Zions Bancorporation N.A (ZION) — Q2 2024 Earnings Call Transcript

Thank you, Alicia, and good evening. We welcome you to this conference call to discuss our 2024 second quarter earnings. My name is Shannon Drage, Senior Director of Investor Relations. 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 at 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; and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for one hour. And I will now turn the time over to Harris Simmons.

Thanks very much, Shannon. We welcome all of you to our call this evening. Before we get into the results for the quarter, I'm really pleased to note that earlier this month, we completed the final major conversion to our new core operating system for loans and deposits. Recall that working in conjunction with our partner Tata Consultancy Services, we previously transitioned virtually all consumer, commercial, and construction loans onto TCS's Bancorp platform before completing our deposits conversions now in 2024. The remarkable success we've had with these conversions is a testament to the skills and dedication of our colleagues. We really want to express our gratitude to the hundreds of people who worked so tirelessly over a period of years to make it all happen. This modernization journey has created a catalyst for driving simplification and consistency throughout our company, as noted on Slide 3. So how does this really create value for the company going forward? Well, as industry observers are aware, virtually the entire legacy U.S. banking industry operates on 40-year to 50-year-old core loan and deposit systems, along with significantly reducing that risk of operating on an antiquated system with dwindling vendor support in many cases. Our system operates on one data model for loans and deposits. It facilitates fraud detection and error correction in real-time, is API-enabled, and cloud-deployable. It supports critical omnichannel functionality like account opening and improves consistency of customer attribute data across major applications. Our employees report that the new system is intuitive, faster, and eliminates the need to toggle between multiple applications. It offers more data at their fingertips, is much easier to learn, reduces training time, and all of this results in a better experience for our customers. In addition to this major foundational investment, we've replaced nearly the entire digital front-end over the last three years, including our consumer online and mobile banking system, upgrading treasury internet banking, which is utilized by a large percentage of our business customers and creating a digital mortgage and small-business application process that took us from 100% paper-based applications to more than 90% electronic over the course of 12 to 18 months. Going forward, we'll certainly find many ways to optimize the investments in our new core, and we're freeing up capacity to continue to invest in evolving technologies that will give us other competitive advantages. As noted on Slide 35, 2023 Coalition Greenwich data shows that our customers rank our digital product capabilities higher than our major bank competitors. Looking at financial results for the quarter, the numbers generally came in as expected. Net interest margin expanded by 4 basis points on a linked-quarter basis and improved 6 basis points against the year-ago quarter as asset repricing outpaced the cost of funding increases. We anticipate this trend will persist in a steady rate environment, while the timing of rate decreases in both the behavior and pricing of deposits will impact net interest income in a falling rate environment. Maintaining pricing discipline while continuing to focus on granular deposit-gathering will be important. While loan demand has increased, loan growth continued to be measured. Higher rates have tempered growth while also reducing the amount of paydowns in the commercial and consumer real estate portfolios. The expected path of benchmark rates in the current political environment is top-of-mind for customers, particularly our small-business and middle-market customers. I mentioned last quarter that we've been particularly successful with a streamlined SBA program aimed at serving smaller businesses with targeted campaigns during the quarter, and we expect to continue to focus on that. This campaign, as well as other customer initiatives, are aimed at bringing new customer relationships to the bank and building our granular deposit base. While fee income growth has been somewhat sluggish during the first half of the year, we remain confident in our ability to grow fee income as we look towards the second half of 2024 and into 2025. Expansion of capital markets represents a key opportunity for us, and more of our bankers are delivering these capabilities to clients. Adjusted expenses in the current period were up 2% compared to the second quarter of 2023. We continue to pursue means to control costs while supporting investments to grow the business. Net charge-offs remain low at just 10 basis points annualized as a percentage of average loans for the quarter, and 8 basis points over the last 12 months. This contrasts with an increase in classified loan balances of $298 million, over three-quarters of which was in the C&I portfolio. The decline in the allowance for credit losses compared to last quarter reflects an improved economic outlook, slightly offset by incremental reserves for C&I. We believe realized losses over the next few quarters will be very manageable and are already reflected in our reserves. Starting on Slide 4, we've included key financial performance highlights. We reported net earnings of $190 million for the quarter. Our period-end loan balance increased one-half of 1% while average balances increased just under 1% for the quarter, led by growth in 1-4 family residential loans. Customer deposit balances declined just under 1% in the quarter on a period-end basis, reflecting normal seasonality while our ratio of noninterest-bearing demand deposits to total deposits was flat to last quarter at 34%. Our common equity Tier-1 ratio was 10.6% compared to 10.4% in the first quarter and 10% a year ago. As I noted in my quote in the earnings release, we've seen strong accretion to tangible book value, which has increased 20.1% year-over-year. Moving to Slide 5, diluted earnings per share of $1.28 was up $0.32 from the prior quarter. Current quarter results reflect a $0.07 positive impact from the sale of our Enterprise Retirement Solutions business and the sale of a bank-owned property in Nevada. Turning to Slide 6, our second quarter adjusted pre-provision net revenue was $278 million, up from $242 million in the first quarter. The linked-quarter increase was attributable to improved revenue, including growth in net interest income and the gains in noninterest income I mentioned previously, in addition to a slight decline in adjusted noninterest expense, largely due to seasonality of compensation expense in the first quarter. As compared to the year-ago quarter, adjusted PPNR was down due to slightly lower adjusted revenue combined with higher adjusted expenses. Generally, this quarter reflects positive trends regarding higher revenue, well-managed expenses, and very satisfactory risk outcomes. These results are supported by our investments in technology, products, and services, which bring value to our customers. With that high-level overview, I'm going to ask Ryan Richards, our Chief Financial Officer, to provide some additional detail related to our financial performance. Ryan?

