Ladies and gentlemen, thank you for standing by, and welcome to Zions Bancorporation's 4th Quarter 2020 Earnings Results Webcast. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please Press Star 0. It is now my pleasure to introduce Director of Investor Relations, James Abbott.
Thank you, Andrew, and good evening. We welcome you to this conference call to discuss our 20 2Q4 and full year earnings. I would like to remind you that during this call, we will be making forward looking statements, although actual results may differ materially. Additionally, the earnings release, the related slide presentation and this earnings call contain several references to non GAAP measures. We encourage you to review the disclaimer in the press release or the slide deck on Slide 2 dealing with forward looking information and the presentation of non GAAP measures, which applies equally to statements made during this call.
A copy of the full earnings release as well as the supplemental slide deck are available at zionsbancorporation.com. We will be referring to these slides during this call. Quarter. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide a high level overview of key financial performance. President and Chief Operating Officer, Scott MacLean, will provide comments on our recent strength in certain strategic areas.
Quarterly earnings call. Finally, Paul Burdes, our Chief Financial Officer, will conclude by providing additional detail on Zions' financial condition. With us also today on the call are Keith Mio and Michael Morris, our Chief Risk Officer and Chief Credit Officer, respectively, who will be responding to questions you may have regarding credit quality. We intend to limit the length of this call to 1 hour. Quarter.
During the question and answer section of the call, we ask you to limit your questions to one primary and one follow-up question to enable other participants to ask questions. I will now turn the time over to Harris. Harris?
Thanks very much, James. We want to welcome all of you to our call this afternoon. Beginning on Slide 3, we are very pleased with the overall results for the quarter. One very significant driver of the increase in earnings per share from the prior quarter was the reduction in the allowance for credit loss, which when coupled with only 13 basis points of annualized loan losses relative to average non PPP loans resulted in a negative provision for credit losses of nearly $70,000,000 Well, we continue to expect that credit losses will remain elevated relative to our long term trend level and there's continued uncertainty with respect to the ultimate impact to borrowers from the pandemic. We've been very encouraged by the resiliency of the great many of our customers.
Adjusted pre provision net revenue was $280,000,000 reflecting a slight linked quarter decline in net interest income and stable customer related fee income. Notably, the adjusted PPNR figure is slightly higher than the year ago period, helped by income from the Paycheck Protection Program. As we've noted numerous times over the last several years, we were resolved to enter whatever downturns on the horizon with strong relative and absolute capital ratios. At 10.8 percent common equity Tier 1 capital and an allowance for credit losses relative to loans of 1.75% on non PPP earnings conference call. We still maintain one of the strongest combinations of CET1 and the ACL within the large regional banking space.
To that end, we've stated that we'll consider increasing capital distributions as the storm passes. And we are hopeful we are approaching a point where we will resume share repurchases, although it's premature to announce anything today. Earlier, I noted the strength we saw in net charge offs, but there are other credit indicators that showed signs of stability, notably non performing assets, classified loans and loans on deferral. Perhaps one of the more surprising numbers for the quarter was the net charge offs realized on the loans that we grouped into the COVID-nineteen elevated risk category. The ratio rounds to 0, which is certainly not what we would have expected earlier in the year in 2020.
Throughout the quarter, we've seen real time consumer and business spending data that's been encouraging. For example, for the month of December, customer's debit card spending was 11% more than the year ago month of December. And credit card spending, which has often been negative when compared to the year ago period, weighed down in part by travel and entertainment spending was slightly positive from the same month a year ago. Slide 4 is a quick summary of some key performance indicators for the full year as compared to the prior 2 years. Although net income, return on assets and earnings per share declined.
James, we may have lost Harris there. Okay. So
Scott, I want
to ask
for where Harris was where Harris left off, it looks like we lost Harris' audio.
Yes, I'd be happy to do that. I think we were on Slide 4. Yes. Okay. This is Scott McLean, and I'll pick it up from here.
And if Harris reengages, we'll slotting back in. So on Slide 4, it's a quick summary of some key performance indicators for the full year as compared to the prior 2 years. Although net income, return on assets and earnings per share declined, you can see on the chart on the top right that pre provision net revenue was fairly stable and would have increased slightly by about $11,000,000 if we had excluded the charitable contribution of $30,000,000 that was related to our success with PPP Round 1. Similarly, the efficiency ratio would have been 58.3 percent in 2020 if not for the charitable contribution, a modest improvement to the level achieved in 2019.
Hey, Scott, I'm back. My apologies, I lost my connection there.
Terrific. I'll hand the ball back to you, Harris. You're on Slide 5.
I'll take the one to
Slide 5. Thank you for filling in. Slide 5 is a depiction of earnings per share with a significant increase in EPS in the Q4 of 2020, largely attributable to the change in provision expense. Turning to Slide 6, adjusted pre provision net revenue was $280,000,000 in 4th quarter as noted. The prior quarter was adversely affected by the $30,000,000 charitable contribution, which would have made the prior quarter's number 297,000,000 course.
The moderate decrease from the prior quarter was largely attributable to a slight decrease in revenue as well as an increase in expense, which Paul will provide detail in his prepared remarks. On Slide 7, we highlight the balance sheet profitability metrics. Obviously, the negative provision has resulted in a level of profitability that is not sustainable in the long run, similar to our view that the depressed stability in the early part of the year was also not likely to persist. As we enter 2021, I'm encouraged with the progress made on the technology front has enabled us to do things faster at a lower cost. We're optimistic that non PPP loan growth will resume as we get further into 20 21 as the economy further strengthens after a challenging year.
