Zions Bancorporation (ZION) Q4 2020 Earnings Call Transcript

Zions Bancorporation (NASDAQ: ZION) Q4 2020 earnings call dated Jan. 19, 2021

Corporate Participants:

James Abbott — Senior Vice President, Director of Investor Relations

Harris H. Simmons — Chairman and Chief Executive Officer

Scott J. McLean — President and Chief Operating Officer

Paul E. Burdiss — Chief Financial Officer

Keith D. Maio — Chief Risk Officer

Michael P. Morris — Executive Vice President and Chief Credit Officer

Analysts:

Erika Najarian — Bank of America Merrill Lynch — Analyst

David Rochester — Compass Point — Analyst

Ken Zerbe — Morgan Stanley — Analyst

John Pancari — Evercore ISI — Analyst

Jennifer Demba — Truist Securities — Analyst

Steven Alexopoulos — JPMorgan — Analyst

Gary Tenner — D.A. Davidson & Co. — Analyst

Ken Usdin — Jefferies & Company — Analyst

Brad Milsaps — Piper Sandler — Analyst

Brian Klock — Keefe, Bruyette & Woods, Inc. — Analyst

Steve Moss — B. Riley FBR, Inc. — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Zions Bancorporation’s Fourth 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 session. [Operator Instructions]

It is now my pleasure to introduce Director of Investor Relations, James Abbott.

James Abbott — Senior Vice President, Director of Investor Relations

Thank you, Andrew and good evening. We welcome you to this conference call to discuss our 2020 fourth quarter 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 contains several references to non-GAAP measures. 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 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.

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 McLean will provide comments on our recent strengths in certain strategic areas. Finally, Paul Burdiss, our Chief Financial Officer will conclude by providing additional detail on Zions’ financial condition. With us also today on the call are Keith Maio 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 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 will turn the time over now to Harris. Harris?

Harris H. Simmons — Chairman and Chief Executive Officer

Thanks very much, James. We want to welcome all of you to our call this afternoon.

Beginning on slide three, we are very pleased with the overall results of 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 related to average non-PPP loans, resulted in a negative provision for credit losses of nearly $70 million. While 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 have been very encouraged by the resiliency of great many of our customers.

Adjusted pre-provision net revenue was $280 million, 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 have noted numerous times over the last several years, we were resolved to enter whatever downturn was on the horizon with strong relative and absolute capital ratios. At 10.8% common equity Tier 1 capital and an allowance for credit losses relative to loans of 1.75% on non-PPP loans, we still maintain the strongest combinations of CET1 and the ACL within the large regional banking space.

To that end, we have stated that we will 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 most — more surprising numbers for the quarter was the net charge-offs realized on the loans that we grouped into the COVID-19 elevated risk category. The ratio rounds to zero, which is certainly not what we would have expected earlier in the year in 2020. Throughout the quarter, we have seen real time consumer and business spending data that’s been encouraging. For example, for the month of December, our customers debit card spending was 11% more than a year ago month of December and credit card spending which has often been negative when compared to the year ago period, went down in part by travel and entertainment spending was slightly positive from the same month a year ago.

Slide four is a quick summary of some key performance indicators for the full year as compared to the prior two years. Although, net income, return on assets and earnings per share declined [Technical Issues]

Scott J. McLean — President and Chief Operating Officer

James, we may have lost Harris there. Okay, so —

James Abbott — Senior Vice President, Director of Investor Relations

I would like to, where Harris was where his left off we think we lost Harris’ audio.

Scott J. McLean — President and Chief Operating Officer

Yeah. I’d be happy to do that. I think we were on slide four. Yeah. Okay. This is Scott McLean and I will pick it up from here and if Harris reengages, we will slot him back in. So on slide four, it’s a quick summary of some key performance indicators for the full year as compared to the prior two years. Although, net income, return on assets and earnings per share declined, you can see on the chart on the top right the pre-provision net revenue, it was fairly stable and would have increased slightly by about $11 million if we had excluded the Charitable contribution of $30 million that was related to our success with PPP Round 1. Similarly, the efficiency ratio would have been 58.3% in 2020 if not for the Charitable contribution, a modest improvement to the level achieved in 2019.

