Q1 2024 Zions Bancorporation NA Earnings Call
Speaker Change: [music].
Greetings and welcome to the Zions Bancorp Q1 earnings Conference call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation spending what should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce San Andres <unk> director of Investor Relations. Thank you Shannon you may begin.
Thank you Daryl and good morning, we welcome you to today's conference call to discuss our 2024 first quarter earnings I would like to remind you that during this call we will be making forward looking statements. Although actual results may differ materially. We encourage you to review the disclaimer in the press release or slide two of the presentation deals.
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 on our website Zions Bancorporation dotcom.
For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide opening remarks, following Harris's comments, Ryan Richards, our Chief Financial Officer will review our financial results.
Also with US today are Scott Mclean, President and Chief Operating Officer, Chris Curious caucus, Chief risk Officer, and Derrick Stewart Chief Credit Officer.
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 Harrison is thanks.
Thanks, very much Shannon and until we welcome all of you to our call. This morning.
I didn't mentioned Ryan Richards is joining our call today is our new Chief Financial Officer, Brian was familiar corporate controller and has been promoted to Chief Financial Officer, which is our former CFO. Paul Burton is now serving as the CEO of our largest affiliate banks Zions Bank East.
These changes along with other leadership changes I think reflects the depth of the challenge that we have in our organization at our intentional efforts to develop a well rounded.
A group of leaders with broad experience.
Well, we and the industry continue to continue to navigate complex and uncertain economic and regulatory conditions, we've not lost focus on bringing value to our customers and shareholders over the long term.
We've just successfully completed the second of three migrations to our new core deposit system, which happens for Nevada State Bank and how much of your bank of Texas customers two weeks ago.
We anticipate completing migration of substantially all remaining accounts in late summer.
This core system is delivering the benefits, we were anticipating including one intuitive easy to use system for virtually all deposit and loan accounts, which improves the ability to view and manage client relationships provides greater access to data and consistency of data, resulting in fewer calls to the back office.
Optimized teller transaction processing, the shortening of new account opening and customer maintenance times.
And real time processing, allowing for improved fraud detection and mistake resolution.
The completion completion of this major transformation is accompanied by other enhancements to our digital capabilities for our customers all of which we believe put US ahead of the pack in terms of our resiliency, our product offerings and ability to serve our customers.
Disadvantage combined with our local approach to relationship banking, the strength of our footprint and our ability to manage risk positions us well for continued advancements in digital banking.
We're also pleased that our efforts to serve and create value for our customers continue to be recognized including through the 2023, Greenwich associates market tracking program.
The answers awarded 20 overall National Excellence Awards ranking third among all U S banks.
And securing our position as one of only three U S banks to average 16 or more wins since the inception of the brand awards in 2009.
We continue to score well across a number of major dimensions for both small business and middle market categories.
Where we lead the way for banks you can trust.
He has long term relationships and ease of doing business.
By the way, we tip, our hat to our friends at Cullen Frost and clinical financial who were our number one and two this year and for their continued and consistent recognition by Greenwich associates over the years, we're proud to be in such good company and associated with other leading regional banks.
Who demonstrate excellence in meeting the needs of small and middle market businesses.
In the current environment, our revenue growth continues to be our biggest challenge with adjusted revenue in the quarter down 11% compared to the year ago period.
Over time relative net interest margin will improve through customer deposit growth and pricing discipline discipline. In addition to the management of interest rate risks risk through our hedging strategy.
We also expect that with a continued passage of time from the events of last spring our relative cost of deposits will continue to improve.
Loan demand it seems to have turned a corner of sorts this quarter with pipelines recovering somewhat from low levels late last year and improving customer sentiment.
Our true success will depend on our ability to grow our customer base and we continue to place an emphasis on granular growth of small business customers.
Recently, we've been particularly successful with a screen streamlined SBA program aimed at serving smaller businesses in our communities.
Program that seems to fill a unique product need for customers and while it doesn't immediately contribute meaningfully to loan balance growth.
Lines of business at those real franchise value and is bringing in a meaningful number of new to the bank customers and our cross selling efforts are also bearing fruit.
We also remain confident in our ability to grow fee income to a larger percentage of total revenue.
Capital markets fees represent a key opportunity in these fees are growing as our product set expands and more of our bankers are marketing these capabilities to clients.
These combined efforts to improve revenue would be paired with well managed expenses.
Adjusted expenses in the current period were up a mere $2 million compared to the first quarter 2023.
And we continue to focus on ways that we can control costs, while continuing to invest in the business.
Net charge offs continue to be benign at just four basis points annualized as a percentage of average loans for the quarter.
This contrasts to an increase in classified loan balances of $141 million driven largely by the C&I portfolio.
We believe realized losses over the next few quarters will continue to be quite manageable and our current expectations are fully reflected in our allowance, which increased one basis point as a percentage of loans.
And which Ryan will speak about in more detail later in the presentation.
