Q1 2022 Zions Bancorporation NA Earnings Call
Greetings and welcome to the Zions Bank Corporation Q1 earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I will now turn the conference over to your host James Abbott Director of Investor Relations you may begin.
Thank you Kyle and good evening, we welcome you to this conference call to discuss our 2022 first quarter earnings I would like to remind you that during this call we will be making forward looking statements. Although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck on slide two dealing with forward looking information.
And the presentation of non-GAAP measures, which apply equally to statements made during this call.
Copies 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, Harry 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 Smile, our chief risk Officer, and Michael Morris, Our Chief Credit 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 question to one primary and one follow up question to enable other participants to ask questions.
I'll now turn the time over to Harris.
Thanks, very much James we want to welcome all of you to our call.
Beginning on slide three.
We're showing some themes that are particularly applicable to zions in recent quarters.
Some that are likely to be a change in the near term horizon.
Loans exclusive of PPP loans increased $1 $2 billion during the quarter, maintaining the momentum developed in the prior quarter.
We saw strong growth in C&I and municipal bonds.
Owner occupied loans also saw good growth in part due to promotional campaigns.
Overall, we are pleased with our loan growth in the first quarter and expect a moderate levels of loan growth will be sustainable through the remainder of the year.
We've invested significantly in securities during the past two years, we believe the securities portfolio is at least for the next few months unlikely to increase significantly from here.
Although the size of the portfolio will ultimately be determined by loan growth.
And deposit flows.
With the recent strength in loan growth, we expect that any near term growth.
Deposits at what might materialize.
In addition to some of the excess cash on our balance sheet would be invested in loans rather than securities.
As many of you know, we're well positioned for rising rates. The futures market is pricing in a fed funds rate of approximately three 5% by mid 'twenty three.
Or an increase of about three percentage points.
We believe we have an exceptional deposit franchise and given the interest rate environment expected by market participants. We expect it will begin to see much more of the value of these deposits emerge in our financial results in coming quarters.
The final item on this slide refers to our ongoing significant investment in technology, which is designed to enable us to remain very competitive in the future.
If you turn to slide four we were generally pleased with our quarterly financial results, which are summarized on this slide.
And as much as we will touch on these items in subsequent slides I'm going to move on but you might find this summer useful.
Please go to slide five.
Diluted earnings per share was $1 27.
Comparing the first quarter to the fourth quarter the single most significant difference.
He was in the provision for credit loss, which was a 28 cents per share positive variance as can be seen on the bottom left chart.
Our provision this quarter improved earnings per share by 16 sense, whereas in the prior quarter the provision reduced earnings per share by <unk> 12 cents.
The other major factor that contributed to earnings was income from PPP loans, which was <unk> 12 per share in the first quarter.
Finally, there were other items noted on the right side of the page that largely offset one another in terms of their impact on our earnings per share.
Turning to slide six.
Our first quarter adjusted pre provision net revenue was $241 million.
The adjustments, which most notably eliminate the gain or loss on securities are shown in the ladder pages of the press release.
This slide deck.
The P. P N. Our bars are split into two portions the bottom portion represents what we think of as generally recurring income while the top portion denotes the revenue.
We've received from PPP loans net of direct external professional services expenses associated with the forgiveness of these loans.
These loans contributed $24 million to P. P and are in the first quarter as you can see exclusive of PPP income we experienced an increase in adjusted P. P and are up 8% over the past year.
And on a per share basis, it increased 17%.
On slide seven we've included a chart to help understand the sequential quarter change in P. PNR.
I've already noted the reduced income from P. P. P loans, we also experienced a decline in certain non customer related fee income items, which was largely due to nonrecurring gains on REO property sales in the fourth quarter and reduced earnings on private equity investments in trading losses in the first quarter.
The expense items shown in the middle of the chart are largely seasonal in nature, Although we did increase our incentive compensation accruals to align with our revenue outlook now includes the effect.
Unexpected rate increases.
Non P. P. P. Net interest income increased about $10 million and finally, there was a $10 million charitable contribution in the prior period that weighed somewhat on the on that quarter.
Turning to slide eight shifting away from the discussion on the financial results to a couple of highlights in our strategic plan and we're pleased to report continued strong progress with upgrading our online and mobile banking platforms to a single platform that has the same look and feel in both applications as well as functionality.
We completed that for the consumer side of the business about a year ago, and we've been rolling out similar upgrades to our small business banking customers.
Since year end, we've converted over 145000 business customers to this new and highly competitive digital and online banking platform.
With the remaining 25% of such customers to be converted to the new platform during may.
The results of the upgrade.
Reflected in the surveys we've done which have been.
Very positive and in the mobile space, we've seen a much improved rating from customers as compared to our previous application and also when compared to the applications for other large regional banks, which we've shown to you in our prior presentations.
Going to slide nine and a major strategic initiative for US is to organically grow our business customer base at a rate that exceeds the natural the natural business formation rate.