Harris H. Simmons — Chairman and Chief Executive Officer

Hey, Scott, I am back. My apologies. I lost my connection there.

Scott J. McLean — President and Chief Operating Officer

Terrific. I will give the ball back to you, Harris. We are on slide five.

Harris H. Simmons — Chairman and Chief Executive Officer

Perfect. On slide five. Thank you for filling in. Slide five is a depiction of earnings per share with a significant increase in EPS in the fourth quarter of 2020, largely attributable to the change in provision expense.

Turning to slide six, adjusted pre-provision net revenue was $280 million in the fourth quarter as noted. The prior quarter was adversely affected by the $30 million Charitable contribution, which would have made the prior quarter’s number, $297 million. A 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 seven, 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 the depressed profitability in the early part of the year was also not likely to persist. As we enter 2021, I am encouraged with the progress made on the technology front that has enabled us to do things faster and at a lower cost. We are optimistic that non-PPP loan growth will resume as we get further into 2021, 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 will bear more fruit including mortgage banking, wealth management and loan syndications.

The next section of slides will be covered by Scott McLean, and so, I will turn the time back over to Scott.

Scott J. McLean — President and Chief Operating Officer

Thank you, Harris, and good evening again to everyone.

Let me direct you to slide eight. Over the last few months, you have 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 PPP 1.0, as we describe it, 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 future core 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 $1.3 billion 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% of the loan balance has been forgiven.

We have a highly controlled process for handling the forgiveness phase and we have engaged PricewaterhouseCoopers to assist, which is part of the non-interest expense increase referenced by Harris. Round 2 launched last Wednesday, January 13th. Last week we trained over 1,500 frontline bankers and the elements of the 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 nine, we have also frequently highlighted that our bankers have been laser-focused on actively calling on the 47,000 PPP 1.0 recipients, more than 14,000 [Phonetic] of which represent new to bank customers. Regarding our existing customers, you can see that these were active relationships with $3.8 billion in deposits and $3.6 billion 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 a deepening of these relationships, the new loans we have originated for these customers has on average been greater than their PPP loan. Regarding the 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-large 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 million from approximately $17 million in 2019. That’s $54 million for the full year of 2020 versus $17 million in 2019. This new process has also allowed us to reduce our turn times by 25% and improved our service levels. Originations exceeded $800 million for three quarters in our pipeline at the beginning of 2021 is higher than the year ago level by 56%.

Next, I will turn the call over to Paul for remarks on credit and additional detail on our financial performance and condition. Paul?

Paul E. Burdiss — Chief Financial Officer

Thank you, Scott, and good evening, everyone. Thanks for joining us.

I will 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 four-fifth of the fourth quarter and one-third of the full year net charge-offs were attributable to the oil and gas portfolio. Consistent with our credit loss allowance of $104 million 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 31st, loans on payment deferral status were 0.5% of non-PPP loans. The right side of this page shows loans that are over 90 days past due. 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 basis points 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 billion 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 three 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 portfolios’ weighted average risk-grade remained relatively unchanged. The lower grades shown here represent the probability of default only. As a reminder, the probability of default combined with 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-PPP 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 four-fifth 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 million at December 31st or 1.74% of non-PPP loans. On the right side, we described 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 million 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, includes risk-grade migration and specific reserves against loans, which combined for a $20 million 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 in 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 million reduction in the ACL.

Slide 16 shows an overview of net interest income and the net interest margin. The chart on the left shows recent trends in both. The net interest margin in the white boxes 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 asset has been driven by the strong growth in deposits. Average deposits increased to $1.8 billion, while average loans including PPP declined by a $1 billion. As a result, average money market investments and securities increased $3.1 billion 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 million while period-end non-PPP loans were down by only about $30 million. Average PPP loans declined $1 billion, while period-end PPP loans declined $1.2 billion. PPP forgiveness reduced PPP loan balances in the quarter and this is expected to continue into 2021.