With the continued improvement we expect in our net interest margin coupled with better than pure credit performance, we anticipate a positive trajectory for.
For relative performance and our ability to improve shareholder returns going forward.
Starting on slide three we've included key financial performance highlights, we reported net and net net earnings.
Reported net earnings of $143 million for the quarter.
Period end loan balance increased just under 1% while average balances increased one 3% for the quarter.
Customer deposit balances declined approximately 1% in the quarter due primarily to a small number of seasonal outflows early in the year.
Our loan to deposit ratio was 78%.
Net charge offs as a percent of loans were just four basis points as noted down from six basis points reported in the prior quarter.
Our common equity tier one ratio was 10, 4% compared to 10, 3% in the fourth quarter and nine 9% a year ago.
Moving to slide four.
Diluted earnings per share of 96 cents was up 18 cents from the prior quarter.
Current quarter results reflect a 7% negative impact from the FDIC as updated estimates of expected losses from the closures of the Silicon Valley Bank and signature bank, which which compares to the 46% negative impact from the initial assessment reflected in the fourth quarter.
Turning to slide five our first quarter adjusted pre provision net revenue was $242 million.
Down from $262 million in the fourth quarter.
The linked quarter decline was attributable primarily to seasonally higher noninterest expense.
Versus the year ago quarter P PNR was down 29%.
As the increase in the cost of deposits exceeded the increase in earning asset yields.
With that high level overview, I'm going to ask Ryan Richards, our chief financial officer to provide additional detail related to our financial performance Brian.
Thank you Harris and good morning, everyone.
I will begin with a discussion of the components, our pre provision net revenue.
Nearly 80% of our revenue is from the balance sheet through net interest income.
Slide six includes our overview of net interest income and the net interest margin.
The chart shows the recent five quarter trend for both.
Net interest income on the bars and net interest margin in the white boxes improved slightly from the prior quarter as the repricing of earning assets outpaced rising funding costs.
Additional detail on changes in the net interest margin is included on slide seven.
Unless inside of the page, we provide a linked quarter waterfall outlining the changes and key components of the net interest margin.
The 22 basis adverse impact associated with borrowings.
<unk> seen both the rate and volume was offset by the positive impact of loan repricing and the impact of lower average interest bearing deposit volumes.
Noninterest bearing deposit volumes volume declines resulted in a slight reduction in the contribution of these funds to balance sheet profitability.
The right hand side of this chart shows the net interest margin comparison to the prior year quarter.
Higher rates were reflected in loan yields which contributed an additional 77 basis points of net interest margin.
The value of noninterest bearing deposits at lower borrowing levels contributed another 93 basis points to the margin.
These positive contributions which were more than offset by increased deposit costs.
Which were which adversely impacted the net interest margin by 208 basis points.
Overall, the net interest margin declined by 39 basis points versus the prior year quarter.
Moving to noninterest income and revenue on slide eight customer related noninterest income was $151 million compared to $150 million in the prior quarter.
With higher capital markets fees offset by smaller declines in other categories.
Our outlook for customer related noninterest income for the first quarter of 2025 is moderately increasing relative to the first quarter of 2024.
The chart on the right side of the page includes adjusted revenue, which is which is the revenue included in the adjusted pre provision net revenue and is used in our efficiency ratio calculation.
Adjusted revenue decreased 11% from the prior year.
And was stable versus the fourth quarter due to the factors noted previously.
Adjusted noninterest expense shown in the lighter blue bars on slide nine increased 22 million to 511 million attributable largely to seasonal increases in compensation.
Reported expenses at $526 million decreased $55 million.
As a reminder, the fourth quarter included 90 million in FDIC special assessment costs, well another $13 million was recognized in the first quarter of this year.
Our outlook for adjusted noninterest expense for the first quarter of 2025 is slightly increasing relative to the first quarter of 2024.
Risks and opportunities associated with this outlook include our ability to manage technology supply chain and employment costs.
Slide 10 highlights trends in our average loans and deposits over the year.
On the left side, you can see that the average loans increased 1% in the current quarter.
Loan demand and customer sentiment improved somewhat during the quarter and our expectation is that loans will be stable to slightly increasing in the first quarter of 2025 relative to the first quarter of 2024.
Now turning to deposits on the right side of this page average deposits for the first quarter decreased slightly as average noninterest bearing and broker deposits declined.
The cost of total deposits shown in white boxes stayed flat at 206 basis points.
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 first quarter remained at 39% and the repricing beta for interest bearing deposits was 60%.
Slide 11 includes a more comprehensive view of funding sources and total funding cost trends.
Left hand side chart includes ending balance trends.
Short term borrowings have decreased 8 billion since the first quarter of 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 a total cost of funding.
As seen on this chart the rate of increase and total funding costs at nine basis points in the current quarter has continued to decline compared to the prior three quarters.
Moving to slide 12.
