Zions Bancorporation, National Association Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2021

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Zions BAM Corporation's 3rd Quarter 20 21 Earnings Results Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer and I would now like to turn the conference over to your host, Mr. James Abbott. You may begin.

Operator

18.

Speaker 1

Thank you, Towanda, and good evening, everyone. We welcome you to this conference call to discuss our 2021 Q3 earnings. I 20. 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 20.4, the slide deck on Slide 2 dealing with forward looking information and the presentation of non GAAP measures, which apply equally to statements made during this call.

Speaker 1

And a copy of the earnings release as well as the slide deck are available at zionsbancorporation.com. For our agenda today, 20. Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks followed by comments from Scott MacLean, our President and Chief Operating Officer. And 2017. Paul Burdes, our Chief Financial Officer, will conclude by providing additional detail on Zions' financial condition.

Speaker 1

And with us also today are Keith Myo, our Chief Risk Officer and Michael Morris, our Chief Credit Officer. We intend to limit the length of this call to 1 hour. And

Speaker 2

and

Speaker 1

Q3. With that, I will turn the time over to Harris.

Speaker 3

18. Thanks very much, James. We want to welcome all of you to our call. Beginning on Slide 3, The themes that are particularly applicable to Zions, both recently as well as we believe in the near term horizon listed here. We are seeing continued strong deposit growth continued in the 3rd quarter.

Speaker 3

It's positioned Zions well relative to many of our peers to be able to invest in securities and offer promotions on loan products and core customer segments. Secondly, for more than a decade, we worked to position the company to perform very well during an economic downturn. We're Really pleased with the results which you see in our credit outcomes again this quarter. 3rd, we along with most of the industry have experienced net attrition of loan balances excluding PPP loans. 18.

Speaker 3

But over the last quarter, we started to see some new commercial loan growth and our strong deposit growth enabled us again to and launched some promotional campaigns in June that have resulted in favorable initial results. These customers are coming from other banks and we've also 18.2% of revenue from existing customers. All of it is accretive to net interest income relative to leaving the liquidity and money market accounts and all of

Speaker 2

it is helpful

Speaker 3

eighteen. We're well positioned for rising interest rates, which is helped by and strong deposit growth that also reflects the careful deployment of liquidity during earlier more uncertain points in time. As the outlook becomes more certain, we have begun and beyond. The final item on this slide refers to our ongoing significant investment in technology, which and well established community banks. Turning to Slide 4, we are pleased with the results on most fronts.

Speaker 3

2019. Our campaigns on owner occupied commercial loans as well as consumer home equity lines of credit resulted in strong growth in both categories, each increasing at an annualized rate exceeding 10% relative to the prior quarter. Excluding PPP loans, and 29.3%, moderately outpacing the growth in the industry, which includes all domestic commercial banks. Over the prior year, deposit growth was 16 percent, which compares to the industry's rate of 12%. It is particularly notable that credit quality and 2020.

Speaker 3

Continued to improve, again reporting net loan recoveries and a nearly 30% decline in special mention loans from the prior quarter. And 2017. These along with other factors led to a further release of loan loss reserves. We indicated last quarter That we would continue to increase the size of the securities portfolio at a rate greater than what we did in 2020. And in the 3rd quarter, We increased the size of the securities portfolio by nearly $2,300,000,000 or 12%, and that's not annualized.

Speaker 3

That's relevant and prior quarter. Diluted earnings per share decreased to $1.45 per share from $2.08 in the prior quarter. There were 2 primary factors that accounted for the decline, the change in the provision expense and the change in the gains 18.5%. One way we and perhaps some of you look at our earnings is to look at adjusted pre provision net revenue, which excludes securities gains and losses And subtracting from that actual net charge offs. On that basis, it was unchanged relative the prior quarter of $290,000,000 Turning to Slide 5.

Speaker 3

At the top left is a chart and 2019 earnings per share results. The chart on the bottom left shows the per share amount for the provision for credit losses during that same period. 18. The provision's effect on earnings per share was quite variable throughout the pandemic and is a major factor in the linked quarter decline in earnings per share. 18.

Speaker 3

On the right side are some notable items that may be of interest. As previously noted, unrealized losses from securities less a partial offset from the reduced and 2017. Success fee accrual to the SBIC fund manager equaled $0.12 per share as compared to unrealized gains of $0.25 per share in the prior quarter. Most of the recent gains and losses on securities are attributable to an investment in small business investment company fund. 1 of the companies within the fund successfully completed an IPO in April, which we described in our Q1 10 Q, with a strong unrealized gain in the 2nd quarter followed by a partial retracement in the 3rd quarter.

Speaker 3

On Slide 6, we highlight the balance sheet profitability metrics. The healthy results were attributable to items that I've previously described. As previously noted, another significant highlight for the quarter was the credit quality of the loan portfolio as illustrated on Slide 7. Relative to the prior quarter, we saw further improvement in problem loans. Using the broadest definition of problem loans, criticized and 18%.

Speaker 3

Although not shown relative to the prior quarter, 20. Special mention loans declined at 29% and classified loans declined 10%. 2. Many of you have seen our slide in the past showing our average net charge off ratio relative to average nonperforming assets Plus 90 plus days past due loans, which is an indicator of loss severity. A 20.

Speaker 3

Chart of this metric relative to our peers can be seen in the appendix. During the 5 years ending 2020, our average annual loss 20.7%, while the peer median was 32%. Over the last 12 months, that ratio for Zions is just 6 percent. We experienced net credit recoveries on loans, which was also true in the prior quarter. Perhaps one of the more interesting credit measures to highlight this quarter is that gross charge offs were a very low $8,000,000 or just 7 basis points and annualized of average non PPP loans.

