Zions Bancorporation, National Association (NASDAQ:ZION) Q2 2024 Earnings Call Transcript

Zions Bancorporation, National Association (NASDAQ:ZION) Q2 2024 Earnings Call Transcript July 22, 2024

Zions Bancorporation, National Association beats earnings expectations. Reported EPS is $1.21, expectations were $1.1.

Operator: Greetings, and welcome to the Zions Bancorp Q2 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shannon Drage, Senior Director of Investor Relations. Thank you, Shannon. You may begin.

Shannon Drage: Thank you, Alicia, and good evening. We welcome you to this conference call to discuss our 2024 second quarter earnings. My name is Shannon Drage, Senior Director of Investor Relations. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or Slide 2 of the presentation dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release, as well as the presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons will provide opening remarks.

Following Harris’ comments, Ryan Richards, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for one hour. And I will now turn the time over to Harris Simmons.

Harris Simmons: Thanks very much, Shannon. We welcome all of you to our call this evening. Before we get into the results for the quarter, I’m really pleased to note that earlier this month, we completed the final major conversion to our new core operating system for loans and deposits. Recall that working in conjunction with our partner Tata Consultancy Services, we previously transitioned virtually all consumer, commercial, and construction loans onto the TCS’s Bancorp platform before completing our deposits conversions now in 2024. The remarkable success we’ve had with these conversions is really a testament to the skills and dedication of our colleagues. We really want to express our gratitude to the hundreds of people who worked so tirelessly over a period of years really to make it all happen.

This modernization journey has created a catalyst for driving simplification and consistency throughout our company, as noted on Slide 3. So how does this really create value for the company going forward? Well, as industry observers are aware, virtually the entire legacy U.S. banking industry operates on 40-year to 50-year-old core loan and deposit systems, along with significantly reducing that risk of operating on an antiquated system with dwindling vendor support in many cases. Our system operates on one data model for loans and deposits. It facilitates fraud detection and error correction in real-time, is API-enabled, and cloud-deployable. It supports critical omnichannel functionality like account opening and it improves consistency of customer attribute data across major applications.

Our employees report that the new system is intuitive, it’s faster, it eliminates the need to toggle between multiple applications. It offers more data at their fingertips. It’s much easier to learn, reduces training time, and all of this results in a better experience for our customers. In addition to this major foundational investment, we’ve also over the last three years, replaced nearly the entire digital front-end, including replacing our consumer online and mobile banking system, upgrading treasury Internet banking which is utilized by a large percentage of our business customers and creating a digital mortgage and small-business application process that took us from 100% paper-based applications to more than 90% electronic over the course of 12 months to 18 months.

Going forward, we’ll certainly find many ways to optimize the investments in our new core and we’re freeing up capacity to continue to invest in evolving technologies that give us other competitive advantages. As noted on Slide 35, 2023 Coalition Greenwich data shows that our customers rank our digital product capabilities higher than our major bank competitors. Looking at financial results for the quarter, the numbers generally came in as expected. Net interest margin expanded by 4 basis points on a linked-quarter basis and improved 6 basis points against the year-ago quarter as asset repricing outpaced the cost of funding increases. We anticipate this trend would persist in a steady rate environment, while the timing of rate decreases in both the behavior and pricing of deposits will impact net interest income in a falling rate environment.

Maintaining pricing discipline while continuing to focus on granular deposit-gathering will be important regardless of the rate environment. While loan demand has increased, loan growth continued to be measured. Higher rates have tempered growth while also reducing the amount of paydowns in the commercial and consumer real-estate portfolios. The expected path of benchmark rates in the current political environment are top-of-mind for customers, particularly our small-business and middle-market customers. I mentioned last quarter, we’ve been particularly successful with a streamlined SBA program aimed at serving smaller businesses with targeted campaigns during the quarter and we expect to continue our focus on that. This campaign as well as other customer initiatives are aimed at bringing new customer relationships to the bank and building our granular deposit base.

While fee income growth has been somewhat sluggish during the first half of the year, we remain confident in our ability to grow fee income as we look towards the second half of 2024 and into 2025. Expansion of capital markets represents a key opportunity for us and more of our bankers are delivering these capabilities to clients. Adjusted expenses in the current period were up 2% compared to the second quarter of 2023. We continue to pursue means to control costs while supporting investments to grow the business. Net charge-offs remain low at just 10 basis points annualized as a percentage of average loans for the quarter and 8 basis points over the last 12 months. This contrasts to an increase in classified loan balances of $298 million, over three-quarters of which was in the C&I portfolio.

The decline in the allowance for credit losses compared to last quarter reflects an improved economic outlook, slightly offset by incremental reserves for C&I. We believe realized losses over the next few quarters will be very manageable and are already reflected in our reserves. Starting on Slide 4. We’ve included key financial performance highlights. We reported net earnings of $190 million for the quarter. Our period-end loan balance increased one-half of 1% while average balances increased just under 1% for the quarter, led by growth in 1-4 family residential loans. Customer deposit balances declined just under 1% in the quarter on a period-end basis, reflecting internal — or rather reflecting normal seasonality while our ratio of noninterest-bearing demand deposits to total deposits was flat to last quarter at 34%.

