Zions Bancorporation N.A (ZION) — Q1 2024 Earnings Call Transcript

Thank you, Daryl, and good morning. We welcome you to this conference call to discuss our 2024 first quarter earnings. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or Slide 2 of the presentation dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release, as well as the presentation are available on our website, zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons will provide opening remarks. Following Harris' comments, Ryan Richards, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Chris Kyriakakis, Chief Risk Officer, and Derek Steward, Chief Credit Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for 1 hour. I will now turn the time over to Harris Simmons.

Thanks very much, Shannon, and we welcome all of you to our call this morning. As Shannon mentioned, Ryan Richards is joining our call today as our new Chief Financial Officer. Ryan was formerly our Corporate Controller and has been promoted to Chief Financial Officer as our former CFO, Paul Burdiss is now serving as the CEO of our largest affiliate bank, Zions Bank. These changes, along with other leadership changes, reflect the depth of the talent that we have in our organization and our intentional efforts to develop a well-rounded group of leaders with broad experience. While we and the industry continue to navigate complex and uncertain economic and regulatory conditions, we have not lost focus on bringing value to our customers and shareholders over the long term. We have just successfully completed the second of three migrations to our new core deposit system which happened for Nevada State Bank and Amegy Bank of Texas customers two weeks ago. We anticipate completing migration of substantially all remaining accounts in late summer. This core system is delivering the benefits we are anticipating, including one intuitive, easy-to-use system for virtually all deposit and loan accounts, which improves the ability to view and manage client relationships, provides greater access to data and consistency of data resulting in fewer calls to the back office, optimized teller transaction processing, the shortening of new account opening and customer maintenance times, and real-time processing allowing for improved fraud detection and mistake resolution. The completion of this major transformation is accompanied by other enhancements to digital capabilities for our customers, all of which, we believe, puts us ahead of the pack in terms of our resiliency, our product offerings, and ability to serve our customers. This advantage, combined with our local approach to relationship banking, the strength of our footprint, and our ability to manage risk positions us well for continued advancements in digital banking. We're also pleased that our efforts to serve and create value for our customers continue to be recognized, including through the 2023 Greenwich Associates Market Tracking Program. Zions was awarded 20 overall national excellence awards, ranking third among all U.S. Banks, and securing our position as one of only three U.S. banks to average 16 or more wins since the inception of the brand awards in 2009. We continue to score well across a number of measure dimensions for both small business and middle market categories, where we lead the way for Bank You Can Trust, Values Long-Term Relationships, and Ease of Doing Business. By the way, we tip our hat to our friends at Colin Frost and Pinnacle Financial who were number one and two this year for their continued and consistent recognition by Greenwich Associates over the years. We're proud to be in such good company and associated with other leading regional banks who demonstrate excellence in meeting the needs of small and middle market businesses. In the current environment, revenue growth continues to be our biggest challenge with adjusted revenue in the quarter down 11% compared to the year ago period. Over time, a relative net interest margin will improve through customer deposit growth and pricing discipline in addition to the management of interest rate risk through our hedging strategy. We also expect that with a continued passage of time from the events of last spring, our relative cost of deposits will continue to improve. Loan demand seems to have turned the corner this quarter with pipelines recovering somewhat from low levels late last year and improving customer sentiment. Our true success will depend on our ability to grow our customer base and we continue to place an emphasis on granular growth of small business customers. Recently, we've been particularly successful with a streamlined SBA program aimed at serving smaller businesses in our communities. It's a program that seems to fill a unique product need for our customers. And while it doesn't immediately contribute meaningfully to loan balance growth, it's a kind of business that builds real franchise value and it's bringing in a meaningful number of new customers to the bank. Our cross-selling efforts are also bearing fruit. We also remain confident in our ability to grow fee income to a larger percentage of total revenue. Capital markets fees represent a key opportunity and these fees are growing as our product set expands and more of our bankers are marketing these capabilities to clients. These combined efforts to improve revenue will be paired with well-managed expenses. Adjusted expenses in the current period were up a mere $2 million compared to the first quarter of 2023. We continue to focus on ways that we can control costs while continuing to invest in the business. Net charge-offs continue to be benign at just 4 basis points annualized as a percentage of average loans for the quarter. This contrasts to an increase in classified loan balances of $141 million driven largely by the C&I portfolio. We believe realized losses over the next few quarters will continue to be quite manageable and our current expectations are fully reflected in our allowance which increased 1 basis point as a percentage of loans. With the continued improvement we expect in our net interest margin coupled with better than pure credit performance, we anticipate a positive trajectory for relative performance and our ability to improve shareholder returns going forward. Starting on Slide 3, we've included key financial performance highlights. We reported net earnings of $143 million for the quarter. Our period end loan balance increased just under 1%, while average balances increased 1.3% for the quarter. Customer deposit balances declined approximately 1% in the quarter due primarily to a small number of seasonal outflows early in the year. Our loan-to-deposit ratio was 78%. Net charge-offs as a percent of loans were just 4 basis points, as noted, down from 6 basis points reported in the prior quarter. Our common equity Tier 1 ratio was 10.4% compared to 10.3% in the fourth quarter and 9.9% a year ago. Moving to Slide 4, diluted earnings per share of $0.96 was up $0.18 from the prior quarter. Current quarter results reflect a $0.07 negative impact from the FDIC's updated estimate of expected losses from the closures of the Silicon Valley Bank and Signature Bank, which compares to the $0.46 negative impact from the initial assessment reflected in the fourth quarter. Turning to Slide 5, our first quarter adjusted pre-provision net revenue was $242 million, down from $262 million in the fourth quarter. The length quarter decline was attributable primarily to seasonally higher noninterest expense. Versus the year ago quarter, PPNR was down 29% as the increase in the cost of deposit succeeded the increase in earning asset yields. With that high-level overview, I'm going to ask Ryan Richards, our Chief Financial Officer, to provide additional detail related to our financial performance. Ryan?

