Zions Bancorp NA (NASDAQ:ZION) Q4 2022 Earnings Call dated Jan. 23, 2023.
Corporate Participants:
James Abbott — Senior Vice President, Director of Investor Relations
Harris H. Simmons — Chairman and Chief Executive Officer
Paul E. Burdiss — Chief Financial Officer
Michael Morris — Executive Vice President and Chief Credit Officer
Scott J. McLean — President and Chief Operating Officer
Analysts:
Manan Gosalia — Morgan Stanley — Analyst
Ebrahim Poonawala — Bank of America — Analyst
John Pancari — Evercore ISI — Analyst
Chris McGratty — KBW — Analyst
Peter Winter — D.A. Davidson — Analyst
Ken Usdin — Jefferies — Analyst
Presentation:
Operator
Greetings, and welcome to the Zions Bancorp Q4 Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, James Abbott, Director of Investor Relations.
James Abbott — Senior Vice President, Director of Investor Relations
Hey, thank you, Joe, and good evening. We welcome you to this conference call to discuss our 2022 fourth quarter and full-year 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 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 at zionsbancorporation.com.
For our agenda today, Chairman and Chief Executive Officer, Harris Simmons will provide opening remarks followed by a brief review of our financial results by Paul Burdiss, our Chief Financial Officer. With us also today are Scott McLean, President and Chief Operating Officer; Keith Maio, Chief Risk Officer; and Michael Morris, Chief Credit Officer. After our prepared remarks, we will hold a question-and-answer session. During the Q&A session, we anticipate holding that to about 45 minutes in time and we expect — we’d ask you to limit your questions to one primary and one follow-up related question.
With that, I will now turn the time over to Harris Simmons.
Harris H. Simmons — Chairman and Chief Executive Officer
Thanks very much, James. And we welcome all of you to our call this evening. Beginning on slide 3, you’ll see some themes that are particularly applicable to Zions in recent quarters as well as some that are likely to be prominent over the near-term horizon. First, our balance sheet, which is supported by a, what we think is a very high quality deposit base has benefited from rising rates, resulting in growth of net interest income, exclusive of the contribution from PPP loans of more than 40% over the year-ago quarter and 30% when including PPP income that had a substantial positive impact a year-ago, but very little effect in the current quarter.
Our deposit cost increased modestly from the prior quarter and remains among the lowest of banks within our peer group. Exclusive of PPP, period-end loans increased $1.8 billion or 3.4% on annualized during the quarter. We’ve achieved strong loan growth, while maintaining the same underwriting standards that have allowed Zions to outperform most of our peers in several key credit metrics over the past decade. We’ve restrained growth in categories that are more likely to experience higher loss rates in a recessionary environment. We continue to believe the effects of higher rates and likely a slowing economy will slow portfolio growth over the next few quarters to a rate that is moderately increasing for the full-year 2023.
The next theme is balance sheet flexibility. We have a loan-to-deposit ratio of 78%, whereas prior to the pandemic, we were running in the 85% to 90% range. We anticipate some further reduction in deposits combined with continued albeit more moderate loan growth, moving us closer to our historical loan-to-deposit ratio range. As we’ve noted in prior earnings calls, our strong liquidity position coming into this cycle afforded us the luxury of being able to prioritize the quality of deposits over quantity. This is reflected in our total cost of deposits, which at 20 basis points this quarter is among the very best of our peers.
We believe we are prepared should a recession materialize. Our pre-provision net revenue equaled and annualized 2.5% of risk-weighted assets. The combination of our regulatory capital and our allowance for credit loss is strong relative to the risk profile of our balance sheet. We note that over the past decade our net charge-off ratio, which has averaged a very modest 11 basis points over that period has been 75% better than the industry average, reflecting the derisking of the balance sheet we’ve frequently spoken off.
Turning to slide 4, we are pleased with the quarterly financial results, which are summarized on this slide, showing a linked-quarter comparison with the third quarter. Adjusted taxable equivalent revenue, net of interest expense increased about 8% relative to the prior quarter and adjusted pre-provision net revenue increased 20%. Those growth rates are not annualized. Our credit quality is strong and loan growth was solid. We continued to experience deposit attrition as we’ve allowed our liquidity to come back into a more normal range and Paul will spend some additional time on that item. One thing to note on this slide is that we have updated the calculation of tangible common equity to exclude the impact of accumulated other comprehensive income or AOCI.