Our common equity Tier-1 ratio was 10.6% compared to 10.4% in the first quarter and 10% a year ago. As I noted in my quote in the earnings release, we’ve seen strong accretion to tangible book value, which has increased 20.1% year-over-year. Moving to Slide 5. Diluted earnings per share of $1.28 was up $0.32 from the prior quarter. Current quarter results reflect a $0.07 positive impact from the sale of our Enterprise Retirement Solutions business and the sale of a bank-owned property in Nevada. Turning to Slide 6. Our second quarter adjusted pre-provision net revenue was $278 million, up from $242 million in the first quarter. The linked-quarter increase was attributable to improved revenue, including growth in net interest income and the gains in noninterest income I mentioned previously in addition to a slight decline in adjusted noninterest expense, largely due to seasonality of compensation expense in the first quarter.

As compared to the year-ago quarter, adjusted PPNR was down due to slightly lower adjusted revenue combined with higher adjusted expenses. Generally, this quarter reflects positive trends with respect to higher revenue, well-managed expenses and very satisfactory risk outcomes. These results are supported by our investments in technology, products and services, which bring value to our customers. With that high-level overview, I’m going to ask Ryan Richards, our Chief Financial Officer, to provide some additional detail related to our financial performance. Ryan?

Ryan Richards: Thank you, Harris, and good evening, everyone. I will begin with a discussion of the components of pre-provision net revenue. Nearly 80% of our revenue is derived 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 is reflected on the bars and the net interest margin is shown in the white boxes. Both measures reflect improvement for two consecutive quarters as the repricing of earning assets outpaced the increase in funding costs. Additional detail on changes in the net interest margin is included on Slide 8. On the left-hand side of this page, we provide a linked-quarter waterfall chart outlining the changes in key components of the net interest margin, incorporating changes in both rate and volume.

12 basis point combined beneficial impact associated with money market, investment securities, loans and borrowings, was partially offset by the adverse impact of deposits. Noninterest-bearing deposit volume declines resulted in a slight reduction in the contribution of these funds 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 money market and loan yields which contributed an additional 50 basis points to the net interest margin. The value of noninterest-bearing deposits and lower borrowing levels contributed another 69 basis points to the margin. These positive contributions were largely offset by increased deposit costs, which adversely impacted the net interest margin by 113 basis points.

Overall, the net interest margin increased 6 basis points versus the prior year quarter. Moving to noninterest income and revenue on Slide 9. Customer-related noninterest income was $154 million compared to $151 million in the prior quarter. With higher commercial account, card and loan-related fees somewhat offset by lower capital market fees. Customer fee income growth has been slower than expected through the first half of 2024 given reduced loan activity and flat wealth management fees. Looking ahead, we are optimistic that our new and expanding capital market capabilities will allow us to grow this area meaningfully over the next four quarters. Our outlook for customer-related noninterest income for the second quarter of 2025 is moderately increasing relative to the second quarter of 2024.

The chart on the right side of this page includes adjusted revenue which is the revenue included in the adjusted pre-provision net revenue and is used in our efficiency ratio calculation. Adjusted revenue decreased slightly from a year ago due to lower noninterest income and an increase 4% versus the first quarter due to the factors previously noted. Adjusted noninterest expense shown in the lighter blue bars on Slide 10, decreased $5 million to $506 million, attributable largely to seasonal increases in compensation from the prior quarter, offset by higher technology and marketing and business development-related expense in the current quarter. Reported expenses at $509 million decreased $17 million. As a reminder, the fourth quarter of 2023 included $90 million of FDIC special assessment costs, while another $13 million and $1 million were recognized in the first and second quarters of this year, respectively.

Our outlook for adjusted noninterest expense for the second quarter of 2025 is slightly increasing relative to the second quarter of 2024. Risks and opportunities associated with this outlook include our ability to manage technology costs, vendor contractual increases 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. Customer sentiment and pipeline suggest we can expect growth to improve as more clarity materializes with respect to the political and economic environments though higher interest rates are impacting near-term growth. Our expectation that loans — is that loans will be stable to slightly increasing in the second quarter of 2025 relative to the second quarter of 2024.

Now turning to deposits on the right side of this page. Average deposit balances for the second quarter increased slightly, notwithstanding a slight decline in the average noninterest-bearing balances. Cost of total deposits shown in the white boxes increased 5 basis points to 211 basis points. As measured against the fourth quarter of 2021, the repricing data on total deposits, including broker deposits and based on average deposit rates in the second quarter was 40% compared to 39% in the first quarter and the repricing beta for interest-bearing deposits remained at 60%, unchanged from the previous quarter. Slide 12 includes a more comprehensive view of funding sources and total funding cost trends. Left side chart includes ending balance trends.

Broker deposits were stable compared to the first quarter at $4 billion and were down $4.2 billion compared to the year-ago quarter as customer deposits have grown by $3 billion versus the prior year period. Compared to the preceding quarter, customer deposits were down slightly, reflecting seasonal trends in the second quarter. 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 2 basis points in the current quarter has continued to decline compared to the prior four quarters. Moving to Slide 13. 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 market — money market investment portfolios over the last five years. Investment portfolio continues to behave as expected. Maturities, principal amortization, and prepayment-related cash flows were $840 million in the second 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, serving as a source of funds for the balance sheet and contributing to net interest margin as those funds are reinvested into higher-yielding loans. The duration of our investment portfolio, which is a measure of price sensitivity to changes in interest rates is estimated at 3.7%. This duration helps to manage the inherent interest-rate mismatch between loans and deposits, but the larger deposit portfolio assumed to have a longer duration than our loan portfolio, fixed-rate term investments are required to balance asset and liability durations.

