ZIONS BANCORPORATION, N.A. 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 ofZions 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.
These 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 this list is not comprehensive, important factors that may cause material differences include changes in general industry and economic conditions, including inflation, economic slowdown or other economic disruption; securities and capital markets behavior, including volatility and changes in market liquidity; changes and uncertainties in legislation and fiscal, monetary, regulatory, trade, and tax policies; changes in interest and reference rates; the quality and composition of our loan and securities portfolios; our ability to recruit and retain talent, including increased competition for qualified candidates as a result of expanded remote-work opportunities and increased compensation expenses; 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 execute our strategic plans, manage our risks, and achieve our business objectives; our ability to develop and maintain information security systems and controls designed to guard against fraud, cyber, and privacy risks; the effects of the COVID-19 pandemic (including variants) and associated actions that may affect our business, employees, and communities; the effects of the ongoing conflict inEastern Europe and other local, national, or international disasters, crises, or conflicts that may occur in the future; and governmental and social responses to environmental issues and climate change. These factors, risks, and uncertainties, among others, are discussed in our 2021 Form 10-K and subsequent filings with theSecurities and Exchange Commission ("SEC"). 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 of the forward-looking statements included herein to reflect future events or developments. 4 --------------------------------------------------------------------------------
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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.
RESULTS OF OPERATIONS
Executive Summary
Our financial results in the third quarter of 2022 reflected strong revenue
growth, which was offset by increases in the provision for credit losses and
noninterest expense. Diluted earnings per share ("EPS") decreased to
Notwithstanding a$57 million decrease in interest income from Paycheck Protection Program ("PPP") loans, net interest income increased$108 million , or 19%, to$663 million , primarily due to a higher interest rate environment and a favorable change in the composition of interest-earning assets. The net interest margin ("NIM") was 3.24%, compared with 2.68%. Nonperforming assets decreased$173 million , and classified loans decreased$432 million . Net loan and lease charge-offs were$27 million , or 0.21% of average loans (ex-PPP), compared with net recoveries of$1 million , or 0.01% of average loans (ex-PPP), in the prior year quarter. Despite improvements in most of our credit quality metrics, the provision for credit losses was$71 million , compared with a$(46) million provision in the prior year period, reflecting loan growth and changes in economic scenarios. Total customer-related noninterest income increased$5 million , or 3%, driven by increases in capital markets and foreign exchange fees, commercial account fees, card fees, and wealth management fees, partially offset by decreases in loan-related fees and retail and business banking fees. Total noninterest income increased$26 million , or 19%, primarily due to unrealized losses recorded during the prior year period related to ourSmall Business Investment Company ("SBIC") investment in Recursion Pharmaceuticals, Inc. Total noninterest expense increased$50 million , or 12%. The increase was driven largely by a$27 million increase in salaries and benefits expense, which was impacted by inflationary and competitive labor market pressures on wages and benefits, increased headcount, and increased incentive compensation accruals arising from improvements in anticipated full-year profitability. Our efficiency ratio was 57.6%, compared with 59.8%, as growth in net revenue outpaced growth in noninterest expense. Average interest-earning assets decreased$0.7 billion , or 1%, from the prior year quarter, driven by declines in average money market investments and PPP loans, the effects of which were largely offset by growth in average available-for-sale ("AFS") investment securities and average loans and leases (ex-PPP). Excluding PPP loans, total loans and leases increased$6.0 billion , or 13%. The increases were primarily in the commercial and industrial, owner-occupied, municipal, consumer 1-4 family residential mortgage, and home equity credit line ("HECL") portfolios. Total deposits decreased$1.9 billion , or 2%, primarily due to a$1.7 billion , or 4%, decrease mainly related to more rate-sensitive larger-balance deposits. Total deposits atSeptember 30, 2022 included approximately$400 million of deposit balances acquired from the purchase of three Northern Nevada branches during the third quarter of 2022. Our loan-to-deposit ratio was 71%, compared with 65% in the prior year quarter, which continues to afford us flexibility in managing our funding costs. 5
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Third Quarter 2022 Financial Performance
Net Earnings Applicable to Adjusted PPNR
Common Shareholders Diluted EPS (in millions) Efficiency Ratio
(in millions)
[[Image Removed: zions-20220930_g1.jpg]][[Image Removed: zions-20220930_g2.jpg]][[Image Removed: zions-20220930_g3.jpg]][[Image Removed: zions-20220930_g4.jpg]]
Net earnings applicable to Diluted earnings per share Adjusted pre-provision net The efficiency ratio
common shareholders declined from the third revenue ("PPNR") increased improved from the prior
decreased from the third quarter of 2021 as a $61
million from the third year quarter, as growth in
quarter of 2021, primarily result of decreased net quarter of 2021, primarily adjusted revenue outpaced
due to a
earnings, the effect of due to growth in adjusted growth in adjusted
unfavorable change in the which was partially offset net revenue, driven largely noninterest expense,
provision for credit by a 10.7 million decrease by an increase in net resulting in positive
losses. in weighted average interest income. This operating leverage.
diluted shares, primarily increase was partially
due to share repurchases. offset by higher adjusted
noninterest expense.
Net Interest Income and Net Interest Margin
NET INTEREST INCOME AND NET INTEREST MARGIN
Three Months Ended
September 30,
(Dollar amounts in millions) 2022 2021 Amount change Percent change
Interest and fees on loans 1 $ 551 $ 484 $ 67 14 %
Interest on money market investments 24 7 17 NM
Interest on securities 132 78 54 69
Total interest income 707 569 138 24
Interest on deposits 19 7 12 NM
Interest on short- and long-term borrowings 25 7 18 NM
Total interest expense 44 14 30 NM
Net interest income $ 663 $ 555 $ 108 19 %
Average interest-earning assets $ 82,474 $ 83,189 $ (715) (1) %
Average interest-bearing liabilities $ 41,398 $ 40,925 $ 473 1 %
bps
Yield on interest-earning assets 2 3.45 % 2.75 % 70
Rate paid on total deposits and interest-bearing
liabilities 2 0.22 % 0.07 % 15
Cost of total deposits 2 0.10 % 0.03 % 7
Net interest margin 2 3.24 % 2.68 % 56
1 Includes interest income recoveries of
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 80% of our net revenue (net
interest income plus noninterest income) for the quarter. Notwithstanding a
Average interest-earning assets decreased$0.7 billion , or 1%, from the prior year quarter, driven by declines of$9.0 billion and$3.4 billion in average money market investments and average PPP loans, respectively. These decreases were largely offset by increases of$6.2 billion and$5.5 billion in average securities and average loans and leases (ex-PPP), respectively. The NIM was 3.24%, compared with 2.68%. The yield on average interest-earning assets was 3.45% in the third quarter of 2022, an increase of 70 basis points ("bps"), reflecting a change in the mix of interest-earning assets from money market investments to securities and loans. The yield also benefited from a decrease in the market value of AFS securities due to rising interest rates. The average rate paid on interest-bearing liabilities increased to 0.43%, compared with 0.13%, reflecting the higher interest rate environment and increased short-term borrowings. [[Image Removed: zions-20220930_g5.jpg]][[Image Removed: zions-20220930_g6.jpg]] Total average loans and leases increased$2.1 billion , or 4%, to$53.0 billion , and were partially offset by decreases in PPP loans, primarily due to forgiveness of these loans by theSmall Business Administration ("SBA"). The yield on total loans increased 35 basis points to 4.17%, reflecting the higher interest rate environment. Excluding PPP loans, average loans and leases increased$5.5 billion , or 12%, primarily in the commercial and industrial, owner-occupied, municipal, 1-4 family residential mortgage, and home equity credit line portfolios. The yield on non-PPP loans increased 57 basis points to 4.16%. During the third quarter of 2022 and 2021, PPP loans totaling$0.2 billion and$1.5 billion , respectively, were forgiven by the SBA. PPP loans contributed$6 million and$63 million in interest income during the same time periods. The yield on PPP loans was 6.28% and 6.66% for the respective periods, and was positively impacted by accelerated amortization of deferred fees on paid off or forgiven PPP loans. AtSeptember 30, 2022 and 2021, the remaining unamortized net deferred fees on PPP loans totaled$5 million and$83 million , respectively. Average total deposits increased$0.1 billion to$77.5 billion at an average cost of 0.10%, from$77.4 billion at an average cost of 0.03% in the third quarter of 2021. The rate paid on total deposits and interest-bearing liabilities was 0.22%, compared with 0.07%. Average noninterest-bearing deposits as a percentage of total deposits were 51%, up 7 --------------------------------------------------------------------------------
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slightly from the same prior year period. Our funding costs were well controlled, reflecting the granularity of our deposit base and the extent of our noninterest-bearing deposits.
