The Zions Bancorp Q2 Earnings Call has begun with an introduction from Shannon Drage, the Interim Director of Investor Relations. Harris Simmons, the Chairman and Chief Executive Officer, will provide opening remarks, followed by Chief Financial Officer Paul Burdiss reviewing the financial results. Scott McLean, President and Chief Operating Officer, and Keith Maio, Chief Risk Officer, are also present. After the prepared remarks, there will be a question-and-answer session.

Zions Bank reported a total deposit cost of 127 basis points for the quarter, compared to 47 basis points in the first quarter. Customer deposits increased 3.2%, and including broker deposits, deposit growth was 7.4%. Loan growth has slowed year-to-date relative to 2022, but the bank's loss absorbing capital remains healthy. The bank also experienced $13 million in net charge-offs, which is higher than the first quarter but lower than historic norms.

In the second quarter, Diluted Earnings Per Share (EPS) was $1.11. This was due to a $13 million severance expense, offset by a gain on the sale of property, as well as increased deposit and other funding costs on net interest income. Net Interest Income and the Net Interest Margin both declined due to the rising rate environment and more competitive pricing. Additional detail on changes in the Net Interest Margin are outlined on Slide 8.

In the second quarter of 2024, net interest income is expected to be stable to slightly decreasing relative to the second quarter of 2023. This is due to the 100 basis points adverse impact associated with deposits, which was partially offset by the positive impact of loans, lower borrowing levels, and increased value of noninterest-bearing funds. Customer-related noninterest income was $162 million, an increase of 7% compared to the prior quarter and 5% compared to the prior year. This was due to the improvement in commercial account fees, including treasury management fees, which made up for the loss of noninterest income due to modified non-sufficient funds and overdraft fee practices.

Customer fees grew 7% in the second quarter compared to the first quarter, and adjusted revenue grew 3% from the year before. Adjusted noninterest expenses decreased 3% from the prior quarter to $494 million. Loan growth has moderated in the current quarter and is expected to increase slightly in the second quarter of 2024. Total deposits declined in the prior quarters but average deposits for the second quarter were down slightly, ending balances grew 7% and customer deposits grew 3%.

In the second quarter, the cost of deposits increased to 127 basis points from 47 basis points in the prior quarter. Noninterest-bearing demand deposit volumes have been declining, but the contribution to the net interest margin has increased significantly. The ratio of insured deposits to total deposits stayed consistent at 55%, and the loan-to-deposit ratio is at 77%. Total deposits have increased 30%, or 22% excluding broker deposits, since the end of 2019.

The investment portfolio declined in size in the second quarter but remains larger than before the pandemic. The duration of the portfolio is slightly shorter than the previous year, estimated at 3.7 years. To manage the interest rate mismatch between loans and deposits, $2.5 billion of received-fixed interest rate swaps were canceled and $2.5 billion of pay-fixed interest rate swaps were added. This will help reduce asset sensitivity and actively manage the asset duration to the emerging liability duration, impacting net interest income.

The terms latent and emergent interest rate sensitivity are used to describe the effects of rate changes on net interest income. Assuming a funding cost beta based on recent history, net interest income is expected to decline by 4% in the second quarter of 2024 compared to the second quarter of 2023. The emergent sensitivity measure indicates an improvement in net interest income of 1% in the second quarter of 2024 compared to the second quarter of 2023. The CET1 ratio continued to grow in the second quarter to 10.0%, and the allowance for credit losses is low. Share repurchases are not expected in the third quarter, and the company will maintain strong levels of regulatory capital while managing to a below-average risk profile.

Credit quality remains strong with non-performing assets and classified loan levels staying low and stable. Loan losses in the quarter were due to individual supply chain issues, inventory build delays, and customer demand changes. The allowance for credit losses is up 5 basis points due to a weaker economic forecast. Commercial real estate represents 23% of the total portfolio and the office portfolio credit metrics stayed the same compared to industry trends. There were no losses in the quarter across the CRE portfolio. The financial outlook for the second quarter of 2024 is provided in the presentation.

Paul Burdiss and Manan Gosalia discuss the trends in net interest income and net interest margin as seen on Page 22 of the presentation appendix. Burdiss explains that these trends are informing the outlook, and Gosalia inquires about the ongoing benefits of expense cuts. Burdiss is reluctant to quantify the specific expense associated with the severance, as it is part of a larger program.

Paul Burdiss explains that the noninterest-bearing deposit mix is currently below pre-pandemic levels and is difficult to predict due to the macroeconomic environment. He states that their outlook for the future includes some migration from noninterest-bearing to interest-bearing deposits, which is reflected in their estimates for net interest income.

Paul Burdiss starts the discussion by discussing the importance of keeping an eye on total deposit costs and how it affects net interest income over time. Harris Simmons then adds that this could be affected by an increase in rates. Scott McLean then explains that the demand deposits are worth more due to rising rates and that their competitive advantage in terms of noninterest-bearing deposits will remain. John Pancari then asks about capital return and Paul Burdiss responds by saying there is no intention to buy back stock in the third quarter, but does not provide information on what could change that.

Scott McLean discussed the events in March and how the bank was able to utilize broker deposits during that time. He also noted the importance of utilizing the bank's higher priced commercial suite products and reciprocal deposits as well. He concluded by mentioning the progress the bank has made in building customer deposits such as sweep deposits and CDs.

The banking industry has been actively encouraging customers to move their deposits off-balance sheet to take advantage of higher money market fund rates since 2021. However, in February and March of this year, the banking industry began to aggressively promote their on-balance sheet deposit rates, which has resulted in customers bringing their deposits back on-balance sheet. This has caused interest-bearing deposit costs to increase by 130 basis points. As the loan yields remain low at 5.65%, the banking industry is still some way off from reaching the NIM trough.

Paul Burdiss and Harris Simmons discussed the outlook of net interest income, which is expected to be flat to slightly decreasing. They also discussed the tepid loan growth, investment portfolio paydowns, and the lower edge of the net interest margin. Paul Burdiss was asked about the cost of interest-bearing deposits, to which he responded that it was 2.22% during the quarter and 1.62% excluding broker deposits. Finally, Nick Moutafakis asked about total IBD beta assumptions, to which Paul Burdiss responded that he was asking about the assumptions used in interest rate risk modeling.

Paul Burdiss explains that the page 15 of the slide deck contains two sets of bars that represent the standard and adjusted assumptions. The adjusted assumptions take into account the deposit betas that have exceeded expectations and incorporate the rate of change in interest-bearing deposits, the shift from noninterest-bearing deposits to interest-bearing deposits, and the repricing speed. Burdiss also notes that net paydowns were just over $900 million in the current quarter and are expected to range between $750 million and $1 billion over the course of several quarters.

The speaker thanked all participants for joining the call and invited them to contact the company with any further questions. They concluded the call by thanking everyone for their interest in Zions Bancorporation.

This summary was generated with AI and may contain some inaccuracies.