Zions Bancorporation NA (ZIONP) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Zions Bancorporation's Fourth Quarter 2020 Earnings Results Webcast. (Operator Instructions) It is now my pleasure to introduce Director of Investor Relations, James Abbott.

Thank you, Andrew, and good evening. We welcome you to this conference call to discuss our 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 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 in 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 strength 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 1 hour. (Operator Instructions)

I will now turn the time over to Harris. Harris?

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

Beginning on Slide 3. We are very pleased with the overall results 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 relative 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 is continued uncertainty with respect to the ultimate impact of borrowers from the pandemic, we've been very encouraged by the resiliency of a 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've noted numerous times over the last several years, we were resolved to enter whatever downturn is on the horizon with strong relative and absolute capital ratios, a 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 one of the strongest combinations of CET1 and the ACL within the large regional banking space. On that end, we've stated that we'll consider increasing capital distributions as the storm passes, and we are hopeful we are approaching a point where we will resume share repurchases, although it's premature to announce anything today.

Earlier, I noted the strength we saw in net charge-offs, but there are other credit indicators that showed signs of stability, notably nonperforming assets, classified loans and loans on deferral. Perhaps one of the more surprising numbers for the quarter was the net charge-offs realized on the loans that we've grouped into the COVID-19 elevated risk category. The ratio rounds to 0, which is certainly not what we would have expected earlier in the year in 2020. Throughout the quarter, we've seen real-time consumer and business spending data that's been encouraging. For example, for the month of December, our customers' debit card spending was 11% more than the year ago month of December. And credit card spending, which has often been negative when compared to the year ago period, weighed down in part by travel and entertainment spending, was slightly positive from the same month a year ago.

Slide 4 is a quick summary of some key performance indicators for the full year as compared to the prior 2 years. Although net income, return on assets and earnings per share declined...

(technical difficulty)

James, we may have lost Harris there. Okay. So I...

Would you like to go where Harris was -- where Harris left off? It looks like we lost Harris' audio.

Yes. I'd be happy to do that. I think we were on Slide 4. Yes. Okay. This is Scott McLean, and I'll pick it up from here. And if Harris reengages, we'll slot him back in.

So on Slide 4, a quick summary of some key performance indicators for the full year as compared to the prior 2 years. Although net income, return on assets and earnings per share declined, you can see on the chart on the top right that pre-provision net revenue is fairly stable. It 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.

Scott, I'm back. My apologies. I lost my connection there.

Terrific. I'll hand the ball back to you, Harris. We're on Slide 5.

So I'll pick up on Slide 5. Thank you for filling in. Slide 5 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 6. 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. The moderate decrease from the prior quarter was largely attributable to a slight decrease in revenue as well as an increase in expense, which Paul will provide detail in his prepared remarks.

On Slide 7, we highlight the balance sheet profitability metrics. Obviously, the negative provision has resulted in a level of profitability that is not sustainable in the long run, similar to our view that the depressed profitability in the early part of the year was also not likely to persist. As we enter 2021, I'm encouraged with the progress made on the technology front that has enabled us to do things faster and at a lower cost. We're 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'll turn the time back over to Scott.

Thank you, Harris, and good evening again to everyone. Let me direct you to Slide 8. Over the last few months, you've heard us talk about our success with Round 1 of the Paycheck Protection Program. Given the negative economic impact of the pandemic and the low interest rate environment, our oversized success with 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're 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've engaged PricewaterhouseCoopers to assist, which is part of the noninterest expense increase referenced by Harris.

Round 2 launched last Wednesday, January 13. Last week, we trained over 1,500 frontline bankers in 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 9. We've 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 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 loans.

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 no small part by the rollout of our Zip Mortgage digital, customer-facing application process, which occurred prior to the significant decline in interest rates and the significant increase in mortgage originations in the country. The combination of these 2 factors, among others, led to a 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 in -- for 3 quarters. And our pipeline at the beginning of 2021 is higher than the year ago level by 66%.

