Zions Bancorporation, National Association Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Greetings and welcome to the Zions Bancorp Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce you to your host, Shannon Drage, Interim Director of Investments. 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 2023 third quarter earnings. My name is Shannon Drage, Interim Director of Investor Relations.

I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or Slide 2 of the 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, Paul Burdiss, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Keith Maio, Chief Risk Officer; and Derek Steward, Chief Credit Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for one hour.

I will now turn the time over to Harris Simmons.

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

Thanks very much, Shannon, and we want to welcome all of you to our call this evening. Zions Bancorporation recently celebrated the 150th anniversary of its -- what we think of as ancestral bank, which was Zion's Savings Bank & Trust Company, which opened for business in October of 1873. I'd like to think that this is a bank that's been built the right way, steadily and prudently over many decades with a persistent focus on developing deep roots in the communities we serve and helping customers develop their own strong financial foundations.

As one of the West most prominent pioneer institutions, we look forward to a great future building on this history and demonstrating a continued commitment to the values that have served us so well over these many years.

One other thing that I want to comment on before we get into the numbers. During this past quarter, Michael Morris, who has very capably served as our Chief Credit Officer for the past decade, retired from the role due to some recent health challenges that led Michael and his family to conclude that he should reduce his workload somewhat. I'm very pleased that Michael will continue with us in a role focused on affordable housing and related projects where I know he will add a great deal of value. Michael's close and very capable associate over the past decade, Derek Steward, has assumed the Chief Credit Officer role. And as Shannon noted, he's with us on the call today and we welcome Derek into this really important position in the company.

So going into the slides. Financial performance for the quarter was marked by sustained stabilization of our net interest margin as well as significant customer deposit growth, both of which have been very encouraging. On Slide 3, you'll see some of the themes that are particularly applicable designs this quarter, and these remained fairly consistent with our messaging from the prior quarter.

Customer deposits grew $3 billion during the quarter and resulted in reduced reliance on both short-term borrowings and brokered deposits. We continue to actively manage our balance sheet and our hedging in response to changes in our interest rate risk profile. We've had a pretty dynamic and proactive response to changing conditions, and this is contributed to the stabilization of the net interest margin and net interest income. We recognized $14 million in net charge-offs during the quarter, which is in line with the prior quarter. Loss absorbing capital increased with common equity tier 1 capital up 7% compared to the prior year. Capital levels remain healthy, particularly relative to our risk profile.

Turning to Slide 4, we've included some key financial performance highlights for the quarter. Circled on the slide, we reported total deposit costs of 192 basis points for the quarter compared with 127 basis points in the second quarter. Period-end customer deposits increased 5%, brokered deposits declined 22%, bringing total deposit growth to 1% quarter-over quarter. Period-end loans were flat to the prior quarter as we observed softening loan demand in the third quarter.

Moving to Slide 5. Diluted earnings per share was up $0.02 over the second quarter to $1.13 on net income of $168 million as lower expenses offset slightly lower revenue.

Turning to Slide 6. Our third quarter adjusted pre-provision net revenue was $272 million, down from $296 million. The linked-quarter decline was attributable to lower non-interest revenue, while adjusted non-interest expenses were flat. Versus the year-ago quarter, PPNR was down 23% as the increase in the cost of funds exceeded the increase in earning asset yields.

With that high-level overview, I'm going to ask Paul Burdiss our Chief Financial Officer, to provide some additional detail related to our financial performance. Paul?

[Paul E. Burdiss, 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. Over the three -- over three-quarters of our revenue is from the balance sheet through net interest income.

Slide 7 includes our overview of net interest income and the net interest margin. The chart shows the recent five-quarter trend for both. Net interest income on the bars and the net interest margin in the white boxes were consistent with the prior quarter as the repricing of earning assets nearly kept pace with rising funding costs. Additional detail on changes in the net interest margin is outlined on Slide 8.

