Q2 2023 Zions Bancorporation NA Earnings Call
Greetings and welcome to Zions Bancorp Q2 earnings call.
At this time all participants are in a listen only mode. A brief 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 it is now my pleasure to introduce your host San.
Then to Rage director of Investor Relations. Thank you Shannon you may begin.
Thank you Alicia and good evening, we welcome you to this conference call to discuss our 2023 second quarter earnings as many of you know our long term director of Investor Relations James Abbott.
To pursue a self employment opportunity and we wish him well my name is Shannon Drayage and I am the interim director until a permanent replacement for James if elected.
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 our 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.
Copy of the earnings release as well as a slide deck are available on Zions Bancorporation dotcom.
For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide opening remarks, following Harrison comments, Paul Burton, our Chief Financial Officer, Who'll review, our financial results.
Also with US today are Scott Mclean, President and Chief operating Officer, and Keith Smile, Chief Risk Officer.
After our prepared remarks, we will hold a question and answer session. This call is scheduled for one hour I will now turn the time over to Harris Simmons.
Thanks, very much Shannon and we welcome all of you to our calls this evening.
We're pleased with the environment around the banking industry seems to have stabilized relative to the disruption we saw during the first quarter.
One notable outcome across the industry has been the acceleration of deposit pricing.
All deposit attrition appears to.
And largely transitory are the higher cost of deposits remains beginning on slide three.
We've shown some themes that are particularly applicable designs this quarter as well as well as service center.
Likely to be prominent over the near term horizon.
Customer customer deposits were up $2 billion for the quarter.
We are grateful, but not surprised that our customers have demonstrated their loyalty and confidence in us.
We continue to actively manage our balance sheet and our responses.
Response to changes in interest rate risk.
This includes funding mix optimization changes in our interest rate hedging strategies and our product.
We're also committed to managing our expenses in relation to a more challenging revenue environment. Our second quarter results reflect a $13 million severance expense related to our objective of flattening expenses over the next year.
Our levels of nonperforming and criticized assets declined slightly compared to the prior quarter.
We experienced $13 million and net charge offs.
In the first quarter, but well below historic norms and reflective of one of one off events rather than portfolio trends.
Loss absorbing capital increased and remains healthy, particularly relative to our risk profile.
Turning to slide four we've included a summary of quarterly financial results showing a linked quarter comparison with the first quarter of 2023.
Circled on the slide we reported total deposit costs of 127 basis points for the quarter compared with 47 basis points in the first quarter.
Period end customer deposits increased three 2%.
Including the impact of broker deposits deposit growth was seven 4%.
Loan growth has slowed year to date relative to 2022 to a moderate annualized pace of growth.
Moving to slide five diluted earnings per share was $1.11.
As shown on the right side, we accrued seven cents per share or $13 million of severance expense.
Offsetting that was an equal positive impact from the gain.
The sale of a piece of property.
These one time items aside the largest contributor to the decline in earnings per share was the impact of increased deposit and other funding costs on net interest income.
We were successful throughout the quarter in maintaining and growing customer deposits through more competitive pricing, including moving customer deposits from off balance sheet products to on balance sheet products.
These efforts are reflected in the higher cost of deposits.
Paul will discuss this further in his comments.
I'm turning to slide slide six our second quarter adjusted pre provision net revenue was $296 million.
The linked quarter decline was attributable to the primary factors I, just noted and was slightly down compared to the year ago quarter.
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.
Thank you Harris and good evening, everyone I'll begin with a discussion of the components of pre provision net revenue or P. P. M R.
Over three quarters of our revenue is from the balance sheet through net interest income slide seven includes our 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 and the net interest margin and white boxes declined in the second.
<unk> is our cost of funds, including the rates, we pay on deposits reflected the impact of the rising rate environment and more competitive pricing.
Additional detail on changes in the net interest margin are outlined on slide eight.
