Q2 2021 Zions Bancorporation NA Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Zions Bancorporation second quarter 'twenty 'twenty 1 earnings results webcast.
At this time, all participants are in listen only mode.
Later, we'll conduct a question and answer session and instructions will follow at that time.
Depending on what you would require assistance during the conference. Please.
The press Star then zero on your Touchtone telephone.
I would now like to turn the conference over to your host Mr. Paul Abbott director of Investor Relations.
Yeah.
Hey, Thank you very much Christian it's actually James Abbott, but thank you again I appreciate it good evening, everyone. We welcome you to this conference call to discuss our of 2020, 1 second quarter earnings.
I'd like to remind you that during this call we will be making forward looking statements. Although actual results may differ materially.
We encourage you to review the disclaimer in the press release for the slide deck on slide 2 dealing with forward looking information and the presentation of non-GAAP measures, which apply equally to the statements made during this call.
A copy of the earnings release as well as the slide deck, we will use on this call are available at Zions Bancorporation dotcom.
For our agenda today, Chairman and Chief Executive Officer, Harris, <unk> Harris Simmons will provide opening remarks, followed by comments from Scott Mclean, our president and Chief operating officer.
Paul Burton, our Chief Financial Officer will conclude by providing additional detail on zions financial condition.
With US also today are Keith <unk>, our chief risk Officer, and Michael Morris, Our Chief Credit Officer.
We intend to limit the length of this call the 1 hour.
During the question and answer section of the call. We request that you limit your questions to 1 primary 1 and a follow up question if necessary to enable other participants to ask questions.
Of that I'll now turn of the time over the Harris.
Thanks, very much James and welcome to all of you who joined our call. This evening.
The start on slide 3.
We were really pleased with the overall results for the quarter, particularly on the credit quality front.
Where we experienced net recoveries of previously charged off loans, we saw loan activity.
Excluding PPP loans that was more encouraging and we.
We'd become somewhat more optimistic about the loan growth prospects for the future.
We accelerated the purchase of purchases of securities.
During the quarter, resulting in linked quarter growth of that port for portfolio on an amount to roughly double that of the prior quarter.
We plan to continue that pace in the near term.
Deposit growth was strong with essentially all of the growth coming from noninterest bearing deposits.
And despite the increase in securities purchases or money market investments increased relative to total assets.
We continue to streamline the organization, allowing operational expense to remain relatively flat. Finally, we were very pleased for the advancement in our technology platform, having rolled out of new consumer.
Interface, both mobile and online banking online banking, which is materially increase the functionality of our consumer digital banking platform.
Diluted earnings per share increased to $2.8 per share from the dollars 90 cents on the prior quarter.
More than $120 million of our allowance for credit loss was released due to improved confidence in the economic outlook.
The strong credit quality of outperformance relative to expectations boosted returns.
The third boosted earnings rather than turn boosted our capital ratios.
This ratio of capital ratios for now.
Particularly strong relative to our risk sports the risk profile.
Earnings for also bolstered by a substantial net unrealized gain on an SPE IC investments of 1.
During the quarter.
And we were encouraged with the relative stability of our non PPP loans, which declined only 1% from the prior quarter.
Examining the 3 major loan categories.
Our non PPP commercial loans increased about 8%.
Which is roughly in line with the <unk>.
The federal Reserve's H 8 data on commercial loans, when excluding PPP loans.
We continue to exercise caution towards commercial real estate loans and several of the property types as.
As such that category only increased 4%.
Consumer reports of portfolio equals about 20% of total loans and it's made up primarily of residential mortgages.
Which declined 3.1% from the prior quarter, although it's notable that the rate of.
Attrition in that portfolio of slowed as the quarter progressed.
Period end deposits increased 3% or $2.3 billion noninterest bearing deposits accounted for for a remarkable 99, 7% of that increase.
Since the beginning of the pandemic our deposits of increased more than $16 billion, which is equivalent to the deposits held at our largest affiliate.
The prior to the pandemic.
Appropriately managing the magnitude of influx of just 18 months, it's been 1 of our highest priorities, which Paul will be addressing in his remarks.
Going to slide 4.
It reflects recent earnings per share results along with some notable items on the right that may be of interest as previously noted 2025 per share on the current quarter.
After tax recognized.
Net gain from an investment in the small business investment company funds 1 of the companies within the fund Retrusion Pharmaceuticals underwent an IPO in April.
Which we described on our first quarterly 10-Q.
Additionally, although not shown on the page the per share value of the reserve release was 56 cents.
On slide 5 we highlight the balance sheet profitability metrics. The very strong results are attributable to items that I previously described.
As previously noted another significant the highlight for the quarter was the credit quality of the loan portfolio as illustrated on slide 6.
We continue to see improvements of nonperforming loans and net charge offs when compared with the prior quarter.
Although not shown special mentioned loans declined 26% from the prior quarter on the classified loan balance declined 6%.
Overall, we experienced net loan recoveries of 2 basis points of non PPP loans from the second quarter declining from 7 basis points of net loan charge offs in the first quarter.
Shown on the chart on the bottom right 1 can see the volatility of the provision contrasted with the relative relative stability of net charge offs.
Turning to slide 7.
Our capital levels increased significantly during the pandemic.
Common equity tier 1 capital ratio increased to 11, 3% from 10% of at the beginning of the pandemic.
We suspended share repurchases during the most of a certain period of the pandemic, while maintaining our common stock cash dividend.
We resumed buybacks in the first quarter repurchasing $50 million of our stock we increased the amount.
The buybacks to $100 million from the second quarter on.
Although it's premature to announce anything that day, the company is well positioned to be more active in our capital management.