It's relatively easy to increase loan and deposit balances by increasing hold limits lowering credit standards are offering below market rates for loans and above market yields for deposits.
But to grow customers requires a lot of work specifically in the service category.
We've relied upon Greenwich Associates research to help us understand the areas in which we performed well in areas that need improvement.
This year, we ranked second overall out of all the banks in the country in middle market small business satisfaction with twenty-seven Excellence awards.
Shown on this slide Greenwich's provided us with additional detail behind some of the rankings.
Across the top half of the page or a few select categories pertaining to survey.
Our responses for middle market business customers.
And across the bottom half of the page or similar results from small business customers.
I underscore as you noted within each chart along with the average score of the peer group members of those that peer group were listed elsewhere in this document and in our proxy filing.
And also the average score of four major banks against whom we compete for business within our markets, notably JP Morgan Chase Bank of America Wells Fargo and U S Bank.
Okay.
We're encouraged with such strength in these and many other categories. The net promoter score from Greenwich surveys is of course, a widely used barometer of customer experience and one that can be mapped to other industries are strong showing as a reflection of our efforts to provide exceptional customer service top notch products and superior technology to enable fast.
And safer service and products.
Additional detail is available on this topic in the appendix.
Slide 30.
We expect that the strength of our reputation will continue to support our efforts regarding customer growth.
This customer growth should translate into both granular and solve it and increases in loan and deposit balances.
And with that I'm going to ask Scott Mclean, our president and C. O O to provide an update on loan growth certain fee income initiatives and our technology investments Scott. Thank.
Thank you Harriss moving to slide 10.
You can highlight for US this quarter was the strong performance in average and period end loan growth.
Average and period end non P. P. P loans increased $1 2 billion or an annualized two 5% when compared to the fourth quarter.
The yield on average total loans decreased 21 basis points from the prior quarter, which is partially attributable to a shift in the mix of loans with average P. P. P loves declining 1 billion and being replaced by non PPP loans, which have a lower yield.
Loans that are replacing PPP loans yields generally in the 3% to 4% range.
Excluding PPP loans, the yield declined 13 basis points to.
343% from 356%.
One of which is attributable to elevated prepayment.
Penalty income recognized in the fourth quarter, but also the effect of some of our promotional campaigns and the maturity of interest rate swaps.
Deposit costs remained low shown on the right our cost of total deposits was stable at just three basis points in the first quarter average deposit growth slowed compared to recent quarters with average total deposits, increasing nearly 200 million or 2% 20 basis points.
And annualized period end deposits declined more than 400 million or 5% largely due to the expected quantitative tightening by the federal reserve, we expect deposit balance growth trends to be closer to stable to perhaps slightly increasing although clearly we're in unchartered territory.
It.
Moving to slide 11.
Loans loans to businesses increased $1 1 billion with considerable strength in C&I and owner occupied of nearly 800 million of linked quarter growth and more than 275 million of municipal loans.
Additionally, we saw growth with our home equity lines of credit and one to four family mortgages. This is particularly encouraging because we experienced $1 5 billion of attrition and one to four family mortgage loans from December 19, 2019 through December 2021.
This was partially offset by contraction in our CRE term and energy portfolios.
Our loan portfolios in most of our market markets showed growth with strength in C&I from California, and Utah municipal growth from Arizona, and owner occupied and all of our markets.
Our utilization rates on approximately 33 billion in revolving commitments increased 0.2 percentage points to 35, 1% compared to the prior quarter.
Quarter level of 34, 9%. This compares to a pre pandemic utilization rate in the fourth quarter of 2019 of 39, 2%.
If we were to return to that level, assuming no further change to the revolving commitments that would result in about $1 2 billion of additional loan balances as I. Previously noted we expect it will see line utilization continue to strengthen those businesses.
Work to rebuild their inventories.
Turning to slide 12 regarding noninterest income.
Customer related fees were 151 million of which about 6 million was attributable to a one time accrual adjustment and commercial account fees.
Normalizing for that effect the customer related fee income increased about 9% over the prior year activity based fees, such as card merchant services and retail and business banking.
Service charges remained strong and recovered from pandemic softness to exceed our 2019 levels.
This improvement is additive to continued strength in wealth management and Treasury management fees.
Compared to the prior quarter, we experienced a decline in capital markets income, where the fourth quarter was particularly strong in syndications and foreign exchange.
Notably and highlighted on the page we are planning to reduce some of our overdraft and non sufficient funds fees.
I expect that this will reduce our fee income by about $5 million or so per quarter beginning in the third quarter of this year.
Turning to slide 13, our mortgage activity continued at both our quarterly and annual record setting pace with fundings, reaching $1 2 billion for the second consecutive quarter.
This represents a 38% year over year increase compared to a 36% decline for the MBA industry market index.
The outperformance versus the industry would largely be attributable to a three.