Turning to yield on loans. The overall yield increased 3 basis points from the prior quarter. The increase in PPP loan yields from 3.50% — to 3.50% from 3.03% in the prior 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, about 5 basis points to the total loan yield. Partially offsetting that positive change, the yield on new loan production, including line drawers was modestly lower than the yield on maturing loans and pay downs. This trend remained consistent with the third quarter. The resulting yield on non-PPP loans decreased about 3 basis points from the prior quarter. Shifting to the chart on the right, in 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 1.25% — 1.25. The purchase activity helps to offset some of the deposit fueled growth in asset sensitivity, but the absolute level of asset sensitivity is still unusually high relative to our long-term history. The charts 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 fix rates for swaps used to hedge our floating rate loans are shown, while the bottom right highlights loan re-pricing characteristics.

On slide 19, consumer-related fees were stable with the prior quarter at $139 million. Mortgage loans sale revenue declined $8 million 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 million in the fourth quarter. After normalizing for the $30 million Charitable contribution in the prior quarter, the $12 million 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 million 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 to streamline and simplify our operations where possible, which has been enabled in part by our investments in technology. As an example of that can be seen in the application of automation in our workspace. Our technology and operations group has been able to incrementally automate an estimated 285,000 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 million 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 it is our best general estimate of our financial performance in the fourth quarter of 2021, as compared to the fourth quarter of 2020’s actual result. Quarters in between are subject to normal seasonality and I would reiterate our earlier reference to the forward-looking statements on slide two.

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 and 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 continued 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 common 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 $1.7 billion.

Finally, regarding capital management. We feel very good about the strength of our common equity Tier 1 ratio at 10.8%, particularly when compared 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, would you please open the line for questions?

Questions and Answers:

Operator

Certainly. [Operator Instructions] Your first question comes from the line of Erika Najarian with Bank of America.

Erika Najarian — Bank of America Merrill Lynch — Analyst

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 ’20 and 4Q ’21, should we expect that net interest income would have bottomed in the fourth quarter of ’20 ex any PPP loan income?

Harris H. Simmons — Chairman and Chief Executive Officer

Well, I will take that Erika. I will start by saying that you saw in the outlook that what we said was that, we expect net interest income in the fourth quarter of 2020 to be sort of modestly above what it is today in — I am sorry, in 2021 relatively — modestly above where it is today in 2020. So I can kind of officially call that a bottom, but I think what we are saying is excluding PPP, we expect it to be growing modestly from here.

Erika Najarian — Bank of America Merrill Lynch — Analyst

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 are 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 first quarter, which the fed is allowing for your larger and arguably more complex peers?

Scott J. McLean — President and Chief Operating Officer

Well, I think we just want to continue to see a little more clarity with respect to how this pandemic will affect. However, there’s been a lot of people who have thought that we may have a little bit of a delayed impact that we might see more impact coming in 2021. I think we are growing increasingly optimistic as evidenced by the reserve release you saw from us in the fourth quarter, but we still think there’s still risk out there. And so we will be cautious, but I expect that we will absolutely be hoping to look at share buybacks as we get into 2021.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Thank you.

Operator

Thank you. And your next question comes from the line of Dave Rochester with Compass Point.

David Rochester — Compass Point — Analyst

Hey. Good afternoon, guys.

Harris H. Simmons — Chairman and Chief Executive Officer

Hi, Dave.

David Rochester — Compass Point — Analyst

Yeah. 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 yields. 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?

Harris H. Simmons — Chairman and Chief Executive Officer

I will take that, Dave. As you look at loan yield, we haven’t been specific. I think the word we used in the third quarter Q is modest and what we are trying to say is that, what we are 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. As it relates to securities growth, we are being — we have a lot of cash on the balance sheet today. You saw that impact on net interest margin. We are working — the whole finance team, the treasury team are working really hard to sort of actively manage that cash.

