Zions Bancorporation, National Association (NASDAQ:ZION) Q1 2024 Earnings Call Transcript

Zions Bancorporation, National Association (NASDAQ:ZION) Q1 2024 Earnings Call Transcript April 22, 2024

Zions Bancorporation, National Association isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Zions Bancorp Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 Shannon Drage, Director of Investor Relations. Thank you, Shannon. You may begin.

Shannon Drage: Thank you, Daryl, and good morning. We welcome you to this conference call to discuss our 2024 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 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 on our website, zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons will provide opening remarks. Following Harris’ comments, Ryan Richards, our Chief Financial Officer, will review our financial results.

Also with us today are Scott 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 1 hour. I will now turn the time over to Harris Simmons.

Harris Simmons: Thanks very much, Shannon, and we welcome all of you to our call this morning. As Shannon mentioned, Ryan Richards is joining our call today as our new Chief Financial Officer. Ryan was formerly our Corporate Controller and has been promoted to Chief Financial Officer as our former CFO, Paul Burdiss is now serving as the CEO of our largest affiliate bank, Zions Bank. These changes, along with other leadership changes, I think reflect the depth of the talent that we have in our organization and our intentional efforts to develop a well-rounded group of leaders with broad experience. While we and the industry continue to navigate complex and uncertain economic and regulatory conditions, we have not lost focus on bringing value to our customers and shareholders over the long term.

We have just successfully completed the second of three migrations to our new core deposit system which happened for Nevada State Bank and Amegy Bank of Texas customers two weeks ago. We anticipate completing migration of substantially all remaining accounts in late summer. This core system is delivering the benefits we are anticipating, including one intuitive, easy-to-use system for virtually all deposit and loan accounts, which improves the ability to view and manage client relationships, provides greater access to data and consistency of data resulting in fewer calls to the back office, optimized teller transaction processing, the shortening of new account opening and customer maintenance times, and real-time processing allowing for improved fraud detection and mistake resolution.

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Q&A Session

The completion of this major transformation is accompanied by other enhancements to digital capabilities for our customers, all of which, we believe, put us ahead of the pack in terms of our resiliency, our product offerings, and ability to serve our customers. This advantage, combined with our local approach to relationship banking, the strength of our footprint, and our ability to manage risk positions us well for continued advancements in digital banking. We’re also pleased that our efforts to serve and create value for our customers continue to be recognized, including through the 2023 Greenwich Associates Market Tracking Program. Zions was awarded 20 overall national excellence awards, ranking third among all U.S. Banks, and securing our position as one of only three U.S. banks to average 16 or more wins since the inception of the brand awards in 2009.

We continue to score well across a number of measure dimensions for both small business and middle market categories, where we lead the way for Bank You Can Trust, Values Long-Term Relationships, and Ease of Doing Business. By the way, we tip our hat to our friends at Colin Frost and Pinnacle Financial who were number one and two this year and for their continued and consistent recognition by Greenwich Associates over the years. We’re proud to be in such good company and associated with other leading regional banks who demonstrate excellence in meeting the needs of small and middle market businesses. In the current environment, revenue growth continues to be our biggest challenge with adjusted revenue in the quarter down 11% compared to the year ago period.

Over time, a relative net interest margin will improve through customer deposit growth and pricing discipline in addition to the management of interest rate risk through our hedging strategy. We also expect that with a continued passage of time from the events of last spring, our relative cost of deposits will continue to improve. Loan demand seems to have turned the corner of [indiscernible] this quarter with pipelines recovering somewhat from low levels late last year and improving customer sentiment. Our true success will depend on our ability to grow our customer base and we continue to place an emphasis on granular growth of small business customers. Recently, we’ve been particularly successful with a streamlined SBA program aimed at serving smaller businesses in our communities.

It’s a program that seems to fill a unique product need for our customers. And while it doesn’t immediately contribute meaningfully to loan balance growth, it’s a kind of business that builds real franchise value and it’s bringing in a meaningful number of new to the bank customers. And our cross-selling efforts are also bearing fruit. We also remain confident in our ability to grow fee income to a larger percentage of total revenue. Capital markets fees represent a key opportunity and these fees are growing as our product set expands and more of our bankers are marketing these capabilities to clients. These combined efforts to improve revenue will be paired with well-managed expenses. Adjusted expenses in the current period were up a mere $2 million compared to the first quarter of 2023.

