Ladies and gentlemen, thank you for standing by. And welcome to the Zions Bancorporation’s Fourth 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. .

Thank you, Andrew, and good evening. We welcome you to this conference call to discuss our 2020 fourth quarter and full year earnings. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially.

Additionally, the earnings release, the related slide presentation and this earnings call contains several references to non-GAAP measures.

We encourage you to review the disclaimer in the press release or the slide deck on slide two dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call.

A copy of the full earnings release, as well as the supplemental slide deck are available at zionsbancorporation.com. We will be referring to these slides during this call. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide a high level overview of key financial performance.

President and Chief Operating Officer, Scott McLean, will provide comments on our recent strengths in certain strategic areas. Finally, Paul Burdiss, our Chief Financial Officer, will pro -- will conclude by providing additional detail on Zions’ financial condition.

With us also today on the call are Keith Maio and Michael Morris, our Chief Risk Officer and Chief Credit Officer, respectively, who will be responding to questions you may have regarding credit quality. We intend to limit the length of this call to 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. I will turn the time over now to Harris.

Harris?.

Thanks very much, James. We want to welcome all of you to our call this afternoon. Beginning on slide three, we are very pleased with the overall results of the quarter.

One very significant driver of the increase in earnings per share from the prior quarter was the reduction in the allowance for credit loss, which when coupled with only 13 basis points of annualized loan losses relative to average non-PPP loans, resulted in a negative provision for credit losses of nearly $70 million.

While we continue to expect that credit losses will remain elevated relative to our long-term trend level and there’s continued uncertainty with respect to the ultimate impact of borrowers from the pandemic, we have been very encouraged by the resiliency of a great many of our customers..

James we may have lost Harris there. Okay, so….

where Harris was -- where he has left off, it looks like we lost Harris’ audio..

Yeah. I’d be happy to do that. I think we were on slide four. Yeah. Okay. This is Scott McLean and I will pick it up over here, and if Harris reengages we will slot him back in. So on slide four, quick summary of some key performance indicators for the full year as compared to the prior two years.

Although, net income, return on assets, and earnings per share declined, you can see on the chart on the top right the pre-provision net revenue was fairly stable and would have increased slightly by about $11 million if we had excluded the Charitable contribution of $30 million that was related to our success with PPP Round 1.

Similarly, the efficiency ratio would have been 58.3% in 2020 if not for the Charitable contribution, a modest improvement to the level achieved in 2019..

Hey, Scott, I am back. My apologies. I lost my connection there..

Terrific. I will give the ball back to you, Harris. We are on slide five..

Perfect. On slide five. Thank you for filling in. Slide five is a depiction of earnings per share with a significant increase in EPS in the fourth quarter of 2020, largely attributable to the change in provision expense. Turning to slide six, adjusted pre-provision net revenue was $280 million in the fourth quarter as noted.

The prior quarter was adversely affected by the $30 million Charitable contribution, which would have made the prior quarter’s number $297 million. The moderate decrease from the prior quarter was largely attributable to a slight decrease in revenue as well as an increase in expense, which Paul will provide detail in his prepared remarks.

On slide seven, we highlight the balance sheet profitability metrics. Obviously, the negative provision has resulted in a level of profitability that is not sustainable in the long run. Similar to our view, the depressed profitability in the early part of the year was also not likely to persist.

As we enter 2021, I am encouraged with the progress made on the technology front that has enabled us to do things faster and at a lower cost. We are optimistic that non-PPP loan growth will resume as we get further into 2021 as the economy further strengthens after a challenging year.

We remain sanguine that some of our initiatives, the seeds of which were planted years ago, will bear more fruit including mortgage banking, wealth management, and loan syndications. The next section of slides will be covered by Scott McLean, and so, I will turn it back over to Scott..

Thank you, Harris, and good evening again to everyone. Let me direct you to slide eight. Over the last few months, you have heard us talk about our success with Round 1 of the Paycheck Protection Program.

Given the negative economic impact of the pandemic and the low interest rate environment, our oversized success with PPP 1.0, as we describe it, has resulted in a meaningful cushion for near-term earnings, as well as creating new business opportunities with our core small business customer base.

Additionally, our new future core system has proven to be helpful in handling this significant PPP volume in several meaningful ways, including its API enablement. We are now engaged in the forgiveness aspect of the program, approximately 10,000 customers, representing $1.3 billion of volume have received SBA forgiveness approval.

Of note, over 80% of these loans are less than $150,000 and on average in excess of 95% of the loan balance has been forgiven..