We remain sanguine that some of our initiatives, the seeds of which were planted years ago with more fruit, including mortgage banking, wealth management and loan syndications. The next section of slides will be covered by Scott McLean. And so I'll turn the time back over to Scott.
Thank you, Harris, and good evening again to everyone. Let me direct you to Slide 8. Over the last few months, You've heard us talk about our success with round 1 of the Paycheck Protection Program. Given the negative economic impact of the pandemic and the low interest rate environment. Our oversized success with PPP1.0 as we has resulted in a meaningful cushion for near term earnings as well as creating new business opportunities with our core small business customer base.
Additionally, our new FutureCore system has proven to be helpful in handling this significant PPP volume in several meaningful ways, including its API enablement. We are now engaged in the forgiveness aspect of the program. Approximately 10,000 customers, representing $1,300,000,000 of volume, have received SBA forgiveness approval. Of note, over 80% of these loans are less than $150,000 and on average in excess of 95 percent of the loan balance has been forgiven. We have a highly controlled process for handling the forgiveness phase, and we've engaged PricewaterhouseCoopers to assist, which is part of the non interest expense increase referenced by Harris.
Round 2 launched last Wednesday, January 13. Last week, we trained over 1500 frontline bankers in the elements program. And as of yesterday, we have taken approximately 20,000 applications. So far, these applications are smaller on average than the average we experienced for PPP 1.0. While it's too early to say how round 2 will compare to round 1, We are ready and able to provide the resources to get the stimulus money into the deposit accounts of small businesses that are in great need at this time.
Turning to Slide 9, we've also frequently highlighted that our bankers have been laser focused on actively calling on the 47,000 PPP1.0 recipients, more than 14,000 of which represent new to bank customers. Regarding our existing customers. You can see that these were active relationships with $3,800,000,000 in deposits and 3,600,000,000 in loans. While we have been successful in originating a significant amount of new loans and services. This portfolio of existing customers will experience churn reflecting the impact of the pandemic and the historical rate of attrition that we experienced.
Additionally, we were able to strengthen relationships by reaffirming a specific banker for 80% of these approximately 32,700 customers. Further reflecting the deepening of these relationships, The new loans we have originated for these customers has on average been greater than their PPP loan. Regarding 14,700 new to bank customers, 30% are now actively using their DDA account, and we are seeing good initial loan activity with these small businesses as well. Although we know that we will not be able to retain all of these clients, We are pleased with these early results. Finally, it's our observation that many small businesses have been resourceful in building liquidity, and it would appear that a number of these small businesses still have a significant amount of their original PPP loan funding available in their deposit accounts.
This should represent a real source of financial strength as we continue to navigate the pandemic. Finally, advancing to Slide 10, 2020 has been a very successful year in our history for our mortgage banking group, driven in no small part by the rollout of our Zip Mortgage digital customer facing application process, which occurred prior to the significant decline in interest rates and the significant increase in mortgage originations in the country. The combination of these two factors, among others, led to substantial increase in mortgage banking revenue, with loan sales revenue increasing to $54,000,000 from approximately $17,000,000 in 2019. That's $54,000,000 for the full year 2020 versus $17,000,000 in 2019. This new process has also allowed us to reduce our turn times by 25% and improved our service levels.
Originations exceeded $800,000,000 for 3 quarters and our pipeline at the beginning of 2021 is higher than the year ago level by 66%. Quarter. Next, I'll turn the call over to Paul for remarks on credit and additional detail on our financial performance and condition. Paul?
Thank you, Scott, and good evening, everyone. Thanks for joining us. I'll begin my comments on Slide 11. Generally, we have presented the credit quality ratios in our earnings presentation materials excluding PPP loans. As Harris noted, classified loans and non performing loans were somewhat stable with the prior quarter.
Overall net charge offs were 13 basis points and for the year just 22 basis points. About 4 5th of the 4th quarter and 1 third of the full year net charge offs were attributable to the oil and gas portfolio. Consistent with our credit loss allowance of $104,000,000 against that portfolio, we do expect energy loan charge offs in the future. However, with the improvement in commodity prices and some of the restructurings that have taken place, our credit loss reserve on this portfolio reflects an improving outlook. On the left side of slide 12, we engaged very early in granting payment deferrals and payment modifications to our borrowers as the pandemic worsened.
At December 31, loans on payment deferral status were 0.5 Please note at the bottom of these bars are statistics regarding total loans that are delinquent by 90 days or more and still accruing. This has recently remained relatively steady between 2 to 3 basis points of non PPP loans. Advancing to Slide 13, the industries represented here are those which we believe to have the greatest risk of default in the current environment. As shown on the right side of the page, the collateral coverage is excellent for this $4,000,000,000 of loans with 98% being covered by collateral often by real estate. Within these loans collateralized by real estate, the median loan to value ratio is 53% and only 3% of these loans have LTV ratios greater than 90%.
Slide 14 presents the 3 groupings highlighted on the previous slide in a time series format. The top left chart shows the loan balances in columns with the weighted average risk grade shown in the three lines. As indicated by the lines, the elevated risk portfolio experienced some risk grade improvement since September as did the remaining portfolio excluding oil and gas lending. The oil and gas portfolio's weighted average grade remains relatively unchanged. The loan grades shown here represent the probability of default only.
