Zions Bancorporation N.A.

Greetings. Welcome to the Zions Bank Corporation Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, James Abbott, Director of Investor Relations.

You may begin. Thank you, Kyle, and good evening. We welcome you to this conference call to discuss our 2022 first quarter earnings. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck on slide two dealing with forward-looking information and the presentation of non-GAAP measures, which apply equally to statements made during this call. A copy of the earnings release, as well as the slide deck, are available at zionsbankcorporation.com. For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide opening remarks, followed by comments from Scott McClain, our President and Chief Operating Officer. Paul Burtis, our Chief Financial Officer, will conclude by providing additional detail on Zion's financial condition. With us also today is Keith Myle, our Chief Risk Officer, and Michael Morris, our Chief Credit Officer. We intend to limit the length of this call to one hour. During the question and answer section of the call, we request that you limit your question to one primary and one follow-up question to enable other participants to ask questions. I will now turn the time over to Harris.

Thanks very much, James. We want to welcome all of you to our call. Beginning on slide three, we're showing some themes that are particularly applicable to Zions in recent quarters. and some that are likely to be themes of the near-term horizon. Loans exclusive of PPP loans increased $1.2 billion during the quarter, maintaining the momentum that developed in the prior quarter. We saw strong growth in CNI and municipal loans. Owner-occupied loans also saw good growth, in part due to promotional campaigns. Overall, we're pleased with the loan growth in the first quarter and expect that moderate levels of loan growth will be sustainable through the remainder of the year. We've invested significantly in securities during the past two years. We believe the securities portfolio is, at least for the next few months, unlikely to increase significantly from here, although the size of the portfolio will ultimately be determined by loan growth and deposit flows. With the recent strength in loan growth, we expect that any near-term growth of deposits that might materialize in addition to some of the excess cash on our balance sheet would be invested in loans rather than in securities. As many of you know, we're well positioned for rising rates. The futures market is pricing in a Fed funds rate of approximately 3.5% by mid-23. We're an increase of about 3 percentage points We believe we have an exceptional deposit franchise, and given the interest rate environment expected by market participants, we expect that we'll begin to see much more of the value of these deposits emerge in our financial results in coming quarters. The final item on this slide refers to our ongoing significant investment in technology, which is designed to enable us to remain very competitive in the future. If you turn to slide four, we're generally pleased with the quarterly financial results which are summarized on this slide. In as much as we'll touch on these items in subsequent slides, I'm going to move on, but you might find this summary useful. We'll go to slide five. Diluted earnings per share was $1.27. Comparing the first quarter to the fourth quarter, the single most significant difference was in the provision for credit loss, which was a 28 cents per share positive variance. This can be seen on the bottom left chart. Our provision this quarter improved our earnings per share by 16 cents, whereas in the prior quarter, the provision reduced earnings per share by 12 cents. The other major factor that contributed to earnings was income from PPP loans, which was 12 cents per share in the first quarter. Finally, there were other items noted on the right side of the page that largely offset one another in terms of their impact on earnings per share. Turning to slide six, Our first quarter adjusted pre-provision net revenue was $241 million. The adjustments, which most notably eliminate the gain or loss on securities, are shown in the latter pages of the press release and of this slide deck. The PPNR bars are split into two portions. The bottom portion represents what we think of as generally recurring income, while the top portion denotes the revenue we've received from PPP loans, net of direct external professional services expenses associated with the forgiveness of these loans. These loans contributed $24 million to PPNR in the first quarter. As you can see, exclusive of PPP income, we experienced an increase in adjusted PPNR of 8% over the past year, and on a per share basis, it increased 17%. On slide seven, we've included a chart to help understand the sequential quarter change in PPNR. I've already noted the reduced income from PPP loans. We also experienced a decline in certain non-customer related fee income items, which was largely due to non-recurring gains on real property sales in the fourth quarter and reduced earnings on private equity investments and trading losses in the first quarter. The expense items shown in the middle of the chart are largely seasonal in nature, although we did increase our incentive compensation accruals to align with a revenue outlook that now includes the effect of expected rate increases. Non-PPP net interest income increased about $10 million, and finally, there was a $10 million charitable contribution in the prior period that weighed somewhat on that quarter. Turning to slide eight, Shifting away from the discussion on the financial results to a couple of highlights in our strategic plan, we are pleased to report continued strong progress with upgrading our online and mobile banking platforms to a single platform that has the same look and feel in both applications as well as functionality. We completed that for the consumer side of the business about a year ago, and we've been rolling out similar upgrades to our small business banking customers. Since year end, we've converted over 145,000 business customers to this new and highly competitive digital and online banking platform, with the remaining 25% of such customers to be converted to the new platform during May. The results of the upgrade are reflected in surveys we've done, which have been very positive. And in the mobile space, we've seen a much improved rating from customers as compared to our previous application. and also when compared to the applications for other large regional banks, which we've shown to you in prior presentations. Going to slide 9, a major strategic initiative for us is to organically grow our business customer base at a rate that exceeds the natural business formation rate. It's relatively easy to increase loan and deposit balances by increasing hold limits, lowering credit standards, or offering below market rates. for loans and above market yields for deposits. But to grow customers requires a lot of work, specifically in the service category. We've relied upon Greenwich Associates' research to help us understand the areas in which we perform well and areas that need improvement. This year we ranked second overall out of all the banks in the country in the middle market small business satisfaction with 27 excellence awards. Shown on this slide, Greenwich has provided us with additional detail behind some of the rankings. Across the top half of the page are a few select categories pertaining to survey responses from middle market business customers. And across the bottom half of the page are similar results from small business customers. Zion's score is denoted within each chart along with the average score of the peer group. Members of that peer group are listed elsewhere in this document and in our proxy filing. And also the average score of four major banks against whom we compete for business within our markets, notably JPMorgan Chase, Bank of America, Wells Fargo, and U.S. Bank. We're encouraged with such strength in these and many other categories. The net promoter score from Greenwich's surveys is, of course, a widely used barometer of customer experience and one that can be mapped to other industries. are strong showing as a reflection of our efforts to provide exceptional customer service, top-notch products and superior technology to enable faster and safer service and products. Additional detail is available on this topic in the appendix, slide 30. We expect that the strength of our reputation will continue to support our efforts regarding customer growth. Ultimately, this customer growth should translate into both granular and solvent increases in loan and deposit balances. And with that, I'm going to ask Scott McLean, our president and COO, to provide an update on loan growth, certain fee income initiatives, and our technology investments. Scott?