As you are likely aware, GAAP accounting works to fair value through the equity account the portion of the securities portfolio held as available-for-sale, while not recognizing changes in the market value of other balance sheet items, including deposits. As a result, this accounting treatment doesn’t fully reflect the economics of the business. So, we’ll be showing return on tangible common equity and any other measures such as tangible book-value per share that incorporate tangible common equity as adjusted for the volatile impact of AOCI. This also reflects how we use such measures internally. For example, one of our incentive compensation arrangements are profit-sharing plan uses such a measure and we’ve adjusted our calculations so as not to produce a payout based on unrealistically high profitability.
Moving to slide 5, diluted earnings per share was $1.84. Comparing the fourth quarter quarter to the third quarter, the single most significant difference was the improvement in revenue, driven by the effect of interest rate changes on earning assets and continued strong performance from customer-related noninterest income. The provision for credit loss contributed $0.14 per share positive variance compared to last quarter, as can be seen on the bottom left chart. In both quarters, the allowance increased about 5 basis points relative to loans outstanding. But in the fourth quarter, we recognized net loan recoveries instead of net charge-offs.
Turning to slide 6, our third quarter adjusted pre-provision net revenue was $420 million. The adjustments which most notably eliminate the gain or loss on securities are shown in the latter pages of the press release and this slide deck. Within the PPNR chart, the top portion of each column denotes the revenue we’ve received from PPP loans net of direct external professional services expense. These loans contributed only $2 million to PPNR in the fourth quarter. Exclusive of PPP income, we experienced an increase in adjusted PPNR of 71% over the year-ago period.
With that high-level overview, I’m going to ask Paul Burdiss, our Chief Financial Officer, to provide additional detail related to our financial performance. Paul?
Paul E. Burdiss — Chief Financial Officer
Thank you, Harris. Good evening, everyone. Thanks for joining us. On slide 7, a significant highlight for us this quarter was the strong performance in average loan growth. Average non-PPP loans increased $1.9 billion or 3.6% when compared to the third quarter. Areas of strength included commercial and industrial loans, residential mortgage and term commercial real estate as can be seen in the appendix on slide 30. The yield in average total loans increased 64 basis points from the prior quarter, which is primarily attributable to increases in interest rates.
Deposit costs increased during the quarter, but remain low. Shown on the right, our cost of total deposits rose to 20 basis points in the fourth quarter from 10 basis points in the third quarter. Our average deposits declined $3.2 billion or 4.1% linked-quarter. For deeper insight into deposit volume changes, please turn to slide 8, where we break down our deposits by size. As shown here, most of our deposits come from relationships holding less than $10 million on our balance sheet. The 20202 decline in deposits came primarily from larger balance accounts. What is not shown on this page is the operational nature of our deposit accounts. We believe that deposit accounts, which are used frequently, accounts which record many inflows and outflows are stickier and less rate-sensitive than other deposits due to their operational nature.
Likewise deposits invested for yield, including many of the deposits over $10 million shown on this page are by definition more rate-sensitive. Our operating account balances were relatively stable through 2022, with a slight decline in the fourth quarter compared to the third, which we believe reflects the rising value of deposits as interest rates have increased. The increase in benchmark rates and the widening differential and our deposit rates paid when compared to other investment products created an opportunity for us to have conversations with our more rate-sensitive customers to discuss off-balance sheet products designed for larger and/or less operational deposits.
A net 47% of the full-year 2022 deposit attrition moved into our off-balance sheet suite of products. This served to maintain the relationship with the customer, while keeping deposit costs well-managed. Looking ahead, the increasing value of deposits will lead us to adjust our deposit rates accordingly, as rate remains the primary lever to attract funds which are less operational in nature. While this will impact our cost of funds, we are confident that the nature of our deposit portfolio including the proportion of non-interest bearing demand deposits to total deposits will allow us to keep our overall cost of funds relatively low.