As a reminder, the probability of default combined with the loss given default are key drivers of the allowance for credit loss. The top right chart on Slide 14 shows the trend in classified and non accrual loans with the classified ratio being the larger number and the non accrual ratio being the smaller number within each bar. The relative stability of the other loans non accrual ratio, which represents 87% of the total non PP loan portfolio is encouraging in the current economic environment. On the bottom right, you can see the net charge offs related to these groups. The oil and gas portfolio accounted for about 4 5ths of the quarter's total net charge offs, while a very small amount of net charge offs came from the elevated risk portfolio.
Slide 15 details our allowance for credit losses or ACL. On the top left, you can see the recent trend. The total ACL was $835,000,000 at December 31 or 1.74 percent of non PPP loans. On the right side, we describe the factors leading to the ACL change in the most recent quarter. The bar chart on the bottom right shows the broad categories of change.
$3,000,000 of the ACL decrease is due to the net impact of changes in economic forecasts and changes in the probability weightings of those forecasts. Credit quality factors represented by the middle bar include risk grade migration and specific reserves against loans, which combined for a $20,000,000 reduction in the ACL when compared to the prior quarter. Finally, portfolio changes driven by the aging of the portfolio, the shift in the portfolio from segments that have higher ACL such as consumer mortgages and oil and gas and toward segments that have lower ACL, allowance for credit losses attached to them such as municipal lending and other similar factors generated a $59,000,000 reduction in the ACL. Slide 16 shows an overview income and the net interest margin. The chart on the left shows recent trends in both.
The net interest margin has compressed in the current quarter relative to the prior quarter. However, as shown in the chart on the right, the compression is essentially attributable to the composition of earning assets, namely a greater concentration of lower yielding money market and investment securities. The change in the composition of earning assets has been driven by the strong growth in deposits. Average deposits increased $1,800,000,000 while average loans including PPP declined by $1,000,000,000 As a result, average money market investments and securities increased $3,100,000,000 when compared to the prior quarter. Slide 17 highlights loan and deposit growth and breaks them down by both rate and volume.
As shown on the left side of the chart, average non PPP loans were lower by about $600,000,000 while period end non PPP loans were down by only about $30,000,000 Average PPP loans declined $1,000,000,000 while period end PPP loans declined $1,200,000,000 PPP forgiveness reduced PPP loan balances in the quarter and this is expected to continue into 2021. Turning to yields on loans, the overall yield increased 3 basis points from the prior quarter. The increase in PPP loan yields from 3.50 percent to 3.50 percent from 3.03 percent in the 4th quarter is an important factor in the overall loan yield. PPP loans account for nearly 12% of average loans, meaning that a 47 basis point differential or increase in the PPP loan yield added about 5 basis points to the total loan yield. Partially offsetting that positive change, the yield on new loan production, including line draws, was modestly lower than the yield on maturing loans and paydowns.
This trend remained consistent with the 3rd quarter. The resulting yield on non PPP loans decreased about 3 basis points from the prior quarter. Shifting to the chart on the right and funding, average total deposits increased 2.7% over the prior quarter. The cost of deposits declined to 8 basis points from 11 basis points in the prior quarter. Slide 18 reports that our balance sheet sensitivity has increased as deposits have increased and benchmark interest rates have fallen.
We are comfortable with the increase in rate sensitivity because we believe the risk to lower rates is limited. As we indicated in October and as you can see in the balance sheet tables In the press release, we deployed some of the increase in deposits into securities. The securities purchases for the quarter had an average yield of about 1 point percent, 1.25%. The purchase activity helps to offset some of the deposit fueled growth in asset sensitivity, that the absolute level of asset sensitivity is still unusually high relative to our long term history. The chart on the right side of the page that page 18 show the interest rate risk sorry, the interest rate reset profile of our loan portfolio and include additional detail on the interest rate swap book.
On the upper right, the volumes, maturities and associated fixed rates for swaps used to hedge our floating rate loans are shown, while the bottom right highlights loan repricing characteristics. On Slide 19, consumer related fees were stable with the prior quarter at $139,000,000 Mortgage loan sale revenue declined $8,000,000 and was offset by broad based improvement in several other categories, including interest rate swap sales revenue, which is found in the capital markets and foreign exchange line as well as wealth management fees and retail fees. Non interest expense shown on slide 20 was $424,000,000 in the 4th quarter. After normalizing for the $30,000,000 charitable contribution in the prior quarter, The $12,000,000 increase in non interest expense included an increase in incentive compensation as credit quality and overall profitability was better than had been expected earlier in the year. Total compensation and benefits for the full year, excluding severance, was $28,000,000 less than in 2019 or 2.5% lower.
Average full time equivalent employees declined about 4.5% in 2020 as compared to 2019, while period end full time equivalent employees declined nearly 6%. Helping to drive these savings are continued efforts streamline and simplify our operations where possible, which has been enabled in part by our investments in technology. As an example of that can 1,000 hours of labor in 2020, a significant savings for our organization. We also reported an increase in our professional and legal services expense. About $3,000,000 of that increase was related to forgiveness the forgiveness process for PPP Round 1 loans.
The remainder of the increase can largely be attributed to ongoing technology initiatives. We are reintroducing our financial outlook, which we suspended for much of 2020 due to the extreme uncertainty surrounding the pandemic. Our updated outlook can be found on Page 21 and is our best general estimate of our financial performance and the Q4 of 2021 as compared to the Q4 of 2020's actual results. Quarters in between are subject to normal seasonality, and I would reiterate our earlier reference to the forward looking statement on Slide 2. We are establishing our loan growth outlook, which excludes PPP loans at slightly increasing, which can be interpreted as a growth rate in the low single digits.
