Thank you for standing by and welcome to the Zions Bank Corporation's First Quarter 2021 Earnings Results Webcast. After the speakers' presentation, there will be a question-and-answer session. 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.

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. 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 0.5% 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 exceptional. 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, resulting in net 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 in 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. 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.

Thank you. 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 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.

Thank you for your question, Ken. We aim to provide an outlook that excludes PPP because it significantly boosts our current net interest income. However, due to forgiveness and other factors, it can be a bit unpredictable. The outlook we shared focuses on the underlying trends in net interest income, which are shaped by our core balance sheet activities, such as loan and deposit growth, as well as interest rate levels. We believe that as economic activity improves, we will see an increase in loan growth over the next year, which will be beneficial. Additionally, we expect that interest rates or the yield curve may steepen throughout the year, which would also contribute positively.

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 year. Can you 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%. Additionally, there is also $168 million of unamortized fees, which will be recognized into net interest income as those loans either amortize, mature or are forgiven. These 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. I know it's challenging to answer that question. 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 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 on 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. That is to say, the underlying trend in the margin isn't nearly as bad, I will say as the headline outcome. In fact, given what rates have done and how much they've 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 that is helpful from a volume perspective net interest income. Then, also to the extent the yield curve steepens 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.

Thank you, Paul. I want to ask about capital management. Can you explain how we should approach that? Specifically, could you remind us of the priorities, especially regarding a potential buyback program? How significant could the benefits of that program be, considering your current CET1 ratio of 11.2%? Thank you.

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, at 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. 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%. 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. Over the medium term, John, I think that's, that might be a decent yardstick, but I'll let Harris provide a few comments.

Currently, our risk-weighted assets are about $55 billion, and our CET1 is at 11.2%. In my assessment, we have the potential to reduce that by approximately a percentage point. The timing of this adjustment will largely depend on loan growth and profitability as the year progresses. However, I expect we will aim to bring that figure closer to a strong position relative to our peers, though not as high as it is 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... 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. 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 wouldn't rule anything out, but we're not actively pursuing anything at the moment. I do think that as we finish some of our systems work in the coming quarters, we might be more interested if the circumstances and pricing are favorable. However, it's not a top priority for us right now, so I don't expect to see anything significant in the near future. As you mentioned, many things are happening, and if the economy improves, particularly with a slight rise in interest rates, we could be better positioned to consider it. That summarizes our current situation.

What kind of transaction would be of interest to Zions if the conditions became right for it?

It would likely be primarily focused on the market and centered in the Western U.S. I’ve noticed recently that many smaller banks, including some large community banks and smaller mid-sized banks, have an excessive amount of commercial real estate exposure, which is something we would likely not be very interested in at this time. Our franchise has a strong focus on commercial opportunities, and while there aren't many that fit that profile, there are a few out there.

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 sensitive 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. Regarding traditional securities, we are not significantly increasing either volume or duration; we are focusing on incremental additions. The main opportunity for adjusting sensitivity lies in the interest rate swap area, particularly the synthetic duration extension through swaps. With the curve steepening, the ALCO Committee has evaluated the maturity profile of the swaps and the associated duration benefits, and we are gradually increasing that. When it comes to balancing the duration of our assets and liabilities, we plan to prioritize swaps if the yield curve remains attractive. The uncertainty arises from not knowing the actual average life or duration of the recent deposit surge. We have experienced an additional $10 billion in deposit growth beyond loan growth, which is contributing to substantial interest sensitivity in our models. However, as managers, the ALCO's role is to approach this with some skepticism, which is our current approach. We are slightly increasing duration through either portfolio size or interest rate swaps, but we haven’t made significant additions yet. Moving forward, I anticipate more activity in swaps and securities.

Okay, great. So, what I'm asking is whether those potential additions will be included in your future forecast, specifically regarding the current attractiveness of swaps compared to what they were three or six months ago. Is it clearly advantageous to proceed with this?

It's a much different risk-return profile today than it was three or six months ago. 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, so you look at where that point of the curve is, how that point of the curve has changed over the last six months. You can see there is absolutely carry there now, where there was almost no carry there, for example, six months ago. The issue that we had, let's say, six months ago about 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. Two: we weren't getting paid at all for adding that duration. Now there is, we're getting paid a little bit for every duration dollar 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. That was included in your forward guidance, which was my initial point, but I got sidetracked.