Thank you, Harris. Moving to slide 10, a significant highlight for us this quarter was the strong performance in average and period-end loan growth. Average and period-end non-PPP loans increased $1.2 billion, or an unannualized 2.5% when compared to the fourth quarter. The yield on average total loans decreased 21 basis points from the prior quarter, which is partially attributable to a shift in the mix of loans, with average PPP loans declining $1 billion and being replaced by non-PPP loans, which have a lower yield. The loans that are replacing PPP loans have yields generally in the 3% to 4% range. Excluding PPP loans, the yield declined 13 basis points to 3.43% from 3.56%, a portion of which is attributable to elevated prepayment penalty income recognized in the fourth quarter. but also the effect of some of our promotional campaigns and the maturity of interest rate swaps. Deposit costs remain low. Shown on the right, our cost of total deposits was stable at just three basis points in the first quarter. Average deposit growth slowed compared to recent quarters, with average total deposits increasing nearly 200 million, or 0.2%, 20 basis points, unannualized. Period end deposits declined more than $400 million, or 0.5%. Largely due to the expected quantitative tightening by the Federal Reserve, we expect deposit balance growth trends to be closer to stable to perhaps slightly increasing, although clearly we're in unchartered territory. Moving to slide 11, loans to businesses increased $1.1 billion with considerable strength in C&I and owner-occupied. of nearly $800 million of linked quarter growth and more than $275 million of municipal loans. Additionally, we saw growth with our home equity lines of credit and one to four family mortgages. This is particularly encouraging because we experienced $1.5 billion of attrition in one to four family mortgage loans from December 2019 through December 2021. This growth was partially offset by contraction in our CRE term and energy portfolios. Our low portfolios in most of our markets showed growth with strength in CNI from California and Utah, municipal growth from Arizona, and owner occupied in all our markets. Our utilization rates on approximately $33 billion in revolving commitments increased 0.2 percentage points to 35.1% compared to the prior quarter level of 34.9%. This compares to a pre-pandemic utilization rate in the fourth quarter of 2019 of 39.2%. If we were to return to that level, assuming no further change to the revolving commitments, that would result in about $1.2 billion of additional loan balance. As I previously noted, we expect that we'll see line utilization continue to strengthen as businesses work to rebuild their inventories. Turning to slide 12 regarding non-interest income, customer related fees were 151 million, of which about 6 million was attributable to a one-time accrual adjustment in commercial account fees. Normalizing for that effect, the customer related fee income increased about 9% over the prior year. Activity-based fees such as card, merchant services, and retail and business banking service charges remain strong and recovered from pandemic softness to exceed our 2019 levels. This improvement is additive to continued strength in wealth management and treasury management fees. Compared to the prior quarter, we experienced a decline in capital markets income, where the fourth quarter was particularly strong in syndications and foreign exchange. Notably, and highlighted on the page, we are planning to reduce some of our overdraft and non-sufficient funds fees. We expect that this will reduce our fee income by about $5 million or so per quarter beginning in the third quarter of this year. Turning to slide 13, our mortgage activity continued at both a quarterly and annual record-setting pace, with fundings reaching $1.2 billion for the second consecutive quarter. This represents a 38% year-over-year increase compared to a 36% decline for the MBA industry market index. The outperformance versus the industry would largely be attributable to three factors. First, the attractiveness of our mortgage product to our core small business and affluent clients. Secondly, success of our digital mortgage application platform, representing now 95% of all applications, up from 100% paper in 2018. Significant process enhancements tailored to improve the experience for all customers and especially our affluent segment. Mortgage fees improved to $7 million compared to approximately $4 million in the fourth quarter. This is well below the quarterly average from 2021 as the demand for saleable fixed rate product declines. However, the benefit is that we are producing more product that can be held for investment on our balance sheet, which was a contributor to the growth in the one to four family mortgage portfolio that I noted earlier. Regarding slide 14, this slide highlights the number of major technology initiatives that are underway and the customer segments that benefit from these enhancements. Harris noted how well the implementation of our digital banking replacement has gone and the positive feedback we're receiving from the consumers and small businesses utilizing this enhanced capability. While there's a lot to talk about on this slide, I will only note that our future core project, the final third phase, which replaces our previous core deposit and branch platform, is on track for a 2023 implementation. With that, I'll now turn the time over to our Chief Financial Officer, Paul Burtis.