Slide 14 provides information about our interest rate sensitivity. While we provided standard parallel interest rate shock sensitivity measures on Slide 27 in the appendix of this presentation, we present again our more dynamic view of latent and emergent interest rate sensitivity given the current environment. In particular, latent interest rate sensitivity which reflects model changes in net interest income based upon past rate movements that have not yet to be fully realized in revenue is estimated to be 8.3%. When combined with the emergent sensitivity which includes the incremental impact of future rate changes included in the implied forward curve at June 30, model net interest income in the second quarter of 2025 is 6.3% higher when compared to the second quarter of 2024.

This is a meaningful increase over our model projections from the previous quarter. 100 basis point parallel shocks of this implied forward outcome suggests a sensitivity range between 4.6% and 7.7%. Importantly, these sensitivities assume no change in the size or composition of our earning assets but do consider how our changes in our deposit mix could influence the net interest income path. The observed slowing of the migration of noninterest-bearing deposits to higher cost deposits is reflected in a change in our assumed through the cycle beta from 49% shown in our first quarter sensitivity to 44% shown here. This beta reflects $3.5 billion of assumed migration of noninterest-bearing deposits into higher cost deposits. Utilizing this modeled outcome and applying management expectations for balance sheet changes and deposit pricing, we believe the net interest income in the second quarter of 2025 will be slightly to moderately increasing relative to the second quarter of 2024.

Risks and opportunities associated with this outlook include realized loan growth, competition for deposits and deposit behavior, and the path of interest rates across the yield curve. Moving to Slide 15. Credit quality remained strong and the portfolio is performing in line with expectations. Annualized net charge-offs were 10 basis points of loans in the quarter. The allowance for credit losses is 1.24% of total loans and leases, a 3 basis point decrease over the prior quarter. Notwithstanding continued strong net charge-off performance, we observed continued deterioration in some of our credit metrics. Nonperforming assets increased $14 million or 4 basis points as a percentage of loans and other real estate owned, while classified and criticized loans balances increased by $298 million and $284 million, respectively.

We continue to expect that ultimate realized loan losses will be very manageable over the remainder of the year. As we know it as 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 16 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 continue to 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 17. The CET1 ratio continued to grow in the second quarter to 10.6%. This, when combined with the allowance for credit losses compares well to our risk profile as reflected in the low level of ongoing loan net charge-offs. We expect our common equity from both a regulatory and GAAP perspective to increase organically through earnings and the AOCI improvement will continue through natural accretion of the securities portfolio regardless of rate path outcomes. Slide 18 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 second quarter of 2025 as compared to the second quarter of 2024.

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. Alicia, please open the line for questions.

Operator: [Operator Instructions] Thank you. Our first question comes from the line of Andrew Gosalia with Morgan Stanley. Please proceed with your question.

Q&A Session

Manan Gosalia: Hi, guys, good afternoon. It’s Manan Gosalia.

Harris Simmons: Good afternoon.

Manan Gosalia: Hi, good afternoon. So I was just — I wanted to check in on the noninterest-bearing deposit trends during the quarter. I know things slowed relative to last quarter. I was just wondering how the trends were intra-quarter. And then how you expect NIB to trend if you get a couple of rate cuts between now and year-end? I mean, I know you have that assumption on $3.5 billion of NIB flowing into a higher cost products in the latent interest sensitivity analysis. So I was wondering how realistic that is or things can be a little bit better than that.

Ryan Richards: Thanks very much for the question. Yes, listen, that is kind of something that we were hoping to highlight on the call. I think on the whole, we were reasonably pleased with the trending during the quarter with a very modest decrease in noninterest-bearing deposits. I think observed in the quarter gave us confidence as we revisited our models to see what some of the underlying assumptions were to sort of tighten up the amount of deposit migration that we had — that was implied with the all-in deposit beta that we shared last quarter. So I think what you’re seeing in that guidance is we’re saying that now we don’t anticipate to see as much of that DDA migration. And as a result, hold the line a little tighter than what could have been expected.

We’ve also observed an ability to manage our interest-bearing deposit costs at a level that doesn’t suggest a great deal of increased pricing to retain those deposits from this point forward. So all those things contribute, of course, to how we sort of laid out our guidance on the emergence — sorry, the latent being more generous with those embedded assumptions. And then with having an expectation of more DDA going forward than perhaps we would have anticipated last quarter contributed to a little bit more asset sensitivity this time around. Of course, all these things are very beholden to deposit behaviors from here. But based upon what we’re seeing we were able to be a little bit more constructive with the guidance this quarter.

Manan Gosalia: Got it. And then as we think about the loan guide for loans to be stable to slightly increasing, how are you thinking about the trajectory of that loan growth? Do you think it’s a little bit weaker in the near term given the uncertainty in the environment and given the upcoming elections and then ramping up from there or maybe if you can just take us through how you’re thinking about that — those loan balances going forward?

Harris Simmons: Yes. Well, I think there is probably some uncertainty at the moment, but I’m not sure that that factors is a big factor in companies — the election per se, I think it’s more just watching to see how the economy sort of unfolds here in the next couple of quarters. Obviously, there’s some signs the economy is slowing a little bit hopefully not in a way that will be — do a lot of damage, but — so we’ll see it. It feels — a lot of what we’re suggesting is that we’ve seen some weakening in loan growth relative to what we’ve been probably a year ago. We don’t see anything that’s likely to change that in the near term. We also see — it’s — the economies are still reasonably healthy here in the Western markets where we operate, but it’s just our best guess.

I think we expect that with some of the things we’re doing with some marketing programs and small-business lending, et cetera, that will be incrementally helpful. But it’s just not a robust loan growth market right now.

