UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
COMMISSION FILE NUMBER 001-12307
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
Registrant’s telephone number, including area code: (801 ) 844-8208
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbols | Name of Each Exchange on Which Registered | ||||||
| Depositary Shares each representing a 1/40th ownership interest in a share of: | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of common shares outstanding at October 31, 2023 148,148,799 shares
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ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
Table of Contents
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Table of Contents
ZIONS BANCORPORATION, NATIONAL ASSOCIATION AND SUBSIDIARIES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS
| ACL | Allowance for Credit Losses | HECL | Home Equity Credit Line | ||||||||
| AFS | Available-for-Sale | HTM | Held-to-Maturity | ||||||||
| ALLL | Allowance for Loan and Lease Losses | IPO | Initial Public Offering | ||||||||
| Amegy | Amegy Bank, a division of Zions Bancorporation, National Association | LIHTC | Low-income Housing Tax Credit | ||||||||
| AOCI | Accumulated Other Comprehensive Income or Loss | Municipalities | State and Local Governments | ||||||||
| ASC | Accounting Standards Codification | NAICS | North American Industry Classification System | ||||||||
| ASU | Accounting Standards Update | NASDAQ | National Association of Securities Dealers Automated Quotations | ||||||||
| BOLI | Bank-Owned Life Insurance | NBAZ | National Bank of Arizona, a division of Zions Bancorporation, National Association | ||||||||
| bps | Basis Points | NIM | Net Interest Margin | ||||||||
| BTFP | Bank Term Funding Program | NM | Not Meaningful | ||||||||
| CB&T | California Bank & Trust, a division of Zions Bancorporation, National Association | NSB | Nevada State Bank, a division of Zions Bancorporation, National Association | ||||||||
| CECL | Current Expected Credit Loss | OCC | Office of the Comptroller of the Currency | ||||||||
| CLTV | Combined Loan-to-Value Ratio | OCI | Other Comprehensive Income or Loss | ||||||||
| CRE | Commercial Real Estate | OREO | Other Real Estate Owned | ||||||||
| CVA | Credit Valuation Adjustment | PAM | Proportional Amortization Method | ||||||||
| DTA | Deferred Tax Asset | PEI | Private Equity Investment | ||||||||
| DTL | Deferred Tax Liability | PPNR | Pre-provision Net Revenue | ||||||||
| EaR | Earnings at Risk | PPP | Paycheck Protection Program | ||||||||
| EPS | Earnings per Share | ROU | Right-of-Use | ||||||||
| EVE | Economic Value of Equity | RULC | Reserve for Unfunded Lending Commitments | ||||||||
| FASB | Financial Accounting Standards Board | S&P | Standard & Poor's | ||||||||
| FDIC | Federal Deposit Insurance Corporation | SBA | U.S. Small Business Administration | ||||||||
| FHLB | Federal Home Loan Bank | SBIC | Small Business Investment Company | ||||||||
| FICO | Fair Isaac Corporation | TCBW | The Commerce Bank of Washington, a division of Zions Bancorporation, National Association | ||||||||
| FRB | Federal Reserve Board | TDR | Troubled Debt Restructuring | ||||||||
| FTP | Funds Transfer Pricing | U.S. | United States | ||||||||
| GAAP | Generally Accepted Accounting Principles | Vectra | Vectra Bank Colorado, a division of Zions Bancorporation, National Association | ||||||||
| GCF | General Collateral Funding | Zions Bank | Zions Bank, a division of Zions Bancorporation, National Association | ||||||||
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This quarterly report includes “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and assumptions regarding future events or determinations, all of which are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements, industry trends, and results or regulatory outcomes to differ materially from those expressed or implied. Forward-looking statements include, among others:
•Statements with respect to the beliefs, plans, objectives, goals, targets, commitments, designs, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Zions Bancorporation, National Association and its subsidiaries (collectively “Zions Bancorporation, N.A.,” “the Bank,” “we,” “our,” “us”); and
•Statements preceded or followed by, or that include the words “may,” “might,” “can,” “continue,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “forecasts,” “expect,” “intend,” “target,” “commit,” “design,” “plan,” “projects,” “will,” and the negative thereof and similar words and expressions.
Forward-looking statements are not guarantees, nor should they be relied upon as representing management’s views as of any subsequent date. Actual results and outcomes may differ materially from those presented. Although the following list is not comprehensive, important factors that may cause material differences include:
•The quality and composition of our loan and securities portfolios and the quality and composition of our deposits;
•Changes and uncertainties in applicable laws, and fiscal, monetary, regulatory, trade, and tax policies, and actions taken by governments, agencies, central banks, and similar organizations, including increases in bank fees, insurance assessments, capital standards, and other regulatory requirements;
•Protracted congressional negotiations and political stalemates regarding government funding and other issues that increase the possibility of government shutdowns or other economic disruptions;
•Changes in general industry, political and economic conditions, including continued elevated inflation, economic slowdown or recession, or other economic challenges; changes in interest and reference rates which could adversely affect our revenue and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity; deterioration in economic conditions that may result in increased loan and leases losses;
•Securities and capital markets behavior, including volatility and changes in market liquidity and our ability to raise capital;
•The impact of bank failures or adverse developments at other banks on general investor sentiment regarding the stability and liquidity of banks;
•The possibility that our recorded goodwill could become impaired, which may have an adverse impact on our earnings and capital;
•Competitive pressures and other factors that may affect aspects of our business, such as pricing and demand for our products and services, our ability to recruit and retain talent, and the impact of digital commerce, artificial intelligence, and other innovations affecting the banking industry;
•Our ability to complete projects and initiatives and execute on our strategic plans, manage our risks, control compensation and other expenses, and achieve our business objectives;
•Our ability to provide adequate oversight of our suppliers or prevent inadequate performance by third parties upon whom we rely for the delivery of various products and services;
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•Our ability to develop and maintain technology, information security systems and controls designed to guard against fraud, cybersecurity, and privacy risks;
•Adverse media and other expressions of negative public opinion whether directed at us, other banks, the banking industry, or otherwise that may adversely affect our reputation and that of the banking industry generally;
•The effects of pandemics and other health emergencies that may affect our business, employees, customers, and communities;
•The effects of wars and geopolitical conflicts, such as the ongoing conflict between Russia and Ukraine and the escalating events in the Middle East, and other local, national, or international disasters, crises, or conflicts that may occur in the future;
•Natural disasters that may impact our and our customer's operations and business; and
•Governmental and social responses to environmental, social, and governance issues, including those with respect to climate change.
We caution against the undue reliance on forward-looking statements, which reflect our views only as of the date they are made. Except to the extent required by law, we specifically disclaim any obligation to update any factors or to publicly announce the revisions to any forward-looking statements to reflect future events or developments.
KEY STRATEGIC ACTIONS
During the first nine months of 2023, the banking industry experienced significant changes in market conditions, including a higher interest rate environment and fluctuations in deposit levels. As a result, we continued to manage the associated risks through the following strategic actions:
•Generated customer deposit growth through a combination of competitive interest rates and expanded utilization of reciprocal deposit programs, including the recapture of off-balance sheet deposits;
•Actively managed the balance sheet through a mix change toward higher-yielding loans, while reducing the size of our lower-yielding securities and money market positions;
•Increased total available liquidity sources, which far exceed our level of uninsured deposits;
•Actively managed our interest rate and market risk exposures through a rebalancing of our accounting hedges for both available-for-sale (“AFS”) securities and commercial loans;
•Remained committed to controlling expenses, including personnel management, while continuing to invest in technology;
•Maintained strong credit performance, including low net charge-offs; and
•Further strengthened our regulatory capital position through increased retained earnings.
RESULTS OF OPERATIONS
Comparisons noted below are calculated for the current quarter compared with the same prior year period unless otherwise specified. Growth rates of 100% or more are considered not meaningful (“NM”) as they generally reflect a low starting point.
Executive Summary
Our financial results in the third quarter of 2023 reflected sequential growth in customer deposits and a stabilization of the net interest margin (“NIM”). Diluted earnings per share (“EPS”) was $1.13, compared with $1.40 in the third quarter of 2022, as lower revenue and higher noninterest expense was partially offset by a lower provision for credit losses.
Net interest income decreased $78 million, or 12%, compared with the prior year quarter, as higher earning asset yields were offset by higher funding costs. Net interest income was also impacted by a reduction in interest-earning
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assets and an increase in interest-bearing liabilities. The NIM was 2.93%, compared with 3.24%, and was up from 2.92% in the second quarter of 2023.
The provision for credit losses was $41 million, compared with a $71 million provision in the prior year period, due to changes in economic forecasts and lower net charge-offs.
Total customer-related noninterest income remained relatively stable at $157 million, compared with the prior year period. A $5 million increase in loan-related fees, primarily due to a $4 million gain on the sale of certain mortgage servicing assets, and a $3 million increase in commercial account fees, driven primarily by increased treasury management sweep income, was partially offset by a $7 million decrease in capital market fees, largely due to reduced swap and loan syndication fees. Total noninterest income increased $15 million, or 9%, primarily due to a valuation loss recognized on one of our equity investments in the prior year period, as well as an increase in dividends on Federal Home Loan Bank (“FHLB”) stock in the current period.
Total noninterest expense increased $17 million, or 4%, relative to the prior year quarter, driven largely by a $9 million increase in technology, telecom, and information processing expense, primarily due to increases in application software expenses. Deposit insurance and regulatory expense increased $7 million, driven largely by an increased Federal Deposit Insurance Corporation (“FDIC”) insurance base rate beginning in 2023 and changes in balance sheet composition. Our efficiency ratio was 64.4%, compared with 57.6%, primarily due to a decline in adjusted taxable-equivalent revenue.
Average interest-earning assets decreased $1.8 billion, or 2%, from the prior year quarter, driven by declines of $4.5 billion and $1.3 billion in average securities and average money market investments, respectively, and partially offset by an increase of $4.0 billion in average loans and leases. Average interest-bearing liabilities increased $10.9 billion, or 26%, from the prior year quarter, driven by increases of $9.9 billion and $1.3 billion in average interest-bearing deposits and average other short-term borrowings, respectively.
Total loans and leases increased $3.0 billion, or 6%, to $56.9 billion from the prior year quarter. Consumer loans increased $1.8 billion, primarily in the 1-4 family residential and consumer construction loan portfolios. Commercial real estate (“CRE”) loans increased $0.8 billion, primarily in the multi-family and industrial construction loan portfolios. Increased funding of construction lending commitments and conversion-to-term loans contributed to growth in these portfolios. Net loan and lease charge-offs totaled $14 million, compared with $27 million in the prior year quarter, and classified loans decreased $196 million, or 20%. Nonperforming assets increased to $219 million, or 0.38% of loans and leases, compared with $151 million, or 0.28% of loans and leases, in the prior year quarter, primarily due to two suburban office commercial real estate loans in the Southern California market totaling $46 million.
Total deposits decreased $0.6 billion, or 1%, from the prior year quarter, due to the $12.4 billion reduction in noninterest-bearing demand deposits, which was largely offset by an $11.8 billion increase in interest-bearing deposits, as the higher interest rate environment influenced the movement of customer balances into interest-bearing products. Total customer deposits (excluding brokered deposits) increased $3.0 billion, or 5%, from June 30, 2023. At September 30, 2023 and June 30, 2023, total customer deposits included approximately $6.4 billion and $3.4 billion, respectively, of reciprocal placement products.
Total borrowed funds, consisting primarily of secured borrowings, decreased $1.1 billion from the prior year quarter, largely due to reduced funding needs as a result of the decrease in interest-earning assets.
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Third Quarter 2023 Financial Performance
| Net Earnings Applicable to Common Shareholders (in millions) | Diluted EPS | Adjusted PPNR (in millions) | Efficiency Ratio | |||||||||||||||||
Net earnings applicable to common shareholders decreased from the third quarter of 2022, as lower net revenue and higher noninterest expense, driven largely by application software expenses and higher FDIC insurance costs, was partially offset by a lower provision for credit losses. | Diluted earnings per share declined from the third quarter of 2022 primarily as a result of decreased net earnings applicable to common shareholders. | Adjusted pre-provision net revenue (“PPNR”) decreased from the third quarter of 2022, primarily due to lower adjusted taxable-equivalent revenue and increased adjusted noninterest expense. | The efficiency ratio increased from the prior year quarter, primarily due to a decline in adjusted taxable-equivalent revenue. | |||||||||||||||||
Net Interest Income and Net Interest Margin
NET INTEREST INCOME AND NET INTEREST MARGIN
| Three Months Ended September 30, | Amount change | Percent change | Nine Months Ended September 30, | Amount change | Percent change | ||||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||
Interest and fees on loans 1 | $ | 831 | $ | 551 | $ | 280 | 51 | % | $ | 2,348 | $ | 1,456 | $ | 892 | 61 | % | |||||||||||||||||||||||||||||||
| Interest on money market investments | 35 | 24 | 11 | 46 | 140 | 42 | 98 | NM | |||||||||||||||||||||||||||||||||||||||
| Interest on securities | 144 | 132 | 12 | 9 | 419 | 372 | 47 | 13 | |||||||||||||||||||||||||||||||||||||||
Total interest income | 1,010 | 707 | 303 | 43 | 2,907 | 1,870 | 1,037 | 55 | |||||||||||||||||||||||||||||||||||||||
| Interest on deposits | 366 | 19 | 347 | NM | 668 | 32 | 636 | NM | |||||||||||||||||||||||||||||||||||||||
| Interest on short- and long-term borrowings | 59 | 25 | 34 | NM | 384 | 38 | 346 | NM | |||||||||||||||||||||||||||||||||||||||
Total interest expense | 425 | 44 | 381 | NM | 1,052 | 70 | 982 | NM | |||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 585 | $ | 663 | $ | (78) | (12) | % | $ | 1,855 | $ | 1,800 | $ | 55 | 3 | % | |||||||||||||||||||||||||||||||
| Average interest-earning assets | $ | 80,678 | $ | 82,474 | $ | (1,796) | (2) | % | $ | 82,325 | $ | 84,189 | $ | (1,864) | (2) | % | |||||||||||||||||||||||||||||||
| Average interest-bearing liabilities | $ | 52,312 | $ | 41,398 | $ | 10,914 | 26 | % | $ | 51,271 | $ | 41,586 | $ | 9,685 | 23 | % | |||||||||||||||||||||||||||||||
| bps | bps | ||||||||||||||||||||||||||||||||||||||||||||||
Yield on interest-earning assets 2 | 5.02 | % | 3.45 | % | 157 | 4.77 | % | 3.01 | % | 176 | |||||||||||||||||||||||||||||||||||||
Rate paid on total deposits and interest-bearing liabilities 2 | 2.10 | % | 0.22 | % | 188 | 1.75 | % | 0.12 | % | 163 | |||||||||||||||||||||||||||||||||||||
Cost of total deposits 2 | 1.92 | % | 0.10 | % | 182 | 1.24 | % | 0.05 | % | 119 | |||||||||||||||||||||||||||||||||||||
Net interest margin 2 | 2.93 | % | 3.24 | % | (31) | 3.06 | % | 2.90 | % | 16 | |||||||||||||||||||||||||||||||||||||
1 Includes interest income recoveries of $1 million and $2 million for the three months ended, and $5 million and $8 million for the nine months ended September 30, 2023, and 2022, respectively.
2 Rates are calculated using amounts in thousands; taxable-equivalent rates are used where applicable.
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Net interest income accounted for approximately 76% of our net revenue (net interest income plus noninterest income) for the current quarter and decreased $78 million, or 12%, relative to the prior year quarter, as higher earning asset yields were offset by higher funding costs. Net interest income was also impacted by a reduction in interest-earning assets and an increase in interest-bearing liabilities.
Average interest-earning assets decreased $1.8 billion, or 2%, from the prior year quarter, driven by declines of $4.5 billion and $1.3 billion in average securities and average money market investments, respectively, and was partially offset by an increase of $4.0 billion in average loans and leases. The decline in average securities was primarily due to principal reductions.
Average interest-bearing liabilities increased $10.9 billion, or 26%, from the prior year quarter, driven by increases of $9.9 billion and $1.3 billion in average interest-bearing deposits and average other short-term borrowings, respectively.
The NIM was 2.93%, compared with 3.24%, and was up from 2.92% in the second quarter of 2023. The yield on average interest-earning assets was 5.02% in the third quarter of 2023, an increase of 157 basis points (“bps”), reflecting higher interest rates and a favorable mix change to higher yielding assets. The yield on average loans and leases increased 167 basis points to 5.84%, and the yield on average securities increased 63 basis points to 2.73%. The yield on average securities benefited from a decrease in the market value of AFS securities due to rising interest rates. The rate paid on average interest-bearing liabilities increased to 3.22%, compared with 0.43%, reflecting the higher interest rate environment.
Average loans and leases increased $4.0 billion, or 8%, to $57.0 billion, mainly due to growth in average consumer and commercial loans. The yield on total loans and leases was 5.84% for the third quarter of 2023, compared with 4.17% for the prior year quarter, reflecting the higher interest rate environment.
Average securities decreased $4.5 billion, or 17%, to $21.2 billion, primarily due to approximately $2.8 billion in principal reductions. During the fourth quarter of 2022, we transferred approximately $10.7 billion fair value ($13.1 billion amortized cost) of mortgage-backed AFS securities to the held-to-maturity (“HTM”) category to reflect our intent for these securities.
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Average deposits decreased $1.8 billion, or 2%, to $75.7 billion at an average cost of 1.92%, from $77.5 billion at an average cost of 0.10% in the third quarter of 2022, driven by the decrease in noninterest-bearing deposits as interest rates increased. Average noninterest-bearing deposits as a percentage of total deposits were 37%, compared with 51% during the same prior year period.
Average borrowed funds, consisting primarily of secured borrowings, increased $0.9 billion from the prior year quarter, largely in response to average loan growth and the decline in total average deposits.
For more information on our investment securities portfolio and borrowed funds and how we manage liquidity risk, refer to the “Investment Securities Portfolio” section on page 16 and the “Liquidity Risk Management” section on page 31. For further discussion of the effects of market rates on net interest income and how we manage interest rate risk, refer to the “Interest Rate and Market Risk Management” section on page 28.
The following schedule summarizes the average balances, the amount of interest earned or paid, and the applicable yields for interest-earning assets and the costs of interest-bearing liabilities.
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CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES
| (Unaudited) | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | Average balance | Amount of interest 1 | Average yield/rate 1 | Average balance | Amount of interest 1 | Average yield/rate 1 | |||||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||||
| Money market investments: | |||||||||||||||||||||||||||||||||||
| Interest-bearing deposits | $ | 1,539 | $ | 21 | 5.52 | % | $ | 1,233 | $ | 7 | 2.19 | % | |||||||||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | 874 | 14 | 6.13 | 2,511 | 17 | 2.66 | |||||||||||||||||||||||||||||
| Total money market investments | 2,413 | 35 | 5.74 | 3,744 | 24 | 2.51 | |||||||||||||||||||||||||||||
| Securities: | |||||||||||||||||||||||||||||||||||
| Held-to-maturity | 10,625 | 59 | 2.21 | 560 | 4 | 2.88 | |||||||||||||||||||||||||||||
Available-for-sale 2 | 10,606 | 87 | 3.24 | 24,892 | 129 | 2.05 | |||||||||||||||||||||||||||||
| Trading | 20 | — | 4.65 | 288 | 3 | 4.57 | |||||||||||||||||||||||||||||
Total securities | 21,251 | 146 | 2.73 | 25,740 | 136 | 2.10 | |||||||||||||||||||||||||||||
| Loans held for sale | 46 | 1 | 4.89 | 37 | 1 | 5.33 | |||||||||||||||||||||||||||||
Loans and leases | |||||||||||||||||||||||||||||||||||
| Commercial | 30,535 | 438 | 5.69 | 29,380 | 308 | 4.16 | |||||||||||||||||||||||||||||
| Commercial real estate | 13,016 | 234 | 7.14 | 12,182 | 145 | 4.73 | |||||||||||||||||||||||||||||
| Consumer | 13,417 | 167 | 4.92 | 11,391 | 103 | 3.61 | |||||||||||||||||||||||||||||
| Total loans and leases | 56,968 | 839 | 5.84 | 52,953 | 556 | 4.17 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 80,678 | 1,021 | 5.02 | 82,474 | 717 | 3.45 | |||||||||||||||||||||||||||||
| Cash and due from banks | 712 | 604 | |||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans and debt securities | (651) | (515) | |||||||||||||||||||||||||||||||||
| Goodwill and intangibles | 1,061 | 1,021 | |||||||||||||||||||||||||||||||||
| Other assets | 5,523 | 4,923 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 87,323 | $ | 88,507 | |||||||||||||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||
| Savings and money market | $ | 35,346 | $ | 215 | 2.42 | % | $ | 36,399 | $ | 18 | 0.20 | % | |||||||||||||||||||||||
| Time | 12,424 | 151 | 4.81 | 1,441 | 1 | 0.32 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 47,770 | 366 | 3.04 | 37,840 | 19 | 0.20 | |||||||||||||||||||||||||||||
| Borrowed funds: | |||||||||||||||||||||||||||||||||||
Federal funds and security repurchase agreements | 1,770 | 24 | 5.31 | 2,000 | 11 | 2.20 | |||||||||||||||||||||||||||||
| Other short-term borrowings | 2,233 | 27 | 4.95 | 885 | 6 | 2.61 | |||||||||||||||||||||||||||||
| Long-term debt | 539 | 8 | 5.37 | 673 | 8 | 4.83 | |||||||||||||||||||||||||||||
| Total borrowed funds | 4,542 | 59 | 5.14 | 3,558 | 25 | 2.80 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 52,312 | 425 | 3.22 | 41,398 | 44 | 0.43 | |||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 27,873 | 39,623 | |||||||||||||||||||||||||||||||||
| Other liabilities | 1,760 | 1,743 | |||||||||||||||||||||||||||||||||
| Total liabilities | 81,945 | 82,764 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity: | |||||||||||||||||||||||||||||||||||
| Preferred equity | 440 | 440 | |||||||||||||||||||||||||||||||||
| Common equity | 4,938 | 5,303 | |||||||||||||||||||||||||||||||||
| Total shareholders’ equity | 5,378 | 5,743 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 87,323 | $ | 88,507 | |||||||||||||||||||||||||||||||
| Spread on average interest-bearing funds | 1.80 | % | 3.02 | % | |||||||||||||||||||||||||||||||
| Net impact of noninterest-bearing sources of funds | 1.13 | % | 0.22 | % | |||||||||||||||||||||||||||||||
Net interest margin | $ | 596 | 2.93 | % | $ | 673 | 3.24 | % | |||||||||||||||||||||||||||
Memo: total cost of deposits | 1.92 | % | 0.10 | % | |||||||||||||||||||||||||||||||
| Memo: total deposits and interest-bearing liabilities | $ | 80,185 | 425 | 2.10 | % | $ | 81,021 | 44 | 0.22 | % | |||||||||||||||||||||||||
1 Rates are calculated using amounts in thousands and a tax rate of 21% for the periods presented.
2 Net of unamortized purchase premiums, discounts, and deferred loan fees and costs.
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| Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | Average balance | Amount of interest 1 | Average yield/rate 1 | Average balance | Amount of interest 1 | Average yield/rate 1 | |||||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||||
| Money market investments: | |||||||||||||||||||||||||||||||||||
| Interest-bearing deposits | $ | 2,356 | $ | 90 | 5.10 | % | $ | 3,674 | $ | 15 | 0.55 | % | |||||||||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | 1,242 | 50 | 5.41 | 2,451 | 27 | 1.47 | |||||||||||||||||||||||||||||
| Total money market investments | 3,598 | 140 | 5.21 | 6,125 | 42 | 0.92 | |||||||||||||||||||||||||||||
| Securities: | |||||||||||||||||||||||||||||||||||
| Held-to-maturity | 10,826 | 181 | 2.24 | 495 | 11 | 2.98 | |||||||||||||||||||||||||||||
Available-for-sale 2 | 11,199 | 243 | 2.89 | 25,285 | 358 | 1.89 | |||||||||||||||||||||||||||||
| Trading | 58 | 1 | 2.43 | 343 | 12 | 4.81 | |||||||||||||||||||||||||||||
Total securities | 22,083 | 425 | 2.57 | 26,123 | 381 | 1.95 | |||||||||||||||||||||||||||||
| Loans held for sale | 41 | 2 | 6.00 | 44 | 1 | 2.55 | |||||||||||||||||||||||||||||
Loans and leases | |||||||||||||||||||||||||||||||||||
| Commercial | 30,620 | 1,236 | 5.40 | 28,945 | 843 | 3.89 | |||||||||||||||||||||||||||||
| Commercial real estate | 12,942 | 668 | 6.90 | 12,151 | 358 | 3.93 | |||||||||||||||||||||||||||||
| Consumer | 13,041 | 467 | 4.78 | 10,801 | 272 | 3.37 | |||||||||||||||||||||||||||||
| Total loans and leases | 56,603 | 2,371 | 5.60 | 51,897 | 1,473 | 3.79 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 82,325 | 2,938 | 4.77 | 84,189 | 1,897 | 3.01 | |||||||||||||||||||||||||||||
| Cash and due from banks | 636 | 615 | |||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans and debt securities | (615) | (503) | |||||||||||||||||||||||||||||||||
| Goodwill and intangibles | 1,063 | 1,017 | |||||||||||||||||||||||||||||||||
| Other assets | 5,556 | 4,618 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 88,965 | $ | 89,936 | |||||||||||||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||
| Savings and money market | $ | 32,852 | $ | 390 | 1.59 | % | $ | 37,942 | $ | 29 | 0.10 | % | |||||||||||||||||||||||
| Time | 8,319 | 278 | 4.46 | 1,505 | 3 | 0.27 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 41,171 | 668 | 2.17 | 39,447 | 32 | 0.11 | |||||||||||||||||||||||||||||
| Borrowed funds: | |||||||||||||||||||||||||||||||||||
Federal funds and security repurchase agreements | 3,921 | 145 | 4.92 | 1,112 | 12 | 1.50 | |||||||||||||||||||||||||||||
| Other short-term borrowings | 5,570 | 211 | 5.07 | 303 | 6 | 2.56 | |||||||||||||||||||||||||||||
| Long-term debt | 609 | 28 | 6.10 | 724 | 20 | 3.69 | |||||||||||||||||||||||||||||
| Total borrowed funds | 10,100 | 384 | 5.08 | 2,139 | 38 | 2.39 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 51,271 | 1,052 | 2.74 | 41,586 | 70 | 0.23 | |||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 30,665 | 40,523 | |||||||||||||||||||||||||||||||||
| Other liabilities | 1,798 | 1,530 | |||||||||||||||||||||||||||||||||
| Total liabilities | 83,734 | 83,639 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity: | |||||||||||||||||||||||||||||||||||
| Preferred equity | 440 | 440 | |||||||||||||||||||||||||||||||||
| Common equity | 4,791 | 5,857 | |||||||||||||||||||||||||||||||||
| Total shareholders’ equity | 5,231 | 6,297 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 88,965 | $ | 89,936 | |||||||||||||||||||||||||||||||
| Spread on average interest-bearing funds | 2.03 | % | 2.78 | % | |||||||||||||||||||||||||||||||
| Net impact of noninterest-bearing sources of funds | 1.03 | % | 0.12 | % | |||||||||||||||||||||||||||||||
Net interest margin | $ | 1,886 | 3.06 | % | $ | 1,827 | 2.90 | % | |||||||||||||||||||||||||||
Memo: total cost of deposits | 1.24 | % | 0.05 | % | |||||||||||||||||||||||||||||||
| Memo: total deposits and interest-bearing liabilities | $ | 81,936 | 1,052 | 1.75 | % | $ | 82,109 | 70 | 0.12 | % | |||||||||||||||||||||||||
1 Rates are calculated using amounts in thousands and a tax rate of 21% for the periods presented.
2 Net of unamortized purchase premiums, discounts, and deferred loan fees and costs.
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Provision for Credit Losses
The allowance for credit losses (“ACL”) is the combination of both the allowance for loan and lease losses (“ALLL”) and the reserve for unfunded lending commitments (“RULC”). The ALLL represents the estimated current expected credit losses related to the loan and lease portfolio as of the balance sheet date. The RULC represents the estimated reserve for current expected credit losses associated with off-balance sheet commitments. Changes in the ALLL and RULC, net of charge-offs and recoveries, are recorded as the provision for loan and lease losses and the provision for unfunded lending commitments, respectively, in the income statement. The ACL for debt securities is estimated separately from loans and is recorded in investment securities on the consolidated balance sheet.