Thank you, Scott, and good evening, everyone. Nearly 80% of our revenue is net interest income, which is significantly influenced by loan and deposit growth and associated interest rates. Scott has already discussed loan growth. Moving to slide 15, we show our securities and money market investment portfolios over the past five quarters. The size of the period end securities portfolio increased by nearly $10 billion over the past year to $27 billion. Money market investments had been increasing significantly with the growth in deposits. Money market investments declined in the quarter by $5 billion to $7.4 billion, reflecting growth in loans and securities and a modest decline in period end deposits. The combination of securities and money market investments is now 40% of total earning assets at period end, which compares to an average level in 2019, before the pandemic, of 26%. Over time, we would expect the mix of highly liquid assets such as securities and money market investments to revert to historical levels. We continue to exercise caution regarding duration extension risk by purchasing bonds with moderate duration both in the current and in an upward shock scenario. The durations of both are listed on the bottom left-hand side of the page. The $4.7 billion of securities purchases for the quarter had an average yield of 2.1%, which is about 40 basis points higher than the prior quarter's yield. The annualized rate of principal and prepayment-based cash flow coming from the securities portfolio was $4.2 billion in the first quarter. Again, that's an annualized rate, and depending upon the opportunity, we expect to be able to deploy the majority of that cash into either loans or higher yielding securities. Also depicted on slide 15 is a summary of our interest rate swap portfolio, maturity, and yield information by quarter. This includes both maturing swaps and forward starting swaps that are in place today but won't be reflected in our financial results until the start date. Slide 16 is an overview of net interest income and the net interest margin. The chart on the left shows the recent five-quarter trend for both. The net interest margin in the white boxes has trended down over the past year but gained two basis points this quarter. The trend reflects the change in earning asset mix due to the deposit-driven rise in excess liquidity over the past year as described on the prior page. Until the first quarter, growth in deposits has impacted the composition of earning assets through a larger concentration in lower-yielding money market and securities investments. The weighted average yield of our securities and money market investments is 1.39%, an increase of 30 basis points over the prior quarter. The volume and yield of securities, coupled with a smaller balance of money market investments, help to improve the net interest margin. Importantly, the increased interest income from securities over the past quarter and year have helped to make up the shortfall from decreased PPP-related revenues and have underscored the value of our exceptional deposit growth. Slide 17 shows information about our interest rate sensitivity. Focusing on the upper left-hand quadrant, as a general statement, we remain very asset sensitive. Each 100 basis points of parallel shift would add approximately $175 million of annual net interest income or just under about 90 cents per share, holding all other factors constant. Our estimated interest rate sensitivity to a 100 basis point parallel interest rate shock was about four percentage points lower in the first quarter than that reported in the fourth quarter. A portion of this reflects the higher denominator, that is net interest income, as our outlook for net interest income from the March 2022 starting point was materially higher than at the same outlook at the end of 2021. This change is largely attributable to increased loans, increased securities, and a steeper yield curve. The remaining change in asset sensitivity is due to active balance sheet hedging. We may continue to add interest rate swaps, including forward starting swaps, which would help to dampen our natural asset sensitivity. We expect to begin to see the impact of short-term interest rate increases in the second quarter as approximately 40% of our earning assets after giving the effect to swaps are tied to indices within one year. Non-interest expenses, on slide 18, grew by $15 million from the prior quarter to $464 million. Adjusted non-interest expense increased $18 million, or 4%, again to $464 million. The linked quarter increase in adjusted non-interest expense was primarily due to seasonal expenses typically experienced in the first quarter related to compensation, which were the same factors that affected pre-provision net revenue as detailed earlier by Harris. These seasonal expenses were somewhat offset by a decrease from the $10 million charitable donation made in the fourth quarter. You may have noticed that we made some changes to the categorization of non-interest expense in the current quarter on the face of our financial statements. As