Q3 2023 Zions Bancorporation NA Earnings Call

Speaker 1: Greetings and welcome to the Zion Bank Corp Q3 earnings conference call. At this time, I'll participate.

Greetings and welcome to the Zions Bancorp Q3 earnings Conference 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 key.

Speaker 1: A brief question and answer session will follow the formal preview.

Speaker 1: If anyone to require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder,

Pat.

As a reminder, this conference is being recorded it is now my pleasure to introduce you to your host Shannon Greene interim director of investments. Thank you Shannon you may begin.

Speaker 1: It is now my pleasure to introduce you to your host, Shannon Drape, interim director of investments.

Speaker 2: Thank you, Alicia, and good evening. We welcome you to this conference call to discuss our 2023 third quarter earnings.

Thank you Alicia and good evening, we welcome you to this conference call to discuss our 2023 third quarter earnings. My name is Shannon Drayage interim director of Investor Relations 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.

Speaker 2: My name is Shannon Draige, interim director of investor relations. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially.

Speaker 2: We encourage you to review the disclaimer in the press release or slide two of the presentation dealing with forward looking information and the presentation of non-GAT measures, which applies equally to statements made during this call.

Release or slide two of the presentation 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 release as well as the presentation are available at Zions Bancorporation dotcom.

Speaker 2: For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide opening remarks.

For our agenda today, Chairman and Chief Executive Officer, Harris Simmons will provide opening remarks.

Speaker 2: Following Harris's comments, Paul Burtis, our Chief Financial Officer, will review our financial results.

Following Harris's comments, Paul Burton, our Chief Financial Officer, Who'll review, our financial results.

Speaker 2: Also with us today are Scott McLean, President and Chief Operating Officer, Chief Mayo, Chief Risk Officer, and Derek Stewart, Chief Credit Officer.

Also with US today are Scott Mclean, President and Chief operating Officer, Keith Meyer, Chief Risk Officer, and Derrick Stewart Chief Credit Officer.

Speaker 2: 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.

After our prepared remarks, we will hold a question and answer session.

Call is scheduled for one hour I will now turn the time over to Harris Simmons.

Speaker 3: Thanks very much Shannon and we want to welcome all of you to our call this this evening.

Thanks, very much Shannon and we want to welcome all of you to our call. This evening.

Speaker 3: Science band cooperation recently celebrated the 150th anniversary of its, what we think of as an ancestral bank, which was science savings bank and trust come.

Science Banner Corporation recently celebrated the 150th anniversary events.

We think all of us and Central Bank, which was iron savings Bank and Trust company, which opened for business in October of 18 73.

Speaker 3: open for business in October of 1873.

Speaker 3: I'd like to think that this bank has been built the right way, steadily and prudently over many decades.

I'd like to think that this.

This is a bank that's been built the right way steadily and prudently over many decades.

Speaker 3: where the persistent focus on developing deep roots in the communities we serve and helping customers develop our own strong financial foundation.

With a persistent focus on developing deep roots in the communities, we serve and helping customers develop their own strong financial foundations.

Speaker 3: One of the West's most prominent pioneer institutions, we look forward to a great future, building on this history and demonstrating a continued commitment to the values that have served us so well over. Thank you.

It's one of the worst most prominent pioneer institutions, we look forward to a great future building on this history and demonstrating our continued commitment to the values it.

It has served us so well over these.

Many years.

Speaker 3: One other thing that I want to Comment on before we get into the numbers during this past quarter Michael Morris who is very capable Served as our chief credit officer for the past decade

Oh, one other thing that I want to comment.

Comment on before we get into the numbers during this past quarter, Michael Morris, who is very Capably served as our chief credit officer for the past decade.

Speaker 3: from a role due to some recent health challenges that led Michael and his family to conclude that he should reduce his workload somewhat.

Retired from her role due to some recent health challenges.

Michael and his family to conclude that he shouldn't reduces workload somewhat.

Speaker 3: I'm very pleased that Michael will continue with us in a role focused on affordable housing and related projects where I know he'll add a great deal of value.

I'm very pleased that Michael will continue continue with us in a role focused on affordable housing and related projects, where I know he'll add a great deal of value.

Speaker 3: Michael's close and very capable associate over the past decade, Derek Stewart, is assumed that Chief Credit Officer Roll and Ashannon noted he's with us on the call today. And we welcome Derek into this really important position in the company.

Hmm.

Michael is close and very capable associates over the past decade, Derrick Stewart has assumed the chief credit officer role in the Shannon noted he's with us on the call today and we welcome Derik into this really important.

And the company.

Speaker 3: So going into the slides, financial performance for the quarter was marked by sustained stabilization of our net interest margin as well as significant customer deposit growth. Both of which have been...

So going into the slides our financial performance for the quarter was marked by sustained stabilization of our net interest margin as well as significant customer deposit growth.

Most of which have been very encouraging.

Speaker 3: Slide three you'll see some of the themes that are particularly applicable designs this quarter and these remain fairly consistent with our messaging from the prior quarter

On slide three you'll see some of the things that are particularly applicable designs. This quarter and these remain fairly consistent with our messaging from the prior quarter.

Speaker 3: The customer deposits grew $3 billion during the quarter and resulted in reduced reliance on both short-term borrowings and broker deposit.

Customer deposits grew $3 billion during the quarter and have resulted in.

Our reduced reliance on both short term borrowings and broker deposits.

Speaker 3: We continue to actively manage our balance sheet at our hedging in response to changes in our interest rate risk profile.

We continue to actively manage your.

Balance sheets are at our hedging in response to changes in our interest rate risk profile.

Speaker 3: We've had a pretty dynamic and proactive response to changing conditions, and this is contributed to the stabilization of the net interest margin and net interest in.

We've had a pretty dynamic and proactive response to changing conditions and this has contributed to the stabilization of the net interest margin and net interest income.

Speaker 3: We recognized $14 million in net charge off during the quarter rate, which is in line with the prior quarter. Loss absorbing capital increased with Common Equity Tier 1 capital up 7% compared to the prior.

We recognized $14 million and our net charge offs during the quarter and which is in line with the prior quarter.

Loss absorbing capital increase with common equity tier one capital up 7% compared to the prior year.

Speaker 3: Capital levels remain healthy, particularly if you're all limited to our risk growth.

Capital levels remain healthy, particularly relative to our risk profile.

Speaker 3: Turning to slide four, we've included some key financial performance highlights for the quarter.

Turning to slide four we've included some key financial performance highlights for the quarter.

Speaker 3: Circle on the slide we reported total deposit costs of 192 basis points for the quarter compared with 127 basis points in the second

Circled on the slide we reported total deposit costs of 192 basis points for the quarter compared with 127 basis points in the second quarter.

Period end customer deposits increased 5% broker deposits declined 22%, bringing total deposit growth two 1%.

Speaker 3: Periodant customer deposits increased 5%, broker deposits declined 22%, bringing total deposit growth to 1%.

Quarter over quarter.

Speaker 3: The period end loans were flat to the prior quarters we observed a softening loan demand.

Period end loans were flat to the prior quarter as we observed.

Softening in loan demand.

In the third quarter.

Speaker 3: Moving to slide five, diluted earnings per share was up two cents over the second quarter.

Moving to slide five diluted earnings per share was up <unk> two cents over the second quarter to $1.13 on net income of 168 million.

Speaker 3: to a dollar thirteen cents on that income of 168 million.

Speaker 3: lower expenses offset slightly lower revenue.

It's a lower expenses offset a slightly.

Slightly lower revenue.

Speaker 3: Turning to slide six, our third quarter adjusted pre-provision that revenue was $272 million. Down from...

Turning to slide six our third quarter adjusted pre provision net revenue was $272 million down.

Down from 296 million.

Speaker 3: The linked quarter decline was attributable to lower non-interest revenue while adjusted non-interest expenses were flat.

Linked quarter decline was attributable.

To lower noninterest revenue, while adjusted noninterest expenses were flat.

Speaker 3: First, as the year ago quarter, PPRR was down 23% as the increase in the cost of funds exceeded the increase in earning F.

First just a year ago quarter P. PNR was down 23% as the increase in the cost of funds exceeded the increase in earning asset yields.

With that high level overview, I'm going to ask Paul Burton, our Chief financial officer to provide some additional detail related to our financial performance Paul. Thank.

Speaker 3: With that high level overview, I'm going to ask Paul Bertis, our Chief Financial Officer, provides some additional detail related to our financial performance. Paul? Thank you, Harrison. Good evening, everyone.

Thank you Harris and good evening everyone.

Speaker 4: I will begin with a discussion of the components of pre-provision net revenue. Over the three quarters of our revenue is from the balance sheet through net interest income. Slide 7 includes our overview of net interest income and the net interest margin. The chart shows the recent five quarter trend for both.

I'll begin with a discussion of the components of pre provision net revenue over the three 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 shows the recent five quarter trend for.

Speaker 4: Net interesting come on the bars and the net interest margin in the white boxes were consistent with the prior quarter as the repricing of earning assets nearly kept pace with rising funding

Both net interest income on the bars and the net interest margin in the white boxes were consistent with the prior quarter as the repricing of earning assets nearly kept pace with rising funding costs.

Speaker 4: Additional detail on changes in the net interest margin is outlined on slide 8. On the left hand side of this page, we provided a linked quarter waterfall chart outlining the changes in key components of the net interest margin. The 109 basis point adverse impact associated with deposits, including changes in both rate and volume, was offset by fewer more expensive borrow funds and the positive impact of low and brief price.

Additional detail on changes in the net interest margin as outlined on slide eight.

On the left hand side of this page we've provided a linked quarter waterfall chart.

Mining the changes in key components of the net interest margin.

The 109 basis point adverse impact associated with deposits, including changes in both rate and volume was offset by fewer more expensive borrowed funds and the positive impact of loan repricing.

Speaker 4: Our success in continuing to grow customer deposits contributed to the reduced level of broker deposits and borrowed funds as we moved through the third quarter.

Our success in continuing to grow customer deposits contributed to the reduced level of broker deposits and borrowed funds as we moved through the third quarter.

Speaker 4: and non-intersparing sources of funds continue to serve as a significant contributor to balance mountain, not.. mole

And noninterest bearing sources of funds continued to serve as a significant contributor to balance sheet profitability.

Speaker 4: The right-hand chart on this slide shows the net interest margin comparison to the prior quarter. Higher rates were reflected in earning asset yields which contributed an additional 157 basis points to the net interest margin. This was more than offset by increased deposit and borrowing costs which when combined with the increased value of non-intersparing funding adversely impacted the net interest margin thanks.

The right hand chart on this slide are on this slide shows the net interest margin comparison to the prior quarter higher rates were reflected in earning asset yields which contributed an additional 157 basis points to the net interest margin. This was more than offset by increased deposit and borrowing.

Costs, which when combined with the increased value of noninterest bearing funding adversely impacted the net interest margin by 189 basis points overall, the net interest margin declined by 31 basis points versus the prior year quarter.

