Q1 2023 Zions Bancorporation NA Earnings Call
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Speaker 2: 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.
Speaker 2: It is now my pleasure to introduce your host, Director of Investor Relations, James Abbott. Thank you, James. You may begin.
Speaker 3: Thank you, Alicia, and good evening. We welcome you to this conference call to discuss our 2023 first quarter earnings.
Speaker 3: 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.
Speaker 3: A copy of the earnings release as well as the slide deck are available at zionsbankcorporation.com.
Speaker 3: For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide opening remarks.
Speaker 3: Following Harris' comments, Paul Burtis, our Chief Financial Officer, will review our financial results. Included in Paul's comments will be a more in-depth discussion about our deposits and capital than is customary in an earnings call forum, but we want to be responsive to the questions we have received over the past several weeks.
Speaker 3: Following Paul's comments, we've asked Michael Morris, our Chief Credit Officer, to discuss credit quality generally, but to do an in-depth discussion about our commercial real estate portfolio and specifically our office commercial real estate portfolio.
Speaker 3: Also with us today include our guests include Scott McLean, President and Chief Operating Officer and Keith Myo, Chief Risk Officer.
Speaker 3: After our prepared remarks, we will hold a question and answer session. We anticipate that the duration of this call will be one hour. I will now turn the time over to Harris Simmons. Thanks very much, James, and welcome to all of you.
Speaker 3: I'd like to begin by offering just a few brief thoughts about the current environment and a topic or two that have been in focus by investors and the analyst community in recent weeks.
Speaker 4: Some of the idiosyncratic structural features that led to the recent domestic bank failures are well known to most of all of you.
Speaker 4: I should cause all of us, I think, to really think more holistically about how we think about banks balance sheets and business models.
Speaker 4: It's particularly odd in my view that thoughtful observers would assess the strength of any bank by examining its capital through the soda straw of tangible common equity or tangible common equity adjusted for HTM marks without considering the economic value and the sustainability of all of the components of the bank's balance sheet.
Speaker 4: and its business model.
Speaker 4: Doing so is myopic as a major portion, perhaps the major portion of any bank's value is found in the characteristics of its deposit franchise.
Speaker 4: something that, short of a recent nod to the percentage of deposits that are insured, is hardly mentioned in most analyses.
Speaker 4: In the shareholder letter I wrote in February , well before the disruptions of mid-March, I noted that the generally accepted accounting principles, the accounting framework, or gap framework, that we're all familiar with, presents on the surface.
Speaker 4: a medley of historic cost and fair value accounting and some of the distortions relative to economic reality.
Speaker 4: are further amplified by the leverage necessary component of banking's business model.
Speaker 4: Applying marks from securities and loans to any bank's capital without approaching the project comprehensively.
Speaker 4: by including the impact to the value of core deposits and other liabilities.
Speaker 4: is an example of what I sometimes refer to as one hand clapping.
Speaker 4: While the events of mid-March were disruptive, they were very manageable and in large measure reflected the continuation of a trend seen in the industry and certainly in our own balance sheet over the past few quarters.
Speaker 4: We'd seen a dramatic rise in deposit balances through the pandemic years, something that had begun to reverse itself as the Fed changed course with its monetary policy.
Speaker 4: In some respects, it's a case of the Fed giveth and the Fed taketh away.
Speaker 4: The deposit trend that we'd seen in the latter part of 2022, in the first two months of this year,
Speaker 4: was only modestly accelerated by any concerns generated by the bank failures.
Speaker 4: And the most valuable part of our deposit base that constitutes the lion's share of our funding was absolutely durable and even saw growth in the latter part of March.
Speaker 4: Specifically, excluding any broker deposits, we opened over 7,000 net new accounts with balances totaling $629 million between March 7th and March 31st.
Speaker 4: specifically excluding any broker deposits, we opened over 7,000 net new accounts with balances totaling $629 million between March 7th and March 31st.
Speaker 4: The accelerations of a shift in funding does impact net interest income, though in a manner that we believe will be very manageable and that will work to offset and part with a greater focus on our operating costs in the months ahead. Finally, a word or two about commercial real estate, which is becoming a topic of greater focus as concerns.
Speaker 4: perhaps increase with respect to a possible recession. We embarked on a long-term project to reduce credit risk in our portfolio over a decade ago in the wake of the great financial crisis.
Speaker 4: One of our objectives was to ensure that CRE was growing at a pace less than that of the remainder of the loan portfolio and we've done that.
Speaker 4: Commercial real estate has grown at an annual rate of 2.5% over the past decade, a growth rate that's about half that of the rest of the portfolio.
Speaker 4: It's required us to high-grade the clients we work with and the projects we finance.
Speaker 4: and has meant that we haven't had a surge of growth during a period of very low cap rates.
Speaker 4: We'll provide additional details about this later in the presentation.
Speaker 4: So now turning to slide four, this is the summary of quarterly financial results showing a linked quarter comparison with the fourth quarter of 2022.
Speaker 4: As most of you are aware, there is less net interest income in the first quarter due to two fewer days.
Speaker 4: Also, non-interest expense experiences seasonality related to higher stock-based compensation and payroll taxes, the combination of which results in materially lower adjusted pre-provision net revenue and compresses the efficiency ratio.
Speaker 4: As you would expect, those seasonal factors normalize as we move through the year.
Speaker 4: Our credit quality remains very strong. Loan growth slowed from the last few quarters to a moderate annualized pace of growth.
Speaker 4: Period N deposits declined 3.4%, but we added $4.5 billion of broker deposits, which was about 6.5 percentage points of deposits.
