, deposit-beta assumptions, hedge activity, and the $2.9 billion accumulated other comprehensive loss on economic value and capital.
- Future capital distributions, including the stated $0.41 per-share quarterly dividend and suspension of common-share repurchases during Q2 and expected Q3.
- Developments in the disclosed legal proceedings and any changes to the estimated range of reasonably possible losses.