The left hand side of this slide we've provided a linked quarter waterfall chart outlining the changes in key components of the net interest margin. The approximately 100 basis point adverse impact associated with deposits, including both changes in rate and volume was partially offset by the positive impact of loans.
Lower borrowing levels and the increased value of noninterest bearing funds.
As noted on prior calls we have been more competitive with deposit pricing a tactic that has accelerated in the second quarter due to increasing depositor sensitivity our success in growing customer to customer deposits contributed to reducing the level of borrowed funds as we move through the second quarter and noninterest bearing.
Sources of funds continued to serve as a significant contributor to balance sheet profitability.
Was almost entirely offset.
By increased deposit and borrowing costs.
Our outlook for net interest income in the second quarter of 2024 is stable to slightly decreasing relative to the second quarter of 2023.
Risks and opportunities associated with this outlook include realized loan growth competition for deposits and the path of interest rates across the yield curve.
Moving to noninterest income and revenue on slide nine customer related noninterest income was $162 million increase of 7% versus the prior quarter and 5% versus the prior year. As we have previously noted we modified our non sufficient funds and overdrafts overdraft fee practices.
At the beginning of the third quarter of 2022, which has reduced our noninterest income by about $3 million per quarter over the past year.
Improvement in commercial account fees, including Treasury management fees has allowed us to make up the loss of this revenue.
Compared to the first quarter customer fees grew $11 million or 7% due to strength in loan syndications interest rate derivative sales and other capital markets activity.
Our outlook for customer related noninterest income for the second quarter of 2024 is moderately increasing relative to the second quarter of 2023.
The chart on the right side of this slide includes adjusted revenue, which is the revenue included in adjusted pre provision net revenue and is used in our efficiency ratio calculation. Adjusted revenue grew 3% from a year ago and decreased by 7% versus the first quarter due to the factors noted previously.
Adjusted noninterest expense shown in the Blue bars on slide 10 decreased 3% from the prior quarter.
$494 million.
The first quarter typically includes seasonal items, such as stock based compensation for retirement eligible employees and payroll taxes in the second quarter. Therefore reflects a decrease due to the lack of those seasonal expenses reported expenses at $508 million includes $13 million in severance expense associated with our intent to.
Latin expenses over the next year.
Outlook for adjusted noninterest expenses stable in the second quarter of 2024, when compared to the second quarter of 2023 and excludes any impact associated with the proposed FDIC special assessment.
Slide 11 highlights trends in our average loans and deposits over the past year on the left side you can see that loan growth has moderated in the current quarter. Our expectation is that loans will increase slightly in the second quarter of 2024, when compared to the second quarter of 2023.
Now turning to deposits on the right side of Slide 11 total deposits had declined for several quarters prior to the current quarter and while average deposits for the second quarter were down slightly ending balances grew 7% compared to the end of the first quarter customer deposits, excluding broker deposits grew 3%.
As noted previously our deep customer relationships enabled deposit growth, while also bringing new business to back.
The cost of deposits shown in the white boxes increased during the quarter to 127 basis points from 47 basis points in the prior quarter.
As measured against the fourth quarter of 2021, the repricing beta on total deposits based on average deposit rates in the second quarter was 25%.
And the similar measure for interest bearing deposits was 43%.
On a spot basis at the end of the second quarter. The total cost of deposits was one 7% and the interest bearing deposit yield was two 8%, bringing the realized deposit betas to 34% for total deposits and 55%.
For interest bearing deposits at the end of the second quarter.
Earlier, I mentioned the contribution that noninterest bearing funds has on the net interest margin slide 12 shows noninterest bearing demand deposit volume trends, although deposit volumes had been declining as more customers move into interest bearing alternatives. The contribution to the net interest margin and therefore the value of the rig.
Mainly deposits has increased significantly.
Slide 13 provides additional information on deposits, including a stratification by FDIC insurance status as the chart on the left shows we reported a notable increase in uninsured deposits throughout 2020 and 2021.
