Greetings, and welcome to Zions Bancorp Q2 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shannon Drage, Director of Investor Relations. Thank you, Shannon. You may begin.

Thank you, Alicia, and good evening. We welcome you to this conference call to discuss our 2023 second quarter earnings. As many of you know, our long-term Director of Investor Relations, James Abbott, has decided to pursue a self-employment opportunity and we wish him well. My name is Shannon Drage, and I am the Interim Director until a permanent replacement for James is selected. 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 our press release or the slide deck on Slide 2 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 slide deck are available on zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Paul Burdiss, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer, and Keith Maio, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for one 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 evening. We're pleased that the environment around the banking industry seems to have stabilized relative to the disruption we saw during the first quarter. One notable outcome across the industry has been the acceleration of deposit pricing. While deposit attrition appears to have been largely transitory, the higher cost of deposits remains. Beginning on Slide 3, we've shown some themes that are particularly applicable to Zions this quarter as well as those that are likely to be prominent over the near-term horizon. Customer deposits were up $2 billion for the quarter. We are grateful, but not surprised that our customers have demonstrated their loyalty and confidence in us. We continue to actively manage our balance sheet in response to changes in interest rate risk. This includes funding mix optimization, changes in our interest rate hedging strategies, and our product portfolio. We're also committed to managing our expenses in relation to a more challenging revenue environment. Our second quarter results reflect a $13 million severance expense related to our objective of flattening expenses over the next year. Our levels of non-performing and criticized assets declined slightly compared to the prior quarter. We experienced $13 million in net charge-offs higher than the first quarter, but well below historic norms and reflective of one-off events rather than portfolio trends. Loss absorbing capital increased and remains healthy, particularly relative to our risk profile. Turning to Slide 4, we've included a summary of quarterly financial results showing a linked quarter comparison with the first quarter of 2023. Circled on the slide, we reported total deposit costs of 127 basis points for the quarter compared with 47 basis points in the first quarter. Period-end customer deposits increased 3.2%. Including the impact of…

Thank you, Harris, and good evening, everyone. I'll begin with a discussion of the components of pre-provision net revenue, or PPNR. Over three-quarters of our revenue is from the balance sheet through net interest income. Slide 7 includes our overview of net interest income and the net interest margin. The chart on the left shows the recent five-quarter trend for both. Net interest income on the bars and the net interest margin in white boxes declined in the second quarter as our cost of funds, including the rates we pay on deposits, reflected the impact of the rising rate environment and more competitive pricing. Additional detail on changes in the net interest margin are outlined on Slide 8. On the left-hand side of this slide, we provided a linked quarter waterfall chart outlining the changes in key components of the net interest margin. The approximately 100 basis points adverse impact associated with deposits, including both changes in rate and volume, was partially offset by the positive impact of loans, lower borrowing levels, and the increased value of noninterest-bearing funds. As noted on prior calls, we have been more competitive with deposit pricing, a tactic that has accelerated in the second quarter due to increasing depositor sensitivity. Our success in growing customer deposits contributed to reducing the level of borrowed funds as we move through the second quarter, and noninterest-bearing sources of funds continue to serve as a significant contributor 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 earning asset yields, which contributed an additional 187 basis points to the net interest margin. This combined with a nearly 100 basis point increase in the value of noninterest-bearing funds was almost entirely offset by increased…

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.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Manan Gosalia with Morgan Stanley. Please proceed with your question.

Hi, good afternoon. Thanks for taking my questions. I wanted to start on some of the trends that you saw on deposit balances and deposit rates during the quarter. At our conference last month, you had mentioned that your NIM was approaching about 2.85% on average for the quarter. And I know it came in a little bit better at 2.92%. So, I was wondering, is that a function of the rate of change improving in June? And it sort of sounded like that based on some of the spot rates that you mentioned, but I was hoping you could give some more color there.

Yes, this is Paul. If I could, I might point you to -- in the appendix of our presentation -- forgive me, I'm trying to find the page number. In the appendix of our presentation on Page 22, we're providing trends in net interest income and then you could see the net interest margin there as well as noninterest-bearing demand deposits. And I think what you see there -- to your question, I think what you see there is a flattening of those trends, which is informing our outlook.

Got it. And then, maybe on the expense side, you had some severance costs this quarter. If you could expand on what the ongoing benefit is from those cuts? And to the extent that some of the pressure on deposit costs and cost of funding returns, how much more room is there for further expense cuts either through ongoing expense saves or cuts in non-core businesses?

