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spk16: Greetings and welcome to the Zions Bancorp Q1 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Shannon Drage, Director of Investor Relations. Thank you, Shannon. You may begin.
spk09: Thank you, Daryl, and good morning. we welcome you to this 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 dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release as well as the presentation are available on our website, zionsbankcorporation.com. 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 McClain, President and Chief Operating Officer, Chris Kyriakakis, Chief Risk Officer, and Derek Stewart, Chief Credit Officer. After our prepared remarks, we will hold a question and answer session. This call is scheduled for one hour. I will now turn the time over to Harris Simmons.
spk11: Thanks very much, Shannon, and we welcome all of you to our call this morning. As Shannon mentioned, Ryan Richards is joining our call today as our new chief financial officer. Ryan was formerly our corporate controller and has been promoted to chief financial officer as our former CFO, Paul Burtis, is now serving as the CEO of our largest affiliate bank, Zions Bank. These changes, along with other leadership changes, I think reflect the depth of the talent that we have in our organization and our intentional efforts to develop a well-rounded group of leaders with broad experience. While we in the industry continue to navigate complex and uncertain economic and regulatory conditions, we have 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 happened for Nevada State Bank and Amogee 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 of this major transformation is accompanied by other enhancements to 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. This advantage 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. Zions was 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 measure dimensions for both small business and middle market categories, where we lead the way for bank you can trust, values, long-term relationships, and ease of doing business. By the way, we tip our hat to our friends at Colin Frost and Pinnacle Financial, who were 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, 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, in addition to the management of interest rate risk through our hedging strategy. We also expect that with the continued passage of time from the events of last spring, our relative cost of deposits will continue to improve. Loan demand 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 streamlined SBA program aimed at serving smaller businesses in our communities. It's a program that seems to fill a unique product need for our customers and while it doesn't immediately contribute meaningfully to loan balance growth, it's the kind of business that builds real franchise value and it's 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 and 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 will be paired with well-managed expenses Adjusted expenses in the current period were up a mere $2 million compared to the first quarter of 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 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 earnings of $143 million for the quarter. Our period end loan balance increased just under 1%, while average balances increased 1.3% 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 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 1 ratio was 10.4% compared to 10.3% in the fourth quarter and 9.9% 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 cent negative impact from the FDIC's updated estimate 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 length quarter decline was attributable primarily to seasonally higher non-interest expense, versus the year-ago quarter, PPNR 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. Ryan?
spk08: Ryan Richards Thank you, Harris, and good morning, everyone. I will begin with the discussion of the components of pre-provision net revenue. Nearly 80 percent 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 improves 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 7. On the left-hand side 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 encompassing both the rate and volume was offset by the positive impact of loan repricing and the impact of lower average interest-bearing deposit volumes. Non-interest-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 to the net interest margin. The value of non-interest-bearing deposits and lower borrowing levels contributed another 93 basis points to the margin. These positive contributions, which were more than offset by increased deposit costs, 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 non-interest income and revenue on slide 8, customer-related non-interest 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 non-interest 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 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 non-interest expense, shown in the lighter blue bars on slide 9, 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, while another $13 million was recognized in the first quarter this year. Our outlook for adjusted non-interest 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 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 non-interest 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 broker deposits and based on average deposit rates in the first quarter, remained 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. The 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 and earning assets have declined. On the right side, average balances for our key funding categories are shown along with the total cost of funding. As seen on this chart, the rate of increase in total funding 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 a ready storehouse of funds to absorb customer-driven 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 Maturities, 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 security 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 4.1% one year ago. This duration helps to manage the inherent interest rate mismatch between loans and deposits. With the larger deposit portfolio assumed to have a longer duration than our loan portfolio, fixed-rate term investments are required to balance asset and liability durations. 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 rate 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 2025 is 1.8% higher when compared to the first quarter of 2024 using the implied forward path of rates at March 31st. and assuming a static balance sheet. 100 basis point parallel up and down shocks of this implied forward outcome suggest about 1% and 2.3% sensitivity around that figure, respectively. If no changes in rates were to occur, model 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 the net interest income in first quarter 2025 will be stable to slightly increasing when compared to the first quarter 2024. Risks and opportunities associated with this outlook include 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 remain strong. Net charge-offs were four basis points of loans in the quarter. The allowance for credit losses is 1.27% 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 of modest credit deterioration in our credit portfolio. Non-performing assets increased 26 million and classified and 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. CRE 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, though criticized and classified levels increase during the quarter. Overall, we expect the CRE portfolio to perform reasonably well with limited losses based on the current economic outlook. Our loss-absorbing capital is shown on slide 16. The CET 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, as 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 that the AOCI improvement will continue through accretion of the securities portfolio regardless of rate path outcomes. Slide 22 summarizes the financial outlook provided over the course of this presentation. As a reminder, this outlook represents our best current estimate for the financial performance for the first quarter of 2025 as compared to the first quarter of 2024. With that, I turn the time back to Shannon.