I'm now going to turn the time over to Scott Mclean, our President and Chief operating officer, Who's going to update you on the Pp program on our technology initiatives Scott.
Thank you Harris and good evening to everyone turning to slide 8.
It's a precursor of the discussing the paycheck protection program or PPP loans are adjusted for.
The provision net revenue was.
$290 million in the second quarter.
This is net of the effects of the previously noted I P O.
You'll notice that the bar of splitting into 2 portions of the bottom portion of the bar represents what we think of it as generally recurring income while the top portion of the bar of the notes of the D. PNR, we've received from PPP loans.
Of course, we recognize the income from the source will decline net.
Otherwise our ability to outperform by a factor of 3 times the industry origination of the P. P loans has resulted in significant benefits to our communities as well as hundreds of thousands of individuals and families.
Of course, our earnings from the P. P.
The program the ball.
Most of the profitability during the pandemic and produce capital that ultimately benefits all shareholders.
And of our from the program has equaled 262 million so far.
There remains of 137 million in capitalized income that will be realized all of the palm.
Turning to slides 9 and 10.
Part of these highlights.
Oversized performance.
The thing that we ranked 10th overall on the origination volume of PPP loans, when combining both years of adult.
So I think the colleagues will energize to rise for the challenge of making a difference of our communities during the pandemic.
Regarding forgiveness, we're well under the process with $6 billion of applications received and $5.3 billion of approved by the SBA that leaves for 5 billion of the P. P D loans on our balance sheet at quarter end.
During the second quarter on an additional $2.4 billion was forgiven by the SBA of moderate increase over the prior quarter's rate leading to a moderate increase in the yield book.
The PPP loans.
Turning to slide 10.
Having noted the positive earnings impact of a moment ago, the slide reflects the longer lasting benefit.
Specifically as a result of the laser focus of our bankers calling efforts.
Do you see growing relationships with all 77000 P. P. The recipient.
These customers collectively of also contributed significantly to our deposit growth during the pandemic.
More specifically of the round 114000, new to bank customers over 50% now appear to be utilizing us for their operating accounts off of.
So it is growing nicely each quarter.
Turning to slide 11.
For those of you who are for.
All of us for a long time and I believe at least the handful of you on this call have followed us for more than 2 decades, you'll know that we are committed the complementing our competitive advantage as the relationship oriented bank by enabling our customers to the business faster and more simply through technology.
Many years ago Zions pioneered the remote deposit capture with literally required an act of Congress to enable us to provide the service the customers.
Today, we continue to be encouraged with the progress made on the technology from.
This year, we rolled out on the landline and mobile banking system.
650000 containers.
Which was very well received by our customers and the.
The implementation went quite.
Quite well.
Given the size of it by early 2022, we will do the same rollout online and mobile capabilities additional capabilities to the 150000 of our business customers.
The in 'twenty 'twenty 3 we expect the complete the multi phase transition to our modern core system.
As of February of 2019, you'll recall that we completed the replacement of our 3 core loans systems and now have virtually all of our loans.
On our modern core utilizing 1 day to model well.
We will continue to provide more details on this competitive advantage of advantage very simply this means that unlike all other U S. Banks, we will have a modern core operating system the greatly reducing the complexity complexity of aging legacy and history of infrastructure.
Specifically, let me just highlight a few things that you really need to know this course of architecture is real time parameter driven a P I enable.
All of compatible.
The entire degrees of cyber resiliency and.
And we will be far more agile as we create new products and capabilities on the future.
It operates with 1 day the model.
A key to being successful on the digital world.
It is capable of the 7 day processing for 1 of the U S market adopts the international capability on standard.
It will dramatically improve how we protect and utilize customer of attribute of data.
Additionally, the unified the customer account opening process of our branches and all along as well as being far more user friendly for our employees.
As you know this core transformation journey has been the catalyst for simplification and modernization throughout the company and sets us up to optimize our investment as we further automate the interface between the systems in the back and front office.
And back and front office processes on.
And that's 1 of the time over the Paul Burton, our Chief Financial Officer to provide additional detail on our financial condition Paul.
Thank you Scott and good evening, everyone more than 3 quarters of our revenue is net interest income, which is significantly influenced by loan and deposit balances and growth as such I'll begin my comments on slide 12, with the review of those 2 categories.
The average loans were down in the second quarter by nearly 2% when compared to the first quarter. We are starting to see slight improvement in our C&I owner occupied home equity and our bank card portfolios, excluding PPP loans average loans were down 1% from the prior quarter and down $2.4 billion on approximate.
The 5% from the prior year period.
Harris noted earlier and it's worth repeating period end loans, excluding PPP loans were essentially flat from the first quarter.
Within the loan portfolio average non P P commercial loans.
We're down $172 million or less than 1% from the prior quarter, while period end commercial loans increased nearly 1%.
Within the commercial real estate category construction and land development loans increased on a period end basis by 5.4% compared to the prior quarter and term CRE declined less than 1% overall, the total commercial real estate portfolio grew 0.4% when compared to the prior quarter.
Average consumer loans declined $437 million or for 1% from the prior quarter. Unlike glass for her when consumer loans were down in each category in the second quarter, we saw growth in 3 categories home equity construction and the other commercial real estate and bank card we saw 5.4.
The decline in residential mortgage is when compared to the prior quarter due to continued refinancing activity, although the attrition rate has slowed as the quarter progressed.
And then the PPP loan portfolio, we continued to see Paydowns and processed forgiveness totaling $2.4 billion in the corner the.
Average balance of PPP loans decreased 3% compared to the prior quarter.
