The operator introduces the Zions Bancorp Q3 earnings conference call and reminds participants that the call is being recorded. Shannon Drage, Interim Director of Investment, introduces the speakers and reminds listeners of forward-looking statements. Chairman and CEO Harris Simmons gives opening remarks, followed by CFO Paul Burdiss discussing financial results. Other executives are also present for the call. The company recently celebrated its 150th anniversary.

The bank has been built steadily and prudently over many decades with a focus on developing deep roots in the communities it serves. The bank's Chief Credit Officer, Michael Morris, retired due to health challenges, but will continue to work in a role focused on affordable housing. Derek Steward has taken over the role of Chief Credit Officer. The bank saw sustained stabilization of its net interest margin and significant growth in customer deposits during the quarter. The bank actively manages its balance sheet and hedges in response to changes in its interest rate risk profile.

The company has responded proactively to changing conditions, resulting in stabilization of net interest margin and income. Net charge offs were in line with the previous quarter and capital levels remain healthy. Total deposit costs increased compared to the previous quarter, while customer deposits increased and brokered deposits declined. Diluted earnings per share increased slightly, but adjusted pre-provision net revenue was down due to lower non-interest revenue. The Chief Financial Officer will provide more detail on the company's financial performance, including net interest income and margin.

The chart in the paragraph shows that net interest income and net interest margin remained consistent with the previous quarter due to the repricing of earning assets and rising funding costs. Changes in the net interest margin are further explained on Slide 8. The left hand chart shows a breakdown of the components affecting the net interest margin, with deposits having the largest negative impact. However, the bank's success in growing customer deposits has reduced the reliance on borrowed funds. The right hand chart compares the net interest margin to the previous quarter, with higher rates on earning assets being offset by increased deposit and borrowing costs. Overall, the net interest margin declined compared to the same quarter in the previous year. The outlook for net interest income in the third quarter of 2024 is stable, with potential risks and opportunities such as loan growth, competition for deposits, and interest rates. Non-interest income decreased by 3% compared to the previous quarter due to lower capital market fees.

Customer fees remained consistent with the previous year, with a decrease in capital markets offset by approved treasury management swap fees. The outlook for customer-related non-interest income for the third quarter of 2024 is expected to moderately increase. Adjusted revenue decreased 8% from the previous year, and adjusted non-interest expense was essentially flat. The outlook for adjusted non-interest expense is slightly increasing in the third quarter of 2024. Average loans were stable, and average deposit balances increased 9% in the third quarter.

In the third quarter, customer deposits increased by 5% and were a significant source of deposit growth. The cost of deposits also increased during this period. The repricing beta for total deposits was 36% and for interest-bearing deposits was 57%. The funding sources and total funding cost trends are shown in Slide 12, with a decrease in short-term borrowings and an increase in customer deposits. Non-interest bearing demand deposits have been declining, but their contribution to the net interest margin is increasing. The investment portfolio is primarily used to absorb customer-driven balance sheet changes and has been behaving as expected, with over $800 million in cash flows in the third quarter.

The company expects its money market and investment securities balances to decrease in the near future, which will provide funds for the balance sheet. The duration of the investment portfolio is slightly shorter than the previous year, which helps manage the risk between loans and deposits. The company has actively managed its asset duration to match the emerging liability duration. They have added $1 billion of pay-fixed interest rate swaps to hedge against a rising rate environment. The impact of current and expected rate changes on net interest income is shown on the right side of the slide. The company uses the terms latent and emergent interest rate sensitivity to describe the effects of rate changes on net interest income.

The paragraph discusses the assumptions and estimates made for the bank's net interest income and credit quality in the third quarter of 2024. It mentions that the estimates are based on the assumption that earning assets will remain unchanged and the in-place yield curve as of September 30th. The bank expects a decline in net interest income in the third quarter of 2024 compared to the same quarter in 2023, but overall stability due to changes in balance sheet composition. Credit quality remains strong, with stable and low classified loan levels, but there was an increase in non-performing assets due to two suburban office loans and one C&I loan. Net charge offs were 10 basis points and the allowance for credit losses increased by 5 basis points, mainly due to reserves for the CRE office portfolio. More information on the commercial real estate portfolio can be found in the appendix of the presentation.

In this paragraph, the speaker discusses the discipline and credit concentration risk management that the company has maintained over the last decade in regards to commercial real estate. They provide an overview of the CRE portfolio and mention that it represents 23% of their loan portfolio with office representing 16%. The credit quality measures for the portfolio are relatively strong, but there was an increase in non-performing assets in the quarter. The speaker also mentions losses on two office loans and expects the portfolio to perform well with limited losses. They then move on to discuss the company's CET1 ratio and their loss absorbing capital position. They state that they do not expect share repurchases in the fourth quarter and will maintain strong levels of regulatory capital. The financial outlook for the next quarter is also summarized. The speaker then concludes their prepared remarks and opens the line for questions.