[[Image Removed: zions-20220930_g7.jpg]][[Image Removed: zions-20220930_g8.jpg]]
Average AFS securities balances increased
Average borrowed funds increased$1.8 billion , driven by increases in short-term borrowings as a result of loan growth and declines in interest-bearing deposits. These increases were partially offset by a decrease in long-term debt, primarily due to the redemption and maturity of senior notes during the past year. 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. For more information on how we manage liquidity risk, refer to the "Liquidity Risk Management" section on page 32. 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. 8 --------------------------------------------------------------------------------
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CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES
Three Months Ended Three Months Ended
(Unaudited) September 30, 2022 September 30, 2021
Average Amount of Average Average Amount of Average
(Dollar amounts in millions) balance interest yield/rate 1 balance interest 1 yield/rate 1
ASSETS
Money market investments:
Interest-bearing deposits $ 1,233 $ 7 2.19 % $ 10,977 $ 5 0.15 %
Federal funds sold and security resell
agreements 2,511 17 2.66 1,739 2 0.50
Total money market investments 3,744 24 2.51 12,716 7 0.20
Securities:
Held-to-maturity 560 4 2.88 557 4 2.87
Available-for-sale 2 24,892 129 2.05 18,814 74 1.56
Trading account 288 3 4.57 199 2 4.41
Total securities 3 25,740 136 2.10 19,570 80 1.63
Loans held for sale 37 1 5.33 52 - 3.03
Loans and leases 4
Commercial - excluding PPP loans 28,972 302 4.13 24,854 235 3.76
Commercial - PPP loans 408 6 6.28 3,795 63 6.66
Commercial real estate 12,182 145 4.73 12,144 105 3.42
Consumer 11,391 103 3.61 10,058 86 3.38
Total loans and leases 52,953 556 4.17 50,851 489 3.82
Total interest-earning assets 82,474 717 3.45 83,189 576 2.75
Cash and due from banks 604 597
Allowance for credit losses on loans and
debt securities (515) (536)
Goodwill and intangibles 1,021 1,015
Other assets 4,923 4,291
Total assets $ 88,507 $ 88,556
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings and money market $ 36,399 $ 18 0.20 % $ 37,262 $ 5 0.05 %
Time 1,441 1 0.32 1,829 2 0.32
Total interest-bearing deposits 37,840 19 0.20 39,091 7 0.07
Borrowed funds:
Federal funds purchased and other
short-term borrowings 2,885 17 2.33 630 - 0.08
Long-term debt 673 8 4.83 1,204 7 2.34
Total borrowed funds 3,558 25 2.80 1,834 7 1.56
Total interest-bearing liabilities 41,398 44 0.43 40,925 14 0.13
Noninterest-bearing demand deposits 39,623 38,320
Other liabilities 1,743 1,302
Total liabilities 82,764 80,547
Shareholders' equity:
Preferred equity 440 440
Common equity 5,303 7,569
Total shareholders' equity 5,743 8,009
Total liabilities and shareholders' equity $ 88,507 $ 88,556
Spread on average interest-bearing funds 3.02 % 2.62 %
Net impact of noninterest-bearing sources
of funds 0.22 % 0.06 %
Net interest margin $ 673 3.24 % $ 562 2.68 %
Memo: total loans and leases, excluding PPP
loans $ 52,545 550 4.16 % $ 47,056 426 3.59 %
Memo: total cost of deposits 0.10 % 0.03 %
Memo: total deposits and interest-bearing
liabilities 81,021 44 0.22 % 79,245 14 0.07 %
1 Rates are calculated using amounts in thousands and a tax rate of 21% for the
periods presented. The taxable-equivalent rates used are the rates that were
applicable at the time of each respective reporting period.
2 The fair value of AFS securities at September 30, 2022 , and September 30,
2021 , was $23.2 billion and $20.5 billion , respectively. In addition to other
factors, the yield on AFS securities was positively impacted by the decline in
fair value.
3 Interest on total securities includes
4 Net of unamortized purchase premiums, discounts, and deferred loan fees and costs.
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Nine Months Ended Nine Months Ended
September 30, 2022 September 30, 2021
Average Amount of Average Average Amount of Average
(Dollar amounts in millions) balance interest 1 yield/rate balance interest 1 yield/rate
ASSETS
Money market investments:
Interest-bearing deposits $ 3,674 $ 15 0.55 % $ 8,162 $ 8 0.13 %
Federal funds sold and security resell
agreements 2,451 27 1.47 2,109 6 0.37
Total money market investments 6,125 42 0.92 10,271 14 0.18 Securities: Held-to-maturity 495 11 2.98 599 13 2.92 Available-for-sale 2 25,285 358 1.89 17,255 209 1.62 Trading account 343 12 4.81 213 7 4.25 Total securities 3 26,123 381 1.95 18,067 229 1.70 Loans held for sale 44 1 2.55 61 1 2.77 Loans and leases 4 Commercial - excluding PPP loans 28,060 798 3.80 24,716 705 3.81 Commercial - PPP loans 885 45 6.83 5,283 191 4.84 Commercial real estate 12,151 358 3.93 12,104 313 3.46 Consumer 10,801 272 3.37 10,315 270 3.50 Total loans and leases 51,897 1,473 3.79 52,418 1,479 3.77 Total interest-earning assets 84,189 1,897 3.01 80,817 1,723 2.85 Cash and due from banks 615 597 Allowance for loan losses (503) (651) Goodwill and intangibles 1,017 1,015 Other assets 4,618 4,106 Total assets$ 89,936 $ 85,884 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings and money market$ 37,942 $ 29 0.10 %$ 36,168 $ 16 0.06 % Time 1,505 3 0.27 2,140 7 0.44 Total interest-bearing deposits 39,447 32 0.11 38,308 23
0.08
Borrowed funds: Federal funds purchased and other short-term borrowings 1,415 18 1.73 856 1 0.07 Long-term debt 724 20 3.69 1,277 22 2.32 Total borrowed funds 2,139 38 2.39 2,133 23 1.41 Total interest-bearing liabilities 41,586 70 0.23 40,441 46
0.15
Noninterest-bearing demand deposits 40,523 36,213 Other liabilities 1,530 1,267 Total liabilities 83,639 77,921 Shareholders' equity: Preferred equity 440 516 Common equity 5,857 7,447 Total shareholders' equity 6,297 7,963 Total liabilities and shareholders' equity$ 89,936 $ 85,884 Spread on average interest-bearing funds 2.78 % 2.70 % Net impact of noninterest-bearing sources of funds 0.12 % 0.08 % Net interest margin$ 1,827 2.90 %$ 1,677 2.78 % Memo: total loans and leases, excluding PPP loans$ 51,012 1,428 3.74 %$ 47,135 1,288
3.65 %
Memo: total cost of deposits 0.05 % 0.04 % Memo: total deposits and interest-bearing liabilities 82,109 70 0.12 % 76,654 46 0.15 % 1 Rates are calculated using amounts in thousands and a tax rate of 21% for the periods presented. The taxable-equivalent rates used are the rates that were applicable at the time of each respective reporting period. 2 The fair value of AFS securities atSeptember 30, 2022 , andSeptember 30, 2021 , was$23.2 billion and$20.5 billion , respectively. In addition to other factors, the yield on AFS securities was positively impacted by the decline in fair value.
