Zions Bancorporation, National Association Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 21, 2024

There are 16 speakers on the call.

Operator

Greetings, and welcome to the Zions Bancorporation Q3 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Shannon Drage.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Matt, and good evening. We welcome you to this conference call to discuss our 2024 Q3 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.

Speaker 1

A copy of the earnings release as well as the presentation are available at zyonsbankcorporation.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 MacLean, President and Chief Operating Officer Derek Steward, Chief Credit Officer and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question and answer session.

Speaker 1

This call is scheduled for 1 hour. I will now turn the time over to Harris Simmons.

Speaker 2

Thanks very much, Shannon. We're generally quite pleased with the results for the quarter, which reflect improvement in our financial performance. We continued to benefit from the strength of our credit risk management, our valuable deposit franchise and expense discipline, while investing in and growing the business. We expect performance will continue to improve as we carefully manage funding costs despite ongoing uncertainty around interest rates in the economy, and in the face of what we expect to be moderate headwinds from the refinancing of real estate assets. We concluded the quarter with the announcement that we reached an agreement with First Bank to acquire 4 of their branches in the Coachella Valley of California with approximately $730,000,000 deposits and $420,000,000 in loans.

Speaker 2

This deal is still subject to regulatory approval, will strengthen our competitive position in that market at about 15,000 new customers and provide us with a team of accomplished bankers with strong ties to their community. Looking further at specific results for the quarter, beginning on Slide 3 are some key metrics. Net earnings for the quarter were $204,000,000 improving by $14,000,000 due to higher revenues and lower expenses. Customer deposits increased 1.5 percentage points point to point for the quarter and reflects stabilization in non interest bearing demand deposits which increased 1% point to point. Net interest margin continued to expand up 5 basis points in the quarter as earning asset yields increased while the cost of funding remains flat.

Speaker 2

Our net interest margin improved 10 basis points against the year ago quarter. Timing and magnitude of future rate changes along with both pricing and the behavior of deposits will impact net interest income in a falling rate environment as Ryan will speak to further in the presentation. Loan growth was modest and under 1% for the quarter. Anecdotally, we believe customer optimism improved in light of the recent reduction in benchmark interest rates and the expectation the downward rate movements could continue in the near term. Demand for our SBA loan product continues to grow in the communities we serve.

Speaker 2

Application counts and strong pipelines for this product are also aided by the launch of new digital application technology, which provides a more intuitive user experience, fewer incomplete applications and simplified document upload capabilities. We're pleased with the continued low level of losses experienced in the loan portfolio. Net charge offs were just 2 basis points annualized as a percentage of average loans for the quarter. Classified loan balances increased $829,000,000 The downgrades were largely in the multifamily portfolio due to weaker performance particularly for 2021 2022 construction loan vintages that have been more acutely impacted by higher interest rates and higher than expected rent concessions during the lease up period. The increase in classified loans is also a function of a change in approach to grading which places more emphasis on current cash flow which is the primary source of repayment and less emphasis on the adequacy collateral values and strength of guarantors and sponsors.

Speaker 2

We continue to believe that realized losses over the next few quarters will be quite manageable due to strong underwriting practices, high borrower equity in the deals and strong sponsor support. Our common equity Tier 1 ratio was 10.7% compared to 10.6% in the 2nd quarter and 10.2% a

Speaker 3

year

Speaker 2

ago, while the tangible common equity ratio also improved by 50 basis points to 5.7%. Moving to Slide 4, diluted earnings per share of $1.37 was up $0.09 or 7% from the prior quarter and 21% from the year ago period.

Speaker 4

It was

Speaker 2

a very clean quarter and there were no notable items impacting earnings

Speaker 4

per share during the quarter.

Speaker 2

On Slide 5, our 2nd quarter adjusted pre provision net revenue was $299,000,000 up from $278,000,000 in the 2nd quarter. The linked quarter increase was attributable to improvement in several important underlying measures, including growth in net interest income, strong customer related fee income, particularly in our Capital Markets division, which had a record quarter and decreases in adjusted non interest expense across multiple categories. With that high level overview, I'm going to ask Ryan Richards, our Chief Financial Officer to provide additional details related to our financial performance. Ryan?

Speaker 4

Harris, and good evening, everyone. I will begin with a discussion of the components of pre provision net revenue. Slide 6 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 is reflected on the bars and net interest margin is shown on the white boxes.