Thank you, Harris, and good evening, everyone. I will begin with a discussion of the components of pre-provision net revenue. Nearly 80% of our revenue is derived from the balance sheet through net interest income. Slide 7 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 is reflected on the bars and the net interest margin is shown in the white boxes. Both measures reflect improvement for two consecutive quarters as the repricing of earning assets outpaced the increase in funding costs. Additional detail on changes in the net interest margin is included on Slide 8. On the left-hand side of this page, we provide a linked-quarter waterfall chart outlining the changes in key components of the net interest margin, incorporating changes in both rate and volume. A 12 basis point combined beneficial impact associated with money market, investment securities, loans, and borrowings was partially offset by the adverse impact of deposits. Noninterest-bearing deposit volume declines resulted in a slight reduction in the contribution of these funds to balance sheet profitability. The right-hand chart on this slide shows the net interest margin comparison to the prior year quarter. Higher rates were reflected in money market and loan yields which contributed an additional 50 basis points to the net interest margin. The value of noninterest-bearing deposits and lower borrowing levels contributed another 69 basis points to the margin. These positive contributions were largely offset by increased deposit costs, which adversely impacted the net interest margin by 113 basis points. Overall, the net interest margin increased 6 basis points versus the prior year quarter. Moving to noninterest income and revenue on Slide 9. Customer-related noninterest income was $154 million compared to $151 million in the prior quarter. Higher commercial account, card, and loan-related fees were somewhat offset by lower capital market fees. Customer fee income growth has been slower than expected through the first half of 2024 given reduced loan activity and flat wealth management fees. Looking ahead, we are optimistic that our new and expanding capital market capabilities will allow us to grow this area meaningfully over the next four quarters. Our outlook for customer-related noninterest income for the second quarter of 2025 is moderately increasing relative to the second quarter of 2024. The chart on the right side of this 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 slightly from a year ago due to lower noninterest income and an increase of 4% versus the first quarter due to the factors previously noted. Adjusted noninterest expense shown in the lighter blue bars on Slide 10 decreased by $5 million to $506 million, attributable largely to seasonal increases in compensation from the prior quarter, offset by higher technology and marketing and business development-related expenses in the current quarter. Reported expenses at $509 million decreased by $17 million. As a reminder, the fourth quarter of 2023 included $90 million of FDIC special assessment costs, while another $13 million and $1 million were recognized in the first and second quarters of this year, respectively. Our outlook for adjusted noninterest expense for the second quarter of 2025 is slightly increasing relative to the second quarter of 2024. Risks and opportunities associated with this outlook include our ability to manage technology costs, vendor contractual increases, and employment costs. Slide 11 highlights trends in our average loans and deposits over the past year. On the left side, you can see that average loans increased slightly in the current quarter. Customer sentiment and pipeline suggest we can expect growth to improve as more clarity materializes with respect to the political and economic environments, though higher interest rates are impacting near-term growth. Our expectation is that loans will be stable to slightly increasing in the second quarter of 2025 relative to the second quarter of 2024. Now turning to deposits on the right side of this page. Average deposit balances for the second quarter increased slightly, notwithstanding a slight decline in the average noninterest-bearing balances. The cost of total deposits shown in the white boxes increased 5 basis points to 211 basis points. As measured against the fourth quarter of 2021, the repricing data on total deposits, including broker deposits, and based on average deposit rates in the second quarter was 40% compared to 39% in the first quarter, and the repricing beta for interest-bearing deposits remained at 60%, unchanged from the previous quarter. Slide 12 includes a more comprehensive view of funding sources and total funding cost trends. The left side chart includes ending balance trends. Broker deposits were stable compared to the first quarter at $4 billion and were down $4.2 billion compared to the year-ago quarter as customer deposits have grown by $3 billion versus the prior year period. Compared to the preceding quarter, customer deposits were down slightly, reflecting seasonal trends in the second quarter. 