Our investment portfolio exists primarily to be ready storehouse of funds to absorb customer driven balanced balance sheet changes.
On this slide we show our securities and money market investments over the last five quarters.
The investment portfolio continues to behave as expected.
Charities principal amortization and prepayment related cash flows were $700 million in the first quarter with this somewhat predictable portfolio cash flow, we anticipate the 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.
The duration 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 1% one year ago.
This duration helps them manage the inherent interest rate mismatch between loans and deposits.
But the larger the deposit portfolio seem to have a longer duration in our loan portfolio.
Right term investments are required to balance of asset and liability durations.
Page 30, excuse me slide 13 provides information about our interest rate sensitivity.
While we 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.
As noted in the Bar chart on the far right side of the page modeled net interest income in first quarter of 2025, it's one 8% higher when compared to the first quarter 2020 for using the implied forward path of rates at March 31st and assuming a static balance sheet.
100 basis point parallel up in Dallas shocks, if that's implied for it outcome suggest about 1% and two 3% sensitivity around that figure respectively.
And no changes in rates were to occur modeled net interest income is 80 basis points higher.
This model analysis reveals that our balance sheet, while asset sensitive using traditional measures is positioned for net interest income growth if short term rates fall faster than long term rates.
Utilizing this modeled outcome and overlaying management expectations for balance sheet changes in deposit pricing. We believe that net interest income in first quarter of 2025 will be stable to slightly increasing when compared to the first quarter of 2024.
Risks and opportunities associated with this outlook includes realized loan growth competition for deposits and the path of interest rate changes across the yield curve.
Moving to slide 14 credit quality, and particularly net charge offs remained strong.
Net charge offs were four basis points of loans in the quarter the.
The allowance for credit losses is one point to 7% of loans, a one basis point increase over the prior quarter due to incremental reserves in the commercial real estate portfolio, partially offset by a modest improvement in our economic scenario.
Notwithstanding strong net charge off performance, we observed some indicators about it modest credit deterioration in our credit portfolio.
Nonperforming assets increased $26 million in classifieds, and Chris criticized loan balances increased by $104 million and 297 million respectively.
As Harris noted we continue to expect the ultimate realized loan losses will be very manageable over the remainder of the year.
As we know it is a topic of interest we have included information regarding the commercial real estate portfolio with additional detail included in the appendix to this presentation.
Slide 15 provides an overview of the CRE portfolio.
<unk> presents a represents 23% of our total loan portfolio with office, representing 14% of total CRE or 3% of total loan balances.
Credit quality measures for the total CRE portfolio remain relatively strong the criticized and classified levels increased during the quarter.
Overall, we expect the CRE portfolio portfolio to perform reasonably well with limited losses based on the current economic outlook.
Our loss absorbing capital as shown on slide 16.
E T ratio continued to grow in the first quarter to 10, 4%.
This when combined with the allowance for credit losses compares well to our risk profile.
It reflected at a low level of ongoing loan net charge offs.
We expect our common equity from both a regulatory and GAAP perspective to increase organically through earnings and at the Aoc I improvement will continue through accretion of that securities portfolio, regardless of rate path outcomes.
Slide 22 summarizes the financial outlook provide over the course of this presentation. As a reminder, this outlook represents our best current estimate for the financial performance for the first quarter of 2025.
As compared to the first quarter of 'twenty 'twenty four but.
With that I'd kind of tie it back to Shannon.
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.
Carol 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 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.
Mr. Archie one moment, please while we poll for your questions.
Our first questions come from the line of Manav Ghazaliyah with Morgan Stanley. Please proceed with your questions.
Hey, good morning, all and Ryan welcome and congrats on the new role.
Thanks, so much.
I was wondering can you dig into the NII guide and the assumptions there in terms of the number of Red cards, assuming youre using the forward curve you are and you know also if you could talk about the assumptions on and I be outgrowing deposit repricing and you know what sensitivity. There is if we don't get any rate cuts this year.
Hey, Thanks, so much for the question and yes, when you look at some of the materials there and it really the emphasize in my remarks sort of the forward curve.
As of the end of the quarter and embedded in that forward curve outlook in the fourth quarter of the year was a fed funds rate of 475, so implying a three rate cuts.
So with that that's kind of our base expectation.
Expectation, but I think as we open our inboxes each and every morning seeing some indicators that would suggest perhaps fewer rate cut for the year, we really see the advantage then of sharing some of our additional supplementary measures around latent and emergent sensitivity and particularly as we think about the likelihood or the possibility of having fewer.
<unk> for the year it becomes more important as we think about that latent sort of view of of interest rate sensitivity that we model it.
It's 8% so we feel good about our ability to be.
We are positioned well for a different rate.
Habits and changes.
How much of that performance as you note will be dependent upon how our deposit deposit pricing behaves moving forward and we were pleased to see some stabilization of that during the quarter and will continue to keep a watch on that moving forward as a deposit competition could you used to be.