The provision for credit losses, which is the combination of both the provision for loan and lease losses and the provision for unfunded lending commitments, was $41 million, compared with $71 million in the third quarter of 2022. The ACL was $738 million at September 30, 2023, compared with $590 million at September 30, 2022. The increase in the ACL was primarily due to deterioration in economic forecasts. The ratio of ACL to total loans and leases was 1.30% and 1.09% at September 30, 2023 and 2022, respectively. The provision for securities losses was less than $1 million during the third quarter of 2023 and 2022.
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The bar chart above illustrates the broad categories of change in the ACL from the prior year period. The second bar represents changes in economic forecasts and current economic conditions, which increased the ACL by $88 million from the prior year quarter.
The third bar represents changes in credit quality factors and includes risk-grade migration and specific reserves against loans, which, when combined, increased the ACL by $7 million, reflecting relatively stable credit quality. Net loan and lease charge-offs totaled $14 million, or 0.10% annualized of average loans during the third quarter of 2023, compared with net charge-offs of $27 million, or 0.20% annualized of average loans during the prior year quarter. Classified loans decreased $196 million, or 20%. Nonperforming assets increased to $219 million, or 0.38% of loans and leases, compared with $151 million, or 0.28% of loans and leases, in the prior year quarter, primarily due to two suburban office commercial real estate loans in the Southern California market totaling $46 million.
The fourth bar represents loan portfolio changes, driven primarily by portfolio-specific risks and loan growth, as well as changes in portfolio mix, the aging of the portfolio, portfolio-specific concerns, and other risk factors; all of which resulted in a $53 million increase in the ACL.
See “Credit Risk Management” on page 21 and Note 6 in our 2022 Form 10-K for more information on how we determine the appropriate level of the ALLL and the RULC.
Noninterest Income
Noninterest income represents revenue earned from products and services that generally have no associated interest rate or yield and is classified as either customer-related or noncustomer-related. Customer-related noninterest income excludes items such as securities gains and losses, dividends, insurance-related income, and mark-to-market adjustments on certain derivatives.
Total noninterest income increased $15 million, or 9%, relative to the prior year. Noninterest income accounted for approximately 24% and 20% of our net revenue during the third quarter of 2023 and 2022, respectively. The following schedule presents a comparison of the major components of noninterest income.
NONINTEREST INCOME
| Three Months Ended September 30, | Amount change | Percent change | Nine Months Ended September 30, | Amount change | Percent change | ||||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||
Commercial account fees | $ | 43 | $ | 40 | $ | 3 | 8 | % | $ | 131 | $ | 118 | $ | 13 | 11 | % | |||||||||||||||||||||||||||||||
Card fees | 26 | 27 | (1) | (4) | 75 | 77 | (2) | (3) | |||||||||||||||||||||||||||||||||||||||
| Retail and business banking fees | 17 | 17 | — | — | 49 | 57 | (8) | (14) | |||||||||||||||||||||||||||||||||||||||
| Loan-related fees and income | 23 | 18 | 5 | 28 | 63 | 61 | 2 | 3 | |||||||||||||||||||||||||||||||||||||||
| Capital markets fees | 18 | 25 | (7) | (28) | 62 | 61 | 1 | 2 | |||||||||||||||||||||||||||||||||||||||
| Wealth management fees | 15 | 14 | 1 | 7 | 44 | 41 | 3 | 7 | |||||||||||||||||||||||||||||||||||||||
| Other customer-related fees | 15 | 15 | — | — | 46 | 46 | — | — | |||||||||||||||||||||||||||||||||||||||
Customer-related noninterest income | 157 | 156 | 1 | 1 | 470 | 461 | 9 | 2 | |||||||||||||||||||||||||||||||||||||||
| Fair value and nonhedge derivative income | 7 | 4 | 3 | 75 | 5 | 20 | (15) | (75) | |||||||||||||||||||||||||||||||||||||||
| Dividends and other income (loss) | 12 | (1) | 13 | NM | 49 | 8 | 41 | NM | |||||||||||||||||||||||||||||||||||||||
| Securities gains (losses), net | 4 | 6 | (2) | (33) | 5 | (10) | 15 | NM | |||||||||||||||||||||||||||||||||||||||
| Noncustomer-related noninterest income | 23 | 9 | 14 | NM | 59 | 18 | 41 | NM | |||||||||||||||||||||||||||||||||||||||
Total noninterest income | $ | 180 | $ | 165 | $ | 15 | 9 | % | $ | 529 | $ | 479 | $ | 50 | 10 | % | |||||||||||||||||||||||||||||||
Customer-related Noninterest Income
Total customer-related noninterest income remained relatively stable at $157 million, compared with the prior year period. Loan-related fees and income increased $5 million, primarily due to a $4 million gain on the sale of certain mortgage servicing assets. Commercial account fees increased $3 million, driven primarily by increased treasury management sweep income. These increases were partially offset by a $7 million decrease in capital market fees, largely due to reduced swap and loan syndication fees.
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Noncustomer-related Noninterest Income
Total noncustomer-related noninterest income increased $14 million from the prior year quarter. Dividends and other income increased $13 million, due to a valuation loss recognized on one of our equity investments in the prior year period, as well as an increase in dividends on FHLB stock in the current period.
Noninterest Expense
The following schedule presents a comparison of the major components of noninterest expense.
NONINTEREST EXPENSE
| Three Months Ended September 30, | Amount change | Percent change | Nine Months Ended September 30, | Amount change | Percent change | ||||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 311 | $ | 312 | $ | (1) | — | % | $ | 974 | $ | 931 | $ | 43 | 5 | % | |||||||||||||||||||||||||||||||
| Technology, telecom, and information processing | 62 | 53 | 9 | 17 | 175 | 158 | 17 | 11 | |||||||||||||||||||||||||||||||||||||||
| Occupancy and equipment, net | 42 | 38 | 4 | 11 | 122 | 112 | 10 | 9 | |||||||||||||||||||||||||||||||||||||||
| Professional and legal services | 16 | 14 | 2 | 14 | 45 | 42 | 3 | 7 | |||||||||||||||||||||||||||||||||||||||
| Marketing and business development | 10 | 11 | (1) | (9) | 35 | 28 | 7 | 25 | |||||||||||||||||||||||||||||||||||||||
| Deposit insurance and regulatory expense | 20 | 13 | 7 | 54 | 60 | 36 | 24 | 67 | |||||||||||||||||||||||||||||||||||||||
| Credit-related expense | 6 | 8 | (2) | (25) | 19 | 22 | (3) | (14) | |||||||||||||||||||||||||||||||||||||||
| Other real estate expense, net | — | — | — | NM | — | 1 | (1) | NM | |||||||||||||||||||||||||||||||||||||||
| Other | 29 | 30 | (1) | (3) | 86 | 77 | 9 | 12 | |||||||||||||||||||||||||||||||||||||||
Total noninterest expense | $ | 496 | $ | 479 | $ | 17 | 4 | % | $ | 1,516 | $ | 1,407 | $ | 109 | 8 | % | |||||||||||||||||||||||||||||||
Total noninterest expense increased $17 million, or 4%, relative to the prior year quarter. Technology, telecom, and information processing expense increased $9 million, primarily due to increases in application software, license, maintenance, and related software amortization expenses. Deposit insurance and regulatory expense increased $7 million, driven largely by an increased FDIC insurance base rate beginning in 2023 and changes in balance sheet composition.
FDIC Special Assessment
In May 2023, the FDIC issued a Notice of Proposed Rulemaking, which would implement a special assessment to recover the cost associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. Using an assessment base equal to the estimated amount of uninsured deposits at December 31, 2022, the FDIC proposed to collect the special assessment at an annual rate of approximately 12.5 bps over eight quarterly periods, beginning with the first quarter of 2024. The ultimate impact and timing of expense recognition will depend on the final rule. As proposed, we estimate the total impact of the special assessment on our deposit insurance and regulatory expense would be approximately $80 million, which is expected to be recognized upon the rule's final issuance.
The efficiency ratio was 64.4%, compared with 57.6%, primarily due to a decline in adjusted taxable-equivalent revenue. For information on non-GAAP financial measures, see page 37.
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Technology Spend
Technology spend represents expenditures associated with technology-related investments, operations, systems, and infrastructure, and includes current period expenses reported on our consolidated statement of income, and capitalized investments, net of related amortization and depreciation, reported on our consolidated balance sheet. Technology spend is reported as a combination of the following:
•Technology, telecom, and information processing expense — includes expenses related to application software licensing and maintenance, related amortization, telecommunications, and data processing;
•Other technology-related expense — includes related noncapitalized salaries and employee benefits, occupancy and equipment, and professional and legal services; and
•Technology investments — includes capitalized technology infrastructure equipment, hardware, and purchased or internally developed software, less related amortization or depreciation.
The following schedule presents the composition of our technology spend:
TECHNOLOGY SPEND
| Three Months Ended September 30, | Amount change | Percent change | Nine Months Ended September 30, | Amount change | Percent change | ||||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||
| Technology, telecom, and information processing expense | $ | 62 | $ | 53 | $ | 9 | 17 | % | $ | 175 | $ | 158 | $ | 17 | 11 | % | |||||||||||||||||||||||||||||||
| Other technology-related expense | 59 | 52 | 7 | 13 | 169 | 152 | 17 | 11 | |||||||||||||||||||||||||||||||||||||||
| Technology investments | 22 | 21 | 1 | 5 | 71 | 65 | 6 | 9 | |||||||||||||||||||||||||||||||||||||||
| Less: related amortization and depreciation | (21) | (14) | (7) | 50 | (51) | (41) | (10) | 24 | |||||||||||||||||||||||||||||||||||||||
Total technology spend | $ | 122 | $ | 112 | $ | 10 | 9 | % | $ | 364 | $ | 334 | $ | 30 | 9 | % | |||||||||||||||||||||||||||||||
Total technology spend increased $10 million relative to the prior year quarter, largely due to increases in application software, maintenance, and related software amortization expenses associated with our core loan and deposit banking system replacement project, as well as higher technology-related compensation and investments in resiliency.
Income Taxes
The following schedule summarizes the income tax expense and effective tax rates for the periods presented.
INCOME TAXES
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (Dollar amounts in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Income before income taxes | $ | 228 | $ | 278 | $ | 736 | $ | 793 | |||||||||||||||
| Income tax expense | 53 | 61 | 182 | 170 | |||||||||||||||||||
| Effective tax rate | 23.2 | % | 21.9 | % | 24.7 | % | 21.4 | % | |||||||||||||||
The effective tax rate was 23.2% and 21.9% for the three months ended September 30, 2023 and 2022, respectively. See Note 12 of the Notes to Consolidated Financial Statements for more information about the factors that impacted the income tax rates, as well as information about deferred income tax assets and liabilities.
Preferred Stock Dividends
Preferred stock dividends totaled $7 million and $6 million for the third quarter of 2023 and 2022, respectively.
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BALANCE SHEET ANALYSIS
Interest-Earning Assets
Interest-earning assets have associated interest rates or yields, and generally consist of money market investments, securities, loans, and leases. We strive to maintain a high level of interest-earning assets relative to total assets. For more information regarding the average balances, associated revenue generated, and the respective yields of our interest-earning assets, see the Consolidated Average Balance Sheet on page 10.
Investment Securities Portfolio
We invest in securities to actively manage liquidity and interest rate risk and to generate interest income. We primarily own securities that can readily provide us cash and liquidity through secured borrowing agreements without the need to sell the securities. We also manage the duration of our investment securities portfolio to help balance the inherent interest rate mismatch between loans and deposits, and to protect the economic value of shareholders' equity. At September 30, 2023, the estimated duration of our securities portfolio decreased to 3.5 percent, compared with 4.1 percent at December 31, 2022, and 3.9 percent at September 30, 2022, primarily due to the addition of fair value hedges of fixed-rate securities during the second quarter of 2023.
For information about our borrowing capacity associated with the investment securities portfolio and how we manage our liquidity risk, refer to the “Liquidity Risk Management” section on page 31. See also Note 3 and Note 5 of the Notes to Consolidated Financial Statements for more information on fair value measurements and the accounting for our investment securities portfolio.
The following schedule presents the major components of our investment securities portfolio.
INVESTMENT SECURITIES PORTFOLIO
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| (In millions) | Par Value | Amortized cost | Fair value | Par Value | Amortized cost | Fair value | |||||||||||||||||||||||||||||
| Held-to-maturity | |||||||||||||||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||||||||||||||
| Agency securities | $ | 94 | $ | 94 | $ | 86 | $ | 100 | $ | 100 | $ | 93 | |||||||||||||||||||||||
Agency guaranteed mortgage-backed securities 1 | 12,201 | 10,106 | 9,637 | 12,921 | 10,621 | 10,772 | |||||||||||||||||||||||||||||
| Municipal securities | 359 | 359 | 326 | 404 | 405 | 374 | |||||||||||||||||||||||||||||
| Total held-to-maturity | 12,654 | 10,559 | 10,049 | 13,425 | 11,126 | 11,239 | |||||||||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 585 | 585 | 460 | 555 | 557 | 393 | |||||||||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||||||||||||||
| Agency securities | 698 | 692 | 645 | 790 | 782 | 736 | |||||||||||||||||||||||||||||
| Agency guaranteed mortgage-backed securities | 8,664 | 8,739 | 7,144 | 9,566 | 9,652 | 8,367 | |||||||||||||||||||||||||||||
| Small Business Administration loan-backed securities | 568 | 606 | 578 | 691 | 740 | 712 | |||||||||||||||||||||||||||||
| Municipal securities | 1,309 | 1,431 | 1,297 | 1,571 | 1,732 | 1,634 | |||||||||||||||||||||||||||||
| Other debt securities | 25 | 25 | 24 | 75 | 75 | 73 | |||||||||||||||||||||||||||||
| Total available-for-sale | 11,849 | 12,078 | 10,148 | 13,248 | 13,538 | 11,915 | |||||||||||||||||||||||||||||
| Total HTM and AFS investment securities | $ | 24,503 | $ | 22,637 | $ | 20,197 | $ | 26,673 | $ | 24,664 | $ | 23,154 | |||||||||||||||||||||||
1 During the fourth quarter of 2022, we transferred approximately $10.7 billion fair value ($13.1 billion amortized cost) of mortgage-backed AFS securities to the HTM category. The transfer of these securities from AFS to HTM at fair value resulted in a discount to the amortized cost basis of the HTM securities equivalent to the $2.4 billion ($1.8 billion after tax) of unrealized losses in AOCI attributable to these securities. The amortization of the unrealized losses will offset the effect of the accretion of the discount created by the transfer. At September 30, 2023, the unamortized discount on the HTM securities totaled approximately $2.2 billion ($1.6 billion after tax).
The amortized cost of total HTM and AFS investment securities decreased $2.0 billion, or 8%, from December 31, 2022, primarily due to principal reductions. Approximately 8% of the total HTM and AFS investment securities
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were floating-rate instruments at both September 30, 2023 and December 31, 2022, respectively. Additionally, at September 30, 2023, we have $3.6 billion of pay-fixed swaps held as fair value hedges against fixed-rate AFS securities that effectively convert the fixed interest income to a floating rate on the hedged portion of the securities.
At September 30, 2023, the AFS investment securities portfolio included approximately $229 million of net premium that was distributed across the various security categories. Total taxable-equivalent premium amortization for these investment securities was $20 million for the third quarter of 2023, compared with $27 million for the same prior year period.
In addition to HTM and AFS securities, we also have a trading securities portfolio, comprised of municipal securities, that totaled $31 million at September 30, 2023, compared with $465 million at December 31, 2022. The prior year-end amount also included $395 million of exposures to money market mutual funds. Beginning in the first quarter of 2023, related balances were presented in “Money market investments” on the consolidated balance sheet.
Refer to the “Interest Rate Risk Management” section on page 28, the “Capital Management” section on page 34, and Note 5 of the Notes to Consolidated Financial Statements for more discussion regarding our investment securities portfolio, swaps, and related unrealized gains and losses.
Municipal Investments and Extensions of Credit
We support our communities by providing products and services to state and local governments (“municipalities”), including deposit services, loans, and investment banking services. We also invest in securities issued by municipalities. Our municipal lending products generally include loans in which the debt service is repaid from general funds or pledged revenues of the municipal entity, or to private commercial entities or 501(c)(3) not-for-profit entities utilizing a pass-through municipal entity to achieve favorable tax treatment.
The following schedule summarizes our total investments and extensions of credit to municipalities:
MUNICIPAL INVESTMENTS AND EXTENSIONS OF CREDIT
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Loans and leases | $ | 4,221 | $ | 4,361 | |||||||
| Held-to-maturity securities | 359 | 405 | |||||||||
| Available-for-sale securities | 1,297 | 1,634 | |||||||||
| Trading securities | 31 | 71 | |||||||||
| Unfunded lending commitments | 282 | 406 | |||||||||
Total | $ | 6,190 | $ | 6,877 | |||||||
Our municipal loans and securities are primarily associated with municipalities located within our geographic footprint. The municipal loan and lease portfolio is primarily secured by general obligations of municipal entities. Other types of collateral also include real estate, revenue pledges, or equipment. At September 30, 2023, we had no municipal loans on nonaccrual.
Municipal securities are internally graded, similar to loans, using risk-grading systems which vary based on the size and type of credit risk exposure. The internal risk grades assigned to our municipal securities follow our definitions of Pass, Special Mention, and Substandard, which are consistent with published definitions of regulatory risk classifications. At September 30, 2023, all municipal securities were graded as Pass. See Notes 5 and 6 of the Notes to Consolidated Financial Statements for additional information about the credit quality of these municipal loans and securities.
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Loan and Lease Portfolio
We provide a wide range of lending products to commercial customers, generally small- and medium-sized businesses. We also provide various retail lending products and services to consumers and small businesses. The following schedule presents the composition of our loan and lease portfolio.
LOAN AND LEASE PORTFOLIO
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (Dollar amounts in millions) | Amount | % of total loans | Amount | % of total loans | |||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Commercial and industrial | $ | 16,341 | 28.7 | % | $ | 16,377 | 29.4 | % | |||||||||||||||
| Leasing | 373 | 0.7 | 386 | 0.7 | |||||||||||||||||||
| Owner-occupied | 9,273 | 16.3 | 9,371 | 16.9 | |||||||||||||||||||
| Municipal | 4,221 | 7.4 | 4,361 | 7.8 | |||||||||||||||||||
| Total commercial | 30,208 | 53.1 | 30,495 | 54.8 | |||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||
| Construction and land development | 2,575 | 4.5 | 2,513 | 4.5 | |||||||||||||||||||
| Term | 10,565 | 18.6 | 10,226 | 18.4 | |||||||||||||||||||
| Total commercial real estate | 13,140 | 23.1 | 12,739 | 22.9 | |||||||||||||||||||
| Consumer: | |||||||||||||||||||||||
| Home equity credit line | 3,313 | 5.8 | 3,377 | 6.1 | |||||||||||||||||||
| 1-4 family residential | 8,116 | 14.3 | 7,286 | 13.1 | |||||||||||||||||||
| Construction and other consumer real estate | 1,510 | 2.7 | 1,161 | 2.1 | |||||||||||||||||||
| Bankcard and other revolving plans | 475 | 0.8 | 471 | 0.8 | |||||||||||||||||||
| Other | 131 | 0.2 | 124 | 0.2 | |||||||||||||||||||
| Total consumer | 13,545 | 23.8 | 12,419 | 22.3 | |||||||||||||||||||
| Total loans and leases | $ | 56,893 | 100.0 | % | $ | 55,653 | 100.0 | % | |||||||||||||||
At September 30, 2023 and December 31, 2022, the ratio of loans and leases to total assets was 65% and 62%, respectively. The largest loan category was commercial and industrial loans, which constituted 29% of our total loan portfolio at both time periods.
During the first nine months of 2023, the loan and lease portfolio increased $1.2 billion, or 2%, to $56.9 billion at September 30, 2023. Consumer loans increased $1.1 billion, primarily in the 1-4 family residential and consumer construction loan portfolios, and commercial real estate loans increased $0.4 billion, primarily in the multi-family and industrial term loan portfolios. Increased funding of construction lending commitments and conversion-to-term loans contributed to growth in these portfolios.
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Other Noninterest-Bearing Investments
Other noninterest-bearing investments are equity investments that are held primarily for capital appreciation, dividends, or for certain regulatory requirements. The following schedule summarizes our related investments.
OTHER NONINTEREST-BEARING INVESTMENTS
| (Dollar amounts in millions) | September 30, 2023 | December 31, 2022 | Amount change | Percent change | |||||||||||||||||||
| Bank-owned life insurance | $ | 551 | $ | 546 | $ | 5 | 1 | % | |||||||||||||||
| Federal Home Loan Bank stock | 71 | 294 | (223) | (76) | |||||||||||||||||||
| Federal Reserve stock | 65 | 68 | (3) | (4) | |||||||||||||||||||
| Farmer Mac stock | 23 | 19 | 4 | 21 | |||||||||||||||||||
| SBIC investments | 185 | 172 | 13 | 8 | |||||||||||||||||||
| Other | 34 | 31 | 3 | 10 | |||||||||||||||||||
| Total other noninterest-bearing investments | $ | 929 | $ | 1,130 | $ | (201) | (18) | % | |||||||||||||||
Total other noninterest-bearing investments decreased $201 million, or 18%, during the first nine months of 2023, primarily due to a $223 million decrease in FHLB stock. We are required to invest approximately 4% of our FHLB borrowings in FHLB stock to maintain our borrowing capacity. The decrease in FHLB stock was primarily due to declines in FHLB borrowings since the first quarter of 2023, which was largely due to reduced funding needs as a result of the decrease in interest-earning assets and the increase in interest-bearing deposits.
In 2007, we received 460,153 non-transferable Class B shares of Visa, Inc. in connection with a restructuring and public offering by Visa U.S.A. As a member of Visa U.S.A., we received the Class B shares based on our interest in Visa U.S.A. and did not pay anything to acquire the shares. On September 13, 2023, Visa, Inc. announced its intent to engage with common stockholders on a potential proposal that would result in the release of certain transfer restrictions on a portion of Visa Class B common stock. If approved by a majority of Class A, B, and C common stockholders, the proposal would provide us the option to convert up to 50% of our Class B shares to freely transferable Visa Class A common shares. The per share closing price of a Visa Class A common share was $230.01 at September 30, 2023. In light of uncertainties associated with certain ongoing litigation matters involving Visa and the timing and outcome of the aforementioned proposal, the ultimate impact of this gain contingency is unknown.