Speaker 4

Both measures reflect improvement for 3 consecutive quarters as the repricing of earning assets outpaced the increase in funding costs. We also continue to benefit from favorable changes in asset mix on our balance sheet. Additional details on changes in the net interest margin are included on slide 7. On the left hand side of this page, we provide a linked quarter waterfall chart outlining the changes and key components of the net interest margin incorporating changes in both rate and volume. Net interest margin expanded by 5 basis points sequentially, driven by higher earning asset yields and improved mix.

Speaker 4

This is reflected in the 2 basis point and 3 basis point margin improvements in the waterfall attributable to money market and securities and loans respectively. Funding component effects were offsetting as the benefits associated with the reduced short term borrowing costs were offset by a slight increase in the average cost of interest bearing deposits and a lesser contribution to profitability from non interest bearing deposits. The right hand chart on this slide shows the net interest margin in comparison to the prior year quarter. Higher rates were reflected in money market, securities and loan yields, which contributed an additional 34 basis points to net interest margin. These positive contributions were somewhat offset by increased deposit costs,

Speaker 3

higher

Speaker 4

borrowings and declines in the value of our non interest bearing deposits to the balance sheet. Overall, the net interest margin increased 10 basis points versus the prior year quarter. Moving to non interest income and revenue on slide 8, customer related non interest income was $161,000,000 compared to $154,000,000 in the prior quarter, largely driven by a $7,000,000 increase in capital market fees that Harris alluded to previously. We remain optimistic that our expanding capital market focus will allow us to grow fee income meaningfully moving forward. Our product offering enables us to address a full complement of risk management and strategic needs of our customers.

Speaker 4

Our outlook for customer related non interest income for the Q3 of 2025 is moderately increasing relative to the Q3 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 increased from both prior quarter year ago periods due to the factors previously noted for net interest income and customer related fee income. Adjusted non interest expense shown in the lighter blue bars on slide 9 decreased $7,000,000 to $499,000,000 attributable largely to decreases in legal and professional services, FDIC premiums and salaries and employee benefits excluding severance. Reported expenses at $502,000,000 also decreased by $7,000,000 compared to the prior quarter.

Speaker 4

Our outlook for adjusted non interest expense for the Q3 of 2025 is slightly increasing relative to the Q3 of 2024. Risks and opportunities associated with this outlook include our ability to manage technology costs, vendor contractual increases and employment costs. Slide 10 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 quarter. As Harris noted previously, we believe that customer optimism has improved in response to the recent rate reduction and the expectation that rates will continue to move downward in the near term.

Speaker 4

Our guidance is that loans will be stable to slightly increasing in the Q3 of 2025 relative to the Q3 of 2024. We expect this growth to be led by our commercial portfolio and offset somewhat as commercial real estate and residential mortgage loans are expected to refinance as rates decline. Now turning to deposits on the right side of this page. Average deposit balances for the 3rd quarter increased modestly, while average non interest bearing deposit balances declined slightly. The cost of total deposits shown in the white boxes increased 3 basis points to 2.14%.

Speaker 4

We were encouraged by the trending in interest bearing deposit costs during the quarter, with the blended spot rate declining to 2.94% at September month end, compared to 3.19% for the quarter and 3.2% for the prior quarter. As a reminder, about 1 third of our deposits were priced at or above benchmark rates prior to the rate cut. We are seeing a near 100 percent beta on those higher cost deposits so far. We anticipate this trend will continue over the next few rate cuts. Slide 11 includes a more comprehensive view of funding sources and total funding cost trends.

Speaker 4

The left side chart includes ending balance trends. Compared to the prior quarter, customer deposits increased slightly. Period end non interest bearing deposits grew 1% and were 33% of total deposits. 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 and previously noted, the total funding costs remained flat sequentially.

Speaker 4

Moving to slide 12, our investment portfolio exists primarily to be a storehouse of funds to absorb customer driven balance sheet changes. On this slide, we show our securities of money market investment portfolios over the last 5 quarters. Maturities, principal amortization and prepayment related cash flows from our securities portfolio were $752,000,000 in the 3rd quarter. The pay down of lower yielding securities continues to contribute to the favorable remix of our earning assets, as well as a means to manage down our wholesale funding costs. Duration of our investment portfolio, which is a measure of price sensitivity to changes in interest rates, is estimated at 3.6%.

Speaker 4

Transitioning to slide 13, we believe that net interest income in the Q3 of 2025 will be slightly to moderately increasing relative to the Q3 of 2024. Risks and opportunities associated with this outlook include realized loan growth, competition for deposits and depositor behavior, and the path of interest rates across the yield curve. While we've provided standard parallel interest rate shock sensitivity measures on Slide 28 in the appendix of this presentation, we present here our view of interest rate sensitivity assuming interest rates follow the path implied on September 30. Model net interest income in the Q3 of 2025 is expected to be 1.4% higher when compared to the Q3 of 2024. This includes the impact of both latent and emergent sensitivity that we have broken out in prior quarters.

