Zions Bancorporation, National Association Q2 2024 Earnings Call Transcript

Presentation

[Operator]

Greetings, and welcome to the Zions Bancorp's Q2 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shannon Drage, Senior Director of Investor Relations. Thank you, Shannon. You may begin.

[Shannon Drage, Director of Investor Relations at Zions Bancorporation, National Association]

Thank you, Alicia, and good evening. We welcome you to this conference call to discuss our 2024 second quarter earnings. My name is Shannon Drage, 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 2 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 at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' 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 Kyriakakis, 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 Harris Simmons.

[Harris H. Simmons, Chairman and Chief Executive Officer at Zions Bancorporation, National Association]

Thanks very much, Shannon. We welcome all of you to our call this evening. Before we get into the results for the quarter, I'm really pleased to note that earlier this month, we completed the final major conversion to our 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 under the TCS's BaNCS core platform before completing our deposits conversions now in 2024.

The remarkable success we've had with these conversions is really a testament to the skills and dedication of our colleagues. We really want to express the gratitude of the 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 3.

So how does this really create value for the company going forward? Well, as industry observers are aware of virtually the entire legacy U.S. banking industry operates on 40- to 50-year-old core loan and deposit systems, along with significantly reducing that risk of operating on an antiquated system with dwindling vendor support in many cases. Our system operates on one data model for loans and deposits.

It facilitates fraud detection and error correction in real time, is API-enabled and cloud deployable. It supports critical omni-channel functionality like account opening, and it improves consistency of customer attribute data across major applications. Our employees report that the new system is 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, reduces training time, and 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, replaced nearly the entire digital front end, 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% paper-based applications to more than 90% electronic over the course of 12 to 18 months.

Going forward, we'll certainly find many ways to optimize the investments in our new core, and we're freeing up capacity to continue to invest in evolving technologies that give us other competitive advantages. As noted on Slide 35, the 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 4 basis points on a linked-quarter basis and improved 6 basis points against the year ago quarter as asset repricing outpaced the cost of funding We anticipate this trend would persist in a steady rate environment, while the timing of rate decreases in both the behavior and pricing and 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 measured. Higher rates have tempered growth while also reducing the amount of paydowns in the commercial and consumer real estate portfolios. The expected path of benchmark rates in the current political environment are top of mind for customers particularly our small business and middle market customers.

As I mentioned last quarter, we've been particularly successful with a streamlined SBA program aimed at serving smaller businesses with targeted campaigns during the quarter, and we expect to continue our focus on that. This campaign as well as other customer initiatives are 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 toward the second half of 2024 and into 2025.

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 and continue to pursue 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 loans for the quarter at 8 basis points over the last 12 months.

This contrast 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 and are already reflected in our reserves.

Starting on Slide 4, 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 one percent, while average balances increased just under 1% for the quarter, led by growth in 1-to-4 family residential loans. Customer deposit balances declined just under 1% in the quarter on a period-end basis, reflecting internal -- rather reflecting normal seasonality, while our ratio of noninterest-bearing demand deposits to total deposits was flat to last quarter at 34%.

Our common equity Tier 1 ratio was 10.6% compared to 10.4% in the first quarter and 10% a year ago. As I noted in my quote in the earnings release, we've seen strong accretion to tangible book value, which has increased 20.1% year-over-year. Moving to Slide 5. Diluted earnings per share of $1.28, was up $0.32 from the prior quarter. Current quarter results reflect a $0.07 positive impact from the sale of our Enterprise Retirement Solutions business and the sale of a bank-owned property in Nevada.

Turning to Slide 6. 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 PPNR was down due to slightly lower adjusted revenue 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.

With 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. Ryan?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

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 7 includes our overview of net interest income and the net interest margin. The chart shows the recent 5 quarters trend for both. Net interest income is reflected on the bars and the net interest margin is shown in the 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 8. On the left-hand side of this page, we provide a linked quarter waterfall chart outlining the changes in key components of the net interest margin, incorporating changes in both rate and volume. 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 the slide shows the net interest margin comparison to the prior year quarter. Higher rates were reflected in money market and loan yields, 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 6 basis points versus the prior quarter. Moving to noninterest income and revenue on Slide 9. Customer related noninterest income was $154 million compared to $151 million in the prior quarter with higher commercial account, card and loan-related fees, somewhat offset by lower capital market fees. Customer fee income growth has been slower than expected through the first half of 2024, given reduced loan activity and flat wealth management fees.