Premises, Equipment, and Software
We are in the final phase of a three-phase project to replace our core loan and deposit banking systems. This final phase includes the replacement of our deposit banking systems through multiple affiliate bank conversions, the first of which was completed in the second quarter of 2023. We expect to complete substantially all of the remaining affiliate bank conversions in 2024.
The following schedule summarizes the capitalized costs associated with our core system replacement project, which are depreciated using a useful life of ten years.
CAPITALIZED COSTS ASSOCIATED WITH THE CORE SYSTEM REPLACEMENT PROJECT
| September 30, 2023 | |||||||||||||||||||||||
| (In millions) | Phase 1 | Phase 2 | Phase 3 | Total | |||||||||||||||||||
| Total amount of capitalized costs, less accumulated depreciation | $ | 24 | $ | 47 | $ | 224 | $ | 295 | |||||||||||||||
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Deposits
Deposits are our primary funding source. The following schedule presents the composition of our deposit portfolio.
DEPOSIT PORTFOLIO
| September 30, 2023 | June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | Amount | % of total deposits | Amount | % of total deposits | Amount | % of total deposits | |||||||||||||||||||||||||||||
| Deposits by type | |||||||||||||||||||||||||||||||||||
| Noninterest-bearing demand | $ | 26,733 | 35.5 | % | $ | 28,670 | 38.6 | % | $ | 35,777 | 49.9 | % | |||||||||||||||||||||||
| Interest-bearing: | |||||||||||||||||||||||||||||||||||
| Savings and money market | 37,026 | 49.1 | 33,303 | 44.8 | 33,474 | 46.7 | |||||||||||||||||||||||||||||
| Time | 5,089 | 6.7 | 3,897 | 5.2 | 1,484 | 2.1 | |||||||||||||||||||||||||||||
| Brokered | 6,551 | 8.7 | 8,453 | 11.4 | 917 | 1.3 | |||||||||||||||||||||||||||||
| Total deposits | $ | 75,399 | 100.0 | % | $ | 74,323 | 100.0 | % | $ | 71,652 | 100.0 | % | |||||||||||||||||||||||
| Deposit-related metrics | |||||||||||||||||||||||||||||||||||
| Estimated amount of insured deposits | $ | 44,176 | 59 | % | $ | 43,911 | 59 | % | $ | 34,018 | 47 | % | |||||||||||||||||||||||
| Estimated amount of uninsured deposits | $ | 31,223 | 41 | % | $ | 30,412 | 41 | % | $ | 37,634 | 53 | % | |||||||||||||||||||||||
Estimated amount of collateralized deposits 1 | $ | 2,915 | 4 | % | $ | 2,679 | 4 | % | $ | 2,861 | 4 | % | |||||||||||||||||||||||
| Loan-to-deposit ratio | 75% | 77% | 78% | ||||||||||||||||||||||||||||||||
1 Includes both insured and uninsured deposits.
Total deposits increased $1.1 billion, or 1%, from June 30, 2023, and $3.7 billion, or 5%, from December 31, 2022. Customer deposits (excluding brokered deposits) increased $3.0 billion, or 5%, from June 30, 2023. This growth, resulting from both existing and new customers, is primarily due to an increase in interest-bearing deposits, as the higher interest rate environment influenced the movement of customer balances into interest-bearing products. Our noninterest-bearing deposits are generally more valuable in a rising interest rate environment, creating meaningful economic value that is not fully reflected on our balance sheet since core deposits and related intangible assets are not recorded at fair value for accounting purposes.
At September 30, 2023 and June 30, 2023, total customer deposits included approximately $6.4 billion and $3.4 billion, respectively, of reciprocal placement products, where we distributed our customers’ deposits in a placement network to increase their FDIC insurance and in return we received a matching amount of deposits from other network banks.
At September 30, 2023, the estimated total amount of uninsured deposits was $31.2 billion, or 41%, of total deposits, compared with $30.4 billion, or 41%, and $37.6 billion, or 53%, of total deposits at June 30, 2023 and December 31, 2022, respectively. Our loan-to-deposit ratio was 75%, compared with 77% and 78% for the same respective time periods. See “Liquidity Risk Management” on page 31 for additional information on liquidity, including the ratio of available liquidity to uninsured deposits.
RISK MANAGEMENT
Risk management is an integral part of our operations and is a key determinant of our overall performance. We employ various strategies to prudently manage the risks to which our operations are exposed, including credit risk, market and interest rate risk, liquidity risk, strategic and business risk, operational risk, technology risk, cybersecurity risk, capital/financial reporting risk, legal/compliance risk (including regulatory risk), and reputational risk. These risks are overseen by various management committees including the Enterprise Risk Management Committee. For a more comprehensive discussion of these risks, see “Risk Factors” in our 2022 Form 10-K.
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Credit Risk Management
Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risk arises primarily from our lending activities, as well as from off-balance sheet credit instruments. Credit policies, credit risk management, and credit examination functions inform and support the oversight of credit risk. Our credit policies emphasize strong underwriting standards and early detection of potential problem credits in order to develop and implement action plans on a timely basis to mitigate potential losses. These formal credit policies and procedures provide us with a framework for consistent underwriting and a basis for sound credit decisions at the local banking affiliate level.
Our overall credit risk management strategy includes diversification of our loan portfolio. Our business activity is conducted primarily within the geographic footprint of our banking affiliates. We strive to avoid the risk of undue concentrations of credit in any particular industry, collateral type, location, or with any individual customer or counterparty. We have actively managed the credit risk in our commercial real estate portfolio for more than a decade, having reduced CRE loans to 23% of total loans, compared with 33% in late 2008. For a more comprehensive discussion of our credit risk management, see “Credit Risk Management” in our 2022 Form 10-K.
U.S. Government Agency Guaranteed Loans
We participate in various guaranteed lending programs sponsored by United States (“U.S.”) government agencies, such as the Small Business Administration (“SBA”), Federal Housing Authority, U.S. Department of Veterans Affairs, Export-Import Bank of the U.S., and the U.S. Department of Agriculture. At September 30, 2023, $574 million of related loans were guaranteed, primarily by the SBA, and included $106 million of Paycheck Protection Program (“PPP”) loans. The following schedule presents the composition of U.S. government agency guaranteed loans.
U.S. GOVERNMENT AGENCY GUARANTEED LOANS
| (Dollar amounts in millions) | September 30, 2023 | Percent guaranteed | December 31, 2022 | Percent guaranteed | |||||||||||||||||||
| Commercial | $ | 680 | 81 | % | $ | 753 | 83 | % | |||||||||||||||
| Commercial real estate | 24 | 79 | 21 | 76 | |||||||||||||||||||
| Consumer | 5 | 100 | 5 | 100 | |||||||||||||||||||
| Total loans | $ | 709 | 81 | % | $ | 779 | 83 | % | |||||||||||||||
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Commercial Lending
The following schedule provides information regarding lending exposures to certain industries in our commercial lending portfolio.
COMMERCIAL LENDING BY INDUSTRY GROUP 1
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (Dollar amounts in millions) | Amount | Percent | Amount | Percent | |||||||||||||||||||
| Real estate, rental and leasing | $ | 3,007 | 10.0 | % | $ | 2,802 | 9.2 | % | |||||||||||||||
| Retail trade | 2,829 | 9.4 | 2,751 | 9.0 | |||||||||||||||||||
| Finance and insurance | 2,739 | 9.1 | 2,992 | 9.8 | |||||||||||||||||||
| Healthcare and social assistance | 2,518 | 8.3 | 2,373 | 7.8 | |||||||||||||||||||
| Public Administration | 2,217 | 7.3 | 2,366 | 7.8 | |||||||||||||||||||
| Manufacturing | 2,193 | 7.3 | 2,387 | 7.8 | |||||||||||||||||||
| Wholesale trade | 1,891 | 6.3 | 1,880 | 6.2 | |||||||||||||||||||
Utilities 2 | 1,550 | 5.1 | 1,418 | 4.6 | |||||||||||||||||||
| Transportation and warehousing | 1,480 | 4.9 | 1,464 | 4.8 | |||||||||||||||||||
| Educational services | 1,297 | 4.3 | 1,302 | 4.3 | |||||||||||||||||||
| Construction | 1,253 | 4.1 | 1,355 | 4.4 | |||||||||||||||||||
| Hospitality and food services | 1,198 | 4.0 | 1,238 | 4.1 | |||||||||||||||||||
| Mining, quarrying, and oil and gas extraction | 1,162 | 3.8 | 1,349 | 4.4 | |||||||||||||||||||
| Other Services (except Public Administration) | 1,061 | 3.5 | 1,041 | 3.4 | |||||||||||||||||||
| Professional, scientific, and technical services | 1,005 | 3.3 | 995 | 3.3 | |||||||||||||||||||
Other 3 | 2,808 | 9.3 | 2,782 | 9.1 | |||||||||||||||||||
| Total | $ | 30,208 | 100.0 | % | $ | 30,495 | 100.0 | % | |||||||||||||||
1 Industry groups are determined by North American Industry Classification System (“NAICS”) codes.
2 Includes primarily utilities, power, and renewable energy.
3 No other industry group exceeds 3.1%.
Commercial Real Estate Loans
At September 30, 2023 and December 31, 2022, our CRE loan portfolio totaled $13.1 billion and $12.7 billion, respectively, representing 23% of the total loan portfolio for both periods. The majority of our CRE loans are secured by real estate primarily located within our geographic footprint. The following schedule presents the geographic distribution of our CRE loan portfolio based on the location of the primary collateral.
COMMERCIAL REAL ESTATE LENDING BY COLLATERAL LOCATION
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (Dollar amounts in millions) | Amount | Percent | Amount | Percent | |||||||||||||||||||
| Arizona | $ | 1,696 | 12.9 | % | $ | 1,521 | 11.9 | % | |||||||||||||||
| California | 3,824 | 29.1 | 3,805 | 29.9 | |||||||||||||||||||
| Colorado | 668 | 5.1 | 637 | 5.0 | |||||||||||||||||||
| Nevada | 1,031 | 7.9 | 910 | 7.1 | |||||||||||||||||||
| Texas | 2,252 | 17.1 | 2,139 | 16.8 | |||||||||||||||||||
| Utah/Idaho | 2,262 | 17.2 | 2,397 | 18.8 | |||||||||||||||||||
| Washington/Oregon | 947 | 7.2 | 899 | 7.1 | |||||||||||||||||||
| Other | 460 | 3.5 | 431 | 3.4 | |||||||||||||||||||
| Total CRE | $ | 13,140 | 100.0 | % | $ | 12,739 | 100.0 | % | |||||||||||||||
Term CRE loans generally mature within a three- to seven-year period and consist of full, partial, and non-recourse guarantee structures. Typical term CRE loan structures include annually tested operating covenants that require loan rebalancing based on minimum debt service coverage, debt yield, or loan-to-value tests. Construction and land development loans generally mature in 18 to 36 months and contain full or partial recourse guarantee structures with
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one- to five-year extension options or roll-to-perm options that often result in term loans. At September 30, 2023, approximately 85% of our CRE loan portfolio was variable-rate, and approximately 24% of these variable-rate loans were swapped to a fixed rate.
Underwriting on commercial properties is primarily based on the economic viability of the project with significant consideration given to the creditworthiness and experience of the sponsor. We generally require that the owner’s equity be injected prior to any advances. Re-margining requirements (required equity infusions upon a decline in value or cash flow of the collateral) are often included in the loan agreement along with guarantees of the sponsor. For a more comprehensive discussion of CRE loans and our underwriting, see the “Commercial Real Estate Loans” section in our 2022 Form 10-K.
The following schedule presents our CRE loan portfolio by collateral type.
COMMERCIAL REAL ESTATE LENDING BY COLLATERAL TYPE
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (Dollar amounts in millions) | Amount | Percent | Amount | Percent | |||||||||||||||||||
| Commercial property | |||||||||||||||||||||||
| Multi-family | $ | 3,563 | 27.1 | % | $ | 3,068 | 24.1 | % | |||||||||||||||
| Industrial | 2,905 | 22.1 | 2,509 | 19.7 | |||||||||||||||||||
| Office | 2,100 | 15.9 | 2,281 | 17.9 | |||||||||||||||||||
| Retail | 1,467 | 11.2 | 1,529 | 12.0 | |||||||||||||||||||
| Hospitality | 696 | 5.3 | 695 | 5.4 | |||||||||||||||||||
| Land | 221 | 1.7 | 276 | 2.2 | |||||||||||||||||||
Other 1 | 1,696 | 12.9 | 1,728 | 13.5 | |||||||||||||||||||
Residential property 2 | |||||||||||||||||||||||
| Single family | 258 | 2.0 | 340 | 2.7 | |||||||||||||||||||
| Land | 76 | 0.6 | 75 | 0.6 | |||||||||||||||||||
| Condo/Townhome | 31 | 0.2 | 13 | 0.1 | |||||||||||||||||||
Other 1 | 127 | 1.0 | 225 | 1.8 | |||||||||||||||||||
| Total | $ | 13,140 | 100.0 | % | $ | 12,739 | 100.0 | % | |||||||||||||||
1 Included in the total amount of the “Other” categories was approximately $241 million and $301 million of unsecured loans at September 30, 2023 and December 31, 2022, respectively.
2 Residential property collateral type consists primarily of loans provided to commercial homebuilders for land, lot, and single-family housing developments.
Our CRE portfolio is diversified across geography and collateral type, with the largest concentration in multi-family. We provide additional analysis of our office CRE portfolio below in view of increased investor interest in that collateral type in recent periods.
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Office CRE loan portfolio
At September 30, 2023 and December 31, 2022, our office CRE loan portfolio totaled $2.1 billion and $2.3 billion, representing 16% and 18% of the total CRE loan portfolio, respectively. Approximately 30% of the office CRE loan portfolio is scheduled to mature in the next 12 months. The following schedule presents the composition of our office CRE loan portfolio and other related credit quality metrics.
OFFICE CRE LOAN PORTFOLIO
| (Dollar amounts in millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Office CRE | |||||||||||
| Construction and land development | $ | 174 | $ | 208 | |||||||
| Term | 1,926 | 2,073 | |||||||||
| Total office CRE | $ | 2,100 | $ | 2,281 | |||||||
| Credit quality metrics | |||||||||||
| Criticized loan ratio | 9.9 | % | 7.2 | % | |||||||
| Classified loan ratio | 5.5 | % | 5.8 | % | |||||||
| Nonaccrual loan ratio | 2.3 | % | — | % | |||||||
| Delinquency ratio | 1.3 | % | 1.5 | % | |||||||
| Net charge-offs, annualized | 0.1 | % | — | % | |||||||
| Ratio of allowance for credit losses to office CRE loans, at period end | 3.57 | % | 1.36 | % | |||||||
The following schedules present our office CRE loan portfolio by collateral location for the periods presented.
OFFICE CRE LOAN PORTFOLIO BY COLLATERAL LOCATION
| (Dollar amounts in millions) | September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collateral Location | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loan type | Arizona | California | Colorado | Nevada | Texas | Utah/ Idaho | Wash-ington | Other 1 | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Office CRE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land development | $ | — | $ | 65 | $ | — | $ | 2 | $ | 15 | $ | 22 | $ | 70 | $ | — | $ | 174 | ||||||||||||||||||||||||||||||||||||||
| Term | 288 | 428 | 90 | 87 | 180 | 594 | 229 | 30 | 1,926 | |||||||||||||||||||||||||||||||||||||||||||||||
Total Office CRE | $ | 288 | $ | 493 | $ | 90 | $ | 89 | $ | 195 | $ | 616 | $ | 299 | $ | 30 | $ | 2,100 | ||||||||||||||||||||||||||||||||||||||
| % of total | 13.7 | % | 23.5 | % | 4.3 | % | 4.3 | % | 9.3 | % | 29.3 | % | 14.2 | % | 1.4 | % | 100.0 | % | ||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collateral Location | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loan type | Arizona | California | Colorado | Nevada | Texas | Utah/ Idaho | Wash-ington | Other 1 | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Office CRE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land development | $ | 8 | $ | 79 | $ | — | $ | 2 | $ | — | $ | 18 | $ | 101 | $ | — | $ | 208 | ||||||||||||||||||||||||||||||||||||||
| Term | 295 | 525 | 97 | 99 | 217 | 613 | 195 | 32 | 2,073 | |||||||||||||||||||||||||||||||||||||||||||||||
Total Office CRE | $ | 303 | $ | 604 | $ | 97 | $ | 101 | $ | 217 | $ | 631 | $ | 296 | $ | 32 | $ | 2,281 | ||||||||||||||||||||||||||||||||||||||
| % of total | 13.1 | % | 27.0 | % | 4.3 | % | 4.3 | % | 9.6 | % | 26.8 | % | 13.5 | % | 1.4 | % | 100.0 | % | ||||||||||||||||||||||||||||||||||||||
1 No other geography exceeds $17 million and $18 million at September 30, 2023 and December 31, 2022, respectively.
Consumer Loans
We originate first-lien residential home mortgages considered to be of prime quality. We generally hold variable-rate loans in our portfolio and sell “conforming” fixed-rate loans to third parties, including Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, for which we make representations and warranties that the loans meet certain underwriting and collateral documentation standards.
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During the first nine months of 2023, consumer loans increased $1.1 billion, primarily in the 1-4 family residential and consumer construction loan portfolios. Increased funding of construction lending commitments and conversion-to-term loans contributed to growth in these portfolios.
We also originate home equity credit lines (“HECLs”). At September 30, 2023 and December 31, 2022, our HECL portfolio totaled $3.3 billion and $3.4 billion, respectively. Approximately 40% and 44% of our HECLs are secured by first liens for the same respective time periods.
At September 30, 2023, loans representing less than 1% of the outstanding balance in the HECL portfolio were estimated to have combined loan-to-value (“CLTV”) ratios above 100%. An estimated CLTV ratio is the ratio of our loan plus any prior lien amounts divided by the estimated current collateral value. At origination, underwriting standards for the HECL portfolio generally include a maximum 80% CLTV with a Fair Isaac Corporation (“FICO”) credit score greater than 700.
Approximately 90% of our HECL portfolio is still in the draw period, and about 18% of those loans are scheduled to begin amortizing within the next five years. We believe the risk of loss and borrower default in the event of a loan becoming fully amortizing and the effect of significant interest rate changes is low, given the rate shock analysis performed at origination. The ratio of HECL net charge-offs (recoveries) for the trailing twelve months to average balances at September 30, 2023 and December 31, 2022, was 0.05% and (0.03)%, respectively. See Note 6 of the Notes to Consolidated Financial Statements for additional information on the credit quality of the HECL portfolio.
Nonperforming Assets
Nonperforming assets include nonaccrual loans and other real estate owned (“OREO”) or foreclosed properties. The following schedule presents our nonperforming assets.
NONPERFORMING ASSETS
| (Dollar amounts in millions) | September 30, 2023 | December 31, 2022 | |||||||||
Nonaccrual loans 1 | $ | 216 | $ | 149 | |||||||
Other real estate owned 2 | 3 | — | |||||||||
| Total nonperforming assets | $ | 219 | $ | 149 | |||||||
Ratio of nonperforming assets to net loans and leases1 and other real estate owned 2 | 0.38 | % | 0.27 | % | |||||||
| Accruing loans past due 90 days or more | $ | 16 | $ | 6 | |||||||
Ratio of accruing loans past due 90 days or more to loans and leases 1 | 0.03 | % | 0.01 | % | |||||||
Nonaccrual loans1 and accruing loans past due 90 days or more | $ | 232 | $ | 155 | |||||||
Ratio of nonperforming assets1 and accruing loans past due 90 days or more to loans and leases1 and other real estate owned 2 | 0.41 | % | 0.28 | % | |||||||
Nonaccrual loans1 current as to principal and interest payments | 62.2 | % | 57.7 | % | |||||||
1 Includes loans held for sale.
2 Does not include banking premises held for sale.
Nonperforming assets as a percentage of loans and leases and OREO increased to 0.38% at September 30, 2023, compared with 0.27% at December 31, 2022. Total nonaccrual loans at September 30, 2023 increased to $216 million from $149 million at December 31, 2022, primarily due to two suburban office commercial real estate loans in the Southern California market totaling $46 million. See Note 6 of the Notes to Consolidated Financial Statements for more information on nonaccrual loans.
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Loan Modifications
Loans may be modified in the normal course of business for competitive reasons or to strengthen our collateral position. Loan modifications may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan.
On January 1, 2023, we adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminated the recognition and measurement of troubled debt restructurings (“TDRs”) and their related disclosures. ASU 2022-02 requires enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. For the first nine months of 2023, loans that have been modified to accommodate a borrower experiencing financial difficulties totaled $243 million.
If a modified loan is on nonaccrual and performs for at least six months according to the modified terms, and an analysis of the customer’s financial condition indicates that we are reasonably assured of repayment of the modified principal and interest, the loan may be returned to accrual status. The borrower’s payment performance prior to and following the modification is taken into account to determine whether a loan should be returned to accrual status.
ACCRUING AND NONACCRUING MODIFIED LOANS TO BORROWERS EXPERIENCING FINANCIAL DIFFICULTY
| (In millions) | September 30, 2023 | ||||
| Modified loans – accruing | $ | 232 | |||
| Modified loans – nonaccruing | 11 | ||||
| Total | $ | 243 | |||
For additional information regarding loan modifications to borrowers experiencing financial difficulty, including information related to TDRs prior to our adoption of ASU 2022-02, see Note 6 of the Notes to Consolidated Financial Statements.
Allowance for Credit Losses
The ACL includes the ALLL and the RULC. The ACL represents our estimate of current expected credit losses related to the loan and lease portfolio and unfunded lending commitments as of the balance sheet date. To determine the adequacy of the allowance, our loan and lease portfolio is segmented based on loan type.
The RULC is a reserve for potential losses associated with off-balance sheet commitments and is separately recorded on the consolidated balance sheet in “Other liabilities.” Any related increases or decreases in the reserve are recorded on the consolidated income statement in “Provision for unfunded lending commitments.”
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The following schedule presents the changes in and allocation of the ACL.
SUMMARY OF CREDIT LOSS EXPERIENCE
| (Dollar amounts in millions) | Nine Months Ended September 30, 2023 | Twelve Months Ended December 31, 2022 | Nine Months Ended September 30, 2022 | ||||||||||||||
| Loans and leases outstanding | $ | 56,893 | $ | 55,653 | $ | 53,918 | |||||||||||
| Average loans and leases outstanding: | |||||||||||||||||
| Commercial | 30,620 | 29,225 | 28,945 | ||||||||||||||
| Commercial real estate | 12,942 | 12,251 | 12,151 | ||||||||||||||
| Consumer | 13,041 | 11,122 | 10,801 | ||||||||||||||
| Total average loans and leases outstanding | $ | 56,603 | $ | 52,598 | $ | 51,897 | |||||||||||
| Allowance for loan and lease losses: | |||||||||||||||||
Balance at beginning of period 1 | $ | 572 | $ | 513 | $ | 513 | |||||||||||
| Provision for loan losses | 136 | 101 | 70 | ||||||||||||||
| Charge-offs: | |||||||||||||||||
| Commercial | 35 | 72 | 65 | ||||||||||||||
| Commercial real estate | 3 | — | — | ||||||||||||||
| Consumer | 11 | 10 | 8 | ||||||||||||||
| Total | 49 | 82 | 73 | ||||||||||||||
| Recoveries: | |||||||||||||||||
| Commercial | 17 | 32 | 21 | ||||||||||||||
| Commercial real estate | — | — | — | ||||||||||||||
| Consumer | 5 | 11 | 10 | ||||||||||||||
| Total | 22 | 43 | 31 | ||||||||||||||
| Net loan and lease charge-offs | 27 | 39 | 42 | ||||||||||||||
| Balance at end of period | $ | 681 | $ | 575 | $ | 541 | |||||||||||
| Reserve for unfunded lending commitments: | |||||||||||||||||
| Balance at beginning of period | $ | 61 | $ | 40 | $ | 40 | |||||||||||
| Provision for unfunded lending commitments | (4) | 21 | 9 | ||||||||||||||
| Balance at end of period | $ | 57 | $ | 61 | $ | 49 | |||||||||||
| Total allowance for credit losses: | |||||||||||||||||
| Allowance for loan and lease losses | $ | 681 | $ | 575 | $ | 541 | |||||||||||
| Reserve for unfunded lending commitments | 57 | 61 | 49 | ||||||||||||||
| Total allowance for credit losses | $ | 738 | $ | 636 | $ | 590 | |||||||||||
| Ratio of allowance for credit losses to net loans and leases, at period end | 1.30 | % | 1.14 | % | 1.09 | % | |||||||||||
| Ratio of allowance for credit losses to nonaccrual loans, at period end | 371 | % | 427 | % | 391 | % | |||||||||||
| Ratio of allowance for credit losses to nonaccrual loans and accruing loans past due 90 days or more, at period end | 343 | % | 410 | % | 345 | % | |||||||||||
Ratio of total net charge-offs to average loans and leases 2 | 0.06 | % | 0.07 | % | 0.11 | % | |||||||||||
Ratio of commercial net charge-offs to average commercial loans 2 | 0.08 | % | 0.14 | % | 0.20 | % | |||||||||||
Ratio of commercial real estate net charge-offs to average commercial real estate loans 2 | 0.03 | % | — | % | — | % | |||||||||||
Ratio of consumer net charge-offs to average consumer loans 2 | 0.06 | % | (0.01) | % | (0.02) | % | |||||||||||
1 The beginning balance for the nine months ended September 30, 2023 for the allowance for loan losses does not agree to the ending balance at December 31, 2022 because of the adoption of the new accounting standard related to loan modifications to borrowers experiencing financial difficulties.