Speaker 4

As expectations on the rate path continue to evolve, we also provide 100 basis point shocks to the rates implied by the forward path, which suggests a sensitivity range between negative 0.8% and positive 3.1%. As a reminder, this is a model view of rate sensitivity based on relatively static assumptions. It does not include management's view of balance sheet changes, pricing strategies and other strategic factors included in our net interest income guidance. Moving to credit quality on slide 14, realized losses in the portfolio continue to be low, with annualized net charge offs of just 2 basis points of loans in the quarter and 6 basis points over the last 12 months. While we are pleased with this outcome, we don't expect to continue to operate at this abnormally low level of charge offs.

Speaker 4

Harris alluded to some of the credit metrics earlier on this call. We experienced further deterioration of credit quality during the quarter. Non performing assets increased $103,000,000 to $306,000,000 and now represent 62 basis points of loans in other real estate owned. Increase was driven by a small number of C and I and commercial real estate credits. Classified and criticized loan balances increased by $829,000,000 $426,000,000 respectively due to the reasons Harris noted in his opening remarks.

Speaker 4

A declining rate environment will ultimately benefit risk rates on CRE lending, but grade improvement will be gradual as we require seasoning of credits in the portfolio before we consider upgrades. The allowance for credit losses increased one basis point over the prior quarter to 1.25 percent of total loans and leases. As we know it is a topic of interest, we have included information regarding the commercial real estate portfolio with additional detail included in the appendix of this presentation. Slide 15 provides an overview of the $13,500,000,000 CRE portfolio, which represents 23% of total loan balances. The portfolio is granular, we have managed this growth carefully over a decade.

Speaker 4

Slide 16 provides a detailed view of the problem loans in our CRE portfolio. The chart on the right hand side provides a breakout of which sub portfolios drove increases and criticized the classified assets during the quarter. Of the 829,000,000 increase in classified loans, 442,000,000 was driven by multifamily apartment credits. The chart on the bottom left hand side of this slide reflects the LTV distribution of classified CRE loans, with the preponderance of loans showing estimated LTVs of 70% or less. Overall, we expect the CRE portfolio to perform reasonably well with limited losses based on the current economic outlook, the types of problems being experienced by the borrowers, relatively low loan to value ratios and continued sponsor support.

Speaker 4

Our loss absorbing capital is shown on slide 17. The CET1 ratio continued to grow in the Q3 to 10.7%. 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 as individual securities pay down and mature. Slide 18 summarizes the financial outlook provided over the course of this presentation.

Speaker 4

As a reminder, this outlook represents our best estimate for the financial performance for the Q3 of 2025 as compared to the Q3 of 2024. With this outlook, we expect to see positive operating leverage and improved efficiency as revenue growth outpaces funding and expense pressures.

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.

Operator

Our first question here is from Manin Chitsevit from Morgan Stanley. Please go ahead.

Speaker 5

Hey, good afternoon.

Speaker 4

Hi.

Speaker 5

I wanted to touch on deposit costs. So the spot rate you gave was really helpful. It sounds like you've already seen a deposit beta of about 50% or so from the 1st Fed rate cut. Could you take us through how you expect that to progress? What have the early discussions been with customers of different deposit types?

Speaker 4

You bet. Listen, I think we are encouraged. I think we were anticipating, as was shared in my prepared remarks, that these one third of our higher cost deposits that we're approaching sort of wholesale rates, given that they had a very close to 100% beta coming up that they would behave in kind on the way down, and we are seeing that, which is encouraging. And I would sort of point you back, it was probably represented in the slide and I didn't give a voice to it in my prepared remarks. But as we sort of think about our interest rate sensitivity that would be implied by the forward curve, we did call out a sort of an all in beta there on the down cycle that would point to a 36% beta.

Speaker 4

So, we will it is a heightened focus for us. It's something that we've been preparing for operationally to make sure that we could do effectively and so far so good. Just to reiterate that the curve that we cite there in that slide in terms of the forward curve was as of September 30. Clearly, there's been some changes since then, but we have not ruled out as part of our process, an assumption of allowing for additional migration of non interest bearing deposits to interest bearing deposits over time.

Speaker 5

And just to be clear that deposit beta of 36% is for total deposits, not just interest bearing deposits, correct?

Speaker 4

Correct, correct. Yes. Coming up, interest bearing showed more closer to 60%, beta and all in was 40%, and coming down, using that view of the world from the rate curve, we were seeing a 36% in our models down beta, all in.