Looking ahead, we are optimistic that our new and expanding capital market capabilities will allow us to grow this area meaningfully over the next four quarters. Our outlook for customer-related noninterest income for the second quarter of 2025 is moderately increasing relative to the second quarter of 2024. The chart on the right side of this 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 slightly from a year ago due to lower noninterest income and 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, attributable largely to seasonal increases in compensation for the prior quarter, offset by higher technology and marketing and business development related expense in the current quarter. Reported expenses at $509 million, decreased $17 million.

As a reminder, the fourth quarter of 2023 included $90 million of FDIC special assessment costs, while 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 to manage technology costs, vendor contractual increases and employment costs.

Slide 11 highlights trends in our average loans and deposits over the past year. On the left side, you can see that average loans increased slightly in the current quarter. Customer sentiment and pipeline suggests we can expect growth to improve as more clarity materializes with respect to the political and economic environments, though 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. Average deposit balances for the second quarter increased slightly, notwithstanding a slight decline in the average noninterest-bearing balances. Cost of total deposits shown in the white boxes increased 5 basis points to 211 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 second quarter, was 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. The left side chart includes ending 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 million 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 shown along with the total cost of funding. As seen on this chart, the rate of increase in total funding costs at 2 basis points in the current quarter has continued to decline compared to the prior four quarters. Moving to Slide 13. Our investment portfolio exists primarily to be a ready store house 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 years. Investment portfolio continues to behave as expected. Maturities, principal amortization and prepayment related cash flows were $840 million in the second quarter. With this somewhat predictable portfolio of 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 contributed 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 3.7%. This duration helps to manage the inherent interest rate mismatch between loans and deposits, but the larger deposit portfolio assumed to have a longer duration in our loan portfolio, fixed rate term investments are required to balance 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 our more dynamic view of latent and emergent interest rate sensitivity given the current environment. In particular, latent 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, is estimated to be 8.3%.

When combined with the emergent sensitivity, which includes the incremental impact of future rate changes included in the implied forward curve at June 30, modeled net interest income in the second quarter of 2025 is 6.3% 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 of this implied forward outcome suggests a sensitive range between 4.6% and 7.7%.

Importantly, these sensitivities assume no change in the size or composition of our earning assets, but do consider how our changes in our deposit mix could influence the net interest income path. The observed slowing of the migration of noninterest-bearing deposits to higher cost deposits is reflected in a change in our assumed through-the-cycle beta from 49% shown in our first quarter sensitivity to 44% shown here.

This beta reflects $3.5 billion of assumed migration of noninterest-bearing deposits into higher cost deposits. Utilizing this modeled outcome and applying management expectations for balance sheet changes and deposit pricing, we believe that 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. Credit 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. The allowance for credit losses is 1.24% of total loans and leases, a 3 basis point decrease over the prior quarter. Notwithstanding continuous raw net charge-off performance, we observed continued deterioration of some of our credit metrics. Nonperforming assets increased $14 million or 4 basis points as a percentage of loans and other real estate owned, while classified and criticized loan balances increased by $298 million and $284 million, respectively.

We continue to expect that ultimate realized loan losses will be very manageable over the remainder of the year. As we know it 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 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.

Credit quality measures for the total CRE portfolio remained relatively strong, though criticized and classified levels increased during the quarter. Overall, we continue to 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 17. The CET1 ratio continued to grow in the second quarter to 10.6%. 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 AOCI improvement will continue through natural accretion of the securities portfolio regardless of rate path outcomes. Slide 18 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 second quarter of 2025 as compared to the second quarter of 2024.

[Shannon Drage, Director of Investor Relations at Zions Bancorporation, National Association]

This concludes our prepared remarks. [Operator Instructions] Alicia, please open the line for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Andrew [Phonetic] Gosalia with Morgan Stanley. Please proceed with your question.

[Manan Gosalia, Analyst at Morgan Stanley]

Hey guys. Good afternoon. It's Manan Gosalia. Hey, good afternoon So I wanted to check in on the noninterest-bearing deposit trends during the quarter. I know things slowed relative to last quarter. I was just wondering how the trends were intra-quarter. And then how you expect NIB trend if you get a couple of rate cuts between now and year-end? I know you have that assumption on $3.5 billion of NIB flowing into higher-cost products in the latent interest sensitivity analysis. So I was wondering how realistic that is or things can be a little bit better than that?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Thanks very much for the question. Yeah, listen, that is something 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 observed in the quarter gave us confidence as we revisit our models to see what some of the underlying assumptions were to sort of tighten up the amount of deposit migration that we had -- that was implied with the all-in deposit beta that we shared last quarter.