spk09: 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. Daryl, please open the line for questions.
spk16: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for your questions. Our first questions come from the line of Manan Ghazalia with Morgan Stanley. Please proceed with your questions.
spk01: Hey, good morning, all, and Ryan, welcome, and congrats on the new role.
spk08: Thanks so much.
spk01: I was wondering, can you dig into the NII guide and the assumptions there in terms of the number of rate cuts? I'm assuming you're using the forward curve here. And also, if you could talk about the assumptions on NIB outflow and deposit repricing and what sensitivity there is if we don't get any rate cuts this year.
spk08: Hey, yeah, thanks so much for the question. And yes, when you look at some of the materials there, and really, we emphasized 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 three rate cuts. So that's kind of our base expectation, but I think as we open our inboxes each and every morning, seeing some indicators that would suggest perhaps fewer rate cuts 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 possibility of having fewer rate cuts for the year, it becomes more important as we think about that latent sort of view of interest rate sensitivity that we model at 0.8%. So we feel good about our ability to be positioned well for different rate pivots and changes. So much of that performance, as you note, will be dependent upon how our deposit pricing behaves moving forward. We were pleased to see some stabilization of that during the quarter, and we'll continue to keep a watch on that moving forward as deposit competition continues to be pretty stiff. Are there any other parts of that question that I missed?
spk01: No, I think you got them. I wanted to follow up on just the deposit costs and balances. I know NIB outflow has 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 both the NIB 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, are you seeing them take a fresh look at their cash levels in a higher for longer rate environment or, you know, the positive trends continuing through the quarter?
spk08: Yeah, no, thank you for that. So, yes, so we did see early in the quarter some seasonality from some of our large commercial deposits that ran off. But most of what you're seeing there in terms of change in the DDA balance in the quarter was a migration to interest-bearing funds. that we saw in modest ways, certainly with our smaller relationship balances, but also with our larger relationship balances. We've seen a very nice stabilization in the NEM 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, and we have allowed for continued migration. That is embedded within our guidance that 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 forward in one year's time to stable the slightly increasing NII.
spk01: Great, thank you.
spk16: Thank you. Our next questions come from the line of John Pancari with Evercore. Please proceed with your questions.
spk04: Morning, and Ryan, welcome. Thanks, John. On the credit front, on commercial real estate, you added a bit to the reserves. You brought the commercial real estate reserve up to about 4%. Can you maybe discuss your confidence in the adequacy of the loan loss reserve? I know losses are certainly limited, but comparatively, I know the your peer regionals are in the 8% to 10% range around their reserving for commercial real estate. So can you maybe walk through your confidence in the adequacy here, given the trend that you're seeing and the pressure in the industry? Thanks.
spk13: Well, thanks, John. This is Derek. We're very confident in the level of reserves that we have. What you can see in the credit portfolio is actually some migration into criticized. That's what's the largest driver of the deterioration in the CRE portfolio. A lot of that's from multifamily, which we're very comfortable with. We're comfortable just because of the loan-to-values that we've underwritten, the conservative underwriting that we've done over the years, as well as the slower periods of growth that we've had compared to peers. over the years. We just, you know, with our loss, the losses that we've had at four basis points and six million for the quarter, it continues to be very manageable. We'll see some challenges probably in the office portfolio over time, but we continue to believe that we're very well reserved for what we think are manageable losses in the future.
spk10: Hey, John, this is Scott. I would just add to that that something which I think almost everybody knows about us, our CRE growth coming into this was about half of the regional bank average, and depending on what size regional banks you're looking at. So as you know, since the Great Recession, our CRE books have 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 just look at the low average and median average loan size. It sort of tells you that the odds of us having Erentor support that can actually make a difference is real. And then finally... And I think compared 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.