Manan Gosalia: Great. Thank you.

Operator: Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.

John Pancari: Good afternoon.

Harris Simmons: Hi, John.

John Pancari: Hi. I want to just have a — I want to ask on the credit side. I know you mentioned the trends are generally within expectations and you were able to release a bit on the reserve. But wanted to get a little more color on the increase in the classified loans, about a 30% increase there linked-quarter and about a 40% plus — I guess 48% increase from the 30 to 89 day past dues. So could you walk through what’s driving that on the commercial book and then how that could influence the outlook for the reserve from here? Could it be — how do you expect that that could change just given these trends? Thanks.

Scott McLean: Sure, John. This is Scott. And the classified increase of about $300 million, about 70% of that came from our C&I portfolio. The good news was it didn’t come from our CRE portfolio. And the — it was really just a collection of kind of six to 10 credits that were kind of in the $10 million to $30 million range. The industries, they were all kind of idiosyncratic. The industries where — there’s contractor, consumer products business, healthcare, transportation, really no straight lines you could draw between all of them. And so that made up about 70% of the increase. And then if you — it’s little — it’s sort of interesting in the criticized increase that you see of about $284 million, it was more real-estate related, principally multifamily.

So you’ll see — we’re seeing more of our multifamily transactions move into the criticized category just simply because I mean, when you think about it, construction is concluding, lease-up periods are longer, the impact of interest rates is higher and those are causing some great migration. But it’s great migration we’ve seen in every other cycle since the great depression. And generally speaking, it is the level of equity that we have in multifamily, the lack of Phase 2 land, and the strength of covenants packages that we have that are — that ultimately cause multifamily to hold up. Generally speaking, you don’t have a big migration in multifamily to non-performing just simply because borrowers are able to reduce their rental rates, provide rent abatement, provide concessions, and — but generally they have cash flow to cover interest and contribute to principals.

So we’re not overly concerned about that. The other comment I’d make and we’ve said this before, but it’s true is that we are coming off a very low base of criticized classified non-performing loans. So the lines look — they look a little more vertical than you want them to look, but it’s simply because of the low base we’re coming off of. I will say that as it relates to CRE office, we — our outstandings there are dropping. We were about $2 billion, they’re down about $247 million. And it’s a good story. It’s kind of a story that we hope continues to play out in the sense that, that decrease of $240 million — almost $250 million represents $300 million in payments by borrowers, about $85 million in additional equity or rebalancing of loans.

So almost $400 million of what you would like to see in a portfolio, $9 million of charge-offs, which we wouldn’t want to see, but that’s a very small number when you consider the magnitude of the portfolio. And then there was some growth. So both with the office and the multifamily portfolios, we’ll continue to report on exactly how the maturity wall is playing out each quarter and the good activity that’s actually going on, which is largely attributable to the fact that our average and median loan size is low and we have good guarantor support on most of these loans.

Ryan Richards: And I think also embedded in that question was the ACL and whether there’s any learnings here. We’re also anticipating that question. I mean, the way that the accounting model works is if it’s working well, the idea that you’re meant to get ahead, you’re supposed to look into the future and see these things coming and have an expectation of losses. We, like many others ingest Moody’s variables to kind of inform our macroeconomic view of the world when we talk about our reserving practices. And for some time prior to even today and currently, we’ve been anticipating a view of macroeconomic economy that was a little bit darker than the out-of-box settings that we are given through that — through the Moody’s variables.

So it’s fair to say that going back some quarters that we’ve had this view that we think that there could be some credit deterioration. So the fact that we’re seeing it now is to be expected. And if we didn’t see it now, that would tell us that we probably saw dark clouds where none can. So I think right now, we’ll continue to watch the data that comes through and there may be learnings in it, but everything we’ve seen so far is certainly within the balance of our reserves.

John Pancari: Great. All right. Thank you. Appreciate that. And then separately, just back to the NII dynamic. Can you just talk a little bit more about the fixed asset repricing opportunity? I know you mentioned you’ve got the liquidity coming out of the securities book and that you could use to fund loan growth and et cetera. So maybe could you just talk about the yield differential around what is maturing in the securities book and where you might be putting on new assets just to get a better feel of the fixed asset repricing on the dollar amount and then the rate differential?

Ryan Richards: Yes, I’m happy to take that part. I think — you’re right. You pointed exactly the right thing in terms of the rundown of our investment securities portfolio that’s been very consistent. And as I noted in my remarks to the tune of about $840 million this quarter, that is helpful to us where we’ve been able to build even some modest loan growth during the quarter to get that rebalanced remixed. And even when we don’t, sitting there with money market investments where we’ve seen some growth as well, that’s still kind of high-five yield attached to it. I think the best way of thinking about the repricing is really reason why we kind of do some deconstruction of our sensitivity is thinking about our latent sensitivity and seeing sort of the buildup on that basis alone that if rates were not to have an overlay of the implied forward, what would happen to this point forward.

And it’s going to be a consistent theme with what we’ve been seeing here recently that the earning asset yields have been repricing more aggressively, more favorably than the funding costs. And based upon our latent guidance, we would certainly expect that to continue. Now we have the overlay with the emergent based upon the dynamics I described before that would kind of counteract to those effects. But I don’t have front book, back-book statistics, I think you’re calling for on the securities yield, but from — give you a sense for the loan book, an all-in basis, the front book coming on 7.82%. They’re rolling-off back-book of 7.68%. You see a little bit more expansion coming on the CRE subsequent of the portfolio, a little less on the consumer.

