Q4 2022 Zions Bancorporation NA Earnings Call
Greetings and welcome to the Zions Bancorp Q4 earnings Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host James Abbott Director of Investor Relations.
Hey, Thank you Joe and good evening, we welcome you to this conference call to discuss our 2022 fourth quarter and full year earnings.
I would like to remind you that during this call we will be making forward looking statements. Although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck on slide two dealing with forward looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call a copy of the earnings.
As well as the slide deck are available at Zions Bancorporation Dot com.
For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide opening remarks, followed by a brief review of our financial results by Paul Burton, Our Chief Financial Officer.
With US also today are Scott Mclean, President and Chief operating Officer, Keith mile Chief Risk Officer, and Michael Morris Chief Credit Officer.
After our prepared remarks, we will hold a question and answer session.
During the Q&A session.
We anticipate holding that to about 45 minutes in time, and we expect a we'd ask you to limit your questions to one primary and one follow up related question with that I'll now turn the time over to Harris Simmons.
Thanks, very much James and we welcome all of you to our call. This evening.
Beginning on slide three you'll see some things that it seems that are particularly applicable to zions in recent quarters as well as some that are likely to be prominent over the near term horizon.
First our balance sheet, which is supported by what we think is a very high quality deposit base has benefited from rising rates, resulting in growth of net interest income exclusive of the contribution from PPP loans of more than 40% over the year ago quarter.
And 30% when including PPP income that had a substantial positive impact a year ago.
But very little effect in the current quarter.
Our deposit costs increased modestly from the prior quarter and remains among the lowest of banks within our peer group.
Exclusive of PPP period end loans increased $1 $8 billion or three 4% on annualized during the quarter.
We've achieved strong loan growth, while maintaining the same underwriting standards that have allowed science to outperform most of our peers in several key credit metrics over the past decade.
We've restrained growth in categories that are more likely to experience higher loss rates.
In a recessionary environment, we continue to believe the effects of higher rates and likely a slowing economy will slow portfolio grows over the next few quarters to a rate that is moderately increasing for the full year 2023.
The next theme is balance sheet flexibility.
We have a loan to deposit ratio of 78%.
Prior to the pandemic, we were running in the 85% to 90% range. We anticipate some further reduction in deposits combined with continued albeit at more moderate loan growth moving us closer to our historical loan to deposit ratio range.
As we've noted in prior earnings calls our strong liquidity position physician coming into this cycle afforded us the luxury of being able to prioritize the quality of deposits over quantity.
This is reflected in our total cost of deposits, which at 20 basis points. This quarter is among the very best of our peers.
We believe we are prepared should a recession materialize.
Our pre provision net revenue equals an annualized 2.5% of risk weighted assets.
The combination of our regulatory capital and our allowance for credit losses strong relative to the risk profile of our balance sheet.
We'd note that over the past decade, our net charge off ratio, which has averaged a very modest 11 basis points over that period, that's been 75% better than the industry average, reflecting the derisking of the balance sheet, we frequently spoken off.
Turning to slide four we are pleased with our quarterly financial results, which are summarized on this slide showing the linked quarter comparison with the third quarter.
Adjusted taxable equivalent revenue net of interest expense increased about 8% relative to the prior quarter.
And adjusted pre provision net revenue increased 20% those gross rates are not annualized.
Our credit quality is strong and loan growth was solid.
We continue to experience deposit attrition attrition is we've allowed our liquidity to come back into a more normal range.
Paul will spend some additional time on that item.
One thing to note on this slide is that we have updated the calculation of tangible common equity to exclude the impact of accumulated other comprehensive income or a OCI.
As youre likely aware GAAP accounting works to fair value through the equity account the portion of the securities portfolio held as available for sale, while not recognizing changes in the market value of other balance sheet items, including deposits.
As a result, this accounting treatment doesn't fully reflect the economics of the business. So it will be.
Showing return on tangible common equity in any other measures such as tangible book value per share that.
That incorporate tangible common equity.
As adjusted for the recent volatile impact of a OCI.
This also reflects how we use such measures internally for example, one of our incentive compensation arrangements or profit sharing plan uses such a measure.
And we've adjusted our calculations so it's not to produce a payout based on unrealistically high.
Profitability.
Moving to slide five diluted earnings per share was $1.84.