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 cost at 2 basis points in the current quarter has continued to decline compared to the prior four quarters. Moving to Slide 13. 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 market investment portfolios over the last five years. The investment portfolio continues to behave as expected. Maturities, principal amortization, and prepayment-related cash flows were $840 million in the second 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, serving as a source of funds for the balance sheet and contributing to net interest margin as those funds are reinvested into higher-yielding loans. The duration of our investment portfolio, which is a measure of price sensitivity to changes in interest rates, is estimated at 3.7%. This duration helps to manage the inherent interest-rate mismatch between loans and deposits, but the larger deposit portfolio is assumed to have a longer duration than our loan portfolio; fixed-rate term investments are required to balance asset and liability durations. Slide 14 provides information about our interest rate sensitivity. While we provided standard parallel interest rate shock sensitivity measures on Slide 27 in the appendix of this presentation, we present again our more dynamic view of latent and emergent interest rate sensitivity given the current environment. In particular, latent interest rate sensitivity, which reflects model changes in net interest income based upon past rate movements that have not yet been fully realized in revenue, is estimated to be 8.3%. When combined with the emergent sensitivity, which includes the incremental impact of future rate changes included in the implied forward curve at June 30, model net interest income in the second quarter of 2025 is 6.3% higher when compared to the second quarter of 2024. This is a meaningful increase over our model projections from the previous quarter. A 100 basis point parallel shock of this implied forward outcome suggests a sensitivity range between 4.6% and 7.7%. Importantly, these sensitivities assume no change in the size or composition of our earning assets but do consider how our changes in our deposit mix could influence the net interest income path. The observed slowing of the migration of noninterest-bearing deposits to higher cost deposits is reflected in a change in our assumed through-the-cycle beta from 49% shown in our first quarter sensitivity to 44% shown here. This beta reflects $3.5 billion of assumed migration of noninterest-bearing deposits into higher cost deposits. Utilizing this modeled outcome and applying management expectations for balance sheet changes and deposit pricing, we believe the net interest income in the second quarter of 2025 will be slightly to moderately increasing relative to the second quarter of 2024. Risks and opportunities associated with this outlook include realized loan growth, competition for deposits, and deposit behavior, and the path of interest rates across the yield curve. Moving to Slide 15. Credit quality remained strong and the portfolio is performing in line with expectations. Annualized net charge-offs were 10 basis points of loans in the quarter. The allowance for credit losses is 1.24% of total loans and leases, a 3 basis point decrease over the prior quarter. Notwithstanding continued strong net charge-off performance, we observed continued deterioration in some of our credit metrics. Nonperforming assets increased by $14 million or 4 basis points as a percentage of loans and other real estate owned, while classified and criticized loans balances increased by $298 million and $284 million, respectively. We continue to expect that ultimate realized loan losses will be very manageable over the remainder of the year. As we know it as a topic of interest, we have included information regarding the commercial real estate portfolio with additional detail included in the appendix of this presentation. Slide 16 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 continue to 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 17. The CET1 ratio continued to grow in the second quarter to 10.6%. This, when combined with the allowance for credit losses, compares well to our risk profile as reflected in the 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 the AOCI improvement will continue through natural accretion of the securities portfolio regardless of rate path outcomes. Slide 18 summarizes the financial outlook provided over the course of this presentation.

