Zions Bancorporation, N.A. — Form 10-Q Summary
Business Context and Reporting Period
Zions Bancorporation is a commercial bank headquartered in Salt Lake City, Utah, operating seven regional bank divisions across 11 Western and Southwestern states. This unaudited filing covers the three months ended March 31, 2022, compared primarily with the three months ended March 31, 2021 and December 31, 2021 balance-sheet data.
Key Financial Metrics
| Metric | Q1 2022 | Comparable period |
|---|---|---|
| Net interest income | $544 million | $545 million in Q1 2021 |
| Net income | $203 million | $322 million in Q1 2021 |
| Net earnings applicable to common shareholders | $195 million | $314 million in Q1 2021 |
| Diluted EPS | $1.27 | $1.90 in Q1 2021 |
| Net interest margin | 2.60% | 2.86% in Q1 2021 |
| Provision for credit losses | Negative $33 million | Negative $132 million in Q1 2021 |
| Noninterest income | $142 million | $169 million in Q1 2021 |
| Noninterest expense | $464 million | $435 million in Q1 2021 |
| Efficiency ratio | 65.8% | 63.5% in Q1 2021 |
| Net cash provided by operating activities | $288 million | $484 million in Q1 2021 |
Average interest-earning assets increased 10% to $86.1 billion, but lower asset yields and a greater concentration in cash and securities compressed the net interest margin. Average loans excluding PPP loans increased 4% to $49.5 billion, while average deposits increased 14% to $81.6 billion.
Loans and leases were $51.2 billion at March 31, 2022. Deposits were $82.4 billion, including $41.9 billion of noninterest-bearing demand deposits. Long-term debt was $689 million, down from $1.0 billion at year-end 2021, primarily due to redemption of $290 million of senior notes. Total assets were $91.1 billion and shareholders’ equity was $6.3 billion.
Liquidity remained supported by deposits, $8.1 billion of cash and money market investments, and a $27.0 billion investment securities portfolio. Additional FHLB and Federal Reserve borrowing capacity was $18.6 billion, with no FHLB or Federal Reserve borrowings outstanding at quarter-end. The loan-to-deposit ratio was 62%.
Credit metrics remained favorable. Net charge-offs were $6 million, or 0.05% of average loans excluding PPP loans. Nonperforming assets were $252 million, or 0.49% of loans and leases and OREO. The allowance for credit losses was $514 million, equal to 1.02% of loans excluding PPP loans.
Material Changes Versus Prior Comparable Period
- Net income declined 37% and diluted EPS declined from $1.90 to $1.27, primarily because the prior-year quarter benefited from a larger negative credit-loss provision.
- Net interest income was broadly stable, but the net interest margin declined 26 basis points to 2.60% as average interest-earning assets grew and yields compressed.
- Non-PPP loans increased $3.2 billion, or 7%, year over year, led by commercial and industrial, commercial owner-occupied, municipal, and home equity credit line balances.
- Total loans declined 4% year over year to $51.2 billion, mainly reflecting PPP forgiveness and lower 1-4 family residential mortgage balances.
- Deposits increased $8.5 billion, or 12%, year over year, driven largely by a $6.1 billion increase in noninterest-bearing deposits.
- Customer-related noninterest income increased 14% to $151 million, but total noninterest income declined 16% because of a $17 million negative mark-to-market adjustment, primarily related to an SBIC investment in Recursion Pharmaceuticals, and the absence of a prior-year gain on Farmer Mac stock.
- Noninterest expense increased 7%, principally from higher salaries and employee benefits reflecting wage inflation, labor-market competition, commissions, and incentive compensation.
- Accumulated other comprehensive income declined to a loss of $1.3 billion, mainly because rising interest rates reduced the fair value of fixed-rate available-for-sale securities. Management stated it did not intend to sell identified securities with unrealized losses.
- Common shareholders’ equity was affected by $50 million of share repurchases; the company repurchased approximately 0.8 million common shares during the quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management’s base-case simulation indicated a modeled 15% increase in first-quarter 2023 net interest income versus first-quarter 2022, excluding PPP loans, assuming a static balance sheet and unchanged March 31, 2022 interest-rate curve. This is a model-based scenario, not a formal earnings forecast.
- Beginning in the third quarter of 2022, planned reductions in the rate and frequency of certain consumer overdraft and insufficient-funds fees were expected to reduce customer-related noninterest income by approximately $5 million per quarter relative to then-current activity.
- First-quarter commercial account fees benefited from a one-time adjustment of approximately $6 million. Excluding that adjustment, the efficiency ratio would have been approximately 66.4%.
- Management cited inflation, supply-chain disruptions, the Russia-Ukraine conflict, changing interest rates, deposit migration, credit quality, cybersecurity, technology execution, competition for talent, regulatory developments, and COVID-19 effects as important risks.
- The bank had approximately $30 billion of loans, unfunded commitments, and securities referencing LIBOR, plus more than $13 billion of LIBOR-referenced derivative notional. Management expected voluntary customer migrations to alternative reference rates by the end of 2022 and remaining transitions before June 2023.
- Total unfunded lending commitments and letters of credit were $27.3 billion at March 31, 2022. The related reserve for unfunded lending commitments was $36 million.
- Material litigation remained outstanding, including matters involving alleged Ponzi schemes, deposit fees, and borrower fraud. The filing estimated reasonably possible losses of approximately $0 million to $10 million above accrued amounts for matters where a meaningful range could be estimated, while noting that the range excludes matters for which estimation was not possible.
- The company adopted retrospective financial reporting reclassifications for certain noninterest expenses, primarily technology-related costs. The reclassifications did not affect net income, net interest income, noninterest income, or shareholders’ equity.
- The Board approved a plan to repurchase up to $50 million of common shares during the second quarter of 2022 and declared a quarterly common dividend of $0.38 per share.
Most Important Facts for Investors to Verify
- Whether loan growth excluding PPP loans and strong deposit balances continue to offset margin pressure from securities concentration and deposit repricing.
- The sustainability of the negative credit-loss provision and whether charge-offs, nonaccrual loans, and the allowance for credit losses remain favorable as inflation and economic uncertainty evolve.
- The duration, valuation sensitivity, and unrealized losses in the available-for-sale securities portfolio, including the effect of further interest-rate increases on AOCI and capital.
- The effect of lower overdraft and insufficient-funds fees on recurring noninterest income beginning in the third quarter of 2022.
- Execution of the LIBOR transition, including approximately $30 billion of referenced assets and commitments and more than $13 billion of derivative notional.
- Progress and spending associated with the core loan and deposit system replacement, including the planned 2023 deposit-servicing conversion.
- Capital resilience, including the 5.4% tangible common equity ratio, 10.0% common equity tier 1 ratio, and 7.3% Tier 1 leverage ratio at March 31, 2022.
- Developments in pending litigation and whether losses exceed current accruals or the disclosed estimated range.