Zions Bancorporation, National Association (NASDAQ:ZION) Q1 2023 Earnings Call Transcript April 19, 2023
Zions Bancorporation, National Association misses on earnings expectations. Reported EPS is $1.33 EPS, expectations were $1.53.
Operator Greetings, and welcome to Zions Bancorp Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Director of Investor Relations, James Abbott. Thank you James. You may begin.James Abbott Thank you, Alicia, and good evening. We welcome you to this conference call to discuss our 2023 first quarter earnings. 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 the slide deck on Slide 2, 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 slide deck are available at zionsbancorporation.com.For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris’ comments Paul Burdiss, our Chief Financial Officer will review our financial results. Included in Paul’s comments will be a more in-depth discussion about our deposits and capital then is customary in an earnings call form, but we want to be responsive to the questions we have received over the past several weeks. Following Paul’s comments, we’ve asked Michael Morris, our Chief Credit Officer to discuss credit quality generally, but to do an in-depth discussion about our commercial real estate portfolio and specifically our office commercial real estate portfolio.
Also with us today, include – our guests include Scott McLean, President and Chief Operating Officer; and Keith Maio, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session. We anticipate that the duration of this call will be one hour. I will now turn the time over to Harris Simmons.Harris Simmons Thanks very much, James, and welcome to all of you. I’d like to begin by offering just a few brief thoughts about the current environment and a topic or two that have been in focus by investors and the analyst community in recent weeks. Some of the idiosyncratic structure features that led to the recent domestic bank failures are well known to most of – all of you.It should cause all of us, I think, to really think more holistically about how we think about bank’s balance sheets and business models.
It’s particularly odd in my view that thoughtful observers would assess the strength of any bank by examining its capital through the soda straw of tangible common equity or tangible common equity adjusted for HTM marks without considering the economic value and this sustainability of all of the components of the bank’s balance sheet and its business model.Doing so is my optic, as a major portion, perhaps the major portion of any bank’s value is found in the characteristics of its deposit franchise. Something that short of a recent nod to the percentage of deposits that are insured is hardly mentioned in most analyses. In the shareholder letter I wrote in February well before the disruptions of mid-March, I noted that the Generally Accepted Accounting Principles, the accounting framework or GAAP framework that we’re all familiar with presents on the surface.
A medley of historic cost and fair value accounting and some of the distortions relative to economic reality are further amplified by the leverage that’s necessary component of banking’s business model.Applying Mark’s from securities and loans to any bank’s capital without approaching the project comprehensively by including the impact to the value of core deposits and other liabilities is an example of what I sometimes refer to as one-hand clapping. While the events of mid-March were disruptive, they were very manageable and in large measure reflected a continuation of a trend seen in the industry and certainly in our own balance sheet over the past few quarters.We’ve seen a dramatic rise in deposit balances through the pandemic years. Something that had begun to reverse itself as the Fed changed course with its monetary policy.
In some respects, it’s a case of the Fed giveth and the Fed taketh away. The deposit trend that we’ve seen in the latter part of 2022 and the first two months of this year was only modestly accelerated by any concerns generated by the bank failures. And the most valuable part of our deposit base that constitutes the lion’s share of our funding was absolutely durable and even saw growth in the latter part of March.Specifically, excluding any broker deposits, we opened over 7,000 net new accounts with balances totaling $629 million between March 7 and March 31. The accelerations of a shift in funding does impact net interest income, though in a manner that we believe will be very manageable and that we’ll work to offset in part with a greater focus on our operating costs in the months ahead.Finally, a word or two about commercial real estate, which is becoming a topic of greater focus as concerns perhaps increase with respect to a possible recession.
We embarked on a long-term project to reduce credit risk in our portfolio over a decade ago in the wake of the great financial crisis. One of our objectives was to ensure that CRE was growing at a pace less than that of the remainder of the loan portfolio and we’ve done that.Commercial real estate has grown at an annual rate of 2.5% over the past decade, a growth rate that’s about half that of the rest of the portfolio. It’s required us to high grade the clients we work with and the projects we finance. And has meant that we haven’t had a surge of growth during a period of very low cap rates. We’ll provide additional details about this later the presentation.So, now turning to Slide 4, this is the summary of quarterly financial results, showing a linked quarter comparison with the fourth quarter of 2022.