During a conference call, an operator introduces a question from Manan Gosalia of Morgan Stanley regarding net interest income (NII). Gosalia asks about the decline in NII in September compared to previous months and how the company expects NII to change in the future. Paul Burdiss, a representative from the company, explains that the monthly NII data was provided to give inter-quarter guidance and should not be overanalyzed. The overall outlook is for NII to remain flat in the third quarter of 2024 compared to the third quarter of 2023. Harris Simmons, another representative, adds that there may be fluctuations due to differences in the number of days in a month.

The speaker discusses the impact of a higher interest rate environment on the company's net interest margin and net interest income. They expect a slight increase in earning assets and a flattening of funding costs, which should result in a stable net interest margin. The potential for improvement in net interest income will depend on the company's ability to manage deposit rates. A question is then asked by Dave Rochester from Compass Point.

David Rochester asked Paul Burdiss about deposit flows, beta, DDA mix and timing. Paul Burdiss said that the outlook for deposit rates is a continued increase, with a total deposit beta of 50%. In terms of DDA mix, it is difficult to predict when it will bottom, but the expectation is for continued DDA migration into interest-bearing deposits. John Pancari asked if there could be upside to the stable loan growth outlook, as some smaller banks are able to gain market share while larger banks focus on their RWA diets and balance sheet optimization.

The speaker, Harris Simmons, believes that loan growth is difficult to predict and may be influenced by various factors such as payoffs and interest rates. There may be some differences of opinion among the group about the outlook for loan growth, but overall they expect it to remain stable. The recent weak loan growth in the third quarter may be a result of caution among customers, rather than the impact of global banks pulling back on large commitments.

The company has faced challenges in meeting their expense objectives, mainly due to inflation and the need to upgrade their core systems. This has resulted in a longer timeline for cost reduction efforts and increased pressure from technology vendors for rate pass-throughs.

Scott McLean, the CEO of the company, talks about the core transformation project and how it will impact the company's P&L in the next 12 months. He also mentions that there may be a timing issue related to the period they go live in. The next question from Chris McGratty is about the deposit beta slide, where he is trying to understand the increase in deposit costs despite the Fed being done with rate hikes. Paul Burdiss explains that there are two factors contributing to this increase: the lagging effect of deposit rates and the migration of non-interest bearing demand into interest-bearing. Chris also asks about the growth opportunity under a 100 threshold, to which Scott responds that they are currently about 10-15% under that threshold.

The speaker is interested in the budgeting costs for the company. They mention that a peer said it would be around $100 million a year, but the speaker believes it will be less due to existing risk management measures in place. They also mention that the incorporation of AOCI into the numerator of capital will be the biggest change for them, but it will likely be resolved by the time the new rules become effective. However, they anticipate an increase in debt requirements, which could create some drag on funding costs.

During a conference call, Brandon King from Truist Securities asked about the outlook for deposit growth given the stable loans and runoff of the securities book. Harris Simmons, the operator, stated that they historically do not give outlooks for deposit growth but have seen substantial growth in the last two quarters. He expects Zions to maintain a solid loan-to-deposit ratio and continue to see growth in the next quarter. There is a meaningful difference in rates between new and existing customer deposits, with the increase in interest-bearing rates coming from new money and existing customers shifting to higher interest-bearing accounts. Scott McLean also mentioned that as the bank became more active in pricing interest-bearing deposits, clients became more active in bringing their deposits to the bank.

The company has seen significant growth in deposits due to existing customers bringing their off-balance sheet deposits back onto the balance sheet. The company has also become more aggressive in paying for these deposits. In terms of fixed asset repricing, the company expects a positive impact of 5-10 basis points per quarter on the earning asset yield. This is based on a sophisticated balance sheet simulation tool that analyzes loans and securities on a detailed level and takes into account the forward curve.

The speaker discusses the expected increase in earning asset yield over the next couple of quarters and answers questions about credit. They mention that 10-15% of the loan portfolio are shared national credits and that they are the lead on about 10% of those. They also mention that the non-performing assets increased due to 2 office loans in Southern California that had issues with leasing and value-add properties. The rest of the portfolio is well balanced.

During the call, Brody Preston asked about the percentage of the portfolio that is composed of SNCs, to which Paul Burdiss clarified that it is 10% to 15%. Burdiss also mentioned that most of these customers are within their footprint and they have ancillary business with them. Preston also asked about the re-tenanting of office loans and if it affected the debt service coverage ratio, to which Burdiss confirmed that it did. The call ended with management thanking participants and inviting them to reach out with any further questions.

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