3 Interest on total securities includes
4 Net of unamortized purchase premiums, discounts, and deferred loan fees and costs.
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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.
[[Image Removed: zions-20220930_g9.jpg]][[Image Removed: zions-20220930_g10.jpg]]
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 $71 million , compared with $(46) million in the third quarter of 2021. The
ACL was $590 million at September 30, 2022 , compared with $529 million at
September 30, 2021 . The increase in the ACL was primarily due to growth in the
loan portfolio, as well as changes in economic scenarios, which were driven by
the increased probability of a recession, the effects of which were partially
offset by improvements in credit quality. The ratio of ACL to net loans and
leases (ex-PPP) was 1.10% and 1.11% at September 30, 2022 and 2021,
respectively. The provision for securities losses was less than $1 million
during the third quarter of 2022 and 2021.
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[[Image Removed: zions-20220930_g11.jpg]]
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 scenarios
and current economic conditions, which increased the ACL by $11 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,
decreased the ACL by $9 million , indicating improvements in overall credit
quality. Nonperforming assets decreased $173 million , or 53%, and classified
loans decreased $432 million , or 31%. Net loan and lease charge-offs were $27
million , or 0.21% annualized of average loans (ex-PPP), in the third quarter of
2022, compared with net recoveries of $1 million , or 0.01% annualized of average
loans (ex-PPP), in the prior year quarter.
The fourth bar represents loan portfolio changes, driven primarily by loan
growth, as well as changes in portfolio mix, the aging of the portfolio, and
other risk factors; all of which resulted in a
See "Credit Risk Management" on page 21 and Note 6 in our 2021 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 we earn 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
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NONINTEREST INCOME
Three Months Ended Nine Months Ended
September 30, Amount Percent September 30, Amount Percent
(Dollar amounts in millions) 2022 2021 change change 2022 2021 change change
Commercial account fees $ 40 $ 34 $ 6 18 % $ 118 $ 100 $ 18 18 %
Card fees 27 25 2 8 77 70 7 10
Retail and business banking fees 17 20 (3) (15) 57 55 2 4
Loan-related fees and income 18 27 (9) (33) 61 73 (12) (16)
Capital markets and foreign exchange
fees 25 17 8 47 61 49 12 24
Wealth management fees 14 13 1 8 41 37 4 11
Other customer-related fees 15 15 - - 46 39 7 18
Customer-related noninterest income 156 151 5 3 461 423 38 9
Fair value and nonhedge derivative
income 4 2 2 NM 20 15 5 33
Dividends and other income (loss) (1) 9 (10) NM 8 24 (16) (67)
Securities gains (losses), net 6 (23) 29 NM (10) 51 (61) NM
Noncustomer-related noninterest
income 9 (12) 21 NM 18 90 (72) (80)
Total noninterest income $ 165 $ 139 $ 26 19 % $ 479 $ 513 $ (34) (7) %
Customer-related
Total customer-related noninterest income increased $5 million , or 3%, from the
prior year quarter, driven by increases in capital markets and foreign exchange
fees, commercial account fees, card fees, and wealth management fees. Capital
markets and foreign exchange fees benefited from improved customer swap, foreign
exchange, and syndication activity. These increases were partially offset by a
decrease in loan-related fees, primarily due to an increased proportion of our
1-4 family residential mortgage production being retained versus sold, and a
decrease in retail and business banking fees. The latter decrease was due
largely to previously disclosed changes in our overdraft and non-sufficient
funds practices, including the rate and frequency with which we assess related
fees. These changes were effected early in the third quarter of 2022.
Noncustomer-related
Total noncustomer-related noninterest income increased$21 million , relative to the prior year quarter. Net securities gains increased$29 million , due largely to unrealized losses recorded during the prior year period related to our SBIC investment in Recursion Pharmaceuticals, Inc. Dividends and other income (loss) decreased$10 million from the prior year period, primarily due to a$6 million valuation loss recognized on one of our equity investments in the current period. 13 --------------------------------------------------------------------------------
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Noninterest Expense
The following schedule presents a comparison of the major components of
noninterest expense.
NONINTEREST EXPENSE
Three Months Ended Nine Months Ended
September 30, Amount Percent September 30, Amount Percent
(Dollar amounts in millions) 2022 2021 change change 2022 2021 change change
Salaries and employee benefits $ 312 $ 285 $ 27 9 % $ 931 $ 845 $ 86 10 %
Technology, telecom, and 53 50 3 6 158 148 10 7
information processing
Occupancy and equipment, net 38 37 1 3 112 115 (3) (3)
Professional and legal services 14 17 (3) (18) 42 56 (14) (25)
Marketing and business 11 9 2 22 28 22 6 27
development
Deposit insurance and regulatory 13 8 5 63 36 25 11 44
expense
Credit-related expense 8 7 1 14 22 19 3 16
Other real estate expense, net - - - NM 1 - 1 NM
Other 30 16 14 88 77 62 15 24
Total noninterest expense
12 % $ 1,407 $ 1,292 $ 115 9 %
Adjusted noninterest expense 1
10 % $ 1,404 $ 1,291 $ 113 9 %
1 For information on non-GAAP financial measures, see "Non-GAAP Financial Measures" on page 33.
Total noninterest expense increased$50 million , or 12%, relative to the prior year quarter. Salaries and benefits expense increased$27 million , or 9%, due to the impact of inflationary and competitive labor market pressures on wages and benefits, increased headcount, and increased incentive compensation accruals arising from improvements in anticipated full-year profitability. Other noninterest expense increased$14 million , primarily due to the reversal of a success fee accrual in the prior year period related to our SBIC investment in Recursion Pharmaceuticals, Inc., as well as increased travel and certain other expenses incurred during the current period. Deposit insurance and regulatory expense increased$5 million , driven largely by a higherFederal Deposit Insurance Corporation ("FDIC") insurance assessment resulting from changes in the balance sheet composition.
Professional and legal services expense decreased
The efficiency ratio was 57.6%, compared with 59.8%, as growth in net revenue outpaced growth in noninterest expense. For information on non-GAAP financial measures, including differences between noninterest expense and adjusted noninterest expense, see page 33.
Income Taxes
The following schedule summarizes the income tax expense and effective tax rates
for the periods presented:
INCOME TAXES
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollar amounts in millions) 2022 2021 2022 2021
Income before income taxes $ 278 $ 311 $ 793 $ 1,177
Income tax expense 61 71 170 261
Effective tax rate 21.9 % 22.8 % 21.4 % 22.2 %
See Note 12 of the Notes to Consolidated Financial Statements for more information about the factors that influenced the income tax rates as well as information about deferred income tax assets and liabilities.
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Preferred Stock Dividends
Preferred stock dividends totaled
Technology Spend As the banking industry continues to move toward information technology-based products and services, we recognize there are disparate ways of discussing expenditures associated with technology-related investments and operations. We generally describe these expenditures as total technology spend, which 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. We believe these disclosures provide more relevant presentation and discussion regarding our technology-related investments and operations.
Total technology spend represents expenditures for technology systems and infrastructure and 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 expenses - 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 provides information related to our technology spend:
TECHNOLOGY SPEND
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2022 2021 2022 2021
Technology, telecom, and information processing expense
52 48 152 140
Technology investments 21 28 65 80
Less: related amortization and depreciation (14) (13) (41) (40)
Total technology spend $ 112 $ 113 $ 334 $ 328 Total technology spend remained relatively flat compared with the prior year period, as increases in related expenses were offset by reduced technology investments.
BALANCE SHEET ANALYSIS Interest-Earning Assets Interest-earning assets are assets that 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 11.
Investment Securities Portfolio
We invest in securities to generate interest income and to actively manage
liquidity, interest rate, and credit risk. Refer to the "Liquidity Risk
Management" section on page 32 for additional information about how we manage
our liquidity risk. See 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.
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The following schedule presents the components of our investment securities portfolio.