Thank you, Harris, and Good morning, everyone. I will begin with the discussion of the components of pre-provision net revenue. Nearly 80% of our revenue is from the balance sheet through net interest income. Slide 6 includes our overview of net interest income and the net interest margin. The chart shows the recent five-quarter trend for both. Net interest income on the bars and net interest margin in the white boxes improved slightly from the prior quarter, as the repricing of earning assets outpaced rising funding costs. Additional detail on changes in the net interest margin is included on Slide 7. On the left-hand side of the page, we provide a linked quarter waterfall, outlining the changes and key components of the net interest margin. The 22 basis adverse impact associated with borrowings, encompassing both the rate and volume, was offset by the positive impact of loan repricing and the impact of lower average interest-bearing deposit volumes. Non-interest-bearing deposit volume declines resulted in a slight reduction in the contribution of these funds to balance sheet profitability. The right-hand side of this chart shows the net interest margin comparison to the prior year quarter. Higher rates were reflected in loan yields, which contributed an additional 77 basis points to the net interest margin. The value of non-interest-bearing deposits at lower borrowing levels contributed another 93 basis points to the margin. These positive contributions were more than offset by increased deposit costs, which adversely impacted the net interest margin by 208 basis points. Overall, the net interest margin declined by 39 basis points versus the prior quarter. Moving to non-interest income and revenue on Slide 8, customer-related non-interest income was $151 million compared to $150 million in the prior quarter, with higher capital markets fees offset by smaller declines in other categories. Our outlook for customer-related non-interest income for the first quarter of 2025 is moderately increasing relative to the first quarter of 2024. The chart on the right side of the page includes adjusted revenue, which is the revenue included in the adjusted pre-provision net revenue and is used in our efficiency ratio calculation. Adjusted revenue decreased 11% from the prior year and was stable versus the fourth quarter due to the factors noted previously. Adjusted non-interest expense, shown in the lighter blue bars on Slide 9, increased by $22 million to $511 million, attributable largely to seasonal increases in compensation. Reported expenses at $526 million decreased $55 million. As a reminder, the fourth quarter included $90 million in FDIC special assessment costs, while another $13 million was recognized in the first quarter this year. Our outlook for adjusted non-interest expense for the first quarter of 2025 is slightly increasing relative to the first quarter of 2024. Risks and opportunities associated with this outlook include our ability to manage technology, supply chain, and employment costs. Slide 10 highlights trends in our average loans and deposits over the year. On the left side, you can see that average loans increased 1% in the current quarter. Loan demand and customer sentiment improved somewhat during the quarter, and our expectation is that loans will be stable to slightly increasing in the first quarter of 2025 relative to the first quarter of 2024. Now turning to deposits on the right side of this page. Average deposits for the first quarter decreased slightly as average non-interest bearing and broker deposits declined. The cost of total deposits, shown in white boxes, stayed flat at 206 basis points. As measured against the fourth quarter of 2021, the repricing beta on total deposits, including broker deposits and based on average deposit rates in the first quarter remained 39%. And the repricing beta for interest bearing deposits was 60%. Slide 11 includes a more comprehensive view of funding sources and total funding cost trends. The left-hand side chart includes ending balance trends. Short-term borrowings have decreased $8 billion since the first quarter of 2023, as customer deposits have grown and earning assets have declined. On the right side, average balances for our key funding categories are shown along with the total cost of funding. As seen on this chart, the rate of increase in total funding