Speaker 4: Moving to slide 5, diluted earnings per share was $1.33.
Speaker 4: As shown on the right side, we accrued $0.06 per share, or $9 million, for a contingency tax reserve related to the treatment of capitalized research and development costs.
Speaker 4: We made the change due to the outcome of recent tax litigation in a case involving another firm.
Speaker 4: Nearly half of the length quarter decline was due to seasonal factors, while the other elements are primarily explained by the change in funding composition and operating expense, which Paul will discuss in his comments.
Speaker 4: Turning to slide six, our third quarter adjusted pre-provision net revenue was $341 million.
Speaker 4: The linked quarter decline was attributable to the same primary factors I just noted, and by comparing to the year ago quarter, thus removing seasonality, as well as normalizing for the effect of PPP loans, the increase was 57% over that year ago period. With that high level overview, I'm gonna ask Paul Burtis, our Chief Financial Officer, to provide additional detail related to...
Speaker 4: for both. Net interest income on the bars and the net interest margin in the white boxes lost ground in the first quarter for the first time in six months.
Speaker 5: The right-hand side of the chart shows the link quarter effect of certain items on the net interest margin. Higher rates help to improve our earning asset yield by 40 basis points. As we saw more depositor sensitivity to the higher interest rate environment, we increased the roll rate on overall.
Speaker 5: We increased the rate on overall deposits by 50 basis points relative to the fourth quarter. Our borrowed funds also increased, which when combined with the higher cost of deposits increased the total cost of interest bearing funds by 95 basis points.
Speaker 5: This degree of core deposit sensitivity therefore resulted in a 55 basis point contraction in our interest rate spread. However, over 40% of our earning assets are funded with non-interest bearing sources of funds. The 50 basis point contraction in interest rate spread was therefore partially offset.
Speaker 5: By an increase of 35 basis points in the value of non-interest bearing funds in the higher rate environment, these factors combine to produce a 20 basis point contraction in the net interest margin in the first quarter when compared to the fourth quarter. I'll say more about recent trends in balance sheet yields in just a few minutes. Moving on to non-interest income and revenue on page 8.
Speaker 5: Customer related non-interest income was $151 million, a decrease of 1% versus the prior quarter and flat to 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 of 2022.
Speaker 5: which has reduced our non-interest income by about $3 million per quarter. Improvement in treasury management fees has allowed us to make up some of that lost revenue. Our outlook for customer-related non-interest income for the first quarter of 2024 is moderately increasing relative to the first quarter of 2023. On the right side of the page, revenue, which is the sum of net interest income, Check out Megan's bio and follow the link below!
Speaker 5: impacted by an incentive compensation reversal of $8 million, while the first quarter of 2023 included seasonal items such as stock-based compensation for retirement eligible employees and payroll taxes of $24 million. The cost of FDIC insurance was also up $4 million versus the fourth quarter.
Speaker 5: While expenses were up in the first quarter, you can see on this page that our efficiency ratio improved by nearly six percentage points when compared to the same quarter one year ago. Our outlook for adjusted non-interest expense is now stable as we expect expenses in the first quarter of next year to be flat to the first quarter of 2023. These ten highlight trends in our loans and deposits over the past year.
Speaker 5: The rate of growth in loans slowed in the first quarter, as seen in the period end numbers, as opposed to the average shown on this page. Our expectation is that loans will increase slightly in the first quarter of 2024 when compared to the first quarter of 2023. Deposits have continued to...
Speaker 5: the trend we reported throughout 2022. As I will discuss in a few minutes, there is a marked difference in the sensitivity of larger uninsured deposits when compared to smaller insured deposits.
Speaker 5: Larger depositors are more sensitive to higher rates, and as we have moved deeper into the interest rate cycle, depository pricing betas have accelerated.
Speaker 5: As discussed in our last earnings call, we have become more aggressive on deposit rates, which we expect will help to attract some of the larger balances that have moved off balance sheet in search of higher yields.
Speaker 5: For the quarter, our cost of total deposits increased to 47 basis points, up from 20 basis points in the prior quarter. At the end of the quarter, the spot cost of total deposits was 90 basis points, with interest bearing deposits yielding 1.63%.
Speaker 5: Our deposit beta at the end of the quarter was 18% when compared to the fourth quarter of 2021.
Speaker 5: These changes, when combined with the continued improvement in low yields, are not expected
Speaker 5: resulted in an estimated net interest margin of about 3% point in time at the end of the first quarter.
Speaker 5: I will provide additional details on the composition and performance of our deposit portfolio over the next few pages.
Speaker 5: beginning with page 11. As shown here, commercial deposits are about one half of our deposits with consumer deposits contributing about one third of total deposits and brokered trust and estate deposits rounding out the portfolio. Not surprisingly, due to deposit size, two-thirds of our commercial deposits are not insured. However, over 60% of those deposits are tied to the bank.
Speaker 5: the past year, deposit size and activity are key drivers of deposit sensitivity. We believe that recent changes in deposit pricing will provide a compelling on balance sheet option, particularly for larger deposits. Page 13 shows the deposit portfolio by FDIC insurance status.
Speaker 5: As the chart on the left shows, we reported a notable increase in uninsured deposits throughout 2020 and 2021.
Speaker 5: And, as has been previously reported, those deposits have been falling back toward historical levels.
Speaker 5: Likewise, our loan to deposit ratio on the right side of the page is moving to be in line with the pre-pandemic level. Since the end of 2019, total deposits are up 21% and are up 18% excluding broker deposits.
Speaker 5: Page 14 compares the total amount of uninsured deposits where we have observed more depositor sensitivity to the aggregate amount of secured and available sources of funds.