We expect low single digit to mid single digit growth in commercial, driven by an expectation for continued solid growth in municipal lending. We expect commercial real estate to be relatively stable and we expect consumer lending to experience low single digit growth. We are establishing our outlook for net interest income also excluding PPP loan revenue at slightly increasing, which incorporates the current shape of the yield curve, some earning asset growth and some modest pressure on the net interest margin as the securities portfolio yield continues to reset lower and we experienced modest pressure on loan yields. We are establishing our outlook for customer related fees at slightly increasing. Mortgage banking income may be subject to some weakness if longer term interest rates rise, but we expect strength from many other revenue categories, especially as we deepen and strengthen relationships with our PPP customers.
We are establishing our outlook for adjusted non interest expense at generally stable. As noted in the comments section on this page, on a GAAP basis, we expect the overall level of GAAP non interest expense in 2021 to be consistent with GAAP non interest expense for 2020 at about $1,700,000,000 Finally, regarding capital management, We feel very good about the strength of our common equity Tier 1 ratio at 10.8%, particularly when paired with the relatively low credit losses and relatively stable pre provision net revenue throughout the pandemic. It is premature to announce any share repurchase program today. However, we have said that as uncertainty subsides, the prospects of actively managing our capital through share repurchase improves.
Of course,
the approval of any repurchase program is subject to approval by our Board of Directors and our regulators. That concludes our prepared remarks. Andrew, could you please open the line for questions?
Your first question comes from the line of Erika Najarian with Bank of America.
Hi, good afternoon everybody. Thank you for the prepared remarks and the financial outlook. As we think about A more upbeat tone on the future. As we think about net interest income and the cadence of it between 4Q 2020 and 4Q 2021. Should we expect that net interest income would have bottomed in the Q4 of 2020 ex any PPP loan income.
Well, I'll take that Erica. I'll start by saying that You saw in the outlook that what we said was that, we expect net interest income in the Q4 of 2020 to be sort of modestly above what it is today in I'm sorry, in 2021, relatively modestly above where it is today in 2020. So I can't kind of officially call that a bottom, but I think what we're saying is excluding PPP, we expect it to be growing modestly from here.
Got it. That's great. And just on capital management, your So shift to quality has clearly been borne out in the credit quality that we're seeing in the middle of the pandemic. And you have significant capital levels even relative to peers. What would you need to see To buy back stock in the Q1, which the Fed is allowing for your larger and arguably more complex peers.
Well, I think we just want to continue to see a little more clarity With respect to how this pandemic will affect borrowers, there have been a lot of people who have thought that we may have a little bit of some delayed impacts that we might see more impacts coming in 2021. I think We're growing increasingly optimistic as evidenced by the reserve release you saw from us in the Q4, but we still I think there's still risk out there. And so I will be cautious, but I expect that we'll absolutely be hoping to look at share buybacks as we get into 2021.
Thank you.
Thank you. And our next question comes from the line of Dave Rochester with Compass Point.
Hey, good afternoon, guys.
Hi, Dan.
On the NII discussion, you guys mentioned new loan yields were still maybe a little bit below book yields or maybe it was roll off yield. Just wondering what how large that differential is at this point? And then just regarding the NII guidance, how much securities growth are you guys assuming in that?
I'll take that, Dave. As it relates to loan yield, we haven't been specific. I think the word we used in the Q3 Q was modest and what we're trying What we're continuing to see is similar to that in terms of that quantification, but we haven't been super specific about what that is. But I think it's a fair word, modest. The as it relates to securities growth.
We have a lot of cash on the balance sheet today. You saw that impact our net interest margin. The whole finance team, the treasury team are working really hard to sort of actively manage that cash, but we also are mindful of view that the economy could really begin to engage in the second half of the year. And so given the very flat nature of the yield curve and I would say a general expectation internally that things will really improve as we or start to really improve as we get into the next half of this year. We want to be careful about putting on too much duration with that incremental cash that's been added.
So the securities it's a long way of saying the securities portfolio may grow, But you won't see it grow anywhere close to the amount of excess cash that's been put out over the course of the last quarter.
Yes. Okay, great. And then
maybe just switching to loans real quick on your outlook for loan growth. How much more runoff are you guys expecting at this point in the energy book. And then bigger picture, as you think about C and I demand and maybe small business loan demand going forward, Does the PPP program, does that impact what that loan demand could be for that the subset of C and I going forward just given that they're now flushed with cash and will be probably spending some of that in the near term.
Dave, this is Scott McLean. I'll
Speak to the first part
of that, I think, well, maybe all of it. The energy outstandings are actually about, well, I'm not sure how we reflected it here, but there's about $100,000,000 of PPP loans in the energy outstandings. And so excluding PPP energy outstanding, so around $2,100,000,000 or so. And That could go down a little bit further, but I do think if oil and gas prices stay where they are and maintain some stability there. I think you're going to see increased drilling and you'll see greater utilization of lines of credit.
So I don't anticipate it could go down the next quarter or 2 some, but I think we'll start to see utilization pick up. And I do think that for small business lending in general, the Our borrowers, they are building liquidity. We've seen that. I think we've seen it across the country. And they still have a healthy proportion of their PPP fundings to rely on as well.
I think it's going to be the broader economy starting to show real improvement and we'll start to see lines of credit being utilized at a greater pace as working capital builds up again and as people start to adjust to the post pandemic environment.