1 final note on loan growth relative to periods prior to the pandemic revolving line of credit utilization has declined several percentage points to about 34% from about 39% based.
Based upon the amount of revolving loan commitments that difference explains about $1.7 billion or.
Nearly all of the decline in non PPP loan balances during the last 18 months.
After several quarters of decline of utilization, we did see a slight uptick in utilization in the second quarter relative to the first part of it.
Deposits have been the driver of the growth of the balance sheet over the past several quarters.
On the right side of this page.
Average deposits increased 4.5% from the prior quarter, while period end deposits increased 3%.
Relative to the year ago period average deposits increased 18%.
Average noninterest bearing deposits increased 8% over the prior quarter and 26% compared to the prior year period.
Our average noninterest bearing deposits are now 49% of average total deposits end of period and they had reached 50%.
The yield on average total loans increased slightly from the prior quarter, which is attributable to the for 5.6% yield on the PPP loan portfolio.
Excluding PPP loans, the yield declined 2 basis points.
2 of $3.6 7% from $3.6 9% as we continued to see some pressure on pricing in most of our markets attributable we believe to the surplus liquidity in the marketplace.
Deposit costs are low our cost of total deposits felt of 4 basis points.
And part of it.
On Slide 13, we show our securities and money market investment portfolios over the last 5 quarters.
Size of the period on securities portfolio increased by about $4 billion over the past year to $19 billion, while money market investments increased 10 billion to $11.8 billion, which is now 14% of earning assets as Harris noted earlier, we accelerated the growth of the securities portfolio on the second quarter and.
Just under $1.2 billion on average to the available for sale of portfolio. We continue to exercise caution regarding duration extension risk by purchasing bonds with volatility short final maturities and keeping an eye on the duration and an upward shock scenario in fact, we estimate that the duration of our available for sale.
The Securities book would extend by less than 1 half of year in a parallel of 200 basis point upward shock.
Slide 14 is an overview of net interest income and the net interest margin.
The chart on the left shows the recent 5 quarter trend for both the net.
Net interest margin in the white boxes has declined over the past year, reflecting the rise in excess of liquidity.
Average deposit growth has exceeded the average loan growth by $13 billion over the past year for the second quarter. This growth in excess of liquidity as referenced in the chart on the rate as the strong growth in deposits is impacted the composition of earning assets due on a larger concentration in lower yielding money market and securities investments.
In the current quarter the effect of of greater concentration of money market investments drove 7 basis points of linked quarter net interest margin compression with the slightly dilutive effects from securities being offset by a lower cost from interest bearing deposits.
Slide 15 shows information about our interest rate sensitivity.
Focusing on the upper left hand quadrant, our asset sensitivity has increased as noninterest bearing demand deposit growth is funding an increase in short term investments. We are generally comfortable with the increase in rate sensitivity because we still believe the risk to lower rate is limited the duration of recent deposit growth remains uncertain.
And adding asset duration is a lot of appealing relative to the interest rate risk profile.
As we previously mentioned, we are marginally adding duration by increasing the size of the investment securities.
On the interest rate swaps portfolio, the $2.7 billion of securities purchases for the quarter had an average yield of 165%.
On slide 16 customer related fees increased 5% in the quarter to $139 million, notably activity based fees, such as card fee and merchant services did well card income increased 15% over the prior quarter due to increased customer activity and spending. Additionally.
Capital markets activity was stronger principally from loans syndication fees and wealth management fees maintained their strong pace when compared to the prior year.
Noninterest expense shown on slide 17 was down 2% to $428 million in the second quarter compared to the prior quarter adjusted noninterest expense was down 5% or $21 million to $419 million. The decrease of adjusted noninterest expense was primarily from lower seasonal employee.
Compensation and benefits expense.
And lower professional services associated with PPP loan forgiveness. Adjusted noninterest expense also excludes the $9 million success fee accrual associated with the incursion Pharmaceuticals IPO.
Slide 18 details of our allowance for credit losses of our ACL in the upper left we show the recent declining trend of the ACL to $574 million at the end of the second quarter or 1.2% of non PPP loans. The chart on the lower rate of this page shows that $103 million of the 122.
The decline in the ACL was driven by an improvement in the macroeconomic forecast.
I'll give you the outlook can be found on slide 19, as a reminder.
This is our outlook for financial performance from the second quarter of 2022 as compared to the second quarter of 2021 the quarters in between are subject to normal seasonality and my comments are subject to our earlier reference to the forward looking statement on slide 2.
Due to the degree of uncertainty in the timing of customers the bidding requests and the SBA approving those requests our outlook for loan growth excludes the PPP loans.
On the commercial loan front, our bankers are expressing optimism and we are just starting to see green shoots of loan growth. However loan payoff activity is also increasing as relatively strong valuations are leading to increased business sale activity. We are not expecting a lot of growth in commercial real estate and consumer loans again dominated by mortgage.
These are likely to be flow to grow as long as the yield curve remains flat and the 30 year conforming mortgages are more appealing and adjustable jumbo mortgages, putting it altogether, we are somewhat more optimistic about loan growth now than we were in April and as such we are modestly increasing our outlook to slightly to moderately increasing from slightly in the.
Freezing.
We expect net interest income also excluding PPP loan revenue to increase moderately over the next year, we expect debt to be the result of continued slight compression of loan and securities yields which will be more than offset by continued deployment of cash into term securities and a somewhat more favorable outlook for growth in non PPP loans.
We reiterate our outlook for customer related fees at moderately increasing we have started to see an improvement in economic activity translating to increases in card and small business related fees as well as long as syndication and other commercial lending related fees. We expect the wealth management revenue will continue its double digit growth trend in mortgage.
