Zions Bancorporation, N.A. Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 21, 2024

Key Takeaways

  • Net earnings rose to $204 million for Q3, driven by higher revenues and disciplined cost management.
  • The net interest margin expanded by 5 basis points sequentially and 10 basis points year-over-year as earning asset yields climbed while funding costs remained flat.
  • Classified loans increased by $829 million, largely in the multifamily CRE portfolio due to weaker performance and a more conservative grading approach, though loss reserves remain well-covered.
  • Adjusted noninterest expense declined by $7 million to $499 million, reflecting strong expense discipline, with only slight expense growth expected next year.
  • Announced an agreement to acquire four First Bank branches in Coachella Valley, adding $730 million of deposits and $420 million of loans to strengthen market presence.
AI Generated. May Contain Errors.
Earnings Conference Call
Zions Bancorporation, N.A. Q3 2024
00:00 / 00:00

Transcript Sections

Skip to Participants
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. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Shannon Drage. Thank you. You may begin.

Shannon Drage
Shannon Drage
Senior Director of Investor Relations at Zions Bancorporation

Thank you, Matt, and good evening. We welcome you to this conference call to discuss our twenty twenty-four third 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 two of the presentation dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release, as well as the presentation, are available at zionsbankcorporation.com. For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide opening remarks. Following Harris's comments, Ryan Richards, our Chief Financial Officer, will review our financial results.

Shannon Drage
Shannon Drage
Senior Director of Investor Relations at Zions Bancorporation

Also with us today are Scott McLean, President and Chief Operating Officer, Derek Stewart, Chief Credit 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. I will now turn the time over to Harris Simmons.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

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 and the economy, 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 FirstBank to acquire four of their branches in the Coachella Valley of California, with approximately $730 million deposits and $420 million in loans.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

This deal, still subject to regulatory approval, will strengthen our competitive position in that market, add 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 million, improving by $14 million due to higher revenues and lower expenses. Customer deposits increased 1.5 percentage points point to point for the quarter, and it reflects stabilization in non-interest-bearing demand deposits, which increased 1 percentage point point to point. Net interest margin continued to expand, up five basis points in the quarter, as earning asset yields increased while the cost of funding remained flat. Our net interest margin improved 10 basis points against the year-ago quarter.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

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 that downward rate movements could continue in the near term. Demand for our SBA loan product continues to grow in the communities we serve. 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.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

Net charge-offs were just two basis points annualized as a percentage of average loans for the quarter. Classified loan balances increased to $829 million. The downgrades were largely in the multifamily portfolio due to weaker performance, particularly for 2021 and 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 of collateral values and the strength of guarantors and sponsors.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

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 second quarter and 10.2% a year 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. It was a very clean quarter, and there were no notable items impacting earnings per share during the quarter.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

In slide five, our second quarter Adjusted Pre-Provision Net Revenue was $299 million, up from $278 million in the second 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. 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?

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Thank you, Harris, and good evening, everyone. I will begin with a discussion of the components of pre-provision net revenue. Slide six includes our overview of net interest income and the net interest margin. The chart shows the recent five-quarter trend for both. Net interest income is reflected on the bars, and net interest margin is shown on the white boxes. Both measures reflect improvement for three 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 seven. 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.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Net interest margin expanded by five basis points sequentially, driven by higher earning asset yields and improved mix. This is reflected in the two basis points and three basis points margin improvements in the waterfall attributable to money market 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. 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 the net interest margin. These positive contributions were somewhat offset by increased deposit costs, higher borrowings, and declines in the value of our non-interest-bearing deposits to the balance sheet.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

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 million, compared to $154 million in the prior quarter, largely driven by a $7 million 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. Our outlook for customer-related non-interest income for the third quarter of 2025 is moderately increasing relative to the third quarter of 2024.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

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 and 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 nine, decreased $7 million to $499 million, attributable largely to decreases in legal and professional services, FDIC premiums, and salaries and employee benefits, excluding severance. Reported expenses at $502 million also decreased by $7 million compared to the prior quarter. Our outlook for adjusted non-interest expense for the third quarter of 2025 is slightly increasing relative to the third quarter of 2024.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

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. Our guidance is that loans will be stable to slightly increasing in the third quarter of 2025 relative to the third quarter 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.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Average deposit balances for the third quarter increased modestly, while average non-interest-bearing deposit balances declined slightly. The cost of total deposits, shown in the white boxes, increased three basis points to 2.14%. 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 one-third of our deposits were priced at or above benchmark rates prior to the rate cut. We are seeing a near 100% 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.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