Speaker 4: Overall the net interest margin declined by 31 basis points versus the prior year quarter.

Speaker 4: Our outlook for net interest income in a third quarter of 2024 is stable relative to the third 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 U.N.

Our outlook for net interest income in the third quarter of 2024. It is stable relative to the third 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.

Speaker 4: Moving to non-interesting income and revenue on slide nine, customer-related non-interest income was $157 million, a decrease of 3% versus the prior quarter, sorry, versus the prior quarter, due to strong capital market fees and the second, in the second quarter. Customer fees were in line with the prior year, as a year-over-year decrease in capital markets was offset by approved treasury management.

Moving to noninterest income and revenue on slide nine customer related noninterest income was $157 million, a decrease of 3% versus the prior year quarter, sorry versus the prior quarter due to strong capital market fees and the second in the second quarter customer fees were in line with the prior year.

Here are the year over year decrease in capital markets was offset.

By improved Treasury minutes management swap fees, our outlook for customer related non interest income for the third quarter of 2024 is moderately increasing relative to the third quarter of 2023.

Speaker 4: Our outlook for customer-related, non-interesting comfort, the third quarter of 2024 is moderately increasing, relative to the third quarter of 2020.

Speaker 4: The chart on the right side of this page includes adjusted revenue, which is the revenue included in adjusted pre-provision net revenue and is used in our efficiency ratio of calculation. Adjusted revenue decreased 8% from a year ago and decreased by 3% versus a second quarter. Due to the factors noted previously and a $13 million gain on the sale of property recognized in the second quarter. Adjusted non-interested expense.

The chart on the right side of this page includes adjusted revenue, which is the revenue included in adjusted pre provision net revenue and is used in our efficiency ratio calculation adjusted revenue decreased 8% from a year ago and decreased by 3% versus the second quarter due to the factors noted previously and a $13 million gain on.

The sale of property recognized in the second quarter adjusted noninterest expense shown in the lighter blue bars on slide 10 was essentially flat to the prior quarter at $493 million reported expenses at $496 million decreased $12 million due to $13 million in severance expense.

Speaker 4: showing in the lighter blue bars on slide 10 was essentially flat to the prior quarter at $493 million.

Speaker 4: reported expenses at $496 million, decreased $12 million due to $13 million in several of the expense recognized in the second quarter.

Nice in the second quarter, our outlook for adjusted noninterest expense is slightly increasing in the third quarter of 2024, when compared to the third quarter of 2023. This outlook excludes any impact associated with the proposed FDIC special assessment, well, we have made headway in our effort to flatten expense growth.

Speaker 4: Our outlook for adjusted non-intersex expense is slightly increasing in the third quarter of 2024 when compared to the third quarter of 2023. This outlook excludes any impact associated with the proposed FDIC special assessment.

Speaker 4: Well, we have made headway in our effort to flatten expense growth. As seen in the current quarter, we expect the timeline for fully achieving our expense objectives to take longer than originally

As seen in the current quarter, we expect the timeline for fully achieving our expense objectives to take longer than originally planned.

Speaker 4: Highlight and trends in our average loans and deposits over the past year are on flight 11.

Highlights and trends in our average loans and deposits over the past year are on slide 11.

Speaker 4: On the left side, you can see that average loans were somewhat flat in the current quarter. As loan demand continues to soften, our expectation is that loans will be stable in the third quarter of 2024 when compared to the third quarter of 2020.

On the left side you can see that average loans were somewhat flat in the current quarter as loan demand continues to soften our expectation is that loans will be stable in the third quarter of 2024, when compared to the third quarter of 2023.

Speaker 4: Now, turning two deposits on the right side of this page, average deposit balances for the third quarter increased 9% while ending balances grew 1% compared to the end of the second.

Now turning to deposits on the right side of this page average deposit balances for the third quarter increased 9%, while ending balances grew 1% compared to the end of the second quarter and the customer deposits, which exclude brokered deposits grew 5% in the third quarter.

Speaker 4: ending customer deposit, which exclude broker deposits, grew 5% in the third quarter.

Speaker 4: We continue to see that other growth coming from both existing and new customers.

We continue to see deposit growth coming from both existing and new customers.

Speaker 4: The cost of deposits shown in the white boxes increased during the quarter to 192 basis points from 127 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 third quarter was 36 percent. The repricing beta for interest-bearing deposits was 57 percent.

The cost of deposits shown in the white boxes increased during the quarter to 192 basis points from 127 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 third quarter was 36% and the repricing.

For interest bearing deposits was 57%.

Speaker 4: By 12, it includes a more comprehensive view of funding sources and total funding costs to trends. The left hand chart includes any balanced trends. Short-term borrowings have decreased $8 billion since the first quarter of 2023 as customer deposits have grown and earning assets have declined.

Slide 12 includes a more comprehensive view of funding sources and total funding cost to truck. The left hand chart include any balanced short.

Short term borrowings have decreased $8 billion since the first quarter of 2023 customer deposits have grown and earning assets have declined.

Speaker 4: On the right hand side, average balances for our key funding categories are shown along with the total cost of funding. As seen on this chart, the rate of increase in total funding cost at 22 basis points in the current quarter has notably declined from the first and second quarter.

On the right hand side average balances for our key funding category are shown along with the total cost of funding.

Seen on this chart the rate of increase in total funding costs at 22 basis points in the current quarter has notably declined from the first and second quarters.

Speaker 4: Like 13 shows non-dustry-sparing demand deposit volume trends, although demand deposit volumes have been declining, as more customers move into interest-bearing alternatives, a contribution to the net interest margin, and therefore the value of the demand deposit portfolio continues to increase.

Slide 13 shows noninterest bearing demand deposit volume trends, although demand deposit volumes have been declining as more customers move into interest bearing alternative the contribution to the net interest margin and therefore the value of the demand deposit portfolio continues to increase.

Speaker 4: Moving to slide 14, our investment portfolio exists primarily to be a ready storehouse of funds to absorb customer-driven, balance sheet chains.

Moving to slide 14, our investment portfolio exists primarily to be already storehouse of funds to absorb customer driven balance sheet changes.

Speaker 4: On this slide, we show our securities and money market investment portfolios over the last five quarters.

On this slide we show our securities and money market investment portfolios over the last five quarters.

Speaker 4: The investment portfolio continues to behave as expected. Principle and prepayment-related cash flows were over $800 million in the third.

The investment portfolio continues to behave as expected principal and prepayment related cash flows were over $800 million in the third quarter.

Speaker 4: With this somewhat predictable portfolio cash flow, we anticipate that money market and investment securities balances combined will continue to decline over the near term, which will be a source of funds for the balance.

With this 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 be a source of funds for the balance sheet.

Speaker 4: The duration of the investment portfolio, which is a measure of price sensitivity to changes and interest rates, is slightly shorter compared to the prior year period, estimated at 3.5% currently versus 3.9% when year ago.

<unk> of the investment portfolio, which is a measure of price sensitivity to changes in interest rates is slightly shorter compared to the prior year period estimated at three 5% currently versus three 9% one year ago.

Speaker 4: This duration helps to manage the inherent interest rate risk mismatch between loans and deposits. With the larger deposit portfolio assumed to have a longer duration than our loan portfolio, fixed rate term investments are required to bring balance to asset and liability duration.

Duration helps to manage the inherent interest rate risk mismatch between loans and deposits with the larger deposit portfolio assumed to have a longer duration than our loan portfolio fixed rate term investments are required to bring balance to asset and liability duration.

Speaker 4: So, like 15 provides information about our interest rate sensitivity. A comparison of our modeled depositor behavior to recently observed depositor behavior suggests shortened deposit duration.

Slide 15 provides information about our interest rate sensitivity a comparison of our modeled depositor behavior to recently observed depositor behavior suggest shorten deposit durations.

Speaker 4: This change in assumption reduces model's asset sensitivity, which we are showing on this page with the bars labeled adjusted deposit assumption.

This change in assumption reduces models asset sensitivity, which we are showing on this page with the bars labeled adjusted deposit assumptions in light of this change we are actively managing our asset duration to the emerging liability duration during the third quarter, we added an additional $1 billion of pay fixed interest.

Speaker 4: In light of this change, we are actively managing our asset duration to the emerging liability duration. During the third quarter, we added an additional $1 billion of payfix interest rate swap.

Speaker 4: as a reminder, the $3.5 billion of portfolio-level pay-fix swaps on our books served to hedge the value of our investment portfolio designated as available for sale in a rising rate environment.

Rate swaps as a reminder, the $3 $5 billion of portfolio level pay fixed swaps on our books serve to hedge the value of our investment portfolio designated as available for sale in a rising rate environment.

Speaker 4: On the right hand side of this slide, we've included detail on the impact current and implied rates are expected to have on net interesting

On the right hand side of this slide we've included detail on the impact current and implied rates are expected to have on net interest income as a reminder, we have been using the term latent interest rate sensitivity and emergent interest rate sensitivity to start the effects on net interest income of rate changes that have occurred but have not yet.

Speaker 4: As a reminder, we have been using the term latent interest rate sensitivity and emergent interest rate sensitivity to describe the effects on net interest income of rate changes that have occurred, but have not yet fully been reflected in the repricing of our financial interest.

Yet fully been reflected and the repricing of our financial instruments.

Speaker 4: as well as those expected to occur as implied by the shape of the occur. Importantly, earning assets are assumed to remain unchanged in size or composition in these descriptions.

As well as those expected to occur as implied by the shape of the yield curve importantly, earning assets are assumed to remain unchanged and size of competition in these description.

Speaker 4: These estimates utilize the adjusted deposit assumptions described earlier.

These estimates utilize the adjusted deposit assumptions described earlier.

Speaker 4: Regarding latent sensitivity, the in place yield curve, as of September 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 2% in the third quarter of 2024 when compared to the third quarter of 2023.

Regarding latent sensitivity the in place yield curve as of September 30th well 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 2% in the third quarter of 2024, when compared to the third quarter of 2023 regarding the <unk>.

Speaker 4: regarding emergent sensitivity. If the September 30, 2023, four-part of interest rates materializes, the emergent sensitivity measure is estimated to be immaterial in the third quarter of 24 when compared to the third quarter of 2023. As noted previously, our outlook for net interest income for the third quarter of 2024 relative to the third quarter of 2023 is stable. As we expect balance sheet composition changes to be a credent to net interest in...

Merchant sensitivity if the September 32023 forward path of interest rates materializes. The emergent sensitivity measure is estimated to be immaterial in the third quarter of 24, when compared to the third quarter of 2023 and no.

Previously our outlook for net interest income for the third quarter of 2024 relative to the third quarter of 2023 as stable as we expect balance sheet composition changes to be accretive to net interest income.

Speaker 4: Moving to slide 16, credit quality remains strong. Classified loan levels remaining stable and low. Non-performing assets increase $64 million, due primarily to two suburban office loans in the Southern California market, which added $46 million, and one C&I loan, which we expect to sell in the fourth quarter.

