Zions Bancorporation, National Association Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 18, 2023

There are 11 speakers on the call.

Operator

Greetings, and welcome to the ZION Bancorp Q3 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. On your telephone keypad. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to Introduce you to your host, Shannon Drades, Interim Director of Investments. Thank you, Shannon. You may begin.

Speaker 1

Thank you, Alicia, and good evening. We welcome you to this conference call to discuss our 2023 Third Quarter Earnings. My name is Shannon Drage, Interim Director of Investor Relations. I would like to remind you that during this call, we will be making forward looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or Slide 2 of the A copy of the earnings release as well as the presentation are available at sciencebancorporation.com.

Speaker 1

For our agenda today, financial officer will review our financial results. Also with us today are Scott MacLean, President and Chief Operating Officer Keith Maio, Chief Risk And Derek Stewart, Chief Credit Officer. After our prepared remarks, we will hold a question and answer session. This call is scheduled for 1 hour. I will now turn the time over to Harris Simmons.

Speaker 2

Thanks very much, Shannon, and we want to welcome all of you to our call Zions Bank Corporation recently celebrated the 150th anniversary of its what we think of as its ancestral bank, which was Thanks, Bryan Savings Bank and Trust Company, which opened for business in October of 18/73. I'd like to think that This is a bank that's been built the right way, steadily and prudently over many decades with a persistent focus on developing deep roots in the communities we serve and helping customers develop their own strong financial foundations.

Speaker 3

As one of

Speaker 2

the West's most prominent pioneer institutions, we look forward to a Future building on this history and demonstrating a continued commitment to the values that have served us so well over these many years. One other thing that I want to comment on before we get into the numbers. During this past quarter, Michael Morris, who has very capably served as our Chief Credit For the past decade, retired from the role due to some recent health challenges that led Michael and his family to conclude that he should reduce his workload somewhat. I'm very pleased that Michael will continue with us in a role focused on affordable housing and related projects where I know he'll add a great deal of value. Michael's close and very capable associate over the past decade, Derek Stewart, has assumed the Chief Credit Officer role.

Speaker 2

And as Shannon noted, He's with us on the call today and we welcome Derek into this really important position in the company. So going into the slides, financial performance for the quarter was marked by sustained stabilization of our net interest margin as well as significant customer deposit growth, both of which have been very encouraging. On Slide 3, you'll see some of the themes that are particularly applicable designs this quarter and these remain fairly consistent with our messaging from the prior quarter. Customer deposits grew $3,000,000,000 during the quarter and resulted in reduced reliance on both short term borrowings and brokered deposits. We continue to actively manage our balance sheet at our hedging in response to changes in our interest rate risk profile.

Speaker 2

We've had a pretty dynamic and proactive response to changing conditions and this has contributed to the stabilization of the net interest margin and net interest income. We recognized $14,000,000 in net charge offs during the quarter, which is in line with the prior quarter. Loss absorbing capital increased with Turning to Slide 4, we've included some key financial performance highlights for the quarter. Circled on the slide, we reported total deposit costs of 192 basis points for the quarter compared with 127 basis points in the 2nd quarter. Period end customer deposits increased 5%, Broker deposits declined 22%, bringing total deposit growth to 1% quarter over quarter.

Speaker 2

Period end loans were flat to the prior quarter as we observed softening loan demand in the 3rd quarter. Moving to Slide 5, diluted earnings per share was up $0.02 over the 2nd quarter To a $1.13 on net income of $168,000,000 as lower expenses offset slightly lower revenue. Turning to Slide 6, our 3rd quarter adjusted pre provision net revenue was $272,000,000 Down from $296,000,000 The linked quarter decline was attributable to lower non interest revenue, while adjusted non interest expenses were Flat versus the year ago quarter PPNR was down 23% as the increase in the cost of funds exceeded the increase in earning asset yields. With that high level overview, I'm going to ask Paul Burdes, our Chief Financial Officer to provide some additional detail related to our financial performance. Paul?

