Why Zions and Utah may dodge the worst of this banking meltdown

State’s fundamentals are strong, but tech startups could face funding challenges. Commercial lending could slow down as well.

As another California bank sought a rescue Thursday, several experts offered this advice for Utahns anxious over Zions Bank and a weeklong jolt to the U.S. banking system:

Take a breath.

Although Zions on Monday saw its shares suffer their largest single-day decline in three years and was flagged by a top credit rating agency for possible downgrade, it has, they said, a vitally different profile from the banks now struggling.

“On balance, our banking industry is in solid shape here in Utah,” said Allan Landon, a professor specializing in finance and banking at the University of Utah’s David Eccles School of Business. “That’s a reflection of a good regulatory environment and a solid economy.”

He and others said Zions was also helped by the region’s relatively robust economy as Utah’s unemployment rate remains low, layoffs have been minimal and retail sales are steady. The state’s economy is also more resilient in downturns than others because of its wider mix of industries — and Zions benefits from that.

“That is a buffer that helps institutions broadly, including the banking sector,” said Phil Dean, chief economist for the U.’s Kem C. Gardner Policy Institute.

New York’s Signature Bank, on the other hand, worked closely with the volatile cryptocurrency sector. Silicon Valley Bank focused on serving the technology sector, Landon and others noted, including support and lending for many of Utah’s tech startup companies from a branch office in Cottonwood Heights.

Utah’s Silicon Slopes tech startups could see their access to capital impeded, Landon said, while the present crisis continues to unwind.

“This is kind of a wake-up call to a set of challenges that are unique to our times,” he said. “It certainly highlighted the challenges the tech industry is facing. If you’re working with a startup right now, getting money is really difficult to do.”

What sets Zions Bank apart

Bigger accounts and bigger risk

Zions shares closed Thursday at $32.11, up 4.56% on the day but still well below its $41.36 closing price a week earlier. The same day, San Francisco-based First Republic became the latest U.S. financial institution to feel ripple effects of the banking crisis.

After hours of negotiations, 11 major U.S. banks agreed to deposit a total of $30 billion in First Republic so it could meet its demands for withdrawals. That was enough to stop investors from abandoning the bank. The bank’s stock was down as much as 36% early in the day but closed up nearly 9%.

First Republic is one of the regional banks that, like Zions, had been flagged for a possible ratings downgrade by Moody’s Investment Services, one of three top U.S. ratings agencies.

As the Silicon Valley Bank drama unfolded, Zions Bank President and CEO Scott Anderson emailed the bank’s clients reassuring them that Zions did not have the same high concentrations of large, unprotected deposits from tech or cryptocurrency customers.

Anderson’s letter also pointed to the average account at Zions Bank being much smaller than those at Silicon Valley and Signature. That also contributes to the bank’s stability, he asserted, because more of its accounts have balances below $250,000, granting them protection from the Federal Deposit Insurance Corp. when banks fail.

Officials at Zions declined to comment further as the bank’s hellish week wore on.

Based on the percentage of its deposits above that $250,000 insurance limit, Zions indeed looks to be in a stronger position than banks going over the edge.

According to “call reports” that all banks must send quarterly to federal regulators, Zions’ percentage of uninsured deposits was about half of total deposits, according to its fourth-quarter 2022 filing. First Republic was about two-thirds, and Silicon Valley was nearly 90%.

Zions’ percentage is also more in line with the rest of the nation’s banks, which showed an average of 47.3% uninsured deposits in the last quarter of 2022. That was down from 50.5% in the last quarter of 2021 as banks saw some big depositors flee to higher-interest investments when inflation took off.

Zions is also far more diversified than the failed banks were, with a loan portfolio spread across commercial sectors in Utah, Idaho and Wyoming and some 1.4 million accounts, many of them fed by deposits from retail customers and small and midsize businesses.

“Unlike SVB, the majority of Zions Banks’ assets are in loans, not securities,” said Andra Ghent, a U. finance professor. Loan values are less susceptible to market changes than securities. Silicon Valley saw large waves of deposits during the COVID-19 pandemic that came in faster than they could be loaned out, so it bought securities with the money.

Those low-risk investments turned sharply negative as the Federal Reserve raised interest rates in its battle with inflation.

A risk of forced losses on investments

Another key factor in Zions’ coming under the market’s stock-battering eyes were what Moody’s and other analysts called “significant” levels of unrealized losses in its portfolio of investments, which was a common thread leading to the bank failures.

The Moody’s warning on Zions said if it saw a higher-than-anticipated level of deposits being yanked from the bank, it might need to sell some underwater assets to raise money. That, the agency said, could crystalize unrealized losses on its books that might, in turn, threaten to take it below regulatory rules for capital on hand — a danger sign for regulators.

Anderson’s letter assured customers that Zions “has access to tens of billions of dollars of readily available liquidity, without having to sell securities.”

A report by investment analysts at Los Angeles-based Wedbush Securities indicates Zions’ vulnerabilities from unrealized losses are close to the median among those of 28 midsize and nine regional banks, based on their recent filings.

Silicon Valley Bank and First Republic Bank, meanwhile, were at the top of that ranking.

“While I’m hesitant to second-guess the stock market,” said Ghent, the U. finance professor, “Moody’s may have used too broad a brush when it put several regional banks, including Zions Bank, under review for a rating change.”

Clark Ivory, CEO of Ivory Homes, Utah’s largest homebuilder, said his company is one of Zions’ bigger customers, and he agreed it had been unfairly caught up in jitters over the banking system.

“Bottom line, I have a lot of confidence in Zions Bank,” Ivory said. “We have nothing in mind but a lot of good business to be done in the future. We look forward to moving ahead and think this, too, shall pass.”

Could this affect Utah’s real estate sectors?

The banking tumult and its spillover onto Zions Bank have raised questions about the impact on commercial and residential real estate, both of which rely heavily on credit. If lending starts to tighten, development could slow, with broader repercussions for the economy.

Both sectors in Utah have already seen a substantial slowdown since interest rates started rising, with homes sales along the Wasatch Front down by double-digit percentages and some brokers referring to this as “The Big Pause” in commercial development.

While apartment and industrial projects such as warehouses and logistics facilities remain at a healthy clip, many office and retail developments are languishing.

“Construction costs are still lofty and interest rates have doubled,” said Kip Paul, vice chair of investment sales for Cushman & Wakefield, a large brokerage based in Salt Lake City. “The majority of these projects that were in planning stages are getting intentionally slow-played now, or they’re all-out acknowledging they’re hitting the pause button.”

But relative to larger private equity investors, Paul said, “Zions is not a big player in the commercial real estate business. It should not affect our world in a major way.”

Ivory noted the current market turbulence and trends in U.S. bond markets may eventually push down mortgage rates, with potential then to boost home sales.

Ghent said it is also possible that Zions Bank might have to raise short-term money and that could temporarily shrink the availability of commercial lending, particularly for new development, because it is a significant source of construction financing in Utah.

In that scenario, she said, residential mortgages would be less affected because most of those are eventually bought and sold as securities on secondary markets, which “insulates the availability of mortgages from shocks to the local banking system.”

Landon, who tracks Utah’s industrial loan banks, said that industry is also well positioned to weather the turmoil. State law has made Utah a haven for industrial loan banks, which are focused on consumer lending like credit cards and car loans.

The industrial loan industry is “every bit as strong as America’s banking industry generally,” Landon said, noting that it is well capitalized and has the liquidity to meet its needs.