On the left-hand side of this page, we've provided a linked-quarter waterfall chart outlining the changes in key components of the net interest margin. The 109 basis point adverse impact associated with deposits, including changes in both rate and volume, was offset by fewer more expensive borrowed funds and the positive impact of loan repricing. Our success in continuing to grow customer deposits contributed to the reduced level of brokered deposits and borrowed funds as we moved through the third quarter. And noninterest-bearing sources of funds continued to serve as a significant contributor to balance sheet profitability.

The right-hand chart on this slide shows the net interest margin comparison to the prior quarter. Higher rates were reflected in earning asset yields, which contributed an additional 157 basis points to the net interest margin. This was more than offset by increased deposit and borrowing costs, which when combined with the increased value of noninterest-bearing funding adversely impacted the net interest margin by 189 basis points. Overall, the net interest margin declined by 31 basis points versus the prior year quarter.

Our outlook for net interest income in the third quarter of 2024 is stable relative to the third quarter of 2023. Risks and opportunities associated with this outlook include realized loan growth, competition for deposits and the path of interest rates across the yield curve.

Moving to non-interest income and revenue on Slide 9. Customer-related non-interest income was $157 million, a decrease of 3% versus the prior year quarter -- I'm sorry, versus the prior quarter due to strong capital market fees in the second quarter. Customer fees were in line with the prior year as the year-over-year decrease in capital markets was offset by improved treasury management swap fee. Our outlook for customer-related non-interest income for the third quarter of 2024 is moderately increasing relative to the third quarter of 2023.

The chart on the right-side of this page includes adjusted revenue, which is the revenue included in adjusted pre-provision net revenue and is used in our efficiency ratio calculation. Adjusted revenue decreased 8% from a year ago and decreased by 3% versus the second quarter due to the factors noted previously and a $13 million gain on the sale of property recognized in the second quarter.

Adjusted non-interest expense, shown in the lighter blue bars on Slide 10, was essentially flat to the prior quarter at $493 million. Reported expenses at $496 million, decreased $12 million due to $13 million in severance expense recognized in the second quarter. Our outlook for adjusted non-interest expense is slightly increasing in the third quarter of 2024 when compared to the third quarter of 2023. This outlook excludes any impact associated with the proposed FDIC special assessment. While we have made headway in our effort to flatten expense growth as seen in the current quarter, we expect the timeline for fully achieving our expense objective to take longer than originally planned.

Highlights and trends in our average loans and deposits over the past year are on Slide 11. On the left side, you can see that average loans were somewhat flat in the current quarter. As loan demand continues to soften, our expectation is that loans will be stable in the third quarter of 2024 when compared to the third quarter of 2023.

Now turning to deposits on the right side of this page, average deposit balances for the third quarter increased 9% while ending balances grew 1% compared to the end of the second quarter. Ending customer deposits, which exclude brokered deposits, grew 5% in the third quarter. We continued to see deposit growth coming from both existing and new customers. The cost of deposits shown in the white boxes increased during the quarter to 192 basis points from 127 basis points in the prior quarter. As measured against the fourth quarter of 2021, the repricing beta on total deposits based on average deposit rates in the third quarter was 36% and the repricing beta for interest-bearing deposits was 57%.

Slide 12 includes a more comprehensive view of funding sources and total funding cost trend. The left-hand chart includes ending balance trends. Short-term borrowings have decreased $8 billion since the first quarter of 2023 as customer deposits have grown and earning assets have declined. On the right-hand 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 22 basis points in the current quarter has notably declined from the first and second quarters.

Slide 13 shows noninterest-bearing demand deposit volume trends. Although demand deposit volumes have been declining as more customers move into interest-bearing alternative, the contribution to the net interest margin and therefore, the value of the demand deposit portfolio continues to increase.

Moving to Slide 14. Our investment portfolio exists primarily to be ready storehouse of funds to absorb customer-driven balance sheet changes. On this slide, we show our securities and money market investment portfolios over the last five quarters. The investment portfolio continued to behave as expected. Principal and prepayment related cash flows were over $800 million in the third quarter. With this somewhat predictable portfolio of cash flow, we anticipate that money market and investment securities balances combined will continue to decline over the near term, which will be a source of funds for the balance sheet.