Comparing the fourth quarter to the third quarter. The single most significant difference was the improvement in revenue driven by the effect of interest interest rate changes on earning assets and continued strong performance from customer related noninterest income.
The provision for credit loss contributed 14 cents per share positive variance compared to last quarter as convinced as can be seen on the bottom left chart.
In both quarters, the allowance increased about five basis points relative to loans outstanding.
But in the fourth quarter, we recognized net loan recoveries instead of net charge offs.
Turning to slide six our third quarter adjusted pre provision net revenue was $420 million, the adjustments, which most notably and eliminate the gain or loss on securities are shown in a lot of pages of the press release.
And this slide deck.
Within the P. P N. Our chart the top portion of each column denotes the revenue we've received from PPP loans net of direct external professional services expense.
These loans contributed only $2 million to Pee PNR in the fourth quarter.
Exclusive of PPP income, we experienced an increase in adjusted P. P. N R. A 71% over the year ago period.
With that high level overview, I'm going to ask Paul Burton, our Chief financial officer to provide additional detail related to our financial performance Paul.
Thank you Harris and good evening, everyone. Thanks for joining us on slide seven a significant highlight for US this quarter was the strong performance and average loan growth average.
Average non PPP loans increased $1 $9 billion or three 6% when compared to the third quarter areas of strength included commercial and industrial loans residential mortgage and term commercial real estate as can be seen in the appendix on slide 30.
The yield an average total loans increased 64 basis points from the prior quarter, which is primarily attributable to increases in interest rates deposit costs increased during the quarter, but remain low.
Shown on the right our cost of total deposits rose to 20 basis points in the fourth quarter from 10 basis points in the third quarter, our average deposits declined $3 $2 billion or four 1% linked quarter for deeper in.
Site into deposit volume changes, please turn to slide eight where we break down our deposits by size.
As shown here most of our deposits come from relationships holding less than $10 million on our balance sheet.
The 2022 decline in deposits came primarily from larger balance accounts, which is not shown on this page is the operational nature of our deposit accounts, we believe that deposit accounts, which are used frequently accounts, which record many inflows and outflows are stickier and less rate set.
Then other deposits due to their operational nature, likewise deposits invested for yield including many of the deposits over $10 million shown on this page are by definition more rate sensitive our operating account balances were relatively stable through 2022 with a slight dip.
Aligned in the fourth quarter compared to the third which we believe reflects the rising value of deposits as interest rates have increased.
The increase in benchmark rates and the widening differential in our deposit rates rates paid when compared to other investment products created an opportunity for us to have conversations with our more rate sensitive customers to discuss off balance sheet products designed for larger end or less operational deposits.
At 47% of the full year 2022 deposit attrition moved into our off balance sheet sweep products. This serve to maintain a relationship with the customer while keeping deposit costs well managed.
Looking ahead.
The increasing value of deposits will lead us to adjust our deposit rates accordingly as rate remains the primary lever to attract funds, which are less operational in nature. While this will impact our cost of funds. We are confident that the nature of our deposit portfolio, including the proportion of noninterest bearing demand deposits to total deposits.
It will allow us to keep our overall cost of funds relatively low moving.
Moving to slide nine we show our securities and money market investment portfolios over the last five quarters.
Size of the securities portfolio declined slightly versus the previous quarter, but as a percent of earning assets. It remains about nine percentage points more than it was immediately preceding the pandemic. The most significant change to the portfolio. This quarter was the movement of bonds from the available for sale accounting classification to the held to maturity.
<unk> classification the value of this movement was nearly $11 billion of fair value and $13 billion of amortized cost. This accounting reclassification effectively freezes one $8 billion of an unrealized loss recorded in accumulated other comprehensive income, which will amortize over the remaining.
<unk> of the bonds, and which will limit the impact on reported accumulated other comprehensive income due to changes in interest rates.
We anticipate that money market and investment securities balances combined will continue to decline over the near term, which will create a source of funds for the rest of the balance sheet.
Our revenue is primarily balance sheet, driven this quarter, 82% of our revenue from net interest income Slide 10 is an overview of net interest income and the net interest margin. The chart on the left shows the recent five quarter trend for both net interest income on the bars reflects the benefit of both.
Loan growth and higher interest rates, while the net interest margin and the white boxes largely reflects the impact of the rising interest rate environment on earnings yields combined with our ability, earning asset yields combined with our ability to contain funding costs.