I'd also just note that the quality of cash to obtain forgiveness, It has to be used it's really intended to be used to offset the specific expenses and to keep employees on payrolls at a time when revenues have been seriously impacted. So I think for a lot of these businesses, they'll use it that way. And as we get further into the year, the economy really does rebound in a strong way. I think you'll see them pick up and start to borrow for longer term kinds of investments in in building their businesses. So that would certainly be the hope and my intuition is that that's going to happen.
Thank you. And our next question comes from the line of Ken Zerbe with Morgan Stanley.
Great, thanks. I guess not to get too deep in the weeds here, but just to come back to your NII guidance, what is the right base on which to grow slightly increasing. I mean, the way I read it is you got the 550,000,000 on Slide 16. Right now, you subtract out the 26, which is the accelerated piece, but does your guidance how do you account for the non accelerated PPP amortization. Should we back that out as well or how are you thinking about it?
Yes. Hey, Ken, this is Paul. I'll take that. I'm sorry if I wasn't clear. What we're trying to provide is kind of an outlook on net interest income excluding PPP.
So the way I would think about it is I would look at the average PPP balances in the Q4, which I think are $6,300,000,000 Those yield is 3.5%. And so if you completely Exclude that, you come up with a sort of multiply that out and exclude that from your net interest income number, you come up with net interest income excluding PPP. That's the base that I think
Got it. Okay. All right. I'll do the math if you don't have that write off. I guess maybe my follow-up question is in terms of the second PPP facility, can you just talk about the pluses and minuses of whether Zions could potentially be as active as it was in the first program.
I suspect it's smaller, but I'm kind of curious how what your involvement might be in the second facility? Thanks.
Well, it's up to say yes, I mean, there's less funding for it. So it is a smaller program and it's really largely targeted at businesses that were particularly hard hit. So I think nationally, you'll see the numbers are down in this round. We'll also be down because in terms of the dollar volumes, because maximum loan amount has been reduced to $2,000,000 But that said, I think you're going to see a lot of participation by business is on the smaller end of the spectrum. And we certainly geared up and We're very engaged and I think expect that we'll show very well again in the 2nd round.
Thank you.
And our next question comes from the line of John Pancari with Evercore ISI.
Good afternoon. On the back to the buyback question there, just want to I know you mentioned that You might be interested in a position to resume buybacks pending later in the year pending Board approval and regulatory approval. Is this are the regulators in any way keeping you from resuming buybacks right now?
Well, we have to we're a little bit differently situated from many of our peers and that we Republic traded National Bank, as you know. And so, there's an application that we make to the OCC for a permanent reduction in capital, and that's what it takes to buy back shares. I fully expect That they'll be reasonable and thoughtful about this. As I I look at the backdrop, what I see is this is a company that has strong capital relative to peers. We have what's been very solid credit quality, certainly relative to peers over the last few quarters.
I think that probably relatively gets better as we get through some of the energy issues that have increased the charge offs, still leaving us with very low charge offs. But absent the energy charge offs. It looks truly great. And then you have I don't expect we're going to see huge loan demand. We Expect that we're going to see loans growing, but probably not at a pace that's going to absorb a lot of earnings.
And I think the conditions are going to be pretty good for us to be pretty actively engaged in buying back shares as we get end of the year or quarter or 2. We just want to make sure that we're being sensible about it. We'll have that conversation with regulators and with our Board, but I think all the conditions are going to be there for reasonably active buyback program.
Okay. All right. Thank you. That's helpful. And then separately, I I was wondering if you could give us an update on the core systems conversion.
Any change in your updated expected timeline and Any change in terms of the cost trajectory involved in the whole conversion? Has that materially changed at all? Thanks.
Thank you for that question. We are the pandemic, there's no question, had an impact on our FutureCorp project and just on projects in general. I mean there was a few months there where It just it was difficult to continue at the pace we were going and the level of effectiveness. And so, but we got through that. We've adjusted to it.
And so originally, we were going to have release 3, the deposits release, come out in 2022, kind of a phased rollout in early kind of early to mid-twenty 22. That probably has been delayed by 6 months and we'll be continuing to evaluate that. We still have time to make up time between now and then, But the pandemic has definitely caused a brief delay in it.
And in terms of
cost Go ahead, Harris.
Scott, I was also going to just note that Another issue that anybody would face with a project like this is a I was going to say reluctance. It just wouldn't be smart as you get further into the Q4 to, we're not going to do it deep into the Q4. So There's kind of a window we're going to have to hit. We hope that we'll be able to hit that, but that's something to keep in mind as well.
That's a great point. And in terms of kind of the ultimate cost and the impact on P and L, our P and L expenses over the next 2 or 3 years and then for the period after go live. It's not materially different. So, hopefully, that helps.
It does. All right. Thank you.
And I would tell you that our level of excitement about it continues to grow because when we get to that place, We will have a 5 to 8 year, maybe 10 year head start on virtually every other major bank in the country. And it really being on our new system during PPP1.0 absolutely made a difference in the level of volume we were able to do.
Thank you. And our next question comes from the line of Jennifer Demba with Truist Securities.
Thank you. Good evening. Your net charge offs have remained very contained this year. Wondering If you're expecting them to rise in 2021 2022 and where they when you think they could peak? And if you could give us just a little more detail on what you're seeing in those more at risk portfolios.
Thanks.
Hey, Michael, it's Jennifer, it's Keith.