As most of you are aware, there is less net interest income in the first quarter due to two fewer days. Also, non-interest expense experienced a seasonality related to higher stock based compensation, and payroll taxes. The combination of which results in materially lower adjusted pre-provision net revenue and compresses the efficiency ratio.As you would expect, those seasonal factors normalize as we move through the year. Our credit quality remains very strong, loan growth slowed from the last few quarters to a moderate annualized pace of growth. Period end deposits declined 3.4% [though] [ph] we added $4.5 billion of broker deposits, which was about 6.5 percentage points of deposits. Moving to Slide 5, diluted earnings per share was $1.33.
As shown on the right side, we accrued $0.06 per share or $9 million for a contingency tax reserve related to the treatment of capitalized research and development costs. We made the change due to the outcome of recent tax litigation and the case involving another firm.Nearly half of the linked quarter decline was due to seasonal factors, while the other elements are primarily explained by the change in funding composition and operating expense, which Paul will discuss in his comments.Turning to Slide 6, our third quarter adjusted pre-provision net revenue was $341 million. The linked quarter decline was attributable to the same primary factors I just noted and by comparing to the year ago quarter, thus removing seasonality, as well as normalizing for the effect of PPP loans, the increase was 57% over that year ago period.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 Burdiss Thank you, Harris, and good evening, everyone. I’ll begin with a discussion of the components of PPNR. Approximately 80% of our revenue is from the balance sheet through net interest income. Page 7 is an overview of net interest income and the net interest margin. The chart on the left shows the recent five quarter trend for both, net interest income on the bars and the net interest margin in white boxes lost ground in the first quarter for the first time in [Technical Difficulty].The right hand side of the chart shows the linked quarter effect of certain items on the net interest margin. Higher rates helped to improve our earning asset yield by 40 basis points. As we saw more deposit sensitivity to the higher interest rate environment, we increased the roll rate on overall – we’ve increased the rate on overall deposits by 50 basis points relative to the fourth quarter.Our borrowed funds also increased, which when combined with the higher cost of deposits, increased the total cost of interest bearing funds by 95 basis points.
This degree of core deposit sensitivity therefore resulted in a 55 basis point contraction in our interest rate spread. However, over 40% of our earning assets are funded with non-interest bearing sources of funds.The 50 basis point contraction in interest rate spread was therefore partially offset by an increase of 35 basis points in the value of non-interest bearing funds in the higher rate environment. These factors combined to produce a 20 basis point contraction in the net interest margin in the first quarter when compared to fourth quarter. I’ll tell you more about recent trends in balance sheet yields in just a few minutes.Moving on to non-interest income and revenue, on Page 8, customer related non-interest income was $151 million, a decrease of 1% versus the prior quarter and flat to the prior year.
As we noted last quarter, we modified our non-sufficient funds and overdraft fee practices near the beginning of the third quarter of 2022, which has reduced our non-interest income by about $3 million per quarter.Improvement in treasury management fees has allowed us to make up some of that lost revenue. Our outlook for our customer related non-interest income for the first quarter of 2024 is moderately increasing relative to the first quarter of 2023. On the right side of the page, revenue, which is the sum of net interest income and customer related non-interest income as shown.Revenue grew by 19% from a year ago and when excluding PPP revenue, it grew by 24% over the same period. Non-interest expense on Page 9 increased 9% from the prior quarter to $512 million.
The base period, the fourth quarter of 2022, was positively impacted by an incentive compensation reversal of $8 million, while the first quarter of 2023 included seasonal items such as stock based compensation for retirement eligible employees and payroll taxes of $24 million. The cost of FDIC insurance was also up $4 million versus the fourth quarter.While expenses were up in the first quarter, you can see on this page that our efficiency ratio improved by nearly 6 percentage points when compared to the same quarter one year ago. Our outlook for adjusted non-interest expense is now stable as we expect expenses in the first quarter of next year to be flat to the first quarter of 2023.Page 10 highlights trends in our loans and deposits over the past year.