Speaker 5

Got it. Okay, great. And just as I think about what impact that should have on NIM, it feels like you've troughed on NIM a couple of quarters ago. How should we expect that to progress from here as rates come down?

Speaker 4

Yes, thank you for that. And it hasn't been our practice to call out NIM specifically given all the variables in and around NIM and loan growth and what that amounts to from an NII perspective. But suffice to say, we have forward guidance that allows for an increase in NII that we've had been fortunate to see NIM expand here for 3 quarters in a row and we see that continuing into next year. So that's all I think premised within our guidance.

Speaker 5

Great. Thank you.

Speaker 4

You bet.

Operator

Our next question is from John Pancari from Evercore ISI. Please go ahead.

Speaker 6

Good afternoon. Hi, John.

Speaker 2

I just

Speaker 6

want to get a little more color on the credit side on the increase in classifieds and NPAs. I know you mentioned that the problem loan increase, the classified loan increase was partly related to a change in internal risk rating. How much of that increase was attributed to the risk rating change? And if part of it was a risk rating change, why did that not necessitate a loan loss reserve increase that corresponds with it? Thanks.

Speaker 7

Thanks, John. This is Derek. It's hard to quantify exactly what the percentage would be because of the change in the grading approach, I'd say. What we've done is become more conservative in the way we rely on guarantor support and sponsor support as we see especially in the multifamily as we see things taking longer for lease up and concessions, we're placing less reliance there. As far as how that doesn't impact the allowance With CECL and the changes to CECL, we built reserves over the last couple of years really, as we saw a downturn in potential downturn in the economy.

Speaker 7

The risk rating changes today with CECL actually impact the allowance much less than they did in years past. And that's why you're not seeing the corresponding increase.

Speaker 6

Okay. All right. Thanks for that. And then also on the credit front, the just curious how the decline in rates, how that impacted this? I would assume the turn the inflection in rates here would inherently be a positive for borrowers to meet their debt service coverage hurdles and accordingly also help you with your loan modifications.

Speaker 6

So curious how that may have influenced the trends we're seeing here in terms of your classified and your non accruals and how that was impacted? Then lastly, just if you can walk through your the reserve allocation right now for if you break out by multifamily versus the rest of the CRE book? Thanks.

Speaker 7

First off, I'll just touch on the reserve allocation. For multifamily, the allowance coverage is 2.4% versus the overall CRE portfolio at 2.2%. As far as the rate impact, short term there's the situation with short term rates, which we plan primarily on short term rates. They're much higher than longer term rates. And so as we've seen, say the 10 year reduce over the last year, it's encouraging borrowers to begin to refinance.

Speaker 7

It does make it easier to work through situations. But we still are in the situation with much higher short term rates. That impacts the coverage that we carry that we have on our books. But I do think that with some decreasing rates combined with stabilization in the 10 year, we're going to see it's easier to work through some of the situations and we'll see some refinance activity in the future.

Speaker 2

Hey, John, I'd just add, this is Harris. I think across the industry certainly here, but I think it's not isolated with us. Since the financial crisis underwriting for multifamily, underwriting CRE generally, but certainly multifamily is fundamentally different than it was if you go back 15 or more years ago. And specifically with respect to the amount of equity we've seen in deals which has routinely been 40% or so. And it's one of the reasons to that there's kind of a disconnect probably between classifying a deal and creating a reserve for it because a lot of respects the reserves were created actually by the borrower by putting additional equity in.

Speaker 2

And so you can have a deal where you expect where there's a well defined weakness there where lease up is slower. That may be offset even by the fact that cap rates are improving. But the fact that they're not meeting their original plan, we're just taking that more seriously and classifying it, watching it more carefully, but not necessarily having to create additional reserves because of the strength of the equity in the deal. So anyway I hope that's helpful but it's kind of a window into how what I think is going on here and perhaps elsewhere.

Speaker 6

Yes, that is helpful. Appreciate it, Harris.

Speaker 4

And John, a useful reference point for your first question. We did include a view on Slide 25 of the materials that sort of shows the build of the allowance over time, returning to Derek's comments and how the relationship of that to non accruals and classifieds, with the message being that sometimes they go in opposite directions, right, because the accounting model requires us to appear in the future at reasonable, affordable forecasts and that's probably the more dominant factor here in how we set our reserves. In fact, if these if the non accruals that classifieds didn't show up, then that probably means we got it wrong in prior years in terms of what our expectations around the economy and what that would mean for credits. So this is probably just more reinforcing the fact that we saw dark clouds forming and this is just sort of evidence of that down the road.