The duration of the investment portfolio, which is a measure of price sensitivity to changes in interest rates, is slightly shorter compared to prior year period estimated at 3.5% currently versus 3.9% one year ago. This duration helps to manage the inherent interest rate risk mismatch between loans and deposits. With the larger deposit portfolio assumed to have a longer duration than our loan portfolio, fixed-rate term investments are required to bring balance to asset and liability durations.

Slide 15 provides information about our interest rate sensitivity. A comparison of our modeled depositor behavior to recently observed depositor behavior suggests shortened deposit durations. This change in assumption reduces modeled asset sensitivity, which we are showing on this page with the bars labeled adjusted deposit assumptions. In light of this change, we are actively managing our asset duration to the emerging liability duration.

During the third quarter, we added an additional $1 billion of pay-fixed interest rate swaps. As a reminder, the $3.5 billion of portfolio level pay-fixed swaps on our books served to hedge the value of our investment portfolio designated as available-for-sale in a rising rate environment.

On the right-hand side of this slide, we've included detail on the impact current and implied rates are expected to have on net interest income. As a reminder, we have been using the terms latent interest rate sensitivity and emergent interest rate sensitivity to describe the effects on net interest income of rate changes that have occurred, but have not yet fully been reflected in the repricing of our financial instruments, as well as those expected to occur as implied by the shape of the yield curve. Importantly, earning assets are assumed to remain unchanged in size or composition in these descriptions. These estimates utilize the adjusted deposit assumptions described earlier.

Regarding latent sensitivity, the in-place yield curve as of September 30th will work through our net interest income over time. Assuming a funding cost beta based on recent history, we would expect net interest income to decline approximately 2% in the third quarter of 2024 when compared to the third quarter of 2023. Regarding emergent sensitivity, if the September 30, 2023 forward path of interest rates materializes, the emergent sensitivity measure is estimated to be immaterial in the third quarter of '24 when compared to the third quarter of 2023.

As noted previously, our outlook for net interest income for the third quarter of 2024 relative to the third quarter of 2023 is stable as we expect balance sheet composition changes to be accretive to net interest income.

Moving to Slide 16. Credit quality remained strong. Classified loan levels remaining stable and low. Non-performing assets increased $64 million due primarily to two suburban office loans in the Southern California market, which added $46 million, and one C&I loan, which we expect to sell in the fourth quarter. Net charge-offs were 10 basis points of loans for the quarter. Loan losses in the quarter were associated with borrowers that have struggled with idiosyncratic supply chain issues, $3 million in losses on two office loans and other small losses distributed throughout the portfolio.

The allowance for credit losses is 1.30% of loans, a 5 basis point increase over the prior quarter due largely to increases in reserves for the CRE office portfolio. As we know this 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 17 is a reminder of the discipline we have maintained over the last decade as it relates to commercial real estate in the context of credit concentration risk management. Our growth has remained well below peers over this time.

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

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

Slide 20 summarizes the financial outlook provided over the course of this presentation. As a reminder, this outlook represents our best current estimate for the financial performance in the third quarter of 2024 as compared to the actual results reported in the third quarter of 2023. The quarters in between are subject to seasonality.

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

This concludes our prepared remarks. As we move to the question-and-answer section of the call, we request that you limit your questions to one primary and one follow-up question to enable other participants to ask questions. Alicia, please open the line for questions.

Questions and Answers

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

[Manan Gosalia, Analyst at Morgan Stanley & Co., LLC]

Hi, good afternoon.

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

Hello.

[Manan Gosalia, Analyst at Morgan Stanley & Co., LLC]

I wanted to ask about NII. When we look at the NII monthly data that you provided earlier in September versus what you have here for the full quarter, it looks like NII declined in September. So just wondering if you could talk about what drove that and how you're thinking about the path of NII between now and the stable outlook you outlined for 3Q '24?