costs at 9 basis points in the current quarter has continued to decline compared to the prior three quarters. Moving to Slide 12, our investment portfolio exists primarily to be a ready storehouse of funds to absorb customer-driven balance sheet changes. On this slide, we show our securities and money market investments over the last five quarters. The investment portfolio continues to behave as expected. Maturities, principal amortization, and prepayment-related cash flows were $700 million in the first quarter. With this somewhat predictable portfolio cash flow, we anticipate the money market and investment security balances combined will continue to decline over the near term, which will be a source of funds for the balance sheet. The duration of the investment portfolio, which is a measure of price sensitivity to changes in interest rates, is slightly shorter compared to the prior year period, estimated at 3.6% currently versus 4.1% one year ago. This duration helps to manage the inherent interest rate mismatch between loans and deposits. Slide 13 provides information about our interest rate sensitivity. While we provided standard parallel interest rate shock sensitivity measures in the appendix of this presentation, we believe a more dynamic view of interest rate sensitivity is most relevant in the current environment. As noted in the bar chart on the far right side of the page, modeled net interest income in the first quarter of 2025 is 1.8% higher when compared to the first quarter of 2024 using the implied forward path of rates at March 31 and assuming a static balance sheet. 100 basis point parallel up and down shocks of this implied forward outcome suggest about 1% and 2.3% sensitivity around that figure respectively. If no changes in rates were to occur, modeled net interest income is 80 basis points higher. This model analysis reveals that our balance sheet, while asset-sensitive using traditional measures, is positioned for net interest income growth if short-term rates fall faster than long-term rates. Utilizing this model of outcome and overlaying management expectations for balance sheet changes in deposit pricing, we believe that net interest income in the first quarter of 2025 will be stable to slightly increasing when compared to the first quarter of 2024. Risks and opportunities associated with this outlook include realized loan growth, competition for deposits, and the path of interest rate changes across the yield curve. Moving to Slide 14, credit quality and particularly net charge-offs remain strong. Net charge-offs were 4 basis points of loans in the quarter. The allowance for credit losses is 1.27% of loans, a 1 basis point increase over the prior quarter due to incremental reserves in the commercial real estate portfolio, partially offset by modest improvement in our economic scenario. Notwithstanding strong net charge-off performance, we observed some indicators of modest credit deterioration in our credit portfolio. Non-performing assets increased $26 million and classified and criticized loan balances increased by $104 million and $297 million, respectively. As Harris noted, we continue to expect the ultimate realized loan losses will be very manageable over the remainder of the year. As we know it is a topic of interest, we have included information regarding the commercial real estate portfolio with additional detail included in the appendix to this presentation. Slide 15 provides an overview of the CRE portfolio. CRE represents 23% of our total loan portfolio, with Office representing 14% of total CRE or 3% of total loan balances. Credit quality measures for the total CRE portfolio remain relatively strong, though criticized and classified levels increased during the quarter. Overall, we expect the CRE portfolio to perform reasonably well, with limited losses based on the current economic outlook. Our loss absorbing capital is shown on Slide 16. The CET ratio continued to grow in the first quarter to 10.4%. This, when combined with the allowance for credit losses, compares well to our risk profile, as reflected in a low level of ongoing loan net charge-offs. We expect our common equity from both a regulatory and GAAP perspective to increase organically through earnings, and that the AOCI improvement will continue through accretion of the securities portfolio, regardless of rate path outcomes.

