Q2 2024 Zions Bancorporation NA Earnings Call
Greetings and welcome to the Zions Bank Corp, Q2 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If any once you require operator assistance during the conference. Please press star zero on your.
Telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Sandra trades Senior director of Investor Relations. Thank you Shannon you may begin.
Thank you Alicia and good evening, we welcome you to this conference call to discuss our 'twenty 'twenty four second quarter earnings. My name is Shannon Drake Senior director of Investor Relations I would like to remind you that during this call we will be making forward looking statements. Although actual results may differ materially we encourage you to review the disclaimer.
In the press release or slide two of the presentation dealing with forward looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call a copy of the earnings release and the presentation are available at 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, and Chris Curious caucus Chief risk Officer.
After our prepared remarks, we will hold a question and answer session. This call is scheduled for one hour and I will now turn the time over to Harrison.
Thanks, very much Shannon, we welcome all of you to our call. This evening and before we get into the results for the quarter I'm really pleased to announce that earlier. This month, we completed the final major conversion to a new core operating system for loans and deposits.
Recall that working in conjunction with our partner Tata consultancy services, we previously transitioned virtually all consumer commercial and construction loans on.
The Tcs bank's core.
Our platform before completing our deposits conversions now in 2024.
The remarkable success, we've had with eastern conversions is really a testament to the skills and dedication of our colleagues, we really want to express our gratitude is hundreds of people who worked so tirelessly.
Over a period of years really to make it all happen.
This modernization journey has created a catalyst for driving simplification and consistency throughout our company as noted on slide three.
So how does this really create value for the company going forward.
Industry observers are aware virtually the entire legacy U S banking industry operates on 40 to 50 year old core loan and deposit systems.
Walnuts significantly reducing that risk of operating on an antiquated system.
Enlink vendor support in many cases our.
Our system operates on one data model for loans and deposits it facilitates fraud detection and error correction in real time.
It's API enabled and cloud deployable it supports critical omnichannel functionality like account openings and.
It improves consistency of customer attribute data across major applications.
Our employees report that the new system is an intuitive it's faster eliminates the need to toggle between multiple applications.
It offers more data at their fingertips, it's much easier to learn.
This is training time.
All of this results in a better experience for our customers.
In addition to this major foundational investment we've also over the last three years replace nearly the entire digital front that you're.
Including replacing our consumer online and mobile banking system upgrading treasury Internet banking, which is utilized by a large percentage of our business customers.
And creating a digital mortgage and small business application process that took us from 100 per cent a paper.
Paper based applications to more than 90% electronic over the course of 12 to 18 months.
Going forward, we will certainly find many ways to optimize the investments in our new core and we're freeing up capacity to continue to invest in evolving technology technologies that give us other competitive.
Advantages.
As noted on slide 35 for 2023 coalition Greenwich data shows that our customers rank, our digital product capabilities higher than our major bank competitors.
Looking at financial results for the quarter. The numbers generally came in as expected net interest margin expanded by four basis points on a linked quarter basis and improved six basis points.
Against the year ago quarter as asset repricing outpaced the cost of funding increases.
We anticipate this trend would persist in a steady rate environment, while the timing of rate decreases in both the behavior and pricing of deposits will impact net interest income in a falling rate environment.
Maintaining pricing discipline, while continuing to focus on granular deposit gathering will be important regardless of the rate environment.
While loan demand has increased loan growth continued to be to be measured.
Higher rates of tempered growth, while also reducing amount of paydowns in the commercial and consumer real estate portfolios.
Spec a passive benchmark rates in the current political environment are top of mind for our customers, particularly our small business and middle market customers.
As I mentioned last quarter, we've been particularly was particularly successful with a streamlined SBA programs aimed at serving smaller businesses.
Targeted campaigns during the quarter and we expect to continue our focus on that.
This campaign as well as other customer initiatives aimed at bringing new customer relationships to the bank and building our granular deposit base.
While fee income growth has been somewhat sluggish during the first half of the year, we remain confident in our ability to grow fee income as we look towards the second half of 'twenty 'twenty four and into 2025.
The expansion of capital markets represents a key opportunity for us and more of our bankers are delivering these capabilities to clients.
Adjusted expenses in the current period were up 2% compared to the second quarter of 2023, we continue to pursue a means to control costs.
While supporting investments to grow the business.
Net charge offs remained low at just 10 basis points annualized as a percentage of average average loans for the quarter.
At eight basis points over the last 12 months.
This contrasts to an increase in classified loan balances of 298 million.
Over three quarters of which was in the C&I portfolio.
The decline in the allowance for credit losses compared to last quarter reflects an improved economic outlook slightly offset by incremental reserves for C&I.
We believe realized losses over the next few quarters will be very manageable.
Already reflected in our reserves.
Starting on slide four we've included key financial performance highlights.
We reported net earnings of $190 million for the quarter.
Our period end loan balance increased one half of 1% while average balances increased just under 1% for the quarter led.
Led by growth in one to four family residential loans.
Customer deposit balances declined to just under 1% in the quarter on a period end basis, reflecting internal rather reflecting a normal.
Seasonality, while our ratio of non interest bearing demand deposits to total deposits was flat to last quarter at 34%.
Our common equity tier one ratio was 10, 6% compared to 10, 4% in the first quarter and 10% a year ago.
As I noted in noted in my quote in the earnings release, we've seen strong accretion to tangible book value, which increased 21% year over year.
Moving to slide five.
Diluted earnings per share of $1 28 was up 32 cents from the prior quarter.
Current quarter results reflect a seven.
Positive impact from the sale of our enterprise retirement solutions business.
And the sale of a bank owned property in Nevada.
Turning to slide six our second quarter adjusted pre provision net revenue was 278 million up from 242 million in the first quarter.