Moving to slide 16 credit quality remains strong classified loan levels remaining stable and low nonperforming assets increased $64 million due primarily to two suburban office loans in the southern California market, which added $46 million and one C&I loan, which we expect to sell in the fourth quarter.

Net charge offs were 10 basis points of loans for the quarter loan losses in the quarter were associated with borrowers that have struggled with idiosyncratic supply chain issues.

Speaker 4: $3 million in losses on two office loans and other small losses distributed throughout the portfolio. The allowance for credit losses is 1.30% of loans. A five basis point increase over the prior quarter due largely to increases in reserves for the CRE office portfolio.

$3 million in losses on two office loans and other small losses distributed throughout the portfolio. The allowance for credit losses is 130% of loans, a five basis point increase over the prior quarter due largely to increases in reserves for the CRE office portfolio.

Yeah.

Speaker 4: As we know as a topic of interest, we have included information regarding the commercial real estate portfolio with additional detail included in the appendix of this presentation. Flight 17 is a reminder of the discipline we have maintained over the last decade as it relates to commercial real estate in the context of credit concentration risk management. Our growth has remained well below peers over the

As we know it was a topic of interest we have included information regarding the commercial real estate portfolio with additional detail included in the appendix of this presentation Slide 17, as a reminder of the discipline. We have maintained over the last decade as it relates to commercial real estate in the context of credit concentration risk management, our growth has remained well below peers over.

This time slide 18 provides an overview of the CRE portfolio CRE represents 23% of our loan portfolio with office, representing 16% of total CRE or 4% of total loan balances credit quality measures for the total CRE portfolio remained relatively strong so nonperforming assets increasing.

Speaker 4: Flight 18 provides an overview of the CRE portfolio. CRE represents 23% of our loan portfolio with office representing 16% of total CRE or 4% of total loan balance.

Speaker 4: Credit quality measures for the total CRE portfolio remain relatively strong, though non-performing assets increase in the quarter to 2.3% of the office portfolio. As mentioned, we recognize $3 million losses on two office loans in the quarter across the CRE office portfolio. Overall, we continue to expect the CRE portfolio to perform well with limited losses based on the current economic outcomes.

The quarter to two 3% of the office portfolio.

And we recognized $3 million in losses on two office loans in the quarter across the CRE office portfolio. Overall, we continue to expect the CRE portfolio to perform well with limited losses based on the current economic outlook.

Speaker 4: Our loss absorbing capital position is shown on slide 19. The CET-1 ratio continued to grow in the third quarter to 10.2%. This, when combined with the allowance for credit losses, compares well to our risk profile as reflected in the low level of ongoing loan net charge-offs. As a macroeconomic environment remains uncertain, we would not expect share references in the fourth quarter.

Our loss absorbing capital position as shown on slide 19, the CET one ratio continued to grow in the third quarter to 10, 2%. This when combined with the allowance for credit losses compares well to our risk profile as reflected in the low level of ongoing loan net charge offs as the macroeconomic environment remain.

Uncertain, we would not expect share repurchases in the fourth quarter.

Speaker 4: We expect to maintain strong levels of regulatory capital while managing to a below average risk profile.

We expect to maintain strong levels of regulatory capital, while managing to a below average risk profile.

Speaker 4: 520 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 third quarter of 2024, as compared...

Slide 20 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 third quarter of 224 as compared.

Speaker 4: to the actual results reported in the third quarter of 2023. The quarter is in between our subject to fees now.

So the actual results actual results reported in the third quarter of 2023 quarters in between are subject to seasonality.

Speaker 2: 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. Policia, please open the line for questions. Thank you.

This concludes our prepared remarks.

If 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.

Thank you.

You will now be conducting a question and answer session.

Speaker 1: 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.

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 necessary to pick up your handset before pressing the star keys.

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One moment, please while we poll for questions.

Yeah.

Speaker 1: Thank you. Our first question comes from the line of Men and Gazalia with Morgan Stanley . Please proceed with your question.

Thank you. Our first question comes from the line of Milan Ghazaliyah with Morgan Stanley . Please proceed with your question.

Yeah.

Hi, good afternoon.

Speaker 5: I wanted to ask about NII. When we look at the NII, monthly data that you provided earlier in September versus what you have here for the full quarter, it looks like NII declined in September .

I wanted to ask about NII.

And I I Oh, what do we look at the NII monthly data that you provided earlier in September .

Versus what you have here for the fourth quarter. It looks like NII declined in September . So just wondering if you could talk about what drove that.

Speaker 5: just running if you could talk about you know what drove that and uh... you know how you're thinking about uh... the boss of n i i between now and uh... and the stable outlook you outlined it up for three q twenty four

And.

How are you thinking about.

The thoughts of NII between now and <unk>.

And the stable outlook you outlined four three to 24.

Speaker 4: Sure, I'll start this, Paul. So the purpose of the monthly net interest income that we provided in both the second and the third quarter was meant to provide some inter-quarter guidance which we don't typically do on the sort of level of where net interest income in the net interest margin was coming out. And so.

Sure I'll start this is Paul.

So the purpose of the monthly net interest income that we provided in both the second and the third quarter was meant to provide some inter quarter guidance, which we don't typically do.

The sort of level of where it netted shouldn't come into net interest margin was.

It was coming out and so yeah, you may recall at the end of the second quarter. During the second quarter call. In July we stated that we expected the net interest margin to begin to stabilize.

Speaker 4: You may recall at the end of the second quarter during the second quarter, Colin July , we stated that we expected a net interest margin to begin to stabilize.

Speaker 4: in the third quarter when compared to the second quarter, after seeing several quarters of net interest margin decline. That net interest income outlook was meant to support that.

In the third quarter, when compared to the second quarter. After seeing several quarters of net interest margin decline and that net interest income outlook was meant to sort of support that.

Speaker 4: I wouldn't read too much into monthly net interest income figures. I think that that can get a little squirrelly. I would rely on our overall outlook, which is that as we look ahead over the course of the next year, we expect our net interest income to be, you know, approximately flat in the third quarter of 24 when compared to the third quarter of 23.

I wouldn't read too much into monthly net interest income figures.

Think that that can get a little squirrelly Ah I would rely on our overall outlook, which is that as we look ahead over the course of the next year. We expect our net interest income to be approximately flat in the third part of 'twenty four when compared to the third quarter of <unk>.

'twenty three.

And so.

Speaker 4: I would you, here's a jacket. Well, I think there's also one fewer day in the month versus August . I mean, you'll get a little fluctuation for things like that as well. Yeah, thank you. So that's kind of my purpose of my statement saying that you're trying to read into any given.

Hershey like that well.

I think theres a theres also one fewer day in the month versus August I mean, you'll get a little fluctuations things like that as well yeah. Thank you. So that's and that's kind of my a purpose of my statement, saying that are you trying to read into any any given month.

Speaker 5: Okay, I appreciate that. And just as we think through the trajectory for NII over the next year.

Okay I appreciate that and just as we think through the trajectory for NII over the next tier.

Speaker 5: in a higher for longer rate environment, I know you took a benefit from utilizing the security spare downs as well as the loans repricing. But given the pressure on the deposit side, should we think about just name and NII, maybe coming down a little bit in the near term and then starting to move up as we get closer to 3Q24 or maybe you can help us with the trajectory there.

You know in our highest for longer rate environment, I know you do get a benefit from.

Utilizing the securities pay downs as well as the laundry pricing.

But given.

The pressure on the deposit side should we think about NIM and NII, maybe coming down a little bit in the near term of that starting to move up as we get closer to <unk> 24 or maybe.

Maybe you can help us with that.

Yeah sure I'll tell I'll tell you how I'm thinking about it and that is that our as the yield curve has steepened. We've considered it we've seen a continued steepening that as you know kind of flattening from inverted flat here over the last several months, particularly in the last couple of weeks.

Speaker 4: Sure, I'll tell you how I'm thinking about it. And that is that our, as the yield curve has steepened, we've seen a continued steepening, that is, you know, kind of flattening from inverted flat.

Speaker 4: The our earning assets are continuing to reprice and so the earning asset pick up if you will I expect it to be in the sort of range of five to ten basis points of quarter Over the next couple of quarters You also saw our funding costs in the increase in our funding costs Begin to really flatten out In the third quarter when compared to the prior two quarters my expectation therefore Is that the improvement in earning assets will keep pace with

The our earning assets are continuing to reprice and so the earning asset pick up if you will I expect it to be in that sort of range of five to 10 basis points a quarter over the next couple of quarters.

You also saw our funding costs and the increase in our funding costs begin to really flattened out in the third quarter when compared to the prior two quarters my expectation therefore.

Is that the improvement in earning asset will keep pace with what will keep pace with the change in funding costs such that you know my expectation is that the net interest margin will.

Speaker 4: We'll keep pace with change and funding costs.

Speaker 4: such that my expectation is that the net interest margin would not decline much from here, consistent with the outlook we provided in the second quarter. Again, as I think about our earnings.

It will be.

Would not decline much from here are consistent with the outlook. We provided in the second quarter again, as I think about earning asset and liability repricing it feels like it.

Speaker 4: It feels like based on the current rate out.

It feels like based on the current rate outlook that we.

Speaker 4: you know, we've had a spot where I'm expecting that interest income to flat, a flat.

We set up we've had a spot where I'm expecting net interest income to flat flatten from here as we say in the outlook and then you know the opportunity for improvement will be really largely predicated on our ability to actively manage those deposit rates.

Speaker 4: as we say in the outlook, and then the opportunity for improvement will be really largely predicated on our ability to actively manage those deposit rates. Great. Thank you.

Yeah.

Great. Thank you.

Thank you.

Yeah.

Thank you. Our next question comes from the line of Dave Rochester with Compass point. Please proceed with your question.

Hey, good afternoon guys.

Speaker 6: Back on the NII guide, what do you guys factor in for deposit flows and beta and the bottom for the GDA mix and the timing of that if you've got any thoughts around your base case there?

Either backup.

Back on the NII guide.

What are you guys factoring in for deposit flows in beta and at the bottom for the G. D. A mix and the timing of that if you've got any thoughts around your base case there yeah.

Speaker 4: I don't have the slide number in front of me, but in the inter-sensitivity slide in the materials, you'll see that we actually provided an expectation of continued increase in deposit rates.

Yeah, and I don't have the slide number in front of me, but in the interest sensitivity slide.

In the materials, you'll see that we actually provided an.

Unknown Executive: Three means and welcome to the Zion Bancorp Q3 earnings conference 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 to require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

An expectation of continued increase in <unk>.

Deposit rates.

Speaker 4: slide 15 of the earnings materials. You can see there in the latent sensitivity that that outlook that kind of minus 2% outlook in latent sensitivity.

Slide 15 of the earnings materials, you can see there in the late and sensitivity that that outlook that kind of minus 2% outlook in late and sensitivity.

Speaker 4: provide a total deposit beta of

Provides a total deposit beta of.