Speaker 5: As shown here, the current level of demonstrated sources of funds handily exceeds the entire volume of uninsured deposits.
Speaker 5: I will preemptively respond to an expected question. We did not access the Federal Reserve discount window nor the new bank term funding program in the first quarter except for an operational test of the BTFP consisting of a $1 million overnight advance. We did not access the Federal Reserve discount window nor the new bank term funding program in the first quarter except for an operational test of the BTFP consisting of a $1 million
Speaker 5: Moving to page 15, our investment portfolio exists primarily to be a ready source of funds to facilitate client-driven balance sheet changes. On this page, we show our securities and money market investment portfolios over the last five quarters. The size of the investment portfolio declined versus the previous quarter, but as a percent of earning assets, it remains larger than it was in the previous quarter.
Speaker 5: immediately preceding the pandemic. This portfolio has behaved as expected. The principal and prepayment-related cash flows were just over $800 million in the first quarter. With this predictable portfolio cash flow, we anticipate that money market and investment securities balances combined will continue to decline over the near term.
Speaker 5: which will in turn create a source of funds for the rest of the balance sheet.
Speaker 5: Perhaps more importantly, the composition of the investment portfolio allows us to secure funding without the need to sell any of the investment securities. This is achieved primarily through a mechanism known as the General Collateral Financing or GCF repo. In this very deep and liquid market, high quality collateral is pledged to the market.
Speaker 5: and program participants exchange funds anonymously through a third-party clearing and guaranteeing settlement, meaning that the value of the collateral is recognized by all as the sole component of risk assessment.
Speaker 5: The duration of the investment portfolio is virtually unchanged from the same prior year period at 4.1 years currently versus 4.0 years a year ago. This duration helps to manage the inherent interest rate mismatch between loans and deposits. With loan durations estimated to be 1.8 years and the larger deposit portfolio duration estimated to be 2.9 years.
Speaker 5: fixed rate term investments are required to bring balance sheet
Speaker 5: to bring balance to asset and liability durations, and thus protect the economic value of shareholders' equity.
Speaker 5: Page 16 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. Importantly, the balance sheet is assumed to be the same.
Speaker 5: of latent sensitivity in addition to the shape of the yield curve is the accelerated funding cost beta, which we discussed on last quarter's call. These factors are modeled to result in a net interest income decline of nearly 7% in the first quarter of 2024 when compared to the first quarter of 2023. secretaries of physician emergent sensitivity Erwin
Speaker 5: If the March 31, 2023 forward path of interest rates were to materialize and using a stable sized balance sheet, the emergent sensitivity measure indicates a decline in net interest income of an additional 1% in the first quarter of 2024 when compared to the first quarter of 2023. With respect to our traditional interest rate risk disclosures, our estimated interest rate sensitivity to a 100 basis point per year.
Speaker 5: interest rate swaps. As a reminder, this traditional interest rate risk disclosure represents a parallel and instantaneous shock while the latent and emergent views reflect the prevailing yield curve at March 31st.
Speaker 5: Our outlook for net interest income for the first quarter of 2024 relative to the first quarter of 2023 is moderately decreasing. More immediately, we expect the recent acceleration of deposit re-pricing beta and balance sheet changes to reduce net interest income by about 7%.
Speaker 5: in the second quarter when compared to the first quarter. On page 17, we quantify the value of the investment portfolio in managing our interest rate risk. On the left-hand side of the page, the dark blue bars show our reported net interest income at risk measures, while the light blue bars show what net interest income at risk would be if we did not actively manage interest rate risk.
Speaker 5: through our investment portfolio and interest rate swaps. As the bars indicate, the difference in the plus 100, or I'm sorry, plus and minus 200 basis point parallel shocks would move from 13% to 39%.
Speaker 5: our investment portfolio and interest rate swaps. As the bars indicate, the difference in the plus 100, or I'm sorry, plus and minus 200 basis point parallel shocks would move from 13% to 39%. An even larger impact.
Speaker 5: on the risk to economic value of equity due to changes in interest rates can be seen on the right-hand chart. Reported EVE at risk would move from 2 percentage point differential to a 49 percent difference without the moderating impact of our fixed rate securities and interest rate swap positions. This demonstrates the value of assessing.
Speaker 5: This demonstrates the value of assessing the balance sheet holistically rather than through the partial view previously described by Harris. Our loss-absorbing capital position is shown on page 18. We believe that our capital position is aligned with the balance sheet and operating risk of the bank. The BET1 ratio continued to grow in the first quarter to 9.9%.
Speaker 5: This compares well to a very low level of ongoing net charge-offs. As the macroeconomic environment has become more uncertain, we do not expect to repurchase shares in the second quarter.
Speaker 5: Our goal continues to be to maintain a CET1 ratio slightly above pure median while managing to a below average risk profile.
Speaker 5: Page 19 provides an illustrative outlook for accumulated other comprehensive loss. The unrealized loss associated with the investment portfolio and cash flow interest rate swaps will reverse as these portfolios pay down and mature. These changes are expected to improve.
Speaker 5: the accumulated other comprehensive loss position by nearly $1 billion by the end of 2024. All things equal, this would add 110 basis points to the common equity ratio and would add just under $7 to book value for common share.
Speaker 5: I will now turn the call over to Michael Morris, our Chief Credit Officer, for a discussion of credit and, in particular, commercial real estate. Michael? Michael Morris, Chief Credit Officer, Commercial Real Estate, California, Department of Commerce, Department of Commerce, and the Department of Commerce, Inc.
Speaker 5: Thanks, Paul. And hello to all those on the line. I'll begin on slide 20 with an overview of our credit quality.
