Q4 2021 Zions Bancorporation NA Earnings Call

Yeah.

Ladies and gentlemen, thank you for standing by and welcome to Zions Bancorporation fourth quarter 2021 earnings results webcast.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press Star then one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press Star then zero I would now like to turn the conference over to your speaker for today Mr. <unk>.

James Abbot you may begin.

Thank you Wanda and good evening, everyone. We welcome you to this conference call to discuss our 2021 fourth quarter earnings and full year earnings results.

I would like to remind you that during this call we will be making forward looking statements. Although actual results may differ materially.

We encourage you to review the disclaimer in the press release or slide deck on slide two dealing with forward looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call a.

A copy of the earnings release as well as the slide deck are available at Zions Bancorporation Dot com.

For our agenda today, Chairman and Chief Executive Officer 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 <unk> financial condition.

With US also today is Keith <unk>, our chief risk Officer.

We intend to limit the length of this call to one hour during the question and answer section of the call. We request that you limit your questions to one primary and one follow up question to enable other participants to ask questions.

I will now turn the time over to Harris.

Thank you very much James and we want to welcome all of you to our call. This.

Savings.

Beginning on slide three our themes that are particularly applicable to zions in recent quarters as well as those that are likely to be themes over the near term horizon.

Loans exclusive of PPP loans increased $1 $4 billion during the quarter roughly double the dollar amount of growth in the third quarter.

One of our primary goals is to increase new to bank customers and our promotional campaigns during the fourth quarter were successful facilitating that with.

Scott Mclean will discuss more in his section.

In addition, we saw improved demand for revolving credit for the first time in several quarters with line utilization improving somewhat.

We saw strong deposit growth, which continued in the fourth quarter.

It's a physician zions well relative to many of our peers to be able to invest in securities and off of promotions on loan products to core customer segments.

As reported by the Federal Reserve domestic commercial bank grew deposits by 12% over the past year, all signs accomplish growth of 19%.

Third we are well positioned for rising interest rates when we met in this form three months ago. The interest rate futures market had implied a single quarter point rate hike by mid 2022.

Today, we have approximately double that in by year end the futures market is pricing in for rate hikes.

We are well positioned for this environment with each quarter point increase in rates experienced in parallel across the curve, adding approximately $60 million of net interest income over the subsequent year.

<unk> 30 per share.

Paul will add some additional detail on this topic in his prepared remarks.

The final item on this slide refers to our ongoing significant investment in technology.

Which is designed to enable science to remain very competitive in the future relative to the largest U S banks fintech.

And two well established community banks.

Turning to slide four we are pleased with the quarterly financial results, we will touch on all of these items in subsequent slides so I'll move on to slide five.

Diluted earnings per share was $1.34 compared comparing the fourth quarter to the third quarter. The single most significant difference within the provision for credit loss, which was 34 per share variance.

Which can which can be seen on the bottom left chart.

Although we had only one basis point or one 100% of annualized net loan charge offs in the fourth quarter and a substantial linked quarter improvement in problem loans, we judged that the environment was somewhat more uncertain than last quarter, especially with respect to the potential impact of.

Of the omicron variant of the <unk>.

Covid virus.

Consequently, we slightly increased our allowance for credit loss from the prior quarter.

Our provision this quarter reduced earnings per share by 12 chance as shown on the bottom left chart, whereas in the prior quarter the negative provision lifted earnings per share by 'twenty two.

Additionally, there were other items noted on the right side of the page.

A significant effect on earnings per share adjusting for those items the linked quarter earnings per share was relatively stable.

We think this is encouraging given the decline of about <unk> 10 per share in income from PPP loans.

On slide six we highlight some balance sheet profitability metrics, which you can review on your own.

Turning to slide seven our fourth quarter adjusted pre provision net revenue was $288 million.

The adjustments, which most notably exclude the gain or loss on securities are shown in the later pages of the press release and the slide deck.

However, the gain on the sale of buildings and the expense associated with the contribution to our charitable foundation have not been excluded.

Those items were similar in size.

The PPE and our borrowers are split into two portions the bottom portion represents what we think of as generally recurring income.

The top portion of the notes that revenue net of direct external professional services expenses, we've received from PPP loans.

We saw a $20 million decline in such income in the fourth quarter relative to the third quarter.

However, we were able to offset that impact with growth in recurring net interest income from both securities and loans.

It made possible through strong deposit growth.

Moving to slide eight a significant highlight for US this quarter was the strong performance in average and period end loan growth.

Average non PPP loans increased $1 $2 billion or an annualized two 5% when compared to the third quarter.

And on a period end basis that growth was one 4 billion.

Two 9%.

The yield on average total loans decreased slightly from the prior quarter, which is attributable to a shift in the mix of loans with average PPP loans declining.

$1 4 billion and being replaced by non PPP loans.

Recall, the PPP loans are experienced yields near 7% due to accelerated amortization of capitalized fees and the loans that are replacing them have yields generally in the 3% to 4% range.

Excluding PPP loans, the yield declined three basis points to 356% from three 9%.

Deposit costs remained low shown on the right our cost of total deposits was stable at just three basis points in the fourth quarter.

Deposit growth remained strong with an average.

Total deposits increasing $4 billion.

Or five 2% on annualized.

And period end deposits, increasing $4 9 billion or six 3%.

In part because of the quantitative tapering by the Federal Reserve, we do not expect deposit growth to remain strong in coming quarters.

As previously noted another significant highlight for the quarter was the credit quality of our loan portfolio as illustrated on slide nine.

Relative to the prior quarter, we saw significant improvement in problem loans using the broadest definition of problem loans criticized and classified loans dropped 19%.

Classified loans declined 11%.

Although not shown on the rollover into the prior quarter special mentioned loans declined 34%.

Of course, the metric that matters in the end as the net charge off to average loans ratio.

We experienced experienced just one basis point of annualized loan losses relative to average total non PPP loans and the same holds true of the full year figure.

Shown in the chart in the bottom right one can see the volatility of the provision contrasted with the relative stability of net charge offs.

This is mostly the result of changing economic forecasts.

Now I'd like to turn the time over to Scott Mclean, our President and Chief operating officer, and he'll provide an update on certain fee income and growth initiatives and our technology technology initiatives Scott.

Thank you harriss.

Regarding slide 10, if you turn to slide 10, as Harris reported we were pleased with our loan growth as it was one of our strongest quarters in many years, excluding PPP loans period end loans grew $1 4 billion or 3%.

Loans to businesses increased over $1 2 billion with considerable strength in C&I with more than $600 million of linked quarter growth in C&I nearly $300 million.

Owner occupied growth and more than $250 million of municipal finance.

Additionally, we saw growth with our home equity lines of credit and CRE term. This growth was partially offset by a slight contraction in our CRE construction, one to four family and energy portfolios are.

Our loan portfolios in all markets showed growth with particular strength in California This quarter.

Our utilization rates on approximately $32 4 billion and revolving commitments increased one two percentage points compared to the third quarter with strength coming largely in C&I. We expect that we will see some further line utilization as businesses seek to rebuild their inventories.

Finally recall that we launched two promotional campaigns on six one on June 1st of 2021 for owner occupied and home equity lines of credit both focused on our core small business and affluent customer basis. These campaigns have created significant energy with our bankers and it represented.

About 40% of our loan growth in the third and fourth quarters. During the six month period, our owner occupied campaign originated approximately 400 loans with commitments of $550 million.

The HELOC campaign originated over 6000 loans.

Exceeding $1 6 billion in commitments.

$5 approximately one third of each loan type whether it was extended.

Two new customers to the bank.

Moving on to noninterest income on slide 11.

We were able to sustain the strength, we experienced in the third quarter customer related fees were $152 million, which was at 10% increase over the year ago quarter activity based fee such as card merchant services and retail and business banking service charges remained strong and recovered from Pan.

<unk> softness to exceed our 2019 levels. This improvement is additive to continued strength in capital markets wealth management and Treasury management fees.

Turning to slide 12.

Our mortgage activity continued at both a quarterly and record.

Both the quarterly and annual record setting pace with fundings, reaching $4 billion for 2021. This represents a 16% increase for the year compared to an 8% decline for the MBA industry market index, while low interest rates certainly contributed to this strong performance.

<unk> the outperformance versus the industry would largely be attributable to the attractiveness of our mortgage product to our core small business and affluent clients. The success of our digital platform, representing now 95% of all applications, which is up from 100% paper in 2018.