Shannon Drage: It is now my pleasure to introduce you to your host, Shannon Drage, interim director of investments. Thank you, Shannon. You may begin. Thank you, Alicia and good evening. We welcome you to this conference call to discuss our 2023 third quarter earnings.

Speaker 4: 50% kind of accumulating over time throughout the next year. That is to say, if it just rates stop rising, we're continuing. We're expecting in that outlook for deposit rates to continue increasing margin.

50%.

Kind of accumulating over time throughout the next year that would just say if interest rates stop rising we're continuing we're expecting in that outlook for deposit rates to continue increasing marginally.

Shannon Drage: My name is Shannon Drage, interim director of investor relations. 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 slide two of the presentation, dealing with forward looking information and the presentation of non-gap measures. Which applies equally to statements made during this call. A copy of the earnings release as well as the presentation are available at Zions Bancorporation.com.

Speaker 4: Yep, and in terms of the DDA mix, where do you think that bottoms and when? That'd be great. Yeah, that's a little more difficult to predict, but what I will say is that sort of all in funding beta includes further migration of non-intersparing demand into intersparing.

Yeah and in terms of the DDA backs are where do you think that bottoms and win that'd be great.

Yeah, that's a little more difficult to predict but what I will say is that sort of all in funding beta.

Includes further migration of noninterest bearing demand into interest bearing deposits.

Speaker 7: So therefore, my expectation is that we will continue to see some DDA migration, but that's all incorporated into our outlook. Thanks, guys.

So therefore my expectation is that we will continue to see some DDA migration, but that's all incorporated into our outlook.

Shannon Drage: For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide opening remarks. Following Harris's comments, Paul Bertis, our Chief Financial Officer will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer, Chief Mayo, Chief Risk Officer, and Derek Stewart, Chief Credit Officer.

Okay.

Got it thanks guys. Thank.

Thank you.

Thank you. Our next question comes from the line of John <unk> from Carty.

Party with Evercore ISI.

Good afternoon.

Shannon Drage: After our prepared remarks, we will hold a question and answer session. This call is scheduled for one hour.

Hi, John .

Okay.

Speaker 8: I just actually want to ask a question on the longroof front, believe it or not. I, you know, it looks like...

I just actually I wanted to ask a question on the loan growth front believe it or not.

Harris Simmons: I will now turn the time over to Harris Simmons. Thanks very much, Shannon, and we want to welcome all of you to our call this evening. Zions Bancorporation recently celebrated the 150th anniversary of its, what we think of as its ancestral bank, which was Zions Savings Bank and Trust Company, which opened for business in October of 1873. I'd like to think that this bank has been built the right way steadily and prudently over many decades, with a persistent focus on developing deep roots in the communities we serve and helping customers develop their own strong financial foundations. As one of the West's most prominent pioneer institutions, we look forward to a great future, building on this history and demonstrating a continued commitment to the values that served us so well over these many years.

But you know it looks like.

Speaker 8: I know your loan growth outlook of stable. One of the things that could be upside that I have, we're seeing some other banks.

The I know your loan growth outlook of stable wondering if there could be upside to that we're seeing some other banks.

Speaker 8: that are below the 100 billion fossil free threshold that they're able to, if acknowledging you're able to step up and you need to share some of the bigger banks are all busy with our RWA diets and balance sheet optimization. So, I mean, would you think that maybe there could be an opportunity to pick up some...

That are below the 100 billion Basel III.

Threshold.

They're able to acknowledging you were able to step up and gain some share in some of the bigger banks are all busy with R.

W E diets and balance sheet optimization.

I mean would you think that maybe there could be an opportunity to pick up some.

Speaker 7: Quality loan growth here that you otherwise wouldn't have had the opportunity to or opportunity to gain share and perhaps that loan growth outlook might be a big conservative.

Quality loan growth year, they otherwise wouldn't have had the opportunity to or opportunity to gain share and perhaps that loan growth outlook might be a little bit conservative.

Yeah, John I'll jump in.

Aye.

Speaker 3: I've always believed long growth is the trickiest thing possible to try and forecast because it's so dependent on payoffs and...

Harris Simmons: One other thing that I want to comment on before we get into the numbers, during this past quarter, Michael Morris, who is very capably served as our Chief Credit Officer for the past decade, retired from a role due to some recent health challenges that led Michael and his family to conclude that he should reduce his workload somewhat. I'm very pleased that Michael will continue with us in a role focused on affordable housing and related projects, where I know he'll add a great deal of value.

I've always believe loan growth is.

Is the trickiest thing possible to try and forecast because it's so dependent on payoffs and.

And and rate and everything else, but.

Speaker 3: I, you know, there may be some. I don't think.

You know there there may be some I don't think.

Speaker 3: We may even have some differences of opinion around the table about where we think loan growth is headed. I think none of us think it's going to be, you know, that we're going to see anything much. But there could be some. We also just note that during the third quarter, it was pretty weak. I think it's, I mean, very recently, we've

We may even have some differences of opinions.

The table about where we think loan growth is Saturday I think none of us think it's gonna be.

You know that we're gonna see anything much but there could be some.

Harris Simmons: Michael's close and very capable associate over the past decade, Derek Stewart, is assumed the Chief Credit Officer role in Ashannon, noted he's with us on the call today, and we welcome Derek into this really important position in the company. So going into the slides, financial performance for the quarter was marked by sustained stabilization of our net interest margin as well as significant customer deposit growth. Both of which have been very encouraging.

But we're also we also just note that during the third quarter.

Pretty weak I think it's very.

We've seen.

Speaker 3: a little bit of pickup but you know it's you can't make much out of a very short period of time turn in terms of trying to extrapolate.

Seeing a little bit of pick up but yeah. You know, it's you can't make much out of a very short period of time, turning in terms of trying to extrapolate that pretty far.

Speaker 3: So I, you know, it's why we've got it kind of stable. It probably represents kind of...

So.

I think you know that's why we've got a kind of stable it probably represents kind of.

Speaker 3: mean of where we're all kind of prognosticating around.

I mean, if where we were.

Harris Simmons: On slide three you'll see some of the themes that are particularly applicable designs this quarter and these remain fairly consistent with our messaging from the prior quarter. Customer deposits grew $3 billion during the quarter and resulted in reduced reliance on both short term borrowings and broker deposits. We continue to actively manage our balance sheet at our hedging in response to changes in our interest rate risk profile. We've had a pretty dynamic and proactive response to changing conditions and this is contributed to the stabilization of the net interest margin and net interest income.

Okay prognosticating around here.

Speaker 9: I would just add to that that I think.

Thomas Scott I would just add to that that I think.

Speaker 10: you know, whatever pulling back the global banks.

You know whatever pulling back there.

Global banks are doing.

Speaker 10: I don't know that it's producing a granular sort of...

I don't know that its producing a granular sort of benefit in the marketplace.

Speaker 9: benefit in the marketplace. And, you know, particularly when you think about the size of our clients and the size of their books, to the extent they're pulling back on really large.

Yeah.

Particularly when you think about the size of our clients are the size of their books.

To the extent they are pulling back on really large commitments.

That's not necessarily where we play.

Right.

I would just say that harriss comment I think all along.

Speaker 10: Our lone flatness right now is more indicative of just the customer base and being cautious.

Harris Simmons: We recognized $14 million in net charge off during the quarter rate which is in line with the prior quarter, loss absorbing capital increased with common equity tier 1 capital up 7% compared to the prior year. Capital levels remain healthy particularly if you're relative to our risk profile. Turning to slide four we've included some key financial performance highlights for the quarter circle on the slide we reported total deposit costs of 192 basis points for the quarter compared with 127 basis points in the second quarter.

Alone flatness right now is more indicative of just the customer base.

Being cautious.

Compared to where they were two or three or four quarters ago. When we were seeing historic loan growth.

Coming out of the pandemic.

Speaker 8: Yeah, no, I got it understood. Um, and then lastly, um, I know um the You had indicated I think paul you indicated in a pair of remarks the expense objectives

Yeah, No I got it understood.

And then lastly, I know.

The you had indicated I think Paul you had any kidney prepared remarks expense objectives.

Speaker 8: are taken longer than originally planned to execute. Could you just talk about that or what is taken longer in terms of any expense rationalization efforts, and maybe if you could tie into that as the core system upgrade, is that at all impacting that thing?

We're taking longer than <unk>.

Harris Simmons: Period and customer deposits increased 5% broker deposits declines 22% bringing total deposit growth to 1% per level quarter. Period and loans were flat to the prior quarter as we observed softening loan demand in the third quarter. Moving to slide five diluted earnings per share was up 2 cents over the second quarter to $1.13 on net income of 168 million as lower expenses offset slightly lower revenue. Turning to slide six our third quarter adjusted pre provision that revenue was $272 million down from 296 million.

Originally planned to execute it could you just talk about that or what.

It is taking longer in terms of any expense rationalization efforts and maybe if you could tie into that as.

The core system.

Upgrade is that at all impacting that.

Speaker 4: Yeah, I'll start and then turn over to Scott and Harris to supplement that I so you saw us take a severance charge in the in the second quarter. The run rate improvement associated that with that I would expect to occur kind of in the fourth to first quarter. But when I speak to sort of taking longer than expected. What I'm speaking about is the inflation headwinds. We're seeing that, you know, across the board and, you know, contract.

I'll start and then I'll turn it over to Scott and Harris to supplement that I see.

So you saw us take a severance charge in the AR in the second quarter.

The run rate improvement associated that with that I would expect to occur kind of in the fourth to first quarter, but when I speak to sort of taking longer than expected. What I'm speaking about is the inflation headwinds, we're seeing that across the board in contracts.

Harris Simmons: The linked quarter decline was attributable to lower non interest revenue while adjusted non interest expenses were flat. First as the year ago quarter PPR was down 23% as the increase in the cost of funds exceeded the increase in earning asset yields.

Speaker 4: and other things. And so, you know, as we continue to fight expenses, you know, we're actively working those expenses down. But the tide, you know, inflation, I hope is turning the corner, but you know, the sort of inflation tide isn't out yet. And we just continue to fight that. It's the reality of the environment that we're all dealing with.

Other things and so you know.

As we continue to fight expenses, we're actively working those expenses down.

But the tide inflation I hope is turning the corner, but you know the sort of inflation tied isn't out yet.

We just continue to fight that and its the reality of the environment that we're that we're all dealing with today.

Paul Bertis: With that high level overview I'm going to ask Paul Bertis our chief financial officer to provide some additional detail related to our financial performance Paul. Thank you Harrison good evening everyone. I will begin with a discussion of the components of pre provision net revenue over the three over three quarters of our revenue. From the balance sheet through net interest income slide seven includes our overview of net interest income and the net interest margin.

Speaker 10: I would just add to that that the other thing we're seeing is that the inflation in 2022, even though it's soft and a little bit this year, in terms of major technology vendors and their renewals and extensions of contracts, we're seeing probably the most vigorous.