The right hand chart on this page shows the linked quarter effect of certain items on the net interest margin overall, earning asset yield improved 64 basis points, while the cost of interest bearing funds increased 61 basis points, reflecting a three basis point expansion in our interest rate spread however, nearly.
Half of our earning assets are funded with noninterest bearing sources of funds. Therefore, the three basis point expansion in interest rate spread is augmented by an increase of 26 basis points in the value of noninterest bearing funds in the higher rate higher interest rate environment. These factors combined to produce a 29.
This point expansion in the net interest margin in the fourth quarter when compared to the third quarter.
Slide 11 provides information about our interest rate sensitivity as a reminder, we have been using the terms latent interest rate sensitivity and emergent interest rate sensitivity to describe the effects on net interest income of rate changes that have occurred as well as those that have yet to occur as implied by the shape of the yield curve.
Accordingly, our balance sheet is assumed to remain unchanged incised in these descriptions regarding latest sensitivity the in place yield curves as of December 31, which was notably more inverted than the curve at September 30th well worked through our net interest income overtime. The difference from the prior period's disclosures.
Latent sensitivity is the shape of the curve and the accelerated pull through of net interest income growth, which was attributable in part to our lower than expected deposit and funding beta as we begin to increase our deposit rates to reflect the increased value of money and the limited rate movements, we have reported so far.
Our modeling would now estimate a deposit beta of approximately 18% compared to the beta of 5% observed cycle to date, therefore, given the modest increase in interest expense and using a stable size balance sheet allegiance sensitivity interest rate risk measure indicates a decline in net interest.
Income of about 1% in the fourth quarter of 2023, when compared to the fourth quarter of 2022 rigs.
Regarding emergent sensitivity if the December 31, 2022 forward path of interest rates were to materialize and using a stable size balance sheet. The emergent sensitivity measure indicates a decline in net interest income of about 2% in the fourth quarter of 2023, when compared to the fourth quarter of 2022 again.
This change in outlook can be traced to strong recent net interest income performance and the inverted interest rate curve.
With respect to traditional interest rate risk disclosures, our estimated interest rate sensitivity to a 100 basis point parallel interest rate shock using a same sized balance sheet.
Has declined by about two percentage points from the third quarter and about 10 percentage points from the beginning of the year as rates have risen and downside risk to net interest income has increased we've been moderating our asset sensitivity primarily through interest rate swaps, while generally maintaining customer operating deposit balances and allowing certain rate sensitive.
Deposits to decline the reported change in interest rates sensitivity. This quarter largely reflects the recent decline in deposits and a higher net interest income denominator as a result, this traditional interest rate risk disclosure represents a parallel.
As a reminder, sorry as a reminder, this traditional interest rate risk disclosure represents a parallel an instantaneous shock, while the latent and emergent views reflect the prevailing yield curve at December 31st.
Our outlook for net interest income for the full year of 2020 Threep relative to the full year 2022 is increasing.
Well, there will be seasonality along the way with fewer days in the first half of the year. For example, we expect that by the fourth quarter of 2023, including the latent and emergent sensitivity as well as unexpected increase in loans net interest income will be modestly higher.
Then that reported in the fourth quarter of 2022.
Moving onto noninterest income and total revenue on slide 12 customer related noninterest income was $153 million, a decrease of 2% versus the prior quarter and an increase of 1% over the prior year.
As we noted last quarter, we modified our non sufficient funds and overdraft fee practices near the beginning of the third quarter, which has reduced our noninterest income by about $3 million per quarter improvement and Treasury management fees has allowed us to make up the loss of that revenue our outlook for customer related noninterest income for the 20 <unk>.
Three full year is moderately increasing relative to the full year 2022 results.
On the right side of the slide revenue, which is the sum of net interest income and customer related noninterest income is shown revenue grew by 24% from a year ago and when excluding PPP income it grew by 32% over the same period.
Noninterest expense on slide 13 decreased 2% from the prior quarter to $471 million. The reduction is primarily due to a net decrease of certain incentive compensation items within salaries and benefits. The total of the remaining expense categories remained relatively flat to the third quarter, we continue to feel that.
Influence of inflation and expect to continue to hire additional staff to support growth, we reiterate our outlook for adjusted noninterest expense to increase moderately for the full year of 2023 relative to the full year of 2022.
