Zions Bancorporation, National Association Q4 2023 Earnings Call Transcript

Participants

Corporate Executives

• Shannon R. Drage, Senior Vice President, Director of Financial Planning and Analysis & Interim Director of IR
• 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 and Chief Credit Officer

Analysts

• John Pancari, Evercore ISI
• David Rochester, Compass Point Research & Trading
• Manan Gosalia, Morgan Stanley.
• Ken Usdin, Jefferies & Company
• Peter J. Winter, D.A. Davidson
• Christopher McGratty, KBW
• Brandon King, Truist Securities
• Matthew Clark, Piper Sandler Companies
• Brody Preston, UBS Group AG
• Jon Arfstrom, RBC Capital Markets

Presentation

[Operator]

Greetings, and welcome to the Zions Bancorporation Q4 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Shannon Drage, Director of Investor Relations. Thank you, Ms. Drage. You may begin.

[Shannon R. Drage, Senior Vice President, Director of Financial Planning and Analysis & Interim Director of IR at Zions Bancorporation, National Association]

Thank you, Camilla, and good evening. We welcome you to this conference call to discuss our 2023 fourth quarter earnings. My name is Shannon Drage, the 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's comments, Paul Burdiss, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Chris Kyriakakis, 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 welcome all of you to our call this afternoon.

As Shannon mentioned, Chris Kyriakakis is joining our call today as our new Chief Risk Officer, and we want to welcome him. Chris was formerly our Chief Audit Executive, and he's replacing Keith Maio, who recently retired after 32 years of really phenomenal service with Zions in a variety of senior positions.

I'd like to start with comments on Slide 3, which includes some themes which are particularly applicable to Zions. Our financial performance this quarter reflects the unusual circumstances of the past year as events last spring were the catalyst for an acceleration of deposit betas across the industry. We've been proactive in managing our balance sheet, making adjustments to our hedging strategy, working with clients to bring back on balance sheet deposits that we'd steered to off-balance sheet money market funds in times of surplus liquidity. And we've demonstrated our ability to effectively manage interest rate and liquidity risk in a very dynamic environment.

In the fourth quarter, we've seen the deposit mix stabilize and deposit costs start to level out. Net interest margin and net interest income were stable in the quarter, and we continue to have a higher concentration of more costly funding sources that is typical for us. And we believe in the near term that reducing our reliance on funding priced at or near wholesale rates, combined with continued deposit pricing discipline, regardless of the future rate path presents a meaningful opportunity to improve revenue performance.

In the medium to long term, we remain focused on improving shareholder returns by growing profitable small business and commercial customer relationships by emphasizing growth in our capital markets and wealth management businesses and continuing to move away from single product loan only and other less profitable relationships.

In 2023, we exited two national lending businesses that produced few deposits, and were experiencing declining levels of profitability, and we changed our approach to mortgage lending as part of our focus on improved profitability. We continue to invest in the business and in enabling technologies to deliver the products and services that our customers need and which enhance the customer experience, all while managing expense growth to nominal levels. We have an established track record for managing risk and underwriting credit with better-than-peer performance. We believe that the combination of these efforts will result in improved financial outcomes for our investors in years ahead.

Turning to Slide 4. We've included key financial performance highlights for the quarter and for the full year. We reported a period-end loan balance increase of 3.8% for the full year, and 1.6% in the current quarter. Customer deposit balances were flat for the full year and were up 2.4% in the quarter. Our loan-to-deposit ratio was 77%. Net charge-offs as a percent of loans were just 6 basis points, both in the quarter and for the full year, down from an already low 8 basis points reported in the prior year. Our common equity Tier 1 ratio was 10.3% compared to 9.8% in the prior year.

Moving to Slide 5. Linked quarter diluted earnings per share was down $0.35 to $0.78 per share on net earnings of $116 million due to the impact of the FDIC special assessment combined with lower non-interest income.

Turning to Slide 6. Our fourth quarter adjusted pre-provision net revenue was $262 million, down from $272 million. The linked quarter decline was attributable primarily to lower non-interest revenue. Versus the year ago quarter, PPNR was down 38% as the increase in our cost of funds exceeded the increase in earning asset yields.

