Q4 2023 Zions Bancorporation NA Earnings Call
Greetings and welcome to the Zions Bancorporation Q4 earnings conference call.
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A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Shannon Drayage director of Investor Relations. Thank you. Mr. <unk> you may begin.
Thank you Kayla and good evening, we welcome you to this conference call to discuss our 2023 fourth quarter earnings My name is Shannon Drake the director of Investor Relations.
Shannon Drake: 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-GAAP measures, which applies equally to statements made during this call.
Shannon Drake: A copy of the earnings release as well as the presentation are available at Zions Bancorporation dotcom.
Shannon Drake: For our agenda today, Chairman and Chief Executive Officer, Harry Simmons, who will provide opening remarks.
Shannon Drake: Following her comments Alberto <unk>, our Chief Financial Officer will review our financial results.
Speaker Change: Also with US today are Scott Mclean, President and Chief operating Officer.
Speaker Change: Urea caucus, Chief risk Officer, and Derrick Stewart, Chief Credit Officer.
Speaker Change: 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.
Harris: Thanks, very much Shannon, we welcome all of you to our call. This afternoon.
Speaker Change: As Shannon mentioned, Chris Curie attack US is joining our call today is our new chief risk officer, and we want to welcome him.
Speaker Change: Chris was formerly our chief audit executive and just replacing keeps Miami, who recently retired after 32 years of really.
Chris Curie: Phenomenal service with science and a variety of senior positions.
I'd like to start with comments on slide three which includes some themes, which are particularly applicable to zions.
Chris Curie: Our financial performance this quarter reflects the unusual circumstances of the past year as events last spring were the catalyst for an acceleration of deposit betas across the industry.
We've been proactive in managing our balance sheet, making adjusted adjustments to our hedging strategy working with clients to bring back on balance sheet deposits that we'd steered to off balance sheet money market funds in times of surplus liquidity.
Chris Curie: We've demonstrated our ability to effectively manage interest rate and liquidity risk in a very dynamic environment.
Chris Curie: In the fourth quarter, we've seen the deposit mix stabilize in deposit cost start to level out.
Chris Curie: Net interest margin and net interest income were stable in the quarter. We continue to have a higher concentration of more costly funding sources that is typical for us.
And we believe in the near term that reducing our reliance on funding priced at or near a wholesale rates combined with continued deposit pricing discipline, regardless of the future rate path.
Chris Curie: Presents a meaningful opportunity to improve revenue performance.
Chris Curie: In the medium to long term, we remain focused on improving shareholder returns by growing profitable small business and commercial customer relationships.
The size and growth in our capital markets and wealth management businesses and continuing to move away from single product low normally in other less profitable relationships.
Chris Curie: In 2023, we exited two national lending businesses that produce few deposits and were experiencing declining levels of profitability and we changed our approach to mortgage lending as part of our focus on improved profitability.
We continue to invest in the business and in Asia and in our enabling technologies to deliver the products and services that our customers need and which enhance the customer experience all while managing expense growth to nominal levels.
Chris Curie: We have an established track record for managing risk and underwriting credit was better than peer performance.
Chris Curie: We believe that the combination of these efforts will result in improved financial outcomes for our investors in years ahead.
Chris Curie: Turning to slide four we've included key financial performance highlights for the quarter and for the full year.
Chris Curie: We reported as period end loan balance increase of three 8% for the full year and one 6% of the current quarter.
Chris Curie: Customer deposit balances were flat for the full year and were up two 4% in the quarter.
Chris Curie: Although the loan to deposit ratio was 77%.
Chris Curie: Net charge offs as a percent of loans were just six basis points, both in the quarter and for the full year down from an already low eight basis points reported in the prior year.
Chris Curie: Our common equity tier one ratio was 10, 3% compared to nine 8% in the prior year.
Chris Curie: Moving to slide five.
Chris Curie: Linked quarter diluted earnings per share was down 35 cents to 78 cents per share on net earnings of $116 million.
Chris Curie: Due to the impact of the FDIC special assessment combined with lower noninterest income.
Turning to slide six.
Chris Curie: Our fourth quarter adjusted pretax pre provision net revenue was $262 million down from $272 million.
Chris Curie: The linked quarter decline was attributable primarily to lower noninterest revenue.
Versus a year ago quarter P. P NR was down 38%.
Chris Curie: As the increase in our cost of funds exceeded the increase in earning asset yields.
Chris Curie: So with that high level overview, I'm going to ask Paul Burton, our Chief financial officer to provide additional detail related to our financial performance Paul.
Paul E. Burdiss: Good evening, everyone and thank you for joining I'll begin with a discussion of the components of pre provision net revenue 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 boat.
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 kept pace with rising funding costs.
Paul E. Burdiss: Additional detail on changes in the net interest margin is outlined on slide eight.
Paul E. Burdiss: On the left hand side of this page we've provided a linked quarter waterfall chart outlining the changes in key components of the net interest margin. The 14 basis point adverse impact associated with deposits, including changes in both rate and volume was offset by the positive impact of loan repricing and higher money market and.
Paul E. Burdiss: Securities yields.