So I think what you're seeing in that guidance is we're saying that we don't anticipate to see as much of that DDA migration and as a result, to 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 doesn't suggest a great deal of increased pricing to retain those deposits from this point forward. So all those things contribute, of course, to 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 forward than perhaps we would have anticipated last quarter contributed to a little bit more asset sensitivity this time around. Of course, all these things are very beholden to deposit behaviors from here. But based upon what we're seeing, we were able to be a little bit more constructive with the guidance this quarter.

[Manan Gosalia, Analyst at Morgan Stanley]

Got it. And then as we think about loan guide for launch to be stable to slightly increasing, how 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 upcoming elections and then ramping up from there or maybe if you can just take us through how you're thinking about that -- those loan balances going forward?

[Harris H. Simmons, Chairman and Chief Executive Officer at Zions Bancorporation, National Association]

Yeah. Well, I think there is probably some uncertainty at the moment, but I'm not sure that, that factors is a big factor in companies -- the election per se. I think it's more just watching to see how the economy sort of unfolds here in the next couple of quarters. Obviously, there are some signs, the economy is slowing a little bit, hopefully not in a way that will be -- do a lot of damage. But -- so we'll see it. It appeals -- a lot of what we're suggesting is that we've seen some weakening in loan growth relative to what we've been probably a year ago.

We don't see anything that's likely to change that in the near term. We also see it's -- economies are still reasonably healthy here in the Western markets where we operate. But it's just our best guess. I think we expect that with some of the things we're doing with some marketing programs and small business lending, etc, that will be incrementally helpful. But it's just not a robust loan growth market right now.

[Manan Gosalia, Analyst at Morgan Stanley]

Great. Thank you.

[Operator]

Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.

[John Pancari, Analyst at Evercore ISI]

Good afternoon. I want to ask on the credit side. I know you mentioned the trends are generally within expectations and you were able to release a bit on the reserve, but I want to get a little more color on the increase in the classified loans, about a 30% increase the linked quarter and about 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.

[Scott J. McLean, President and Chief Operating Officer at Zions Bancorporation, National Association]

Sure, John. This is Scott. And the classified increase of about $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 6 to 10 credits that were kind of in the $10 million to $30 million range. The industries, they were all kind of idiosyncratic industries where there's a contractor, consumer products business, healthcare, transportation, really no straight lines you could draw between all of them.

And so that made up about 70% of the increase. And then 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 see -- we're seeing more of our multifamily transactions move into 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 and those are causing some great migration. But it's migration we've seen in every other cycle since the great depression.

And generally speaking, it is the level of equity that we have in multifamily, the lack of Phase 2 land and the strength of covenant packages that we have that are -- that ultimately cause multifamily to hold out. Generally speaking, you don't have a big migration in multifamily to nonperforming, just simply because borrowers are able to reduce their rental rates, provide renovate and provide concessions. And -- but generally, they have cash flow to cover interest and contribute to principal. So we're not overly concerned about that.

The other comment I'd make, and we've said this before, but it's true, is that we are coming off a very low base of criticized, classified and nonperforming loans. So the lines look there's a little more vertical than you want to book, but it's simply because of the low base we're coming off of. I will say that as it relates to CRE office, we are outstandings there are dropping. We were about $2 billion. They're down about $247 million.

And it's a good story. It's kind of a story that we hope continues to play out in the sense that, that decrease of $240 million -- almost $250 million represents $300 million in payments by borrowers, about $85 million in additional equity or rebalancing of loans. So almost $400 million of what you would like to see in a portfolio, $9 million of charge-offs, which we wouldn't want to see, but that's a very small number when you consider the magnitude of the portfolio.

And then there was some growth. So both with the office and the multifamily portfolios, we'll continue to report on exactly how the maturity wall is playing out each quarter and the good activity that's actually going on, which is largely attributable to the fact that our average and median loan size is low, and we have good guarantor support on most of these loans.

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Scott, I think also embedded in that question was the ACL and whether there's any learning CRE. We're also participating that question. I mean, the way that the accounting model works is, if it's working well, the idea that you get ahead looking to the future and see these things coming and have an expectation of losses. We, like many others, in just Moody's variables to kind of inform our macroeconomic view of the world when we talk about our reserving practices.

And for some time prior to today and currently, we've been anticipating a view of macroeconomic economy that was a little bit darker in the out-of-the-box settings that we are given through that to the 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 is to be expected. And if we didn't see it now that would tell us that we probably sell dark were none came. So I think right now, we'll continue to watch the data that comes through and there may be learnings in it. But everything we've seen so far is certainly within the balance of our reserves.