Three factors.
First the attractiveness of our mortgage product to our core small business and affluent clients secondly success of our digital.
Mortgage application platform, representing now 95% of all applications.
From a 100% pay a paper.
In 2018.
Significant process enhancements tailored to improve the experience for all customers and especially our affluent segment.
Mortgage fees improved to $7 million compared to approximately 4 million in the fourth quarter. This is well below the quarterly average from 2021 as the demand for saleable fixed rate product declines. However, the benefit is that we are producing more products. It can be.
Held for investment on our balance sheet, and which was a contributor to the growth in the one to four family mortgage portfolio that I noted earlier.
Regarding slide 14, this slide highlights the number of major technology initiatives that are underway.
And the customer segments that benefit from these enhancements Harris noted how well the implementation of our digital banking replacement is gone and the positive feedback we're receiving from the consumers and small businesses utilizing this enhanced capability.
There's a lot to talk about it on this slide I would only note that our future core project.
The final third phase, which replaces our previous core deposit and branch platform.
It is on track for 2023 implementation.
With that I'll now turn the time over to our Chief Financial Officer, Paul births.
You Scott and good evening everyone.
Nearly 80% of our revenue is net interest income, which is significantly influenced by loan and deposit growth and associated interest rates Scott as I just discussed loan growth moving to slide 15, we show our securities and money market investment portfolios over the past five quarters.
Size of the period end securities portfolio increased by nearly $10 billion over the past year to $27 billion money market investments had been increasing significantly with the growth in deposits money market investments declined in the quarter by $5 billion.
$274 billion, reflecting growth in loans and securities and a modest decline in period end deposits.
Combination of Securities and money market investments is now 40% of total earning assets at period end, which compares to an average level in 2019 before the pandemic of 26% overtime. We would expect the mix of highly liquid assets, such as securities and money market investments to revert to historical levels.
We continue to exercise caution regarding duration extension risk by purchasing bonds with moderate duration, both in the current and in an upward shock scenario. The durations of both are listed on the bottom left hand side of the page.
The $4 $7 billion of securities purchases for the quarter had an average yield of two 1%, which is about 40 basis points higher than the prior quarters yield the annualized rate of principal and prepayment based cash flow coming from the securities portfolio was $4 $2 billion in the first quarter again.
That's an annualized rate and depending upon the opportunity we expect to be able to deploy the majority of that cash into either loans or higher yielding securities.
Also depicted on slide 15 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.
Slide 16 is an overview of net interest income and the 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 trended down over the past year, but gained two basis points. This quarter. The trend reflects the change in earning asset mix due.
To the deposit driven rise in excess liquidity over the past year as described on the prior page until the first quarter growth in deposits has impacted the composition of earning assets to a larger concentration in lower yielding money market and securities investments the weighted average yield of our securities and money.
Get investments is 139% an increase of 30 basis points over the prior quarter, the volume and yield of securities coupled with a smaller balance balance of money market investments helped to improve the net interest margin.
Importantly, the increased interest income from securities over the past quarter and year have helped to make up the short fall from decreased P. P. P related revenues and have underscored the value of our exceptional deposit growth.
Slide 17 shows information about our interest rate sensitivity focusing on the upper left hand quadrant as a general statement, we remained very asset sensitive each 100 basis points a parallel shift.
<unk> would add approximately $175 million of annual net interest income or just under about 90 per share holding all other factors constant our estimated interest rate sensitivity to a 100 basis point parallel interest rate shock was about four percentage points lower in the <unk>.
First quarter than that reported in the fourth quarter a portion of this reflects the higher denominator that is net interest income as our outlook for net interest income from the March 2022, starting point was materially materially higher than at the same outlook at the end of 2021.
This change large is largely attributable to increase loans increased securities and a steeper yield curve.
The remaining change in asset sensitivity is due to active balance sheet hedging. We may continue to add interest rate swaps, including forward, starting swaps, which would help to dampen our natural asset sensitivity. We expect to begin to see the impact of short term interest rate increases in the second quarter is approximately 40% of our earning assets after.
We're giving the effect to swaps are tied to indices within one year.
Noninterest expenses on slide 18 grew by $15 million from the prior quarter to $464 million.
Adjusted noninterest expense increased $18 million or 4% again to $464 million linked quarter increase in adjusted noninterest expense was primarily due to seasonal expenses typically experienced in the first quarter related to compensation compensation, which were the same factors that affected pre.
Provision net revenue as detailed earlier by Harris. These seasonal expenses were somewhat offset by a decrease from the $10 million charitable donation made in the fourth quarter.
You may have noticed that we made some changes to the categorization of noninterest expense in the current quarter on the face of our financial statements as the banking industry continues to move toward information technology based products and services, we have improved the presentation and disclosure of certain expenses related to our technology related.
Investments and operations.
These improved disclosures will be amplified in our upcoming 10-Q filing.
