Q4 2020 Zions Bancorporation NA Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Zions Bank corporations fourth quarter 'twenty 'twenty earnings results webcast. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session. The ask the question. During the session you will need to press star one on your telephone.
All of it.
If you require any further assistance please press star zero.
It is now my pleasure to introduce <unk> director of Investor Relations.
But.
Thank you Andrew and good evening.
We welcome you to this conference call to discuss our 2024th quarter and full year earnings.
I would like to remind you that during this call we will be making forward looking statements. Although actual results may differ materially. Additionally, the earnings release the related slide presentation and this earnings call contain several references to non-GAAP measures.
We encourage you to review of the disclaimer in the press release for the slide deck on slide two dealing with forward looking information and the presentation of non-GAAP measures.
Which applies equally to the statements made during this call.
A copy of the full earnings release as well as the supplemental slide deck are available at Zions Bancorporation Dot com we.
We will be referring to the slides during this call for <unk>.
Our agenda today, Chairman and Chief Executive Officer, Harris Simmons will provide a high level overview of the key financial performance.
President and Chief operating Officer, Scott Mclean will provide comments on our recent strength in certain strategic areas. Finally, Paul Burton, our Chief Financial Officer will conclude by providing additional detail on zions financial condition.
With US also today on the call are Keith mile and Michael Morris, Our Chief Risk Officer, and Chief Credit Officer, respectively, who will be responding to questions. You may have regarding credit quality.
We intend to limit the length of this call the one hour.
During the question and answer of 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.
I will now turn sometime over the Harris <unk> Harris.
Thanks, very much James and we want to welcome all of you to our call. This afternoon.
Beginning on slide three.
We are very pleased for the overall results for the quarter.
One very significant driver of the increase in earnings per share from the prior quarter was the reduction in the allowance for credit loss.
Which when coupled with only 13 basis points of annualized loan losses relative to average non PPP loans.
Other than the negative provision for credit losses of nearly $70 million.
Well, we continue to expect net credit losses will remain elevated relative to our long term trend level and there is continued uncertainty with respect to the ultimate impact of the borrowers from the pandemic.
We've been very encouraged by the visit the.
Resiliency of a great many of our customers.
Adjusted pre provision net revenue was $280 million, reflecting a slight linked quarter decline in net interest income and stable customer related fee income.
The adjusted P. P of our figure of slightly higher than the year ago period.
Helped by income from the Paycheck protection program.
As we've noted in the numerous times over the last several years, we were resolved the ed or whatever downturn was on the horizon of strong relative and absolute capital ratios.
At 10, 8% common equity tier one capital.
The allowance for credit losses relative to loans of 1.75 per cent non PPP loans.
We still maintaining one of the strongest combinations of CET, one and the ACL within the large regional banking space.
To that end, we've stated that we will consider increasing capital distributions as the storm passes and we're hopeful we're approaching the point, where we will resume share repurchases, although it's premature to announce anything today.
Earlier I noted the strength, we saw in net charge offs, but there are other credit indicators that showed some signs of stability.
Notably nonperforming assets classified loans and loans on the deferral.
Perhaps one of the most more surprising numbers for the quarter was the net charge offs realized on the loans that we grouped under the COVID-19, the elevated risk category.
The ratio of rounds to zero, which is certainly not what we would've expected early in earlier in the in the year and in 2020.
Throughout the quarter, we've seen real time consumer and business spending data that's been encouraging for example for the month of December.
Customers' debit card spending was 11% more than the year ago month of December the credit card spending, which has often been negative from compared to the year ago period weighed down in part by travel and entertainment spending.
Slightly positive from the same most of the same months a year ago.
Slide four is a quick summary of some key performance indicators for it for the full year as compared to the prior two years.
Although net income return on assets and earnings per share declined.
James We may of last.
The.
Harris there.
Okay. So.
Scott one of August.
The for where Harris was whereas lift off of it looks like the loss terrorists as audio.
Yeah, I'd be happy to do that I think we were on slide four.
Yeah, Oh, Okay, the Scott Mclean and I'll pick it up from here Harris Reengage as well.
Slotting back so on slide for a quick summary of some key performance indicators for the full year as.
As compared to the prior two years of.
Although net income the turn on the assets and earnings per share of declines you can see on the chart on the top right. The pre provision net revenue was fairly stable and.
And one of increased slightly by about 11 million. If we had excluded the charitable contribution of $30 million that was related to our success with P. P. P round one.
Similarly, the efficiency ratio.
Would've been 58, 3% in 'twenty and 'twenty, if not for the charitable contribution of modest improvement to the level achieved in 2019.
Hey, Scott I'm back like my apologies I lost the connection there.
Perfect.
The ball back to you here of soccer on fly topic one of them.
Slide five.
For filling in slide five is a depiction of our earnings per share with the significant increase in EPS in the fourth quarter of 2020, largely attributable to the change in provision expense.
Turning to slide six.
Just the.
Pre provision net revenue was $280 million in the fourth quarter as as noted.
The prior quarter was adversely affected by the $30 million charitable contribution.
Which would have made the prior quarter's number $297 million.
The moderate decrease from the prior quarter was largely attributable to a slight decrease in revenue as well as an increase in expense.
Which Paul will provide detail in his prepared remarks.
On slide seven we highlight the balance sheet profitability metrics.
Obviously, the negative provision as a result of at a level of profitability that is not sustainable in the long run.
All other to our view that the depressed profitability in the early part of the year. It was also not likely to persist.
As we enter 2021 I'm encouraged with the progress made on the technology from for this enabled us to do things faster and at a lower cost.
We are optimistic that non P. P. P loan growth will resume as we get further into 2021 of the economy further strengthens after a challenging year.
We remain sanguine that some of our initiatives the seeds of which were planted years ago, a little bit more fruit, including mortgage banking wealth management and loan syndications.
