Zions Bancorporation - Q1 2024
April 22, 2024
Transcript
Operator (participant)
Greetings and welcome to the Zions Bancorp Q1 Earnings Conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Shannon Drage, Director of Investor Relations. Thank you, Shannon. You may begin.
Shannon Drage (Director of Investor Relations)
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 two 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's comments, Ryan Richards, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Michael Morris, 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 one hour. I will now turn the time over to Harris Simmons.
Harris Simmons (Chairman and CEO)
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, I think 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 in 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've just successfully completed the second of three migrations to our new core deposit system, which happened for Nevada State Bank and Amegy Bank 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 put 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 Greenwich Brand Awards in 2009.
We continue to score well across a number of measured 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 Cullen/Frost and Pinnacle Financial Partners, who were number one and two this year, and 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, relative net interest margin will improve through customer deposit growth and pricing discipline, in addition to the management of interest rate risks through our hedging strategy. We also expect that with the 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 a corner of sorts 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 the kind of business that builds real franchise value, and it's bringing in a meaningful number of new-to-the-bank customers, and 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, and 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, and which Ryan will speak about in more detail later in the presentation. 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 balance has 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 deposit ratio was 78%. Net Charge-Offs as a percent of loans were just four basis points, as noted, down from six 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 four, Diluted Earnings Per Share at 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 five, our first quarter adjusted pre-provision net revenue was $242 million, down from $262 million in the fourth quarter. The linked quarter decline was attributable primarily to seasonally higher non-interest expense. Versus the year-ago quarter, PPNR was down 29% as the increase in the cost of deposits exceeded 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?
Ryan Richards (CFO)
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 and lower borrowing levels contributed another 93 basis points to the margin. These positive contributions, which 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 year 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 $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. With the larger deposit portfolio assumed to have a longer duration than our loan portfolio, fixed-rate term investments are required to balance asset liability durations. Slide 13 provides information about our interest rate sensitivity. While we've 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 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 31st and assuming a static balance sheet. 100 basis points 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 modeled 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 modeled outcome and overlaying management expectations for balance sheet changes in deposit pricing, we believe that net interest income in 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 four basis points of loans in the quarter. The allowance for credit losses is 1.27% of loans, a one basis point increase over the prior quarter due to incremental reserves in the commercial real estate portfolio, partially offset by a modest improvement in our economic scenario. Notwithstanding strong net charge-off performance, we observe 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 as 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 the low level of ongoing loan net charge-offs. We expect our common equity from both a regulatory and gap perspective to increase organically through earnings, and that the AOCI improvement will continue through accretion of the securities portfolio regardless of rate path outcomes. Slide 22 summarizes the financial outlook provided over the course of this presentation. As a reminder, this outlook represents our best current estimate for the financial performance for the first quarter of 2025 as compared to the first quarter of 2024. With that, I turn the time back to Shannon.
Shannon Drage (Director of Investor Relations)
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.
Operator (participant)
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for your questions. Our first questions come from the line of Manan Gosalia with Morgan Stanley. Please proceed with your questions.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Hey, good morning, all. Ryan, welcome and congrats on the new role.
Ryan Richards (CFO)
Thanks so much.
Manan Gosalia (Executive Director and Senior Equity Analyst)
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.
Ryan Richards (CFO)
Hey, yeah, thanks so much for the question. And yes, when you look at some of the materials there and really, we emphasized in 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 475, so 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 then of sharing some of our additional supplementary measures around latent and emergent sensitivity.
Particularly as we think about the possibility of having fewer rate cuts for the year, it becomes more important as we think about that latent sort of view of interest rate sensitivity that we model at 0.8%. We feel good about our ability to be positioned well for different rate pivots and changes. 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. Were there any other parts of that question that I missed?
Manan Gosalia (Executive Director and Senior Equity Analyst)
No, I think you got them. I wanted to follow up on just the deposit costs and balances. I know NIB outflow has accelerated maybe a little bit this quarter, but at the same time, the overall cost of deposits was relatively flat. So maybe if you can 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?
Ryan Richards (CFO)
Yeah, 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 smaller relationship balances, but also with our larger relationship balances. We've seen a very nice stabilization in the 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.