Speaker 6

Got it. All right. Thanks, Ryan.

Operator

Our next question is from Ben Guranger from Citi. Please go ahead.

Speaker 8

Hi. Good afternoon, Gus.

Speaker 9

Hi. So in your loan guidance, I get that refinancing of CRE is a little bit of a headwind in the future. And it makes sense. It's for everybody. But when you guys think about your the credits you have outstanding,

Speaker 5

do you think that

Speaker 9

there's you need another 50, 100, 150 basis points lower? I guess that there's math, but there's also behavioral component to when people actually do try to refinance off. And can you kind of just think about, is there kind of a line in the sand that people are looking for? And then have you earmarked kind of dollar amount that you would think potentially at risk over the next 12 to 18 months?

Speaker 7

Yes. I don't know if there's a specific rate decrease that would drive activity. I think it's more dependent upon the borrower and what they're trying to accomplish and what their goals are. Certainly, with rate reductions, it will drive refinance activity. I think it just depends on the borrower and the situation and what they're trying to accomplish.

Speaker 7

If they're a long term hold, do they want to sell the property? There's a lot of different variables that go into it.

Speaker 3

This is Scott. I would just add to that that the other element at play there is if they're concerned about their overall portfolio, their holdings, they're going to be more apt to go to longer term just to eliminate recourse. So, because we generally have recourse on most of our loans, as we've said, on large portion of them. And when they go long term, though generally there's no recourse associated with it.

Speaker 7

Yes. And one more thing just to add, this is Derek again. Because of the curve and because of our short term rates are so much higher than the long term rates, borrowers are incented at the right opportunity to actually go and refinance. And in many cases, especially on the multifamily assets, once they're leased up, they're able to accomplish it and actually even receive more loan proceeds than what we have on the books today. So, it's something I think that we'll see as the borrowers have the right opportunities in the future.

Speaker 9

Got you. That's helpful. And then the guidance, you said slightly increasing on the non interest expense. And you kind of like technology costs and investments. Are these one time or kind of concurrent, like, just given your size, I'm talking more so to kind of the plus 100 or just for overall growth.

Speaker 9

Is it kind of looking forward, kind of catching up? And then is it one time in nature? I guess not one quarter, but are these investment spend is going to end in the immediate future? Or are they more likely to be consistent going forward?

Speaker 4

Yes. No, thanks for that. I'm happy to get started there and invite my colleagues to jump in as they see fit. Listen, we just first emphasize that we're going to be continually focused on expenses. That's not going to change.

Speaker 4

Continuous improvement, you'll hear that from us time and again. That doesn't mean we stop investing. And I think that's been borne out here in recent periods that while the mix might change and where we're deploying that those investments, there's plenty of things that I think that will be important to us moving forward. So, the allocation could change slightly, but I wouldn't expect the overall spend to change greatly.

Speaker 3

This is Scott and I totally agree that the technology spend is just not something that is going to go down materially in almost any large financial institution, I don't think. And as Ryan said, the mix will change. We just don't have the pressure on us anymore to replace our core. Every other bank that you own or will ever own has that pressure on them to do something and it's costly. So I think that's a big strategic difference.

Speaker 3

The other thing I would say is that we it'd be helpful if we had 1 or 2 really big expense items that we could point to because it make your jobs easier. The great thing about the way we have gone about reducing costs in the past, particularly from 2015 to 2021, 2022 time period is that we just have a large basket of items that amount to greater adoption of common practices, automation and certainly this future core investment that we've made, that spend is coming down even though we may reallocate part of it. So it's just a big bucket of small items. And so if we went through them with you, you'd kind of yawn, but collectively, if we can keep expenses to this outlook, that will be, we think, a real accomplishment.

Speaker 9

That's right. Appreciate it. Thanks.

Operator

Our next question is from Bernard Von Chizuki from Deutsche Bank. Please go ahead.

Speaker 10

Hey, guys. Good afternoon. I had a follow-up on the First Bankers branch acquisition. How do you think about further interest in asset acquisitions like maybe another branch pickup, a bolt on deal or a whole bank merger?

Speaker 2

Well, I think we'll think about it opportunistically. It's not really something that we're highly focused on as a means of growth. We think that with the right economics, right fit, it's something that we probably have a little more latitude than we've had before because of kind of being through the score conversion that we've been working on for a long time. But it's not kind of front burner in our thinking at all.

Speaker 10

Understood. And then maybe just on Capital Markets, obviously that's been emphasis for you. And obviously there's a nice pickup in the quarter from the increase in swaps, fees, loan syndications and the expanded real estate capital markets. Any color you can provide during the quarter thus far and just expectations for 4Q and going into like 2025?