Banking revenue should remain generally stable.
Adjusted non interest expense approved improved from the prior quarter and we expect the non interest expense will increase slightly for the second quarter of 2022 from the $419 million reported in the part of just ended we remain disciplined on expense control, but as business activity and profitability increases expenses may increase.
My disclaimer from our April call. This outlook does not reflect a significant change in inflation from what we've observed over the past several years, which we believe is an emerging and increasingly important risk to our outlook.
Finally regarding capital management echoing Harris his comments, we have a very strong common equity tier 1 ratio now at 11, 3%, particularly in the context of <unk>.
Excellent credit performance and the results of our internal stress testing as we consider the balance between capital ratios and our risk profile. We believe there is room for more active capital management in the near to medium term for long as the current macro economic and credit trends continue to be favorable.
This concludes our prepared remarks Christian would you. Please open the line for questions.
Ladies and gentlemen, if you have the question at this time. Please press Star then the number 1 key on your Touchtone telephone.
For your question Thats been answered.
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Your first question is from Ken Zerbe from Morgan Stanley. Your line is open.
Alright, great. Thanks, Good evening guys.
I guess, maybe just starting off in terms of.
The security investments I know you said, you're you obviously stepped up security investments this quarter and you plan to continue at sort of of this elevated pace going forward.
Obviously, I know you don't invest in the 10 year treasury, but with yields of around 1.2% on the Treasury side can you just talk I worry that.
The securities that you're buying are also kind of falling in yield can you just talk about like what you could I guess I'm, saying what are what are the investments that you're investing in today for what.
For the yielding today versus kind of what your average purchase yield for us on it and <unk>.
And Ken I'll start on that given even the good evening.
Youre right I mean, obviously theres been a big rally in the 10 year, we've seen rates fall, we don't invest in the 10 year as you said.
Our duration of kind of in the 3 to 5 year sort of bucket and we put.
The securities on there and that's generally where we've been investing.
In swaps.
As well I will say that we the alka.
Alco, our asset liability management committee tries to be somewhat thoughtful around timing. So it's not like we've got an automated program, where we're buying on X million dollars per day or per week.
And so in the face of dramatically falling yields I think youll see us.
Kind of slowdown with the hopes that we'll be able to make that up later on in the quarter.
Yeah.
Got it okay, I think that helps a little bit.
Maybe just as a related follow up.
Obviously the euro.
Your guidance on net interest income, becoming sort of moderately increasing from here seems to be the most positive change and your guidance is that driven.
By year end of your I guess change in stance on the investment investing in securities like it because is it going up because you're investing more on securities or is it going to that because of I don't know changing things like your outlook for for loan yields or something else. Thanks.
Yes, Theres a lot of again I'll start on that there is a lot of mixed into that as you know the balance sheets of pretty complicated thing, but 1 of the things that we are observing and I would say, particularly versus a year ago, gaining confidence and is sort of the stickiness of the deposits that are showing up on our balance sheet and all of the ratio of the relationships that go along with the.
Scott.
Nice job of explaining how the new depositors that are coming into the bank, we're really trying to integrate them and make them of sticky as possible and as a result, it feels like the balance sheet growth is a little more permanent than I would have speculated a year ago and what all of that means is that yes, we can be a little more confident in how we're investing that cash.
So that's part of it but the other is as I said there are some green shoots for loan growth, which is highly speculative and there's a lot of things can change in the next year.
But generally speaking the optimism in our footprint really feels it feels like it's improving and so there's an element of a little bit of kind of core balance sheet growth.
In that outlook as well.
Alright, thank you.
Your next question is from the Rochester from Compass point Your line is open.
Hey, good afternoon guys.
Just on your NII guidance I was just curious how much of that.
The debt moderate growth is going to be driven by securities purchases versus.
Loan growth it sounds like.
Youre starting to see some some green shoots on the loan growth side, if rates continue to sit here for fall further you decided not to allocate cash the securities what's the risk of that space.
Basically what I'm asking.
Yeah, Hey, Dave I'll start on that.
You're right. It is maybe a little rate dependent and so.
As we say, there's all of you know a lot of things of that can.
That can change the outlook, but yes.
We've got as I.
I said on my prepared remarks, we've got over $10 billion in cash.
<unk>, earning the overnight rate and so we've got a lot of capacity to continue to invest.
And as I said, we're keeping duration pretty short and so the yield might not be fantastic, but.
It's more than 10 or 15 basis points. If we go out to 3 or 5 years. So we're trying to be really thoughtful about about how we do that there is some rate risk attached to it.
And the risk risk of loan growth loan growth of attached to it what we're trying to provide with this for quarter outlook is sort.
Of our best estimate based on where we stand and based on what we see of where we think things are going to be a year from now.
Okay. I appreciate that maybe just 1 quick follow up on on the capital side you guys spoke to this already it seems like you've got all kinds of capacity to accelerate the buyback going into the back half of the year I was just curious.
With tier of capital ratios.
Target it to actually decline over time.
Was wondering where roughly you guys see your targeted CET 1 ratio now on how quickly do you think youre going to get there I know youll side from some capital off for the support loan growth but.
It just seems like you've got a lot there for buybacks.
I'm just curious how quickly you could reduce that to your new target.
Well I'll start on that and Harris will provide his perspective as well.
We have been saying for some time that we expect to have a sort of a slightly better than median capital position and a slightly lower the median risk profile and that continues to be our goal and so as you point out to the extent that the economy of reemergence and full of kind of get back the business in capital ratios adjust I would expect.
Adjusted <unk> of accordingly, although.
That's gonna be the speed at which we do that is going to be subject for the board and other approvals.