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

Thank you, Scott, and good evening, everyone. Thanks for joining us. I'll begin my comments on Slide 11. Generally, we have presented the credit quality ratios in our earnings presentation materials excluding PPP loans. As Harris noted, classified loans and nonperforming loans were somewhat stable with the prior quarter. Overall net charge-offs were 13 basis points and, for the year, just 22 basis points. About 4/5 of the fourth quarter and 1/3 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 31, 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 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 these $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 3 groupings highlighted on the previous slide in a time-series format. The top-left chart shows the loan balances in columns with the weighted average risk rate shown in the 3 lines. As indicated by the lines, the elevated risk portfolio experienced some risk-grade improvement since September, as did the remaining portfolio excluding oil and gas lending. The oil and gas portfolio's weighted average risk grade remained relatively unchanged. The loan grade shown here represent the probability of default only. As a reminder, the probability of default combined with the loss given default are key drivers of the allowance for credit loss.

The top-right chart on Slide 14 shows the trend in classified and nonaccrual loans with the classified ratio being the larger number and the nonaccrual ratio being the smaller number within each bar. The relative stability of the other loans' nonaccrual ratio, which represents 87% of the total non-PP (sic) [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 4/5 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 31 or 1.74% of non-PPP loans. On the right side, we describe the factors leading to the ACL change in the most recent quarter.

The bar chart on the bottom right shows the broad categories of change. $3 million of the ACL decrease is due to the net impact of changes in economic forecast and changes in the probability weightings of those forecasts. Credit quality factors, represented by the middle bar, include risk grade migration and specific reserves against loans, which combined for a $20 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 ACLs, such as consumer mortgages and oil and gas and toward segments that have lower ACL, allowance for credit losses, attached to them such as municipal lending and other similar factors, generated a $59 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 on the chart on the right, the compression is essentially attributable to the composition of earning assets, namely a greater concentration of lower-yielding money market and investment securities. The change in the composition of earning assets has been driven by the strong growth in deposits. Average deposits increased $1.8 billion, while average loans, including PPP, declined by $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 yield 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 added about 5 basis points to the total loan yield. Partially offsetting that positive change, the yield on new loan production, including line draws, was modestly lower than the yield on maturing loans and paydowns. This trend remained consistent with the 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 and funding, average total deposits increased 2.7% over the prior quarter. The cost of deposits declined to 8 basis points from 11 basis points in the prior quarter.

Slide 18 reports that our balance sheet sensitivity has increased as deposits have increased and benchmark interest rates have fallen. We are comfortable with the increase in rate sensitivity because we believe the risk to lower rates is limited. As we indicated in October and as you can see in the balance sheet tables in the press release, we deployed some of the increase in deposits into securities. The securities purchases for the quarter had an average yield of about 1.25%. The purchase activity helps to offset some of the deposit fuel 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's Page 18, show the interest rate risk -- sorry, the interest rate reset profile of our loan portfolio and include additional detail on the interest rate swap book. On the upper right, the volumes, maturities and associated fixed rates for swaps used to hedge our floating rate loans are shown, while the bottom right highlights loan repricing characteristics.

On Slide 19, consumer-related fees were stable with the prior quarter at $139 million. Mortgage loan 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.

Noninterest 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 noninterest 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 in -- 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 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 results. Quarters in between are subject to normal seasonality, and I would reiterate our earlier reference to the forward-looking statement on Slide 2.

We are establishing our loan growth outlook, which excludes PPP loans, at slightly increasing, which can be interpreted as a growth rate in the low single digits. We expect low single-digit to mid-single-digit growth in commercial, driven by an expectation for continued solid growth in municipal lending. We expect commercial real estate to be relatively stable, and we expect consumer lending to experience low single-digit growth.