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. 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 and money market investment portfolios over the last five quarters. Maturities, principal amortization, and prepayment-related cash flows from our securities portfolio were $752 million in the third quarter.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

The paydown 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%. Transitioning to slide 13, we believe that net interest income in the third quarter of 2025 will be slightly to moderately increasing relative to the third quarter 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 30th.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Modeled net interest income in the third quarter of 2025 is expected to be 1.4% higher when compared to the third quarter of 2024. This includes the impact of both latent and emergent sensitivity that we have broken out in prior quarters. 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 -0.8% and +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.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Moving to credit quality on slide 14, realized losses in the portfolio continue to be low, with annualized net charge-offs of just two basis points of loans in the quarter and six 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. Now, 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 million to $306 million, and now represent 62 basis points of loans and other real estate owned. Increase was driven by a small number of C&I and commercial real estate credits.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Classified and criticized loan balances increased by $829 million and $426 million, respectively, due to the reasons Harris noted in his opening remarks. A declining rate environment will ultimately benefit risk grades 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% 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 $13.5 billion CRE portfolio, which represents 23% of total loan balances. The portfolio is granular. We have managed this growth carefully over a decade.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

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 in criticized and classified assets during the quarter. Of the $829 million increase in classified loans, $442 million 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 continue 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. Our loss-absorbing capital is shown on slide 17.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

The CET1 ratio continued to grow in the third quarter 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. As a reminder, this outlook represents our best estimate for the financial performance for the third quarter of 2025 as compared to the third quarter of 2024. With this outlook, we expect to see positive operating leverage and improved efficiency as revenue growth outpaces funding and expense pressures.

Shannon Drage
Shannon Drage
Senior Director of Investor Relations at Zions Bancorporation

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. Matt, please open the line for questions.

Operator

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Our first question here is from Manan Gosalia from Morgan Stanley. Please go ahead.

Manan Gosalia
Manan Gosalia
Analyst at Morgan Stanley

Oh, hey, good afternoon.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Hi.

Manan Gosalia
Manan Gosalia
Analyst at Morgan Stanley

I wanted to touch on deposit costs. So, you know, 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 first, Fed rate cut. Could you take us through how you expect that to progress? You know, what have the early discussions been with customers of different deposit types?

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Yeah, 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 were 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 a, an all-in beta there, on the down cycle that would point to a 36%, beta.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

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 thirtieth. 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.

Manan Gosalia
Manan Gosalia
Analyst at Morgan Stanley

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

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Right. Correct, yeah. 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.

Manan Gosalia
Manan Gosalia
Analyst at Morgan Stanley

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

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Yeah, thank you for that. And it hasn't been our practice to call out NIM specifically, given all the variables in around NIM and loan growth and what all of 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 three quarters in a row, and we see that continuing into next year. So that's all, I think, premised within our guidance.

Manan Gosalia
Manan Gosalia
Analyst at Morgan Stanley

Great. Thank you.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

You bet.

Operator

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

John Pancari
John Pancari
Analyst at Evercore ISI

Good afternoon.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Hi, John.

John Pancari
John Pancari
Analyst at Evercore ISI

Just wanted 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.

Derek Stewart
Derek Stewart
Chief Credit Officer at Zions Bancorporation

Okay. Thanks, John. This is Derek. You know, 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. You know, as far as how that doesn't impact the allowance, with CECL and the changes to CECL, you know, we built reserves over the last couple of years, really, as we saw a potential downturn in the economy. Risk rating changes today with CECL actually impact the allowance much less than they did, you know, in years past.

Derek Stewart
Derek Stewart
Chief Credit Officer at Zions Bancorporation

That's why you're not seeing the corresponding increase.

John Pancari
John Pancari
Analyst at Evercore ISI

Okay. All right. Thanks for that. And then also on the credit front, just curious how the decline in rates, you know, 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. So curious, how that may have influenced the trends we're seeing here in terms of your classified and your non-accruals and, you know, and how that was impacted. Then lastly, just if you can walk through your the reserve allocation right now for if you break it out by multifamily versus the rest of the CRE book. Thanks.