Speaker 4

Thanks for the question. And yes, listen, I'm really pleased with that outcome for this quarter, record quarter, as Harris mentioned. All the categories you mentioned, FX fees were also in the mix there. This is another one of those areas where it's evidence that we've been investing along the way, not just been solely focused on expenses and that's bearing fruit. We've

Speaker 6

had

Speaker 4

a really nice growth rate with this business, now going back 3 to 4 years at 10% compounded annual growth rate. We haven't made a practice to kind of give 1 quarter forward type guidance on that. Suffice to say that that group continues to have very significant growth ambitions and to continue to build on the franchise they've already built with enhancing capabilities. So we're looking for good things to come from that capital markets practice moving forward.

Speaker 3

I would just add that there's nothing accidental about this. It's totally intentional. We've invested significantly in this as a growth business, which we've talked about in previous quarters, previous years. It's just we hit some kind of flat years there for some of the products. But the infrastructure, the risk infrastructure, the technology infrastructure, the subject matter expertise, it's fundamentally all in place to support higher levels of revenue.

Speaker 2

I just add, I mean that said it's also the nature of this business is that it tends to be probably a little more variable. I mean I expect it to grow really nicely, but it's you know with that growth, you'll see variability quarter to quarter probably greater than you see in some other lines of business.

Operator

Our next question is from Matthew Clark from Piper Sandler. Please go ahead.

Speaker 11

Hey, good afternoon. Thanks for the questions. First one just on the criticized being up a lot less than classified that would imply that special mention was down I think almost $400,000,000 Can you just confirm that's the case and then what drove the upgrades in special mention?

Speaker 7

Well, most of the criticized or the special mention actually moved into the classified. We had already we had a lot of them in special mention, so they just moved into classified, moved a notch down.

Speaker 11

Got it. Okay. And then on the borrowings, I think you reduced those by about a third. Any updated thoughts on your outlook on borrowings in general and appetite to reduce those further or vice versa?

Speaker 4

I think we sort of look at borrowings in concert with what's going with our core deposits. We'll look at our short term borrowings and look at brokered CD levels, broker deposits and balance that in terms of what's happening on the asset side of our balance sheet, where are we seeing growth. We have the advantages was alluded to in my prepared remarks of having the investment securities books pay down with lower yielding assets and choosing where to deploy those cash flows when we receive them, potentially to pay down wholesale funding sources, potentially to invest in loan growth. So, it's a really hard one to answer in isolation. It's more of an equation about how the balance sheet is performing overall.

Operator

Our next question is from Chris McGratty from KBW. Please go ahead. Good afternoon. Harrison, on credit, you had debreciated basis points this quarter were extremely low. I think I've asked in the past, how do you think of normalized losses

Speaker 5

going forward?

Speaker 2

Well, I don't know. Again, 2 basis points isn't probably sustainable. It's I don't know. We've kind of consistently said we sort of aspire to be kind of in the top quartile. That's maybe the best way to think about it because it's also going to change as you go through cycles.

Speaker 2

But currently that's probably something closer to 15 basis points or something like that. And again it's kind of like I said about capital markets, it's also it tends to be lumpy. So any given quarter isn't probably a fair reflection of what's to come. But as you kind of you stitch back over the course of 4 or 8 quarters, you start to get a picture of what's there. And I think that's probably a fair representation of where we are.

Operator

Great. And then my follow-up on capital return with the drop in rates albeit the backup recently. Has there been any change in kind of appetite or what we should be looking for the more active buybacks to be part of the equation? Thanks.

Speaker 4

No, not yet. I mean I think

Speaker 2

we're still looking for more clarity with respect to what capital rules are going to look like. I mean I don't I think we've got the luxury a little bit of time before we're going to cross 100, but we kind of like to know what that's going to look like. And so we'll certainly continue to watch that as tangible equity continues to build. We'll get to a point where we're probably more comfortable in managing capital more aggressively, but I don't think we're there yet.

Operator

Our next question is from Samuel Vargas from UBS. Please go ahead.

Speaker 8

Hey, good afternoon. I just wanted to go back to the balance sheet a little bit. The liquidity levels for the quarter based on the average was meaningfully higher than the end of period. So I just wanted to see if you could give some commentary around where you'd expect liquidity levels broadly to move in 4Q and whether there was any sort of seasonality that impacted 3Q numbers?

Speaker 4

And can you just amplify what you when you say liquidity levels, what you're drawing out there in that comment?

Speaker 8

Yes. So just in terms of the cash and money market investments, where those might move?