Speaker 3

Shown in the chart on the bottom right, one can see the volatility of the and quarter provision contrasted with the relative stability of net charge offs. This is mostly the result of changing economic forecasts. Our capital position is depicted on Slide 8. We increased our share buyback to $325,000,000 in the 3rd quarter and have indicated that ultimately We expect to target a common equity Tier 1 ratio at a level moderately above the peer median. We expect to announce any capital actions for the Q4 in conjunction with our regularly scheduled Board meeting this coming Friday.

Speaker 3

2. Next, Scott McLean, our President and Chief Operating Officer, is going to provide an update on the PPP program and our technology initiatives. Scott?

Speaker 4

Thank you, Harris. Turning to Slide 9. Our 3rd quarter adjusted and $90,000,000 net of the effects of the previously noted IPO. The PPNR bars are 20. The bottom portion represents what we think of as generally recurring income, while the top portion denotes the PPNR we've received 18 from PPP loans.

Speaker 4

During the course of the Paycheck Protection Program, our performance of producing on a relative basis and 3 times more than the industry average, will result in approximately $460,000,000 in additional income to the company, 21, which represents capital that ultimately benefits all shareholders. To be specific, PPP related revenue has equaled $380,000,000 and there remains $83,000,000 in capitalized income, net of origination costs that will be recognized over time. Although PPP related revenue will decline, we are enthusiastic about the longer term benefit of adding approximately 20,000 small business customers and strengthening relationships with 57,000 existing customers. Turning to Slide 10, Reflect some of the highlights from our 3x, 3x performance that I noted earlier. 6.5000000000 of applications or nearly 80% of the total volume.

Speaker 4

Dollars 6,700,000,000 It's been approved for forgiveness by the SBA and $3,100,000,000 of PPP loans remain 18.5% on our balance sheet at quarter end. Turning to Slide 11. This slide illustrates the longer term benefit Specifically, as a result of our outreach, you see growing relationships with many of the 77,000 and PPP participating customers. These customers collectively have contributed approximately $6,000,000,000 18.5% of our deposit growth and new non PPP loan balances exceed $550,000,000 to this collection of customers. 20.

Speaker 4

More specifically, of the PPP 2020 vintage, the spring 2020 vintage, 14,000 new to bank customers. Approximately 54% are now appear to be utilizing us as their primary For their primary operating accounts. This percentage, as we've noted previously, has been growing nicely each quarter 20. And we are seeing similar growth trends with the PPP 2021 vintage of 5,000 MediBank customers, which started earlier this year. Turning to slide 12, recall that in our investor presentations, and we provide a detailed slide of our major technology projects.

Speaker 4

Today, we want to just highlight 2. 18. Many of you may recall in April, FDIC Chair, Helena McWilliams was quoted as saying that her and number one concern for the banking industry was its reliance on aging core loan and deposit systems. 19. So where do we stand on this topic?

Speaker 4

As of February 2019, you'll recall that we completed the replacement 18 of our 3 legacy core loan systems and now have virtually all of our loans on our new modern core. 23, we expect to complete the final phase of our core modernization journey with a conversion from our legacy deposit systems 2, our new enterprise core system. To put this in perspective, a big four accounting firm recently reported And Zions is the only bank approaching the ability to utilize a modern core for the entire enterprise. And 2020. Interestingly, you were starting to hear about some digital first core systems.

Speaker 4

While these provide the most advanced architectural elements and 2020. We're generally designed for digital only banks. None have yet to be proven usable on a scale or complexity required by 18. So why does this matter? At a high level, implementation of one core solution and 2019.

Speaker 4

Across all lines of business, all products and all geographies greatly reduces complexity, 20. More specifically, the architecture is, as noted on this slide, and parameter driven, meaning we can quickly turn off and on or adjust features without reprogramming or testing for months. 18. This collection of characteristics and others will greatly reduce the time it takes to introduce new products and capabilities. 20.

Speaker 4

As an example, our new core was an important contributor to producing PPP revenue exceeding $460,000,000 Within a matter of days, We were able to introduce the PPP product and increase the number of business related loans on our system 18.50000 to over 95,000 with loan boarding occurring in minutes. Most would agree this represents a significant early return on our core replacement investment. As you talk to other banks, They will say that their older 1st generation core loan and deposit systems have been adapted to mimic real time, utilize API and synthesized dozen of data models. Well, we were doing that as well in our loan systems and continue to do that and 2020. But all of these technologies all of these technology gymnastics 6 months that take place generally in what is referred to as middleware absolutely introduce complexity, risk and cost.

Speaker 4

Regarding one additional highlight, I'd like to note that our core system's 7 day processing capability. Most of the world outside the United States operates on 7 day processing. When we implemented the loan portion of our new core, we adopted 7 day processing. However, as the U. S.

Speaker 4

Deposit market has still not adopted 7 day processing, we chose to convert back to 5 day processing 20. The point is that we were literally able to turn this This slide also conveys numerous other customer and employee facing benefits, which I'd be happy to expand on in Q and A. Turning to Slide 13, my last slide. While we have been highly focused on our industry leading work regarding core modernization, I wanted to highlight one of our numerous new customer facing capabilities. Earlier in the year, we converted 610,000 consumers to our new online mobile platform.

Speaker 4

While time does not allow us to review all the details of 18. We are gratified with the early acceptance by consumers as measured by ratings in the Apple App and Google App stores. You can see that we are on par with the largest U. S. Banks and are top tier with our peers.

Speaker 4

22. The rollout of this new online mobile system to approximately 150,000 small business clients will occur in 2022. 18. With that, I'll turn the remainder of the time over to Paul Burdiss, our Chief Financial Officer.

