Zions Bancorporation NA

NASDAQ:ZION

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to Zions Bancorporation’s Third Quarter 2020 Earnings Results webcast. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session [Operator Instructions].

I would now like to hand the conference over to your host, Director of Investor Relations, James Abbott. Sir, please go ahead.

[James Abbott, Investor Relations]

Thank you, Latif and good evening, everyone. We welcome you to this conference call to discuss our 2020 third quarter earnings.

I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. Additionally, the earnings release, the related slide presentation and this earnings call, contain several references to non-GAAP measures.

We encourage you to review the disclaimer in the press release or the slide deck on Slide 2, dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to the statements made during this call. A copy of the full earnings release, as well as the supplemental slide deck are available at zionsbancorporation.com. We will be referring to the slides during this call.

Let me introduce our agenda today: First, Chairman and Chief Executive, Harris Simmons, will provide a high level overview of key financial performance; President and Chief Operating Officer, Scott McLean, will then provide comments on our recent strengths in certain strategic areas; Keith Maio and Michael Morris, our Chief Risk Officer and Chief Credit Officer respectively, will review the credit condition of the loan portfolio; finally, Paul Burdiss, our Chief Financial Officer, will conclude by providing an additional detail on Zions’ financial condition.

We intend to limit the length of this call to one hour. During the question and answer section of the call, we ask you to limit your questions to one primary and one follow up question to enable other participants to ask questions. With that, I will turn the time over to Harris Simmons.

[Harris Simmons, Chairman and Chief Executive]

Thanks very much, James. We welcome all of you to our calls this evening. Beginning on Slide 3, which is a summary of several key financial highlights. We just note that we were generally pleased with the overall results for the quarter. Earnings per share are back to a level experienced throughout much of 2019. Although, revenue has declined somewhat from what we experienced the.

Our non-interest expenses declined moderately, resulting in adjusted pre-provision net revenue, excluding the charitable contribution we made during the quarter of -- pre-provision net revenue of $297 million, which is actually somewhat stronger than the quarterly average in 2019. Additionally, the diluted shares have declined by about 17% from the levels in early 2019, which is the result of share repurchases prior to the pandemic and the expiration of warrants earlier this year.

We were resolved to enter whatever downturn was on the horizon with strong relative and absolute capital ratios. At 10.4% common equity Tier 1 capital and allowance for credit losses relative to loans at 1.9%, we still have one of the strongest capital ratios within the large regional bank space. Another major positive this quarter is the loan deferral and delinquency story, which Keith and Michael will address in greater detail shortly.

Now just to highlight that with what we are seeing in real time economic data such as credit and debit card spending, there is business and consumer sentiment indicators and relative linked quarter stability in loan rates within the industries most adversely affected by the pandemic. All of these indicators support our conclusion that our allowance for credit losses in the second quarter was at a appropriate level for -- at the end of the quarter was at appropriate level for the third quarter rather. That resulted in an provision for credit losses that was generally consistent with our net charge offs in the third quarter, a decline of 67% from the prior quarter.

Slide 4 shows our earnings per share. Both the second and third quarters had larger onetime items in the non-interest expense line that were very similar in size, $28 million in a pension termination charge in the second quarter and $30 million for a charitable contribution which we had noted earlier and that's made possible by our success with the PPP program in the third quarter.

The largest single difference between the second and third quarters was the provision expanse, which explains about $0.52 per share of the $0.67 differential. Fee income is also known as the meaningful contributing factor, which if one excludes the securities gains and losses and credit valuation allowance in both quarters contributed to an increase of about $0.06 per share.

Turning to Slide 5. Adjusted pre-provision net revenue was $267 million in the third quarter. And as noted if we further adjust this for the charitable contribution related to the PPP program of $30 million, it would have been $297 million or a decline of $3 million compared to the prior quarter. You can see the outsized provision’s relative effect on profitability in the chart on the right, especially when compared with provisions in periods prior to the pandemic.

On Slide 6, we highlight the balance sheet profitability metrics. The outlook for credit quality being more stable within the prior two quarters, profitability has improved to level that I wouldn't necessarily label as totally satisfactory but certainly much better than what we experienced in the prior two quarters.

With that I'm going to turn little bit of time over to Scott McLean, our President and Chief Operating Officer. Scott?

[Scott McLean, President and Chief Operating Officer]

Thank you, Harris, and good evening to everyone. Let me direct you to Slide 7. Over the last few months, we've spoken frequently about our success with the small business administration Paycheck Protection Program. As noted on this page, we ranked as the ninth largest originator of PPP loans in the country. Yet when measured by deposits, Zions is the 37th largest financial institution in the country.

Our share of PPP originations was 3.6 times our deposit market share and 25% to 50% of the units or dollars, depending on what you're measuring of the three largest participants, which were banks that are approximately 35 times our size. This significant outperformance was a function of our history as the bank for small businesses, and our ability to combine the efforts of 1,500 plus customer facing bankers with best in class technology and workflow processes. This effort helped stabilize more than 47,000 businesses that employed hundreds of thousands of workers. If measured by the number of loans rather than by balance, about 75% of these loans were less than $100,000 in size.