And significant process enhancements tailored to improve the experience for all customers and especially our affluent segment.

Although mortgage fees finished the year at $33 4 million versus $55 4 million in 2020. They are still almost double 2019 levels of $17 1 million.

One additional benefit is that we should start to see.

Balance sheet, one to four family.

Outstandings grow as our fundings are returning to a more traditional mix of two thirds held for investment one third held for sale.

Turning to slide 13 as we.

Provided in our third quarter call significant detail regarding the benefits of future core, which you can still see on slide 26 in the appendix today, we wanted to provide some color on a few of the numerous other technology investments that are expanding the reach of our bankers and improving our customers.

And employee experience.

In 2021 as you can see in the first sort of horizontal panel there we replaced our consumer online mobile.

Digital application for 650000 consumers the conversion went extremely well and our ratings and the prominent app stores have been terrific when compared to our global and large regional competitors. Later this year 150000, plus of our small business customers will move on to the small.

Business version of this platform.

And a second horizontal panel we wanted to highlight two elements of our work with Salesforce.

First on the lifetime.

Hand side up until January of 2021, we had a.

Brief partnership with a fintech featuring their digital small business loan application.

Shortly after launching our partner informed us that they would no longer support the application. After 2021 some of the vagaries of doing business with.

Pantex.

Based on technology, we develop to produce a record production of PPP loans recall three times.

Our deposit share.

In the industry.

We launched our own PPP battle tested small business lending digital application.

For virtually no upfront cost and no real ongoing cost this.

This has been a real benefit it's going to be a real featured part of what we're doing going forward.

Later this year, we will merge our six instances of sales force to one unified incident Salesforce reports that we will be the only one of their 51 major financial institution customers that has accomplished this objective for.

Non siloed bank like us the power of Salesforce is so much greater one enterprise instance, as it facilitates referrals across geographies and product groups provides bankers with a much clearer view of relationships and offers so many other benefits. This is going to be a big step forward for us.

And it will be.

Exemplary in terms of sales forces client base.

Regarding our use of automation. We are frequently asked how we have been able to keep our expenses expense growth so low when compared to the 2014 or 2015 time period.

The primary reason is our continuous development of a large collection of simplification initiatives and a strong commitment to automation.

Our team automated approximately 300000 hours of back office activities in 2021, some of which were one time and some were recurring activities. Several examples included work related to our <unk>.

Paycheck protection program, the PPP program and various processing functions.

Small business loan originations loan and deposit operations mortgage processing.

Et cetera.

These.

Improvements are.

Simple amended by significant headway, we are making with the automation of our testing protocols and other critical functions and managing our information technology assets.

Finally this summer.

Youll note there on the <unk>.

Right hand side of the slide bottom right.

We will open our 400000 square foot technology campus.

And Salt Lake City, representing a reduction in both our current footprint from 500000 square feet.

And 11 buildings to 400000 square feet one building.

Our occupancy costs will decrease by about 13% as a result of this campus will accommodate up to nine 1900 technology and operations colleagues and is being designed to achieve.

Platinum LEED certification this will be a significant competitive advantage as the competition for technology talent, we will continue to be fierce.

I'll now turn the time over to Paul Burton, our Chief Financial Officer Paul.

Thank you Scott and good evening, everyone and thanks for joining approximately three quarters of our revenue is net interest income, which is significantly influenced by loan and deposit growth and associated interest rates. Scott has already discussed loan growth. So if we move to slide 14, we show our securities and money market investment portfolios.

Over the last five quarters the.

The size of the period end securities portfolio increased by more than $8 billion over the past year to nearly $25 billion.

While money market investments increased by $5 6 billion to $12 4 billion.

Combination of securities and money market investments has risen to 42% of total earning assets at period end, which compares to an average level in 2019 prior to the pandemic of 26% we continue to exercise caution regarding duration extension risk.

Purchasing bonds with relatively short duration.

Both the current and in an upward shock scenario.

The duration of both are listed on the bottom left side of this page the $4 $9 billion of securities purchase purchases for the quarter had an average yield of 169%.

Also shown on page 14 is a summary of our interest rate swaps portfolio maturity and yield information by quarter. This includes both maturing swaps and forward starting swaps that are.

In place today, but won't be reflected in our financial results until the start date.

As the yield on the interest rate swaps footfalls over time due to the recent interest rate environment. Some of that decline will be dampened by rising notional value.

Slide 15 is an overview of net interest income and net interest margin.

Start on the left shows the recent five quarter trend for both the net interest margin in the white boxes has declined over the past year, reflecting the change in earning asset mix due to the rise in excess liquidity as described on the prior page recently growth in deposits in excess of loans has impacted the composite.

<unk> of earning assets through a larger concentration in lower yielding money market and securities investments the weighted average yield of our securities and money market investments is 1.09% and with that concentration increasing by three percentage points in the quarter. It continues to weigh on our net interest margin and fee.

I estimate that the increase in concentration of money market investments from 7% of earning assets a year ago to 15% of earning assets in the most current quarter.

Has accounted for 22 of the 37 basis points of net interest margin compression over the past year importantly, this decrease.

In the net interest interest margin does not reflect a decline in net interest income as deal.

Our investments exceeds the yield on our new deposits.

Slide 16 shows information about our interest rate sensitivity focusing on the upper left quadrant as a general statement. We remained very asset sensitive while we've deployed deposit driven cash into fixed rate securities. As previously noted deposit growth has been even stronger which has resulted in.

$1 $1 billion of growth in lower yielding short term money market assets.

While not new to the fourth quarter. This estimated rate sensitivity assumes.

That the incremental deposits have modestly shorter duration characteristics when compared to the deposits on our balance sheet. Prior to the recent deposit surge we are continuing to deploy deposit driven cash into securities, which helps to moderate our natural asset sensitivity.

Our estimated interest rate sensitivity was similar to that reported in the third quarter such that our annual net interest income would improve by about 12% if rates were to rise by 100 basis points.

As previously noted we may continue to add interest rate swaps, including forward, starting swaps, which would also help to dampen our.

Our natural asset sensitivity.

Noninterest expenses on slide 17 grew by $20 million from the prior quarter to $449 million.

Adjusted noninterest expense increased $14 million or 3% to $446 million the linked quarter increase in adjusted noninterest expense was primarily due to a $10 million.

Donation to the Zions Bancorporation Foundation.

If the charitable contribution were excluded our adjusted noninterest expense increased about 1%.

Slide 18 details our allowance for credit losses or ACL in.

In the upper left we show the recent declining trend in the ACL over the past several quarters with a slight uptick in the fourth quarter of 2021.

At the end of the fourth quarter, the ACL was $553 million or 113% of non PPP loans.

Chart on the lower right side of this page shows the three broad categories that resulted in the ACL increase of $24 million.

Nearly all of the change was attributable to concerns over the impact that the <unk> variant may have on the overall economy as well as changes in the portfolio mix and composition such as the replacement of nearly risk free PPP loans with more traditional commercial loans.

Our capital position is depicted on slide 19.

We repurchased $325 million of common stock in the fourth quarter.

With the loan growth, we achieved we believe that our capital position is generally aligned with balance sheet risk and operating risks, we typically show the trailing five quarters in our slides, but in this case, we went back to year before the pandemic in order to provide a better perspective.

In the chart at the top you'll note that we had reduced our common equity tier one ratio to 10, 2% in the fourth quarter of 2019 and with the onset of the pandemic and with line draws in the first quarter of 2020, we saw that ratio declined to 10.0% as we temporarily suspended.

Repurchases during the most uncertain period of the pandemic the capital ratio climbed and as the economic outlook improved we have actively managed our capital capital to be more aligned with our risk profile.

On the bottom left we've displayed the quarterly return of shareholders equity measured as a percentage of our daily average market capitalization.

The total capital returned either through common dividends or share repurchases sums to about one third of the market value of the company and just three years from another perspective, one can consider the reduction in average diluted shares recall, we have warrants outstanding that expired and resulted in no dilution to shareholders. During this time.

Im frame as well as an active share buyback program. The results of these efforts was a reduction in average diluted shares of more than 45 million shares or 23%.

109, 199 million diluted shares outstanding in the fourth quarter of 2018 to just under $154 million in the current quarter.

On the bottom right chart is an illustration of a significant divergence and the risk profile of our assets beginning in the fourth quarter of 2019 as measured with our risk weighted assets and our total assets.

<unk>.