Speaker 5: We're pleased to report another quarter of improved problem loans as measured by classified loans. Such loans declined to 1.6% of total loans.
Speaker 5: Non-performing assets increased slightly but was off a very low base.
Speaker 5: And as Harris noted earlier, we're happy to be able to report today that we had no net charge-offs in the quarter, in the first quarter. Nevertheless, due primarily to an increase in the probability of a recession in the quantitative models that we use for setting the allowance along with additional dollars added to the qualitative allowance for the commercial real estate office segment, the allowance for credit loss.
Speaker 5: increased 7% to nearly $680 million, or 1.21% of loans as a coverage ratio.
Speaker 5: Looking back over a longer period as the Federal Reserve began to increase interest rates, we've increased the allowance by 32 percent, while net charge-offs have remained very low, while classified loans have decreased 21 percent.
Speaker 5: Turning to slide 21, there is a significant amount of media coverage about commercial real estate and the risk of default and loss on loan portfolios.
Speaker 5: As Harris said at the outset of the call, not all commercial real estate loans are created equal.
Speaker 5: We have been addressing this risk for more than a decade now, having reduced CRE.
Speaker 5: to 23% of total loans from 33 at the peak in late 2008.
Speaker 5: Five years ago we spent a considerable portion of our investor day highlighting our credit risk reduction efforts and three years ago we told investors at our 2020 investor day
Speaker 5: that we expect it to be in the best quartile of net charge-offs as we go through the next recession, with commercial real estate being a key element that must perform well to make good on that expectation.
Speaker 5: Over the past decade we've outperformed by a considerable margin the loss rate of both the industry as a whole and our large regional bank peers.
Speaker 5: Our commercial real estate portfolio is diversified across geography.
Speaker 5: With the largest concentration in California, although if measured on a per capita basis, our concentration there is actually smaller than many of our other geographies that we're in.
Speaker 5: Our portfolio is also well diversified across asset classes or product types.
Speaker 5: With the largest concentration in multifamily, Office CRE is the property type receiving the most attention in the financial media and by investors. We'll discuss that a little more in detail in a moment.
Speaker 5: On slide 22, we have been tracking our commercial real estate growth rates relative to peers over time.
Speaker 5: Since late 2017, we've grown CRE a total of 9%, which compares to inflation of 23% during that same time period.
Speaker 5: It is well below the roughly 45 percent organic increase seen.
Speaker 5: at the media of our peers.
Speaker 5: In order to engineer this slower growth, we've employed more rigorous underwriting standards than many of our peers.
Speaker 5: and we've adhered to our concentration framework.
Speaker 6: Thank you.
Speaker 5: Turning to slide 23.
Speaker 5: We've been presenting this or similar data on the left in the appendix.
Speaker 5: of our slide decks for a number of years. It shows the weighted average LTV of each of the major asset classes which is calculated using the current loan amount divided by the most recent appraisal.
Speaker 5: All of the property types have a weighted LTV that is less than 60% loan to value. Further, we look at the tail risk within our portfolios, not just LTV tail risk, but other underwriting standards as well, such as debt coverage ratio. Then on the bottom, you can see the distribution of LTVs for all term CRE loans.
Speaker 5: with only 1% of CRE loans having an LTV that is greater than 80%.
Speaker 5: I should note that we watch for layering of risk factors and generally require mitigation of risk.
Speaker 5: if one underwriting element is a bit off the fairway. For example, if the LTV is higher than our normal comfort level, we may require a cash sweep.
Speaker 5: faster amortization schedule, a greater personal guarantee, and so forth. This practice is a major factor in why our loss, given non-accrual rates, are among the best, most relevant subjects.
Speaker 5: within our peer group and within the industry. On the right is a look at one underwriting aspect of our CRE portfolio. The darker blue bars show the LTV distribution using the current loan balance and the most recent appraisal.
Speaker 5: However, periodically we run sensitivities and analyses that show the estimated current value by attaching the most recent appraisal.
Speaker 5: to commercial property price indices and rolling the appraisal forward to show more of a pro forma or indexed LTV.
Speaker 5: With the deterioration in office property prices, it's not surprising to see that the light blue bars have shifted somewhat to the right with an estimated $130 million of office loans in the 80% to 90% category, but none in the 90% or greater category.
Speaker 5: Not shown on this slide, but on slides 29 and 30 in the appendix, we provide a lot of additional detail in our office portfolio, including important factors such as the median and average size,
Speaker 5: our allowance coverage relative to office loans as well as criticized office loans.
Speaker 5: credit tendency rates, lease expirations by year, loan maturities per year, and other key factors in estimating the probability of and the loss given to fall.
Speaker 5: In summary, we're comfortable with how we're going to be managing the office exposure.
Speaker 5: and the risk profile of those loans, we're expecting some credit loss.
Speaker 3: but we think it's very manageable. So James, I will turn the call back to you. Thanks, Michael. Slide 24 summarizes our financial outlook. Paul mentioned some of these throughout the call, so I'll just briefly summarize the changes in these. The first one is a change in the reduction in loan growth to slightly increasing from...
Speaker 3: on that so I won't deliver that.
Speaker 3: And then thirdly, is an improvement in non-interest expense, which we changed to stable from moderately increasing in the previous edition.
Speaker 3: This concludes our prepared remarks. As we move to the question and answer section of the call, we request that you limit your questions to one primary and one follow-up question to enable other participants to ask questions.
Speaker 3: With that, Alicia, if you'll open the line for questions. Thank you. We will now be conducting a question and answer session.
Speaker 2: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star key.
Speaker 2: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star key. One moment please while we poll for questions.