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. Alicia, please open the line for questions.

Hi, guys, good afternoon. It's Manan Gosalia.

Good afternoon.

Hi, good afternoon. I just wanted to check in on the noninterest-bearing deposit trends during the quarter. I know things slowed relative to last quarter. I was just wondering how the trends were intra-quarter. And then how you expect NIB to trend if you get a couple of rate cuts between now and year-end? I mean, I know you have that assumption on $3.5 billion of NIB flowing into higher cost products in the latent interest sensitivity analysis. So I was wondering how realistic that is or if things can be a little bit better than that.

Thank you for the question. We wanted to emphasize this point during the call. Overall, we were reasonably satisfied with the trends in the quarter, noting a slight decrease in noninterest-bearing deposits. The observations made during the quarter provided us with confidence to revisit our models and refine the assumptions regarding deposit migration that were reflected in the deposit beta shared last quarter. Consequently, our guidance indicates that we do not expect as much migration of DDA deposits, allowing us to maintain a tighter stance than previously anticipated. We have also managed to control our interest-bearing deposit costs, which suggests that we won't need to significantly raise prices to retain those deposits going forward. All of these factors have shaped our guidance regarding future expectations, particularly with our anticipation of more DDA deposits than we thought last quarter, which has led to an increase in asset sensitivity this time. Naturally, these projections depend heavily on deposit behaviors moving forward, but based on our current observations, we felt more optimistic with this quarter's guidance.

Got it. And then as we think about the loan guide for loans to be stable to slightly increasing, how are you thinking about the trajectory of that loan growth? Do you think it's a little bit weaker in the near term given the uncertainty in the environment and given the upcoming elections, or maybe if you can just take us through how you're thinking about those loan balances going forward?

Yes. There is some uncertainty at the moment, but I don't believe that the election is a significant factor for companies. It seems more about observing how the economy unfolds in the next few quarters. There are indications that the economy is slowing slightly, although hopefully not in a way that causes significant harm. We have noticed some decline in loan growth compared to a year ago, and we don’t anticipate that changing in the near future. The economies in the Western markets where we operate remain fairly healthy, but this is our best estimate. We expect that our marketing programs and small business lending efforts will be somewhat beneficial, but the loan growth market is not very strong right now.

Great. Thank you.

Good afternoon.

Hi, John.

I want to ask about the credit situation. I know you mentioned that the trends are generally within expectations and that you were able to release some reserves. However, I would like more details on the increase in classified loans, particularly the 30% increase compared to the previous quarter and the over 40%, specifically a 48% increase in 30 to 89-day past dues. Could you explain what is driving this increase in the commercial portfolio and how it might affect the outlook for reserves moving forward? How do you anticipate these trends may change? Thank you.

Sure, John. This is Scott. The classified loans increased by about $300 million, with approximately 70% of that increase coming from our commercial and industrial portfolio. The positive aspect is that this increase was not from our commercial real estate portfolio. It mainly consisted of six to ten loans in the $10 million to $30 million range, spanning various industries such as contracting, consumer products, healthcare, and transportation, with no clear connections among them. This accounted for about 70% of the overall increase. In terms of the criticized loans, which rose by about $284 million, most of this was related to real estate, particularly multifamily housing. We're noticing that more of our multifamily transactions are being classified as criticized due to factors like the nearing completion of construction, extended lease-up periods, and the greater impact of interest rates, leading to significant changes. However, this type of migration has occurred in every cycle since the Great Depression. Typically, multifamily loans don't shift dramatically to non-performing status because borrowers can often lower rental rates, offer rent concessions, and generally maintain cash flow sufficient to cover interest and make principal payments. Therefore, we aren't particularly worried about that. I’d also point out that we are starting from a very low level of criticized and classified non-performing loans, which is why the changes appear more dramatic than they might otherwise suggest. Regarding our commercial real estate office loans, our outstanding loans have decreased. They were around $2 billion and have dropped by about $247 million. This trend is encouraging, as this decline reflects $300 million in borrower payments and about $85 million in additional equity or loan rebalancing, totaling nearly $400 million in positive portfolio activity, despite $9 million in charge-offs, a relatively small figure given the size of the portfolio. We've also seen some growth. For both the office and multifamily portfolios, we will continue to provide updates on the maturity wall and the positive activity stemming from the fact that our average and median loan sizes are low, with strong guarantor support for most of these loans.

I believe there were underlying questions regarding the ACL and any insights we may have. We anticipated this inquiry. The accounting model functions in a way that encourages foresight; you're meant to predict potential losses based on future expectations. Like others, we use Moody's variables to shape our macroeconomic perspective when discussing reserving practices. For some time now, we have held a slightly more pessimistic view of the macroeconomic landscape than what Moody's standard settings suggest. Therefore, we've been expecting some credit deterioration for a few quarters, and the current observations align with our expectations. If we had not seen this deterioration, it would suggest we misread the economic signals. Moving forward, we will continue to analyze incoming data, which may offer further insights, but thus far, everything we have encountered is well within our reserve balance.