Speaker 2

Thank you, Scott, and good evening, everyone, and thanks for joining us. More than 3 quarters of our revenue is in the form of net interest income, which is significantly influenced by loan and deposit growth and associated interest rates. As such, I'll begin my comments on Slide 14 with a review of these results. 6. Although the average total loans were down in the 3rd quarter by 3.7% when compared to the 2nd quarter, we experienced average loan growth and on a period ended basis that growth was $661,000,000 or 1.4 18.

Speaker 2

The strongest linked quarter growth was in commercial construction at nearly $270,000,000 and this is the result of increased construction activity on previously established lines of credit. We reported strength in commercial and industrial loans, which increased $280,000,000 or 2%. We ran promotions during the quarter on owner occupied and home equity loans, Which increased $215,000,000 $107,000,000 respectively. Declines were reported in PPP loans $1,400,000,000 as Scott previously noted, and Term Commercial Real Estate, which declined more than $220,000,000 In the Q3, we reported a more modest decline in residential mortgage balances than we have in recent quarters, $1,000,000 down nearly $130,000,000 With a strong held for investment pipeline of mortgages, we may see some further stabilization 2 or possibly growth in residential mortgages in the near term. One final note on loan growth.

Speaker 2

20. Relative to periods prior to the pandemic, revolving line of credit utilization has declined several percentage points. 19. Using the Q3 of 2019 as the benchmark quarter, our revolving line utilization rate was 39.5% as compared to 23.7 percent in the Q3 of 2021, which was essentially from the prior quarter. 20.

Speaker 2

Although revolving loan balances did increase from the prior quarter, up about $200,000,000 the lending commitments increased about $700,000,000 As I've noted in the past, deposits have been and remain the driver of balance sheet growth over the past several quarters and in the 3rd quarter. On the right side of this page, Average deposits increased 3.7% from the prior quarter. Relative to the year ago period, average deposits increased 16%. Average non interest bearing deposits increased 4.9% over the prior quarter and 24% compared to the prior year period. And our non interest bearing deposits make up 1 half of average total deposits.

Speaker 2

The yield on average total loans increased slightly from the prior quarter, 1,000,000, which is attributable to the 6.7% yield on the PPP loan portfolio. Excluding PPP loans, the yield declined 8 basis and 8 points to 3.59 percent from 3.67%. Deposit costs remain low. Our cost of total deposits fell to 3 basis 20 points in the Q3. Moving to Slide 15, we show our securities and money market investment portfolios over the last 5 quarters.

Speaker 2

18. The size of the period end securities portfolio increased by nearly $6,000,000,000 over the past year to $21,000,000,000 18.7% has risen to nearly 40% of total earning assets at period end, which compares to an average level 2019 prior to the pandemic of 26%. We continue to exercise caution regarding duration extension risk 18.5% by purchasing bonds with relatively short duration, both in the current and in an upward shock rate shock scenario. The $3,600,000,000 of security purchases 20.5 percent. Slide 16 is an overview of net interest income and and Q3.

Speaker 2

The chart in the left shows the recent 5 quarter trend for both. The net interest margin in the white boxes has declined over the past year, eighteen, reflecting the rise in excess liquidity as described on the prior page. For the Q3, this growth in excess liquidity is referenced in the chart on the right 6.5% as the strong growth in deposits has impacted the composition of earning assets through a larger concentration in lower yielding money market and securities investments. And Q3. The weighted average yield of our securities and money market investments is just 1.07%.

Speaker 2

And with that concentration Increasing by 4 percentage points in the quarter, it weighed on the net interest margin. In fact, I estimate that the increase in money market investments Has accounted for 33 of the 45 basis point net interest margin compression over the past year. 18. Slide 17 shows information about our interest rate sensitivity. Focusing on the upper left quadrant as a general 18.

Speaker 2

Our asset sensitivity has increased as deposits have been invested in short term money market assets. This increase in estimated rate sensitivity assumes and 2020. That the incremental deposits have modestly shorter duration characteristics when compared to deposits on our balance sheet prior to the recent deposit surge. We are continuing to deploy deposit driven cash into securities, which helps to moderate and natural asset sensitivity. However, with continued strong deposit growth and higher prepayment rates on mortgage loans and securities, 18.

Speaker 2

Our estimated interest rate sensitivity was similar to the 2nd quarter level such that in an interest rate environment that is shocked immediately 100 basis points higher than the 18.5%. Our net interest income at the 12 month horizon is estimated to be higher by 12%. 6. As previously noted, we may continue to add interest rate swaps, including forward starting swaps, which would help to temper our natural asset sensitivity. 18.

Speaker 2

On Slide 18, building on a good second quarter, customer related fees increased an additional 9% and In the Q3 to $151,000,000 Notably, activity based fees such as card fees, merchant services and retail and business banking fees remained strong and have grown to the level of 2 years ago prior to the pandemic. This improvement added to continued strength in loan related, capital markets and Wealth Management Revenues. Non interest expenses on Slide 19 were essentially unchanged from the prior quarter at $429,000,000 and adjusted non interest expense increased 3% or $13,000,000 to $432,000,000 and quarter. The linked quarter increase in adjusted non interest expense was primarily due to employee compensation. The increase was associated with higher base salaries and profitability driven long and short term compensation.

Speaker 2

Other non interest expense includes a $4,000,000 success fee reversal and Q3. Slide 20 details our allowance for credit losses or 18. Slide 20 details our allowance for credit losses or ACL. In the upper left, we show the recent and 2019. Declining trend in the ACL to $529,000,000 at the end of the 3rd quarter or 1.11 percent of non PPP loans.