The next section of slides will be covered by Scott Mclean.
And so all of a lot of turn the time back over to Scott.
Thank you Harris and good evening again to everyone let.
Let me direct you to slide eight over the last few months.
You heard us talk about our success with round one of the Paycheck protection program.
Given the negative economic.
The economic impact of the pandemic and the low interest rate environment, our oversized success with P. P. P. One dot O as we describe it has resulted in a meaningful cushion for near term earnings as well as creating new business opportunities with our core small business customer base. Additionally.
Additionally, our new future core system has proven to be helpful. In handling the significant P. P P volume and several meaning meaningful ways, including its a P I enablement.
We're now engaged in the forgive me if the aspect of the program of approximately 10000 customers representing $1 $3 billion of volume have received SBA forgiveness approval of note over 80% of these loans are less than 150000 and on average in excess of 95% of.
The loan balance has been forgiven.
We have of highly controlled process for handling the forgiveness phase and we've engaged.
Price Waterhouse Cooper steal share.
Which is part of the noninterest expense increased referenced by Harris.
Round, two launched last Wednesday January of the 13th.
Last week, we trained over 1500 frontline bankers and the elements of the program and as of yesterday, we have taken approximately 20000 of applications.
So far all of these applications are smaller on average than the average we experience for P. P. B one dot O.
While it's too early to say how round two will compare the round one we were ready and able to provide the resources to get the stimulus money into the deposit accounts of small businesses that are in great need at this time.
Turning to slide nine we've also frequently highlighted that our bankers have been laser focused on actively calling on the 47000 P. P. P. One dato recipients more than 14000 of which represent new to bank customers.
Regarding our existing customers you can see that these were active relationship.
With $3 8 billion in deposits and 3.6 billion.
And loans and loans.
While we have been successful in originating of Jamaica, a significant amount of new loans and services. This portfolio of existing customers will experience churn.
Selecting the impact of the pandemic and the historical rate of attrition that we experience. Additionally, we were able to strengthen relationships by reaffirming of specific banker for 80 per cent of these approximately 32700 customers.
Further reflecting the deepening of these relationships the new loans. We have originated for these customers has on average been greater than their P. P loans.
Regarding the 14700, new the bank customers, 30% are now actively using their DDA accounts and we are seeing good initial loan activity with the small businesses as well, although we know that we will not be able to retain all of these clients. We are pleased with these early results.
Finally, it's our observation that mainly small businesses have been resourceful and building liquidity and it will.
It appears that a number of the small businesses still have a significant amount of.
Of the original P. P P loans funding available in their deposit accounts.
The should represent a real source of the financial strength as we continue to navigate the pandemic.
Finally, advancing to slide 10.
The 'twenty 'twenty of it's been a very successful year in our history for our mortgage banking growth driven in no small part by the rollout of our ZIP mortgage digital customer facing application process, which occurred prior to <unk>.
The significant decline in interest rates and the significant increase.
And in mortgage originations in the country the <unk>.
Combination of these two factors among others led the substantial increase in mortgage banking revenue with loan sales revenue increasing to 54 million from approximately $17 million in 2019, that's 54 million for the full year 'twenty 'twenty versus $17 million in 2019, the new.
This has also allowed us to reduce our turn times by 25 per cent and improved our service levels.
Originations exceeded 800 million.
And he and the for three quarters in our pipeline at the beginning of 'twenty 'twenty, one is higher than the year ago level of about 56%.
Next I will turn the call over to Paul for remarks.
On credit and the additional detail on our financial performance and condition Paul.
Thank you Scott and good evening, everyone. Thanks for joining us I'll begin my comments on slide 11, generally we have presented the credit quality ratios in our earnings presentation materials, excluding PPP loans.
As Harris noted classified loans and nonperforming loans were somewhat stable with the prior quarter overall net charge offs for 13 basis points and for the year, just 22 basis points about for fifth of the fourth quarter and one third of the full year net charge offs were attributable to the oil and gas portfolio.
With our credit loss allowance of $104 million against that portfolio, we do expect energy loan charge offs in the future. However, with the improvement in commodity prices and some of the restructurings that have taken place our credit loss reserve on this portfolio reflects an improving outlook.
On the left side of slide 12, we engaged very early and granting payment deferrals and payment modifications to our borrowers as the pandemic worsened.
At December 31st.
Well the on payment deferral status were 0.5% of non PPP loans the.
Right side of this page.
Shows the loans that are over 90 days past due please note at the bottom of these bars are statistics regarding total loans that are delinquent 90 days or more and still accruing. This has recently remained relatively steady between two to three basis points of non PPP loans.
Advancing to slide 13, the industries represented here are those which we believe the have the greatest risk of default.
In the current environment as shown on the right side of the page. The collateral coverage is excellent for this $4 billion of loans with 98% being covered by collateral often buy real estate within these loans collateralized by real estate. The median loan to value ratio is 53 per cent and only three per cent of these low.
Loans have the LTV ratios greater than 90 per cent.
Slide 14 presents the three groupings highlighted on the previous slide in the time series format. The <unk>.
Top left chart shows the loan balances in columns with the weighted average risk grade shown in the three lines as indicated by the lines of the elevated risk portfolio experienced some risk grade improvement since September as did the remaining portfolio, excluding oil and gas lending the oil and gas portfolio.
Weighted average risk grade remained relatively unchanged the loan grade shown here represent the probability of default only as a reminder, the probability of default combined with the loss given default are key drivers of the allowance for credit loss.
The top right chart on slide 14 shows the trend in 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 the relative stability of the other loans non accrual ratio, which represents 87 per cent of the total net.
Non P. P loan portfolio is encouraging and the current economic environment on.