So now we're engaged in the forgiveness aspect of the program. At this point, more than 10,000 customers, representing about $1.7 billion of volume, have applied for forgiveness. We have a highly controlled process for handling the forgiveness process and we've engaged PricewaterhouseCoopers to assist us. We've also chosen to be an active participant in the mainstream program. Although, initial volume is just light as has been reported across the country.

From a financial perspective, the short-term benefit of the PPP program will serve as a meaningful cushion against the abrupt decline in interest rates and the economic volatility caused by the pandemic. As a longer term benefit, we have more than 14,000 new to bank PPP customers with whom our affiliates are laser focused on building deep relationships. Particularly timely with this calling effort is the introduction of what we call treasury select, which is a set of small business treasury management products, offering a simplified version of the nationally recognized treasury management products we have provided to larger businesses for years.

Perhaps of greater importance is the 33,000 plus existing customers who received a PPP loan, most of which were previously deposit only customers with whom we can now build an even more meaningful relationship. This focused calling effort by our bankers is also being reinforced by a branding campaign that highlights our PPP results, as well as our longstanding commitment to small businesses.

Moving on to Slide 8, shifting gears a bit. Few years ago, we set out to significantly expand our capabilities and profitability in the residential mortgage area. As a result of this enhanced focus, lower interest rates and our ability to gain market share, 2020 mortgage production has been considerably stronger than the year ago period. You can see this on Slide 8.

Slide 8 notes several key successes related to the rollout of what we refer to as zip mortgage, our digital customer facing application process. This digital application will verify employment, pull internal revenue service information and pull all of our customers’ bank statements. The three largest frustrations among mortgage applicants. This new process has also allowed us to reduce our turn times by 25% and improved our customer service levels.

Originations exceeded $1 billion in the prior quarter. And despite the moderation in the refinancing wave in the third quarter, we still funded more than $920 million of residential mortgage loans in that quarter. Correspondingly selling income is serving to offset pandemic related fee declines, fee softness, that we are experiencing in other areas. Credit metrics remain consistent with our traditional practice and they are provided on the bottom of the slide. Residential mortgage lending continues to be a natural for us, particularly given our large small business customer base.

[Harris Simmons, Chairman and Chief Executive]

Thanks very much, Scott. And before we turn the time over to Keith, I just like to take just a moment to express my thanks on behalf of all of our shareholders to Ed Schreiber, who's been our Chief Risk Officer for past number of years and who retired on October 1st. Ed was really instrumental in helping us to strengthen a risk program and he's just done a phenomenal job and we really want to wish him all the best. He's going to continue to do a little bit of consulting for us for the next few quarters, but he'll have a lot more time to snowboard and do some things that he loves to do.

He's succeeded by Keith Maio, who many of you know, Keith served for several years as the CEO of our National Bank of Arizona operations. And for the past few years has been our Chief Banking Officer. And he's really just an exceptional banker and will do a wonderful job in this new role as our Chief Risk Officer. So Keith, let me turn a few minutes over to you.

[Keith Maio, Chief Risk Officer]

Thank you, Harris. And I'll begin my comments this evening on Slide 9. Because of the relatively minimal credit risk within PPP loans and because prior quarters would not be comparable, we have presented the credit quality ratios excluding PPP loans.

Classified loans this quarter increased to 3.4% of total non-PPP loans from 3.1% in the prior quarter. And nonperforming assets, including loans that are 90 days past due increased 5 basis points to 79 basis points of non-PPP loans and other real estate owned from 74 basis points in the prior quarter. About one-fifth of the nonaccruals are within the energy sector, which is a similar proportion to a prior quarter. And hotels, restaurants and recreational businesses also accounted for about one-fifth of nonaccrual loans, up from about 10% from nonaccruals in the prior quarter. The remainder of nonaccrual loans is distributed across various industries.

Net charge offs bumped up in the third quarter to 43 basis points from 26 basis points last quarter. About one-third of gross charge offs were attributable to the energy industry. Retail businesses were also a significant contributor to this quarter’s charged offs. As we review classified nonaccrual and delinquent loan ratios, it's worth repeating what we've said in various investor meetings, including our Investor Day in February.

In the past, Zions generally experienced much lower loss rate relative to problem loans than most of our peers. Like most other banks, we underwrite loans based upon stressed cash flow assumptions but we typically secure the loan with collateral. For example, real estate or other business and personal assets. We also require personal guarantees on most of our loans and many borrowers have external sources of capital that is available to support their investment during a period of difficulty, particularly if the problem is considered to be transitory.

During the global financial crisis, the value of collateral plunged. But in this pandemic, many assets are perhaps somewhat softer, but generally holding up. And in the case of residential property, the values have generally increased. The dark blue columns on the chart have been quite small relative to the classified ratios. And when compared to other large regional banks, Zions typically screens in the best or lowest loss severity quartile.

I might also highlight the time series of the chart to help put this recession in perspective. We've included the average of those same credit ratios in the global financial crisis, ‘08 and ‘09 and during the oil and gas downturn, ‘15 and ‘16. Although, we are not yet declaring mission accomplished with the strong risk management infrastructure, the preparations we made to prepare the portfolio in advance for a downturn. And the significant support of the government relief provided to consumers and businesses, the credit deterioration has been much less than we might have expected it to be. When comparing the classified loan ratio during the global financial crisis to the level today, we are experiencing only about one quarter of the level of problem loans.