The linked quarter increase was attributable to improved revenue, including growth in net interest income and the gains in noninterest income I mentioned previously.
In addition to a slight decline in adjusted noninterest expense.
Largely due to seasonality of compensation expense in the first quarter.
As compared to the year ago quarter adjusted P. PNR was down.
Was down due to slightly lower adjusted revenue component combined with higher adjusted expenses.
Generally this quarter reflects positive trends with respect to higher revenue well managed expenses and very satisfactory risk outcomes.
These results are supported by our investments in technology products and services, which bring value to our customers.
Well that high level overview, I'm going to ask Ryan Richards, our chief financial officer to provide some additional detail related to our financial performance Brian.
Thank you Harris and good evening everyone.
I will begin with a discussion of the components of pre provision net revenue.
Nearly 80% of our revenue is derived 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 golf.
Net interest income is reflected on the bars and the net interest margin as shown in white boxes.
Both measures reflect improvement for two consecutive quarters as the repricing of earning assets outpaced the increase in funding costs.
Additional detail on changes in the net interest margin is included on slide eight.
On the left hand side of this page, we provide a linked quarter waterfall chart, how long any of the changes in key components of the net interest margin incorporating changes in both rate and volume.
The 12 basis point combined beneficial impact associated with money market investment securities loans, and borrowings was partially offset by the adverse impact of deposits.
Noninterest bearing deposit volume declines resulted in a slight reduction in the contribution of these funds to balance sheet profitability.
Right hand chart on this slide shows the net interest margin comparison to the prior year quarter.
Higher rates were reflected in money market and millennials, which contributed an additional 50 basis points to the net interest margin.
The value of noninterest bearing deposits and lower borrowing levels contributed another 69 basis points to the margin.
These positive contributions were largely offset by increased deposit costs, which adversely impacted the net interest margin by 113 basis points.
Overall, the net interest margin increased six basis points versus the prior year quarter.
Moving to noninterest income and revenue on slide nine cuts.
Customer related non interest income was $154 million compared to 151 million in the prior quarter.
With higher commercial account card in loan related fees somewhat offset by lower capital market fees.
That's our fee income growth has been slower than expected through the first half of 'twenty 'twenty four.
Reduced loan activity.
And flat wealth management fees.
Looking ahead, we are optimistic that our new and expanded capital market capabilities will allow us to grow this area meaningfully over the next four quarters.
Our outlook for customer related non interest income for the second quarter of 2025 is moderately increasing relative to the second quarter of 'twenty 'twenty four.
The chart on the right side of this page includes adjusted revenue.
The revenue included in the adjusted pre provision net revenue and is used in our efficiency ratio calculation.
Adjusted revenue decreased slightly from a year ago due to lower noninterest income increased 4% versus the first quarter due to the factors previously noted.
Adjusted noninterest expense shown in the lighter blue bars on slide 10.
Decreased $5 million to $506 million.
Sure it'll largely to seasonal increases in compensation from the prior quarter.
Offset by higher technology, and marketing and business development related expense in the current quarter.
Our reported expenses at 509 million decreased $17 million.
As a reminder, the fourth quarter of 2023 included 90 million of FDIC special assessment costs well.
Another $13 million and $1 million were recognized in the first and second quarters of this year respectively.
Our outlook for adjusted noninterest expense for the second quarter of 2025 is slightly increasing relative to the second quarter of 2024.
Risks and opportunities associated with this outlook include our ability of Maggi managed technology costs.
Under contractual increases in employment costs.
Slide 11 highlights trends in our average loans and deposits over the past year.
I left side, you can see that average loans increased slightly in the current quarter.
Customer sentiment and pipeline suggests we can expect ROE to improve as more clarity materializes with respect to the political and economic environments.
So higher interest rates are impacting near term growth.
Our expectation that loans is that loans will be stable to slightly increasing in the second quarter of 2025 relative to the second quarter of 2024.
Now turning to deposits on the right side of this page <unk>.
Average deposit balances for the second quarter increased increased slightly notwithstanding a slight decline in the average noninterest bearing balances.
The cost of total deposits as shown in the white boxes increased five basis points to 211 basis points as.
As measured against the fourth quarter of 2021.
The repricing data on total deposits, including brokered deposits and based on average deposit rates in the second quarter was 40, 40% compared to 39% in the first quarter and the repricing beta for interest bearing deposits remained at 60% unchanged from the previous quarter.
Slide 12 includes a more comprehensive view of funding sources and total funding cost trends.
Left side chart includes any balance trends.
Broker deposits were stable compared to the first quarter at $4 billion and were down $4 2 billion compared to the year ago quarter.
As customer deposits have grown by $3 billion versus the prior year period.
Compared to the preceding quarter customer deposits were down slightly reflecting seasonal trends in the second quarter.
On the right side average balances for our key funding categories are showing along with a total cost of funding.
As seen on this chart the rate of increase and total funding costs at two basis points in the current quarter has continue to decline compared to the prior four quarters.
Moving to slide 13, our investment portfolio exists primarily to be a ready storehouse of funds to absorb customer driven balance sheet changes.
On this slide we show our securities and money market investment portfolios over the last five years.
Our investment portfolio continues to behave as expected.
<unk> principal amortization and prepayment related cash flows were $840 million in the second quarter.
But there is somewhat predictable portfolio cash flow, we anticipate the money market and investment security balances combined will continue to decline over the near term.
Serving as a source of funds for the balance sheet and contributing to net interest margin as those funds are reinvested into higher yielding loans.
The duration of our investment portfolio, which is a measure of price sensitivity to changes in interest rates is estimated at three 7%.
This duration helps to manage the inherent interest rate mismatch between loans and deposits.
The larger deposit portfolio has seemed to have a longer duration in our loan portfolio.
Fixed rate term investments are required a balanced asset and liability durations.
