Zions Bancorporation NA

NASDAQ:ZION

Earnings Call Transcript 2022-Q1

[Operator]

Greetings. Welcome to the Zions Bancorporation 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. [Operator instructions] Please note, this conference is being recorded.

I'll now turn the conference over to your host, James Abbott, Director of Investor Relations. You may begin.

[James Abbott, SVP, IR and Exterior Communications]

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 2 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 zionsbancorporation.com.

For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks; followed by comments from Scott McLean, our President and Chief Operating Officer. Paul Burdiss, our Chief Financial Officer, will conclude by providing additional detail on Zions' financial condition. With us also today is Keith Maio, our Chief Risk Officer and Michael Morris, our Chief Credit Officer.

We intend to limit the length of this call to one hour. During the question-and-answer section of the call, we request that you limit your questions to one primary and one follow-up question to enable other participants to ask questions.

I will now turn the time over to Harris.

[Harris Simmons, Chairman and CEO]

Thank you very much, James. We want to welcome all of you to our call. Beginning on Slide 3, we're showing some themes that are particularly applicable designs in recent quarters and some that are likely to be themes on 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 C&I 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 invented 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 a recent strength in loan growth, we expect that any near-term growth of deposits that would 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 or an increase of about three 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 4, we are generally pleased with the quarterly financial results, which are summarized on this slide. In as much as we'll touch on these items and subsequent slides, I'm going to move on, but you might find this summary useful.

We'll go to Slide 5. Diluted earnings per share was a $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 $0.28 per share positive variance. This can be seen on the bottom left chart.

Our provision this quarter improved our earnings per share by $0.16, whereas in the prior quarter, it's a provision of reduced earnings per share by $0.12. The other major factor that contributed to earnings was income from PPP loans, which was $0.12 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 6, 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 and of 8% over the past year and on a per share basis, it increased 17%. On Slide 7, we've included the 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 8, 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 remaining 25% of such customers to be converted to the new platform during May. The results of the upgrade reflected in the 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 in 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 and middle markets, 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. Zions' score is denoted within each chart, along with the average score of the peer group. Members of that peer group were 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 JP Morgan Chase, Bank of America, Wells Fargo and US Bank.

We're encouraged with such strength in these 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. Our strong showing is 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 solid increases in loan and deposit balance.

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?

[Scott McLean, President and COO]

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 end period -- 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 maturity of interest rate swaps.

Deposit costs remained 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 are in unchartered territory.

Moving to Slide 11, loans -- loans to businesses increased $1.1 billion with considerable strength in C&I and owner-occupied of nearly $800 million of link 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 '19, 2021 through December 2021. This growth was partially offset by contraction in our CRE term and energy portfolios.

Our load portfolios in most of our markets showed growth with strength and C&I 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 balances. 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 onetime 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 remained 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 experience 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 activeness 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 a 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 and 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, our digital banking replacement has gone, and the positive feedback we were 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 Burdiss.

[Paul Burdiss, CFO]

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 quarters yield. The annualized rate of principle 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 finance 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 helped 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 adds would add approximately $175 million of annual net interest income, or just under about $0.90 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 large -- is largely attributable to increased loans, increased securities and the 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 increased 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-Q 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 a 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 use 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 of that, we raised the probability of a recession in our assessment of the economy, largely due to changes in uncertainty about the spill-over effects of the war in Eastern Europe and because of the risk inflation may have on our borrower's 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 believed 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 one 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 of the CET1 ratio declined at 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 purchase 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.

[Operator]

[Operator instructions] Our first question is from Christ McGratty with KBW. Please proceed with your question.

[Christ McGratty, KBW]

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

[Paul Burdiss, CFO]

Sure. This is Paul. I'll start, 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 even without rate increases, we're expecting what we termed strong net interest, income growth, and as outlined in my prepared marks and on the slides and as we've noted previously, we're -- 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 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 current quarter. We're 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.

[Christ McGratty, KBW]

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

[Paul Burdiss, CFO]

Well, yeah, I think the key is that there -- 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 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.

[Christ McGratty, KBW]

Okay. Thank you.

[Operator]

Our next question is from Ebrahim Poonawala with Bank of America. Please proceed with your question.

[Ebrahim Poonawala, Bank of America]

Good afternoon.I guess just wanted to go back Harris to your outlook on loan growth 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 disrupt 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.