the banking industry continues to move toward information technology-based products and services, we have improved the presentation and disclosure of certain expenses related to our technology-related investments and operations. These improved disclosures will be amplified in our upcoming 10 filing. Another significant highlight for the quarter was the credit quality of the loan portfolio as illustrated on slide 19. Relative to the prior quarter, we saw continued improvement in problem loans. Using the broadest definition of problem loans, the balance of criticized and classified loans dropped 11% and classified loans dropped 7%. Although not shown relative to the prior quarter, special mention loans declined 20%. Of course, net charge-offs to average loans is the most important measure of credit quality. We had only five basis points of annualized net charge-offs relative to average non-PPP loans in the first quarter, and the loss rate was only one basis point in the prior quarter. Shown in the chart on the bottom right, one can see the volatility of the provision for credit loss, contrasted with the relative stability of net charge-offs. Slide 20 details our allowance for credit losses, or ACL. In the upper left, we show recent declining trend in the ACL over the past several quarters. At the end of the first quarter, the ACL was $514 million, or 1.02% of non-PPP loans. The economic scenarios that we used to build our quantitative ACL model improved relative to the prior quarter, and we released the qualitative reserves associated with expected losses related to the pandemic. However, as a partial offset to that, we raised the probability of a recession in our assessment of the economy, largely due to changes in uncertainty about the spillover effects of the war in Eastern Europe and because of the risk inflation may have on our borrowers' profit margins. Our loss-absorbing capital position is shown on slide 21. We repurchased $50 million of common stock in the first quarter. With the loan growth we achieved in the quarter and continued minimal charge-offs, we believe that our capital position is generally aligned with balance sheet and operating risk. We typically show that trailing five quarters in our investor slides, but in this case, we went back to a year before the pandemic in order to provide a longer perspective. In the chart on the left, you'll note that we had reduced our common equity Tier 1 ratio to 10.2% in the fourth quarter of 2019. And with the onset of the pandemic and with line draws in the first quarter of 2020, we saw the CET1 ratio decline to 10%. After capital growth, through intentional earnings retention during the uncertainty of the pandemic, the CET1 ratio has now returned to 10% in the current quarter. Shown on the right are our credit losses. We've intentionally matched the scales on both charts so that you can see the order of magnitude of losses incurred during this timeframe relative to the capital set aside for expected loss, also known as the allowance for credit losses, and the capital set aside for unexpected loss, in the form of common equity. Given the extremely low level of loss, we believe our capital position is appropriately strong relative to our risk profile. Our financial outlook can be found on slide 22. This is our best current estimate for financial performance for the first quarter of 2023 as compared to the actual results reported for the first quarter of 2022. The results in between are subject to normal seasonality. Consistent with recent quarters, our outlook for loan and net interest income exclude PPP loans. The impact of PPP loans on interest income is expected to dissipate over the next couple of quarters. We reiterate our outlook for loan growth at moderately increasing. We are expecting net interest income, also excluding PPP loan revenue, to increase over the next year. As noted previously, we believe our net interest income will improve as interest rates increase. particularly along the short end of the curve. We had another successful quarter for customer related fees, and we remain optimistic that many components of fee income will continue to grow. However, the reduction of overdraft and non-sufficient fund fees, which Scott discussed previously, and with mortgage banking fee income likely to decrease as the production shifts to help for investment, our outlook for customer related fees has shifted to stable from slightly increasing. For adjusted non-interest expense, we are reiterating our expectation of moderately increasing, with the largest risk factor continuing to be wage and price pressure. Finally, regarding capital management, we are hopeful that our capital will continue to be deployed to support customer-driven balance sheet growth. As a reminder, share repurchase and dividend decisions are made by our board of directors, and as such, we expect to announce any capital actions for the second quarter in conjunction with our regularly scheduled board meeting this coming Friday. This concludes our prepared remarks. Kyle, would you please open the line for questions?