Slide 14 provides information about our interest rate sensitivity.
While we provided standard parallel interest rate shock sensitivity measures on slide 27 in the appendix of this presentation.
We present again are more dynamic view of late and emergent interest rate sensitivity given the current environment.
In particular.
Late and interest rate sensitivity.
Which reflects model changes in net interest income based upon past rate movements that have not yet to be fully realized in revenue.
Estimated to be eight 3%.
When combined with emergent sensitivity, which includes the incremental impact of future rate changes included in the implied forward curve at June 30th.
Modeled net interest income in the second quarter of 2025 is six 3% higher when compared to the second quarter of 2024.
This is a meaningful increase over our model projections from the previous quarter.
100 basis point parallel shock. So this implied Ford outcomes suggested sensitivity range between four 6% and seven 7%.
Importantly, these sensitivities assume no change in the size or composition of our earning assets, but do consider how our changes.
And our deposit mix could influence to net interest income path.
The observed slowing of the migration of noninterest bearing deposits to higher cost deposits.
As reflected in a change in our assumed through the cycle beta from 49% as shown in our first quarter sensitivity to 44% shown here.
This data reflects $3 5 billion of assumed migration and noninterest bearing deposits into higher cost deposits.
Utilizing this model the outcome and applying management expectations for balance sheet changes in deposit pricing.
We believe the net interest income in the second quarter of 2025 will be slightly to moderately increasing relative to the second quarter of 2024.
Risks and opportunities associated with this outlook include realized loan growth.
Competition for deposits and deposit behavior.
And the path of interest rates across the yield curve.
Moving to slide 15.
Quality remains strong and the portfolio is performing in line with expectations.
Annualized net charge offs were 10 basis points of loans in the quarter.
Now as for credit losses is $1, two 4% of loans total loans and leases.
Three basis point decrease over the prior quarter.
Notwithstanding continued strong net charge off performance, we observed continued deterioration of some of our credit metrics.
Nonperforming assets increased 14 million or four basis points as a percentage of loans and other real estate owned.
Classified and criticized loan balances increased by $298 million and $284 million respectively.
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, including in the appendix of this presentation.
Slide 16 provides an overview of the CRE portfolio CRE represents 23% of our total loan portfolio with office, representing 14% of total CRE or 3% of total loan balances critical.
Credit quality measures for the total CRE portfolio remain relatively strong the criticized and classified levels increased during the quarter.
Overall, we can see.
Do you expect the CRE portfolio to perform reasonably well.
The losses based on the current economic outlook.
Our loss absorbing capital as shown on slide 17.
The CET one ratio continue to grow in the second quarter to 10, 6%.
This when combined with the allowance for credit losses compares well to our risk profile has reflected in the 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 the Aoc I improvement will continue through natural accretion of the securities portfolio, regardless of rate path to outcomes.
Slide 18 summarizes the financial outlook provide over the course of this presentation. As a reminder, this alec represent our best current estimate for the financial performance for the second quarter of 2025 as compared to the second quarter of 2024.
This concludes our prepared remarks as we move to the question and answer section of the call. We request that you limit your questions to one primary and one follow up question to enable other participants to ask questions. Alicia. Please open the line for questions.
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.
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One moment, please while we poll for questions.
Yeah.
Yes.
Thank you. Our first question comes from the line of Andrew Costlier with Morgan Stanley. Please proceed with your question.
Hi, guys. Good afternoon, its Simonenko Italia.
Afternoon.
Hey, good afternoon. So I was just wanted to check in on.
The noninterest bearing deposit trends during the quarter.
I I I know things slowed relative to last quarter I was just wondering how the trends intra quarter and then.
How you would expect and I beat a trend if you get a.
A couple of rate cuts between now and year end I mean.
I know you have that assumption on that it's really an Australian F N.
<unk> be flowing into our higher cost products in it a latent our interest sensitivity analysis. So just wondering how realistic that is or you know things can be a little bit better than that.
Yeah. Thanks, very much for the question, yes, listen that kind of stuff that we were hoping to highlight on the call I think on the whole we were reasonably pleased with the trending during the quarter. The very modest decrease in noninterest bearing deposits I think observe in the court gave us confidence as we revisit our models to see with some of the underlying assumptions.
Sure.
Sort of tightened up the amount of deposit migration that we had there was implied with the all in deposit beta that we shared last quarter.
I think what youre seeing in that in that guidance is we're saying that we don't anticipate to see as much of that DBA migration.
As a result of hold the line a little tighter than what could have been expected. We've also observed an ability to manage our interest bearing deposit costs at a level that does not suggest a great deal of increased pricing to retain those deposits from this point forward.
So all those things are contributing a force that's how we sort of laid out our guidance on the emergence sorry, the latent being more generous with those embedded assumptions and then with having an expectation of more DDA going first before it then perhaps it would've anticipated last quarter contributed to a little bit more asset sensitivity.
At this time around.
All of these things are very beholden to.
Deposit behaviors from here.
Part of what we're seeing we were able to be a little bit more constructive with the guidance this quarter.
Got it.
And then as we think about that the loan guide for loans to be stable to slightly increasing.
Are you thinking about the trajectory of that loan growth do you think it's a little bit weaker in the near term given the uncertainty in the environment and given the the upcoming.
Coming elections, and then ramping up from there or I guess, maybe if you can just take us through how you're thinking about that those loan balances are going forward.
Yep Yep.
Speaker Change: Well I see it.
I think there is probably some uncertainty at the moment, but yeah I'm not sure that that factors.
It's a big factor in.
And our company.
Companies.
<unk> per se I think it's more a just one.
Watching to see how the economy.
Sort of unfolds here and that's in the next couple of quarters.
Obviously, there are some signs of the economy is slowing a little bit hopefully not in a way that will be.