Sure. This is Paul. I'll start with that response. I am reluctant to quantify the specific expense associated with the severance, because it's part of a much larger program. And the larger program is meant to create a noninterest expense level a year from now, which is roughly consistent with the current quarter, excluding the FDIC special assessment. So, as it relates to whether or not there's further room to the extent the environment changes, that's the kind of thing I think that we're going to have to manage through to the extent those possible changes might occur.

Great. Thank you.

Thank you.

Thank you. Our next question comes from John Pancari with Evercore ISI. Please proceed with your question.

Good afternoon.

John, good afternoon.

Just on the noninterest-bearing deposit mix, I know it's around, I guess, just shy of 40% right now on the end-of-period balances as of second quarter after the 7% decline in balances this quarter. Where do you see that bottoming out in terms of that noninterest-bearing mix? I know it's already below the pre-pandemic levels. Thanks.

Well, the mix -- the issue with the ratio, of course, is that it has two numbers. And as I noted, we are having success growing interest-bearing deposits -- I'm sorry, -- yes, interest-bearing deposits. And so, it's hard to provide sort of a specific kind of "bottom" to that ratio, because it's taken in the context of total deposits, but also the macroeconomic sort of environment has a very large effect. If interest rates were to spike up again from here, we would probably continue to see pressure there. What I can say though is that our outlook, sort of our best estimate, for where we think net interest income is going to be a year from now versus today incorporates some additional migration in DDA out of noninterest-bearing and into interest-bearing. And so that's all implied in sort of those beta figures that I was referring to. And so, I think from my perspective, the thing to keep an eye on is the behavior of total deposit costs and how that's affecting net interest income over time. So, we've lost, as you know, over $10 billion of demand deposits over the last year. My expectation is that we wouldn't -- under our sort of baseline assumptions, we wouldn't lose nearly that much over the next year.

Absent a lot of further increase in rates.

Yes.

Hey, John, this is Scott. The slide that Paul just pointed out, Slide 22, it shows, as always, just focus on declining DDA in a period of rising rates, but the demand deposits become worth more also. And I think that's what that slide depicts. Clearly noninterest-bearing is lower, but they're worth more than they were a year ago and has very favorable influence. The other thing I would say is that when you look at our mix of DDA, which you're talking about, the total deposits, through -- back two decades now, more than two decades, we've always had a competitive advantage in terms of our mix of noninterest-bearing to total deposits, that slide is in the deck, also in the appendix, and -- Slide 25. And we don't anticipate that, that relationship that's existed for over two decades will change materially in terms of our competitive advantage versus our peers through many different interest rate environments, because it's clearly a function of our strategy of banking businesses and the type of deposits they have with us, which are small, granular operating accounts that are not as sensitive to interest rate movement.

Great. Thanks, Scott. Appreciate that. Then secondly, just on capital return. I know you indicated no real intention to buy back the stock in the third quarter. Just give us an update, what could change that? What could bring it back in the market for your shares here? Thanks.

I'll start there. There's a lot of uncertainty I think including in the regulatory environment around where capital rules are going. And just given the environment and the uncertainty around that, we think it's prudent to continue to build capital organically. As I noted, our goal is to balance the risk profile with the capital position of the organization. And to the extent the macroeconomic environment becomes more clearer, the capital sort of regulatory rules become more clearer, then it's possible that you could see us be a little more active. But as it stands, my sort of near-term expectation is that there's so much uncertainty that my personal expectation is that we wouldn't be very active in that market.

Great. Thanks for taking my questions.

Okay. Thanks, John.

Thank you. Our next question comes from Steven Alexopoulos with JPMorgan. Please proceed with your question.

Hi, everybody. I wanted to start, so looking at, one, the growth of broker deposits, and then two, how customer deposits have started returning to the balance sheet, what's the opportunity to replace some of those broker deposits with lower cost customer funds here?

Steve, thank you for that question. This is Scott. The events in March, starting on about March 9 or 10, that was a really quick change in jolt to the marketplace. And I think what we tried to demonstrate through March and into the second quarter was the ability to utilize broker deposits, which we did over the short-term period, March, April, that time period. But then, we were also pulling on the lever of our higher priced commercial suite products and reciprocal deposits. Really all three are important levers for any bank, and I think investors should draw comfort when a bank can demonstrate it can utilize all three. We're seeing, as you noted and as Paul noted, good progress in building customer deposits, both sweep deposits, particularly, and CDs. And I think what you'll see is that we'll continue to have success with that. And our brokered CDs will go down, absent some other big shock to the system, I think pretty confident that's what you'll see over the next six months.