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

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

Thank you, Harris. Good evening, everyone, and thank you for joining. I'll begin with a discussion of the components of pre-provision net revenue. 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 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 14 basis point adverse impact associated with deposits, including changes in both rate and volume was offset by the positive impact of loan repricing and higher money market and securities yields. Non-interest-bearing sources of funds continue to serve as a significant contributor to balance sheet profitability.

The right-hand chart on this slide shows the net interest margin comparison to the prior year quarter. Higher rates were reflected in earning asset yields, which contributed an additional 106 basis points to the net interest margin. This was more than offset by increased deposit and borrowing costs, which when combined with the increased value of non-interest-bearing funding, adversely impacted the net interest margin by 168 basis points. Overall, the net interest margin declined by 62 basis points versus the prior year quarter.

Moving to non-interest income and revenue on Slide 9. Customer-related non-interest income was $150 million, a decrease of 4% versus the prior quarter due to lower loan servicing fees, primarily attributable to the sale of certain mortgage servicing rights recognized in the third quarter. The remainder of customer-related fees were relatively in line with the prior year as year-over-year decrease in capital markets revenue was offset by improved commercial account fees. Within capital markets, customer interest rate swap related revenue in 2023 was adversely impacted by loan demand and the interest rate environment. This headwind was largely offset as investment in new product capabilities has resulted in growth in other sources of capital markets revenue. We remain confident that we are poised for meaningful growth in capital markets activity and revenue. Our outlook for customer-related non-interest income for the full year of 2024 is moderately increasing relative to the full year 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 16% from a year ago and decreased by 2% versus the third quarter due to the factors noted previously.

Adjusted non-interest expense, shown in the lighter blue bars on Slide 10, was essentially flat to the prior quarter at $489 million. Reported expenses at $581 million increased $85 million due to the $90 million in FDIC special assessment costs recognized in the quarter. Our outlook for adjusted non-interest expense is slightly increasing in 2024 relative to 2023. Risks and opportunities associated with this outlook include our ability to manage technology and employment costs.

Slide 11 highlights trends in our average loans and deposits over the past year. On the left side, you can see that average loans increased slightly in the current quarter. As loan demand remained soft, our expectation is that loans will be stable at year-end '24 when compared to year-end '23.

Now turning to deposits on the right side of this page. Average deposit balances in the fourth quarter increased slightly as growth in customer deposits were offset by declines in broker deposits. The cost of deposits shown in the white boxes increased during the quarter to 206 basis points from 192 basis points in the prior quarter. As measured against the fourth quarter of 2021, the repricing beta on total deposits, including broker deposits, and based on average deposit rates in the fourth quarter was 39% and the repricing beta for interest-bearing deposits was 60%.

Slide 12 includes a more comprehensive view of funding sources and total funding trends. The left side of the 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 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 cost at 15 basis points in the current quarter has continued to decline compared to the prior three quarters.

Slide 13 shows non-interest-bearing demand deposit volume trend, you can see that the recent trend in demand deposit attrition appears to be flattening. Although demand deposit volumes have been declining over the past six quarters as customers move into interest-bearing alternatives, the contribution to the net interest margin shown in the white boxes, and, therefore, the value of the demand deposit portfolio has increased.

Moving to Slide 14. Our investment portfolio exists primarily to be a ready storehouse of funds to absorb customer-driven balance sheet changes. On this slide, we show our securities and money market investment portfolios over the last five quarters. The investment portfolio continues to behave as expected. Maturities, principal amortization and prepayment-related cash flows were over $700 million in the third quarter. With this somewhat predictable 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 the prior year period, estimated at 3.6% currently versus 4.2% one year ago. This duration helps to manage the inherent interest rate risk mismatch between loans and deposits. With a larger deposit portfolio assumed to have a longer duration than our loan portfolio, fixed rate term investments are required to balance asset and liability duration.

Moving to Slide 15. We've provided the projected trend of AOCI, accumulated other comprehensive income, in -- based on an expected accretion and interest rate impacts based on the forward curve as of December 31. AOCI improved to $2.7 billion, from $3.1 billion in the prior year, largely due to principal amortization in the securities portfolio, combined with interest rate swap maturities. We expect based on the current forward curve that AOCI will decline by about $900 million cumulatively over the next eight quarters.