Pretty stiff.
Are there any other parts of that question that I missed.
Speaker Change: No I think you've got them I wanted to follow up on just the <unk>.
The deposit costs and balance as you know I know and I be outflows accelerated maybe a little bit this quarter, but.
At the same time, the overall cost of deposits was relatively flat. So maybe if you can talk about the trajectory through the quarter of bullets, the and I be balances as well as the cost of deposits.
Is there any seasonality.
There that we need to be considering and you know what are you hearing from clients you know you're seeing them take a fresh look at their cash levels and a higher for longer rate environment or.
You know that.
The positive trends continuing got through the quarter Yeah. No. Thank you for that so yes. So we did see early in the quarter some seasonality for some of our large commercial deposits that ran off but most of what you're seeing there in terms of the change in the DDA balance in the quarter was it migration into interest bearing debt.
We saw in modest ways, certainly with a small smaller relationship balances, but also with our larger relationship balances. We saw we've seen a very nice stabilization of the NIM going back for fourth quarters.
And we saw I think even through the end of the period, where some of that migration was tempered somewhat we have not ruled out now we have allowed for continued migration of that is embedded within our guidance.
You'll see in our materials that would allow for our total deposit beta to scale up from this current level. So there is some room for maneuver in terms of that migration and still allowing us to hit our guidance as we peer for it in one year's time to stable to slightly increasing NII.
Great. Thank you.
Thank you our next questions come from the line of John Pan Kearney with Evercore. Please proceed with your questions.
Morning, Ryan won't come.
I think John on the on the credit front.
On commercial real estate, you added a bit to the reserves Brooklyn commercial real estate reserve up to about 4%.
Could you maybe discuss your confidence in the adequacy of the loan loss reserve I mean, I know bosses are.
Certainly limited, but comparatively I know the.
Your your peer regionals or in the 10% range around their reserving for commercial real estate. So can you maybe walk through your confidence in the adequacy here given the trends that you're seeing in the pressure on.
And the industry.
Well thanks, John This is Derek.
We're very confident in the level of reserves that we have what you what you can see from in the credit portfolio is actually some migration into criticized that switch.
The largest driver.
A driver of the deterioration in the CRE portfolio a lot of that is from multifamily.
Which which we're very comfortable with.
We're we're comfortable just because of the loan to values that we've underwritten the conservative underwriting.
Underwriting that we've done.
<unk> done over the years as well as the slower periods of growth that we've had compared to peers.
Over the years we.
Yeah.
<unk>.
With our loss.
The losses that we've had it at four basis points and 6 million for the quarter continues to be a.
Very manageable.
We will see some challenges probably in the office portfolio overtime.
But we continue to believe that we're very well reserved for what we think are manageable losses in the future.
Hey, John This is Scott.
I would just add to that.
Something which I think almost everybody knows about us our CRE growth coming into this was about half of <unk>.
The regional bank average and.
Depending on what size regional banks you are looking at so as you know since the great recession our.
Sorry folks been growing about 3% to 5% a year.
Which is significantly less than peers.
I think the fact that it's 80% of the portfolio is term.
Says that.
We have demonstrated cash flow.
Related to a large portion of the book.
And then you you just look at the low average and median.
Average loan size.
It sort of tells you that the.
The odds of us having guarantor support they can actually make a difference is real and then finally.
Thank.
There to some of our peers.
We've been very disciplined about hold levels.
And you know concentration management, particularly as it relates to hold levels is really important going into a time like this.
Great. Thanks, Scott I appreciate it and then separately on the expense side, our expense trends came in a little bit better than expected or even beat the outlook was a little bit better can you maybe.
Minus some of the efforts on the.
The expense front do you see some incremental gains as you look to the franchise and then separately do you see can you remind us of the <unk>.
Spence dynamics tied to the completion of the core system conversion.
I'll leave a year, one you might actually get a bump up in those costs before you see efficiencies. So if you could maybe walk through that with us as well.
Yeah, let me start with.
You know highlighting I think as was noted the year over year performance. It was about a year ago. This time or commit was made to bend the expense curve.
In the backdrop of the revenue environment that we're in and where we.
We feel pleased with where we came out on an adjusted basis relative to that but last year, Mark having a very modest <unk>, 4% increase in adjusted expenses.
So I felt like we've kept skin commitments there and we are really operating in the spirit of continuous improvement that wasn't a one and done.
We continue to inventory opportunities moving forward.
To make sure that we manage those responsibly and we see opportunities as you note as we think about the very good success in Harris highlighted in his remarks on our core financial transformation work and how that's progressing and we do see some opportunity in terms of direct implementation expense associated with that going into next year.
We have been spending a lot of time internally focusing on where we can bring automation improvements we've been mobilizing a lot of our people internally to drive out labor manual labor hours out of our work.
