The operator welcomes listeners to the Zions Bancorp Q2 earnings conference call and introduces Shannon Drage, Senior Director of Investor Relations, who will be leading the call. Shannon reminds listeners that the call will include forward-looking statements and directs them to review the disclaimer. The agenda for the call includes opening remarks from Chairman and CEO Harris Simmons, a review of financial results from CFO Ryan Richards, and a Q&A session. Harris mentions the successful completion of a major conversion to a new core operating system for loans and deposits.

The company has successfully transitioned loans onto a new platform and expresses gratitude to those who worked on it. This modernization creates value by reducing risk, improving fraud detection and customer data consistency, and providing a better experience for employees and customers.

The company has made significant investments in digital technology, including replacing their online and mobile banking systems and creating a digital mortgage and small-business application process. These investments have resulted in high rankings for their digital product capabilities. Net interest margin has improved and loan growth has been tempered due to higher interest rates. Customers are concerned about the expected path of benchmark rates in the current political environment.

In the fourth paragraph, the speaker discusses the bank's success with a streamlined SBA program for smaller businesses and their focus on bringing in new customers and building their deposit base. They also mention their confidence in growing fee income in the second half of the year and expanding their capital markets capabilities. The bank has been able to control costs while still investing in the business. Net charge-offs remain low, but there has been an increase in classified loan balances, mainly in the C&I portfolio. The bank's allowance for credit losses has decreased due to an improved economic outlook, but they have made additional reserves for C&I loans. The bank's net earnings for the quarter were $190 million and they saw growth in their 1-4 family residential loans.

In the fifth paragraph, the article discusses the decline in customer deposit balances and the stability of the noninterest-bearing demand deposits ratio. It also mentions the increase in common equity Tier-1 ratio and strong accretion to tangible book value. The following paragraph discusses the company's second quarter diluted earnings per share, which were up from the previous quarter due to positive impacts from the sale of a business and a bank-owned property. The adjusted pre-provision net revenue for the quarter also increased, driven by improved revenue and well-managed expenses. The company's investments in technology, products, and services are highlighted as contributing to the positive results. The Chief Financial Officer then provides more detail on the components of pre-provision net revenue, with 80% of revenue coming from net interest income.

Slide 7 provides an overview of net interest income and net interest margin, showing improvement for two consecutive quarters due to the repricing of earning assets. Slide 8 includes a linked-quarter waterfall chart detailing the changes in key components of the net interest margin, with a 12 basis point beneficial impact from money market, investment securities, loans, and borrowings, partially offset by a decline in noninterest-bearing deposits. The right-hand chart on this slide shows a comparison to the prior year quarter, with higher rates contributing to a 6 basis point increase in the net interest margin. Slide 9 discusses noninterest income, which was $154 million in the current quarter, with slower customer fee income growth due to reduced loan activity and flat wealth management fees.

The company is optimistic about their new and expanding capital market capabilities and expects moderate growth in customer-related noninterest income for the next four quarters. Adjusted revenue and noninterest expenses have decreased slightly, but there are risks associated with managing technology costs and employment costs. Average loans have increased slightly and the company expects growth to improve in the future, despite the impact of higher interest rates.

In the second quarter of 2025, it is expected that loans will remain stable or slightly increase. Deposits increased slightly, with a 5 basis point increase in the cost of total deposits. Broker deposits remained stable, while customer deposits have grown. The total cost of funding has continued to decline. The investment portfolio is primarily used to absorb changes in the balance sheet, and maturities and cash flows were $840 million in the second quarter.

The company expects their portfolio cash flow to remain steady, leading to a decline in money market and investment security balances. They plan to reinvest these funds into higher-yielding loans to contribute to their net interest margin. The duration of their investment portfolio is estimated at 3.7%, helping to manage interest-rate mismatch between loans and deposits. The company also provides information on their interest rate sensitivity, with latent and emergent sensitivity estimated to be 8.3% and 6.3%, respectively. This is a significant increase from previous projections, and a 100 basis point parallel shock could result in a sensitivity range between 4.6% and 7.7%. The company also considers how changes in their deposit mix could impact their net interest income.