Another significant highlight for the quarter was the credit quality of the loan portfolio as illustrated on slide 19 relative.
Relative to the prior quarter, we saw continued improvement in problem loans using the broadest definition of problem loans, the balance of criticized and classified loans dropped 11% and classified loans dropped 7%, although not shown relative to the prior quarter special mentioned loans declined 20%.
Of course net charge offs to average loans is the most important measure of credit quality, we had only five basis points of annualized net charge offs relative to average non PPP loans in the first quarter and a loss rate was only one basis point in the prior quarter.
Shown in the chart on the bottom right you can see the volatility of the provision for credit loss contrast, it with the relative stability of net charge offs.
Slide 20 details our allowance for credit losses or ACL in the upper left we show recent declining trend in the ACL over the past several quarters at the end of the first quarter. The ACL was $514 million or one 2% of non PPP loans.
The economic scenarios that we use to build our quantitative ACL model improved relative to the prior quarter and we released the.
Qualitative reserves associated with expected losses related to the pandemic. However, as a partial offset to that we raise the probability of a recession in our assessment of the economy, largely due to changes and uncertainty about the spillover effects of the war in eastern Europe , and because of the risk inflation.
May have on our borrowers profit margins.
Our loss absorbing capital position is shown on slide 21, we repurchased $50 million of common stock in the first quarter with a loan growth we achieved in the quarter and continued minimal charge offs. We believe that believe that our capital position is generally aligned with balance sheet and operating risk we typically.
Show the trailing five quarters in our investor slides, but in this case, we went back to a year before the pandemic in order to provide a longer perspective.
And the chart on the left 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 the CET one ratio declined to 10%.
After capital growth through intentional earnings retention during the uncertainty of the pandemic. The CET one ratio has now returned to 10%.
In the current quarter.
Shown on the right our credit losses, we've intentionally matched the scales on both charts. So that you can see the order of magnitude of losses incurred during this timeframe relative to the capital set aside for expected loss also known as the allowance for credit losses, and the capital set aside for unexpected loss in the form of Com.
Equity given the extremely low level of loss, we believe our capital position is appropriately strong relative to our risk profile.
Our financial outlook can be found on slide 22.
This is our best current estimate for financial performance for the first quarter of 2023 as compared to the actual results reported for the first quarter of 2022. The result in between our subject to normal seasonality consistent with recent quarters, our outlook for loan and net interest income exclude PPP.
Loans the impact of PPP loans on interest income is expected to dissipate over the next couple of quarters.
We reiterate our outlook for loan growth at moderately increasing.
We are expecting net interest income also excluding PPP loan revenue to increase over the next year. As noted previously we believe our net interest income will improve as interest rates increase, particularly along the short end of the curve.
We had another successful quarter for customer related fees and we remain optimistic that many components of fee income will continue to grow however, the reduction of overdraft and non sufficient fund fees, which Scott discussed previously and with mortgage banking fee income likely to decrease as the production shifts to held for investment our outlook for customer.
And related fees has shifted to stable from slightly increasing.
For adjusted Noninterest expense, we are reiterating our expectation of moderately increasing with the largest risk factor continuing to be wage and price pressure.
Finally regarding capital management, we are hopeful that our capital will continue to be deployed to support customer driven balance sheet growth as a reminder, share repurchase and dividend decisions are made by our board of directors and as such we expect to announce any capital actions for the second quarter in conjunction with our regularly scheduled board meeting this coming Friday.
This concludes our prepared remarks, Carl would you. Please open the line for questions.
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Our first question is from Chris Mcgratty with K B W. Please proceed with your question.
Hey, great. Thanks for the question I wanted to start with.
The net interest income guide I believe last quarter. It did not include before.
The forward curve and in this quarter I think your slide suggests it does.
But the guidance didn't change I'm interested in kind of a commentary about what what the assumptions are within that.
Sure. This is Paul I'll start you know there are only so many adjectives we can use to describe things that are going up or going down.
I think we've been pretty clear.
That even without rate increases were expecting what we termed strong net interest income growth and as outlined in my prepared remarks and on the slides and as we've noted previously our wear.
Because we're asset sensitive we expect any increase in rates from here on out to be additive to net interest income so that the interest rate increase in short term rates that we saw from the fed was at the very end of March that did not show up much in the current quarter.
In the in the first quarter, we're expecting that to start to show up in the second quarter, and then incremental rate increases beyond that.
We expect to be worked into net interest income.
Okay. So it sounds like.
And if I understand it.
Changing the guide for net interest income, even though the slide suggests you put the forward curve and it didn't adjust I'm just trying to sure I don't Miss anything there well yeah I think the key is that the as I said there are one the only so many sort of without getting into a lot of numbers. There's only so many adjectives we can use to describe growth and.
We believe that we continue to believe that our net interest income even without interest rates is going to be up for the year any incremental increases in short term rates will be additive to that.