A lot of damage but.
So we'll you'll see it just it feels like.
A lot of what we're suggesting is that.
We've seen some weakening.
And loan growth relative to what we did.
Speaker Change: You know Ben probably a year ago.
Uh huh.
We don't see anything that's likely to change that in Africa in the near term. We also see its economies are still reasonably healthy here.
Western markets, where we operate but.
So it's just our best guess I like I think we.
We expect it with some of the things we're doing with some marketing programs.
Business lending etcetera that will be incrementally helpful.
But it's just not a robust loan growth market right now.
Great. Thank you.
Thank you. Our next question comes from the line of John Penn Korea with Evercore ISI. Please proceed with your question.
Good afternoon.
Hey, Tom.
Alright.
Wanted to just have a but wanted to ask on the credit side I know you mentioned the.
The trends are generally within expectations and you were able to release a bit on the reserve, but wanted to get a little more color on the increase in the classified loans about a 30% increase linked quarter in the in about a 40% plus I guess, 48% increase in the 30 to 89 day past dues. So could you walk through what's driving that.
On the commercial book and then how that could influence the outlook for the reserve from here could it be.
How do you expect that that could change just given these trends. Thanks.
Sure John This is Scott.
And on the classified increase of about three.
$300 million.
About 70% of that came from our C&I portfolio. The good news was it didn't come from our CRE portfolio.
And the it was really just a collection of kind of six to 10 credits.
That were kind of in the $10 million to $30 million range are the industries are there they were all kind of idiosyncratic.
Industries, where there's contractor consumer products.
Products business health care transportation.
Really no.
No straight lines, you could draw between all of them.
And.
So that that made up about 70% of the increase.
And then if.
It is a little it's sort of interesting in the criticized increase that you see of about 284 million.
It was more real estate related principally multifamily so you'll.
You'll see.
We're seeing more of our multifamily.
Transactions are.
Move into to criticize the criticized category just simply because I mean, when you think about it.
Construction is concluding lease up periods are longer the impact of interest rates is higher.
Speaker Change: And those are those are causing some some grade migration, but it's great migration, we've seen in every other cycle since the great.
Great Depression.
And generally.
Generally speaking it is the level of equity that we have in multifamily the lack of.
Phase two land and a strength of covenants.
Packages that we have better that ultimately caused multifamily to hold up generally speaking you don't have a big migration in multifamily to nonperforming just simply because borrowers are able to reduce.
The rental rates provide rent abatement and provide concessions and but generally they have cash flow to cover cover interest and contribute to principal. So so we're not overly concerned about that the other comment I'd make and we've said this before but it is true is that we're coming off of.
Very low base.
Of criticized classified and nonperforming loans, so the lines look.
They look a little more vertical than you'd want them to look, but it's simply because of the low base, we're coming off of it.
Well I will say that as it relates to CRE office.
We our outstandings there.
Our are dropping.
Speaker Change: We're about $2 billion theyre down about 247 million.
And it's a good story its kind of a story that we hope continues to play out in the sense that that decrease of 240, almost 250 million.
<unk> represents 300 million in payments by borrowers are about 85 million in additional equity or rebalancing of loans. So almost $400 million of what you would what you would like to see in our portfolio 9 million of charge offs, which we wouldn't want to see but that's a very small number when you consider that.
<unk> of the portfolio and then there was some growth so.
Both with the office and multifamily portfolios will continue to report on.
Exactly how the maturity wall is playing out to each quarter.
And the good activity, that's actually going on which is largely attributable to the fact that our average and maybe had loan size is low and.
Good guarantor support on most of these loans.
I think also embedded in that question was the ACL and whether theres any learnings here right.
We're also anticipating that question I mean, the way that that the county model works is if it's working well. The idea then your messaging ahead, you're supposed to looking to the future and see these things coming and have an expectation of losses.
We like many others ingest Moody's variables to kind of inform our macroeconomic view of the world and.
When we talk about our reserving practices and for some time prior to eastern today and currently we've been anticipating a view of the macroeconomic economy that was a little bit darker than the out of the box settings that we are giving through that Moody's variables. So it's fair to say that going back some quarters that we've had.
This view that we think that there could be some credit deterioration. So the fact that we're seeing it now.
To be expecting that if we didn't see now that would tell us that we probably saw dark clouds, where none none came.
So I think right now we'll continue to watch the data as it comes through and there may be learnings in it but everything we've seen so far is it's certainly within the bounds of our reserves.
Great Alright. Thank you I appreciate that and then separately just back to the NII dynamics can you just.
Talk a little bit more about the fixed asset repricing opportunity I know you mentioned, you've got you know.
The liquidity coming out of the Securities book.
You could use to fund loan growth.
Et cetera, it's really can you just talk about the yield differential round what is.
Maturing in the Securities book, and where you might be putting on new assets just to get a better feel of the <unk>.
Fixed asset repricing on the dollar amount and then the rate differential.
Yeah, I'm happy to.
I'll take that in parts.
Yeah, you're right you pointed at exactly the right thing in terms of the.
The run down of our investment Securities portfolio, that's been very consistent and as I noted in my remarks to the tune of about $840 million. This quarter that is helpful to us.
Where we've been able to build even some some modest loan growth during the quarter to get that rebalanced remixed and even even when we don't know sitting there with money market investments, where we've seen some growth as well that's still got a high five yield attached to it I think the best way of thinking about the repricing.
It's really the reason why we kind of do some deconstruction of our sensitivity is thinking about our latest sensitivity I'm in and see where the buildup on that basis alone that if rates were not to have an overlay of the imply for them what would happens at this point forward.
And it's gonna be a consistent theme with what we've been seeing here recently that deep.
Earning asset yields have been re pricing more aggressively more favorably in the funding costs.
