Operator: Thank you. Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Jon Arfstrom: Hey, thanks. Good afternoon.
Paul Burdiss: Hey, Jon.
Jon Arfstrom: Credit looks pretty good for you guys, and I understand the prepared comments on the outlook. But can you comment on some of the criticized and classified trends in the back of the deck on like 33, 34, and 36, those slides. And curious what you expect on losses over time.
Derek Steward: Sure. Thanks, Jon. This is Derek. The loss — future losses are harder to predict here. But what we’re seeing is some continued challenges in the office portfolio, we continue to work through those. Again our office portfolio is a pretty small book for less than 3% of the total loans. We continue to work through those. We did not have any new non-accruals in the office portfolio this quarter. What we are seeing is the multifamily portfolio seeing some increase in criticized there. And it really comes from three things. One is some delayed construction which is being solved by additional equity from our sponsors. And then the second thing that’s contributing is higher interest rates as well as the third would be some slowdown in the lease-up velocity that we’re seeing for the multifamily book.
They’re still able to achieve rents, but in some cases, they’re granting concessions. It’s just taking the lease up a little bit longer than originally underwritten. So in most cases, we think it will just take a little longer to get there. And the sponsors are continuing to support the portfolio as we work through those trends.
Jon Arfstrom: And I guess the — one of the surprises in the quarter was the zero provision. And I guess, how do you guys want us to think about the provision going forward? Is it safe to go back to where you were in the prior three quarters or…
Scott McLean: I’ll just offer just a perspective on it. We’ve got about, at present, there is about 19 years of loss that could be absorbed by the allowance, given the total loss performance over the last year. Clearly, we wouldn’t have an allowance that runs out 19 years’ worth of losses when we’ve got a portfolio duration much shorter than that. It really reflects the fact that as we built that, we expected what we’re now in fact seeing, and that’s what the accounting rules require, is that you basically forecast what is the loss in the life of the portfolio. So the fact that we’re seeing increased levels of criticized isn’t of great concern. I’d also add to what Derek just said, for example, with respect to multifamily, you’re probably — deals that have done, this isn’t just Zions, I think this is really, we’ve seen this across the industry.
In recent years, the equity going into those deals is probably double what it was a decade ago. And so there is a lot more cushion and ability for these deals to experience some slowdown, et cetera. But we nevertheless will show those as criticized if they’re not meeting the original projections. So we don’t see a lot of, I think Derek, it would be fair to say that, we’re not seeing a lot of loss content in it, but the allowance that we were building in the first three-quarters of the year kind of anticipates — anticipated what we’ve started to see. But even at the current levels, criticized levels, non-accruals, non-performing assets at 0.39% of total loans, and real estate owned is in very good shape relative to historical experience. And so I think we’re pretty comfortable with it.
Jon Arfstrom: Okay. Paul, any thoughts on the provision? I’m just trying to help out Shannon, so we don’t end up with a wide consensus, but somewhat teasing you. But any thoughts, I mean, is it a zero provision going forward?
Paul Burdiss: Well, as I said, the key determinants are the economic outlook. And then the path, as Harris was saying, the sort of path of credit migration. I mean, in the current quarter, effectively what happened is that credit migration path performed approximately as expected in the prior quarter and the macroeconomic forecast is just a little bit better. And so those are the key determinants until to the extent those continue to hold true, then that would have a positive impact on the allowance for credit loss.
Scott McLean: I mean, the question about the future provisions reminds me of the story of two economists walking on the street and one says, there’s a $20 bill on the sidewalk, and the other says, so that’s impossible, someone would have picked it up. The point being that under CECL, the accounting standard, if you think something’s going to happen in the future, you got to reflect it now. And so almost by definition, you can’t predict that future provisions are going to be one way or the other because you’d already picked that up if you will. So I think it’s really hard to say, what it becomes in the future. You just have to see how the future changes every quarter or your outlook for it. But I do think it’s — again I think it’s fair to say, I think we feel — the bottom line is I think we feel pretty comfortable with the quality of the portfolio, where our reserves are today, and we’ll see where it goes from here.
Jon Arfstrom: Fair enough. Thank you.
Scott McLean: Thank you.
Operator: Thank you. We have reached the end of our question-and-answer session. With that, I would like to turn the floor back over to Shannon Drage for closing comments.
Shannon Drage: Thank you, Camilla, and thank you to all for joining us today. If you have additional questions, please contact us at the e-mail or phone number listed on our website. We look forward to connecting with you throughout the coming months and thank you for your interest in Zions Bancorporation. This concludes our call.
Operator: Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