[Harris Simmons, Chairman and CEO]

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've had, we're seeing pretty solid growth in just in C&I, we show that excluding energy and we could see some growth in energy, but I think, just broad based C&I 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 5-1, 7-1, 10-1, adjustable rate mortgages that we are putting on the balance sheet and we've -- 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've 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, we're seeing it, we're pretty, pretty much seeing it across the entire Western United States. I think that, with respect to customer sentiment, supply chain issues and fed actions, there's nothing that maybe we've got probably a generation of people in this industry who'd never seen higher interest rates been around prior to 2007.

Yeah. But, if we were to see a 3.5% or 4% fed funds rate, 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 they -- 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 kind of the fed fund's future 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 all these supply chain issues have made it and the kind of the geopolitical risk in the world, I think probably and this is my own supposition, I know 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 saying when I think about what the next few quarters probably hold.

[Ebrahim Poonawala, Bank of America]

Got it. Thanks for that. And one quick follow up, maybe Paul for you. If I heard you correctly, the loan yield went down 13 basis points we saw LIBOR hit higher through the course of the first quarter. Just give us a sense of why the 13 basis points declined, was it a mix change in the loan book that led to that decline and just how much of the book is LIBOR versus prime rate?

[Paul Burdiss, CFO]

Yeah it was a -- there was a little bit of mix change involved in that. There were -- 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 rates that matured in the quarter that also adversely impacted that by a couple of basis points.

[Ebrahim Poonawala, Bank of America]

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

[Paul Burdiss, CFO]

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.

[Harris Simmons, Chairman and CEO]

One thing that's worth noting is 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.

[Ebrahim Poonawala, Bank of America]

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

[Paul Burdiss, CFO]

Sure. Thank you.

[Operator]

Our next question is from Ken Usdin with Jefferies. Please proceed with your question.

[Ken Usdin, Jefferies]

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, if you were talking pre rates of moderately increasing NII, do we think about that kind of core growth and then add let, 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 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.

[Paul Burdiss, CFO]

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 was held constant and the world, as you know, it just doesn't -- 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, 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 don't know certain 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 the timing of the rate increases and then the timing of the resets matter, some resets happen in the middle of the month, some happen sort of early or late. And so it's very hard to apply too much precision to the math. But I would just remind you that that 100 basis point figure that I gave you that approximately $175 million that is a full year impact for an immediate shock today,

[Ken Usdin, Jefferies]

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 23's numbers. I hear you might not be run rate. I guess, let me just ask you one more, just about the sensitivity then. So then what would be the -- what would be the factor that you'd be sensitive to like to worry about that would make, a 175 not play out. Like, is there one that could like swing the most of the factors that you ran through and thanks for the color Paul?

[Paul Burdiss, CFO]

The largest factor in interest sensitivity is always deposits, so its 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.

[Ken Usdin, Jefferies]

Okay. All right. Great. Thank you, Paul.

[Paul Burdiss, CFO]

Yeah. Thank you Ken.

[Operator]

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

[Jennifer Denba, Truist Securities]

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.

[Harris Simmons, Chairman and CEO]

Hi, Jen. Yeah. Michael Morris will take a swing it there.

[Michael Morris, Chief Credit Officer]

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 sort of 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 is 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

[James Abbott, SVP, IR and Exterior Communications]

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.

[Michael Morris, Chief Credit Officer]

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

[Jennifer Denba, Truist Securities]

Thanks so much.

[Operator]

Our next question is from John Pancari with Evercore ISI. Please proceed with your question.

[John Pancari, Evercore ISI]

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 basis points or so was from that. And then also do you happen to have the new money yields on new loan production that give us an idea where you're putting paper on today. Thanks.

[Harris Simmons, Chairman and CEO]

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

[John Pancari, Evercore ISI]

Okay. Thanks. And do you have the new money on yields?

[James Abbott, SVP, IR and Exterior Communications]

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 coupon or with the origination fees, you'd probably add 10 basis points to 20 basis points on top of that to get to a yield overall.

[John Pancari, Evercore ISI]

Got it. Okay. Thank you. And then on the comp and benefits line, I know up about 11% link quarter. I know you mentioned about, I guess it's about $25 million in seasonal factors, 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?

[Paul Burdiss, CFO]

Well, we've tried to provide on Page 7, there are several items in there and you -- of the slide deck that is you can 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, there, as I have mentioned previously, I think the largest risk that we have on expenses remains competition for people. And so that's, salaries and benefits and that's all incorporated into our outlook. But I just note that as a risk factor.

[John Pancari, Evercore ISI]

Okay. Thanks. And if I could just ask one more, in terms of your deposit expectation for stable up balances, can you just talk about what you're seeing in terms of deposit flows that's, where you think you could be seeing some pressures or you'd be getting 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?