2 Ratios are annualized for the periods presented except for the period representing the full twelve months.
The total ACL increased to $738 million, from $636 million, during the first nine months of 2023, primarily due to deterioration in economic forecasts. See Note 6 of the Notes to Consolidated Financial Statements for additional information related to the ACL and credit trends experienced in each portfolio segment.
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Interest Rate and Market Risk Management
Interest rate risk is the potential for reduced net interest income and other rate-sensitive income resulting from adverse changes in the level of interest rates. Market risk is the potential for loss arising from adverse changes in the fair value of fixed-income securities, equity securities, other earning assets, and derivative financial instruments as a result of changes in interest rates or other factors. Because we engage in transactions involving various financial products, we are exposed to both interest rate risk and market risk. For a more comprehensive discussion of our interest rate and market risk management, see the “Interest Rate and Market Risk Management” section in our 2022 Form 10-K.
Interest Rate Risk
We strive to position the Bank for interest rate changes and manage the balance sheet sensitivity to reduce the volatility of both net interest income and economic value of equity (“EVE”). With the recent prominent bank failures during the first half of 2023, customer deposit behavior deviated from modeled behaviors, with the latter being informed using data reflecting an extended period of relatively low interest rates. As such, in addition to our historical-based assumptions, we have included adjusted deposit assumptions into our interest risk rate management, which increase the deposit beta for interest-bearing products and increase the percentage of non-interest bearing deposits that migrate to interest-bearing products. While we seek to comply with our interest rate risk limits under both sets of assumptions, management believes the adjusted deposit assumptions are more likely to reflect future behavior of deposits.
We generally have granular deposit funding, and much of this funding has an indeterminate life with no maturity, and can be withdrawn at any time. Because most deposits come from household and business accounts, their duration is generally longer than the duration of our loan portfolio. As such, we are naturally “asset-sensitive” — meaning that our assets are expected to reprice faster or more significantly than our liabilities. We regularly use interest rate swaps, investment in fixed-rate securities, and funding strategies to manage our interest rate risk. These strategies collectively have muted the expected sensitivity of net interest income to changes in interest rates. Asset sensitivity measures depend upon the assumptions we use for deposit runoff and repricing behavior. As interest rates rise, we expect some customers to move balances from demand deposits to interest-bearing accounts such as money market, savings, or certificates of deposit. Our models are particularly sensitive to the assumption about the rate of such migration.
We also assume a correlation, referred to as a “deposit beta,” with respect to interest-bearing deposits, wherein the rates paid to customers change at a different pace when compared with changes in average benchmark interest rates. Generally, certificates of deposit are assumed to have a high correlation, while interest-bearing checking accounts are assumed to have a lower correlation.
The following schedule presents deposit duration assumptions using both historical-based deposit behavior as well as the adjusted deposit assumptions discussed previously.
DEPOSIT ASSUMPTIONS
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| Historical-based assumptions | Adjusted assumptions | Historical-based assumptions | ||||||||||||||||||||||||||||||||||||
| Product | Effective duration (unchanged) | Effective duration (+200 bps) | Effective duration (unchanged) | Effective duration (+200 bps) | Effective duration (unchanged) | Effective duration (+200 bps) | ||||||||||||||||||||||||||||||||
| Demand deposits | 4.2% | 3.8% | 3.1% | 2.9% | 3.6% | 3.5% | ||||||||||||||||||||||||||||||||
| Money market | 2.2% | 2.1% | 1.5% | 1.3% | 2.3% | 2.0% | ||||||||||||||||||||||||||||||||
| Savings and interest-bearing checking | 2.4% | 2.0% | 1.6% | 1.1% | 3.1% | 2.8% | ||||||||||||||||||||||||||||||||
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As more rate-sensitive deposits have runoff, the effective duration of the deposits under the historical-based assumptions has lengthened due to the remaining deposits that are assumed to be less rate sensitive. Conversely, the effective duration of the deposits under the adjusted assumptions has shortened considerably due to faster deposit repricing.
As noted previously, we utilize derivatives to manage interest rate risk. The following schedule presents derivatives that are designated in qualifying hedging relationships at September 30, 2023. Included are the average outstanding derivative notional amounts for each period presented and the weighted average fixed-rate paid or received for each category of cash flow and fair value hedge. Fair value hedges of assets include $2.5 billion in notional of hedges of AFS securities designated under the portfolio layer method that were added during the second quarter of 2023. See Note 7 of the Notes to Consolidated Financial Statements for additional information regarding the impact of these hedging relationships on interest income and expense.
DERIVATIVES DESIGNATED IN QUALIFYING HEDGING RELATIONSHIPS
| 2023 | 2024 | 2025 | 3Q25 - 2Q26 | 3Q26 - 2Q27 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | Fourth Quarter | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | First Quarter | Second Quarter | Third Quarter | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges of assets 1,2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average outstanding notional | $ | 2,250 | $ | 1,817 | $ | 1,483 | $ | 1,050 | $ | 550 | $ | 350 | $ | 350 | $ | 350 | $ | 111 | $ | 100 | |||||||||||||||||||||||||||||||||||||||
| Weighted-average fixed-rate received | 2.24 | % | 2.05 | % | 1.96 | % | 1.82 | % | 1.96 | % | 2.34 | % | 2.34 | % | 2.34 | % | 1.66 | % | 1.65 | % | |||||||||||||||||||||||||||||||||||||||
Cash flow hedges of liabilities 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average outstanding notional | $ | 500 | $ | 500 | $ | 500 | $ | 500 | $ | 500 | $ | 500 | $ | 500 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Weighted-average fixed-rate paid | 3.67 | % | 3.67 | % | 3.67 | % | 3.67 | % | 3.67 | % | 3.67 | % | 3.67 | % | — | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value hedges | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value hedges of assets 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average outstanding notional | $ | 4,171 | $ | 4,444 | $ | 4,558 | $ | 4,562 | $ | 4,558 | $ | 2,428 | $ | 1,049 | $ | 1,044 | $ | 1,037 | $ | 1,001 | |||||||||||||||||||||||||||||||||||||||
| Weighted-average fixed-rate paid | 3.33 | % | 3.24 | % | 3.21 | % | 3.21 | % | 3.21 | % | 2.47 | % | 1.84 | % | 1.83 | % | 1.83 | % | 1.83 | % | |||||||||||||||||||||||||||||||||||||||
1 Cash flow hedges consist of receive-fixed swaps hedging pools of floating-rate loans.
2 Cash flow hedges of assets fully matures in October 2027. Amounts for 2027 have not been prorated to reflect this hedge maturing during the period.
3 Cash flow hedges of liabilities fully matures in May 2025.
4 Fair value hedges of assets consist of pay-fixed interest rate swaps hedging AFS fixed-rate securities.
Incorporating the historical-based and adjusted deposit assumptions and the impact of derivatives in qualifying hedging relationships previously discussed, the following schedule presents earnings at risk (“EaR”), or the percentage change in 12-month forward-looking net interest income, and our estimated percentage change in EVE. Both EaR and EVE are based on a static balance sheet size under parallel interest rate changes ranging from -100 bps to +300 bps. These measures highlight the sensitivity to changes in interest rates across various scenarios; the outcomes are not intended to be forecasts of expected net interest income.
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INCOME SIMULATION – CHANGE IN NET INTEREST INCOME AND CHANGE IN ECONOMIC VALUE OF EQUITY
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Parallel shift in rates (in bps)1 | Parallel shift in rates (in bps)1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repricing scenario | -100 | 0 | +100 | +200 | +300 | -100 | 0 | +100 | +200 | +300 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Historical-based assumptions: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings at Risk (EaR) | (4.4) | % | — | % | 4.4 | % | 8.9 | % | 13.3 | % | (2.4) | % | — | % | 2.4 | % | 4.8 | % | 7.1 | % | ||||||||||||||||||||||||||||||||||||||||||
Economic Value of Equity (EVE) | (0.8) | % | — | % | 1.8 | % | 3.5 | % | 5.0 | % | 2.0 | % | — | % | (1.1) | % | (2.3) | % | (3.7) | % | ||||||||||||||||||||||||||||||||||||||||||
| Adjusted assumptions: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings at Risk (EaR) | (0.7) | % | — | % | 0.6 | % | 1.4 | % | 2.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Economic Value of Equity (EVE) | 4.4 | % | — | % | (4.9) | % | (9.7) | % | (14.1) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
1 Assumes rates cannot go below zero in the negative rate shift.
Under the historical-based assumptions, the asset sensitivity, as measured by EaR, increased during the third quarter of 2023, primarily due an increase in pay-fixed interest rate swap notional, partially offset by deposit migration from low beta products to high beta products. Under the adjusted deposit assumptions, asset sensitivity decreased significantly due to faster deposit repricing. Both assumptions result in interest rate risk being within policy limits; management believes the adjusted deposit assumptions are more likely to reflect future behavior of deposits.
For interest-bearing deposits with indeterminate maturities, the weighted average modeled beta is 42% under the historical-based assumptions, and 62% under the adjusted assumptions.
The EaR analysis focuses on parallel rate shocks across the term structure of benchmark interest rates. In a non-parallel rate scenario where shorter-term rates increase slightly, but the ten-year rate increases by 200 bps, the increase in EaR as modeled under the historical-based assumptions would be approximately 50 percent larger than the change associated with the parallel +200 bps rate change.
EaR has inherent limitations in describing expected changes in net interest income in rapidly changing interest rate environments due to a lag in asset and liability repricing behavior. As such, we expect net interest income to change due to “latent” and “emergent” interest rate sensitivity. Unlike EaR, which measures net interest income over 12 months, latent and emergent interest rate sensitivity explains changes in current quarter net interest income, compared with expected net interest income in the same quarter one year forward.
Latent interest rate sensitivity refers to future changes in net interest income based upon past rate movements that have yet to be fully recognized in revenue but will be recognized over the near term. We expect latent sensitivity to reduce net interest income by approximately 2% in the third quarter of 2024, compared with the third quarter of 2023.
Emergent interest rate sensitivity refers to future changes in net interest income based upon future interest rate movements and is measured from the latent level of net interest income. If interest rates rise consistent with the forward curve at September 30, 2023, we expect emergent sensitivity to decrease net interest income by an insignificant amount from the latent sensitivity level, for a cumulative 2% reduction in net interest income.
Our focus on business banking also plays a significant role in determining the nature of our asset-liability management posture. At September 30, 2023, $24.3 billion of our commercial lending and CRE loan balances were scheduled to reprice in the next six months. For these variable-rate loans, we have executed $2.6 billion of cash flow hedges by receiving fixed rates on interest rate swaps. At September 30, 2023, we also had $3.5 billion of variable-rate consumer loans scheduled to reprice in the next six months. The impact on asset sensitivity from commercial or consumer loans with floors has become insignificant as rates have risen. See Notes 3 and 7 of the Notes to Consolidated Financial Statements for additional information regarding derivative instruments.
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Market Risk – Fixed Income
We are exposed to market risk through changes in fair value. This includes market risk for trading securities and for interest rate swaps used to hedge interest rate risk. We underwrite municipal and corporate securities. We also trade municipal, agency, and treasury securities. This underwriting and trading activity exposes us to a risk of loss arising from adverse changes in the prices of these fixed-income securities.
Changes in the fair value of AFS securities and in interest rate swaps that qualify as cash flow hedges are included in accumulated other comprehensive income (loss) (“AOCI”) for each financial reporting period. During the third quarter of 2023, the $105 million after-tax increase in AOCI loss related to investment securities was driven largely by declines in the fair value of the AFS securities primarily due to increases in benchmark interest rates. For more discussion regarding investment securities and AOCI, see the “Capital Management” section on page 34. See also Note 5 of the Notes to Consolidated Financial Statements for further information regarding the accounting for investment securities.
Market Risk – Equity Investments
Through our equity investment activities, we own equity securities that are publicly traded. In addition, we own equity securities in governmental entities and companies, e.g., Federal Reserve Board (“FRB”) and the FHLB, that are not publicly traded. Equity investments may be accounted for at cost less impairment and adjusted for observable price changes, fair value, the equity method, or proportional or full consolidation methods of accounting, depending on our ownership position and degree of influence over the investees’ business. Regardless of the accounting method, the values of our investments are subject to fluctuation. Because the fair value of these securities may fall below the cost at which we acquired them, we are exposed to the possibility of loss. Equity investments in private and public companies are evaluated, monitored, and approved by members of management in our Equity Investments Committee and Securities Valuation Committee.
We hold both direct and indirect investments in predominantly pre-public companies, primarily through various Small Business Investment Company (“SBIC”) venture capital funds as a strategy to provide beneficial financing, growth, and expansion opportunities to diverse businesses generally in communities within our geographic footprint. Our equity exposure to these investments was approximately $185 million and $172 million at September 30, 2023 and December 31, 2022, respectively. On occasion, some of the companies within our SBIC investment may issue an initial public offering (“IPO”). In this case, the fund is generally subject to a lockout period before liquidating the investment, which can introduce additional market risk. See Note 3 of the Notes to Consolidated Financial Statements for additional information regarding the valuation of our SBIC investments.
Liquidity Risk Management
Liquidity refers to our ability to meet our cash, contractual, and collateral obligations, and to manage both expected and unexpected cash flows without adversely impacting our operations or financial strength. We manage our liquidity to provide funds for our customers’ credit needs, our anticipated financial and contractual obligations, and other corporate activities. Sources of liquidity include deposits, borrowings, equity, and unencumbered assets, such as loans and investment securities. Our investment securities are primarily held as a source of contingent liquidity. We generally own securities that can readily provide us with cash and liquidity through secured borrowing agreements with securities pledged as collateral.
We maintain and regularly test a contingency funding plan to identify sources and uses of liquidity. Additionally, we have a Board-approved liquidity policy that requires us to monitor and maintain adequate liquidity, diversify funding positions, and anticipate future funding needs. In accordance with this policy, we monitor our liquidity positions by conducting various stress tests and evaluating certain liquid asset measurements, such as a 30-day liquidity coverage ratio.
We perform regular liquidity stress tests and assess our portfolio of highly liquid assets (sufficient to cover 30-day funding needs under stress scenarios). These stress tests include projections of funding maturities, uses of funds, and assumptions of deposit runoff. The assumptions consider the size of deposit account, operational nature of deposits, type of depositor, and concentrations of funding sources including large depositors and aggregate levels of
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uncollateralized deposits exceeding insured levels. Concentrated funding sources are given large runoff factors up to 100% in projecting stressed funding needs. Our liquidity stress testing considers multiple timeframes ranging from overnight to 12 months. Our liquidity policy requires us to maintain sufficient on-balance sheet liquidity in the form of FRB reserve balance and other highly liquid assets to meet stressed outflow assumptions.
We have a dedicated funding desk that monitors real-time inflows and outflows of our FRB account, and we have tools, including ready access to repo markets and FHLB advances, to manage intraday liquidity. FHLB borrowings are “open-term,” allowing us the ability to retain or return funds based on our liquidity needs. We pledge a large portion of our highly liquid investment securities portfolio through the General Collateral Funding (“GCF”) repo program. Through this program, high-quality collateral is pledged, and program participants exchange funds anonymously, which allows for near instant access to funding during market hours.
Additionally, we have pledged collateral to the FRB’s primary credit facility (or discount window) and the Bank Term Funding Program (“BTFP”), which provide additional contingent funding sources outside the normal operating hours of the FHLB and the GCF program. The BTFP offers loans of up to one year in length to eligible depository institutions pledging U.S. Treasuries, agency debt and government mortgage-backed securities, and other qualifying assets as collateral. Unlike other funding sources, borrowing capacity under the BTFP is based on the par value, not the fair value, of collateral. Advances can be requested under the program through mid-March 2024.
For more information on our liquidity risk management practices, see “Liquidity Risk Management” in our 2022 Form 10-K.
For the first nine months of 2023, the primary sources of cash came from an increase in deposits, a decrease in investment securities, and net cash provided by operating activities. Uses of cash during the same period primarily included a decrease in short-term borrowings, an increase in loans and leases, and dividends paid on common and preferred stock. Cash payments for interest reflected in operating expenses were $913 million and $63 million for the first nine months of 2023 and 2022, respectively.
The FHLB and FRB have been, and continue to be, a significant source of back-up liquidity and funding. We are a member of the FHLB of Des Moines, which allows member banks to borrow against eligible loans and securities to satisfy liquidity and funding requirements. We are required to invest in FHLB and FRB stock to maintain our borrowing capacity. At September 30, 2023, our total investment in FHLB and FRB stock was $71 million and $65 million, respectively, compared with $294 million and $68 million at December 31, 2022.
At September 30, 2023, loans with a carrying value of $24.7 billion and $12.5 billion, compared with $23.7 billion and $3.9 billion at December 31, 2022, were pledged at the FHLB and FRB, respectively, as collateral for current and potential borrowings.
At September 30, 2023 and December 31, 2022, investment securities with a carrying value of $20.3 billion and $13.5 billion, respectively, were pledged as collateral for potential borrowings. For the same time periods, these pledges included $9.6 billion and $8.3 billion for available use through the GCF repo program, $6.6 billion and $1.0 billion to the FRB, and $4.1 billion and $4.2 billion to secure collateralized public and trust deposits, advances, and for other purposes.
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A large portion of these pledged assets are unencumbered, but are pledged to provide immediate access to contingency sources of funds. The following schedule presents our total available liquidity including unused collateralized borrowing capacity.
AVAILABLE LIQUIDITY
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in billions) | FHLB | FRB | GCF | BTFP | Total | FHLB | FRB | GCF | BTFP | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total borrowing capacity | $ | 16.6 | $ | 11.0 | $ | 9.3 | $ | 6.9 | $ | 43.8 | $ | 16.6 | $ | 4.0 | $ | 8.4 | $ | — | $ | 29.0 | |||||||||||||||||||||||||||||||||||||||
| Borrowings outstanding | 1.6 | — | 1.0 | — | 2.6 | 7.2 | — | 2.7 | — | 9.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Remaining capacity, at period end | $ | 15.0 | $ | 11.0 | $ | 8.3 | $ | 6.9 | $ | 41.2 | $ | 9.4 | $ | 4.0 | $ | 5.7 | $ | — | $ | 19.1 | |||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 0.7 | 0.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits 1 | 1.7 | 1.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total available liquidity | $ | 43.6 | $ | 21.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ratio of available liquidity to uninsured deposits | 140 | % | 56 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
1 Represents funds deposited by the Bank primarily at the Federal Reserve Bank.
At September 30, 2023 and December 31, 2022, our total available liquidity was $43.6 billion, compared with $21.1 billion, respectively. At September 30, 2023, we had sources of liquidity which exceeded our uninsured deposits without the need to sell any investment securities.
General financial market and economic conditions impact our access to, and cost of, external financing. Access to funding markets is also directly affected by the credit ratings we receive from various rating agencies. The ratings not only influence the costs associated with borrowings, but can also influence the sources of the borrowings. All of the credit rating agencies rate our debt at an investment-grade level.
The following schedule presents our current credit ratings.
| CREDIT RATINGS | ||||||||||||||||||||||||||
| as of October 31, 2023: | ||||||||||||||||||||||||||
| Rating agency | Outlook | Long-term issuer/senior debt rating | Subordinated debt rating | Short-term debt rating | ||||||||||||||||||||||
| Kroll | Positive | A- | BBB+ | K2 | ||||||||||||||||||||||
| S&P | Negative | BBB+ | BBB | NR | ||||||||||||||||||||||
| Fitch | Stable | BBB+ | BBB | F2 | ||||||||||||||||||||||
| Moody's | Stable | Baa2 | NR | P2 | ||||||||||||||||||||||
Various uncertainties in the banking industry during the first nine months of 2023 resulted in ratings pressure for a number of banks, including Zions. As a result, the credit rating agencies took the following actions related to our issuer, debt, and deposit ratings:
•In April 2023, Moody's downgraded our long-term issuer rating to Baa2 from Baa1, our short-term debt rating to P2 from P1, and changed their outlook on our long-term deposit and issuer ratings to “Stable” from “Ratings under review.”
•In May 2023, Standard & Poor's (“S&P”) changed their outlook on our long-term deposit and issuer ratings to “Negative” from “Stable.”
•In October 2023, Fitch downgraded our short-term debt rating to F2 from F1.
We may, from time to time, issue additional preferred stock, senior or subordinated notes, or other forms of capital or debt instruments, depending on our capital, funding, asset-liability management, or other needs as market conditions warrant. These additional issuances may be subject to required regulatory approvals. We believe that our sources of available liquidity are adequate to meet all reasonably foreseeable short- and intermediate-term demands.
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Capital Management
A strong capital position is vital to the achievement of our key corporate objectives, our continued profitability, and to promoting depositor and investor confidence. We seek to (1) maintain sufficient capital to support the current needs and growth of our businesses, and (2) fulfill responsibilities to depositors and bondholders while managing capital distributions to shareholders through dividends and repurchases of common stock.
We utilize stress testing as an important mechanism to inform our decisions on the appropriate level of capital, based upon actual and hypothetically stressed economic conditions, which are comparable in severity to the scenarios published by the FRB. The timing and amount of capital actions are subject to various factors, including our financial performance, business needs, prevailing and anticipated economic conditions, and the results of our internal stress testing, as well as Board and Office of the Comptroller of the Currency (“OCC”) approval. Shares may be repurchased occasionally in the open market or through privately negotiated transactions. For a more comprehensive discussion of our capital risk management, see “Capital Management” in our 2022 Form 10-K.
SHAREHOLDERS' EQUITY
| (Dollar amounts in millions) | September 30, 2023 | December 31, 2022 | Amount change | Percent change | |||||||||||||||||||
| Shareholders’ equity: | |||||||||||||||||||||||
Preferred stock | $ | 440 | $ | 440 | $ | — | — | % | |||||||||||||||
Common stock and additional paid-in capital | 1,726 | 1,754 | (28) | (2) | |||||||||||||||||||
Retained earnings | 6,157 | 5,811 | 346 | 6 | |||||||||||||||||||
| Accumulated other comprehensive loss | (3,008) | (3,112) | 104 | 3 | |||||||||||||||||||
| Total shareholders' equity | $ | 5,315 | $ | 4,893 | $ | 422 | 9 | % | |||||||||||||||
Total shareholders’ equity increased $422 million, or 9%, to $5.3 billion at September 30, 2023, compared with $4.9 billion at December 31, 2022. Common stock and additional paid-in capital decreased $28 million, primarily due to common stock repurchases during the first quarter of 2023. As the macroeconomic environment remained uncertain, we did not repurchase common shares during the second or third quarters of 2023, nor do we expect to repurchase common shares during the fourth quarter of 2023.
AOCI was a $3.0 billion loss at September 30, 2023, and, for the first nine months of 2023, reflected (1) a $169 million decline in the fair value of fixed-rate AFS securities as a result of higher interest rates, primarily offset by $158 million in unrealized loss amortization associated with the securities transferred from AFS to HTM during the fourth quarter of 2022, and (2) a $114 million increase in unrealized gains and other adjustments associated with derivative instruments used for risk management purposes. Absent any sales or credit impairment of the AFS securities, the unrealized losses will not be recognized in earnings. We do not intend to sell any securities with unrealized losses. Although changes in AOCI are reflected in shareholders’ equity, they are excluded from regulatory capital, and therefore do not impact our regulatory ratios.
For more discussion on our investment securities portfolio and related unrealized gains and losses, see Note 5 of the Notes to Consolidated Financial Statements.
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CAPITAL DISTRIBUTIONS
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions, except share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Capital distributions: | |||||||||||||||||||||||
| Preferred dividends paid | $ | 7 | $ | 6 | $ | 22 | $ | 22 | |||||||||||||||
| Total capital distributed to preferred shareholders | 7 | 6 | 22 | 22 | |||||||||||||||||||
| Common dividends paid | 61 | 62 | 184 | 178 | |||||||||||||||||||
Bank common stock repurchased 1 | — | 50 | 50 | 151 | |||||||||||||||||||
| Total capital distributed to common shareholders | 61 | 112 | 234 | 329 | |||||||||||||||||||
| Total capital distributed to preferred and common shareholders | $ | 68 | $ | 118 | $ | 256 | $ | 351 | |||||||||||||||
Weighted average diluted common shares outstanding (in thousands) | 147,653 | 149,792 | 147,794 | 150,766 | |||||||||||||||||||
| Common shares outstanding, at period end (in thousands) | 148,146 | 149,611 | 148,146 | 149,611 | |||||||||||||||||||
1 Includes amounts related to the common shares acquired from our publicly announced plans and those acquired in connection with our stock compensation plan. Shares were acquired from employees to pay for their payroll taxes and stock option exercise cost upon the exercise of stock options.
Pursuant to the OCC’s “Earnings Limitation Rule,” our dividend payments are restricted to an amount equal to the sum of the total of (1) our net income for that year, and (2) retained earnings for the preceding two years, unless the OCC approves the declaration and payment of dividends in excess of such amount. At September 30, 2023, we had $1.9 billion of retained net profits available for distribution.
During the third quarter of 2023, we paid dividends on preferred stock of $7 million and dividends on common stock of $61 million, or $0.41 per share. In October 2023, the Board declared a regular quarterly dividend of $0.41 per common share, payable on November 16, 2023 to shareholders of record on November 9, 2023. See Note 9 of the Notes to Consolidated Financial Statements for additional information about our capital management actions.
Basel III
We are subject to Basel III capital requirements that include certain minimum regulatory capital ratios. At September 30, 2023, we exceeded all capital adequacy requirements under the Basel III capital rules. Based on our internal stress testing and other assessments of capital adequacy, we believe we hold capital sufficiently in excess of internal and regulatory requirements for well-capitalized banks. See the “Supervision and Regulation” section and Note 15 of our 2022 Form 10-K for more information about our compliance with the Basel III capital requirements. The following schedule presents our capital amounts, capital ratios, and other selected performance ratios.