There is some room for maneuver in terms of that migration and still allowing us to hit our guidance as we peer forward in 1 year's time to stable the slightly increasing NII.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Great. Thank you.
Operator (participant)
Thank you. Our next questions come from the line of John Pancari with Evercore. Please proceed with your questions.
John Pancari (Senior Managing Director)
Good morning. Ryan, welcome.
Ryan Richards (CFO)
Hey, thanks, John.
John Pancari (Senior Managing Director)
On the credit front, on commercial real estate, yeah, 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 mean, I know losses are certainly limited, but comparatively, I know your peer regionals are in the 8%-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 in the industry? Thanks.
Derek Steward (Chief Credit Officer)
Well, thanks, John. This is Derek. We're very confident in the level of reserves that we have. What you can see in the credit portfolio is actually some migration into criticized. That's what's the largest driver of the deterioration in the CRE portfolio. A lot of that's from multifamily, which we're very comfortable with. We're comfortable just because of the loan to values that we've underwritten, the conservative underwriting that we've done over the years, as well as the slower periods of growth that we've had compared to peers over the years. With the losses that we've had at 4 basis points and $6 million for the quarter, it continues to be very manageable. We'll see some challenges, probably in the office portfolio over time, but we continue to believe that we're very well reserved for what we think are manageable losses in the future.
Scott McLean (President and COO)
Hey, John, this is Scott. I would just add to that that something which I think almost everybody knows about us, our CRE growth coming into this was about half of the regional bank average, depending on what size regional banks you're looking at. So as you know, since the Great Recession, our CRE book's been growing about 3%-5% a year, which is significantly less than peers. I think the fact that it's 80% of the portfolio is term says that we have demonstrated cash flow related to a large portion of the book. And then you just look at the low average and median average loan size, it sort of tells you that the odds of us having guarantor support that can actually make a difference is real.
And then finally, and I think compared to some of our peers, we've been very disciplined about hold levels. Concentration management, particularly as it relates to hold levels, is really important going into a time like this.
John Pancari (Senior Managing Director)
Great. Thanks, Scott. I appreciate it. And then separately, on the expense side, expense trends came in a little bit better than expected. I even think the outlook was a little bit better. Can you maybe remind us on some of the efforts on the expense front if you see some incremental gains as you look through the franchise? And then separately, can you remind us of the expense dynamic tied to the completion of the core system conversion? I believe in year one, you might actually get a bump up in those costs before you see efficiencies. So if you could maybe walk through that with us as well. Thanks.
Ryan Richards (CFO)
Yeah, let me start with highlighting, I think, as was noted, the year-over-year performance. It was about a year ago this time where a commitment was made to bend the expense curve in the backdrop of the revenue environment that we're in. And we feel pleased with where we came out on an adjusted basis relative to that last year mark, having a very modest 0.4% increase in adjusted expenses. So I felt like we kept some commitments there. And we're really operating in the spirit of continuous improvement. That wasn't a one-and-done. We continue to inventory opportunities moving forward to make sure that we manage those responsibly. And we see opportunities, as you note, as we think about the very good success that Harris highlighted in his remarks on our core financial transformation work and how that's progressing.
We do see some opportunity in terms of direct implementation expense associated with that going into next year. We have been spending a lot of time internally focusing on where we can bring automation improvements. We've been mobilizing a lot of our people internally to drive out manual labor hours out of our work. We see opportunities associated with kind of our facilities. We've shown that we've had an ability to realize some economies there with some of the projects we've worked on in recent years. Our compensation structure will continue to match the revenue environment and how we trend across that dimension. So I don't know, Scott, if there's anything that you would want to add?
Scott McLean (President and COO)
No, Ryan, that was awesome. All of those comments speak to the rigorous discipline we've had. This quarter last year, as Ryan noted, we were sitting on about 8%-10% year-over-year expense growth when we called that we would be flat to the first quarter of this year. So it wasn't by accident. There was a lot of rigorous discipline that Ryan noted and that we think will be beneficial going forward. Related to our future core projects, specifically, we've noted that there will be next year in 2025 about a $12 million-$15 million decrease in amortization costs. There will also be, we'll see some benefit from reduced what we would call bubble staffing that exists in many areas of the bank to help with the conversions.