[John Pancari, Analyst at Evercore ISI]

Great. All right. I appreciate that. And then separately, just back to the NII dynamic. Can you just talk a little bit more about the fixed asset repricing opportunity? I know you mentioned you've got the liquidity coming out of the securities book and that you could use to fund loan growth and etc. So maybe could you just talk about the yield differential around what is maturing in the securities book and where you might be putting on new assets just to get a better feel of the fixed asset repricing on the dollar amount and then the rate differential?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah, I'm happy to take that I think you're right. You pointed exactly the right thing in terms of the rundown of our investment securities portfolio that's been very consistent. And as I noted in my remarks, it's the tune about $840 million this quarter. That is helpful to us where we've been able to build even some modest loan growth during the quarter to get that rebalanced remix. And even when we don't, sitting there with money market investments where we've seen some growth as well, that's still kind of high 5 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 latent sensitivity and seeing sort of the buildup on that basis alone, that if rates were not to have an overlay of the imply for what would happen with this going forward. And it's going to be a consistent theme with what we've been seeing here recently that the earning asset yields have been repricing more aggressively, more favorably than the funding costs. And based upon our latent guidance, we would certainly expect that to continue.

Now we have the overlay with the emergent based upon the dynamics I described before that would kind of counteract those effects. But I don't have front load back book statistics, I think you're calling for in the securities yield. But give you a sense for the loan book, an all-in basis, front book coming on at 7.82%. They're rolling off back book of 7.68%. We see a little bit more expansion coming on the CRE 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, John.

[John Pancari, Analyst at Evercore ISI]

That does, Ryan. Thank you.

[Operator]

Thank you. Our next question comes from the line of Ben Gerlinger with Citi. Please proceed with your question.

[Ben Gerlinger, Analyst at Smith Barney Citigroup]

Good afternoon. I hope to get the timezone changed but yeah we're so far into the day and everything [Indecipherable]. Anyway, so I guess the latent and emergence and they have implied of 6.3 And then when you think about just the outlook 12 months forward, looking at 2Q '25 versus 2Q '24, the was slightly to moderately increasing on NII 12 months from now.

Is it fair to this kind of think -- right, you guys have done a pretty in-depth mosaic of what could happen on both sides of the balance sheet. It would just imply NII goes up roughly 6% 12 months from now, which would really kind of just gets you to, call it, like a $630-ish million. Am I thinking about that correctly or am I thinking too simplistic about the whole thing?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

I don't think you're thinking about it wrong. We purposely leave balance of uncertainty in there because ultimately, we have a read on what we're seeing in the quarter, we feel good about it. But we're all be holding to the deposit movements to pricing and what happens for this going forward.

The sensitivity statistics we provide really are kind of aesthetic balance sheet view, allowing some migration for deposits. Harris gave you some insights to how we're thinking about loans, and we certainly are opening up to the notion that they could be slightly increasing there, but we also have stable within our guidance. So we're just trying to leave enough boundaries for the degrees of unknown to fit within the guidance. But I think -- I don't think you're thinking about it wrong.

[Ben Gerlinger, Analyst at Smith Barney Citigroup]

Got it. Okay. That's very helpful. And then switching to credit. I just want to touch base. I know there's a comment that most of -- majority of the roughly $300 million in classified was more C&I. And there was -- I think they said there's no common thread. I'm just kind of curious, is it operational, like the businesses are having issues on our profitability or is it something that's a little bit more in depth just kind of thinking like what are the pressure points that are impacting the C&I businesses other than just higher interest rates slowing than their buyers down?

[Scott J. McLean, President and Chief Operating Officer at Zions Bancorporation, National Association]

Yeah. I'd actually -- I'd like to give you some really crisp themes, but they just aren't. I mean when you talk about a major contractor, consumer products, healthcare, transportation, there's just -- I wouldn't even relate it to higher interest rates. Each one has kind of a story and they're all people we know well. So it's just things happen. And so I just wouldn't give you a common story, I don't think.

[Ben Gerlinger, Analyst at Smith Barney Citigroup]

Got you. And it's fair to assume it's throughout the footprint or is it any centralized geography?

[Scott J. McLean, President and Chief Operating Officer at Zions Bancorporation, National Association]

Yes.

[Ben Gerlinger, Analyst at Smith Barney Citigroup]

Got you. Okay, appreciate that.

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

I think it's also useful to there have been a lot of kind of resolutions during the quarter as they typically are at, but there are a lot of, I think, parts to all of this. But I think what you're seeing in the reserve is reflective of the idea that we don't see any significant risk building in there.

[Operator]

Thank you. Our next question comes from the line of Steven Alexopoulos with J.P. Morgan. Please proceed with your question.