Okay. Thank you.
Sure.
Yeah.
Our next question is from Abraham Pune wallet with Bank of America. Please proceed with your question.
Hey, good afternoon.
I guess.
Just wanted to go back to your outlook on loan growth seems fairly bullish in terms of.
Demand across the board with one if you could talk to us in terms of regionally or by category type any particular industry, that's driving growth and then clearly there's a lot of concern around fed actions, maybe some incremental supply chain disruptions impacting customer sentiment as we look into the back half of <unk>.
Just give us your sense of based on what you see in terms of your borrowers. How you think the fed actions will impact borrower demand to the extent you can if you look back into needed this year.
Sure well first of all in terms of categories, where I think we're going to likely see growth.
Through the remainder of the year I mean, we've had you know we're seeing.
Pretty solid growth in just in C&I, Yeah, you know we.
We show that excluding energy.
And we could see some growth in energy, but I think I think just broad based.
C&I growth is going to be.
Pretty pretty solid this year.
<unk> also talked about the fact that we've got a very nice pipeline despite.
Rates in our mortgage operation and.
Lot of those are a lot of our production.
Are you.
5171, and 10, one adjustable rate mortgages that were putting on the balance sheet and.
And we've I think we've seen.
And a kind of a refi phase of this cycle and.
I would expect that we're going to see growth in that in that component.
We've continued to see good growth in municipal.
We had one larger deal.
It came on this quarter, that's going to come off in August I believe later this year.
Just kind of an opportunistic deal, but but overall I think.
We will still expect see decent growth in municipal.
A decent certainly.
Mid single digits or better.
And so those are those are some of the primary areas, where I would expect that we're going to see growth.
In terms of geographically.
We're seeing it pretty much.
Pretty much seen it across the entire western United States.
Think that with.
With respect to.
Our customer sentiment and supply chain.
Issues in fed actions there.
Theres nothing that.
No.
Maybe.
We've got probably a generation.
The people in this industry, who had never seen higher interest rates.
And around prior to 2007.
But.
If we were to see a three and a half or a 4% fed funds rate.
I mean, we've had some pretty strong economies back to your time with that kind of.
Interest rate picture and I I I.
I personally don't think it's going to be enough to derail.
The economy I think that.
Fed loses control if they you know inflation really gets out of hand, certainly that that could and we could see you know see a recession.
That would slow things down.
But I don't think that anything that we're seeing in terms of Canada.
Fed funds futures market suggests that we're going to see the kinds of interest rates at historically have created a lot of problem and then in.
And in fact I tend to believe that.
You have a lot of businesses that are.
Going to be working to build inventory too.
All of these supply chain issues.
Have made it.
And it's kind of a geopolitical risk in the world I think probably I think this is my own supposition.
<unk> for this but.
That you're going to see a lot of businesses, saying they need to.
To source more domestically.
They need to shorten their supply lines.
And.
<unk> built more inventory cushion than maybe they've had before because.
They've they've seen a lot of loss business because they didn't have inventory.
Through this recovery, so I I personally am relatively.
When I think about.
What the next few quarters probably hold.
Got it okay.
Thanks for that and one quick follow up maybe Paul for you.
I think I heard you correctly the core loan yields went down 13 basis points, we saw a LIBOR had higher through the course of the first quarter.
Just give us a sense of why that 13 basis point decline was it.
Mix change in the loan book.
That decline and just how much of the book is LIBOR versus prime rate.
Yes, it was.
There's a little bit of mix change involved in that.
We are are ongoing promotional rates on loans, which we've talked about previously had an adverse impact overall on loan yields, but that's I think temporary.
And then we had some interest rate swaps that matured in the quarter that also adversely impacted by a couple of basis points.
And do you see I did of these being a drag going forward or is that kind of done well I D.
Our largest concern as it relates to our loan yields is ongoing competition in an environment, where there's a lot of excess liquidity in the system.
Cause spread compression I think that's our biggest risk too.
To.
Frankly to loan yield expansion, but I think it's substantially all entirely more than offset by our asset sensitivity.
I believe because we've got sort of more floating rate earning assets.
Then liabilities, we are naturally as interest rates go up we're naturally going to see an expansion of net interest income.
But one thing Thats worth noting is the.
Prepayment penalty in the fourth quarter.
It was a significant contributor to the yield in the fourth quarter and so as that prepayment penalty income dropped off in the in the first quarter that was also a contributor factor to why the.
The yield of the overall portfolio decline.
No. Thank you, but thanks for taking my questions sure. Thank you.
Our next question is from Ken <unk> with Jefferies. Please proceed with your question.
Hey, good evening, how are you just coming back on the NII. So maybe Paul is the right way to think about it you gave the 100 basis points of parallel shift would be approximately $175 million of annual net interest income. So if you were talking.
If you were talking pre rates of moderately increasing NII.
