Prepared remarks
Thank you, Matt, and good evening. We welcome you to this conference call to discuss our 2024 Fourth Quarter and Full Year 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; Derek Steward, Chief Credit Officer; and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for 1 hour. I will now turn the time over to Harris Simmons.
Thanks very much, Shannon, and good evening, everyone. I'd like to start off our call by acknowledging the devastating wildfires, which started in Southern California earlier this month and continue to impact so many people. Our focus continues to be on the safety and well-being of our colleagues, customers, and their families. We've been fortunate there have been no reported injuries or property loss among our people. And we're grateful for the first responders and charitable organizations who are working to protect so many people and assist them in getting back on their feet. As it relates to anticipated credit losses related to damage from the wildfires, we have a very limited amount of residential exposure in the burn zones. Due to insurance in place, we anticipate any losses or credit impact to be minimal. We have programs in place to work with borrowers that may need payment restructuring due to the fires.
Based on past experience with similar natural disasters, we expect any losses to be very low. Shifting now to performance. Key metrics for the year and the quarter are presented on Slide 3. We're pleased with the continued improvement in our financial performance relative to the prior year. Fourth quarter adjusted pre-provision net revenue, which excludes most notably the impact of the FDIC special assessment for the 2023 bank failures, increased 19% relative to the prior year quarter. Net earnings for the year were $737 million or $4.95 per share. For the fourth quarter, earnings were $200 million or $1.34 per share. The net interest margin expanded for the fourth consecutive quarter, primarily due to interest-bearing liabilities repricing downward faster than earning asset yields. The margin was 3.05% for the quarter compared to 3.03% in the prior quarter and against its trough of 2.91% in the year ago quarter.
Our efficiency ratio improved to 62%. As Ryan will highlight later, our guidance for 2025 anticipates continued improvement in these profitability measures and positive operating leverage for the year. Customer deposits increased on both an ending and average basis in the fourth quarter and the full year. We continue to see relative stability in non-interest bearing demand deposits, which on average grew slightly over the prior quarter. Average loan growth was modest at 1.1% on a linked quarter basis and 3.2% for the full year. Net loan losses were higher in the quarter at $36 million or 24 basis points annualized, with two-thirds of the net loss amount attributable to a single commercial and industrial credit. The level of classified balances increased by $777 million, primarily in commercial real estate. At the same time, the levels of non-accrual loans in the portfolio remained low and in fact, decreased by 18% during the quarter due to significant equity and strong guarantor support in the portfolio.
We believe we are at or nearing the peak for CRE classified balances, and we continue to expect that any realized losses that may occur over the next year will be very manageable. Moving to Slide 4. Diluted earnings per share was $1.34 compared to $1.37 in the prior period and $0.78 in the prior year quarter. Provision for credit losses this quarter of $41 million had a negative impact of $0.21 per share. Slide 5 provides a five-quarter view of pre-provision net revenue. On an adjusted basis, our fourth quarter results of $312 million reflect an improvement of 4% on a linked quarter basis. And as previously noted, a 19% improvement over the prior year period. Adjusted revenue growth outpaced expenses as funding cost pressures abated somewhat. Our Capital Markets business experienced strong results, and we continue to maintain expense discipline despite inflationary pressures. Looking to the next year, we are optimistic that our performance will reflect sustained growth, continued improvement in our net interest margin and increased profitability. With that high level overview, I'll turn the time over to our Chief Financial Officer, Ryan Richards for additional details related to our performance.
Thank you, Harris, and good evening, everyone. I will begin with a discussion of the components and associated performance drivers in pre-provision net revenue. Beginning with net interest income and net interest margin on Slide 6, you will see the five-quarter trend for both measures, reflecting four consecutive quarters of improvement. During the quarter, the downward repricing of interest-bearing liabilities outpaced the pressure on asset yields. Net interest margin further benefited from a reduction of $1.4 billion in average short-term borrowings. Additional details on changes in the net interest margin are included on Slide 7. On the left-hand side of this page, we provided a linked quarter waterfall chart outlining the key changes and key components of the net interest margin, incorporating changes in both rate and volume. The net interest margin expanded by 2 basis points sequentially due primarily to the lower cost of funding.