[Steven Alexopoulos, Analyst at J.P. Morgan]

Hi everybody. I want to start maybe for you, Ryan. So if we could unpack this a little bit more. So just looking at the changes that you've made, I don't know 5 basis of the net interest income sensitivity. So you're taking down the assumption for deposit beta bid. And I'm wondering, is that because you overlay the current forward curves, so you have more cut in the curve, and that's why you're looking for a lower beta or is something else driving that? Because -- and it seems like that's what's influencing the improvement of the NII outlook.

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Thank you for the question. The beta commentary there really attaches to our latent sensitivity even before you can think about the forward curve overlay. And I think it's pretty much informed by what we observed during the course of the quarter and the trends of the building up until the quarter about the tapering of runoff activity and migration. And so I think on the base of that in observing pricing activity in our markets and what we believe it's taking to retain those deposits and where we have to pay up in place that really informed a little tighter all-in deposit beta through the cycle.

[Steven Alexopoulos, Analyst at J.P. Morgan]

Okay. So we can extrapolate from that, that the outlook for NII is based on the current forward curve, right?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Once you overlay the emergent, yes, the 6% figure you cited includes the implied forward as of 6/30, which contemplates a Fed fund rate at the middle of 2025, 4.50%.

[Harris H. Simmons, Chairman and Chief Executive Officer at Zions Bancorporation, National Association]

I think just fundamentally, too, if there's a single driver, it's probably a developing belief on our part that demand deposits -- noninterest-bearing demand deposits are going to be a little more stable than we previously thought. I think we tried 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 probably overshot that a little bit.

[Steven Alexopoulos, Analyst at J.P. Morgan]

Got it. Okay. And then for my follow-up. So if we look at what's happening on the technology side, I guess, there's two parts of this question. So one, the technology-related costs, you're 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 you guys have made this point for a while now in a modern core. But how should we -- how does this translate to shareholder benefits, right? I usually think of things they improve ROE or they improve growth. Do we anticipate a higher growth rate from you guys over time because of this modern core differential?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Well, first of all, in terms of what it does to cost, the core platform itself, we will see costs come down next year. We were ahead of the peak this year. They come off by about $10 million next year. But I wouldn't make much of that in a vacuum because they're -- it's like the poor will always be among us the backlog of projects that people want to get done around here. And so -- but certainly, that's helpful to free up that capacity. In terms of the benefit that comes from this, I mean, first of all, I think in my mind, a primary benefit is simply every bank has to have these core systems.

I mean these are the real chassis and foundation of everything else, all the front end that the consumer sees is, is build upon these core processing engines and systems, and they do a lot of heavy lifting in every bank, and they're incredibly complicated to replace -- I was thinking -- last weekend, I was telling to some of our employees, I remember a case study in business school many years ago when John Reed was running what was in Citigroup. And he talked about going through a systems conversion. He said it was like changing out the jet engine on a plane in flight.

And we've seen even this past weekend with the CrowdStrike 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., It takes a lot of time and people to do this. And for me, one of the benefits -- this is something ultimately every large bank has to deal with. Some will deal with it a piece at a time.

Some -- I mean we've tackled a lot over the last 10-plus years with this. But having it fundamentally in the rearview mirror is just a big -- is a big accomplishment and something that we will not have to worry about that I think a lot of other banks are still as the world becomes ever more real time as we see, I mean, one of the benefits we noted, it allows us -- everybody else is posting payments, and they kind of fake it in terms of memo posting and making it appear like things from real time.

This is actually posting right into the core in real time. It allows you to detect errors more quickly. It allows us -- we expect to detect fraud more quickly. One of the things we're absolutely seeing is employees on the front line are having a much easier time navigating. I remember talking about employee just visiting a branch some years ago. He come from a larger bank and complaining about toggling between applications and screens to get their work done. This eliminates a whole lot of that. It makes it much easier for employees just to serve customers.

It makes it, therefore, much easier for us to train employees. And so entry-level employees, whether they be in contact centers and branches with old systems, you've got a steep learning curve with having to learn a lot of -- I mean there are a lot of crib sheets sitting around on desks around this industry. We think that we've now got a solution that makes us much, much, much easier for our employees. It provides more information at their fingertips. So when somebody has a question, we can answer it without doing a lot of research. It brings that information right to the user's screen. I am hopeful that we'll find ways to deliver some of that functionality right out to our customers. So we'll see as we go on. I'm hoping that this will begin in the process of discovery where we find use cases that would be really become super.

Yeah, the last thing I'd say is, this is not a digitally native core. No large bank is on one. And complexity that you find in larger banks really can't be addressed by some of the new digital cores 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 every reason to because it's got a huge installed base. And all of those are benefits that I think will accrue to our shareholders over time.