We see we see opportunities associated with kind of our facilities and we've shown that we've had an ability to realize some economies there with some of the projects. We've worked on in recent years and our you know our compensation structure will continue to match the revenue environment and how we trend across that dimension. So I don't know Scot, if there's anything that you'd want out right.
That was awesome.
All of those comments speak to the rigorous discipline, we've had you know.
This quarter last year as Ryan noted, we were sitting on about 8% to 10% again year over year expense growth. When we called that we would be flat to the first quarter of this year. So.
It wasn't by accident, there's a lot of rigorous discipline that Ryan noted.
And that we think will be beneficial going forward.
Related to our future core projects specifically.
We've noted that there will be.
Speaker Change: Next year, and 25 about a $12 million to $15 million decrease in amortization costs.
There will also be we'll see some.
Benefit from reduced what we would call double staffing that exists in many areas of the bank.
To help with the conversions and then.
With Harris noted we've seen some real process time improvements at the Teller line on our <unk>.
New accounts platforms.
But where we see higher levels of turnover anyway, where we may see some efficiency from that as well.
Okay, great. Thanks, Scott Thanks, Ryan.
Okay.
Thank you our next questions come from the line of Steven Alexopoulos with Jpmorgan. Please proceed with your questions.
Good morning, everybody.
Good morning.
First by the way thanks for the 930 a M call. This is a great time flood hopefully you keep it.
Uh huh.
My question Yeah.
Yeah, I won't ask a question on that.
In terms of the net interest income guidance. This comment in here that there's upside if short term rates declined. Most banks you know are indicating that if short term rates come down because of the lag on the deposit side. They would think that would pressure NII in the short run, but it seems like you're saying the opposite here could you expand on that.
Yes, I would emphasize that the near term nature of that but what we're seeing there. So you can take a look across our.
Basically our interest bearing deposits besides that around $50 billion, you think about a third of those being priced pretty near wholesale prices for 75% above we sort of said as we've kind of been making the rounds that we.
We expect to have a good bit of pricing sensitivity on those deposits that can be advantageous to us on the way down and that would be the near term headwinds.
That we could realize.
Got it okay.
That's helpful and then for my follow up maybe for you Harriss. It was interesting to hear you say that loan demand seem to turn a corner because if you look at the consumer side sentiment still pretty negative mostly tied to inflation, but it seems like you are citing business customers, maybe send it's improving a bit could you talk about that and do we need.
Hutch to see improved pipeline to turn into actual improve loans. Thanks.
Well I think what we're seeing is.
I mean, it's just.
This is coming from our kind of frontline lenders.
Are expressing.
They're seeing a little more optimism probably from from borrowers.
I don't know that you need cuts.
That.
This really hinges on a quarter point or.
That's what's doing it so much as just probably.
General belief that maybe the.
The economy is not headed into a recession that the things are a little more resilient from.
That might have been kind of the sentiment.
Six or nine months ago.
So I suspect that's it but but our comment about about.
Maybe improving.
Loan demand coming at Us is.
It's simply a reflection of what we're hearing from our lenders.
So, it's a little hard to quantify but but but that's.
Yeah.
That's what we're seeing internally.
In the past when you saw an improvement in the pipeline how long would that typically take to filter through actual loan growth improving.
Oh.
Six months.
Okay.
Thanks for taking my questions.
Thanks.
Thank you our next questions come from the line of Bernard Bonkers Hickey with Deutsche Bank. Please proceed with your questions.
Yeah, Hi, good morning.
<unk> been making investments in your capital markets and wealth management segments to help drive a more sustainable revenue base.
Market's revenues had a nice uptick in the quarter driven by the real estate and Securities underwriting you mentioned.
Speaker Change: Do you expect improvement to be driven from these areas or any color you can provide on where the unexpected improvement will come from.
I might just say that we have a very intentional calling effort, we've got a lot of bankers and engaged in it.
Yeah.
I generally expect it's going to be sort of across the board.
And.
Well, we have we have some ambitious internal targets and people committed to it so.
I don't think it's going to be any any single category I think I think youre going to see it.
Sort of across the board in capital markets.
And then maybe on the funding side I know on slide 11 of your presentation.
Having the 4 billion and brokered deposits and 5 billion in borrowings.
You've done a nice job of bringing these down.
Over the last several quarters.
What are your expectations on further bringing down our wholesale borrowing so for this year.
Yeah.
I'll speak to that.
And our treasurer, Mike Yeah.
It doesn't matter either I'm, the corporate treasurer, I mean, it's really.
We've seen.
Deposit.
Stabilizing from where after last year and actually we saw growth half of last year, which is why we brought down those broker deposits.
Going forward, it's going to really be a function of what happens with our deposits what happens is our loan growth.
We expect those numbers to continue to come down somewhat.
But that depends on how the rest of the balance sheet behaved weather.
Loan growth is.
Superheat comes in very strong and you know, we always need to keep more of that wholesale borrowing.
Speaker Change: I would just add to that.