We are establishing our outlook for net interest income, also excluding PPP loan revenue, at slightly increasing, which incorporates the current shape of the yield curve, some earning asset growth and some modest pressure on the net interest margin as the securities portfolio yield continues to reset lower and we experience 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 noninterest expense at generally stable. As noted on the comments section on this page, on a GAAP basis, we expect the overall level of GAAP noninterest expense in 2021 to be consistent with GAAP noninterest 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 paired with the relatively low credit losses and relatively stable pre-provision net revenue throughout the pandemic.

It is premature to announce any share repurchase program today. However, we have said that as uncertainty subsides, the prospects of actively managing our capital through share repurchase improves. Of course, the approval of any repurchase program is subject to approval by our Board of Directors and our regulators.

That concludes our prepared remarks. Andrew, would you please open the line for questions?

(Operator Instructions) Your first question comes from the line of Erika Najarian with Bank of America.

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?

Well, I'll take that, Erika. I'll 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'm sorry, in 2021, modestly above where it is today in 2020. So I can't kind of officially call that a bottom, but I think what we're saying is excluding PPP, we expect it to be growing modestly from here.

Got it. That's great. And just on capital management, your -- so shift to quality has clearly been borne out in the credit quality that we're seeing in the middle of the pandemic. What -- 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?

Well, I think we just want to continue to see a little more clarity with respect to how this pandemic will affect borrowers. There have been a lot of people who thought that we may have a little bit of a -- some delayed impacts that we might see more impact coming in 2021. I think we're 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'll be cautious, but I expect that we'll absolutely be hoping to look at share buybacks as we get into 2021.

And our next question comes from the line of Dave Rochester with Compass Point.

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?

I'll take that, Dave. The -- as it relates to loan yield, we haven't been specific. I think the word we used in the third quarter Q was modest. And what we're trying to say is that what we're continuing to see is similar to that in terms of that quantification, but we haven't been super specific about what that is. But I think it's a fair word, modest.

The -- as it relates to securities growth, we're being -- we have a lot of cash on the balance sheet today. You saw that impact our 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 we're -- given the very flat nature of the yield curve and, I would say, a general expectation internally that things will really improve as we -- or start to really improve as we get into the next half of this year. We want to be careful about putting on too much duration with that incremental cash that's been added. So the securities -- it's a long way of saying the securities portfolio may grow, but you won't see it grow anywhere close to the amount of excess cash that's been put out over the course of the last quarter.

Yes. Okay. Great. And then maybe just switching to loans real quick. On your outlook for loan growth, how much more runoff are you guys expecting at this point in the energy book?

And then bigger picture, as you think about C&I demand and maybe small business loan demand going forward, does -- the PPP program, does that impact what that loan demand could be for that subset of C&I going forward just given that they're now flush with cash and we'll be probably spending some of that in the near term?

Dave, this is Scott McLean. I'll speak to the first part of that. I think -- well, maybe all of it. The energy outstandings are actually about -- well, I'm not sure how we reflected it here, but there's about $100 million of PPP loans in the energy outstandings. And so excluding PPP, energy outstandings are 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're going to see increased drilling and you'll see greater utilization of lines of credit.

So I don't anticipate -- it could go down the next quarter or 2, some, but I think we'll start to see utilization pick up. And I do think that for small business lending in general, the -- our borrowers, they are building liquidity. We've seen that. I think we've seen it across the country. And they still have a healthy proportion of their PPP fundings to rely on as well. So I think it's going to be the broader economy starting to show real improvement, and we'll start to see lines of credit being utilized at a greater pace as working capital builds up again and as people start to adjust to the post-pandemic environment.

I'd also just note that the -- while they have cash -- to obtain forgiveness, it has to be used -- actually, it's really intended to be used to offset the specific expenses and to keep employees on payrolls at a time when revenues have been curiously impacted. So I think for a lot of these businesses, they'll use it that way. And as we get further into the year, the economy really does rebound in a strong way. I think you'll see them pick up and start to borrow for longer term kinds of investments in building their businesses. So that would certainly be the hope, and my intuition is that that's going to happen.