Slide 16 provides information about our interest rate sensitivity, which differs in content and format compared to prior quarters. While we provided standard parallel interest rate shock sensitivity measures in the appendix of this presentation, we believe a more dynamic view of interest rate sensitivity is most relevant in the current environment. Noted in the bar chart on the far-right side of this page, modeled net interest income in the fourth quarter of 2024 is 2.4% higher when compared to the fourth quarter of 2023 using the implied forward path of interest rates at year-end and assuming a static balance sheet. 100 basis point parallel up and down shocks of this implied forward outcome suggests about 2% of interest rate sensitivity around that figure. This modeled analysis reveals that our balance sheet, while asset-sensitive using traditional measures, is positioned for net interest income growth if short-term rates fall faster than long-term rates.

Utilizing this model outcome and overlaying management expectations for balance sheet changes and deposit pricing, we believe that net interest income will -- in the fourth quarter of 2024, will be stable to slightly increasing when compared to the fourth quarter of 2023. Our outlook is that full year net interest income will be slightly decreasing in 2024 when compared to 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 Slide 17. Credit quality remains strong. Classified loans increased $56 million, driven by the commercial real estate portfolio, while non-performing assets decreased $4 million. Net charge-offs were 6 basis points of loans in the quarter. Loan losses in the quarter were somewhat granular and largely associated with our commercial loan portfolio. The allowance for credit losses is 1.26% of loans, a 4 basis point decrease over the prior quarter due to a modest improvement in our economic outlook.

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 18 is a reminder of the discipline we have maintained over the past decade as it relates to the commercial real estate portfolio growth. We have chosen our partners carefully and our growth has remained well below peers over time.

Slide 19 provides an overview of the commercial real estate portfolio. CRE represents 23% of our loan portfolio, with office representing 15% of total CRE or 3% of total loan balances. Credit quality measures for the total CRE portfolio remained relatively strong, though criticized and classified levels increased in the quarter. 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 20. The CET1 ratio continued to grow in the third quarter to 10.3%. This, when combined with the allowance for credit losses, compares well to our risk profile as reflected in the low level of ongoing net charge-offs. We expect to maintain solid regulatory capital while managing to a below-average risk profile.

Slide 21 summarizes the financial outlook provided over the course of this presentation. As a reminder, this outlook represents our best current estimate for the financial performance for the full year of 2024 as compared to 2023.

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. Camilla, please open the line for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] And our first question comes from the line of John Pancari with Evercore. Please proceed with your question.

[John Pancari, Analyst at Evercore ISI]

Good afternoon. Just on the balance sheet commentary that you gave on the loan growth guidance of stable balances on an end-of-period basis, can you maybe talk about the -- what the trajectory could look like in terms of where do you expect you could see some growth and what's offsetting that that keeps you pretty conservative there in terms of flattish balances for the year? Thanks.

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

Well, I'll start with that. It's -- our outlook is a reflection of what we're hearing kind of on the ground from our frontline relationship managers. It feels like demand is softening. And so that ultimately, that's kind of what's baked into our outlook.

When you get into the components of the portfolio, those are driven, as you know, by market conditions. So for example, as the commercial real estate market, the capital markets associated part of commercial real estate, as that becomes less of a takeout for commercial real estate loans, you may see those accumulate on our balance sheet as construction loans work to completion, while C&I, traditional C&I, for example, may decline with economic weakness.

Harris or Scott, would you add anything to that?

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

Yeah. This is Scott. I don't think I would. I think our feeling is that the economy is going to be moderately muted throughout the year, which would actually be a positive thing compared to what we all thought six to nine months ago. So you would think that as we get towards the end of the year, we'll start to see loan growth in the economy probably pick up. But we had pretty good C&I growth last year despite some of the other movements, and we may be surprised on the upside there.

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

I'd just add, the one- to four-family, the residential portfolio, we've seen growth. Some of that is a product we could call a onetime close product, which you had construction loans that were funding up and being completed. And that will -- I expect will subside somewhat. We've really tightened the parameters around that to make sure that it's not growing too fast relative to the portfolio overall and limiting the number of kind of single product kind of relationships that we have in that program. So I think that will probably slow a little bit.

On the other hand, the economy feels like it -- you talk to any of our lenders today, and I don't think any of us are very good at predicting what the world is going to look like three months from now. But it does feel like the economy is going to probably be in a reasonably decent shape through the year, and that could help. So anyway, we'll watch with interest, John.