And based upon our latest guidance, we would certainly expect that to continue now.
Now we have the overlay with with the emerging.
Based upon the dynamics I described before that would.
Kind of counteract to those those effects, but.
I don't have front book back book Statistics, I think you're calling for in the securities yield, but I'll give you a sense for the loan book.
And all in basis, our front book coming on at 782%.
They're rolling off backlog of 7.68, you see a little bit more expansion coming on the CRE subsequently the portfolio a little less on the consumer that gives you some broad strokes about the types of balance sheet movements that we're seeing hopefully that helps you out.
Hey, guys Ryan Thank you.
Thank you. Our next question comes from the line of Ben Killinger with Citi. Please proceed with your question.
Hey, good afternoon or good afternoon.
[laughter] I always forget detachment change, but yes, we're so far for the day and hurting our best shot anyway. So.
So I get the latest and emergence of the implied of 6.3.
And then when you think about just.
Oh It was 12 months forward looking at <unk> 25 versus <unk> 24.
Burbidge, a slightly to moderately increasing on NII.
12 months from now is it fair to just kind of think alright. So you guys have done a pretty in depth mosaic of what could happen on both sides of the balance sheet produce imply NII goes up six roughly 6% 12 months from now what should really kind of just gets you to call. It like the 630 ish.
Am I thinking about that correctly or am I thinking too simplistic, but the whole thing.
I don't think you are thinking about it wrong, we purposely we bounce of uncertainty in there because ultimately.
No.
We have a read on what we're seeing in the quarter, we feel good about it.
I think we're all beholding to the deposit movements pricing and what happens from this point forward.
The sensitivities statistically we provide a really are kind of a static balance sheet, allowing some migration for deposits parents gave you some insight as to how we're thinking about loans and we certainly are opening up to the notion that it could be slightly increasing their but we also have stable within our guidance. So we're just probably leave enough boundaries for the degrees of unknowns.
To stay within the guidance, but I think I don't think you're thinking about it wrong.
Got it Okay. That's very helpful. And then switching to credit I just wanted to touch base I know there was a comment that most a majority of the roughly $300 million.
Classified was more C&I.
And there was I think theres some theres no common thread I was just kind of curious is it operational like the businesses are having issues and where profitability or is it something that's a little bit more and that's just.
Just kind of thinking like what's the what are the pressure points that are impacting on C&I businesses other than just higher interest rates flowing back their buyers down.
Yeah, I've actually yeah, I'd like to give you some really crisp themes, but they just are.
I mean, when you talk about a major contract.
Contractor, a consumer products health care transportation, there's just you know I wouldn't even related to higher interest rates each one.
There's kind of a story and.
They're all people, we know well so it just things happened.
<unk>.
<unk>.
So I.
Just wouldn't give you a common a common story I don't think.
Gotcha, it's fair to assume it's throughout the footprint or is it any centralized geography, yes.
Yep.
Got you Okay I appreciate that.
I think it's also uses other than a lot of kind of resolutions during the quarters are typically our peninsula.
There are a lot of moving.
Parts to all of this but.
You know I think what youre seeing in the reserve.
Speaker Change: It's reflective of the ideas that are we don't see any.
Significant risk building from there.
Thank you.
Our next question comes from the line of Susan acts off Bliss with J P. Morgan. Please proceed with your question.
Hi, everybody.
Uh huh.
I want to start.
Yeah, Ryan so yes.
If we can unpack this a little bit more so just looking at the changes that you've made.
Slide this is on the net interest income sensitivity.
So you're taking down your assumption for deposit beta bid.
And I'm wondering is that because you overlay. The current forward curves here more in the curve and Thats why youre looking for a lower beta.
Or is something else driving that.
Because it seems like that's what's influencing that improvement of banter out.
Alrighty then.
Thank you for the question the beta commentary there really attaches to our latent sensitivity and then before you even think about the forward curve overlay.
Thank you very much informed by what we observed during the course of the quarter and the trends have been building up until the floor about the tapering of run off activity and migration.
I think the base with that and observing pricing activity in our markets and what we believe it is taking to retain those deposits and where we have to pay up in places that.
Really informed a little tighter all in Uh huh.
The beta through the cycle.
Okay. So we can extrapolate from that that the.
The outlook for NII is based on the current forward curve right.
The overlay of the emergent, yes, do you think that 6% figure decided that includes the implied for it as a sixth journey, which contemplates a fed fund rate are.
In the middle of 2025.
450.
I think just fundamentally.
Two it if there's a single driver it's it's.
Probably.
Hey, Oh.
Yes.
Developing belief on our part that our.
Demand deposits noninterest bearing demand deposits.
Are you going to be a little more stable than we previously thought I think we've been a little conservative.
That can obviously change that's.
But based upon the trends we're seeing at the moment, we just we think that we'd probably over.
Shop that a little bit.
Got it.
Okay. Thank you and then for my follow up so if we look at what's happening on the technology side I guess, there's two parts to this question. The one the technology related costs youre running like 14% year over year now that you're on.
The new deposit system like help us think about what that looks like.
Over the next year and then maybe Harris for you. So you're one of the few banks do you guys have made this point for a while now on a modern core but how should we how does this translate to shareholder benefits, where I, usually big things to improve our OE or they improve growth do we anticipate a higher growth rate from you guys over time because of the smaller core differential.
Thanks.
Well first of all you know in terms of what it does to.
Cost.
Yeah.
Is that the core platform itself.
We will see cost coming down next year waiver prohibit a peak this year they come off by about $10 million next year.
But I wouldn't I wouldn't make much of that in a vacuum because they're there.
It's like the poor will always be among us shovel the backlog of.
Projects that people want to get done around here and.
And so, but but but certainly that's that's helpful to free up that capacity.
In terms of the.
You know.