I'd agree with that.
And I.
1 thing I would.
Notice.
Right.
I think that we've got quite a lot of room right now, but I also think for those others continue.
<unk> continued to adjust targets downward.
Uh huh.
I don't expect that we're going to be involved in a race to the bottom.
In terms of you know.
How long can we take these ratios.
Among other things.
At the ports.
Happening in the world of commercial real estate I think is.
Not not at the moment because I think.
As leases runoff from this world kind of of Josh.
That's an area, we're all going to be watching really carefully.
There's still a lot of risk of the world.
Despite.
The fact that we're not seeing it emerging as losses today. So.
I expect it will be.
Are going to want to be.
On a little bit conservative relative to the crowd, but.
But curious there is indeed, a fair amount of room, there to day, and we're going to be working on that.
Alright, great. Thanks.
Yep.
Your next question is from Ebrahim point of water from Bank of America for your line is open.
Good afternoon.
I guess just 1 first question on loan growth for you heard from your peers as well around the green shoots on loans.
Obviously, you guys had flat guidance this quarter over quarter.
Just give us some color in terms of.
What gives you optimism that this trend that you've seen recently is sustainable and would appreciate if you could put some numbers out on what.
The slight loan growth for the back half means.
This is Scott Mclean, all happy to take that.
You know 1 of the things we said throughout the last couple of quarters is when you when your portfolio is declining.
You need the first reach of couple of quarters before.
You can start to project the increases even though a lot of our peers projected increases from the second half of the year I think we're just pleased that.
Here on the second quarter, we've seen the flattening.
We're not experiencing the same declines and I think that gives us optimism that we can start to move from that with growth.
Clearly seeing more greater greater activity in all of our client bases.
1 of the biggest things that I think will drive loan growth will just be as our small.
Small and medium size businesses rebuild their working capital positions.
They all collectively pulled back really hard on.
The investment in inventory and certainly receivables and the with the inflationary pressures supply chain pressures youre seeing businesses.
In heavily into rebuilding inventory again as the.
Their sales are increasing and so this should lead to some additional utilization increase in utilization, which we are at historic levels historically low levels of as Paul.
Noting the other thing I would comment on is the.
We are we are very actively.
Positioning our owner occupied financings in the HELOC financings.
Throughout the the late spring and the summer months from fall months here because.
Those 2 products of directly aimed at our primary client base and we think.
We think with the right structure of Theres, a lot of potential demand there.
I just I, just just just to add a footnote to that.
We're using some.
From reasonably aggressive.
Introductory kind of tier.
Piece of rate pricing and.
And on that that should produce grow from those couple of portfolios, which are really important portfolios for us. So.
It may in the in the very short term.
The volume.
The impact will be offset by some of the rate impact, but but.
But if the rates will be getting a lot better on the rates, we're getting on cash.
Sure.
Got it and just as a follow up for that like the 2 things that we've heard for.
From other banks, especially on loan growth of customer liquidity and supply chain constraints impact on the inventories I did of.
Do you think like if you could give an update based on your customers the liquidity stands and not just seeing some easing of supply chain constraints.
Yeah.
Our customer base just as it is for most banks and throughout the cause of the economy. There they have a lot of liquidity.
It's reflected in the low utilization rates, but.
But there is no softening on the concerns about supply chain or concerns about inflation those concerns are real.
There's certainly the remaining steady if not building in terms of the minds of the business owners.
Okay. Thank you.
Your next question is from Ken <unk> from Jefferies. Your line is open.
Hey, Thanks, guys good afternoon.
Nice to see the the ongoing control of core expenses and I heard you know on continuing to.
Net putting forward the.
The systems.
And heading towards the phase III.
As you deal with this current environment move pass hopefully you know the Covid spend and then the onto the last legs of of.
All of our future core and are we any closer to kind of seeing that.
Youre turning over of of expenses, where you might start to net benefit or are we still have a little bit more of the kind of build out going on underneath the surface until we get to that point, where.
Where we really start to see the productivity enhancement. Thanks.
Yeah, Scott I'll go ahead, so that's 1.
Yeah happy to address that.
You know we will.
We'll see.
Slight increase this year.
On our expenses related to our future core project over the last year that was 3 of $4 million built into our forecast in the next year, we'll actually see some softening.
But in 2023, when we go live with our deposits application.
That's where we'll see a little bit of a bump up.
To be followed quickly on the 24 by a pretty nice drop off so.
All in all of our expenses related to technology in future of course, specifically.
It should be.
Very manageable in 2022 and.
And the only reason there was an increase of 23 I think when you put a major system in the into production.
Pulls forward.
A lot of expenses in that year, and then there's about a 20 per cent falloff on that related cost in the following years. So.
Hum.
At the there'll be a 1 year of kind of increase from 23 and then just the question is you.
How do we divert those now available technology dollars for other technologies.
I'm not sure we will have to divert all of them for other technologies, but the the.
Demand for technology spend will probably always continue to be very high.
We certainly will be passed.
The elephant in the room, which is paying for a completely new core system something of the rest of the industry.
In its entirety has in front of it.
Yes.
Got it thank you Scott.
And just 1 follow up Paul.
You mentioned that there's the the ebb and flow between.
Your rate sensitivity of kind of moving higher because of the noninterest bearing deposits. But then we have the the current burden of just the lower near term rates does anything change with regards to your your hedging strategy and have you do you have you added any or terminated any to kind of bring forward some of that or you just kind of let it play out according to schedule.
Even amidst this volatility where we're having now thank you.
Yeah.
