Q3 2020 Zions Bancorporation NA Earnings Call
I would now like to hand the conference over to your host director of investor relations. James Abbott, sir, please go ahead.
Thank you and good evening. Everyone. We welcome you to this conference call to discuss our 2020 third-quarter earnings. I would like to remind you that during this call. We will be making forward-looking statements. Although actual results May differ materially Additionally the earnings release the related slide presentation and this earnings call contains several references to non-gaap measures wage courage you to review the disclaimer in the press release or the slide deck on slide to dealing with forward-looking information and the presentation of non-gaap measures which applies equally to statements made during a call a copy of the full earnings release as well as the supplemental slide deck are available at Zions Bank Corporation.
We will be referring to the slide during this call.
Let me introduce our agenda today first chairman and chief executive officer Harris Simmons will provide a high-level overview of key financial performance president and Chief Operating Officer Scott McClellan, then provide comments on our recent strengths in certain strategic areas Keith Mile and Michael Morris our chief risk officer and chief credit officer respectively will review the credit condition of the loan portfolio. Finally albertus. Our Chief Financial Officer will conclude by providing additional detail on Zion's Financial condition. We intend to limit the length of this call to one hour during the question and answer section of the call. We ask you to limit your questions to one primary and one follow-up question to enable other participants to ask questions that I will turn the time over now to assistance.
Thanks very much, James. We welcome all of you to our call this evening beginning on flight three, which is a summary of several key financial highlights. We just thought we were generally pleased with the overall results of the quarter earnings per share are back to a level experience throughout much of 2019. Although Revenue has declined somewhat from what we experienced then our non-interest expenses declined moderately resulting in adjusted pre-provision net revenue, excluding the charitable contribution. We made during the course of free provision that revenue of $297 billion dollars.
which is
Actually somewhat stronger than the quarterly average in 2019.
Additionally, the diluted shares have declined by about 17% from the levels in early 2019, which is the result of share repurchases prior to the pandemic and the expiration of warrants earlier this year.
We were told to enter whatever downturn was on. The horizon was strong relative and absolute Capital ratios at 10.4% common Equity Tier 1 Capital an allowance for credit losses relative to loans at 1.9% We still have one of the strongest Capital ratios within the large Regional Bank space.
Another major positive. This quarter is the loan deferral and delinquency story which Keith and Michael will address in Greater detail shortly that will just highlight that phone number you're seeing in real time economic data such as credit and debit card spending various business and consumer sentiment indicators and relative links between quarter stability and Loan growth within the industry's most adversely affected by the pandemic all of these indicators support our conclusion that are allows for credit losses in the second order. Was it a appropriate level for home at the end of the quarter was an appropriate level for the third quarter price that resulted in a provision for credit losses that was generally consistent with our net charge-offs in the third quarter a decline of 67% from the prior quarter.
Slide four shows our earnings-per-share both the second and third quarters had larger one-time items in the non interest expense line that were very similar in size Forty-Eight billion dollars and a pension termination charge in the second quarter and $30 for a charitable contribution, which we had noted earlier and making a success for the PPP program in the third quarter the largest single difference between the second and third quarters was the provision expense which explains about $0.52 per share of sixty-seven percent differential.
The income is also known as a meaningful contributing factor, which if one excludes the Securities gains and losses and credit valuation allowance in both quarters have contributed and and in fact of about 6 cents per share.
Turning to slide five adjusted pre-provision that Revenue was $267 million in the third quarter and it's noted if you further adjust this for the children charitable contribution, like the PPP program of thirty million dollars. It would have been $297 million or a decline of three million dollars compared to the prior quarter. You can see the outsize provisions relative effect of profitability in the chart on the right, especially when compared with provisions and periods prior to the pandemic on flight 6, we highlight the balance sheet profitability metrics off the outlook for credit quality being more stable than in the prior two quarters profit ability is improved to a level that I wouldn't necessarily label as totally satisfactory, but certainly much better than what we experienced in the prior 2 quarters.
Well that I mean the church.
The a little bit of time over to Scott McClain our president and Chief Operating Officer Scott.
Thank you Harrison. Good evening. Denver. Let me direct you to slide seven over the last few months. We spoken frequently about our success with the small business administration paycheck Protection Program is noted on this page. We ranked as the 9th largest originator of PPP loans in the country yet when met by deposits designed to the 37th largest financial institution in the country our share of PPP origination was 3.6 times are deposit markets here and twenty-five to fifty percent of the units or dollars depending on which you measuring of the three largest participants which were bank that offers that are approximately thirty five times our size.
This significant outperformance was a function of our history of the bank for small businesses and our ability to combine the efforts of 1,500 plus customer-facing Bankers off with best-in-class technology and workflow processes this effort help stabilize more than 47,000 businesses that employed hundreds of thousands of workers. If major wage the number of loans rather than by balance about 75% of these loans were less than a hundred thousand dollars in size.