Customer deposits down a little bit in the first quarter, which is somewhat seasonal.
We still got out of it we still have about $6 billion in client deposits that are off balance sheet.
And.
So.
You know, it's a pretty conscious decision, we could certainly have shown that $2 billion of customer deposit growth.
Our borrowings would've come down overnight borrowings would've come down and it's something we don't we just tried to be very natural decisions.
Try to till the end of borrowings number or or or hit our customer deposit growth number just simply through.
Right mechanics.
We try to make the best decision, we can about what customers really need and what we're looking for at any point in time.
Great. Thanks for the color and taking my questions.
Speaker Change: Okay.
Thank you our next questions come from the line of Ken <unk> with Jefferies. Please proceed with your questions.
Oh, Hey, guys How're you doing can I, just ask you a little bit more about.
The mix of earning assets, you mentioned that cash and securities would be keep coming down what are you going to be looking to do.
Within that in terms of securities portfolio Rollovers and <unk>.
Versus the overall mix of the.
Cash and securities. Thanks.
Yeah. Thanks for that can you have noticed the trend that we've allowed our investment securities portfolio to have some attrition we can see that continuing.
Our time longer and that's that's helping us in terms of that yield coming off and the reinvestments, we've been seeing in loans and the remix the balance sheet has been a nice trend through the course of the past year and we certainly saw that this past quarter. So I don't know that we have a specific number in line is kind of goes back to what Matt said is.
Let's see where loan growth shows up and how our deposit base behaves, but that's but that's what we've been seeing.
Okay, and then separately just.
87 billion and far away from that next 100 threshold I'm just wondering if you could talk us through how not having the holding company structure changes how you guys think about approaching that.
And think about getting the company ready, especially given your history, where you work a category five bank originally and have some of that infrastructure can you just kind of help us think about like what what needs to happen as you move forward in what we would be realizing along the way there. Thanks.
Ill take a stab at that campus Harris.
<unk>.
The first thing I'd note is just picking up on something that Ryan said about.
Continued run down in the securities portfolio, we have enough liquidity kind of inherently here that that probably gives us I don't know if its another year or just kind of walk through it.
It is going to help us kind of push that that data out, which which helps with the OCI.
Run off and kind of normalizing.
<unk>.
Yeah.
Getting getting that dragged down.
In advance of crossing a 100.
In terms of the kind of requirements.
I think we are.
I think we believe we are in pretty good shape, because we continue.
Still doing stress testing, we think they are.
We'll probably have to be a little more rigorous in terms of kind of the documentation.
We would supply to regulators et cetera.
But all of the mechanics.
We continue to refresh models.
We will.
We'll need to get back into the resolution plan business.
But our structure I think makes it actually much easier.
I mean, it's a pretty bare bones structure that we have that I think makes resolution planning.
All that much easier.
<unk>.
Yeah.
The lack of a holding company.
Probably the main impact is theres no supervisory stress test, it's really only internal.
And so.
You know until we get to I think $2 50.
So.
Fundamentally I don't think that we're going to see.
Kind of a.
A major event when we get there.
Probably the major event really is depending on how Basel III end game.
Gets revised.
Oh, we would expect and what <unk>.
What if anything happens with a long term debt rule I mean, I think that.
Uh huh.
If I have a concern it's probably more around the long term debt rule I think that needs to get revisited.
Sort of anti tailored.
For <unk> $400 billion regional bank.
And so Mike.
My hope is that we'll see some attention paid to that as well.
But beyond that I think we're going to be in pretty good shape.
Yeah.
Great. Thank you Harris.
Thank you our next questions come from the line of Brandon King with true Securities. Please proceed with your questions.
Hey, good morning, Thanks for taking my questions.
Brandon King: Thanks Brandon.
So I wanted to talk about earning asset yields saw a nice increase in the quarter could you just lay out what your what your expectations are for that pace of increase over the next several quarters.
Yes, and thank you for that as we've sort of been talking along the way. We did have a nice pick up this quarter in earning asset yields we sort of been guiding to a zero.
Zero to five basis points and I think if you look over a couple of quarters, we've been out to chin that bar.
So some good repricing activity, which was really born out in that late and sensitivity that we showed in the slide that if nothing else happens with the rate curve, we stand to gain here.
Okay and do you think you can still go above that I guess zero to five is that a fair assumption or is that still the kind of the range I wouldn't rule it out, but that's kind of where we've been talking for the market and not wanting to get ahead of ourselves.
Okay, and then lastly office CRE there was a meaningful step down in that portfolio are also being criticized classified and non accruals. So could you just talk about how you're managing that portfolio. What are you seeing in how you're actively managing.
Well return it.
Yes, Thanks, Brandon this is derrick.
The decline in office.
Criticized and classifieds was actually one positive resolution that we.
We had we were paid in paid in full on a nonaccrual loan.
Where we'd actually previously had a charge off last year. So that we just continue to work through the office portfolio, you'll see that we've actually reduced that portfolio over time.