Moving to Slide 10, we and most other banks engaged very early in granting payment deferrals and payment modifications. We did not broadly reach out to customers with an offer to defer a payment but we granted such deferrals liberally if we were requested so by a customer. At June 30th, loans on payment deferral status were 6.3% of non PPP loans. While at September 30th, that same ratio was just 0.6%. Less than half of which were redeferrals.

The next question one might ask is how are delinquencies now that loans have come off deferral. On the right side of the chart [showing] total loans that are delinquent by 30 days or more, which declined two tenths of a point since June. Of these loans that had been granted a payment deferral at one point and has since come off deferral, only 1% of those or slightly more than $40 million are delinquent in their payment by 30 days or more. We attribute part of this to risk management practices we've employed and also to our early outreach calling program.

Next, I'll turn the call over to Michael Morris, our Chief Credit Officer. Michael?

[Michael Morris, Chief Credit Officer]

Thanks, Keith. I'll start on Slide 11. We introduced an earlier variation of this in April, which we've further refined the definition of what is now included and we've reviewed the performance of these subindustries, but this is relatively the same chart that you've seen in prior quarters. The high risk COVID categories.

The industries represented here are the ones that have the greatest risk of default with the weighted average risk rate of 9.2 on a 10 scale with worse grades than 10 being regulatory grade that you would expect, special mention substandard nonaccrual doubtful. But I would like to reemphasize a point that Keith has made about collateral. The probability of default grade is not necessarily predictive of the loss given default.

As you can see in the bottom four lines in the chart on the right side of the page, the collateral coverage is good for this four plus billion of loans, with 98% being covered by collateral most of the time by real estate with roughly a 52% median loan to value ratio with only 3% of the loans having LTV ratios of greater than 90%.

Slide 12 shows the same tree groupings that we've highlighted on the previous slide in a time series. The top left chart shows loan balances in columns with the weighted average risk grade shown in the three lines, where the elevated risk portfolio experienced general stability since June, which you can see on the light blue line where it does show stability and flattening out in Q3. The oil and gas portfolio experienced a deterioration of two tens of a point on risk grade. The rest of the portfolio experienced general stability.

It's worth noting that the probability of default between grades is not linear. For example, the probability of default for grade 10 loan, the worst pass grade in our gradient range, is significantly greater than a grade nine loan, et cetera. The elevated risk portfolio has a weighted average risk grade of 9.2, while the other portfolio, the other being the rest of the commercial and consumer book, has a grade of 7.0. The loan grades shown here do not reflect the loss given default estimations. Although, the combination of the two gives one of the more significant drivers of the allowance for credit loss.

The top right chart shows the trend in classified and non-accrual loans with the classified ratio being the larger number and the non-accrual ratio being the smaller number within each bar. The relative stability of the other loan’s non-accrual ratio, which again represents 87% of the total non-PPP loan portfolio, is encouraging. On the bottom left, you can see that utilization rates of the various portfolio segments. We continue to be encouraged with the credit implications of the COVID-19 elevated risk line utilization rate falling yet again, down to 29% from 34% last quarter.

Finally, in the bottom right, you can see the net charge offs related to these groups. The oil and gas portfolio tends to experience elevated charge offs and in some cases later recoveries. And that is the case for a few charge offs that we've seen in the recent past, including situations where we receive equity for debt that may be forgiven or charged off. I would note that we reduced the allowance for credit loss on this portfolio, the oil and gas portfolio in the third quarter, relative to the prior quarter due to continued reports from line bankers, credit partners and borrowers that the companies are faring better than previously expected.

There are several factors that contributed to that decision, beginning with roughly 25% to 30% rebound in the price of oil across the futures curve, as well as spot price improvements. Favorable developments with wells that have been shut as many are back into production and a number of prepackaged bankruptcies as the second liens and senior debt will be whittled away through the prepackaged bankruptcy and will end up with borrowing basis in the upstream oil and gas portfolio that are totally conforming.

Not shown on the page but perhaps worth noting are delinquencies. Keith already highlighted the substantial improvement in delinquencies. I might just add that the loans within the COVID-19 elevated risk category had a somewhat higher 30-day or more past due delinquency rate than the overall portfolio at about 1.1%. Additionally, we feel that the small and micro size business loans within our portfolio are weathering the storm reasonably well. For example, commercial loans with commitments less than $50,000, which by unit count are significant in the company have a delinquency rate of just 106 which is about the same as it was a year ago, which was 102.

So taking a step back and considering all the factors as a whole, from the improvement in delinquencies and deferrals, the relative stability within the COVID-19 elevated risk grade portfolio, the outlook for oil and gas loans improving for reasons cited previously, good levels of consumer and commercial spending as compared to the year ago level to list few, we’re more and more comfortable with the credit situation than we were just a few months ago. Still, we will remain vigilant and disciplined as always.

So I'll now turn the time over to Paul Burdiss, our Chief Financial Officer. Paul?

[Paul Burdiss, Chief Financial Officer]

Thank you, Michael and good evening, everyone. I'll begin on Slide 13, which details our allowance for credit losses. On the top left, you can see the recent trend in our ACL. The total ACL was $917 million at September 30th. Excluding the allowance on PPP loans, the ACL was $915 million or about 1.9% of non-PPP loans.