Paul E. Burdiss: Noninterest bearing sources of funds continued 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 year quarter higher rates were reflected in earning asset yields which contributed an additional 106 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.
Paul E. Burdiss: <unk> of noninterest bearing funding adversely impacted the net interest margin by 168 basis points overall, the net interest margin declined by 62 basis points versus the prior year quarter.
Paul E. Burdiss: Moving to noninterest income and revenue on slide nine customer related noninterest income was $150 million, a decrease of 4% versus the prior quarter.
Paul E. Burdiss: Due to lower loan servicing fees, primarily attributable to the sale of certain mortgage servicing rights recognized in the third quarter. The remainder of customer related fees were relatively in line with the prior year as year over year decrease in capital markets revenue was offset by improved commercial account fees.
Paul E. Burdiss: Within capital markets customer interest rate swap related revenue in 2023 with adversely impacted by loan demand and the interest rate environment. This headwind was largely offset as investment in new product capabilities has resulted in growth in other sources of capital markets revenue we remain confident.
Paul E. Burdiss: That we are poised for meaningful growth in capital markets activity and revenue our outlook for customer related noninterest income for the full year of 2024 is moderately increasing relative to the full year 2023.
Paul E. Burdiss: 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 16% from a year ago and decreased by 2% versus the third quarter due to the factors noted previously.
Adjusted noninterest expense shown in the lighter blue bars on slide 10 was essentially flat to the prior quarter at $489 million reported expenses at $581 million increased $85 million due to the $90 million.
Paul E. Burdiss: In FDIC special assessment costs recognized in the quarter.
Paul E. Burdiss: Our outlook for adjusted noninterest expense is slightly increasing in 2024 relative to 2023 risks risks and opportunities associated with this outlook include our ability to manage technology and employment costs.
Slide 11 highlights trends in our average loans and deposits over the past year on the left side you can see that average loans increased slightly in the current quarter.
Paul E. Burdiss: As loan demand remains soft our expectation is that loans will be stable at year end 24, when compared to year end 'twenty three.
Paul E. Burdiss: Now turning to deposits on the right side of this page average deposit balances in the fourth quarter increased slightly as growth in customer deposits were offset by declines in brokered deposits the cost of deposits as shown in the white boxes increased during the quarter to 206 basis points from 192 basis points in the prior quarter.
Paul E. Burdiss: As measured against the fourth quarter of 2021, the repricing beta on total deposits, including brokered deposits and based on average deposit rates in the fourth quarter was 39% and the repricing beta for interest bearing deposits was 60%.
Paul E. Burdiss: Slide 12 includes a more comprehensive view of funding sources and total funding trends.
Paul E. Burdiss: Yeah.
Paul E. Burdiss: The left side of the chart includes ending balance trends short term borrowings have decreased $8 billion since the first quarter of 'twenty three 2023 as customer deposits have grown in earning assets have declined on the right side average balances for our key funding categories are shown along with the total cost of funding.
Paul E. Burdiss: As seen on this chart the rate of increase in total funding costs at 15 basis points in the current quarter has continued to decline compared to the prior three quarters.
Paul E. Burdiss: 13 shows noninterest bearing demand deposit volume trends you can see that the recent trend in demand deposit attrition appears to be flattening, although demand deposit volumes have been declining over the past six quarters as customers move into interest bearing alternatives. The contribution to the net interest margin shown in the white.
Paul E. Burdiss: Boxes, and therefore, the value of the demand deposit portfolio has increased.
Paul E. Burdiss: Moving to slide 14, our investment portfolio exists primarily to be a ready storehouse of funds to absorb customer driven balance sheet changes.
Paul E. Burdiss: This slide we show our securities and money market investment portfolios over the last five quarters. The investment portfolio continues to behave as expected maturities principal amortization and prepayment related cash flows were over $700 million in the third quarter with this somewhat predictable cash flow, we anticipate that money market and investment securities balance.
Paul E. Burdiss: Combined we will continue to decline over the near term, which will be a source of funds for the balance sheet.
Iteration 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 3.6% currently versus four 2% one year ago. This duration helps to manage the inherent interest rate risk mismatch between loans.
Paul E. Burdiss: And deposit with a larger deposit portfolio assumed to have a longer duration than our loan portfolio fixed rate term investments are required to balance asset and liability duration moving.
Paul E. Burdiss: Moving to slide 15, we've provided the projected trend of Aoc I accumulated other comprehensive income.
Paul E. Burdiss: And based on an expectation expected accretion and interest rate impacts based on the FERC curve as of December 31.
Paul E. Burdiss: <unk> improved to $2 7 billion from $3 $1 billion in the prior year largely due to principal amortization in the securities portfolio combined with interest rate swap maturities.
Paul E. Burdiss: We expect based on the current forward curve that Aoc I will decline by about $900 million cumulatively over the next eight quarters.
Paul E. Burdiss: Slide 16 provides information about our interest rate sensitivity, which differs in content and format compared to prior quarters. While we've provided standard parallel interest rate shock sensitivity measures in the appendix of this presentation. We believe a more dynamic view of interest rates sensitivity is most relevant in the current environment.