And.
We will still have some office challenges I'm sure for the next.
Little while but.
So far we've actually had positive resolutions there.
Thanks for taking my questions.
Thank you our next questions come from the line of Peter Winter with D. A Davidson. Please proceed with your questions.
Thanks, Good morning.
Peter J. Winter: Can you provide some color on the increase in the C&I classified loans.
Yeah.
Thank you this is Eric again.
The increase in the classifieds this quarter there was actually one.
Living facility cause CRE related.
Just was experiencing slower lease up in some higher expenses that migrated to classify.
Brandon King: And then.
Brandon King: There were a number of other C&I credits that just.
Brandon King: Nothing.
The large trends to point out or specific industries, but just they.
They were C&I credits that migrated into classified.
Okay.
And then separately just yet.
When I look at the interest bearing deposit costs.
Pretty impressive.
<unk> three basis points.
Because you're seeing most peers have an increase.
Roughly eight to 15 basis point this quarter.
What's the outlook for deposit costs.
Going forward, if there's no fed cut this year.
Yeah Yeah.
I'm happy to say a few words, there I listen as we look at our training, we still really like our overall total cost of deposits and we stack up pretty favorably on that basis. It's fair to say as we play this game of catch up we got a little bit behind pricing that we ran up on the interest bearing yields.
Appropriately for that for the time, and but we kind of now have gotten out of the pattern of where we've really been historically relative to peers and so we observe that and we've been looking for ways to manage appropriately working with our clients to meet their needs, but also relative to other funding sources, making sure that we're not.
Extending ourselves too much on the rate paid and so we did see some success of that and we plan to continue working on that I don't know her personally.
And I think that captured it really well.
Good.
Got it thank you.
Thank you. Our next question is come from the line of Chris Mcgratty with <unk>. Please proceed with your questions.
Oh, great. Thanks Harriss any.
Big picture changes in use of capital for the next maybe year or two you're rebuilding capital with with OCI, but just more broadly uses of capital.
Yeah.
No.
Look I think as we think about capital over the next couple of years, we're clearly going to be focused on the $100 billion kind of threshold and what that means.
And.
Thinking about what our ratios are going to look like crossing that.
Crossing that Mark.
And beyond that.
Sure.
We are.
We're very focused internally.
On.
Trying to.
You know trying to invest in things that are.
That generate higher returns so fee income businesses like capital markets wealth.
We are.
You know, we're highly focused on small business lending.
Sentiment there has been kind of tough.
And that market over the last.
Three or four years.
Pandemic.
But.
I think that's probably.
We're seeing maybe some change there and noted that kind of SBA lending is it's turning into a bright spot for us.
And.
And.
We really like that business not only because because you.
You get a little better spread but.
But it really it brings the kinds of deposits that I think really build.
Our sustainable.
Franchise create a lot of franchise value there are smaller operating other operating accounts to ensure they are sticky.
And so.
There are a lot of things, we can do for small and middle market kinds of customers that adds value and so that's that's just a that's a real primary focus we're trying to do more.
Incrementally on the consumer fronts.
That's not been a major driver for us in.
In recent years, but we think theres some opportunity there.
Again, largely with a view to.
Creating a more fully insured deposit base I mean, I think thats.
Just just an editorial comment I mean.
Think the if there's a if there's a crying need up here it's for.
I look at it.
The deposit insurance system.
I think it's fundamentally broken.
And.
It's it should be a source of concern about it you know for anybody who is trying to think about the longer term sustainability of the diversified banking system.
<unk>.
You know in the absence of that we need to be really focused on building.
More more.
The more granular deposit base.
Uh huh.
And so that's.
That's a real focus of ours will be I think in years to come.
So anyway those are.
It's not all about capital, but it's us.
But those are kind of some of the activities we're focused on.
That's great. Thank you for that and just as my follow up would be.
In terms of the tax rate.
As the first quarter, a good run rate for the rest of their.
Yes, I don't have any different guidance to give you at this point in time okay.
Okay. Thank you.
Thank you our next questions come from the line of Ben Garlinger with Citi. Please proceed with your questions.
Hey, good morning, everyone.
Good morning.
I just had a quick question on the multifamily uptick.
You guys are way out the geographic presence by state in terms of just percentages is that a fair assumption to think that the uptick.
Up tick as kind of uniform across that or is there a certain stage area in the United States are starting to see a little bit more.
Kind of indigestion amongst the multifamily.
Yeah.
Thanks for the question this is Derek again.
Good question.
It's actually we're not seeing any specific.
Market.
I mean real estate is very well it depends on what street corner you're on.
So it depends on.
The markets and what we're seeing on the multifamily side, it's really three three primary issues.
<unk> is in some cases.
A higher cost to complete the projects and so and delays on the projects and so we see some issues there on the construction side, maybe a smaller percentage and then the larger the larger issues are really just slower lease up.