On the right side of Page 13, 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. The first bar represents the change in forecast category, the $50 million increase from the prior quarter is our estimate of the change in credit losses due to modest changes in the economic forecast employed in our loss models.

Credit quality factors represented by the middle bar include risk grade migration and specific reserves against loans, which when combined add $24 million to the ACL when compared to the prior quarter. Finally, portfolio changes driven by non-PPP loan balances declining, the aging of the portfolio and other similar factors generated $71 million reduction in the ACL. Ultimately, the ACL was relatively stable when compared to the prior quarter.

Slide 14 shows an overview of net interest income and the net interest margin. The chart on the left depicts recent trends in both. The net interest margin in the white boxes have compressed in the current quarter relative to the prior quarter. This is attributable primarily to loan yields moving lower, which adversely affected the margin by 12 basis points, reflecting the downward shift across the yield curve over the past several quarters and a greater weighting or mix of lower yielding PPP loans relative to total earning assets.

The second most significant factor in the linked quarter margin compression was the composition and yield of the money market and securities portfolio. Due to the increase in average deposits of $3.5 billion and with average loans only increasing $725 million, the surplus cash went to paying down borrowings and increasing short-term investments, which increased $1.5 billion from the prior quarter. And yield of just 25 basis points, the increasing levels of short-term investments, has a dilutive effect on the net interest margin but not necessarily on net interest income.

Net interest income contracted by $8 million or 1% on a linked quarter basis. With the average earning asset balance increasing by 3%, the decline in net interest income was largely driven by the decline in loan yields and the change in earning asset mix described earlier. Notably, the $6.8 billion in PPP loans, on average, contributed $52 billion of interest revenue in the quarter.

As an important note, late in the quarter we modified outstanding PPP loans to a term of five years, which is consistent with the terms of PPP loans made later in the process. This action will reduce the yield on PPP loans to about 1.7% in the fourth quarter and beyond and less, and this is an important consideration, the loans undergo a forgiveness or other prepayment event.

As a reminder, the net fees attached to PPP loans serve as the mechanism to augment the PPP loan yields beyond the 1% stated coupon and as such, are amortized over the life of the PPP loans. Upon maturity or forgiveness, these fees will accelerate into net interest income. As Scott illustrated earlier, measured by volume, we have received an application or forgiveness on about 25% of our PPP loan.

Slide 15 highlights loan and deposit growth and breaks them down by both rate and volume. Relative to the pirate quarter, average PPP loans increased $1.8 billion as depicted by the lightly shaded bar, while average non-PPP loans declined $1 billion or 2%. Because the PPP loan yield was only 3% in the third quarter, this remixing of the portfolio contributed to linked quarter loan yield compression.

Shifting to the chart on the right and funding. Average total deposits increased 5.6% over the prior quarter not annualized. Many banks including Zions are reporting relatively strong deposit growth. One could speculate that this may be attributable to the significant fiscal and monetary programs designed to support the economy during the pandemic. The cost of deposits declined to 11 basis points from 15 basis points in the prior quarter.

Turning to Slide 16, our balance sheet sensitivity has increased as benchmark interest rates have fallen. We are comfortable with the increase in rate sensitivity, because we believe the risk to lower interest rates is limited. The recent increase in short-term investments may be deployed into longer duration securities over the next several quarters, which would likely impact overall balance sheet sensitivity.

The chart on the right show the interest rate reset profile of our loan portfolio and include additional detail on the interest rate swap book. On the lower -- on the upper right the volumes, maturities and associated fixed rates for the swaps used to hedge our floating rate loans are shown, while on the bottom right where you see a highlight of our loan repricing characteristics. Loans with longer maturities are expected to reprice downward if the current interest rate environment does not change.

On Slide 17, customer related fees increased $9 million from prior quarter, reflecting increased residential mortgage retail deposit and card activity. Noninterest expense, shown on Slide 18, increased to $442 million in the third quarter. However, as discussed elsewhere after normalizing for these $30 million charitable contribution, the total non-interest expense was $412 million in the quarter. Year to date on this basis, adjusted noninterest expense is running about 4% lower in 2020 when compared to 2019. This view is intended to illustrate that we have been able to effectively manage costs to help offset the decline in revenue while continuing to invest in our business, as Harris noted at the beginning of the call.

While we have suspended forward looking guidance given the nature of the current operating environment, we are encouraged by the continued strength of our balance sheet and have been impressed by the creativity and resiliency demonstrated every day by our colleagues, our customers and our communities.

This concludes our prepared remarks. Latif, please open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Dave Rochester of Compass Point. Your line is open.

[Dave Rochester, Compass Point]

You guys have some great deferral trends this quarter and you really didn't move the reserve around that much. So just wondering where the reserve sat on that COVID at risk bucket at this point that 8.4% of loans. And I know Moody's includes more stimulus in at least one of their scenarios. So just wondering if you guys assume more stimulus as well. And if we don't get that, if you have a sense for what the sensitivity is to the reserve you have on that bucket, or at least the PPP customers in that bucket or overall that would be great.