I would just add to that that the.

The other thing we're seeing is that the inflation in 2022, even though it soften a little bit this year.

In terms of major technology vendors and their renewals and extensions of contracts.

Being a.

Probably the most vigorous.

Speaker 10: rate pass-throughs that we've seen in years and I think it's I think it's symptomatic of the fact that the inflation occurred last year things we're doing this year and going into 24 quite a bit of pressure on those kind of baseline technologies.

Right pass throughs that we've seen in years and I think it's I think it's symptomatic of the fact that the inflation occurred last year things were now in this year and going into 'twenty for quite a bit of pressure on.

Paul Bertis: The chart shows the recent five quarter trend for both net interest income on the bars and the net interest margin in the white boxes were consistent with the prior quarter as the repricing of earning assets nearly kept pace with rising funding costs. Additional detail on changes in the net interest margin is outlined on slide eight on the left hand side of this page we provided a linked quarter waterfall chart outlining the changes in key components of the net interest margin.

On those kind of baseline technology.

Speaker 3: They've all been watching Hulu and Disney Plus, I think.

Vendors, they've all been watching Hulu Disney plus I think [laughter] and in all of our core transformation project.

Speaker 10: And on our core transformation project, I would just say that

I would just say that.

Speaker 10: And we have commented for years that when we go live with the final deposits release, which we did go live with a pilot, one of our affiliates in the second quarter, that during this period, it'll take us 12 months to fully convert all of our affiliates. And during that conversion period, just because the way the accounting works.

And we have commented for years that when when we go live with the final.

Paul Bertis: The 109 basis point adverse impact associated with deposits including changes in both rate and volume was offset by fewer more expensive borrow funds and the positive impact of loan free price. Our success in continuing to grow customer deposits contributed to the reduced level of broker deposits and borrowed funds as we moved through the third quarter. And non-intersparing sources of funds continue to serve as a significant contributor to balance sheet profitability. The right hand chart on this slide shows the net interest margin comparison to the prior quarter.

Deposits released which we did.

Go live with a pilot with one of our affiliates.

And the second quarter.

During this period as it will take US 12 months to fully convert all of our affiliates and during that conversion period, just because of the way the accounting works.

Speaker 10: Our P&L impact will get worse by about 10 to 15 million dollars. And then in the following year, the following 12 months after that, they drop by a commensurate amount. So there's a little bit of a timing issue related to actually the period we're going live in.

Our P&L impact.

We will get worse by about $10 million to $15 million.

Then in the following year or the following 12 months after that.

They drop.

By a commensurate amount so there's a little bit of a timing issue related to actually the period, where going live now.

Paul Bertis: Higher rates were reflected in earning asset yields which contributed an additional 157 basis points to the net interest margin. This was more than offset by increased deposit and borrowing costs which when combined with the increased value of non-intersparing funding adversely impacted the net interest margin by 189 basis points. Overall, the net interest margin declined by 31 basis points versus the prior year quarter. Our outlook for net interest income in a third quarter of 2024 is stable relative to the third quarter of 2023.

Got it got it thank you very much for that.

Thank you John .

Yeah.

Speaker 1: Thank you. Our next question comes from Chris McGrady with KBW. Please proceed with your questions.

Thank you. Our next question comes from Chris Mcgratty with K B W. Please proceed with your question.

Speaker 11: Oh great, thanks. Paul, maybe we can come back to the...

Oh, great. Thanks.

Paul maybe we can come back to the.

Speaker 11: the deposit made of slide 15. So I make sure I fully understand. I'm comparing your assumed full cycle beta last quarter of 40 to the new 50.

The deposit beta slide slide 15, I, just want make sure I fully understand I'm I'm I'm comparing your assumed full cycle beta last quarter of 40.

The new 50.

Paul Bertis: Risks and opportunities associated with this outlook include realized loan growth, competition for deposits, and the path of interest rates across the incur. Moving to non-interested income and revenue on slide 9, customer-related non-interested income was $157 million, a decrease of 3% versus the prior quarter due to strong capital market fees and the second quarter. Customer fees were in line with the prior year as a year-over-year decrease in capital markets was offset by improved treasury management swap fees.

Speaker 11: And I'm trying to reconcile the 70 basis points of additional deposit.

And I'm trying to reconcile the 70 basis points of additional deposit pressure from here if the so I guess, if the fed's done yeah.

Speaker 11: Pressure from here. If the F, So I guess if the Fed's done.

Speaker 4: Yeah. Why would you see that big of an increase in deposit cost from here? Yeah, so there's two things going on there. As I said, you know, there's sort of the lagging effect of deposit rates. Again, this is what we're assuming in the model.

Why would you see that big of an increase in deposit costs from here yeah. So there's two things going on there as I said, yeah. There is sort of the lagging effect of deposit rates again. This is what we're assuming in the model.

Speaker 4: I'm hopeful that we can do a little bit better than this, but based on recent history, our expectation is that there are some intersparing products will continue to float up. But another big part of that is an assumption of continuing migration of non-intersparing demand into intersparing. That sort of, we don't normally think of that as beta, but it has the practical or economic effect of a repricing beta. And so all of those things combine into that 70 base.

I'm hopeful that we can do a little bit better than this but based on recent history. Our expectation is that there are some you know interest bearing products will continue to float up but another big part of that is an assumption of continued migration of noninterest bearing demand into interest bearing that sort of you know.

Paul Bertis: Our outlook for customer-related non-interested income for the third quarter of 2024 is moderately increasing relative to the third quarter of 2023. The chart on the right side of this page includes adjusted revenue, which is the revenue included in adjusted pre-provision net revenue and is used in our efficiency ratio of calculations. Adjusted revenue decreased 8% from a year ago and decreased by 3% versus the second quarter due to the factors noted previously and a $13 million gain on the sale of property recognized in the second quarter.

We don't normally think of that as beta, but it has the practical or economic effect of a repricing beta and so all of those things combined into that 70 basis points.

Speaker 11: Okay. It may be separately, I think John asked about the growth opportunity under 100. I mean, you're about 10 or 15% under the 100 threshold. I'm interested in the cost that you're beginning to budget. I think one of your peers said it's 100 million a year from crossing. You have a time to remix and stay under, but how are you thinking about the cost to ultimately go over 100?

Okay.

Maybe separately.

I think John asked about the growth opportunity under 100, I mean, you're about 10 or 15 per cent under under the 100 threshold.

I'm interested in the costs that you're that you're beginning to budget I think one of your peers said, it's $100 million a year from crossing you have a time to remix and stay under but how are you thinking about the cost to to ultimately go over 100, but yeah. So I'll start with that and invite Harris and Scott to jump in I recall, we were a CCAR bank a few years ago.

Paul Bertis: Adjusted non-interested expense shown in the lighter blue bars on slide 10 was essentially flat to the prior quarter at $493 million. Reported expenses at $496 million decreased $12 million due to $13 million in severance expense recognized in the second quarter. Our outlook for adjusted non-interested expense is slightly increasing in the third quarter of 2024 when compared to the third quarter of 2023. This outlook excludes any impact associated with the proposed FDIC special assessment.

Speaker 4: Well, yeah, so I'll start with that and invite Harris and Scott to jump in. I, you know, recall, we were a CCAR bank a few years ago, and sort of all of the muscular activity that we put in place to be compliant with, you know, CCAR and being a CIFI and all those things, that's all still in place. I mean, there were really, we put in some really great risk management things that, you know, continue to be, continue to be in place. So.

And sort of all of the muscular activity that we put in place to be compliant with CCAR.

CCAR and being a city and all of those things.

That's all still in place I mean, there were really we put in some really great risk management things that continue to be to continue to be in place. So I I don't foresee personally anywhere close to a $100 million of incremental cost in fact, I think that we sort of have the things in place today to be able to comply the biggest change for US, yes, I think there'll be some changes in risk weighted assets around the <unk>.

Speaker 4: I don't foresee, personally, anywhere close to $100 million of incremental costs. In fact, I think that we sort of have the things in place today to be able to comply. The biggest change for us, I think there will be some changes in risk-weighted assets around the edges that we need to pay attention to. But the biggest change for us will be the incorporation of ASEI into the numerator of capital. And as I think we've previously stated, the relatively short duration of our investment portfolio, which is the source.

Paul Bertis: While we have made headway in our effort to flatten expense growth as seen in the current quarter, we expect the timeline for fully achieving our expense objectives to take longer than originally planned. Highlights and trends in our average loans and deposits over the past year are on slide 11. On the left side, you can see that average loans were somewhat flat in the current quarter. As loan demand continues to soften our expectation is that loans will be stable in the third quarter of 2024 when compared to the third quarter of 2023.

Hedges that we need to pay attention to but the biggest change for us will be the incorporation of <unk> into the numerator of capital and that's as I think we've previously stated the relatively short duration of our investment portfolio, which is the source of our the source of the ALC I do we have on the balance sheet, we expect to be.

Speaker 4: of our uh... the source of the a.m.c.i. that we have on the balance sheet uh... we expect to be you know large impact we expect to be largely gone by the time that those rules become effective for

Large that impact we expect to be largely gone by the time that those rules become effective for us.

Paul Bertis: Now, turning to deposits on the right side of this page, average deposit balances for the third quarter increased 9% while ending balances grew 1% compared to the end of the second quarter, and Carter. Ending customer deposits, which exclude broker deposits, grew 5% in the third quarter. We continue to see deposit growth coming from both existing and new customers. The cost of deposits, shown in the white boxes, increased during the quarter to 192 basis points from 127 basis points in the prior quarter.

Speaker 3: I guess I just, you know, I think that's very true with respect to capital. I think the one place it's going to cost is on the debt requirement.

I guess I just I.

I think that's actually a very true with respect to capital I think the one place it's going to cost us on the debt requirement.

And.

Speaker 3: We've got about half billion dollars of data if you put the proposed debt requirement into place today That would go up to about four billion

Now we've got about half a billion dollars of data. If you. If you put the proposed debt requirement into place today that would go up to about 4 billion roughly.

Speaker 3: So that incremental three and a half billion, you know, the credit spread on that relative to the cost of funding with either wholesale, you know, any of them.

And so that incremental three and a half day and you know the credit spread on on that relative to the cost of funding.

With regard to wholesale.

Paul Bertis: As measured against the fourth quarter of 2021, the repricing beta on total deposits based on average deposit rates in the third quarter was 36% and the repricing beta for interest bearing deposits was 57%. By 12 includes a more comprehensive view of funding sources and total funding cost trends. The left hand chart includes ending balance trends. Short-term borrowings have decreased $8 billion since the first quarter of 2023 as customer deposits have grown and earning assets have declined.

Any other wholesale source on loan.

Speaker 3: larger deposits, et cetera, is going to...

Uh huh.

Larger deposits et cetera.

It is it's going to.

Speaker 3: create some drag, I think. You know, you kind of do the math, whatever you think that credit spread is.

Create some drag I think you know that.