Yes. The other thing I'll note is those brokered CDs are in a sort of a laddered format. So they've got kind of an average maturity of about six months. So there's an opportunity, as Scott said, to replace them as we're able to grow customer deposits.

I think another important point, Steven, is the growth in interest-bearing deposits for us, we didn't just start talking to our customers about their liquidity and the rates we pay for that. If you go back to 2021, zero interest rate environment, we were pushing clients, we were recommending to them that they move their deposits off our balance sheet. We entered the quarter with about $12 billion in off-balance sheet deposits, customer deposits. And we'd recommended that they do that because money market funds, we're going to pay more than the banking industry. So, when we started more actively in February and March and into the second quarter talking to our clients about our on-balance sheet rates, it wasn't like that. For the first time we talked to our customers about their liquidity, they were, generally speaking, happy to bring them back on-balance sheet and that -- we think that trend will continue as we have become more aggressive about our pricing and short-term deposits.

So, if I could follow-up on that, interest-bearing deposit costs increased materially this quarter, right, 130 bps, the brokered were key part of that. And if we think about the ability maybe to start replacing some of those, and I'm staring at your loan yields, that's only 5.65%, so some repricing opportunity there, how far away are we from your NIM troughing?

Sorry, I just want to clarify the question.

From a troughing.

Thank you. Troughing, that was the word I missed. So, when you consider our outlook, which is kind of flat to slightly decreasing net interest income. And you consider that in the context of what I might describe as somewhat tepid loan growth. Combined with an investment portfolio, which is going to continue to pay down, again, we had nearly $1 billion of paydowns this quarter, my expectation is earning assets, generally speaking, are going to be kind of flat to down. And so, when you put those two things together, the revenue as a numerator and earning assets as a denominator, I actually think we're getting -- my point of view, I think, we're getting pretty close to -- again, barring some unforeseen event, I think we're getting pretty close to the lower edge of the net interest margin in the current environment. In fact, the spot net interest margin at the end of the quarter was very close to the quarterly average.

Okay.

Also, I mean, the cost of interest-bearing deposits was 2.22% during the quarter. If you exclude the broker deposits, it was 1.62%. So, I mean to your point, to the extent we bring additional customer money back on, I mean, it's -- what we're bringing back on is certainly costing more at the margin than the average. But there's additional room to bring that down a little bit.

Okay. Thanks for taking my questions.

Thanks, Steven.

Thank you. Our next question comes from Chris McGratty with KBW. Please proceed with your question.

Hi, this is actually Nick Moutafakis on for Chris. Just going back to the -- on interest-bearing deposit costs, could you guys remind us of your total IBD beta assumptions?

I think you're asking about the assumptions that we use in our interest rate risk modeling. Is that correct?

Correct. Yes.

Yes. So, if I could point you back to the page -- I don't have the page in front of me, but we have a page in the slide deck around interest rate risk specifically and around the modeled outcome. I'll note again that we've got two sets of bars there. The second set of bars is what we're calling the sort of adjusted assumptions, because what we've observed is deposit betas, which have exceeded expectations based on our models for a lot of reasons. It's on Page 15 of the slide deck. So, I think the most important -- as you're thinking about sort of looking ahead, I think the most important measures to consider are the betas that we've realized since the beginning of 2022. And then, considering that our net interest income outlook is incorporating the sort of the most current view on beta, which is effectively very close to the beta that we've realized since the beginning of 2022.

So, if I look at the standard versus adjusted on that Slide 15 there, it's really just increased beta is the only -- is also dynamic mix shift like further shift from noninterest to interest-bearing, or it's really just a higher beta?

Yes, incorporated in -- when I say beta, incorporated in our beta, that's not only the rate of change in interest-bearing deposits, but incorporated in there is some shift from noninterest-bearing -- I'm sorry -- yes, from noninterest-bearing deposits to interest-bearing deposits. So it's a combination of mix shift and sort of repricing speed.

Okay. And then, maybe just paydowns coming off the securities book just quarterly. If you could help me out with that? I don't know if it's in the slide deck or not here.

Well, I said in the script -- it is actually in the slide deck. And I said in script, the paydowns were just over -- the net paydowns were just over $900 million in the current quarter, any range kind of between $750 million and $1 billion over the course of several quarters.

Great. Thanks.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Shannon for closing comments.

Thank you, Alicia, and thank you to all for joining us today. If you have additional questions, please contact us at the e-mail 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.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.