[Michael Morris, Chief Credit Officer]

The reserve is fairly substantial on the COVID-19 portfolio so we didn't move that down much. The PPP loans don't carry much of a reserve at all. We don't consider there to be a lot of credit risk on that book given the federal guarantee, the100% guarantee.

[Dave Rochester, Compass Point]

I was just talking about the customers that you already have loans outstanding, that also have PPP loans for you guys if there were any sensitivity there if you don't get to re up on the PPP, or if they don't get more funds through that if there's any sensitivity there?

[Michael Morris, Chief Credit Officer]

Well, there's definitely a correlation, there will be a correlation. And on the larger exposures, I would not expect there to be a huge correlation. On the smaller exposures, like some of the small business and micro loans that we talked about earlier, there will definitely be a relationship if stimulus 2.0 doesn't deliver to the small business owner.

[Dave Rochester, Compass Point]

And in terms of quantifying that at risk reserve ratio, do you happen to have what that is? I know it’s substantial but just curious how large that is.

[Michael Morris, Chief Credit Officer]

I think we'll have to get back to you on that.

[Harris Simmons, Chairman and Chief Executive]

I think it's useful enough that if we take the kind of the smallest of those loans under $50,000, we have -- and it's relatively -- it's very small outstandings. It's about $165 million in outstanding exclusive of some card balances but those balances are also very small. So it's just not a big portfolio. When you get a little larger you get it under 250,000, we’ve got a little over a billion dollars outstanding. So as you get, as the business get a little larger the exposure gets larger. But I think that's really these micro businesses that are probably most at risk and it's not a big exposure for us. And so far the delinquencies, even after most of them would -- have been expected to exhausted their PPP funding, are actually holding in really well compared to where they were even just a year ago. So I'd agree with Michael. There will be some impact but I don’t think it's going to be particularly severe for us.

[Dave Rochester, Compass Point]

And maybe just one more quick one on the margin. You got securities reinvestment rates here at the 1.2% level. You’ve got a little chunk of loans here that's still scheduled to reprice this year and more next year. I was just wondering do you have enough leverage on the cost side? So I know you can reduce CD costs but can you do anything else on the borrowings? Can you do anything else at the interest bearing core deposit side to offset that pressure? Or do you think that the NIM just inevitably has to move lower from here ex-liquidity and the PPP fees that are coming?

[Paul Burdiss, Chief Financial Officer]

On the liability side, there's limited opportunity to continue move that down. There's a little bit of opportunity on deposit rates, there are CDs you can see on the on the book. There are CDs that have term rates attached to them that have been put on over the course of the last year. Those will run off and out over the course of time. And then obviously, we will limit our borrowing because we're in sort of a net over funded position and that will reduce the overall cost of borrowing. But really the repricing of assets I would expect the repricing of assets to exceed the repricing liabilities. And we've been talking about margin compression here for the last several quarters and that we're seeing that now and I would expect to continue to see that at least in the near term.

[Operator]

Thank you. Our next question comes from the line of Ken Zerbe of Morgan Stanley. Your line is open.

[Ken Zerbe, Morgan Stanley]

Maybe just staying on that point. What is the average yields on the new loans that you've actually added in 3Q and could that new loan yield compress further from here?

[Paul Burdiss, Chief Financial Officer]

Well, I'm not going to quantify the new loan yields necessarily, but the yield is a function of two things, rate and spread -- rate and credit spread. And given where the yield curve is today, the only thing that's going to create additional compression on loan yield will be either a change in credit spread by the market repricing credit spreads lower or by the composition of our portfolio change.

So for example, you've seen over the course the last five years, commercial real estate maybe loans have grown a little slower and -- municipal loans have grown a little faster. And there's a differential in pricing there as there's also a differential in risk. But by enlarge my personal expectation is that I don't think that new loans being put on are going to look a lot different from loans that may have been added this quarter. PPP loans being the exclusion. And so I think what you're going to see the margin compression is really going to be driven by the change in yield associated with older longer term fixed rate loans running off and being replaced by newer loans. So it's really a function of the flatness of the curve.

[Ken Zerbe, Morgan Stanley]

No, I understood, Paul. And I guess that's the reason for the question, which we’re trying to get a magnitude of how much the yield differential is between that existing portfolio and then the new loans.

[Paul Burdiss, Chief Financial Officer]

And what I'm saying is that it's hard to be very specific about that, because there are so many other things that can impact that. I'm hopeful that we can get back to a day soon where we can start to provide some forward-looking guidance. But the environment right now is just to uncertain.

[Ken Zerbe, Morgan Stanley]

Got it. Maybe asked a different way. If we just look at total -- the decline in loan yields on Slide 15, it looks like it was down about 15 basis points. I guess some of that’s the PPP, and I'm sure -- it looks like it's going to compress further with the change that you made to the PPP program. But if we think about 15 basis points a quarter, is that a reasonable decline in loan balances or loan yields going forward?

[Paul Burdiss, Chief Financial Officer]

Well, as you said, and I think we do -- Page 17 of our press release, I think we do a pretty decent job of really trying to break out and provide as much granularity as possible for investors to know and understand how the portfolio yield is changing. And so you can see that our commercial loans, for example, excluding PPP are down less than 10 basis points quarter-over-quarter from $405 million to $396 million. So the PPP loans clearly have had an outsized impact on yield. And I would encourage you to look at that page, Page 17, because I think you can get a pretty good indication of how loans have changed last quarter.