Paul E. Burdiss: No reason in the Bar chart on the far right side of this page modeled net interest income in the fourth quarter of 'twenty 'twenty four is two 4% higher when compared to the fourth quarter of 2023, using the implied forward path of interest rates at year end and assuming a static balance sheet 100 basis point parallel up and down.
Paul E. Burdiss: Shocked that this implied forward outcome.
Paul E. Burdiss: [noise] suggest about 2% of interest rate sensitivity around that figure.
Paul E. Burdiss: This modeled analysis reveals that our balance sheet well asset sensitive using traditional measures is positioned for net interest income growth if short term rates fell faster than long term rates.
Paul E. Burdiss: Utilizing this model outcome and overlaying management expectations for balance sheet changes in deposit pricing. We believe that net interest income in the fourth quarter of 2024 will be stable to slightly increasing when compared to the fourth quarter of 2023. Our outlook is that full year net interest income will be slightly decreasing.
Paul E. Burdiss: In 2024, when compared to 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.
Paul E. Burdiss: Moving to slide 17 credit quality remains strong classified loans increased $56 million driven by the commercial real estate portfolio, while nonperforming assets decreased $4 million net charge offs were six basis points of loans in the quarter loan losses in the quarter were somewhat granular and largely associated with it.
Paul E. Burdiss: Our commercial loan portfolio.
Paul E. Burdiss: For credit losses is 1.26% of loans, a four basis point decrease over the prior quarter due to a modest improvement in our economic outlook.
Paul E. Burdiss: As we know it is a topic of interest we've included information regarding the commercial real estate portfolio with additional details included in the appendix of this presentation. Slide 18 is a reminder of the discipline. We have maintained over the past decade as it relates to the commercial real estate portfolio growth, we have chosen our partners carefully and our growth has remained well below.
Paul E. Burdiss: Peers over time.
Paul E. Burdiss: Slide 19 provides an overview of the commercial real estate portfolio.
Paul E. Burdiss: <unk> represents 23% of our loan portfolio with office, representing 15% of total CRE or 3% of total loan balances credit quality measures for the total CRE portfolio remained relatively strong they'll criticize and classified levels increased in the quarter. Overall, we continue to expect the CRE portfolio to.
Paul E. Burdiss: Performed well with limited losses based on the current economic outlook.
Paul E. Burdiss: Our loss absorbing capital position as shown on slide 20, the CET one ratio continued to grow into third quarter to 10, 3%. This one combined with the allowance for credit losses compares well to our risk profile as reflected in the low level of ongoing net charge offs, we expect to maintain solid regulatory.
Paul E. Burdiss: Capital, while managing to a below average risk profile.
Paul E. Burdiss: Slide 21 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 for the full year of 2024 as compared to <unk>.
Paul E. Burdiss: 23.
Paul E. Burdiss: This concludes concludes our prepared remarks as we move to the question and answer section of the call.
Quest that you limit your questions to one primary and one follow up question to enable other participants to ask questions. Camillo. Please open the line for questions.
Speaker Change: Thank you we will now be conducting a question and answer session.
Speaker Change: If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue and you May Press star two if he would like to move your questions on the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please while we poll for questions.
Yes.
Speaker Change: Thank you and our first question comes from the line of John <unk> with Evercore. Please proceed with your question.
John: Good afternoon.
John: Just on the balance sheet commentary that you gave on the on the loan growth guidance.
John: Stable balances on an end of period basis could you maybe talk about.
What's the trajectory could look like in terms of where where do you expect you could see some growth in what's offsetting that that keeps you pretty conservative there in terms of flattish balances for the year. Thanks.
Speaker Change: Well I'll start with that I you know the.
Speaker Change: It's our outlook is a reflection of what we're hearing kind of on the ground from our frontline.
Speaker Change: Relationship managers it it feels like it feels like a demand is softening.
Speaker Change: And so that ultimately that's kind of what's baked into our baked into our outlook.
Speaker Change: When you get into the components of the portfolio. Those are driven as you know by market condition. So for example.
Speaker Change: As the commercial real estate market are the capital markets are you know associated part of commercial real estate are as that becomes less of a takeout for commercial real estate loans, you may see those accumulated on our balance sheet is construction loans worked to completion, well C&I traditional C&I for it.
Example may decline with the economic weakness.
Speaker Change: Harris or Scott would you add anything to that.
Scott J. McLean: I don't think I would.
Speaker Change: Thank you.
Speaker Change: Our feeling is that the economy is going to be moderately muted throughout the year, which would actually be a positive thing compared to what we all thought.
Speaker Change: Six to nine months ago.
Speaker Change: So you would you would think that as we get towards the end of the year, we'll start to see loan growth in the economy, probably pick up but.
Speaker Change: We have a pretty good C&I growth last year.
Speaker Change: Despite some of the other movements and.
May be surprised on the upside there.
Speaker Change: Just I'd just add.
Speaker Change: The one to four family.
Speaker Change: The residential portfolio.
Speaker Change: We'd seen grow some of that is a product we call. It onetime close product, which you had construction loans that were you know funding up has been completed.
Speaker Change: That'll settle.