Derek Stewart
Derek Stewart
Chief Credit Officer at Zions Bancorporation

Okay. First, 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, you know, there's the situation with short-term rates, which we lend primarily on short-term rates. They're much higher than longer-term rates. And so as we've seen, the ten-year reduce over the last year, it's encouraging borrowers to begin to refinance. 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, you know, that we have on our books.

Derek Stewart
Derek Stewart
Chief Credit Officer at Zions Bancorporation

But I do think that with, you know, some decreasing rates, you know, combined with stabilization in the tenure, we're going to see, you know, it's easier to work through some of the situations, and we'll see some refinance activity in the future.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

Hey, John, I'd just add, it's Harris. I think across the industry, certainly here, but I think it's not isolated with us. You know, since the financial crisis, underwriting for multifamily, underwriting CRE generally, but certainly multifamily is fundamentally different than it was if you go back, you know, 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, too, 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. And so you can have a deal where there's a well-defined weakness, where lease-up is slower.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

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. 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.

Operator

Yes, that is helpful. Appreciate it, Harris.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

John, a useful reference point for your first question. We did include a view on slide 25 of the materials. This sort of shows the build of the allowance over time, returning to Derek's comments, and you know, how the relationship of that to nonaccruals and classifieds. With the message being that sometimes they go in opposite directions, right? Because the accounting model requires us to peer into the future at reasonable and supportable forecasts, and that's probably the more dominant factor here in how we set our reserves. In fact, if these nonaccruals and 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.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

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.

Operator

Got it. All right. Thanks, Ryan.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

You bet.

Operator

Our next question is from Ben Gerlinger, from Citi. Please go ahead.

Benjamin Gerlinger
Benjamin Gerlinger
Analyst at Citigroup Inc.

Hi, good afternoon, guys.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Ben.

Benjamin Gerlinger
Benjamin Gerlinger
Analyst at Citigroup Inc.

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 the credits you have outstanding, do you think that there you need another fifty, a hundred, a hundred and fifty basis points lower? I get that there's math, but there's also a behavioral component to on when people actually do try to refinance off. And if can you kind of just think about, is there a kind of line in the sand that people are looking for? And then, have you earmarked a kind of dollar amount that you would think potentially at risk over the next twelve to eighteen months?

Derek Stewart
Derek Stewart
Chief Credit Officer at Zions Bancorporation

Yeah, you know, 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, you know, with rate reductions, it will drive refinance activity. You know, I think it just depends on the borrower and the situation and what they're trying to accomplish. 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.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

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 a large portion of them. And, when they go long term, they'll generally, there's no recourse associated with it.

Derek Stewart
Derek Stewart
Chief Credit Officer at Zions Bancorporation

Yeah. And one more thing, just to add this, 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, you know, 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, you know, as the borrowers have the right opportunities in the future.

Benjamin Gerlinger
Benjamin Gerlinger
Analyst at Citigroup Inc.

Gotcha. That's helpful. And then the guidance, you said, slightly increasing on the non-interest expense, and you highlight technology costs and investments. Are these one time or kind of concurrent? Like, just given your side, I'm talking more so to kind of the plus a hundred or just for overall growth. 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?

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Yeah, no, thanks for that. I'm happy to get started there and invite my colleagues to jump in as they see fit. Listen, let me just first emphasize that, you know, we're gonna be continually focused on expenses. That's not gonna change. 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. I don't know.

Scott McLean
Scott McLean
President and COO at Zions Bancorporation

This, Scott, and I totally agree with that. The technology spend is just not something that is gonna 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. The other thing I would say is that we, you know, it'd be helpful if we had one or two really big expense items that we could point to, because it'd make your jobs easier.

Scott McLean
Scott McLean
President and COO at Zions Bancorporation

The great thing about the way we have gone about reducing costs in the past, particularly from 2015 to the 2021, 2022 time period, is that we just have a large basket of items that amount to a greater adoption of common practices, automation, and certainly this future core investment that we've made, so 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, you know, to this outlook, that, that'll be, we think, a real accomplishment.

Benjamin Gerlinger
Benjamin Gerlinger
Analyst at Citigroup Inc.

Got you. I appreciate it. Thanks.

Operator

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

Bernard von Gizycki
Bernard von Gizycki
Analyst at Deutsche Bank

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

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

I think you know 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 we probably have a little more latitude than we've had before because of you know kind of being through this core conversion that we've been working on for a long time. But it's not kind of front burner in our thinking at all.