What's going to happen is that over time you're going to see fewer and fewer loans repricing in any given quarter. And I think we do a decent job on Page 16 of the earnings slide showing the maturity profile of our loan portfolio so that you can get a feel for kind of how many of those loans are repricing in any given period over the course of the next five years or so. Hopefully, that's helpful.

[Ken Zerbe, Morgan Stanley]

It is very helpful, yes. And if I can just change topics really quick, but one last question. It looks like expenses, if we exclude the contribution, did run a little bit higher than recent history. How much of that relates to the additional PPP expenses and should it remain at that level going forward?

[Paul Burdiss, Chief Financial Officer]

Well, as I said in my prepared remarks, if you exclude that -- if you look at adjusted expenses and you look at 2019 and 2020 and you exclude the $30 million associated with that charitable contribution, our expenses are down 4% year-over-year. And I think that's largely, I think that's pretty indicative of the current expense run rate.

[Harris Simmons, Chairman and Chief Executive]

And I’d just note we did spend a little more in the quarter. We mentioned we've done kind of a branding campaign. Just trying to reinforce in businesses mines that we're a good bank for business and we spent about $5 million in the quarter on that campaign. So that produced a little bit of additional bump that I wouldn't expect you'll see every quarter.

[Operator]

Thank you. Our next question comes from the line of [Peter] Pancari of Evercore ISI. Your question please.

[John Pancari, Evercore ISI]

It's John Pancari. So a question on the loan growth front. I know you've given us a lot of color on the NIM side. Just trying to back into how this could impact spread revenue. So on the loan growth side, we saw some pretty good declines on end of period balances in most areas. And just given the backdrop right now around commercial demand, I guess just could you help us think about how you expect loan balances to traject from here? Is it fair to assume ongoing declines?

[Scott McLean, President and Chief Operating Officer]

We're going to continue to see softness in total loan balances that shouldn't be a big surprise with the level of economic activity. And quite frankly. it's what you would expect during this time, as you know, obviously. And so the weakness, the softness we're seeing in C&I if you look back at -- that slide is in the appendix and it's Slide 22. The weakness we're seeing in C&I is just what you would expect -- revenues are down for our C&I clients and consequently, their working capital requirements are less and they're borrowing less, building liquidity.

And so really, it's just softness across the C&I spectrum but we're also seeing softness in one to four family and HELOCS, our residential products, principally because of the refinancing boom that's going on. So I think you're going to continue to see it at sort of the rates we're experiencing today. And then when the economy does start to turn whenever that is I think we're going to see a pretty nice rebound with a fair amount of pent-up activity coming back. I think people are ready to get back to work.

[John Pancari, Evercore ISI]

And then separately on the credit front and looking at charge-offs. We saw pretty good increase this quarter. And I just want to first confirm, is it fair to assume that we're still going to see upside pressure. I'm assuming you would expect that here. And then if you have maybe any color on when do you think charge-offs could peak. If you could just give us a little bit of insight there, whether you've factored that into your outlook and when that could be.

[Michael Morris, Chief Credit Officer]

We had several credits that kind of tipped over in Q3 that were already a little troubled. You could say the same about a few industries like the restaurant industry going into COVID, already had some stress. So in some of our numbers are some of those credits that were already in workout. And then the market softened in the secondary market so the note sale world changed pretty dramatically. Can't really predict what we're going to see going forward. You don't know. But the bulk of net charge-offs, I don't think we're going to see this year.

[Paul Burdiss, Chief Financial Officer]

And I think it's fair to say that there's nothing material that's kind of living on the radar screen in terms of larger credits that I'm aware of anyway, Michael, that they're likely to create a big dent in the fourth quarter.

[John Pancari, Evercore ISI]

And related to that, just my last question, is it fair to assume then that given all that you factored into your reserve. And is it fair to assume those charge-offs rise that we should see some reserve releases as we go or at least declines in the overall reserve balance aside from any new reserves for loan growth?

[Harris Simmons, Chairman and Chief Executive]

As you know, the reserve under in CECL land is based on so many sort of various items, all other things equal, generally speaking, our reserve is set to our best expectation for where we think losses are going to occur over the course of the life of the loan portfolio. And so without a change in expectations or outlook, it would be hard to speculate on when we may or may not see reserve growth or releases.

[Operator]

Thank you. Our next question comes from the line of Steve Moss of B. Riley Securities. Your question please.

[Steve Moss, B. Riley Securities]

Just following up on credit. I believe you guys mentioned earlier that there's a high proportion of NPLs are tied to hotels and restaurants. Just wondering was that a similar driver in the criticized loans as well?

[Michael Morris, Chief Credit Officer]

I wouldn't say one industry stands out over the other outside of those two, hospitality. And full service restaurants, quick service restaurants are faring quite well. But I would not say that there are other industries that really stand out. They do in terms of criticized and classified but in terms of forecasting net charge-offs, there really aren't other industries that jump out other than the COVID-19 heightened risk industries that we pointed out on these slides.

[Steve Moss, B. Riley Securities]

And in terms of just curious -- what are you seeing for activity and business activity at the hotel -- motel exposure you have?