Speaker 2

And the chart on the lower right side of this page shows the 3 broad categories that resulted in a decline of $45,000,000 2. More than 60% of the change was attributable to changes in the portfolio mix and composition. Our updated outlook is found on Slide 21. And as a reminder, this is our outlook for financial performance in the Q3 of 2022 as compared to the actual results reported for the Q3 of 2021. The quarters in between are subject to normal seasonality and my comments are subject to our earlier reference and forward looking statements found on Slide 2.

Speaker 2

Due to the degree of uncertainty on the timing of customers submitting requests and the SBA approving those requests, and Q3. Our outlook for loan growth excludes PPP loans. We are more optimistic about loan growth now than we were in July and as such 2. We are increasing our outlook to moderately increasing from slightly to moderately increasing, led by core C and I, including our promotional 6.5% owner occupied loan product. We expect net interest income also excluding PPP loan revenue to increase over the next year and Q3.

Speaker 2

As compression of loan and security deals will be more than offset by continued deployment of cash into term securities and and more favorable outlook for growth in non PPP loans. The current quarter's customer related fees are the highest we have reported. And Q3. Building on such a strong Q3, we are reducing our outlook for customer related fees 1 year from now to be stable to slightly increasing 18. We are adjusting our expectation for adjusted non interest expense to be moderately increasing from and slightly increasing.

Speaker 2

We remain disciplined on expense control. However, increased business activity, emerging inflationary trends and continued investment in enabling technologies will place upward pressure on non interest expense over the near term. And finally, with respect to capital management, we remain comfortable that our philosophy of lower than average risk and and Q3. The Q3 is the 1st Tier 1 relative to risk

Speaker 5

weighted assets remains well above

Speaker 2

the peer median. As we consider the balance between capital ratios and our risk profile, We believe that we have capacity for continued active capital management in the near to medium term, so long as the current macro and economic and credit trends continue to be favorable. This concludes our prepared remarks. Towanda, please open the line for questions.

Operator

And 1st question comes from the line of Ebrahim Poonawana with Bank of America. Your line is open.

Speaker 6

Hey, good afternoon. I was wondering, Paul, if you could just unpack the NII guide a little bit, Just help us understand in terms of what are you assuming in terms of the how much cash you expect to deploy and 2020. Into securities over the next 12 months, where you see that liquidity levels going? And 2. Does the increasing imply 4% to 6% or somewhat higher in the high single digit range when you think about the growth year over year?

Speaker 2

Thanks. Yes. Sorry, I missed the second part of your question on 4% to 6%. What was that question?

Speaker 6

Yes. I was just Increasing, does that imply mid single digits or high single digits NII growth?

Speaker 2

Right, sorry. So first, let me talk about deposits, Because that's really the driver here, right? We have had deposits across the industry are up. I think we have We've been able to garner more than our fair share of deposits. And as we are analyzing these deposits over time, what we're finding 18.

Speaker 2

A year ago, I would have thought that these deposits were more transitory to borrow a word from the Fed than they're proving to be. What we're actually observing is that many of these new deposit accounts are being used in an operating nature, which history tells us 2. Means that they're more sticky than they otherwise would be. So this is what's giving us confidence to be, I don't want to say aggressive, but certainly buying more securities than we might otherwise would, I. E.

Speaker 2

Putting those deposit dollars To work. So as we're thinking about our net interest income outlook next year, and again, remember, This excludes PPP loans, right? So taking them out of the base and not considering them going forward. 2. We have increased confidence that loans loan growth will pick up.

Speaker 2

And so we're going to use part of the cash that way. And as that cash continues to prove to be somewhat stable, that is the deposits continue to prove to be somewhat stable, We will continue to deploy that in investment security. We our asset sensitive position is such that we can afford to continue to add duration 18. On the asset side, for some time to come without really adversely impacting, our risk profile. In fact, I would argue it kind of improves our risk profile as we reduce volatility.

Speaker 2

So it's those key factors. It's the continued deployment of securities and growth in loans That we believe will ultimately drive growth in net interest income over the course of the next year excluding PPP.

Speaker 6

That was helpful. And does that imply mid single digits or high single digits NII growth?

Speaker 2

18. Well, we have a tendency to not try to put dollars on it, but generally speaking, increasing would be 6? Mid to above mid.

Speaker 6

Got it. Thanks for taking my question.

Speaker 2

6. Yes, thank you.

Operator

Thank you. Our next question comes from the line of Dave Rochester with Compass Point. Your line is open.

Speaker 4

18. Good afternoon, guys.

Speaker 7

I was just wondering on the liquidity front, what the minimum cash level you want to hold 2, either as a balance or percent of assets. Just trying to figure out how much excess cash you think you have that you can deploy in the securities 6.

Speaker 2

Yes. So Dave, hey, so it depends on what we're assuming for deposits, right? Everything is centered around those. 18. As we gain confidence in those deposits, that amount of sort of cash we need to hold 6.5% for what I would characterize as a liquidity risk can go down.

Speaker 2

And what we're seeing is that, as I said, the stability of that cash 2. If you look back over time, you can see that it would not be uncommon at all for us to run with a sort of and cash position, I. E, the money market investments line on our balance sheet of kind of $2,000,000,000 to $3,000,000,000 And in fact, a year ago, that's where it was. So I wouldn't as we gain confidence in the stability of those deposits, I would expect And I should also add that there is an enormous amount of liquidity in our investment portfolio. So we're investing relatively short.

Speaker 2

What that means 20. We've got about $400,000,000 of cash flow every month that we're continuing to reinvest. So when we think about our cash position, it's not only cash on the balance sheet, But the cash flow that's turning through the investment portfolio. So a long way of saying that, 6. If you look historically, we have run with a cash position that's much, much lower than today.