Speaker 12

Yes. This is Matt Tyler. I'm the Corporate Treasurer. Our investment portfolio, I mean, we participate heavily in just overnight and short term repo market. And so we tend not to hold a lot of cash just for liquidity because the repo market and the securities we have in our securities portfolio is pretty deep and we can turn that into cash really easily on demand.

Speaker 12

And so the absolute level of cash is kind of just it declined at the end of the quarter because we paid off some of our borrowings that we had had. And so it's I mean, I think the level of cash is a very poor measure of our liquidity.

Speaker 8

Understood. Thanks for that color. And then just on the non interest bearing deposit front, it seems like the in the period and then the average are converging. I guess, can you give some sense of potential 4Q seasonality there?

Speaker 4

No, I don't know that we've really ever called out 4Q seasonality on non interest bearing deposits. We do probably at times earlier in the year. So, I'm not sure there is a call it on that front other than just to say that we are pleased and the continued stabilization we're seeing in that area. We're not ruling out that there could be some more migration, but it does seem to be settling in. And my prepared remarks also called out the trend and the pattern for interest bearing deposits with the rate pay coming down.

Speaker 4

So, big picture, I think we're pleased with what we're seeing, but we're always going to watch this closely.

Operator

Great. Thanks for taking my question.

Speaker 4

You bet.

Operator

Our next question is from Mike Mayo from Wells Fargo. Please go ahead.

Speaker 13

Hey, Harris, it was great seeing you recently and hearing you wax poetic about the virtues and benefits of an upward sloping yield curve. So first, I guess,

Speaker 4

do

Speaker 13

you have more conviction now, seeing what you're seeing in the market? And how do I reconcile your desire in ongoing asset sensitivity? It's very clear that you are with lots of rate cuts with a guide higher for NII over the next year. It looks like you're you have your cake and you get to eat it too, but it doesn't always work out that way. So what are your thoughts about that and what are the risks to that scenario?

Speaker 13

Thanks.

Speaker 2

Well, I'll offer a couple of thoughts and Ryan might have some as well. I mean, I don't know. I think it's totally a fool's errand to try and predict where our yield curve is headed next. That's betting against a lot of smart money. It's already probably formed it into the expectations of that are reflected there.

Speaker 2

But I think that among other things we have we do have some continued opportunity to reprice. I really believe that one of the things that hit us in the wake of Silicon Valley's failure,

Speaker 10

we

Speaker 2

saw there was a lot of kind of immediate deposit dislocation. We were pretty aggressive in moving a lot of balances off balance sheet back on balance sheet. We're working through that. That's part of the story in terms of why margins are improving. As well as the what I think is going to be a better story than we had expected with respect to stabilization of non interest bearing deposits.

Speaker 2

And so those would be some of the factors that lead me to believe that we're going to continue to see some firming in the margin over the course of the next year. Ryan, anything? Anybody else? Yes.

Speaker 4

No, thanks for that. And Mike, it's good to spend a little time with you. Listen, you're right. I mean, we on the peer set, we do screen to be higher on the assets in a down rate environment that has repercussions. As it turns out, as those investment securities portfolio continues to pay down, there's a chance that you become even more asset sensitive if you don't sort of stare at it and figure out what's the right balance between what you want to think about in terms of near terms, earnings at risk visavis kind of longer terms exposure to tangible common equity should rates reverse at some point.

Speaker 4

I know that's something we spoke about when we're together about not just managing for the short term, but sort of seeing through the cycle about where this could go. So we're constantly thinking about and talking actively about what's that right balance between down earnings exposure visavis what happens if rates turn around on your tangible common equity. So as we think about where our investment security portfolio is today and what we need to support our liquidity needs, we said on a prior call that you could imagine that you could have some more runoff from here. But we'll also think about duration holistically as we think about solving for the asset and liability side of the balance sheet to see if there's opportunities to add a little duration back, again, bearing in mind that the risk on either side. So we try to be balanced in the management of those risks.

Speaker 2

I'd add just a further thought. I think I may have mentioned this when you were here visiting with us, but at least my personally personal leaning is toward the notion that inflation is probably going to be a little more stubborn than the Fed has believed. I think you've seen that in recent weeks. And whoever wins this election, what you're seeing in terms of kind of deglobalization, the prospect of tariffs, there are plus, plus a $1,800,000,000,000 deficit in peacetime, pretty good economy. There are a lot of kind of inflationary forces in the world.

Speaker 2

I think that

Speaker 4

are

Speaker 2

if I were betting my own money and to some extent we are here, I think that I continue to believe that the real risk is more toward increasing rates than decreasing rates. If you get beyond maybe the next 3 months, kind of look out 2 or 3 years. So anyway, hope that's helpful.