[Steven Alexopoulos, Analyst at J.P. Morgan]

Okay. Thanks for my questions.

[Operator]

Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.

[Ken Usdin, Analyst at Jefferies & Company]

Thanks. Good afternoon. Just a follow-up on the cost side. So when you guys last quarter talked about that $12 million to $15 million of cost reduction to happen as the systems get moved further along, what part of the year does that get run rate? And is that fully implied in the 2Q '25 forward guidance?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Thanks, Ken. The delta of the $12 million is sort of a year-over-year comparison, full year '24 to full year '25. But yes, and to Harris' point, at the margin, that would imply some savings that suggest that all that would fall the bottom line would probably not be appropriate. So we've embedded into our forward guidance for the second quarter of '25. The intent to make other investments and continue building out our technology offerings outside of FutureCore.

[Ken Usdin, Analyst at Jefferies & Company]

Right. And then is that the full amount of like the reduction that happens over time? And there's a conversation we've had for a long time as the build-out happened. But like is that the majority of what happens or over time, is there an increment that also comes as just the legacy pieces are further retired? And getting the point about incremental investments, which make sense. So just kind of the underlying base.

Some of the earlier phases of this that went in a few years ago is as they become fully amortized, I mean, we're amortizing this over 10 years, capitalized cost. But these are core systems you would expect to have a longer -- much longer lives than that. And so that will help as you get out into time but.

[Scott J. McLean, President and Chief Operating Officer at Zions Bancorporation, National Association]

Yeah. The amortization of this, I mean, it comes down about 10% a year, which -- because it's basically a 10-year amortization. And the benefit of it -- the additional benefit financially is just that at a time when almost every hardware, software infrastructure vendors is passing along double-digit renewal increases for multiyear contracts or single-year contracts, this pressure of needing to replace core loan and pump systems is -- has become a nonevent for us. The pressure is no longer there. The whole attitude has 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.

[Ken Usdin, Analyst at Jefferies & Company]

Okay, got it. Thank you.

[Operator]

Thank you. Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please proceed with your question.

[Bernard Von Gizycki, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good evening. It's Bernard Von Gizycki. 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 customer initiatives? Just any expectations on broadening relationships and growing deposits?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Well, specifically, we referred to -- we really leaning into SBA lending, and I expect to see more of that. I mean we -- our volumes are up substantially over the last year, but we've had a ways to go. I mean I think that it's an area where we believe there's a lot of opportunity. But today, they're 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 we think are really important. I'm particularly focused on -- I think in the wake of what happened in the spring of last year, the imperative of really focusing on the granularity of your deposit base is an important thing for regional banks to be thinking about. And so that's a big part of kind of how we're thinking about where we go from here is a focus on what we can do better in consumer and small business, in particular, where those kinds of full relationships come to the bank.

[Scott J. McLean, President and Chief Operating Officer at Zions Bancorporation, National Association]

I would just add to that, that the -- we've talked before about the customer appreciation calling effort that Harris started couple of years ago. We're making -- our colleagues are making about 100,000 calls a year to just generally small business clients of the bank, some individuals, but largely small businesses, just simply to thank them for their relationship. And it is really fun and exciting to hear about the granular activities that come from that. Just simple deposits moving over and small loans and personal relationships moving over.

But when you think about that happening 100,000 times a year, that's a big number. We're also on the middle market and commercial banking side pushing hard and calling on the top prospects in our markets, which sounds kind of like when you always do that? Of course, you would everybody would say they would. But most middle market commercial bankers are kind of going and making a pure prospect call is not the highest thing on their list because it's an awkward experience for many people. So I think that focus like the customer appreciation calls will start to reignite loan growth for us over time.

[Bernard Von Gizycki, Analyst at Deutsche Bank Aktiengesellschaft]

Okay, great. That's great color. And then just separately, you highlighted the optimism on expanding the capital market capabilities and you expect it to grow meaningfully over the next four quarters. I know it was sequentially weaker by $3 million in 2Q, 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?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah. I just -- I mean, I think the fundamentally thing I'd say is it's going to be lumpy 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 we -- I think what we're seeing internally, we're really pleased with the engagement that they have with our commercial bankers. And they have kind of a pretty full dance card in terms of appointments and it's something it feels internally very much like it's getting the kind of traction that we would have hoped.

I expect that the second half is going to be a notable improvement over the first half just based upon what kind of pipeline looks like at least early here in the third quarter. But it's not going to be a straight line kind of business. And that's about all I probably mentioned to say about it. It's -- but we're really excited about the people we have doing it.