spk04: Great. Thanks, Scott. I appreciate it. And then separately on the expense side, expense trends came in a little bit better than expected. I mean, I think the outlook was a little bit better. Can you maybe remind us on some of the efforts On the expense front, if you see some incremental gains as you look, you know, through the franchise and then separately, do you see, can you remind us of the expense dynamics tied to the completion of the core system conversion? I believe in year one, you might actually get a bump up in those costs before you see efficiencies. So if you can maybe walk through that with us as well. Thanks.
spk08: Let me start with highlighting, I think it was noted, the year-over-year performance. It was about a year ago this time where a commitment was made to bend the expense curve in the backdrop of the revenue environment that we're in. We feel pleased with where we came out on an adjusted basis relative to that last year mark, having a very modest 0.4% increase in adjusted expenses. So I felt like we kept commitments there. And we're 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 that Harris highlighted in his remarks on our core financial transformation work and how that's progressing. 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 manual labor hours out of our work. 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 compensation structure will continue to match the revenue environment. and how we trend across that dimension. So I don't know, Scott, if there's anything you'd want to add.
spk10: No, Ryan, that was awesome. All of those comments speak to the rigorous discipline we've had. This quarter last year, as Ryan noted, we were sitting on about 8% to 10% 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 was a lot of rigorous discipline that Ryan noted. and that we think will be beneficial going forward. Related to our future core project specifically, we've noted that there will be next year in 25 about a $12 to $15 million decrease in amortization costs. There will also be, we'll see some benefit from reduced what we would call bubble staffing that exists in many areas of the bank. to help with the conversions. And then I think we've, as Harris noted, we've seen some real process time improvements at the teller line and on our new accounts platforms that where we see higher levels of turnover anyway, where we may see some efficiency from that as well.
spk04: Okay, great. Thanks, Scott. Thanks, Ryan.
spk16: Thank you. Our next questions come from the line of Stephen Alexopoulos with JP Morgan. Please proceed with your questions.
spk12: Good morning, everybody. First, by the way, thanks for the 9.30 a.m. call. This is a great time slot. Hopefully you keep it. For my questions, Yeah, I won't ask the question on that. But in terms of the net interest income guidance, this comment in here that there's upside if short-term rates decline, most banks 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?
spk08: Yeah, I would emphasize the near-term nature of that. But what we're seeing there is if you look across our basically our interest-bearing deposits, and you decide that around $50 billion. You think about a third of those being priced pretty near wholesale prices, 4.75% and above. We sort of said, as we've kind of been making the rounds, that 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 if only short-term rates were to move down, not a parallel shift that we think that we could realize. Got it.
spk12: Okay. That's helpful. And then for my follow-up, maybe for you, Harris, it was interesting to hear you say that loan demand seemed to turn a corner. Because if you look at the consumer side, sentiment's still pretty negative, mostly tied to inflation. But it seems like you're citing business customers, maybe sentence improving a bit. Can you talk about that? And do we need cuts to see improved pipelines turn into actual improved loans? Thanks. Thanks.
spk11: Well, I think what we're seeing is – I mean, it's just – this is coming from our kind of frontline lenders. They're expressing that they're seeing a little more optimism probably from borrowers. I don't know that you need cuts that – this really hinges on a quarter or point. That's what's doing it so much is just probably a general belief that maybe the economy is not headed into recession, that things are a little more resilient than might have been kind of the sentiment six or nine months ago. So I suspect that's it. But our comment about maybe improving loan demand coming at us is simply a reflection of what we're hearing from our lenders. So it's a little hard to quantify, but that's what we're seeing internally.
spk12: In the past, when you saw an improvement in the pipeline, how long would that typically take to filter through actual loan growth improvement?
spk11: Oh, six months. Okay.
spk12: All right. Thanks for taking my questions. Yep.
spk16: Thanks. Thank you. Our next questions come from the line of Bernard Von Gazicki with Deutsche Bank. Please proceed with your questions.
spk03: Hi, good morning. You've been making investments in your capital markets and wealth management segments to help drive a more sustainable revenue base. You know, capital markets revenues had a nice uptick in the quarter driven by the real estate and securities underwriting you mentioned. Do you expect improvement to be driven from these areas or any color you can provide on where the expected improvement will come from?