So now we're engaged in the Forgiveness aspect of the program at this point more than 10,000 customers representing about one point seven billion dollars of volume of applied for forgiveness. We have a highly controlled process for handling the Forgiveness process and we've engaged price Waters at pricewaterhousecoopers to assistance. We've also chose to be an active participant in the Main Street program. Although initial volume is is light as as has been reported across the country from a financial perspective the short-term benefit of the PPP program will serve as a meaningful cushion against the abrupt Decline and interest rates and the economic volatility caused by the pandemic
As a as a longer-term benefit, we have more than 14,000 new to bank EP customers with whom our Affiliates are laser focused on building deep relationships particularly timely with this calling effort is the introduction of what we call treasury select which is a set of small business treasury management product offering a simplified version of the nationally-recognized treasury management products. We have provided to larger businesses for years.
Perhaps of Greater importance is the $33,000 plus existing customers who received a PPP loan most of which were previously deposited only customers with whom we can now build an even more meaningful relationship. This Focus calling effort by our Bankers is also being reinforced by a branding campaign page that highlights RPP results as well as our long-standing commitment to small businesses.
Hang on to slide age shifting gears a bit a few years ago. We set out to significantly expand our capabilities and profitability in in the Residential Mortgage area as a result of this enhanced Focus lower interest rates and our ability to gain market share 2020 mortgage production has been considerably stronger than the year ago. You could see this on slide 858 notes several key successes related to the rollout of what we refer to as zip mortgage our digital customer-facing application process. This digital application will verify employment full Internal Revenue Service information and pull all of the customers bank statement. The three largest frustration among mortgage applicants. This new process is also allowed us to reduce our turn Times by 25% and improve
Customer service levels exceeded 1 billion dollars in the prior quarter and despite the moderation in the refinancing wave in the third quarter. We still find it more than a hundred and twenty million of Residential Mortgage Loans in that quarter correspondingly sailing income is serving to offset pandemic related fee declines fee softness that we are experiencing in other areas.
Credit metrics remain consistent with our traditional practice and they are provided on the bottom of the slide residential mortgage lending continues to be a natural for us. Particularly. Given our large small business customer base.
Thanks very much, Scott. And before we turn the time over to key, I just like to take just a moment to express my thanks the a half of month all of our shareholders to Ed Schreiber who's in our chief risk officer for the past number of years and who retired on October 1st had was really instrumental in getting us to strengthen a a, you know, our risk program and it's just on a phenomenal job and we really want to wish him all the best. He's going to come back to be a little bit of Consulting for us for next few quarters, but he'll have a lot more time to snowboard and do some things that he loves to do.
He's he's succeeded by he keeps May who many of you know, Keith served for several years is the CEO of Our National Bank of Arizona operation. And for the past few years has been our chief banking officer and he's he's really just an exceptional banker and uh, we'll do a wonderful job in this new role of risk officer case. Let me turn a few minutes over to you.
Thank you Harris it all begin my comments this evening on slide nine because of the relatively minimal credit risk within PPP loans. And because prior quarters would not be comparable. We have presented the credit quality ratios, excluding loans classified loans this quarter increased to 3.4% of total non PPP loans from 3.1 percent in the prior quarter and non-performing assets including loans that are 90 days past due increased five basis points to 79 basis points of non-wage lounge and other real estate owned from 74 basis points in the prior quarter about one-fifth of the nanak rules are within the energy sector, which is a similar proportion to a prior quarter wage and hotels restaurants and recreational businesses also accounted for about one-fifth of non-accrual loans up from about 10% of nanak rules in the prior quarter the remainder of monochrome
Phones is distributed across various.
Industries net charge-offs pumped up in the third quarter to 43 basis points from 26 basis points last quarter about one-third of gross charge-off tributable to the energy industry retail businesses were also a significant contributor to this quarter's charge-offs as we review classified non-accrual an a loan ratios. It's worth repeating what we've said in various investor meetings, including our investor Day in February in the past Zions generally experienced much lower wage rate relative to problem loans that most of our peers like most other Banks we underwrite loans based upon stress cash flow assumptions, but we typically secure the loan with collateral for example, real estate or other business and personal assets. We also require personal guarantees almost of our loans and many borrowers have external sources of capital that is available.
To support their investment during a period of difficulty particularly if the problem is considered to be transitory.
during the global financial crisis the value of collateral plunged, but in this pandemic many assets are perhaps somewhat softer, but generally holding up and in the case of residential property values have generally increased
the dark blue columns on the chart have been quite small relative to the classified ratios and when compared to other large Regional Banks Zions typically screens in the best organist lost severity cortile.
I might also highlight the time series of the chart to help put this recession in perspective. We've included the average of those same credit ratios in the global financial crisis. Oh wait no 9 a.m. During the oil and gas downturn fifteen and sixteen. Although we are not yet declaring mission accomplished with a strong risk management infrastructure that preparations we made to prepare the portfolio in advance for a downturn and the significant support of the government relief provided to Consumers and businesses. The credit deterioration has been much less than we might have expected it to be when comparing the classified loan ratio during the global financial crisis to the level today. We are experiencing only about one-quarter of the level of problem loans.