Moving to slide 9, we show our securities and money market investment portfolios over the last five quarters. The size of the securities portfolio declined slightly versus the previous quarter, but as a percent of earning assets, it remains about 9 percentage points more than it was immediately preceding the pandemic. The most significant change to the portfolio this quarter was the movement of funds from the available-for-sale accounting classification to the held-to-maturity classification. The value of this movement was nearly $11 billion of fair value and $13 billion of amortized cost.
This accounting reclassification effectively freezes $1.8 billion of an unrealized loss recorded in accumulated other comprehensive income, which will amortize over the remaining life of the bonds and which will limit the impact on reported accumulated other comprehensive income due to changes in interest rates. We anticipate that money market and investment securities balances combined will continue to decline over the near-term, which will create a source of funds for the rest of the balance sheet. Our revenue is primarily balance sheet driven. This quarter, 82% of our revenue is from net interest income.
Slide 10 is an 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 reflects the benefit of both loan growth and higher interest rates, while the net interest margin in the white boxes, largely reflects the impact of the rising interest-rate environment on earning yields combined with our ability — earning asset yields combined with our ability to contain funding costs. The right-hand chart on this page shows the linked-quarter effect of certain items on the net interest margin.
Overall, earning asset yield improved 64 basis points, while the cost of interest-bearing funds increased 61 basis points, reflecting a 3 basis point expansion in our interest rate spread. However, nearly half of our earning assets are funded with noninterest-bearing sources of funds. Therefore, the 3 basis point expansion in interest rate spread is augmented by an increase of 26 basis points in the value of noninterest-bearing funds in the higher interest-rate environment. These factors combined to produce a 29 basis point expansion in the net interest margin in the fourth quarter when compared to the third quarter.
Slide 11 provides information about our interest rate sensitivity. As a reminder, we have been using the terms latent interest rate sensitivity and emergent interest rate sensitivity to describe the effects on net interest income of rate changes that have occurred as well as those that have yet to occur as implied by the shape of the yield curve. Importantly, the balance sheet is assumed to remain unchanged in size in these descriptions. Regarding latent sensitivity, the in-place yield curve as of December 31, which was notably more inverted than the curve at September 30, will work through our net interest income over time.
The difference from the prior periods disclosures of latent sensitivity is the shape of the curve and the accelerated pull-through of net interest income growth, which was attributable in part to our lower-than-expected deposit and funding beta. As we begin to increase our deposit rates to reflect the increased value of money and the limited rate movements we have reported so far, our modeling would now estimate a deposit beta of approximately 18% compared to the beta of 5% observed cycle to date. Therefore, given the model increase in interest expense and using a stable side balance sheet, the latent sensitivity interest rate risk measure indicates a decline in net interest income of about 1% in the fourth quarter of 2023 when compared to the fourth quarter of 2022.
Regarding emergent sensitivity, if the December 31, 2022 forward path of interest rates were to materialize and using a stable sized balance sheet, the emergent sensitivity measure indicates a decline in net interest income of about 2% in the fourth quarter of 2023 when compared to the fourth quarter of 2022. Again, this change in outlook can be traced to strong recent net interest income performance and the inverted interest rate curve. With respect to traditional interest rate risk disclosures, our estimated interest rate sensitivity to a 100 basis point parallel interest rate shock using a same sized balance sheet has declined by about 2 percentage points from the third quarter and about 10 percentage points from the beginning of the year.
As rates have risen and downside risks to net interest income has increased, we’ve been moderating our asset sensitivity, primarily through interest rate swaps, while generally maintaining customer operating deposit balances and allowing certain rate sensitive deposits to decline. The reported change in interest rate sensitivity this quarter largely reflects the recent decline in deposits and a higher net interest income denominator. As a result, this traditional interest rate risk disclosure represents a parallel — as a reminder, sorry, as a reminder, this traditional interest rate risk disclosure represents a parallel and instantaneous shock, while the latent and emergent views reflect the prevailing yield curve at December 31.
Our outlook for net interest income for the full-year of 2023 relative to the full-year 2022 is increasing. While there will be seasonality along the way with fewer days in the first half of the year for example, we expect that by the fourth quarter of 2023, including the latent and emergent sensitivity as well as an expected increase in loans, net interest income will be modestly higher than that reported in the fourth quarter of 2022.