Well. Thanks for your question, we haven't terminated on anything yet we have done that in the past as you know we haven't done that but given the recent rally it's certainly something we'll be paying attention to in terms of adding as I noted we added.
Pretty significantly the securities portfolio.
We have been growing that over the course of last year by several billion dollars I think we're going to continue to grow that and then we're also paying a lot of attention to swaps, we put on a half of $1 billion of notion of value of swaps in.
In the last quarter. These are forward starting swaps in the yield curve got to the kind of a level that we are a little more comfortable with it's backed off away from that now, but we're certainly paying attention to.
Kind of both of those.
Duration, adding.
That is the investment portfolio and swaps as we think about managing our interest rate interest rate sensitivity position, which as you correctly pointed out is really being driven by some.
Pretty great deposit growth and particularly demand deposit growth.
Yeah.
Got it okay. Thank you Paul.
Okay.
Your next question is from Jonathan <unk> from Evercore ISI.
Good afternoon.
Just on the on the loan growth.
I heard you in terms of.
Noting some flattening that you saw imbalances in the second quarter.
I get your expectation for slightly to moderately increasing over the next 12 months just in terms of.
On inflection in terms of how should we think about.
Loan growth of resuming are you implying that next quarter is when we should see some.
Some growth in it.
You expect the steady strengthening from that point or is it still something that's kind of backend loaded on your next 12 month outlook. Thanks.
If I could just if I could start on that 1.
As you know, we don't we try really hard not to make sort of quarter by quarter outlook, which is why we do our sort of 4 quarters out and so I don't want to get overly precise on timing.
But as we said, we sort of sort of flattening of period end balances. This quarter that felt pretty good we saw on uptake in utilization of that felt pretty good.
So we need.
We need some more affirming evidence right.
But I would stay focused on where we're gonna be a year from now as opposed to.
Trying to speculate on what's going to happen in the third quarter.
Okay. That's helpful and then.
On the I guess the.
2 quick things on the expense front 2 part question 1 just in terms of the completion of the core.
Jack in 2023, and you just have the debt.
The timing in 2023, when do you expect that to complete the if you can give us an update there and then separately.
I noticed obviously dovetails into your expense expectations can you give us your updated thoughts on your long term efficiency ratio of level I know you're running around the 59.
Range.
This quarter, where do you see the longer term trend for the for the bank as you look out thanks.
The Scot, let me put a fine finer point on this core transformation expenses thought I was talking about it kind of elliptically on I'll put a finer point on it then.
First of all of the polar Harris, if they want to talk about longer term efficiency ratio, but what I basically said was that of our.
Our expenses for future core our core transformation project.
Basically what would be the they're they're they're they're in the range of about $45 million.
And in 2000, 22021, and there'll be a little less in that part of 'twenty 2 so around that number.
In terms of P&L impact and that number will go up.
The end of the low Fifty's in 2023, when we bring the system online and then the in the following year it will it'll drop by about <unk>.
$7 million to $8 million. So those are the kind of swings we're talking about theyre not big dramatic swings.
But they do free up dollars once we get past 2023 of them in terms of the timing in 2023, it's not 1 big conversion as we bring all of our affiliates onto the deposit system, it's multiple conversions and that'll take place throughout the year, but by the time, we get for the second half of 'twenty 3 we should be we should be clear.
Saving.
And then as you know.
With respect of longer term efficiency ratios.
You've got the tell me what the rate environment looks like.
Thank you.
No.
The 25 basis points of margin.
It's worth a couple of hundred million dollars year to us and that that just so changes the picture in terms of efficiency ratio of debt.
I think in the.
In the current rate environment M&A remains.
What we've seen over the last.
3 months 6 months.
For a very long period of time.
I think it's kind of be tough to be.
Under.
Yeah.
Probably the kind of low sixties.
Hope for a low sixty's, but.
With some with some movement.
Personally I'm sort of the police, but this inflation does not just transitory.
I mean, we're seeing it in.
It's also good for the efficiency ratio.
In terms of wage pressures.
So we're trying to fill open positions.
It's a really.
Relative labor market right now and.
We're seeing I heard this morning.
And employ the kind of call was hired without an interview.
For about a 50% increase of pay.
And you know.
The stuff like that is starting to go on I think I think for what we're going to see.
Personally is.
Is the.
Sustained a sustained period of inflation, that's kind of lead to higher rates for this kind of.
Now, it's kind of produce better margin kind of produce the other kinds of problems along with it but I think that.
I think that it's in my mind unlikely that we're going to see this rate environment last for very long time, but if it does I think it's going to be tough if it doesn't I think we'll see yourselves coming.
Coming back into the.
In terms of the <unk>.
Sort of a more normal rate environment, I think we'd be down.
Probably in the mid to low <unk>.
But.
It's just so dependent on on the rate environment, it's hard the site.
Got it thanks Harris that's helpful.
Your next question is from Peter Winter from Wedbush Securities. Your line is open.
Great. Thanks.
I wanted to talk about credit quality, which is excellent and it's probably some of the best in the peer group, but.
As you look out next year, what is a new normal for net charge offs through the cycle with all of the Derisking that you guys have done.
Well I'll take a stab of that.
We've we've tried to say is.
The last 2 or 3 years.
Our aspiration is to be kind of in the best kind of at the top.
The best quartile on the industry in terms of.
In terms of charge offs and.
And I expect that that will be the case.
It's hard to know.
Exactly what that number is although.
I mean, because we've seen we've seen periods like.
Like this before of where we've had.
We're down to kind of no charge offs for net recoveries.
And you can't do that.
I'm not sure you want to do that forever.
But.
You know I would expect that we're probably.
Going to be in the <unk>.