Moving to slide 10 we and most other Banks engaged very early in granting payment deferrals and payment modifications. We did not break. We reach out to customers with an offer to defer a payment but we granted such deferrals. Liberally if we were requested. So by a customer at June 30th loans on payment foul status were 6.3% of non PPP loans. Well, let's September 30th that same ratio was just 0.6% less than half of which wage deferrals.
The next question one might ask is Howard delinquencies. Now that loans have come off deferral on the right side of the chart showing total loans that are delinquent by 30 days or more which took two tenths of a point since June of these loans that have been granted a payment deferral at one point and have since come off deferral only 1% of those or slightly more than forty million dollars are delinquent in their payment by 30 days or more. We attribute part of this to risk management practices. We've employed and also to our early Outreach calling program next. I'll turn the call over to Michael Morris our chief credit officer, Michael.
Thanks Keith. I'll start on slide 11:00. We introduced an earlier variation of this in April, which we further refined. The definition of what is not included and we've reviewed the performance of these sub Industries, but this is relatively the same chart that you've seen in Prior quarters. The high-risk COVID-19 is dead.
Industries represented here are the ones that have the greatest risk of default with a weighted average risk grade of 9.2 on a ten scale.
With worse grades than 10 being the regulatory grades that you would expect special mention substandard non-accrual doubtful.
But I would like to emphasize a point that Keith has made about collateral. The probability of default grade is not necessarily predictive of the loss given fault, as you can see in the bottom four lines of the chart on the right side of the page. The collateral coverage is good for this for plus billion of loans with 98% being covered by collateral most of the time I buy real estate with roughly 52% medium loan-to-value ratio with only 3% of the loans having LTV ratios greater than 90%
Slide 12 shows the same three groupings that we've highlighted on the previous slide in a Time series the top left chart shows loan balances and columns with the weighted average risk grade month shown in the three lines where the elevated risk portfolio experienced General stability since June, which you can see on the light blue line where it's just show stability and flattening out and Q3 the oil and gas portfolio experienced deterioration of two-tenths of a point on wrist grade the rest of the portfolio experience General debility. It's worth noting that the probability of default between grades is not linear for example, the probability of default for grade ten loan.
The worst pass grade in our grading range is significantly greater than a grade nine loan Etc. The elevated risk portfolio has a weighted average risk grade of 9.2 while the other portfolio the other being the rest of the commercial and consumer book as a grade of 7.0 the loan grades shown here. Do not reflect the Lost given to fall dead ends. Although the combination of the two is one of the more significant drivers of the allowance for credit loss.
The top-right chart shows the training classified and non-accrual loans with the classified ratio being the larger number and the non-accrual ratio being the smaller number within each bar wage, the relative stability of the other loans non-accrual ratio, which again represents 87% of the total non p p loan portfolio is encouraging.
On the bottom left you can see that utilization rates are the various portfolio segments. We continue to be encouraged with the credit implications of the COVID-19 elevated risk wine utilization rate falling yet again down to 29% from 34% less quarter.
Finally in the bottom-right. You can see the net charge-offs related to these groups the oil and gas portfolio tends to experience elevated charge-offs and in some cases later recovered and that is the case where a few charge-offs that we've seen in the recent past including situations where we we receive equity for debt that may be forgiven or charged off. I would note that we reduced the allowance for credit loss on this portfolio the oil and gas portfolio on the third quarter relative to the prior quarter due to connect to reports from line Bankers credit partners and borrowers that companies are faring better than previously expected. There are several factors that contributed to that decision getting with roughly twenty-five to thirty percent Rebound in the price of oil across the future curve as well as spot price improvements favorable divulging
With well should have been shot as many are back into production and a number of pre-packaged bankruptcies as the second liens and Senior debt will be whittled away through the prepackaged bankruptcy and we'll end up with borrowing bases in the Upstream oil and gas portfolio that aren't conforming.
Not shown on the page, but perhaps we're noting our delinquencies Keith already highlighted the substantial Improvement in delinquencies. I might just add that the loans off within the COVID-19 elevated risk category had a somewhat higher 30 day or more past due delinquency rate than the overall portfolio at about 1.1%
Additionally, we feel that the small and micro-sized business loans within our portfolio or weathering the storm reasonably. Well, for example commercial loans with commitments less than $50,000 which by unit count are significant in the company have a delinquency rate of just 106 which is about the same as it was a year ago, which was 102 volts. So taking a step back and considering all the factors is a whole from the Improvement and delinquencies and deferrals the relative stability within the COVID-19 elevated risk grayed out folio the outlook for oil and gas loans improving for reasons cited previously good levels of consumer and Commercial spending is compared to the year-ago level off the list of few. We are more and more comfortable comfortable with the credit situation than we were just a few months ago.
Still we will.
Remained Vigilant and disciplined as always. So I'll now turn the time over to Paul bertus our Chief Financial Officer Paul.
