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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by and welcome to the Zions Bank Corporation's First Quarter 2021 Earnings Results Webcast. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the conference to your host, Mr. James Abbott, Director of Investor Relations. Sir, you may begin.
Thank you, and good evening, everyone. We welcome you to this conference call to discuss our 2021 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. 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 the 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 the slides during this call.
For our our agenda today, Chairman and Chief Executive Officer, Harris Simmons will provide a brief high-level overview of key financial performance of the company. Subsequent to Harris comments, Paul Burdiss, our Chief Financial Officer will conclude by providing additional detail on Zions' financial condition. With us also today are Scott McLean, our President and Chief Operating Officer; Keith Maio, 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 ask you to limit your questions 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 and we welcome all of you to our call this evening. Beginning on Slide 3 of the presentation that we distributed. We are pleased with the overall results of the quarter, particularly on the credit quality front. Diluted earnings per share increased to $1.90 from $1.66 per share in the prior quarter. The increase can be attributed to the change in the provision for credit losses. This reserve release which was almost double the size of the release in the prior year quarter was made possible by the combination of a low 7 basis points of annualized loan losses relative to average non-PPP loans, 6 basis points on total loans, total average loans and it's also the result of continued improvement in the economic outlook.
Our capital improves with common equity Tier 1 capital, the ratio increasing about 40 basis points to 11.2%. Period end loans were flat with the prior quarter, helped by additional growth in PPP loans from the 2021 round of the program. When viewed through the lens, Federal Reserve H8 [ph] data and from other reporting Bank's recent earnings releases, it appears that we held up better than a great many banks, if you'd both with and without the effect of PPP loans. Period end deposits increased 6% or 24% annualized and non-interest bearing deposits increased more than 10% or 42% annualized.
Slide 4 reflects recent earnings per share results along with some notable items on the right hand side of the chart -- of the slide here that may be of interest to you.
And then turning to Slide 5, adjusted pre-provision net revenue was $253 million in the first quarter. The decrease from the prior quarter was largely although not entirely attributable to seasonal factors such as reduced revenue from fewer days in the quarter and increased expense primarily from an increase in long-term incentive compensation. We've also displayed the provision for credit losses, which has been the most volatile component of our earnings. Paul Burdiss will provide additional detail in his prepared remarks about some of these items.
On Slide 6, we highlighted the balance sheet profitability metrics. A very strong results over the past two quarters in large measure reflect the partial reversal of credit loss provisions in the first two quarters of 2020.
Turning to Slide 7. We highlighted the increase in our common equity Tier 1 capital ratio, which as I noted increased to more than 11% from 10% a year ago. Much of this is attributable to the fact that we suspended share repurchases during the most uncertain period of the pandemic, while maintaining our common stock cash dividend. In the first quarter, we repurchased $50 million of our stock and although it's premature to announce anything today, the company is well positioned to be more active in our capital management over the next several months, we believe.
Slide 8 highlights our Paycheck Protection Program lending success. We've been very pleased with the results of our efforts, ranking 10th overall in origination volume when combining last and this year's results. We are well into the forgiveness process with $4.4 billion of applications received and $2.8 billion approved by the SBA. During the first quarter, an additional $1.5 billion was forgiven by the SBA, a slight increase over the prior quarter's rate, leading to a moderate increase in the yield of those loans. 2021 Round has been a continued success although, fewer of our borrowers if needed the funds, still of the more than 28,000 applications submitted in the current round nearly 4,000 of the applications are from customers that are new to the bank in the current round, in addition to the nearly 15,000 new customers from the 2020 applicants.
Turning to Slide 9, we can see the status of customers that as a result of the PPP or new to the bank as well as those who are existing customers who obtained a PPP loan from us. We have an active calling program that is designed to introduce these customers to our frontline bankers. Then can assess the customer's financial services' needs and offer products and services that might be a good fit for their business. As shown in the chart on the right, these customers have added various products and services outside of the PPP loan and related deposit account. We are encouraged by the progress we're making on this front and look forward to more progress in the months and quarters ahead.