And then I think, as Harris noted, we've seen some real process time improvements at the teller line and on our new accounts platforms where we see higher levels of turnover anyway, where we may see some efficiency from that as well.
John Pancari (Senior Managing Director)
Okay, great. Thanks, Scott. Thanks, Ryan.
Operator (participant)
Thank you. Our next questions come from the line of Steven Alexopoulos with J.P. Morgan. Please proceed with your questions.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Morning, everybody. First, by the way, thanks for the 9:30 A.M. call. This is a great time slot. Hopefully, you keep it. For my question, yeah, I won't ask the question on that. But in terms of the net interest income guidance, there's comment in here that there's upside if short-term rates decline. Most banks are indicating that if short-term rates come down because of the lag on the deposit side, they would think that would pressure NII in the short run. But it seems like you're saying the opposite here. Could you expand on that?
Ryan Richards (CFO)
Yeah, and I would emphasize the near-term nature of that. But what we're seeing there is if you look across basically our interest bearing deposits, you decide that around $50 billion, you think about a third of those being priced pretty near wholesale prices, 4.75% above. We've 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 headwinds if only short-term rates were to move down, not a parallel shift that we think that we could realize.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
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. Because if you look at the consumer side, sentiment's 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.
Harris Simmons (Chairman and CEO)
Well, I think what we're seeing is, I mean, this is coming from our kind of frontline lenders. They're expressing that they're seeing a little more optimism, probably, from borrowers. I don't know that you need cuts that this really hinges on a quarter or point, or that's what's doing it so much is just probably a general belief that maybe the economy is not headed into recession, that things are a little more resilient than might have been kind of the sentiment six or nine months ago. So I suspect that's it. But our comment about maybe improving loan demand coming at us is simply a reflection of what we're hearing from our lenders. So it's a little hard to quantify, but that's what we're seeing internally.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
In the past, when you saw an improvement in the pipeline, how long would that typically take to filter through actual loan growth improving?
Harris Simmons (Chairman and CEO)
Oh, six months.
Steven Alexopoulos (Managing Director and Senior Equity Research Analyst)
Okay. All right. Thanks for taking my questions.
Harris Simmons (Chairman and CEO)
Yep. Thanks.
Operator (participant)
Thank you. Our next questions come from the line of Bernard von Gizycki with Deutsche Bank. Please proceed with your questions.
Bernard von Gizycki (Equity Research Analyst)
Yeah, 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?
Harris Simmons (Chairman and CEO)
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. We have some ambitious internal targets and people committed to it. 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.
Bernard von Gizycki (Equity Research Analyst)
And then maybe on the funding side, I know on slide 11 of your presentation, you note having the $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 stuff for this year?
Harris Simmons (Chairman and CEO)
I'll speak for that. Well, Matt Tyler, our treasurer, might have a comment about it.
Matthew Tyler (Corporate Treasurer)
Yeah. This is Matt Tyler. I'm the Corporate Treasurer. I mean, it's really, we've seen deposits kind of stabilizing from where after last year. And actually, we saw this growth after last year, which is why we brought down those broker deposits. Going forward, it's going to really be a function of what happens with our deposits, what happens with our loan growth. We expect those numbers to continue to come down somewhat. But that depends on how the risk to balance sheet behaves. Whether loan growth is super easy, comes in very strong, then we'll probably need to keep more of that wholesale borrowing.
Scott McLean (President and COO)
I would just add to that that customer deposits down a little bit in the first quarter, which, as Ryan says, is somewhat seasonal. We've still got about $6 billion in client deposits that are off balance sheet. So it's a pretty conscious decision. We could certainly have shown $1 billion-$2 billion of customer deposit growth. Borrowings would have come down. Overnight borrowings would have come down. And it's something we just try to make very natural decisions, not try to bend a borrowings number or hit a customer deposit growth number just simply through rate mechanics. We try to make the best decision we can about what customers really need and what we're looking for at any point in time.