Let me jump in and I'll turn
it over to Michael maybe for
a little more detail. A couple of things. One, we're Still not seeing any significant negative impacts in terms of charge offs to the portfolio on those COVID related industries. And we get into some a little bit of detail about what those are, but we're not seeing any impacts there. And I think this comment has been made a couple of times.
As we get through this next round of stimulus to help people get around the bend and we get to vaccination, which I know a lot of businesses are looking forward to. We just we don't see that in the future, but we also don't know what the economy holds. So as it relates to that portfolio. We haven't seen losses materialize. We don't didn't see them certainly this quarter.
We don't see them in the short term. And in terms of the other portfolios, as mentioned earlier, a substantial portion of the charge offs this past year and certainly this past quarter were in the oil and gas portfolios. We don't see any significant charge offs looming in the next couple of quarters in those portfolios. But Michael, let me turn it to you real quickly and see if you have something to add.
Well, I think you covered it well, Keith.
I would only add that I think the unit count around charge offs might rise a little bit. I'm not sure about the net charge off ratio up or down, but we do expect to see some small business failures, although small business is holding up very well, mostly because I think our borrowers are disciplined. They're resilient. They have more cash potentially than we thought they did. And now with this stimulus, and vaccine and immunity around the corner.
I think Keith's hit it on the head.
If I could just add to that under the CECL accounting rules that we are currently living by. We are estimating our credit losses to be $835,000,000 over the lifetime of our of the loan portfolio. And so, it's just a really important, I think, punctuation to all of commentary.
Thanks so much.
Thank you.
And our next question comes from the line of Steven Alexopoulos with JPMorgan. Hi, everyone.
I wanted to first ask a question on the strong deposit growth again this quarter. I know 4Q is typically a window dressing quarter, but with no new government stimulus in the 4th quarter. Where is all this incremental liquidity coming from? Are customers just hoarding cash? And How much risk is there if rates rise that could potentially be siphoned out pretty quickly?
Well, I'll start. It's so much speculative. As we've referenced certainly last quarter and I think this quarter, we believe that Yes, significant fiscal and other stimulus programs are creating a lot of liquidity in the system that's washing up on bank balance sheets, including our balance sheet. As I said earlier on in the response to a question, we have a lot of cash on the balance sheet today, but we're being really mindful about how far out the curve we put that cash to work because we do think there's a reasonable chance that by the end of the year, Yes, some significant part of that may have left the bank. But that is I will say that is somewhat speculative.
Okay. Hey,
this is Scott. Hey, clearly, our DDA, the total deposit ratio has continued to increase. And so there will naturally be probably a drop in that. But If you look at our that mix of non interest bearing to total deposits over a very long period of time, it has been very resistant 2 periods of increased interest rates. And I think that people have figured out that's largely a function of our really small customer business customer client base, small operating accounts.
It just hasn't been that susceptible to rate chasing, basis point chasing.
Okay. That's helpful. And maybe for a follow-up, Regarding NIM and the pressure you guys have seen from securities and fixed rate loans resetting lower, maybe for Paul, How much steepness in the curve would we need to see to more fully alleviate that pressure? If we get to, I don't know, 2% in the 10 year, is it gone? Like Where does that need to be for us not to worry about this anymore?
Thanks.
It's hard for me to be really specific I will say the part of the curve that we're particularly focused on is kind of the 3 to 5 year point in the curve because that's where at the margin, That's kind of where we're investing, our discretionary sort of part of the balance sheet, the investment portfolio. To the extent we're mitigating or attempting to mitigate the interest rate risk through swaps. That's kind of where that occurs. And to the extent we've got fixed rate loans that sort of happen around that part 2. So it's hard for me to be really specific around what that looks like, although I wouldn't target it to the 10 year, I would probably target it to sort of the 3 to 5 year part of the curve.
Okay, fair enough. Thanks for taking my questions.
Thank you.
And our next question comes from the line of Gary Tenner with D. A. Davidson.
Thanks. Good afternoon. I guess
I had a pretty sizable reserve release this quarter. I appreciate the color in the slide deck on the moving parts for the quarter. Given the positive commentary in terms of PPP2 vaccinations etcetera, just trying to get a sense of where you think that provision number could go in the near term. I mean, if we get a successful vaccine rollout as we go through the spring. I mean, is that just an acceleration of reserve release into 2021 versus 2022?
Well, I'll start with that. As you know, under CECL, we need to create the allowance for credit losses that's consistent with our best expectation for the life of loan losses in the book. And that's the $835,000,000 we set in the 4th quarter. We also noted that as the portfolio migrates, as risk ratings improve, as the economic forecast improved to the extent it does. We saw that this quarter.
To the extent that those things continue sort of over and above where our current expectations are for improvement. Those are the things that would lead the allowance for credit losses down. And likewise, a reversal of fortunes on any or all of those could be an offsetting factor on the allowance.
I'd maybe just add that I think I can speak for all of us here in saying that the 4th quarter charge off experience was I mean, we were elated by it. Certainly not what we were would have expected in a pandemic. I think it's a little early to know yet whether that was an aberration. But if we see continuation of that trend in the Q1 and then on into the Q2. I mean, I think absolutely you're going to see some reserve releases.
It will simply change our outlook as to what the damage is going to look like. On the stimulus that's out here, the vaccine, everything that I think the real test is going to be in the actual experienced charge offs that we see here this quarter and maybe even at the end of the second quarter.
Okay. Thank you for that. And then quick question on time deposits, down quite a bit this quarter versus the 3rd quarter on average and a 20 basis point decline in rate there. What are you booking new or rollover time deposits at right now? And Do you think that that total outstanding number continues to decline and what kind of rate you think it could get you?