The benefit that comes from this I mean first of all I think in my mind.
Primary benefit is simply.
Every every bank has to have these core systems I mean these this these are.
Speaker Change: These are.
The real chassis and foundation.
Everything else all the front end of the consumer sees.
<unk> is built upon these core processing engines and systems and and they do a lot of heavy lifting and every bank and they are incredibly complicated to replace I was thinking this last weekend I was 10.
So all of our employees.
I remember a case study in business school, many years ago, when John Reid was running what was at Citigroup.
He talks about going through a systems conversion. He said it was like changing out the jet engine on a plane in flight.
You know and we've we've.
We've seen even this past weekend with the crowd strike outage.
The impact that a single bug can have.
Can be catastrophic and so there is an incredible amount of complexity and a huge amount of testing.
That is very expensive and very elaborate takes a lot of time with people to do this.
Speaker Change: And for me one of the benefits. This is something ultimately every large bank has to deal with some we'll deal with it a piece at a time somewhat.
We've tackled a lot over the last.
10, plus years with this.
But having it fundamentally in the rearview mirror and it's just a big a big accomplishment.
And something that we will not have to worry about that but I think a lot of other banks are still.
As the world becomes ever more real time as we see.
Speaker Change: One of the benefits. We noted it allows us everybody else is posting payments and they kind of fake it.
Terms of memo posting and making it appear like things from real time. This is actually posting.
Right into.
They are they.
You know the core in real time.
It allows you to.
Tact errors.
More quickly allows us we expect to detect fraud more quickly.
If it is one of the things we are absolutely seeing is employees on the front line are having a much easier time navigating.
I remember talking to their employee just visiting a branch some years ago I come from a larger bank and they are complaining about toggling between applications and screens to get their work done. This eliminates a whole lot of that Oh. It makes it much easier for employees just to serve customers.
It makes it therefore much easier for us to train employees and so.
You know entry level employees, whether they'd be in contact centers and branches.
With the old systems, you got a steep learning curve with having to learn a lot of I mean, there's there.
There are a lot of crib sheets.
Sitting around on desks around this industry, we think that we've now got a solution that.
It makes us much much much easier for our for our employees.
It provides more information at their fingertips.
So when when somebody has a question we can answer it without doing a lot of research.
It brings that information right too.
Right to the users screen I'm hopeful that we'll find ways to deliver some of that functionality right out to our customers.
So we'll we'll see as we go on.
I'm, hoping that this will begin.
The process of discovery, where we find use cases that it would be really become super.
The last thing I'd say is.
Speaker Change: You know this this is this is not a digitally native core no large bank is.
One.
And the complexity that you find in larger banks really can't be addressed by some of the new digital course out there today someday, perhaps so.
But I'm pretty confident that we have with this solution something that is really solid it has a huge installed base globally. We have a vendor that's not going away and are going to support this.
They have they have every reason to because it's got a huge installed base.
And all of those are benefits.
Hum.
Now that I think will accrue to our shareholders over time.
Okay. Thanks for taking my questions.
Yeah.
Thank you. Our next question comes from the line of Ken Houston with Jefferies. Please proceed with your question.
Thanks, Good afternoon, Hey, just to follow up on the cost side. So when you guys last quarter, you talked about that that $12 million to $15 million of cost reduction to happen as the systems get.
Food further along what part of the year does that get run rate it and is that fully employed and in the <unk> 25 forward guidance.
Ken: Yeah. Thanks, Ken.
Speaker Change: The the Delta of the $12 million is sort of a year over year comparison full year 'twenty for the full year 'twenty five but yes.
So at this point.
At the margin that would imply some savings.
This suggests that all of that would fall to bottom line would probably not be appropriate. So we've embedded into our forward guidance for the second quarter of 'twenty five the intent to make other investments and continued building out our technology offerings outside of future core.
And then is that the full amount of like the reduction that happens over time and it is a conversation we've had for a long time is that as the build out happened, but like is it is that the majority of what happens over time is there an increment that also comes at just the legacy pieces are further retired and.
Speaker Change: Getting the point about incremental investments, which makes sense, so just kind of underlying base.
The earlier phases of SME that.
It went up a few years ago is as they become fully amortized I mean, we're amortizing this over 10 years.
The capitalized cost.
But these.
These are core systems, you would expect to have a longer much longer life than that.
So.
You know that that will help as you get out into time, but.
Yeah.
The amortization of this I mean it comes down.
Speaker Change: About 10% a year.
With you because it's basically a 10 year amortization.
And the benefit of it.
Speaker Change: The additional benefit financially, it's just that at a time when.
Speaker Change: Almost every hardware software infrastructure vendors, passing along double digit.
Renewal increases.
For multiyear contracts or single year contracts.
This pressure of needing to replace <unk>.
Speaker Change: Core loan and deposit systems is.
<unk> has become a non event for us it's the pressure is no longer there.
The whole the whole attitude is turned towards how do we optimize it how do we monetize the investment we've made so.
The timing right now is especially unique I think in terms of being beneficial.
Okay got it thank you.
Okay.
Thank you. Our next question comes from the line of Bernard one.
I see.
The kick.
Sorry, [laughter] with Deutsche Bank. Please proceed with your question.
Hey, good evening at Saks Bernard Bongo.
So thanks for taking my questions.
So you mentioned the success of the client campaigns to attract new deposits.
At the beginning of the call can you provide any color on these promotions and customers' initiatives, just any expectations on broadening relationships and growing deposits.
Well, specifically, we referred to.
We are.
We're really leaning into SBA lending and I expect to see more of that I mean, we are our volumes are up substantially over last year.
But we've got a ways to go I mean I.
I think that.
It's an area, where we believe there's a lot of opportunity with their ideas. There are smaller deals. They don't it's not going to move the needle in a big way in terms of loan growth.