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

Great. I guess not to get too deep in the weeds here, but just to come back to your NII guidance, what is the right base on which the growth is slightly increasing? I mean the way I read it is 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?

Yes. Ken, this is Paul. I'll take that. I'm sorry if I wasn't clear. What we're 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 -- multiple that out and exclude that from your net interest income number, you come up with net interest income excluding PPP. That's the base that I'm thinking.

Got it. Okay. All right. I'll do the math if you don't have that write off. I guess maybe my follow-up question is in terms of a second PPP facility, can you just talk about the pluses and minuses of whether signs could potentially be as active as it was in the first program? I suspect just smaller but I'm kind of curious what your involvement might be in the second facility.

Well, it's -- Ken, it's a -- I mean there's less funding for it. So it is a smaller program, and it's really largely targeted at businesses that were particularly hard-hit. So I think nationally, you'll see the numbers are down in this round. 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're going to be -- see a lot of participation by businesses on the smaller end of the spectrum. And we're certainly geared up and we're very engaged. And I think -- I expect that we'll show very well again in the second round.

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

On the -- back to the buyback question there. Just want to -- I know you mentioned that you might be interested in a position to resume buybacks pending -- later in the year pending Board approval and regulatory approval. Is this -- are the regulators in any way keeping you from resuming buybacks right now?

Well, you have to -- we're a little bit differently situated from many of our peers in that we're a publicly traded national bank, as you know. And so there's an application that we make to the OCC for a permanent reduction in capital, and that's what it takes to buy back shares. I fully expect that the -- that they'll be reasonable and thoughtful about this.

As I -- if I look at the backdrop, I -- what I see is this is a company that has strong capital relative to peers. We have what's been a very solid credit quality certainly relative to peers over the last few quarters. I think that probably relatively gets better as we get through some of the energy issues that have increased the charge-offs, still leaving us with very low charge-offs. But absent the energy charge-offs, it looks truly great.

And then you have -- I don't expect we're going to see huge loan demands. We expect that we're going to see loans growing but probably not at a pace that's going to absorb a lot of earnings. And so I think the conditions are going to be pretty good for us to be pretty actively engaged in buying back shares as we get end of the year, a quarter or 2. We just want to make sure that we're being sensible about it. And we'll have that conversation with regulators and with our Board, but I think all the conditions are going to be there for a reasonably active buyback program.

Okay. All right. That's helpful. And then separately, I was wondering if you could give us an update on the core system's conversion, any change in your updated expected time line and any change in terms of the cost trajectory involved in the whole conversion. Has that materially changed at all?

Thank you for that question. We are -- the pandemic, there's no question, had an impact on our future core project and just on projects in general. I mean there was -- there were a few months there where it just -- it was difficult to continue at the pace we were going and the level of effectiveness. And so -- but we got through that. We've adjusted to it. And so originally, we were going to have released 3. The deposits release come out in 2022, kind of a phased rollout in early -- kind of early to mid-2022. That probably has been delayed by 6 months, and we'll be continuing to evaluate that. We still have time to make up time between now and then, but the pandemic has definitely caused a brief delay in it. And in terms of cost...

I just...

Go ahead, Harris.

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

No. It's a great -- 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 2 or 3 years and then for the period after go-live, it's not materially different. So hopefully, that helps.

It does. All right.

And I would tell you that our level of excitement about it continues to grow because when we get to that place, we will have a 5- to 8-year, maybe 10-year head start on virtually every other major bank in the country. And it really -- being on our new system during PPP 1.0 absolutely made a difference in the level of volume we were able to do.

And our next question comes from the line of Jennifer Demba with Truist Securities.

Your net charge-offs have remained very contained this year. Wondering if you're 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're seeing in those more at-risk portfolios.