INVESTMENT SECURITIES PORTFOLIO
September 30, 2022 December 31, 2021
Estimated Estimated
Amortized fair Amortized fair
(In millions) Par value cost value Par value cost value
Held-to-maturity
Municipal securities $ 423 $ 423 $ 379 $ 441 $ 441 $ 443
Available-for-sale
U.S. Treasury securities 555 557 394 155 155 134
U.S. Government agencies and corporations:
Agency securities 859 851 807 833 833 845
Agency guaranteed mortgage-backed securities 23,002 23,162 19,566 20,340 20,549 20,387
Small Business Administration loan-backed
securities 740 793 766 867 938 912
Municipal securities 1,611 1,780 1,626 1,489 1,652 1,694
Other debt securities 75 75 74 75 75 76
Total available-for-sale 26,842 27,218 23,233 23,759 24,202 24,048
Total HTM and AFS investment securities $ 27,265 $ 27,641 $ 23,612 $ 24,200 $ 24,643
The amortized cost of total held-to-maturity ("HTM") and AFS investment
securities increased
AtSeptember 30, 2022 , the investment securities portfolio includes$376 million of net premium that is distributed across the various asset classes. Total taxable-equivalent premium amortization for our investment securities was$27 million for the third quarter of 2022, compared with$29 million for the same prior year period. In addition to HTM and AFS securities, we also have a Trading securities portfolio of$526 million and$372 million , atSeptember 30, 2022 andDecember 31, 2021 , respectively, which is comprised primarily of municipal securities and money market sweep transactions for customers. Refer to the "Capital Management" section on page 33 and Note 5 of the Notes to Consolidated Financial Statements for more discussion regarding our investment securities portfolio and related unrealized gains and losses.
In
Municipalities
We provide products and services to state and local governments (referred to
collectively as "municipalities"), including deposit services, loans, and
investment banking services. We also invest in securities issued by
municipalities. The following schedule summarizes our exposure to state and
local municipalities:
EXPOSURE TO MUNICIPALITIES
September 30, December 31,
(In millions) 2022 2021
Loans and leases $ 4,224 $ 3,658
Held-to-maturity securities 423 441
Available-for-sale securities 1,626 1,694
Trading account securities 302
355
Unfunded lending commitments 337
280
Total direct exposure to municipalities
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. Our municipal loans and securities primarily relate to municipalities located within our geographic footprint.
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AtSeptember 30, 2022 , no municipal loans were 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. AtSeptember 30, 2022 , 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.
Loan and Lease Portfolio
AtSeptember 30, 2022 andDecember 31, 2021 , the ratio of loans and leases to total assets was 61% and 55%, respectively. The largest loan category was commercial and industrial loans, which constituted 29% and 27% of our total loan portfolio for the same periods. The following schedule presents our loans and leases according to major portfolio segment, specific loan class, and percentage of total loans: LOAN AND LEASE PORTFOLIO September 30, 2022 December 31, 2021 % of % of (Dollar amounts in millions) Amount total loans Amount total loans Commercial: Commercial and industrial$ 15,656 29.0 %$ 13,867 27.3 % PPP 306 0.6 1,855 3.6 Leasing 347 0.7 327 0.6 Owner-occupied 9,279 17.2 8,733 17.2 Municipal 4,224 7.8 3,658 7.2 Total commercial 29,812 55.3 28,440 55.9 Commercial real estate: Construction and land development 2,800 5.2 2,757 5.4 Term 9,556 17.7 9,441 18.6 Total commercial real estate 12,356 22.9 12,198 24.0 Consumer: Home equity credit line 3,331 6.2 3,016 5.9 1-4 family residential 6,852 12.7 6,050 11.9 Construction and other consumer real estate 973 1.8 638 1.3 Bankcard and other revolving plans 471 0.9 396 0.8 Other 123 0.2 113 0.2 Total consumer 11,750 21.8 10,213 20.1 Total net loans and leases$ 53,918 100.0 %$ 50,851 100.0 % The loan and lease portfolio increased$3.1 billion fromDecember 31, 2021 . Excluding PPP loans, commercial loans increased$2.9 billion , or 11%, driven largely by increases in commercial and industrial loans, municipal loans, and owner-occupied loans of$1.8 billion ,$566 million , and$546 million , respectively. Consumer loans increased$1.5 billion , primarily due to increases in 1-4 family residential loans, construction and other consumer real estate loans, and home equity credit lines of$802 million ,$335 million , and$315 million , respectively. 17 --------------------------------------------------------------------------------
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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
September 30, December 31, Amount
(Dollar amounts in millions) 2022 2021 change Percent change
Bank-owned life insurance $ 543 $ 537 $ 6 1 %
Federal Home Loan Bank stock 151 11 140 NM
Federal Reserve stock 69 81 (12) (15)
Farmer Mac stock 19 19 - -
SBIC investments 169 179 (10) (6)
Other 32 24 8 33
Total other noninterest-bearing investments $ 983 $ 851 $ 132 16 %
Total other noninterest-bearing investments increased $132 million , or 16%,
during the first nine months of 2022, primarily due to a $140 million increase
in Federal Home Loan Bank ("FHLB") stock. This increase was driven largely by
increases in FHLB short-term borrowings during the third quarter of 2022 as a
result of loan growth and declines in interest-bearing deposits.
Premises, Equipment, and Software
Net premises, equipment, and software increased$69 million , or 5%, fromDecember 31, 2021 , primarily due to capitalized costs related to the construction of a new corporate technology center inMidvale, Utah , which was completed inJuly 2022 , and a new corporate center forVectra Bank Colorado ("Vectra") inDenver, Colorado , which is expected to be completed in the fourth quarter of 2022. We are also in the final phase of a three-phase project to replace our core loan and deposit banking systems, and are on track to convert our deposit servicing system in 2023. Capitalized costs associated with the core system replacement project generally carry a useful life of ten years, and are summarized in the following schedule.
CAPITALIZED COSTS ASSOCIATED WITH THE CORE SYSTEM REPLACEMENT PROJECT
September 30, 2022
(In millions) Phase 1 Phase 2 Phase 3 Total
Total amount of capitalized costs, less accumulated
depreciation $ 32 $ 57 $ 190 $ 279
Deposits
Deposits are a primary funding source. The following schedule presents our deposits by category and percentage of total deposits:
DEPOSITS
September 30, 2022 December 31, 2021
% of % of
(Dollar amounts in millions) Amount total deposits Amount total deposits
Noninterest-bearing demand $ 39,133 51.5 % $ 41,053 49.6 %
Interest-bearing:
Savings and money market 35,389 46.6 40,114 48.4
Time 1,473 1.9 1,622 2.0
Total deposits $ 75,995 100.0 % $ 82,789 100.0 %
Total deposits decreased $6.8 billion , or 8%, from December 31, 2021 , primarily
due to a $4.9 billion decrease in interest-bearing deposits, and a $1.9 billion
decrease in noninterest-bearing deposits. Total deposits included $166
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million and$381 million of brokered deposits atSeptember 30, 2022 andDecember 31, 2021 , respectively. Additionally, total deposits atSeptember 30, 2022 included approximately$400 million of deposit balances acquired from the purchase of three Northern Nevada branches during the third quarter of 2022. See "Liquidity Risk Management" on page 32 for additional information on funding and borrowed funds. Total time deposits that exceed the currentFDIC insurance limit of$250,000 were$420 million and$563 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The estimated total amount of uninsured deposits, including related interest accrued and unpaid, was$44 billion and$49 billion atSeptember 30, 2022 andDecember 31, 2021 , respectively.
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 reduce 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, cyber risk, capital/financial reporting risk, legal/compliance risk (including regulatory risk), and reputational risk. These risks are overseen by the various management committees of which the Enterprise Risk Management Committee is the focal point. For a more comprehensive discussion of these risks, see "Risk Factors" in our 2021 Form 10-K.
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. For a more comprehensive discussion of our credit risk management, see "Credit Risk Management" in our 2021 Form 10-K.
We participate in various guaranteed lending programs sponsored byUnited States ("U.S.") government agencies, such as the SBA,Federal Housing Authority ,U.S. Department of Veterans Affairs ,Export-Import Bank of the U.S ., and theU.S. Department of Agriculture . AtSeptember 30, 2022 ,$740 million of related loans were guaranteed, primarily by the SBA, and included$306 million of PPP loans. The following schedule presents the composition ofU.S. government agency guaranteed loans.