Do we think about that kind of core growth and then add you know what if we were to get 200 basis points of rate this year than we'd effect, if we get an annualized 350 million in next year and then so for first quarter, we'd get about a fourth of that I know that's a lot of math, but just trying to use your sensitivity to Kai.
Help us back into that.
That zone that you're kind of leading us to with core growth and then the sensitivity on top of it yes, I'm reluctant to apply too much precision to that and the reason is that the way that our interest rate shocks are modeled and this is true for all banks is that they're sort of done in an environment, where everything else is held.
Constant in the World you know as you know just doesn't just doesn't work that way. So there are many factors in this I just mentioned loan spreads that's a factor deposit repricing as you know and I mean that has an enormous impact.
On interest rate risk, although I don't believe that that is an adverse risk in this case I think that.
Given the.
Excess liquidity in the system and particularly within our organization I, It's worth reiterating that our loan to deposit ratio of 62% I mean, I don't know certainly in my career I don't recall seeing a loan to deposit ratio for a large regional bank of our size being in that ballpark. So there's a lot of liquidity in the system and I think as a result, we'll be able to control.
Joel deposit pricing I'm looking ahead. So so generally speaking I hear what you're saying and I you know.
The timing of the rate increases and then the timing of the resets matter. Some resets happened in the middle of the month, some happen sort of earlier late and so it's very hard to apply too much precision to the math, but I would just remind you that that 100 basis point figure that I gave you.
Approximately $175 million that is a full year impact for an immediate shock today.
Right, Yeah, right, so what I'm, saying, but if we got eight hikes. This year right by them by the end of the year you'd have the benefits of those hikes playing through in 'twenty threes numbers. So I hear you might not be run rate I guess, let me just ask you one more just about the sensitivity then.
So then what would be the it won't be the biggest factor that you'd be.
Sensitive to like to you know to worry about that would make you know a 175 not play out like is there one that could swing. The most of the factors that you ran through.
Thanks for the color.
Just factor in interest sensitivity is always deposits.
So its deposit volumes and deposit pricing, but affirming your prior statement. Yes, you are correct all other things equal that would be the impact in 2023.
Okay, Alright, great. Thank you Paul Yeah. Thank you Ken.
Our next question is from Jennifer Denver with Jewish Securities. Please proceed with your question.
Thank you good afternoon.
Your asset quality has been so good for for many quarters just wondering.
What what loan buckets, you feel are most vulnerable as rates go up at a fairly quick pace here.
Yes, Michael Morris will take a swing at that hydrogen for thanks for the question.
Any revolving debt is going to be fairly sensitive to interest rate hikes, a debt coverage ratios.
Matter.
In a big way.
Consumer may.
It'd be a little bit.
Little more precarious than the other industries just.
Because thats totally tied to sort of labor costs, and what the consumer can handle and isn't something that can be passed on easily.
So our consumer book is something that we're watching carefully around a debt coverage ratio or debt to income levels.
And.
The other industries that were impacted by Covid.
If they haven't returned to a.
Sort of business as usual they may be a little more susceptible to two rate hikes.
We're watching the office.
Portfolio very carefully.
One of the asset classes and CRE that's.
Probably going through the most change right now hospitality seems to be coming back.
Slowly, but surely revpar is up you can see a lot of airport traffic.
So we're seeing good signs on the hospitality portfolio. So.
Office consumer a couple of other categories.
And Michael This is James could you just speak to the underwriting that we do to anticipate rate hikes I think that's worth mentioning here well, we stress the underwriting on almost every loan product that we have and we're currently stressing.
Any campaign product added suggested rate plus a premium so.
There are a lot of there's quite a bit of cushion in our underwriting.
And we think that will bode well in terms of Ltvs as we go forward.
Thanks, so much.
Our next question is from John Penn carry with Evercore ISI. Please proceed with your question.
Good afternoon.
Regarding the.
The loan yield topic again can you, maybe just give us a little bit of color in terms of sizing up the impact from the ongoing promotional rate and how much of the decline in loan yields of what was at 21 basis points or so was from that and then also do you happen to have the new money yields on new.
New loan production and give us an idea of where you're putting paper on today. Thanks.
Well I'll start on the impact of the the promotional campaigns for the last two quarters that has been about five or six basis points per quarter.
Okay. Thanks, Cindy that'd be a new money yields.
Yes. So John this is James the new money yield without any sort of fees origination fees embedded in this so this is just a coupon.
Three 2%.
So with coupon use or with the origination fee, probably add 10 to 20 basis points on top of that to get to a yield.
Overall.
Got it okay. Thank you and then on the comp and benefits line I know up about 11% linked quarter.
Mentioned about I guess, it's about a $25 million and seasonal factors you know as we model out the.
The next quarter and in the next several quarters, what's a good jumping off point for the salary and benefits line item given that is it just adjusting for the $25 million and going from there.