Yes, this is Paul. That kind of deposit number largely is kind of a brokered CD, sort of one of many sources of funding for us that historically we've utilized and tried to spread out our sources of funds, including brokered CDs. Given the massive amount of liquidity that's washed out of the balance sheet over the last 9 months, We're actually just letting that portfolio run off. So I would and it's a relatively short portfolio. So I would expect, as evidenced by the change in the balance quarter.
So I would expect that to continue to run off over the course of the next several quarters and frankly not be replaced.
Thank you.
Thank you.
And Our next question comes from the line of Ken Usdin with Jefferies.
Hi, thanks guys. Hey, on the PPP 1.0 slide, I'm just wondering, have you tried to or started thinking about sizing that new to bank customer opportunity? It's Interesting to see how much existing customers have with the bank, but I don't want to presume that it's a similar size opportunity. Do you have a way that you're starting to kind of think through that and how much uplift you might get on top of what you've seen already come in through new to bank customers?
Yes, that's a great question. And we are we can absolutely see everything those 14,700 approximately new to bank customers are doing. We're tracking their utilization DDA count very carefully because that indicates that that's a 30% number that they're actively moving their relationship. And so that's progressed from obviously 0% to 30% in a short period of time. So we're having lots of interaction.
This is We know these we can count these customers in ones, not in 100 and 1000. We're keeping track of the calling effort on them through our contact management system, our CEOs and our bankers are highly focused on it. And so It's hard to know where it will end up, but we're encouraged by the early loan growth and new services growth that we see there. And but I'll tell you, it's always more fun to talk about kind of new customers. It's a little sexier.
But the approximately 33,000 existing customers, we probably didn't have that closer relationship with some of those. And so this Gave us a chance to have a really intimate experience with them, and we're seeing a nice pickup in loans and other services and just a strengthening of the relationship there. So, if you were going through a pandemic, you'd rather have had 47,000 really intimate interactions than just sitting back on your couch in your jammies. So, we're watching it closely. We're measuring it closely.
And when you think about the fact that we've got another 150,000 business customers with revenues less than $1,000,000 that did not apply for a PPP loan. We're pretty energized about the progress we can make during this time period.
Got it. Thanks. And as a follow-up for Paul, Paul, so if you do the math that you implied before, you get the starting point, I think, around $500,000,000 ex PPP NII, and then we'll grow it on top of that. My question is, presuming that's right, how do you even start to think about like what PPP lumpiness looks like in terms of reported NII as the next year progresses, obviously with more forgiveness with PPP 2.0 coming out. I presume there might be some left by the end of next year, but Is it as much of a guessing game for you guys as it is for us at this point when you think about the out year for that?
Well, we I think we provided some pretty good statistics on the on the 1st round of PPP and sort of the level of forgiveness that we saw in the Q1. As we noted that And as you know, there's a 1% coupon attached to those loans. We had $141,000,000 of unamortized sort of net fees at of September 30. That was down to $102,000,000 with $26,000,000 of sort of accelerated amortization associated with that. So we're trying to provide all the pieces so that you can kind of provide your own estimates on how that forgiveness is coming in.
I would say That 4th quarter was a good quarter, kind of when you think that that was the Q1 of forgiveness. My expectation is that we're going to see it we're going to see that continue into 2020 or 2021. So That is you can kind of get your arms around that. But to your point, the hard part will be the second round of PPP and sort of how fast those come on the books and then to the extent that borrowers meet the threshold, how quickly those are forgiven by the SBA. That is a lot murkier to me, but all that being said, I think 2021 will be for the next several quarters at least significantly impact net interest income will be significantly impacted by the existence of the PPG program.
Your math is approximately right. I came up with a slightly different answer When I did this a couple of weeks ago, if you look at the yield, dollars 6,300,000,000 3.5% yield for a full year, that's $220,000,000 And so you divide that by 4 and it's like $55,000,000 associated with PPP.
Right. Matt, I was just taking it away from the FTE number. So I was just doing 5.57 minuteus 55. So I think we're on the same page there. Right,
got it.
Yes. Okay. Thanks a lot, Paul.
Okay, thanks.
And our next question comes from the line of Brad Milsaps with Piper Sandler.
Hey, good evening.
Hi, Ed.
Hey, just wanted to follow-up on expenses. You guys have done a great job for several years really keeping a really tight lid on expenses. It looks like the guidance is for flat expenses, at least on a GAAP basis in 2021. However, I know in 2020, you had about $60,000,000 related to the donation and I think the termination of the pension. Just kind of curious, if that would imply about a 3% or 4% growth rate.
Does some of that attributable to some of the things that Scott talked about being delayed with all the technology spend that you guys have going on or are there other things there sort of juxtaposed against sort of the ongoing expense initiatives that you guys have in place.
Paul, do
you want to speak to that and I'll add?
Yes, yes, sure. So, yes, as we reported, we expect kind of GAAP expense to be roughly You did point out some unusual items in 2020. But as we look ahead to 2021, the continued build out of our technology stack is a really important part of kind of what we're doing, an important part of who we're going to. So that is a contributor, certainly, to the expenses we expect to see in 2021. Scott, would you add to that?
Yes. I just I think you got to have to look at the longer time period. You go back to 2014, 2015, and on an absolute basis, our expenses are up about 5 percent, not annually, just on an absolute basis from that prior time period. And so We are continuing to invest in technology, but at the same time, you saw us reduce our FTE count by 5% the Q4 of last year, and you can absolutely see that in our FTE numbers. So we're pretty encouraged about our ability to continue to keep expenses relatively flat.