Another highlight for the quarter was the continued strong credit quality across the loan portfolio as illustrated on slide 14 relative to the prior quarter. We saw continued improvement in the balance of criticized and classified loans recoveries from pallet balances previously charged off led to a net recovery of two basis points of average nine P.
P P loans in the fourth quarter compared to a loss of 21 basis points in the prior quarter, notably our nonperforming asset ratio and classified loan ratio continued to improve and are at very healthy levels.
Slide 15 details the recent trend in our allowance for credit losses or ACL over the past several quarters at the end of the fourth quarter. The ACL was $636 million a $46 million increase from the third quarter. The linked quarter ACL increase can be ascribed to loan growth and weakening economic forecasts the reserve ratio to total.
Loans was up five basis points from the prior quarter to 1.15% of non PPP loans, our ACL will continue to reflect the size and composition of our loan portfolio and evolving macroeconomic forecast.
Our loss absorbing capital position is shown on slide 16, we believe that our capital position is aligned with the balance sheet and operating risk of the bank. The CET one ratio grew slightly in the fourth quarter to nine 7%, although CET one the CET one ratio remained really relatively flat I'd like to point out the.
Significant amount of earnings retained over the past year, the balance of common equity tier one capital grew by over $400 million or 7% in 2022, however risk weighted assets during the year grew by $7.5 billion or 13%, primarily driven by loan growth, we repurchased $50 million of common stock in the fourth quarter.
And $200 million for the year as a reminder of share repurchase and dividend decisions are made by our board of directors and as such we expect to announce any capital actions for the first quarter in conjunction with our regularly scheduled board meetings this coming Friday.
Our goal continues to be continues to maintain a CET one capital ratio slightly above the peer median while managing to a below average risk profile.
Slide 17 summarizes the financial outlook provided over the course of this presentation. This outlook represents our best current estimate for the financial performance and full year 2023 as compared to actual results reported for the full year 2022. This is a change from our historical approach, where we traditionally provide outlook for a single quarter.
When you're out we plan to return to that approach when reporting financial performance over the remainder of the year.
This concludes our prepared remarks, Joe would you. Please open the line for questions.
Yes.
And gentlemen, we will now be conducting a question and answer session.
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Yeah.
From the line of Matt N go.
Salvia with Morgan Stanley . Please proceed.
Hi, good afternoon.
Hi.
A question on the NIM trajectory it looks like the guide is implying a sizable decline in the near term with a recovery in the back half can.
Can you maybe talk about your assumptions and the puts and takes there.
Yes. This is Paul I'll start I'll characterize it this way our deposit beta so far through the cycle as I noted in my remarks is about 5% our expectation is that our deposit beta.
Based on past history and remodel.
Addling is going to have to be closer to our through the cycle of 18% Oh, you know over the next year or so.
To match, our modeled result, and so inherent in our outlook.
Is an acceleration of deposit pricing and in fairness. Yeah. This may or may not come to fruition, but that is the nature of a forward looking view is that there's a lot of uncertainty involved.
Got it okay and.
On the on the rate sensitive deposits last quarter, you mentioned, there's about $5 billion or so of those deposits that could flow out.
Can you give us.
An update on those numbers and you know maybe what portion of our deposits decline. This quarter was attributable to the should I read sensitive deposits actually I would say, it's it's very hard for me to describe specifically sort of the category of deposits.
The the point that I was trying to make last quarter was that it did feel like given where rates were on our balance sheet versus market rates. There was a sort of increasing pressure we could see on rate sensitive deposits. We clearly saw some of that flow through in the fourth quarter, but it would be very difficult for me to specifically you had described.
<unk>, you know sort of how much of that you know related to that specific comment.
Got it thank you thank.
Thank you.
Yeah.
Our next question comes from the line of Ebrahim <unk> with Bank of America. Please proceed.
Hey, good afternoon.
Okay got it maybe just following up on the deposit beta guidance, 18% implies about 90 basis points to 1% for total cost of deposits.
And if I, even asked us in fed funds just wondering when you think about acceleration in deposit costs have you seen that over the last few weeks or months I'm just trying to handicap is that guidance always been zero. It is what it is there risk.
To the upside in terms of where things might go a different ends up holding onto rates for much longer at those levels. So would appreciate any color in terms of what you've seen in our deposit pricing over the last few weeks last few months.