This concludes our prepared remarks. As we move to the question-and-answer section of the call, we request that you limit your questions to one primary and one follow-up question to enable other participants to ask questions. Daryl, please open the line for questions.

Hey, good morning all, and Ryan welcome and congrats on the new role.

Thanks so much.

I was wondering, can you dig into the NII guide and the assumptions there in terms of the number of rate cuts? I'm assuming you're using the forward curve here. And also if you could talk about the assumptions on NIB outflow and deposit repricing and what sensitivity there is if we don't get any rate cuts this year?

Hey. Yes, thanks so much for the question. And yes, when you look at some of the materials there, and really we emphasize my remarks, sort of the forward curve as of the end of the quarter, and embedded in that forward curve outlook in the fourth quarter of the year was a Fed funds rate of 4.75%, implying three rate cuts. So that's kind of our base expectation, but I think as we open our inboxes each and every morning seeing some indicators that would suggest perhaps fewer rate cuts for the year, we really see the advantage of sharing some of our supplementary measures around latent and emergent sensitivity. And particularly, as we think about the likelihood or possibility of having fewer rate cuts, it becomes more important as we think about that latent view of interest rate sensitivity that we model at 0.8%. So we feel good about our ability to be positioned well for different rate pivots and changes. So much of that performance, as you note, will be dependent upon how our deposit pricing behaves moving forward. We were pleased to see some stabilization of that during the quarter, and we'll continue to keep a watch on that moving forward as deposit competition continues to be pretty stiff. Are there any other parts to that question that I missed?

No, I think you got them. I wanted to follow up on just the deposit costs and balances. I know NIB outflows accelerated maybe a little bit this quarter, but at the same time, the overall cost of deposits was relatively flat. So maybe if you could talk about the trajectory through the quarter of both the NIB balances as well as the cost of deposits. Is there any seasonality there that we need to be considering? And what are you hearing from clients? Are you seeing them take a fresh look at their cash levels in a higher for longer rate environment or are the positive trends continuing through the quarter?

Yes. No, thank you for that. So, yes, so we did see early in the quarter some seasonality from some of our large commercial deposits that ran off. But most of what you're seeing there in terms of the change in the DDA balance in the quarter was a migration to interest bearing that we saw in modest ways certainly with a smaller relationship balances, but also with our larger relationship balances. We've seen a very nice stabilization in NIM going back four quarters. And we saw I think even through the end of the period where some of that migration was tempered somewhat. We have not ruled out and we have allowed for continued migration that is embedded within our guidance that you'll see in our materials that would allow for our total deposit beta to scale up from this current level. So there is some room for maneuver in terms of that migration and still allowing us to hit our guidance as we peer forward in one year's time to stable to slightly increasing NII.

Good morning. And Ryan, welcome.

Thanks, John.

On the credit front, on commercial real estate, you added a bit to the reserves. You brought the commercial real estate reserve up to about 4%. Can you maybe discuss your confidence in the adequacy of the loan loss reserve? I know losses are certainly limited, but comparatively, I know that your peer regionals are in the 8% to 10% range around their reserving for commercial real estate. So can you maybe walk through your confidence in the adequacy here, given the trends that you're seeing and the pressure on the industry? Thanks.

Thanks, John. This is Derek. We are very confident in our reserves. In our credit portfolio, we have noticed some movement into criticized assets, which is the main factor behind the decline in the commercial real estate portfolio. Much of this relates to multifamily, and we feel secure about it due to the loan-to-value ratios we have underwritten and our conservative approach over the years. Additionally, our slower growth compared to peers has contributed to our confidence. With our losses at 4 basis points and $6 million for the quarter, we find them very manageable. Although we anticipate some challenges in the office portfolio in the future, we believe we are well-prepared for what we consider manageable losses ahead.