The rate of growth in loans slowed in the first quarter as seen in the period end numbers as opposed to the average shown on this page. Our expectation is that loans will increase slightly in the first quarter of 2024 when compared to the first quarter of 2023.Deposits have continued the trend we reported throughout 2022. As I will discuss in a few minutes, there is a market difference in the sensitivity of larger uninsured deposits when compared to smaller insured deposits. Larger depositors are more sensitive to higher rates and as we have moved deeper into the interest rate cycle, deposit repricing betas have accelerated.As discussed in our last earnings call, we have become more aggressive on deposit rates, which we expect will help to attract some of the larger balances that have moved off balance sheet in search of higher yields.
For the quarter, our cost of total deposits increased to 47 basis points, up from 20 basis points in the prior quarter. At the end of the quarter, the spot cost of total deposits was 90 basis points with interest bearing deposits yielding 1.63%.Our deposit beta at the end of the quarter was 18% when compared to the fourth quarter of 2021. These changes when combined with the continued improvement in loan yields resulted in an estimated net interest margin of about 3% point in time at the end of the first quarter. I will provide additional details on the composition and performance of our deposit portfolio over the next few pages.Beginning with Page 11, as shown here, commercial deposits are about one-half of our deposits with consumer deposits contributing about one-third of total deposits in brokered, trusted estate deposits rounding out the portfolio.
Not surprisingly due to deposit size, two-thirds of our commercial deposits are not insured.However, over 60% of those deposits are tied to the bank through operating account relationships. Due to the operational nature of these deposits, we view these deposits as being less rate sensitive than other large deposits. Page 12 provides a view of changes in deposit balances in the first quarter when compared to the prior quarter end by balanced year. As we have observed over the past year, deposit size and activity are key drivers of deposit sensitivity.We believe that recent changes in deposit pricing will provide a compelling on balance sheet option, particularly for larger deposits. Page 13 shows the deposit portfolio by FDIC insurance status.
As the chart on the left shows, we reported a notable increase in uninsured deposits throughout 2020 and 2021 and has been previously reported, those deposits have been falling back toward historical levels.Likewise, our loan-to-deposit ratio on the right side of the page is moving to be in-line with the pre-pandemic level. Since the end of 2019, total deposits are up 21% and are up 18%, excluding broker deposits.Page 14 compares the total amount of uninsured deposits where we have observed more deposit sensitivity to the aggregate amount of secured and available sources of funds. As shown here, the current level of demonstrated sources of funds handily exceeds the entire volume of uninsured deposits. I will preemptively respond to an expected question.We did not access the Federal Reserve discount window nor the new bank term funding program in the first quarter except for an operational test of the BTFP consisting of a $1 million overnight advance.Moving to Page 15, our investment portfolio exists primarily to be a ready source of funds to facilitate client driven balance sheet changes.
On this page, we show our securities and money market investment portfolios over the last five quarters. The size of the investment portfolio declined versus the previous quarter, but as a percent of earning assets it remains larger than it was immediately preceding the pandemic. This portfolio has behaved as expected.The principal and prepayment related cash flows were just over $800 million in the first quarter. With this predictable portfolio of cash flow, we anticipate that money market and investment securities balances combined will continue to decline over the near term, which will in-turn create a source of funds the rest of the balance sheet. Perhaps more importantly, the composition of the investment portfolio allows us to secure funding without the need to sell any of the investment securities.
This is achieved primarily through a mechanism known as the general collateral financing or GCF Repo.In this very deep and liquid market, high quality collateral is pledged and program participants exchange funds anonymously through a third-party clearing and guaranteeing settlement, meaning that the value of the collateral is recognized by all as the sole component of risk assessment. The duration of the investment portfolio is virtually unchanged from the same prior year period at 4.1 years currently versus 4.0 years a year ago.This duration helps to manage the inherent interest rate mismatch between loans and deposits with loan durations estimated to be 1.8 years and the larger deposit portfolio duration estimated to be 2.9 years, fixed rate term investments are required to bring balance sheet – to bring balance to asset and liability durations and thus protect the economic value of shareholders’ equity.Page 16 provides information about our interest rate sensitivity.