But we also are mindful of a 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.

David Rochester — Compass Point — Analyst

Yeah. 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 books? And then bigger picture, as you think about C&I demand maybe small business loan demand going forward? Does the PPP program, does that impact what that loan demand could be for that subset of C&I going forward, just given that they are now flushed with cash and will be probably spending some of that in the near-term?

Scott J. McLean — President and Chief Operating Officer

Dave, this is Scott McLean. I will speak to the first part of that. I think — well, maybe all of it. The energy outstandings are actually about — well, I am not sure how we reflect it here, but there’s about $100 million of PPP loans in the energy outstandings. And so excluding PPP energy outstandings around $2.1 billion 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 are going to see increased drilling and you will see greater utilization of lines of credit. So I don’t anticipate it. It could go down the next quarter or two quarters some, but I think we will start to see utilization pick up.

And I do think that for small business lending in general, our borrowers, they are building liquidity, we have seen that. I think we have seen it across the country and they still have a healthy proportion of their PPP fundings to rely on as well. So I think it’s going to be the broader economy starting to show real improvement and we will 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.

Harris H. Simmons — Chairman and Chief Executive Officer

I will also just note that the — probably [Phonetic] have cash to obtain forgiveness has to be used actually $1.10 trillion to be used to offset the kind of 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 those they will use it that way and as we get further into the year, the economy really does rebound in a strong way. I think I can just see them pick up and start to borrow for longer term kinds of investments in building their businesses. So that would certainly be the hope and my intuition is that that’s going to happen.

Operator

Thank you. And our next question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe — Morgan Stanley — Analyst

Great. Thanks. I guess not to get too deep in the weeds here, but just to come back here, NII guidance. What is the right base on which to growth is slightly increasing? I mean, the way I read it is that you got the $550 million on slide 16 right now. You subtract out the $26 million, 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?

Paul E. Burdiss — Chief Financial Officer

Yeah. Hey, Ken, this is Paul. I will take that. Sorry, if I wasn’t clear. What we are trying to provide is a 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 third fourth quarter, which I think are $6.3 billion. Those yield of 3.5% and so if you completely exclude that you come up with a sort of multiply that out and exclude that from the net interest income number, you come up with net interest income excluding PPP. That’s the base that I think.

Ken Zerbe — Morgan Stanley — Analyst

Got it. Okay. All right. I will do the math if you don’t have that right off. I guess, maybe my follow-up question is in terms of a 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. I am kind of curious how — what your involvement might be in the second facility? Thanks.

Harris H. Simmons — Chairman and Chief Executive Officer

I can say —

Ken Zerbe — Morgan Stanley — Analyst

Yeah.

Harris H. Simmons — Chairman and Chief Executive Officer

I think 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 will see the numbers are down in this round. It will also be down because in terms of the dollar volumes, because the maximum loan amount has been reduced to $2 million. But that said, I think, you are going to see a lot of participation by businesses on the smaller end of the spectrum and we are certainly geared up and we are very engaged and I think expect that we will show very well again in the second round.

Ken Zerbe — Morgan Stanley — Analyst

Thank you.

Operator

And our next question comes from the line of John Pancari with Evercore ISI.

John Pancari — Evercore ISI — Analyst

Good afternoon. On the back to the buybacks question there, just want — 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. Are the regulators in any way keeping you from resuming buybacks right now?

Harris H. Simmons — Chairman and Chief Executive Officer

Well, we have to. We are a little bit differently situated from many of our peers and that we are publicly traded national bank as you know. And so there’s an application that we make to the SEC for a permanent reduction in capital and that’s what it takes to buy back shares. I fully expect that they will be reasonable and thoughtful about this. As I look at the backdrop, what I see is this is a company that has a strong capital relative to peers. We have what’s been a very solid credit quality certainly relative to peers here over the last few quarters.