Great. All right. Thank you. I appreciate that. And then separately, just back to the NII dynamic. Can you just talk a little bit more about the fixed asset repricing opportunity? I know you mentioned you've got the liquidity coming out of the securities book, and that you could use to fund loan growth, etc. So maybe could you just talk about the yield differential around what is maturing in the securities book and where you might be putting on new assets just to get a better feel of the fixed asset repricing on the dollar amount and then the rate differential?

I'm glad to address that question. You accurately highlighted the consistency of our investment securities portfolio. As I mentioned, we have about $840 million this quarter, which has allowed us to achieve some modest loan growth and rebalance our portfolio. Even without that, our money market investments have grown, providing a decent yield. The key to understanding the repricing is to look at our sensitivity analysis, focusing on the inherent sensitivity and how it builds up if rates remain unaffected by the implied forward. Recently, we’ve observed that the yields on earning assets have been repricing more favorably than our funding costs, and we expect this trend to continue based on our guidance. While there are factors that might counteract these effects, I don't have specific figures on the securities yield you're asking about. However, for the loan book, the front book is showing a yield of 7.82%, while the back book is at 7.68%. We're anticipating some growth in the commercial real estate sector, but slightly less in consumer loans. This should give you a general idea of the movements within our balance sheet. I hope this provides some clarity.

That does, Ryan. Thank you.

Hi, good afternoon. I was forgetting that the times wouldn't change, but yes, we're deep into the day and we have a great opportunity ahead. So, I understand the latent and emergence now indicate an implied rate of 6.3%. When considering the outlook for the next 12 months, comparing 2Q '25 to 2Q '24, the language suggests a slight to moderate increase in net interest income 12 months from now. Is it accurate to think that you have conducted a thorough analysis of what could happen on both sides of the balance sheet? Could you suggest that net interest income might rise by around 6% in the next 12 months, bringing it to approximately $630 million? Am I on the right track with this thought, or am I oversimplifying the situation?

I don’t think you’re viewing it incorrectly. We intentionally leave some uncertainty because we have insights into our current quarter. We feel optimistic about it, but we are influenced by deposit movements, pricing, and future developments. The sensitivity statistics we provide represent a static balance sheet perspective, allowing for some changes in deposits. Harris shared our thoughts on loans, and we are open to the idea that they might see slight growth, while still maintaining stability within our guidance. We set boundaries to accommodate unknown factors within the guidance, but I believe you’re not misunderstanding the situation.

Got it. That's very helpful. Now, moving to credit, I want to check in. I understand that most of the approximately $300 million in classified loans were mainly from commercial and industrial sectors. I've also noted that there's no common issue reported. I'm curious whether the problems are operational, like the businesses struggling with profitability, or if it's something more complex. I'm considering what pressure points might be affecting the commercial and industrial sectors beyond just higher interest rates leading to slower buyer activity.

Yes. I’d like to provide some clear themes, but there really aren’t any. When we discuss major sectors like contractors, consumer products, healthcare, and transportation, each has its own unique situation, and I wouldn’t necessarily link them to higher interest rates. Each has its own narrative, and they are all familiar to us. Things just occur differently across these sectors. So, I wouldn’t say there’s a common narrative connecting them.

Got you. It's fair to assume it's throughout the footprint or is it any centralized geography?

Yes.

Got you. Okay. Appreciate the time.

I believe it doesn't provide much value. There have been several resolutions during the quarter as usual, but there are many factors involved in this situation. However, I think the reserve reflects that we don't perceive any significant risk developing.

Hi, everybody.

Hi.

I want to start maybe for you, Ryan. So if we could unpack this a little bit more. So just looking at the changes that you've made, I don't know what slide, this is on the net interest income sensitivity. So you're taking down the assumption for deposit beta a bit. And I'm wondering, is that because you overlay the current forward curve, so you have more cut in the curve and that's why you're looking for a lower beta or is something else driving that? Because it seems like that's what's influencing the improvement of the NII outlook.

Thank you for the question. The beta commentary really relates to our inherent sensitivity even before considering the forward curve overlay. It was significantly influenced by our observations throughout the quarter and the trends that have developed leading up to it, particularly regarding the tapering of runoff activity and migration. Based on that and our analysis of pricing activity in our markets, along with what we think is necessary to retain deposits and where we need to offer higher rates, we adjusted our all-in deposit beta to be a little tighter throughout the cycle.