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 expect the balance sheet to change over the next year.

Understood. Thank you, Paul.

Okay. Thank you.

Thank you. Our next question comes from Steven Alexopoulos of JP Morgan. Your line is open.

I wanted to start on the expense side, if I just look at the big picture, so adjusted non-interest expenses were up 8% year-over-year, parts legal and professional fees. But the comp line is still up 5% year-over-year. Maybe for Paul, can you run through why the comp expenses have risen so much?

Yes, certainly. As mentioned in the press release, a significant portion of the changes was due to long-term incentives. To highlight, base salaries have decreased by $5 million year-over-year, which is an important point. However, there have been increases in profit-sharing and the 401(k) company match. We have been encouraging greater employee participation in the 401(k), and fortunately, they are responding positively, but this results in some additional expenses as we contribute. There has been nearly $6 million in year-over-year adjustments related to 401(k), including profit-sharing and the 401(k) match. Another important aspect is our value-sharing plans, which are long-term incentive programs calculated over a three-year period as detailed in our proxy statement. This program is primarily based on our financial performance in comparison to peers, and this year, particularly in the first quarter, our financial performance has significantly improved compared to last year amid the pandemic-related uncertainties. Consequently, there have been increases in accruals linked to those long-term incentive plans, which are the main factors contributing to the year-over-year changes.

Okay. So, if we assume that base salaries don't decline moving forward, again should we assume that mid-single digit is where growth of the comp line should remain anything really described to be temporary assuming the employees continue to contribute?

Well, it's dependent on earnings is the key, right. It's sort of meter to earnings. As performance improves, this is what I tried to say in my outlook on expenses as performance improves, there is a meter on expense in comp that is related to performance, but as it relates particularly to compensation expense, the key performance indicator is really financial performance, if that makes sense. Otherwise, we feel like we have a pretty good handle and we'll remain really disciplined on expenses. As noted, there was an incremental $5 million, a total of $8 million of PPP-related forgiveness expense that is sort of third-party help with forgiveness because it is somewhat complicated and that's the kind of thing that doesn't show up every quarter.

Okay, that's helpful. And then for my follow-up question on the loan outlook, so you're calling for a slight increase in loans over the next year despite one, an economic boom expected fairly widely and two, you're picking up quite a few new customers through PPP. Why you're expecting only a slight increase in loans? Thanks.

I'll start and then maybe Scott can jump in on that too. As I said, loan growth, that was $10 billion short of deposit growth year-over-year. We have a lot of deposits and we have a lot of customers with deposits. Our line of credit utilization is down pretty significantly year-over-year and I think there's a direct correlation to deposits with that. I think there's a little bit of a crowding out, if you will, of the government providing funds, such that our customers don't need as much credit, which makes us sort of a little less confident on economic activity translating for loan growth as it has in the past. Scott, would you add to that?

Yes. I wouldn't add much to it. Steven, I just think if you know when you're in a period like this, it's hard to call the bottom. But I would agree with you once it turns. I think we will see nice growth; it's just a function of when is it going to turn. As Paul noted, the point-to-point decline in our loan balances is almost entirely related to lower utilization of revolving credits. So our non-revolving credits are basically stable with where they were a year ago, which I think is a strength. And if you look through the PPP borrowers specifically, the new loans that we've generated with those borrowers represent about 10% of what the existing companies were borrowing pre-pandemic. So we're seeing a nice volume there as you noted. I think we have a much more kind of positive outlook than we had maybe three to four months ago, but it's just a big ship to turn and once it turns, I think we should expect to be back in the mid-single-digit loan growth process, which is where we were for a number of years.

Okay, great. Thanks for all the color.

Thank you. Our next question comes from Steve Moss with B. Riley Securities. Your line is open.

Hi, good afternoon. Just following up on loan growth, maybe you guys talked about lenders being more optimistic about business activity. Kind of curious where maybe you guys are seeing improvements in the loan pipeline.