[Michael Morris, Chief Credit Officer]

Well, I'll speak generally to what we're hearing from the street, not necessarily our exposure. I mean, our exposure is quite a mixed bag. We have some high end. We have some low end. We have hospitality loans that are mostly in our footprint, if not almost exclusively in our Western footprint. And we're seeing leisure and tourism pick up a little bit. We're seeing some of the hotels that we have in the recreational markets. And I'll call those markets like Park City, Zion National Park, Scottsdale, a few select markets in Colorado and the mountains, some coastal, hospitality, doing well. The business and convention hotels are struggling. Occupancy rates getting back to the 30%, 40% range, where the tourism is up somewhat back to pre-COVID, in many cases, 60% occupancy, 70%.

[Harris Simmons, Chairman and Chief Executive]

I might just jump in, I read in the newspaper yesterday that visitor totals at Zion National Park in September were higher than they were a year ago, which I found quite amazing. But people are returning to kind of outdoor, kind of the outdoors these recreation areas, just to underscore what Michael is saying.

[Steve Moss, B. Riley Securities]

And then one last one just on capital here, a little bit of an uptick in your CET1 ratio again. And I know you're getting deposit growth and so your leverage ratio -- plus with fee leverage ratio a little tighter. But just kind of what are your thoughts about the potential for share repurchases in the future.

[Harris Simmons, Chairman and Chief Executive]

Paul, do you want to -- I mean, I'll just say, we're in favor of them. Well, yes. I mean we're -- it maybe still a little early, but I'm hoping that if we can demonstrate, the credit remains in pretty good shape. And we can keep PPNR in relatively decent condition, I hope we'll be back in a position to be able to resume that as we get into next year. But it's too early to probably to call that yet.

[Paul Burdiss, Chief Financial Officer]

And I'll just add, as I think you know, we are rerunning our models with the stress tests provided to the CCAR banks. And so stress testing is a very large component of our capital management exercises. So we're going through that. But I think we all feel pretty good about the level of capital that we have. And to the extent the economic outlook becomes more certain, back to John's question about the allowance for credit losses, there's a lot of good things will happen as the economic outlook becomes more certain and I would expect that to include share buybacks. As Harris said, we're all in favor of them when the time is right.

[Operator]

Thank you. Our next question comes from the line of Ken Usdin of Jefferies. Your line is open.

[Ken Usdin, Jefferies]

Paul, I just wanted to follow-up on the restriking of the PPP loans. So if presuming that there is -- if you didn't have forgiveness coming, is the only delta that we need to do is just to take that [303] yield, change it to [17] and then have to restrike the amortization schedule out to -- was it five years instead of the two years. So can you help us frame what that looks like in terms of just the contribution from PPP before you get to forgiveness in the fourth quarter maybe versus that [52] you saw in the third?

[Paul Burdiss, Chief Financial Officer]

Yes. I'm not sure what the [52] is, I'd have to have a reminder on that. But you're right, a little over 3% to about $170 million in the fourth quarter and under GAAP as a level yield sort of accounting. So I would expect those -- all other things equal, those loans to be yielding $170 million for the remainder of their lives, again, before forgiveness. And we outlined at the footnote of one of our pages, I don't remember which one. But in our slide deck, we actually footnote that there's basically $140 million of capitalized fees that are going to come into income over the life of the loans. And as I said in my prepared remarks, to the extent we do experience loan forgiveness or prepayments, that would accelerate the revenue attached to that loan into current quarter net interest income.

[Ken Usdin, Jefferies]

So the $141 million is just the -- that's all that's left, or is that just the -- is that the all that's left, if we just do the 4.5% over the book?

[Paul Burdiss, Chief Financial Officer]

That's a September 30th number, and that's sort of the fees net of costs that are capitalized against the loan. And again, the purpose of that is to augment -- the coupon is 1%. So the way the program was designed it was designed to augment the yield.

[Ken Usdin, Jefferies]

So the yield would be in addition to the $141 million?

[Paul Burdiss, Chief Financial Officer]

The 1% coupon would be in addition to the $141 million that would amortize in. Yes.

[Ken Usdin, Jefferies]

And just one long question on the CRE side. And interesting that the CRE business is actually growing for you guys and for a lot of other industry participants. Just wondering what you're seeing in terms of, is there a little bit of back to banks? Is it that projects are getting reopened that might have been quiet? Just any color on what you're seeing inside the CRE business and if you expect that to continue. Thank you.

[Michael Morris, Chief Credit Officer]

A lot of what we have seen have been construction loans that have converted to term. We're not actively out looking at originating large CRE term loans today and we haven't been for several quarters. It's mostly conversion. And there's the occasional acquisition that will finance. But the CRE activity has been fairly strong relative to the other food groups of C&I and consumer, just overall.

We're monitoring collection rates of the different asset classes. We're seeing positive performance in multifamily. CRE retail is a challenge but we haven't seen material problems arise yet. Collection rates are on the way up in CRE retail. Industrial is in favor. We've seen quite a few industrial transactions. In fact some of the growth that we've seen in CRE has come from the industrial asset class. And of course, there are certain asset classes that we're pausing on, hospitality being probably the most notable. Is that helpful?