And because we just have this, again, huge bucket of smaller type initiatives like Paul referenced with automation that are creating savings, not necessarily savings that any one particular one, you go, wow, that's going to change the course of the company. But what changes the course of a company is when you have a culture of that continuous improvement and it's happening in little pieces all along the way.
Yes, I'd also just and it was said earlier, but just to remind, Expenses in the quarter were impacted by the fact that credit quality as reflected in the charge off number is better than expected probably. And so we did increase accruals for incentive compensation as a result of that. I mean that had about a $7,000,000 impact on the quarter. We also had some additional costs, kind of professional fees associated with the PPP program. So there were not that it was a really messy quarter, noisy quarter, but it was there were a couple of items in there that took expenses a little higher.
Great. Thank you, guys.
Thank you. And our next question comes from the line of Brian Klock with Keefe Bruyette Woods.
Hey, good evening guys. And real quick before the bell, two follow ups for you, Paul. On the PPP and the forgiveness, you mentioned that you gave some color on the Q1. Are you saying that, that was the color on the Q1 of forgiveness, so that was the Q4 of 2020. Is that true?
Or did you actually say what you think that forgiveness may impact the Q1 of 2021.
Forgiveness will absolutely impact so sorry if I book. I was trying to refer to the 4th quarter, and I think we've got some statistics in here in terms of the number of loans that were it's on the front page of that press release, right? Number of loans that were forgiven. My point is that we still have a lot of loans to work through the process. And so I'm expecting that to absolutely impact net interest income for the next couple of quarters.
And then PPP 2.0 as we like to call it, Yes, that is sort of, as I said earlier, an additional layer of complexity because I think the forgiveness period on those, by the time we sort of get through midyear or possibly before, I'm not sure, we may start to see forgiveness on that second round of PPP. And as Harris said in his prepared remarks, We have seen a lot of applications coming in on that second round of the program. And it's really important for us to be open and available to our communities to really help them out with the program. And so we're all very focused on doing that.
Okay, great.
Just one follow-up question to Brad's question on the guidance on the adjusted non interest expense. So in order to be the guidance of being flat in 2021, it's based on the 2020 adjusted net interest income that's on that slide. So really just excludes the pension expense from that, right? So it's like $1,670,000,000 as the base to compare from?
There's 2 ways to do it. One is to look at the 4th quarter, because that slide is kind of 4th quarter to 4th quarter comparison. And I think what we're saying is, look, the 4th quarter by the time you get to the Q4 next year, it's roughly consistent. The other thing, as we say on the slide, And we're pretty explicit about that we expect the full year 2021 GAAP non interest expense to be approximately stable with the fiscal year GAAP non interest expense figure, which we say right on the slide is $1,700,000,000
Okay. So does that imply that there's Some non GAAP expenses, maybe another charitable contribution similar to what you had in 2020?
Yes. So sorry, not to imply that. We're just trying to come up with that there are a couple of different ways that you triangulate on the same number. We're expecting expenses, adjusted expenses to be about $1,700,000,000
in 2021. Got it. Okay, that's helpful. Thank you very much. Thanks for your time.
Yes. Thank you.
Your next question comes from the line of Steve Moss with B. Riley Securities.
Good afternoon. Just one follow-up question for me on the allowance for credit losses here, the $59,000,000 decline related to portfolio changes. You've had a lot of loan growth here driven by municipal and owner occupied over the past 12 months. Just kind of wondering, do we think about that a good component of that $59,000,000 being sustainable as we head to the first half of twenty twenty one in terms of reserve release.
I'm sorry, I didn't quite catch the question. Could you repeat it?
Sure. So just on Slide team with the $59,000,000 reduction in the ACL from portfolio changes. You guys mentioned there are new loans and portfolio mix 2 of the drivers. And just looking at growth over the past 4 quarters have been driven by municipal loans and unoccupied CRE. So I'm thinking if that continues into 2021, do we see a good chunk of that $59,000,000 reserving with those sales core continue into the first half of twenty twenty one?
Well, I can't necessarily say that it continues, but what I can't you're picking up on the theme, which is to the extent we are growing parts of the portfolio that are less risky that absolutely has an impact on sort of the overall average allowance for credit loss relative to loan. The other really important factor though that I that we mentioned in the slide and it's a really important factor I don't want to overlook, to the extent loan growth has slowed, The existing portfolio is shortening. And under CECL, one of the key sort of key determinants of the allowance for credit loss is the lifetime of the loans. And as loans move through time, the probability of default decreases. So to the extent that we've got a shortening portfolio From an average life perspective, that also absolutely has an impact on the allowance for credit loss.
Well, Certainly, the credit quality bar on that page, Page 15, Slide 15, assuming the pandemic, We start to see a recovering economic activity. There's and their credit quality improvement should be reflected there as well. Much more appreciated. Thank you very much.
Saw it
in the 4th quarter.
Thank you. And I'm showing no further questions. So with that, I'll turn the call back over to Director of Investor Relations, James Abbott,
for any closing remarks. Thank you, everyone. We appreciate you joining us for the Q4 earnings call for 2020. We look forward to seeing you and speaking with you in the near term. If you have any follow-up questions, I will be around this evening and tomorrow and so forth.
To take any of those questions, please just reach out to me at the number at the top of the press release. Thank you. And with that, we are adjourned. Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.