Speaker 3

Thank

Speaker 4

Revenue is from the balance sheet through net interest income. Slide 7 includes our overview of net interest income and the net interest margin. The chart shows the recent 5 quarter trend for both. Net interest income on the bars and the net interest margin in the white boxes were consistent In the net interest margin is outlined on Slide 8. On the left hand side of this page, we've provided a linked quarter waterfall chart Outlining the changes in key components of the net interest margin, the 109 basis point adverse impact associated with deposits, Including changes in both rate and volume was offset by fewer more expensive borrowed funds and the positive impact of loan prep pricing.

Speaker 4

Our success in continuing to grow customer deposits contributed to the reduced level of broker deposits and borrowed funds as we move through the Q3. And non interest bearing sources of funds continue to serve as a significant contributor to balance sheet profitability. The right hand chart on this slide shows the net interest margin comparison to the prior quarter. Higher rates were reflected in earning asset yields, which contributed an additional 157 basis points to the net interest margin. This was more than offset by increased deposit and borrowing costs, which when combined with the increased value Of non interest bearing funding adversely impacted the net interest margin by 189 basis points.

Speaker 4

Overall, the net interest margin declined by 31 basis points versus the prior year quarter. Our outlook for net interest income in the Q3 2024 is stable relative to the Q3 of 2023. Risks and opportunities associated with this outlook include realized loan growth, Competition for deposits and the path of interest rates across the yield curve. Moving to non interest income and revenue on Slide 9, customer related non interest income was $157,000,000 a decrease of 3% versus the prior year quarter sorry versus the prior quarter due to strong capital market fees in the second quarter. Customer fees were in line with the prior year As a year over year decrease in capital markets was offset by improved treasury management swap fees, Our outlook for customer related non interest income for the Q3 of 2024 is moderately increasing relative to the Q3 of 2023.

Speaker 4

The chart on the right side of this page includes adjusted revenue, which is the revenue included in adjusted pre provision net revenue and is used In our efficiency ratio calculation, adjusted revenue decreased 8% from a year ago and decreased by 3% versus the 2nd quarter Due to the factors noted previously and a $13,000,000 gain on the sale of property recognized in the 2nd quarter. Adjusted non interest expense, shown in the lighter blue bars on Slide 10, was essentially flat to the prior quarter at $493,000,000 Reported expenses at $496,000,000 decreased $12,000,000 due to $13,000,000 in severance expense recognized in the 2nd quarter. Our outlook for adjusted non interest expense is slightly increasing in the Q3 of 2024 when compared to the Q3 of 2023. This outlook As seen in the current quarter, we expect the timeline for fully achieving our expense objectives to take longer than originally planned. Highlights and trends in our average loans and deposits over the past year are on Slide 11.

Speaker 4

On the left side, you can see that Loans were somewhat flat in the current quarter as loan demand continues to soften our expectation is that loans will be stable in the Q3 of 2024 when compared to the Q3 of 2023. Now turning to deposits on the right side of this page, average deposit balances for the 3rd quarter Increased 9%, while ending balances grew 1% compared to the end of the second quarter. Ending customer deposits, which exclude broker deposits, Grew 5% in the 3rd quarter. We continue to see deposit growth coming from both existing and new customers. The cost of deposits shown in the white boxes increased during the quarter to 192 basis points From 127 basis points in the prior quarter.

Speaker 4

As measured against the Q4 of 2021, the repricing beta on total deposits Based on average deposit rates in the Q3 was 36% and the repricing beta for interest bearing deposits was 57%. Slide 12 includes a more comprehensive view of funding sources and total funding cost trends. The left hand chart includes Ending balance trends. Short term borrowings have decreased $8,000,000,000 since the Q1 of 2023 as customer deposits have grown and earning assets have declined. On the right hand side, average balances for our key funding categories are shown along with the total cost of funding.

Speaker 4

As seen on this chart, the rate of increase in total funding cost at 22 basis points in the current quarter has notably declined from the first and second quarters. Slide 13 shows non interest bearing demand deposit volume trends. Although demand deposit volumes have been declining as more customers move into interest bearing alternatives, the contribution to the net interest margin and therefore the value of the demand deposit portfolio continues to increase. Moving to Slide 14, our investment portfolio exists primarily to be a ready storehouse of funds to absorb customer driven balance sheet changes. On this slide, we show our securities And money market investment portfolios over the last 5 quarters.