And has been previously reported the level of uninsured deposits has been falling back toward historical levels. During the second quarter the ratio of insured deposits to total deposits stayed consistent at 55% the growth in insured deposit balances included both reciprocal deposits and broker deposits.
Our loan to deposit ratio on the right side is at 77%.
To put this in historical context total deposits are up 32% I'm, sorry, total deposits are up 30% or 22% include excluding broker deposits since the end of 2019.
Moving to slide 14, our investment portfolio exists primarily to be ready store house of fun to absorb client driven balance sheet changes on this slide we show our securities and money market investment portfolios over the last five quarters.
Is that the investment portfolio declined versus the previous quarter, but as a percent of earning assets. It remains larger than it was immediately preceding the pandemic.
This portfolio continues to behave as expected principal and prepayment related cash flows were over $900 million in the second quarter, which is somewhat predictable portfolio of cash flow, we anticipate that money market and investment securities balances combined will continue to decline over the near term, which will in turn be a source of fund.
For the rest of the balance sheet.
The duration of the investment portfolio is slightly shorter compared to prior year. The prior year period estimated at $3 seven years currently versus $4 four years, one year ago. This duration helps them manage the inherent interest rate mismatch between loans and deposits with long durations estimated to be 1.8 years and a lot.
As your deposit portfolio duration estimated to be about $2 five years fixed term investments are required to bring balance to asset and liability duration.
Slide 15 provides information about our interest rate sensitivity a comparison of our model results to recent actual deposit behavior suggests reduced asset sensitivity, which we are showing on this page with the bars labeled as adjusted deposit assumptions.
In light of this change we are actively managing our asset duration to the emerging liability duration during the second quarter $2 $5 billion of receive fixed interest rate swaps were canceled and $2 $5 billion of pay fixed interest rate swaps were added.
On the right side of this slide we've included detail on the impact current implied rates are expected to have on net interest income as a reminder, we have been using the term lease and interest rate sensitivity and emergent interest rate sensitivity to describe the effects on net interest income of rate changes that have occurred but have yet to be fully reflected in the repricing.
Financial instruments as well as those expected to occur as implied by the shape of the yield curve importantly, earning assets are assumed to remain unchanged in size or composition. In these description. These estimates also assume deposit behavior is in line with that how is it behavior realized over the past 12 months.
Regarding latency sensitivity the in place yield curve as of June 30th will work through our net interest income over time, assuming a funding cost beta based on recent history. We would expect net interest income to decline approximately 4% in the second quarter of 2024, when compared to the second quarter of 2023 regarding emergent sensitive.
If the June 30 of 2023 forward curve.
For passive interest rates materializes, the emergent sensitivity measure indicates an improvement in net interest net interest income of approximately 1%. In addition to the latent sensitivity estimate in the second quarter of 2024, when compared to the second quarter of 2023 as noted previously our outlook for net interest income for the second quarter of 2024.
Relative to the second quarter of 2023 is stable to slightly decreasing.
Our loss absorbing capital position as shown on slide 16, our capital position is aligned with the bank's risk profile. The CET one ratio continued to grow in the second quarter to 10.0%. This one combined with the allowance for credit losses compares well to a very low level of ongoing loan net charge offs as the map.
So economic environment remains uncertain, we would not expect share repurchases in the third quarter.
We expect to maintain strong levels of regulatory capital, while managing to a blow average risk profile.
Slide 17 credit quality remains strong with nonperforming assets and classified loan levels remain stable and love.
Net charge offs were nine basis points of loans for the quarter loan losses in the quarter were associated with borrowers that have struggled with idiosyncratic supply chain issues delays and inventory build and changing customer demand. We do not feel these are indicative of emerging stress in the loan portfolio, which otherwise reflected slightly improving credit measures during the.
The allowance for credit losses is 1.25% of loans, a five basis point increase over the prior quarter as a result of a somewhat weaker economic forecast.
