ZIONS BANCORPORATION, NATIONAL ASSOCIATION /UT/ Q1 FY2024 earnings call

• Core deposit system migration: Successfully completed the second of three migrations for Nevada State Bank and Amegy Bank of Texas customers, with anticipation of completing remaining migrations in late summer. The core system offers benefits like improved client relationship management and enhanced fraud detection. - Awards and recognition: Zions was awarded 20 overall national excellence awards in the 2023 Greenwich Associates Market Tracking Program, ranking third among U.S. banks. - Revenue challenges: Revenue growth is a key challenge, with adjusted revenue down 11% year-over-year. - Net interest margin outlook: Expected to improve through customer deposit growth, pricing discipline, and effective interest rate risk management. - Loan demand: Loan demand has turned the corner, with pipelines recovering from low levels. - SBA program and cross-selling: A streamlined SBA program for smaller businesses is successful, and cross-selling efforts are yielding results. - Expenses: Adjusted expenses increased by $2 million compared to Q1 2023. - Credit quality: Net charge-offs were benign at 4 basis points, but classified loan balances in the C&I portfolio increased by $141 million. The allowance for credit losses rose 1 basis point as a percentage of loans.

Zions Bancorp reported net earnings of $143 million for Q1 2024. Period-end loan balance increased just under 1%, while average loan balances grew 1.3% during the quarter. Customer deposit balances declined approximately 1% primarily due to seasonal outflows early in the year. The loan-to-deposit ratio stood at 78%. Net charge-offs were 4 basis points annualized as a percentage of average loans. The common equity Tier 1 ratio was 10.4%. Adjusted pre-provision net revenue was $242 million, down from $262 million in the fourth quarter and 29% lower than the year-ago quarter due to the cost of deposits outpacing the increase in earning asset yields.

• Net interest margin: Anticipated to improve through customer deposit growth, pricing discipline, and interest rate risk management. - Loan demand: Expected to be stable to slightly increasing in Q1 2025 compared to Q1 2024. - Adjusted noninterest expense: Expected to be slightly increasing in Q1 2025 relative to Q1 2024. - Net interest income: Modeled net interest income in Q1 2025 is projected to be stable to slightly increasing compared to Q1 2024, with sensitivity to interest rate changes.

• Operational risks: Managing technology, supply chain, and employment costs poses risks. - Deposit competition: Stiff deposit competition affects deposit pricing. - Interest rate changes: Can impact the investment portfolio and net interest margin. - Commercial real estate: The commercial real estate portfolio, particularly the office segment, presents potential credit risks with criticized and classified loan balances on the rise.

Q: Can you dig into the NII guide and assumptions on rate cuts and deposit repricing?

A: Yes, using the forward curve as of the end of the quarter with an implied three rate cuts. Also highlighted latent sensitivity, and noted that deposit pricing behavior will be crucial.

Q: Talk about deposit costs and balances trajectory?

A: Early in the quarter, there was seasonality in large commercial deposits, with migration to interest-bearing deposits. NIM has stabilized, and there is room for deposit migration within guidance.

Q: Confidence in adequacy of loan loss reserve for commercial real estate?

A: Very confident, with migration to criticized loans, conservative underwriting practices, and disciplined hold levels.

Q: Expense efforts and core system conversion impact?

A: There was a modest year-over-year expense increase, with continuous improvement efforts. The core system conversion may have initial costs but is expected to yield long-term efficiencies.

Q: Loan demand turning corner and consumer sentiment?

A: Lenders are seeing more optimism from borrowers, and loan demand improvement may take around 6 months to translate into actual loan growth.

Q: Capital markets revenue improvement?

A: There is an intentional calling effort with bankers, and growth across capital markets is expected.

Q: Mix of earning assets and securities portfolio?

A: Cash and securities are expected to continue declining, with reinvestments in loans based on loan growth and deposit behavior.

Q: Management of Office CRE portfolio?

A: The office portfolio is being worked through, with reductions over time and positive resolutions on some non-accrual loans.

Q: Increase in C&I classified loans?

A: Due to assisted living facility CRE-related issues and C&I credits migrating to classified status.

Q: Deposit costs outlook if no Fed cuts?

A: Remains favorable, with management focusing on keeping deposit costs competitive relative to peers.

Q: Big picture changes in use of capital?

A: Focus is on the $100 billion threshold, with investments in fee income businesses like capital markets and small business lending.

Q: Multifamily CRE uptick and geographic presence?

A: Not in a specific market, with issues including slower lease up, rent concessions, and interest rate increases.

Q: Office CRE as next shoe to drop?

A: Office has challenges but is manageable, and the bank is not involved in large downtown trophy office properties.

Q: Deposit insurance broken comment?

A: The $250k deposit insurance limit is not indexed for inflation, leading to de facto insured large banks, and there is a focus on developing an insured deposit base.

Q: Capital discussion and CET1 ratio?

A: Focus is on increasing the tangible common equity ratio, covering employee stock grants, and solidifying the position when crossing the $100 billion threshold.