As a reminder, we have been using the terms, latent interest rate sensitivity, and emergent interest rate activity to describe the effects on net interest income of rate changes that have occurred, as well as those have yet to occur as implied by the shape of the yield curve. Importantly, as balance sheet is assumed to remain unchanged in size in these descriptions.Regarding latent sensitivity, the in-place yield curve as of March 31, which was notably more inverted than the curve at December 31, will work through our net interest income over time. The difference from the prior period disclosures of latent sensitivity, in addition to the shape of the yield curve, is the accelerated funding cost beta, which we discussed on last quarter’s call.
These factors are modeled to result in a net interest income decline of nearly 7% in the first quarter of 2024 when compared to the first quarter of 2023.Regarding emergent sensitivity, if the March 31, 2023 forward path of interest rates were to materialize and using a stable sized balance sheet, the emergent sensitivity measure indicates a decline in net interest income of an additional 1% in the first quarter of 2024 when compared to the first quarter of 2023. With respect to our traditional interest rate risk disclosures, our estimated interest rate sensitivity to a 100 basis point parallel interest rate shock using a same size balance sheet has increased by about 1 percentage point from the fourth quarter.As the composition of the balance sheet changes, we actively manage our interest rate risk through changes in the investment portfolio or through our cash flow swaps.
We have recently begun to reduce asset duration through the unwinding of interest rate swaps. As a reminder, this traditional interest rate risk disclosure represents a parallel and instantaneous shock while the latent and emergent views reflect the prevailing yield curve at March 31.Our outlook for net interest income for the first quarter of 2024 relative to the first quarter of 2023 is moderately decreasing, more immediately we expect the recent acceleration of deposit repricing beta and balance sheet changes to reduce net interest income by about 7% in the second quarter when compared to the first quarter.On Page 17, we quantified the value of the investment portfolio in managing our interest rate risk. On the left hand side of the page, the dark blue bars show our reported net interest income at risk measures, while the light blue bars show what net interest income at risk would be if we did not actively manage interest rate risk through our investment portfolio and interest rate swaps.As the bars indicate, the difference in the plus and minus 200 basis point parallel shocks would move from 13% to 39%, and even larger impact on the risk to economic value of equity due to changes in interest rates can be seen on the right hand chart.
Reported [EVE] [ph] at risk would move from 2 percentage point differential to a 49% difference without the moderating impact of our fixed rate securities and interest rate swap positions. This demonstrates the value of assessing the balance sheet holistically rather than through the partial view previously described by Harris.Our loss absorbing capital position is shown on Page 18. We believe that our capital position is aligned with the balance sheet and operating risk of the bank. The CET1 ratio continued to grow in the first quarter to 9.9%. This compares well to a very low level of ongoing net charge-offs. As the macroeconomic environment has become more uncertain, we do not expect to repurchase shares in the second quarter. Our goal continues to be to maintain a CET1 ratio, slightly above peer median, while managing to a below-average risk profile.Page 19 provides an illustrative outlook for accumulated other comprehensive loss.
The unrealized loss associated with the investment portfolio and cash flow interest rate swaps will reverse as these portfolios pay down and mature. These changes are expected to improve the accumulated other comprehensive loss position by nearly $1 billion by the end of 2024. All things equal, this would add 110 basis points to the common equity ratio and would add just under $7 to book value per common share.I will now turn the call over to Michael Morris, our Chief Credit Officer, for a discussion of credit and in particular, commercial real estate. Michael?Michael Morris Thanks, Paul, and hello to all those on the line. I’ll begin on Slide 20 with an overview of our credit quality. We’re pleased to report another quarter of improved problem loans as measured by classified loans.
Such loans declined to 1.6% of total loans. Non-performing assets increased slightly, but was off a very low base. And as Harris noted earlier, we’re happy to be able to report today that we had no net charge-offs in the quarter, in the first quarter.Nevertheless, due primarily to an increase in the probability of a recession in the quantitative models that we used for setting the allowance along with additional dollars added to the qualitative allowance. For the commercial real estate office segment, the allowance for credit loss increased 7% to nearly 680 million or 1.21% of loans as a coverage ratio.Looking back over a longer period, as the Federal Reserve began to increase interest rates, we’ve increased the allowance by 32%, while net charge-offs have remained very low and while classified loans have decreased 21%.Turning to Slide 21, there is a significant amount of media coverage about commercial real estate and the risk of defaults and loss on loan portfolios.