Speaker 2: Thank you. Our first question is from Manak Gasalia with Morgan Stanley . Please proceed with your question.
Speaker 7: Hi, good afternoon. Thanks for taking my question. I was wondering, can you talk a little bit about the trajectory of deposits through the quarter? How much of that decline in deposits was seasonal versus continued runoff of rate sensitive deposits versus ?
Speaker 7: overall on the deposit flow through the quarter.
Speaker 4: Yeah, I can maybe.
Speaker 4: just offer a little more color to it. Now we had seen in the fourth quarter
Speaker 4: roughly five billion dollars of, a little over five billion dollars in runoff.
Speaker 4: And I'm gonna speak specifically to non-brokered and non kind of what we call our gold sweep product which is a very wholesale product. So we've had men's export products need more armoured guess-'t-benefit products
Speaker 4: between September and December .
Speaker 4: between September and December .
Speaker 4: just over $5 billion, excluding broker deposits, etc. It was a little over $8 billion in the first quarter.
Speaker 4: And so it was
Speaker 4: It was a continuation of a trend, actually a trend that began back in June . We'd had about a $1.8 billion decrease, so it was an accelerating phenomenon as rates were rising.
Speaker 4: And it's hard to know exactly how to pinpoint, you know, how much is due to, how much was trend and how much was due to the disruption in mid-March.
Speaker 4: But my sense of things is that this was, you know, it was maybe $3 billion or something like that, two to three billion. It was beyond trend.
Speaker 4: and furthermore that probably a fair amount of that will come back as things stabilize. We've had a very low deposit beta and that was deliberate and it's contributed to it because we've done a very little liquid position. As we bring that probably a little more into line, I expect that too.
Speaker 7: to slow down. Got it. And then, maybe if you can help us with a little more detail on the moderately decreasing guide on NII. Can you help us think through – so, that guidance is from now through – or for 1Q24 on a year-on-year basis. But can you help us think through the
Speaker 7: How are you thinking about this trajectory through the course of 2023? Well, yeah, this is Paul. These are the main components, of course.
Speaker 3: are the continued inversion of the yield curve worse than it was, worse, i.e. more inverted in the first quarter relative to the fourth quarter. That was an important change, I think, as we think about that.
Speaker 8: view of latent sensitivity changes in rates as they work through the balance sheet. But there was also, as I noted, some funding composition changes. So as we look out over the course of the year, I gave some pretty specific, I think, outlook numbers, back in January , Chris lyric noted that some pretty complex numbers became changes on the academic graph but didn't Authority Could get change in rates with about the spit
Speaker 8: with respect to what to expect in the second quarter. Then from there, my expectation would be that loan growth and perhaps improved deposit flows would improve that over time getting to results next year.
Speaker 8: that is in the ballpark of what I described.
Speaker 8: that is in the ballpark of what I described. Got it, thank you.
Speaker 9: Thank you.
Speaker 2: Thank you. Our next question comes from Dave Rochester with Compass Point.
Speaker 2: Thank you. Our next question comes from Dave Rochester with Compass Point. Please proceed with your question.
Speaker 10: Hey, good afternoon guys. Back on the NII guide, I appreciate all the details. I just wanted to run through them real quick. Paul, it sounds like you're saying NII down 7% for 2Q versus 1Q, but when you take a step back and look at the annual or the year over year, it sounds like it's a little bit worse than the moderate or the mid-single digit.
Speaker 10: I just wanted to confirm you guys are looking for stable from 2Q on to 1Q24 effectively, is that correct? How are you guys thinking about the positive funding trends in that context? On the first point, I wouldn't characterize the first quarter of 2020 as a
Speaker 8: 24 as being worse necessarily than the second quarter of 23. The way I'm thinking about it, you've got some countervailing influences. One is the continued impact of the inverted curve on net interest income. On the other side of that, I would expect some balance sheet growth in there as well. Then as it relates to the funding composition, what we have in our model is kind of a continued impact as part of the method Set to be in the prediction of the total
Speaker 8: What's the word I'm looking for? Our beta has been so low for so long. As we said in last quarter's call, we expect that beta to catch up over the course of 2023. And so, incorporated in that outlook, we saw some of that beta catch up here in the first quarter. We saw it again sort of at the end of the first quarter.
Speaker 8: That beta catch up, if you will, is going to continue throughout 2023. There's some counter bailing trends there, but it ends up in a place that I would say that guidance would be roughly similar to where we expect to be in the second quarter. The positive... Oh, sorry.
Speaker 10: But I was just saying I didn't mean to confuse it just looked like you were saying that the and I had one q24 Was going to be potentially higher than what you were looking forward to Q23 just given you were talking about Q23 down 7% and once you 24 only being down Roughly 5% effectively versus the quarter you just reported so it sounds like you're talking about a little bit of an upward trend on NII
Speaker 10: openings in March and the other details you guys gave. Can you just talk about what your larger operating deposit account customers are doing more broadly post the failures last month? Have you seen much movement on the operating account side? Are they holding less funds in their accounts since the turmoil? And then if there's any kind of quarter to date to queue commentary on deposit trends you can give in terms of up or down.
Speaker 11: There, as we've said, and as Paul discussed,
Speaker 11: there's a certain subset of those larger commercial depositors where they have well and excess of what they need for just their operating accounts.
Speaker 11: And some of that money is certainly interest rate sensitive. It's probably the most interest rate sensitive.
Speaker 11: And then secondly, there was just a disruption. So we certainly lost some deposits related to the disruption, but those relationships are really strong and...