35
CAPITAL AMOUNTS AND RATIOS
| (Dollar amounts in millions) | September 30, 2023 | December 31, 2022 | September 30, 2022 | ||||||||||||||
Basel III risk-based capital amounts: | |||||||||||||||||
| Common equity tier 1 capital | $ | 6,803 | $ | 6,481 | $ | 6,342 | |||||||||||
| Tier 1 risk-based | 7,242 | 6,921 | 6,781 | ||||||||||||||
| Total risk-based | 8,500 | 8,077 | 7,887 | ||||||||||||||
| Risk-weighted assets | 66,615 | 66,111 | 65,985 | ||||||||||||||
| Basel III risk-based capital ratios: | |||||||||||||||||
| Common equity tier 1 capital ratio | 10.2 | % | 9.8 | % | 9.6 | % | |||||||||||
| Tier 1 risk-based ratio | 10.9 | 10.5 | 10.3 | ||||||||||||||
| Total risk-based ratio | 12.8 | 12.2 | 12.0 | ||||||||||||||
| Tier 1 leverage ratio | 8.3 | 7.7 | 7.5 | ||||||||||||||
| Other ratios: | |||||||||||||||||
| Average equity to average assets (three months ended) | 6.2 | % | 5.4 | % | 6.5 | % | |||||||||||
| Return on average common equity (three months ended) | 13.5 | 25.4 | 15.8 | ||||||||||||||
Return on average tangible common equity (three months ended) 1 | 17.3 | 33.4 | 19.6 | ||||||||||||||
Tangible equity ratio 1 | 4.9 | 4.3 | 4.2 | ||||||||||||||
Tangible common equity ratio 1 | 4.4 | 3.8 | 3.7 | ||||||||||||||
1 See “Non-GAAP Financial Measures” on page 37 for more information regarding these ratios.
On July 27, 2023, bank regulators issued a proposal to implement the Basel Committee on Banking Supervision’s finalization of the post-crisis bank regulatory capital reforms. The proposal provides for a July 1, 2025 effective date, subject to a three-year phase-in period for certain aspects of the proposal. Bank regulators recently extended the comment period for the proposal to January 16, 2024.
The proposal, commonly referred to as Basel III “Endgame,” would significantly revise the capital requirements applicable to large banking organizations, defined as those with total assets of $100 billion or more. At September 30, 2023, we had $87.3 billion in total assets and do not currently qualify as a large banking organization. We are evaluating the potential future impact of the proposal, as we expect it is more likely than not we would become subject to this proposal over the next few years.
Under the proposal, at such time we were to increase our total assets to $100 billion or more, we would, among other things, be required to (1) include unrealized gains and losses on AFS debt securities in regulatory capital, (2) hold capital for operational risk and market risk, and (3) calculate risk-based capital ratios under both the standardized approach and the expanded risk-based approach.
On August 29, 2023, bank regulators issued a proposal that would expand a long-term debt requirement to all banks with total assets of $100 billion or more. The proposed rule would require these banks to have a minimum outstanding amount of eligible long-term debt that is the greater of (i) 6% of total risk-weighted assets; (ii) 2.5% of total leverage exposure, and (iii) 3.5% of average total assets. In the event we were to increase our total assets to $100 billion or more, we would have a three-year implementation period to issue debt and meet the other requirements under the proposal. At September 30, 2023, if enacted as proposed, the estimated amount of incremental debt we would be required to issue would be approximately $3.5 billion over the three year phase-in period.
Additionally, on August 29, 2023, the FDIC issued a proposal that revises the requirements for resolution planning (“living wills”) for banks in two asset categories. Under the proposal, banks with total assets of $100 billion or more would be required to submit more detailed living wills, while banks with total assets between $50 billion and $100 billion would submit more limited information filings, in each case filed biennially beginning in 2025.
36
NON-GAAP FINANCIAL MEASURES
This Form 10-Q presents non-GAAP financial measures, in addition to GAAP financial measures. The adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures are presented in the following schedules. We consider these adjustments to be relevant to ongoing operating results and provide a meaningful basis for period-to-period comparisons. We use these non-GAAP financial measures to assess our performance and financial position. We believe that presenting these non-GAAP financial measures permits investors to assess our performance on the same basis as that applied by our management and the financial services industry.
Non-GAAP financial measures have inherent limitations and are not necessarily comparable to similar financial measures that may be presented by other financial services companies. Although non-GAAP financial measures are frequently used by stakeholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under generally accepted accounting principles (“GAAP”).
Tangible Common Equity and Related Measures
Tangible common equity and related measures are non-GAAP measures that exclude the impact of intangible assets and their related amortization. We believe these non-GAAP measures provide useful information about our use of shareholders’ equity and provide a basis for evaluating the performance of a business more consistently, whether acquired or developed internally.
RETURN ON AVERAGE TANGIBLE COMMON EQUITY (NON-GAAP)
| Three Months Ended | ||||||||||||||||||||
| (Dollar amounts in millions) | September 30, 2023 | June 30, 2023 | September 30, 2022 | |||||||||||||||||
Net earnings applicable to common shareholders (GAAP) | $ | 168 | $ | 166 | $ | 211 | ||||||||||||||
| Adjustment, net of tax: | ||||||||||||||||||||
| Amortization of core deposit and other intangibles | 1 | 1 | 1 | |||||||||||||||||
Net earnings applicable to common shareholders, net of tax | (a) | $ | 169 | $ | 167 | $ | 212 | |||||||||||||
| Average common equity (GAAP) | $ | 4,938 | $ | 4,818 | $ | 5,303 | ||||||||||||||
| Average goodwill and intangibles | (1,061) | (1,063) | (1,021) | |||||||||||||||||
| Average tangible common equity (non-GAAP) | (b) | $ | 3,877 | $ | 3,755 | $ | 4,282 | |||||||||||||
| Number of days in quarter | (c) | 92 | 91 | 92 | ||||||||||||||||
| Number of days in year | (d) | 365 | 365 | 365 | ||||||||||||||||
Return on average tangible common equity (non-GAAP) 1 | (a/b/c)*d | 17.3 | % | 17.8 | % | 19.6 | % | |||||||||||||
1 Excluding the effect of AOCI from average tangible common equity would result in associated returns of 9.9%, 10.0%, and 13.2% for the periods presented, respectively.
TANGIBLE EQUITY RATIO, TANGIBLE COMMON EQUITY RATIO, AND TANGIBLE BOOK VALUE PER COMMON SHARE (ALL NON-GAAP MEASURES)
| (Dollar amounts in millions, except per share amounts) | September 30, 2023 | June 30, 2023 | September 30, 2022 | |||||||||||||||||
| Total shareholders’ equity (GAAP) | $ | 5,315 | $ | 5,283 | $ | 4,696 | ||||||||||||||
| Goodwill and intangibles | (1,060) | (1,062) | (1,034) | |||||||||||||||||
| Tangible equity (non-GAAP) | (a) | 4,255 | 4,221 | 3,662 | ||||||||||||||||
| Preferred stock | (440) | (440) | (440) | |||||||||||||||||
| Tangible common equity (non-GAAP) | (b) | $ | 3,815 | $ | 3,781 | $ | 3,222 | |||||||||||||
| Total assets (GAAP) | $ | 87,269 | $ | 87,230 | $ | 88,474 | ||||||||||||||
| Goodwill and intangibles | (1,060) | (1,062) | (1,034) | |||||||||||||||||
| Tangible assets (non-GAAP) | (c) | $ | 86,209 | $ | 86,168 | $ | 87,440 | |||||||||||||
| Common shares outstanding (in thousands) | (d) | 148,146 | 148,144 | 149,611 | ||||||||||||||||
| Tangible equity ratio (non-GAAP) | (a/c) | 4.9 | % | 4.9 | % | 4.2 | % | |||||||||||||
| Tangible common equity ratio (non-GAAP) | (b/c) | 4.4 | % | 4.4 | % | 3.7 | % | |||||||||||||
| Tangible book value per common share (non-GAAP) | (b/d) | $ | 25.75 | $ | 25.52 | $ | 21.54 | |||||||||||||
37
Efficiency Ratio and Adjusted Pre-Provision Net Revenue
The efficiency ratio is a measure of operating expense relative to revenue. We believe the efficiency ratio provides useful information regarding the cost of generating revenue. We make adjustments to exclude certain items that are not generally expected to recur frequently, as identified in the subsequent schedule, which we believe allows for more consistent comparability across periods. Adjusted noninterest expense provides a measure as to how we are managing our expenses. Adjusted pre-provision net revenue enables management and others to assess our ability to generate capital. Taxable-equivalent net interest income allows us to assess the comparability of revenue arising from both taxable and tax-exempt sources.
EFFICIENCY RATIO (NON-GAAP) AND ADJUSTED PRE-PROVISION NET REVENUE (NON-GAAP)
| Three Months Ended | Nine Months Ended | Year Ended | ||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | September 30, 2023 | June 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | December 31, 2022 | ||||||||||||||||||||||||||||||||
| Noninterest expense (GAAP) | (a) | $ | 496 | $ | 508 | $ | 479 | $ | 1,516 | $ | 1,407 | $ | 1,878 | |||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||||||||
Severance costs | — | 13 | — | 14 | 1 | 1 | ||||||||||||||||||||||||||||||||
Other real estate expense, net | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||
Amortization of core deposit and other intangibles | 2 | 1 | 1 | 5 | 1 | 1 | ||||||||||||||||||||||||||||||||
Restructuring costs | 1 | — | — | 1 | — | — | ||||||||||||||||||||||||||||||||
SBIC investment success fee accrual 1 | — | — | 1 | — | — | (1) | ||||||||||||||||||||||||||||||||
Total adjustments | (b) | 3 | 14 | 2 | 20 | 3 | 2 | |||||||||||||||||||||||||||||||
Adjusted noninterest expense (non-GAAP) | (a-b)=(c) | $ | 493 | $ | 494 | $ | 477 | $ | 1,496 | $ | 1,404 | $ | 1,876 | |||||||||||||||||||||||||
| Net interest income (GAAP) | (d) | $ | 585 | $ | 591 | $ | 663 | $ | 1,855 | $ | 1,800 | $ | 2,520 | |||||||||||||||||||||||||
Fully taxable-equivalent adjustments | (e) | 11 | 11 | 10 | 31 | 27 | 37 | |||||||||||||||||||||||||||||||
Taxable-equivalent net interest income (non-GAAP) | (d+e)=f | 596 | 602 | 673 | 1,886 | 1,827 | 2,557 | |||||||||||||||||||||||||||||||
| Noninterest income (GAAP) | g | 180 | 189 | 165 | 529 | 479 | 632 | |||||||||||||||||||||||||||||||
Combined income (non-GAAP) | (f+g)=(h) | 776 | 791 | 838 | 2,415 | 2,306 | 3,189 | |||||||||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||||||||
Fair value and nonhedge derivative gains | 7 | 1 | 4 | 5 | 20 | 16 | ||||||||||||||||||||||||||||||||
Securities gains (losses), net 1 | 4 | — | 6 | 5 | (10) | (15) | ||||||||||||||||||||||||||||||||
Total adjustments 2 | (i) | 11 | 1 | 10 | 10 | 10 | 1 | |||||||||||||||||||||||||||||||
Adjusted taxable-equivalent revenue (non-GAAP) | (h-i)=(j) | $ | 765 | $ | 790 | $ | 828 | $ | 2,405 | $ | 2,296 | $ | 3,188 | |||||||||||||||||||||||||
Pre-provision net revenue (non-GAAP) | (h)-(a) | $ | 280 | $ | 283 | $ | 359 | $ | 899 | $ | 899 | $ | 1,311 | |||||||||||||||||||||||||
| Adjusted PPNR (non-GAAP) | (j)-(c) | 272 | 296 | 351 | 909 | 892 | 1,312 | |||||||||||||||||||||||||||||||
Efficiency ratio (non-GAAP) 2 | (c/j) | 64.4 | % | 62.5 | % | 57.6 | % | 62.2 | % | 61.1 | % | 58.8 | % | |||||||||||||||||||||||||
1 The success fee accrual is associated with the gains and losses from our SBIC investments, which are excluded from the efficiency ratio through securities gains (losses), net.
2 Excluding the $13 million gain on sale of bank-owned premises recorded in dividends and other income, the efficiency ratio for the three months ended June 30, 2023 would have been 63.6%.
38
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED BALANCE SHEETS
| (In millions, shares in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Money market investments: | |||||||||||
| Interest-bearing deposits | |||||||||||
| Federal funds sold and securities purchased under agreements to resell | |||||||||||
| Investment securities: | |||||||||||
Held-to-maturity, at amortized cost (fair value: $ | |||||||||||
| Available-for-sale, at fair value | |||||||||||
| Trading, at fair value | |||||||||||
| Total investment securities | |||||||||||
| Loans held for sale | |||||||||||
| Loans and leases, net of unearned income and fees | |||||||||||
| Less allowance for loan and lease losses | |||||||||||
| Loans held for investment, net of allowance | |||||||||||
| Other noninterest-bearing investments | |||||||||||
| Premises, equipment and software, net | |||||||||||
| Goodwill and intangibles | |||||||||||
| Other real estate owned | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Deposits: | |||||||||||
| Noninterest-bearing demand | $ | $ | |||||||||
| Interest-bearing: | |||||||||||
| Savings and money market | |||||||||||
| Time | |||||||||||
| Total deposits | |||||||||||
| Federal funds and other short-term borrowings | |||||||||||
| Long-term debt | |||||||||||
| Reserve for unfunded lending commitments | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Shareholders’ equity: | |||||||||||
Preferred stock, without par value; authorized | |||||||||||
Common stock ($ | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
39
CONSOLIDATED STATEMENTS OF INCOME
| (Unaudited) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| (In millions, except shares and per share amounts) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Interest income: | |||||||||||||||||||||||
| Interest and fees on loans | $ | $ | $ | $ | |||||||||||||||||||
| Interest on money market investments | |||||||||||||||||||||||
| Interest on securities | |||||||||||||||||||||||
| Total interest income | |||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||
| Interest on deposits | |||||||||||||||||||||||
| Interest on short- and long-term borrowings | |||||||||||||||||||||||
| Total interest expense | |||||||||||||||||||||||
| Net interest income | |||||||||||||||||||||||
| Provision for credit losses: | |||||||||||||||||||||||
| Provision for loan and lease losses | |||||||||||||||||||||||
| Provision for unfunded lending commitments | ( | ( | |||||||||||||||||||||
| Total provision for credit losses | |||||||||||||||||||||||
| Net interest income after provision for credit losses | |||||||||||||||||||||||
| Noninterest income: | |||||||||||||||||||||||
| Commercial account fees | |||||||||||||||||||||||
| Card fees | |||||||||||||||||||||||
| Retail and business banking fees | |||||||||||||||||||||||
| Loan-related fees and income | |||||||||||||||||||||||
| Capital markets fees | |||||||||||||||||||||||
| Wealth management fees | |||||||||||||||||||||||
| Other customer-related fees | |||||||||||||||||||||||
| Customer-related noninterest income | |||||||||||||||||||||||
| Fair value and nonhedge derivative income | |||||||||||||||||||||||
| Dividends and other income (loss) | ( | ||||||||||||||||||||||
| Securities gains (losses), net | ( | ||||||||||||||||||||||
| Total noninterest income | |||||||||||||||||||||||
| Noninterest expense: | |||||||||||||||||||||||
| Salaries and employee benefits | |||||||||||||||||||||||
| Technology, telecom, and information processing | |||||||||||||||||||||||
| Occupancy and equipment, net | |||||||||||||||||||||||
| Professional and legal services | |||||||||||||||||||||||
| Marketing and business development | |||||||||||||||||||||||
| Deposit insurance and regulatory expense | |||||||||||||||||||||||
| Credit-related expense | |||||||||||||||||||||||
| Other real estate expense, net | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total noninterest expense | |||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income taxes | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Preferred stock dividends | ( | ( | ( | ( | |||||||||||||||||||
| Net earnings applicable to common shareholders | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average common shares outstanding during the period: | |||||||||||||||||||||||
| Basic shares (in thousands) | |||||||||||||||||||||||
| Diluted shares (in thousands) | |||||||||||||||||||||||
| Net earnings per common share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
40
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income for the period | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Net unrealized holding losses on investment securities 1 | ( | ( | ( | ( | |||||||||||||||||||
Net unrealized gains (losses) on other noninterest-bearing investments | ( | ( | |||||||||||||||||||||
| Net unrealized holding gains (losses) on derivative instruments | ( | ( | ( | ||||||||||||||||||||
Reclassification adjustment for decrease (increase) in interest income recognized in earnings on derivative instruments | ( | ||||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | ( | ( | ( | ||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
See accompanying notes to consolidated financial statements.
1 For the three and nine months ended September 30, 2023, the amounts include $160 million and $169 million related to the decline in the fair value of fixed-rate AFS securities as a result of higher interest rates, offset by $55 million and $158 million in unrealized loss amortization associated with the securities transferred from AFS to HTM during the fourth quarter of 2022, respectively.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| (In millions, except shares and per share amounts) | Preferred stock | Common stock | Accumulated paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total shareholders’ equity | |||||||||||||||||||||||||||||||||||||||||
Shares (in thousands) | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Net income for the period | |||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Net activity under employee plans and related tax benefits | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock, $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Change in deferred compensation | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Net income for the period | |||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Bank common stock repurchased | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
Net activity under employee plans and related tax benefits | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock, $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
41
| (In millions, except shares and per share amounts) | Preferred stock | Common stock | Accumulated paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total shareholders’ equity | |||||||||||||||||||||||||||||||||||||||||
Shares (in thousands) | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Net income for the period | |||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | |||||||||||||||||||||||||||||||||||||||||||||||
Bank common stock repurchased | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
Net activity under employee plans and related tax benefits | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock, $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Change in deferred compensation | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Net income for the period | |||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Bank common stock repurchased | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
Net activity under employee plans and related tax benefits | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock, $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Change in deferred compensation | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| (In millions) | Nine Months Ended September 30, | ||||||||||
| 2023 | 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income for the period | $ | $ | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Provision for credit losses | |||||||||||
Depreciation and amortization | |||||||||||
Share-based compensation | |||||||||||
Deferred income tax expense | |||||||||||
Net decrease (increase) in trading securities | ( | ||||||||||
Net decrease (increase) in loans held for sale | ( | ||||||||||
Change in other liabilities | ( | ||||||||||
Change in other assets | ( | ||||||||||
Other, net | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Net decrease in money market investments | |||||||||||
| Proceeds from maturities and paydowns of investment securities held-to-maturity | |||||||||||
| Purchases of investment securities held-to-maturity | ( | ( | |||||||||
| Proceeds from sales, maturities, and paydowns of investment securities available-for-sale | |||||||||||
| Purchases of investment securities available-for-sale | ( | ( | |||||||||
| Net change in loans and leases | ( | ( | |||||||||
| Purchases and sales of other noninterest-bearing investments | ( | ||||||||||
| Purchases of premises and equipment | ( | ( | |||||||||
Other, net | ( | ||||||||||
| Net cash provided by investing activities | |||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Net increase (decrease) in deposits | ( | ||||||||||
| Net change in short-term borrowed funds | ( | ||||||||||
| Redemption of long-term debt | ( | ( | |||||||||
| Proceeds from the issuance of common stock | |||||||||||
| Dividends paid on common and preferred stock | ( | ( | |||||||||
| Bank common stock repurchased | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net increase (decrease) in cash and due from banks | ( | ||||||||||
| Cash and due from banks at beginning of period | |||||||||||
| Cash and due from banks at end of period | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
| Net cash paid for income taxes | |||||||||||
Noncash activities: | |||||||||||
| Loans held for investment reclassified to loans held for sale, net | |||||||||||
See accompanying notes to consolidated financial statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2023
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Zions Bancorporation, National Association and its majority-owned subsidiaries (collectively “Zions Bancorporation, N.A.,” “the Bank,” “we,” “our,” “us”) have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. References to GAAP, including standards promulgated by the Financial Accounting Standards Board (“FASB”), are made according to sections of the Accounting Standards Codification (“ASC”).
The results of operations for the three and nine months ended September 30, 2023 and 2022 are not necessarily indicative of the results that may be expected in future periods. In preparing the consolidated financial statements, we are required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying Notes. Actual results could differ from those estimates. For further information, refer to the consolidated financial statements and accompanying footnotes included in our 2022 Form 10-K.
We evaluated events that occurred between September 30, 2023 and the date the accompanying financial statements were issued, and determined that there were no material events that would require adjustments to our consolidated financial statements or significant disclosure in the accompanying Notes.
Zions Bancorporation, N.A. is a commercial bank headquartered in Salt Lake City, Utah. We provide a wide range of banking products and related services in 11 Western and Southwestern states through seven separately managed bank divisions, which we refer to as “affiliates,” or “affiliate banks,” each with its own local branding and management team. These include Zions Bank, in Utah, Idaho, and Wyoming; California Bank & Trust (“CB&T”); Amegy Bank (“Amegy”), in Texas; National Bank of Arizona (“NBAZ”); Nevada State Bank (“NSB”); Vectra Bank Colorado (“Vectra”), in Colorado and New Mexico; and The Commerce Bank of Washington (“TCBW”) which operates under that name in Washington and under the name The Commerce Bank of Oregon in Oregon.
44
2. RECENT ACCOUNTING PRONOUNCEMENTS
Standard | Description | Date of adoption | Effect on the financial statements or other significant matters | |||||||||||||||||
Standards not yet adopted by the Bank | ||||||||||||||||||||
ASU 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force) | This Accounting Standards Update (“ASU”) expands the optional use of the proportional amortization method (“PAM”), previously limited to investments in low-income housing tax credit (“LIHTC”) structures, to any eligible equity investments made primarily for the purpose of receiving income tax credit and other tax benefits when certain criteria are met. PAM results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of income tax expense (benefit). This ASU allows for an accounting policy election to apply PAM on a tax-credit-program-by-tax-credit-program basis. The ASU also includes additional disclosure requirements about equity investments accounted for using PAM. The new standard is effective for calendar year-end public companies beginning January 1, 2024, with early adoption permitted. | Periods beginning after December 15, 2023 | We do not currently have any additional equity investments that are eligible for PAM under the provisions of this ASU. We will continue to evaluate its use for new investments. The overall effect of the guidance is not expected to have a material impact on our financial statements. We do not plan to early adopt this new standard. | |||||||||||||||||
ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions | This ASU clarifies that contractual restrictions prohibiting the sale of an equity security are not considered part of the unit of account of the equity security, and therefore, are not considered in measuring fair value. The amendments clarify that an entity cannot recognize and measure a contractual sale restriction as a separate unit of account. The amendments in this ASU also require additional qualitative and quantitative disclosures for equity securities subject to contractual sale restrictions. The new standard is effective for calendar year-end public companies beginning January 1, 2024, with early adoption permitted. | Periods beginning after December 15, 2023 | The requirements of this ASU are consistent with our current treatment of equity securities subject to contractual sale restrictions and are not expected to impact the fair value measurements of these securities. We are evaluating supplementary disclosure requirements and additional data needed to meet these requirements. The overall effect of this standard is not expected to have a material impact on our financial statements. We do not plan to early adopt this new standard. | |||||||||||||||||
Standards adopted by the Bank | ||||||||||||||||||||
ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures | This ASU eliminated the recognition and measurement requirements for troubled debt restructurings (“TDRs”) for creditors that have adopted ASC 326 (“CECL”), eliminated certain TDR disclosures, and required enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. The new standard also required public companies to present current period gross charge-offs (on a current year-to-date basis for interim-period disclosures) by year of origination in their vintage disclosures. | Periods beginning after December 15, 2022 | We adopted this ASU on a modified retrospective basis on January 1, 2023. It did not have a material impact on our financial statements. | |||||||||||||||||
45
3. FAIR VALUE
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For more information about our valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 3 of our 2022 Form 10-K.
Fair Value Hierarchy
The following schedule presents assets and liabilities measured at fair value on a recurring basis:
| (In millions) | September 30, 2023 | ||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
Available-for-sale securities: | |||||||||||||||||||||||
| U.S. Treasury, agencies, and corporations | $ | $ | $ | $ | |||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Other debt securities | |||||||||||||||||||||||
| Total available-for-sale | |||||||||||||||||||||||
| Trading securities | |||||||||||||||||||||||
| Other noninterest-bearing investments: | |||||||||||||||||||||||
| Bank-owned life insurance | |||||||||||||||||||||||
Private equity investments 1 | |||||||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Agriculture loan servicing | |||||||||||||||||||||||
| Deferred compensation plan assets | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| LIABILITIES | |||||||||||||||||||||||
| Securities sold, not yet purchased | $ | $ | $ | $ | |||||||||||||||||||
| Other liabilities: | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
1 The Level 1 private equity investments (“PEIs”) relate to the portion of our Small Business Investment Company (“SBIC”) investments that are publicly traded.