Speaker 2

And over time, I would expect to get back to something closer to that. 6.

Speaker 7

Okay. And then just switching gears to the loans on the teaser rate products. Just curious where those rates are today, what they step up to and a year or so. And then what's your appetite is for total production there?

Speaker 8

How long do you think you're going

Speaker 7

to run those? Any details there would be great. Thanks.

Speaker 4

2. Yes. Thank you, Dave. This is Scott McLean. The home equity line of credit program we ran from June 1 to the end of August And that rate was 90 basis points for the 1st year and then it converted to 2.99% to the extent they were new loans Out to 10 years.

Speaker 4

The and similarly on the owner occupied program that also started June 1, and It's tentatively scheduled to conclude at the end of this year. That promotional rate was 90 basis points and it converts 20. Have each of our affiliates on a cycling basis and Keep that HELOC promotion alive. And likewise, if we get to the end of the year and the rate environment seems still very flat to stable, That both have generated and more than the loans that they've produced, it's given all of our bankers something really exciting to talk about 18. And so it's been a really good strategy for us.

Speaker 5

Yes. Okay, great. Thanks for all the color. Appreciate

Operator

it. Thank you. Our next question comes from the line of Peter Winter with Wedbush Securities. Your line is open.

Speaker 5

Thanks. I wanted to ask just two questions on the asset sensitivity. Can you just remind us what percentage of loans have floors and how many Fed rate hikes you need to go above those loan floors?

Speaker 2

James, do we still have that on the slide off the top of my head? I think Do you have it handy, James?

Speaker 1

Yes. I'll get it by the end of the call, Peter. It's $6,000,000,000 or $7,000,000,000 as I recall, but let me find the number really quickly.

Speaker 9

Okay. And

Speaker 1

it's only about 50 basis points or so in the money. So it's not a huge move. And I guess my final thought on that would be is it is incorporated in our interest rate sensitivity outlook. So as we Think about an up 100 scenario that is incorporated in that.

Speaker 5

Got it. And I'm just wondering about the deposit betas. I saw on the slide What your forecast is? I'm just wondering if the deposit betas come in lower. I'm I'm just wondering if there's any type of sensitivity analysis, just given how much growth you've had in non interest bearing deposits?

Speaker 2

Yes. Well, we certainly do a lot of sensitivity analysis and I think we have some in that we published quarterly in our 10 Q. 2. I think there's a couple of key assumptions in there. One is that the duration of the deposits that we've recently put on is actually a little shorter And the duration of sort of the, what I might call, the heritage portfolio of deposits.

Speaker 2

That's one point. And the other point is there's so much and liquidity in the market that we believe that when rates start to rise, we do not believe we will need to be very aggressive in raising rates, Perhaps less than historically, perhaps. And that feeds into our asset sensitivity.

Speaker 5

19.

Speaker 4

On the question about loans with floors, we have about 35,000,000,000 and about $24,000,000,000 These numbers Or not exactly at September 30, but about $24,000,000,000 have floors and the floors are generally

Speaker 5

20. Okay. Thanks, guys. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Jennifer Demba with Truist Securities. Your line is open.

Speaker 10

18. Thank you. Good evening. A question on the loan loss reserve, now down to 122 6 points of non PPP loans. Just wondering given the economy should continue to improve and Sounds like you're pretty confident your loan losses are going to stay pretty low.

Speaker 10

How much lower could that go?

Speaker 2

Hi, Justin. Go ahead, Curtis.

Speaker 3

Well, it sounds like a game of limbo. How long could you go? I think the very nature of CECL is we everything that we think About the future of that reserve is incorporated into it. But if we Look, if we saw a permanent I don't think that the what we're seeing right now in terms of credit quality, with you You mentioned gross charge offs coming in at 7 basis points is probably a sustainable or even where we should be. But if we found that we're just that losses are not materializing, then it will continue, I presume, to come lower.

Speaker 3

I don't think there's any There's no sort of arbitrary limit or threshold or anything of the sort. I mean, we're just doing our best every quarter to try to understand what future losses 2. Inherent in that portfolio can look like over the life of the underlying loans. So I think it's a tough question to answer, right? In theory, I think it can come lower.

Speaker 3

I'm not sure I would really expect it 18. Just given the nature of the portfolio and the times we're in.

Speaker 10

Thank you. Second question is on your lending pipeline. Could you just talk about the pipeline outside the promotions that you had during the quarter and what you're seeing in terms of demand right now?

Speaker 4

Sure, Deborah. This is Scott. As you think about the categories, Paul noted our utilization rate and on revolving credits. And I think it's reasonable to expect and that's just generally C and I credits principally, but it has some consumer and some CRE related to it. And I think our general thought is over the next 12 months, we'll see revolving usage start to go up again.

Speaker 4

I don't think we have to work through all this cash. 2. If you go back to the 2,008, 2009, the monetary easing ban, that liquidity fundamentally saved in the system and utilization rates. We're not overly burdened by that. So customers just got used to dealing with a higher level of liquidity.

Speaker 4

2. Secondly, I would say that our municipal finance business is continuing to go nicely. We're seeing Increases in other C and I pipelines related to larger transactions, syndications, etcetera. And CRE in general, I wouldn't look for CRE to grow faster than our portfolio grows, but CRE in general It has been growing nicely. And finally, one of the places where we've seen the most decreases in our portfolio has been in 1 to 4 family mortgages.

Speaker 4

And And based on the mix of that portfolio the mix of that pipeline, excuse me, we should start to see 1 to 4 family growing 18. Again, if you look back over the last 5 or 6 years before the pandemic, 1 to 4 family mortgage products were generally about 20% to 0.5 percent of our growth. And I don't think it's unreasonable to think that that will return as well.