This is reflected in the 23 basis points and 12 basis points margin improvements in the waterfall, attributable to deposits and borrowings, respectively. Improved funding costs were somewhat offset by the declines in earning asset yields and a lesser contribution from noninterest-bearing sources of funds. The right-hand chart of this slide shows a 14 basis point improvement in the net interest margin versus the prior year quarter, also benefiting from the improved cost of deposits. Moving to non-interest income and revenue on Slide 8. Customer-related non-interest income was $173 million for the quarter, an increase of 7.5% on a linked quarter basis and 15% versus the year ago quarter. We are pleased with the record performance of customer fees for the quarter and full year, driven in large part by capital markets as we continue to realize growth from our strategic investments. Capital markets were up 36% for the full year compared to 2023.
Commercial account fees were also a key contributor to increased fee revenue for the quarter and the full year. As shown on the chart on the right side of this page, both total revenue and adjusted revenue increased from the prior quarter and prior year periods due to the factors previously noted for net interest income and customer-related fee income. Our outlook for customer-related fee income for the full year of 2025 is moderately increasing relative to the full year 2024. Adjusted non-interest expense shown in the lighter blue bars on Slide 9, increased $10 million to $509 million, attributable to slight increases in compensation related accruals, legal services, and occupancy. Reported expenses also at $509 million, increased by $7 million compared to the prior quarter. Our outlook for adjusted non-interest expense for the full year 2025 is slightly to moderately increasing relative to the full year 2024.
Included in this outlook is the expectation that we will increase marketing spend, incur expenses related to the branch acquisition in California, and other investments in revenue-generating businesses. Slide 10 highlights trends in our average loans and deposits over the year. On the left side, you can see that average loans increased just over 1% for the quarter. Consumer mortgages and C&I loans continue to be the drivers for this increase. Total loan yields declined by 23 basis points, largely in response to the reduction in short-term benchmark rates, with some partial offsets from fixed loan repricing and loan swaps. Our frontline bankers have noted increased client optimism, particularly from our commercial and small business customers. Our outlook for period-end loan balances for the full year 2025 is slightly increasing relative to the full year 2024. Growth is expected to be led by commercial loans, offset somewhat by managed declines in mortgages and commercial real estate exposures as pay-offs are expected to outpace new originations.
Turning to deposits on the right side of the page. Average deposit balances for the fourth quarter increased modestly. As Harris mentioned earlier, we are pleased by the stability we continue to see in the level of non-interest-bearing deposits. Cost of total deposits, shown in the white boxes declined by 21 basis points to 1.93%. Interest-bearing deposits costs decreased by 32 basis points versus the prior quarter. On average, the rate on interest-bearing deposits was 2.87% for the quarter compared to 3.19% in the prior period. Interest-bearing deposit spot rate at December month-end was 2.62% and the total deposit spot rate was 1.78%. Deposit repricing has been disciplined and in line with our expectations, reflecting nearly 100% betas on higher-cost deposits. Slide 11 includes a more comprehensive view of funding sources and total funding cost trends. The left side chart includes ending balance trends.
Compared to the prior quarter, total deposits grew approximately $500 million, comprised of period-end growth of $670 million in customer deposits, offset by a $163 million reduction in higher-cost broker deposits. Period-end non-interest-bearing demand deposits were relatively stable and represented approximately 32% of total deposits. 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 total funding costs declined by 24 basis points during the quarter. Moving to Slide 12. Our investment portfolio exists primarily to be a storehouse of funds to absorb customer-driven balance sheet changes. Here, we present our securities and money market investment portfolios over the last five years. Maturities, principal amortization, and prepayment related cash flows from our investment securities portfolio were $749 million in the fourth quarter.
Net of reinvestment, cash flows for the quarter were $370 million. The paydown and reinvestment of lower yielding securities continues to contribute to the favorable remix of our earning assets as well as a means to manage down our wholesale funding costs. The duration of the investment portfolio, which is a measure of price sensitivity to changes in interest rates is estimated at 3.4 years. While we provided standard parallel interest rate shock sensitivity measures on Slide 28 in the appendix of this presentation, we present on Slide 13 our view of net interest income sensitivity, assuming interest rates follow the path implied as of December 31, which assumes the Fed funds target reaches 4.25%. Modeled net interest income in the fourth quarter of 2025 is expected to be 6.8% higher when compared with the fourth quarter of 2024. This includes the impact of both latent and emergent sensitivity that we have broken out in prior quarters.