Spectral subsides somewhat we've we've really tightened the parameters around that since you have to.
Speaker Change: To make sure that it's not.
Speaker Change: Growing our you know two.
Two fast relative to the portfolio overall.
Speaker Change: And limiting the number of kind of.
Speaker Change: Single product kind of relationships that we have in that program. So I you know I think that that will probably slow a little bit on the other hand, you know the economy feels like it.
Speaker Change: Oh gosh.
Speaker Change: You know if you talked to any of our lenders today and I you know I don't think any of US are very good at predicting what are what.
Speaker Change: What will tend to look like three months from now but it does it does feel like the economy is going to probably be in.
Speaker Change: Reasonably decent shape through the year that that could that could help so.
Speaker Change: Anyway, well well.
Speaker Change: We'll watch with interest John.
John: Okay, great. Thanks, Harris and then.
Harris: Just separately on the other side of the balance sheet.
Maybe if you can give us your thoughts on.
What deposit growth could look like for the year as you as you look at the.
Harris: The trends there and then maybe also just a bit on around where do you see your noninterest bearing mix stabilizing it dropped down a bit to about 36% of deposits.
Harris: This quarter, so curious where you see that bottoming here. Thanks.
Well the good news is we did see deposit growth and meaningful deposit growth here.
Harris: We moved into the end of the year and I would note that.
Both on balance sheet deposits and kind of customer sweet balances that is effectively a customer need that we're sweeping off balance sheet for them both increased in the quarter.
Harris: So those you know those are good things as we look ahead.
Harris: And certainly what we've seen over the course of the last couple of quarters is that our deposit rate is increasingly important particularly for rate sensitive money.
Harris: And so.
As we move through the year, we're going to be carefully balancing.
Harris: The need for funds and the rate we pay on those funds with the need to kind of continue to demonstrate improvement in our net interest margin.
Harris: As it relates to and the cost of funds, obviously associated with that as it relates to you know.
Harris: Where noninterest bearing demand is trending I think you know we.
We saw some green shoots in terms of run off in the current quarter as noninterest bearing demand attrition appeared to slow from what we've seen historically, so it's very difficult to predict precisely where that goes.
Harris: But I would note that my expectation is we will continue to see some.
Harris: Noninterest bearing deposit attrition just because of the differential in interest rates between zero and the prevailing market rate.
Harris: That trend has slowed it feels like it will continue to slow, but I'm not predicting it and.
Certainly in the near term.
Speaker Change: Okay, great. Thanks, Paul Thank you John.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from the line of Dave Rochester with Compass point. Please proceed with your question.
Hey, good afternoon guys.
On the NII guide just given your comments about flat loans. This year, and then run off in cash and securities. It sounds like you're baking in lower earning assets I guess on an average for the year I guess, what what are you at this point assuming for deposit betas.
Speaker Change: That analysis as well just on the cuts that you're baking in for the year.
Speaker Change: So in that particular outlook. We are following the forward curve at the end of the year and the forward curve does include several rate cuts, particularly as you get into second half of the year. There is something around deposit beta there. If you think about our deposit portfolio and what you see is it's kind of by modal and that you've got a lot of very low interest.
Speaker Change: Deposits and then you've got some sort of higher beta higher rate deposits are a key assumption there and I felt pretty good about it is that those higher beta higher rate deposits. We are we will be able to would be able to reprice those relatively quickly if interest rates on the short end.
Speaker Change: Where to begin to fall, but the point of the interest sensitivity analysis that we present is to show that we're pretty balanced and Ah if rates were to remain flat or down a little or maybe even up a little which you know it doesn't look as likely here on the near term, we believe that we're going to be able to you know.
Speaker Change: Carved a good path for net interest income a predictable path.
Speaker Change: It should be relatively stable based on all these other things.
Speaker Change: Okay, and then just as a follow up how much in the way of the the off balance sheet sweep deposits are there at this point and is that still an opportunity for you guys to.
Speaker Change: To pay down some of the higher cost stuff on balance sheet or is that largely played out at this point.
Speaker Change: Well as I said the good news is that these those off balance sheet I'll call them deposits grew this quarter I think there were $7 billion seven 3 billion. Thank you Scott seven $3 billion those are extremely rate sensitive and so with the right rate. It's possible that we could continue to pull some of those on the balance sheet.
Speaker Change: But I think we've managed our deposit portfolio are pretty well here over the last couple of quarters.
Speaker Change: Still good about where were at as it relates to the mix our mix of rate and volume.
Speaker Change: And so I wouldn't necessarily say thoroughly be expecting to pull those continue to pull those on the balance sheet.
Yeah.
Speaker Change: Based on our current outlook for funding need.
Speaker Change: Okay. Thanks, guys.
Speaker Change: Thank you.
Speaker Change: Yeah.
Thank you. Our next question will come from the line of <unk> with Morgan Stanley. Please proceed with your question.
Kenneth Michael Usdin: Hi, good afternoon all.
Kenneth Michael Usdin: On Oh on the on the deposit portfolio.
Kenneth Michael Usdin: You spoke about how it's a it's very bimodal and the assumption is that the high beta deposits can reprice relatively quickly. So as we think through our rate cards and you know if we can get.