Thank you, Scott, and good evening, everyone. Thanks for joining us. I will begin my comments on slide 11. Generally we have presented the credit quality ratios in our earnings presentation materials excluding PPP loans. As Harris noted, classified loans and non-performing loans were somewhat stable with the prior quarter.

Overall, net charge-offs were 13 basis points and for the year just 22 basis points. About four-fifth of the fourth quarter and one-third of the full year net charge-offs were attributable to the oil and gas portfolio. Consistent with our credit loss allowance of $104 million against that portfolio, we do expect energy loan charge-offs in the future.

However, with the improvement in commodity prices and some of the restructurings that have taken place, our credit loss reserve on this portfolio reflects an improving outlook. On the left side of slide 12, we engaged very early in granting payment deferrals and payment modifications to our borrowers as the pandemic worsened.

At December 31st, loans on payment deferral status were 0.5% of non-PPP loans. The right side of this page shows loans that are over 90 days past due. Please note, at the bottom of these bars are statistics regarding total loans that are delinquent by 90 days or more and still accruing.

This has recently remained relatively steady between 2 basis points to 3 basis points of non-PPP loves. Advancing to slide 13, the industries represented here are those which we believe to have the greatest risk of default in the current environment.

As shown on the right side of the page, the collateral coverage is excellent for this $4 billion of loans, with 98% being covered by collateral often by real estate. Within these loans, collateralized by real estate, the median loan-to-value ratio is 53% and only 3% of these loans have LTV ratios greater than 90%..

Certainly. Your first question comes from the line of Erika Najarian with Bank of America..

Hi. Good afternoon, everybody. Thank you for the prepared remarks and the financial outlook.

As we think about a more upbeat tone on the future, as we think about net interest income and the cadence of it between 4Q ‘20 and 4Q ‘21, should we expect that net interest income would have bottomed in the fourth quarter of ‘20 ex any PPP loan income?.

Well, I will take that Erika. I will start by saying that you saw in the outlook that what we said was that we expect net interest income in the fourth quarter of 2020 to be sort of modestly above what it is today in, I am sorry in 2021 relatively -- modestly above where it is today in 2020.

So, I can’t kind of officially call that a bottom, but I think what we are saying is excluding PPP, we expect it to be growing modestly from here..

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

What -- and you have significant capital levels even relative to peers, what would you need to see to buy back stock in the first quarter, which the Fed is allowing for your larger and arguably more complex peers?.

Well, I think we just want to continue to see a little more clarity with respect to how this pandemic will affect borrowers. There’s been a lot of people who have thought that we may have a little bit of a delayed impact that we might see more impact coming in 2021.

I think we are growing increasingly optimistic as evidenced by the reserve release you saw from us in the fourth quarter, but we still think there’s still risk out there. And so, we will be cautious, but I expect that we will absolutely be hoping to look at share buybacks as we get into 2021..

Thank you..

Thank you. And your next question comes from the line of Dave Rochester with Compass Point..

Hey. Good afternoon, guys..

Hi, Dave..

Yeah. On the NII discussion, you guys mentioned new loan yields were still maybe a little bit below book yields or maybe it was roll-off yields. Just wondering what how large that differential is at this point.

And then just regarding the NII guidance, how much securities growth are you guys assuming in that?.

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

The -- as it relates to securities growth, we are being -- we have a lot of cash on the balance sheet today. You saw that impact our net interest margin. We are working -- the whole finance team, the treasury team are working really hard to sort of actively manage that cash.

But we also are mindful of a view that the economy could really begin to engage in the second half of the year, and so given the very flat nature of the yield curve, and I would say, a general expectation internally that things will really improve as we are starting to really improve as we get into the next half of this year, we want to be careful about putting on too much duration with that incremental cash that’s been added.

So the securities -- it’s a long way of saying the securities portfolio may grow, but you won’t see it grow anywhere close to the amount of excess cash that’s been put out over the course of the last quarter..

Yeah. Okay. Great.

And then maybe just switching to loans real quick on your outlook for loan growth, how much more runoff are you guys expecting at this point in the energy books? And then bigger picture, as you think about C&I demand, maybe small business loan demand going forward, does the PPP program, does that impact what that loan demand could be for that subset of C&I going forward, just given that they are now flushed with cash and will be probably spending some of that in the near-term?.

Dave, this is Scott McLean. I will speak to the first part of that. I think -- well, maybe all of that. The energy outstandings are actually about -- well, I am not sure how we reflected it here, but there’s about $100 million of PPP loans in the energy outstandings.