As Harris said at the outset of the call, not all commercial real estate loans are created equal. We have been addressing this risk for more than a decade now having reduced CRE to 23% of total loans from 33% at the peak in late 2008.Five years ago, we spent a considerable portion of our Investor Day highlighting our credit risk reduction efforts, and three years ago, we told investors at our 2020 Investor Day that we expected to be in the best quartile of net charge-offs as we go through the next recession. With commercial real estate being a key element, that must perform well to make good on that expectation.Over the past decade, we’ve outperformed by a considerable margin the loss rate of both the industry as a whole and our large regional bank peers.
Our commercial real estate portfolio is diversified across geography with the largest concentration in California. Although it’s measured on a per capita basis, our concentration there is actually smaller than many of our other geographies that we’re in.Our portfolio is also well-diversified across asset classes or product types with the largest concentration in multifamily. Office CRE is the property type receiving the most attention in the financial media and by investors and so I’ll discuss that a little more in detail in a moment.On Slide 22, we have been tracking our commercial real estate growth rates relative to peers over time. Since late 2017, we’ve grown CRE a total of 9%, which compares to inflation of 23% during that same time period.
And it is well below the roughly 45% organic increase seen at the media of our peers. In order to engineer this slower growth, we’ve employed more rigorous underwriting standards than many of our peers. And we’ve adhered to our concentration framework.Turning to Slide 23, we’ve been presenting this or similar data on the left in the appendix of our slide decks for a number of years. It shows the weighted average LTV of each of the major asset classes, which is calculated using the current loan amount divided by the most recent appraisal although the property types have a weighted LTV that is less than 60% loan to value.Further, we look at the tail risk within our portfolios, not just LTV tail risk, but other underwriting standards as well. Such as debt coverage ratio.
Shown on the bottom, you can see the distribution of LTVs for all term CRE loans with only 1% of CRE loans having an LTV that is greater than 80%. I should note that we watch for layering of risk factors and generally require mitigation of risk, if one underwriting element is a bit off the fairway.For example, if the LTV is higher than our normal comfort level, we may require a cash sweep, faster amortization schedule, a greater personal guarantee and so forth. This practice is a major factor in wire loss given non-accrual rates are among the best within our peer group and within the industry.On the right is a look at one underwriting aspect of our CRE portfolio. The darker blue bars show the LTV distribution using the current loan balance in the most recent appraisal.
However, periodically, we run sensitivities and analyses that show the estimated current value by attaching the most recent appraisal to commercial property price indices and rolling the appraisal forward to show more of a pro forma or indexed LTV.With the deterioration in office property prices, it’s not surprising to see that the light blue bars have shifted somewhat to the right. With an estimated 130 million of office loans in the 80% to 90% category, but none in the 90% or greater category. Not shown on this slide, but on Slides 29 and 30 in the appendix, we provide a lot of additional detail in our office portfolio.Including important factors such as the median and average size, our allowance coverage relative to office loans, as well as criticized office loans, credit tenancy rates, lease expirations by year, loan maturities per year, and other key factors in estimating the probability of and the loss given default.In summary, we’re comfortable with how we’re going to be managing the office exposure and the risk profile of those loans, we’re expecting some credit loss, but we think it’s very manageable.So James, I will turn the call back to you.James Abbott Thanks, Michael.
Slide 24 summarizes our financial outlook. Paul mentioned some of these throughout the call, so I’ll just briefly summarize the changes in these. The first one is a change in the reduction of loan growth to slightly increasing from moderately increasing. And this simply reflects our expectation that the continued tightening of monetary policy will result in further waning of loan demand.Secondly, a reduction in our quarterly view of net interest income has changed to moderately decreasing from slightly increasing. Paul elaborated extensively on that, so I won’t deliver that. And then thirdly, is an improvement in non-interest expense, which we changed to stable from moderately increasing in the previous edition.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.And with that, Alicia, if you’ll open the line for questions.
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Question-and-Answer Session Operator Thank you. [Operator Instructions]
Thank you. Our first question is from Manank Gosalia with Morgan Stanley. Please proceed with your question.Manank Gosalia Hi, good afternoon. Thanks for taking my question. I was wondering, can you talk a little bit about the trajectory of deposits through the quarter? How much of that decline in deposit was seasonal versus, you know, continued run-off of rate sensitive deposits versus what you specifically saw after March is?