Hey, John, this is Scott. I would like to add that many are aware that our commercial real estate growth coming into this was about half of the average for regional banks, depending on the size of the banks. Since the Great Recession, our theory book has been growing by about 3% to 5% annually, which is significantly less than our peers. The fact that 80% of the portfolio is teamed indicates that we have shown cash flow related to a large portion of the book. Additionally, when you consider the low average and medium average loan sizes, it suggests that the likelihood of having guarantor support that could truly make a difference is real. Lastly, compared to some of our peers, we have been very disciplined regarding hold levels. Managing concentration, particularly in relation to hold levels, is crucial as we navigate through times like this.

Thank you, Scott. I appreciate it. Regarding expenses, the trends seem to be slightly better than anticipated, and I believe the outlook has improved as well. Could you update us on the initiatives related to expenses and whether you expect to see incremental improvements across the franchise? Additionally, could you explain the expense dynamics associated with completing the core system conversion? I understand that in the first year there may be an increase in costs before efficiencies are realized. I would appreciate your insights on that as well. Thank you.

Yes, I'll start by highlighting our year-over-year performance. Roughly a year ago, we committed to managing our expenses in light of the current revenue environment. We are pleased with our adjusted expenses, which increased by only 0.4% compared to last year, demonstrating that we kept our commitments. We are committed to continuous improvement and regularly review opportunities to manage our expenses responsibly. As noted, Harris highlighted the success of our core financial transformation, which we believe presents some opportunity for reducing direct implementation expenses next year. We have focused our efforts on enhancing automation and have mobilized our workforce to reduce manual labor hours. We also see potential for savings in our facilities, as we have successfully realized economies from various projects in recent years. Additionally, our compensation structure will continue to align with our revenue environment. Scott, do you have anything you would like to add?

No, Ryan, that was great. All of those comments highlight the disciplined approach we’ve maintained. This time last year, as Ryan mentioned, we were experiencing about 8% to 10% year-over-year expense growth, while we had predicted that we would remain stable compared to the first quarter of this year. This outcome wasn’t coincidental; it resulted from the rigorous discipline that Ryan referenced, which we believe will be advantageous moving forward. Regarding our future core projects, we anticipate a decrease in amortization costs of approximately $12 million to $15 million in 2025. We will also benefit from a reduction in what we refer to as double staffing in various areas of the bank to assist with conversions. Additionally, as Harris mentioned, we have observed significant improvements in processing times at the teller line and for our new accounts platforms, where we typically see higher turnover rates, which may also create efficiency gains.

Okay, great. Thanks, Scott. Thanks, Ryan.

Good morning, everyone. First, I appreciate the 9:30 a.m. call. It's a great time slot, and I hope it stays that way. For my question, regarding the net interest income guidance, I noticed the mention of potential upside if short-term rates decline. Most banks are suggesting that a decrease in short-term rates could put pressure on NII in the short term due to lagging on the deposit side. However, it seems you are indicating the opposite. Could you provide more details on this?

Yes, I would emphasize the near-term nature of that. But what we're seeing there is, if you think across our interest-bearing deposits, and you decide that around $50 billion, you think about a third of those being priced pretty near wholesale prices, 4.75% and above. We sort of said as we've kind of been making the rounds that we expect to have a good bit of pricing sensitivity on those deposits that can be advantageous to us on the way down. And that would be the near-term headwind if only short-term rates were to move down, not a parallel shift that we think that we could realize.

Got it. Okay, that's helpful. And then for my follow-up, maybe for you, Harris. It was interesting to hear you say that loan demand seemed to turn a corner. But if you look at the consumer side, sentiment is still pretty negative, mostly tied to inflation. But it seems like you're citing business customers; maybe sentiment's improving a bit. Can you talk about that? And do we need cuts to see improved pipelines turn into actual improved loans? Thanks.

I believe what we're observing is that our frontline lenders are indicating a greater optimism among borrowers. It doesn't seem like we need significant cuts; the situation is likely influenced by a general belief that the economy may not be heading toward a recession and that there is a bit more resilience than the sentiments from six or nine months ago. So, that's my assessment. Our comments about a potential increase in loan demand are simply based on what we're hearing from our lenders. While it's challenging to quantify, that's the internal perspective we're experiencing.

In the past, when you saw an improvement in the pipeline, how long would that typically take to filter through actual loan growth improving?