Okay. So we can extrapolate from that that the outlook for NII is based on the current forward curve, right?

Would you overlay the emergent? Yes. The 6% figure you cited includes the implied forward as of 6.30%, which contemplates a fed fund rate at the middle of 2025, 4.50%.

I think fundamentally, if there's a single driver, it's our developing belief that noninterest-bearing demand deposits will be more stable than we previously thought. We may have been a bit conservative in our outlook. This could obviously change, but based on the current trends, we believe we may have overestimated our initial assessment.

Thank you. For my follow-up, regarding technology costs, you're currently seeing a 14% increase year-over-year. Now that you're using the new deposit system, how should we view this over the next year? Harris, since you're one of the few banks that have implemented a modern core, how does this benefit shareholders? Typically, I expect improvements in return on equity or growth. Should we expect a higher growth rate from you due to the advantages of this modern core? Thanks.

We expect to see costs decrease next year for the core platform, with a reduction of about $10 million. However, it's important to note that there will always be a backlog of projects that need to be addressed. This cost reduction is beneficial as it frees up capacity. A significant advantage of having these core systems in place is that every bank requires them as they form the foundation for all other operations. The front-end services that customers interact with depend on these core processing systems, which are complex and challenging to replace. This past weekend's CrowdStrike outage highlighted how one small bug could lead to major issues, showcasing the complexity and the extensive, costly testing these systems require. Every large bank must tackle this, often in stages. We have made considerable progress over the last decade, and having this issue resolved is a significant achievement that alleviates concerns that many other banks still face. As the banking world moves towards real-time operations, our system posts payments directly into the core in real-time, allowing us to identify errors and potential fraud more quickly. Employees on the front line are finding it much easier to navigate their tasks compared to past systems that required them to switch between multiple applications. This streamlining enhances customer service and facilitates training for new employees, reducing the steep learning curve associated with outdated systems. We believe our solution provides more accessible information for employees, enabling swift responses to customer inquiries without extensive research. We anticipate identifying innovative ways to extend this functionality to our customers in the future. It's worth noting that this is not a digitally native core, as no large bank operates on one. The complexities present in larger banks can’t be solved with many of the new digital cores currently available, though that may change in the future. Nonetheless, we are confident that our solution is robust and supported by a strong vendor with a significant global installed base. These factors will ultimately bring benefits to our shareholders over time.

Okay. Thanks for taking my questions.

Thanks. Good afternoon. Just to follow up on the cost side. So when you guys last quarter talked about that $12 million to $15 million of cost reduction to happen as the systems get food further along, what part of the year does that get run-rated? And is that fully implied in the 2Q '25 forward guidance?

Thanks, Ken. The delta of the $12 million is sort of a year-over-year comparison, full year '24 to full year '25. But yes, and to Harris's point, at the margin, that would imply some savings but suggests that all that would fall to the bottom line would probably not be appropriate. So we've embedded into our Board guidance for the second quarter of '25 the intent to make other investments and continue building on our technology offerings outside of future core.

Right. And then is that the full amount of, like, the reduction that happens over time and as a conversation we've had for a long time as the build-out happened, but, like, is that the majority of what happens, or over time, is there an increment that also comes as just the legacy pieces are further retired and getting the point about incremental investments, which makes sense? So just kind of underlying base.

Some of the earlier phases of this that went in a few years ago, as they become fully amortized, I mean, we're advertising this over 10 years to capitalize cost, but these are core systems. You would expect to have longer, much longer lives than that. And so that will help as you get out into time. But...

Yes. The amortization of this amounts to about 10% a year because it's essentially a 10-year amortization. The additional financial benefit is that, while many hardware and software infrastructure vendors are imposing double-digit renewal increases for multi-year or single-year contracts, the need to replace our core loan and deposit systems has become a non-issue for us. This pressure has diminished. Our focus has shifted to optimizing and monetizing the investments we've made. Therefore, the current timing is particularly advantageous, I believe.

Okay. Got it. Thank you.

Hi, good evening. It's Bernard Von Gizycki. So thanks for taking my questions. So you mentioned the success of the client campaigns to attract new deposits at the beginning of the call. Can you provide any color on these promotions and customer initiatives, just any expectations on broadening relationships and growing deposits?