So that gives you some broad strokes about the types of balance sheet movements that we’re seeing. Hopefully, that helps, John.

John Pancari: That does, Ryan. Thank you.

Operator: Thank you. Our next question comes from the line of Ben Gerlinger with Citi. Please proceed with your question.

Ben Gerlinger: Hi, good afternoon. Yes, good afternoon. I was forgetting the times wouldn’t change, but yes, we’re so far into the day and we’re going to be out yes, a great shot. Anyway, so I get the latent and emergence now you have the implied of 6.3%. And then when you think about just the outlook 12 months forward, looking at 2Q ’25 versus 2Q ’24, the verbiage of slightly to moderately increasing on NII 12 months from now. Is it fair to just kind of think — all right, so you guys have done a pretty in-depth mosaic of what could happen on both sides of the balance sheet? Could you just imply NII goes up roughly 6% 12 months from now, which would really kind of just get you to call it, like the $630-ish million? Am I thinking about that correctly or am I staying too simplistic about the whole thing?

Ryan Richards: I don’t think you’re thinking about it wrong. We purposely leave bounds of uncertainty in there because ultimately, we have a read on what we’re seeing in the quarter. We feel good about it. But we’re all beholden to the deposit movements, pricing and what happens for this point forward. The sensitivity statistics we provide really are kind of a static balance sheet view, allowing some migration for deposits. Harris gave you some insights to how we’re thinking about loans and we certainly are opening up to the notion that they could be slightly increasing there, but we also have stable within our guidance. So we’re just leaving up boundaries for the degrees of unknowns to fit within the guidance. But I think — I don’t think you’re thinking about it wrong.

Ben Gerlinger: Got it. Okay. That’s very helpful. And then switching to credit. I just want to touch base. I know there is a comment that most — a majority of the roughly $300 million in classified was more C&I. And there was — I think there said there’s no common thread. I’m just kind of curious, is it operational like the businesses are having issues on the profitability or is it something that’s a little bit more in-depth? Just kind of thinking like what are the pressure points that are impacting the C&I businesses other than just higher interest rates slowing their buyers down?

Harris Simmons: Yes. I’d actually — I’d like to give you some really crisp themes, but there just aren’t. I mean, when you talk about a major contract — contractor, consumer products, healthcare, transportation, there’s just — I wouldn’t even relate it to higher interest rates. Each one has kind of a story and they’re all people we know well. So it just things happen. And — so I just wouldn’t give you a common story, I don’t think.

Ben Gerlinger: Got you. It’s fair to assume it’s throughout the footprint or is it any centralized geography?

Harris Simmons: Yes.

Ben Gerlinger: Got you. Okay. Appreciate the time.

Harris Simmons: I think it’s also useless. Now there have been a lot of kind of resolutions during the quarter as there typically are, but it’s — so there are a lot of moving parts to all of this, but I think what you’re seeing in the reserve is reflective of the idea that we don’t see any significant risk building there.

Operator: Thank you. Our next question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Steven Alexopoulos: Hi, everybody.

Harris Simmons: Hi.

Steven Alexopoulos: I want to start maybe for you, Ryan. So if we could unpack this a little bit more. So just looking at the changes that you’ve made, I don’t know what slide, this is on the net interest income sensitivity. So you’re taking down the assumption for deposit beta a bit. And I’m wondering, is that because you overlay the current forward curve, so you have more cut in the curve and that’s why you’re looking for a lower beta or is something else driving that? Because it seems like that’s what’s influencing the improvement of the NII outlook.

Ryan Richards: The beta — thank you for the question. The beta commentary there really attaches to our latent sensitivity even before you even think about the forward curve overlay. And I think it was very much informed by what we observed during the course of the quarter and the trends have been building up until the quarter about the tapering of runoff activity and migration. And so I think on the base of that and observing pricing activity in our markets and what we believe it’s taking to retain those deposits and where we have to pay up in places, that really informed a little tighter all-in deposit beta through the cycle.

Steven Alexopoulos: Okay. So we can extrapolate from that that the outlook for NII is based on the current forward curve, right?

Ryan Richards: Would you overlay the emergent? Yes. The 6% figure you cited includes the implied forward as of 6.30%, which contemplates a fed fund rate at the middle of 2025, 4.50%.

Harris Simmons: I think just fundamentally, yes, too, if there’s a single driver, it’s probably a developing belief on our part that demand deposits — noninterest-bearing demand deposits are going to be a little more stable than we previously thought. I think we’ve probably been a little conservative. Yes, that can obviously change. That’s — but based upon the trends we’re seeing at the moment, we just — we think that we probably overshot that a little bit.

Steven Alexopoulos: Got it. Okay. Thank you. And then for my follow-up, so if we look at what’s happening on the technology side, I guess there’s two parts of this question. So one, the technology-related costs, you’re running like 14% year-over-year. Now that you’re on the new deposit system, like help us think about what that looks like over the next year? And then maybe, Harris, for you. So you’re one of the few banks you guys have made at this point for a while now in a modern core. How should we — how does this translate to shareholder benefits? I usually think of things, they improve ROE or they improve growth. Do we anticipate a higher growth rate from you guys over time because of this modern core differential? Thanks.

Harris Simmons: Well, first of all, in terms of what it does to cost, the core platform itself, we will see costs come down next year. We were ahead of the peak this year. They come off by about $10 million next year. But I wouldn’t make much of that in a vacuum because there — it’s like the poor will always be among us, so will the backlog of projects that people want to get done around here. And — so — but certainly that’s helpful to free up that capacity. In terms of the benefit that comes from this. I mean, first of all, I think in my mind, a primary benefit is simply every bank has to have these core systems. I mean these are the real chassis and foundation of everything else. All the front-end that the consumer sees is built upon these core processing engines and systems and they do a lot of heavy lifting in every bank and they’re incredibly complicated to replace.