On the bottom right you can see the net charge offs related to these groups the oil and gas portfolio accounted for about for fifth of the quarter's total net charge offs well a very small amount of net charge offs came from the elevated risk portfolio.
Slide 15 details of our allowance for credit losses or ACL on the top left you can see the recent trend. The total ACL was $835 million at December 31st or 174% of non PPP loans on the right side. We described the factors leading to the ACL change in the most.
The quarter the bar chart on the bottom right shows the broad categories of change $3 million of the ACL decrease is due to the net impact of changes in economic forecasts and changes in the probability weightings of those forecasts credit quality factors represented by the Middle Bar includes rich grade.
Migration and specific reserves against the loans, which combined for a $20 million reduction in the ACL when compared to the prior quarter finally portfolio of changes driven by the aging of the portfolio the shift in the portfolio from segments that have a higher ACL of such as consumer mortgages and oil and gas and tours.
The segments that have lower ACL.
A lot of for credit losses attached to them such as municipal lending and other similar factors generated of $59 million reduction in the ACL.
Slide 16 shows an overview of net interest income and the net interest margin.
The chart on the left shows recent trends in both the net interest margin in the white boxes has compressed in the current quarter relative to the prior quarter. However, as shown on the chart on the right. The compression is essentially attributable to the composition of earning assets, namely a greater concentration of lower yielding money market and investment securities.
The change in the composition of earning assets has been driven by the strong growth in deposits average deposits increased $1 $8 billion, while average loans, including PPP declined by $1 billion. As a result average money market investments and securities increased $3 $1 billion when can.
<unk> to the prior quarter.
Slide 17 highlights loan and deposit growth and breaks them down by both rate and volume as shown on the left side of the chart average non PPP loans were lower by about $600 million, while period end non PPP loans were down by only about $30 million average PPP loans declined $1 billion while period.
And PPP loans declined $1 2 billion PPP forgiveness reduce PPP loan balances in the quarter and this is expected to continue into 2021.
Turning to yields on loans, the overall yield increased three basis points from the prior quarter the increase in PPP loan yield from 350%.
The $3 five per cent from $3 two of 3% in the prior quarter is an important factor in the overall loan yield PPP loans account for nearly 12 per cent of average loans, meaning that of 47 basis point differential or.
Our increase in the PPP loans loan yields added about five basis points to the total loan yield partially offsetting that positive change the yield on new loan production, including line draws was modestly lower than the yield on maturing loans and pay downs. This trained for this trend remained consistent with the third quarter.
The resulting yield of non PPP loans decreased about three basis points from the prior quarter.
Shifting to the chart on the right and funding average total deposits increased two 7% over the prior quarter the cost of deposits declined to eight basis points from 11 basis points in the prior quarter.
Slide 18 reports that our balance sheet sensitivity has increased as deposits have increased in benchmark interest rates have fallen we are comfortable with the increase in rate sensitivity because we believe the risk to lower rates is limited.
As we indicated in October and as you can see in the balance sheet tables in the press release, we deployed some of the increase in deposits into securities.
The securities purchases for the quarter and then the average yield of about 1.25% 1.25, the purchase activity helps to offset some of the deposit fueled growth in asset sensitivity, but the absolute level of asset sensitivity is still unusually high relative to our long term history.
The charts on the right side of the page that page 18 show the interest rate risk sorry, the interest rate reset profile of our loan portfolio and include additional detail on the interest rate swap book on the upper right. The <unk>.
<unk> maturities and associated fixed rates for swaps used to hedge our floating rate loans are shown while the bar.
All of them right highlights loan repricing characteristics.
On slide 19 consumer related fees were stable with the prior quarter at $139 million mortgage loan sale revenue day claim declined $8 million and was offset by broad based improvement in several other categories, including interest rate swap sales revenue, which is found in the capital markets and foreign exchange line.
As well as wealth management fees and retail fees.
Non interest expense shown on slide 'twenty was $424 million in the fourth quarter after normalizing for the $30 million charitable contribution in the prior quarter.
The $12 million increase in noninterest expense included an increase of incentive compensation as credit quality and overall profitability was better than had been expected earlier in the year.
The total compensation and benefits for the full year, excluding severance was $28 million less than in 2019, or two 5% lower average fulltime equivalent employees declined about four 5% in 2020 as compared to 2019, while period end fulltime equivalent employees declined.
Nearly 6% helped.
Helping to drive these savings our continued efforts to streamline and simplify our operations where possible which has been enabled in part in part by our investments in technology.
As an example of that.
Can be seen in the application of automation in our workspace.
Our technology and operations group has been able to incrementally automate an estimated 285000 hours of labor in 2020 of significant savings for our organization.
We also reported an increase in our professional and legal services expense about $3 million of that increase was related to forgiveness of debt forgiveness process for PPP round, one loans the remainder of the increase can largely be attributed to ongoing technology initiatives.
We are reintroducing, our financial outlook, which we suspended for much of 2020 due to the extreme uncertainty surrounding the pandemic. Our updated outlook can be found on page 21, and is our best General estimate of our financial performance in the fourth quarter of 2021 as compared to the fourth quarter of.
2000, Twenty's actual result.
The thing between our subject to normal seasonality and I would reiterate our earlier reference to the forward looking statement on slide two.
We are establishing our loan growth outlook, which excludes PPP loans at slightly increasing which can be interpreted as a growth rate in the low single digits. We expect low single digit to mid single digit growth in commercial driven by an expectation for continued solid growth in municipal lending we expect.
The commercial real estate to be relatively stable and we expect consumer lending to experience low single digit growth.
We are establishing our outlook for net interest income also excluding PPP loan revenue at slightly increasing which incorporates the current shape of the yield curve, some earning asset growth and some modest pressure on the net interest margin at the securities portfolio yield continues to reset lower and we experienced.
Modest pressure on loan yields.