We've really focused on SBA lending, and I expect to see more growth in that area. Our volumes have significantly increased compared to last year, but we still have room for improvement. We see a lot of potential in this segment, as these are smaller deals that may not greatly impact loan growth but are crucial for building important relationships. In light of last spring's events, it's crucial for regional banks to concentrate on the details of their deposit bases. This understanding is central to our strategy as we prioritize enhancing our services for consumers and small businesses, where we can foster those valuable full relationships.

I would just add that we have spoken before about the customer appreciation calling effort that Harris initiated a couple of years ago. Our colleagues are making about 100,000 calls each year to generally small business clients of the bank, and some individuals, primarily to express our gratitude for their relationship. It is really rewarding to hear about the positive outcomes from these calls, like simple deposits and small loans transferring, as well as the strengthening of personal relationships. With 100,000 calls happening annually, that’s a significant impact. Additionally, on the middle market and commercial banking side, we are diligently focusing on engaging with the top prospects in our markets. While it might seem like a given for all bankers, making purely prospect calls often isn’t prioritized, as it can be awkward for many. I believe that this emphasis, similar to the customer appreciation calls, will help reignite our loan growth over time.

Okay, great. That's great color. And just separately, you highlighted the optimism on expanding the capital market capabilities and you expect it to grow meaningfully over the next four quarters. I know it was sequentially weaker by $3 million in 2Q and I think you flagged lower loan syndications, swaps, and some other related fees. Any color you can provide on activity levels and just the drivers of the optimism?

Yes, I believe the key point is that we can expect fluctuations. That’s typical for any capital markets business. We have assembled a strong team, and we are pleased with their engagement with our commercial bankers. They have a busy schedule in terms of appointments, and internally, it feels like we are gaining the traction we hoped for. I anticipate that the second half will show significant improvement compared to the first half, based on the pipeline, at least early in the third quarter. However, it won't be a smooth path. Overall, we are really excited about the team we have in place.

Got it. Thanks for taking my questions.

Yes.

Hi, just had one question for me and to follow up on kind of the C&I conversation. So hearing increasing concern about smaller businesses within C&I. So could you comment on the health of your small business, how they've navigated this environment and where they stand today?

Yes, first of all, you can see it reflected in the overall loss numbers. I have always believed that small business can thrive without large charge-off numbers. Excluding the commercial card business, our loss history with small business loans is similar to the charge-off rates for middle-market or larger commercial loans. We continue to see good credit quality in that portfolio, and there is nothing concerning us. It's worth noting that most small businesses don't borrow; only about 30% of our small business customers are borrowing customers, as many operate conservatively with the cash they have available. While we are not experiencing robust growth, we are observing fairly good conditions.

Thanks for taking my questions.

Okay.

Oh, great. The 28% money market and securities cash as a proportion of the balance sheet, how does that trend over the next year or so in your guide? And I guess I'm asking overall earning asset growth relative to the loan growth. Thanks.

Yes, thank you for that. We expect the trend to continue, allowing the investment securities portfolio to run off. We could see another $1 billion or $2 billion in runoff of those investment securities before considering reinvestment at that level. The impact on the money market and the concentration of the two categories largely depends on how quickly we see loan growth materialize. I believe that’s the simplest way to answer your question. We don't have a specific metric to provide on that front.

Okay, great. Thanks. And maybe, Harris, any updated thoughts on capital? You're building capital pretty quickly. Any thoughts on capital? Thanks.

Yes, I expect that will continue in the near term. There are still unanswered questions regarding how the muzzle three endgame will be revised, and we are close to crossing that threshold, which is something we're interested in. We all anticipate that any simplification will involve AOCI coming back into the CET1 calculation. We're making significant progress; as mentioned, a 20% increase in tangible book value, both in total and per share, is quite rewarding. I would like to see that trend continue for a bit and reduce the AOCI number to a manageable level before we seriously consider becoming very aggressive with share buybacks.

Great. Thank you very much.

Yes.

Good afternoon. Thank you for joining the call. I wanted to revisit Slide 15 regarding the rise in problem loans compared to the reserves. I understand your economic outlook has changed. If there hadn’t been an increase in criticized loans, do you think there would have been a significant decline in reserves in relation to loans? If that were the case, where do you believe that would be headed?