As expectations on the rate path continue to evolve, we also provide 100 basis points shocks to the rates implied by the forward path, which suggests a sensitivity range between 4% and 9.4%. As a reminder, this slide presents a model view of rate sensitivity based on static balance sheet assumptions, while allowing for some additional migration of non-interest-bearing deposits into higher-cost time deposits. This view does not include expected balance sheet changes, pricing strategies, and other strategic factors included in full-year net interest income guidance. Our outlook for net interest income for the full year 2025 is moderately increasing relative to the full year 2024. The sensitivity associated with this guidance includes risks and opportunities, including realized loan growth, competition for deposits, deposit behavior, and the path of interest rates across the yield curve. When combined with our outlook for customer-related fee income and non-interest expense, we anticipate continued positive operating leverage moving forward into 2025.
We begin our discussion of credit quality on Slide 14. Harris previously noted that realized losses in the portfolio continue to be quite manageable, with annualized net charge-offs to 24 basis points of loans in the quarter and just 10 basis points over the last 12 months, with the jump in losses this quarter attributable to a single commercial credit. Non-performing assets decreased $70 million in the quarter, while criticized and classified loan balances increased by $849 million and $777 million, respectively. The decline in non-performing assets was driven largely by several successful resolutions at par, together with a large charge-off previously noted in the portfolio. The increase in classified loans was primarily driven by commercial real estate, specifically in multi-family, industrial, and office sectors. Effective loss content in classified loans remained low due to significant borrower equity, strong sponsor support, and continued borrower cash flows despite the pressure on those cash flows.
Recent reductions in short-term benchmark interest rates should benefit our operating costs and slow unfavorable grade migration, while the increase in term rates may result in criticized balances staying higher for longer, due to less favorable refinance opportunities. The allowance for credit losses was stable versus the prior quarter at 1.25%, and the loan loss allowance coverage compared with non-accrual loans improved to 234%. For reference in our appendix, we've included a trend for ACL, non-accrual, and classified loans. As a reminder, classified loans primarily reflect a measure of probability of default while the CECL methodology used to set the reserve is a forward-looking measure of expected loss, which also encompasses loss given default.
Sure. This is Derek. Thanks for the question. It actually was a long-time client of the bank, a 10 or 15-year client of the bank in the retail space. It was a very unique customer and we had banked the company for a long time. It was purchased by a private equity company. Between the push to grow a little faster, along with some management challenges, just created challenges for the company that led to the loss. It's a pretty unique business and really nothing else like it in our portfolio, but that was the situation.
Yeah. No. Thank you. This is Scott McLean, and I appreciate the question. We've been talking about building this business over the last couple of years and our enthusiasm for it. We've really been adding the product capabilities, the risk structure, and the technology infrastructure. In the fourth quarter, we just saw a really nice increase in some of the basic products, loan syndications, interest rate products, and our real estate capital markets business, which we've been building out. The markets haven't been overly friendly up until the last six months or so, but we're starting to see a more regular flow there, and it produced meaningful revenue in the fourth quarter. The investment capital markets type businesses are lumpy. We've invested heavily in infrastructure and we've got the people in place. We have very active calling programs with our commercial bankers, focused specifically on capital markets opportunities, both current and longer-term. I think all that hard work should benefit us in the years to come. We're also seeing a continuation of our basic products, things like treasury management, merchant services, and our corporate trust business, which has a very large market share, albeit a shrinking market, but a significant position. So we should see continued progress, we think, because of all the hard work we've put into capital markets.
Questions and answers
It looks like deposit betas on a spot basis are running close to 60% already. Can you talk about how you expect that to progress from here? I'm assuming there is still some benefit that's going to come with a lag. But at the same time, there's fewer rate cuts in the forward curve, which might impact how much more you can do. So if you can just run through some of that?
I think that's probably the case. I mean you'll see in the appendix the projections with respect to how AOCI runs off. If you look at it as a proxy for this, tangible book value has been improving pretty rapidly, I think it's around 20%, 21% over the last 12 months. We expect that we don't know the final outline of what the rules are going to look like in the transition period, and how regulators will reengage with this. We expect that AOCI will come back into capital; that's probably one thing that will survive, but the timing of it is not entirely clear. In the meantime, I think we feel like we're on a good glide path to getting to the point where this will solve itself without having to do anything regarding capital actions. We'll probably continue to regard our buyback activity until we can see this with more clarity; that's how I think about it.