Sure So I'll start with that and ask Harris or Scott to join in the where we've seen the pressure is not necessarily on the rate. It's been in the volume, which kind of implies that there's a rate element attached to that the 18% to be clear, while it's a very precise number as implied that sort of a model.
Old number based on our experience and it is intended to capture sort of our best estimate of where deposit rates could be but to your point. Yeah. This is kind of a day by day challenge, we're constantly managing the balance between the rate paid and maintenance of the very valuable deposit.
<unk> on the balance sheet, so I would love to be able to tell you that it was very.
Conservative or otherwise, but it's you know it's frankly, it's based on history and based on our models. It's our best estimate of where we think our deposit rates are expected to go.
I would only add I mean this is my own view is it because to the extent that the fed.
Moderates the rate of increase in interest rates that is helpful.
Likely to be helpful in that it.
Probably allow us to I will still have to do some catching up but.
But I.
I think it's gonna be.
Little easier to do without the kind of aggressive hikes that we've seen in the last couple of quarters.
Yeah.
Got it and I guess, maybe just another one on it obviously, it's on slide 28.
Swap maturities and he sends off any additions that you plan to make a I guess not looking on the other side protecting him. If he can't Sneeze Guards just wanted your thought process on that.
Yeah. So yeah, so our strategic Alco, we meet regularly to discuss our interest rate risk positioning and the use of swaps in managing that are I would say over the course of the last couple of quarters. Our interest rate sensitivity has been driven more by deposits.
Then by things that we're doing in the derivatives market. So right now we're pretty close to balance from an interest rate risk perspective. So looking ahead I think it will be a function of loan and deposit growth. Yeah that is what will be the key driver of our swap strategy.
Yeah.
Got it thank you thank.
Thank you.
Our next question comes from the line of John Kerry with Evercore ISI. Please proceed.
Good afternoon John .
On the regarding your your.
Your outlook for NII, you indicated that the change in your view reflects both the shape of the yield curve as well as the pull through of NII growth Alright, maybe can you help kind of parse that out how much of the change was attributable to the shape of the curve.
The incremental inversion that we've seen versus the the pull through of your NII growth.
I'll I'll characterize it this way if you go back a couple of quarters.
We were showing latent and emergent sensitivity, if I remember correctly of about 15% and 8% for 23% total that was sort of a one year out view of changes in net interest income.
Related to rate and then we provided an update to that in the third quarter. If you. If you work through that and do the math, you'll see that the net interest income that we just reported it feels like a.
It came much faster than those models would have predicted kind of three to six months ago and so what we're saying is that the pull through has been stronger than expected. Some of that is loan growth for a lot of it has been related to deposit pricing we.
We need to maintain some fidelity to our modeling which is why we have a forward looking view that incorporates a kind of more aggressive deposit rates are based on.
Recent experience you know what that means is that we've been able to achieve a lot of the right. The value of the rate increases are more quickly than expected.
One one part of that the other is the shape of the curve has changed dramatically in the last three to six months.
And as you know yeah, we're looking where we're looking at a fairly positively shaped curve a six months ago are the yield curve. After about what two years is inverted now so what we're looking at now is a much less expectation of rate increase.
With a little more pronounced.
Fall on the backend and so all of those things are shaping our view on net interest income.
Okay, great. Thanks, Paul and then separately also on the rate from the noninterest.
Noninterest bearing deposit mix.
Sitting around 50% of total deposits currently where do you see that trending and then separately if you could just.
Hum any other actions that you can foresee that.
Perhaps lessen your asset sensitivity is for as you're starting to factor in fed cuts in the back half of this.
Sure.
Well our.
Our proportion of noninterest bearing to total deposits at just over 50% is in my opinion kind of remarkably high given the change the rapid change in interest rates and historical level. So I I. It would be very difficult for me to predict that that would increase that is to say that we would be growing noninterest bearing.
Was it faster than interest bearing deposits.
But nonetheless striking that right balance between the rate, we're paying on interest bearing funds and the ability to maintain those operating noninterest bearing deposits. Our deposits is a kind of a key part of what we do every day the stickiness as I tried to describe in my prepared remarks around those DDA those those operating accounts.
Really has to do with the granularity and the operating nature of those accounts and so we have a long history, a decade long history of a.
A very solid proportion of noninterest bearing deposits to total deposits.