I was thinking — just last weekend, I was telling some of our employees, I remember a case study in business school many years ago when John Reid was running what was in Citigroup. And he talked about going through systems conversion. He said it was like changing out the jet engine on a plane and flight. And we’ve seen even this past weekend with the CrowdStrike outage, the impact that a single bug can have can be catastrophic and so there is an incredible amount of complexity and a huge amount of testing that is very expensive and very elaborate, takes a lot of time and people to do this. And for me, one of the benefits, this is something ultimately every large bank has to deal with. Some will deal with it a piece at a time. Some will — I mean, we’ve tackled a lot over the last 10-plus years with this, but having it fundamentally in the rearview mirror is just a big — is a big accomplishment and something that we will not have to worry about that I think a lot of other banks are still — as the world becomes ever more real time as we see, I mean, one of the benefits we noted, it allows us, everybody else is posting payments and they kind of fake it in terms of memo posting and making it appear like things are in real-time.

This is actually posting right into the core in real-time. It allows you to detect errors more quickly. It allows us, we expect, to detect fraud more quickly. It — one of the things we’re absolutely seeing is employees on the front line are having a much easier time navigating. I remember talking to an employee just visiting a branch some years ago, come from a larger bank, and they’re complaining about toggling between applications and screens to get their work done. This eliminates a whole lot of that. Makes it much easier for employees just to serve customers. It makes it therefore much easier for us to train employees. And so, entry-level employees, whether they be in contact centers and branches, with old systems, you’ve got a steep learning curve with having to learn a lot of, I mean, there are a lot of crib sheets sitting around on desks, around this industry.

We think that we’ve now got the solution that makes this much, much, much easier for our employees. It provides more information at their fingertips. So when somebody has a question, we can answer it without doing a lot of research. It just brings that information right to the user’s screen. I am hopeful that we’ll find ways to deliver some of that functionality right out to our customers. So we’ll see as we go on. I’m hoping that this will begin the process of discovery where we find use cases that would be really kind of super. The last thing I’d say is, this is not a digitally native core. No large bank is on one. And the complexity that you find in larger banks really can’t be addressed by some of the new digital cores out there today. Someday, perhaps so.

But I’m pretty confident that we have with this solution something that is really solid. It has a huge installed base globally. We have a vendor that’s not going away and are going to support this. They have every reason to because it’s got a huge installed base. And all of those are benefits that — I think will accrue to our shareholders over time.

Steven Alexopoulos: Okay. Thanks for taking my questions.

Harris Simmons: Yes.

Operator: Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.

Ken Usdin: Thanks. Good afternoon. Just to follow up on the cost side. So when you guys last quarter talked about that $12 million to $15 million of cost reduction to happen as the systems get food further along, what part of the year does that get run-rated? And is that fully implied in the 2Q ’25 forward guidance?

Ryan Richards: Thanks, Ken. The delta of the $12 million is sort of a year-over-year comparison, full year ’24 to full year ’25. But yes, and to Harris’s point, at the margin, that would imply some savings but suggests that all that would fall the bottom line would probably not be appropriate. So we’ve embedded into our Board guidance for the second quarter of ’25 the intent to make other investments and continue building on our technology offerings outside of future core.

Ken Usdin: Right. And then is that the full amount of, like, the reduction that happens over time and as a conversation we’ve had for a long time as the build-out happened, but, like, is that the majority of what happens, or over time, is there an increment that also comes as just the legacy pieces are further retired and getting the point about incremental investments, which makes sense. So just kind of underlying base.

Harris Simmons: Some of the earlier phases of this that went in a few years ago as they become fully amortized, I mean, we’re advertising this over 10 years to capitalize cost, but these are core systems. You would expect to have longer, much longer lives than that. And so that will help as you get out into time. But…

Scott McLean: Yes. The amortization of this, I mean, it comes down about 10% a year because it’s basically a 10-year amortization. And the benefit of it — the additional benefit financially is just that at a time when almost every hardware, software infrastructure vendor is passing along double-digit renewal increases for multiyear contracts or single year contracts, this pressure of needing to replace core loan and deposit systems is — has become a non-event for us. It’s — the pressure is no longer there. The whole attitude is turned towards how do we optimize it, how do we monetize the investment we’ve made. So that’s — the timing right now is especially unique, I think, in terms of being beneficial.

Ken Usdin: Okay. Got it. Thank you.

Operator: Thank you. Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please proceed with your question.

Bernard Von Gizycki: Hi, good evening. It’s Bernard Von Gizycki. So thanks for taking my questions. So you mentioned the success of the client campaigns to attract new deposits at the beginning of the call. Can you provide any color on these promotions and customer initiatives, just any expectations on broadening relationships and growing deposits?

Harris Simmons: Well, specifically we referred to — we’ve — we really leaning into SBA lending, and I expect to see more of that. I mean, we — our volumes are up substantially over last year, but we’ve had a ways to go. I mean, I think that it’s an area where we believe there’s a lot of opportunity. They’re smaller deals. They don’t — it’s not going to move the needle in a big way in terms of loan growth, but kinds of relationships that we think are really important. I’m particularly focused on, I think in the wake of what happened in the spring of last year, the imperative of really focusing on the granularity of your deposit base is an important thing for regional banks to be thinking about. And so that’s a big part of kind of how we’re thinking about where we go from here is a focus on what we can do better in consumer and small business in particular, where those kinds of full relationships come to the bank.