Moving on to noninterest income and total revenue on slide 12, customer-related noninterest income was $153 million, a decrease of 2% versus the prior quarter and an increase of 1% over the prior year. As we noted last quarter, we modified our non-sufficient funds and overdraft fee practices near the beginning of the third quarter, which has reduced our noninterest income by about $3 million per quarter. Improvement in treasury management fees has allowed us to make up the loss of that revenue. Our outlook for customer-related noninterest income for the 2023 full-year is moderately increasing relative to the full-year 2022 results.
On the right-side of slide, revenue which is the sum of net interest income and customer-related noninterest income is shown. Revenue grew by 24% from a year-ago and when excluding PPP income, it grew by 32% over the same period. Noninterest expense on slide 13, decreased 2% from the prior quarter to $471 million. The reduction is primarily due to a net decrease of certain incentive compensation items within salaries and benefits. The total of the remaining expense categories remained relatively flat to the third quarter. We continue to feel the influence of inflation and expect to continue to hire additional staff to support growth. We reiterate our outlook for adjusted noninterest expense to increase moderately for the full-year of 2023 relative to the full-year of 2022.
Another highlight for the quarter was the continued strong credit quality across the loan portfolio as illustrated on slide 14. Relative to the prior quarter, we saw continued improvement in the balance of criticized and classified loans. Recoveries from balances previously charged-off led to a net recovery of 2 basis points of average non-PPP loans in the fourth quarter compared to a loss of 21 basis points in the prior quarter. Notably, our nonperforming asset ratio and classified loan ratio continue to improve and are at very healthy levels.
Slide 15 details the recent trend in our allowance for credit losses or ACL over the past several quarters. At the end of the fourth quarter, the ACL was $636 million, a $46 million increase from the third quarter. The linked-quarter ACL increase can be ascribed to loan growth and weakening economic forecast. The reserve ratio to total loans was up 5 basis points from the prior quarter to 1.15% percent of non-PPP loans. Our ACL will continue to reflect the size and composition of our loan portfolio and evolving macroeconomic forecast.
Our loss-absorbing capital position is shown on slide 16. We believe that our capital position is aligned with the balance sheet and operating risk of the bank. The CET1 ratio grew slightly in the fourth quarter to 9.7%. Although, CET1 — the CET1 ratio remained really relatively flat, I’d like to point out the significant amount of earnings retained over the past year. The balance of common equity Tier 1 capital grew by over $400 million or 7% in 2022. However, risk-weighted assets during the year grew by $7.5 billion or 13%, primarily driven by loan growth.
We repurchased $50 million of common stock in the fourth quarter and $200 million for the year. As a reminder, share repurchase and dividend decisions are made by our Board of Directors and as such, we expect to announce any capital actions for the first quarter in conjunction with our regularly scheduled board meetings this coming Friday. Our goal continues to be — continues to maintain a CET1 capital ratio slightly above the peer median, while managing to a below average risk profile.
Slide 17 summarizes the financial outlook provided over the course of this presentation. This outlook represents our best current estimate for the financial performance in full-year 2023, as compared to actual results reported for the full-year 2022. This is a change from our historical approach where we traditionally provide an outlook for a single quarter one year out. We plan to return to that approach when reporting financial performance over the remainder of the year.
This concludes our prepared remarks. Joe, would you please open the line for questions.
Questions and Answers:
Operator
Yes. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] From the line of Manan Gosalia with Morgan Stanley. Please proceed.
Manan Gosalia — Morgan Stanley — Analyst
Hi, good afternoon.
Harris H. Simmons — Chairman and Chief Executive Officer
Hello.
Paul E. Burdiss — Chief Financial Officer
Hi.
Manan Gosalia — Morgan Stanley — Analyst
Question on the NIM trajectory. It looks like the guide is implying a sizable decline in the near-term with the recovery in the back-half. Can you maybe talk about your assumptions and the puts and takes there?