Speaker 4

The investment portfolio continues to behave as expected. Principal and prepayment related cash flows We're over $800,000,000 in the 3rd quarter. With the somewhat predictable portfolio cash flow, we anticipate that money market and investment Price sensitivity to changes in interest rates is slightly shorter compared to the prior year period estimated 3.5% currently versus 3.9% 1 year ago. This duration helps to manage the inherent interest rate risk mismatch With the larger deposit portfolio assumed to have a longer duration than our loan portfolio, fixed rate term investments are required Slide 15 provides information about our interest rate sensitivity. A comparison of our modeled depositor behavior to recently observed depositor behavior suggests shortened deposit duration.

Speaker 4

This change in assumption reduces modeled asset sensitivity, which we are showing on this page with the bars labeled adjusted deposit assumptions. In light of this change, we are actively managing our asset duration to the emerging liability duration. During the Q3, we added an additional $1,000,000,000 of pay fixed interest rate swaps. As a reminder, the $3,500,000,000 of portfolio level pay fixed swaps on our books Serve to hedge the value of our investment portfolio designated as available for sale in a rising rate environment. On the right hand side of this slide, we've included detail on the impact current and implied rates are expected to have on net interest income.

Speaker 4

As a reminder, we have been using the terms latent interest rate sensitivity and emergent interest rate sensitivity to describe the effects On net interest income of rate changes that have occurred but have not yet fully been reflected in the repricing of our financial instruments, as well as those expected to occur as implied by the shape of the yield curve. Importantly, earning assets are assumed to remain unchanged in size or composition in These estimates utilize the adjusted deposit assumptions described earlier. Regarding latent sensitivity, the in place yield curve as of September 30, we'll work through our net interest income over time. Assuming a funding cost beta based on recent history, we would expect net interest income To decline approximately 2% in the Q3 of 2024 when compared to the Q3 of 2023. Regarding emergent If the September 30, 2023 forward path of interest rates materializes, the emergent sensitivity measure is estimated to be immaterial in the Q3 of 2024 when compared to the Q3 of 2023.

Speaker 4

As noted previously, our outlook for net interest For the Q3 of 2024 relative to the Q3 of 2023 is stable as we expect balance sheet composition changes to be accretive to net interest income. Moving to Slide 16, credit quality remains strong. Classified loan levels remaining stable and low. Non performing assets increased $4,000,000 due primarily to 2 suburban office loans in the Southern California market, which added $46,000,000 And one C and I loan, which we expect to sell in the 4th quarter. Net charge offs were 10 basis points of loans for the quarter.

Speaker 4

Loan losses in the quarter were associated with borrowers that have struggled with idiosyncratic supply chain issues, dollars 3,000,000 in losses On 2 office loans and other small losses distributed throughout the portfolio. The allowance for credit losses is 1 point 3 0 percent of loans, a 5 basis point increase over the prior quarter due largely to increases in reserves for the CRE office portfolio. As we know as a topic of interest, we have included information regarding the commercial real estate portfolio with additional detail included in the appendix of this presentation. Slide 17 is a reminder of the discipline we have maintained over the last decade as it relates to commercial real estate in the context of credit concentration risk management. Our growth has remained well below peers over this time.

Speaker 4

Slide 18 provides an overview of the CRE portfolio. CRE represents 23% of our loan portfolio with office representing 16% of total CRE or 4% of total loan balances. Credit quality measures for the total CRE portfolio remain relatively strong, though non performing assets increased in the quarter to 2.3% of the office portfolio. As mentioned, we recognized $3,000,000 in losses on 2 office loans in the quarter across the CRE office portfolio. Overall, we continue to expect the CRE portfolio to perform well with limited losses based on the current economic outlook.