And I asked because I know you mentioned that a lot of this was, you know, has mostly accelerated what you would have typically seen in this rate environment anyway, but I wanted to get your thoughts overall on the deposit flow through the quarter.Harris Simmons Yeah, I can maybe just offer a little more color to it. We had seen in the fourth quarter, roughly $5 billion of little over $5 billion in run-off, and I’m going to speak specifically to non-brokered and [non-tenants] [ph], what we call our [gold sweet product] [ph], which is a very wholesale product. So, we’ve had a – between September and December just over $5 billion, excluding broker deposits was little over $8 billion in the first quarter. And so it was a continuation of a trend, actually a trend that began back in June.
We’d had about a $1.8 billion decrease.So, it was an accelerating phenomenon as rates were rising. And it’s hard to know exactly how to pinpoint, you know, how much is due to how much was trend and how much was due to the disruption in mid-March. But my sense of things is that this was, you know, it was – maybe, you know, maybe $3 billion, or something like that, 2 billion to 3 billion. It was beyond the trend. And furthermore, that probably a fair amount of that will come back as things stabilize. And we’ve had a very low deposit beta, and that was deliberate and it’s contributed to it, because we’ve done a very liquid position as we bring that probably a little more in the line, I expect that to slow down.Manank Gosalia Got it. And then maybe if you can help us with a little more detail on the moderately decreasing guide on NII, can you help us think through so, you know, that guidance is from now through or for 1Q 2024 on a year-on-year basis, but can you help us think through how you’re thinking about the trajectory through the course of 2023?Paul Burdiss Well, this is Paul there, you know, the main components, of course, are the, you know, kind of continued inversion of the yield curve.
It’s worse than it was worse, you know, i.e. more inverted in the first quarter relative to the fourth quarter. That was an important change. I think, as we think about that sort of view of latent sensitivity, changes in the rates as they work through the balance sheet, but there was also, as I noted, some funding composition changes.So, as we look out over the course of the year, I gave some pretty specific, I think outlook with respect to what to expect in the second quarter in there. Then from there, my expectation would be that loan growth, and perhaps, you know, improved deposit flows would improve that over time getting to results next year, that is in the ballpark of what I’ve described.Manank Gosalia Got it. Thank you.Paul Burdiss Thank you.Operator Thank you.
Our next question comes from Dave Rochester with Compass Point. Please proceed with your question.Dave Rochester Hey, good afternoon, guys. Back on the NII guide, appreciated all the details, I just want to run through them real quick, Paul, it sounds like you’re saying, NII down 7% for 2Q versus 1Q, but when you take a step back and look at the annual or the year-over-year, it sounds like it’s a little bit worse than the moderate or the mid-single-digit decline that you’re talking about 1Q to 1Q. So, I just wanted to confirm you guys are looking for stable NII from 2Q on and so 1Q 2024 effectively, is that correct? And like how are you guys – Oh, go ahead. [Multiple Speakers] deposits and funding trends in that context?Paul Burdiss Okay, yeah, on the first point, I wouldn’t characterize the first quarter of 2024 as being worse, necessarily than the second quarter of 2023.
The way I’m thinking about it, you’ve got some countervailing influences. One is the continued impact of the inverted curve, net interest income, but on the other side of that, I would expect some balance sheet growth in there as well. And then as it relates to the funding composition, what we have in our model is, kind of a continued with what I’m looking for, kind of, our beta has been so low for so long. As we said in last quarters call, we expect that beta to catch up over the course of 2023. And so, incorporated in that outlook, we saw some of that beta catch up here in the first quarter. We saw it, again, sort of at the end of the first quarter, but that sort of beta catch up, if you will, is going to continue throughout 2023. So, there’s some kind of countervailing trends there.