I think that probably — relatively it gets better as we get through some of the energy issues that have increased the charge-offs and 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 are going to see a huge loan demand. We expect that we are going to see loans growing, but probably not at a pace that’s going to absorb a lot of earnings. And so, I think the conditions were going to be pretty good for us to be pretty actively engaged in the buyback shares as we get into the year or quarter two. We just want to make sure that we are being sensible about it and we will have that conversation with the regulators and our Board, but I think all the conditions are going to be there for recently active buyback program.

John Pancari — Evercore ISI — Analyst

Okay. All right. Thank you. That’s helpful. And then separately, I guess, why don’t you 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.

Scott J. McLean — President and Chief Operating Officer

Thank you for that question. Pandemic, there’s no question had an impact on our future core project and just on projects in general, I mean there was a month there where it just was difficult to continue at the pace we were going and the level of effectiveness. And so, but we got through that. We have adjusted to it. And so originally we were going to have released three [Phonetic] the deposits release come out in 2022 [Phonetic] kind of a phased rollout in early — kind of early to mid-2022. That probably has been delayed by six months and we will be continuing to evaluate that. We still have time to make-up time between now and then. But pandemic has definitely caused a brief delay in it. And in terms of — in terms of costs.

Harris H. Simmons — Chairman and Chief Executive Officer

I just —

Scott J. McLean — President and Chief Operating Officer

Go ahead, Harris.

Harris H. Simmons — Chairman and Chief Executive Officer

Scott, I was also going to make this note that, the other — another issue that anybody would face with a project like this is a, I was going to say reluctance. It’s just wouldn’t be smart as you get further into the fourth quarter to — we are not going to do it deep into the fourth quarter. So there’s kind of a window we are going to have to hit and we hope that we will be able to hit that, but that’s something to keep in mind as well.

Scott J. McLean — President and Chief Operating Officer

No. That’s a great point. And in terms of kind of the ultimate cost and the impact on P&L, our P&L expenses over the next two years to three years and then for the period after go live, it’s not materially different. So hopefully that helps.

John Pancari — Evercore ISI — Analyst

It does. All right. Thank you.

Scott J. McLean — President and Chief Operating Officer

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 five-year to eight-year, maybe 10-year head start on virtually every other major bank in the country. And it really being on our new system during PPP 1.0 absolutely made a difference in the level of volume we were able to do.

Operator

Thank you. And your next question comes from the line of Jennifer Demba with Truist Securities.

Jennifer Demba — Truist Securities — Analyst

Thank you. Good evening. Your net charge-offs have remained very contained this year. I am wondering if you are expecting them to rise in ’21 and ’22, and where they — when you think they could peak? And if you could give us just a little more detail on what you are seeing in those more at-risk portfolios? Thanks.

Keith D. Maio — Chief Risk Officer

Hey, Michael. It’s — Jennifer, it’s Keith. Let me jump in and I will turn over to Michael maybe for a little more detail.

Michael P. Morris — Executive Vice President and Chief Credit Officer

Sure.

Keith D. Maio — Chief Risk Officer

A couple of things. One, we are still not seeing any significant negative impacts in terms of charge-offs to the portfolio on those COVID related industries and we will get into some a little bit of detail about what those are, but we are 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 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 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 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.

Michael P. Morris — Executive Vice President and Chief Credit Officer

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 am 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 are resilient and have more cash potentially than we thought they did and now with this stimulus and vaccine and immunity around the corner I think, Keith said it [Technical Issues].

Keith D. Maio — Chief Risk Officer

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 million over the lifetime of the loan portfolio and so it is just a really important I think punctuation to all of that commentary.

Jennifer Demba — Truist Securities — Analyst

Thanks so much.

Keith D. Maio — Chief Risk Officer

Thank you.

Operator

And our next question comes from the line of Steven Alexopoulos with JPMorgan.

Steven Alexopoulos — JPMorgan — Analyst

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 fourth quarter, where is all of this incremental liquidity coming from, are customers just holding cash and how much risk is there if rates rise that that could potentially be siphoned out pretty quickly?