September 30, Percent December 31, Percent
(Dollar amounts in millions) 2022 guaranteed 2021 guaranteed
Commercial $ 844 86 % $ 2,410 95 %
Commercial real estate 18 72 22 73
Consumer 4 100 5 100
Total loans $ 866 85 % $ 2,437 94 %
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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, 2022 December 31, 2021
(Dollar amounts in millions) Amount Percent Amount Percent
Finance and insurance $ 2,853 9.6 % $ 2,303 8.1 %
Real estate, rental and leasing 2,703 9.1 2,536 8.9
Retail trade 2,663 8.9 2,412 8.5
Manufacturing 2,414 8.1 2,374 8.3
Healthcare and social assistance 2,374 8.0 2,349 8.2
Public Administration 2,254 7.5 1,959 6.9
Wholesale trade 1,908 6.4 1,701 6.0
Transportation and warehousing 1,387 4.6 1,273 4.5
Construction 1,339 4.5 1,456 5.1
Utilities 2 1,331 4.5 1,446 5.1
Educational services 1,310 4.4 1,163 4.1
Hospitality and food services 1,243 4.2 1,353 4.8
Mining, quarrying, and oil and gas extraction 1,237 4.1 1,185 4.2
Other Services (except Public Administration) 1,075 3.6 1,213 4.2
Professional, scientific, and technical 972 3.3 1,084 3.8
services
Other 3 2,749 9.2 2,633 9.3
Total $ 29,812 100.0 % $ 28,440 100.0 %
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 2.9%.
Commercial Real Estate Loans
The following schedules present credit quality information for our commercial real estate ("CRE") loan portfolio segmented by real estate category and collateral location.
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COMMERCIAL REAL ESTATE PORTFOLIO BY LOAN TYPE AND COLLATERAL LOCATION (Dollar amounts in
September 30, 2022 millions)
Collateral Location
Utah/
Loan type Arizona California Colorado Nevada Texas Idaho Wash-ington Other 1 Total % of total CRE
Commercial term
Balance outstanding $ 1,092 $ 3,147 $ 490 $ 685 $ 1,561 $ 1,600 $ 627 $ 354 $ 9,556 77.3 % % of loan type 11.4 % 32.9 % 5.1 % 7.2 % 16.3 % 16.8 % 6.6 % 3.7 % 100.0 % Delinquency rates 2: 30-89 days - % 0.1 % 0.4 % - % 0.1 % - % - % - % 0.1 % ? 90 days - % - % - % - % 1.0 % - % - % - % 0.2 % Nonaccrual loans $ -$ 3 $ - $ -$ 15 $ - $ -$ 1 $ 19 Commercial construction and land development Balance outstanding$ 226 $ 460$ 62 $ 79 $ 373 $ 584 $ 252$ 55 $ 2,091 16.9 % % of loan type 10.8 % 22.0 % 3.0 % 3.8 % 17.9 % 27.9 % 12.0 % 2.6 % 100.0 % Delinquency rates 2: 30-89 days - % - % - % - % - % - % - % - % - % ? 90 days - % - % - % - % - % - % - % - % - % Residential construction and land development 3 Balance outstanding$ 64 $ 136$ 46 $ 1 $ 206 $ 204 $ 9$ 43 $ 709 5.8 % % of loan type 9.0 % 19.1 % 6.5 % 0.2 % 29.0 % 28.8 % 1.3 %
6.1 % 100.0 %
Total construction and land development$ 290 $ 596$ 108 $ 80 $ 579 $ 788 $ 261$ 98 $ 2,800 Total CRE$ 1,382 $ 3,743 $ 598 $ 765 $ 2,140 $ 2,388 $ 888$ 452 $ 12,356 100.0 % (Dollar amounts in December 31, 2021 millions)
Collateral Location
Utah/
Loan type Arizona California Colorado Nevada Texas Idaho Wash-ington Other 1 Total % of total CRE
Commercial term
Balance outstanding $ 1,038 $ 3,331 $ 508 $ 653 $ 1,606 $ 1,408 $ 444 $ 453 $ 9,441 77.4 % % of loan type 11.0 % 35.3 % 5.4 % 6.9 % 17.0 % 14.9 % 4.7 % 4.8 % 100.0 % Delinquency rates 2: 30-89 days - % 0.2 % 0.2 % - % - % 0.1 % - % - % 0.1 % ? 90 days - % 0.1 % - % - % 0.2 % - % - % - % 0.1 % Nonaccrual loans $ -$ 3 $ - $ -$ 17 $ - $ - $ -$ 20 Commercial construction and land development Balance outstanding$ 242 $ 405$ 94 $ 107 $ 475 $ 543 $ 181$ 40 $ 2,087 17.1 % % of loan type 11.6 % 19.4 % 4.5 % 5.1 % 22.8 % 26.0 % 8.7 % 1.9 % 100.0 % Delinquency rates 2: 30-89 days - % - % - % - % - % - % 13.2 % - % 0.9 % ? 90 days - % - % - % - % - % - % - % - % - % Residential construction and land development 3 Balance outstanding$ 82 $ 167$ 44 $ 2 $ 162 $ 167 $ 9$ 37 $ 670 5.5 % % of loan type 12.3 % 25.0 % 6.6 % 0.2 % 24.2 % 24.9 % 1.3 %
5.5 % 100.0 %
Total construction and land development$ 324 $ 572$ 138 $ 109 $ 637 $ 710 $ 190$ 77 $ 2,757 Total CRE$ 1,362 $ 3,903 $ 646 $ 762 $ 2,243 $ 2,118 $ 634$ 530 $ 12,198 100.0 %
1 No other geography exceeds
2 Delinquency rates include nonaccrual loans.
3At
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AtSeptember 30, 2022 andDecember 31, 2021 , our CRE construction and land development and term loan portfolios represented approximately 23% and 24% of the total loan portfolio, respectively. The majority of our CRE loans are secured by real estate, which is primarily located within our geographic footprint. AtSeptember 30, 2022 , approximately 21% of the CRE loan portfolio matures in the next 12 months. Construction and land development loans generally mature in 18 to 36 months and contain full or partial recourse guarantee structures with one- to five-year extension options or roll-to-perm options that often result in term debt. 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. AtSeptember 30, 2022 andDecember 31, 2021 , approximately$257 million , or 9%, and$160 million , or 6%, of the commercial construction and land development portfolio consisted of land acquisition and development loans, respectively. Most of these loans are secured by specific retail, apartment, office, or other projects. For a more comprehensive discussion of CRE loans, see the "Commercial Real Estate Loans" section in our 2021 Form 10-K.
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.
We also originate home equity credit lines. At
HECL PORTFOLIO BY
September 30,
(In millions) 2022 December 31, 2021
Secured by first liens $ 1,517 $ 1,503
Secured by second (or junior) liens 1,814 1,513
Total $ 3,331 $ 3,016
At September 30, 2022 , 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 high credit scores.
Approximately 91% of our HECL portfolio is still in the draw period, and about
19% 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 minimal.
The ratio of HECL net charge-offs (recoveries) for the trailing twelve months to
average balances at September 30, 2022 and December 31, 2021 was (0.03)% and
(0.01)%, 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 as a percentage of loans and leases and other real estate
owned ("OREO") decreased to 0.28% at September 30, 2022 , compared with 0.53% at
December 31, 2021 .
Total nonaccrual loans at September 30, 2022 decreased to $151 million from $271
million at December 31, 2021 , reflecting credit quality improvements across most
of our loan portfolios.
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The balance of nonaccrual loans can decrease due to paydowns, charge-offs, and the return of loans to accrual status under certain conditions. If a nonaccrual loan is refinanced or restructured, the new note is immediately placed on nonaccrual. If a restructured loan performs under the new terms for a period of at least six months, the loan can be considered for return to accrual status. See "Restructured Loans" and Note 6 of the Notes to Consolidated Financial Statements for more information on nonaccrual loans.