We are establishing our outlook for customer related fees at slightly increasing mortgage banking income may be subject to some weakness if longer term interest rates rise, but we expect strength from many other revenue categories, especially as we deepen and strengthen relationships with our PPP customers.
We are establishing our outlook for adjusted noninterest expense at generally stable.
As noted in the comments section on this page.
On a GAAP basis, we expect the overall level of GAAP noninterest expense in 2021 to be consistent with GAAP noninterest expense for 2020 at about $1 7 billion.
Finally regarding capital management, we feel very good about the strength of our common equity tier one ratio at 10, 8%, particularly when paired with the relatively low credit losses and relatively stable pre provision net revenue throughout the pandemic.
It is premature to announce any share repurchase program. Today. However, we have set that as uncertainty subsides the prospects of actively managing our capital through share repurchase improves of course, the approval of any repurchase program is subject to approval by our board of directors and our regulators that can.
<unk> our prepared remarks, Andrew would you. Please open the line for questions.
Certainly as a reminder, ladies and gentlemen to ask the question you will need the press star one on your telephone.
Draw your question press the pound key please standby, while we compile the Q&A roster.
The first question comes from the line of Erika Najarian with Bank of America.
Hi, good afternoon, everybody and thank you for the prepared remarks, and the financial outlook.
You know as we think about.
A more upbeat tone on the <unk>.
<unk> share as we think about net interest income and the cadence of it.
Between <unk> 20 for key 'twenty, one should we expect the net interest income would've bottomed in the fourth quarter of 'twenty ex any PPP loan income.
Well I'll take the Erica.
I'll start by saying that you saw in the outlook that what we what we said was that.
We expect our net interest income in the fourth quarter of.
2020.
To be sort of modestly above what it is today.
I'm sorry in 2021 belt of modestly above where it is today and 2020, so I can't kind of officially called out of bottom, but I think what we're saying is excluding PPP, we expect it to be growing modestly from here.
Got it.
That's great and just on capital management, you know you are.
The shift to quality has clearly been borne out in the credit quality that we're seeing in the middle of the pandemic.
And you have.
Significant capital levels, even relative to peers, what would you need to see to buyback stock in the first quarter, which decided allowing for your of larger arguably more complex peers.
Well I think.
I think we just want to continue to see a little.
A little more clarity.
With respect to how this pandemic.
It will affect.
There've been a lot of people, who thought that we may have a little bit of of.
Some delayed impacts that we might see more impact coming in 2021 I think.
We are growing increasingly optimistic.
<unk>.
Evidenced by the reserve release yourself from us in the fourth quarter, but we still.
Thank you.
So risk out there.
So it will be cautious, but I expect that.
Of that.
We will absolutely be hope.
The whole thing to look at share buybacks as we get a.
And the 2021.
Thank you.
Yeah.
Thank you and our next question comes from the line of Dave Rochester with Compass point.
Hey, good afternoon guys.
Okay.
Yes on the NII discussion you guys mentioned your loan yields were still maybe a little bit below book yields or maybe it was roll off yield I'm just wondering what how large that differential is at this point and then just regarding the the NII guidance, how much securities growth you guys assuming in that.
I'll take that Dave.
Is it really colonial we haven't been specific I think the word we used in the third quarter of Q with modest and what we're trying to say that what we're continuing to see us.
Similar to that.
Terms of the quantification, but we haven't been super specific about what the.
But I think it's a fair word modest the.
As it relates to.
Securities growth, we're being we have a lot of cash on the balance sheet today you saw that.
You saw that impact our net interest margin.
We are working the whole finance team the treasury team are working really hard.
Just sort of actively manage that cash, but we also are mindful of.
You that the economy could really begin to engage in the second half of the year and so on given the very flat nature of the yield curve and I.
I would say of general expectation internally the things will really improve as we are starting to really improve as we get into the next time. This year, we want to be careful about putting on too much duration.
With that incremental cash that's been.
That's been added so the security for its a long way of saying the securities portfolio may grow.
But you won't see it grow anywhere close to.
The amount of excess cash that's been put out over the course of the last quarter.
Yeah.
Okay, Great and then maybe just switching of loans real quick on on.
On your outlook for loan growth how much more run off are you guys expecting.
At this point in the energy book, and then bigger picture as you think about C&I demand, maybe small business loan demand going forward.
Does the PPP program does that impact.
What that the.
Loan demand could be for that the subset of the C&I going forward, just given that they're now flushed with cash and will be probably spending some of that in the near term.
Doug This is Scott Mclean all.
Speak to the first part of that I think well maybe all of it the.
Yeah.
The energy Outstandings are actually about Oh, well.
I'm not sure how we reflected it here, but there's about 100 millions of dollars of PPP loans in the energy Outstandings and so.
Excluding the P. P P energy outstandings of around 2.1.
Billion or so and.
That could go down a little bit further, but I do think if oil and gas prices stay where they are and maintain some stability. There I think youre going to see increased drilling and you'll see greater utilization of lines of credit.
So I don't anticipate of it could go down the next quarter or two some but I think we'll start to see utilization pick up.
And I do think the for small business lending in general the.
You know our borrowers.
They are building liquidity, we've seen that I think we're seeing it across the country and they still have.
The healthy proportion of their PPP fundings to rely on as well so.
Yeah.
I think it's going to be the broader economy.
Starting to show real improvement of doing well, we'll start to see lines of credit being utilized in the greater pace as working capital builds up again and as people start to adjusted.
Adjusted the post pandemic environment.
I'd also just note that the.
While they have cash.
To obtain the.
Forgiveness.
It has to be used that's true.
Really intended to be used to offset.
The.
The no specific expenses.
And to keep employees on payrolls of the time when revenues.
But I'm curious of impacted so.
But I think for for a lot of these businesses the they'll use it that way and as we get further into the year card.