Six months.

Hi. Good morning. You've been making investments in your capital markets and wealth management segments to help drive a more sustainable revenue base. Capital markets revenues had a nice uptick in the quarter, driven by the real estate and securities underwriting you mentioned. Do you expect improvement to be driven from these areas or any color you can provide on where the expected improvement will come from?

I might just say that we have a very intentional calling effort. We've got a lot of bankers engaged in it. I generally expect it's going to be sort of across the board. And we have some ambitious internal targets and people committed to it. So I don't think it's going to be any single category. I think you're going to see it sort of across the board in capital markets.

And then maybe on the funding side. I know on Slide 11 of your presentation, you note having $4 billion in broker deposits and $5 billion in borrowings. And you've done a nice job of bringing these down over the last several quarters. What are your expectations on further bringing down wholesale borrowing for this year?

To address that, I've got Matt Tyler, our Treasurer, who may have a comment on it. Yes, this is Matt Tyler. I'm the Corporate Treasurer. We've seen deposits stabilizing since last year and actually experienced some growth, which is why we reduced those broker deposits. Looking ahead, the direction of our deposits and loan growth will really dictate our approach. We anticipate that those figures will continue to decrease somewhat, but this is contingent on the risk profile of our balance sheet. If loan growth surges or comes in very strong, we may need to retain more of that wholesale borrowing.

I want to mention that customer deposits declined slightly in the first quarter, which Ryan describes as somewhat seasonal. We still have around $6 billion in client deposits that are off-balance sheet. This is a deliberate choice on our part. We could easily have recorded $1 billion or $2 billion in customer deposit growth, which would have led to a decrease in borrowings, including overnight borrowings. However, we prefer to make natural decisions rather than manipulate the numbers for borrowings or customer deposit growth just by adjusting rates. Our focus is on determining what our customers truly need and aligning that with our goals at any given time.

Hey guys, how you doing? Can I just ask you a little bit more about the mix of earning assets? You mentioned that cash and securities would keep coming down. What are you going to be looking to do within that in terms of securities portfolio rollovers versus the overall mix of the cash and securities? Thanks.

Yeah, thanks for that, Ken. You've noticed the trend that we've allowed our investment securities portfolio to have some attrition. We can see that continuing for a time longer, and that's helping us in terms of that deal coming off and the reinvestments we've been seeing in loans and the remix of the balance sheet has been a nice trend through the course of the past year, and we certainly saw that this past quarter. So I don't know that we have a specific number in line. It kind of goes back to what Matt said, let's see where loan growth shows up and how our deposit base behaves, but that's what we've been seeing.

Okay, I know you're at $87 billion, quite a distance from the next $100 billion threshold. I'm curious if you could discuss how not having the holding company structure influences your approach to reaching that goal and preparing the company, especially considering your past as a category 5 bank and existing infrastructure. Can you help us understand what needs to happen as you progress and what we can expect to see along the way? Thank you.

I’ll address that, Ken. It’s Harris. The first thing I'd like to highlight is in relation to what Ryan mentioned about the ongoing reduction in the securities portfolio. We have sufficient liquidity, which will help us manage our data effectively. This, in turn, aids in the AOCI runoff and prepares us for the threshold of 100. Regarding the requirements, we believe we are in a solid position since we are still conducting stress testing. We expect to be more thorough with the documentation we provide to regulators. We continue to update our models and need to reengage with the resolution planning process. Our structure simplifies this, as we have a fairly straightforward framework. The absence of a holding company means we don't have to undergo a supervisory stress test, only internal assessments, until we reach the 250 threshold. Therefore, I don’t anticipate a significant issue when we do reach that point. The main concern hinges on potential revisions to the Basel III endgame and the long-term debt rule. Personally, I believe the long-term debt rule needs to be reconsidered as it doesn't suit a $100 billion regional bank. I hope it receives attention. Overall, I think we will be in a good position.

Great. Thank you, Harris.

Hey, good morning. Thanks for taking my questions.

Thanks, Brandon.

So, I wanted to talk about earning asset yields. I saw a nice increase in the quarter. Could you just lay out what your expectations are for that pace of increase over the next several quarters?