Total risk weighted assets have increased 10%.

While our average total assets have increased 34%, which is again attributable to the strong inflow of deposits.

Our financial outlook can be found on slide 20.

This is our best current estimate for financial performance in the fourth quarter of 2022 as compared to the actual results reported for the fourth quarter of 2021.

In between our subject to normal seasonality and my comments are subject to our earlier reference to forward looking statements on slide two.

Consistent with our outlook provided in recent quarters due to the degree of uncertainty on the timing of customers' submitting requests in the SBA approving those requests our outlook for loan in net interest income exclude PPP loans.

We reiterate our outlook for loan growth to be moderately increasing.

We expect net interest income.

Again, excluding PPP loan revenue to increase over the next year.

In addition to earning asset growth achieved from loans, we expect to continued deployment of cash into medium term securities with limited duration extension risk as highlighted on the page. This outlook does not assume an increase in short term interest rates.

We had another successful quarter for customer related fees and as Scott noted.

Still with the positive momentum, we are increasing our outlook for customer related fees to slightly increasing from stable to slightly increasing.

For adjusted Noninterest expense, we are reiterating our expectation of moderately increasing one factor in this outlook is persistent wage and price pressure. Despite this headwind we expect positive operating leverage in 2022.

As noted in the comments column on this page this outlook excludes the charitable contribution made in the fourth quarter of 2021.

Finally regarding capital management, we have repeatedly stated that it is our objective to operate with lower than average risk combined with a stronger than median common equity tier one capital ratio. We believe that we have generally reached a point at which these two considerations are coming into balance. Meanwhile.

With customer loan demand returning it seems likely that during the next few quarters more of the capital that we generate will be used to support loan growth and less will be used for share repurchases, notably share repurchases and dividends are decisions left to the board and as such we expect to announce any capital actions for the first.

Quarter when that information becomes available.

This concludes our prepared remarks to wonder could you. Please open the line for questions.

Thank you, ladies and gentlemen, as a reminder to ask a question. Please press Star then one on your telephone.

All your question press the pound key.

Thats Star one to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of Abraham on a wallet with Bank of America. Your line is open.

Good afternoon.

Okay.

So I just wanted to dig into the NII guidance.

I guess it implies something in a mid single digit <unk>.

Talk to US what are you assuming in terms of cash deployment as part of that guidance and then what.

The rule of thumb, when you think about affect any type in terms of what it means.

To the margin as you think about is there any difference in the first 25 or 50 basis points higher.

Back half anything that we should be mindful of.

This is Paul I'll start with that as it relates to the deployment of cash.

We said in our prepared remarks are kind of first second and third choices for cash deployment.

As loan growth.

And so we're very focused on achieving that to the extent, we don't achieve that we have been deploying.

Our cash in a measured way into the investment portfolio over time and so.

As we see the funds flows develop in the across 2022 my expectation is that we will continue to do that it's important to note that we have confidence.

In the deployment of cash because we performed a lot of analytics on the quality of our depositors and what we're finding is that the majority of deposits coming in.

Are being utilized in an operational way by our customers, which if history is any guide means that those deposits are relatively sticky.

So as a result.

Will be.

Continuing to deploy that cash I would say at a pace that is consistent with what <unk> seen over the past.

Four to six quarters as the second part of your question had to do with our interest sensitivity and whether or not.

There may be kind of more or less opportunity for the first 25 basis points.

As to the last 25 basis points.

But speculative.

Because.

It highly depends on sort of the speed with which the federal reserve not only increase the short term rates, but also begins to draw withdrawal of liquidity from the system.

There are an awful lot of variables in there.

Our best guess is that for the first 100 basis points.

The impact the flow through to the net interest income.

And again I would focus on net interest income as opposed to net interest margin as a flow through to net interest income should be.

Consistent for the first 100 basis points.

That was helpful and just as a follow up.

Loan growth outlook it feels conservative given the quarter you had maybe Paul Harris, just give us a sense of customer sentiment and do you see inflation as being at risk in terms of business activity. When it comes to investment spend and the outlook for loan growth any color would be helpful.

Okay.

Well I think.

Your guess is as good as ours, probably in terms of the impact of inflation.

On loan demand I do think that.

That 22 is going to be pretty good year for loan demand because.

Because we we are seeing a lot of.

A lot of businesses that are.

Reasonably short in terms of inventory.

I think there'll be.

I tend to believe they're going to be a lot of inventory build this year.

But there also there are uncertainties, certainly the pandemic and its impact.

Is one of them.

So I think we're I think we're optimistic but it's a little hard to know with much precision.

What this is going to look like this year.

Thanks for taking my questions.

Thank you.

Our next question comes from the line of Brad Milsap with Piper Sandler Your line is open.

Thank you.

Hi, Brad.

Yes.

It's kind of on the deposit discussion that thats kind of the most difficult predict you touched on it a bit.

We'll get a better sense of kind of.

That you think you can make.

Our liquidity over the next.

12 months, and obviously knowing deposits are tough to predict but just kind of want to get a sense of your mind, Paul that you would hope.

In terms of liquidity balance and when we're speaking at this time.

Yeah, Thanks, Brad Youre, breaking up a little bit, but I think I got the gist of your question it had to do with our confidence around deposits and.

The degree to which we expect to deploy that over the course of the next year.

I would say it is an uncertain environment as I said earlier.

The speed with which the federal reserve withdrawals liquidity from the system I think we will absolutely have an impact on overall bank deposits, we get confidence from the operating nature of the deposits.

But we have been bringing on.

And the good news is from a liquidity perspective.

We have a lot of room, a lot of margin for error I'll say, because we're still at the end of the year had $10 billion invested in short term deposits at the federal reserve. So you've been seeing is at the margin increase the size of our portfolio by $1 billion will be in a half a quarter sort of net.

Acquisition over the course of the last several quarters.

Things change very quickly and very significantly I would expect to see that kind of continued deployment of liquidity.

Okay, great. Thank you hopefully a more clear now just just as a follow up are there any areas or any industries that you guys are sort of pushing back from or is it pretty much all systems go in terms of areas that you're lending into at this point.

Hi, This is Keith I'll start with if there's if there's anything that we're sensitive about it's in the commercial real estate space.

And really centered in office, it's hard to tell what the long term future of <unk>.

That's particularly the class a office is going to be just because you've got long tenor to leases people are obligating are they're paying their obligations under leases just don't know what renewals are going to look like so that's a sensitive area as well as even pre pandemic.

Retail commercial real estate those are the two areas that I can think of that were a little bit sensitive to.

Great. Thank you.

Thank you. Thank you. Our next question comes from the line of Chris Mcgratty with <unk>. Your line is open.

Great good afternoon.

I am interested.

And how the expense trajectory may may trend, if we do get the forward curve. Obviously the upside I think you said $60 million for hike on net interest income Paul how would how should we be thinking about.

Maybe accelerated investment or additional incentive comp in that scenario.

Well.

I'll, let Scott and her speak to the incentive comp as it relates to investment in the business and my expectation is.

Much of the net interest income that we would get from rate hikes should fall to the bottom line. The big question Mark in my mind incentive comps part of it.

But also.

Salaries is also part of it.

And other organizations, including other banks are seeing increasing pressure.

As it relates to wages and so as I look ahead to next year.

It's not a definitive trajectory, but it's certainly something that we are paying a lot of attention to.

As it relates to those expenses, but I don't think that thats going to be driven by the change in rates right I think the change in rates.

Reaction.

As opposed to a cause and so again I'll just reiterate that.

I am hopeful that much of the revenue that we derive from.

Increase in rates due to our asset sensitivity will drop to the bottom line.

Yes.

Just to add.

I think.

If we see increased revenue from higher rates.

Some of that.

That will have some impact on.

On incentive compensation, we have.

We have some.

Set of plans that.

Obviously tied to profitability and so that could have some impact I don't think it's going to have I don't think it's going be very material I don't think it's going to change other investment.

Decisions and any fundamental ways.

Yes. This is Scott Mclean I would just add that I think irrespective of rates.

We.

And irrespective of PPP.

We have really good growth going on in a number of the businesses that we have.

Invested in over the last three or four years.

And that combined with just the organic loan growth and fee income growth that we've talked about.

Should provide a nice environment when you strip out interest rates and PPP for.

For organic growth.

Okay, Great and then my follow up I'm looking at slide 18.

You walk through the cadence in the change in the ACL I'm interested on that $22 million.