Speaker 11: You know, the large customers that I've talked to, Harris talked to, Paul, et cetera, they've seen this before and they understand the strength of the company. So I, as Paul said, I think some of those balances will naturally come back, particularly after this earnings release.
Speaker 11: And so it's just a combination of interest rate sensitivity and sensitivity and some money certainly did move because of the...
Speaker 11: And so it's just a combination of interest rate sensitivity and in some movies, some money certainly did move because of the volatility.
Speaker 9: Thanks, guys.
Speaker 9: Thanks, guys.
Our next question comes from John Pankri with Evercore IFF. Please proceed with your question. Good afternoon. Hi, John . I want to see on the, just a couple of things on your NII outlook. Can you just clarify?
What deposit growth outlook is baked into your NII forecast? And then similarly, what is the non-interest bearing mix trend that you assume as well? Thanks.
Yeah, we typically don't provide outlook on deposits, but I can say that they're embedded in that is a little more deposit attrition. As I said previously, my expectation is with a better, more aggressive pricing, as I said in my comments, that we could perhaps waive some of these.
that have moved off the balance sheet back onto the balance sheet, but inherent in the outlook is a little more deposit attrition. Okay. Then, similarly, do you have the ability to help give it some color on the bearing mix change? Then, can you remind us how you're thinking about a through cycle?
Well, non-interest bearing mix, you saw the period end balances, we did see some runoff kind of period over period. On average, non-interest bearing deposits remain about half of total deposits. But as I think historical trends would indicate, at 50% of deposits, holding non-interest bearing deposits at 50% of total deposits is a pretty atypical level.
And so we would expect that to revert over the course of the year. So I'm not going to predict where that goes, except to say that I would expect that mix to change over the course of the year, and that interest-bearing deposits, by the time we get to the end of the year, interest-bearing deposits will exceed non-interest-bearing deposits. Okay, great. Thank you. Oh, and on deposits data, our... Okay, we had some other questions.
Our terminal beta for interest-bearing deposits is near 50%, about 45% for total deposits is about 28%.
Thank you. Our next question comes from Brad with PIPR sampler. Please proceed with your question. Please proceed with your question.
Hey, good afternoon and thanks for taking my questions. Paul, I was just curious, the broker deposits that you put on at the end of the quarter, I was curious if you'd give me a sense of maybe the duration and rate on those and then kind of what would the trade-off be between the...
deposits you expect to come back to the bank versus the brokered money or short-term borrowings or Fed funds purchased. Just trying to think about maybe what the pickup could be there. I would assume you want to take that funding and maybe reduce some of the wholesale that you brought on, but that may be thinking about it incorrectly. Just wanted to get some additional color. I think that's approximately correct. The way we see broker deposits as...
kind of another source of wholesale funds really, even though they're called deposits, they're pretty rate sensitive, as you know. And so that's why we make an effort to break those out in our disclosure so that investors can see sort of clearly core versus broker deposits. We think that's an important distinction. The maturity profile of those...
is a ladder profile that goes from three months to 18 months over the course. The rates paid on those are very, very competitive, as you would imagine. My expectation is, if we're successful bringing in some of the deposits that have recently left the balance sheet due to rate, for example.
effectively pull so far away. Great, thank you. And as my follow-up, you gave a lot of guidance around, you know, expenses. You also noted in the deck that you know you're looking for ways to maybe further reduce expenses. Would those already be encompassed in your
in your guide or should I treat that comment as there could be more to come given the reduced revenue outlook? Those are incorporated into the outlook that we provided.
Okay, great. Thank you very much. Thank you. Thank you. Our next question comes from Ked Ousden with Jeff Rees. Please proceed with your question. Thanks a lot. I just wanted to come back on to the left side of the balance sheet. We're talking a lot about the right....
So as you think about just like how the adjustments happen on the asset side, you know, just what is your general outlook for what the securities portfolio and the pace of runoff, I know you gave us the AFS pull-to-par, and then, you know, what do you have any changes here in terms of just how you look at loan growth in terms of...
that balancing act between loans and deposits from here? Thanks. Sure. On securities, as we've been reporting for some time, the duration of that portfolio has been pretty steady at around four years, and that's over the course of the last year, despite a pretty massive change in interest rates.
That portfolio has been cash flowing at about, I'd say a little over $800 million a quarter. That's been pretty consistent over the last year and that's the level of cash flow that I would expect to continue borrowing some unforeseen, you know, massive drop in longer term rates. So that will, as you noted...
We provided some level of disclosure around the amortization or the accretion of the accumulated other comprehensive loss that's related to all those things. It remains a ready source of funds for us. I do not expect to be purchasing any securities and I would expect the portfolio to be running off.
at that level, certainly over the course of the next year. On the loan growth question that you asked, if you look at the last four quarters, four or five quarters, they've been some of the strongest loan growth quarters in our history. This quarter... Okay, we're trying to see if any of this could be a success.
as compared to the fourth quarter of 2022, it's running at a rate that is more like what we saw throughout the latter part of 2015 through 19. And so it's a growing mid single digits is a very sustainable rate we think.
Okay, just a follow-up, and Harris, I know where you stand on your view of TCE and unrealized losses, but just bigger, bigger picture with a lot of talk about what happens with re-regulation here. How do you think the crowd of banks where Zions hangs, kind of that former $50 to $1 billion crowd?
you know, might be treated in terms of, you know, potential re-regulation of your size type of bank? Well, I don't know, you know, the jury's still out. My hope is that there will be, you know, the regulators and Congress and others will come at this really thoughtfully because it has, beyond the banking system, it has a lot of implications for...
for the housing markets for example, I mean a third of all the agency mortgage backed securities are held in the banking system. And if you create, another third's held by the Fed. And you know, if those two, that two thirds of those total holdings are trying to get rid of them, I think it has a lot of implications for the 30 year mortgage and thus for housing.