Paul E. Burdiss — Chief Financial Officer
Yeah, this is Paul, I’ll start. I’ll characterize it this way. Our deposit beta so far through the cycle as I noted in my remarks is about 5%. Our expectation is that our deposit beta based on past history and our modeling is going to have to be closer to — through the cycle of 18% over the next year or so to match our modeled result. And so inherent in our outlook is an acceleration of deposit pricing and in fairness, this may or may not come to fruition but that it’s — the nature of forward-looking view is that there’s a lot of uncertainty involved.
Manan Gosalia — Morgan Stanley — Analyst
Got it. Okay. And maybe on the rate-sensitive deposits, last quarter you mentioned there is about $5 billion or so of those deposits that could flow out. Can you give us an, an update on those numbers and maybe what portion of the deposit decline this quarter was attributable to those rate-sensitive deposits? Thanks.
Paul E. Burdiss — Chief Financial Officer
I would say, it’s very hard for me to ascribe specifically, sort of the categorization of deposits. The point that I was trying to make last quarter was that it did feel like, given where rates were on our balance sheet versus market rates, there was a sort of increasing pressure we could see on rate-sensitive deposits. We clearly saw some of that flow through in the fourth quarter, but it would be very difficult for me to specifically ascribe sort of how much of that related to that specific comment.
Manan Gosalia — Morgan Stanley — Analyst
Got it. Thank you.
Paul E. Burdiss — Chief Financial Officer
Thank you.
Operator
Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed.
Ebrahim Poonawala — Bank of America — Analyst
Hey, good afternoon. I guess, maybe or just, Paul following-up on the deposit beta guidance 18% implies about 90 basis points to 1% for total cost of deposits at a 5.5% Fed funds. I’m just wondering when you think about acceleration in deposit costs, have you seen that over the last few weeks or months? I’m just trying to handicap is that guidance conservative or is there a risk to the upside in terms of where things might go if the Fed ends up holding on to rates for much longer at those levels? So, would appreciate any color in terms of what you’ve seen around deposit pricing over the last few weeks or last few months.
Paul E. Burdiss — Chief Financial Officer
Sure. So, I’ll start with that and ask Harris or Scott to join in. Where we’ve seen the pressure is not necessarily on the rate, it’s been in the volume, which kind of implies that there is a rate element attached to that. The 18%, to be clear, well, it’s a very precise number as implied that sort of a model number based on our experience and it’s intended to capture sort of our best estimate of where deposit rates could be. But to your point, yeah, this is kind of a day-by-day challenge, we’re constantly managing the balance between the rate paid and maintenance of the very valuable deposit franchise on the balance sheet. So, I would love to be able to tell you that it was very conservative or otherwise, but it’s it’s — frankly, it’s based on history and based on our models, it’s our best estimate of where we think deposit rates are expected to go.
Harris H. Simmons — Chairman and Chief Executive Officer
I’d only add, I mean, this is my own view is that to the extent that the Fed moderates the rate of increase in interest rates that is helpful, likely to be helpful and that it probably allow us to — I will still have to do some catching up, but I think it’s going to be little easier to do without the kind of aggressive hikes that we’ve seen in the last couple of quarters.
Ebrahim Poonawala — Bank of America — Analyst
And I guess maybe just another one on — around rates on slide 28, layout the swap maturities. Any sense of any additions that you plan to make? I guess now looking on the other side, protect them if we hit rate cuts? Just what is the thought process around that?
Paul E. Burdiss — Chief Financial Officer
Yeah, so our strategic ALCO, we meet regularly to discuss our interest-rate risk positioning and the use of swaps in managing that. I would say over the course of last couple of quarters, our interest rate sensitivity has been driven more by deposits than by things that we’re doing in the derivatives market. So right now, we’re pretty close to balance from an interest rate risk perspective. So looking ahead, I think it will be a function of loan and deposit growth that is what will be the key driver of our swaps strategy.
Ebrahim Poonawala — Bank of America — Analyst
Got it. Thank you.
Paul E. Burdiss — Chief Financial Officer
Thank you.
Operator
Our next question comes from the line of John Pancari with Evercore ISI. Please proceed.
John Pancari — Evercore ISI — Analyst
Good afternoon.
Paul E. Burdiss — Chief Financial Officer
John.