It's as we know this is a topic of interest we've included detail around the commercial real estate portfolio, including the E. R. E office portfolio in the appendix of this presentation beginning on page 29.
CRE represents 23% of our total our total portfolio with office, representing 17% of total CRE or 4% of the total loan balances credit quality measures for the total CRE portfolio remains strong the office portfolio credit metrics were stable with lower classified and criticized rates when compared to.
Industry trends there were no losses in the quarter across the CRE portfolio and we expect the CRE portfolio to continue to perform well based on the current economic outlook.
Slide 18 summarizes the financial outlook provided over the course of this presentation. As a reminder, this outlook represents our best current estimate for the financial performance in the second quarter of 2024.
As compared to the actual results reported for the second quarter of 2023.
Quarters in between are subject to normal seasonality.
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. Alicia. Please open the line for questions.
Okay.
We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be.
So Sarah to pick up your handset before pressing the star one moment, please while we poll for questions.
Yeah.
Thank you. Our first question comes from Matt Mohan Ghazaliyah with Morgan Stanley . Please proceed with your question.
Hi, good afternoon, thanks for taking my questions.
I wanted to start on.
On some of the trends that you saw on deposit balances and deposit rates during the quarter.
At our conference last month, you had mentioned that your that your NIM was approaching about 285 on average for the quarter and I know it came in a little bit better at 292. So I was wondering is that a function of the rate of change improving in June and it sort of sounded like that based on some of the spot rates that do you.
I mentioned, but I was hoping you could give some more color there.
Yeah. This is Paul if I could I might point you to in the appendix of our presentation forgive me I'm trying to find the page number.
And you pay for a presentation on page 22, we're providing monthly trends in net interest income.
And then you can see the net interest margin there as well as our noninterest bearing demand deposits and I think what you see there to your question I think what you see there is a flattening of those trends, which is informing our outlook.
Got it and then.
Maybe on the expense side.
You had some severance costs this quarter, if you could expand on what the ongoing benefit is from those cuts.
And does he said that some of the pressure on deposit costs and cost of funding with times, how much more room is there for further expense cuts.
You know I did through ongoing expense savings or.
Gotcha and non core businesses.
Sure Oh this is Paul I'll start.
That respond to the.
I am reluctant to quantify the specific expense associated with the severance because the it's part of a much larger program and the larger program is meant to create a noninterest spent noninterest expense level a year from now.
Which is roughly consistent with the current quarter that excluding the the FDIC special special assessment, so as it relates to whether or not there's further room to.
To the extent the environment changes.
The kind of thing I think that we're gonna have to manage through to.
To the extent you know those.
Possible changes might occur.
Great. Thank you.
Okay.
Thank you. Our next question comes from John Mccarthy with Evercore ISI. Please proceed with your question.
Good afternoon John .
One of them.
One just on the noninterest bearing deposit mix.
I guess, just shy of 40% right now on end of period balances.
The second quarter after the 7% decline in balances this quarter, where do you see that bottoming out.
In terms of that known interest bearing mix I know, it's already below the pre pandemic levels.
Well the mix the issue the issue with the ratio of course is that it has two numbers and as I noted we are having we are having success growing interest bearing deposits or I'm, sorry, yeah interest bearing deposits and so it's it's hard to provide sort of a specific kind of quote unquote bottom to that ratio.
Because its taken in the context of total deposits, but also the macroeconomic sort of environment. It has a very large effect if interest rates were to spike up again from here, we would probably continue to see pressure there.
Can't say, though is that our outlook sort of our best estimate.
For where we think net interest income is going to be a year from now versus versus today incorporates.
Some additional migration in DDA out of noninterest bearing into interest bearing and so that's all implied in sort of those those are those beta figures, but that I was referring to.
So I think from my perspective, the thing to keep an eye on us.