At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Chris McGrady with KBW. Please proceed with your question.

Hey, great. Thanks for the question. I want to start with the manager's income guide. I believe last quarter it did not include the forward curve. And this quarter, I think your slide suggests it does. But the guidance didn't change. I'm interested in kind of a commentary about what the assumptions are within that. Thanks.

Sure. This is Paul. I'll start. You know, there are only so many adjectives we can use to describe things that are going up or going down. I think we've been pretty clear that, you know, even without rate increases, we're expecting what we termed, you know, strong net interest income growth and as outlined in my prepared remarks and on the slides and as we've noted previously, because we're asset sensitive, we expect any increase in rates from here on out to be additive to net interest income. So the interest rate increase in short-term rates that we saw from the Fed was at the very end of March. That did not show up much in the first quarter. We're expecting that to start to show up in the second quarter and then incremental rate increases beyond that, we expect to be worked into net interest income.

Okay. So if I understand that you're not changing the guide for net interest income, even though the slide suggests that you put the forward curve in, it didn't adjust. I'm just trying to make sure I don't miss anything there.

Well, yeah, I think the key is that, as I said, there are only so many sort of, without getting into a lot of numbers, there's only so many adjectives we can use. to describe growth. And, you know, we believe that we continue to believe that our net interest income, even without interest rates, is going to be up for the year. Any incremental increases in short-term rates will be added to that.

Okay, thank you.

Sure. Our next question is from Abraham Punawalla with Bank of America. Please proceed with your question.

Hey, good afternoon. I guess just wanted to go back, Harris, to your outlook on loan growth. It seems fairly bullish in terms of demand across the board. One, if you could talk to us in terms of regionally or by category type, any particular industries that's driving growth. And then clearly there's a lot of concern around Fed actions, maybe some incremental supply chain disruptions impacting customer sentiment as we look into the back half of the year. Just give us your sense of, based on what you see in terms of your borrowers, how you think the Fed actions will impact borrower demand to the extent you can as we look back into later this year.

Sure. Well, first of all, in terms of categories where I think we're going to likely see growth through the remainder of the year, we're seeing pretty solid growth in CNI. We showed that excluding energy. And we could see some growth in energy, but I think just broad-based CNI growth is going to be pretty solid this year. Scott also talked about the fact that we've got a very nice pipeline despite rising rates in our mortgage operation. And a lot of those are – a lot of our production are – you know, 5-1, 7-1, 10-1 adjustable rate mortgages that we're putting on the balance sheet. And we've, you know, I think we've seen the end of kind of the refi phase of this cycle and I would expect that we're going to see growth in that component. We continue to see good growth in municipal. We had one larger deal that came on this quarter that's going to come off in August, I believe, or later this year. It was just kind of an opportunistic deal. But overall, I think we'll still, I expect, see decent growth in municipal. I don't know, decent, certainly mid-single digits or better. And so those are some of the primary areas where I would expect that we're going to see growth. In terms of geographically, you know, we're seeing it, we're pretty much seeing it across the entire western United States. I think that, you know, with respect to customer sentiment, supply chain issues, and Fed actions, there's nothing that, you know, maybe We've got probably a generation of people in this industry who have never seen higher interest rates and been around prior to 2007. But if we were to see a 3.5% or 4% Fed funds rate, I mean, we've had some pretty strong economies back through time with that kind of interest rate picture. And I personally don't think it's going to be enough to derail the economy. I think that if the Fed loses control, if inflation really gets out of hand, certainly that could, and we could see a recession. That would slow things down. But I don't think that anything that we're seeing in terms of the Fed funds futures market suggests that we're going to see the kinds of interest rates that historically have created a lot of problem And in fact, I tend to believe that you have a lot of businesses that are going to be working to build inventory to, you know, all these supply chain issues have made it, you know, and kind of the geopolitical risk in the world, I think probably, this is my own supposition, no science for this, but that you're going to see a lot of businesses saying they need to source more domestically, that they need to shorten their supply lines and build more inventory cushion than maybe they've had before because they've seen a lot of lost business because they didn't have inventory through this recovery. So I personally am relatively sanguine, I think, about what the next few quarters probably hold.

Got it. Thanks for that. And one quick follow-up, maybe, Paul, for you. If I heard you correctly, the core loan yields went down 13 basis points. We saw LIBOR head-high through the course of the first quarter. Just give us a sense of why that 13 basis points decline. Was it a mixed change in the loan book that led to that decline? Just how much of the book is LIBOR versus prime rate?

Yeah, there was a little bit of mixed change involved in that. We are ongoing promotional rates on loans, which we've talked about previously, had an adverse impact overall on loan yields, but that's, I think, temporary. And then we had some interest rate swaps that matured in the quarter that also adversely impacted that by a couple of basis points.

And do you see either of these being a drag going forward or is that kind of done?

Well, my largest concern as it relates to loan yields is ongoing competition in an environment where there's a lot of excess liquidity in the system that would cause spread compression. I think that's our biggest risk to, frankly, to loan yield expansion. But I think it's substantially, well, entirely more than offset by our asset sensitivity. I believe because we've got sort of more floating rate earning assets than liabilities, we are naturally, as interest rates go up, we're naturally going to see an expansion of net interest income.

Paul, one thing that's worth noting is that the prepayment penalty in the fourth quarter was a significant contributor to the yield in the fourth quarter. And so as that prepayment penalty income dropped off in the first quarter, that was also a contributing factor to why the yield of the overall portfolio declined.

Noted. Thank you both. Thanks for taking my questions.

Sure. Thank you. Our next question is from Ken Usden with Jefferies. Please proceed with your question.