The following schedule presents our nonperforming assets:
NONPERFORMING ASSETS
September 30, December 31,
(Dollar amounts in millions) 2022 2021
Nonaccrual loans 1 $ 151 $ 271
Other real estate owned 2 - 1
Total nonperforming assets $
151
0.28 % 0.53 %
Accruing loans past due 90 days or more $ 20 $ 8 Ratio of accruing loans past due 90 days or more to loans and leases 1
0.04 % 0.02 %
Nonaccrual loans1 and accruing loans past due 90 days or more
0.55 %
Accruing loans past due 30-89 days 3 $
84
67.2 %
1 Includes loans held for sale.
2 Does not include banking premises held for sale.
3 Includes$31 million and$35 million of PPP loans atSeptember 30, 2022 andDecember 31, 2021 , respectively, which we expect will be paid in full by either the borrower or the SBA.
Troubled Debt Restructured Loans
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 classified as troubled debt restructurings ("TDRs").
At September 30, 2022 and December 31, 2021 , TDRs totaled $245 million and $326
million , respectively. Modifications that qualified for applicable accounting
and regulatory exemption for borrowers experiencing financial difficulties
exclusively related to the COVID-19 pandemic were not classified and reported as
TDRs.
If the restructured loan 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 restructuring is taken into account to
determine whether a loan should be returned to accrual status.
ACCRUING AND NONACCRUING TROUBLED DEBT RESTRUCTURED LOANS
September 30, December 31,
(In millions) 2022 2021
Restructured loans - accruing $ 206 $ 221 Restructured loans - nonaccruing
39 105
Total $ 245 $ 326
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In the periods following the calendar year in which a loan was restructured, a loan may no longer be reported as a TDR if it is accruing, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time of the modification or restructure). See Note 6 of the Notes to Consolidated Financial Statements for additional information regarding TDRs.
TROUBLED DEBT RESTRUCTURED LOANS ROLLFORWARD
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2022 2021 2022 2021
Balance at beginning of period $ 275 $ 458 $ 326 $ 311
New identified TDRs and principal 15 17
increases 42 200
Payments and payoffs (41) (33) (103) (64)
Charge-offs (3) - (5) (3)
No longer reported as TDRs - (86) (3) (86)
Sales and other (1) (4) (12) (6)
Balance at end of period $ 245 $ 352 $ 245 $ 352
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.
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The following schedule shows the changes in the ACL and a summary of credit loss experience:
SUMMARY OF CREDIT LOSS EXPERIENCE
Nine Months Ended Twelve Months Ended Nine Months Ended
(Dollar amounts in millions) September 30, 2022 Loans and leases outstanding $ 53,918 $ 50,851 $ 50,678 Average loans and leases outstanding: Commercial - excluding PPP loans 28,060 25,014 24,716 Commercial - PPP loans 885 4,566 5,283 Commercial real estate 12,151 12,136 12,104 Consumer 10,801 10,267 10,315
Total average loans and leases outstanding $ 51,897
$ 51,983 $ 52,418 Allowance for loan and lease losses: Balance at beginning of period $ 513 $ 777 $ 777 Provision for loan losses 70 (258) (281) Charge-offs: Commercial 65 35 27 Commercial real estate - - - Consumer 8 13 10 Total 73 48 37 Recoveries: Commercial 21 29 24 Commercial real estate - 3 - Consumer 10 10 8 Total 31 42 32 Net loan and lease charge-offs 42 6 5 Balance at end of period $ 541 $ 513 $ 491 Reserve for unfunded lending commitments: Balance at beginning of period $ 40 $ 58 $ 58 Provision for unfunded lending commitments 9 (18) (20) Balance at end of period $ 49 $ 40 $ 38 Total allowance for credit losses: Allowance for loan and lease losses $ 541 $ 513 $ 491 Reserve for unfunded lending commitments 49 40 38 Total allowance for credit losses $ 590 $ 553 $ 529 Ratio of allowance for credit losses to net loans and leases, at period end 1 1.09 % 1.09 % 1.04 % Ratio of allowance for credit losses to nonaccrual loans, at period end 391 % 204 % 164 % Ratio of allowance for credit losses to nonaccrual loans and accruing loans past due 90 days or more, at period end 345 % 198 % 162 % Ratio of total net charge-offs to average loans and leases 2, 3 0.11 % 0.01 % 0.01 % Ratio of commercial net charge-offs to average commercial loans 3 0.20 % 0.02 % 0.01 % Ratio of commercial real estate net charge-offs to average commercial real estate loans 3 - % (0.02) % - % Ratio of consumer net charge-offs to average consumer loans 3 (0.02) % 0.03 % 0.03 %
1 The ratio of allowance for credit losses to net loans and leases (excluding
PPP loans) was 1.10% at
2 The annualized ratio of net charge-offs to average loans and leases (excluding
PPP loans) was 0.11% at
3 Ratios are annualized for the periods presented except for the period representing the full twelve months.
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The total ACL increased to$590 million , from$553 million , during the first nine months of 2022, primarily due to growth in the loan portfolio, as well as changes in economic scenarios, which were driven by the increased probability of a recession, the effects of which were partially offset by improvements in credit quality. The RULC represents a reserve for potential losses associated with off-balance sheet commitments and increased$9 million during the first nine months of 2022. The reserve is separately recorded on the consolidated balance sheet in "Other liabilities," and any related increases or decreases in the reserve are recorded on the consolidated income statement in "Provision for unfunded lending commitments."
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.
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 2021 Form 10-K.
Interest Rate Risk
Average total deposits remained relatively flat at$77.5 billion , compared with the prior year period. During 2021, deposits increased and were primarily invested in fixed-rate, medium-duration AFS securities. The investment in these securities relative to short-duration money market funds resulted in higher earning-asset yields, increased net interest income, and decreased asset sensitivity to rising 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. We anticipate that changes in deposit rates will lag changes in reference rates. Our modeled cost of total deposits forSeptember 2023 is approximately 0.63% without the effect of additionalFederal Reserve rate hikes. Additional rate hikes would be expected to result in further increases to the cost of total deposits. Actual results may differ materially due to various factors, including the shape of the yield curve, competitive pricing, money supply, our credit worthiness, etc. We use our historical experience as well as industry data to inform our assumptions. The migration and correlation assumptions previously discussed result in deposit durations presented in the following schedule: DEPOSIT ASSUMPTIONS September 30, 2022 Effective duration Effective duration Product (unchanged) (+200 bps) Demand deposits 3.2 % 3.0 % Money market 1.8 % 1.6 % Savings and interest-bearing checking 2.6 % 2.4 % 26
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As the more rate sensitive deposits have runoff, the effective duration of deposits has lengthened due to remaining deposits assumed to be stickier and less rate sensitive.
Additionally, we utilize derivatives to manage interest rate risk. The following schedule presents derivatives that are designated in qualifying hedging relationships atSeptember 30, 2022 . 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. 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
2022 2023 2024
Fourth(Dollar amounts in millions) Quarter First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter 4Q24 - 3Q25
3Q25 - 2Q26
Cash flow hedges
Cash flow asset hedges 1
Average outstanding notional $ 7,336 $ 7,300 $
6,833 $ 6,533 $ 6,233 $ 5,800 $ 5,466 $ 5,033
$ 2,221 Weighted-average fixed-rate received 1.77 % 1.84 % 1.83 % 1.79 % 1.71 % 1.61 % 1.57 % 1.50 % 1.57 % 1.68 % 2022 4 2023 2024 2025 2026 2027 2028 2029 2030 2031 Fair value hedges Fair value debt hedges 2 Average outstanding notional$ 500 $ 500 $
500
$ 500
-
Weighted-average fixed-rate received 1.70 % 1.70 % 1.70 % 1.70 % 1.70 % 1.70 % 1.70 % 1.70 % - % - % Fair value asset hedges 3 Average outstanding notional$ 828 $ 827 $
1,099
1,192
Weighted-average fixed-rate paid 1.65 % 1.65 % 1.71 % 1.74 % 1.74 % 1.74 % 1.73 % 1.73 % 1.73 % 1.73 %
1 Cash flow hedges consist of receive-fixed swaps hedging pools of floating rates loans.
2 Fair value debt hedges consist of receive-fixed swaps hedging fixed-rate debt. The$500 million fair value debt hedge matures at the end ofJuly 2029 . Amounts for 2029 have not been prorated to reflect this hedge maturing during the year.