Thank you, Michael and good evening. Everyone. I'll begin on 5/13 which details are allowed for credit losses on the top left. You can see the recent Trend in our ACL. The total ACL was $917 in September 30th, excluding the allowance on loans. The ACL was $950 million or about 1.9% of non vult lungs and the right side of page thirteen. We describe the factors leading to the ACL change in the most recent quarter the bar chart on the bottom right shows the broad categories of change the first bar represents the change in forecast category the 50 million dollar increase from the prior quarter is our estimate of the change in credit losses. Am too modest changes in the economic forecast employed in our loss models.
Credit quality factors represented by the middle bar include risk grade migration and specific reserves against loans, which when combined at 24 million dollars to the ACL compared to the prior quarter finally portfolio changes driven by non PPP long balance is declining the Aging of the portfolio and other similar factors generated 571 million dollar reduction in the ACL. Ultimately. The ACL was relatively stable when compared to the prior quarter.
Slide fourteen shows an overview of net interest income and the net interest. Margin the chart on the left depicts recent Trends in both the net interest margin in the white box have compressed in the current quarter relative to the prior quarter. This is attributable primarily to loan yields moving lower which adversely affected the margin by 12 basis points reflecting the downward shift across the yield curve over the past several quarters and a greater waiting or mix of lower-yielding PPP loans relative to wage earning assets the second most significant factor in a linked quarter margin compression was the composition in yields of the money market and securities portfolio due to the increase in average deposits of three point five billion dollars and with average loans only increasing $725 million dollars the Surplus cash went to paying down borrowing job.
And increasing short-term Investments, which increased one point five billion dollars from the prior quarter and yield of just 25 basis points. The increasing levels of short-term Investments had the Volute of effect on the net interest margin, but not necessarily on net interest income.
Net interest income contracted by eight million dollars or 1% on a linked quarter basis with the average earning asset balance decreasing by I'm sorry, the average earning average average earning a wage increasing by 3% The decline in net interest in comes largely driven by the declining lung yields and the change in earning asset mix described earlier. Notably the six point eight billion dollars in PPP loans on average contributed $52 million dollars of Interest Revenue in the quarter as an important note late in the quarter. We modified outstanding PPP loans to a term of five years, which is consistent with the terms of PPP loans made later in the process. This action will reduce the money on PPP loans to about 1.7% in the fourth quarter and Beyond and less and this is an important consideration loans undergo a forgiveness. Yep.
or other prepayments of
Set as a reminder the net fees attached to PPP loans serve as the mechanism to augment the PPP low yields beyond the 1% stated coupons and as such are amortized over the life of the PPP loans upon maturity or forgiveness. These will accelerate into net interest income a Scott off earlier measured by volume. We have received an application for forgiveness on about 25% of our PPP loans.
Five-fifteen highlights loan and deposit growth and breaks them down by both rate and volume relative to the prior quarter averaged PPP loans increased 1.8 billion dead as depicted by the lightly shaded bar while average non PVP loans declined 1 billion dollars or 2% because of the PPP loan yield was only three years in the third quarter this re mixing of the portfolio contributed to linked quarter compression shifting to the chart on the right and funding average total deposits increased 5.6% over the prior quarter not annualized many banks including Zions are reporting relatively strong deposit growth one could speculate that this may be able to the significant fiscal and monetary programs designed to support the economy during the pandemic the cost of deposits declined to 11 basis points from fifteen basis points in the prior month.
Turning to slide 16 our balance sheet sensitivity has increased as Benchmark interest rates have fallen. We are comfortable with the increase in rate sensitivity because we believe the risk to lower interest rates is limited the recent increase in short-term Investments may be deployed in to longer-duration Securities over the next several quarters, which would likely impact off-balance-sheet sensitivity the charts on the right show the interest rate reset profile of our loan portfolio and include additional detail on the interest rate swap books off on the lower on the upper right the volume maturities and Associated fixed rates for the swaps used to hedge are floating rate loans are shown while on the bottom, right you'll see a highlight of our loan repricing characteristics loans with longer maturities are expected to reprice downward if the current interest rate environment does not change.
On 517 customer related fees increased $9 from prior quarter reflecting increased Residential Mortgage retail deposit and card activity log in interest expense shown on slide eighteen increased to $442 in the third quarter. However, as discussed elsewhere after normalizing for the 30 million dollar charitable contribution, the total non-interest expense was $412 million dollars in the quarter year to date on this basis adjusted non interest expense is running about 4% lower in twenty-twenty when compared to 2019. This view is intended to illustrate that we have been able to effectively manage costs to help offset the decline in revenues while continuing to invest in our business as Harris noted at the beginning of a call.
We have suspended forward-looking guidance given the nature of the current operating environment. We are encouraged by the continued strength of our balance sheet and have been impressed by their creativity and resiliency frustrated Everyday by our colleagues our customers and our communities. This concludes our prepared remarks Latif, please open the line for questions.
Yes, sir. As a reminder to ask a question, please. Press star one on your touch-tone telephone again. That's star one on your touch-tone. Telephones. Ask question to withdraw your question. Press the pound key. Please wait while we compiled the Q&A roster.
Our first question comes from the line of day Rochester of compass point your line is open.