If you are in.

We estimate between how much was for new loan growth versus the overlay that you that you mentioned due to COVID-19 this quarter.

Well this is Paul we haven't necessarily disclosed the breakdown.

All those component parts there are several component parts are there.

It's loan growth as noted and some of it is a qualitative reserves forward looking into the seasonal sort of guidance and rules.

Around our expected impact of.

Kind of the rise of the new variant of <unk>.

Covid so theres several factors included in there and.

And at $22 million, we didnt feel it was necessary to try to break it down into its sub components.

Okay. Thank you.

Thank you.

As a reminder, ladies and gentlemen, Thats star one to ask a question.

Our next question comes from the line of Gary Tenner with D. A Davidson your line is open.

Thanks, Good afternoon.

I just wanted to ask a little more about kind of the loan growth outlook for for the year.

Pretty broad base this quarter and youre talking about a bit more moderate over the next year. So are you thinking I guess I guess two questions. One are you thinking about energy, becoming a contributor to loan growth over the next year and then number two in terms of the campaigns that helped drive loan growth in the back half of the year or any of those still active or.

Those come through now.

Sure, Let me Scott Mclean, let me.

Address the campaigns first our owner occupied campaign is ongoing.

<unk>.

We've raised rates a bit but the volume has still been good and our HELOC campaigns, even though we don't have a promotional campaign period like we did from June one to November one.

Each affiliate has kind of rotating through the year with the campaign. So I think what we'll see is.

Continued nice growth.

And owner occupied and municipal.

I am sorry, owner occupied and Helocs and and then as Harris noted.

I think the C&I growth that we've seen this quarter. It was very strong and I think we will see it going forward I don't really believe that interest rate increases I think it's interesting to read about right about.

Most Ceos.

I have been living in a time when interest rates were zero, it's unlike any other time.

Very few other times in their careers. So I don't think they are afraid of higher rates.

To run their business.

I would also note on energy.

Yes, I think.

I think we could see.

Some growth there we're down we've dropped to about $2 billion, but we've seen an increase in commitments.

So on the reserve base lending that we do that's performed really well in midstream I think we will see.

See some growth growth there and then one to four family is the other one that we've had a contraction in over the last 18 months during the pandemic because we were originating a much higher percentage of held for sale as opposed to held for investment and you can see that linked quarter that was down $90 million.

Down.

Year over year about $900 million.

And traditionally if you go back over the last five years prior to the pandemic.

One to four family and Helocs those residential products contributed about 20%, 25% of our growth I think we will get back to that and so youll see youll see some.

Input coming on.

On the one to four family side, and I think on energy as well.

Thanks for the color Scott.

Thank you.

Our next question comes from the line of Jonathan <unk> with Evercore ISI. Your line is open.

Good afternoon.

On the on the.

No.

One other thing on the positive operating leverage front I know you mentioned that you would expect that.

The benefit of rate hikes should fall to the bottom line. So is it fair to assume that the operating leverage under that scenario.

The higher rate scenario should should widen.

Yes, John I think Thats fair this is Paul.

Okay.

We outlined that we expect to continue to be able to grow net interest income in particular.

Even without rates going up and as we note we expect positive operating leverage there.

So.

Given our asset sensitive position I think it's a fair assumption.

Given my prior comments on much of that revenue fall into the bottom line did that should improve our positive operating leverage a rise in rates that is yes.

Got it thanks, Yeah, I just wanted to confirm that and then secondly on the.

On the buyback front I know you indicated the potential for reduced buybacks given the balance sheet opportunity Youre seeing can you maybe help size up that that impact you.

You bought back it looks like around $800 million.

And shares in 2021, it looks like consensus is looking for about $5 million to $600 million. In 2022 is that a fair amount of decline that you think is reasonable to consider when you look at your loan growth expectation for 2022.

Well I'll make couple of comments.

First of all I don't want to get in front of the board who makes these decisions.

And we.

That hasn't been decided yet, but I did say in my remarks.

That we've worked really hard over the course of 2021 to bring our CET one ratio back down to sort of where we would like for it to be over the medium to long term and that is yes.

Sort of slightly better than median CET, one and we believe a lower than average risk profile as I said in my comments.

We're really close to that level now and so looking ahead.

Any expected share repurchase would reflect.

That current positioning of sort of capital and risk.

Okay, great. Thanks, Paul.

Keith.

Thank you.

Our next question comes from the line of Jon <unk> with RBC capital market. Your line is open.

Hey, Thanks, good afternoon.

Good question.

Yes.

A question for you on slide 28.

<unk>.

That.

The gaps that you have between.

You and your major competitors on the.

The feedback.

How do you think that looked Harris.

Pre pandemic or maybe before you started this.

Germany of.

Kind of revamping the company from a technology perspective.

Well I think.

For a long time, we've been receiving.

Really good reviews from customers in both middle market and small business.

It's shown up in these granite tradings that we've been talking about for a long time for example.

Yes.

I do think that our.

Performance through the PPP episode really.

We didn't differentiate us from.

A lot of other banks and it has been.

Been helpful.

And we're increasingly.

<unk>.

Delivering as certainly as other banks are too, but I think we are delivering.

A lot of digital tools.

And.

More of that to come here in 2022 for small business customers, we will be rolling out.

Our new online and mobile.

Front end or a platform for small businesses that will be.

A real leap forward in terms of capabilities.

And.

On a mobile device for example.

With what they see online so I think that.

It's been strong I think it is getting stronger and we're going to continue to work to make it stronger still we're doing a lot of work.

Outside of the technology realm, one of the things that I care greatly about.

The investment, we're making in people in our branches and frontline bankers and their skill set there.

<unk> two.

To make decisions and to get problem solve for customers and.

And that's something I think.

We will also be a differentiator in years ahead, so it's something that.

I think we're doing well and I think we'll continue to get better.

John This is Scott I would just add.

We had the 2018 2019 version of this in a number of decks.

Until about nine nine months or so ago.

Numbers are very consistent with the pre pandemic.

And I would just remind you also net promoter score for the net promoter score aficionados.

<unk> plus is considered excellent.

Those that study net promoter scores generally say if you can just stay 50 plus theirs.

No great value necessarily in being 60 or 70 or 80.

Just stay excellent as part of the month as part of the Battle Cry.

Okay.

So I guess the messages youre seeing your.

You had a gap.

Youre definitely keeping up in your competitive is that fair.

Yes, yes.

Yes, I think we're highly competitive.

Okay, and then Scott can you can you touch on Muni and oil and gas in terms of some of your expectations there.

Sure.

Our municipal business.

This was a business that harriss really identified four as a significant opportunity probably Harrison I'm guessing it was about four or five years, maybe five years ago. It's just been an outstanding business the credit quality is terrific.

We invested a lot in people and they're out in our affiliates.

The transactions Theyre originating are small by most people's standards, there are $2 million to $5 million, maybe $10 million on the upper end there small municipalities.

There.

Police car fleets, there fire stations water stations that kind of thing and credit quality has just been outstanding we have also been successful at selling.

Our other banking services into this client base. So it's not just a deal. So you will see this continue to be a real focal point because.

Most investment bankers won't go to the places we go to is just too small to Dusty They don't go there.

So.

And so it's been a great business and we will continue to be.

The energy business.

Our outstandings are down to about $2 billion and I think we will see some growth credit quality has improved as you would have guessed.

Significantly.

And we'll we should see continued improvement into this year, we're starting to see borrowing basis in our fall Redetermination borrowing basis stayed flat and started to increase I think we'll see that more this year.

The equity markets are still close to most energy companies, but most believe they'll open back up later this year.

Public debt and private debt markets.

Much better in 2021 than they were in previous years, So capital is coming back in the industry.

I think.

And the other big change is that probably half the banks called on energy companies no longer do at a half to two thirds.

So the pricing has gone up in the structure.

Has it become even more conservative so it really is a good time.

To be in the business on a very conservative basis.

Okay. Thanks very helpful. I appreciate it.

Thank you.

I'm showing no further questions in the queue I would now like to turn the call back over to Mr. Abbott for closing remark.

Thank you Wanda and thank you to all of you for joining us today for our call.

You have additional questions. Please contact me via email or phone number listed on our website.

Forward to connecting with you throughout the coming months and we thank you for your interest in but anything Corporation. This concludes our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Yes.

Sure.

Yes.

Yes.

Yes.

Yes.

Okay.

Okay.

Okay.