The behavior of total deposit costs and how that's affecting net interest income over time. So we've lost a as you know over $10 billion of demand deposits over the last year My expectation is that we wouldn't.
Under our sort of baseline assumptions are we wouldn't lose nearly that much over the next year.
Yeah.
Absent a lot of further increases in rates, Yeah, Hey, John This is Scott I, the slide that Paul just pointed out slide 22.
It shows.
Oh, it's just focus on.
Declining DBA in a period of rising rates, but the demand deposits become worth more also and I think that's what that slide depicts.
Clearly not interesting slower but.
They're they're worth more than they were a year ago and it has very favorable influence.
The other thing I would say is that.
When you look at our mix of DBA, which you're talking about the total deposits.
You know back two decades now more than two decades, we've always had a competitive advantage.
In terms of our mix of noninterest bearing to total deposits.
Why that is.
It's in the deck also in the appendix slide 25.
Yeah, we don't anticipate that that relationship that's existed.
Over two decades will change materially in terms of our competitive advantage versus our peers through many different interest rate environments, because it's clearly a function of.
Our strategy of banking businesses.
Type of deposits they have with windows, which are small granular.
Operating accounts that are not as sensitive.
Interest rate moves.
Great. Thanks, Scott I appreciate that and then secondly, just on capital return I know you.
Indicating no real intention.
To buyback the stock in the third quarter.
Just kind of an update.
What could change that will could bring it back in the market for your shares here. Thanks.
I'll start there yeah, theres a lot of uncertainty I think including in the regulatory environment around where capital rules are going and just you know given the environment and the uncertainty around that.
We think it's prudent to continue to build capital organically as I noted our goal is to balance.
The risk profile with the capital position of the organization and to the extent the macroeconomic environment becomes more clear the capital sort of regulatory rules become more clear than it's possible that you could see us.
Be a little more active but as it stands.
Sort of near term expectation is that there's so much uncertainty that.
You know my personal expectation is that we wouldn't be very active.
In that market.
Great. Thanks for taking my questions. Okay. Thanks, Ron.
Thank you. Our next question comes from Steven Alexopoulos with J P. M. For again. Please proceed with your question.
Hi, everybody.
Right.
I wanted to start so looking at the growth of broker deposits and then two how customer deposits have started returning to the balance sheet, what's the opportunity to replace some of those broker deposits with lower cost customer funds here.
So we thank you for that question Scott.
You know.
The events in March starting on about March 9th or 10th a that was a really quick change of jolt to the marketplace.
And I think what we tried to demonstrate through March and into the second quarter was the ability to utilize our broker deposits, which we did over the short term period March April .
Time period.
But then we were also pulling on the level of the lever.
Our higher priced commercial suite products and reciprocal deposits really all three are important levers French bank and I think I think investors should.
Draw comfort when a bank and demonstrated can utilize all three we're seeing as you noted and as Paul noted a good a good progress on building customer deposits those sweep deposits predictably and C D and I think what Youll see is that well.
We will continue to have success with that and our brokerage Cds will go down absent some other big shock to the system.
Oh.
I'm pretty.
Pretty confident that's.
But that's what you'll see over the next six months.
Yeah, Yeah. The other thing I'll notice those brokered Cds are sort of a ladder format and so they've got a kind of an average maturity of about six months. So theres an opportunity as Scott said to replace them.
As we're able to grow customer classes I think another important point.
The.
The growth in interest bearing deposits for us we didn't just start talking to our customers about.
Their liquidity on the rates, we pay for that if you go back to 2021.
Zero interest rate environment, we were pushing clients, we were recommending to them, but they moved their deposits off our balance sheet. We ended the quarter with about $12 billion in off balance sheet deposits customer deposits and we have recommended that they do that because our money market funds, we're going to pay more than the bank.
Industry. So when we started more actively in February and March and into the second quarter talking to our clients about our on balance sheet right. It wasn't like that was the first time, we talk to our customers about their liquidity. They were generally speaking happy to bring them back on balance sheet and.