Hey, good afternoon, guys, you guys have some great deferral Trend this quarter and you really didn't move the reserve around that much was just wondering where the reserve sat on that COVID-19 it at this point that 8.4% alone. And I know Moody's includes more stimulus and at least one of their scenarios was just wondering if you guys assume more stimulus as well. And if we don't get that if you have a a censor what the sensitivity is to the reserve you have on that bucket, or at least the PPP customers in that bucket or overall, that'd be great.
Yeah, this is Michael Dave. All I'll take that the reserve is is fairly substantial on the COVID-19 portfolio. So we didn't move that down much the triple P loans. Don't carry much of a of a of a Reserve at all. We don't consider there to be a lot of credit risk on that book off the the federal guarantees a hundred percent guarantee.
Okay. Yeah, I guess I was just talking about the customers that you already have loans outstanding to that also have PPP loans for you guys. If there were any sensitivity there if you don't get two on the pound key or if they don't get more funds through that if there's any sensitivity there. Well, there's definitely a correlation there will be a correlation and wage, you know on the larger exposures. I would not expect there to be a huge correlation on the smaller exposures like some of the small business and micro loans that we talked about earlier. There will definitely be a relationship if stimulus 2.0 doesn't deliver to the small business owner.
In terms of quantifying that at risk Reserve ratio do you happen to have with that is I know substantial but just curious how large that is.
You know, I think we'll have to get back to you on that. Yeah, I think it's useful to know that.
If we take kind of the smallest of those loans under $50,000 we have is relatively it's very small outstanding 865 million dollars an outstanding exclusive of some of some card balances, but those balances are also very small. So it's not a it's it's just not a big portfolio off when you get that 250,000. They've got a little over a billion dollars outstanding soon as you get you know, is the business get a little larger than the exposures get large, but I think it's really these micro businesses that are probably most at risk and and and it's not a big exposure force and so far the delinquencies, you know, even after all she would have been expected to be too exhausted PPP funding or or or or actually holding in really well compared to what they were just a year ago, so
So I would agree with Michael. There'll be some impact, but I don't think it's going to be particularly severe Force.
Okay, great. Maybe just one more quick one of the margin given you got security through that's it right here at the 1.2% level. You've got, you know a little chunk of loans here that that still scheduled to record this year and and more next year was just wondering if you have enough, you know leverage on the cost side to I know you can reduce CD costs. They can you do anything else in the borrowing. Can you do anything else in the interest bearing a core deposit side to offset that pressure or do you think that the name just inevitably have to move lower from here equity in the PPP fees that are coming.
Yeah, thanks for the question. The this is Paul V. There is limited on the on the liability side. There's limited opportunity continue move that down. There's a little bit of opportunity on divorce rates. There are CD's you can see on the on the book there are cities that have you know term rates attached to them that have been put on over the course of last year those will run off and out, you know over the course of time and then obviously we will you know limit our borrowing because we're in a sort of a net overfunded position in that will reduce the overall cost of borrowing but really home of the the um, the repricing of assets I would expect a repricing of assets to exceed the replacing the liabilities and we've been talking about margin compression here for the last several months and that you know, we're seeing that now and and I would expect to continue to see that at least in the near-term
Okay. All right. Thank God. I appreciate it.
Thank you. My next question comes the line of Ken Debbie Morgan Stanley your line is open.
Thanks. Good evening. Maybe it's staying on that point. What is the average yield on the new loans that you actually added in three q and include that a new loan yield compress further from here.
Well, I I'm not going to quantify it a new loan yields necessarily but you know the yield is a function of two things rate and spread rate and credit spread right in the given where they yield curve is today. The only thing that's going to create additional compression unload yields will be either a change in credit spread by the market repricing credit spreads lower or Thursday by the composition of our portfolio change. So, for example, you've seen over the course of the last five years commercial real estate, maybe loans of going a little slower in Resident or in Municipal loans wage a little faster and there's a differential and pricing there is there's also a differential and risk but by and large, you know, my personal expectation is that I don't think that new loans being put on are going to be a lot different from your loans that may have been added this quarter PPP loans being the exclusion. And so I think what you're going to see the margin compression is really going to be driven by uh,
the change in yield associated with older longer-term fixed-rate loans running off and being replaced by
Buy New Orleans, so it's really a function of the flatness of the curve. So I understood Paul and I guess that that's the reason for the question which you know, we're trying to get a magnitude of how much the yield differential between that existing portfolio and then the new loans
Right and what I'm saying is that it's it's hard to be very specific about that because there are so many other things that that can impact that you know, I'm hopeful that we can get back to a day soon where we can start to provide a forward-looking guidance, but the you know environment right now is just so uncertain God maybe maybe I said a different way if we just look at total or the decline and Loan yields wage five-fifteen looks like it was down about fifteen basis points. I guess some of us the PPP and I'm sure it looks like it's going to compress further with the change that you made to the PPP program. But but if we think about 15,000 a quarter is that is that a reasonable decline in loan balances or loan yields going forward? Well, as you said and I think we do on a page seven a press release. I think we do a pretty decent job of of really trying to break out and provide as much granularity as possible for investors to you know know and understand how the
Portfolio yield of changing and so you can see that our commercial loans, for example, excluding PPP are down less than 10 basis points quarter-over-quarter from 4:05 to 3. So the PPP loans clearly about it outside impact on yield and I would encourage you to look at to look at that page page Seventeen because I think you can get a pretty good indication of of how may have changed last quarter. What's going to happen. Is it over time? You're going to see fewer and fewer loans repricing in any given quarter and I think we do a decent job on page sixteen of the earnings slide showing the maturity profile of our loan portfolio so that you can get a feel for what kind of how many how many of those loans are repricing, you know, given, uh. Uh over the course of the next five years or so. Hopefully that's helpful. It is very helpful. Yeah, and if I just I'll change the topics really quick, but one last question. Yep.