Okay.

[music].

[music].

Ladies and gentlemen, thank you for standing by and welcome to Zions Bancorporation fourth quarter 2021 earnings results webcast.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press Star then one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press Star then zero I would now like to turn the conference over to your speaker for today, Mr. James Abbott you may begin.

Thank you Wanda and good evening, everyone. We welcome you to this conference call to discuss our 2021 fourth quarter earnings and full year earnings results.

I would like to remind you that during this call we will be making forward looking statements. Although actual results may differ materially.

We encourage you to review the disclaimer in the press release or slide deck on slide two dealing with forward looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call.

Copy of the earnings release as well as the slide deck are available at Zions Bancorporation dotcom.

For our agenda today, Chairman and Chief Executive Officer 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 is Keith <unk>, our chief risk Officer.

We intend to limit the length of this call to one hour during the question and answer section of the call. We request that you limit your questions to one primary and one follow up question to enable other participants to ask questions.

I will now turn the time over to Harris.

Thank you very much James and we want to welcome all of you to our call. This.

The savings.

Beginning on slide three are things that are particularly applicable to zions in recent quarters as well as those that are likely to be themes over the near term horizon.

Loans exclusive of PPP loans increased $1 $4 billion during the quarter roughly double the dollar amount of growth in the third quarter.

One of our primary goals is to increase new to bank customers and our promotional campaigns during the fourth quarter were successful facilitating that.

Which Scott Mclean will discuss more in his section.

In addition, we saw improved demand for revolving credit for the first time in several quarters with line utilization improving somewhat.

We saw strong deposit growth, which continued in the fourth quarter.

Physician zions, well relative to many of our peers to be able to invest in securities and offer promotion by loan products to core customer segments.

As reported by the Federal Reserve domestic commercial bank grew deposits by 12% over the past year, all signs accomplish growth of 19%.

Third we are well positioned for rising interest rates when we met in this form three months ago. The interest rate futures market had implied a single quarter point rate hike by mid 2022.

Today, we have approximately doubled that in by year end the futures market is pricing in for rate hikes.

We are well positioned for this environment with each quarter point increase in rates experienced in parallel across the curve.

Adding approximately $60 million of net interest income over the subsequent year.

Or about <unk> 30 per share.

Paul will add some additional detail on this topic in his prepared remarks the <unk>.

Final item on this slide refers to our ongoing significant investment in technology.

Which is designed to enable science to remain very competitive in the future relative to the largest U S banks and Fintech and two well established community banks.

Turning to slide four we are pleased with the quarterly financial results, we will touch on all of these items in subsequent slides so I'll move on to slide five.

Sure.

Diluted earnings per share was $1 34.

Compared comparing the fourth quarter, just flip to the third quarter. The single most significant difference within the provision for credit loss, which was 34 per share variance.

Which can which can be seen on the bottom left chart.

Although we had only one basis point or one 100th of a percent of annualized net loan charge offs in the fourth quarter and a substantial linked quarter improvement and problem loans, we judged that the environment was somewhat more uncertain than last quarter, especially with respect to the potential impact.

Of the omicron very end of it.

Covid virus.

Consequently, we slightly increased our allowance for credit loss from the prior quarter.

Our provision this quarter reduced our earnings per share by 12 chance as shown in the bottom left chart.

As in the prior quarter, the negative provision lifted earnings per share by 'twenty two.

Additionally, there were other items noted on the right side of the page.

Had a significant effect on earnings per share adjusting for those items the linked quarter earnings per share was relatively stable. We think this is encouraging given the decline of about <unk> 10 per share in income from PPP loans.

On slide six we highlight some balance sheet profitability metrics, which you can review on your own.

Turning to slide seven our fourth quarter adjusted pre provision net revenue was $288 million.

The adjustments, which most notably exclude the gain or loss on securities are shown in the later pages of the press release and the slide deck.

However, the gain on the sale of buildings and the expense associated with a contribution to our charitable foundation have not been excluded.

Both of those items were similar in size.

The PPA and our borrowers are split into two portions the bottom portion represents what we think of as generally recurring income.

While the top portion of the notes that revenue net of direct external professional services expenses, we've received from PPP loans.

We saw a $20 million decline in such income in the fourth quarter relative to the third quarter How's.

However, we were able to offset that impact with growth in recurring net interest income from both securities and loans.

Made possible through strong deposit growth.

Moving to slide eight a significant highlight for US this quarter was the strong performance in average and period end loan growth.

Average non PPP loans increased $1 $2 billion or an annualized two 5% when compared to the third quarter.

And on a period end basis that growth was one 4 billion.

Our two 9%.

The yield on average total loans decreased slightly from the prior quarter, which is attributable to a shift in the mix of loans with average PPP loans declining.

One 4 billion and being replaced by a non PPP loans.

Recall, the PPP loans have experienced yields near 7% due to accelerated amortization of capitalized fees and the loans that are replacing them have yields generally in the 3% to 4% range.

Excluding PPP loans that yield declined three basis points to 356% from three 5% 9%.

Deposit costs remained low shown on the right our cost of total deposits was stable at just three basis points in the fourth quarter.

Deposit growth remained strong with an average total deposits, increasing $4 billion or five 2% on annualized.

And period end deposits, increasing $4 9 billion or six 3%.

In part because of the quantitative tapering by the Federal Reserve, we do not expect deposit growth to remain strong in coming quarters.

As previously noted another significant highlight for the quarter was the credit quality of our loan portfolio as illustrated on slide nine.

Relative to the prior quarter, we saw significant improvement in problem loans using the broadest definition of problem loans criticized and classified loans dropped 19% and classified loans declined 11%.

Not shown relative to the prior quarter special mentioned loans declined 34%.

Of course, the metric that matters in the end as the net charge off to average loans ratio.

We experienced experienced just one basis point of annualized loan losses relative to average total non PPP loans and the same holds true of the full year figure.

Shown in the chart in the bottom right one can see the volatility of the provision contrasted with the relative stability of net charge offs.

This is mostly the result of changing economic forecasts.

Now I'd like to turn the time over to Scott Mclean, our President and Chief operating officer, and he'll provide an update on certain fee income and growth initiatives and our technology.

Allergy initiatives Scott.

Thank you harriss.

Regarding slide 10, if you turn to slide 10, as Harris reported we were pleased with our loan growth as it was one of our strongest quarters in many years, excluding PPP loans period end loans grew $1 4 billion or 3%.

Loans to businesses increased over $1 2 billion with considerable strength in C&I with more than $600 million of linked quarter growth in <unk>.

Nearly 300 million of owner occupied growth and more than $250 million of municipal finance.

Additionally, we saw growth with our home equity lines of credit and CRE term. This growth was partially offset by a slight contraction in our CRE construction, one to four family and energy portfolios.

Our loan portfolios in all markets showed growth with particular strength in California This quarter.

Our utilization rates on approximately $32 4 billion and revolving commitments increased one two percentage points compared to the third quarter with strength coming largely in C&I. We expect that we will see some further line utilization as businesses seek to rebuild their inventories.

Finally recall that we launched two promotional campaigns on six one on June 1st of 2021 for owner occupied and home equity lines of credit both focused on our core small business and affluent customer bases. These campaigns have created significant energy with our bankers and it represented.

About 40% of our loan growth in the third and fourth quarters. During this six month period, our owner occupied campaign originated approximately 400 loans with commitments of $550 million and the HELOC campaign originated over 6000 loans.

Exceeding $1 6 billion in commitments.

By $1 approximately one third of each loan type whether it was extended.

Two new customers to the bank.

Moving on to noninterest income on slide 11.

We were able to sustain the strength, we experienced in the third quarter customer related fees were $152 million, which was at 10% increase over the year ago quarter activity based fees, such as card merchant services and retail and business banking service charges remained strong and recovered from Pan.

<unk> softness to exceed our 2019 levels. This improvement is additive to continued strength in capital markets wealth management and Treasury management fees.

Turning to slide 12.

Our mortgage activity continued at both a quarterly and record.

Both the quarterly and annual record setting pace with fundings, reaching $4 billion for 2021. This represents a 16% increase for the year compared to an 8% decline for the MBA industry market index, while low interest rates certainly contributed to this strong performance.

<unk> the outperformance versus the industry would largely be attributable to the attractiveness of our mortgage product to our core small business and affluent clients. The success of our digital platform, representing now 95% of all applications, which is up from a 100% paper in 2018.