Well, we've tried to provide on page seven there are several items in there.
The slide deck that as you can.
You can kind of see where the seasonal things are things like share based comp.
And retirement plans payroll taxes those are all things that are very seasonal.
So as Youre thinking about your sort of quote unquote jumping off point I.
I would.
Consider that disclosure.
The other thing I'll note.
Is that you know there.
As I have mentioned previously I think are the largest risk that we have.
On expenses remains competition.
For people.
And so thats salaries and benefits and that's all incorporated into our outlook, but I just note that as a as a risk factor.
Okay, Thanks, and if I could just ask one more in terms of your deposit expectation for stable balances can you just talk about what you're seeing in terms of deposit flows.
Where are you.
You could be seeing some pressures are you beginning to see more deposit outflow at your corporate since there are still burning through or is it more about competition that's starting to.
Become a greater factor before you actually see the impact in rates what are you seeing now.
Yeah. This is Scott Mclean and.
We're seeing some outflows, we're certainly not saying the increases we're seeing in so.
But.
Think that there just hasn't been enough of a move and other short term rates too.
You know really pull investors into.
And to interest bearing other interest bearing type investments and.
So I I just generally speaking this early in a rate increase cycle you just don't see that much you know.
Real movement.
And so I think that's going to play out over the next three to four months and as we see a couple of larger increases than then.
There'll certainly be a little more.
And most of them.
And as tariffs I think that to the first quarter.
There's.
A lot of kind of seasonality or cyclicality in the first quarter, we typically see.
Some run off in the first quarter.
What's hard to gauge is.
Kind of starting to.
Uh huh.
The balance sheet a little bit.
That's going to do across the industry.
And so I personally I do think we're kind of in uncharted waters.
And I think we could see a little bit of increase right.
I actually think that we could see some some decrease across the industry I mean that would sort of logically makes sense to me.
But I don't I don't think it'll be anything severe.
And.
And in some respects to be a good thing just to.
To get it to start getting it the problem. So I would just add also that.
Harris noted earlier and I did as well, but there is a pent up demand to build inventory.
So some of this.
Potential decline in deposits or downward pressure on deposits could simply be businesses moving cash into inventory and that's a healthy thing.
So.
Not necessarily are interest rate driven.
And so we'll be watching that pretty closely right.
Alright, Okay. Thanks, Scott.
This is James we're a we have about 10 minutes left in the call and we have four people in queue at the moment. So we're going to move into what we affectionately refer to as the lightning round.
So we'll ask people to just do one question and then we'll try to keep our answers are quickens concise. Thanks.
Thank you. Our next question is from Peter Winter with Wedbush Securities. Please proceed with your question.
Great. Thanks.
I just wanted to follow up on Ken's question about the sensitivity of the 100 basis point increase.
Equaling $175 million, if I compare that to last quarter.
Paul you mentioned that each 25 basis point rate hike equals 60 million in net interest income can you just talk about the.
The change and maybe the outlook for asset sensitivity going forward, if you're going to dampen that.
Yeah, I think youre, what youre, describing which I referenced in my prepared remarks is that our our stated asset sensitivity. It's fallen by about four percentage points from last quarter to this quarter. There are a couple of things going into that one interestingly is a larger baseline revenue. So we have been.
Continuing to add investment securities over time, we added them in the fourth quarter and in the first quarter and when you average sort of taken to it.
Take into effect sort of the averaging effect of when they were put on and how that converts to run rate revenues. The revenues are actually up pretty substantially just in the last couple of quarters due to the.
Investment portfolio. So a dollar change in net interest income as modeled actually has a smaller percentage change.
Cuz revenues run rate revenues are just higher.
That's important and then the other element and related element.
Is that we as we add to our investment portfolio and as we think about and we actually add interest rate swaps either sort of current or forward starting that also has.
And impact on asset sensitivity. So those are the two key changes quarter over quarter or a higher run rate and net interest income.
And then the addition of duration in the form of Securities and swaps.
Got it okay.
Thanks, Bob and then looking ahead, our interest sensitivity is has been and will always be determined by changes in deposits really.
So looking ahead changes in deposits the pricing.
<unk> of deposits.
The additions of run off of deposits those will really be the key factors in my mind anyway, as we think about.
Interest sensitivity.
Got it thank you sure.
Our next question is from Brad Milsap with Piper Sandler. Please proceed with your question.
Hi, good evening, Thanks for taking my question.
Paul I was curious if you could.
Maybe add a little more color on the pace of the final kind of remaining 7 billion or so of liquidity from here and remind us how much cash flow is kind of coming off the bond portfolio either monthly quarterly annually. However, you you kind of want to slice and dice it.
So the first the first part of your question when you're talking about the $7 billion that you talked about kind of the money market investments of cash on the balance sheet.
Yes, sure, yes, yeah, okay well.