Bernard von Gizycki (Equity Research Analyst)
Great. Thanks for the color and taking my questions.
Operator (participant)
Thank you. Our next questions come from the line of Ken Usdin with Jefferies. Please proceed with your questions.
Ken Usdin (Managing Director of Equity Research)
Hey, guys. How are 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.
Ryan Richards (CFO)
Yeah. Thanks for that, Ken. You've noticed the trend of 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 the yield 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 is, "Let's see where loan growth shows up and how our deposit base behaves." But that's what we've been seeing.
Ken Usdin (Managing Director of Equity Research)
Okay. And then separately, just I know you're at $87 billion, far away from that next $100 billion threshold. I'm just wondering if you could talk us through how not having the holding company structure changes how you guys think about approaching that and think about getting the company ready, especially given your history where you were a Category V bank originally and have some of that infrastructure. Can you just kind of help us think about what needs to happen as you move forward and what we would be realizing along the way there? Thanks.
Harris Simmons (Chairman and CEO)
I'll take a stab at that, Ken, Harris. I mean, the first thing I'd note is just picking up on something that Ryan said about continued run down in the securities portfolio. We have enough liquidity kind of inherently here that it probably gives us. I don't know if it's another year or just kind of what. But it is going to help us kind of push that data out, which helps with the AOCI runoff and kind of normalizing getting that drag down in advance of crossing 100. In terms of the kind of requirements, I think we believe we're in pretty good shape because we're still doing stress testing. We think we'll probably have to be a little more rigorous in terms of kind of the documentation that we would supply to regulators, etc. But all the mechanics, we continue to refresh models.
We'll need to get back into the resolution plan business. But our structure, I think, makes that actually much easier. I mean, it's a pretty bare-bones structure that we have that I think makes resolution planning all that much easier. And the lack of a holding company, probably the main impact is there's no supervised stress test. It's really only internal. And so until we get to, I think, 250. And so fundamentally, I don't think that we're going to see kind of a major event when we get there. Probably the major event really is depending on how Basel III Endgame gets revised as we would expect and what, if anything, happens with the long-term debt rule. I mean, I think that if I have a concern, it's probably more around the long-term debt rule. I think that needs to get revisited.
It's sort of anti-tailored for a $100 billion regional bank. And so my hope is that we'll see some attention paid to that as well. But beyond that, I think we're going to be in pretty good shape.
Ken Usdin (Managing Director of Equity Research)
Great. Thank you, Harris.
Harris Simmons (Chairman and CEO)
Yep.
Operator (participant)
Thank you. Our next questions come from the line of Brandon King with Truist Securities. Please proceed with your questions.
Brandon King (Managing Director and Senior Equity Research Analyst)
Hey. Good morning. Thanks for taking my questions.
Ryan Richards (CFO)
Hey. Thanks, Brandon.
Brandon King (Managing Director and Senior Equity Research Analyst)
Yep. So wanted to talk about earning asset yield. 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?
Ryan Richards (CFO)
Yeah. And thank you for that. As we've sort of been talking along the way, we did have a nice pickup this quarter in earning asset yield. We've sort of been guiding to 0-5 basis points. And I think if you look over a couple of 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.
Brandon King (Managing Director and Senior Equity Research Analyst)
Okay. And do you think you could still go above that, I guess, 0-5? Is that a fair assumption, or is that still kind of the range?
Ryan Richards (CFO)
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.
Brandon King (Managing Director and Senior Equity Research Analyst)
Okay. And then lastly, in Office CRE, there was a meaningful step down in that portfolio, also within 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? Your turn. Tricky.
Derek Steward (Chief Credit Officer)
Yeah. Thanks, Brandon. This is Derek. The decline in office criticized and classified loans was actually one positive resolution that we had. We were paid in full on a non-accrual loan where we'd actually previously had a charge-off last year. We just continue to work through the office portfolio. You'll see that we've actually reduced that portfolio over time. We'll still have some office challenges, I'm sure, for the next little while. So far, we've actually had positive resolutions there.
Brandon King (Managing Director and Senior Equity Research Analyst)
Thanks for taking my questions.