Scott McLean: I would just add to that that the — we’ve talked before about the customer appreciation calling effort that Harris started a couple of years ago. We’re making — our colleagues are making about 100,000 calls a year to just generally small business clients of the bank, some individuals, but largely small businesses, just simply to thank them for their relationship. And it’s — it is really fun and exciting to hear about the granular activities that come from that. Just simple deposits moving over and small loans and personal relationships moving over. But when you think about that happening 100,000 times a year, that’s a big number. We’re also on the middle market and commercial banking side, pushing hard at calling on the top prospects in our markets which sounds kind of like, well, wouldn’t you always do that?

Of course you would. Everybody would say they would. But most middle market commercial bankers are kind of going and making a pure prospect call is not the highest thing on their list because it’s an awkward experience for many people. So I think that focus, like the customer appreciation calls will start to reignite loan growth for us over time.

Bernard Von Gizycki: Okay, great. That’s great color. And just separately, you highlighted the optimism on expanding the capital market capabilities and you expect it to grow meaningfully over the next four quarters. I know it was sequentially weaker by $3 million in 2Q and I think you flagged lower loan syndications, swaps and some other related fees. Any color you can provide on activity levels and just the drivers of the optimism.

Harris Simmons: Yes, I just — I mean, I think the fundamental thing I’d say is it’s going to be lumpy. That’s kind of the nature of every capital markets business, I think you’ve ever probably seen. We’ve got a really good team that has been built and we — I think what we’re seeing internally, we’re really pleased with the engagement that they have with our commercial bankers. And they have kind of a pretty full dance card in terms of appointments. And it’s something that feels internally very much like it’s getting the kind of traction that we would have hoped. I expect that the second half is going to be a notable improvement over the first half just based upon what kind of pipeline looks like, at least early here in the third quarter. But it’s not going to be a straight line kind of business. And that’s about all I probably venture to say about it, so. But we’re really excited about the people we have doing it.

Bernard Von Gizycki: Got it. Thanks for taking my questions.

Harris Simmons: Yes.

Operator: Thank you. Our next question comes from the line of Brandon King with Truist Securities. Please proceed with your question.

Brandon King: Hi, just had one question for me and to follow up on kind of the C&I conversation. So hearing increasing concern about smaller businesses within C&I. So could you comment on the health of your small business, how they’ve navigated this environment and where they stand today?

Harris Simmons: Yes, I mean, listen, I think, first of all, you see it in just the overall loss numbers. I’ve always believed that small business done right can be — it doesn’t have to have big charge-off numbers attached to it. Over time, fundamentally, if I exclude the card business, I mean, a commercial card business, our loss history with small business loans is very close to what it looks like in terms of charge-offs for middle market or larger loans, commercial loans. And so we are seeing continued good credit quality in that portfolio. Nothing that’s giving us any concern. Now, most small businesses, by the way, don’t borrow. Only about 30% of our small business customers actually are borrowing customers. So there are a lot of small businesses that operate very conservatively. They operate with the cash they have on hand. But I think we’re not seeing robust growth, but we’re seeing pretty good help.

Brandon King: Thanks for taking my questions.

Harris Simmons: Okay.

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

Chris McGratty: Oh, great. The 28% money market and securities cash as a proportion of the balance sheet, how does that trend over the next year or so in your guide? And I guess I’m asking overall earning asset growth relative to the loan growth. Thanks.

Ryan Richards: Yes, thanks for that. I think the way that we see the kind of the trend continuing, so to speak, allowing for the investment securities portfolio to continue to run off, certainly to see the potential for another $1.2 billion — excuse me, $1 billion or $2 billion of runoff of those investment securities before we would think about sort of reinvestment activity at that level. And so really what happens with the money market and the concentration of the two categories really depends on how quickly we see that loan growth pull through. So that — I think that’s probably the simplest way of answering that question. I don’t know that we have a specific measure to offer on that front.

Chris McGratty: Okay, great. Thanks. And maybe, Harris, any updated thoughts on capital? You’re building capital pretty quickly. Any thoughts on capital? Thanks.

Harris Simmons: Yes, I would expect that’s going to continue here in the near term. I mean, we’re — there’s still unanswered questions as to how muzzle three endgame is going to be revised and we’re close enough to crossing that threshold that something we’d be interested in. I think we all expect that whatever happens in simplifying it, that AOCI is going to come back into the calculation of CET1. And so we’re making a lot of progress, I — as I noted in the quote, of a 20% increase in tangible book value, both nominally and on a per share basis, is really gratifying. Like to kind of see that continue for a bit before we — and get the AOCI number down to something that’s totally manageable before we probably start to think about getting very aggressive about share buybacks.

Chris McGratty: Great. Thank you very much.

Harris Simmons: Yes.

Operator: Thank you. Our next question comes from the line of Christopher Spahr with Wells Fargo. Please proceed with your question.

Christopher Spahr: Good afternoon. Thanks for taking the call. So I was just going back to Slide 15 and just the increase in problem loans relative to the reserves, I understand, like your economic views changed. And — so, I mean, if you didn’t have an increase in criticized loans, would you have seen a meaningful decline in reserves to loans? And then if so, where do you think that would go?