The company has observed a slower migration of noninterest-bearing deposits to higher cost deposits, resulting in a change in their assumed through the cycle beta. They expect net interest income to slightly increase in the second quarter of 2025, but there are risks and opportunities that could affect this outlook. Credit quality remains strong, but there has been some deterioration in credit metrics. The commercial real estate portfolio represents 23% of the total loan portfolio, with office properties making up 14% of the CRE portfolio and 3% of total loan balances.

The credit quality of the total CRE portfolio remains strong, although criticized and classified levels increased in the quarter. The company expects the portfolio to perform well with limited losses based on the current economic outlook. The CET1 ratio grew in the second quarter and, combined with the allowance for credit losses, reflects a low level of ongoing loan net charge-offs. The company expects its common equity to increase organically through earnings and AOCI improvement. The financial outlook for the second quarter of 2025 compared to the second quarter of 2024 was provided. During the question-and-answer section of the call, participants were asked to limit their questions to one primary and one follow-up question. The first question asked about noninterest-bearing deposit trends during the quarter and how they may be affected by potential rate cuts.

Ryan Richards, speaking on a call, addressed the assumption of $3.5 billion of NIB flowing into higher cost products in the latent interest sensitivity analysis. He stated that they were pleased with the modest decrease in noninterest-bearing deposits in the quarter and have revised their models to tighten up deposit migration assumptions. They anticipate less DDA migration and have observed an ability to manage interest-bearing deposit costs without significant pricing increases. This has led to a more generous guidance for the latent assumptions and a slightly more asset sensitivity. Richards also stated that loan growth is expected to be stable to slightly increasing, but this is dependent on deposit behaviors.

During a recent earnings call, Harris Simmons, CEO of a financial company, discussed the company's loan balances and the potential impact of the upcoming elections and economic uncertainty. He stated that while there is some uncertainty, it is not a major factor in the company's loan growth. The company has seen some weakening in loan growth compared to a year ago, but they do not expect any significant changes in the near term. They are implementing marketing programs and focusing on small-business lending to help boost loan growth. On the credit side, the company has seen an increase in classified loans and past due loans, but overall trends are within expectations and they were able to release some reserves.

Scott McLean, speaking on behalf of the company, explains that the increase in classified assets on the commercial book was driven by the C&I portfolio, with the remaining increase coming from the multifamily sector. He notes that the increase was due to a few specific credits in various industries, rather than a trend across the board. He also mentions that the increase in criticized assets was primarily related to multifamily, but that the company is not overly concerned as these types of migrations are common in every cycle. He attributes the resilience of multifamily to factors such as strong equity, lack of Phase 2 land, and strong covenants packages.

The speaker discusses the low base of criticized classified non-performing loans and how it affects the appearance of the lines. They also mention a decrease in CRE office outstandings and attribute it to borrower payments and equity rebalancing. The speaker also addresses the question of the ACL and mentions that they use Moody's variables to inform their reserving practices.

The speaker explains that they have been expecting a decline in the economy for some time now and it is not surprising to see it happening. They will continue to monitor the data and everything so far is within their reserves. They also talk about the fixed asset repricing opportunity and how they have been able to build loan growth during the quarter.

The speaker discusses the repricing of assets and funding costs, and how they expect this trend to continue. They also give some statistics on the front and back book of loans. They mention the impact of latent and emergence factors and state that they expect NII to slightly or moderately increase in the next 12 months.

The speaker agrees with the listener's estimate that NII will increase by 6% in the next year, bringing it to around $630 million. They explain that there are uncertainties and factors that could affect this estimate, such as deposit movements and loan growth. The speaker then discusses the credit situation, stating that the majority of classified loans are in the C&I sector, but there is no clear pattern or theme causing these issues.

The speaker discusses the changes made to the bank's net interest income sensitivity, specifically the decrease in deposit beta. They clarify that this decrease is not due to the current forward curve, but rather based on observed trends in the market and pricing activity.