Yes, so it's a fair question. It's hard to get too speculative as to exactly what would occur there. We have a very fulsome process, as I would have alluded to, sort of ingesting macroeconomic scenarios, getting back with our senior executives and our credit professionals and saying, how does that feel? Does that kind of mirror the world that we see moving forward? We look at our credit grade migration within the portfolio and try to discern based upon prior practice or prior reserving, whether those were things that would have been contemplated in our economic scenarios. And we have qualitatives that are set aside for various applications that are unique and maybe separate and not covered through those economic foundations. So I guess I'd round back to based upon earlier reserving practices, what we're seeing is certainly within the bounds of what we would have expected in terms of deterioration. Whether the counterfactual of having fewer criticized or classified would have changed the outcome is difficult to say without having run through our entirety of our process. But at the margin, it would have been a factor that we would have thought about in terms of credit migration and other types of metrics that would inform the process.

All right, thanks. And then my follow-up is just on the overall capital stack and just if there's any other kind of ins and outs, like on the long-term debt side? Thank you.

Yes, we are cautiously observing the developments regarding long-term debt proposals to understand their implications. We have been retaining earnings for some time, as Harris mentioned. We anticipate improvements in AOCI moving forward, and we have included some projections of that in the appendix. Recently, we have implemented hedges that help mitigate potential adverse outcomes related to rising rates, should they arise again. Overall, that outlines our trend in this area.

Yes, I'm really eager to see what happens with the long-term debt proposal. I expect it to be somewhat modified, which makes sense, but we are in a wait-and-see mode regarding that.

And given the fact that we have a more fulsome build of our equity position, that might afford us opportunities to think about our positioning of our capital over time, depending on the outcome as a long-term debt proposal.

Hi, good afternoon. I just had a quick question around loan growth. I wanted to get some color on the single-family residential growth that you've seen over the last several quarters now. Is this a part of your sort of interest rate risk management strategy? Should we expect this to keep growing at a similar pace as it has recently? And could you give any color on the roll on yields that you're getting currently on this book?

Yes, regarding the volumes, most of what we're seeing is from a buildup over the last several quarters, primarily consisting of one-time closed loans, which are construction loans that transition into permanent mortgages. This is a competitive product and is where most of the fundings are coming from. The origination of held-for-investment 1-4 family mortgages has decreased significantly, reflecting the industry trend. I don't anticipate growth in our 1-4 family segment over the next 12 to 18 months unless we see a decrease in rates and a revival in the purchase mortgage market, which is possible. Additionally, we're focusing more on originating held-for-sale mortgages, particularly smaller ones, as that market still presents some opportunities. As for the yields on new production, I don't have the exact figure available, but I believe it's in the mid-7s range.

Mid to upper 7.

Yes, mid to upper 7s. The yields have increased significantly as rates have risen.

Got it. Thanks for all the color. I appreciate it.

Thanks. Hi, everyone. I think most of my questions have been handled, but, Scott, can you just talk about how things are in Houston and going -

Oh, sure.

Yes. Anything to call in terms of the outlook and credit? Yes.

No, you're kind to ask that question. Houston is so used to big storms coming through, and this one wasn't supposed to be major, but it ended up being a bit of both. It came in as a category one, just barely reaching that classification right before it made landfall. Until Sunday night around 10 o'clock, it was projected to make landfall about 60 to 70 miles west of Houston, but like some other severe storms, it shifted east at the last moment and struck Houston directly. Wind speeds reached between 90 and 100 miles per hour, which were felt inland as well. The positive aspect of the storm was that it moved quickly, exiting the region within 24 hours. While it didn't bring heavy rainfall, the tree damage was extensive, causing significant power outages. At one point, around 80% of the power connections in Houston, both residential and commercial, were offline. This led to a considerable challenge due to the tree damage. However, the city has managed to cope with the aftermath. There’s a lot of hardship, but the people of Houston and Texas are quite resilient; they know how to support one another in tough times, and that's what's happening now. Regarding any potential losses in our loan book, when Hurricane Harvey hit, we set aside a $30 to $40 million loan loss reserve, even though Harvey lasted five days, and we ended up facing virtually no losses.

The six quarters after Harvey came through Texas, we had net recoveries of about 5 basis points.

Yes, that was in 2017. So in any event, you won't. Well, as of right now, and we have a good view of the portfolio, you won't see us setting aside any reserve for losses related to Hurricane Beryl.

Okay. All right. Thanks, guys. I appreciate it.

Thank you.

Thank you, Alicia, and thank you all for joining 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, and we thank you for your interest in Zions Bancorporation. This concludes our call.