Speaker 10

18. Thanks, Scott.

Operator

Thank you. Eighteen. Our next question comes from the line of Ken Usdin with Jefferies. Your line is open.

Speaker 11

19. Hi, thanks. Good evening. I just want to ask on capital. This quarter you guys did that the extra step up and still had room to grow loans.

Speaker 11

And you've talked to us about trying to get your CET1 ratio down over time Closer to peers and directionally. So I guess what's the trade off now if you're starting to see a little bit better loan growth with regards to How fast the pace of capital return could be in that kind of waiting or hoping or expecting the loan growth to come back in terms of RWA usage?

Speaker 2

18. We have a list of peers 18. And we remain sort of significantly above that median and Over time, as we have said, we expect to have lower than average risk eighteen. And therefore, we've got some room to go on that ratio. So my point of saying that is that we can absolutely absorb accelerating loan growth and continued share repurchases.

Speaker 2

But as a reminder, as Harris 2. Noted that that capital activity is subject to board approval.

Speaker 11

Okay. And then Scott, 2. Another good update on FutureCore and the timing. And I guess we're still all waiting for that Time period when you get that double spend out of the way. So how much closer are we to starting to sunset some of the older stuff?

Speaker 11

Is there are you still expecting cost to go up. So I'm just wondering the ins and outs in terms of the moderately increasing cost base that you're still expecting from here versus when do we really start to see some of those synergies from the platform. Thanks.

Speaker 4

Yes. Thank you for that question. Pretty similar to what we said during the Q3 and earlier in the year. The future core related P and L cost will actually be kind of flat to down a little bit next year. It should increase in 23 by about $7,000,000 to $10,000,000 over our current run rate Just because that is the implementation year and you'll generally see expenses go up because of accounting treatment there.

Speaker 4

And then in 2024, it'll drop about $10,000,000 So to kind of put a fine point on your question. I would, however, note that When you think about overall technology spend, and we've said this for a long time, I don't know that it's going to abate for many reasons. The investments that all banks 18. Need to make in cyber protection, the investments you have to make to be cloud ready and utilize the benefits of cloud, The investments you need to make around data, etcetera. And so I don't know that that's where you'll see it.

Speaker 4

Where I think you'll see it will be in operational expenses. And as we continue to see the benefits of the system, it will come in operational expenses, Not necessarily in technology spend.

Speaker 11

Got it. Thank you.

Operator

Nineteen. Thank you. Our next question comes from the line of Steven Alexopoulos with JPMorgan. Your line is open.

Speaker 12

6. Hey, everybody. In terms of my first question, Scott, responding to Jennifer's question, the one area that you didn't really touch on was energy, Which I'd imagine is you could probably get good risk adjusted returns given most banks are still restricting exposure there. It's a question.

Speaker 2

Do you guys have an appetite 20.

Speaker 12

For energy lending here, and are you seeing increased demand just given the surge in energy prices overall?

Speaker 4

The answer is yes and yes. If I can say that without being politically insensitive. The our energy loans outstanding are about 1,900,000,000 16. Right now, you'll recall that we got down to about this level after the 2015, 2016 and and then we were able to grow back up to about $2,500,000,000 and now we've Run back down to about $1,900,000,000 At these prices, which were predictable, for both oil and natural gas, We will start to see drilling increase and you will see line utilization going up 2. And there are far fewer players today.

Speaker 4

The and the market pricing has gone up on reserve based loans And credit quality structures have improved. They were not bad before, but they've become more conservative as the number of banks Globally and particularly in the U. S. Has shrunk by probably half that will do energy financing today, From kind of 25% to 30% down to sort of the mid teens. We'll continue to see both.

Speaker 4

Basically, the portfolio is about 40% and 45% upstream reserve based loans, which is what we specialize in, about a similar position about 40% for midstream and Smaller percentage around 15 for oilfield service. But Stephen, you're absolutely right. We will see growth there. We anticipate it. We're feeling it.

Speaker 4

And 2. To go back to $2,500,000,000 or slightly higher would not be an unreasonable expectation over the next year and a half.

Speaker 5

Okay.

Speaker 12

18. That's really helpful color. Separately, if I look at slide 13, Scott, can you give more color on what customers 20. So favorably that drove the increase in the App Store ratings? Thanks.

Speaker 4

Yes. That's a great question. It's when you look at it, well, first of all, our ratings were not and Not very favorable before. So they may be reacting to, hey, it just is a whole lot better. But they're ranking us on a level, as I said, Very close to the global banks, which are clearly terrific in this regard and top tier for our peer banks.

Speaker 4

And it really is the items Noted there. But we have a unified platform for online and mobile. That may sound kind of simple, but a lot don't. And it means that you have to constantly be synchronizing your online and mobile product. It's one platform for us now.

Speaker 4

The alerts option particularly are attractive when you think about fraud and the increase of fraud in our environment. And I would also note This is just the start for us. We can now push upgrades, new capabilities Daily, if we want. Okay. That's a huge difference from where we were.

Speaker 4

We can now push daily if we like. And we have a really 20. High punch list of enhancements that we didn't make part of the initial offering that we'll roll out over the next 12 months, Which we think will do nothing but support these favorable ratings and possibly increase them.

Speaker 12

Yes, we looked at it's pretty high across all of the sub banks too, pretty consistent there.

Speaker 13

Thanks for all the color.

Speaker 4

Thank you. Yes, it's basically an average. I don't think it's a weighted average. I think it's just an arithmetic average, but it's a little artistic as you can imagine. 18.