Operator (participant)
Thank you. Our next questions come from the line of Peter Winter with D.A. Davidson. Please proceed with your questions.
Peter Winter (Managing Director and Senior Research Analyst)
Thanks. Good morning. Can you provide some color on the increase in the C&I classified loans?
Derek Steward (Chief Credit Officer)
Yeah. Thank you. This is Derek again. The increase in the classifieds this quarter, there was actually one assisted living facility, so CRE-related, that just was experiencing slower lease-up and some higher expenses. That migrated to classified. And then there were a number of other C&I credits that just nothing large trends to point out or specific industries, but just they were C&I credits that migrated into classifieds.
Peter Winter (Managing Director and Senior Research Analyst)
Okay. And 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 8-15 basis points this quarter. What's the outlook for deposit costs going forward if there's no Fed cuts this year?
Ryan Richards (CFO)
Yeah. 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 as 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've observed 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 can add.
Harris Simmons (Chairman and CEO)
No, I think that captured it really well. It's good.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. Thank you.
Operator (participant)
Thank you. Our next questions come from the line of Chris McGratty with KBW. Please proceed with your questions.
Christopher McGratty (Head of U.S. Bank Research and Managing Director)
Oh, great. Thanks. Harris, any big-picture changes in use of capital for the next maybe year or two, rebuilding capital with OCI, but just more broadly, uses of capital?
Harris Simmons (Chairman and CEO)
No. I mean, look, I think as we think about capital over the next couple of years, we're clearly going to be focused on the $100 billion kind of thresholds and what that means and thinking about what our ratios are going to look like crossing that mark. And beyond that, we're very focused internally on trying to invest in things that generate higher returns, so fee-income businesses like capital markets, wealth. We're highly focused on small business lending. Sentiment there has been kind of tough in that market over the last three or four years, I think, with the pandemic. But I think that's probably we're seeing maybe some change there and noted that kind of SBA lending is turning into a bright spot for us.
And we really like that business not only because you get a little better spread, but it brings the kinds of deposits that I think really build a sustainable franchise, create a lot of franchise value. They're smaller operating accounts. They're insured. They're sticky. And so there are a lot of things we can do for small and middle-market kinds of customers that add value. And so that's a real primary focus. We're trying to do more incrementally on the consumer front. That's not been a major kind of driver for us in recent years. But we think there's some opportunity there, again, largely with a view to creating a more fully insured deposit base. I mean, I think that's just an editorial comment. I mean, I think if there's a crying need out there, it's for a look at the deposit insurance system. I think it's fundamentally broken.
It should be a source of concern about it for anybody who's trying to think about the longer-term sustainability of a diversified banking system. In the absence of that, we need to be really focused on building a more granular deposit base. That's a real focus of ours and will be, I think, in years to come. Anyway, that's not all about capital. Those are kind of some of the activities we're focused on.
Christopher McGratty (Head of U.S. Bank Research and Managing Director)
That's great. Thank you for that. Just my follow-up would be in terms of the tax rate, is the first quarter a good run rate for the rest of the year?
Ryan Richards (CFO)
Yeah. I don't have any different guidance to give you at this point in time.
Christopher McGratty (Head of U.S. Bank Research and Managing Director)
Okay. Thank you.
Operator (participant)
Thank you. Our next questions come from the line of Ben Gerlinger with Citi. Please proceed with your questions.
Ben Gerlinger (Managing Director)
Hey. Good morning, everyone.
Ryan Richards (CFO)
Morning.
Ben Gerlinger (Managing Director)
Just had a quick question on the multifamily uptick. You guys lay out the geographic presence by state in terms of just percentages. Is it a fair assumption to think that the uptick is kind of uniform across that? Or is there certain states or areas of the United States that are starting to see a little bit more kind of indigestion amongst the multifamily?