You kind of do the math wherever you think that credit spread is.

Speaker 12: on times of risk weighted asset numbers. So that I think to me is going to be the primary sort of new thing that we'll hit. That's very helpful. Thanks. Thank you.

You know.

Sometimes a risk weighted asset number. So that's that's that I think to me, it's going to be the primary sort of news thing that.

That will hit.

Okay.

Very helpful. Thanks.

Paul Bertis: On the right hand side, average balances for our key funding categories are shown along with the total cost of funding. As seen on this chart, the rate of increase in total funding cost at 22 basis points in the current quarter has notably declined from the first and second quarter. Slide 13 shows non-dustrous bearing demand deposit volume trends. Although demand deposit volumes have been declining, as more customers move into interest bearing alternatives, the contribution to the net interest margin and therefore the value of the demand deposit portfolio continues to increase.

Thanks, a lot.

Okay.

Thank you.

Speaker 1: Our next question comes from the line of Brandon King with Truas Securities. Please proceed with your question.

Our next question comes from the line of Brandon King with Qs Securities. Please proceed with your question.

Hey, good evening Greg.

Speaker 13: So with the, you know, expectation of, you know, stable loans over the next 12 months and around all the securities book, what's the outlook for deposit growth?

So with the expectation of stable loans over the next 12 months and the runoff of the Securities book, What's the outlook for deposit growth.

Speaker 4: Well, yeah, we we historically stayed away from deposit growth outlooks. I think

Well, yeah, we we historically stayed away from deposit growth outlooks, I think what you've seen though over the last couple of quarters is substantial deposit growth.

Paul Bertis: Moving to slide 14, our investment portfolio exists primarily to be a ready storehouse of funds to absorb customer-driven balance sheet changes. On this slide, we show our securities and money market investment portfolios over the last five quarters. The investment portfolio continues to behave as expected. Principle and prepayment related cash flows were over $800 million in the third quarter. With the somewhat predictable portfolio cash flow, we anticipate that money market and investment securities balances combined will continue to decline over the near term, which will be a source of funds for the balance sheet.

Speaker 4: You know what you've seen though, over the last couple of quarters, is substantial deposit growth.

Speaker 4: As you know, we are continued conversations with our customers of paid off in the form of an increased deposits on the balance sheet. Deposit growth has been very good over the last two quarters, and then the third quarter in particular, I wouldn't expect that level of deposit growth to continue, but I do expect, I do expect Zayn Sebeau to maintain a very solid loan deposit ratio.

As you know, we our continued conversations with our customers.

Paid off in the form of an increased deposits on the balance sheet deposit growth has been very good over the last two quarters and in the third quarter in particular, I wouldn't expect that level of deposit growth to continue but I do expect I do expect volume to be able to maintain a very solid loan to deposit ratio.

Speaker 4: and continue to see deposit growth probably at least into the next quarter.

And continued to see deposit growth are.

Probably at least into the next quarter.

Paul Bertis: The duration of the investment portfolio, which is a measure of price sensitivity to changes and interest rates, is slightly shorter compared to the prior period estimated at 3.5% currently versus 3.9% one year ago. This duration helps to manage the inherent interest rate risk mismatch between loans and deposits. With the larger deposit portfolio assumed to have a longer duration than our loan portfolio, six rate term investments are required to bring balance to asset and liability durations.

Okay.

Speaker 13: And within that, is there a meaningful delta between the rate on new customer deposits versus existing customers?

And within that is there a meaningful delta between the rate.

New customer deposits versus existing customers.

Speaker 4: Yeah, the deposit growth that we've seen in the third quarter has definitely been on the higher end of our deposit offering rates. And so you see that in the continued increase in the intersparing deposit rate, that's largely coming from the new money coming on the balance sheet at higher rates.

Yes are the deposit growth that we've seen in the third quarter has definitely been on the higher end of our deposit sort of offering rates and so you see that.

And the continued increase in the interest bearing deposit rate, that's largely coming from the new money coming on the balance sheet at higher rates.

Paul Bertis: By 15 provides information about our interest rate sensitivity, a comparison of our modeled depositor behavior to recently observed depositor behavior suggests shortened depositorations. This change in assumption reduces model asset sensitivity, which we are showing on this page with the bars labeled adjusted deposit assumptions. In light of this change, we are actively managing our asset durations to the emerging liability duration. During the third quarter, we added an additional $1 billion of payfix interest rate swaps.

Speaker 14: Okay. So, it's more of that as far as existing customers, you know, bringing back funds and mix shifting into higher interest rate accounts. Yeah. This is Scott. I would say that

Okay. So it's more of that and as far as existing customers. You know bring you back funds and mix shifting to higher interest bearing accounts.

Scott I would I would say that.

Speaker 10: What we've seen is that as we became much more active in our pricing of interest-bearing deposits...

What we've seen is that as we became much more active in our pricing of interest.

Interest bearing deposits.

Speaker 10: that we, our clients, have become much more active in bringing their deposits back. So, as we've said, we had approximately $11 a day in deposit, it's all valid.

Our clients have.

Got much more active in bringing their deposits back so.

Paul Bertis: As a reminder, the $3.5 billion of portfolio level payfix swaps on our books served to hedge the value of our investment portfolio designated as available for sale in a rising rate environment. On the right-hand side of this slide, we've included detail on the impact current and implied rates are expected to have on net interest income. As a reminder, we've been using the term latent interest rate sensitivity and emergent interest rate sensitivity to describe the effects on net interest income of rate changes that have occurred but have not yet fully been reflected in the repricing of our financial instruments, as well as those expected to occur as implied by the shape of the occur.

We as we've said.

Approximately $11 billion in deposits off balance sheet.

Speaker 10: client deposits that were in off balance sheet money market funds because we just the industry was awash with liquidity and as we started

It's a client deposits that went off balance sheet money market funds.

We just the industry was awash with liquidity and as we started.

Speaker 10: Continuing to talk to those clients about bringing those deposits back on balance sheet, it was a very easy conversation.

Continuing to talk to those clients about bringing those deposits back on balance sheet. It was very easy conversation and we got more aggressive about what we were paying theyre not only bringing back what they had in our off balance sheet money market sweeps, but theyre, bringing other deposits they've had in other institutions and meaningful amounts.

Speaker 10: we got more aggressive about what we were paying. They're not only bringing back what they had in our off-balance sheep, many market sweeps, but they're bringing other deposits.

Speaker 10: meaningful amount. So I wouldn't so much say that the growth has come from new bit.

No.

I wouldn't so much say that the growth has come from new customers as much as it has come from existing customers, but just have a lot of deposits that were not on our balance sheet.

Paul Bertis: Importantly, earning assets are assumed to remain unchanged in size or composition in these descriptions. These estimates utilize the adjusted deposit assumptions described earlier. Regarding latent sensitivity, the in-place yield curve, as of September 30, 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 2% in the third quarter of 2024 when compared to the third quarter.

Speaker 10: As much as it has come from existing customers, that just have a lot of deposits that were not on our Valenci, going into this year.

Going into this year.

Got it.

Thanks for taking my questions.

Thank you Brent.

Thank you.

Speaker 1: Our next question comes from the line of Brody Preston with UBS. Please proceed with your question. Please proceed with your question.

Our next question comes from the line of Brody Preston with UBS. Please proceed with your question.

Hey, good evening, everyone. How are you have you already kind of thing.

Speaker 15: Hey, I wanted just to follow up on the fixed asset repricing commentary. If I heard you correctly, I think you said it was 5 to 10 basis points a quarter positive to the earning asset yield over the next couple. I was hoping you could maybe unpack that a little bit for us and say what are the assumptions driving that, like what's the amount of loans that are repricing over the next, you know, 12 months and, you know, what's the back book yield that's coming off versus, you know, new origination yield.

Hey, I wanted just to follow up on the the fixed asset repricing commentary if I. If I heard you correctly I think you said it was five to 10 basis points a quarter positive to the earning asset yield over the next couple I was hoping you could maybe unpack that a little bit for us and say what are what are the assumptions driving that like.

Paul Bertis: As noted previously, our outlook for net interest income for the third quarter of 2024 relative to the third quarter of 2023 is stable, as we expect balance sheet composition changes to be a credent to net interest income. Moving to slide 16, credit quality remains strong, classified loan levels remaining stable and low, non-performing assets increased $64 million due primarily to two suburban office loans in the Southern California market which added $46 million and one C&I loan which we expect to sell in the fourth quarter.

What's the amount of loans that are repricing over the next 12 months and you know what's the back book yield that's coming off versus new origination yields.

Speaker 4: Yeah, I'm going to answer that slightly differently than the way you asked it, and that is to say that we've got a really sophisticated balance sheet simulation tool where we are sort of analyzing our loans and securities on a note-by-note or CUSIP-by-CUSIP basis.

I'm going to answer that slightly differently than the way you've asked it in there just to say that we've got.

A really sophisticated balance sheet simulation tool, where we are.

Our sort of analyzing our loans and securities on a note by note or CUSIP by CUSIP basis.

Paul Bertis: Net charge offs were 10 basis points of loans for the quarter. Loan losses in the quarter were associated with borrowers that have struggled with idiosyncratic supply chain issues, $3 million in losses on two office loans and other small losses distributed throughout the portfolio. The allowance for credit losses is 1.30% of loans, a five basis point increase over the prior quarter due largely to increases in reserves for the CRE office portfolio. As we know as a topic of interest, we have included information regarding the commercial real estate portfolio with additional detail included in the appendix of this presentation.

Speaker 4: You know, we put in the forward curve and then we turn all of that around. And as we look at those model results here for the next five, you know, next couple of quarters, what we see is that the earning asset yield in the aggregate. So that's investment portfolio, sort of cash flow out of investments, you know, any repricing of cash, and then addition to the loans, you know, which would be generally speaking longer reset.

We put in the forward curve and then we turn all of that around and as we look at those model results here for the next five and next couple of quarters and what.

What we see is that the earning asset yield in the aggregate so that's investment portfolio.

Cash flow out of investments you know any repricing of cash.

In addition to the loans, which would be generally speaking longer resets.

Speaker 4: uh... that are resetting to the now prevailing higher rates you know all of those things combined are creating an accretion in the yield of earning assets in the range of five to ten basis points over the course of the next couple of quarters

That are resetting to the now prevailing higher rates you know all of those things combined are creating an accretion in the yield on earning assets in the range of five to 10 basis points over the course of the next couple of quarters.

Paul Bertis: Slide 17 is a reminder of the discipline we have maintained over the last decade as it relates to commercial real estate in the context of credit concentration risk management. Our growth has remained well below peers over this time. Slide 18 provides an overview of the CRE portfolio. CRE represents 23% of our loan portfolio with office representing 16% of total CRE or 4% of total loan balances. Credit quality measures for the total CRE portfolio remain relatively strong, though non-performing assets increase in the quarter to 2.3% of the office portfolio.