Bernard von Gizycki
Bernard von Gizycki
Analyst at Deutsche Bank

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, you know, from the increase in swaps, fees, loan syndications, and the expanded real estate capital markets. You know, any color you can provide during the quarter thus far, and just expectations, you know, go further for 4Q and going into, like, twenty twenty-five?

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Hey. Oh, 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 evident that we've been investing along the way, and not just been solely focused on expenses, and that's bearing fruit. We've had a really nice growth rate with this business now going back three to four years, a 10% compound annual growth rate. We haven't made it a practice to kind of give one quarter forward type guidance on that. Suffice to say that group continues to have very significant growth ambitions, and to continue to build on the franchise they've already built with enhancing capabilities.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

So we're looking for good things to come from that capital markets practice moving forward.

Scott McLean
Scott McLean
President and COO at Zions Bancorporation

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.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

Can I just add, just, I mean, that said, it's also the nature of that 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, you'll see, you know, variability quarter to quarter, probably greater than you see in some other lines of business.

Bernard von Gizycki
Bernard von Gizycki
Analyst at Deutsche Bank

Got it. Thanks for taking my questions.

Operator

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

Matthew Clark
Matthew Clark
Analyst at Piper Sandler

Yeah, 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 million. Can you just confirm that's the case, and then what drove the upgrades in special mention?

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Well, most of the criticized or the special mention-

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

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

Samuel Varga
Samuel Varga
Analyst at UBS

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?

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

I think we sort of look at borrowings in concert with, you know, 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 advantage, as 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.

Samuel Varga
Samuel Varga
Analyst at UBS

Yep, understood. Thank you.

Operator

Our next question is from Chris McGratty from KBW. Please go ahead.

Christopher McGratty
Christopher McGratty
Analyst at Keefe, Bruyette & Woods

Oh, good afternoon. Harris, on credit, you had demonstrated basis points this quarter were extremely low. I think I've asked in the past, how do you think of normalized losses, going forward?

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

I don't know. Again, two basis points isn't probably sustainable if you're... 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. But, you know, currently, that's probably something closer to, you know, fifteen basis points or something like that.

Christopher McGratty
Christopher McGratty
Analyst at Keefe, Bruyette & Woods

Okay.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

You know, again, it's kind of like I said about capital markets. It's also, it tends to be lumpy. So, you know, any given quarter isn't probably a fair reflection of what's to come. You know, if you kind of stitch back over the course of, you know, four or eight quarters, you start to get a picture of what's there, and I think that's probably a fairer representation of where we are.

Christopher McGratty
Christopher McGratty
Analyst at Keefe, Bruyette & Woods

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 for more active buybacks to be part of the equation? Thanks.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

No, not yet. I mean, I think we're still looking for more clarity with respect to what capital rules are going to look like. I mean, I think we've got the luxury of a little bit of time before we're going to cross a hundred, but we'd kind of like to know what that's going to look like. And so, you know, we'll certainly continue to watch that. You know, as tangible equity continues to build, you know, 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.

Christopher McGratty
Christopher McGratty
Analyst at Keefe, Bruyette & Woods

Okay. Thanks, Harris.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

Yep.

Operator

Our next question is from Samuel Varga, from UBS. Please go ahead.

Samuel Varga
Samuel Varga
Analyst at UBS

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.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

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

Samuel Varga
Samuel Varga
Analyst at UBS

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

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Yeah. This is Matt Tyler, I'm the corporate treasurer. Our investment portfolio, and we participate heavily in just the overnight and short-term repo market. And so, you know, 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. And so, you know, 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, you know, it's we -- I mean, I think the level of cash is a very poor measure of our liquidity.

Samuel Varga
Samuel Varga
Analyst at UBS

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

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

No, I don't know that we've really ever called out Q4 seasonality on non-interest-bearing deposits. We do probably at times earlier in the year. So I don't. I'm not sure there is a call-out on that front other than just to say that we are pleased in 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 paid coming down. So big picture, I think we're pleased with what we're seeing, but we're always going to watch this closely.

Samuel Varga
Samuel Varga
Analyst at UBS

Great. Thanks for taking my question.

Operator

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

Mike Mayo
Mike Mayo
Analyst at Wells Fargo

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, you know, I guess, do you have more conviction now, you know, seeing what you're seeing in the market? And how do I reconcile your desire and 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 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 of that scenario? Thanks.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

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

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

We're working through that. That's part of the story in terms of why margins are improving. As well as the, you know, what I think is going to be a better story than we had expected with respect to stabilization of non-interest-bearing deposits. So those would be some of the factors that lead me to believe that we're going to continue to see, you know, some firming in the margin over the course of the next year. Ryan, anything? Anybody else?