It really does rebound the strong way.
I think youll see the pick up and start to.
Borrow for a longer term kinds of investments and building their businesses. So.
That would certainly be the hope of my intuition is that that's going to happen.
Thank you into the next question comes from the line of Ken Zerbe with Morgan Stanley.
Great. Thanks.
I guess that's it.
Get too deep in the weeds here, but just to come back to your NII guidance, what is the right base on which to growth the slightly increasing.
The way I read it as you've got the 550 million of.
On Slide 16, right now you subtract out the 26, which is the accelerated peace, but does your guidance.
How do you account for the non accelerated P. P. P amortization of should we back that out as well or how are you thinking about it yes, hey, Ken. This is Paul I'll take that I I'm, sorry, if I wasn't clear what we're trying to provide is a kind.
Kind of an outlook of net interest income excluding PPP. So the way I would think about it is I would look at the average PPP balances.
In the third the fourth quarter, which I think are $6 $3 billion those yield of three 5%.
And so as you complete the exclude that you come up with a you know sort of multiply that out and exclude that from your net interest income number you come up with net interest.
Net interest income excluding PPP, that's the base that I think.
Yeah.
Got it okay.
Alright, I'll I'll do the math of few if you don't have that right off.
I guess, maybe just maybe the follow up question.
In terms of the second PPP facility.
Can you just talk about the pluses and minuses of of whether science could potentially be as active as it was in the first program I suspect of smaller I'm kind of curious how what your involvement might be in the second facility.
So that's the cafe.
I mean there is.
The there's less of the funding for it. So it is a smaller program and that's really largely targeted at.
The businesses that were particularly hard part yet so I think I think nationally you'll see the numbers are down in this round.
Well also be down because of it in terms of of the dollar volumes.
Does the the.
The maximum all amounts has been reduced to $2 million.
But that said I think you're gonna be C of lot of participation by.
The business is on the smaller end of the spectrum and.
And we certainly geared up and we're we're very engaged and I I think.
I expect that will show very well again in the second round.
Thank you.
And our next question comes from the line of John <unk> with Evercore ISI.
Good afternoon.
On the back of the buybacks.
The question there just wanted to I know you mentioned that you might be interested in Peru, and the position of resumed buybacks pending.
The later in the year pending board approval and regulatory approval.
Is this are the regulators in any way keeping you from resuming buybacks right now.
Well we have to.
Yeah.
We're a little bit differently situated from from many of our peers and that we are.
We're a publicly traded national bank as you know.
And so there is an application that we make to the OCC for a permanent reduction in capital that's what it takes to buy back shares.
I fully expect that the.
But there'll be a reasonable and.
Full about about this.
Yeah.
I look at the backdrop by what I see is this is the company that has.
Our strong capital relative to peers, we have.
What's been.
You know very solid credit quality of certainly relative to peers.
For the last few quarters.
I think that probably kind of relative relatively gets better as we get through some of the energy issues that.
That's.
Of the increase of the charge offs still leaving us with very very low charge offs, but yeah.
Absent the energy.
The charge offs it looks it's true.
Great.
And then you you have.
We don't expect we're going to see.
You know a huge loan demand.
We expect that we're going to see loans growing but the probably not at the pace, it's going to absorb.
A lot of earnings and so.
I think the conditions are going to be.
Pretty good for us to be a pretty actively engaged in the buying back shares as we get.
And of the year of quarter or two we just wanted to make sure of it.
You know that we're being sensible about it and.
We'll have that conversation with the regulators and with our board but.
But I think all of the conditions are going to be there for.
For a reasonably active buyback program.
Okay Alright. Thank you that's helpful. And then separately I was wondering if you could give us an update on the core systems conversion any change in your updated the expected timeline and any change in terms of the.
Of the cost trajectory.
Involved in the whole conversion of that materially changed at all thanks.
Thank you for that question.
We are you know.
Pandemic, there's no question had an impact on.
The future core project in interest on projects in General I mean, there wasn't there was the months there where.
It just it was difficult to.
Continue at the pace, we were going and the level of effectiveness and so but we got through that we've adjusted to it and so originally we were going to.
Have released three of the deposits release.
Come out in 'twenty 'twenty, two kind of a phased rollout in early kind of kind of early to mid 2022.
That probably has been delayed by six months and.
We'll be continuing to evaluate that we still have time to to make up time between now and then but.
But the pandemic has definitely caused the oh the brief delay of it.
And in terms of snow.
In terms of cost.
Go ahead Scott.
It's also kind of make this note that the.
The other day another issue that anybody would.
Faced with the project like this.
I was gonna say reluctance, it's just it just wouldn't be smart as you get further end of the fourth quarter too.
We're not gonna do it the deep into the fourth quarter. So.
There's kind of a window, we're gonna have to hit.
Hopefully, we'll be able to hit that but.
That's something that keep in mind as well.
Now that's of Great. That's a great point and in terms of kind of the ultimate cost and the impact on P&L, our P&L expenses over the next.
The two or three years and then for the period after go live.
It's not it's not materially different so.
Hopefully that helps.
It does alright, thank you.
And I would tell you of that.
Our level of excitement about it continues to grow because.
When we get to that place.
We will have a five to eight year, maybe 10 year head start on virtually every other major bank in the country.
Hum.
It really being on our new system during P. P. P. One dot O absolutely made the difference in the level of volume we were able to do.
Thank you the.
The next question comes from the line of Jennifer Denver with truly securities.
Thank you good evening.
Your net charge offs of them very contained this year wondering if you're expecting them to rise in 'twenty, one and 'twenty, two and where they when do you think they could peak.
And if you could give us just a little more detail on what you're seeing in those more at risk portfolios.
Hey, Michael it's Eric.