Speaker 15: Okay, understood. And then I wanted to switch gears to credit. I had a couple of generic questions and one that was a little bit more pointed. Just, I was hoping you could tell us what portion of the loan portfolio were shared national credits and of that what you'd lead on. And then I also wanted to ask on the non-performing assets that they increased 68 million. You called out it was due to the

Okay understood and then I wanted to switch gears to credit.

Generic questions and and one that was a little bit more points I. Just I was hoping you could tell us what are what portion of the loan portfolio were shared national credits.

All of that what she had a lead on and then I also wanted to ask on the nonperforming assets increased 68 million and you called out it was due to <unk>.

Speaker 15: to suburban office loans. I wanted to ask, you know, what geographies those were in and what drove those to non-perform.

Two suburban office loans I wanted to ask you know what geographies there those were in and what drove those to nonperforming.

Paul Bertis: As mentioned, we recognize $3 million in losses on two office loans in the quarter across the CRE office portfolio. Overall, we continue to expect the CRE portfolio to perform well with limited losses based on the current economic outlook. Our loss of absorbing capital position is shown on slide 19. The CET-1 ratio continued to grow in the third quarter to 10.2%. This, when combined with the allowance for credit losses, compares well to our risk profile as reflected in the low level of ongoing loan net charge-offs.

Speaker 16: This is Derek, so let me start with the second part of the question first, with the two office loans in question were actually in California.

They're doing well.

Hi, This is Derek So let me let me start with the second part of the question first.

The two office lumps in question were actually in California.

Speaker 16: in Southern California and they just had a

Our southern California and.

Just to pick or pad.

<unk> had a leasing.

Speaker 16: lease rollover issues and they were actually value-add properties.

Lease rollover issues and they were actually value add.

Our properties, where we're.

Paul Bertis: As a macroeconomic environment remains uncertain, we would not expect share purchases in the fourth quarter. We expect to maintain strong levels of regulatory capital while managing to a below-average risk profile. Slide 20 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 third quarter of 2024, as compared to the actual results reported in the third quarter of 2023. The course is in between our subject to seasonality.

Speaker 16: weren't able to retend in as fast as the sponsor was hoping.

They weren't able to re tenant as fast as well as.

As the sponsor was.

Hoping for.

Uh huh.

Speaker 15: Got it. Did you have the shared national credit data?

Got it and then do you have the do you have the shared national credit data.

Speaker 4: I think on SNCCS, if you don't mind, Eric. I think on SNCCS, the total shared national credit is, of course, of the loan portfolios in the range of 10 to 15%.

I think on snacks, if you don't mind, Eric I think on snacks.

Total shared national credits as a proportion of the loan portfolio is in the range of 10% to 15%.

Speaker 4: And I don't have the sort of number of agents in versus non-agent field on that, but that's sort of the ballpark in our portfolio.

And I don't have the sort of number of agency versus non agency deals on that but that's that's sort of the ballpark Oh.

In our portfolio.

Speaker 9: Yeah, we agent about 10% of, 10 to 15% of what we participate in, the rest we're, in terms of SNCCs, and then we're a participant.

We are you said about 10% of 10% to 15% of what we participate in.

Unknown Executive: This concludes our prepared remarks.

Unknown Executive: 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.

The rest were in terms of snacks and then we're a participant in the others.

It's also a very balanced portfolio it's.

Unknown Executive: Alicia, please open the line for questions. Thank you. We will now be conducting a question and answer session. 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 handset before pressing the star keys. One moment, please, while we pull for questions. Thank you.

Very diverse and.

Our portfolio has performed well for us over the years.

Speaker 15: Okay, just to just to clarify, was it 10 to 15 percent of the portfolio is SNCCs and of that 10 to 15 percent you agent?

Okay, just sticking just to clarify was it 10% to 15% of the portfolio and snacks.

That 10% to 15% you agent.

Yes.

Speaker 10: Okay, and just if I could see it one more, I'm just on the reteniting of the early, early, early, early, early. The other thing you need to understand too is that

Okay, and just if I could sneak one more in just on the retail lending is always probably was obviously, yes.

The other thing you need to understand too is that.

Speaker 10: Somewhere in the range of 90 to 95% of these customers are in our footprint. They're not out-of-footprint transactions, and in those where we are not the agent, in almost all cases, we have...

Somewhere in the range of 90% to 95% of these customers are in our footprint.

They're not out of footprint transactions.

Manan Gosalia: Our first question comes from the line of Menan Ghazalia with Morgan Stanley. Please proceed with your question. Hi, good afternoon. I wanted to ask about NII. When we look at the NII monthly data that you provided earlier in September versus what you have here for the full quarter, it looks like NII declined in September. Just wondering if you could talk about what drove that and how you are thinking about the bots of NII between now and the stable outlook you outlined for 3Q24.

And and and then those where we are not the agent.

Almost all cases, we have ancillary business.

So these are clients that we know in our markets. This is not buying paper outside of our markets.

Speaker 15: Okay, great. That's that's helpful color. Um, could I just ask one last one on the on those office loans with the re-tenanting? Was the the the slow kind of re-tenanting process cause like the debt service coverage ratio to go below one? Or anything like that?

Okay, Great. That's that's helpful color could I just ask one last one on the on those office loans with a re tenant them.

The slow kind of retail lending process cause like the debt service coverage ratio to go below one or anything like that.

Yes, they did.

[laughter].

Speaker 15: Okay, thank you very much for taking my questions, everyone. I appreciate it. Yep. Thanks, Bertie.

Okay. Thank you very much for taking my questions everyone I appreciate it.

Thanks, Brett.

Paul Bertis: Sure. I will start this this fall. The purpose of the monthly net interest income that we provided in both the second and the third quarter was meant to provide some inter-quarter guidance, which we don't typically do, on the level of where net interest income in the net interest margin was coming out. You may recall at the end of the second quarter, during the second quarter, we stated that we expected the net interest margin to be stabilized in the third quarter when compared to the second quarter after seeing several quarters of net interest margin decline.

Speaker 1: Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing.

Thank you there are no further questions at this time I would like to turn the floor back over to management for closing comments.

Speaker 2: Thank you, Alicia, and thank you to all for joining us today. If you have additional questions, please contact us on 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 Bank Corporation. This concludes our call.

Thank you Alicia and thank you all for joining US today. If you have additional questions. Please contact us on 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.

Yes.

Okay.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker 1: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Paul Bertis: Net interest income outlook was meant to support that. I wouldn't read too much into monthly net interest income figures. I think that that can get a little squirrelly. I would rely on our overall outlook, which is that as we look ahead over the course of the next year, we expect our net interest income to be approximately flat in the third quarter of 24 when compared to the third quarter of 23. I think there's also one fewer day in the month versus August. You'll get a little fluctuation for things like that as well.

Oh, Oh Oh.

Speaker 17: it

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Paul Bertis: Thank you. That's my purpose of my statement saying that you're trying to read into any given... Okay, I appreciate that. And just as we think through the trajectory for NII over the next year, in a high or for longer rate environment, I know you took at benefit from utilizing the security spare downs as well as the launch reprising. But given the pressure on the deposit side, should we think about just NIM and NII, maybe coming down a little bit in the near term, and then starting to move up as we get closer to 3Q24, or maybe you can help us with the trajectory there?

Okay.

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Paul Bertis: Sure, I'll tell you how I'm thinking about it. And that is that our, as the yield curve has steepened, if we've seen a continued steepening, that is kind of flattening from inverted flat, here over the last several months, particularly in the last couple of weeks. Our earning assets are continuing to reprice. And so the earning asset pick up, if you will, I expect it to be in the sort of range of 5 to 10 basis points of quarter over the next couple of quarters.

Paul Bertis: You also saw our funding costs and the increase in our funding costs begin to really flatten out in the third quarter when compared to the prior two quarters. My expectation, therefore, is that the improvement in earning assets will keep pace with, will keep pace with the change in funding costs, such that my expectation is that the net interest margin would not decline much from here consistent with the outlook we provided in the second quarter.

Paul Bertis: Again, as I think about our earning asset and liability reprising, it feels like, based on the current rate outlook that we've said a spot where I'm expecting net interest income to flatten from here as we say in the outlook. And then the opportunity for improvement will be really largely predicated on our ability to actively manage both to pause the rate.

Unknown Executive: Great, thank you.

Unknown Executive: Thank you.

Dave Rochester: Our next question comes from the line of Dave Rochester with Compass Point. Please proceed with your question. Hey, good afternoon, guys.

Paul Bertis: Good afternoon. Back on the NII guide. What are you guys factoring in for deposit flows and beta and the bottom for the GDA mix and the timing of that, if you've got any thoughts around your base case there? Yeah, I don't have a slide number in front of me. But in the interest sensitivity slide in the materials, you'll see that we actually provided an expectation of continued increase in deposit rates, a slide 15 of the earnings materials.

Paul Bertis: You can see there in the latent sensitivity that that outlook, that kind of minus 2% outlook in latent sensitivity, provides a total deposit beta of 50% kind of accumulating over time throughout the next year. That is to say, if it just rates stop rising, we're expecting in that outlook for deposit rates to continue increasing.

Unknown Executive: You know, increasing margin. Absolutely. And in terms of the DDA mix, where do you think that bottoms and when would be great? Yeah, that's a little more difficult to predict, but what I will say is that sort of all in funding beta includes further migration of non-intersparing demand into intersparing audits. So, therefore, my expectation is that we will continue to see some DDA migration, but that's all incorporated into our outlook. Got it. Thanks, guys. Thank you.

John Cardi: Our next question comes from a line of John from Cardi with Evercore ISI. Good afternoon. Hi, John.

Harris Simmons: I just actually want to ask a question on the loan growth front, believe it or not. I, you know, it looks like the, I know, your loan growth outlook of stable. Well, one of the, it could be upside to that we're seeing some other banks that are below the 100 billion fossil free threshold that they're able to acknowledge and be able to step up and share some of the bigger banks are all busy with their RWA diets and balance sheet optimization.

Harris Simmons: So, I mean, would you think that maybe there could be an opportunity to pick up some quality loan growth here that you otherwise wouldn't have had the opportunity to or opportunity to gain share and perhaps that loan growth outlook might be a big conservative. John, I'll jump in. I, as Harris, I, I've always believed loan growth is the trickiest thing possible to try and forecast because it, you know, it's so dependent on payoffs and, and, and rate and everything else.

Harris Simmons: But I, you know, there may be some, I don't think we may even have some differences of opinions around the table about where we think loan growth is headed. I, I think none of us think it's going to be, you know, we're going to see anything much, but there could be some, but we're all, you know, we also just know that during third quarter, it was pretty weak. I think it's, I mean, very recently we've seen a little bit of pickup, but, you know, it's, you can't make much out of a very short period of time, in terms of trying to extrapolate that very far.

Harris Simmons: So, I, you know, it's why we've got it kind of stable. It probably represents kind of the, the mean of where we were all kind of prognosticating around here. I would just add to that that I think, you know, whatever pulling back the global banks are doing, I don't know that it's producing a granular sort of benefit in the marketplace. And, you know, particularly when you think about the size of our clients and the size of their books, to the extent they're pulling back on really large commitments.