And significant process enhancements tailored to improve the experience for all customers and especially our affluent segment.

Mortgage fees finished the year at $33 4 million versus $55 4 million in 2020, they are still almost double 2019 levels of.

$17 $1 million.

One additional benefit is that we should start to see.

On balance sheet, one to four family.

Outstandings grow as our fundings are returning to a more traditional mix of two thirds held for investment one third held for sale.

Turning to slide 13 as we.

Provided in our third quarter call significant detail regarding the benefits of future core, which you can still see on slide 26 in the appendix today, we wanted to provide some color on a few of the numerous other technology investments that are expanding the reach of our bankers and improving our customers.

And employee experience.

In 2021 as you can see in the first sort of horizontal panel there we replaced our consumer online mobile.

Digital application for 650000 consumers.

Version went extremely well and our ratings and the prominent app stores have been terrific when compared to our global and large regional competitors. Later this year 150000, plus of our small business customers. We will move on to the small business version of this platform.

And a second horizontal panel, we want to highlight two elements of our work with Salesforce.

First on the left.

Hand side up until January of 2021, we had a.

A brief partnership with a fintech featuring their digital small business loan application.

Shortly after launching our partner informed us that they would no longer support the application. After 2021 some of the vagaries of doing business with.

Fintech.

Based on technology, we develop to produce a record production of PPP loans recall three times.

Our deposit share.

In the industry, we launched our own PPP battle tested small business lending digital application for virtually no upfront cost and no real ongoing cost.

This has been a real benefit it is going to be a real featured part of what we're doing going forward.

Later this year, we will merge our six instances of sales force to one unified incident Salesforce reports that we will be the only one of their 51 major financial institution customers that has accomplished this objective for.

For a non Siloed bank like us the power of Salesforce is so much greater one enterprise instance, as it facilitates referrals across geographies and product groups provides bankers with a much clearer view of relationships and offer. So many other benefits. This is going to be a big step forward for us.

And it'll be exemplary in terms of sales forces client base.

Regarding our use of automation. We are frequently asked how we have been able to keep our expense expense growth so low when compared to the 2014 or 2015 time period.

The primary reason is our continuous development of a large collection of simplification initiatives and a strong commitment to automation.

Our team automated approximately 300000 hours of back office activities in 2021, some of which were one time and some were recurring activities. Several examples included work related to our <unk>.

Paycheck protection program, the PPP program, and various processing functions and small business loan originations loan and deposit operations mortgage processing.

Et cetera.

These.

Improvements are.

Simple amended by significant headway, we are making with the automation of our testing protocols and other critical functions and managing our information technology assets.

Finally this summer.

Youll note there on the <unk>.

Right hand side of the slide bottom right.

We will open our 400000 square foot technology campus.

And Salt Lake City, representing a reduction in both our current footprint from 500000 square feet.

And 11 buildings to 400000 square feet one building.

Our occupancy costs will decrease by about 13% as a result of this the campus will accommodate up to nine 1900 technology and operations colleagues and is being designed to achieve.

Platinum LEED certification this will be a significant competitive advantage as the competition for technology talent will continue to be fierce.

I'll now turn the time over to Paul <unk>, Our Chief Financial Officer Paul.

Thank you Scott and good evening, everyone and thanks for joining approximately three quarters of our revenue is net interest income, which is significantly influenced by loan and deposit growth and associated interest rates. Scott has already discussed loan growth. So if we move to slide 14, we show our securities and money market investment portfolios.

Over the last five quarters the.

The size of the period end securities portfolio increased by more than $8 billion over the past year to nearly $25 billion, while money market investments increased by $5 6 billion to $12 $4 billion.

The combination of securities and money market investments has risen to 42% of total earning assets at period end, which compares to an average level in 2019 prior to the pandemic of 26% we continue to exercise caution regarding duration extension risk by purchasing.

Bonds with relatively short duration.

Both in the current and in an upward shock scenario.

The duration of both are listed on the bottom left side of this page the $4 $9 billion of securities purchase purchases for the quarter had an average yield of 169%.

Also shown on page 14 is a summary of our interest rate swap portfolio maturity and yield information by quarter. This includes both maturing swaps and forward starting swaps that are in place today, but won't be reflected in our financial results until the start date.

As the yield on the interest rate swaps book falls over time due to the recent interest rate environment. Some of that decline will be dampened by rising notional value.

Slide 15 is an overview of net interest income and net interest margin.

The chart on the left shows the recent five quarter trend for both the net interest margin in the white boxes has declined over the past year, reflecting the change in earning asset mix due to the rise in excess liquidity as described on the prior page recently.

In deposits in excess of loans has impacted the composition of earning assets through a larger concentration in lower yielding money market and securities investments the weighted average yield of our securities and money market investments is 109% and with that concentration increasing by three percentage points in the quarter.

It continues to weigh on our net interest margin in fact, I estimate that the increase in concentration of money market investments from 7% of earning assets a year ago to 15% of earning assets in the most current quarter.

<unk> accounted for 22 of the 37 basis points of net interest margin compression over the past year importantly, this decrease.

In the net interest interest margin does not reflect a decline in net interest income as deal.

Our investments exceeds the yield on our new deposits.

Slide 16 shows information about our interest rate sensitivity focusing on the upper left quadrant as a general statement, we remain very asset sensitive while we've deployed deposit driven cash into fixed rate securities. As previously noted deposit growth has been even stronger which has resulted in.

$1 $1 billion of growth in low yielding short term money market assets, while not new to the fourth quarter. This estimated rate sensitivity assumes.

That's the incremental deposits have modestly shorter duration characteristics when compared to the deposits on our balance sheet. Prior to the recent deposit surge we are continuing to deploy deposit driven cash into securities, which helps to moderate our natural asset sensitivity.

Our estimated interest rate sensitivity was similar to that reported in the third quarter such that our annual net interest income would improve by about 12% if rates were to rise by 100 basis points. As previously noted we may continue to add interest rate swaps, including forward, starting swaps, which would also help to damper.

Our natural asset sensitivity.

Noninterest expenses on slide 17 grew by $20 million from the prior quarter to $449 million.

Adjusted noninterest expense increased $14 million of 3% to $446 million the linked quarter increase in adjusted noninterest expense was primarily due to a $10 million donor.

Donation to the Zions Bancorporation Foundation.

If the charitable contribution were excluded our adjusted noninterest expense increased about 1%.

Slide 18 details our allowance for credit losses or ACL in.

In the upper left we show the recent declining trend in the ACL over the past several quarters with a slight uptick in the fourth quarter of 2021 at.

At the end of the fourth quarter, the ACL was $563 million or 113% of non PPP loans.

On the lower right side of this page shows the three broad categories that resulted in the ACL increase of $24 million.

Nearly all of the change was attributable to concerns over the impact that the <unk> variant may have on the overall economy as well as changes in the portfolio mix and composition such as the replacement of nearly risk free PPP loans with more traditional commercial loans.

Our capital position is depicted on slide 19, we.

We repurchased $325 million of common stock in the fourth quarter.

And with the loan growth, we achieved we believe that our capital position is generally aligned with balance sheet risks and operating risk. We typically show the trailing five quarters in our slides, but in this case, we went back to a year before the pandemic in order to provide a better perspective.

In the chart at the top you'll note that we had reduced our common equity tier one ratio to 10, 2% in the fourth quarter of 2019 and with the onset of the pandemic and with line draws in the first quarter of 2020, we saw that ratio declined to 10.0% as we temporarily suspended share.

Our repurchases during the most uncertain period of the pandemic the capital ratio declined and as the economic outlook improved we have actively managed our capital capital to be more aligned with our risk profile.

On the bottom left we have displayed the quarterly return of shareholders equity measured as a percentage of our daily average market capitalization.

The total capital returned either through common dividends or share repurchases sums to about one third of the market value of the company and just three years from another perspective, one can consider the reduction in average diluted shares recall, we had warrants outstanding that expired and resulted in no dilution to shareholders. During this time.

Frame as well as an active share buyback program. The results of these efforts was a reduction in average diluted shares of more than 45 million shares or 23% from 109 199 million diluted shares outstanding in the fourth quarter of 2018.

<unk> to just under $154 million in the current quarter.

On the bottom right chart is an illustration of a significant divergence and the risk profile of our assets beginning in the fourth quarter of 2019 as measured with our risk weighted assets and our total assets.

<unk>.

Total risk weighted assets have increased 10%.