The 15 to 20 basis point kind of range would be something that is sort of.
More normal and probably kind of reflects what we've done with the balance sheet.
Got it that's helpful and then.
Just just a follow up to that just the <unk>.
Loans for credit losses, trumped, the 1% to 2% ex PPP.
And then I look to the seasonal day, 1 I think it was about 1.8, but.
Just given more confidence in the economic outlook and the changes to the credit risk profile do you think.
The allowance for credit losses could go below.
That January 1.
Let's see Paul do you have any thoughts about that it looks like you are.
Yes. This is part of all.
I'll start with that.
On the under Cecil the.
The allowance for credit losses, so heavily dependent on the economic outlook.
The the you've got the 2 main factors of the <unk>.
The as an underlying risk in the portfolio and then the.
And then the economic outlook and what we saw this quarter was another release it was based largely on a very quickly improving economic outlook and it's it is a.
The kind of a complicated skus that we have to build every quarter. So it would be very very speculative I think to say that we can get a lot lower or even go up from here just because we just don't know theres. So many assumptions that go into it.
Yeah.
I know, it's a really weak probably answer of relative to what youre looking for but the honest answer is is that from quarter to quarter. We don't know until we get there.
And then we assess the risk of it.
The end of the quarter and we built the allowance sort of loan by loan.
From the bottom up.
Yes.
Okay.
Thanks, Bob.
Okay.
Your next question is from Chris Mcgratty from K B W. Your line is open.
Hey, good afternoon. Thanks for the question.
I want to go back to a comment earlier on the call about the degree of confidence in the size of the balance sheet versus a year ago I Wonder if you could elaborate the.
Specific to the deposits.
We've heard of some of your peers talk about some of the transitory deposits that may or may not burned down over time and just looking for a few.
The comments to build on on your comments before about the competence of the balance sheet.
I'll start you know the.
Well the a couple of things there 1 you know I would say our deposit growth relative to average deposit growth looks pretty good.
Hey.
It feels like our deposit growth as the little stronger some of that is from new customers some of it from existing customers.
But we do a lot of analytics, we were part of the sort of the.
CCAR and LCR world for a while and so all of the things that we developed we still utilize to run the business and run the bank and so part of that development on liquidity stress testing was really good insights into the operating nature of.
Of our customer accounts and what we're seeing is yes.
New customers are using their accounts on an operating way and existing customers are continuing in.
In our building their use of their deposit accounts and in operating way and what that means is is that they just feel more sticky. So I would of I would have guessed and did a year ago that the deposits that were generated through the PPP program because as a reminder of the all of those PPP fundings.
Had to occur on our balance sheet right, we put them into a deposit account drawn on our bank.
And I expected that those funds would be largely spent.
On a relatively short amount of time, but what we found is that our customers are far more resilient.
Frankly of and I gave them credit for and that's been a really great credit story as they've learned to balance out their cash flows and the way they run their business, but it's also been a really good liquidity story because all of this money that I expected to be utilized in the business ended up sort of staying on the balance sheet and.
And as a result over time and here we are a year later and deposits are much higher than they were.
When I was originally originally kind of speculating on that so it's a long way of saying that you know sort of over time and experience and with with the real analytics.
Looking at the the.
On sort of operating statistics of underlying the deposits, we're just gaining more confidence.
Those deposits are going to be around longer than we originally originally thought.
Thank you for the color.
Maybe just 1 housekeeping on the on the tax rate.
Is this a good is this the good tax rate going forward.
Sure.
Well that is highly speculative.
I would say.
Just on the current law I think we're in pretty good shape, but that could change as you know.
Got it thank you very much.
The Christian this is James again, just wanted to announce that we've just got a few minutes left for the call. So we're going to switch gears into the lightning round for the call. It. So we'll just go with the <unk>.
1 question per each questioner of at this point. Thank you all.
And your next.
Is from GAAP return tenant from the D. A Davidson your line is open.
I had the question just with regard to the energy portfolio further decline this quarter, which I suppose isn't really surprise, but.
I'm curious how the increase in commodity price is.
Maybe starting to show itself if at all among your E&P borrowers from an exploration perspective.
Whether the whether the expectation would be the cash flows are so strong at this point is the de levered that they would actually draw down on lines for that purpose or that they would fund it more out of out of cash flow.
Yes. Thank you for the question the Scott Mclean again.
Clearly the strengthening in the.
Commodity prices has helped the entire energy sector and our balances.
Excluding PPP loans are basically flat.
Or do you think we'll see some growth there.
There and.
But but basically.
Upstream companies use you see them.
Going back into the field, you see drilling increasing.
And and that most of that will be funded it'll be funded partially by cash flow, but also utilization.
So the sector of strengthening there there still is not available capital whether equity or debt fundamentally about half the banks, who used to be on the energy lending industry of exited.
So it'll basically the bank revolvers and cash flow that they'll find out of but I think I think you'll we'll see over time increases and the revolving balances for upstream companies credit quality was obviously done on improving as well, we're seeing that in and should continue to see them soon.
Your next question is from Brad Millsaps from Piper Sandler.
Hey, good evening.
Addressed my question on energy, but maybe.
Kind of looking at the portfolio of more Holistically are there other areas that.
Debt you guys are emphasizing or deemphasizing more than others Harris mentioned, some concerned around CRE, maybe some teaser rates around HELOC, you've mentioned municipal finance in the in the past the are there other areas of the loan book that you guys are maybe more of less bullish on as we kind of contemplate your loan growth guidance of over the next 12 months.
I guess, the 1 thing I true.
I was talking about CRE and I mean, I expect that probably continues to grow up but for a very modestly.