Thank expenses. If we exclude the contribution did run a little bit higher than recent history how much how that relates to the additional PPP expenses and and should remain at that level going forward.
Well, you know, as I said, I if you as I said in my prepared remarks if you exclude that if you look at adjusted expenses and you look at 2019 and 2028 exclude the 30 million dollars associated with that charitable contribution. Our expenses are down 4% year-over-year. And and I think that's largely I think that's pretty much the ticket of of the of the current expense run, right?
All right. Thank you. I just go ahead please spend a little more into kind of a branding campaign. Just trying to reinforce in businesses Minds that that we're a good thing for business and we spent about about 5 million dollars in 1/4 on on that campaign. So that that that that that produced a little bit of additional pump that that I wouldn't expect to see everything.
Thank you.
Thank you. All right. Next question comes from the line of Peter Pan Kori of evercore. Isi your question, please.
It's it's John Payne carry a question question on the on the loan growth front. You're you've given us a lot of color on the on the inside. I'm just trying to back into how this could impact spread Revenue. So on the loan growth side, we saw some pretty good declines on and the balances and in most areas and just give him a backdrop right now around commercial demand. I guess just can you help us? Think about how you expect loan balances to project from here. Is it fair to assume ongoing declines?
Yeah, John, this is Scott McClean. You know, we're we're going to continue to see softness in total loan balances. That shouldn't be a big surprise, you know with the level of economic activity and quite frankly. It's it's it's what you would expect during this time as you know, obviously month. And so, you know the weakness the softness we're seeing in C&I if you look back at that slide is in the office and x and it's slide twenty-two, you know the weakness we're seeing and seeing eye it's just what you would expect it's um, you know revenues or down and I clients, uh, and and consequently, they're working capital requirements or less and and they're they're, you know borrowing last name.
Then liquidity and so really it's just softness across the sea and I Spectrum but naturally but we're also seeing softness in 124 family and he locks are our residential products principally because of the refinancing, you know, boom that's going on. So I so I think you're going to see it at sort of the rates. We're experiencing today. And then when it you know, when the economy does start to term whatever that is, I think we're going to see a pretty nice rebound, uh with a fair amount of pin up activity coming back. I think people are ready to get back to work.
Got it. All right Scott. That's helpful. Thank you. And then on separately on the credit front just in looking at a charge of you know, we saw pretty good increase this quarter and I just want to First confirm fair to assume that we're still going to see upside pressure. I'm assuming you would expect that here. And then if you have maybe any color on when do you think charge-off could peek if you could just give us a little bit of insight there whether you've factored that into your your outlook and when that wage
Sure.
This is this is Michael. I'll take that I'll take that question. You know, we had we had several credits that kind of tipped over in Q3 that were already a little troubled. You could say the same about a few Industries like the restaurant industry going into.
You just you don't know but the, you know the bulk of net charge-offs. I don't think we're going to see this year.
I think it's for the same, you know, there's just there's nothing.
Material it's kind of looming on the radar screen in terms of larger credits that I'm aware of. Anyway, Michael, but that's right.
a big dent in the fourth quarter
Okay, got it. Got it and related to that. Just my last question. It just is it fair to assume then that given all that you factored into your reserve and is it fair to assume as wage rise that we should see some Reserve releases as we go or at least declined in the in the overall Reserve balance aside from any new reserves for lumber.
You know, I'll jump in on that John D. You know, the reserve under in Cecil land is based on so many sort of various various items all the things equal generally speaking. Uh-huh, you know, our Reserve is set to our best expectation for where we think losses are going to occur over the course of the, you know, life of the of the loan portfolio. And so, you know without a change in expectations or Outlook, it would be hard to speculate on. You know, when we may or may not be, you know, Reserve growth or releases.
Okay. Thanks Paul.
Thank you. My next question comes from the line of Steve Moss, Abby Riley Securities the question, please.
Good afternoon. Just following up on credit. I believe you guys mentioned earlier that the you know, there's a high proportion are tied hotels and restaurants. Just wondering, you know, was that a similar driver in the criticized loans as well?
Yeah, I wouldn't say this is Michael. I wouldn't say one industry stands out over the other outside of those two hospitality and full service restaurant Quick Service restaurants are faring quite well, but I would not say that there are other industries that really stand out they do in terms of criticized and classified but in in terms of forecasting net charge-offs there really aren't other industries that that jump out.