But it ends up in a place that I would say, you know, kind of that guidance would be roughly similar to where we were – where we expect to be in the second quarter. [Multiple Speakers]Dave Rochester I was just saying, I didn’t mean to confuse, it just looked like you were saying that the NII in 1Q 2024 was going to be potentially higher than what you were looking forward to 2Q 2023, just given you were talking about taking 2023 down 7%. And 1Q 2024 only being down roughly 5%, effectively versus the quarter you just reported. So, it sounds like you’re talking about a little bit of an upward trend on NII, I just wanted to confirm that, that that’s what you were thinking?Paul Burdiss Again, that would be related to, kind of balance sheet growth in these countervailing trends outside.
And the kind of upside potential, if you will, would be an improvement in the funding mix as we go throughout the year.Dave Rochester Got you. And then appreciated all the color on the account openings in March and the other details you guys gave, you just talk about what your larger operating deposit account customers are doing more broadly post the failures last month, have you seen much movement on the operating accounts side? Are they holding less funds in their accounts since the turmoil and then if there’s any kind of quarter to date 2Q commentary on deposit trends you can give in terms of up or down that would definitely be helpful as well? Thanks.Scott McLean Dave, this is Scott McLean, you know, on the second part of that we, you know, we just don’t provide, kind of intro quarter updates.
So, we’ll stay with that practice. And in terms of larger depositors, there, as we’ve said, as Paul discussed, we, you know, there’s a certain subset of those larger commercial depositors where they have well in excess of what they need for just their operating accounts. And some of that money is certainly interest rate sensitive, it’s probably the most interest rate sensitive.And then secondly, you know, there was just a disruption. So, we certainly lost some deposits related to the disruption, but those relationships are really strong and, you know, the large customers that I’ve talked to Harris talked to, Paul, etcetera. They, you know, they’ve seen this before and they understand the strength of the company. So, I, as Paul said, I think some of those balances will naturally come back particularly after this earnings release.
And so, it’s just a combination of interest rate sensitivity and some sentiment money certainly did move because of the volatility.Dave Rochester Great. Thanks, guys.Operator Thank you. Our next question comes from John Pancari with Evercore ISI. Please proceed with your question.John Pancari Good afternoon.Paul Burdiss Hi, John.John Pancari I want to see on the, just a couple of things on your NII outlook, can you just clarify what deposit growth outlook is baked into your NII forecast? And then similarly, what is the non-interest bearing mix trend that you assume as well? Thanks.Paul Burdiss Yeah, we you know, we typically don’t provide outlook on deposits, but I can say that they’re embedded in that is a little more deposit attrition. As I said, previously, my expectation is with, kind of a better, more aggressive pricing, as I said in my comments that we could, you know, perhaps waive some of these deposits that have moved back, moved off the balance sheet back on the balance sheet, but inherent in the outlook is a little more deposit attrition.John Pancari Okay, and then similarly, do you have the ability to help give us some color on the, just bearing mixed change?
And then can you remind us how you’re thinking about it through cycle deposit beta?Paul Burdiss Well, non-interest bearing mix, we saw – as you saw in the period end balances, we did see some runoff kind of period-over-period, on average, non-interest bearing deposits remain about half of total deposits, but as I think historical trends would indicate, you know, it’s at 50% of deposits, holding non-interest bearing deposits of 50% of total deposits, is a pretty a typical level. And so we would expect that to revert over the course of the year. So, I’m not going to predict where that goes, except to say that I would expect that mix to change over the course of the year. And that interest bearing deposits by the time we get to the end of the year, interest bearing deposits will exceed non-interest bearing deposits.John Pancari Okay, great, thanks.Paul Burdiss Sorry.
On deposits data, our terminal beta for interest-bearing deposits is near 50%, about 45% for total funds, total interest-bearing funds, or sorry, total deposits interest – total deposits is about 28%.John Pancari Great. Thank you.Paul Burdiss Okay. Thank you.Operator Thank you. Our next question comes from Brad Milsaps with Piper Sandler. Please proceed with your question.Brad Milsaps Hey, good afternoon, and thanks for taking my questions. Paul, I was just curious, the broker deposits that you put on at the end of the quarter, I was curious if you could give me a sense of, maybe the duration and rate on those, and then kind of what would the trade-off be between the deposits, you expect to come back to the bank versus the brokered money or, you know, short-term borrowings or Fed Funds purchase, just trying to try to think about, you know, maybe what the pickup could be there?