46
| (In millions) | December 31, 2022 | ||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
Available-for-sale securities: | |||||||||||||||||||||||
| U.S. Treasury, agencies, and corporations | $ | $ | $ | $ | |||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Other debt securities | |||||||||||||||||||||||
| Total available-for-sale | |||||||||||||||||||||||
| Trading securities | |||||||||||||||||||||||
| Other noninterest-bearing investments: | |||||||||||||||||||||||
| Bank-owned life insurance | |||||||||||||||||||||||
Private equity investments 1 | |||||||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Agriculture loan servicing | |||||||||||||||||||||||
| Deferred compensation plan assets | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| LIABILITIES | |||||||||||||||||||||||
| Securities sold, not yet purchased | $ | $ | $ | $ | |||||||||||||||||||
| Other liabilities: | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
1 The Level 1 PEIs relate to the portion of our SBIC investments that are publicly traded.
Level 3 Valuations
Our Level 3 financial instruments include PEIs and agriculture loan servicing. For additional information regarding our Level 3 financial instruments, including the methods and significant assumptions used to estimate their fair value, see Note 3 of our 2022 Form 10-K.
Rollforward of Level 3 Fair Value Measurements
The following schedule presents a rollforward of assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs:
| Level 3 Instruments | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Private equity investments | Ag loan servicing | Private equity investments | Ag loan servicing | Private equity investments | Ag loan servicing | Private equity investments | Ag loan servicing | |||||||||||||||||||||||||||||||||||||||
Balance at beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Unrealized securities gains (losses), net | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Other noninterest income (expense) | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchases | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Cost of investments sold | ( | ||||||||||||||||||||||||||||||||||||||||||||||
Transfers out 1 | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at end of period | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
1 Represents the transfer of SBIC investments out of Level 3 and into Level 1 because they are publicly traded.
47
The rollforward of Level 3 instruments includes the following realized gains and losses recognized in securities gains (losses) on the consolidated statement of income for the periods presented:
| (In millions) | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
| Securities gains (losses), net | $ | $ | $ | $ | ( | ||||||||||||||||||
Nonrecurring Fair Value Measurements
Certain assets and liabilities may be measured at fair value on a nonrecurring basis, including impaired loans that have been measured based on the fair value of the underlying collateral, other real estate owned (“OREO”), and equity investments without readily determinable fair values. Nonrecurring fair value adjustments generally include changes in value resulting from observable price changes for equity investments without readily determinable fair values, write-downs of individual assets, or the application of lower of cost or fair value accounting. At September 30, 2023, we had $1 million of collateral-dependent loans classified in Level 2, and we recognized $2 million of losses from fair value changes related to these loans. At December 31, 2022, we had an insignificant amount of assets or liabilities that had fair value changes measured on a nonrecurring basis. For additional information regarding the measurement of fair value for impaired loans, collateral-dependent loans, and OREO, see Note 3 of our 2022 Form 10-K.
Fair Value of Certain Financial Instruments
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| (In millions) | Carrying value | Fair value | Level | Carrying value | Fair value | Level | |||||||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||||||||
| Held-to-maturity investment securities | $ | $ | 2 | $ | $ | 2 | |||||||||||||||||||||||||||||
Loans and leases (including loans held for sale), net of allowance | 3 | 3 | |||||||||||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||||||||
| Time deposits | 2 | 2 | |||||||||||||||||||||||||||||||||
| Long-term debt | 2 | 2 | |||||||||||||||||||||||||||||||||
The previous schedule does not include certain financial instruments that are recorded at fair value on a recurring basis, as well as certain financial assets and liabilities for which the carrying value approximates fair value. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value, see Note 3 of our 2022 Form 10-K.
48
4. OFFSETTING ASSETS AND LIABILITIES
The following schedules present gross and net information for selected financial instruments on the balance sheet.
| September 30, 2023 | ||||||||||||||||||||||||||||||||||||||
| Gross amounts not offset in the balance sheet | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Gross amounts recognized | Gross amounts offset in the balance sheet | Net amounts presented in the balance sheet | Financial instruments | Cash collateral received/pledged | Net amount | ||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Derivatives (included in other assets) | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||
Federal funds and other short-term borrowings | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Derivatives (included in other liabilities) | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Gross amounts not offset in the balance sheet | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Gross amounts recognized | Gross amounts offset in the balance sheet | Net amounts presented in the balance sheet | Financial instruments | Cash collateral received/pledged | Net amount | ||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Derivatives (included in other assets) | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total assets | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||
Federal funds and other short-term borrowings | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Derivatives (included in other liabilities) | ( | |||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||
Security repurchase and reverse repurchase agreements are offset, when applicable, in the balance sheet according to master netting agreements. Security repurchase agreements are included with “Federal funds and other short-term borrowings.” Derivative instruments may be offset under their master netting agreements; however, for accounting purposes, we present these items on a gross basis in our balance sheet. See Note 7 for further information regarding derivative instruments.
5. INVESTMENTS
Investment Securities
Investment securities are classified as held-to-maturity (“HTM”), available-for-sale (“AFS”), or trading. HTM securities, which management has the intent and ability to hold until maturity, are measured at amortized cost. The amortized cost amounts represent the original cost of the investments, adjusted for related amortization or accretion of any purchase premiums or discounts, and for any impairment losses, including credit-related impairment. When a security is transferred from AFS to HTM, the difference between its amortized cost basis and fair value at the date of transfer is amortized as a yield adjustment through interest income, and the fair value at the date of transfer results in either a premium or discount to the amortized cost basis of the HTM securities. The amortization of unrealized losses reported in accumulated other comprehensive income (“AOCI”) will offset the effect of the amortization of the premium or discount in interest income that is created by the transfer.
49
AFS securities are measured at fair value, and changes in fair value (unrealized gains and losses) are reported as net increases or decreases to AOCI, net of related taxes. Trading securities are measured at fair value with gains and losses recognized in current period earnings. The carrying values of our securities do not include accrued interest receivables of $60 million and $75 million at September 30, 2023 and December 31, 2022, respectively. These receivables are presented on the consolidated balance sheet in “Other assets.” See Notes 3 and 5 of our 2022 Form 10-K for more information regarding our process to estimate the fair value and accounting for our investment securities, respectively.
During the fourth quarter of 2022, we transferred approximately $10.7 billion fair value ($13.1 billion amortized cost) of mortgage-backed AFS securities to the HTM category. The transfer of these securities from AFS to HTM at fair value resulted in a discount to the amortized cost basis of the HTM securities equivalent to the $2.4 billion ($1.8 billion after tax) of unrealized losses in AOCI attributable to these securities. The amortization of the unrealized losses will offset the effect of the accretion of the discount created by the transfer. At September 30, 2023, the unamortized discount on the HTM securities totaled approximately $2.2 billion ($1.6 billion after tax).
The following schedule presents the amortized cost and estimated fair values of our HTM and AFS securities:
| September 30, 2023 | |||||||||||||||||||||||
| (In millions) | Amortized cost | Gross unrealized gains 1 | Gross unrealized losses | Estimated fair value | |||||||||||||||||||
| Held-to-maturity | |||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||
| Agency securities | $ | $ | $ | $ | |||||||||||||||||||
| Agency guaranteed mortgage-backed securities | |||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Total held-to-maturity | |||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||
| Agency securities | |||||||||||||||||||||||
| Agency guaranteed mortgage-backed securities | |||||||||||||||||||||||
| Small Business Administration loan-backed securities | |||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Other debt securities | |||||||||||||||||||||||
| Total available-for-sale | |||||||||||||||||||||||
| Total HTM and AFS investment securities | $ | $ | $ | $ | |||||||||||||||||||
1 Gross unrealized gains for the respective security categories were individually less than $1 million.
| December 31, 2022 | |||||||||||||||||||||||
| (In millions) | Amortized cost | Gross unrealized gains | Gross unrealized losses | Estimated fair value | |||||||||||||||||||
| Held-to-maturity | |||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||
| Agency securities | $ | $ | $ | $ | |||||||||||||||||||
| Agency guaranteed mortgage-backed securities | |||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Total held-to-maturity | |||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||
| Agency securities | |||||||||||||||||||||||
| Agency guaranteed mortgage-backed securities | |||||||||||||||||||||||
| Small Business Administration loan-backed securities | |||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Other debt securities | |||||||||||||||||||||||
| Total available-for-sale | |||||||||||||||||||||||
| Total HTM and AFS investment securities | $ | $ | $ | $ | |||||||||||||||||||
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Maturities
The following schedule presents the amortized cost and weighted average yields of debt securities by contractual maturity of principal payments at September 30, 2023. This schedule does not reflect the duration of the portfolio, which would incorporate amortization, expected prepayments, interest rate resets, and fair value hedges; the effects of which result in measured durations shorter than contractual maturities.
| September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total debt securities | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | Amortized cost | Average yield | Amortized cost | Average yield | Amortized cost | Average yield | Amortized cost | Average yield | Amortized cost | Average yield | |||||||||||||||||||||||||||||||||||||||||||||||||
| Held-to-maturity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency securities | $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Agency guaranteed mortgage-backed securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Municipal securities 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total held-to-maturity securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency guaranteed mortgage-backed securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business Administration loan-backed securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Municipal securities 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other debt securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total available-for-sale securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total HTM and AFS investment securities | $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
1 The yields on tax-exempt securities are calculated on a tax-equivalent basis.
51
The following schedule presents gross unrealized losses for AFS securities and the estimated fair value by length of time the securities have been in an unrealized loss position.
| September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| (In millions) | Gross unrealized losses | Estimated fair value | Gross unrealized losses | Estimated fair value | Gross unrealized losses | Estimated fair value | |||||||||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||||||||||||||
| Agency securities | |||||||||||||||||||||||||||||||||||
| Agency guaranteed mortgage-backed securities | |||||||||||||||||||||||||||||||||||
| Small Business Administration loan-backed securities | |||||||||||||||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total available-for-sale investment securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| (In millions) | Gross unrealized losses | Estimated fair value | Gross unrealized losses | Estimated fair value | Gross unrealized losses | Estimated fair value | |||||||||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| U.S. Government agencies and corporations: | |||||||||||||||||||||||||||||||||||
| Agency securities | |||||||||||||||||||||||||||||||||||
| Agency guaranteed mortgage-backed securities | |||||||||||||||||||||||||||||||||||
| Small Business Administration loan-backed securities | |||||||||||||||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total available-for-sale investment securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
At September 30, 2023 and December 31, 2022, approximately 3,129 and 3,562 AFS investment securities were in an unrealized loss position, respectively.
Impairment
On a quarterly basis, we review our investment securities portfolio for the presence of impairment on an individual security basis. For additional information on our policy and impairment evaluation process for investment securities, see Note 5 of our 2022 Form 10-K.
AFS Impairment
We did not recognize any impairment on our AFS investment securities portfolio during the first nine months of 2023. Unrealized losses primarily relate to changes in interest rates subsequent to purchase and are not attributable to credit; as such, absent any future sales, we would expect to receive the full principal value at maturity. At September 30, 2023, we had not initiated any sales of AFS securities, nor did we have an intent to sell any identified securities with unrealized losses. We do not believe it is more likely than not that we would be required to sell such securities before recovery of their amortized cost basis.
HTM Impairment
For HTM securities, the allowance for credit losses (“ACL”) is assessed consistent with the approach described in Note 6 for loans and leases measured at amortized cost. At September 30, 2023, the ACL on HTM securities was less than $1 million, all HTM securities were risk-graded as “Pass” in terms of credit quality, and none were considered past due.
52
Securities Gains and Losses Recognized in Income
The following schedule presents securities gains and losses recognized in the consolidated income statement.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Gross gains | Gross losses | Gross gains | Gross losses | Gross gains | Gross losses | Gross gains | Gross losses | |||||||||||||||||||||||||||||||||||||||
| Available-for-sale | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Trading | |||||||||||||||||||||||||||||||||||||||||||||||
| Other noninterest-bearing investments | |||||||||||||||||||||||||||||||||||||||||||||||
| Total gains | |||||||||||||||||||||||||||||||||||||||||||||||
Net gains (losses) 1 | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||||||
1 Net gains (losses) were recognized in securities gains (losses) in the income statement.
The following schedule presents interest income by security type.
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (In millions) | Taxable | Nontaxable | Total | Taxable | Nontaxable | Total | |||||||||||||||||||||||||||||
| Investment securities: | |||||||||||||||||||||||||||||||||||
| Held-to-maturity | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||||||||||||
| Trading | |||||||||||||||||||||||||||||||||||
| Total securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (In millions) | Taxable | Nontaxable | Total | Taxable | Nontaxable | Total | |||||||||||||||||||||||||||||
| Investment securities: | |||||||||||||||||||||||||||||||||||
| Held-to-maturity | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Available-for-sale | |||||||||||||||||||||||||||||||||||
| Trading | |||||||||||||||||||||||||||||||||||
| Total securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
53
6. LOANS, LEASES, AND ALLOWANCE FOR CREDIT LOSSES
Loans, Leases, and Loans Held for Sale
Loans and leases are summarized as follows according to major portfolio segment and specific loan class:
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Loans held for sale | $ | $ | |||||||||
| Commercial: | |||||||||||
Commercial and industrial 1 | $ | $ | |||||||||
| Leasing | |||||||||||
| Owner-occupied | |||||||||||
| Municipal | |||||||||||
| Total commercial | |||||||||||
| Commercial real estate: | |||||||||||
| Construction and land development | |||||||||||
| Term | |||||||||||
| Total commercial real estate | |||||||||||
| Consumer: | |||||||||||
| Home equity credit line | |||||||||||
| 1-4 family residential | |||||||||||
| Construction and other consumer real estate | |||||||||||
| Bankcard and other revolving plans | |||||||||||
| Other | |||||||||||
| Total consumer | |||||||||||
Total loans and leases | $ | $ | |||||||||
1 Commercial and industrial loan balances include Paycheck Protection Program (“PPP”) loans of $106 million and $197 million for the respective periods presented.
Loans and leases are measured and presented at their amortized cost basis, which includes net unamortized purchase premiums, discounts, and deferred loan fees and costs totaling $34 million and $49 million at September 30, 2023 and December 31, 2022, respectively. Amortized cost basis does not include accrued interest receivables of $290 million and $247 million at September 30, 2023 and December 31, 2022, respectively. These receivables are presented in the consolidated balance sheet within the “” line item.
Municipal loans generally include loans to state and local governments (“municipalities”) with the debt service being repaid from general funds or pledged revenues of the municipal entity, or to private commercial entities or 501(c)(3) not-for-profit entities utilizing a pass-through municipal entity to achieve favorable tax treatment.
Land acquisition and development loans included in the construction and land development loan portfolio were $205 million at September 30, 2023 and $262 million at December 31, 2022.
Loans with a carrying value of $37.2 billion at September 30, 2023 and $27.6 billion at December 31, 2022 have been pledged at the Federal Reserve (“FRB”) and the Federal Home Loan Bank (“FHLB”) of Des Moines as collateral for current and potential borrowings.
At the time of origination, we determine the classification of loans as either held for investment or held for sale. Loans held for sale are measured at fair value or the lower of cost or fair value and primarily consist of (1) commercial real estate (“CRE”) loans that are sold into securitization entities, and (2) conforming residential mortgages that are generally sold to U.S. government agencies. The following schedule presents loans added to, or sold from, the held for sale category during the periods presented.
54
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Loans added to held for sale | $ | $ | $ | $ | |||||||||||||||||||
| Loans sold from held for sale | |||||||||||||||||||||||
Occasionally, we have continuing involvement in the sold loans in the form of servicing rights or guarantees. The principal balance of sold loans for which we retain servicing was $3.4 billion and $3.5 billion at September 30, 2023 and December 31, 2022, respectively. During the third quarter of 2023, we sold the servicing rights related to $3.0 billion of mortgage loans, but retained sub-servicing through October 2023.
Income from sold loans, excluding servicing, was $8 million and $15 million for the three and nine months ended September 30, 2023, and $2 million and $12 million for the three and nine months ended September 30, 2022, respectively. The increase in income from sold loans during the third quarter of 2023 was primarily due to a $4 million gain on the sale of certain mortgage servicing rights.
Allowance for Credit Losses
The allowance for credit losses (“ACL”), which consists of the allowance for loan and lease losses (“ALLL”) and the reserve for unfunded lending commitments (“RULC”), represents our estimate of current expected credit losses related to the loan and lease portfolio and unfunded lending commitments as of the balance sheet date. For additional information regarding our policies and methodologies used to estimate the ACL, see Note 6 of our 2022 Form 10-K.
The ACL for AFS and HTM debt securities is estimated separately from loans. For HTM securities, the ACL is estimated consistent with the approach for loans measured at amortized cost. See Note 5 of our 2022 Form 10-K for further discussion of our methodology used to estimate the ACL on AFS and HTM debt securities.
Changes in the ACL are summarized as follows:
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||
| (In millions) | Commercial | Commercial real estate | Consumer | Total | |||||||||||||||||||
| Allowance for loan losses | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for loan losses | ( | ||||||||||||||||||||||
| Gross loan and lease charge-offs | |||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||
| Net loan and lease charge-offs (recoveries) | |||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Reserve for unfunded lending commitments | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for unfunded lending commitments | ( | ( | ( | ||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Total allowance for credit losses at end of period | |||||||||||||||||||||||
| Allowance for loan losses | $ | $ | $ | $ | |||||||||||||||||||
| Reserve for unfunded lending commitments | |||||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | |||||||||||||||||||
55
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| (In millions) | Commercial | Commercial real estate | Consumer | Total | |||||||||||||||||||
| Allowance for loan losses | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||
| Adjustment for change in accounting standard | ( | ( | |||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for loan losses | |||||||||||||||||||||||
| Gross loan and lease charge-offs | |||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||
| Net loan and lease charge-offs (recoveries) | |||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Reserve for unfunded lending commitments | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for unfunded lending commitments | ( | ( | ( | ||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Total allowance for credit losses at end of period | |||||||||||||||||||||||
| Allowance for loan losses | $ | $ | $ | $ | |||||||||||||||||||
| Reserve for unfunded lending commitments | |||||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| (In millions) | Commercial | Commercial real estate | Consumer | Total | |||||||||||||||||||
| Allowance for loan losses | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for loan losses | |||||||||||||||||||||||
| Gross loan and lease charge-offs | |||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||
| Net loan and lease charge-offs (recoveries) | ( | ||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Reserve for unfunded lending commitments | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for unfunded lending commitments | |||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Total allowance for credit losses at end of period | |||||||||||||||||||||||
| Allowance for loan losses | $ | $ | $ | $ | |||||||||||||||||||
| Reserve for unfunded lending commitments | |||||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | |||||||||||||||||||
56
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| (In millions) | Commercial | Commercial real estate | Consumer | Total | |||||||||||||||||||
| Allowance for loan losses | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for loan losses | |||||||||||||||||||||||
| Gross loan and lease charge-offs | |||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||
| Net loan and lease charge-offs (recoveries) | ( | ||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Reserve for unfunded lending commitments | |||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for unfunded lending commitments | ( | ||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||
| Total allowance for credit losses at end of period | |||||||||||||||||||||||
| Allowance for loan losses | $ | $ | $ | $ | |||||||||||||||||||
| Reserve for unfunded lending commitments | |||||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | |||||||||||||||||||
Nonaccrual Loans
Loans are generally placed on nonaccrual status when payment in full of principal and interest is not expected, or the loan is 90 days or more past due as to principal or interest, unless the loan is both well-secured and in the process of collection. Factors we consider in determining whether a loan is placed on nonaccrual include delinquency status, collateral value, borrower or guarantor financial statement information, bankruptcy status, and other information which would indicate that the full and timely collection of interest and principal is uncertain.
A nonaccrual loan may be returned to accrual status when (1) all delinquent interest and principal become current in accordance with the terms of the loan agreement, (2) the loan, if secured, is well-secured, (3) the borrower has paid according to the contractual terms for a minimum of six months, and (4) an analysis of the borrower indicates a reasonable assurance of the borrower's ability and willingness to maintain payments.
The amortized cost basis of nonaccrual loans is summarized as follows:
| September 30, 2023 | |||||||||||||||||||||||
| Amortized cost basis | Total amortized cost basis | ||||||||||||||||||||||
| (In millions) | with no allowance | with allowance | Related allowance | ||||||||||||||||||||
| Loans held for sale | $ | $ | $ | $ | |||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | |||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||
| Construction and land development | |||||||||||||||||||||||
| Term | |||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||
| Home equity credit line | |||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||
| Total consumer loans | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
57
| December 31, 2022 | |||||||||||||||||||||||
| Amortized cost basis | Total amortized cost basis | ||||||||||||||||||||||
| (In millions) | with no allowance | with allowance | Related allowance | ||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | |||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||
| Term | |||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||
| Home equity credit line | |||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||
| Total consumer loans | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
For accruing loans, interest is accrued and interest payments are recognized into interest income according to the contractual loan agreement. For nonaccruing loans, the accrual of interest is discontinued, any uncollected or accrued interest is reversed from interest income in a timely manner (generally within one month), and any payments received on these loans are not recognized into interest income, but are applied as a reduction to the principal outstanding. When the collectability of the amortized cost basis for a nonaccrual loan is no longer in doubt, then interest payments may be recognized in interest income on a cash basis. For the three and nine months ended September 30, 2023 and 2022, there was no
The amount of accrued interest receivables reversed from interest income during the periods presented is summarized by loan portfolio segment as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Commercial | $ | $ | $ | $ | |||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||
| Consumer | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Past Due Loans
Closed-end loans with payments scheduled monthly are reported as past due when the borrower is in arrears for two or more monthly payments. Similarly, open-end credits, such as bankcard and other revolving credit plans, are reported as past due when the minimum payment has not been made for two or more billing cycles. Other multi-payment obligations (i.e., quarterly, semi-annual, etc.), single payment, and demand notes, are reported as past due when either principal or interest is due and unpaid for a period of 30 days or more.
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Past due loans (accruing and nonaccruing) are summarized as follows:
| September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | Current | 30-89 days past due | 90+ days past due | Total past due | Total loans | Accruing loans 90+ days past due | Nonaccrual loans that are current 1 | ||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Leasing | |||||||||||||||||||||||||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||||||||||||||||||||
| Municipal | |||||||||||||||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||
Construction and land development | |||||||||||||||||||||||||||||||||||||||||
| Term | |||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||
| Home equity credit line | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||||||||||||||||||||
Construction and other consumer real estate | |||||||||||||||||||||||||||||||||||||||||
Bankcard and other revolving plans | |||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | Current | 30-89 days past due | 90+ days past due | Total past due | Total loans | Accruing loans 90+ days past due | Nonaccrual loans that are current 1 | ||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Leasing | |||||||||||||||||||||||||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||||||||||||||||||||
| Municipal | |||||||||||||||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||
Construction and land development | |||||||||||||||||||||||||||||||||||||||||
| Term | |||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||
| Home equity credit line | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||||||||||||||||||||
Construction and other consumer real estate | |||||||||||||||||||||||||||||||||||||||||
Bankcard and other revolving plans | |||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
1 Represents nonaccrual loans that are not past due more than 30 days; however, full payment of principal and interest is not expected.
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Credit Quality Indicators
In addition to the nonaccrual and past due criteria, we also analyze loans using loan risk-grading systems, which vary based on the size and type of credit risk exposure. The internal risk grades assigned to loans follow our definition of Pass, Special Mention, Substandard, and Doubtful, which are consistent with published definitions of regulatory risk classifications.
•Pass – A Pass asset is higher-quality and does not fit any of the other categories described below. The likelihood of loss is considered low.
•Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in our credit position at some future date.
•Substandard – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have well-defined weaknesses and are characterized by the distinct possibility that we may sustain some loss if deficiencies are not corrected.
•Doubtful – A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable.
There were no loans classified as Doubtful at September 30, 2023 and December 31, 2022.
For consumer loans and for CRE loans with commitments greater than $1 million, we generally assign internal risk grades similar to those described previously based on automated rules that depend on refreshed credit scores, payment performance, and other risk indicators. These are generally assigned either a Pass, Special Mention, or Substandard grade, and are reviewed as we identify information that might warrant a grade change.
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| September 30, 2023 | |||||||||||||||||||||||||||||
| Term loans | Revolving loans amortized cost basis | Revolving loans converted to term loans amortized cost basis | |||||||||||||||||||||||||||
| Amortized cost basis by year of origination | |||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | ||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||
| Commercial and industrial | |||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total commercial and industrial | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Leasing | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total leasing | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total owner-occupied | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Municipal | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total municipal | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||
| Total commercial gross charge-offs | |||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||
| Construction and land development | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total construction and land development | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Term | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total term | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||
| Total commercial real estate gross charge-offs | |||||||||||||||||||||||||||||
61
| September 30, 2023 | |||||||||||||||||||||||||||||
| Term loans | Revolving loans amortized cost basis | Revolving loans converted to term loans amortized cost basis | |||||||||||||||||||||||||||
| Amortized cost basis by year of origination | |||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | ||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||
| Home equity credit line | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total home equity credit line | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total 1-4 family residential | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Construction and other consumer real estate | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total construction and other consumer real estate | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Bankcard and other revolving plans | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total bankcard and other revolving plans | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Other consumer | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total other consumer | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Total consumer | |||||||||||||||||||||||||||||
| Total consumer gross charge-offs | |||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Total gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
62
| December 31, 2022 | |||||||||||||||||||||||||||||
| Term loans | Revolving loans amortized cost basis | Revolving loans converted to term loans amortized cost basis | |||||||||||||||||||||||||||
| Amortized cost basis by year of origination | |||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||
| Commercial and industrial | |||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total commercial and industrial | |||||||||||||||||||||||||||||
| Leasing | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total leasing | |||||||||||||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total owner-occupied | |||||||||||||||||||||||||||||
| Municipal | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total municipal | |||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||
| Construction and land development | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total construction and land development | |||||||||||||||||||||||||||||
| Term | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total term | |||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||
63
| December 31, 2022 | |||||||||||||||||||||||||||||
| Term loans | Revolving loans amortized cost basis | Revolving loans converted to term loans amortized cost basis | |||||||||||||||||||||||||||
| Amortized cost basis by year of origination | |||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||
| Home equity credit line | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total home equity credit line | |||||||||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total 1-4 family residential | |||||||||||||||||||||||||||||
| Construction and other consumer real estate | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total construction and other consumer real estate | |||||||||||||||||||||||||||||
| Bankcard and other revolving plans | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total bankcard and other revolving plans | |||||||||||||||||||||||||||||
| Other consumer | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Accruing Substandard | |||||||||||||||||||||||||||||
| Nonaccrual | |||||||||||||||||||||||||||||
| Total other consumer | |||||||||||||||||||||||||||||
| Total consumer | |||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Loan Modifications
On January 1, 2023, we adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminated the recognition and measurement of troubled debt restructurings (“TDRs”) and their related disclosures. As a result, we no longer separately measure an allowance for credit losses for TDRs, relying instead on our credit loss estimation models. The adoption of this guidance did not have a material impact on our financial statements.