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Sure. I'll start. This is Paul. So the purpose of the monthly net interest income that we provided in both the second and the third quarter was meant to provide some inter-quarter guidance which we don't typically do on the sort of level of where net interest income and the net interest margin was coming out. And so, you may recall, at the end of the second quarter, during the second quarter call in July, we stated that we expect the net interest margin to begin to stabilize in the third quarter when compared to the second quarter after seeing several quarters of net interest margin decline.

And that net interest income outlook was meant to sort of support that. I wouldn't read too much into monthly net interest income figures. I think that that can get a little squirrely [Phonetic]. I would rely on our overall outlook, which is that as we look ahead, over the course of the next year, we expect our net interest income to be approximately flat in the third quarter of '24 when compared to the third quarter of '23.

And so, would you -- Harris, do you like to add to that?

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

Yeah. I think there's also one fewer day in the month versus August. I mean, you'll get a little fluctuation for things like that as well.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah, thank you. So that's -- and that's kind of my purpose of my statement saying that, it's hard to read into any given month.

[Manan Gosalia, Analyst at Morgan Stanley & Co., LLC]

Okay. I appreciate that. And just as we think through the trajectory for NII over the next year in a higher for longer rate environment, I know you do get benefit from utilizing the securities paydowns as well as the loans repricing. But given the pressure on the deposit side, should we think about just NIM and NII may be coming down a little bit in the near term and then starting to move up as we get closer to 3Q '24? Or maybe you can help us with the trajectory there.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Sure. I'll tell you how I'm thinking about it. And that is that our -- as the yield curve has steepened, we've seen a continued steepening that is kind of flattening from inverted to flat here over the last several months, particularly in the last couple of weeks. The -- our earning assets are continuing to reprice. And so the earning asset pickup, if you will, I expect it to be in the sort of range of 5 basis points to 10 basis points a quarter over the next couple of quarters. You also saw our funding costs and the increase in our funding costs begin to really flatten out in the third quarter when compared to the prior two quarters.

My expectation therefore is that the improvement in earning assets will keep pace with -- will keep pace with the change in funding costs such that my expectation is that the net interest margin will be -- would not decline much from here, consistent with the outlook we provided in the second quarter. Again, as I think about our earning asset and liability repricing, it feels like based on the current rate outlook, that we've hit a spot where I'm expecting net interest income to flat -- flatten from here as we said in the outlook. And then the opportunity for improvement will be really largely predicated on our ability to actively manage those deposit rates.

[Manan Gosalia, Analyst at Morgan Stanley & Co., LLC]

Great, thank you.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Thank you.

[Operator]

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

[Dave Rochester, Analyst at Compass Point]

Hey, good afternoon, guys.

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

Hi, Dave.

[Dave Rochester, Analyst at Compass Point]

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

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

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

[Dave Rochester, Analyst at Compass Point]

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

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

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

[Dave Rochester, Analyst at Compass Point]

Got it. Thanks, guys.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Thank you.

[Operator]

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

[John G. Pancari, Analyst at Evercore ISI]

Good afternoon.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Hi, John.

[John G. Pancari, Analyst at Evercore ISI]

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

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

John, I'll jump in. I -- it's Harris. I've always believed loan growth is the trickiest thing possible to try and forecast because it's so dependent on payoffs and rate and everything else. But I -- there may be some. I don't think we may even have some differences of opinions around the table about where we think loan growth is headed. I think none of us think it's going to be -- that we're going to see anything much. But there could be some. But we're also -- we also just note that during the third quarter, it was pretty weak. I think it's -- I mean, very recently, we've seen a little bit of pickup, but it's -- you can't make much out of a very short period of time [Indecipherable] in terms of trying to extrapolate that for very far.

So I -- that's why we guided kind of stable. It probably represents kind of the [Technical Issues] of where we -- where we're all kind of prognosticating around here.