Yeah I'll start with the second question first so the couple of things to note about our investment portfolio. It is larger today, however, in our modeling, which I attempted to say in my remarks are on the slides our modeling indicates that that portfolio is effectively fully extend it.
So the benefit of having mortgage backed securities is that these are not bullet bonds, but amortizing securities that provide cash flow on an ongoing basis and the cash flow comes in.
In the form of both principal scheduled principal and prepayment repayments and principal payments.
Because of that portfolio as model is largely extended I think that the cash flow for out of the portfolio. Looking ahead is somewhat predictable.
And.
Currently it's running at about $1 billion, a quarter, a little more than a $1 billion a quarter. So over the course of the year, that's a little over $4 billion of cash that we would either expect to use in our business in other places such as to fund loans.
Or perhaps.
By additional investment Securities Incidentally.
I had mentioned in the prepared remarks that the securities that we bought in the first quarter or about 40 basis points higher.
In the than in the fourth quarter and while you know kind of past performance is no indication of future results I would say that if we were to buy all of our bonds in the current quarter today, our rates are about 100 basis points higher than they were in the first quarter, So a pretty significant.
Difficult move in rates.
And a lot of cash flow coming off of the portfolio is going to provide an opportunity for us to participate in.
In rising rates as it relates to the the $7 billion or so that's on the balance sheet today My expectation is as we as we see.
The pickup in loan growth continuing.
I am hopeful that that would be enough to absorb that excess liquidity the rest of it.
It would be either through managing deposits or managing the investment portfolio. My expectation currently is that I would not expect that the investment portfolio to grow a lot from here over the next couple of quarters.
Hopefully that a lot of words, hopefully that answered your question.
Yes. Thank you very much I appreciate it.
Thank you.
Yes.
Our next question is from Gary Tenner with D. A Davidson. Please proceed with your question.
Thanks, Good afternoon.
Obviously, you guys aren't the first nor would we be the last to make changes to your NSF and overdraft programs.
Wonder if you could kind of comment on what your thought.
Process was on making that decision now.
Yeah.
Whether it was just simply getting in the way of a snowball coming downhill I guess on that topic or.
Yeah.
Moreover, pressure from regulatory.
Yes.
I'd say no.
Or overt pressure than you've seen in the media.
But no inside baseball.
Later on that I think it's like I encouraged our people I said look.
This shouldn't be driven by regulators I don't think it's a province of regulators. So long as what we're doing is disclosed properly and is within the law.
But I do think that we need to be thinking about it competitively and.
I mean.
Certainly the world has changed in terms of the technologies available to customers and to us too.
To manage these things and.
And so the competitive landscape has changed.
We're trying to be responsive to that.
That simple.
Okay. Thank you.
Yeah.
Our final question is from Steve Moss with B Riley Securities. Please proceed with your question.
Good afternoon.
Maybe just with the five year Treasury here close to 3% kind of curious as to how youre thinking about commercial real estate pricing. These days.
If youre going to move away from the promotional rate that's been working at and then just also curious as to you know what your how you think about risk here if cap rates ship here.
Uh huh.
The first part of that question about promotional pricing on owner occupied loans. We've been we haven't really talked about it but we have been raising our <unk>.
Promotional rate as rates have gone up since the promotion started in June 1st of last year and so.
We've kind of maintained the same spread.
Versus the appropriate.
Maturity swap but.
We have been raising our rates consistently and we will probably slow that promotional rate process down here in the second quarter because.
Rates are too volatile so we've got a lot of pent up demand.
So we will see that go through but it will probably slow down the promotional rate program.
And then maybe just in terms of the risk out pay just kind of curious as to how you guys think about it.
What kinds of prior cap rate.
How do you think that.
No, we won't value and structures.
Well it depends on the product type.
As you know the owner occupied real estate are the underwriting is around the business first.
These two repayment sources there so that's the primary focus.
An investor real estate, we've seen pretty flat levels.
A request loan to cost loan to values are within our.
Traditional wheelhouse, we're not really cutting back.
From a.
From an underwriting box standpoint.
The way, we underwrite like I mentioned earlier.
We're using stressed rates interest rates to determine.
Debt coverage ratios and all the asset classes and commercial real estate.
And.
We're not seeing a huge appetite, we're going to see a lot of conversion of construction to term.
Which is only possible if theres stabilization.
And strong NOI, where we're seeing slight movement on cap rates.
Go in North, which as you know is it.
Kind of a devaluation here and there.
And those will probably move as rates go up Theres always been a strong correlation between cap rates and interest rates, so, but we're sensitizing around that and underwriting around that.
Okay. Thank you very much.
We have reached the end of the question and answer session and I will now turn the call over to James Abbott for closing remarks.
Thank you Kyle and thank you to all of you for joining US today. If you have additional questions. Please contact me at the email or phone number listed on our website. We look forward to connecting with you throughout the coming months and thank you again for your interest in Zions Bancorporation. This concludes our call.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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