Maybe some rent concessions early on during the lease up period combined with interest rates increase.
And what we're seeing is it's taking longer to get to stabilization than what we originally.
Projected for a number of these projects, but they continue to the sponsors continue to support them.
They are bringing equity and to continue to support them as they get to stabilization.
So we've seen this exact same.
Process play out in previous cycles and in previous geographies.
And.
And Youll see some grade migration to criticized and classified but because of the post great recession underwriting which was its about twice as much equity.
No secondary or tertiary land.
Covenant packages that require.
Very specific remedies as opposed to just coming to the table.
One of the nice things about multifamily as you might have had periods of rent concessions and slower lease up but generally this cash flow.
And with the double a doubling of equity.
It's why we think we will see a path through the multifamily softness.
Yeah.
Gotcha. That's helpful color and then when you just think about just kind of commercial real estate as a whole I know you've talked about some kind of looming.
Problems to work through within office offers kind of.
Hey, Julien phrase the next shoe to drop but is that where you're likely to see the next incremental increase in criticized classified that necessarily charge off but where do you think it's a little bit more uniform across all CRE.
Well.
Yeah.
It's probably all CRE has been impacted by the increase in interest rates.
And then some slowdown in the multifamily leasing office certainly has been.
Challenge for some time coming out of the pandemic and so.
On the office side.
We have $1 9 billion, we've actually reduced that intentionally over the last four five years. So we were kind of ahead of it even before the pandemic.
And the other thing that we have is we're just.
We were never in the large.
CBD downtown Trophy office properties that are.
Say, New York City, it's just not our markets, it's not what we do.
So I think the office, we will continue to have some challenges from from.
What we do have but I think it will be manageable over.
The next.
The near term.
Got you that's really helpful. Appreciate it thanks, everyone.
Thank you. Our next question is come from the line of Brian Foran with Autonomous. Please proceed with your questions.
Okay.
Harris I wonder if I could just follow up on the deposit insurance broking comment is.
Is it the level the 250000 or is it the lack of a separate system for operating accounts or.
Maybe you could just give that next level of detail of what the key change you would like to see it.
Well, yeah, I mean, I'd start with the fact that.
The $2 50, which was last established.
Last changed and I think 2011.
You know, it's not indexed to inflation and so its lost about close to a third of its purchasing power. If you will since since was last changed so the real.
Real deposit insurance has come down by nearly a third since the last change.
You have a world in which I mean Dodd Frank was largely intended to solve the too big to fail problem, we saw with SBB.
Episode.
Too big to fail is still there.
Not only is it there it was it was.
Basically.
Given the sample of approval by <unk>.
Treasury Department and others during the crisis.
Yeah.
<unk> you.
You saw the flow of funds going from smaller banks to the <unk>.
It's very very small handful of very large banks.
And it's not because it wasn't because of capital credit quality et cetera et cetera. It was because.
Because they are.
They are de facto insured.
And so you have you have a very large portion of the nation's deposits that are de facto insurers you have among those who are not too big to fail, you've probably got let's call. It.
Half of those deposits are fully insured and so it leaves kind of this sliver.
2025% of deposits out there that are.
Not insured, but thats, where all the instability is coming from.
And.
Not to suggest here.
This call what the solution ought to be but.
Im a little disheartened that there hasn't been more focus on it by policymakers.
Wait till the next crisis for it to.
Uh huh.
Its head again.
I simply think it ought to be something that everybody is.
Is focused on.
But in the absence of that.
It is important that we remain focused on.
Developing the insured portion of that deposit base. It just becomes fundamentally important is y.
That's really why SBB is no longer here today.
Is because.
They didn't have an insured deposit base.
And think of it.
That's very helpful. Thank you.
And then maybe just on the capital discussion rounding that out.
Clear common equity will increase when you gave the OCI burned down projection.
The CET one kind of in the $10 five range is that kind of a good landing spot or do you see that increasing as well over the next year.
Well I.
[laughter].
Yeah.
Look I don't think we'll be doing other than probably.
Covering the cost of.
Employee stock grants that kind of thing.
I don't think we're going to be in the stock buyback.
Road here for a while until we can see greater clarity and really understand that we're going to be in solid shape crossing a 100.
I don't know quite where that ratio is really independent of what loan growth looks like this year.
Yeah.
We're focused on increasing the tangible common equity ratio.
Getting a OCI behind us and.
We want to have strong capital here so.
Thank you very clear.
Right.
Thank you we have reached the end of our question and answer session I would now electronic floor back over to Shannon <unk> for closing remarks.
Thank you Daryl and thank you to all for joining US today. If you have additional questions. Please contact us at the email or phone number listed on our website. We look forward to connecting with you throughout the coming months. Thank you for your interest in Zions Bancorporation. This concludes our call.
Thank you. This does conclude today's teleconference. You may disconnect at this time. Thank you for your participation enjoy the rest of your day.
Okay.
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