John Pancari — Evercore ISI — Analyst
On the — regarding your outlook for NII, you indicated that the change in your view reflects both the shape of the yield curve, as well as the pull-through of NII growth. Maybe can you help kind of parse that out? How much of the change was attributable to the shape of the curve? Any incremental inversion that we’ve seen versus the pull-through of the NII growth?
Paul E. Burdiss — Chief Financial Officer
I’ll characterize it this way. If you go back a couple of quarters, we were showing latent and emergent sensitivity, if I remember correctly, of about 15% and 8% for 23% total. That was sort of a one year out view of changes in net interest income related to rate and then we provided an update to that in the third quarter. If you work through that and do the math, you’ll see that the net interest income that we just reported feels like it came much faster than those models would have predicted kind of, three to six months ago.
And so what we’re saying is that the pull-through has been stronger-than-expected. Some of that’s loan growth, but a lot of it has been related to deposit pricing. We need to maintain some fidelity to our modeling, which is why we have a forward-looking view that incorporates kind of more aggressive deposit rates. But based on recent experience, what that means is that we’ve been able to achieve a lot of the rate — the value of the rate increases more quickly than expected. That’s one part of that.
The other is the shape of the curve has changed dramatically in the last three to six months. And as you know, we’re looking — where we’re looking at a fairly positively shaped curve six months ago, the yield curve after about what two years is inverted now. So, what we’re looking at now is much less expectation of rate increase with a little more pronounced fall on the back-end. And so all of those things are shaping our view on net interest income.
John Pancari — Evercore ISI — Analyst
Okay. Great. Thanks, Paul. And then separately on — also on the rate front, the noninterest-bearing deposit mix sitting around 50% of total deposits currently. Where do you see that trending and then separately, if you could just discuss any other actions that you can foresee that perhaps lessen your asset sensitivity as you’re starting to factor in Fed cuts in the back-half of this year?
Paul E. Burdiss — Chief Financial Officer
Our proportion of noninterest-bearing to total deposits at just over 50% is in my opinion, kind of, remarkably high given the change, the rapid change in interest rates and historical levels. So, it would be very difficult for me to predict that, that would increase that is to say that we will be growing noninterest-bearing deposits faster than interest-bearing deposits, but nonetheless, striking that right balance between the rate we’re paying on interest-bearing funds and the ability to maintain those operating noninterest-bearing deposits is kind of, a key part of what we do every day.
The stickiness as I tried to describe in my prepared remarks around those DDA, those operating accounts, really has to do with the granularity and the operating nature of those accounts. And so we have a long history, a decades-long history of a very solid proportion of noninterest-bearing deposits to total deposits and I think that will continue, but it’s based on the nature of the accounts, the nature of customers we have.
John Pancari — Evercore ISI — Analyst
Okay, great. Thank you.
Paul E. Burdiss — Chief Financial Officer
Thank you.
Operator
Your next question comes from the line of Chris McGratty with KBW. Please proceed.
Chris McGratty — KBW — Analyst
Great, thanks. Obviously, the deposits are going to drive the size of the balance sheet. But if you look back Paul, securities pre-COVID were around little over 20% of earning assets. Is that kind of where we’re going to get to when the unwind of COVID fully plays out in your opinion?
Paul E. Burdiss — Chief Financial Officer
The key measure of liquidity that we utilize is liquidity stress testing. So, not unlike our capital stress testing models, we have liquidity stress testing models. And I would say inherent in that are assumptions around behavior deposits and drawdowns on commitments and sort of those things that can impact ultimately liquidity. So, based on all of that, very long answer to your question, which is probably requires a shorter answer is that, that proportion that you saw pre-pandemic with respect to the investment securities as a store house of on-balance sheet liquidity relative to total assets is approximately where we would get to all other things equal.
Chris McGratty — KBW — Analyst
Okay. Great. And then I noticed more disclosure in the back on the office portfolio, which is great. Maybe just help us how you’re thinking about where risk in the portfolio lies in ’23, the highest risk kind of, one, two and three? Thanks.
Harris H. Simmons — Chairman and Chief Executive Officer
I think will turn that over to Michael Morris, our Chief Credit Officer.