Then the COVID-19 heightened Risk Industries that we pointed out on these slides.
okay, in terms of just curious what are you seeing for activity in business activity at the hotel motel exposures you have
Well, I'll speak generally to what we're hearing from the street. Not necessarily our exposure. I mean, our exposure is quite a mixed bag. We have some high-end. We have some low-end. We have Hospitality loans that are in mostly our footprint. If not almost exclusively in our Western footprint, and we're seeing Leisure and tourism pick up a little bit. We're seeing some of the hotels that we have in the recreational markets and I'll call those markets like Park City Zion National Park Scottsdale a few select markets in Colorado in the mountains some Coastal Hospitality doing doing well the whole business and Convention.
Hotels or struggling occupancy rates getting you know back to the thirty 40% range where the tourism is up some somewhat back to pre COVID-19.
I read I might just jump in I read in the newspaper yesterday that visit her totals at Zion National Park in September higher than they were a year ago month which like like I found quite quite amazing, but people are returning to kind of outdoor kind of the outdoors these Recreation areas. Just underscore what Michael okay, if that's helpful and then one last one just on Capitol here, you know a little bit of uptick in your seat to one ratio again, and and you're getting divorced as the growth in so your leverage plus what he lived a little tighter, but just kind of what are your thoughts about the potential for share repurchases in the future?
well, do you want to I mean, I'll just say we're we're in favor of them, but maybe you know still a little early but I you know, I'm hoping that if we you know if we can demonstrate the credit remains in in pretty good shape and
You know, we can keep p p and are in relatively decent condition. I you know, I hope would be back in in a position to be able to resume that as we get in the next year, but it's it's too early probably a call back yet. And if I I'll just add you know, as I as I think you know, you know, we are re-running our models with the strength has provided to the seat car Banks and so you'll stress-testing, you know is a very large component of our Capital Management exercises. So we're going through that but I I think we all feel pretty good about the level of capital we have and to the extent the economic Outlook becomes more certain back to John's question about the allowance for credit losses, you know, there's a lot of good things will happen as the economic Outlook that comes off certain and I would expect that to include share BuyBacks is Harris said we're you know, we're all in favor of them when the time's right.
All right. Thank you very much. Thank you.
Thank you. And next question, for the line of Ken Austin of Jefferies. Your line is open.
Hey, thanks guys. Good afternoon Paul. I just wanted to follow up on the re striking of the loan. So if presuming that there is no if you didn't have forgiveness incoming is is the only Delta that we need to do is just to take that 303 yield change it to one 7 and then have to restrike the amortization schedule out to was it five years instead of the two years. So can you help us frame what that looks like in terms of just the contribution from PPP before you get to forgiveness in the fourth quarter, maybe versus that 52 you saw on the 3rd?
Yeah, so the I'm not sure what the 52 is. I'd have to have a reminder on that but the but you're right the you know a little over 3% to about 170,000 the fourth quarter and you know under Gap at the level yield sort of accounting. So, you know, I would expect those all of the things equal, you know, those loans to be yielding, you know, 174 the remainder of their lives again before forgiveness, and we outline at the footnote in one of our Pages don't remember which one but a nurse like a footnote that there's you know, basically a hundred and forty million dollars of capitalized, you know fees that are going to come into income over the life of the loan. And as I said in my prepared remarks to the extent, we do experience loan forgiveness for prepayments that would accelerate the, you know, the the revenue attached to that loan into current and the current quarter net interesting film dead.
Right. So the 141 is is just the that's the all that's left or is that just the is that the all that's left if we just do the four and half over the book that the September 30th number and that's sort of the you know, the fees net of costs that are capitalized against the loan. And again, the purpose of that is to augment, you know, the coupon is 1% So, you know, the the way the program is designed to augment the yield.
Right. So that's the the yield would be an addition to the 141.
The 1% coupon would be an addition to the 141 that would amortize in. Yes, understood. Okay, got it, and just one lone question on the CRV interesting that the business is actually growing with you guys and for a lot of other industry participants. Just wondering what you're seeing in terms of is there a little bit of back to bank says it's that projects or getting reopen that might have been quiet just any color on on what you're seeing inside the CRM business and if you expect that to continue, thank you.
Sure Ken, this is Michael. I'll take that you know, a lot of what we have seen have been construction loans would have converted to term. We don't we're not actively out looking at originating large CRT term loans today. And we haven't been for several quarters. It's mostly conversion. Um and there's the educational acquisition that will finance but the cre activity has been has been fairly strong relative to the other food groups of CN I Suk consumer just overall we're monitoring collection rates of the different asset classes. We're seeing positive performance in motion family cre retail is a challenge but we haven't seen material problems arise yet collection rates are on the way up in cre retail.
industrial is
In favor, we've seen quite a few industrial transactions. In fact, some of the growth that we seen in cre has come from the industrial asset class. Of course, there are certain asset classes that we're pausing on Hospitality being probably the most notable.
Not helpful.
Very much. Thank you very much.