ASU 2022-02 requires enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. Loans may be modified in the normal course of business for competitive reasons or to strengthen our collateral position. Loan modifications may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. For loans that have been modified with a borrower experiencing financial difficulty, we use the same credit loss estimation methods that we use for the
64
rest of the loan portfolio. These methods incorporate the post-modification loan terms, as well as defaults and charge-offs associated with historical modified loans. All nonaccruing loans more than $1 million are evaluated individually, regardless of modification.
We consider many factors in determining whether to agree to a loan modification and we seek a solution that will both minimize potential loss to us and attempt to help the borrower. We evaluate borrowers’ current and forecasted future cash flows, their ability and willingness to make current contractual or proposed modified payments, the value of the underlying collateral (if applicable), the possibility of obtaining additional security or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral.
A modified loan on nonaccrual will generally remain on nonaccrual until the borrower has proven the ability to perform under the modified structure for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual. There were less than $1
The amortized cost of loans to borrowers experiencing financial difficulty that were modified during the period, by loan class and modification type, is summarized in the following schedule:
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Amortized cost associated with the following modification types: | |||||||||||||||||||||||||||||||||||||||||
| Interest rate reduction | Maturity or term extension | Principal forgiveness | Payment deferral | Multiple modification types 1 | Total 2 | Percentage of total loans 3 | |||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||
Construction and land development | |||||||||||||||||||||||||||||||||||||||||
| Term | |||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||||||||||||||||||||
Bankcard and other revolving plans | |||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||||||||||||
65
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Amortized cost associated with the following modification types: | |||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | Interest rate reduction | Maturity or term extension | Principal forgiveness | Payment deferral | Multiple modification types 1 | Total 2 | Percentage of total loans 3 | ||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||
Construction and land development | |||||||||||||||||||||||||||||||||||||||||
| Term | |||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||||||||||||||||||||
Bankcard and other revolving plans | |||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||||||||||||
1 Includes modifications that resulted from a combination of interest rate reduction, maturity or term extension, principal forgiveness, and payment deferral modifications.
2 Unfunded lending commitments related to loans modified to borrowers experiencing financial difficulty totaled $10 million at September 30, 2023.
3 Amounts less than 0.05% are rounded to zero.
The financial impact of loan modifications to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023, is summarized in the following schedule:
| Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | ||||||||||||||||
| Weighted-average term extension (in months) | Weighted-average interest rate reduction (in percentage points) | Weighted-average term extension (in months) | |||||||||||||||
| Commercial: | |||||||||||||||||
| Commercial and industrial | % | ||||||||||||||||
| Owner-occupied | |||||||||||||||||
| Total commercial | |||||||||||||||||
| Commercial real estate: | |||||||||||||||||
Construction and land development | |||||||||||||||||
| Term | |||||||||||||||||
| Total commercial real estate | |||||||||||||||||
Consumer: 1 | |||||||||||||||||
| 1-4 family residential | |||||||||||||||||
Bankcard and other revolving plans | |||||||||||||||||
| Total consumer loans | |||||||||||||||||
| Total weighted average financial impact | % | ||||||||||||||||
1 Primarily relates to a small number of loans within each consumer loan class.
66
Loan modifications to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023, resulted in less than $1
The following schedule presents the aging of loans to borrowers experiencing financial difficulty that were modified on or after January 1, 2023 (the date we adopted ASU 2022-02) through September 30, 2023, presented by portfolio segment and loan class.
| September 30, 2023 | |||||||||||||||||||||||||||||
| (In millions) | Current | 30-89 days past due | 90+ days past due | Total past due | Total amortized cost of loans | ||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||
Construction and land development | |||||||||||||||||||||||||||||
| Term | |||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||||||||
Bankcard and other revolving plans | |||||||||||||||||||||||||||||
| Total consumer loans | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Troubled Debt Restructuring Disclosures Prior to Our Adoption of ASU 2022-02
Loans may be modified in the normal course of business for competitive reasons or to strengthen our collateral position. Loan modifications and restructurings may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. Loans that have been modified to accommodate a borrower who is experiencing financial difficulties, and for which we have granted a concession that we would not otherwise consider, are considered TDRs. For further discussion of our policies and processes regarding TDRs, see Note 6 of our 2022 Form 10-K.
67
Information on TDRs, including the amortized cost on an accruing and nonaccruing basis by loan class and modification type is summarized in the following schedules:
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Amortized cost resulting from the following modification types: | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | Interest rate below market | Maturity or term extension | Principal forgiveness | Payment deferral | Other 1 | Multiple modification types 2 | Total | ||||||||||||||||||||||||||||||||||
| Accruing | |||||||||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||||||||||||||||||||
| Municipal | |||||||||||||||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||
| Construction and land development | |||||||||||||||||||||||||||||||||||||||||
| Term | |||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||
| Home equity credit line | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | |||||||||||||||||||||||||||||||||||||||||
| Total accruing | |||||||||||||||||||||||||||||||||||||||||
| Nonaccruing | |||||||||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||
| Owner-occupied | |||||||||||||||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||
| Term | |||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||
| Home equity credit line | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential | |||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | |||||||||||||||||||||||||||||||||||||||||
| Total nonaccruing | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
1 Includes TDRs that resulted from other modification types including, but not limited to, a legal judgment awarded on different terms, a bankruptcy plan confirmed on different terms, a settlement that includes the delivery of collateral in exchange for debt reduction, etc.
2 Includes TDRs that resulted from a combination of the previous modification types reflected in the schedule.
Unfunded lending commitments related to TDRs totaled $7 million at December 31, 2022.
The total amortized cost of all TDRs in which interest rates were modified below market was $63 million at December 31, 2022. These loans are included in the previous schedule in the columns for interest rate below market and multiple modification types.
The net financial impact on interest income due to interest rate modifications below market for accruing TDRs for the year ended December 31, 2022 was not significant.
On an ongoing basis, we monitor the performance of all TDRs according to their restructured terms. Subsequent payment default is defined in terms of delinquency, when principal or interest payments are past due 90 days or more for commercial loans, or 60 days or more for consumer loans.
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The amortized cost of TDRs that had a payment default during the year ended December 31, 2022, which were still in default at period end, and were within 12 months or less of being modified as TDRs was approximately $10 million.
Collateral-Dependent Loans
When a loan is individually evaluated for expected credit losses, we estimate a specific reserve for the loan based on (1) the projected present value of the loan’s future cash flows discounted at the loan’s effective interest rate, (2) the observable market price of the loan, or (3) the fair value of the loan’s underlying collateral.
Select information on loans for which the borrower is experiencing financial difficulties and repayment is expected to be provided substantially through the operation or sale of the underlying collateral, including the type of collateral and the extent to which the collateral secures the loans, is summarized as follows:
| September 30, 2023 | |||||||||||||||||
| (Dollar amounts in millions) | Amortized cost | Major types of collateral | Weighted average LTV 1 | ||||||||||||||
| Commercial: | |||||||||||||||||
| Commercial and industrial | $ | Accounts receivable, Inventory | |||||||||||||||
| Owner-occupied | Hospital | ||||||||||||||||
| Total commercial | |||||||||||||||||
| Commercial real estate: | |||||||||||||||||
| Construction and land development | Land | ||||||||||||||||
| Term | Hotel, Office building | ||||||||||||||||
| Total commercial real estate | |||||||||||||||||
| Total | $ | ||||||||||||||||
| December 31, 2022 | |||||||||||||||||
| (Dollar amounts in millions) | Amortized cost | Major types of collateral | Weighted average LTV 1 | ||||||||||||||
| Commercial: | |||||||||||||||||
| Owner-occupied | $ | Land, Warehouse | |||||||||||||||
| Commercial real estate: | |||||||||||||||||
| Term | Multi-family | ||||||||||||||||
| Consumer: | |||||||||||||||||
| Home equity credit line | Single family residential | ||||||||||||||||
| 1-4 family residential | Single family residential | ||||||||||||||||
| Total | $ | ||||||||||||||||
1 The fair value is based on the most recent appraisal or other collateral evaluation.
Foreclosed Residential Real Estate
At September 30, 2023 and December 31, 2022, we did no 11 million and $10 million for the same periods, respectively.
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7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Objectives and Accounting
Our primary objective for using derivatives is to manage interest rate risk. We use derivatives to stabilize forecasted interest income from variable-rate assets and to modify the coupon or the duration of fixed-rate financial assets or liabilities. We also assist clients with their risk management needs through the use of derivatives. Cash receipts and payments from derivatives designated in qualifying hedging relationships are classified in the same category as the cash flows from the items being hedged in the statement of cash flows, and cash flows from undesignated derivatives are classified as operating activities. For a more detailed discussion of the use of and accounting policies regarding derivative instruments, see Note 7 of our 2022 Form 10-K.
Fair Value Hedges of Liabilities – During the second quarter of 2023, we terminated our remaining receive-fixed interest rate swap with a notional amount of $500 million that had been designated in a qualifying fair value hedge relationship of fixed-rate debt. The receive-fixed interest rate swap effectively converted the interest on our fixed-rate debt to floating until it was terminated. Prior to termination, changes in the fair value of derivatives designated as fair value hedges of debt were offset by changes in the fair value of the hedged debt instruments as shown in the schedules on the following pages. The unamortized hedge basis adjustments resulting from the terminated hedging relationship will be amortized over the remaining life of the fixed-rate debt.
Fair Value Hedges of Assets – During the third quarter of 2023, we entered into new hedges of a defined portfolio of fixed-rate commercial loans using pay-fixed, receive-floating swaps with an aggregate notional amount of $1.0 billion that were designated as fair value hedges under the portfolio layer method described in ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method.
At September 30, 2023, we also had pay-fixed, receive-floating interest rate swaps with an aggregate notional amount of $1.1 billion designated as fair value hedges of specifically identified AFS securities. Fair value hedges of fixed-rate assets effectively convert the fixed interest income to a floating rate on the hedged portion of the assets. Changes in fair value of derivatives designated as fair value hedges of fixed-rate financial assets were largely offset by changes in the value of the hedged assets, as shown in the schedules on the following pages. We had an additional $2.5
Cash Flow Hedges – At September 30, 2023, we had receive-fixed interest rate swaps with an aggregate notional amount of $2.6 billion designated as cash flow hedges of pools of floating-rate commercial loans. At September 30, 2023, there was $201 million of losses deferred in AOCI related to terminated cash flow hedges that are expected to be fully amortized by October 2027. Additionally, at September 30, 2023, we had one pay-fixed interest rate swap with a notional amount of $500 million designated as a cash flow hedge of the variability in the interest payments on certain FHLB advances. Changes in the fair value of qualifying cash flow hedges during the quarter were recorded in AOCI as shown in the schedule below. The amounts deferred in AOCI are reclassified into earnings in the periods in which the hedged interest receipts or payments occur (i.e., when the hedged forecasted transactions affect earnings).
Collateral and Credit Risk
Exposure to credit risk arises from the possibility of nonperformance by counterparties. No significant losses on derivative instruments have occurred as a result of counterparty nonperformance. For more information on how we incorporate counterparty credit risk in derivative valuations, see Note 3 of our 2022 Form 10-K. For additional discussion of collateral and the associated credit risk related to our derivative contracts, see Note 7 of our 2022 Form 10-K.
Our derivative contracts require us to pledge collateral for derivatives that are in a net liability position at a given balance sheet date. Certain of these derivative contracts contain credit risk-related contingent features that include the requirement to maintain a minimum debt credit rating. We may be required to pledge additional collateral if a credit risk-related feature were triggered, such as a downgrade of our credit rating. In past situations, counterparties
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have not generally demanded that additional collateral be pledged when provided for by the contractual terms. At September 30, 2023, the fair value of our derivative liabilities was $512 million, for which we were required to pledge cash collateral of $1 million in the normal course of business. If our credit rating were downgraded one notch by either Standard & Poor’s (“S&P”) or Moody’s at September 30, 2023, there would likely be no additional collateral required to be pledged.
Derivative Amounts
The following schedule presents information regarding notional amounts and recorded gross fair values at September 30, 2023 and December 31, 2022, and the related gain (loss) of derivative instruments.
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
Notional amount 1 | Fair value | Notional amount | Fair value | ||||||||||||||||||||||||||||||||
| (In millions) | Other assets | Other liabilities | Other assets | Other liabilities | |||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
| Cash flow hedges of floating-rate assets: | |||||||||||||||||||||||||||||||||||
Receive-fixed interest rate swaps | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Cash flow hedges of floating-rate liabilities: | |||||||||||||||||||||||||||||||||||
| Pay-fixed interest rate swaps | |||||||||||||||||||||||||||||||||||
| Fair value hedges: | |||||||||||||||||||||||||||||||||||
| Debt hedges: Receive-fixed interest rate swaps | |||||||||||||||||||||||||||||||||||
| Asset hedges: Pay-fixed interest rate swaps | |||||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
Customer interest rate derivatives 1 | |||||||||||||||||||||||||||||||||||
| Other interest rate derivatives | |||||||||||||||||||||||||||||||||||
| Foreign exchange derivatives | |||||||||||||||||||||||||||||||||||
| Purchased credit derivatives | |||||||||||||||||||||||||||||||||||
Total derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Total derivatives | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
1 Customer interest rate derivatives include both customer-facing derivative as well as offsetting derivatives facing other dealer banks. The fair value of these derivatives include a net credit valuation adjustment (“CVA”) of $17 million, reducing the fair value of the liability at September 30, 2023, and $13 million, reducing the fair value of the liability at December 31, 2022.
The amount of derivative gains (losses) from cash flow and fair value hedges that were deferred in other comprehensive income (“OCI”) or recognized in earnings for the three and nine months ended September 30, 2023 and 2022 is presented in the schedules below.
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||
| (In millions) | Effective portion of derivative gain/(loss) deferred in AOCI | Amount of gain/(loss) reclassified from AOCI into income | Interest on fair value hedges | Hedge ineffectiveness/AOCI reclass due to missed forecast | |||||||||||||||||||
Cash flow hedges of floating-rate assets:1 | |||||||||||||||||||||||
| Purchased interest rate floors | $ | $ | $ | $ | |||||||||||||||||||
| Received-fixed interest rate swaps | ( | ||||||||||||||||||||||
| Cash flow hedges of floating-rate liabilities: | |||||||||||||||||||||||
| Pay-fixed interest rate swaps | ( | ||||||||||||||||||||||
| Fair value hedges: | |||||||||||||||||||||||
| Debt hedges: Receive-fixed interest rate swaps | |||||||||||||||||||||||
Basis amortization on terminated hedges2 | ( | ||||||||||||||||||||||
| Asset hedges: Pay-fixed interest rate swaps | ( | ||||||||||||||||||||||
Basis amortization on terminated asset hedges3 | |||||||||||||||||||||||
Total derivatives designated as hedging instruments | $ | $ | ( | $ | $ | ( | |||||||||||||||||
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| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| (In millions) | Effective portion of derivative gain/(loss) deferred in AOCI | Amount of gain/(loss) reclassified from AOCI into income | Interest on fair value hedges | Hedge ineffectiveness/AOCI reclass due to missed forecast | |||||||||||||||||||
Cash flow hedges of floating-rate assets: 1 | |||||||||||||||||||||||
| Purchased interest rate floors | $ | $ | $ | $ | |||||||||||||||||||
| Received-fixed interest rate swaps | ( | ||||||||||||||||||||||
| Cash flow hedges of floating-rate liabilities: | |||||||||||||||||||||||
| Pay-fixed interest rate swaps | |||||||||||||||||||||||
| Fair value hedges: | |||||||||||||||||||||||
| Debt hedges: Receive-fixed interest rate swaps | ( | ||||||||||||||||||||||
Basis amortization on terminated debt hedges 2 | ( | ||||||||||||||||||||||
| Asset hedges: Pay-fixed interest rate swaps | ( | ||||||||||||||||||||||
Basis amortization on terminated asset hedges 3 | |||||||||||||||||||||||
Total derivatives designated as hedging instruments | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| (In millions) | Effective portion of derivative gain/(loss) deferred in AOCI | Amount of gain/(loss) reclassified from AOCI into income | Interest on fair value hedges | Hedge ineffectiveness/AOCI reclass due to missed forecast | |||||||||||||||||||
Cash flow hedges of floating-rate assets: 1 | |||||||||||||||||||||||
| Purchased interest rate floors | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate swaps | ( | ( | |||||||||||||||||||||
| Fair value hedges of liabilities: | |||||||||||||||||||||||
| Receive-fixed interest rate swaps | ( | ||||||||||||||||||||||
Basis amortization on terminated hedges2 | |||||||||||||||||||||||
| Fair value hedges of assets: | |||||||||||||||||||||||
| Pay-fixed interest rate swaps | |||||||||||||||||||||||
Basis amortization on terminated hedges 2 | |||||||||||||||||||||||
Total derivatives designated as hedging instruments | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| (In millions) | Effective portion of derivative gain/(loss) deferred in AOCI | Amount of gain/(loss) reclassified from AOCI into income | Interest on fair value hedges | Hedge ineffectiveness/AOCI reclass due to missed forecast | |||||||||||||||||||
Cash flow hedges of floating-rate assets: 1 | |||||||||||||||||||||||
| Purchased interest rate floors | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate swaps | ( | $ | |||||||||||||||||||||
| Fair value hedges of liabilities: | |||||||||||||||||||||||
| Receive-fixed interest rate swaps | |||||||||||||||||||||||
Basis amortization on terminated hedges 2, 3 | |||||||||||||||||||||||
| Fair value hedges of assets: | |||||||||||||||||||||||
| Pay-fixed interest rate swaps | ( | $ | |||||||||||||||||||||
Basis amortization on terminated hedges 2, 3 | $ | ||||||||||||||||||||||
Total derivatives designated as hedging instruments | $ | ( | $ | $ | $ | ||||||||||||||||||
1 For the 12 months following September 30, 2023, we estimate that $133 million of losses will be reclassified from AOCI into interest income, compared with an estimate of $173 million of losses at September 30, 2022.
2 At September 30, 2023, the total cumulative unamortized basis adjustment for terminated fair value hedges of debt was $48 million. We did no t have any cumulative unamortized basis adjustment for terminated hedges of debt at September 30, 2022. We had $3 million and $10 million of cumulative unamortized basis adjustments from terminated fair value hedges of assets at September 30, 2023 and 2022, respectively.
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The amount of gains (losses) recognized from derivatives not designated as accounting hedges is summarized as follows:
| Other Noninterest Income/(Expense) | |||||||||||||||||||||||
| (In millions) | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
Customer-facing interest rate derivatives | $ | $ | $ | $ | |||||||||||||||||||
| Other interest rate derivatives | |||||||||||||||||||||||
| Foreign exchange derivatives | |||||||||||||||||||||||
| Purchased credit derivatives | ( | ||||||||||||||||||||||
Total derivatives not designated as hedging instruments | $ | $ | $ | $ | |||||||||||||||||||
The following schedule presents derivatives used in fair value hedge accounting relationships, as well as pre-tax gains/(losses) recorded on such derivatives and the related hedged items for the periods presented.
| Gain/(loss) recorded in income | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| (In millions) | Derivatives 2 | Hedged items | Total income statement impact | Derivatives 2 | Hedged items | Total income statement impact | |||||||||||||||||||||||||||||
Debt: Receive-fixed interest rate swaps 1, 2 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
Assets: Pay-fixed interest rate swaps 1, 2 | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Gain/(loss) recorded in income | |||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| (In millions) | Derivatives 2 | Hedged items | Total income statement impact | Derivatives 2 | Hedged items | Total income statement impact | |||||||||||||||||||||||||||||
Debt: Receive-fixed interest rate swaps 1, 2 | $ | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||
Assets: Pay-fixed interest rate swaps 1, 2 | ( | ( | ( | ||||||||||||||||||||||||||||||||
1 Consists of hedges of benchmark interest rate risk of fixed-rate long-term debt, fixed-rate AFS securities, and fixed-rate commercial loans. Gains and losses were recorded in net interest expense or income consistent with the hedged items.
2 The income/expense for derivatives does not reflect interest income/expense from periodic accruals and payments to be consistent with the presentation of the gains/(losses) on the hedged items.
The following schedule provides information regarding basis adjustments for hedged items.
| Par value of hedged assets/(liabilities) | Carrying amount of the hedged assets/(liabilities) 1 | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged item | |||||||||||||||||||||||||||||||||
| (In millions) | September 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||
Long-term fixed-rate debt 2 | $ | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||
Fixed-rate assets 3 | ( | ( | |||||||||||||||||||||||||||||||||
1 Carrying amounts exclude (1) issuance and purchase discounts or premiums, (2) unamortized issuance and acquisition costs, and (3) amounts related to terminated fair value hedges.
2 We terminated the remaining fair value hedge of debt during the second quarter of 2023. The remaining hedge basis adjustments will be amortized over the life of the associated debt.
3 These amounts include the amortized cost basis of defined portfolios of AFS securities and commercial loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the defined portfolio anticipated to be outstanding for the designated hedged period. At September 30, 2023, the amortized cost basis of the defined portfolios used in these hedging relationships was $11.5 billion; the cumulative basis adjustment associated with these hedging relationships was $103.9 million; and the notional amounts of the designated hedging instruments were $3.5 billion.
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8. LEASES
We have operating and finance leases for branches, corporate offices, and data centers. At September 30, 2023, we had 409 branches, of which 277 are owned and 132 are leased. We lease our headquarters in Salt Lake City, Utah. The remaining maturities of our lease commitments range from the year 2023 to 2062, and some lease arrangements include options to extend or terminate the leases.
All leases with lease terms greater than twelve months are reported as a lease liability with a corresponding right-of-use (“ROU”) asset. We present ROU assets for operating leases and finance leases on the consolidated balance sheet in “,” and “,” respectively. The corresponding liabilities for those leases are presented in “,” and “.” For more information about our lease policies, see Note 8 of our 2022 Form 10-K.
The following schedule presents ROU assets and lease liabilities with associated weighted average remaining life and discount rate.
| (Dollar amounts in millions) | September 30, 2023 | December 31, 2022 | |||||||||
| Operating leases | |||||||||||
| ROU assets, net of amortization | $ | $ | |||||||||
| Lease liabilities | |||||||||||
| Finance leases | |||||||||||
| ROU assets, net of amortization | |||||||||||
| Lease liabilities | |||||||||||
| Weighted average remaining lease term (years) | |||||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
| Weighted average discount rate | |||||||||||
| Operating leases | % | % | |||||||||
| Finance leases | % | % | |||||||||
Additional information related to lease expense is presented in the following schedule.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Lease expense: | |||||||||||||||||||||||
| Operating lease expense | $ | $ | $ | $ | |||||||||||||||||||
Other expenses associated with operating leases 1 | |||||||||||||||||||||||
| Total lease expense | $ | $ | $ | $ | |||||||||||||||||||
| Related cash disbursements from operating leases | $ | $ | $ | $ | |||||||||||||||||||
1 Other expenses primarily include property taxes and building and property maintenance.
The following schedule presents the total contractual undiscounted lease payments for operating lease liabilities by expected due date for each of the next five years.
| (In millions) | Total undiscounted lease payments | ||||
2023 1 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
1 Contractual maturities for the three months remaining in 2023.
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We enter into certain lease agreements where we are the lessor of real estate. Real estate leases are made from bank-owned and subleased property to generate cash flow from the property, including from leasing vacant suites in which we occupy portions of the building. Operating lease income was $3 11 million and $10 million for the first nine months of 2023 and 2022, respectively.
We originated equipment leases, considered to be sales-type leases or direct financing leases, totaling $374 million and $386 million at September 30, 2023 and December 31, 2022, respectively. We recorded income of $4 million and $3 million on these leases for the third quarter of 2023 and 2022, respectively, and $12 million and $9 million for the first nine months of 2023 and 2022, respectively.
9. LONG-TERM DEBT AND SHAREHOLDERS’ EQUITY
Long-Term Debt
The long-term debt carrying values presented in the consolidated balance sheet represent the par value of the debt, adjusted for any unamortized premium or discount, unamortized debt issuance costs, and basis adjustments for interest rate swaps designated as fair value hedges. The following schedule presents the components of our long-term debt.
LONG-TERM DEBT
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
Subordinated notes 1 | $ | $ | |||||||||
| Senior notes | |||||||||||
| Finance lease obligations | |||||||||||
| Total | $ | $ | |||||||||
1 The change in the subordinated notes balance is primarily due to a fair value hedge accounting adjustment. See also Note 7.
The decrease in long-term debt was primarily due to the redemption of $128 million, 4.50 % matured senior notes during the second quarter of 2023.