Michael Morris — Executive Vice President and Chief Credit Officer
Thanks for the question, Chris. The biggest I guess the issue that we have are what we call repositioned assets where we’re waiting for some lease-up assets were bought cheaply and that absorption hasn’t followed through COVID. So, that’s a segment of office that we’re watching. We’re also thinking about it. Strategically, we’re looking down the road, we’re asking how will office be positioned. And will there be less office but more space. We’re looking at all kinds of variations of what office will look like. We have a pretty substantial suburban office mix, which has held up well. Central Business District office isn’t something we’re big into, you won’t see us in trophy buildings around the West and inside of our footprint, but we’re very cautious around the asset class right now.
Chris McGratty — KBW — Analyst
Okay, great. And maybe just on the tax rate, any thoughts going into ’23? Thanks.
Paul E. Burdiss — Chief Financial Officer
On the effective tax rate?
Chris McGratty — KBW — Analyst
Yeah, that’s right. Thanks, Paul.
Paul E. Burdiss — Chief Financial Officer
I don’t see a big change from what we reported in for the full-year ’23 or starting point in ’22.
Chris McGratty — KBW — Analyst
Great. Thank you.
Paul E. Burdiss — Chief Financial Officer
Thank you.
Operator
Our next question comes from the line of Peter Winter with D.A. Davidson. Please proceed.
Peter Winter — D.A. Davidson — Analyst
Thanks. So, credit has been outstanding. I was just wondering how you’re thinking about net charge-offs in ’23? And then secondly, if we’re at the appropriate ACL ratio just assuming no change in the economy?
Harris H. Simmons — Chairman and Chief Executive Officer
Well, I’m going to start with it, on the ACL, we think what’s appropriate, place having just certified that. I mean, we the process we go through I think it’s pretty comprehensive and we think it reflects the risks that is there today.
Michael Morris — Executive Vice President and Chief Credit Officer
I would say on the net charge-off front, this is Michael, if you look at historical run-rates and you look at the last couple of years, we’ve also been I think really fortunate. And how long that good fortune last is something that we could all speculate about. But I think we have the right credit infrastructure to continue to manage net charge-offs. Well, we get good recoveries. We have a great back-office special asset group that goes after charged-off loans aggressively and — but it’s hard to say that we can keep net charge-offs as low through what is anticipated to be potentially milder recession forthcoming.
Scott J. McLean — President and Chief Operating Officer
This is Scott McLean. I would just add to that. I think the other thing you just have to look at where do you think risk is really going to come from in a decline. And we’ve said pretty consistently that it’s probably going to come in consumer unsecured. We don’t have hardly any consumer unsecured. It’s probably going to common in construction loan portfolios. And our construction portfolio is about 20% of total CRE. The rest of our CRE is term, which is — those are stabilized cash flows with low loan-to-values. Third place, my comment land portfolios, we have very little land.
So, I think those are areas, leverage finance is another area that gets brought up. That’s not really disclosed, although we think Moody’s is going to do a report on that sometime in the first half of the year and we think as we did last time they did one, we’ll probably compare favorable to our regional bank peers. So, it’s it’s kind of like where do you think it’s going to come and do we have that. And the answers are we’re positioned pretty conservatively.
Peter Winter — D.A. Davidson — Analyst
Got it. And then Paul, if I could just ask about maybe the outlook for deposit growth this year, or maybe do you think it would stabilize in the second half of this year?
Paul E. Burdiss — Chief Financial Officer
Yeah. As I said, the key lever for deposits in this environment I think is rate. And so I’m not — it’s very difficult to predict deposit balances because ultimately it’s highly dependent on customer behavior. But I certainly would expect us to strike maybe an improved balance between rate and volume over the course of the next year. When we consider the alternative cost of funds, our all-in cost deposits at 20 basis points is fantastic, but it also as Harris said in his opening remarks, we are in a position with a lot of flexibility in our balance sheet. And we feel like there are many levers that we could pull to change the deposit growth profile.
Peter Winter — D.A. Davidson — Analyst
Got it, thank you.
Paul E. Burdiss — Chief Financial Officer
Thank you.