And I think that'll continue but but it's based on the nature of the accounts and the nature of the customers we have.
Yeah.
Okay, great. Thank you.
Thank you.
Our next question comes from the line of Chris Mcgratty with <unk>. Please proceed.
Great. Thanks.
Obviously, the deposits are going to drive the size of the balance sheet, but if you look back Paul.
Securities pre COVID-19 were around little over 20% of earning assets.
Is that kind of where we're going to get to when when the unwind of COVID-19 fully fully plays out in your opinion.
The key measure of liquidity that we utilize this liquidity stress testing so not unlike our capital stress testing models, we have liquidity stress testing models, and and I would say our inherent in that our be our assumptions around behavior deposits and drawdowns on commitments and sort of those things that can impact us.
Ultimately liquidity so based on all of that very long answer to your question, which is probably requires a shorter answer.
Is that that proportion that you saw pre pandemic with respect to the investment securities as a storehouse of on balance sheet liquidity relative to total assets is approximately where.
Where we would get to all other things equal.
Yeah.
Okay.
Great and then I noticed more disclosure in the in the back on the office portfolio, which is great and maybe just.
Help us with how you're thinking about where where risk in the portfolio lies in 'twenty three the highest risk.
One two and three of them.
I think we'll turn that over to Michael Morris, Our Chief Credit Officer.
Thanks for the question Chris.
You know the biggest I guess.
Issue that we have or what we call repositioned.
That's.
Where we're waiting for some lease up the assets were bought cheaply.
Yeah.
That absorption hasn't followed through Covid.
That's a segment of office that we're watching we're also thinking about it strategically.
Strategically we're looking down the road we're asking.
How office be positioned.
And will there be less office, but more space.
We're looking at all.
Kinds of variations of what office will look like we have.
But pretty substantial suburban office mix, which has held up well.
Central business District.
Office isn't something we're big into you won't see us in trophy buildings.
Around the west and inside of our footprint, but.
We're very cautious around the asset class right now.
Okay, Great and maybe just on the tax rate.
Going into 'twenty three.
On the effective tax rate.
Yeah, that's right next door.
I don't see a big change from what we reported in our full year 'twenty three.
I'm sorry. Please go ahead.
Great. Thank you.
Uh huh.
Yes.
Our next question comes from the line of Peter Winter with D. A Davidson. Please proceed.
Ah Thanks, So credit who has been outstanding.
Just wondering.
How are you thinking about net charge offs and in 'twenty three and then secondly, if you know if we're at the appropriate Ah <unk>.
ACL ratio, just assuming no change in the economy.
Well.
I'm going to start with on the ACO, we think we're through appropriate place having just certified that.
I mean, we the process we go through I think it's pretty comprehensive.
The risk that is there today.
So.
I would say on the net charge off front this is Michael.
If you look at historical run rates and you look at the last couple of years we've.
We've also been really fortunate.
And how long that good fortune lasse.
<unk>.
Something that we can.
Can all speculate about.
But I think we have the right.
Credit infrastructure to continue to manage net charge offs as well.
Well, we get good recoveries.
We have a great back office, our special asset group that.
It goes after charged off loans aggressively.
And.
But.
It's hard to say that we can keep net charge offs to slow.
Through what is anticipated to be.
Potentially a.
Milder.
Recession forthcoming.
Hi, This is Scott Mclean, and I would just add to that.
Yeah, I think the other thing you just have to look at where do you think risk is really going to come from you know decline and we've said pretty consistently that.
It's probably gonna common consumer unsecured.
We don't have.
Hardly any.
Tumor unsecured.
It's probably gonna common construction loan portfolios.
And you know our construction portfolio is about 20% of total CRE the rest of our CRA as term, which as you know those are stabilized cash flows with low loan to values.
Third place my common land portfolios, we have very little land.
So.
Those are areas leveraged finance is another area that gets brought up.
It's not really just closed although we think Moody's is going to do.
I'll report on that sometime in the first half of the year and we think as we did last time. They did one will probably compare favorable to our regional bank peers. So it's it's kind of like where do you think it's going to come and do we have that and the answers are.
Positioned pretty conservatively.
Got it and then Paul if I can just ask about maybe the outlook for deposit growth.
This year or maybe do you think it would stabilize in the second half of this year.
As I as I said.