Jennifer It's Keith let me jump in and I'll I'll turn it over to Michael maybe for a little more detail a couple of things one we're still not seeing any significant.
The negative impacts in terms of charge offs to the portfolio on those COVID-19 related industries, and we can get into some of a little bit of detail about what those are but we're not seeing any impacts there and I think this common it's been made a couple of times.
As we get through this next round of stimulus to help people get around the bend and we get the vaccination, which I know a lot of businesses are looking forward to we just we don't see that in the future, but we also don't know what the economy holds so as it relates to that portfolio, we haven't seen losses materialize, we don't didn't see them certainly.
This quarter, we don't see them in the short term.
In terms of the other portfolios as mentioned earlier, a substantial portion of the charge offs. This past year and certainly this past quarter when the oil and gas portfolios. We don't see any significant charge offs are looming.
In the next couple of quarters from those portfolios, but Michael Let me turn the T real quickly and see if you have something to add.
Well I think you've covered it well Keith I would only add that I think the unit count.
Around charge offs might rise a little bit I'm not sure about.
The net charge off ratio up or down.
But we do expect to see some small business failures although.
The.
Small business is holding up.
Very well.
Mostly because.
I think our borrowers are disciplined the resilient had more cash.
Essentially than we thought they did and now with this stimulus.
And you know vaccine and community around the corner I think.
He said it on the head.
If I could just add to that under the.
Seasonal accounting rules that we are currently living by we are estimating.
Our credit losses of $835 million of the lifetime of our of the loan portfolio and so.
It's just a really important I think punctuation to all of that commentary.
Thanks, so much.
Okay.
And our next question comes from the line of Steven electrical of countless with JP Morgan.
Hi, everyone.
I wanted to first ask the quest.
On the strong deposit growth again this quarter I know for Q is typically a window dressing quarter, but with no new government stimulus from the fourth quarter, where is all of this incremental liquidity coming from.
<unk> is just warning cash and how much risk is there if rates rise of that could potentially be siphoned out pretty quickly.
Well I'll start with so much speculative.
We've referenced the certainly last quarter and I think this quarter, we believe that the.
And physical and other stimulus programs are creating a lot of liquidity in the system.
That's washing up on bank balance sheets, including our balance sheet as I said.
Oh the earlier on in the response to a question we have a lot of cash on the balance sheet today, but we're being really mindful about how far out the curve, we put that cash to work because we do think there's a reasonable chance that by the end of the year some significant part of that.
I may have left the bank.
I will say that is somewhat speculative.
Okay.
Tell me this.
Hey.
You know clearly.
Our DDA to total deposit ratio has continued to increase them and so the.
The there will naturally be you know probably a drop in that but.
If you look at our mix of noninterest bearing to total deposits over very long periods of time it has been very resistant.
Two periods of increased rates.
And I think that people have figured out that is largely a function of a really small customer of business customer client a small operating accounts.
Just hasn't been bad susceptible to a rate chasing basis point, Jason Okay.
That's helpful.
And maybe for a follow up regarding NIM and the pressure you guys of seed from securities and fixed rate loans, resetting lower and maybe for Paul how much steepness in the curve what do we need to see the more fully alleviate that pressure if we get the I don't know two per cent of the 10 years of gone.
Where does that need to be for the us not to worry about this anymore.
It's hard for me to be really specific about that I will say the part of the curve that we're particularly focused on is kind of the three to five year of appointing the curve because that's where at the margin.
That's kind of where we're investing our discretionary sort of part of the balance sheet the investment portfolio.
For the extent, we're mitigating or attempting to mitigate the interest rate risk through swaps, that's kind of where that occurs.
And to the extent, we've got fixed rate loans, they just sort of happened around that that part too. So it's hard for me to be really specific.
Around what that looks like although I wouldn't target it to the 10 year I would probably targeted to sort of the three to five year part of the curve.
Okay fair enough. Thanks for taking my questions. Thank you.
And our next question comes from the line of Gary Tenner with D. A Davidson.
Thanks, Good afternoon.
I guess I had a pretty sizable reserve released this quarter I appreciate the color in the slide deck on the moving parts for the quarter.
Given the positive commentary you know in terms of the PPP two vaccinations et cetera, just trying to get a sense of where you think that provision number could go in the near term I mean, if we get.
A successful vaccine rollout as we go through the spring I mean is that just the acceleration of reserve release into 'twenty 'twenty, one versus 'twenty 'twenty two.
Well I'll start with that I I you know the.
As you know our undersea so we we need to create the allowance for credit losses, that's consistent with our best expectation.
For the life of loan losses in the book and that's the that's the $835 million, we set in the fourth quarter. We also noted that.
As the portfolio of migrates at risk ratings as risk ratings improved as the economic forecast.
True to the extent of it does and we saw that this quarter.
To the extent that those things continue sort of over and above where our current expectations are for improvement.
And those of the those are the things that would lead the allowance for credit losses down and likewise, a reversal of fortunes on any of all of those.
The and offsetting factor on the allowance.
I'd, maybe just add debt.
I think I can speak for all of us here and saying that for the fourth quarter charge off experience.
Was I mean, we were delighted by it.
Certainly not what we were would have expected and the pandemic.
I think it's a little early to know yet because of that was an aberration.
But if we if we see a continuation of that trend in the first quarter.
And then all the into the second quarter.
I think absolutely youre going to see some.
On the reserve releases.
It will simply.
Changed our outlook is for us.
What the damage is going to look like.
I sit on the stimulus.
That's out there the vaccine every everything that.
Uh huh.
Aye.
I think the real test is going to be in the actual experienced charged.
Charge offs that we see here this quarter and maybe even at the end of the second quarter.
Okay. Thank you for that and then quick question on <unk>.
Time deposits are down quite a bit this quarter versus the third quarter on average.
The 20 basis point decline in rate there.