And so, excluding PPP energy outstandings are around $2.1 billion or so, and that could go down a little bit further, but I do think if oil and gas prices stay where they are and maintain some stability there, I think you are going to see increased drilling and you will see greater utilization of lines of credit. So, I don’t anticipate it.

It could go down the next quarter or two quarters some, but I think we will start to see utilization pick up. And I do think that for small business lending in general, the -- our borrowers, they are building liquidity, and we have seen that.

I think we have seen it across the country, and they still have a healthy proportion of their PPP fundings to rely on as well.

So, I think it’s going to be the broader economy starting to show real improvement, and we will start to see lines of credit being utilized at a greater pace as working capital builds up again and as people start to adjust to the post-pandemic environment..

I’d also just note that the while they have cash to obtain forgiveness, it has to be used actually it is really intended to be used to offset the specific expenses and to keep employees on payrolls at a time when revenues have been seriously impacted.

So, I think for a lot of these businesses those they will use it that way and as we get further into the year the economy really does rebound in a strong way. I think I can just see them pick up and start to borrow for longer term kinds of investments in building their businesses.

So that would certainly be the hope and my intuition is that that’s going to happen..

Thank you. Your next question comes from the line of Ken Zerbe with Morgan Stanley..

Great. Thanks. I guess not don’t get too deep in the weeds here, but just come back here NII guidance. What is the right base on which to gross least slightly increasing? I mean, the way I read it is that you got the $550 million on slide 16 right now.

You subtract out the $26 million, which is the accelerated piece, but does your guidance -- how do you account for the non-accelerated PPP amortization? Should we back that out as well or how are you thinking about it?.

Yeah. Hey, Ken. This is Paul. I will take that. I -- sorry if I wasn’t clear, what we are trying to provide is a kind of an outlook on net interest income excluding PPP. So the way I would think about it is, I would look at the average PPP balances in the third fourth quarter, which I think are $6.3 billion.

Those yield of 3.5% and so you completely exclude that you come up with a sort of multiply that out and exclude that from the net interest income number, you come up with net interest income excluding PPP. That’s the base that I think..

Got it. Okay. All right. I will do the math if you don’t have that right off. I guess, maybe my follow up question is in terms of a second PPP facility, can you just talk about the pluses and minuses of whether Zions could potentially be as active as it was in the first program? I suspect it’s smaller.

I am kind of curious how -- what your involvement might be in the second facility? Thanks..

Only I can say….

Yeah..

I think there’s less funding for it. So it is a smaller program and it’s really largely targeted and our businesses that were particularly hard hit. So I think nationally you will see the numbers are down in this round. It will also be down because in terms of the dollar volumes, because the maximum loan amount has been reduced to $2 million.

But that said, I think, you are going to see a lot of participation by businesses on the smaller end of the spectrum. And we certainly geared up and we are very engaged and I think to expect that we will show very well again in the second round..

Thank you..

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

Good afternoon. On the back to the buybacks question there, just want -- I know you mentioned that you might be interested in a position to resume buybacks pending later in the year, pending Board approval and regulatory approval.

Is this -- are the regulators in any way keeping you from resuming buybacks right now?.

Well, we have to, we are a little bit differently situated from many of our peers and that we are publicly traded national bank as you know. And so there’s an application that we make to the SEC for a permanent reduction in capital and that’s what it takes to buy back shares.

I fully expect that the -- that there will be reasonable and thoughtful about this. As I look at the backdrop, I -- what I see is this is a company that has a strong capital relative to peers. We have what’s been a very solid credit quality certainly relative to peers here over the last few quarters.

I think that probably in a relatively gets better as we get through some of the energy issues that have increased the charge-offs and still leaving us with very low charge-offs, but absent the energy charge-offs it looks truly great. And then you have -- we -- I don’t expect we are going to see a huge loan demand.

We expect that we are going to see loans growing, but probably not at a pace that’s going to absorb a lot of earnings. And so, I think, the conditions were going to be pretty good for us to be pretty actively engaged in the buyback shares as we get into the year or quarter two.

We just want to make sure that we are being sensible about it and we will have that conversation with the regulators and our Board, but I think all the conditions are going to be there for recently active buyback program..

Okay. All right. Thank you. That’s helpful. And then separately, I guess, why don’t you give us an update on the core systems conversion. Any change in your updated expected timeline and any change in terms of the cost trajectory involved in the whole conversion, has that materially changed at all? Thanks..