[Bernard Von Gizycki, Analyst at Deutsche Bank Aktiengesellschaft]

Thanks for taking my questions.

[Operator]

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

[Brandon King, Analyst at Truist Securities]

Hey, just had one question from me and the follow-up on kind of the C&I conversation. So hearing increasing concern about smaller businesses within C&I, so could you comment on the health of your small business customers how they navigate this environment and where they stand today?

[Harris H. Simmons, Chairman and Chief Executive Officer at Zions Bancorporation, National Association]

Yeah. I mean -- listen, I think, first of all, you see it in just the overall loss numbers. I've always believe that small business done right. Can be -- it doesn't have to have big charge-off numbers attached to it. Over time, fundamentally, if I exclude the card business and -- the commercial card business, our loss history with small business loans is very close to what it looks like in terms of charge-offs for middle market or larger loans, commercial loans.

And so we are seeing continued good credit quality in that portfolio. Nothing that's giving us any concern. Now most small businesses, by the way, don't borrow. Only about 30% of our small business customers actually are borrowing customers. So there are a lot of small businesses that operate very conservatively. They operate with the cash they have on hand. But I think we're not seeing robust growth, but we're seeing pretty good help.

[Brandon King, Analyst at Truist Securities]

Thanks for taking my questions.

[Operator]

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

[Chris McGratty, Analyst at Keefe, Bruyette & Woods]

Great. The 28% money market 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?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah. Thanks for that. I think the way that we see the trend continuing, so to speak, and allowing for the investment securities portfolio to continue to run off, certainly see the potential for another $1 billion or $2 billion of runoff of those investment securities before we would think about sort of 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 that's -- 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.

[Chris McGratty, Analyst at Keefe, Bruyette & Woods]

Okay, great. And maybe, Harris, any updated thoughts on capital? You're building capital pretty quickly. Any thoughts on capital?

[Harris H. Simmons, Chairman and Chief Executive Officer at Zions Bancorporation, National Association]

Yeah. I would expect that's going to continue here in the near term. I mean there's still unanswered questions as to how Basel III end game is going to be revised, and we're close enough to crossing that threshold that something we'd be interested in. I think we all expect that whatever happens in simplifying it that AOCI is going to come back into calculation of CET1.

And so we're making a lot of progress, as I noted in the quote, kind of a 20% increase in tangible book value, both nominally and on a per share basis is really gratifying. I'd like to kind of see that continue for a bit before we -- and get the AOCI number down to something that's totally manageable before we probably start to think about getting very aggressive about share buybacks.

[Chris McGratty, Analyst at Keefe, Bruyette & Woods]

Great. Thank you very much.

[Operator]

Thank you. Our next question comes from the line of Christopher Spahr with Wells Fargo. Please proceed with your question.

[Christopher Spahr, Analyst at Wells Fargo & Company]

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 can understand like your economic views changed. And -- so I mean, if you didn't have an increase in criticized loans, would you have seen a meaningful decline in reserves to loans? And then if so, where do you think that would go?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah. So it's a fair question. It's hard to get too speculative as to exactly what would occur there. I mean we have a very fulsome process, as I would have alluded to, sort of adjusting macroeconomic scenarios, getting back with our senior executives and our credit professionals and saying, how does that feel? Is that kind of near the world that we see moving forward? We look at our credit grade migration within the portfolio and try to discern based upon prior practice or prior reserving and whether those were things that would have been contemplated in our economic scenarios.

And we have qualitative there set aside for various applications that are unique and maybe separate and not covered through those economic foundation. So I guess I'd round back to based upon earlier reserving practices, what we're seeing is certainly within the balance of what we would have expected in terms of deterioration. Whether the counterfactual of having fewer criticized or classified will it change the outcome? It's difficult to say without having run through our entirety of our process. But at the margin, it would have been a factor that we would have thought about in terms of credit migration and other types of metrics that would inform the process.

[Christopher Spahr, Analyst at Wells Fargo & Company]

All right. And then my follow-up is just on the overall capital stack and just if there's any other kind of ins and outs like on the long-term debt side?

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah. I think that we're watchful as everybody else is as to what comes for the long-term debt proposal to see what that means. We have been retaining earnings here for a time, as Harris sort of alluded to. We see the path for AOCI to improve. Moving forward, we include some projections of that in the appendix. We can able to put some hedges on in recent periods that really takes away some of more adverse outcomes associated with rising rates, if those were to occur again. So I think big picture, we -- that's kind of how we've been trending on that front.

[Harris H. Simmons, Chairman and Chief Executive Officer at Zions Bancorporation, National Association]

I think it's kind of just -- we're really anxious to see what happens for the long-term debt proposal. I expect it will get sort of tailored down somewhat. And by all rights, that should happen. It makes sense that it should happen. But we'll -- a little bit in wait and see mode about that.