Harris H. Simmons — Chairman and Chief Executive Officer

Well, I will start. It’s somewhat speculative. As we have referenced certainly last quarter and I think this quarter, we believe that the 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 sheets. As I said earlier on in a response to a question, we have a lot of cash on the balance sheet today, but we are 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, some significant part of that may have left the bank. But that I will say that is somewhat speculative.

Steven Alexopoulos — JPMorgan — Analyst

Okay. And just —

Scott J. McLean — President and Chief Operating Officer

This is Scott.

Steven Alexopoulos — JPMorgan — Analyst

Hi, Scott.

Scott J. McLean — President and Chief Operating Officer

Hey. Clearly, our DDA, the total deposit ratios 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 to periods of increased rates and I think that people have figured out that’s largely a function of our really small customer or business customer client base, small operating accounts. It just hasn’t been that susceptible to right chasing — basis point chasing.

Steven Alexopoulos — JPMorgan — Analyst

Okay. That’s helpful. And maybe for a follow-up. Regarding NIM and the pressure you guys have from securities and fixed rate loans resetting lower, maybe for Paul, how much steep this in a curve would we need to see to more fully alleviate that pressure? And if we get to I don’t know 2% on the 10 years that’s gone like, where does that need to be for us not to worry about this anymore? Thanks.

Paul E. Burdiss — Chief Financial Officer

It’s hard for me to be really specific about that. I will say the part of the curve that we are particularly focused on is kind of a three-year to five-year plan in the curve, because that’s where at the margin, that’s kind of where we are investing our discretionary sort of part of the balance sheet, the investment portfolio to the extent we are mitigating or attempting to mitigate the interest rate risk through swaps, that’s kind of where that occurs. And to the extent we have got fixed rate loans they sort of happen around that part too. 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 three-year to five-year part of the curve.

Steven Alexopoulos — JPMorgan — Analyst

Okay. Fair enough. Thanks for taking my questions.

Paul E. Burdiss — Chief Financial Officer

Thank you.

Operator

And our next question comes from the line of Gary Tenner with D.A. Davidson.

Gary Tenner — D.A. Davidson & Co. — Analyst

Thanks. Good afternoon. You guys 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 PPP 2 vaccinations, etc. 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?

Michael P. Morris — Executive Vice President and Chief Credit Officer

Well, I will start with that. As you know, under CECL, we need to create the allowance for credit losses that is consistent with our best expectation for the life of loan losses in the book and that’s the $835 million we set in the fourth quarter. We also noted that, as the portfolio migrates, as risk ratings improve, as the economic forecast improves 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, then 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.

Harris H. Simmons — Chairman and Chief Executive Officer

I will maybe just add to that. I think I can speak for all of us here in saying that the fourth 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 a continuation of that trend in the first quarter and then on into the second quarter, I mean, I think, absolutely you are going to see some reserve releases. It will simply change our outlook as to what the damage is going to look like. And then on the stimulus that’s out there, 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 into the second quarter.

Gary Tenner — D.A. Davidson & Co. — Analyst

Okay. Thank you for that. And then quick question on time deposits down quite a bit this quarter versus the third quarter on average on a 20-basis-point decline in rate there. What are you booking new or rollover time deposits out right now and then do you think that that total outstanding number continues to decline and what kind of rate you think you could get to?

Paul E. Burdiss — Chief Financial Officer

Yeah. This is Paul. That time deposit number largely is sort of a broker CD. So it’s sort of one of many sources of funding for us. So historically, we have utilized and tried to spread out our sources of funds including broker CDs. Given the massive amount of liquidity that’s washed on to the balance sheet over the last nine months, we are 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. Of course, I would expect that to continue to run-off over the course next several — course over the next several quarters and frankly not be replaced.

Gary Tenner — D.A. Davidson & Co. — Analyst

Thank you.

Paul E. Burdiss — Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Ken Usdin with Jefferies.