Key lever for deposits in this environment I think is right and so yeah I'm not it's very difficult to predict deposit balances because ultimately it's highly dependent on customer behavior, but I certainly would expect us to strike a maybe an improved balance.
Between rate and volume over the course of the next year when we consider the alternative cost of funds you know are.
Our all in cost of deposits at 20 basis points.
Is fantastic, but it also as Harris said in his opening remarks.
We are in a position with a lot of flexibility in our balance sheet.
We feel like there are many levers that we can pull.
Yes.
The deposit growth profile.
Got it. Thank you. Thank you.
Yeah.
And our next question comes from the line of Ken.
Ken <unk> with.
With Jefferies. Please proceed.
Hey, Thanks, I wanted to bring together all the kind of pieces of NII in your outlook is still talking about a <unk> 23 to <unk> 22 a.
Slight increase.
I'm just wondering Paul you know, what's the power through point right. You are talking about betas, increasing taking up more borrowing securities are coming down. So we got the loan growth and I guess, maybe it's the front book and the repricing can you help us kind of understand what are the what are the positives that offset some of the things that you've spoken to already that would get that NII up on a year over.
Year basis looking out to <unk> 23.
Yeah the key.
The let's see are the couple of upsell by a couple of key items would be.
The leverage inherent in our deposit book as I said, our ability to maintain a very favorable cost of interest bearing funds. In addition to maintaining that book of noninterest bearing deposits.
Reported it in our comments the majority in my way of thinking the majority of our net interest margin expansion. This quarter really had to do with the stability in the value of those noninterest bearing deposits our ability to hold onto those is really important as is our loan growth, which you know which we.
Talk about there's a lot of uncertainty in the economic environment.
The inversion of the yield curve is not a positive for us and for many banks are and so if rates kind of stabilize if that inversion starts to go away. If we get decent deposit growth and we really are able to hold the line on both volume and rate with respect to our deposits those are all incrementally helpful.
Yeah.
Okay. So free funding point makes it makes the most sense to me on that and can you talk to us about just loan betas and loan repricing like how does that pull through from here.
How would you put that in context with your.
With the beta commentary on the deposit side. Thanks, well, we are we used to have a page in here don't know if they still haven't James back in the appendix.
There is about a little less than half of our loans ex swaps reprice within the first three months.
And then after that you see some repricing out along the curve and so to the extent that rates stabilize you'll.
You'll see the the that rate repricing continue to to occur.
But as we think about deposit beta you know I think oftentimes people are really thinking about the short end part of the curve and the short end part of that repricing and as I said, it's kind of between 40 and 50% of our loans will reprice within three months of a change in the base rate.
Yeah, right Slide slide 27 for those of you on the call and have access to the slide deck is that schedule that Oh was referencing and if there is a lag as we've talked about historically.
That lag if you actually look at it.
If you look at what the yield is on loans in the fourth quarter of 'twenty two versus the average benchmark rates in the third quarter of 'twenty two.
You get about a 45% loan yield data.
And that's the difference between just measuring it on the current quarter versus the current quarter. The problem was doing is it takes a little bit of time for the loans to catch up to what's happened with the benchmark rate if that if that's helpful.
Yeah, Great and can I just ask one more just on expenses you said no moderately off of what was a better year end result here is is that a pivot at all from comments that debt that you guys had made recently about what the expected growth rate might look like in terms of your just your you're at your expense growth outlook for 'twenty three thanks.
Wouldn't call that a pivot.
Think that are the really difficult inflationary environment and the environment for compensation on this kind of change the trajectory of.
Non interest expense, but we've been talking about that for several quarters and so I wouldn't characterize that as a difference what I will say is that the factors that are driving that are also driving interest rates to be significantly higher and on a net basis. When we think about the funds or the revenue that drops to the bottom line.
Theres positive operating leverage in that environment for us.
Thanks, Paul Yeah. Thank you.
Thank you ladies.
Ladies and gentlemen, this concludes our question and answer session and I'd like to turn the call back to James Abbott for closing remarks.
Thank you Joe and thank you to all of you for joining US today. If you have any additional questions. Please contact us at the email or phone number listed on our website and we look forward to connecting with you throughout the coming months. Finally, thank you for your interest in Zions Bancorporation and this does conclude our call today.
This concludes today's conference. Thank you for your participation you may now disconnect.
Yeah.