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

And given the fact that we have a more fulsome build on our equity position that might afford us opportunities to think about our positioning of our capital over time. Depending on the outcome, it's long-term debt [Indecipherable].

[Operator]

Thank you. Our next question comes from the line of Samuel Varga with UBS. Please proceed with your question.

[Samuel Varga, Analyst at UBS Group]

Hey, good afternoon. Just a quick question around loan growth. I wanted to get some color on the single-family residential growth that you've seen over the last several quarters now. Is this a part of your sort of interest rate risk management strategy? Should we expect this to keep growing at a similar pace as it has recently? And could you give any color on the roll on yields that you're getting currently in this book?

[Scott J. McLean, President and Chief Operating Officer at Zions Bancorporation, National Association]

Yes. In terms of just volumes, most of the volume we're seeing is a fund up of over the last 4, 5, 6 quarters, has been fundings under what we call onetime closed loans. There are -- it's a construction loan that leads into a permanent mortgage. It's a great product, very competitive. And so that's what most of the fundings are coming from. The origination of held for investment, 1-to-4 family mortgages is down significantly as it is in the industry.

And so I don't -- I think over the next 12 to 18 months, you'll see growth in our 1-to-4 family slow. And unless we see rates come down and a renewal of the purchased mortgage business. So that -- which could happen. And then the other thing that's going on is we're shifting and originating more held-for-sale mortgages, smaller mortgages 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 think it's sort of kind of a mid-7s type number.

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah, mid- to upper 7s.

[Scott J. McLean, President and Chief Operating Officer at Zions Bancorporation, National Association]

Yeah, mid to upper 7s. And it's just suffice it to say that the yields have gone up quite a bit as rates have gone up.

[Samuel Varga, Analyst at UBS Group]

Got it. Thanks for all the color. I appreciate it.

[Operator]

Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Thanks. Hi everyone. I think most of my questions have been handled. But Scott, can you just talk about how things are in Houston [Technical Issues], yeah, anything to call on in terms of the outlook on credit?

[Scott J. McLean, President and Chief Operating Officer at Zions Bancorporation, National Association]

Thank you. Nice to ask that question. Houston is 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. It came in as a category 1. It just got barely got to that level of distinction just before it landed. And up until Sunday night about 10:00, it was going to go in about 60, 70 miles west of Houston, but similar to some other big storms that have hit Houston, it veered east right at the end, and it was a dead hit. It was a straight on hit at Houston.

Winds were 90 to 100 miles an hour. They were 90 to 100 miles an hour, 100 miles [Indecipherable]. The great thing about the storm was that it was fast moving. It was out of the region within 24 hours. 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 off-line at one point. And so it was just a huge challenge just because of the tree damage that created a lot of the power issues.

So -- but the city has come through it and there's a lot of pain that goes with it. But Houston and Texas folks are pretty resilient. They know how to kind of pick everybody up, get them through things like this, and that's what's happening. You're nice to ask. So I don't -- in terms of any loss potential, in our loan book, we saw with Harvey, you recall we set aside a $30 million, $40 million reserve -- loan loss reserve for Harvey, which was a hurricane that lasted 5 days, etc, etc, and we had virtually no losses.

[Ryan Richards, Chief Financial Officer at Zions Bancorporation, National Association]

So the 6 quarters, I think, as I recall 6 quarters after Harvey came through Texas, we had net recoveries of about 5 basis points.

[Scott J. McLean, President and Chief Operating Officer at Zions Bancorporation, National Association]

Yes, 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 us setting aside any reserve for losses related to hurricane

[Operator]

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

[Harris H. Simmons, Chairman and Chief Executive Officer at Zions Bancorporation, National Association]

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

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Shannon Drage, Director of Investor Relations
• Harris H. Simmons, Chairman and Chief Executive Officer
• Ryan Richards, Chief Financial Officer
• Scott J. McLean, President and Chief Operating Officer

Analysts

• Manan Gosalia, Morgan Stanley
• John Pancari, Evercore ISI
• Ben Gerlinger, Smith Barney Citigroup
• Steven Alexopoulos, J.P. Morgan
• Ken Usdin, Jefferies & Company
• Bernard Von Gizycki, Deutsche Bank Aktiengesellschaft
• Brandon King, Truist Securities
• Chris McGratty, Keefe, Bruyette & Woods
• Christopher Spahr, Wells Fargo & Company
• Samuel Varga, UBS Group AG
• Jon Arfstrom, RBC Capital Markets