[Scott McLean, President and COO]

Yeah, this is Scott McLean and we're 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 really pull investors into interest, 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 real movement. And so I think that's going to play out over the next, 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.

[Harris Simmons, Chairman and CEO]

Yeah. This is Harris. I think that to the first quarter is all, 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, with the fed kind of starting to during the balance sheet a little bit, what that's going to do across the industry. And so I personally, I do think we're kind of in uncharted waters and we could see a little bit of increase, but, I actually think that we could see some decrease across the industry. That would sort of logically make sense to me. But I don't think it'll be anything severe. And in some respects be a good thing just to get it -- start getting at the problem.

[Scott McLean, President and COO]

I would just add also that Harris noted earlier and I did as well, but 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 interest rate driven phenomenon and so we'll be watching that pretty closely.

[John Pancari, Evercore ISI]

Right. Okay. Thanks Scott.

[James Abbott, SVP, IR and Exterior Communications]

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.

[Operator]

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

[Peter Winter, Wedbush Securities]

Great. Thanks. I just wanted to follow up on Ken's question about the sensitivity of the a 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 interesting income. Can you just talk about the change and maybe the outlook for asset sensitivity going forward if you're going to dampen that?

[Harris Simmons, Chairman and CEO]

Yeah, I think what you're describing, which I had referenced in my prepared remarks is that our stated asset sensitivity has fallen by a 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 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 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 we -- 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 and net interests income and then the addition of duration in the form of securities and swaps.

[Peter Winter, Wedbush Securities]

Got it. Okay. Thanks a lot.

[Harris Simmons, Chairman and CEO]

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

[Peter Winter, Wedbush Securities]

Got it. Thank you.

[Operator]

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

[Brad Milsaps, Piper Sandler]

Hi, good evening. Thanks for taking my question. Paul just 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.

[Paul Burdiss, CFO]

So the first part of your question that when you talked about the $7 billions of liquid, you heard about kind of the money market investments, the cash on the balance sheet.

[Brad Milsaps, Piper Sandler]

Yes, sir. Yes.

[Paul Burdiss, CFO]

Okay. Well I'll start with the second question first. So, a couple of things to note about our investment portfolio. It is law 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 back 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 principal -- schedule principle and prepay repayments and principle payments. Because that portfolio as model 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 by additional investment securities. Incidentally, I'd 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, 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 a hundred basis points higher than they were in the first.

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 lot of words, hopefully that answers your question.

[Brad Milsaps, Piper Sandler]

Yes. Thank you very much. I appreciate it.

[Operator]

Our next question is from Gary Tenner from D.A. Davidson. Please proceed with your question.

[Gary Tenner, D.A. Davidson]

Thanks. Good afternoon. Obviously you guys aren't the first nor will we 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 or whether it was just simply getting in the way of a kind of snowball coming downhill at you on that topic, or any more overt pressure for regulators?

[Harris Simmons, Chairman and CEO]

No, I'd say no more overt pressure than you've seen in the media. But no inside baseball from regulators on that. I think it's -- and I encouraged our people. I said, look this shouldn't be driven by regulators. I don't think it's the providence 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 of about it competitively and 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 and so we're trying to be responsive to that. It's about that simple.

[Gary Tenner, D.A. Davidson]

Okay. Thank you.

[Operator]

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

[Steve Moss, B Riley Securities]

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 what your -- how you're thinking about risk here if cap rates shift higher?

[Harris Simmons, Chairman and CEO]

Yeah. The first part of that question about promotional pricing on owner occupied loans, we've been -- 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. And so we've kind of maintained the same spread versus the appropriate maturity swap.

But we have been raising our rates consistently, and 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 pen up demand and so we'll see that go through, but we'll probably slow down the promotional rate program.

[Steve Moss, B Riley Securities]

And then maybe just in terms of the risk appetite, just kind of curious as to how you guys think about if with potential prior cap rates, how to think about loan to value and structures.

[Harris Simmons, Chairman and CEO]

Well, it depends on the product type, but as you know, owner occupied real estate the underwriting is around the business first. There always two repayments 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 or 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 and all the asset classes and commercial real estate and we're not seeing a huge appetite. We're going to 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, as a 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.

[Steve Moss, B Riley Securities]

Okay. Thank you very much.

[Operator]

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

[James Abbott, SVP, IR and Exterior Communications]

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 Bancorporation. This concludes our call.

[Operator]

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