Operator

Thank you. Our next question comes from the line of John Pancari with Evercore.

Speaker 5

19. Good afternoon, guys.

Speaker 14

On the 18. Calling effort I mean on the calling, on the promotions effort around the home equity and the commercial real estate, are there Similar promotions or a similar sales push that, given the success of these promotions that you can

Speaker 2

and

Speaker 14

20. You also is there any consideration around you mentioned that syndicated lending has

Speaker 4

been picking up. Have you been evaluating your hold levels 2. On that front, just looking at different ways that

Speaker 14

you can capitalize on some of this improvement in demand that you're mentioning? Thanks.

Speaker 4

Just a quick I'll just give

Speaker 5

you a quick answer.

Speaker 3

John, I'd say that I don't think we're not going to allow it to get into our thinking about hold limits. Let me start there. I That's just a that's really an important kind of risk management consideration, not one that's we're going to let revenue drive. I'm comfortable with where our limits are, but I don't want to conflate how we use this liquidity 2. To justify taking on a lot more risk.

Speaker 3

I think the we may find ourselves looking at other opportunities 18. In terms of how we use promotional pricing, I think a big consideration is just Systemically, how we can support products, how we introduce pricing. 2. And some are simply easier because of the nature Of a fixed rate or a term deal where you know that it's going to be outstanding for a period of time. You can have a teaser rate for the 1st portion, but no, you're pretty confident that you're going to get a sizable annuity in the out years.

Speaker 3

That's not always true with some other loan types, which can be shorter term in nature and Little more challenging to manage in terms of making sure that ultimately this is going to provide some really solid benefit for us. So I appreciate the comment. It's something we should think about. But I think the couple of products So we've focused this on are probably the right ones at the present time.

Speaker 14

6. Got it. That's helpful. And then separately, Harris, just you've been discussing your capital optionality. And 2.

Speaker 14

I just wanted to see if we can get your updated thoughts around M and A. We've seen a number of your bank peers complete deals and there's been A bit of a race here to gain scale and then what's clearly a highly competitive space. So 2. Curious of your thoughts there as you look at potential M and A, either bank or non bank as well. Thanks.

Speaker 3

Yes. I think our thinking hasn't really changed relative to bank M and A. I don't 6. I think that you can win this race by just getting larger. Bigger isn't better, better is better.

Speaker 3

It's Absolutely the way we think about this. There could be deals that make sense. There are a lot of deals that probably don't. 20. We continue to be, I think, pretty cautious about any activity given that all the internal focus we have on and getting this FutureCore project behind us.

Speaker 3

As we emerge from that, I think we'll 19. Certainly an opportunity to do things that would be appealing to customers and And it will provide some capabilities that might be incrementally enticing to sellers. But at the At the end of the day, we just want to get through that project, clear our minds and then look at the economics of and Q3. And if it makes sense, if they particularly end market consolidation that improves Incrementally economics, that's something we certainly look at. But it's not going to be a driver of our Strategically, it's not something that's kind of front burner for us.

Operator

2. Our next question comes from the line of Gary Tenner with D. A. Davidson.

Speaker 2

Yes, we

Speaker 1

got you in there. Go ahead.

Speaker 8

Hi, I apologize. So my first question, just a quick one on PPP. It looks like about a third of the remaining balances have forgiveness applications already 18.

Speaker 5

And could you kind of ballpark

Speaker 8

where you think the year end level could be Given that there's still a sizable amount of fees to be collected, split between the Q4 and next year.

Speaker 2

Gary, this is Paul. It's pretty speculative. I mean, we've it's not only it's not up to us, right? The Clients need to submit for it and then the SBA needs to act on it. So my expectation is largely that PPP loans, It's going to have sort of probably a half life aspect to it, but I'd say the vast majority of our loans are going to be gone by the middle of next 2.

Speaker 2

This year is my personal estimate, but again, it's pretty speculative.

Speaker 11

Okay, great. 2. And then,

Speaker 8

Scott, if I heard your answer to the question on rate sensitivity and floors correctly, it was $35,000,000,000 in variable rate loans, 24 Of which have floors. And did you say that the floors are generating the money by less than 100 basis points? Or was that a different figure?

Speaker 4

James made the comment about in the money. And what I failed to say was The LIBOR floors are were generally at 1%, some as low as 0%. The prime floors All right, 3.25% to 4%. That was the guidance. And I think Jake made a comment about what was in the

Speaker 2

2. Can I clarify that just a little bit, Scott? The number of loans with floors in the money is $5,600,000,000 And the average in the money moneyness, we call it, is just over 50 basis points. It's about 60 basis 20. As Scott correctly pointed out, we have a lot of loans with floors that are kind of out of the money.

Speaker 2

I think your question is really about the in the money floors. It's $5,600,000,000 and about 60 basis points.

Speaker 8

Okay, great guys. Thank you.

Speaker 2

Thank you.

Operator

6. Our next question comes from the line of Chris McGratty with KBW. Your line is open. Great.

Speaker 13

Thanks eighteen. Just want to make sure I understand the remixing strategy that has the potential to unfold. I guess the question is, What is the kind of the level of securities earning assets that you would anticipate? The money comes out of cash, 2. How does it flow into the loans versus securities, I guess, is the question proportionally?

Speaker 2

Well, look, 2. I want to grow and I think we all want to grow loans 1st and foremost and we're all very, very focused on that. And so that loan growth is going to be the driver and that's our anchor, right? Everything around that is how we invest our deposits into earning assets. And so 1st and foremost is loans, and then second priority would be securities.