Thank you for that. As we've sort of been talking along the way, we did have a nice pick-up this quarter in earning asset yields; we've sort of been guiding to 0 basis points to 5 basis points. And I think if you look over a couple quarters, we've been able to chin that bar. So, some good repricing activity, which was really borne out in that latent sensitivity that we showed in the slide that, if nothing else happens with the rate curve, we stand to gain here.

Okay. And do you think you can still go above that, I guess, zero to five? Is that a fair assumption, or is that still the kind of the range?

I wouldn't rule it out, but that's kind of where we've been talking for the market and not wanting to get ahead of ourselves.

Okay. And then lastly, in Office CRE, there was a meaningful step down in that portfolio. Also then, criticized, classified and non-accruals. So could you talk about how you're managing that portfolio? What you're seeing? And how you're actively managing?

Yes, thanks, Brandon. This is Derek. The decline in criticized office properties was actually a positive development for us. We received full payment on a non-accrual loan that had previously resulted in a charge-off last year. We continue to work through the office portfolio, which we have gradually reduced over time. We will likely face some office challenges in the near future, but so far, we've seen positive outcomes in that area.

Thanks for taking my questions.

Thanks. Good morning. Can you provide some color on the increase in the C&I classified loans?

Yes. Thank you. This is Derek again. The increase in the classifieds this quarter, there was actually one assisted living facility related to CRE that just was experiencing slower lease-up and some higher expenses that migrated to classifieds. And then there were a number of other C&I credits that just nothing large to point out or specific industries, but just they were C&I credits that migrated into classifieds.

Okay. And then separately, just when I look at the interest-bearing deposit cost, it's pretty impressive that it decreased 3 basis points. Because you're seeing most peers have an increase of roughly 8 basis points to 15 basis points this quarter. What's the outlook for deposit costs going forward if there's no Fed cuts this year?

Yes, listen, I'm happy to say a few words there. Listen, as we look at our trending, we still really like our overall total cost of deposits, and we stack up pretty favorably on that basis. It's fair to say if we played this game of catch-up where we got a little bit behind pricing that we ran up on the interest-bearing yields appropriately for the time, but we've kind of now gotten out of the pattern of where we've really been historically relative to peers. And so we deserve that, and we've been looking for ways to manage appropriately, working with our clients to meet their needs, but also relative to other funding sources, making sure that we're not extending ourselves too much on the rate paid. And so we did see some success of that and we plan to continue working on that. I don't know, Harris, if there's anything you'd like to add.

Nothing to add. You captured it really well.

Great, thanks. Harris, any big picture changes in use of capital for the next maybe year or two? You're rebuilding capital with OCI, but just more broadly, uses of capital?

No, I mean, as we consider capital over the next couple of years, we will be focused on the $100 billion threshold and its implications. We are considering what our ratios will look like as we cross that mark. Internally, we are focused on investing in areas that yield higher returns, such as fee income businesses like capital markets and wealth. We are keenly interested in small business lending, which has faced challenges in the market over the last few years, especially due to the pandemic. However, we are beginning to see some positive changes, particularly with SBA lending becoming a bright spot for us. We appreciate this business not only for the better spread it offers but also because it brings deposits that enhance a sustainable franchise and create significant value. These are smaller operating accounts that are insured and tend to be sticky. We see many opportunities to add value for small and middle-market customers. We are also looking to incrementally expand on the consumer side, which hasn’t been a major driver for us recently, but we believe there are opportunities to create a more fully insured deposit base. This is an important issue; I believe the deposit insurance system is fundamentally broken and poses a concern for anyone considering the long-term viability of a diversified banking system. In light of this, we must concentrate on developing a more granular deposit base, and that will be a significant focus for us in the years ahead. Overall, while capital is important, these are the activities we are concentrating on.

That's great. Thank you for that. And just my follow-up in terms of the tax rate, is the first quarter a good run rate for the rest of the year?

I don't have any different guidance to give you at this point in time.

Good morning, everyone.

Good morning.

I just had a quick question on the multifamily uptick. You guys lay out the geographic presence by state in terms of just percentages. Is that a fair assumption to think that the uptick is kind of uniform across that, or is there a certain state or area in the United States where you're starting to see a little bit more kind of indigestion amongst multifamily?