Operator
Your next question comes from the line of Ken Usdin with Jefferies. Please proceed.
Ken Usdin — Jefferies — Analyst
Hey, thanks. I wanted to bring together all the kind of pieces of NII. Your outlook is still talking about 4Q ’23 to 4Q ’22 slight increase. And I’m just wondering, Paul, what’s the power of through point, right? You’re talking about betas increasing, you’re taking out more borrowings, securities are coming down. So, we’ve got the loan growth and I guess, maybe it’s the front book repricing. Can you help us kind of understand what are the positives that offset some of the things that you’ve spoken to already that would get that NII up on a year-over-year basis looking out to 4Q ’23?
Paul E. Burdiss — Chief Financial Officer
The key — look, couple of key items would be the leverage inherent in our deposit book, as I said, our ability to maintain a very favorable cost of interest-bearing funds, in addition to maintaining that book of noninterest-bearing deposits. Reported in our comments, the majority in my way of thinking, the majority of our net interest margin expansion this quarter really had to do with the stability and the value of those noninterest-bearing deposits. So, our ability to hold on to those is really important as is loan growth, which which we talked about. There’s a lot of uncertainty in the economic environment. The inversion of the yield curve is not a positive for us and for many banks. And so, if rates kind of stabilize, if that inversion starts to go away, if we get a decent deposit growth and we really hope are able to hold the line on both volume and rate with respect to our deposits, those are all incrementally helpful.
Ken Usdin — Jefferies — Analyst
Okay. The prefunding point makes the most sense to me on that. And can you talk us about just loan betas and loan repricing? Like, how does that pull-through from here and how would you put that in context with your — with the beta commentary on the deposit side? Thanks.
Paul E. Burdiss — Chief Financial Officer
Well, we still have a page in here. Don’t know if you still have it, James back in the appendix, but there is about a little less than half of our loans ex swaps repriced within the first three months and then after that, you see some repricing out along the curve. And so to the extent that rates stabilize, you’ll see that rate repricing continue to occur. But as we think about deposit beta, I think oftentimes people are really thinking about the short-end part of the curve and the short-end part of that repricing. And as I said, it’s kind of between 40% and 50% of our loans will reprice within three months of a change in the base rate.
James Abbott — Senior Vice President, Director of Investor Relations
Slide 27, for those of you on the call and have access to the slide deck is that schedule that Paul was referencing. And there is a lag as we’ve talked about historically, that that lag, if you actually look at if you look at what the yield is on loans in the fourth quarter of ’22 versus the average benchmark rates in the third quarter of ’22, you’re going to get about a 45% loan yield beta. And that’s the difference between just measuring it on the current quarter versus the current quarter. The problem with doing is it takes a little bit of time for the loans to catch-up to what’s happened with the benchmark rate, if that’s helpful.
Ken Usdin — Jefferies — Analyst
Yeah, great. Can I just ask one more, just on expenses, you said moderately off of what was a better year-end result here. Is that a pivot at all from comments that you guys had made recently about what the expected growth rate might look like in terms of your just — your expense growth outlook for ’23? Thanks.
Paul E. Burdiss — Chief Financial Officer
I wouldn’t call that a pivot. I think that it’s really difficult in inflationary environment and the environment for compensation. Just kind of changed the trajectory of noninterest expense, but we’ve been talking about that for several quarters and so I wouldn’t characterize that as a difference. What I will say is that the factors that are driving that are also driving interest rates to be significantly higher. And on a net basis, when we think about the funds or the revenue that drops to the bottom line, there’s positive operating leverage in that environment for us.
Ken Usdin — Jefferies — Analyst
Thank you, Paul.
Paul E. Burdiss — Chief Financial Officer
Yeah, thank you.
Operator
Thank you. Ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the call back to James Abbott for closing remarks.
James Abbott — Senior Vice President, Director of Investor Relations
Thank you, Joe, and thank you to all of you for joining us today. If you have any additional questions, please contact us at the email or phone number listed on our website and we look forward to connecting with you throughout the coming months. Finally, thank you for your interest in Zions Bancorporation and this does conclude our call today.
Operator
[Operator Closing Remarks]