Hey, good evening. How are you? Just coming back on the NII. So maybe, Paul, is the right way to think about it, you gave the 100 basis points of parallel shift would be approximately $175 million of annual net interest income. So if you were talking pre-rates of moderately increasing NII, do we think about that kind of core growth and then add, you know, if we were to get 200 basis points of rates this year, then we'd effectively get an annualized $350 million in next year. And then so for first quarter, we'd get about a fourth of that. I know that's a lot of math, but just trying to use your sensitivity to kind of help us back into that zone that you're kind of leading us to with core growth and then the sensitivity on top of it.

Yeah, I'm reluctant to apply too much precision to that. And the reason is that the way that our interest rate shocks are modeled, and this is true for all banks, is that they're sort of done in an environment where everything else is held constant. And the world, as you know, just doesn't work that way. So there are many factors in this. I just mentioned loan spreads. That's a factor. Deposit repricing, as you know, Ken, I mean, that has an enormous impact on interest rate risk, although I don't believe that that is an adverse risk in this case. I think that given the excess liquidity in the system, and particularly within our organization. It's worth reiterating that our loan deposit ratio is 62%. I mean, I don't know, certainly in my career, I don't recall seeing a loan deposit ratio for a large regional bank of our size being in that ballpark. So there's a lot of liquidity in the system, and I think as a result we'll be able to control deposit pricing looking ahead. So generally speaking, I hear what you're saying and I, you know, uh, the timing of the rate increases and then the timing of the resets matter. Some resets happen in the middle of the month, you know, some happen sort of early or late. And so it's very hard to apply too much precision to the math. Uh, but I would just re remind you that that a hundred basis point figure that I gave you, uh, that approximately $175 billion, that is a full year impact for an immediate shock today.

Right. Yeah, right. So I'm saying, but if we got eight hikes this year, right, by then, by the end of the year, you'd have the benefits of those hikes playing through in 23s numbers. So I hear you might not be running. I guess, let me just ask you one more just about the sensitivity then. So then what would be the, what would be the biggest factor that you'd be, you know, sensitive to like to, you know, to worry about that would make, you know, a 175, you know, not play out? Like, is there one that could like swing the most of the factors that you ran through?

Thanks for the call, Paul. Yeah, the largest factor in interest sensitivity is always deposits. So it's deposit volumes and deposit pricing. But affirming your prior statement, yeah, you are correct. All of the things equal, that would be the impact in 2023. Okay.

All right, great. Thank you, Paul.

Yeah, thank you, Ken.

Our next question is from Jennifer Demba with Truist Securities. Please proceed with your question.

Thank you. Good afternoon. Your asset quality has been so good for many quarters. Just wondering what loan buckets you feel are most vulnerable as rates go up at a fairly quick pace here?

Hi, Jen. Yeah, Michael Morris will take a swing at that.

Hi, Jennifer. Thanks for the question. Any revolving debt is going to be fairly sensitive to interest rate hikes. Debt coverage ratios matter in a big way. Consumer may be a little more precarious than the other industries just because that's totally tied to labor costs and what the consumer can handle and isn't something that can be passed on easily. So our consumer book is something that we're watching carefully around debt coverage ratio or debt to income levels. And the other industries that were impacted by COVID, if they haven't returned to sort of business as usual, they may be a little more susceptible to rate hikes. We're watching the office portfolio very carefully. That's one of the asset classes in CRE that's probably going through the most change right now. Hospitality seems to be coming back slowly, but surely. RevPAR's up. You can see a lot of airport traffic, and so we're seeing good signs on the hospitality portfolio. So office, consumer, couple of other categories.

And Michael, this is James. Could you just... speak to the underwriting that we do to anticipate rate hikes? I think that's worth mentioning here.

We stress the underwriting on almost every loan product that we have. We're currently stressing any campaign product at its adjusted rate plus a premium. There's quite a bit of cushion in our underwriting. We think that will bode well in terms of LTVs as we go forward.

Thanks so much.

Our next question is from John Pencary with Evercourt ISI. Please proceed with your question.

Good afternoon. Regarding the loan yield topic again, can you maybe just give us a little bit of color in terms of sizing up the impact from the ongoing promotional rate and how much of the decline in loan yields of, what was it, 21 basic points or so was from that? And then also, do you happen to have the new money yields on new loan production? And give us an idea where you're putting paper on today. Thanks.

Well, I'll start on the impact of the promotional campaigns. For the last two quarters, that has been about five or six basis points per quarter.

Okay, thanks. And do you have the new money loan yields?

Yeah. So, John, this is James. The new money yield without any sort of fees, origination fees embedded in this, so this is just a coupon, is about 3.2%. So, with the origination fee, you probably add 10 to 20 basis points on top of that to get to a yield overall.