[Ken Usdin, Jefferies]

Very much. Thank you very much.

[James Abbott, Investor Relations]

Latif, this is James again. If we can -- I'll just announce that we are about five minutes out from the end of the call. And so we're going to shift over to what we call eleventh round and so we'll just take one question from each of the next participants and see if we can get through the rest of the queue. Thanks.

[Operator]

Our next question comes from the line of Steven Alexopoulos of JPMorgan. Your question please.

[Steven Alexopoulos, JPMorgan]

To follow-up on the questions on loan resets for Paul. For the loans resetting in 2021, what's the average yield these loans are resetting from? Thanks.

[Paul Burdiss, Chief Financial Officer]

I was thinking you were talking about PPP. You're actually talking about our loan yield…

[Steven Alexopoulos, JPMorgan]

Yes. Its not PPP.

[Paul Burdiss, Chief Financial Officer]

I don't have -- in front of me, I don't have the loan yield time series. I think we have to go back and get that for you. I don't have that off the top of my head.

[Operator]

Thank you. Our next question comes from the line of Brock Vandervliet of UBS. Your line is open.

[Brocker Vandervliet]

Just in terms of capital, kind of philosophically, we've climbed the mountain, so to speak, with CECL, continuing to build capital 10.4% CET1, all that's looking good. On the back side of this, where do you kind of place the bogey of the appropriate capital level whether it's CET1 or some other metric.

[Paul Burdiss, Chief Financial Officer]

As we have tried to describe before we entered into 2020. The level of capital that we're striving to achieve is really heavily predicated on the outcome of our loss models, which is why we generally publish the results of our stress test so that investors have some insight into that primary mechanism for managing capital. But I would say coming into this year, we also said that we expected to hold capital at a level that was kind of at or above peer medians with the concept that we believe we've got, on average, sort of lower balance sheet risk.

And if we can demonstrate lower risk in a modestly level -- a higher level of capital, we think that creates a really good balance for shareholders. So I don't know that that's changed other than the environment, there's a lot more uncertainty -- uncertain but I feel really good about how our balance sheet was positioned coming into this environment.

[Operator]

Your next question comes from Jennifer Demba of Tryst Securities.

[Jennifer Demba, Tryst Securities]

Can you just talk to us about what kind of trajectory and improvement you're seeing in customer and mortgage fees so far in the third quarter? Are you seeing further improvement -- on the fourth quarter, I'm sorry, are you seeing further improvement versus the third quarter on a monthly basis?

[Scott McLean, President and Chief Operating Officer]

And we did see in the third quarter as we noted a nice improvement in retail and business service charges as well as card. And so year-over-year and experienced a pretty significant decline as has the industry. But for the first time we saw little bit of a rebound in both retail and business service charges and in cards. So that's encouraging. And in terms of how we're progressing so far here in October, it's too early to really provide any color on that.

[Operator]

Our next question comes from the line of Erika Najarian of Bank of America.

[Erika Najarian, Bank of America]

One question, conversations with investors prior to your reporting earnings indicated that the underperformance of the stock really had to do with PPNR concerns and where that would reset to rather than credit. And I guess, I just wanted to go back to some of the margin questions that were asked earlier in the call. As we think about 2021 and normalized ROEs and ROAs for Zion and no change in the interest rate environment. It seems like, Paul, you indicated that the NIM could go down to 2.9% ish in the fourth quarter, just based on doing quick math on your exchange with Ken Usdin. And then obviously, there's a little bit of repricing still. I mean, where does the NIM bottom from here? Is it without any change, major change in liquidity profile and interest rates and growth? Does it bottom around the 2.8%, 2.9% range.

[Paul Burdiss, Chief Financial Officer]

Erika, I can't be very specific, obviously, about where the NIM sort of bottoms out. But I think we have been telegraphing for some time that we have been expecting margin compression and we've seen that. The mitigant will be balance sheet growth and loan growth. And clearly, we saw that with PPP loans that grew pretty substantially here through the first couple of quarters. And as a result, we've had a pretty decent cushion to what might otherwise have been a modestly declining sort of PPNR number. So the key for us is being focused on loan growth and balance sheet growth. And also at the end of the day, as you know, it's a volume and rate conversation. And to the extent the interest environment is so difficult it's incumbent upon us to really offset that with loan growth where possible.

[Harris Simmons, Chairman and Chief Executive]

I might just add. I mean, I think there's also the very real possibility that you're going to see around two of PPPs in a smaller scale and for more impacted industries. But that could provide sort of another kind of a booster shot and prolong this somewhat. But the PPP at the end of the day is a temporary phenomenon and underlying that is this very real pressure and I think that's going to be with us for a little while.

[Operator]

Gentlemen, are there any closing remarks at this time.

[James Abbott, Investor Relations]

Thank you, Latif. This is James. And due to time constraints, we're going to have to end the call at this time, but we very much appreciate all of you joining the call today. There are two or three of you that I will attempt to get in touch with shortly after this call that were left in the queue.

And if you have any additional questions outside of that, please contact me, James Abbott, at either my e-mail or by phone, listed on our Web site. We look forward to connecting with you throughout the coming months, and we thank you for your interest in Zions Bancorporation. With that, this concludes our third quarter earnings call. Thank you.

[Operator]

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