ZIONS BANCORPORATION, NATIONAL ASSOCIATION /UT/ Q3 FY2024 earnings call

Key Points

• Generally pleased with Q3 results, reflecting improvement in financial performance. Benefited from credit risk management, deposit franchise, and expense discipline while investing in the business.
• Announced agreement to acquire four branches from FirstBank in California with ~$730 million of deposits and $420 million in loans, subject to regulatory approval.
• Net earnings improved due to higher revenues and lower expenses. Customer deposits stabilized with non-interest bearing demand deposits increasing 1% point-to-point. Net interest margin expanded with earning asset yields up and funding cost flat.
• Loan growth modest, but SBA loan product demand grew aided by new digital application technology. Net charge-offs low at 2 basis points annualized. Classified loan balances increased due to multifamily portfolio weakness and change in risk rating approach.
• Common Equity Tier 1 ratio at 10.7%, tangible common equity ratio improved to 5.7%. Diluted earnings per share $1.37, up from prior quarter and year-ago period.

Net earnings for the quarter were $204 million. Customer deposits increased 1.5 percentage points point-to-point for the quarter. Net interest margin continued to expand, up 5 basis points in the quarter as earning asset yields increased while the cost of funding remained flat, and improved 10 basis points against the year-ago quarter. Loan growth was modest in under 1% for the quarter. Net charge-offs were just 2 basis points annualized as a percentage of average loans for the quarter. Classified loan balances increased $829 million. Our Common Equity Tier 1 ratio was 10.7% compared to 10.6% in the second quarter and 10.2% a year ago, while the tangible common equity ratio also improved by 50 basis points to 5.7%.

Guidance

• Expect net interest income in the third quarter of 2025 to be slightly to moderately increasing relative to the third quarter of 2024.
• Adjusted non-interest expense outlook for the third quarter of 2025 is slightly increasing relative to the third quarter of 2024, with risks related to technology costs, vendor contractual increases, and employment costs.
• Loans are expected to be stable to slightly increasing in the third quarter of 2025 relative to the third quarter of 2024, led by the commercial portfolio but offset somewhat by commercial real estate and residential mortgage loan refinancing as rates decline.
• Average deposit balances for the third quarter are expected to increase modestly, with interest-bearing deposit costs trending favorably.

Risks

• Ongoing uncertainty around interest rates and the economy, with moderate headwinds from refinancing of real estate assets.
• Risks associated with deposit costs management, including the path of interest rates affecting deposit beta and cost.
• Credit risks in the CRE portfolio, particularly in the multifamily segment with weaker performance due to higher interest rates and rent concessions during lease-up.
• Uncertainty in the performance of the capital markets division with potential variability in quarterly results.

Q: Hi, good afternoon. I wanted to touch on deposit costs. So the spot rate you gave was really helpful. It sounds like you've already seen a deposit beta of about 50% or so from the first Fed rate cut. Could you take us through how you expect that to progress? What have the early discussions been with customers of different deposit types?

A: Yes, you bet. Listen, I think we are encouraged. I think we were anticipating, as we shared in my prepared remarks that these - one-third of our higher-cost deposits that were approaching sort of wholesale rates and given that they had a very close to 100% beta coming up that they would behave in kind on the way down and we are seeing that, which is encouraging. And I would sort of point you back, it was probably represented in the slide and I didn't give a voice to it in my prepared remarks, but as we sort of think about our interest rate sensitivity that would be implied by the forward curve, we did call out a sort of an all-in beta there on the down-cycle that would point to a 36% beta. So we will - it is a heightened focus for us. It's something that we've been preparing for operationally to make sure that we could do it effectively, and so far so good. Just to reiterate that the curve that we cite there in that slide in terms of the forward curve was as of September 30, clearly, there's been some changes since then, but we have not ruled out as part of our process, an assumption of allowing for additional migration of non-interest-bearing deposits to interest-bearing deposits over time.

Q: I just wanted to get a little more color on the credit side on the increase in classifieds and NPAs. I know you mentioned that the problem loan increase, the classified loan increase was partly related to a change in internal risk rating. How much of that increase was attributed to the risk rating change? And if part of it was a risk rating change, why did that not necessitate a loan-loss reserve increase that corresponds with it?

A: Okay. Thanks, John. This is Derek. It's hard to quantify exactly what the percentage would be because of the change in the grading approach. I'd say what we've done has become more conservative in the way we rely on guarantor support and sponsor support. As we see, especially in the multifamily - as we see things taking longer for lease-up and concessions, we're placing less reliance there. As far as how that doesn't impact the allowance with CECL and the changes to CECL, we built reserves over the last couple of years really as we saw a downturn in - potential downturn in the economy, the risk rating changes today with CECL actually impact the allowance much less than they did in years past. And that's why you're not seeing the corresponding increase?