I truly believe that most banks of our ill, more traditional, you know, half their deposits are more kind of insured.
They're trying to balance this balancing act between managing earnings at risk and creating some stability to the earning stream and the economic value of equity. And to do that, I mean that's why we put a couple slides in here showing.
If we weren't using some of these tools, mortgage backed security, swaps, et cetera, we'd be very asset sensitive and you'd...
It might be good for the economic value of equity, but not so much for earnings stability.
might be good for the economic value of equity, but not so much for earnings stability.
And I'd also note, frankly, a lot of talk about stress tests. The fact of the matter is that there's a built, the stress tests have traditionally really focused on the more traditional causes of stress.
trouble in the industry which has been credit related. And there's a built-in incentive to create duration in those stress tests so that you have an earning stream during a period of economic weakness.
And so all of those are the kinds of things I would hope will be thought through and
that there's a balanced view of all of this because I think the couple of banks that really have ignited this, you know, created this storm, had very idiosyncratic, and particularly Silicon Valley obviously, but very idiosyncratic kinds of business models and deposit structures, and we've gotta be careful that we don't throw out a lot of babies with the bathwater, so.
banks if you if you if you go about this with a meat cleaver you've got some of the largest banks in the country that are going to have to raise tens upon tens upon tens of billions of dollars of capital. I'm not sure the market could even absorb it very well.
Just some random thoughts about it. I appreciate your thoughts, Harms. Thank you. Yep....
So, just some random thoughts about it. I appreciate your thoughts, Harris. Thank you. Thank you. Our next question comes from...
from Ibaheim, Pune, Walla with Bank of America. Please proceed with your question. Good afternoon. Couple of follow-up questions. One, I think you provided the spot cost of deposits at 163 for interest bearing deposits.
An apology is if I missed it, but can you remind us where you expect terminal deposit betas if we think that the Fed has maybe one more rate hike to go? Where do you think interest-bearing deposits or total deposit costs level out for the bank?
I won't give you the precise cost, but I will say, as I said previously, we expect the over the cycle deposit beta, and we're going to see some catch up on this this year, to be just under 50%, about 45%. For interest bearing specifically, which I think was your question.
Do you expect to get there by the end of the year?
I suspect we would, yes. I guess this is a separate question. You provided detail on the CRE book, maybe a question for Michael. Just in terms of from your lens, when you look at the CRE market, a lot of concern. We haven't been able to tell you nothing about CRE.
Do you think that the market is right in focusing on office area as probably the most stressful area or if rates remain higher for longer, do you worry about this spreading beyond the office subsector? Well, I do think office is going to be really challenging.
for quite a few years. And it has a lot to do with remote work optionality and sort of the new model that's developing and how do you right size.
the architecture and design and the current four plates.
and those tenants who are downsizing. So I think office will continue to be one of the tougher segments.
in the industry, not just in our market.
And I don't think it is more of a contagion kind of issue. I don't see the other asset classes.
being as stressed because it really has to do with where we work.
Industrial has done well, continues to do well.
Multifamily may have been oversupplied going into the pandemic.
But there isn't a lot of activity over the last three years in multifamily and if there is it's
starting back up, so I'm not too worried about multifamily. I think supply and demand are pretty much in equilibrium. Hospitality will continue to be, I think, underwritten, pretty conservative underwriting guidelines, potentially throughout the industry.
Homebuilders are coming back. We were fairly concerned about Homebuilders last year and the year before.
even though they were setting records for sales. We saw sales really dry up last year, but they're coming back, and we feel good about our HomeBuilder portfolio and potentially the industry.
as rates either flatten and plateau or even move down a little bit by the end of the year is some of the thinking. Thank you.
either flatten and plateau or even move down a little bit by the end of the year is some of the thinking. Thank you. Thank you. Thank you this is N Katy Kramer.
Thank you. Our next question comes from Brandon King with Truist Securities. Please proceed with your question.
Thank you. Our next question comes from Brandon King with Truist Securities. Please proceed with your question. Hey, good afternoon. Hi, Brandon.
I appreciate all the color and details as far as credit quality and all the trends. I wanted to get a sense of what you're thinking as far as the cadence of net charge-offs as we progress through the year and as losses normalize from very low levels. I think it's going to be...
all the color and details as far as credit quality and all the trends. I wanted to get a sense of what you're thinking as far as the cadence of net charge-offs as we progress through the year and as losses normalize from very low levels. Well, I think it's going to be...
Currently, I don't think there's anything that's looming large on the radar.
in terms of problems that we can see coming at us. What we see coming at us though is, you know, the Fed's been working at this in terms of trying to slow things, to slow demand. Yeah, I think what we've seen in the regional bank and community bank space.
probably is going to have everybody more focused than they had been on liquidity and capital. I think there is an expectation that that is going to create tighter credit conditions.
I expect that we will in a relative sense. So, but
The reserves are there for events that...
The reserves are there for events that...
that we think are very possible out through the life of these loans. It's our best estimate, I guess, kind of almost by definition. That's how we arrive at the number. But in the near term, we're not seeing anything that's giving us any real concern.
To the extent it comes, I think it's going to come later in the year and into next year. I think you can see that pretty clearly on page 20 of our investor flood. Got it. Is there a normalized net charge off range that you underwrite to or that you keep in mind when...
during the underwriting process? We underwrite to get repaid on every deal. Yeah. We really do. I mean, it's a...
You know, obviously, customers run into problems. There are things that are unforeseen that happen.