3 Fair value assets hedges consist of pay-fixed swaps hedging AFS fixed-rate securities. Increases in average outstanding notional are due to forward-starting interest rate swaps.
4 Represents the fourth quarter of 2022.
Incorporating the 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 economic
value of equity ("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.
INCOME SIMULATION - CHANGE IN NET INTEREST INCOME AND CHANGE IN ECONOMIC VALUE
OF EQUITY
September 30, 2022 December 31, 2021
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
Earnings at Risk (4.2) % - % 4.1 % 8.2 % 12.2 % (5.2) % - % 11.2 % 22.7 % 33.6 %
(EaR)
Economic Value of Equity 4.0 % - % (2.0) % (4.1) % (6.1) % 20.9 % - % 0.8 % (0.5) % (1.2) %
(EVE)
1 Assumes rates cannot go below zero in the negative rate shift.
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The asset sensitivity, as measured by EaR, decreased during the third quarter of 2022, primarily due to (1) deposit runoff, (2) an increase in receive-fixed-rate swap notional, and (3) a higher level of "base-case" net interest income, which reduced the percentage change for the same modeled dollar change in net interest income. For interest-bearing deposits with indeterminate maturity, the weighted average modeled beta is 26%. If the weighted average deposit beta were to increase to 36%, the EaR in the +100 bps rate shock would change from 4.1% to 3.0%. The EaR analysis focuses on parallel rate shocks across the term structure of benchmark interest rates. In a non-parallel rate scenario where the overnight rate increases 200 bps, but the ten-year rate increases only 30 bps, the increase in EaR is modeled to be approximately two-thirds of the change associated with the parallel +200 bps rate change. We recognize that 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 (ex-PPP), 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 add approximately 10% to net interest income in the third quarter of 2023, compared with the third quarter of 2022 (ex-PPP). 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 atSeptember 30, 2022 , we expect emergent sensitivity to add approximately 4% to the latent sensitivity level of net interest income. Our focus on business banking also plays a significant role in determining the nature of our asset-liability management posture. AtSeptember 30, 2022 ,$24.3 billion of our commercial lending and CRE loan balances were scheduled to reprice in the next six months. Of these variable-rate loans, approximately 97% are tied to either the prime rate, London Interbank Offered Rate ("LIBOR"), Secured Overnight Financing Rate ("SOFR"), American Interbank Offered Rate ("AMERIBOR"), orBloomberg Short -term Bank Yield ("BSBY"). For these variable-rate loans, we have executed$7.1 billion of cash flow hedges by receiving fixed rates on interest rate swaps. AtSeptember 30, 2022 , 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.
LIBOR Exposure
LIBOR is being phased out globally, andU.S. banking regulators instructed banks to cease entering into new lending arrangements using LIBOR no later thanDecember 31, 2021 , and migrate to alternative reference rates no later thanJune 2023 . To facilitate the transition process, we instituted an enterprise-wide program to identify, assess, and monitor risks associated with the expected discontinuance or unavailability of LIBOR, which includes active engagement with industry working groups and regulators. This program also includes active involvement of senior management with regular engagement from the Enterprise Risk Management Committee, and seeks to minimize client and internal business operational impacts, while providing reporting transparency, consistency, and a central governance model that aligns with accounting and regulatory guidance. 28 --------------------------------------------------------------------------------
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We have implemented processes, procedures, and systems to ensure contract risk is sufficiently mitigated. New originations, and any modifications or renewals of LIBOR-based contracts, contain fallback language to facilitate transition to an alternative reference rate. For our contracts that referenced LIBOR and had a duration beyondJune 2023 , all fallback provisions and variations were identified and classified based upon those provisions. By the end of 2021, we had discontinued substantially all new originations and any renewals or modifications referencing LIBOR. We have a significant number of assets and liabilities that reference LIBOR. AtSeptember 30, 2022 , we had$20.3 billion in loans (mainly commercial loans), unfunded lending commitments, and securities referencing LIBOR. The amount of borrowed funds referencing LIBOR atSeptember 30, 2022 was less than$1 billion . These amounts exclude derivative assets and liabilities on the consolidated balance sheet. AtSeptember 30, 2022 , the notional amount of our LIBOR-referenced interest rate derivative contracts was$10.0 billion , of which nearly all related to contracts with central counterparty clearinghouses. The adoption of alternative reference rates continues to evolve in the marketplace. We are positioned to support our customers' needs by accommodating multiple alternative reference rates, including the Constant Maturity Treasury ("CMT") rate, the FHLB rate, AMERIBOR, SOFR, and BSBY. During the first quarter of 2022, we began to prompt our customers to voluntarily modify their contracts and migrate to a reference rate other than LIBOR. Voluntary modifications are expected to qualify for the available Tax Safe-Harbor provisions as allowed by Internal Revenue Service ("IRS") guidance. We expect that customers who voluntarily migrate to an alternative reference rate will do so by the end of this year, and we expect the remaining customers to move to an alternative rate index in accordance with the relevant fallback provisions in their contracts prior toJune 2023 . For more information on the transition from LIBOR, see Risk Factors in our 2021 Form 10-K.
Market Risk - Fixed Income
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.
AtSeptember 30, 2022 , we had$526 million of trading assets and$34 million of securities sold, not yet purchased, compared with$372 million and$254 million atDecember 31, 2021 , respectively. We are exposed to market risk through changes in fair value. This includes market risk for interest rate swaps used to hedge interest rate risk. 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 ("AOCI") for each financial reporting period. The after-tax change in AOCI attributable to AFS securities decreased$909 million and$2.7 billion for the three and nine months endedSeptember 30, 2022 , respectively, due largely to increased interest rates. Refer to Note 5 of the Notes to Consolidated Financial Statements for more discussion regarding our investment securities portfolio and related unrealized gains and losses. As discussed in the Net Interest Income and NIM section above, our deposit costs are well controlled, reflecting the granularity of our deposit base and the extent of our noninterest-bearing deposits. This funding advantage is more pronounced in a rising interest rate environment, creating meaningful economic value that is not fully reflected on our balance sheet since deposits and related intangible assets are not recorded at fair value for accounting purposes.
Market Risk - Equity Investments
We hold both direct and indirect investments in predominantly pre-public companies, primarily through various 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$169 million and$179 million atSeptember 30, 2022 andDecember 31, 2021 , 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 29 --------------------------------------------------------------------------------
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additional market risk. See Note 3 of our 2021 Form 10-K for additional information regarding the valuation of our SBIC investments.
Liquidity Risk Management
Overview
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. Sources of liquidity include deposits, borrowings, equity, and unencumbered assets, such as marketable loans and investment securities. For a more comprehensive discussion of our liquidity risk management, see "Liquidity Risk Management" in our 2021 Form 10-K. Our AFS investment securities are primarily held as a source of contingent liquidity. We target securities that can be readily turned into cash through repurchase agreements or sales. We manage our short-term funding needs through secured borrowing with securities pledged as collateral. AtSeptember 30, 2022 , our investment securities portfolio of$24.2 billion and cash and money market investments of$4.6 billion , collectively comprised 33% of total assets, compared with$24.9 billion of investment securities, and$13.0 billion of cash and money market investments, collectively comprising 41% of total assets atDecember 31, 2021 .