As we enter 2021, I'm encouraged with the progress made on the technology front that has enabled us to do things faster and at lower cost. We are currently rolling out our new front-end online and mobile banking platform for consumers and in 2023, we expect to complete the transition to our new core deposit system. Chair Jelena McWilliams of the FDIC recently noted quote, I would say that if we could scratch every legacy computer system and start a new that would be wonderful" although, we've not replaced every legacy system, we've come a long way and we believe we're doing some really leading work here. We are further along in the process and any of our peers that we're aware off. We expect this will give us a long-term competitive advantage and staying relevant allowing us to be nimble and fast and adopting new technologies from vendors and ultimately making the experience for the customer very user friendly.
I'll now turn the time over to Paul Burdiss, our CFO to provide some additional detail on our financial results.
Paul?
Thank you, Harris and good evening, everyone. I'll begin my comments on Slide 10 with average loans and deposits. Loan growth has been elusive for banks recently and our first quarter results are consistent with that trend. As shown on the left side of the page, average total loans were nearly flat in the first quarter, when compared to the fourth quarter. The same is true for period end loans. Excluding PPP loans, average loans are essentially unchanged from the prior quarter and are down $1.3 billion or approximately 2.5% from the prior quarter. It's incidentally the majority of the loan declines that we've seen have been in revolving lines of credit, which is consistent with the deposit growth we've seen, and I'll describe that in a few moments.
Within the loan portfolio, average non-PPP, C&I loans are down $149 million or about 1.5% [ph] from the prior quarter and down $782 million or 3% from the year ago period. Average consumer loans are down $403 million or 3.6% from the prior quarter and are down $1.1 billion or 9% from the prior year period. Consumer loans are down in each category. Most notably in residential, mortgages as refinancing activity has added to fee income, while reducing outstanding loans on our books. The notable increases came from PPP loans, municipal lending and commercial real estate. While credit trends are generally improving across the portfolio, the credit quality in our municipal lending portfolio continues to stand out as being exception.
The increase in PPP loans reflected the production of $2.6 billion of Round 2021 loans, partially offset by $1.6 billion around 2020 PPP loan forgiveness down to pay-downs, net in growth of nearly $900 million between the first and the fourth quarter period end. As Harris noted earlier, we're particularly pleased with being able to assist and support so many thousands of small businesses and obtaining the government stimulus money through our internally developed simple, easy, fast and safe process.
Turning to deposits on the right side of this page. Average deposits increased 4.7% from the prior quarter, while period end deposits increased at a moderately stronger pace. Relative to the year-ago period, average deposits increased over 25%. Average non-interest bearing deposits increased at a slightly stronger pace in both the quarter and year-over-year comparison. And at this point, our average non-interest bearing deposits are 47% of total average deposits up from a ratio in the low '40s prior to 2020. This mix shift has provided support to our net interest margin, although, non-interest bearing deposits are not as valuable when interest rates are low.
Before I advanced to the next slide, I will highlight loan and deposit yields. The yield on average total loans increased slightly from the prior quarter, which is attributable to the PPP loan portfolio. Excluding PPP loans, the yield declined slightly to 3.69% from 3.74%. As noted in the press release financials, the yield on new loan production is moderately lower than the loans rolling-off and the dilution is generally consistent with the levels we've seen in prior quarters. There remains continued pressure on pricing in most of our markets, which is what one would expect, given the significant increase in liquidity throughout our banking system. Deposit yields continued to be very well behaved, as our cost of total deposits has fallen to 5 basis points in the first quarter.
On Slide 11, we show our securities and money market investment portfolios over the last five quarters. You'll notice, we increased the size of the period end securities portfolio by about $2.4 billion over the past year to $17.2 billion, while money market investments increased $7.9 billion to $9.7 billion, which is 12% of earning assets. The growth in cash is attributable in part to the forgiveness of PPP loans. The origination of new PPP loans with the proceeds have not been -- have been placed into order their deposit account and not yet been used by our customers and general increases in the liquidity of our customers. We continue to grow our investment portfolio at a measured pace during the first quarter, reflecting unprecedented growth in deposits and helped by the steepening of the yield curve. As the longevity of recently added deposits remain uncertain, we will extra -- exercise extra caution and will likely hold more in money market investments, then we would at times of greater certainty.