This is James again. If we can I'll just announce that weird about 5 minutes out from the end of the call. And so we're going to shift over to what we call the lessons around and so it'll just take one question from the next participants and see if we can get through the rest of the que. Thanks. Yes, sir. Our next question comes from the line of Stephan Alexander JPMorgan the question, please.
To follow up on the questions alone resets for Paul for the laundry setting and 20 21. What's the average yield? These loans are resetting from thanks God. Oh, sorry. I was thinking you were talking about PDT. You're actually talking about loaned old. I yeah, I don't have the I don't have the life of me. I don't have the loan yield time series. Um, uh, I think I think we'd have to go back and get that for you. I don't have that off top my head.
Okay. That was my question. Thanks.
Thank you. And next question comes from the line of Brooke Van VA of UBS. Your line is open.
No, thanks. Just in terms of of capital, you know kind of philosophically we've climbed climbed the mountains. So to speak with Cecil contingent Capital 10.4% ct1. All that looking good, you know on the backside of this, where do you kind of missed the bogey of the appropriate Capital level whether it's 81 or some other metric?
You know, that's that's as we have just tried to describe before we entered into twenty-twenty. Yeah, the the the level of capital that we're trying to achieve a goal to achieve is really, you know, heavily predicated on the outcome of our of our our loss models, which is why we you know, we generally publish the results of a stress test. So that investors have some insight into that primary mechanism for managing Capital, but I would say coming into this year. We also said that we expected to hold down a little at a level that was you know, kind of a door above, you know, pure medians with the concept that you know, we believe we've got on average sort of lower balance sheet risk and if we can get straight lower risk and a modestly love a higher level of capital, we think that creates a really good balance for shareholders, so I don't know that that's changed other than the environment is a lot more uncertainty uncertain dead.
But I feel really good about you know, how are bouncy was positioned coming into this environment?
Okay. Thank you.
Thank you and next question comes from Jennifer Demba of security. So your line is open.
Thank you. Can you just talk to us about what kind of trajectory an improvement you're seeing in customer and mortgage feeds so far in the third quarter. Are you seeing further improvements on the fourth quarter? I'm sorry. Are you saying further Improvement third quarter on a monthly basis.
Hey Jennifer, this is Scott. And we did see in the in the second quarter a third quarter as we noted a nice Improvement in retail on business service charges as well as card and uh, so we had you know, year-over-year and experience pretty significant decline as has the industry. But but the the first time we've sold a little bit of a rebound in both retail business service charges and in card, so that's encouraging and in terms of how we're progressing so far here in June October, you know, it's it's too early to really provide any color on that.
Thanks so much.
Thank you. And next question comes from the line of Eric. I'll Bank of America Airline is open.
One question, you know conversations with investors prior to your reporting earnings indicated that you know, the under-performance of the stock really had to do with p p and our concerns and where that would reset to rather than credit. And I guess I just wanted to go back to some of the margin questions that were asked earlier in the call, you know as we think about, you know, 2021 and normalized and our ways for Zion and no change in the interest rate environment. It seems like Paul you indicated that the dog could go down to you know to 9 ish in the fourth quarter just based on doing quick math on your exchange with can used in and then obviously there's a little bit of repricing still page where I mean, where does the name bottom from here it is it without any change major change in liquidity profile and and interest rates and growth does it bottom or off?
to 8 to 9 range
You know Eric, I can't I can't be very specific obviously about where the Nim sort of bottoms out. But I think we have been telegraphing for some time that you know, we have been expecting margin compression wage and and we've seen that the you know, the the mitigant will be balance sheet growth and Loan growth and you know clearly we saw that with PPP loans that you know, pretty substantially here through the first couple of quarters and as a result, you know, we've had a uh, a pretty decent cushion to what what might otherwise have been a you know, a modestly declining sort of PNR number. So the key for us is being focused on loan growth and balance sheet growth and that's all at the end of the day, you know, it's down the volume and rate conversation and see the extent the the the interest rate environment is is so difficult. It's the incumbent upon us to really offset that with Lone Grove.
possible
There's also the very real possibility that you're going to see around 2 if PPP, you know, the smaller scale and for more affected Industries, but that that could provide, you know can sort of another kind of a booster shot and and prolong this subplot but it's a p p p at the end of the day is is it is a temporary phenomenon and you know underlying that is dead. Is this great real pressure and I think that's going to be witnessed real one.
I might just add. I mean, I think the you know, they should.
Got it. Thank you.
Thank you. I'm in are there any closing remarks at this time?
Thank you. This is James in and do the time constraints. We're going to have to end the call at this time, but we very much appreciate all of you joining the call today. There are two or three of you that I'm not attempt to get in touch with you shortly after this call, but we're left in the queue. And if you have any additional questions outside of that, please contact me James Abbott at either my email or phone listed on our website. We look forward to connecting with you throughout the coming months, and we thank you for your interest in Zions Bank Corporation. Is that this concludes our third quarter earnings call? Thank you. Gentlemen, this concludes today's conference call. Thank you for participating. You mean now disconnect.
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