Got it. Okay, thank you. And then on the comp and benefits line, and they're up about 11% in the quarter. I know you mentioned about, I guess, about $25 million in seasonal factors. You know, as we model out the next quarter and the next several quarters, what's a good jumping off point for the salary and benefits line item, given that? Is it just adjusting for the $25 million and going from there?

Well, we've tried to provide on page seven, there are several items in there of the slide deck that is. You can kind of see where the seasonal things are, things like share-based comp and retirement plans, payroll taxes. Those are all things that are very seasonal. So as you're thinking about your sort of, quote, unquote, jumping off point, I would consider that disclosure. The other thing I'll note is that, you know, as I've mentioned previously, I think the largest risk that we have on expenses remains competition for people. And so that's, you know, salaries and benefits. And that's all incorporated into our outlook, but I just note that as a risk factor.

Okay, thanks. And if I could just ask one more. In terms of your deposit expectation for stable to up balances, Can you just talk about what you're seeing in terms of deposit flows where you think you could be seeing some pressures? Are you beginning to see more deposit outflow at your corporates as they're burning through, or is it more about competition that's starting to become a greater factor before you actually see the impact in rates? What are you seeing now?

Yeah, this is Scott McLean. And, you know, we were seeing some outflows, we're certainly not seeing the increases we were seeing. And so, but I think that there just hadn't been enough of a move in other short term rates to, you know, really pull investors into, into interest bearing, you know, other interest bearing type investments. And so, I just, generally speaking, this early in a rate increase cycle, you just don't see that much, you know, real movement. And so I think that's going to play out over the next, you know, three to four months. And as we see a couple of larger increases, then there'll certainly be a little more movement in those numbers.

Mr. Harris, I think that, too, the first quarter is all, I mean, there's a lot of kind of seasonality or cyclicality in the first quarter. We typically see some runoff in the first quarter. What's hard to gauge is, you know, with the Fed kind of starting to drain the balance sheet a little bit, what that's going to do across the industry. And so, personally, I do think we're kind of in uncharted waters. You know, we could see a little bit of increase. You know, I actually think that we could see some decrease across the industry. I mean, that would sort of logically make sense to me. But I don't think it'll be anything severe. And, you know, in some respects, it would be a good thing just to start getting at the problem.

I would just add also that Harris noted earlier, and I did as well, that there is a pent-up demand to build inventory. And so some of this potential decline in deposits or downward pressure on deposits could simply be businesses moving cash into inventory, and that's a healthy thing. So not necessarily an interest rate-driven phenomenon. And so we'll be watching that pretty closely.

Right. Okay, thanks, Scott.

This is James. We have about 10 minutes left in the call, and we have four people in queue at the moment. So we're going to move into what we affectionately refer to as the lighting round. So we'll ask people to just do one question, and then we'll try to keep our answers quick and concise. Thanks.

Thank you. Our next question is from Peter Winter with Wedbush Securities. Please proceed with your question.

Great. Thanks. I just wanted to follow up on Ken's question about the sensitivity of the 100 basis point increase equaling $175 million. If I compare that to last quarter, Paul, you mentioned that each 25 basis point rate hike equals $60 million in net interest income. Can you just talk about the change and maybe the outlook for asset sensitivity going forward if you're going to dampen that?

Yeah, I think what you're describing, which I had referenced in my prepared remarks, is that our stated asset sensitivity has fallen by about four percentage points from last quarter to this quarter. There are a couple things going into that. One, interestingly, is a larger baseline revenue. So we have been continuing to add investment securities over time. We added them in the fourth quarter and in the first quarter. And when you average sort of taken to – take into effect sort of the averaging effect of when they were put on and how that converts to run rate revenues. The revenues are actually up pretty substantially just in the last couple of quarters due to the investment portfolio. So a dollar change in net interest income as modeled actually has a smaller percentage change because revenues, run rate revenues, are just higher. So that's important. And then the other element and related element is that as we add to our investment portfolio and as we think about and we actually add interest rate swaps, either sort of current or forward starting, that also has an impact on asset sensitivity. So those are the two key changes quarter over quarter are a higher run rate in net interest income and then the addition of duration in the form of securities and swaps. Okay.

Thanks, Bob.

And then looking ahead, our interest sensitivity, you know, has been and will always be determined by changes in deposits, really. And so, you know, looking ahead, changes in deposits, the pricing of deposits, you know, additions or runoff of deposits, those will really be the key factors in my mind anyway, as we think about interest sensitivity.

Got it. Thank you.

Sure. Our next question is from Brad Millsaps with Piper Sandler. Please proceed with your question.

Hi, good evening. Thanks for taking my question. Paul, I was curious if you could maybe add a little more color on the pace of the final kind of remaining $7 billion or so liquidity from here. And remind us how much cash flow is kind of coming off the bond portfolio, either monthly, quarterly, annually, however you kind of want to slice and dice it.

So the first part of your question is when you talk about the $7 billion liquidity, you're talking about kind of the money market investments, the cash on the balance sheet?