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

John, this is Scott. I would just add to that, that I think whatever pulling back the global banks are doing, I don't know that it's producing a granular sort of benefit in the marketplace. And particularly when you think about the size of our clients and the size of their books, to the extent they're pulling back on really large commitments that is not necessarily where we play. But yeah, I would just say to Harris' comment, I think our loan flatness right now is more indicative of just the customer base being cautious compared to where they were two, three, four quarters ago when we were seeing historic loan growth coming out of the pandemic.

[John G. Pancari, Analyst at Evercore ISI]

Yeah. No, I got it. Understood. And then lastly, I know the -- you had indicated -- I think, Paul you had indicated in the prepared remarks the expense objectives are taking longer than originally planned to execute. Could you just talk about that? And what is taking longer in terms of any expense rationalization efforts? And maybe if you could tie into that as the core system upgrade, is that at all impacting that? Thanks.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah. I'll start and then I'll turn it over to Scott and Harris to supplement that. I -- so you saw us take a severance charge in the second quarter. The run rate improvement associated that -- with that, I would expect to occur kind of in the fourth to first quarter. But when I speak to sort of taking longer than expected, what I'm speaking about is the inflation headwinds. We're seeing that across the board in contracts and other things. And so, as we continue to fight expenses, we're actively working those expenses down. But the tide -- inflation, I hope is turning the corner. But the sort of inflation tide isn't out yet, and we just continue to fight that and it's the reality of the environment that we're all dealing with today.

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

I would just add to that, that the other thing we're seeing is that the inflation in 2022, even though it's softened a little bit this year. In terms of major technology vendors and their renewals and extensions of contracts, we're seeing probably the most vigorous rate pass-throughs that we've seen in years. And I think it's symptomatic of the fact that the inflation occurred last year, things renewing this year and going into '24, quite a bit of pressure on those kind of baseline technology vendors.

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

They've all been watching Hulu and Disney+, I think.

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

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

[John G. Pancari, Analyst at Evercore ISI]

Got it. Thank you very much for that.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Thank you, John.

[Operator]

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

[Chris McGratty, Analyst at KBW]

Great, thanks. Paul, maybe we can come back to the deposit beta slide, Slide 15. I just want make sure I fully understand. I'm comparing your assumed full-cycle beta last quarter of 40% to the new 50%, and I'm trying to reconcile the 70 basis points of additional deposit pressure from here. If the Fed -- so, I guess if the Fed is done, why would you see that big of an increase in deposit costs from here?

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah. So there's two things going on there. As I've said, there is sort of a lagging effect of deposit rates. Again, this is what we're assuming in the model. I'm hopeful that we can do a little bit better than this. But based on recent history, our expectation is that there are some interest-bearing products will continue to float up. But another big part of that is an assumption of continued migration of noninterest-bearing demand into interest-bearing. That sort of -- we don't normally think of that as beta, but it has the practical or economic effect of a repricing beta. And so, all of those things combined into that 70 basis points.

[Chris McGratty, Analyst at KBW]

Okay. Maybe separately, I think John asked about the growth opportunity under $100 billion. I mean, you're about 10% or 15% under the $100 billion threshold. I'm interested in the costs that you're beginning to budget. I think one of your peers said it's $100 million a year from crossing. You have the time to remix and stay under, but how are you thinking about the costs to ultimately go over $100 billion?

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

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

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

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

I guess I just -- I think that's actually very true respect to capital. I think the one place it's going to cost is on the debt requirement. And we've got about $0.5 billion of debt. If you put the proposed debt requirement into place today, that would go up to about $4 billion roughly. So that incremental $3.5 billion, the credit spread on that relative to the cost of funding with either wholesale -- any other wholesale source, home loan, larger deposits, etc., is going to create some drag I think. And that, you kind of do the math, whatever you think that credit spread is on in terms of our risk-weighted asset numbers. So that I think to me is going to be the primary sort of new thing that will hit us.