spk11: You know, I might just say that we have a very intentional calling effort. We've got a lot of bankers engaged in it, and I generally expect it's going to be sort of across the board. And we have... You know, we have some ambitious internal targets and people committed to it. So I don't think it's going to be any single category. I think you're going to see it sort of across the board in capital markets.
spk03: And then maybe on the funding side, I know on slide 11 of your presentation, you know, having the $4 billion in broker deposits, and $5 billion in borrowings. And, you know, you've done a nice job of bringing these down over the last several quarters. What are your expectations on further bringing down wholesale borrowings for this year?
spk11: I'll speak to that. Matt Tyler, our treasurer, might have a comment about it.
spk02: This is Matt Tyler. I'm the corporate treasurer. I mean, it's really, you know, we've seen, you know, deposits – kind of stabilizing from where after last year and actually we saw a growth after 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 with our loan growth. We expect those numbers to continue to come down somewhat, but that depends on how the risk to balance sheet behaves. loan growth comes in very strong, then we'll probably need to keep more of that wholesale borrowing.
spk10: I would just add to that that customer deposits down a little bit in the first quarter, which, as Ryan says, is somewhat seasonal. We still have about $6 billion in client deposits that are off-balance sheets. And so, you know, it's a pretty conscious decision. We could certainly have shown $1.2 billion of customer deposit growth. Borrowings would have come down. Overnight borrowings would have come down. And it's something we don't, we just try to make very natural decisions, not try to bend the borrowings number or hit a customer deposit growth number just simply through you know, 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.
spk03: Great. Thanks for the color and taking my question.
spk16: Thank you. Our next questions come from the line of Ken Oosden with Jeffries. Please proceed with your questions.
spk14: Hey guys, how you doing? Can I just ask you a little bit more about, um, The mix of earning assets, you mentioned that cash and securities would keep coming down. What are you going to be looking to do within that in terms of securities portfolio rollovers versus the overall mix of the cash and securities? Thanks.
spk08: Yeah, thanks for that, Ken. You've noticed the trend is that we've allowed our investment securities portfolio to have some attrition. We can see that continuing forward. for a time longer, and that's helping us in terms of the yield coming off and the reinvestments we've been seeing in loans and the remix of 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. It kind of goes back to what Matt said is, you know, let's see where loan growth shows up and how our deposit base behaves, but that's what we've been seeing.
spk14: Okay. And then separately, just I know you're at $87 billion, 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 were a Category 5 bank originally and have some of that infrastructure. Can you just kind of help us think about what needs to happen as you move forward and what we would be realizing along the way there. Thanks.
spk11: I'll take a stab at that, Ken Harris. I mean, the first thing I'd note is, you know, just picking up on something that Ryan said about, you know, continued rundown in the securities portfolio. We have enough liquidity kind of inherently here that, you know, it probably gives us I don't know if it's another year or just kind of what, but it is going to help us kind of push that data out, which helps with the AOCI runoff and kind of normalizing getting that dragged down in advance of crossing 100. In terms of the kind of requirements, I think we believe we're in pretty good shape because we continue. We're still doing stress testing. We think we'll probably have to be a little more rigorous in terms of kind of the documentation that we would supply to regulators, et cetera. But all the mechanics, we continue to refresh models. uh, you know, we'll need to get back into the resolution plan business. Uh, but our structure, I think makes that actually much easier. Um, I mean, it's a pretty bare bones structure that we have that I think, uh, makes resolution planning, uh, all, all the much easier. Um, and, um, uh, you know, the lack of a holding company, um, probably the main impact is there's no supervised stress test. It's really only internal. And so until we get to, I think, 250. And so fundamentally, I don't think that we're going to see kind of a major event when we get there. Probably the major event really is, depending on how Basel III Endgame gets revised, as we would expect, and what if anything happens with the long-term debt rule? I mean, I think that if I have a concern, it's probably more around the long-term debt rule. I think that needs to get revisited. It's sort of anti-tailored for a $100 billion regional bank. And so 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.
spk14: Great. Thank you, Harris.
spk16: Yep. Thank you. Our next questions come from the line of Brandon King with Truist Securities. Please proceed with your questions.
spk00: Hey, good morning. Thanks for taking my questions.
spk08: Thanks, Brandon.