[John Pancari, Analyst at Evercore ISI]

Okay. Great. Thanks, Harris. And then just separately on the other side of the balance sheet, just maybe if you can give us your thoughts on what deposit growth could look like for the year as you look at the trends there? And then maybe also just a bit on -- around where do you see your non-interest-bearing mix stabilizing, it dropped down a bit to about 36% of deposits as of this quarter. So curious where you see that bottoming here? Thanks.

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

Well, the good news is we did see deposit growth and meaningful deposit growth here as we moved into the end of the year. And I would note that both on-balance sheet deposits and kind of customer suite balances that is effectively customer money that we're sweeping off-balance sheet for them both increased in the quarter. So those are good things.

As we look ahead and certainly what we've seen over the course of the last couple of quarters is that deposit rate is increasingly important, particularly for rate-sensitive money. And so as we move through the year, we're going to be carefully balancing the need for funds and the rate we pay on those funds, with the need to kind of continue to demonstrate improvement in our net interest margin. As it relates to -- and the cost of funds, obviously, associated with that.

As it relates to where non-interest-bearing demand is trending, I think we saw some green shoots in terms of runoff in the current quarter as non-interest-bearing demand attrition appeared to slow from what we've seen historically. So it's very difficult to predict sort of precisely where that goes, but I would note that my expectation is we will continue to see some non-interest-bearing deposit attrition just because of the differential in interest rates between zero and the prevailing market rate. So that trend has slowed. It feels like it will continue to slow, but I'm not predicting an end certainly in the near term.

[John Pancari, Analyst at Evercore ISI]

Okay, great. Thanks, Paul.

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

Thank you, John.

[Operator]

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

[David Rochester, Analyst at Compass Point Research & Trading]

Hey. Good afternoon, guys. On the NII guide, just given your comments about flat loans this year and then run off in cash and securities, it sounds like you're baking in lower earning assets, I guess, on average for the year. I guess, what are you, at this point, assuming for deposit betas in that analysis as well, just some of the cuts that you're baking in for the year?

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

So in that particular outlook, we are following the forward curve at the end of the year. And the forward curve does include several rate cuts, particularly as you get in the second half of the year. The assumption around deposit beta there, if you think about our deposit portfolio, what you see is this kind of bimodal, in that you've got a lot of very low interest rate deposits and then you've got some sort of higher beta, higher rate deposits.

Our key assumption there, and I feel pretty good about it, is that those higher beta, higher rate deposits, we will be able to -- would be able to reprice those relatively quickly if interest rates on the short end were to begin to fall. But the point of the interest sensitivity analysis that we present is to show that we're pretty balanced. And if rates were to remain flat or down a little or maybe even up a little, which doesn't look as likely here on the near term, we believe that we're going to be able to carve a good path for net interest income, a predictable path and that it should be relatively stable based on all these other things.

[David Rochester, Analyst at Compass Point Research & Trading]

Okay. And then just as a follow-up, how much in the way of the off-balance sheet sweep deposits are there at this point? And is that still an opportunity for you guys to pay down some of the higher-cost stuff on balance sheet? Or is that largely played out at this point?

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

Well, as I said, the good news is that those off-balance sheet, I'll call them, deposits, grew this quarter. I think they're near $7 billion?

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

$7.3 billion.

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

Thank you, Scott. $7.3 billion. Those are extremely rate-sensitive. And so with the right rate, it's possible that we could continue to pull some of those on the balance sheet. But I think we've managed our deposit portfolio pretty well here over the last couple of quarters. And I feel good about where we're at as it relates to the mix of rate and volume. And so I wouldn't necessarily be expecting to pull those -- continue to pull those on the balance sheet, based on our current outlook for funding need.

[David Rochester, Analyst at Compass Point Research & Trading]

Okay. Thanks guys.

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

Thank you.

[Operator]

Thank you. Our next question will come from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

[Manan Gosalia, Analyst at Morgan Stanley.]

Hi. Good afternoon, all. On the deposit portfolio, you just spoke about how it's very bimodal and the assumption is that the higher beta deposits can reprice relatively quickly. So as we think through rate cuts and if we can get six or seven rate cuts over the next 18 months or so, would there be a difference in how those rate cuts play through in terms of the benefits? So for instance, will the first few rate cuts be more or less positive than the next few rate cuts?