What are you booking new or rollover of time deposits that right now and then you know the.
Do you think that the total outstanding number of continues to decline and what kind of rate do you think it could get you.
Yeah. This is Paul day that time deposit number of largely as sort of.
Kind of of broker CD sort of sort of hub.
One of many sources of funding for us the historically, we've utilized and tried to spread out of our sources of funds, including brokerage Cds given the the massive amount of liquidity that's washed out of the balance sheet of over the last nine months, we're actually just letting that portfolio run off so I went and relatively short portfolio. So I would expect.
As evidenced by the change in the balance of course, I would expect that the continue to run off over the course of the next level.
Of course of the next several quarters and frankly not be replaced.
Thank you.
Yeah.
Thank you.
The next question comes from the line of Kinder, whose debt with Jefferies.
Alright, thanks, guys.
On the PPP one point of slide I, just wondering have you tried to or start thinking about sizing that new to bank customer opportunity. It's just interesting to see how much existing customers have with the bank, but I don't want to presume that it's of similar size opportunity do you have a way that you are starting to kind of think through that and how much uplift you might get.
On top of what you've seen already come in through new to bank customers.
Yeah, that's of Great question.
And you know.
We are [laughter].
We can absolutely see everything that was 14700 approximately needed by the customers are doing.
We're tracking their utilization of their DDA account very carefully because that indicates that.
That's the 30% number that they're they're they're actively moving their relationship and so that's progressed from obviously the zero to 30% of the short period of time so.
We're having lots of interaction the this is.
Hum.
We know these we can count these customers are in one's not in hundreds of thousands.
We're keeping track of the calling effort all of them through our contact management system of our Ceos and our bankers are highly focused on it and so it's hard to know where it'll end up but we're encouraged by the you know the early loan growth in our.
New services growth that we see there.
And but I'll tell you.
It's always more fun to talk about kind of new customers at the little sexier, but the approximately 33000 existing customers.
We probably didn't have that closer relationship with some of those and so this gave us the chance to have a really intimate experience with them and we're seeing a nice pick up in loans.
And other services and just the strengthening of the relationship there. So you know if you.
We're going through the pandemic you you'd rather have had 47000 really intimate interactions.
Just sitting back on your couch, Andrew Jammies so.
We're watching it closely we're measuring it closely.
And when.
When you think about the fact that we've got another 150000.
Business customers with.
With revenues of less than a million dollars that did not apply for a PPP loans.
We were pretty energized about the progress we can make during this time period.
Got it thanks, and a follow up for Paul Paul. So if you do the math that you implied before you get the starting point I think of around $500 million ex PPP NII and then we will grow it on top of that my my question is presuming that's right.
Do you even start to think about like what PPP lumpiness looks like in terms of reported NII as the next year progresses, obviously with more forgiveness with PPP 2.0 coming out.
Zoom there might be some left you know by the end of next year, but is it as much of a guessing game for you guys. As it is for US at this point when you think about the.
Yeah of the out year for that well.
Well, we for I think we've provided some pretty good statistic.
The first round of PPP and sort of of the level of forgiveness than we saw in the first quarter.
As we noted that the.
And as you know.
The 1% coupons attached to those loans, we had $141 million of unamortized sort of net fees.
September 30th that was down to $102 million with $26 million of sort of accelerated amortization associated with that so we're trying to provide all the pieces of it you can kind of provide your own estimates on how that forgiveness is coming in I would say that fourth quarter was a good quarter.
The kind of.
When you think that that was the first quarter of forgiveness of my expectation is that we're going to see it we're going to see that continue into 2020.
For 2021, so that is you can kind of get your arms around that but to your point the the hard part will be.
The second round of PPP.
And sort of how fast those come on the books and then to the extent the borrowers meet the threshold how quickly those are forgiven by the SBA that theres a lot murkier to me, but but all of that being said.
I think 2021.
We will be.
For the next several quarters at least significantly impact net interest income will be significantly impacted by the existence of.
Of the PPP program and your math is approximately right I came up with a slightly different answer.
Just a couple of weeks ago. If you look at the yield of $6 3 billion and three five per cent yield for a full year, that's $220 million.
So you divide that by four and it's like $55 million associated with PPP.
Right right I was just taking it away from the FTE number. So I was just doing 557 minus 55. So I think we're on the strikes there got it.
Hey, Thanks, a lot Paul Okay. Thanks.
And our next question comes from the line of Brad Millsaps with Piper Sandler.
Hey, good evening.
Okay.
Hey, just wanted to follow up on expenses you guys have done a great job for several years really keeping a really tight lid on expenses.
Looks like the guidance is for flat expenses at least on a GAAP basis. In 2021. However, I know in 2020, you had about $60 million related to the donation and I think the termination of the pension.
Just kind of curious your that would imply about a three or 4% growth rate.
Some of that some of that attributable of some of the things that Scott talked about being delayed.
With all of the technology spend that you guys have going on or are there other things, they're sort of juxtaposed against sort of of the ongoing expense initiatives that you guys have in place.
Paul do you want to speak to that.
Yeah sure. So yeah as we as we reported we expect kind of GAAP expense to be roughly similar you did point out some unusual items.
In 2020.
Our 2020, but as we look ahead to 2021.
The continued build out of our technology stack of some really important part of kind of of.
What we're doing and important part of who we are going to you. So that is that is a contributor.
Certainly.
The expenses, we expect to see in 2021 of <unk>.
What would you add to that.
Yeah I just.
I think you got to have to look at the longer time period. You go back to 2014 2015 and on an absolute basis, our expenses are up about 5%.
A lot of annually just on absolute basis from that the prior time period and so we.
We are continuing to invest in technology, but.
But at the same time, you saw us reduce our FTE count by 5% the.
Fourth quarter of last year, and you can absolutely see that in our FTE numbers. So.