Slide 12 is an overview of net interest income and the net interest margin. The chart on the left shows the recent five quarter trend in both. The net interest margin in the white boxes has declined over the past year, reflecting both falling rates and rising excess liquidity. Notably, average deposit growth has exceeded average loan growth by $10 billion over the past year. This growth in excess liquidity is referenced in the chart on the right as strong growth in deposits has impacted the composition of earning assets through a larger concentration in lower yielding money market and securities investments. In the current quarter, the effect of lower rates and a greater concentration of cash and securities drove 9 basis points of linked quarter net interest margin compression with excess cash driving eight of those 9 basis points.
Slide 13 has a lot of information about our interest rate sensitivity, but I'll focus on the upper left quadrant. If you compare this to our prior iterations of this page, you will note that our asset sensitivity has increased as deposits have increased. This, of course, assumes that the incremental deposits have similar duration characteristic as a deposits on our balance sheet prior to the recent deposit surge. Understanding this is one of the greater challenges we currently face when determining the appropriate mix of security to cash. We are generally comfortable with the increase in rate sensitivity because we believe the risk to lower rates in somewhat limited and the durability of recent deposit growth remains uncertain. As previously indicated, we deployed some of the increase in deposits into securities. Security purchases for the quarter at an average yield of about 1.3%.
On Slide 14, customer-related fees declined modestly in the quarter to $133 million. Relative to the prior quarter, capital market activity is somewhat weaker, principally due to fewer interest rate swap sales and syndication fees. Several fee income categories were fairly stable compared to the prior quarter, such as commercial account fees and most of the items within retail and business banking, the exception being non-sufficient fund fees. Wealth management fees continue to grow and are now being reported on a separate line item.
Non-interest expense is shown on Slide 15, was $435 million in the first quarter, up from $11 million in the current quarter. Adjusted non-interest expense was up $17 million to $440 million. The quarter-over-quarter adjusted non-interest expense increase can largely be broken down as follows. Additions of $10 million for seasonal equity grants to retirement eligible employees, $9 million for our profit sharing and seasonable -- seasonal matching contributions to employee 401(k) accounts and an incremental $5 million associated with PPP loan forgiveness. These additions were partially offset by a decrease in base salaries of $10 million.
I'll review credit quality and credit expense begins on Slide 16. Building upon comments from Harris earlier, we saw a meaningful improvement in non-performing loans and net charge-offs, when compared to the prior quarter. Not shown here is the criticized loan level, which includes both classified loans and special mentioned loans. That balance declined 7% from the prior quarter. Overall net charge-offs were 7 basis points in the first quarter, declining from 13 basis points in the prior quarter. I think that is worth repeating, net charge-offs were $8 million in the first quarter or 7 basis points of average non-PPP loans.
Slide 17 details our allowance for credit losses or ACL. On the top left, you can see the recent declining trend in our ACL to $695 million at March 31 or 1.48% of non-PPP loans. The chart on the lower right side of this page shows that $110 million of the 140 million change in the ACL quarter-over-quarter was driven by an improvement in the macroeconomic outlook. We expect that future changes to the ACL will be driven by changes in the macroeconomic outlook as well as loan portfolio, credit performance and growth.
Our outlook can be found on Slide 18. As a reminder, this is our outlook for financial performance in the first quarter of 2022 as compared to the first quarter of 2021. The quarters in between are subject to normal seasonality and my comments are subject to our earlier reference to the forward-looking statement on Page 2. Our loan growth outlook, which excludes PPP loans is somewhat uncertain. While our bankers are expressing optimism the unprecedented level of government stimulus is almost certainly having an adverse impact on the need for credit, particularly among our main street borrowers. On balance, we are reasonably comfortable reiterating our slightly increasing outlook, which can be interpreted as non-PPP loan growth in the low-single digits.