And we continue to focus on ways that we can control costs, while continuing to invest in the business. Net charge-offs continue to be benign at just 4 basis points annualized as a percentage of average loans for the quarter. This contrasts to an increase in classified loan balances of $141 million driven largely by the C&I portfolio. We believe realized losses over the next few quarters will continue to be quite manageable and our current expectations are fully reflected in our allowance which increased 1 basis point as percentage of loans. Which Ryan will speak about in more detail later in the presentation. With the continued improvement we expect in our net interest margin coupled with better than pure credit performance, we anticipate a positive trajectory for relative performance and our ability to improve shareholder returns going forward.

Starting on Slide 3, we’ve included key financial performance highlights. We reported net earnings of $143 million for the quarter. Our period end loan balance increased just under 1%, while average balances increased 1.3% for the quarter. Customer deposit balances declined approximately 1% in the quarter due primarily to a small number of seasonal outflows early in the year. Our loan-to-deposit ratio was 78%. Net charge-offs as a percent of loans were just 4 basis points, as noted, down from 6 basis points reported in the prior quarter. Our common equity Tier 1 ratio was 10.4% compared to 10.3% in the fourth quarter and 9.9% a year ago. Moving to Slide 4, diluted earnings per share of $0.96 was up $0.18 from the prior quarter. Current quarter results reflect a $0.07 negative impact from the FDIC’s updated estimate of expected losses from the closures of the Silicon Valley Bank and Signature Bank, which compares to the $0.46 negative impact from the initial assessment reflected in the fourth quarter.

Turning to Slide 5, our first quarter adjusted pre-provision net revenue was $242 million, down from $262 million in the fourth quarter. The length quarter decline was attributable primarily to seasonally higher noninterest expense. Versus the year ago quarter, PPNR was down 29% as the increase in the cost of deposit succeeded the increase in earning asset yields. With that high-level overview, I’m going to ask Ryan Richards, our Chief Financial Officer, to provide additional detail related to our financial performance. Ryan?

Ryan Richards: Thank you, Harris, and Good morning, everyone. I will begin with the discussion of the components of pre-provision net revenue. Nearly 80% of our revenue is from the balance sheet through net interest income. Slide 6 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 net interest margin in the white boxes improved slightly from the prior quarter, as the repricing of earning assets outpaced rising funding costs. Additional detail on changes in the net interest margin is included on Slide 7. On the left-hand side of the page, we provide a linked quarter waterfall, outlining the changes and key components of the net interest margin.

The 22 basis adverse impact associated with borrowings, encompassing both the rate and volume, was offset by the positive impact of loan repricing and the impact of lower average interest-bearing deposit volumes. Non-interest-bearing deposit volumes, volume declines, resulted in a slight reduction in the contribution of these funds to balance sheet profitability. The right-hand side of this chart shows the net interest margin comparison to the prior year quarter. Higher rates were reflected in loan yields, which contributed an additional 77 basis points to the net interest margin. The value of non-interest-bearing deposits at lower borrowing levels contributed another 93 basis points to the margin. These positive contributions, which were more than offset by increased deposit costs, which adversely impacted the net interest margin by 208 basis points.

Overall, the net interest margin declined by 39 basis points versus the prior quarter. Moving to non-interest income and revenue on Slide 8, customer-related non-interest income was $151 million compared to $150 million in the prior quarter, with higher capital markets fees offset by smaller declines in other categories. Our outlook for customer-related noninterest income for the first quarter of 2025 is moderately increasing relative to the first quarter of 2024. The chart on the right side of the 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 decreased 11% from the prior year and was stable versus the fourth quarter due to the factors noted previously.

Adjusted noninterest expense, shown in the lighter blue bars on Slide 9, increased increase $22 million to $511 million, attributable largely to seasonal increases in compensation. Reported expenses at $526 million decreased $55 million. As a reminder, the fourth quarter included $90 million in FDIC special assessment costs, while another $13 million was recognized in the first quarter this year. Our outlook for adjusted noninterest expense for the first quarter of 2025 is slightly increasing relative to the first quarter of 2024. Risks and opportunities associated with this outlook include our ability to manage technology, supply chain, and employment costs. Slide 10 highlights trends in our average loans and deposits over the year. On the left side, you can see that average loans increased 1% in the current quarter.

Loan demand and customer sentiment improved somewhat during the quarter, and our expectation is that, loans will be stable to slightly increasing in the first quarter of 2025 relative to the first quarter of 2024. Now turning to deposits on the right side of this page. Average deposits for the first quarter decreased slightly as average non-interest bearing and broker deposits declined. The cost of total deposits, shown in white boxes, stayed flat at 206 basis points. 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 first quarter remained 39%. And the repricing beta for interest bearing deposits was 60%. Slide 11 includes a more comprehensive view of funding sources and total funding cost trends.