Speaker 4

Our loss absorbing capital position is shown on Slide 19. The CET1 ratio continued to grow in the Q3 to 10.2%. This, When combined with the allowance for credit losses, compares well to our risk profile as reflected in the low level of ongoing loan net charge offs. As the macroeconomic environment remains uncertain, we would not expect share repurchases in the Q4. We expect to maintain strong levels of regulatory capital while managing to a below average risk profile.

Speaker 4

Slide 20 summarizes the financial outlook provided over the course of this presentation. As a reminder, this outlook represents our best current estimate For the financial performance in the Q3 of 2024 as compared to the actual results reported in the Q3 of 2023.

Speaker 1

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. Felicia, please open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Menan Gazalina

Speaker 5

I wanted to ask about NII. When we look at the NII monthly data that provided earlier in September versus what you have here for the full quarter. It looks like NII declined in September. So Just wondering if you could talk about what drove that and how you're thinking about the path of NII between now And the stable outlook you outlined for 3Q24?

Speaker 4

Sure. I'll start. Paul, so the purpose of the monthly net interest income that we provided in both the second and the third quarter Was meant to provide some inter quarter guidance, which we don't typically do, on the sort of level of where The net interest margin was coming out. And so you may recall at the end of the second quarter during the 2nd Quarter call in July, we stated that we expected the net interest margin to begin to stabilize in the 3rd quarter when compared to the 2nd quarter After seeing several quarters of net interest margin decline and that net interest income outlook was meant to sort of support that. I wouldn't read too much into monthly net interest income figures.

Speaker 4

I think that that can get a little squirrelly. I would rely on our overall outlook, which is that as we look ahead over the course of the next year, we expect our net interest income To be approximately flat in the Q3 of 'twenty four when compared to the Q3 of 23. And so Harrison, would you like to add to that?

Speaker 2

Well, I think there's also one fewer day in the month versus August. I mean, you'll get a little fluctuation for

Speaker 4

So that's kind of my purpose of my statement saying that it's hard to read into any given month.

Speaker 5

Okay. I appreciate that. And just as we think through the trajectory for NII over the next year, In a higher for longer rate environment, I know you do get benefit from utilizing the securities pay downs as well as the loans repricing. Thanks. But given the pressure on the deposit side, should we think about NIM and NII maybe coming down a little bit in the near term and then starting to move up as we get closer to 3Q 'twenty four or Maybe you can help us with the trajectory there.

Speaker 4

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

Speaker 4

You also saw our funding costs And the increase in our funding costs began to really flatten out in the Q3 when compared to the prior two quarters. My expectation, therefore, Is that the improvement in earning assets will keep pace with change in funding costs Such that my expectation is that the net interest margin will be would not decline much from here consistent with

Speaker 5

the outlook

Speaker 4

we provided in the In the Q2, again, as I think about earning asset and liability repricing, it feels like based on The current rate outlook that we've hit a spot where I'm expecting net interest income to flatten from here as we say in the outlook. And The opportunity for improvement will be really largely predicated on our ability to actively manage those deposit rates.

Operator

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

Speaker 3

Hey, good afternoon, guys.

Speaker 6

Hey, Dave.

Speaker 2

Hi, Dave. Just

Speaker 3

back on the NII guide, What are you guys factoring in for deposit flows in beta and the bottom for the DDA mix and the timing of that, if you've got any thoughts around your base case there?

Speaker 4

Yes. On I don't have the slide number in front of me. But in the intersensitivity slide In the materials, you'll see that we actually provided an expectation of continued increase In deposit rates, slide 15 of the earnings materials, you can see there in the latent sensitivity That outlook, that kind of minus 2% outlook in latent sensitivity provides The total deposit beta of 50% kind of accumulating over time throughout The next year, that is to say if interest rates stop rising, we're continuing we're expecting in that outlook for deposit rates To continue increasing marginally.

Speaker 3

And in terms of DDA mix, where do you think that bottoms and when? That would be great.

Speaker 4

Yes, that's a little more difficult to predict. But what I will say is that sort of all in funding beta Includes further migration of non interest bearing demand into interest bearing deposits. So therefore, my expectation is that we will continue to see some DDA migration, but that's all incorporated into our outlook.

Speaker 3

Got it. Thanks, guys.