We expect net interest income, also excluding PPP loan revenue to increase slightly with the deployment of cash into securities and the slight growth in non-PPP loans, partially offset by moderate compression of loan yields. We established our outlook at slightly increasing for customer-related fees in January and we are increasing that to moderately increasing. We believe an improvement in economic activity should help to increase card and small business related fees as well as loan syndication and other commercial lending-related fees. And that Wealth Management will continue the trend of double-digit growth and the mortgage banking revenues will remain generally stable at the current level.
I also have a bit of late-breaking news, based upon current market conditions, we believe that we will recognize a second quarter gain in our SBIC investment portfolio of over $25 million. We will have more to disclose, when we file our 10-Q in a few weeks. We are making a slight change to our outlook for adjusted non-interest expense moving to stable to slightly increasing from generally stable. We will remain disciplined on expense control, but as business activity and profitability increases expenses may increase. This outlook does not reflect a significant change in inflation from the last several years, which we believe may be a risk to this outlook.
Finally, regarding capital management, we feel good about the strength of our common equity Tier 1 ratio at 11.2%, particularly in the context of excellent credit performance and the results of our internal stress testing. As we consider the balance of risk and capital, we believe there may be room for more active capital management in the near to medium term. So long as the current macroeconomic and credit trends continue or improve.
This concludes our prepared remarks. Valerie, would you please open the line for questions.
Thank you. [Operator Instructions] Our first question comes from Ken Zerbe with Morgan Stanley. Your line is open.
Hi. Great. Thanks. Good evening, guys. I guess, Paul, just a couple of questions on guidance. I think you touched on this very briefly, but in terms of the net interest income stable is slightly increasing. Can you just break that out a little bit in terms of how much of that is driven by core balance sheet growth versus PPP run off over time versus core NIM compression versus the accelerated fee income that you're getting from the PPPs, if that's possible. Just it sounds like some of the core parts are a little bit weaker and that this might being held up by PPP but just unsure? Thank you.
Yeah. Thanks for your question, Ken. So what we try to do is provide an outlook that excludes PPP and the reason for that is exactly what you described that, that PPP is absolutely augmenting our current level of net interest income. But because of forgiveness and other factors can be somewhat volatile. And so, the outlook that we provided was really meant to speak to the underlying trends in net interest income, which are going to be defined by what's happening on our core balance sheet that is loan and deposit growth, and then also the absolute level of rates. We believe as activity improves, we're going to -- as we said in the loan growth outlook, which also excludes PPP loans. We are expecting some level of economic activity to translate to increased loan growth over the course of the next year. We think that will be additive. And then there is also an expectation that interest rates and/or the yield curve may continue to steepen over the course of the year, which we think would also be additive.
Got it. Understood. Maybe, I should rephrase my question I probably stated incorrectly, but how, like, what would you expect for PPP? You're obviously one of the biggest PPP lenders in the mid-cap space and it should be pretty meaningful for your results over the course of the years [indiscernible] get some clarity around that. Thank you.
Yeah. So I can't make a specific prediction on PPP because of all the things we've outlined, but you can see in our financials that we've got over $6 billion of loans today related to the PPP program. Those are yielding 1%. There is also $168 million of unamortized fees, which will be recognized into net interest income as those loans either amortize mature or forgiven. And so those are the pieces that are going to flow into our net interest income, but the timing of that is just a little bit uncertain because it's somewhat dependent upon as I said, kind of a forgiveness or repayment of those loans.
Understood. No, I know it's hard to -- it's hard to answer that question. All right. Thank you very much, I appreciate it.
Thanks, Ken.
Thank you. Our next question comes from John Pancari of Evercore ISI. Your line is open.
I want to see if you can give a bit more color on your margin expectation. Just curious what's embedded in your stable to slightly increasing NII outlook and how that margin expectation might differ in terms of what factoring PPP or excluding PPP, I guess, however, you're able to help us kind of set that out? Thanks.