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Yeah, no, thanks for that. And Mike, it's good to spend a little time with you. You know, listen, I-- you're right. I mean, we on the peer set, we do screen to be higher on the asset sensitivity in a down rate environment, you know, 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, vis-a-vis kind of longer terms exposure to tangible common equity should rates reverse at some point.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

I know that's something we spoke about when we were 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, vis-a-vis what happens if rates turn around on your tangible common equity. So as we think about, you know, 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, you know, the risk on either side.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

So we try to be balanced in the management of those risks.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

I'd add just, you know, just a further thought. I think I may have mentioned this when you were here visiting with us, but at least, you know, my personal leaning is toward the notion that 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, you know, whoever wins this election, you know, what you're seeing in terms of kind of de-globalization, the prospect of tariffs, you know, there. Plus, you know, a $1.8 trillion deficit in peacetime, pretty good economy.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

There are a lot of kind of inflationary forces in the world, I think that are, you know, if I were betting my own money, and I, 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. You know, if you get beyond maybe, you know, the next three months, you know, kind of look out two or three years. So, anyway, hope that's helpful.

Mike Mayo
Mike Mayo
Analyst at Wells Fargo

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, you know, pressures on the yield curve?

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

Yeah, maybe somewhat. But like I say, even with, you know, the likelihood of a, you know, another rate cut, maybe another two or three, who knows? You know, I think that there's still a lot of things that we can work on here that will stabilize and even strengthen the margin.

Mike Mayo
Mike Mayo
Analyst at Wells Fargo

All right. Thank you.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

Yep.

Operator

Our next question is from Anthony Elian from J.P. Morgan. Please go ahead.

Anthony Elian
Anthony Elian
Analyst at JPMorgan Chase & Co.

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 I look at slide 13, you know, 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 third quarter, or what else drove that?

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Yeah, 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, just 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 thirtieth. There's been quite a lot of change since then.

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

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 our balance sheet, including things like earning asset growth as well.

Anthony Elian
Anthony Elian
Analyst at JPMorgan Chase & Co.

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

Derek Stewart
Derek Stewart
Chief Credit Officer at Zions Bancorporation

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

Anthony Elian
Anthony Elian
Analyst at JPMorgan Chase & Co.

Thank you.

Operator

Our next question is from Jon Arfstrom from RBC Capital Markets. Please go ahead.

Jon Arfstrom
Jon Arfstrom
Analyst at RBC Capital Markets

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 are borrowers getting more confident? You expect some improvement there over time?

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

You know, 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, you know, one to four family, even though, you know, 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 that will actually help with non-interest income, but will probably eliminate some of the growth that we've had in one to four family. So, that's kind of what gets us to this, you know, whatever we say, the, you know, modest, slightly-

Ryan Richards
Ryan Richards
CFO at Zions Bancorporation

Slightly increasing.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

Slightly increasing loan growth, the combination of those pieces.

Jon Arfstrom
Jon Arfstrom
Analyst at RBC Capital Markets

Okay.

Harris Simmons
Harris Simmons
CEO at Zions Bancorporation

Yep.

Jon Arfstrom
Jon Arfstrom
Analyst at RBC Capital Markets

Yeah, it's good to hear the core C&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 do we expect more of the same on that, or was that just capital markets or some other factor there? Thank you.

Scott McLean
Scott McLean
President and COO at Zions Bancorporation

Yeah, you know, 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 billion for quite some time, and they've kind of ticked down, you know, $1.8 billion, $1.9 billion, and they go back up. And I've been saying for some time, I think, you know, that portfolio could grow, you know, at a nice rate over the next two or three years. Hadn't really happened, but I think that's because of consolidation in the industry.

Scott McLean
Scott McLean
President and COO at Zions Bancorporation

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. We have great relationships, long-term relationships. We're not a newcomer to financing energy. Anyway, I continue to be kind of optimistic about it, but it would be kind of a balanced part of our overall C&I growth.

Jon Arfstrom
Jon Arfstrom
Analyst at RBC Capital Markets

Okay, thank you.

Operator

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

Shannon Drage
Shannon Drage
Senior Director of Investor Relations at Zions Bancorporation

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 Bancorporation, 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.

Executives
Analysts
Powered by Quartr