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from the line of John Pancardi with Evercore ISI.

Speaker 3

Good afternoon.

Speaker 2

Hi, John.

Speaker 3

I just Actually, I want to ask a question on the loan growth front, believe it or not. It looks like the I know your loan growth outlook is stable. Wondering if there could be upside to that. We're seeing some other banks that Are below the $100,000,000,000 Basel III threshold that they're able to Acknowledging you're able to step up and gain some share as some of the bigger banks are all busy with their RWA diets and balance sheet optimization. So I mean, would you think that maybe there could be an opportunity to pick up some quality loan growth here that you otherwise wouldn't have Have the opportunity to or opportunity to gain share and perhaps that loan growth outlook might be a bit conservative?

Speaker 2

John, I'll jump in. It's Harris. I've always believed loan growth It is the trickiest thing possible to try and forecast because it's so dependent on payoffs And rate and everything else, but I there may be some. I don't think we may even have some differences Opinions around the table about where we think loan growth is headed. I think none of us think it's going to be that we're going to see anything much, But there could be some.

Speaker 2

We also just note that during the Q3, it was pretty weak. I think it's I mean, very recently, we've Seeing a little bit of pickup, but you can't make much out of a very short period of time In terms of trying to extrapolate that very far. So I think that's why we've got it kind of stable. It probably It's kind of the mean of where we're all kind of prognosticating around here.

Speaker 7

Tom, this is Scott. I would just add to that that I think whatever pulling back the global banks I don't know that it's producing a granular sort of benefit in the marketplace. And Particularly when you think about the size of our clients and the size of their books, to the extent they're pulling back on really large commitments, that's not necessarily where we But I would just say to Harris' comment, I think our loan flatness right now It's more indicative of just the customer base

Speaker 3

and

Speaker 7

being cautious and Compared to where they were 2, 3, 4 quarters ago when we were seeing historic loan growth coming out of the pandemic.

Speaker 3

Yes. No, I got it. Understood. And then lastly, I know the you had indicated I think Paul you indicated in prepared remarks. The expense objectives are taken longer than originally planned Could you just talk about that and what is taking longer in terms of any expense rationalization efforts?

Speaker 3

And maybe if you could tie into that as the core system upgrade, is that at all impacting that? Thanks.

Speaker 4

Yes. I'll start and then turn it over to Scott and Harris to supplement that. So you saw us take a severance charge In the Q2, the run rate improvement associated with that, I would expect to occur kind of in the 4th To the Q1, but when I speak to sort of taking longer than expected, what I'm speaking about is the inflation headwinds. We're seeing that across Board and contracts and other things. And so as we continue to fight expenses, we're actively working those expenses down.

Speaker 4

But the tide, inflation, I hope, is turning the corner, but the sort of inflation tide isn't out yet. And we just continue to fight that. And It's the reality of the environment that we're all dealing with today.

Speaker 7

I would just add to that that The other thing we're seeing is that the inflation in 2022, even though it softened a little bit this year. In terms of major technology vendors and their renewals and extensions of contracts, we're seeing Probably the most vigorous rate pass throughs that we've seen in years. And I think it's symptomatic of the fact that The inflation occurred last year, things renewing this year and going into 2024, quite a bit of pressure On those kind of baseline technology vendors.

Speaker 2

We've all been watching Hulu and Disney plus I think.

Speaker 7

And on our core transformation project, I would just say that and we have commented for years that when When we go live with the final deposits release, which we did go live with a pilot, one of our affiliates In the Q2 that during this period, it'll take us 12 months to fully convert all of our affiliates. And during that conversion period, just because the way the accounting works, our P and L impact We'll get worse by about $10,000,000 to $15,000,000 And then in the following year, the following 12 months after that, They drop by a commensurate amount. So there's a little bit of a timing issue related to actually the period we're going live in.

Operator

Thank you. Our next question comes from Chris McGratty with KBW. Please proceed with your question.