Yeah. I'll take that, John. Thanks for your question. This is very similar to the response like just gave relative to net interest income, that's really where we're focused revenue and net interest income, the margin is being significantly impacted by all the cash we have on the balance sheet. As I said, loan growth or deposit growth exceeded loan growth by $10 billion over the course of the last year and on our balance sheet that's significant. Of the approximately 55 basis points of margin compression, we've experienced over the last year, about half of that is related to an increase in cash balances. So that is to say, the underlying trend in the margin isn't nearly as bad, I will say as the headline outcome. And in fact, given what rates have done and how much they fallen. I feel pretty good about where our margin is.
So looking ahead. again trying to exclude PPP because of the volatility, our expectation is that we will see a little loan growth in that is helpful from a volume perspective net interest income. And then also to the extent, the yield curve steepen a little bit from here, which is possible we think that would also be additive. So it's really those pieces of the core net interest income reflected in the net interest margin that we're focused on.
All right. Got it. Thanks, Paul. And then separately on the capital front, currently I've heard your comments around potentially becoming more active on capital management. Can you help us kind of how we should think about that. Like, what type of, if you could remind us of the priorities and clearly, there could imply a much more active buyback program. How should we think about the upside to that program and how substantial it could be as you look at where you stand right now at the 11.2% CET1? Thanks.
Yeah. I'll start with that and Harris will probably provide his perspective as well. I will say, we have said pretty consistently kind of up until the pandemic that the start of the pandemic, that we believe that we've got lower than average risk on our balance sheet and we think that a combination of kind of lower than average risk and average to slightly better than average CET1 ratio is the best outcome for us and our shareholders. And so as you can see that despite the pandemic, we have significantly grown our CET1 ratio over the last year, in fact our CET1 is up 120 basis points from 10% to 11.2%. And so it feels to me like we're getting a little further away from that sort of peer median performance or peer median level that we think is important relative to the risk on our balance sheet. So over the sort of medium term, John, I think that's, that might be a decent yardstick, but I'll let Harris provide a few comments.
Well, I just add -- we've got currently risk weighted assets are about $55 billion and so our CET1 is 11.2% and I think that and my own assessment is that we have a room to bring that down by about a percentage points. So you can kind of do the math, the timing of that is really going to depend on what happens with loan growth and now obviously profitability as we go through the year here, but I would expect that we'll try to work that back down to something closer to and I've kind of a strong showing relative to peers but not as high as we are today.
Got it. Thanks, Harris. That's helpful.
Okay.
Thank you. Our next question comes from Dave Rochester of Compass Point. Your line is open.
Hey. Good afternoon, guys. Paul, you talked about this earlier, but can you just maybe frame the magnitude of that difference in the front book, back book on the yield on your new loans in the securities purchases. It's a little bit closer to maybe 10 bps versus like 50 basis points. I know it may seem like splitting hairs, but with the cost of funds where it is, as low as it is around 9 bps. There just isn't a whole lot of room to offset that pressure outside of just deploying a lot of cash. So just wondering, how close we are to parity there? And I know you mentioned [indiscernible]. I guess that was probably over the quarter, right. You might be a little bit higher on that now?
You kind of cut out there at the end, Dave, but I'm going to answer the question that I think you asked and then you can correct me. So I will provide some numbers although, I'm a little reluctant to do that because there is, you can imagine, sort of, a lot of volatility in the figures, but the trends that we're seeing on that what we refer to as the front book, back book that is loans and securities coming on versus loans and securities coming off. It's sort of in the range of 25 basis points in the loan portfolio and sort of 50 or 50 plus on the securities portfolio. And as I said, that's kind of consistent with what we've seen over the course of the past several quarters. So, no change in trend there.
Thank you. Our next question comes from Jennifer Demba of Truist Securities. Your line is open.
Good afternoon. Hi, Harris. Could you talk about the company's interest and acquisitions in the future. There have been some very high profile deals in the industry over the last several months, as companies look to add more scale.