Harris Simmons: It's not necessarily where we play, but, you know, I would just say the Harris is coming. Well, our loan flatness right now is more indicative of just the customer base and being cautious. And, you know, compared to where they were two, three, four quarters ago, when we were seeing, you know, historic loan growth coming out of the pandemic. Yeah, no, I got it, understood. And then lastly, I know the, you know, I didn't kid it.

Harris Simmons: I think Paul, you didn't kid it. And in a pair of remarks, the expense objectives are taken longer than originally planned to execute. Could you just talk about that or what, what is taken longer in terms of any expense rationalization efforts. And maybe if you could tie into that as the core system upgrades that at all impacting that. Thanks. Yeah, I'll start and I turn over to Scott and Harris to supplement that.

Harris Simmons: I, so you saw us take a seven charge in the in the second quarter. The run rate improvement associated that with that, I would expect to occur kind of in the fourth to first quarter. But when I speak to sort of taking longer than expected, what I'm speaking about is the inflation headwinds. We're seeing that, you know, across the board in, you know, contracts. And other things. And so, you know, as we continue to fight expenses, you know, we're actively working those expenses down.

Harris Simmons: But the tide, you know, inflation, I hope is turning the corner, but, you know, the sort of inflation tide isn't out yet. And we just continue to fight that. It's the reality of the environment that we're, that we're all dealing with today. I would just add to that that the, the other thing we're seeing is that the inflation and, you know, in 2022, even though it's soft and a little bit this year.

Harris Simmons: In terms of major technology vendors and their renewals and extensions of contracts, we're seeing probably the most vigorous rate passthroughs that we've seen in years. And I think it's, I think it's heptomatic of the fact that the inflation occurred last year. Things were doing this year and going into 24 are quite a bit of pressure on those kind of baseline technology vendors. They've all been watching Hulu and Disney Plus, I think.

Harris Simmons: And on our core transformation project, I would just say that we have commented for years that when, when we go live with the final deposits release, which we did go live with a pilot, one of our affiliates in the second quarter, that during this period, it'll take us 12 months to fully convert all of our affiliates. And during that conversion period, just because the way the accounting works, our P&L impact will get worse by about 10 to 15 million dollars.

Harris Simmons: And then in the following year, the following 12 months after that, they drop by a commensurate amount. So, there's a little bit of a timing issue related to actually the period we're going. Thank you very much for that. Thank you, Jon. Thank you.

Paul Bertis: Our next question comes from Chris McGratty with KBW. Please proceed with your question. Oh, great. Thanks. Paul, maybe we can come back to the deposit beta slide 15. I just want to make sure I fully understand. I'm comparing your assumed full cycle beta last quarter of 40 to the new 50. And I'm trying to reconcile the 70 basis points of additional deposit pressure from here. I guess if the Fed's done, why would you see that big of an increase in deposit cost from here?

Paul Bertis: Yes, so there's two things going on there. As I said, there's sort of the lagging effect of deposit rates. Again, this is what we're assuming in the model. I'm hopeful that we can do a little bit better than this. But based on recent history, our expectation is that there are some intersparing products will continue to float up. But another big part of that is an assumption of continuing migration of non-intersparing demand into intersparing. We don't normally think of that as beta, but it has the practical or economic effect of a repricing beta. And so all of those things combine into that 70 basis points. Okay.

Paul Bertis: Maybe separately, I think John asked about the growth opportunity under 100. I mean, you're about 10 or 15 percent under the 100 threshold. I'm interested in the cost that you're beginning to budget. I think one of your peers said it's 100 million a year from crossing. You have a time to remix and stay under, but how are you thinking about the cost to ultimately go over 100? Yes, so I'll start with that and invite Harrison Scott to jump in.

Paul Bertis: Recall, we were a C-Car bank a few years ago. And sort of all of the muscular activity that we put in place to be compliant with C-Car and being a C-Pee and all those things, that's all still in place. I mean, there were really, we put in some really great risk management things that continue to be in place. So I don't force the, personally, anywhere close to 100 million dollars of incremental cost.

Paul Bertis: In fact, I think that we sort of have the things in place today to be able to comply. The biggest change for us, I think there'll be some changes in risk weighted assets around the edges that we need to pay attention to. But the big change for us will be the incorporation of ASEI into the numerator of capital. And as I think we've previously stated, the relatively short duration of our investment portfolio, which is the source of our, the source of the ASEI that we have on the balance sheet, we expect to be, you know, that impact we expect to be largely gone by the time that those rules become effective for us.

Paul Bertis: I guess I just, you know, I think that's actually, you know, the true respect to capital. I think the one place is going to cost us on the debt requirement. And, you know, we've got about half billion dollars of debt. If you put the proposed debt requirement into place today, that would go up to about 4 billion roughly. And so that incremental three and a half billion, you know, the credit spread on that relative to the cost of funds, and David Holsell.

Paul Bertis: Any other Holsell source, home loan, larger deposits, et cetera, is going to create some drag, I think. You kind of do the math, whatever you think that credit spread is, on times that risk weighted asset numbers. That I think, to me, is going to be the primary sort of new. I'm saying that we'll hear. That's very helpful. Thanks, thanks, voters. Thank you.

Brandon King: Our next question comes from the line of Brandon King with truest securities. Please proceed with your question. Hey, good evening. So with the, you know, expectation of, you know, stable loans over the next 12 months and around all the securities book, what's the outlook for deposit growth? Well, yeah, we, we historically stayed away from deposit growth outlooks. I think, you know, what you've seen though over the last couple of quarters is substantial deposit growth.

Brandon King: As, you know, we are continued conversations with our customers of, you know, paid off in the form of an increased deposit on the balance sheet. Deposit growth has been very good over the last two quarters. And then the third quarter in particular, I wouldn't expect that level of deposit growth to continue. But I do expect, I do expect signs to be able to maintain a, a very solid loan deposit ratio. And, you know, continue to see deposit growth probably at least into the next quarter.

Brandon King: Okay. And, and within that, is there a meaningful delta between the rate on a new customer deposits versus existing customers? Yeah, the deposit growth that we've seen in the third quarter has definitely been on the higher end of our deposit sort of offering rates. And so you see that in the continued increase in the interest bearing deposit rate, that's largely coming from the new money coming on the balance sheet at higher rates.

Brandon King: Okay. So it's more of that than as far as the existing customers, you know, bringing back funds and mixed shipping into higher interest bearing accounts. Yeah, the Scott, I would, I would say that what we've seen is that as we became much more active in our pricing of interest bearing deposits, that we are clients have become much more active in bringing their deposits back. So we, as we've said, we had approximately $11 a day in dollars in deposits off balance sheet that client deposits that were an off balance sheet, money market funds, because we just the industry was a wash with liquidity.

Brandon King: And as we started continuing to talk to those clients about bringing those deposits back on balance sheet, it was very easy. Sation, and we got more aggressive about what we were paying. They're not only bringing back what they had in our off-balance sheet money market sweeps, but they're bringing other deposits they've had in other institutions in meaningful amounts.

Scott Mclean: So I wouldn't so much say that the growth has come from new customers as much as it has come from existing customers that just had a lot of deposits that were not on our balance sheet going into this year. Got it. Thanks for taking my questions. Thank you, Brandon.

Brody Preston: Thank you. Our next question comes from the line of Brody Preston with UBS. Please proceed with your question.

Paul Bertis: Good evening, everyone. How are you? Brody, good. Thanks. Hey, I wanted just to follow up on the fixed asset repricing commentary. If I heard you correctly, I think you said it was five to ten basis points, a quarter positive to the earning asset yield over the next couple. I was hoping you could maybe unpack that a little bit for us and say what are what are the assumptions driving that? What's the amount of loans that are repricing over the next 12 months and what's the back book yield that's coming off versus new origination yields?

Paul Bertis: Yeah, I'm going to answer that slightly differently than the way you asked it, and then it's to say that we've got a really sophisticated balance sheet simulation tool where we are analyzing our loans and securities on a note by note or coos it by coos it basis. We put in the forward curve and then we turn all of that around. And as we look at those model results here for the next couple of quarters, what we see is that the earning asset yield in the aggregate.

Paul Bertis: So that's investment portfolio, sort of cash flow out of investments, any repricing of cash. And then in addition to the loans, which would be generally speaking longer resets that are resetting to the now prevailing higher rates. You know, all of those things combined are creating an accretion in the yield of earning assets in the range of five to 10 basis points over the course of the next couple of quarters. Okay, understood.

Derek Stewart: And then I wanted to switch gears to credit. I had a couple generic questions and one that was a little bit more pointed just I was hoping you could tell us what what portion of the loan portfolio were shared national credits. And of that, what you'd lead on. And then I also wanted to ask on the nonperforming assets that they increase 68 million and you called out it was due to two suburban office loans.

Derek Stewart: I wanted to ask, you know, what geographies they're those were in and what drove those to nonperforming. Derek, well, this is Derek. So let me let me start with the second part of the question first with the two office loans and question were actually in California. Southern California. And they just were had a leasing lease roll over issues and they were actually value add properties where where They weren't able to read tenon as fast as the sponsor was hoping for.

Derek Stewart: Got it. Did you have the shared national credit data? I think on SNICS, if you don't mind, Derek. I think on SNICS, the total shared national credit is, of course, of the loan portfolios in the range of 10 to 15%. And I don't have the sort of number of agents versus non-Asian to deal with on that. But that's sort of the ballpark in our portfolio. Yeah, we agent about 10% of 10 to 15% of what we participate in.

Derek Stewart: The rest were in terms of SNICS and then we're participating in the others. It's also a very balanced portfolio. It's very diverse. And portfolio is performed well for some of the years. Okay, just to clarify, was it 10 to 15% of the portfolio is SNICS and of that 10 to 15% you agent? Yes. Okay. And just, if I could seek one more, I'm just on the reteniting of those. The other thing you need to understand, too, is that somewhere in the range of 90 to 95% of these customers are in our footprint.

Derek Stewart: They're not out of footprint transactions. And in those where we are not the agent, in almost all cases, we have ancillary business. So these are clients that we know in our markets. This is not buying paper outside of our markets. Okay, great. That's helpful color. Could I just ask one last one on those office loans with the reteniting? Was the slow kind of reteniting process caused like the debt service coverage ratio to go below one or anything like that? Yes, but you did.

Brody Preston: Okay. Thank you very much for taking my questions everyone. I appreciate it. Thanks, Bernie. Thank you.

Unknown Executive: There are no further questions at this time. I would like to turn the floor back over to management for closing comments. Thank you, Alicia. And thank you all for joining us today. If you have additional questions, please contact us on 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 Zion's bank corporation.

Unknown Executive: This concludes our call. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. [inaudible] John Arfstrom, John Arfstrom, John Arfstrom,