Shareholders' Equity
Our common stock is traded on the National Association of Securities Dealers Automated Quotations (“NASDAQ”) Global Select Market. At September 30, 2023, there were 148.1 million shares of $0.001 par value common stock outstanding. Common stock and additional paid-in capital decreased $28 million, or 2 %, to $1.7 billion at September 30, 2023, from December 31, 2022, primarily due to common stock repurchases during the first quarter of 2023. As the macroeconomic environment remained uncertain, we did not repurchase common shares during the second or third quarters of 2023, nor do we expect to repurchase common shares during the fourth quarter of 2023.
AOCI was a $3.0 billion loss at September 30, 2023. The following schedule presents the changes in AOCI by major component.
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| (In millions) | Net unrealized gains/(losses) on investment securities | Net unrealized gains/(losses) on derivatives and other | Pension and post-retirement | Total | |||||||||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
OCI (loss) before reclassifications, net of tax 1 | ( | ||||||||||||||||||||||
| Amounts reclassified from AOCI, net of tax | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Balance at September 30, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Income tax expense (benefit) included in OCI (loss) | $ | ( | $ | $ | $ | ||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Balance at December 31, 2021 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
OCI (loss) before reclassifications, net of tax | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from AOCI, net of tax | ( | ( | |||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | ||||||||||||||||||||
| Balance at September 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Income tax benefit included in OCI (loss) | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
1 For the nine months ended September 30, 2023, the amounts include $169 million related to the decline in the fair value of fixed-rate AFS securities as a result of higher interest rates, offset by $158 million in unrealized loss amortization associated with the securities transferred from AFS to HTM during the fourth quarter of 2022, respectively.
Amounts reclassified from AOCI 1 | Statement of income (SI) | |||||||||||||||||||||||||||||||||||||
| (In millions) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
| Details about AOCI components | 2023 | 2022 | 2023 | 2022 | Affected line item | |||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on derivative instruments | $ | ( | $ | ( | $ | ( | $ | SI | Interest and fees on loans | |||||||||||||||||||||||||||||
| Less: Income tax expense (benefit) | ( | ( | ( | |||||||||||||||||||||||||||||||||||
Amounts reclassified from AOCI | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
1 Positive reclassification amounts indicate increases to earnings in the income statement.
10. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Commitments and Guarantees
The following schedule presents the contractual amounts related to off-balance sheet financial instruments used to meet the financing needs of our customers.
| (In millions) | September 30, 2023 | December 31, 2022 | |||||||||
Unfunded lending commitments 1 | $ | $ | |||||||||
| Standby letters of credit: | |||||||||||
| Financial | |||||||||||
| Performance | |||||||||||
| Commercial letters of credit | |||||||||||
Mortgage-backed security purchase agreements 2 | |||||||||||
| Total unfunded commitments | $ | $ | |||||||||
1 Net of participations.
2 Represents agreements with Farmer Mac to purchase securities backed by certain agricultural mortgage loans.
For more information about these commitments and guarantees including their terms and collateral requirements, see Note 16 of our 2022 Form 10-K.
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Legal Matters
We are involved in various legal proceedings or governmental inquiries, which may include litigation in court and arbitral proceedings, as well as investigations, examinations, and other actions brought or considered by governmental and self-regulatory agencies. Litigation may relate to lending, deposit and other customer relationships, vendor and contractual issues, employee matters, intellectual property matters, personal injuries and torts, regulatory and legal compliance, and other matters. While most matters relate to individual claims, we are also subject to putative class action claims and similar broader claims. Proceedings, investigations, examinations, and other actions brought or considered by governmental and self-regulatory agencies may relate to our banking, investment advisory, trust, securities, and other products and services; our customers’ involvement in money laundering, fraud, securities violations and other illicit activities or our policies and practices relating to such customer activities; and our compliance with the broad range of banking, securities and other laws and regulations applicable to us. At any given time, we may be in the process of responding to subpoenas, requests for documents, data and testimony relating to such matters and engaging in discussions to resolve the matters.
At September 30, 2023, we were subject to the following material litigation:
•Two civil cases, Lifescan Inc. and Johnson & Johnson Health Care Services v. Jeffrey Smith, et. al., brought against us in the United States District Court for the District of New Jersey in December 2017, and Roche Diagnostics and Roche Diabetes Care Inc. v. Jeffrey C. Smith, et. al., brought against us in the United States District Court for the District of New Jersey in March 2019. In these cases, certain manufacturers and distributors of medical products seek to hold us liable for allegedly fraudulent practices of a borrower of the Bank who filed for bankruptcy protection in 2017. The cases are in discovery phases. Trial has not been scheduled in either case.
•Sipple v. Zions Bancorporation, N.A., brought against us in the District Court of Clark County, Nevada in February 2021 with respect to foreign transaction fees. This case is in the discovery phase and trial has been scheduled for late spring 2024.
At least quarterly, we review outstanding and new legal matters, utilizing then available information. In accordance with applicable accounting guidance, if we determine that a loss from a matter is probable and the amount of the loss can be reasonably estimated, we establish an accrual for the loss. In the absence of such a determination, no accrual is made. Once established, accruals are adjusted to reflect developments relating to the matters.
In our review, we also assess whether we can determine the range of reasonably possible losses for significant matters in which we are unable to determine that the likelihood of a loss is remote. Because of the difficulty of predicting the outcome of legal matters, discussed subsequently, we are able to meaningfully estimate such a range only for a limited number of matters. Based on information available at September 30, 2023, we estimated that the aggregate range of reasonably possible losses for those matters to be from zero to approximately $5 million in excess of amounts accrued. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from this estimate. Those matters for which a meaningful estimate is not possible are not included within this estimated range and, therefore, this estimated range does not represent our maximum loss exposure.
Based on our current knowledge, we believe that our current estimated liability for litigation and other legal actions and claims, reflected in our accruals and determined in accordance with applicable accounting guidance, is adequate and that liabilities in excess of the amounts currently accrued, if any, arising from litigation and other legal actions and claims for which an estimate as previously described is possible, will not have a material impact on our financial condition, results of operations, or cash flows. However, in light of the significant uncertainties involved in these matters, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to our financial condition, results of operations, or cash flows for any given reporting period.
Any estimate or determination relating to the future resolution of litigation, arbitration, governmental or self-regulatory examinations, investigations or actions or similar matters is inherently uncertain and involves significant
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11. REVENUE RECOGNITION
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Disaggregation of Revenue
The schedule below presents net revenue by our operating business segments for the three months ended September 30, 2023 and 2022.
| Zions Bank | CB&T | Amegy | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
Commercial account fees | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Card fees | |||||||||||||||||||||||||||||||||||
Retail and business banking fees | |||||||||||||||||||||||||||||||||||
Capital markets fees | |||||||||||||||||||||||||||||||||||
| Wealth management fees | |||||||||||||||||||||||||||||||||||
| Other customer-related fees | |||||||||||||||||||||||||||||||||||
Total noninterest income from contracts with customers (ASC 606) | |||||||||||||||||||||||||||||||||||
Other noninterest income (non-ASC 606 customer-related) | |||||||||||||||||||||||||||||||||||
Total customer-related noninterest income | |||||||||||||||||||||||||||||||||||
Other noncustomer-related noninterest income | |||||||||||||||||||||||||||||||||||
Total noninterest income | |||||||||||||||||||||||||||||||||||
Net interest income | |||||||||||||||||||||||||||||||||||
Total net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| NBAZ | NSB | Vectra | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
Commercial account fees | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Card fees | |||||||||||||||||||||||||||||||||||
Retail and business banking fees | |||||||||||||||||||||||||||||||||||
Capital markets fees | |||||||||||||||||||||||||||||||||||
| Wealth management fees | |||||||||||||||||||||||||||||||||||
| Other customer-related fees | |||||||||||||||||||||||||||||||||||
Total noninterest income from contracts with customers (ASC 606) | |||||||||||||||||||||||||||||||||||
Other noninterest income (non-ASC 606 customer-related) | |||||||||||||||||||||||||||||||||||
Total customer-related noninterest income | |||||||||||||||||||||||||||||||||||
Other noncustomer-related noninterest income | |||||||||||||||||||||||||||||||||||
Total noninterest income | |||||||||||||||||||||||||||||||||||
Net interest income | |||||||||||||||||||||||||||||||||||
Total net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| TCBW | Other | Consolidated Bank | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
Commercial account fees | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
Card fees | ( | ||||||||||||||||||||||||||||||||||
Retail and business banking fees | ( | ||||||||||||||||||||||||||||||||||
Capital markets fees | |||||||||||||||||||||||||||||||||||
| Wealth management fees | |||||||||||||||||||||||||||||||||||
| Other customer-related fees | |||||||||||||||||||||||||||||||||||
Total noninterest income from contracts with customers (ASC 606) | |||||||||||||||||||||||||||||||||||
Other noninterest income (non-ASC 606 customer-related) | |||||||||||||||||||||||||||||||||||
Total customer-related noninterest income | |||||||||||||||||||||||||||||||||||
Other noncustomer-related noninterest income | |||||||||||||||||||||||||||||||||||
Total noninterest income | |||||||||||||||||||||||||||||||||||
Net interest income | |||||||||||||||||||||||||||||||||||
Total net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
79
The schedule below presents net revenue by our operating business segments for the nine months ended September 30, 2023 and 2022.
| Zions Bank | CB&T | Amegy | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
Commercial account fees | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Card fees | |||||||||||||||||||||||||||||||||||
Retail and business banking fees | |||||||||||||||||||||||||||||||||||
Capital markets fees | |||||||||||||||||||||||||||||||||||
| Wealth management fees | |||||||||||||||||||||||||||||||||||
| Other customer-related fees | |||||||||||||||||||||||||||||||||||
Total noninterest income from contracts with customers (ASC 606) | |||||||||||||||||||||||||||||||||||
Other noninterest income (non-ASC 606 customer-related) | |||||||||||||||||||||||||||||||||||
Total customer-related noninterest income | |||||||||||||||||||||||||||||||||||
Other noncustomer-related noninterest income | |||||||||||||||||||||||||||||||||||
Total noninterest income | |||||||||||||||||||||||||||||||||||
Net interest income | |||||||||||||||||||||||||||||||||||
Total net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| NBAZ | NSB | Vectra | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
Commercial account fees | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Card fees | |||||||||||||||||||||||||||||||||||
Retail and business banking fees | |||||||||||||||||||||||||||||||||||
Capital markets fees | |||||||||||||||||||||||||||||||||||
| Wealth management fees | |||||||||||||||||||||||||||||||||||
| Other customer-related fees | |||||||||||||||||||||||||||||||||||
Total noninterest income from contracts with customers (ASC 606) | |||||||||||||||||||||||||||||||||||
Other noninterest income (non-ASC 606 customer-related) | |||||||||||||||||||||||||||||||||||
Total customer-related noninterest income | |||||||||||||||||||||||||||||||||||
Other noncustomer-related noninterest income | |||||||||||||||||||||||||||||||||||
Total noninterest income | |||||||||||||||||||||||||||||||||||
Net interest income | |||||||||||||||||||||||||||||||||||
Total net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| TCBW | Other | Consolidated Bank | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
Commercial account fees | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Card fees | |||||||||||||||||||||||||||||||||||
Retail and business banking fees | ( | ||||||||||||||||||||||||||||||||||
Capital markets fees | |||||||||||||||||||||||||||||||||||
| Wealth management fees | ( | ||||||||||||||||||||||||||||||||||
| Other customer-related fees | |||||||||||||||||||||||||||||||||||
Total noninterest income from contracts with customers (ASC 606) | |||||||||||||||||||||||||||||||||||
Other noninterest income (non-ASC 606 customer-related) | |||||||||||||||||||||||||||||||||||
Total customer-related noninterest income | |||||||||||||||||||||||||||||||||||
Other noncustomer-related noninterest income | |||||||||||||||||||||||||||||||||||
Total noninterest income | |||||||||||||||||||||||||||||||||||
Net interest income | |||||||||||||||||||||||||||||||||||
Total net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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12. INCOME TAXES
The effective income tax rate was 23.2 % for the third quarter of 2023, compared with 21.9 % for the third quarter of 2022. The effective tax rates for the first nine months of 2023 and 2022 were 24.7 % and 21.4 %, respectively. The tax rates during both periods were reduced by nontaxable municipal interest income and nontaxable income from certain bank-owned life insurance (“BOLI”), and were increased by the non-deductibility of Federal Deposit Insurance Corporation (“FDIC”) premiums, certain executive compensation plans, and other fringe benefits. The tax rate for the first nine months of 2023 was higher relative to the same prior year period, primarily as a result of a discrete item that affected the reserve for uncertain tax positions during the first quarter of 2023.
At both September 30, 2023 and December 31, 2022, we had a net deferred tax asset (“DTA”) totaling $1.1
We evaluate DTAs on a regular basis to determine whether a valuation allowance is required. In conducting this evaluation, we consider all available evidence, both positive and negative, based on the more-likely-than-not criteria that such assets will be realized. This evaluation includes, but is not limited to, the following:
•Future reversals of existing deferred tax liabilities (“DTLs”) — These DTLs have a reversal pattern generally consistent with DTAs and are used to realize the DTAs.
•Tax planning strategies — We have considered prudent and feasible tax planning strategies that we would implement to preserve the value of the DTAs, if necessary.
•Future projected taxable income — We expect future taxable income will offset the reversal of remaining net DTAs.
Based on this evaluation, we concluded that a valuation allowance was not required at both September 30, 2023 and December 31, 2022.
13. NET EARNINGS PER COMMON SHARE
Basic and diluted net earnings per common share based on the weighted average outstanding shares are summarized as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions, except shares and per share amounts) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Less common and preferred dividends | |||||||||||||||||||||||
| Undistributed earnings | |||||||||||||||||||||||
| Less undistributed earnings applicable to nonvested shares | |||||||||||||||||||||||
| Undistributed earnings applicable to common shares | |||||||||||||||||||||||
| Distributed earnings applicable to common shares | |||||||||||||||||||||||
| Total earnings applicable to common shares | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average common shares outstanding (in thousands) | |||||||||||||||||||||||
| Net earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Total earnings applicable to common shares | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average common shares outstanding (in thousands) | |||||||||||||||||||||||
| Dilutive effect of stock options (in thousands) | |||||||||||||||||||||||
Weighted average diluted common shares outstanding (in thousands) | |||||||||||||||||||||||
| Net earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
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The following schedule presents the weighted average stock awards that were anti-dilutive and not included in the calculation of diluted earnings per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Restricted stock and restricted stock units | |||||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
14. OPERATING SEGMENT INFORMATION
We manage our operations with a primary focus on geographic area. We conduct our operations primarily through seven separately managed affiliate banks, each with its own local branding and management team, including Zions Bank, California Bank & Trust, Amegy Bank, National Bank of Arizona, Nevada State Bank, Vectra Bank Colorado, and The Commerce Bank of Washington. These affiliate banks comprise our primary business segments. Performance assessment and resource allocation are based upon this geographic structure. Our affiliate banks are supported by an enterprise operating segment (referred to as the “Other” segment) that provides governance and risk management, allocates capital, establishes strategic objectives, and includes centralized technology, back-office functions, and certain lines of business not operated through our affiliate banks.
We allocate the cost of centrally provided services to the business segments based upon estimated or actual usage of those services. We also allocate capital based on the risk-weighted assets held at each business segment. We use an internal funds transfer pricing (“FTP”) allocation process to report results of operations for business segments. This process is subject to change and refinement over time. Total average loans and deposits presented for the business segments include insignificant intercompany amounts between business segments and may also include deposits with the “Other” segment.
At September 30, 2023, Zions Bank operated 95 branches in Utah, 25 branches in Idaho, and one branch in Wyoming. CB&T operated 75 branches in California. Amegy operated 75 branches in Texas. NBAZ operated 56 branches in Arizona. NSB operated 45 branches in Nevada. Vectra operated 33 branches in Colorado and one branch in New Mexico. TCBW operated two branches in Washington and one branch in Oregon.
Transactions between business segments are primarily conducted at fair value, resulting in profits that are eliminated for reporting consolidated results of operations. The following schedule presents average loans, average deposits, and income before income taxes because we use these metrics when evaluating performance and making decisions pertaining to the business segments. The condensed statement of income identifies the components of income and expense which affect the operating amounts presented in the “Other” segment.
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The following schedule presents selected operating segment information for the three months ended September 30, 2023 and 2022:
| Zions Bank | CB&T | Amegy | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| SELECTED INCOME STATEMENT DATA | |||||||||||||||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||||||||||||||
Net interest income after provision for credit losses | |||||||||||||||||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| SELECTED AVERAGE BALANCE SHEET DATA | |||||||||||||||||||||||||||||||||||
| Total average loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Total average deposits | |||||||||||||||||||||||||||||||||||
| NBAZ | NSB | Vectra | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| SELECTED INCOME STATEMENT DATA | |||||||||||||||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Provision for credit losses | ( | ||||||||||||||||||||||||||||||||||
Net interest income after provision for credit losses | |||||||||||||||||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| SELECTED AVERAGE BALANCE SHEET DATA | |||||||||||||||||||||||||||||||||||
| Total average loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Total average deposits | |||||||||||||||||||||||||||||||||||
| TCBW | Other | Consolidated Bank | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| SELECTED INCOME STATEMENT DATA | |||||||||||||||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Provision for credit losses | ( | ( | |||||||||||||||||||||||||||||||||
Net interest income after provision for credit losses | |||||||||||||||||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||
| SELECTED AVERAGE BALANCE SHEET DATA | |||||||||||||||||||||||||||||||||||
| Total average loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Total average deposits | |||||||||||||||||||||||||||||||||||
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The following schedule presents selected operating segment information for the nine months ended September 30, 2023 and 2022:
| Zions Bank | CB&T | Amegy | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| SELECTED INCOME STATEMENT DATA | |||||||||||||||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Provision for credit losses | ( | ||||||||||||||||||||||||||||||||||
Net interest income after provision for credit losses | |||||||||||||||||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| SELECTED AVERAGE BALANCE SHEET DATA | |||||||||||||||||||||||||||||||||||
| Total average loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Total average deposits | |||||||||||||||||||||||||||||||||||
| NBAZ | NSB | Vectra | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| SELECTED INCOME STATEMENT DATA | |||||||||||||||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||||||||||||||
Net interest income after provision for credit losses | |||||||||||||||||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| SELECTED AVERAGE BALANCE SHEET DATA | |||||||||||||||||||||||||||||||||||
| Total average loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Total average deposits | |||||||||||||||||||||||||||||||||||
| TCBW | Other | Consolidated Bank | |||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| SELECTED INCOME STATEMENT DATA | |||||||||||||||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Provision for credit losses | ( | ||||||||||||||||||||||||||||||||||
Net interest income after provision for credit losses | |||||||||||||||||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||
| SELECTED AVERAGE BALANCE SHEET DATA | |||||||||||||||||||||||||||||||||||
| Total average loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Total average deposits | |||||||||||||||||||||||||||||||||||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our most significant risks include interest rate and market risk, which are closely monitored by management as previously discussed. For more information regarding interest rate and market risk, see the “Interest Rate and Market Risk Management” section in this Form 10-Q.
84
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures at September 30, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at September 30, 2023. There were no changes in our internal control over financial reporting during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 10 of the Notes to Consolidated Financial Statements is incorporated by reference herein.
ITEM 1A. RISK FACTORS
We amend the following risk factors as discussed in Part I, Item 1A. Risk Factors in our 2022 Form 10-K and as previously amended and supplemented in Part II, Item 1A. Risk Factors in our 2023 Form 10-Qs:
Changes in levels and sources of liquidity and capital, including the resulting effects of recent events in the banking industry, may limit our operations and potential growth.
Our primary source of liquidity is deposits from our customers, which may be impacted by market-related forces such as increased competition for these deposits and a variety of other factors. Deposits across the banking industry have been fluctuating in recent quarters in large part due to the increased interest rate environment and prominent bank failures. We, like many other banks, experienced deposit outflows as customers spread deposits among several different banks to maximize their amount of FDIC insurance, moved deposits to institutions offering higher rates or banks deemed “too big to fail,” or removed deposits from the U.S. financial system entirely. Although our deposit levels have stabilized during recent quarters, our cost of funds has increased, and the potential for greater volatility remains, particularly if there is more negative news surrounding the banking industry or perceived risks regarding bank safety and soundness. Our costs will also increase as a result of the FDIC’s special assessment to recover the costs associated with protecting uninsured depositors following the bank closures that occurred earlier in 2023. If we are unable to continue to fund assets through customer bank deposits or access other funding sources on favorable terms, or if we suffer continued increases in borrowing costs or FDIC insurance assessments, or otherwise fail to manage liquidity effectively, our liquidity, operating margins, financial condition, and results of operations may be materially and adversely affected.
The Federal Reserve's tightened monetary policy may contribute to a decline in the value of our fixed-rate loans and investment securities that are pledged as collateral to support short-term borrowings, and other economic conditions may also affect our liquidity and efforts to manage associated risks. The FHLB system and Federal Reserve have been, and continue to be, a significant source of additional liquidity and funding. Changes in FHLB funding programs could adversely affect our liquidity and management of associated risks.
Problems encountered by other financial institutions could adversely affect financial markets generally and have indirect adverse effects on us.
The soundness and stability of many financial institutions may be closely interrelated as a result of credit, trading, clearing, or other relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses, or defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms, and exchanges, with which we interact on a daily basis, and therefore, could adversely affect us. This phenomenon has been evident in the recent events affecting the banking industry, as financial institutions, like us, have been impacted by concerns regarding the soundness or creditworthiness of other financial institutions or reports of the risk of systemic deterioration in asset classes, such
85
as commercial real estate. This has caused substantial and cascading disruption within the financial markets, increased expenses, and adversely impacted the market price and volatility of our common stock.
The Russian invasion of Ukraine, the escalating conflict in the Middle East, other geopolitical conflicts, and retaliatory measures imposed by the U.S. and other countries, including the responses to such measures, may cause significant disruptions to domestic and foreign economies and markets.
The Russia/Ukraine war and the rapidly escalating conflict in the Middle East, along with other geopolitical conflicts, have created new risks for global markets, trade, economic conditions, cybersecurity, and similar concerns. For example, these conflicts could affect the availability and price of commodities and products, adversely affecting supply chains and increasing inflationary pressures; the value of currencies, interest rates, and other components of financial markets; and lead to increased risks of events such as cyberattacks that could result in severe costs and disruptions to governmental entities and companies and their operations. The impact of these conflicts and retaliatory measures is continually evolving and cannot be predicted with certainty. It is likely that these conflicts will continue to affect the global political order and global and domestic markets for a substantial period of time, regardless of when these conflicts end.
While these events have not materially interrupted our operations, these or future developments resulting from these conflicts, such as cyberattacks on the U.S., the Bank, our customers, or our suppliers, could make it difficult to conduct business.
Protracted congressional negotiations and political stalemates in Washington D.C. regarding government funding and other issues may introduce additional volatility in the U.S. economy including capital and credit markets and the banking industry in particular.
The current continuing resolution that provides short-term appropriations to fund the U.S. government expires on November 17, 2023. Democrat and Republican lawmakers are at a stalemate and efforts to pass spending bills for long-term government funding have been complicated, increasing the risk of a government shutdown. Any such shutdown may result in further U.S. credit rating downgrades or defaults, and may introduce additional volatility in the U.S. economy, including capital and credit markets and the banking industry in particular; cause disruptions in the financial markets; impact interest rates; and result in other potential unforeseen consequences. In any such event, the Bank’s liquidity, operating margins, financial condition, and results of operations may be materially and adversely affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 5. OTHER INFORMATION
None of our directors or officers have adopted terminated
86
ITEM 6. EXHIBITS
a.Exhibits
| Exhibit Number | Description | ||||||||||
| Second Amended and Restated Articles of Association of Zions Bancorporation, National Association, incorporated by reference to Exhibit 3.1 of Form 8-K filed on October 2, 2018. | * | ||||||||||
| Second Amended and Restated Bylaws of Zions Bancorporation, National Association, incorporated by reference to Exhibit 3.2 of Form 8-K filed on April 4, 2019. | * | ||||||||||
| Certification by Chief Executive Officer required by Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (filed herewith). | |||||||||||
| Certification by Chief Financial Officer required by Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (filed herewith). | |||||||||||
| Certification by Chief Executive Officer and Chief Financial Officer required by Sections 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 (15 U.S.C. 78m) and 18 U.S.C. Section 1350 (furnished herewith). | |||||||||||
| 101 | Pursuant to Rules 405 and 406 of Regulation S-T, the following information is formatted in Inline XBRL (i) the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, (ii) the Consolidated Statements of Income for the three months ended September 30, 2023 and September 30, 2022 and the nine months ended September 30, 2023 and September 30, 2022, (iii) the Consolidated Statements of Comprehensive Income for the three months ended September 30, 2023 and September 30, 2022 and the nine months ended September 30, 2023 and September 30, 2022, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the three months ended September 30, 2023 and September 30, 2022 and the nine months ended September 30, 2023 and September 30, 2022, (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and September 30, 2022, and (vi) the Notes to Consolidated Financial Statements (filed herewith). | ||||||||||
| 104 | The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL. | ||||||||||
* Incorporated by reference
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of long-term debt are not filed. We agree to furnish a copy thereof to the Securities and Exchange Commission and the Office of the Comptroller of the Currency upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ZIONS BANCORPORATION, NATIONAL ASSOCIATION | ||
| /s/ Harris H. Simmons | ||
| Harris H. Simmons, Chairman and Chief Executive Officer | ||
| /s/ Paul E. Burdiss | ||
| Paul E. Burdiss, Executive Vice President and Chief Financial Officer | ||
Date: November 3, 2023
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