The.
Municipal portfolio.
We're seeing a more competitive environment out there and.
That's that's probably slowed us down a little bit.
And.
And so we will we will see what happens for that but that's been a that's been on.
Growth driver.
Yeah.
Which I think will probably be it.
Growing at a day.
On a slower pace.
I think the owner occupied commercial real estate is likely to see some some decent growth that's something that we are out really.
Really promoting.
As I mentioned before.
And some of them.
I might just add to that that we've seen you know multi quarters, where our 1 to 4 family mortgages on balance sheet of decline. These are basically jumbo mortgages.
And we're starting to see a mix change again back to originating more held for investment I don't know if that for.
Well flattened this quarter or next quarter, but if you look back over the last 5 or 6 years 25 per cent of our loan growth has come from London for family.
Great product for us of great.
A great business and I think you'll see we'll see growth there again, just maybe another quarter or 2 before it flattens and starts to return.
Yeah.
Yeah. So those are the.
Right and then I was going to sort of just fundamentally just just just just commercial C&I mortgage.
More generally as companies I think as Scott.
<unk> pointed out.
Your a lot of opportunities for companies to the building inventory and kind of getting back to something closer to normal and I think that's kind of result in some of on demand.
Okay.
For your next question is from David Long from Raymond James Your line is open.
Yeah.
Hi, everyone.
As it relates to C&I loan growth you discuss several external factors that may help in seeing some green shoots but is there anything you can do internally to try to get loan growth to pick up is there an opportunity.
Attunity for you to adjust your underwriting the more aggressive on price anything that zions itself can do.
Try to help reaccelerate that C&I loan growth. Thank you.
Well, yes, I mean.
As mentioned, we were using some kind of.
On a reasonably aggressive introductory rates.
We're trying to.
It really take advantage of is the fact, we have a lot of very.
Very very little cost money.
And so we're you know we're trying to really build the book of business that will.
On normally price.
As we get out of here.
But it will start to build balances earlier than that and give us a real income pickup even at the lower introductory rates and we're getting on cash. So that's part of the main thing we're doing we're not really relaxing underwriting I don't.
We think that that needs to remain reasonably constant.
But.
But we are seeing opportunities to put some.
Try and more aggressively.
Rice in the near term.
I would just add to that the secret sauce I always is.
The amount of time of your bankers spend out of their office, calling on clients and our bankers are out.
They are they are out calling they've been doing it virtually they're doing it more of a basically now and at the end of the day you can't really right about it much in the analyst report.
But that's fundamentally what drives the loan growth.
Yes.
This is Michael I might add.
The.
We've reduced our.
Kind of a temporary guidance around underwriting.
From <unk>.
Covid at its peak to now something that looks more like.
Pre COVID-19 underwriting so.
We're back to.
Kind of of pre Covid view of kind of underwrite new risk.
Yep.
Your next question is from Steve Moss from B Riley Your line is open.
Good afternoon, just with the balance sheet continue to grow here and obviously youre sticking to.
The more active on the capital management side kind of curious as to leverage ratio went down this quarter. How long are you willing to go on that ratio with buybacks potentially with the low to mid 7% range be acceptable to you guys.
Sorry, the question was on the leverage ratio.
Yeah would you.
The go down to like.
The low to mid 7% range, yes, so I'm going to give an answer that's more complicated than your question and the answer is that it's of.
Little bit dependent upon the nature of the risk of the assets that we're putting on so for example, right now we've got a lot of PPP loans, which we see as having a.
Little to no credit risk.
And on a lot of basically overnight investments, which have little to no credit risk and as a result.
I think our philosophy around capitalization is that we have to hold capital the commensurate with the risk on the balance sheet that is true for the risk adjusted ratio of and it's true for the leverage ratio. So so long as there's not a lot of incremental risk being added.
I don't think organizationally I don't think we're overly concerned with the leverage ratio ticking down a little bit from here.
I don't think that's likely to become the binding constraint for us.
Well the worry about other things before we do that.
Your last question is from Steven Alexopoulos from Jpmorgan. Your line is open.
Hi, everybody. Thanks for taking the question.
I'm curious as it relates to Covid is the delta variant, having any impact on confidence levels of your commercial customers yet right are they just starting to pay attention to this or not and maybe for Michael as it relates to your reserve is the potential impact from Delta embedded in the economic outlook that you use this quarter to.
The reserve thanks.
The good question.
Yes go ahead, Michael maybe.
Maybe take the addition of St.
It might be a little too early.
To understand.
I understand the impact to our borrowing community.
But we did have a discussion about the delta variant.
We will probably have a discussion on Q3 about it.
It would end up in the qualitative.
Yeah.
Area of the.
Of the ACO.
Yeah, and I would just say.
I agree.
I'm not sure.
We can yet discerned any.
Real concern on on our customers' part about the Delta variant.
Infection rates today are still about.
10% or something of where they were at the very peak.
So you know.
I see.
Thank you.
With the.
Big portion of the population vaccinated.
And as it starts to pick up I think it's going to create a real.
For younger people to get vaccinated.
I hope.
And then our hope is got to be that as we start to understand what you need to do in terms of boosters et cetera that everybody is kind of playing playing ball.
I don't think it's showing any signs at the moment of slowing down.
For commercial customers.
From the recovery.
Thank you I'm showing no further question at this time I would like to turn the call back to Mr. James Abbott for closing.
Thank you Christian and thank you to all of you for joining US today. If you have any additional questions. Please contact me at email my email or by phone.
On our website look forward to connecting with you throughout the coming months.
Again, thank you for your interest in Zions Bancorporation. This concludes our call.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day.
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