Ken Usdin — Jefferies & Company — Analyst

Hi. Thanks, guys. On the PPP 1.0 slide, I am just wondering, have you tried to or started thinking about sizing that new to bank customer opportunity? It’s just 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 are starting to kind of think through that and how much uplift you might get on top of what you have seen already come in through new to bank customers?

Harris H. Simmons — Chairman and Chief Executive Officer

Yeah. It’s a great question. And we can absolutely see everything — those 14,700 approximately new to bank customers we are dealing. We are tracking their utilization of their DDA account very carefully, because that indicates that, that’s a 30% number that they are actively moving their relationship and so that’s progressed from obviously zero to 30% in a short period of time. So we are having lots of interaction. This is — we know these — we can count these customers in ones, not in hundreds and thousands. We are 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 are encouraged by the early loan growth and new services growth that we see there. But I will 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 are seeing a nice pick-up in loans and other services and just a strengthening of the relationship there.

So if you were going through a pandemic, you would rather have had 47,000 really intimate interactions than just sitting back on your couch in your jammies. So we are watching it closely. We are measuring it closely. And when you think about the fact that we have got another 150,000 business customers with revenues less than a $1 million that did not apply for a PPP loan, we are pretty energized about the progress we can make during this time period.

Ken Usdin — Jefferies & Company — Analyst

Got it. Thanks. And 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 million ex-PPP NII and then we will 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?

Paul E. Burdiss — Chief Financial Officer

Well, I think we have provided some pretty good statistics on the first round of PPP and sort of the level of forgiveness that we saw in the first quarter. As we noted that — and as you know there’s a 1% coupon attached to those loans. We had $141 million of unamortized sort of net fees at September 30th. That was down to $102 million with $26 million of sort of accelerated amortization associated with that. So we are trying to provide all the pieces of it. You can kind of provide your own estimates on how that forgiveness is coming in. I would say that fourth quarter was a good quarter kind of when you think that that was the first quarter of forgiveness. My expectation is that we are going to see it — we are 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 the 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 impacted, net interest income will be significantly impacted by the existence of the PPP program. And 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 $6.3 billion and 3.5% yield for a full year that’s $220 million and so I divided that by 4 and it’s like $55 million associated with PPP.

Ken Usdin — Jefferies & Company — Analyst

Right. And I was just taking it away from the FTE number. So I was just doing $557 [Phonetic] million minus $55 [Phonetic] million. So I think we are on the same page there.

Paul E. Burdiss — Chief Financial Officer

Right. Got it. Yeah.

Ken Usdin — Jefferies & Company — Analyst

Yeah. Okay. Thanks a lot, Paul.

Paul E. Burdiss — Chief Financial Officer

Okay. Thanks.

Operator

Your next question comes from the line of Brad Milsaps with Piper Sandler.

Brad Milsaps — Piper Sandler — Analyst

Hey, good evening.

Harris H. Simmons — Chairman and Chief Executive Officer

Hi, Brad.

Brad Milsaps — Piper Sandler — Analyst

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 million related to the donation and I think the termination of the pension. Just kind of curious that would imply about a 3% or 4% growth rate, did 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 just opposed against sort of what the ongoing expense initiatives that you guys have in place?

Scott J. McLean — President and Chief Operating Officer

Paul, do you want to speak to that?

Paul E. Burdiss — Chief Financial Officer

Yeah, sure. So yeah, as we reported, we expect kind of GAAP expense to be roughly similar. You did point out some unusual items in 2020. But as we look ahead to 2021, that continue to build out of our technology stack is a really important part of kind of what we are doing an important part of who we are going to. So that is a contributor certainly to the expenses we expect to see in 2021.

Scott, would you add to that?

Scott J. McLean — President and Chief Operating Officer

Yeah. 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%, not annually just 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% in the fourth quarter of last year and you can absolutely see that in our FTE numbers. So we are 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.

Harris H. Simmons — Chairman and Chief Executive Officer

Yeah. I’d also just — I said earlier but just to remind. Expenses in the quarter were impacted by the fact that credit quality is 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 and that had about $7 million impact on the quarter. We also had some additional costs kind of professional fees associated with the PPP program. So they were — not that it is a really messy quarter or a noisy quarter but it was so, there were a couple of items in there that took expenses little higher.