This is Scott. In the small business, basic commercial and industrial, and owner-occupied areas, I believe we will also see some strength from our one-to-four family mortgages that we hold on our balance sheet. We're taking several actions to increase that held for investment percentage after seeing some run-off. Looking back over the past year, growth in one-to-four family mortgages accounted for about 25% of our overall growth in nearly any time frame, and I anticipate that returning. We've observed solid growth in municipal loans over the last year; it has been one of the more promising segments of our portfolio, and we are pleased with that business. The credit quality is very high, and we are beginning to see some benefits from ancillary business derived from it. Historically, municipal loans, like mortgages, contribute roughly 20% to our overall loan growth. As for commercial real estate, it will grow, but likely at a rate equal to or lower than the overall growth rate of the loan portfolio. I believe that any incremental positive growth will come from commercial and industrial, small business, along with our core markets, mortgages, and municipal loans.

Okay, thanks for that, Scott. And then I guess for Paul, just kind of curious as to you held securities balances steady at 20% of assets. Could we tick up a couple of percentage points here? It sounds like you're a bit reluctant to do that and kind of also wondering where our investment securities yields here purchases today is a kind of a 1.5% range maybe versus the 1.3% for the quarter.

On the yield, it fluctuates daily, but it’s likely around 1.4% to 1.5%. Regarding our investment portfolio, we have been cautious about expanding it due to uncertainty about the sustainability of the surge in deposits driven by various fiscal and monetary programs from the government. However, we are not inactive. Our portfolio has grown from $14.8 billion to $17.2 billion over the past year. As we progress and if cash continues to grow or we gain more confidence in its sustainability, we will make marginal additions to the portfolio, but we won't invest dramatically, like adding $5 billion in a quarter. Any increases will be slight, and this trend is expected to continue in the near term.

Okay, great. Thank you very much.

Thank you.

Thank you. Our next question comes from Brad Milsaps with Piper Sandler. Your line is open.

Okay. Good evening.

Hi, good evening.

Paul, just wanted to follow-up on the discussion on securities. I did notice that the yield this quarter on the available-for-sale portfolio held in pretty flat, I think once 169 versus 170. Just kind of curious if there's anything in there from a time perspective that helps you in a positive way that we might see reverse out of the near-term, especially talking about where new money yields are coming in?

I don't recall anything in there that is truly one-time in nature. I think it may be more indicative of changes in prepayment speeds and how they influence yields. As the yield curve rises, prepayment and premium amortization slow down, leading to higher yields. If I remember correctly, and I apologize if I'm a bit unclear, that is probably the main factor offsetting some of the front book and back book dynamics we've previously discussed.

Okay, great. That's helpful. And then just on asset quality, clearly you guys have seen improvement. Just kind of curious if there is a level to think about in terms of the overall level of the reserve that you might see as sort of a floor as you think about your see-saw model and kind of where the reserves today relative to where you think it could be.

Well, I would love to be that confident that I can predict something like that. In CECL, as you know, this really is highly dependent not only on the underlying credit quality of the portfolio but maybe and what you saw this quarter, more importantly dependent upon the macroeconomic forecast. It's really hard for me to put any kind of floor on that figure. It's hard for me to give color beyond that because it is going to be so dependent largely on the macroeconomic forecast on any given quarter-end.

Great, thank you.

Thank you.

Thank you. Our next question is from Gary Tenner of D.A. Davidson. Your line is open.

Thanks, good afternoon. I appreciate all the color and discussion about the loan outlook. I did have one follow-up. I wonder if you could kind of discuss where the kind of stance on appetite for lending in particular areas are maybe compared today to pre-pandemic areas that you are maybe still wanting to stay clear of or any of that maybe have changed your perception over the last year.

I think our stance on lending has changed significantly. We are interested across the board in commercial and C&I sectors. We continue to focus on growing our loan portfolio, particularly in municipal loans and leases, and I anticipate continued growth in this area. As the economy improves, I believe there will be increased demand from small businesses. However, as Paul pointed out, liquidity is an issue and a potential headwind, which makes it challenging to navigate this environment. This level of liquidity is unprecedented, and it's difficult to determine what impact it will have as the economy gains momentum. We're cautious about commercial real estate due to known challenges in retail and office spaces. I also think we need to be careful with multifamily investments. While there has been significant growth in activity, I hope to see further developments in one-to-four family loans, particularly jumbo ARMs which have performed very well. Consumers have made substantial pay-downs on home equity lines and refinancing has been active, but I expect that activity may plateau and look to begin growing again. Michael, our Chief Credit Officer, may have additional insights.