Derek Steward (Chief Credit Officer)
Thanks for the question. This is Derek again. It's a good question. We're not seeing it in a specific market. I mean, real estate is very local. It depends on what street corner you're on. And so it depends on the markets. And what we're seeing on the multifamily side is really three primary issues. One is in some cases, there's a higher cost to complete the projects and delays on the projects. And so we see some issues there on the construction side, maybe a smaller percentage. And then the larger issues are really just slower lease-up, maybe some rent concessions early on during the lease-up period combined with interest rates increasing. And what we're seeing is it's taking longer to get to stabilization than what we originally projected for a number of these projects. But the sponsors continue to support them.
They're bringing equity in to continue to support them as they get to stabilization.
Scott McLean (President and COO)
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 softening.
Ben Gerlinger (Managing Director)
Gotcha. That's helpful color. And then when you just think about just kind of commercial real estate as a whole, and I know you talked about some kind of looming problems to work through within office. Is office kind of, I hate to use the phrase, the next shoe to drop? But is that where you're likely to see the next incremental increase in criticized classified? Not necessarily a charge-off, but or do you think it's a little bit more uniform across all of CRE?
Derek Steward (Chief Credit Officer)
Well, it's probably all CRE has been impacted by the increase in interest rates and then some slowdown in the multifamily leasing. Office certainly has been a challenge for some time coming out of the pandemic. So on the office side, we have $1.9 billion. We've actually reduced that intentionally over the last 4 or 5 years. So we were kind of ahead of it even before the pandemic. And the other thing that we have is we're never in the large CBD downtown trophy office properties that say, "New York City." It's just not our markets. It's not what we do. And so I think the office will continue to have some challenges from what we do have. But I think it will be manageable over the near term.
Ben Gerlinger (Managing Director)
Gotcha. That's really helpful. I appreciate it. Thanks, everyone.
Operator (participant)
Thank you. Our next questions come from the line of Brian Foran with Autonomous. Please proceed with your questions.
Brian Foran (Analyst)
Harris, I wonder if I could just follow up on the deposit insurance bracket 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.
Harris Simmons (Chairman and CEO)
Well, yeah. I mean, I'd start with the fact that the $250,000, which was last established—it was last changed in, I think, 2011. It's not indexed for inflation. And so it's lost about close to a third of its purchasing power, if you will, since it was last changed. So the real deposit insurance has come down by nearly a third since the last change. You have a world in which—I mean, Dodd-Frank was largely intended to solve the too big to fail problem. We saw with the SVB episode that too big to fail is still there. Not only is it there, it was basically given the stamp of approval by the Treasury Department and others during a crisis. You saw the flow of funds going from smaller banks to a very, very small handful of very large banks.
It wasn't because of capital, credit quality, etc., etc. It was because they're de facto insured. And so you have a very large portion of the nation's deposits that are de facto insured. You have among those who are not too big to fail, you've probably got call it half of those deposits are fully insured. And so it leaves kind of this sliver 20%-25% of deposits out there that are not insured. But that's where all the instability is coming from. And I'm not to suggest here during this call what the solution ought to be. But I'm a little disheartened that there hasn't been more focus on it by policymakers. We're going to wait till the next crisis for it to rear its head again. And I simply think it ought to be something that everybody is focused on.
But in the absence of that, it's important that we remain focused on developing the insured portion of that deposit base. It just becomes fundamentally important. It's really why SVB is no longer here today, is because they didn't have an insured deposit base. And.
Brian Foran (Analyst)
Thank you.
Harris Simmons (Chairman and CEO)
Yeah.
Brian Foran (Analyst)
That's 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 burndown projection. The CET1 kind of in the 10.5 range, is that kind of a good landing spot? Or do you see that increasing as well over the next year?
Harris Simmons (Chairman and CEO)
Well, look, I don't think we'll be doing other than probably covering the cost of employee stock grants, that kind of thing. 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. We want to have strong capital here, so.
Brian Foran (Analyst)
Thank you. Very clear.
Harris Simmons (Chairman and CEO)
Okay.
Operator (participant)
Thank you. We have reached the end of our question and answer session. I'm going to now like to turn the floor back over to Shannon Drage for closing remarks.
Shannon Drage (Director of Investor Relations)
Thank you, Daryl. 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.
Operator (participant)
Thank you. This does conclude today's teleconference. You may disconnect at this time. Thank you for your participation. Enjoy the rest of your day.