Brad Milsaps — Piper Sandler — Analyst

Great. Thank you, guys.

Harris H. Simmons — Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. And your next question comes from the line of Brian Klock with Keefe, Bruyette & Woods.

Brian Klock — Keefe, Bruyette & Woods, Inc. — Analyst

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 first quarter. Are you saying that that was the color on the first quarter of forgiveness, so that was the fourth quarter of 2020. Is that what did you actually say what you think the forgiveness may impact the first quarter of 2021?

Scott J. McLean — President and Chief Operating Officer

The forgiveness will absolutely impact, so sorry if I misspoke. I was trying to refer to the fourth quarter and I think that we have some statistics in here in terms of the number of loans that were on the front page of the 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 am 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, yeah, 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 mid-year or possibly before, I am 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 are all very focused on doing that.

Brian Klock — Keefe, Bruyette & Woods, Inc. — Analyst

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 side. It really just excludes the pension expense from that, right? So it’s like a $1 billion six years, seven years to base to compare from?

Scott J. McLean — President and Chief Operating Officer

Well, there’s two ways to do it. One is to look at the fourth quarter, because that’s why this is kind of fourth quarter to fourth quarter comparison. I think what we are saying is, look, the fourth quarter — by the time you get the fourth quarter next year it’s roughly consistent. The other thing as we see on the slide and we are pretty explicit about that do 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 $1.7 billion.

Brian Klock — Keefe, Bruyette & Woods, Inc. — Analyst

Okay. So does that imply that there is some non-GAAP expenses maybe another Charitable contribution similar to what you had in 2020?

Scott J. McLean — President and Chief Operating Officer

Well, yes, so not — sorry, not to imply that. We are just trying to come up with it. There are a couple different ways that you triangulate on the same number we are expecting expenses — adjusted expenses to be about $1.7 billion in 2021.

Brian Klock — Keefe, Bruyette & Woods, Inc. — Analyst

Got it. Okay. That’s helpful. Thank you very much. Thanks for your time.

Scott J. McLean — President and Chief Operating Officer

Yeah. Thank you.

Operator

Your next question comes from the line of Steve Moss with B. Riley Securities.

Steve Moss — B. Riley FBR, Inc. — Analyst

Good afternoon. Just one follow up question from me on the allowance for credit losses here. The $59 million decline related to portfolio changes, maybe how are 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 million being sustainable as we head to the first half of 2021 in terms of reserve release?

Michael P. Morris — Executive Vice President and Chief Credit Officer

I am sorry. I didn’t quite catch the question. Could you repeat it?

Steve Moss — B. Riley FBR, Inc. — Analyst

Sure. So just on slide 15 with the $59 million reduction in the ACL from portfolio changes, you guys mentioned there are new loans and portfolio mix as two of the drivers. And just looking at growth over the past four quarters have been driven by municipal loans and owner occupied CRE. So I am thinking if that continues into 2021, do we see a good chunk of that $59 million reserve release in the first quarter continue into the first half of 2021?

Michael P. Morris — Executive Vice President and Chief Credit Officer

Well, I candidly say that it continues, but what I can — you are 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 on 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 of 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 have got a shortening portfolio from average life perspective that also absolutely has an impact on the allowance for credit loss.

Scott J. McLean — President and Chief Operating Officer

Well, certainly, the credit quality bar on that page, page 15, slide 15, assuming the pandemic we started to see a recovering economic activity, there’s — net credit quality improvement should be reflected there as well. That’s what I —

Steve Moss — B. Riley FBR, Inc. — Analyst

Thank you very much.

Scott J. McLean — President and Chief Operating Officer

— saw it in the fourth quarter.

Operator

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.

James Abbott — Senior Vice President, Director of Investor Relations

Thank you everyone. We appreciate you joining us for the fourth quarter 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.

Operator

[Operator Closing Remarks]