Michael, it's -- Jennifer, it's Keith. Let me jump in and I'll turn it over to Michael maybe for a little more detail. A couple of things. One, we're still not seeing any significant negative impacts in terms of charge-offs to the portfolio on those COVID-related industries. And we can get into some -- a little bit of detail about what those are, but we're not seeing any impacts there. And I think this comment has been made a couple of times. As we get through this next round of stimulus to help people get around the bend and we get to vaccination, which I know a lot of businesses are looking forward to, we just -- we don't see that in the future, but we also don't know what the economy holds. So as it relates to that portfolio, we haven't seen losses materialize. We don't -- didn't see them certainly this quarter. We don't see them in the short term.

And in terms of the other portfolios, as mentioned earlier, a substantial portion of the charge-offs this past year and certainly this past quarter were the oil and gas portfolios. We don't see any significant charge-offs looming in the next couple of quarters in those portfolios. But Michael, let me turn it to you real quickly and see if you have something to add.

Well, I think you covered it well, Keith. I would only add that I think the unit count around charge-offs might rise a little bit. I'm not sure about the net charge-off ratio, up or down. But we do expect to see some small business failures, although small business is holding up very well mostly because I think our borrowers are disciplined. They're resilient. They have more cash potentially than we thought they did. And now with this stimulus and vaccine and immunity around the corner, I think Keith's hit it on the head.

If I could just add to that, under the CECL accounting rules that we are currently living by, we are estimating our credit losses to be $835 million over the lifetime of our -- of the loan portfolio. And so it's a really important, I think, punctuation to all of that commentary.

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

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 hoarding cash? And how much risk is there if rates rise that, that could potentially be siphoned out pretty quickly?

Well, I'll start. It's so much speculative. I -- as we've 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 sheet. As I said earlier on in a response to a question, we have a lot of cash on the balance sheet today. But we're being really mindful about how far out the curve we put that cash to work because we do think there's a reasonable chance that by the end of the year, some significant part of that may have left the bank. But that -- I will say that is somewhat speculative.

Okay.

And Paul, maybe...

Steve, this is Scott. Clearly, our DDA, the total deposit ratio has continued to increase. And so there will naturally be probably a drop in that. But if you look at our -- that mix of noninterest-bearing to total deposits over a very long period of time, it has been very resistant to periods of increased interest rates. And I think that people have figured out that's largely a function of our really small customer -- business customer client base, small operating accounts. It just hasn't been that susceptible to rate chasing -- basis point chasing.

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

It's hard for me to be really specific about that. I will say the part of the curve that we're particularly focused on is kind of the 3- to 5-year point in the curve because that's where -- at the margin, that's kind of where we're investing our discretionary sort of part of the balance sheet, the investment portfolio. To the extent we're mitigating or attempting to mitigate the interest rate risk through swaps, that's kind of where that occurs. And to the extent we've got fixed rate loans, that could 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 3- to 5-year part of the curve.

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

So you 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, et cetera, just trying to get a sense of where you think that provision number could go in the near term. I mean if we get a successful vaccine rollout as we go through the spring, I mean is that just an acceleration of reserve release into 2021 versus 2022?

Well, I'll start with that. The -- as you know, under CECL, we need to create the allowance for credit losses that's consistent with our best expectation for the life of loan losses in the book. And that's the $835 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.

I'd maybe just add 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 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're going to see some reserve releases. It will simply change our outlook as to what the damage is going to look like. And I -- on the stimulus that's out here, the vaccine, everything that -- I think the real test is going to be in the actual experienced charge-offs that we see here this quarter and maybe even into the second quarter.

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

Yes. This is Paul. That time deposit number largely is sort of kind of a broker CD, sort of one of many sources of funding for us that historically, we've utilized and tried to spread out our sources of funds, including broker CDs. Given the massive amount of liquidity that's washed on in the balance sheet over the last 9 months, we're actually just letting that portfolio run off. So I would -- and it's a relatively short portfolio. So I would expect -- as evidenced by the change in the balance this quarter. So I would expect that to continue to run off over the course of the next several quarters and frankly not be replaced.

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

On the PPP 1.0 slide, I'm just wondering have you tried to -- or start 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-sized opportunity. Do you have a way that you're starting to kind of think through that and how much uplift you might get on top of what you've seen already come in through new-to-bank customers?