Thank you for the question. This is Derek again. It's a good question. We're not seeing it in a specific market. Real estate is very local, and it depends on the specific location. What we're observing on the multifamily side can be attributed to three main issues. First, in some instances, there are higher costs and delays in completing projects on the construction side, although this affects a smaller percentage. The larger challenges we face are slower lease-ups, which may involve some rent concessions early in the lease-up period, coupled with increasing interest rates. As a result, it's taking longer to reach stabilization than we initially projected for many of these projects. However, the sponsors are continuing to support them by bringing in additional equity to help them achieve stabilization.

We've seen this exact same process play out in previous cycles and in previous geographies, and you'll see some great migration to criticized and classified, but because of the post-Great Recession underwriting which was about twice as much equity, no secondary or tertiary land, covenant packages that require very specific remedies as opposed to just coming to the table. One of the nice things about multifamily is, you might hit periods of rent concessions and slower lease-up. But generally there's cash flow, and with the doubling of equity, it's why we think we'll see a path through the multifamily's office.

I understand. That's useful information. When considering commercial real estate as a whole, you mentioned some potential issues within the office sector. Are you anticipating that the office sector could be the next area to see an increase in classified and criticized classifications? Not necessarily charge-offs, but do you think the situation is more consistent across all of commercial real estate?

Well, commercial real estate has definitely been affected by rising interest rates, and there's also been a slowdown in multifamily leasing. The office sector has faced challenges for some time, particularly as we emerge from the pandemic. We currently hold $1.9 billion in office assets, which we have intentionally reduced over the past 45 years, so we were somewhat prepared even before the pandemic hit. Additionally, we typically do not invest in large central business district trophy office properties, like those in New York City; that’s just not our focus. Therefore, while the office sector may continue to face some hurdles, I believe we can manage them in the short term.

Got you. That's really helpful. Appreciate it. Thanks, everyone.

Harris, I wonder if I could just follow up on the deposit insurance broken comment. Is it the level, the $250,000, or is it the lack of a separate system for operating accounts, or maybe you could just give that next level of detail of what the key change you would like to see is.

Well, yes. I would start by noting that the $250,000 limit was last updated in 2011 and hasn't been adjusted for inflation, leading to a loss of nearly a third of its purchasing power since then. Consequently, the real value of deposit insurance has declined significantly. The Dodd-Frank legislation was primarily aimed at addressing the too big to fail issue, yet recent events like the SVB situation show that this problem still persists. In fact, it seemed to receive implicit endorsement from the Treasury Department and others during the crisis. We observed funds shifting from smaller banks to a very limited number of large banks, not due to their capital or credit quality, but because they are effectively insured. A significant portion of the country's deposits are de facto insured. Among those banks that are not too big to fail, about half of the deposits are fully insured. We generally consider 20% to 25% of deposits to be uninsured, which is where the instability arises. While I'm not here to propose a specific solution, I am somewhat discouraged by the lack of attention from policymakers, waiting for the next crisis to address it. I believe it should be a focus for everyone. In the meantime, it's crucial that we concentrate on developing the insured segment of the deposit base, as this is fundamentally important. This key factor is why SVB is no longer operational today—they lacked an insured deposit base.

That was very helpful. Thank you. And then maybe just on the capital discussion, rounding that out, you were clear the common equity will increase and you gave the AOCI a burn down projection. The CET1 kind of in the 10.5%, is that kind of a good landing spot or do you see that increasing as well over the next year?

Well, I don't think we'll be doing other than probably covering the cost of employee stock grants, that kind of thing. And I don't think we're going to be in the stock buyback mode here for a while until we can see greater clarity and really understand that we're going to be in solid shape crossing 100. I don't know quite where that ratio is. It's really going to depend on what loan growth looks like this year. But we're focused on increasing the tangible common equity ratio, getting AOCI behind us, and we want to have strong capital here.

Thank you, Daryl, and thank you to all for joining us today. If you have additional questions, please contact us at the email or phone number listed on our website. We look forward to connecting with you throughout the coming months. Thank you for your interest in Zions Bancorporation. This concludes our call.