Hum.
And that you know, we think that trend will continue as we have become more.
Aggressive about our.
Sure.
So if I could follow up on that interest bearing deposit cost increased materially this quarter 830 bps. The brokered were a key part of that and if we think about the ability maybe to start replacing some of those and I'm staring at your loan yields at only 565 as a repricing opportunity there how far away.
Are we from your NIM traffic.
Oh, sorry, sorry, so I just want to clarify my question from a trucking trough oh. Thank.
Thank you trough and that was the word I missed so you know.
When you consider our outlook, which is kind of flat to slightly decreasing net interest income and you consider that in the context of what I might describe as somewhat tepid loan growth combined with an investment portfolio, which is going to continue to pay down again, we had nearly $1 billion of pay downs this quarter my.
As you know, earning assets generally speaking.
We're gonna be kind of flat to down and so when you put those two things together the revenue.
As the numerator in earning assets as a denominator I actually think we're getting you know my point of view I think we're getting pretty close to again barring some unforeseen event I think we're getting pretty close to the lower edge.
Of the net interest margin in the current environment in fact, the spot net interest margin.
At the end of at the end of the quarter was very close to the quarterly average.
Okay, Oh, sorry also.
I mean the.
Our cost of interest bearing deposits was was 2.22% during the quarter. If you exclude the broker deposits. It was 162, so I mean to your point to the extent, we bring additional customer money back on.
I mean, it's it's you know what we're bringing back on is certainly costing more to margin and.
Than the average, but there's there's additional room to bring that down a little bit.
Okay. Thanks for taking my questions.
Thanks, Dave.
Thank you. Our next question comes from Chris Mcgratty with K B W. Please proceed with your question.
Okay.
Hi, This is actually Nick topic is on for Chris just going back to the.
On the interest bearing deposit costs could you guys remind us of your <unk>.
Total IBD beta assumptions.
Yeah.
I think I think you're asking about the assumptions that we use in our interest rate risk modeling is that correct.
Correct, Yeah, so it sounds like you're back to the page on the patient in front of me, but we have a page in the slide deck around interest rate risk specifically around the modeled outcome.
I'll note again that we've got to set the bars there. The second set of bars is what we're calling the sort of adjusted assumptions.
Because what we've observed is that deposit betas, which have exceeded our expectations based on our models.
For a lot of reasons.
It's on page 15 of the slide deck so I.
I think the most important as you're thinking about sort of looking ahead I think the most important measures to consider are the.
The betas that we've realized since the beginning of.
2022.
And then considering that our net interest income outlook is incorporating the sort of the most current view on beta which is effectively a very close to the base that we've actually realized since the beginning of 2022.
So if I look at the standard versus adjusted on that Slide 15, there. It's really just the increased beta is the only.
It is also a dynamic mix shifts like further shifts from noninterest and interest bearing or so is this really just a higher beta incorporated in our when I say beta incorporated in our beta.
Not only the rate of change in non interest bearing deposits, but incorporated in there is some shift from noninterest bearing I'm, sorry, yeah from noninterest bearing deposits to interest bearing deposits. So it's a combination of mix shift.
And sort of repricing suite.
Okay, and then maybe just the pay.
Pay downs coming off the Securities book, just a quarterly if you could help.
Help me out with that I don't know if it's in the slide deck or not but.
I said in the script it is actually in the slide deck and I said it in the script. The pay downs were just over the net pay downs were just over $900 million in the current quarter any range kind of between $7 50, and a $1 billion over the course of the last several quarters.
Great.
Thanks.
Yes.
Thank you there are no further questions at this time I would like to turn the floor back over to Shannon for closing comments.
Thank you Alicia and thank you to all for joining US today. If you have additional questions. Please contact us at the email or phone number listed on our website. We look forward to connecting with you throughout the coming months. Thank you for your interest in Zions Bancorporation. This concludes our call.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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