Speaker 4

Great. Thanks. Paul, maybe we

Speaker 8

could come back to the deposit beta slide, Slide 15. I just want to make sure I fully understand. I'm comparing your assumed full cycle beta last quarter of 40 to the new 50. And I'm trying to reconcile the 70 basis points of additional deposit pressure from here. So I guess if the Fed is done, Yes.

Speaker 8

Why would you see that big of an increase in deposit costs from here?

Speaker 4

Yes. So there's 2 things going on there. As I said, there's sort of the lagging effect of deposit rates. Again, this is what we're assuming in the model. I'm hopeful that we can do a little bit better than this.

Speaker 4

But based on recent history, our expectation is that There are some interest bearing products will continue to float up, but another big part of that is an assumption of continued migration of non interest bearing demand Into interest bearing, that sort of we don't normally think of that as beta, but it has the practical or economic effect Of a repricing beta. And so all of those things combined into that 70 basis points.

Speaker 8

Okay. Maybe separately, I think John asked about the growth opportunity under 100%. I mean, you're about 10% or 15% under the 100 threshold. I'm interested in the costs that you're beginning to budget. I think one of your peers said it's $100,000,000 a year from crossing.

Speaker 8

You have time to remix and stay under, but how are you thinking about the costs to ultimately go over 100?

Speaker 4

Well, yes. So I'll start with that and invite Harris and Scott Recall, we were a CCAR bank a few years ago and sort of all of the muscular activity that we put in place To be compliant with CCAR and being a SIFI and all those things, that's all still in place. I mean, there were really we put in some really great risk Things that continue to be in place. So I don't foresee personally anywhere close to $100,000,000 of incremental cost. In fact, I think So we sort of have the things in place today to be able to comply.

Speaker 4

The biggest change for us, I think there'll be some changes in risk weighted assets around the edges that we need to pay attention to. The bigger change for us will be the incorporation of AOCI into the numerator of capital. And As I think we've previously stated, the relatively short duration of our investment portfolio, which is the source of our the Source of the AOCI that we have on the balance sheet, we expect to be large that impact we expect to be largely gone by the time that those Rules become effective for us.

Speaker 2

I guess I just I think that's actually very true with respect to capital. I think the one place it's going to Just on the debt requirement. And we've got about $500,000,000 of debt. If you put the proposed Debt requirement into place today that would go up to about $4,000,000,000 roughly. So that incremental 3 point The credit spread on that relative to the cost of funding with either wholesale Any other wholesale source, home loan, larger deposits, etcetera It's going to create some drag, I think.

Speaker 2

And that you kind of do the math, whatever you think That credit spread is on times our risk weighted asset number. So That I think to me is going to be the primary sort of new thing that we'll hit.

Speaker 8

That's very helpful. Thanks a lot, Harrison.

Operator

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

Speaker 6

Hey, good evening.

Speaker 4

Good evening.

Speaker 6

So with the expectation of stable loans over the next 12 months

Speaker 4

We historically have stayed away from deposit growth outlooks. I think what you've seen though over the last couple of quarters Is substantial deposit growth, as we our continued conversations with our customers have Paid off in the form of an increased deposits on the balance sheet. Deposit growth has been very good over the last 2 quarters and in the 3rd quarter in particular. I wouldn't expect that level of deposit growth to continue, but I do expect Zions to be able to maintain A very solid loan to deposit ratio and continue to see deposit growth probably at least into the next quarter.

Speaker 6

Okay. And within that, is there a meaningful delta between the rate on new customer deposits versus Existing customers?

Speaker 4

Yes. The deposit growth that we've seen in the 3rd quarter Has definitely been on the higher end of our deposit sort of offering rates. And so you see that And the continued increase in the interest bearing deposit rate, that's largely coming from the new money coming on the balance sheet at higher rates.

Speaker 6

Okay. So it's more of that than as far as existing customers bringing back funds and mix shifting into higher interest

Speaker 7

Yes. This is Scott. I would say that what we've seen is that as we It became much more active in our pricing of interest bearing deposits that we our clients Have become much more active in bringing their deposits back. So, we as we've said, we had approximately $11,000,000,000 in deposits It's off balance sheet, client deposits that were in off balance sheet money market funds because we just The industry was awash with liquidity. And as we started continuing to talk to those clients about bringing those Pause us back on balance sheet.