Speaker 13

Yes. I guess the bottom line is you're willing to sacrifice some short term earnings given your conviction that longer term you're going to see some of those pressures on the yield curve?

Speaker 2

Yes, maybe somewhat. But like I say even with the likelihood of another rate cut, maybe another 2 or 3, who knows. I think that there's still a lot of things that we can work on here that will stabilize and even strengthen the margin.

Operator

Our next question is from Anthony Eleon from JPMorgan. Please go ahead.

Speaker 14

Hi, everyone. Last quarter, you noted that the latent and emergent rate sensitivities were expected to benefit NII by a combined 6.3% over the next year. Today, you reiterated your NII guide of slightly to moderately increasing. But if

Speaker 4

I look at slide 13,

Speaker 14

the combined impact should only benefit NII by about 1.4%. I guess was that reduction in the percentage just driven by realizing most of the NII benefit in the Q3? Or what else drove that?

Speaker 4

Yes, no, thank you for the question. Absolutely, that is part of it. We try to make that call out as part of the commentary on that slide 13 that we've already enjoyed a 4% increase

Operator

just

Speaker 4

to help people bridge from last quarter's guidance to this quarter. Of course, there's as Harris sort of alluded to, sort of anticipating what the yield curve at any point in time is extraordinarily challenging. But what you're seeing here, I just want to reiterate again that what you're seeing here is the rate path as of September 30. There's been quite a lot of change since then. So probably the most important piece of this is going back to our guidance, which I think you've mentioned, which would allow for other kind of dynamic assumptions and how we're seeing through the management of balance sheet, including things like earning asset growth as well.

Speaker 14

Thank you. And then my follow-up, is the increase in classified loans for multifamily, was that broad based across your footprint or concentrated in specific markets? Thank you.

Speaker 7

This is Derek. We're actually very diversified across the footprint. It is all within the footprint. It's not one specific market. We in a lot of our slides you'll see where our geographic diversification actually is.

Speaker 7

We didn't see it in one specific market.

Operator

Thank you. Our next question is from Jon Arshoom from RBC Capital Markets. Please go ahead.

Speaker 15

Hey, thanks. Good evening, everyone. Harris, I want to ask you a question just on overall loan growth. Are you more optimistic on loan growth than you were a quarter ago? I mean, are pipelines higher and our borrower was getting more confident?

Speaker 15

Do you expect some improvement there over time?

Speaker 2

I'm probably more optimistic with respect to commercial loan growth, but I would temper that with probably a greater belief that you're going to see headwinds in commercial real estate. And for that matter, 1 to 4 family, even though rates are lower, we're expecting that we'll probably take a little more of an approach toward originate and sell kind of a model. And so I would hope that will actually help with non interest income, but will probably eliminate some of the growth that we've had in 1 to 4 family. So that's kind of what gets us to this, whatever we say modest, slightly slightly increasing loan growth, the combination of those pieces.

Speaker 15

Okay. Yes, it's good to hear the core C and I is a little bit better. Maybe this is for you, Scott. I'm not sure who will take it, but can you comment on the energy balance trends this quarter, kind of what happened there and should we expect more of the same amount that or was that just capital markets or some other factor there? Thank you.

Speaker 7

Yes.

Speaker 3

John, there's been a significant reduction in the number of banks in the energy lending business. And so we saw our energy outstandings tick down just a little bit. But they've been right around $2,000,000,000 for quite some time and they've kind of ticked down $1,800,000,000 $1,900,000,000 and they go back up. And I've been saying for some time, I think that portfolio could grow at a nice rate over the next 2 or 3 years hadn't really happened. But I think that's because of consolidation in the industry.

Speaker 3

And so I continue to be kind of optimistic about the growth because there are fewer banks, the underwriting principles are better than any other time I can ever remember and the pricing is better than any other time that I can remember. So and we have great relationships, long term relationships. We're not a newcomer to financing energy. So anyway, I continue to be kind of optimistic about it, but it would be kind of a balanced part of our overall C and I growth.

Speaker 15

Thank you.

Operator

This concludes the question and answer session. I'd like to turn the floor back to management for any closing comments.

Speaker 1

Thank you, Matt, and thank you all for joining us today. If you have additional questions, please contact us at the email or phone number listed on our website. We appreciate your interest in Zions Bank Corporation and look forward to connecting with you throughout the coming months. This concludes our call.

Operator

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

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Earnings Conference Call
Zions Bancorporation, National Association Q3 2024
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