But the kinds of relationships that.
That we think are really important I.
Typically are focused on.
Oh well.
I think in the wake of what happens in the spring of last year.
Uh huh.
The imperative of.
We're really focusing on the granularity of your deposit base.
It's an important thing for regional banks to be thinking about and so that's that's a that's a big part of kind of how we're thinking about where we go.
From here is is a focus on that.
What we can do better in consumer and small business in particular.
Where are those kinds of relationships.
Come to the bank.
Speaker Change: I I would just add to that that the.
We've talked before about the customer appreciation, calling effort. The Paris started couple of years ago were making our colleagues are making about 100000.
Calls a year.
Two.
Just generally.
Generally small business clients of the bank some some individuals but largely small businesses just simply to thank them for their relationship.
It is a it is really fun and exciting to hear about the granular activities that come from that just simple deposits.
Moving over on small loans and personal relationships moving over.
But but when you think about that happening out of a thousand times a year.
That's a big number we're also on the middle market and commercial banking side.
Pushing hard at calling on.
The top prospects in our in our markets, which sounds.
So kind of like why wouldn't you always do that of course, you would everybody would say they would.
But but most middle market commercial bankers or kind of.
Yeah, going and making a pure prospect call is not the highest thing on their list because it's it's an awkward experience for many people so.
That focus like the customer appreciation calls.
Well, we'll start to reignite loan growth for us over time.
Okay, Great that's great color and just separately.
The optimism on expanding capital market capabilities, and you expect it to grow meaningfully over the next four quarters.
No it was sequentially weaker by $3 million into Q and I think you flagged.
Lower loan syndications swaps and some other related fees any color you can provide on activity levels.
And just the drivers of the optimism.
Yeah.
Yeah.
I think that fundamentally thing I'd say is it's going to be lumpy.
So thats kind of the nature of every capital markets business I think you've probably seen we've got a really good team.
That has been built and.
And we I think overseeing internally, we're really pleased with the engagement that they have with our commercial bankers.
And you know.
They have kind of a pretty full dance card in terms of appointments and.
And that's.
It's if it's something that feels internally very much like us getting the kind of traction that we would hope would have hoped.
I expect that the second half is going to be.
A notable improvement over the first half just based upon what.
Pipeline looks like at least early early here in the third quarter.
But yeah.
It's not going to be a straight line kind of business.
And.
Speaker Change: That's.
That's that's about all I venture to say about it it's.
But we're really excited about the people we have doing it.
Thanks for taking my questions.
Thank you. Our next question comes from the line of Brandon King with True Securities. Please proceed with your question.
Hey, just I just had one question for me and a follow up on kind of the C&I conversation.
So hearing you know increasingly concerned about smaller businesses within C&I. So could you comment on you know the healthiest small business, how they navigate this environment and where they stand today.
Yeah.
I mean.
Listen I think first of all you see it in just the overall the loss numbers.
I've always believed that small business done right.
It can be you know it doesn't have to have.
It doesn't have to have big big charge off.
Numbers attached to it.
Overtime.
Fundamentally if I exclude.
Excluding the card business commercial card business.
Our loss history with small business loans is very close to what it looks like in terms of charge offs are for middle market or larger loans commercial loans.
And so.
Ah we're.
We are seeing.
Continued good good credit quality.
In that portfolio nothing nothing thats.
Giving us any.
Any concern now.
Most small businesses by the way don't borrow only about 30% off of our small business customers actually.
Our borrowing customers.
So there are a lot of small businesses that are.
That operate very conservatively they they are.
They they operate with the cash they have on hand.
But.
You know I think we're not seeing we're not seeing real robust growth, but we're seeing pretty good health.
Okay.
Taking my questions Okay.
Yeah.
Thank you. Our next question comes from the line of Chris Mcgratty with K B W. Please proceed with your question.
Oh great.
The 28%.
Money market and in Securities cash.
As a proportion of the balance sheet, how does that trend over the next year or so in your guide.
And I guess I'm, asking overall, earning asset growth relative to the loan growth. Thanks.
Yeah, Thanks for that I think.
Way that we see.
See the trends continuing so to speak and allowing for the investment securities portfolio to continue to run off.
We see the potential for another $2 excuse me 1 billion or $2 billion of runoff in the investment securities before when you think about.
So our reinvestment activity at that level.
And so really what happens with the money market and the concentration of the two categories.
It really depends on how quickly we see that loan growth pull through.
So.
I think that's probably the simplest way of answering that question I don't know that we have a specific measure to offer on that front.
Speaker Change: Okay.
Great. Thanks, and maybe Harris any any updated thoughts on capital you're building capital pretty quickly.
Oh, I think capital thanks.
Yeah.
I would expect that's going to continue here in the near term I mean theres still.
And answered unanswered questions as to how.
Basel III end game is going to be revised.
We're close enough to crossing that threshold.
That's something we'd be interested in.
We all expect that.
Whatever happens.
And simplifying it today OCI has kind of come back into the calculation of CET one.
And.
And so we were making a lot of progress.
Cause I noted and I quote you know kind of a 20% increase in tangible book.
Speaker Change: Book value are both nominally and on a per share basis.
It was really gratifying.
Like to kind of see that continue for a bit before we.
Get get the Aoc by number down to something Thats.
That's totally manageable before we'd.
Speaker Change: Probably start to think about getting there.
Very aggressive about share buybacks.
Great. Thank you very much.
Yeah.
Thank you. Our next question comes from the line of Chris first there with Wells Fargo. Please proceed with your question.
Good afternoon, thanks for taking the call.
So just going back to slide 15, and just the increase in problem loans relative to the reserves.
I understand like your economic views changed in <unk>.
I mean, if you didnt have an increase in criticized loans would you have seen a meaningful decline in reserve to loans.