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

That's pretty difficult to predict. I think over time, my point of view is, over time, the lower rates are the more -- the faster rates kind of hit an implied floor and where that implied floor is -- has been reset lower over the last 10 years. But certainly, for the first several rate cuts, I would expect, particularly, as I said, for the sort of very high beta, high rate deposits, I would expect that we would be able to follow those down pretty quickly in repricing.

[Manan Gosalia, Analyst at Morgan Stanley.]

Great. And maybe on the reserves in the ACL ratio. I think you mentioned that it decreased due to a less negative economic outlook. So if you can expand on that and talk about what is embedded into your ACL outlook? And if you think that ACL can come down further from here if a soft landing becomes more and more likely?

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

Well, yes, I'll start with that. We use, as many do, we use an outside resource for the macroeconomic forecast. And the two key driving components of the allowance for credit losses are the underlying credit quality in the portfolio and migration, whether or not the portfolio is migrating in a way that's consistent with prior estimates. And then the macroeconomic outlook is, of course, the other piece of that.

So generally speaking, I would say credit migration is proceeding similar to our expectation. And so the change in the allowance, and it's a pretty minor change in the allowance, is really based on a slightly better macroeconomic forecast.

[Manan Gosalia, Analyst at Morgan Stanley.]

Great. Thank you.

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

Thank you.

[Operator]

Our next question will come from the line of Ken Usdin with Jefferies. Please proceed with your question.

[Ken Usdin, Analyst at Jefferies & Company]

Thank you. Wondering on the earning asset side, you mentioned that you do expect earning asset yields to increase throughout the year. Just wondering, last quarter, you had talked about like five to 10 a quarter. And I'm just wondering, just given the rate moves and what's coming on the books today versus what's coming off, how much flow-through do you still expect to see as we go forward? Thanks.

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

Yes. That's -- Ken, that's remained pretty consistent this quarter. It's hard to have a lot of insight into what happens more than a couple of quarters out. But our expectation is, with -- it's a combination of kind of fixed rate pay downs that's in the form of loans and investment securities. And then the kind of amortization of swaps or maturities of swaps, including canceled swaps. Those are kind of underwater based on the original received pay rate. The combination of all of those things should provide a little bit of lift to earning asset yields for the next couple of quarters. And so it's consistent with that zero to five that we expressed last time.

[Ken Usdin, Analyst at Jefferies & Company]

Okay. Got it. And on the right side of the balance sheet, how much more room do you have? You mentioned that you're seeing good deposit growth and you're not expecting much loan growth. Securities portfolio is kind of flattish, not shrinking. So how much more can you reduce that reliance on brokered and other wholesale funding from where you were at the end of this year?

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

Well, yes, it's a combination of, as you correctly point out, the securities portfolio is going to continue to amortize away somewhat predictably as we've noted for the last several quarters. Loan growth will be the big question mark there in terms of funds needed. But clearly, we're focused on bringing in customer deposits at a rate that's lower than kind of alternative wholesale funds. And so to the extent we continue to see that opportunity, we'll continue to work that.

[Ken Usdin, Analyst at Jefferies & Company]

Okay. Got it. Thanks, Paul.

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

Thank you.

[Operator]

Thank you. Our next question will come from the line of Peter Winter with D.A. Davidson. Please proceed with your question.

[Peter J. Winter, Analyst at D.A. Davidson]

Hi. I wanted to just follow up on John's question earlier on loan growth because it is coming in, your outlook is a little bit more cautious than what we've heard from other banks. We've heard that borrower sentiment has improved a little bit versus 90 days ago. And there was an expectation once the Fed starts to cut rates, you should start to see loan demand pick up -- line utilization pick up. But you guys -- you're not thinking that way?

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

This is Scott. I would just say that we've seen line utilization increase a bit. So that is happening. But trying to compare others' outlooks to ours, it's just kind of a function of who they're talking to. If you roll back a couple of years when loans were pretty flat in the industry and flat for us, everybody was talking about loans were going to definitely start increasing by a certain quarter, and we hesitated saying that. And I'm glad we did because they were wrong, and we happened to be right on that particular turn that happened a couple of quarters later.

So I just would go back to what Harris said, it's very hard to project. I also think that interest rates, if you look at them historically, they're not especially bad right now. I mean, if you go back 20, 30, 40 years, they're generally in line. So they're not at an especially historically based high level. So I don't know that we have to have interest rates going down, the short-term rates, to see activity pick up, could certainly help some industries. But I don't think most business folks, commercial business folks are overly anxious about the current level of rates.