But I'm quite serious about the fact that over the last decade plus we've become
Certainly more careful about concentration limits and about the, perhaps particularly in the CRE space.
But I think we've always had good underwriting standards. I think if you go back and look at what happened to us in the great financial crisis, it was more about concentrations than it was about underwriting per se.
and we had too much land and construction, land development, acquisition.
That was really where we had the most pain. We have very little of that these days.
And so I rather expect we're gonna, in a relevant sense, I think we're gonna be in quite good shape. What we've said before numerous times that.
if you think about a recession, you think about the asset classes that are, you know, going to be under the greatest pressure in a recession, a general broad-based recession, you think about consumer, we don't really have any consumer unsecured to speak of.
buying retail paper, that kind of thing. We just don't have a lot of that. Construction lending, construction is only 20% of the CRE portfolio, and as Harris just said, there's virtually no land in it. So that's always a toxic area.
And then highly leveraged transactions, what the industry refers to as highly leveraged transactions. We believe our exposure to that is less than peers. Moody's has said that some years ago. They're doing another study on it right now, we believe, and we think we'll compare well there too. Those would be three asset classes that would pop up on most people's radar in terms of.
potential challenges. Got it. Thanks Brandon. Take more questions. Thank you Brandon. Alicia we are at our time limit we're just going to see if we can very quickly go through two more questions just to really skip through them very quickly and and so we appreciate everyone's patience for just going over time just a minute. Of course. No worries.
Our next question comes from Chris McGrady with KBW. Please proceed with your question. Great, thanks for squeezing me in. The 110 basis points of OCI that's gonna come back, Paul, over the next seven quarters, that would, in a static world, take you to around 11. I know you've always said it.
top end above peers. We've seen some peers kind of officially bless 11. Is that a fair level of capital that you might consider running?
I think there's maybe two things going on there. As you know, we do not include the AOCI in our regulatory capital, so our CET1 ratio, which is at 9.9%, is not affected by the accretion of the accumulated other comprehensive loss.
It's an important distinction. We know that, and we manage to regulatory capital, we know that there are those who have been recently looking at tangible common equity. The purpose of the slide is for those folks who are focused on tangible common equity to demonstrate that without a whole lot of...
We can get to an accretion of about 110 basis points in that ratio based solely on the continued accretion of that accumulated other comprehensive loss into capital as the relatively short duration of our portfolio allows for fairly rapid amortization.
Thank you. Our next question comes from Stephen Alexopoulos. Please proceed with your question. With JP Morgan. Hi everybody. Hi Sue. Thank you.
Aris, this one's for you. I wanted to follow up on your response to Ken's earlier question on new regulation. We basically said that Civ-B and Signature are unique models. It's your hope that the baby doesn't get thrown out with the bathwater. But if we put regulation aside, when you look at the speed at which deposits moved out of those banks, not to mention the role that social media played, which is a totally separate topic.
even though your business is very different than them, does this change the way you and the board think about managing risk and liquidity? Yeah, I mean, listen, I think that that's very much a new element. It's not just social media, it's the reduced friction, if you will, in moving money from institution to institution, et cetera. And so I think that is something that very much needs to be in everybody's calculus, is you think about the duration of core deposits.
And I think it's hard to figure that out really from Silicon Valley and Signature because they, for all the obvious reasons in terms of the size of their accounts, and particularly Silicon Valley, you had a...
I don't know, I had a few dozen people managing, you know, well over half of the deposit base of that company could have been, I think of them as the digital puppeteers that really brought that thing down in a moment. I don't think that's how most banks are actually built.
taking into account. And I think we're, I do think we'll learn, it's actually been a useful exercise in looking at where, which money moved, was it operational, was it insured, yada yada yada. And I expect that we and probably others will be going through.
adjusting the assumptions and all of our models around the durations of farms based upon not just the type but their attributes as well. If I could add to that, Harris, I totally agree with everything that Harris just said. I think that we manage liquidity, for example, through liquidity stress testing, and so we've got kind of a massive amount of deposit outflows incorporated into that. I don't think we're going to get into that.
of available and untapped sources of liquidity. So I don't know that it's gonna change the result much, but it might change the analytics.
That's helpful. If I could ask one more bit of an oddball question. But Western Alliance reported earlier and they said on their call they saw a pretty sharp reaction from their depositors as their stock price was under quite a bit of pressure right in the aftermath of SIBD.
I'm curious, if you look at the deposit flows of the individual banks, did you see more of a movement out of Zion's Bank because of maybe an association to the holding company in stock versus say an Amagy or one of the other banks where maybe that association is not as strong or was it fairly universal? I don't think we saw any.
Interesting question, but I don't think we saw any correlation there. Thanks for taking my question. The other thing, the other reality is that a lot of small business owners, a lot of consumers just don't watch stock prices that much. What we think of as being an electric three weeks, a lot of people, they're just not as tuned into it because...
their bank is open, their bankers are there, they're handling their transactions, you know, et cetera. I think we overrate sometimes the level of attentiveness that many businesses and consumers have to, what's actually going on in the economy. That's a good color. Okay, thank you guys. Yep, thank you. It's worth, I'm gonna circle back real quickly to a comment earlier around deposits. There was a question about the current level of deposits. I think it's in a kind of a Reg FD friendly environment. It's worthwhile to mention that deposits have been.
listed on our website. We look forward to connecting with you throughout the coming months and again thank you for your interest in Zions Bank Corporation. Alicia this concludes our call.
Great, thank you. You may disconnect your lines at this time. Thank you for your participation.
You may disconnect your lines at this time. Thank you for your participation.
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