Liquidity Management Actions
For the first nine months of 2022, the primary sources of cash came from a decrease in money market investments, an increase in short-term funds borrowed, and net cash provided by operating activities. Uses of cash during the same period included primarily an increase in investment securities, an increase in loans and leases, and redemption of long-term debt. Cash payments for interest were$63 million and$61 million for the first nine months of 2022 and 2021, respectively. Total deposits were$76.0 billion atSeptember 30, 2022 , compared with$82.8 billion atDecember 31, 2021 . The decrease in deposits was primarily due to a$4.7 billion decrease in savings and money market deposits, and a$1.9 billion decrease in noninterest-bearing demand deposits. Our core deposits, consisting of noninterest-bearing demand deposits, savings and money market deposits, and time deposits under$250,000 , were$75.5 billion atSeptember 30, 2022 , compared with$81.9 billion atDecember 31, 2021 . AtSeptember 30, 2022 , our loan-to-deposit ratio was 71%, compared with 61% atDecember 31, 2021 . 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 received from various rating agencies. Our credit ratings are presented in the following schedule: CREDIT RATINGS as ofOctober 31, 2022 : Long-term issuer/senior Rating agency Outlook debt rating Subordinated debt rating Short-term debt rating Kroll Positive A- BBB+ K2 S&P Stable BBB+ BBB NR Fitch Stable BBB+ BBB F1 Moody's Stable Baa1 NR NR The FHLB system and Federal Reserve Banks have been, and continue to be, a significant source of back-up liquidity and funding. We are a member of the FHLB ofDes Moines , which allows member banks to borrow against their eligible loans and securities to satisfy liquidity and funding requirements. We are required to invest in FHLB andFederal Reserve stock to maintain our borrowing capacity. AtSeptember 30, 2022 , our total investment in FHLB andFederal Reserve stock was$151 million and$69 million , respectively, compared with$11 million and$81 million atDecember 31, 2021 . 30 --------------------------------------------------------------------------------
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The amount available for additional FHLB andFederal Reserve borrowings was$15.9 billion atSeptember 30, 2022 , compared with$18.3 billion atDecember 31, 2021 . Loans with a carrying value of$27.6 billion and$26.8 billion atSeptember 30, 2022 andDecember 31, 2021 , respectively, were pledged at the FHLB and theFederal Reserve as collateral for current and potential borrowings. AtSeptember 30, 2022 we had$3.5 billion of short-term FHLB borrowings outstanding and noFederal Reserve borrowings outstanding. AtDecember 31, 2021 , we had no FHLB orFederal Reserve borrowings outstanding. Total borrowed funds increased$4.1 billion during the first nine months of 2022, driven by increases in short-term borrowings as a result of loan growth and declines in interest-bearing deposits. These increases were partially offset by a decrease in long-term debt primarily due to the redemption of senior notes during the first quarter of 2022. 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. Capital Management Overview A strong capital position is vital to the achievement of our key corporate objectives, our continued profitability, and to promoting depositor and investor confidence. Our capital management objectives include: (1) consistently improving risk-adjusted returns on our shareholders' capital and appropriately managing capital distributions, (2) maintaining sufficient capital to support the current needs and growth of our businesses, and (3) fulfilling responsibilities to depositors and bondholders. 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 theFederal Reserve Board ("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 our Board of Directors ("Board") andOffice 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 2021 Form 10-K. SHAREHOLDERS' EQUITY September 30, December 31, (Dollar amounts in millions) 2022 2021 Amount change Percent change Shareholders' equity: Preferred stock $ 440 $ 440 $ - - % Common stock and additional paid-in capital 1,799 1,928 (129) (7) Retained earnings 5,597 5,175 422 8 Accumulated other comprehensive income (loss) (3,140) (80) (3,060) NM Total shareholders' equity $ 4,696 $ 7,463$ (2,767) (37) % Total shareholders' equity decreased$2.8 billion , or 37%, to$4.7 billion atSeptember 30, 2022 , compared with$7.5 billion atDecember 31, 2021 . Common stock and additional paid-in capital decreased$129 million , primarily due to common stock repurchases. AOCI decreased$3.1 billion , primarily due to decreases in the fair value of fixed-rate available-for-sale securities as a result of changes in interest rates. Absent any sales or credit impairment of these securities, the unrealized losses will not be recognized in earnings. We do not intend to sell any securities with unrealized losses. Additionally, changes in AOCI do not impact our regulatory capital ratios. Refer to Note 5 of the Notes to Consolidated Financial Statements for more discussion on our investment securities portfolio and related unrealized gains and losses. 31 --------------------------------------------------------------------------------
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Common shares outstanding decreased 2.0 million during the first nine months of 2022, primarily due to common stock repurchases. During the third quarter of 2022, we repurchased 0.9 million common shares outstanding for$50 million . InOctober 2022 , the Board approved a plan to repurchase up to$50 million of common shares outstanding during the fourth quarter of 2022. CAPITAL DISTRIBUTIONS Three Months Ended Nine Months Ended September 30, September 30, (In millions, except share data) 2022 2021 2022 2021 Capital distributions: Preferred dividends paid $ 6 $ 6 $ 22 $ 23 Bank preferred stock redeemed - - - 126 Total capital distributed to preferred 6 6 22 149
shareholders
Common dividends paid 62 62 178 174 Bank common stock repurchased 1 50 325 151 475 Total capital distributed to common 112 387 329 649
shareholders
Total capital distributed to preferred and common shareholders $ 118 $ 393 $ 351 $ 798 Weighted average diluted common shares outstanding (in thousands) 149,792 160,480 150,766 162,460 Common shares outstanding, at period end (in thousands) 149,611 156,530 149,611 156,530 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. Under 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. AtSeptember 30, 2022 , we had$1.6 billion of retained net profits available for distribution. During the third quarter of 2022, we paid dividends on preferred stock of$6 million and dividends on common stock of$62 million , or$0.41 per share. InOctober 2022 , the Board declared a regular quarterly dividend of$0.41 per common share, payable onNovember 17, 2022 , to shareholders of record onNovember 10, 2022 . 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 to maintain adequate levels of capital as measured by several regulatory capital ratios. AtSeptember 30, 2022 , 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. The following schedule presents our capital and other performance ratios. 32 --------------------------------------------------------------------------------
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CAPITAL RATIOS
September 30, December 31, September 30,
2022 2021 2021
Tangible common equity ratio 1 3.7 % 6.5 % 7.2 %
Tangible equity ratio 1 4.2 7.0 7.7
Average equity to average assets (three months
ended) 6.5 8.3 9.0
Basel III risk-based capital ratios:
Common equity tier 1 capital 9.6 10.2 10.9
Tier 1 leverage 7.5 7.2 7.6
Tier 1 risk-based 10.3 10.9 11.6
Total risk-based 12.0 12.8 13.6
Return on average common equity (three months ended) 15.8 11.5 12.3
Return on average tangible common equity (three
months ended) 1 19.5 13.4 14.2
1 See "Non-GAAP Financial Measures" on page 33 for more information regarding these ratios.
Our regulatory tier 1 risk-based capital and total risk-based capital was$6.8 billion and$7.9 billion atSeptember 30, 2022 , compared with$6.5 billion and$7.7 billion , respectively, atDecember 31, 2021 . See the "Supervision and Regulation" section and Note 15 of our 2021 Form 10-K for more information about our compliance with the Basel III capital requirements.
NON-GAAP FINANCIAL MEASURES
This Form 10-Q presents non-GAAP financial measures, in addition to generally
accepted accounting principles ("GAAP") financial measures, to provide investors
with additional information. 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,
financial position, and for presentations of our performance to investors. 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 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.
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RETURN ON AVERAGE TANGIBLE COMMON EQUITY (NON-GAAP)
Three Months Ended
September 30, June 30, September 30,
(Dollar amounts in millions) 2022 2022 2021
Net earnings applicable to common shareholders, (a) $ 211
$ 234 net of tax Average common equity (GAAP)$ 5,303 $ 5,582 $ 7,569 Average goodwill and intangibles (1,021) (1,015) (1,015) Average tangible common equity (non-GAAP) (b)$ 4,282 $ 4,567 $ 6,554 Number of days in quarter (c) 92 91 92 Number of days in year (d) 365 365 365 Return on average tangible common equity (a/b/c)*d 19.5 % 17.1 % 14.2 %
(non-GAAP)
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