[Peter J. Winter, Analyst at D.A. Davidson]

Thanks.

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

Can I just add, again, I noted earlier, if we see the economy start to pick up, I would expect that that will help with loan growth. But we do have probably slowing growth in the residential portfolio, which is going to offset some of that. That's probably the reason that we might be a little cautious.

[Peter J. Winter, Analyst at D.A. Davidson]

Okay. And then just one last question. your economic outlook, you mentioned, that improved slightly. You've got strong capital. I'm just wondering what are some of the parameters you need to see in order to feel comfortable to kind of resume share buybacks?

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

Well, I'll tell you as it relates to bank capital, there's a lot of uncertainty around the regulatory rules right now. So we're paying a lot of attention to that. We're not a Category IV bank, but we certainly would be, I expect, by the time the proposed capital rules become effective.

So it would be nice to see a little more certainty around what those capital rules are. And even though generally speaking, we're -- our credit performance has been excellent. We are feeling a little bit better about the macroeconomic path. We still remain a little cautious. And so over the near term, at least, I wouldn't expect a large share repurchase.

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

Can I -- I'd just add. I mean, it's been actually a long time since we've really had a seriously challenging credit cycle. And so even though we're all kind of thinking probably it's going to be a soft landing, et cetera. There's enough uncertainty in the world. I think it's probably a time to be a little conservative on the capital front. And especially given what Paul said about the -- just rules are in flux, et cetera. So we'll be a little careful.

[Peter J. Winter, Analyst at D.A. Davidson]

Got it. Thanks so much.

[Operator]

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

[Christopher McGratty, Analyst at KBW]

Great. Thanks for the question. Paul, maybe a high-level question on the margin. You had a peer last week talk about kind of a 3%-plus NIM, similar company, balance sheet size and mix. Feels like that's kind of the trajectory you guys are messaging given the balance sheet dynamics. I'm just kind of interested if you would agree with kind of what the overall level of when margins may be going.

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

Well, in my experience, the net interest margin is extraordinarily difficult to predict because there are so many factors. In our case, I think what we're demonstrating is a pretty stable net interest income and declining earning assets. And so you do the math on that, and the expectation is some modest improvement in the margin.

[Christopher McGratty, Analyst at KBW]

Okay. Perfect. And then I just want to make sure I understand all the slides, the sensitivities that you provide, which are helpful. If I kind of zoom out, I mean, the ideal rate environment for Zions going into '24, I mean, we've talked about higher for longer and also the Fed curve like the forward curve. What would be kind of the dial-up if you could have it your way?

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

Well, again, our modeling is showing a pretty balanced position. So I certainly like to think that we'll be a little agnostic as it relates to the ultimate path and curve shape. Through portfolio layer swaps, we have worked to hedge our tangible common equity to a spike higher in rates on the longer end of the curve.

And then as I said, on the shorter end of the curve, we feel with the distribution of deposits that we have that we would be able to adjust deposit pricing on those very high-priced deposits pretty quickly on the downside. And so, again, it's a pretty deliberate construction of a hedging program to manage the balance sheet in an uncertain interest rate environment. And so a long way of saying that I wouldn't necessarily pick a best path for us. If we've done what we think we're doing well, then we should be pretty agnostic to rate.

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

Yes. I'd just -- I would only add, if we saw rates come down, 1.5-points [Phonetic] or something like that, it will be a great thing for borrowers. And so I think it does matter in terms of our borrowers. And so I've always thought the kind of three on the short end and five on the long end is about nirvana for a company like ours.

[Christopher McGratty, Analyst at KBW]

That's awesome. Thank you.

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

Thanks.

[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. Thanks for taking my questions. So I understand the use of your liquidity position to kind of sort of run it down to pay for loan growth and other uses of funds. But is there a certain floor that you're thinking when you think about your cash position in money market investments?

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

Well, yes. So on cash and money market, I think you'd see us probably at around $2 billion or so, given the size and composition of the balance sheet. It's pretty close to where we're running today. We don't -- it's cash in sort of in the traditional sense, therefore, it's immediate liquidity. But we feel very confident in our ability to draw on the liquidity embedded in our investment portfolio through the repo in other markets.