[Chris McGratty, Analyst at KBW]

Great. That's very helpful. Thanks a lot, Harris.

[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, good evening.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Hi, Brandon.

[Brandon King, Analyst at Truist Securities]

So with the expectation of stable loans over the next 12 months and the run-off of the securities book, what's the outlook for deposit growth?

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

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

[Brandon King, Analyst at Truist Securities]

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

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

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

[Brandon King, Analyst at Truist Securities]

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

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

Yeah. This is Scott. I would say that what we've seen is that as we became much more active in our pricing of interest-bearing deposits, that we -- our clients have become much more active in bringing their deposits back. So as we've said, we had approximately $11 billion in deposits off balance sheet and client deposits that were in off-balance sheet money market funds, because we just -- the industry was awash with liquidity.

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

[Brandon King, Analyst at Truist Securities]

Got it. Thanks for taking my questions.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Thank you, Brandon.

[Operator]

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

[Brody Preston, Analyst at UBS Group]

Hey, good evening, everyone. How are you?

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Hi, Brody. Thanks.

[Brody Preston, Analyst at UBS Group]

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

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah. I'm going to answer that slightly differently than the way you asked it. And that is to say that we've got a really sophisticated balance sheet simulation tool where we are sort of analyzing our loans and securities on a note by note or [Indecipherable] basis. We put in the forward curve and then we turn all of that around. And as we look at those modeled results here for the next five -- next couple of quarters, what we see is that the earning asset yield in the aggregate, so that's investment portfolio, sort of cash flow out of investments, any repricing of cash, and then in addition to the loans, which would be, generally speaking, longer resets that are resetting to the now prevailing higher rates, all of those things combined are creating an accretion in the yield of earning assets in the range of 5 basis points to 10 basis points over the course of the next couple of quarters.

[Brody Preston, Analyst at UBS Group]

Okay, understood. And then I wanted to switch gears to credit. I had a couple of generic questions and one that was a little bit more pointed. Just -- I was hoping you could tell us what portion of the loan portfolio were shared national credits. And of that, what [Indecipherable] lead on? And then I also wanted to ask on the non-performing assets, they increased $68 million and you called out it was due to two suburban office loans. I wanted to ask what geographies those were in and what drove those to non-performing.

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Derek...

[Derek Steward, Executive Vice President, Chief Credit Officer at Zions Bancorporation, National Association]

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

[Brody Preston, Analyst at UBS Group]

Got it. And did you have the -- do you have the shared national credit data?

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

I think on SNCs [Phonetic] -- if you don't mind, Derek, I think on SNCs, total shared national credit, portion of the loan portfolio is in the range of 10% to 15%. And I don't have the sort of number of agents in versus non-agent deals on that. But that's sort of the ballpark in our portfolio.

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

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

[Brody Preston, Analyst at UBS Group]

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

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

Yes.

[Brody Preston, Analyst at UBS Group]

Okay. And just if I could sneak one more in. Just on the re-tenanting though it was off...

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

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

[Brody Preston, Analyst at UBS Group]

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

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Yes, they did.

[Brody Preston, Analyst at UBS Group]

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

[Paul E. Burdiss, Chief Financial Officer at Zions Bancorporation, National Association]

Yeah. Thanks, Brody.

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

Thanks, Brody.

[Operator]

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

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

Thank you, Alicia, and thank you to all for joining us today. If you have additional questions, please contact us on e-mail or phone number listed on our website. We look forward to connecting with you throughout the coming months. Thank you for your interest in Zions 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
• Paul E. Burdiss, Chief Financial Officer
• Scott J. McLean, President and Chief Operating Officer
• Derek Steward, Executive Vice President, Chief Credit Officer

Analysts

• Manan Gosalia, Morgan Stanley & Co., LLC
• Dave Rochester, Compass Point
• John G. Pancari, Evercore ISI
• Chris McGratty, KBW
• Brandon King, Truist Securities
• Brody Preston, UBS Group AG