The left-hand side 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 costs at 9 basis points in the current quarter has continued to decline compared to the prior three quarters. Moving to Slide 12, 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 investments over the last five quarters. The investment portfolio continues to behave as expected.

Maturities, principal amortization, and prepayment-related cash flows were $700 million in the first quarter. With this somewhat predictable portfolio cash flow, we anticipate the money market and investment security 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 4.1% one year ago. This duration helps to manage the inherent interest rate mismatch between loans and deposits. With the larger deposit portfolio assumed to have a longer duration than our loan portfolio, fixed rate term investments are required to balance asset liability durations.

Slide 13 provides information about our interest rate sensitivity. 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. As noted in the bar chart on the far right side of the page, modeled net interest income in first quarter 2025 is 1.8% higher when compared to the first quarter 2024 using the implied forward path of rates at March 31st and assuming a static balance sheet. 100 basis point parallel up and down shocks of this implied forward outcome suggest about 1% and 2.3% sensitivity around that figure respectively. If no changes in rates were to occur, modeled net interest income is 80 basis points higher.

This model 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 of outcome and overlaying management expectations for balance sheet changes in deposit pricing, we believe that net interest income in first quarter 2025 will be stable to slightly increasing when compared to the first quarter of 2024. Risk and opportunities associated with this outlook include realized loan growth, competition for deposits, and the path of interest rate changes across the yield curve. Moving to Slide 14, credit quality and particularly net charge-offs remain strong. Net charge-offs were 4 basis points of loans in the quarter.

The allowance for credit losses is 1.27% of loans, a 1 basis point increase over the prior quarter due to incremental reserves in the commercial real estate portfolio, partially offset by modest improvement in our economic scenario. Notwithstanding strong net charge off performance, we observed some indicators of modest credit deterioration in our credit portfolio. Non-performing assets increased $26 million and classifieds and criticized loan balances increased by $104 million and $297 million, respectively. As Harris noted, we continue to expect the ultimate realized loan losses will be very manageable over the remainder of the year. 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 to this presentation.

Slide 15 provides an overview of the CRE portfolio. CRE represents 23% of our total loan portfolio, with Office representing 14% of total CRE or 3% of total loan balances. Credit quality measures for the total CRE portfolio remain relatively strong, though criticized and classified levels increased during the quarter. Overall, we expect the CRE portfolio to perform reasonably well, with limited losses based on the current economic outlook. Our loss absorbing capital is shown on Slide 16. The CET ratio continued to grow in the first quarter to 10.4%. This, when combined with the allowance for credit losses, compares well to our risk profile, as reflected in a 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 the AOCI improvement will continue through accretion of the securities portfolio, regardless of rate path outcomes.

Slide 22 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 first quarter of 2025 as compared to the first quarter of 2024. With that, I turn the time back to Shannon.

Shannon Drage: 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. Daryl, please open the line for questions.

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

Manan Gosalia: Hey, good morning all, and Ryan welcome and congrats on the new role.

Ryan Richards: Thanks so much.

Manan Gosalia: I was wondering, can you dig into the NII guide and the assumptions there in terms of the number of rate cuts? I’m assuming you’re using the forward curve here. And also if you could talk about the assumptions on [NIB] (ph) outflow and deposit repricing and what sensitivity there is if we don’t get any rate cuts this year?

Ryan Richards: Hey. Yes, thanks so much for the question. And yes, when you look at some of the materials there, and really we emphasize my remarks, sort of the forward curve as of the end of the quarter, and embedded in that forward curve outlook in the fourth quarter of the year was a Fed funds rate of 4.75%, so implying three rate cuts. So that’s kind of our base expectation, but I think as we open our inboxes each and every morning seeing some indicators that would suggest perhaps fewer rate cuts for the year, we really see the advantage then of sharing some of our additional supplementary measures around latent and emergent sensitivity. And particularly, as we think about the likelihood or the possibility of having fewer rate cuts for the year, it becomes more important as we think about that latent sort of view of interest rate sensitivity that we model at 0.8%.

So we feel good about our ability to be positioned well for different rate pivots and changes. So much of that performance, as you note, will be dependent upon how our deposit pricing behaves moving forward. We were pleased to see some stabilization of that during the quarter, and we’ll continue to keep a watch on that moving forward as deposit competition continues to be pretty stiff. Are there any other parts to that question that I missed?