Kenneth Michael Usdin: Six or seven or eight Scotch over the next 18 months or so what would there be a difference in how those rate cuts play through in terms of the benefits. So for instance, with their first few rate cuts be more or less positive than the next few rate cuts.
That's pretty difficult to predict I think over time.
Kenneth Michael Usdin: My point of view is over time, the lower rates are the more the faster growth rates kind of hidden implied floor and where that implied floor is you know has been reset lower over the last 10 years.
Kenneth Michael Usdin: But certainly for the first several rate cuts I would expect particularly as I said for the sort of very high beta high rate deposits I would expect that we would be able to follow those out pretty quickly in repricing.
Speaker Change: Great and then maybe on.
Speaker Change: The reserves in D. C out ratio I think you mentioned that it decreased due to a less negative economic outlook. So if you can expand on that and talk about what is embedded into your ACL outlook and if you're if you think that.
Speaker Change: That is he al can come down further from here, if a soft landing it becomes more and more likely.
Speaker Change: Yeah, I'll start with that we use as many do we use an outside resource for the macroeconomic forecasts.
And there you know the two key driving components, yeah allowance for credit losses are the underlying credit quality in the portfolio and migration, whether or not the portfolio is migrating in a way that's consistent with prior estimates and then the macroeconomic outlook is of course, the other piece of that so generally speaking I would say credit.
Speaker Change: Ration is proceeding similar to our expectation and so the change in the allowance and it's a pretty minor change in the allowance is really based on a slightly better slightly better macroeconomic forecast.
Speaker Change: Yeah.
Speaker Change: Great. Thank you.
Thank you.
Speaker Change: Thank you. Our next question will come from the line of Ken <unk> with Jefferies. Please proceed with your question.
Ken: Thanks, Good afternoon.
Ken: I'm wondering on the on the earning asset side, you mentioned that you expect.
Ken: Earning asset yields to increase throughout the year, just wondering last quarter, you had talked about like five to 10, a quarter and I'm. Just wondering just given the rate moves and what's coming on the books today versus what's coming off.
How much flow through or do you still expect to see as we go forward. Thanks, Yeah, Kenneth that's really pretty consistent this quarter.
Speaker Change: It's hard to have a lot of insight into what happens more than a couple of quarters out.
But our expectation is with.
Speaker Change: So it's a combination of kind of fixed rate pay downs, yeah. That's in the form of loans and investment securities.
Speaker Change: And then the kind of amortization of swaps or maturities of swaps, including canceled swaps.
Speaker Change: Those are you know.
Speaker Change: Kind of underwater based on the original receive a pay rate.
Speaker Change: The combination of all of those things should provide a little bit of lift to earning asset yields for the next couple of quarters and so it's consistent with that zero to five that we express my son.
Speaker Change: Okay got it and on the right side of the balance sheet, how much more room do you have you mentioned that you're you're seeing good deposit growth and you're not expecting much loan growth just curious portfolios kind of flattish not shrinking so how much more can you reduce that reliance on brokered and other wholesale funding from from where you were at the end of this year.
Speaker Change: Well, yes, it's a combination of as you correctly pointed out the securities portfolio is going to continue to to amortize away somewhat predictably as we've noted for the last several quarters.
Speaker Change: Loan growth will be the big question Mark there in terms of funds funds needed, but clearly we're focused on bringing in customer deposits at a rate that's lower than you know kind of alternative wholesale funds and so to the extent we continue to see that opportunity will continue to work that.
Speaker Change: Okay got it thanks, Paul thank.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question will come from the line of Peter Winter with D. A Davidson. Please proceed with your question.
Peter Winter: Hi, I wanted to just follow up on John's question earlier on on loan growth. It 'cause. It. It is coming in you your outlook is a little bit more cautious than what we've heard from other banks we've heard that.
Peter Winter: Borrower sentiment has improved a little bit you know versus 90 days ago, and there was an expectation once the fed starts to cut rates you should start to see loan demand a pick up line utilization pick up.
Peter Winter: But you guys youre not thinking.
Peter Winter: That way.
Peter Winter: This is Scott I would just say that we've seen line utilization increase a bit.
Scott J. McLean: So that is happening but.
Scott J. McLean: Trying to compare others outlooks ours, just kind of a function of who they're talking to you.
Scott J. McLean: Roll back a couple of years when loans were pretty flat in the industry and flat for US everybody was talking about loans.
Scott J. McLean: Loans, we're gonna have definitely started increasing by a certain quarter and we.
Scott J. McLean: Saying that and I'm glad we did because they were wrong and we happen to be right on that particular term that happened a couple of quarters later so.
Scott J. McLean: I I just we'd go back to what Harris said, it's very hard to project.
Scott J. McLean: I also think that.
Scott J. McLean: Interest rates.
Scott J. McLean: Look at them historically there.
Scott J. McLean: It is enough, especially bad right now I mean, if you go back 2030 40 years.
Scott J. McLean: They're generally in line so they're not at all especially historically based escalate.
Scott J. McLean: High level.
Scott J. McLean: I don't know that we have to have interest rates going down to short term rates to see activity pick up could certainly help some industries, but.