I think speaking to that deposit beta assumption that you quoted there on the interest-bearing deposits, that's pretty much in line with what we've been seeing. As we've grown more comfortable with the level of non-interest-bearing deposits and the behaviors there, the implied assumption about the continued migration from non-interest-bearing into interest-bearing has been tightened over time. This has also allowed us to be a bit more constructive about how we see NII sensitivity out one year, still benefiting from some fixed asset repricing that is still playing through the system and some latency in the repricing of time deposits with down rates still benefiting from that. With a more stable and we hope growing deposit base, supplanting wholesale fund sources, all that lends to a more constructive outlook.
Hi. Good afternoon. So this question is kind of related to the election and post-election, and I see there is a big pop in energy, oil, and gas growth, Slide 24, especially when you compare to the prior quarter. Just how much do you think that might be election-related? Is there more momentum to that? And what other areas could see growth in commercial loans?
Sure. This is Scott. Our energy portfolio outstandings were at about $3 billion, four or five years ago. They trended down during the 2020 downturn price volatility. We've been around $2 billion and basically saw a $100 million increase in that portfolio from a little bit below $2 billion to a little bit above. I think we have good opportunities there; pricing and credit structure has never been better as many banks have exited the market, and we're a long-time player with a long-time reputation. So we continue to hope it will be a nice source of C&I growth going forward. In general, we were up about $2.1 billion average loans year-over-year, about a 3.5% increase. Our general sense is that small and medium-sized business owners are a little more optimistic. There’s a sense that regulatory issues confronting small and medium-sized businesses could have improved, maybe not much, but some. So we think C&I lending has an opportunity to grow.
To answer the second question, we saw the increase in classified loans was pretty granular. The downgrades that led to the increase were not from one large credit; it was distributed across our footprint and the geographies. As stated earlier, $609 million was from CRE, with $254 million from multifamily and $242 million from industrial. The story for industrial and multifamily is the construction delays that are occurring, slower lease-up performance to plan issues, increased costs, and just increases in expenses combined with interest rate increases. These factors are leading to them being classified. At the same time, it seems like it’s a matter of timing, and most of these credits will work their way through; it’s just taking a little longer to reach stabilization and performance. Given our loan-to-value ratios, we expect that they will perform and either be upgraded through progress or refinanced out over time.
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. Matt, will you please open the line for questions?
Thank you. We will now start the question-and-answer session. The first question comes from Manan Gosalia at Morgan Stanley. Please go ahead.
Got it. And for my follow-up, do you have – where your CET1 ratio is including AOCI for the quarter? And is that something you need to manage to especially given the volatility that we're seeing in the long end of the curve?
It is something that we certainly are cognizant of, and I know that we periodically get the question about when might we take more additional capital actions. Our view is still of uncertainty about where the Basel III end game rules reside. Even without that, there's an increasing expectation that we'll be managing our capital inclusive of AOCI. We do include our appendix slides outlining the path we see today with $2.4 billion in AOCI losses in the past year. We certainly do think internally about what our excluding AOCI capital levels are, with an expectation of continuing to grow capital over time to more of a median peer capital level. Those are things that we do monitor, and we are comfortable with the glide path for any realistic expectation about what the Basel II end game could be applicable for us.
Is it fair to say that if there is more volatility in the long end of the curve that it would only really impact when you think about buybacks as opposed to impacting how you grow your loan book?
I think that's probably the case. I mean, you’ll see back in the appendix the projections with respect to how AOCI runs off. If you look at it as a proxy for this, tangible book value has been improving pretty rapidly. We expect that we don't know the final outline of what the rules are going to look like in the transition period, but I think we're in a good position overall. In terms of being prepared for anything that comes with crossing the $100 billion threshold in the new regulatory environment, I think we’re in good shape. I see it as possible with anything that prices out well. It’s not necessarily front and center, but we could be in a position to do strategic deals.
Hey. Good afternoon, everyone. Just first on the C&I credit where you realized some charge-offs. Can you just give us a sense for the type of business that is or was, and kind of what exactly happened there?
Sure. This is Derek. Thanks for the question. It actually was a long-time client of the bank, a 10 or 15-year client of the bank in the retail space. It was a very unique customer actually and we had banked the company for a long time. It was purchased by a private equity company. That, I think, between pushing to grow a little faster, along with some management challenges just created challenges for the company that led to the loss. It's a pretty unique business and really nothing else like it in our portfolio, but that was what the situation was.
This concludes our call.
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