We're pretty encouraged about our ability to continue to keep expenses.
Hum.
The relatively flat.
And because where we just have this again huge bucket of smaller type of initiatives like Paul referenced with automation that are creating savings not necessarily savings that.
The one particular, one you know you go Wow, that's going to change the course of the company.
But what changes the course of the company is when you have a culture of the continuous improvement of its happening in little pieces, all along the way.
Yeah, I guess I'd also just.
Said earlier, but just for the mine.
Our expenses in the quarter were.
Impacted by the fact that credit quality.
As reflected in the charge off number was.
It was.
Better than expected and.
So we did increase the accruals for incentive compensation as a result of that.
That had about a $7 million.
The impact from the quarter, we also had some additional costs.
Some of the professional fees associated with the PPP program.
No.
Sure.
It was a really messy quarter noisy quarter, but it was.
There were a couple of those.
Items in there of it took expenses from here.
Great. Thank you guys.
Okay.
Okay.
The next question comes from the line of Brian Klock with.
Keith Bruyette <unk> woods.
Hey, good evening, guys and the.
Real quick before the bell.
Two follow ups for you Paul.
And the PPP and the forgiveness you mentioned that you gave some color on the first quarter.
Saying that that was the color on the first quarter of forgiveness of debt with the fourth quarter of.
Of 2020 that is that true or did you actually say what you think the forgiveness may impact the first quarter of 2021.
Oh, the forgiveness will absolutely impact some of them sorry, if I misspoke I was trying to refer to the fourth quarter and I think we've got some statistics in here in terms of of the number of loans that were you know.
On the front page of the press release right a number of loans that were forgiven. My point is is that we still have a lot of loans to work through the process and so I'm expecting that to absolutely impact.
Net interest income for the next couple of quarters, and then PPP 2.0, as we like to call. It yes.
Yes that is sort of as I said earlier, an additional layer of complexity, because I think the forgiveness period on those by the time, we sort of get through the mid year.
Our debt, possibly before I'm not sure we may start to see forgiveness on that second round of of PPP and as Harris said in his prepared remarks, we have seen.
A lot of applications coming in on that second round of the program and it's really important for us.
To be open and available to our communities to really help them out.
With the program and so we're you know we're all very focused on doing that.
Okay, Great just one follow up question.
The Brad's question on the guidance on the adjusted noninterest expense.
So in order to be the guidance of being flat in 2021, it's based on the 2020 adjusted net interest income that's on that side. So it really just the excludes the pension expense from that right. So I think of billions of dollars 70 is the base the compare from.
Well, there's two ways to do it.
One is to look at the fourth quarter.
Because that's why does the you know kind of fourth quarter, the fourth quarter comparison.
And I think what we're saying is look for the fourth quarter, you know by the time of getting the fourth part of next year, it's roughly consistent the other thing as we say on the slide.
And we're pretty explicit about debt do we expect the full year 'twenty, one GAAP non interest expense to be approximately stable with the fiscal year GAAP.
Non interest expense figure, which we say right of the slide is one $7 billion.
Okay. So does that end.
Implying that there's some.
Non-GAAP expenses made me and other charitable contribution similar to what you had in 2020.
Yes, so sorry, not to imply that we're just trying to come up with the there are a couple of different ways that you triangulate on the same number of were expecting.
<unk> adjusted expenses to be about $1 $7 billion in.
In 'twenty 'twenty one.
Got it okay. That's that's helpful. Thank you very much thanks for your time.
Yes. Thank you.
Your next question comes from the line of Steve Moss with B Riley Securities.
Good afternoon.
One follow up question for me on the allowance for credit losses here. The 59 million dollar decline related to portfolio changes you've put a lot of loan growth here driven by municipal and owner occupied over the past 12 months kind of.
I'm wondering do we think about that you know of.
Good component of that puts the 9 billion being sustainable as we head into the first half of 'twenty 'twenty 'twenty one in terms of reserve release.
So I'm, sorry, I didn't quite catch the question could you repeat it.
Oh sure. So just on the slide 15, with the $59 million a reduction of the ACL from portfolio changes.
You guys mentioned, there are new loans the portfolio mix the two of the drivers and just looking at.
Growth over the past.
For quarters has been driven by municipal loans and owner occupied CRE. So I'm thinking that that continues into 'twenty 'twenty, one do we see a good chunk of that.
The $59 million of reserve release, those sales quarter continue into the first half of 'twenty 'twenty one.
Well I.
Just trying to say that it continues but what I can't you are picking up on the theme, which is to the extent we are growing parts of the portfolio. There are less risky and absolutely has an impact on sort of the overall average of allowance for credit losses relative to loans. The other really important factor, though that I that we mentioned in the slide and it's a really important factor I don't want overlook division.
Loan growth has slowed the existing portfolio is shortening and under Cecil one of the key sort of key.
Key determinants of the honest for credit loss is the lifetime of the loans and as loans move through time, the probability of default decreases so to the extent that we've got of shortening portfolio.
From the average life perspective that also absolutely has an impact on the allowance for credit losses.
Well, it's certainly certainly the credit quality bar on that page page 15 slide 15.
Assuming.
The pandemic.
We start to see of recovering economic.
The economic activity of theirs.
The credit quality improvements should be reflected there as well.
Most of the right. Thank you very much.
In the fourth quarter.
Thank you and I'm showing no further questions. So with that I'll turn the call back over to the director of Investor Relations James Abbott for any closing remarks.
Yeah.
Thank you everyone. We appreciate you joining us for the fourth quarter earnings call for 2020, we look forward to seeing you and speaking with you.
In the near term if you of any follow up questions I'll be around this evening and tomorrow and so forth to take any of those questions. Please just reach out to me at.
At the number at the top of the press release thank.
Thank you and with that we are adjourned. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.
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