Our average total assets have increased 34%, which is again attributable to the strong inflow of deposits.

Our financial outlook can be found on slide 20.

This is our best current estimate for financial performance in the fourth quarter of 2022 as compared to the actual results reported for the fourth quarter of 2021.

The quarters in between are subject to normal seasonality and my comments are subject to our earlier reference to forward looking statements on slide two.

Consistent with our outlook provided in recent quarters due to the degree of uncertainty on the timing customers submitting requests and the SBA approving those requests our outlook for loan in net interest income excludes PPP loans.

We reiterate our outlook for loan growth to be moderately increasing.

We expect net interest income.

Excluding PPP loan revenue to increase over the next year.

In addition to earning asset growth achieved from loans. We expect continued deployment of cash into medium term securities with limited duration extension risk as highlighted on the page. This outlook does not assume an increase in short term interest rates.

We had another successful quarter for customer related fees and as Scott noted.

Still with the positive momentum, we are increasing our outlook for customer related fees to slightly increasing from stable to slightly increasing.

For adjusted Noninterest expense, we are reiterating our expectation of moderately increasing one factor in this outlook is persistent wage and price pressure. Despite this headwind we expect positive operating leverage in 2022.

As noted in the comments column on this page this outlook excludes the charitable contribution made in the fourth quarter of 2021.

Finally regarding capital management, we have repeatedly stated that it is our objective to operate with lower than average risk combined with a stronger than median common equity tier one capital ratio. We believe that we have generally reached a point at which these two considerations are coming into balance. Meanwhile.

With customer loan demand returning it seems likely that during the next few quarters more of the capital that we generate will be used to support loan growth and less will be used for share repurchases, notably share repurchases and dividends are decisions left to the board and as such we expect to announce any capital actions for the first.

Quarter when that information becomes available.

This concludes our prepared remarks to wonder could you. Please open the line for questions.

Ladies and gentlemen, as a reminder to ask a question press Star then one on your telephone to withdraw your question press the pound key again Thats star one to ask a question. Please standby, while we compile the Q&A roster.

Sure.

Our first question comes from the line of Ebrahim <unk> with Bank of America. Your line is open.

Good afternoon.

Okay.

I just wanted to dig into the NII guidance.

I guess it implies committed on mid single digit EBITDA will yogurt.

Talk to us.

Are you assuming in terms of cash deployment as part of that guidance and then.

What's the rule of thumb when you think about affect any type in terms of what it means.

To the margin as we think about is there any difference in the first 25 about 50 basis points hike versus the back half anything that we should be mindful of.

This is Paul I'll start with that as it relates to the deployment of cash.

We said in our prepared remarks are kind of first second and third choices for cash deployment.

As loan growth.

And so we're very focused on achieving that to the extent, we don't achieve that we have been deploying.

Our cash in a measured way into the investment portfolio over time and so.

As we see the funds flows developed in the across 2022 my expectation is that we will continue to do that it is important to note that we have confidence.

In the deployment of cash because we performed a lot of analytics on the quality of our depositors and what we're finding is that the majority of deposits coming in.

Are being utilized in an operational way by our customers, which if history is any guide means that those deposits are relatively sticky.

As a result, we will be.

Continuing to deploy that cash I would say at a pace that is consistent with what <unk> seen over the past.

Four to six quarters as the second part of your question had to do with our interest sensitivity and whether or not.

There may be kind of more or less opportunity for the first 25 basis points.

As to the last 25 basis points. This is a little bit speculative.

Because it highly depends on sort of the speed with which the federal reserve not only increase in short term rates, but also begins to draw withdrawal of liquidity from the system. So there are an awful lot of variables in there.

My Best guess is that for the first 100 basis points.

The impact to the flow through to the net interest income.

And again I would focus on net interest income as opposed to net interest margin as a flow through to net interest income should be pretty consistent for the first 100 basis points.

That was helpful and just as a follow up.

Our loan growth outlook it feels conservative given the quarter you had maybe Paul Harris, just give us a sense of customer sentiment and do you see.

Inflation as being at risk in terms of business activity when it comes to investment spend and the outlook for loan growth any color would be helpful.

Well I think.

Your guess is as good as ours, probably in terms of the impact of inflation.

On loan demand I do think that and I think that 'twenty two is going to be pretty good year for loan demand because.

Because we we.

We are seeing a lot of.

A lot of businesses that are.

Reasonably short in terms of inventory.

There'll be I tend to believe they're going to be a lot of inventory build this year.

But there are also there are uncertainties, certainly the pandemic and its impact.

Is one of them.

So I think we're I think we're optimistic but it's a little hard to know with much precision.

What this is going to look like this year.

Thanks for taking my questions.

Thank you.

Our next question comes from the line of Brad.

<unk> with Piper Sandler Your line is open.

Hey, good.

Hi, Brad.

Yes.

Sure.

We have kind of fall on the deposit discussion that thats kind of the most difficult area to predict you touched on it a bit.

We'll get a better sense of kind of.

That you think you can make.

And the liquidity over the next.

12 months, obviously, knowing deposits are tough to predict but just kind of want to get a sense of your mind, Paul that you would hope to be in terms of liquidity balance and when we're speaking on a year.

Yes, thanks, Brian Youre, breaking up a little bit, but I think I got the gist of your question it had to do with our confidence around deposits and.

The degree to which we expect to deploy that over the course of the next year.

I would say it is an uncertain environment as I said earlier.

The speed with which the federal reserve withdrawals liquidity from the system I think we will absolutely have an impact on overall bank deposits, we get confidence from the operating nature of the deposits.

But we have been bringing on.

And the good news is from a liquidity perspective.

We have a lot of room, a lot of margin for error I'll say, because we're still at the end of the year had $10 billion invested in short term deposits at the federal reserve. So you've been seeing is at the margin increase the size of our portfolio by $1 billion to $1 billion of half a quarter sort of net.

Acquisition over the course of the last several quarters.

Things change very quickly and very significantly I would expect to see that kind of continued deployment of liquidity.

Okay, great. Thank you hopefully unlock there now just just as a follow up are there any areas or any industries that you guys are sort of pushing back from or is it pretty much all systems go in terms of areas that you're lending into at this point.

This is Keith I'll start with <unk>.

If there's if there's anything that we're sensitive about it's in the commercial real estate space.

And really centered in office, which is it's hard to tell what the long term future of.

Particularly the class a office is going to be just because <unk> got long tenor to leases people are obligating are they're paying their obligations under leases just don't know what renewals are going to look like so that's a sensitive area as well as even pre pandemic retail commercial real estate. Those are the two areas that I can think of that were a little bit sensitive to.

Great. Thank you Greg.

Thank you. Thank you. Our next question comes from the line of Chris Mcgratty with <unk>. Your line is open.

Great good afternoon.

I'm interested.

And how the expense trajectory may may trend, if we do get the forward curve.

The upside I think you said $60 million for hike on net interest income Paul how would how should we be thinking about.

Maybe accelerated investment or additional incentive comp in that scenario.

Well.

I'll, let Scott and her speak to the incentive comp as it relates to investment in the business and my expectation is.

That much of the net interest income that we would get from rate hikes should fall to the bottom line. The big question Mark in my mind incentive comps part of it but.

But also.

Salaries is also part of it.

And other organizations, including other banks are seeing increasing pressure.

As it relates to wages and so as I look ahead to next year.

It's not a definitive trajectory, but it's certainly something that we are paying a lot of attention to.

As it relates to those expenses, but I don't think that thats going to be driven by the change in rates right I think the change in rates.

Reaction.

As opposed to a cause and so again I'll just reiterate that I am hopeful that much of the revenue that we derive from increase in rates due to our asset sensitivity will drop to the bottom line.

Yes I'd.

Just to add.

I think.

If we see increased revenue from higher rates.

Some of that.

That will have some impact on incentive compensation we have.

We have some.

Incentive plans that.

Obviously tied to profitability and.

So that could have some impact I don't think it's going to have I don't think it's going be very material I don't think it's going to change other investment.

Decisions and any fundamental ways.

Yes. This is Scott Mclean I would just add that I think irrespective of rates.

We we had irrespective of PPP.

We have really good growth going on in <unk>.

The businesses that we've invested in over the last three or four years.

And that combined with just the organic loan growth and fee income growth that we've talked about.

Should provide a nice environment when you strip out interest rates and PPP for.

For organic growth.

Okay, Great and then my follow up I'm looking at slide 18.