Speaker 7

It was very easy conversation and we got more aggressive about what we were paying. They're not only bringing back What they had in our off balance sheet money market sweeps, but they're bringing other deposits they've had in other institutions in meaningful So, I wouldn't so much say that the growth has come from new customers as much as it has come from existing customers It just had a lot of deposits that were not on our balance sheet going into this year.

Operator

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

Speaker 3

Hey, good

Speaker 9

evening, everyone. How are you?

Speaker 4

Hi, Brody. Thanks.

Speaker 3

Hey, I wanted just to

Speaker 9

follow-up on the fixed Asset re pricing commentary, if I heard you correctly, I think you said it was 5 to 10 basis points a quarter positive to the earning asset yield over the next I was hoping you could maybe unpack that a little bit for us and say what are the assumptions driving that, like What's the amount of loans that are repricing over the next 12 months? And what's the back book yield that's coming off versus new origination yields?

Speaker 4

Yes. I'm going to answer that slightly differently than the way you asked it. And that is to say that we've got a really sophisticated Balance sheet simulation tool where we are sort of analyzing our loans and securities on a note by note or CUSIP by CUSIP basis. We put in the forward curve and then we turn all of that around. As we look at those model results Here for the next five next couple of quarters, what we see is that the earning asset yield in the aggregate, so that's investment portfolio, Sort of cash flow out of investments, any repricing of cash, and then in addition to the loans, which would be, generally speaking, longer resets That are resetting to the now prevailing higher rates.

Speaker 4

All of those things combined are creating an accretion in the yield of earning assets in the range of 5 to

Speaker 9

Okay, understood. And then I wanted to switch gears To credit, I had a couple of generic questions and one that was a little bit more pointed. Just I was hoping you could tell us What portion of the loan portfolio were shared national credits? And of that, what should lead on? Then I also wanted to ask on the nonperforming assets.

Speaker 9

They increased $68,000,000 and you called out it was due to 2 suburban office Loans, I wanted to ask what geographies those were in and what drove those to non performing?

Speaker 10

This is Derek. So let me start with the second part of the question first The 2 office loans in question were actually in California, Southern California. And They just had leasing lease rollover issues and they were actually value add Properties where they weren't able to re tenant as fast as the sponsor was

Speaker 3

Got it. And did

Speaker 9

you have the shared national credit data?

Speaker 4

I think on SNCs, if you don't mind, Eric, I think on SNCs, the total shared national credit is a proportion of the loan portfolio is in the range of 10% to 15%. And I don't have the sort of number of agents in versus non agents deals on that, but that's sort of the ballpark in our portfolio.

Speaker 7

Yes, we agent about 10% of 10% to 15% of what we participate in. The rest were In terms of snakes and then we're a participant in the others. It's also a very balanced portfolio. It's very diverse and a portfolio that's performed well for us over the years.

Speaker 9

Okay. Just to clarify, was it 10% to 15% of the portfolio is SNCs and of that 10% to 15% new agent?

Speaker 7

Yes.

Speaker 9

Okay. And just if I could sneak one more and just on the re tenanting of those office loans.

Speaker 7

The other thing you need to understand too is that somewhere in the range of 90% to 95% of these customers are in our They're not out of footprint transactions and in those where we are not the agent In almost all cases, we have ancillary business. So these are clients that we know in our markets. This Is not buying paper outside of our markets.

Speaker 9

Okay, great. That's helpful color. Could I just ask one last one on those office loans with the re Tenanting, was did the slow kind of re tenanting process cause like the debt service coverage ratio to go below 1 or anything like that?

Speaker 10

Yes, they did.

Speaker 9

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

Speaker 4

Thanks, Bertie.

Speaker 1

Thanks, Bertie.

Operator

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

Speaker 1

Thank you, Alicia, and thank you to all for joining If you have additional questions, please contact us on the e mail 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.

Operator

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

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Earnings Conference Call
Zions Bancorporation, National Association Q3 2023
00:00 / 00:00