[Brandon King, Analyst at Truist Securities]

Okay. And then on your comments about the higher cost deposits, how many of those are indexed? And if not, if they're negotiated, could you just give us a sense of how you plan on going about lowering those deposit costs to do your rate cuts and kind of how you're approaching your customers with that?

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

Yes. The majority of those deposits are not specifically indexed. That is that they will not sort of automatically reset, but we've got an army of bankers who are talking to our customers every day. And as rates -- the value of money falls, if short-term rates fall, then I'm confident that we'll be able to manage those rates down pretty quickly.

[Brandon King, Analyst at Truist Securities]

Thanks for taking my questions.

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

Yes. Thanks, Brandon.

[Operator]

Thank you. Our next question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question.

[Matthew Clark, Analyst at Piper Sandler Companies]

Hey, good afternoon. Thanks for the questions. Just the first one around the customer-related fee income. I know it's only just under 10% of your overall fees kind of annually or at least in 2023. But just on the wealth management side, a little surprised to see that dip down. Can you just update us on the flows there, ins and outs and how those fees are recognized, the timing of those fees?

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

Well, I think it's -- when you say dipped down, I think it's kind of bouncing between 14% and 15%. I think that's probably kind of rounding that's driving that. I would say, particularly notable in our wealth management group, you'll notice that there has been some market volatility over the course of the last couple of years, and I think the strength of our program is demonstrated in the consistency of revenue that you see there.

[Matthew Clark, Analyst at Piper Sandler Companies]

Okay. But in terms of how those fees are -- the timing of those -- how those fees are recognized, is it on a delay -- is it kind of a one quarter lag? Or is it consistent with the performance in the quarter?

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

Yes, it's consistent. It's up to date and consistent with the performance of the quarter, there's not a lag there.

[Matthew Clark, Analyst at Piper Sandler Companies]

Okay. Okay. And then just one quick one. If you have the spot rate on deposits at the end of the year.

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

I don't have it handy. We'll have to call you back with that one.

[Matthew Clark, Analyst at Piper Sandler Companies]

Okay. Thank you.

[Operator]

Thank you. And 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 afternoon, everyone. Paul, I just wanted to follow up on the NII guide on Slide 16. So it says, 4Q '24 expected to be stable to slightly increasing when compared to 4Q '23. So that would be considered 0% to 2%, correct?

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

Well, we use words, not numbers, but it's certainly low single digit.

[Brody Preston, Analyst at UBS Group]

Got it. Okay. And I wanted to follow up on the deposit beta commentary. I understand that you have a mix of high beta and low beta deposits. So I was hoping to better understand what the interest-bearing deposit beta on the way down is underpinning that specific guidance? It kind of implies a 40% to 45% interest-bearing deposit beta on the way down. Is that about right?

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

Let me think about that. That might be in the ballpark. Again, looking -- thinking about the amount of relatively high beta products we have, we think we're going to have a very high beta on those. Our cumulative beta on interest-bearing deposits has been -- interest-bearing, has been 60% over this cycle. And so we're -- that's interest-bearing, that excludes the DDA. So I'm certainly hopeful that we would be able to have a beta that looks like that on the way down.

[Brody Preston, Analyst at UBS Group]

Okay. Great. And then my last one is just around the swaps. You terminated another $800 million of received fixed swaps this quarter. I just wanted to better understand what the -- what drives the decision to terminate the swaps? And then you've done that a few times, I think, over the last year or so. Could you clarify what the NII impact of the accretion of the swap losses will be in 2024?

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

Well, we -- I don't have the chapter and verse details in front of me, but the reason that we have been canceling those swaps is that the swaps are there to help add asset duration. And the asset duration was to sort of balance the deposit duration. Depositor behavior has evolved differently than we expected. And so we've seen the DDA runoff, and we've seen higher betas perhaps than what we would have modeled a year ago. And so that effectively shortens the duration of deposits. The canceled swaps and then the paid fixed swaps that we've put on have all been for the purpose of shortening asset durations to try to create that balance between asset durations and liability durations. As we look ahead, the net interest income outlook that we've provided incorporates the effect of the amortization of those swap maturities that you just asked about.

[Brody Preston, Analyst at UBS Group]

Okay. Got it. Thank you for taking my questions.

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

Sure. Thank you.

[Operator]

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

[Jon Arfstrom, Analyst at RBC Capital Markets]

Hey, thanks. Good afternoon.