The discussion focuses on the outlook for NII, which is based on the current forward curve and includes an implied forward of 6.30%. The participants believe that demand deposits will be more stable than previously thought. Technology-related costs have increased by 14% year-over-year, but are expected to decrease next year due to the new deposit system. The modern core platform is expected to bring benefits such as lower costs and improved growth.

The primary benefit of having core systems in place is that they serve as the foundation for all other banking processes. These systems are complex and expensive to replace, but once they are in place, there is a sense of security and efficiency. With real-time posting, errors and fraud can be detected more quickly, and employees are able to navigate the system more easily. Overall, having these core systems in place is a major accomplishment and a necessary step for all large banks.

The speaker recalls a conversation with an employee from a larger bank who complained about the difficulty of switching between applications and screens. The speaker believes that their new system will make it easier for employees to serve customers and train new employees. They also mention the potential for delivering this functionality to customers. The speaker is confident that their solution is solid and will benefit shareholders over time. The next question asks about the cost implications of the new system.

The $12 million to $15 million cost reduction discussed in the previous quarter will be realized over the course of a year and is factored into the company's second quarter guidance for 2025. As legacy systems are further retired, there may be additional cost savings in the future. The amortization of the systems will decrease by 10% each year, providing financial benefits in the long term. Additionally, the pressure to replace core systems has become a non-issue for the company due to the cost savings.

The company is focused on optimizing and monetizing their investments, which is especially beneficial at this time. They have seen success in attracting new deposits through client campaigns and are looking to expand relationships and grow deposits. They are particularly focused on SBA lending and the granularity of their deposit base. They also have a customer appreciation calling effort in place.

The bank is making 100,000 calls a year to small business clients to thank them for their relationships. They are also focusing on calling on top prospects in their markets to reignite loan growth. The bank is optimistic about expanding their capital market capabilities, but it may be lumpy. They have a good team and are pleased with their engagement with commercial bankers.

The speaker discusses the traction and improvement of their business in the second half of the year, but notes that it may not be a straight line. They express excitement about their team and the health of their small business loans, which have historically had low charge-offs. They also mention that not all small businesses borrow money, but overall, they are seeing good credit quality.

The speaker from KBW asks about the trend of money market and securities cash as a proportion of the balance sheet in the next year. The speaker from the company responds that it will depend on loan growth and the potential for investment securities to run off. They do not have a specific measure for this. The speaker is also asked about capital and responds that they are building capital quickly, but there are still unanswered questions about the endgame of muzzle three. They expect AOCI to come back into the calculation of CET1 and are making progress with a 20% increase in tangible book value.

The speaker is discussing the increase in problem loans and reserves on Slide 15. They mention that their economic views have changed and they have a thorough process for assessing the situation. They also mention that their current practices are in line with previous expectations and it is difficult to speculate on what would have happened if there were fewer criticized or classified loans.

The speaker discusses the factors that inform the credit migration process, including the long-term debt proposals and the company's retention of earnings. They also mention their increased equity position and the potential impact of the long-term debt proposal on their capital stack. The questioner asks about the recent growth in single family residential loans and whether it is part of the company's interest rate risk management strategy and if it will continue at a similar pace.

The speaker discusses the current state of the company's book and the yields they are receiving. They mention a shift towards one-time closed loans and a decrease in origination of held-for-investment 1-4 family mortgages. They also mention an increase in yields due to rising interest rates. The speaker is asked about the situation in Houston and they respond that the storm was not supposed to be significant, but ended up causing some damage.

The speaker discusses the impact of a recent hurricane on Houston, Texas. The storm was originally predicted to hit the city from the west, but at the last minute, it veered east and made a direct hit. The storm had winds of 90-100 miles per hour and caused major tree damage, leading to widespread power outages. However, the city has shown resilience in recovering from the storm. The speaker also mentions that there have been no losses reported in their loan book due to the hurricane.

Management thanks the participants for joining the call and invites them to contact them for any further questions. They look forward to connecting in the future and thank everyone for their interest in Zions Bancorporation. The call is now concluded.

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