And then if so where do you think that would go.
Yeah. So.
So is it fair question.
It's hard to be.
Speaker Change: The two speculative as to exactly what would occur there I mean, we have a.
Very fulsome process as it is I would have alluded to sort of adjusting macroeconomic scenarios getting back with our senior executives in our credit professionals.
How does that feel does that kind of near the world that we see moving forward.
We look at our credit grade migration within the portfolio and try to.
CERN based upon prior practice of prior reserving and one of those were things that were but it would've been contemplated in our economic scenarios and we have qualitative reserves set aside for various.
Implications that are unique and maybe separate and not covered through those economic foundation. So I guess I would round back to based upon earlier reserving practices. What we're seeing is certainly within the bounds of what we would've expected in terms of deterioration.
The counterfactual of having fewer criticized or classified to really change the outcome.
It is difficult to say with without having run through our entirety of our process.
But at the margin it would it would have been a factor you know that we would have thought about in terms of credit migration.
And other types of metrics that wouldn't important the process.
Alright, Thanks, and then my follow up is just on the overall capital stack and I guess, just if there's any other kind of ins and outs on the long term debt side. Thank you.
Yeah, I think that we're watchful as everybody else's as to what comes from long term debt proposal to see what that means.
We have been retaining earnings here for time isn't here sort of alluded to.
We see the path or any LTI to improve moving forward, which includes our projections are that in the appendix.
You have to put some hedges on in recent periods that really takes away some of the more adverse outcomes associated with rising rates if those were to occur again.
So I think yeah.
Big picture, we can.
We've been training them on that front.
Okay.
Yeah, I think it's kind of as you know.
We were really anxious to see what happens with long term debt proposal I expect it will get sort of tailored down [laughter].
And.
By all rights that should happen and makes it makes sense that it should happen.
Uh huh.
But we will get a little bit and wait and see mode about that.
And given the fact that we have a more fulsome build of our equity position that that might afford us opportunities to think about our positioning of our capital over time.
Depending on the outcome is a long term debt.
Okay.
Thank you. Our next question comes from the line of Samuel Varga with UBS. Please proceed with your question.
Hey, good afternoon, I just had.
A quick question around loan growth.
Ted.
Just some color on the single family residential growth that you've seen over the last several quarters now.
This is part of your sort of your interest rate risk management strategy should we expect this to keep growing at a similar pace as it has recently and can you give any color on the roll on yields that youre getting currently in this book.
Yes in terms of just volumes.
Most of the volume we're seeing is a fund up over the last 456 quarters has been fundings under what we call one time close loans there.
It's a construction loan that leaked into a permanent mortgage it's a great product.
Very competitive and and so that's what most of the fundings are coming from the.
The origination of.
Held for investment one to four family mortgages was down significantly as it has in the industry.
So I.
Hi, Joe.
Over the next 12 to 18 months, you'll see growth in our one to four family slow.
And unless we see rates come down and our renewal of.
The purchase mortgage business, so that which could happen.
And then the other thing Thats going on is where we're shifting and originating more held for sale.
Mortgages smaller mortgages.
As as that market continues to offer some opportunities in terms of the yields.
On new production I don't have that right in front of me I, I'd say sort of a kind of a mid sevens.
Number mid to upper Sevens mid to upper Sevens and it's just.
Suffice it to say that.
Speaker Change: The yields have gone up quite a bit.
As rates have gone up.
Speaker Change: Yes.
Got it thanks for all the color I appreciate it.
Thank you. Our next question comes from the line of John Armstrong with RBC Capital markets. Please proceed with your question.
Thanks, Hi, everyone.
I think most of my questions have been handled but Scott can you just talk about how things are in Houston.
Oh sure Yeah anything to call out in terms, yes.
Yep.
I just asked that question.
Houston.
It's just so accustomed to big bad storms coming through and this was not supposed to be big or bad, but it turned out to be a little bit of both.
If the you know it.
Came in as a category one it's just barely got to that that level of distinction just before Atlanta.
And up until Sunday night about 10 o'clock. It was going to go in about 60, 70 miles west of Houston, but similar to some other big storm so the pitch Houston yet.
Veered east right at the end and it was a dead hit it straight on hit at Houston wins were 90 to 100 miles an hour. They were 90 to 100 miles an hour 100 miles inland.
The great thing about the storm was that it was fast moving it was out of the region within 24 hours.
It didn't have a chance to drop enough rain.
But massive tree damage and that created the power issues that you've read about literally.
80% plus or minus of the power hookups in Houston residential and commercial were offline at one point.
So it was just a huge huge challenge.
Just because of the tree damage.
Created a lot of the power issues. So.
But the city has come through it and yeah, there's a lot of pain that goes with it but.
Houston, Texas folks are pretty resilient and they know how to kind of.
Pick everybody get them through things like this and that's that's what's happening you're nice to ask though.
I don't you know in terms of any loss potential.
In our loan book, we saw with Harvey you would recall we set aside.
$30 $40 million reserve loan loss reserve for Harvey, which was a hurricane that lasted five days et cetera, et cetera, and we had virtually no losses. So the.
The six quarters.
As I recall six quarters after Harvey came through Texas.
We had net recoveries of about five basis points that was in 2017 so.
In any event.
You won't well as of right now and we have a good view of the portfolio you won't see a set of setting aside any reserve.
For losses.
Two two.
Hurricane Barry.
Okay, Alright, thanks, guys I appreciate it.
Yeah.
Thank you there are no further questions at this time I would like to turn the floor back over to management for closing comments.
Thank you Alicia and thank you all for joining 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 we thank you for your interest in Zions Bancorporation. This concludes our call.
Yeah.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
[music].
Okay.
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Mhm.
[music].
Hum.
Speaker Change: Mhm mhm.
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