spk00: Yep. So I wanted to talk about earning asset yields. Saw a nice increase in the quarter. Could you just lay out what your expectations are for that pace of increase over the next several quarters?
spk08: Yeah, and thank you for that. As we've sort of been talking along the way, we did have a nice pickup this quarter in earning asset yields. We've sort of been guiding to zero to five basis points. I think if you look over a couple quarters, we've been able to chin that bar. So some good repricing activity, which was really borne out in that latent sensitivity that we showed in the slide that If nothing else happens with the rate curve, we stand to gain here.
spk00: 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 range?
spk08: 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.
spk00: Okay. And then lastly, in office CRE, there was a meaningful step down in that portfolio. Also went in, you know, criticized classified and non-accruals. So could you talk about, you know, how you're managing that portfolio, what you're seeing, and how you're actively managing?
spk13: Yeah, thanks, Brandon. This is Derek. The decline in office criticized in class fights was actually one positive resolution that we had. We were paid in full on a non-actual loan where we'd actually previously had a charge-off last year. So 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.
spk00: Thanks for taking my questions.
spk16: Thank you. Our next questions come from the line of Peter Winter with DA Davidson. Please proceed with your questions.
spk05: Thanks. Good morning. Can you provide some color on the increase in the CNI classified loans?
spk13: Yeah. Thank you. This is Derek again. The increase in the classifieds this quarter, there was actually one assisted living facility as the area you've related that just was experiencing slower lease up and some higher expenses that migrated to classifieds. And then there were a number of other CNI credits that just nothing large friends to point out or specific industries, but just they were CNI credits that migrated into classifieds.
spk05: Okay. And separately, when I look at the interest-bearing deposit cost, it's pretty impressive that it decreased three basis points. Because you're seeing most peers have an increase of roughly 8 to 15 basis points this quarter. What's the outlook for deposit costs going forward if there's no Fed cuts this year?
spk08: Yeah, that was nice. I'm happy to say a few words there. Listen, as we look at our trending, 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 played this game of catch-up where we got a little bit behind pricing that we ran up on the interest-bearing yields appropriately for the time, but we've kind of now 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, Harris, if there's anything you want to add. No, I think that captured it really well. That's good. Got it.
spk05: Thank you.
spk16: Thank you. Our next questions come from the line of Chris McGrady with KBW. Please proceed with your questions.
spk07: Oh, great. Thanks. Harris, any big picture changes in use of capital for the next maybe year or two? You're rebuilding capital with OCI, but just more broadly, uses of capital?
spk11: No, I mean, 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, you know, thinking about what our ratios are going to look like crossing that mark. You know, and beyond that, we're, you know, we're very focused internally on trying to you know, try and invest in things 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 in that market over the last, you know, three or four years, I think with the pandemic. But I, you know, I think that's probably... We're seeing maybe some change there and noted that kind of SBA lending is turning into a bright spot for us. And we really like that business, not only because you get a little better spread, but it really brings the kinds of deposits that I think really build a sustainable business. franchise, create a lot of franchise value. They're smaller operating accounts. They're insured. They're sticky. There are a lot of things we can do for small and middle market kinds of customers that add value. That's a real primary focus. We're trying to do more incrementally on the consumer front. That's not been a major driver for us in recent years, but we think there's some opportunity there. Um, again, largely with a view to, uh, creating a more fully insured deposit base. I mean, I think that's, uh, just, just an editorial comment. I mean, I, I, I think the, if there's a, if there's a crying need out there, it's for, uh, a look at the deposit insurance system. Uh, I think it's fundamentally broken and, uh, It should be a source of concern for anybody who's trying to think about the longer-term sustainability of a diversified banking system. And in the absence of that, we need to be really focused on building a more granular deposit base. And so that's a real focus of ours. It will be, I think, in years to come. So anyway, that's not all about capital, but those are kind of some of the activities we're focused on.
spk07: That's great. Thank you for that. And just my follow-up would be in terms of the tax rate, is the first quarter a good run rate for the rest of the year?
spk08: I don't have any different guidance to give you at this point in time.
spk16: Okay.
spk07: Thank you.
spk16: Thank you. Our next questions come from the line of Ben Gerlinger with Citi. Please proceed with your questions.
spk06: Good morning, everyone.
spk16: Good morning.