Speaker 2

And again, it's relatively short term. So to the extent these deposits Stay sticky. First, we'll fund the loans and then sort of whatever is left over Leaving a kind of a storehouse of cash for immediate liquidity will over time be invested into longer term securities. 2. I hope that's helpful.

Speaker 2

It's a little I know it's not precise, but that's the thought process. And so as you're thinking about the balance sheet and modeling it, that's I would encourage you to

Speaker 5

and Use that sort of thought process.

Speaker 13

Okay. That's helpful. And maybe I could just ask one in terms of the guidance. I'm 18. I want to make sure I understand the outlook.

Speaker 13

Could you just maybe provide a key or kind of 18. A little bit more guidance on each of the outlook kind of moderating, increasing, increasing. I know you I'll

Speaker 2

tend to give specifics, but just kind

Speaker 13

of stack ranking kind of ranges would

Speaker 3

be helpful for us. Thanks.

Speaker 2

18. Well, I think James typically does that. He's got a whole lexicon And Rubik's cube that we use to interpret that. But on the as it relates to our outlook, we're being intentional around not applying specific percentages around these numbers. If we wanted to apply percentages, we would just put them out there, right?

Speaker 2

18. And so the language is intended to convey relative measures From slight to moderate to increasing, without being overly specific on, the percentage changes.

Speaker 3

I say especially because we're likely to be wrong. I mean, This is an outlook. It's not a crystal ball. And there are so many factors that can influence all of this. So 18.

Speaker 3

I just wanted to ask

Speaker 5

a question about the liquidity that you've got

Speaker 2

on the balance sheet. Relative to your size, you've operated at kind of higher levels of liquidity in previous years. And if I look back to 2015, again, on a relative basis, 20. You were able to bring that liquidity down about 4 to 6 quarters. And given the comments on today's conference call Regarding the deposit stickiness, the opportunities for loan growth across the franchise, I'm wondering, do you think the allocation of liquidity could occur faster this time?

Speaker 2

18. Well, yes, so if we go back in time, you may recall, we had about Round numbers. In the beginning of 2015, about $8,000,000,000 of cash equivalents. And you're right, over the ensuing kind of 6 ish to 8 ish quarters. We brought that down.

Speaker 2

And you think about the pace with which we are buying today, I mean, we're buying 2. Not only are we reinvesting all that cash flow and remember, we're portfolio is putting out cash flow of about $400,000,000 a month. We're adding $1,000,000,000 to $2,000,000,000 a quarter. So there is a natural, I would say, limit in terms of how much and positioning. We want to be in any given quarter because that quarter that vintage of purchases is defined by the rate environment 6.

Speaker 2

In that quarter. And so we're trying to be measured as we were then. We're trying to be measured in the deployment of the liquidity. Yes. Perhaps we could accelerate it a little bit, but just like we said back then, we don't want to Take a very large position in the rate environment in any given quarter, which is why we're sort of legging into the position as opposed to You're putting all of our chips on red, if you will.

Speaker 3

Right. That was my question. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. And Q3. Our final question comes from the line of Brock Vandelet with UBS. 6. Your line is open.

Speaker 9

All right. Thanks for the question. This is an advantage being at the end of the call. I just going back to the and Question 2 before in terms of an answer key around the descriptives. I think a number of us are kind of Struggling with, specifically NII and expense guidance 2.

Speaker 2

And just worried I'm worried whether I'm

Speaker 9

a little ahead of my skis on numbers. And I'm just looking for I guess one on NII, just clarification. So we should be growing off of the $4.99 number That is ex PPP and low I'm thinking low single digit 20. Expenses kind of growth on that.

Speaker 1

Yes. 2. Brock, this is James. What we've tried to convey in the past is like slightly increasing is kind of low single digits and then moderately increasing is mid single digits. We've never had to use a high like a rapid growth sort of situation, at least not in a while.

Speaker 1

But So just increasing would be pretty healthy robust growth in net interest income, which is fundamentally driven by But maybe a little bit of offset on price on the loans as the loans as the front book, back book dynamic plays out. But it's That was a little hard to gauge because that's a competitive environment situation. Does that help a little bit?

Speaker 9

Yes, it is. It does, James. And on expenses, it's guiding off of $4.32 the adjusted total and that's moderately Increasing.

Speaker 2

Correct. So that again is

Speaker 1

That pertains to kind of this and 2020. Recognition that there is inflationary pressures in the environment and also the technology The expenditure that Scott referenced earlier in the call.

Speaker 9

Got it. Okay. All right. Thank you. That's helpful.

Speaker 2

If I could, I would say note the color code on that Page 21. I don't think it's a stretch to Say increasing is a bigger number than moderately increasing, which is a bigger number than stable Or slightly increasing, right. So that's sort of the nomenclature and the way to think about this. And therefore, you could see net interest income is showing up and 2020. Clearly in the increasing camp and that is because, again excluding PPP, we see the opportunity to invest, Continue to grow the size of the portfolio and increasing confidence about the loan outlook As key drivers.

Speaker 2

And then on top of all of that, while we're not expecting any increases in short term rates in 2022, It is an opportunity for Zions Bancorp due to the again deposit driven asset sensitivity on our balance sheet.

Speaker 5

6.

Operator

Thank you. I would now like to turn the call back over to Mr. James Abbott for closing

Speaker 1

18 months. Thank you very much. I appreciate that, Twanda. Thank you all for joining us today. If you do have any additional questions, please contact me 18 months at either my email or phone number listed on our website.

Speaker 1

Look forward to connecting with you throughout the coming months. And thank you again for your interest in Zions Bancorporation.

Operator

2. With

Speaker 5

that, this concludes our call.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now

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Earnings Conference Call
Zions Bancorporation, National Association Q3 2021
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