Scott J. McLean: I don't think I don't think most business folks commercial business folks are overly.
Scott J. McLean: Anxious about the current level of rates.
Scott J. McLean: I just had a you know again I had noted earlier if I'm if we see the economy start to pick up that I would expect that that will.
Scott J. McLean: That will help with loan growth, but we do have we do have probably slowing growth in the residential portfolio, where she's going to offset some of that that's probably.
Scott J. McLean: The reason that we might be a little a little cautious.
Speaker Change: Okay, and then just one last question.
Speaker Change: Your economic outlook, you mentioned that that improves slightly you've got strong capital I'm just wondering what what are some of the parameters you need to see in order to feel comfortable to kind of resume share buybacks.
Speaker Change: Well I will tell you as it relates to bank capital, there's a lot of uncertainty.
Speaker Change: Around the regulatory rules right now.
Speaker Change: So we're paying a lot of attention to that we're not a category four bank, but we certainly would be I expect by the time the proposed capital rules become effective so you know it.
It would be nice to see a little more certainty around what those capital rules are and even though generally speaking where feet. You know our credit performance has been excellent we are feeling a little bit better about the macroeconomic path are we still remain a little cautious and so over the near term at least I wouldn't expect a large.
Speaker Change: Our share repurchase.
Speaker Change: Can I just add I mean, it's been actually a long time since we've really had.
Speaker Change: That's seriously challenging credit cycle and.
Speaker Change: So you know, even though we're all kind of thinking probably it's going to be a soft landing et cetera.
Speaker Change: There's enough uncertainty in the World I think it's probably the time to be a little conservative on the capital front, especially given what Paul said about this.
You know just rules are influx et cetera, so we'll be a little careful.
Speaker Change: Got it thanks guys.
Speaker Change: No.
Speaker Change: Thank you. Our next question comes from the line of Chris Mcgratty with <unk> W. Please proceed with your question.
Chris Mcgratty: Oh, great. Thanks for the question.
Chris Mcgratty: Paul maybe high level question on the margin you had a peer last week talk about kind of a 3% plus NIM similar company balance sheet size.
Chris Mcgratty: Mix it feels like that's kind of the trajectory you guys are messaging given the.
Chris Mcgratty: The balance sheet dynamics I'm, just kind of interested if you would agree with kind of with the overall level of margins may be gone.
Speaker Change: Well in my experience the net interest margin is extraordinarily difficult to predict because there are so many factors in.
Speaker Change: In our case I think what we're demonstrating is is.
Speaker Change: Pretty stable net interest income and.
Speaker Change: And declining earning assets and so you do the math on that and the expectation is some modest improvement in the margin.
Speaker Change: Okay.
Speaker Change: Perfect and then I just want make sure I understand all the slides the sensitivities that you provided which are helpful. If I can.
Speaker Change: Zoom out I mean, the ideal rate environment.
Speaker Change: For zions going into 'twenty, four and we've talked about higher for longer and also the fed curve. The forward curve what would be kind of the dialogue. If you could if you could heavier weight.
Speaker Change: Well, yeah again, our modeling is showing a pretty balanced position. So I certainly like to think that there will be a little agnostic as it relates to the ultimate path in curve shape, we through portfolio layer swaps, we have work to hedge.
Speaker Change: Our tangible common equity to a spike higher in rates on the longer end of the curve.
Speaker Change: And then as I said on the shorter end of the curve, we feel with the distribution of deposits that we have that we would be able to adjust deposit pricing on those very high priced deposits pretty quickly.
Speaker Change: On the downside and so.
Speaker Change: Again, it's a pretty deliberate construction of a hedging program to manage the balance sheet in an uncertain interest rate environment and so I have.
Speaker Change: A long way of saying that I wouldnt necessarily pick our best path for us.
Speaker Change: If we've done what we think we're doing well.
Speaker Change: Well, then we should be pretty agnostic right.
Speaker Change: I would only add like you know if we saw rates come down.
Speaker Change: A point and a half or something like that it would be a great thing for borrowers and you know so I think it does it does matter in terms of our.
Speaker Change: Our borrowers.
So I've always thought that 10 of our.
Speaker Change: Three on the short end and five on the long end is.
Nirvana for a company like ours.
Speaker Change: Yeah, that's that's awesome thinking like that.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from the line of Brandon King with tourists Securities. Please proceed with your question.
Brandon King: Hey, good evening, thanks for taking my questions.
Brandon King: So I understand the use of your liquidity position to kind of run it down to pay for our loan growth.
Brandon King: Other uses of funds, but is there a certain floor. That's your thinking when you think about you know your cash position money market investments.
Speaker Change: Well, yeah, so on cash and money market I think you'd see us probably at around $2 billion or so given the size and composition of the balance sheet.
Speaker Change: It's pretty close to where we're running today, we we don't you know if it's.
Speaker Change: It's cash in sort of in the traditional sense. Therefore, it's immediate liquidity, but we feel very confident in our ability to draw on the liquidity embedded in our investment portfolio through the repo and other markets.
Speaker Change: Okay.