Sure. I think that I wouldn't count anything out, but it's not something that we are out actively trying to pursue. I do expect that as we complete some of the systems work that we're doing and get out here just a few quarters. I think we could find ourselves, perhaps more interested if the fit is right and the price is right, etc. But it is not -- I guess, it's not a high priority for us right at the moment. And so I don't really expect it -- we'd see if anything significant in the near future, but as you note there, a lot of things happening and as the economy picks up and in particular, if we see some increase in interest rates some modest increase could put us in a much better position to be thinking about that. So I guess that's how I'd characterize where we are at the moment.
What kind of transaction would be of interest to Zion if the conditions became right for it?
Well, it would probably most prominently in market, Western US centric that I've noted in various forms over in recent times that a lot of smaller banks even some of the large community banks and smaller mid-sized banks have probably an over abundance of commercial real estate exposure that would not -- I mean that would be something we would not probably be very interest today. We would you look for -- our franchise has reasonably strong commercial orientation and there are not that many of them, but there are some out here that they kind of fit that profile.
Thanks, Harris.
Yeah.
Our next question comes from Ken Usdin of Jefferies. Your line is open.
Hi, thanks. Good afternoon. Paul, just wondering if you could talk a little bit more about that great Slide 11 you have about the securities and interest rate sensitivity. So you mentioned that you're a lot more as sensive [ph] now because of all the deposit inflows and I see that table of your planned to swap run-off. Just wondering, how you might intend to navigate going forward with either adding incremental swaps, putting on more floors and how you manage that against just what you're doing on the traditional ALM side?
Sure, Ken. Thanks for your question. So a couple of things, one on the traditional securities as I tried to lay out in the prepared comments. We're really, we're not going crazy in terms of adding either volume or duration there. We're really sticking to our knitting and sort of incrementally adding. So the real opportunity to sort of change into sensitivity is really on the interest rate swap side, sort of the, the synthetic extension of duration with swaps, which is what your question, keys on. I will say as the curve has steepened we the ALCO [ph] Committee have discussed the maturity profile of the swaps in sort of the duration that's accretive by that and we are incrementally adding to that. And so in terms of activity, when I think about balancing the duration of the assets and liabilities, we are going to be much more focused on the swap side to the extent that yield curve remains somewhat attractive. And I think that's the uncertain part of the reason I pause is the uncertain part is that again I tried to say in my prepared remarks, what we don't know is what the sort of real average life or duration of the surge in deposits has been or will be, right.
So we've got this incremental $10 billion of deposit growth in excess of loan growth that's creating a lot of interest sensitivity in our models, but as managers. the ALCO's job is to look at that with some on level of skepticism and that's what we're doing. So we're marginally adding duration either in portfolio size or industry interest rate swaps. But we haven't added a lot yet. Looking ahead, I would look for more activity in swaps and security.
Okay, great. Yeah. And that's what I'm getting at and is that, would that those potential adds be built into your forward forecast like the potential to add and what kind of -- how in the money are swaps today versus what you saw them being three months, six months ago. Is it a clear winner to do it?
It's a much different risk return profile today than it was three or six months ago. And you can see that very clearly in the shape of the curve. Now we don't go out much beyond kind of five years on swaps and so you look at where that point of the curve, how that point of the curve has changed over the last six months. And you can see there is absolutely carry there now, where there was almost no carry there for example, six months ago. So the issue that we had, let's say, six months ago about kind of trying to put on some protection against lower rates was, one, we didn't think the rates were much lower or could go much lower. And two, we weren't getting paid at all for adding that duration. Now there is, we're getting paid a little bit for, if you will, every duration dollars that we're putting on which is why we're a little more active. So nothing too exciting yet, but we're absolutely paying a lot of attention to that.
Okay. And that was in your forward -- that's built into your forward guide was my first part of it, I got away from it.
Yeah. It is. Although, I'll say there isn't a lot of speculation around a continued steepening of the curve. That outlook is really based on sort of what we know today and how we think the -- how we expect balance of the balance sheet to change over the next year.
Understood. Thank you, Paul.
Okay. Thank you.
Thank you. And I am showing no further questions. So with that, I will 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 first quarter earnings call for 2021. 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.