Yes. That's a great question. And we are -- we can absolutely see everything -- those 14,700 approximately new-to-bank customers are doing. We're tracking their utilization of their DDA count very carefully because that indicates that that's a 30% number that they're actively moving their relationship. And so that's progressed from obviously 0 to 30% in a short period of time. So we're having lots of interaction. This is -- we know these -- we can count these customers in ones, not in hundreds and thousands. We're keeping track of the calling effort on them through our contact management system. Our CEOs and our bankers are highly focused on it. And so it's hard to know where it will end up, but we're encouraged by the early loan growth and new services growth that we see there.

And -- but I'd 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 close a relationship with some of those. And so this gave us a chance to have a really intimate experience with them, and we're seeing a nice pickup in loans and other services and just the strengthening of the relationship there. So if you were going through a pandemic, you'd rather have had 47,000 really intimate interactions than just sitting back on your couch in your jammies. So we're watching it closely. We're measuring it closely. And when you think about the fact that we've got another 150,000 business customers with revenues less than $1 million that did not apply for a PPP loan, we're pretty energized about the progress we can make during this time period.

Got it. And as a follow-up for Paul. Paul, so if you do the math that you implied before, you get the starting point, I think, of around $500 million ex PPP NII, and then we'll grow it on top of that. My question is, presuming that's right, how do you even start to think about like what PPP lumpiness looks like in terms of reported NII as the next year progresses? Obviously, with more forgiveness with PPP 2.0 coming out, I presume there might be some left by the end of next year. But is it as much of a guessing game for you guys as it is for us at this point when you think about the out-year for that?

Well, we -- I think we provided some pretty good statistics on the first round of PPP and sort of the level of forgiveness that we saw in the first quarter. As we noted, there -- 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 30. That was down to $102 million with $26 million of sort of accelerated amortization associated with that. So we're trying to provide all the pieces so that you can kind of provide your own estimates on how that forgiveness is coming in.

I would say that fourth quarter was a good quarter kind of when you think that, that was the first quarter of forgiveness. My expectation is that we're going to see it -- we're going to see that continue into 2020 -- or 2021. So that is -- you can kind of get your arms around that. But to your point, the hard part will be the second round of PPP and sort of how fast those come on the books and then to the extent that borrowers meet the threshold, how quickly those are forgiven by the SBA. That is a lot murkier to me.

But all that being said, I think 2021 will be -- for the next several quarters at least, significantly -- 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 divide that by 4 and it's like $55 million associated with PPP.

Right. I was just taking it away from the FTE number. So I was just doing $557 million minus $55 million. So I think we're on the same page there.

Right. Got it. Yes.

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

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 if that would imply about a 3% or 4% growth rate. Is some of that attributable to some of the things that Scott talked about being delayed with all the technology spend that you guys have going on? Or are there other things there sort of juxtaposed against sort of the ongoing expense initiatives that you guys have in place?

Paul, do you want to speak to that and I'll...

Yes, yes. Sure. So yes, 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, the continued build-out of our technology stack is a really important part of kind -- of what we're doing and an important part of who we're going to. So that is a contributor certainly to the expenses we expect to see in 2021. Scott, would you add to that?

Yes. I just -- I think you got to have to look at the longer time period. You go back to 2014, 2015, and on an absolute basis, our expenses are up about 5%, not annually, just on 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're pretty encouraged about our ability to continue to keep expenses relatively flat. And because we're -- we just have this, again, huge bucket of smaller-type initiatives, like Paul referenced with automation, that are creating savings, not necessarily savings that any one -- particular one, "You go, wow, that's going to change the course of the company." But what changes the course of a company is when you have a culture of that continuous improvement and it's happening in little pieces all along the way.