And then on your comments about the higher cost deposits.
Speaker Change: How many of those are index and if not if they're negotiated it could you give us a sense of how you plan on going about you know lowering those deposit costs could get rate cuts and kind of how you're approaching your customers with that yeah.
Speaker Change: The majority of those deposits are not specifically index that is that they will not sort of automatically reset, but we've got an army of bankers, who are talking to our customers every day.
Speaker Change: And as rates you know the value of money falls, if short term rates fall, then I'm confident that we'll be able to manage those rates down pretty quickly.
Speaker Change: Thanks for taking my questions Yeah. Thanks, Brian.
Speaker Change: Thank you. Our next question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question.
Hey, good afternoon, thanks for the questions.
Speaker Change: <unk>.
Matthew Clark: Just the first one around the customer related fee income.
Matthew Clark: You know I know it's only.
Just under 10% of your overall fees kind of annually or at least in 2023, but just on the on the wealth management side.
Matthew Clark: Apprised to see that dip down can you just can you just update us on the flows there are ins and outs in and how those fees are recognized the timing of those fees.
Speaker Change: Well I think it's when you say dipped down I think it's kind of bouncing between 14 and 15 I think that's probably kind of a rounding.
Speaker Change: That's that's driving that.
Speaker Change: I would say, particularly notable in our wealth management group, you'll notice that there has been some market volatility over the course of the last couple of years and I think the strength of our program as demonstrated in the consistency of revenue that you see there.
Speaker Change: Okay.
Okay, but in terms of how those fees are the timing of those how those fees are recognized as is it on a delay is it kind of a one quarter lag or is it is it didn't.
Speaker Change: Is it consistent with the performance in the quarter, Yeah, it's consistent it's up to date and consistent with the performance of the quarter Theres not a lag there.
Speaker Change: Okay. Okay, and then just one quick one if you have the spot rate on deposits at the end of the year.
Speaker Change: I don't have it handy will have to call you back with that one.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you and our next question comes from the line of Brody Preston with UBS. Please proceed with your question.
Brody Preston: Hey, good afternoon, everyone.
Brody Preston:
Paul I just wanted to follow up on the NII guide on Slide 16. So it says <unk> 24 are expected to be stable to slightly increasing one compared to <unk> 23, so that'd be considered zero to 2% correct.
Paul E. Burdiss: Well you know we use we use where we use words not numbers.
Paul E. Burdiss: But it is certainly low single digit.
Speaker Change: Got it Okay, and you know I wanted to follow up on the deposit beta commentary I understand that you have a mix of high beta low beta.
Speaker Change: Deposits, what I was I was hoping to better understand what the interest bearing deposit beta on the way down as that's underpinning underpinning that specific a.
Speaker Change: Specific guidance kind of implies a 40 to 50, 40% to 45% interest bearing deposit beta on the way down is that about right.
Speaker Change: Let me think about that.
Speaker Change: Yeah that might be in the ballpark I mean, you know again looking thinking about the amount of relatively high beta products. We have we did write off of very high beta on those.
Speaker Change: Our cumulative beta.
On interest bearing deposits has been interest bearing has been 60% over this cycle.
Speaker Change: And so we're sort of net interest bearing debt excludes the DDA.
Speaker Change: So I'm certainly hopeful that we would be able to have a beta of it looks like that on the way down.
Speaker Change: Okay, Great and then my last one is just around the swaps you terminated another 800 million received fixed swaps.
This quarter I, just wanted to better understand what's the what drives the decision to terminate the swaps and then you've done that a few times I think over the last year or so could you clarify what the NII impact of you know the accretion of the swap losses will be in 2024.
Speaker Change: Oh well we.
Speaker Change: Don't have the chapter and verse details in front of me, but the reason that we have been canceling those swaps is that you know that the that the swaps are there to help add asset duration and the asset duration was two was to sort of balance the deposit duration depositor behavior has evolved.
Speaker Change: Have you no differently than we expected and so we've seen the DVA run off and we've seen higher betas are perhaps than what we would've modeled a year ago, and so that effectively shortened the duration of deposits and the the canceled swaps and then the.
Speaker Change: The pay fixed swaps that we put on have all been for the purpose of shortening asset durations to try to create that balance.
Between.
Speaker Change: Our asset durations than liability duration as we look ahead. The net interest income outlook that we've provided incorporates the the effect of the amortization of the swap maturities that you that you just asked about.
Speaker Change: Okay got it. Thank you for taking my questions here. Thank you.
Speaker Change: Thank you. Our next question comes from the line of John Armstrong with RBC Capital markets. Please proceed with your question.
John Armstrong: Hey, Thanks, good afternoon.
John Armstrong: John.
John Armstrong: Credit looks pretty good for you guys and I understand the prepared comments on the outlook, but can you comment on some of the criticized and classified trends.
John Armstrong: In the back of the deck on like 33, 34, and 36 those slides.
John Armstrong: Yes.
John Armstrong: What do you expect that.
Speaker Change: Yeah sure curious what you expect on losses over time.
Speaker Change: Sure.
Speaker Change: Thanks, John This is Derek.
Derek: Eric lost future losses are harder to predict here.