spk06: I just had a quick question on the multifamily uptick. You guys lay out the geographic presence by state in terms of just percentages. Is it a fair assumption to think that the uptick is kind of uniform across that, or is there certain states or areas in the United States that are starting to see a little bit more kind of indigestion amongst multifamily.
spk13: Thanks for the question. This is Derek again. It's a good question. It's actually, we're not seeing it in a specific market. I mean, real estate is very local. It depends on what street corner you're on. And so it depends on the markets. And what we're seeing on the multifamily side is really three primary issues. One is, in some cases, there's a higher cost to complete the projects and delays on the projects. And so we see some issues there on the construction side, maybe a smaller percentage. And then the larger issues are really just slower lease up, maybe some rent concessions early on during the lease up period, combined with interest rates increasing. 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 the sponsors continue to support them. They're bringing equity in to continue to support them as they get to stabilization.
spk10: We've seen this exact same process play out in previous cycles and in previous geographies. and you'll see some great migration to criticized and classified, but because of the post-Great Recession underwriting, which was 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 is you might hit periods of, of rent concessions and slower lease up. But generally there's cash flow and with the doubling of equity, it's why we think we'll see a path through the multifamily softness.
spk06: Gotcha. That's helpful, Colin. And then when you just think about just kind of commercial real estate as a whole, I know you talked about some kind of looming problems to work through within office. Is office kind of, I hate using the phrase, the next shoe to drop, but is that where you're likely to see the next incremental increase in criticized classified? Not necessarily a charge-off, but do you think it's a little bit more uniform across all of CRE?
spk13: Well, 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 challenged for some time coming out of the pandemic. And so You know, on the office side, we have $1.9 billion. We've actually reduced that intentionally over the last four or 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're never in the large CBD downtown trophy office properties that – New York City. It's just not our markets. It's not what we do. And so I think the office will continue to have some challenges from what we do have, but I think it will be manageable over the near term.
spk06: Gotcha. That's really helpful. I appreciate it. Thanks, everyone.
spk16: Thank you. Our next questions come from the line of Brian Ferrant with Autonomous. Please proceed with your questions.
spk15: Harris, I wonder if I could just follow up on the deposit insurance broken comment. Is it the level, the $250,000, 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 is.
spk11: Well, yeah. I mean, I'd start with the fact that the $250,000, which was last established, it was last changed in, I think, 2011. You know, it's not indexed for inflation, and so it's lost about close to a third of its purchasing power, if you will, since it was last changed. So the 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 the SVB episode that too-big-to-fail is still there. Not only is it there, it was basically given the stamp of approval by the Treasury Department and others during the crisis. You saw the flow of funds going from smaller banks to a 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 they're de facto insured. And so you have a very large portion of the nation's deposits that are de facto insured. You have among those who are not too big to fail, you've probably got half of those deposits are fully insured. And so it leaves kind of this sliver of You know, 20%, 25% of deposits out there that are not insured, but that's where all the instability is coming from. And I'm, you know, not to suggest here during this call what the solution ought to be, but I'm a little disheartened that there hasn't been more focus on it by policymakers, you know, waiting until the next crisis for it to rear its head again. And I simply think it ought to be something that everybody is focused on. But in the absence of that, it's important that we remain focused on developing the insured portion of that deposit base. It just becomes fundamentally important. It's really why SVB is no longer here today, is because they didn't have an insured deposit base.
spk15: Thank you. That's very helpful. Thank you. And then maybe just on the capital discussion, rounding that out, you were clear the common equity will increase, and you gave the AOCI burndown projection. The CET1 kind of in the 10.5 range, is that kind of a good landing spot, or do you see that increasing as well over the next year?
spk11: Well, I... Look, I don't think we'll be doing, you know, other than probably covering the cost of employee stock grants, that kind of thing. And I don't think we're going to be in the stock buyback mode here for a while until we can see greater clarity and really understand that we're going to be in solid shape crossing 100. I don't know quite where that ratio is. It's really going to depend on what loan growth looks like this year. But we're focused on increasing the tangible common equity ratio, getting AOCI behind us, and we want to have strong capital here.
spk15: Thank you. Very clear. Okay.
spk16: Thank you. We have reached the end of our question and answer session. I'm now going to turn the floor back over to Shannon Drage for closing remarks.
spk09: Thank you, Darrell, 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 Bank Corporation. This concludes our call.
spk16: 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.
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