Yes, sir. Yes.

Yeah. Okay. Well, I'll start with the second question first. So a couple of things to note about our investment portfolio. It is larger today. However, in our modeling, which I attempted to say in my remarks or on the slides, our modeling indicates that that portfolio is effectively fully extended. So the benefit of having mortgage-backed securities is that these are not bullet bonds but amortizing securities that provide cash flow on an ongoing basis, and the cash flow comes in the form of both scheduled principal and repayments and principal payments. Because that portfolio as modeled is largely extended, I think that the cash flow out of the portfolio looking ahead is somewhat predictable. And currently it's running at about a billion dollars a quarter, a little more than a billion dollars a quarter. So over the course of the year, That's a little over $4 billion of cash that we would either expect to use in our business in other places, such as to fund loans, or perhaps buy additional investment securities. Incidentally, I mentioned in the prepared remarks that the securities that we bought in the first quarter were about 40 basis points higher than in the than in the fourth quarter. And while, you know, kind of past performance is no indication of future results, I would say that if we were to buy all of our bonds in the current quarter today, rates are about 100 basis points higher than they were in the first quarter. So a pretty significant move in rates and a lot of cash flow coming off of the portfolio is going to provide an opportunity for us to participate in rising rates. As it relates to the $7 billion or so that's on the balance sheet today, My expectation is as we see the pickup in loan growth continuing, I am hopeful that that would be enough to absorb that excess liquidity. The rest of it would be either through managing deposits or managing the investment portfolio. My expectation currently is that I would not expect the investment portfolio to grow a lot from here over the next couple of quarters. Hopefully that a lot of words, hopefully that answers your question.

Yes. Thank you very much. I appreciate it.

Yep.

Thank you. Our next question is from Gary Tanner with DA Davidson. Please, please proceed with your question.

Thanks. Good afternoon. Um, obviously you guys aren't the first, uh, nor will you be the last to make changes to your NSF and overdraft programs. I just wonder if you could kind of comment on what your thought process was on making that decision now, whether it was just simply getting in the way of a snowball coming downhill at you on that topic, or any more overt pressure from regulators?

I'd say no more overt pressure than you've seen in the media, but no inside baseball from regulators on that. In fact, I encouraged our people. I said, look, this shouldn't be driven by regulators. I don't think it's the province of regulators so long as what we're doing is disclosed properly and it's within the law. But I do think that we need to be thinking about it competitively. Certainly, the world has changed in terms of the technologies available both to customers and to us to manage these things. And so the competitive landscape has changed. So we're trying to be responsive to that. It's about that simple.

Thank you. Yep.

Our final question is from Steve Moss with B Reilly Securities. Please proceed with your question.

Good afternoon. Maybe just with the five-year treasury here close to 3%, kind of curious as to how you're thinking about commercial real estate pricing these days, if you're going to move away from the promotional rates you guys have been working at. And then just also curious as to how you're thinking about risk here if cap rates shift higher.

The first part of that question about promotional pricing on owner-occupied loans, We haven't really talked about it, but we have been raising our promotional rate as rates have gone up since the promotion started in June 1st of last year. We've kind of maintained the same spread versus the appropriate maturity swap, but we have been raising our rates consistently. We will probably slow that promotional rate process down here in the second quarter because it's just rates are too volatile. So we've got a lot of pent up demand and so we'll see that go through, but we'll probably slow down the promotional rate program.

And then maybe just in terms of the risk appetite, just kind of curious as to how you guys are thinking about, you know, with terms of prior cap rates, how to think about loan-to-value and structures?

Well, it depends on the product type, but as you know, owner-occupied real estate, the underwriting is around the business first. There are always two repayment sources there, so that's the primary focus. On investor real estate, we've seen pretty flat levels of requests, loan-to-cost, loan-to-values are within our traditional wheelhouse, we're not really cutting back from an underwriting box standpoint. The way we underwrite, like I mentioned earlier, we're using stress rates, interest rates, to determine debt coverage ratios in all the asset classes in commercial real estate. And we're not seeing a huge appetite. We're gonna see a lot of conversion of construction to term. which is only possible if there's stabilization and strong NOI. We're seeing slight movement on cap rates going north, which is kind of a devaluation here and there. And those will probably move as rates go up. There's always been a strong correlation between cap rates and interest rates. But we're sensitizing around that and underwriting around that.

Okay. Thank you very much.

We have reached the end of the question and answer session, and I'll now turn the call over to James Abbott for closing remarks.

Thank you, Kyle, and thank you to all of you for joining us today. If you have additional questions, please contact me at the email or phone number listed on our website. We look forward to connecting with you throughout the coming months, and thank you again for your interest in Zions Bank Corporation. This concludes our call.

This concludes today's conference and you may disconnect your lines at this time.

Thank you for your participation.