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

Hey, Jon.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Credit looks pretty good for you guys, and I understand the prepared comments on the outlook. But can you comment on some of the criticized and classified trends in the back of the deck on like 33, 34 and 36, those slides? Curious what you expect on losses over time.

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

Sure. Thanks, Jon. This is Derek.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Hi, Derek.

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

The loss -- future losses are harder to predict here. But what we're seeing is some continued challenges in the office portfolio. We continue to work through those, again, our office portfolio is a pretty small book, for less than 3% of the total loans. We continue to work through those. We did not have any new non-accruals in the office portfolio this quarter.

What we are seeing is the multifamily portfolio, seeing some increase in criticized there. And it really comes from three things. One is some delayed construction, which is being solved by additional equity from our sponsors. And then the second thing that's contributing is higher interest rates, as well as the third would be some slowdown in the lease-up velocity that we're seeing for the multifamily book. They're still able to achieve rents, but in some cases, they're granting concessions. It's just taking the lease up a little bit longer than originally underwritten. So in most cases, we think it will just take a little longer to get there, and the sponsors are continuing to support the portfolio as we work through those trends.

[Jon Arfstrom, Analyst at RBC Capital Markets]

And I guess one of the surprises in the quarter was the zero provision. And I guess, how do you guys want us to think about the provision going forward? Is it safe to go back to where you were in the prior three quarters? Or do you still...

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

I would just offer -- just a perspective on it. We've got about at present, there's about 19 years of loss could be absorbed by the allowance, given the total loss performance over the last year. Clearly, we wouldn't have an allowance that runs out 19 years' worth of losses. We've got a portfolio duration much shorter than that. It really reflects the fact that as we built that, we expected what we're now in fact seeing, and that's what the accounting rules require, is that you basically forecast what is the loss in the life of the portfolio.

And so the fact that we're seeing increased levels of criticized isn't a great concern. I'd also add to what Derek just said, for example, with respect to multifamily, you're probably -- deals that have done -- this isn't just Zions. I think this is really -- we've seen this across the industry. In recent years, the equity going into those deals is probably double what it was a decade ago. And so there is a lot more cushion and ability for these deals to experience some slowdown, et cetera. But we, nevertheless, will show those as criticized if they're not meeting the original projections.

So we don't see a lot of -- I think Derek would be true to say that, is we're not seeing a lot of loss content in it. But the allowance that we were building in the first three quarters of the year kind of anticipates what -- anticipated what we've started to see. But even at the current levels, criticized levels, non-accruals, non-performing assets at 0.39% of total loans and real estate owned is in very good shape relative to historical experience. So I think we're pretty comfortable with it.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Paul, any thoughts on the provision? I'm just trying to help out Shannon, so we don't end up with a wide consensus. But somewhat teasing you, but any thoughts? I mean, is it a zero provision going forward?

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

As I said, the key determinants are the economic outlook. And then the path, as Harris was saying, the sort of path of credit migration. I mean, in the current quarter, effectively, what happened is that credit migration path performed approximately as expected in the prior quarter, and the macroeconomic forecast is just a little bit better. And so those are the key determinants. And so to the extent those continue to hold true, then that would have a positive impact on the allowance for credit loss.

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

I mean the question about future provisions reminds me of the story of two economists walking down the street, and one says, there's a $20 bill on the sidewalk, and the other says, so that's impossible, someone would have picked it up. And the point being that under CECL, the accounting standard, if you think something is going to happen in the future, you've got to reflect it now. And so almost by definition, you can't predict the future provisions are going to be one way or the other because you'd already picked that up, if you will.

So I think it's really hard to say what it becomes in the future. You just have to see how the future changes every quarter or your outlook for it. But I do think it's -- again, I think it's fair to say, I think we feel -- the bottom line is, I think we feel pretty comfortable with the quality of the portfolio, where our reserves are today, and we'll see where it goes from here.

[Jon Arfstrom, Analyst at RBC Capital Markets]

Fair enough. Thank you.

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

Thank you.

[Operator]

We have reached the end of our question-and-answer session. And with that, I would like to turn the floor back over to Shannon Drage for closing comments.

[Shannon R. Drage, Senior Vice President, Director of Financial Planning and Analysis & Interim Director of IR at Zions Bancorporation, National Association]

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

[Operator]

[Operator Closing Remarks]