Ryan Richards: Yes, so it’s a fair question. It’s hard to get too speculative as to exactly what would occur there. We have a very fulsome process, as I would have alluded to, sort of ingesting macroeconomic scenarios, getting back with our senior executives and our credit professionals and saying, how does that feel? Does that kind of mirror the world that we see moving forward? We look at our credit grade migration within the portfolio and try to discern based upon prior practice or prior reserving, whether those were things that would have been contemplated in our economic scenarios. And we have qualitatives that are set aside for various applications that are unique and maybe separate and not covered through those economic foundations.

So I guess I’d round back to based upon earlier reserving practices, what we’re seeing is certainly within the bounds of what we would have expected in terms of deterioration. Whether the counterfactual of having fewer criticized or classifieds would have changed the outcome is difficult to say without having run through our entirety of our process. But at the margin, it would have been a factor that we would have thought about in terms of credit migration and other types of metrics that would inform the process.

Christopher Spahr: All right, thanks. And then my follow-up is just on the overall capital stack and just if there’s any other kind of ins and outs, like on the long-term debt side? Thank you.

Ryan Richards: Yes, I think that we’re watchful as everybody else is as to what comes from long-term debt proposals to see what that means. We have been retaining earnings here for a time, as Harris sort of alluded to. We see the path for AOCI to improve moving forward. We include some projections of that in the appendix. We’ve been able to put some hedges on in recent periods that really takes away some of the more adverse outcomes associated with rising rates as those were to occur again. So I think, big picture, we — that’s kind of how we’ve been trending on that front.

Harris Simmons: Yes, I think it’s kind of just — we’re really anxious to see what happens to a long-term debt proposal. I expect it’ll get sort of tailored down somewhat and by all rights, that should happen, make sense that it should happen, but we’ll — a little bit in wait-and-see mode about that.

Ryan Richards: And given the fact that we have a more fulsome build of our equity position, that might afford us opportunities to think about our positioning of our capital over time, depending on the outcome as a long-term debt proposal.

Operator: Thank you. Our next question comes from the line of Samuel Varga with UBS. Please proceed with your question.

Samuel Varga: Hi, good afternoon. I just had a quick question around loan growth. I wanted to get some color on the single family residential growth that you’ve seen over the last several quarters now. Is this a part of your sort of interest rate risk management strategy? Should we expect this to keep growing at a similar pace as it has recently? And could you give any color on the roll on yields that you’re getting currently on this book?

Scott McLean: Yes, in terms of just volumes, most of the volume we’re seeing is a fund up of over the last four, five, six quarters has been fundings under what we call one-time closed loans. There — it’s a construction loan that leads into a permanent mortgage. It’s a great product, very competitive. And so that’s what most of the fundings are coming from. The origination of held-for-investment 1-4 family mortgages is down significantly as it is in the industry. And so I don’t — I think over the next 12 to 18 months, you’ll see growth in our 1-4 family slow and unless we see rates come down and a renewal of — for the purchase mortgage business, so that — which could happen. And then the other thing that’s going on is we’re shifting and originating more held-for-sale mortgages, smaller mortgages, as that market continues to offer some opportunities In terms of the yields on new production, I don’t have that right in front of me.

I think it’s sort of kind of a mid-7s type number.

Ryan Richards: Mid to upper 7.

Scott McLean: Yes, mid to upper 7s. And it just — suffice it to say that the yields have gone up quite a bit as rates have gone up.

Samuel Varga: Got it. Thanks for all the color. I appreciate it.

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

Jon Arfstrom: Thanks. Hi, everyone. I think most of my questions have been handled, but, Scott, can you just talk about how things are in Houston and going –

Scott McLean: Oh, sure.

Jon Arfstrom: Yes. Anything to call in terms of the outlook and credit? Yes.

Scott McLean: No, You’re nice to ask that question, Houston boy, I tell you, it’s just so accustomed to big, bad storms coming through. And this was not supposed to be big or bad, but it turned out to be a little bit of both. The — it came in as a category one. It just barely got to that level of distinction just before it landed. And up until Sunday night, about 10 o’clock, it was going to go in about 60 miles 70 miles west of Houston. But similar to some other big storms that have hit Houston, it veered East right at the end, and it was a dead hit. It was a straight on hit at Houston. Winds were 90 miles an hour to 100 miles an hour. They were 90 miles an hour to 100 miles an hour, 100 miles inland. The great thing about the storm was that it was fast moving.

It was out of the region within 24 hours. Didn’t have a chance to drop enough rain, but massive tree damage. And that created the power issues that you’ve read about. Literally 80% plus or minus of the power hookups in Houston residential and commercial were offline at one point. And so it was just a huge, huge challenge just because of the tree damage. That created a lot of the power issues. But the city has come through it, and there’s a lot of pain that goes with it. But Houston and Texas folks are pretty resilient. They know how to pick everybody up and get them through things like this, and that’s what’s happening. You’re nice to ask, though. I don’t — in terms of any loss potential, in our loan book we saw with Harvey, we — you’d recall we set aside a $30 million, $40 million reserve — loan loss reserve for Harvey, which was a hurricane that lasted five days, et cetera, et cetera.

And we had virtually no losses, so.

Ryan Richards: The six quarters — I think, as I recall, six quarters after Harvey came through Texas, we had net recoveries of about 5 basis points.

Scott McLean: Yes, that was in 2017. So in any event, you won’t. Well, as of right now, and we have a good view of the portfolio, you won’t see us setting aside any reserve for losses related to Hurricane Beryl.

Jon Arfstrom: Okay. All right. Thanks, guys. I appreciate it.

Scott McLean: Thank you.

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

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

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.