Speaker Change: But what we're what we're seeing is Ah Ah can.
Speaker Change: Some continued challenges in the office portfolio, we continue to work through those again, our office portfolio is a pretty small.
Speaker Change: Book for less than 3% of the total loans, we continue to work through those we we did not have any new non accruals in the office portfolio. This quarter. What we are seeing is the multifamily portfolio seeing some increase.
Speaker Change: The increase in criticized.
Speaker Change: There are and it really comes from three three things one is some delayed construction.
Speaker Change: Which is being solved by additional equity from our sponsors and then a second thing that's contributing is.
Speaker Change: The higher interest rates.
Speaker Change: Well as the third would be some slowdown in the lease up velocity that we're seeing for the multifamily book.
Speaker Change: They're still able to achieve rents, but in some cases, they're granting concessions. It's just taking the lease up a little bit longer than originally underwritten.
So in most cases, we think it will just take a little longer to get there.
Speaker Change: And the sponsors are continuing to support the portfolio as we worked worked through.
Speaker Change: You know those trends.
Speaker Change: Hmm.
Speaker Change: And I guess one of the surprises in the quarter was the zero provision and I guess, how do you guys want us to think about.
Speaker Change: The provision going forward is it safe to go back to where you were in the prior three quarters or so.
Speaker Change:
Speaker Change: Yes.
Just a perspective on it.
Speaker Change: We've got about at present, there's about 19 years of loss.
Speaker Change: Pip sort by the.
Speaker Change: But it's a allowance.
Speaker Change: Given the total.
Loss.
Speaker Change: Performance over the last year.
Speaker Change: Okay, clearly we wouldn't have a.
Speaker Change: An allowance.
Speaker Change: That runs out 19 years worth of losses.
Well, we've got a portfolio duration of our shores in that it really reflects the fact that as we felt that we expected.
Speaker Change: And in fact, seeing and that's what the accounting rules require or is it you.
Speaker Change: Basically forecast was what what is the loss in the life of the portfolio.
Speaker Change: And so the fact that we're seeing increased levels of criticized isn't a great concern I'd I'd also add to what Derek just said for example, with respect to multifamily.
Speaker Change: Probably you know deals that have done this isn't just science I think that's really what we see.
Speaker Change: Seeing this across the industry.
Speaker Change: In recent years, the equity going into those deals is probably double what it was.
A decade ago.
And so there is a lot more cushion and ability for.
Speaker Change: These deals too.
Speaker Change: <unk> experienced some slowdown et cetera, but we nevertheless will show those as criticized if they're not meeting the original projections. So we don't see a lot of I think Derek it's fair to say that we're not.
Speaker Change: St lot of loss content of it but.
Speaker Change: The the allowance that we're building in the first three quarters of the year kind of anticipates.
Speaker Change: What I had anticipated what we've what we've started to see but even at even even at the current levels are criticized levels non accruals.
Speaker Change: Nonperforming assets at plus three 9% of total.
Speaker Change: Loves and real estate owned as.
Speaker Change: Isn't very good shape relative to historical experience so.
I think we're pretty comfortable.
Oh.
Speaker Change: Okay.
Speaker Change: Yeah, Paul Paul any any thoughts on the provision I I'm, just trying to help out Shannon.
You don't end up with a wide consensus but.
Speaker Change: Somewhat.
Speaker Change: Yes.
Speaker Change: Any thoughts I mean is it a zero provision going forward.
Speaker Change: Thank God. The key determinants are the economic outlook and then the path of terrorists or things just sort of path of credit migration I mean.
In the current quarter, you know effectively what's happened is that you know credit migration path for.
Speaker Change: Performed approximately as expected in the prior quarter and the macroeconomic forecast is just a little bit better and so those are the key determinants until it to the extent to the extent that those continue to hold true then that would have a positive impact on the allowance for credit loss.
Speaker Change: A question about their future provisions reminds me of a story of two economists walking down the street and one says there's a 20 dollar bill on the sidewalk and the other stuff. So that's impossible someone some of them would have picked it up right.
Speaker Change: But the point being under <unk>.
Speaker Change: Under Cecil accounting standard.
Speaker Change: You, if you think something's going to happen in the future you Gotta reflected now.
So you are almost by definition you cant predict the.
Speaker Change: The future provisions are gonna be one way or the other because.
Speaker Change: Already picked that up if you will so.
Speaker Change: I think it's really hard to say what it becomes in the future.
Speaker Change: You just have to see how the future changes every quarter.
Speaker Change: Or your outlook for it but I just think it's again I think it's fair to say I think we feel like the bottom line. So I think we feel pretty comfortable with the quality of the portfolio.
Speaker Change: Where our reserves are today and Oh, we'll see we'll see where it goes from here.
Speaker Change: Fair enough. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you we have reached the end of our question and answer session and with that I would like to turn the floor back over to Shannon <unk> for closing comments.
Shannon: Thank you Kayla and thank you to all for joining US today. If you have additional questions. Please contact us at the email or phone number listed on our website. We look forward to connecting with you throughout the coming months and thank you for your interest in Zions Bancorporation. This concludes our call.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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