You walk through the cadence and the change in the ACL I'm interested about that $22 million.

If you have an estimate between how much was for new loan growth versus the overlay that you've mentioned due to COVID-19 this quarter.

Well. This is Paul we haven't necessarily disclosed the breakdown of all of those component parts. There are several component parts. There some of its loan growth as noted and some of it is a qualitative reserves forward looking under the seasonal sort of guidance and rules.

Around our expected impact of.

Kind of the rise of the new variant of <unk>.

Covid so theres several factors included in there and.

And at $22 million, we didnt feel it was necessary to try to break it down into its sub components.

Okay. Thank you.

Thank you.

As a reminder, ladies and gentlemen, Thats star one to ask a question.

Our next question comes from the line of Gary Tenner with D. A Davidson your line is open.

Thanks, Good afternoon.

I just wanted to ask a little more about kind of the loan growth outlook for for the year.

Pretty broad base this quarter and youre talking about a bit more moderate over the next year. So are you thinking I guess I guess two questions. One are you thinking about energy, becoming a contributor to loan growth over the next year and then number two in terms of the campaigns that helped drove loan growth in the back half of the year or any of those still active or.

Have those come through now.

Sure, Let me Scott Mclean, let me.

Address the campaigns first our owner occupied campaign is ongoing.

<unk>.

We've raised rates a bit but the volume has still been good and our HELOC campaign, even though we don't have a promotional campaign period like we did from June one to November one.

Each affiliate has kind of rotating through the year with a campaign. So I think what we'll see is.

Continued nice growth.

Owner occupied and municipal.

I am sorry, owner occupied and Helocs and and then as Harris noted.

I think the C&I growth that we've seen this quarter. It was very strong and I think we will see it going forward I don't really believe that interest rate increases I think it's interesting to read about right about.

Think most Ceos.

They have been living in.

When interest rates were zero, it's unlike any other time.

Very few other times in their career. So I don't think they are afraid of higher rates to to run their business.

I would also note on energy that yes, I think.

I think we could see.

Some growth there we're down we've dropped to about $2 billion, but we've seen an increase in commitments.

So on the reserve base lending that we do that's performed really well in midstream I think we will see.

See some growth growth there and then one to four family is the other one that we've had a contraction in over the last 18 months during the pandemic because we were originating a much higher percentage of held for sale as opposed to held for investment and you can see that linked quarter that was down $90 million.

Down.

Year over year about $900 million.

And traditionally if you go back over the last five years prior to the pandemic.

One to four family and Helocs those residential products contributed about 20%, 25% of our growth I think we will get back to that and so youll see youll see some.

Some input coming on.

The one to four family side, and I think on energy as well.

Thanks for the color Scott.

Thank you.

Our next question comes from the line of Jonathan <unk> with Evercore ISI. Your line is open.

Good afternoon.

Okay.

On the on the.

One other thing on the positive operating leverage front I know you mentioned that you would expect that.

The benefit of rate hikes should fall to the bottom line. So is it fair to assume that the operating leverage under that scenario.

Higher rate scenario should should widen.

Yes, John I think Thats fair this is Paul.

Yes.

We outlined that we expect to continue to be able to grow net interest income in particular, even without rates going up and as we note. We expect positive operating leverage there and so.

Given our asset sensitive position I think it's a fair assumption.

Given my prior comments on much of that revenue fall into the bottom line did that should improve our positive operating leverage a rise in rates that is yes.

Got it thanks, Hey, I just wanted to confirm that and then secondly on the on.

On the buyback front I know you indicated the potential to reduce buybacks given the balance sheet opportunity Youre seeing can you maybe help size up that that impact I mean, I know you bought back it looks like around $800 million.

And shares in 2021, it looks like consensus is looking for about $5 million to $600 million. In 2022 is that a fair amount of decline that you think is reasonable to consider when you look at it.

<unk> loan growth expectation for 2022.

And then a couple of comments.

First of all I don't want to get in front of the board who makes these decisions.

And we.

Then it hasnt been decided yet, but I did say in my remarks.

That we've worked really hard over the course of 2021 to bring our CET one ratio back down to sort of where we would like for it to be over the medium to long term and that is that it.

Sort of slightly better than median CET, one and we believe a lower than average risk profile and as I said in my comments.

We're really close to that level now and so looking ahead.

Any expected share repurchase would reflect.

The current positioning of sort of capital and risk.

Okay, great. Thanks, Paul.

Keith.

Thank you.

Our next question comes from the line of Jon <unk> with RBC capital market. Your line is open.

Hey, Thanks, good afternoon.

Good question Doug.

A question for you on slide 28.

<unk>.

That.

The gaps that you have between.

You and your major competitors.

The feedback.

How do you think that looked Harris.

Pre pandemic or maybe before you started this.

Sure any of.

Kind of revamping the company from a technology perspective.

Well I think.

For a long time, we've been receiving.

Really good reviews from customers in both middle market small business.

It's showing up in these granite tradings that we've been talking about for a long time for example.

Yes.

I do think that our.

Performance through the PPP episode really didn't differentiate us from a lot of other banks and as Ben.

It's been helpful.

And we are increasingly.

Delivering as certainly as other banks are too, but I think we are delivering.

A lot of digital tools.

And.

More of that to come here in 2022 for small business customers will be rolling out.

New.

Online and mobile.

Front end or a platform for small businesses that will be.

A real leap forward in terms of capabilities.

Yes.

On a mobile device for example, and consistent with what they see online.

So I think that.

It's been strong I think it's getting stronger and we're going to continue to work to make it stronger still we're doing a lot of work.

Outside of the technology realm, one of the things that I care greatly about.

The investment, we're making in people in our branches and frontline bankers and their skill set there.

And our ability to.

To make decisions and to get problem solve for customers and.

And that's something I think.

We will also be a differentiator in years ahead. So.

It's something that.

I think we're doing well and I think we'll continue to get better.

John This is Scott I would just add.

We had the 2018 2019 version of this in a number of deaths.

Until about nine months or so ago.

The numbers are very consistent with the pre pandemic.

And I would just remind you also net promoter score for the net promoter score aficionados.

50, plus is considered excellent.

And those that study net promoter scores generally say if you can just stay 50 plus.

There is no great value necessarily in being 60 or 70 or 80.

Just stay excellent as part of the month as part of the Battle Cry.

Okay. So I guess the messages youre, saying youre.

You had a gap.

Youre definitely keeping up in your competitive is that fair.

Yes, Okay, Yes, I think we're highly competitive.

Okay. Okay, and then Scott can you can you touch on beauty and oil and gas in terms of some of your expectations there.

Sure.

Municipal business.

This was a business that Harris really identified four as a significant opportunity probably Harrison I'm guessing was about four or five years, maybe five years ago. It's just been an outstanding business the credit quality is terrific.

<unk> did a lot in people and they're out in our affiliates.

The transactions Theyre originating are small by most people's standards, there are $2 million to $5 million, maybe $10 million on the upper end there small municipalities.

There.

<unk>.

Police car fleets, there fire stations water stations that kind of thing.

Credit quality has just been outstanding we have also been successful at selling.

Our other banking services into this client base. So it's not just the deal. So you will see this continue to be a real focal point because.

Most investment bankers won't go to the places we go to <unk>.

Just two small two to SP.

Go there.

So.

And so it's been a great business and we will continue to be.

The energy business.

Our outstandings are down to about $2 billion and I think we will see some growth credit quality has improved as you would have guessed.

Significantly.

And we'll we should see continued improvement into this year, we're starting to see borrowing bases in our fall Redetermination borrowing basis stayed flat and started to increase I think we'll see that more of this year.

The equity markets are still close to most energy companies, but most believe they'll open back up later this year.

Public and private debt markets.

Much better in 2021 than they were in previous years, So capital is coming back in the industry.

I think.

And the other big change is that probably half the banks called on energy companies no longer do it a half to two thirds.

The pricing has gone up in the structure.

Has it become even more conservative so it really is a good time.

To be in the business.

Conservative basis.

Okay. Thanks very helpful. I appreciate it.

Thank you.

I am showing no further questions in the queue I would now like to turn the call back over to Mr. Abbott for closing remark.

Thank you Wanda and thank you to all of you for joining us today for our call. If you have additional questions. Please contact me.

Mail or phone number listed on our website.

Forward to connecting with you throughout the coming months and we thank you for your interest in Ben. Thank Corporation. This concludes our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.