Yes. I'd just -- I'd also just -- it was 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. It was better than expected probably. And so we did increase accruals for incentive compensation as a result of that. I mean that had about a $7 million impact in the quarter. We also had some additional costs, kind of professional fees associated with the PPP program. So there were -- not that it was a really messy quarter or a noisy quarter, but it was -- there were a couple of items in there that took expenses a little higher.

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

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 true? Or did you actually say what you think, the forgiveness may impact the first quarter of 2021?

Forgiveness will absolutely impact -- so sorry if I misspoke. I was trying to refer to the fourth quarter, and I think we've got some statistics in here in terms of the number of loans that were -- it was on the front page of the press release, right, a number of loans that were forgiven. My point is that we still have a lot of loans to work through the process. And so I'm expecting that to absolutely impact net interest income for the next couple of quarters.

And then PPP 2.0, as we like to call it, yes, that is sort of -- as I said earlier, an additional layer of complexity because I think the forgiveness period on those, by the time we sort of get through the midyear or possibly before -- I'm not sure, we may start to see forgiveness on that second round of PPP. And as Harris said in his prepared remarks, we have seen a lot of applications coming in on that second round of the program. And it's really important for us to be open and available to our communities to really help them out with the program, and so we're all very focused on doing that.

Okay. Great. Just -- and one follow-up question to Brad's question on the guidance on the adjusted noninterest expense. So in order to be -- the guidance of being flat in 2021, it's based on the 2020 adjusted net interest income that's on that slide. So it really just excludes the pension expense from there, right? So it's like $1.67 billion as the base to compare from?

Well, there's 2 ways to do it. One is to look at the fourth quarter because that slide is kind of fourth quarter to fourth quarter comparison. And I think what we're saying is look, the fourth quarter -- by the time you get to the fourth quarter next year, it's roughly consistent. The other thing, as we say on the slide and we're pretty explicit about that, we expect the full year '21 GAAP noninterest expense to be approximately stable with the fiscal year GAAP noninterest expense figure, which we said right on the slide is $1.7 billion.

Okay. So does that imply that there's some non-GAAP expenses, maybe another charitable contribution similar to what you had in 2020?

Yes. So not -- sorry, not to imply that. We're just trying to come up with -- there are a couple of different ways that you triangulate on the same number. We're expecting expenses -- adjusted expenses to be about $1.7 billion in 2021.

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

Just one follow-up question for me on the allowance for credit losses here, the $59 million decline related to portfolio changes. You've had a lot of loan growth here driven by municipal and owner-occupied over the past 12 months. Just kind of wondering, do we think about that -- a good component of that $59 million being sustainable as we head to the first half of 2021 in terms of reserve release?

So I'm sorry. I didn't quite catch the question. Could you repeat it?

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, 2 of the drivers. And just looking at growth over the past 4 quarters have been driven by municipal loans and owner-occupied CRE. So I'm thinking if that continues into 2021, do we see a good chunk of that $59 million reserve release, those -- or continue into the first half of 2021?

Well, I can't necessarily say that it continues, but what I -- you're picking up on the theme which is to the extent we are growing parts of the portfolio that are less risky, that absolutely has an impact on sort of the overall average allowance for credit loss relative to loans. The other really important factor though that I -- that we mentioned in the slide, and it's a really important factor I don't want to overlook, to the extent loan growth has slowed, the existing portfolio is shortening. And under CECL, one of the key sort of determinants of the allowance for credit loss is the lifetime of the loans. And as loans move through time, the probability of default decreases. So to the extent that we've got a shortening portfolio from an average life perspective, that also absolutely has an impact on the allowance for credit loss.

Well and certainly, the credit quality bar on that page, Page 15, Slide 15, assuming the pandemic -- we start to see a recovering economic activity, there's -- the credit quality improvement should be reflected there as well in the fourth quarter.

Thank you. And I'm showing no further questions. So with that, I'll turn the call back over to Director of Investor Relations, James Abbott, for any closing remarks.

Thank you, everyone. We appreciate you joining us for the 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.

Ladies and gentlemen, this concludes today's conference. Thank you for participating, and you may now disconnect.