No, Harris. I think you covered most of the bases. I think if you look at utilization on the consumer side, it's down equal to or greater than the other domains that you think about consumer C&I CRE. I think consumer is going to come back quite quickly both in utilization and new originations outside of one-to-four. Small business, we've recently taken some of the measures off that we put in during, I'd call it, kind of the heart of the crisis. So we'd lose some a little bit on small business and consumer, and we're getting back to sort of the pre-COVID place. So I would expect there would be growth there as well.

I'd also add owner-occupied real estate, commercial real estate is a category. I said I expect we'll see some growth here. That's something we're really comfortable with and we were trying to emphasize in some of the market. So a little of all of the above I guess.

I'd just add this. This is Scott. I'd just add to that that there are some things you won't see us do. If you go back into time and you look at other periods of low loan demand and low interest rates, we've seen other banks reach for credit and reach for yield. You won't see us do things out of the norm on taking larger share of credit. You won't see us dramatically increasing our leverage finance book. We've been very modest in that regard; you won't see us growing rapidly our construction loan portfolio. But you won't see us lean into things that other banks additionally lean into when they're faced with and taking higher risk.

Well, great. Thank you for the color.

Thank you. Our next question comes from Erika Najarian of Bank of America. Your line is open.

Hi, I have one question. Many of your peers have increased their expense outlook this earnings season, either by also raising their revenue projections or by offering significantly larger incentives. I understand that there's a considerable amount of caution in your revenue outlook, but if we experience a stronger period due to the curve steepening or if loan demand increases more than just slightly, what should investors anticipate regarding expense guidance if your revenue expectations turn out to be conservative?

Go ahead, Harris.

I want to emphasize that we don't anticipate many changes, apart from potentially incentive compensation, which is linked to profitability as Paul mentioned earlier. This may lead to higher profit-sharing contributions, but aside from that, I don't expect any major shifts unless there are strong connections made. Our focus will continue to be on managing expenses diligently, regardless of the rate environment.

And if I could, I'll just note that we have not changed our expense outlook. Our non-interest expense outlook there were clearly some items in the first quarter that we thought we needed to talk about. I also talked about sort of the risk of inflation and what might happen there, but our non-interest expense outlook hasn't changed from the prior quarter.

Okay, got it. Thanks.

Thank you. Our next question comes from Peter Winter of Wedbush Securities. Your line is open.

Hi, I just had a quick question on PPP. I was just wondering if you could say how you're thinking about it in the second quarter and if there was any impact this quarter with the loan portal closed for part of the quarter.

Scott, you want to take that?

The new loan volume is down to a trickle. So we don't anticipate unless something happens new that you will see us reporting at the end of the second quarter significant change from what we've reported other than more forgiveness. But we're not seeing a lot of new PPP volume nor is the rest of the industry.

Right. I was looking more for net interest income number relative to the $60 million in the first quarter.

Sorry about that. Paul?

I apologize for the confusion. Predicting forgiveness is quite challenging. As you noted, there was a slight slowdown with the SBA, particularly in the middle of the quarter, due to new rules and conditions established by the administration regarding forgiveness and program access. A variety of factors affected the quarter, but by the end, things seemed to pick up again. Overall, I don't believe the situation was significantly different than it might have been otherwise. It would be somewhat speculative to discuss potential developments in the second, third, or fourth quarters, which is why we've aimed to provide an outlook that removes the effects of PPP, as it remains unpredictable and out of our control. Thus, we've shared relevant details, including the PPP loan balances, which remain at 1% on our books, along with $168 million in unamortized fees. Ultimately, how efficiently or effectively these elements work through the process is uncertain.

I just want to add, Paul. It's been over a year since we issued our first PPP loan, and a year ago we were very busy processing these loans. I don't have many outstanding loans from 2020 that haven't applied for forgiveness, so I didn't expect these to linger as long as they have. We are just monitoring the situation and learning along the way, which emphasizes Paul’s point.

Thanks, Harris. Thanks, that's all I had.

Thank you. I am showing no further questions. So with that, I will turn the call back over to Mr. Abbott, for any closing remarks.

Thank you, Valerie. And thank you all for joining us on the call today. If you have any additional questions, please contact me by email or phone as listed on our website. Again, it's [email protected]. We look forward to connecting with you throughout the coming months and thank you for your interest today in Zions Bancorporation. This concludes our call. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect. Have a great day.