Thank you for that question. We are -- pandemic there’s no question had an impact on our future core project and it just all projects in general. I mean there was a month there where it just was difficult to continue at the pace we were going and the level of effectiveness. And so but we got through that. We have adjusted to it.

And so originally we were going to have released three to deposits release come out in 2020 kind of a phased rollout in early and kind of early to mid-2022. That probably has been delayed by six months and we will be continuing to evaluate that. We still have time to make up time between now and then.

But pandemic is definitely caused a brief delay in it. And in terms of -- in terms of costs..

I just..

Go ahead, Harris..

Scott I was also going to make this note that, the other -- another issue that anybody would face with a project like this is a, I was going to say reluctance. It’s just wouldn’t be smart as you get further into the fourth quarter to -- we are not going to do it deep into the fourth quarter.

So there’s kind of a window we are going to have to hit and we hope that we will be able to hit that. But that’s something to keep in mind as well..

No. That’s a great point. And in terms of kind of the ultimate cost and the impact on P&L, our P&L expenses over the next two years to three years and then for the period after go live, it’s not materially different. So hopefully that helps..

It does. All right. Thank you..

And I would tell you that, our level of excitement about it continues to grow, because when we get to that place, we will have a five-year to eight-year, maybe 10-year head start on virtually every other major bank in the country.

And it really being on our new system during PPP 1.0 absolutely made a difference in the level of volume we were able to do..

Thank you. And your next question comes from the line of Jennifer Demba with Truist Securities..

Thank you. Good evening. Your net charge-offs have remained very contained this year. I am wondering if you are expecting them to rise in ‘21 and ‘22, and where they -- when you think they could peak? And if you could give us just a little more detail on what you are seeing in those more at risk portfolios? Thanks..

Hey, Michael. It’s -- Jennifer, it’s Keith. Let me jump in and I will turn over to Michael maybe for a little more detail..

Sure..

A couple of things. One we are still not seeing any significant negative impacts in terms of charge-offs to the portfolio on those COVID related industries and we get into some a little bit of detail about what those are, but we are not seeing any impacts there.

And I think this comments been made a couple of times, as we get through this next round of stimulus to help people get around the bend and we get to vaccination, which I know a lot of businesses are looking forward to. We just -- we don’t see that in the future, but we also don’t know what the economy holds.

So as it relates to that portfolio, we haven’t seen losses materialize. We don’t -- didn’t see them certainly this quarter. We don’t see them in the short-term. And in terms of the other portfolios as mentioned earlier, a substantial portion of the charge-offs this past year and certainly this past quarter in the oil and gas portfolios.

We don’t see any significant charge-offs looming in the next couple of quarters in those portfolios. But Michael let me turn it to you real quickly and see if you have something to add..

Well, I think, you covered it well Keith. I would only add that I think the unit count around charge-offs might rise a little bit. I am not sure about the net charge-off ratio up or down, but we do expect to see some small business failures, although, small business is holding up very well.

Mostly because I think our borrowers are disciplined, they are resilient and have more cash potentially than we thought they did and now with this stimulus and vaccine and immunity around the corner I think, Keith said on ahead..

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

Thanks so much..

Thank you..

And your next question comes from the line of Steven Alexopoulos with J.P. Morgan..

Hi, everyone. I wanted to first ask a question….

Hi..

… on the strong deposit growth again this quarter. I know 4Q is typically a window dressing quarter, but with no new government stimulus in the fourth quarter.

Where is all of this incremental liquidity coming from, are customers just holding cash and how much risk is there if rates rise that that could potentially be siphoned out pretty quickly?.

Well, I will start, it’s somewhat speculative. As we have referenced certainly last quarter and I think this quarter, we believe that the significant fiscal and other stimulus programs are creating a lot of liquidity in the system that’s washing up on bank balance sheets including our balance sheets.

As I said earlier on in their response to a question, we have a lot of cash on the balance sheet today, but we are being really mindful about how far out the curve we put that cash to work, because we do think there’s a reasonable chance that by the end of the year some significant part of that may have let the bank.

But that -- I will say that is somewhat speculative..

Okay. And just….

This is Scott..

Hi, Scott..

Hey. Clearly, our DDA, the total deposit ratios continued to increase. And so there will naturally be probably a drop in that.

But if you look at our -- that mix of non-interest-bearing to total deposits over a very long period of time, it has been very resistant to periods of increased rates and I think that -- people have figured out that’s largely a function of our really small customer or business customer client base, small operating accounts.

It just hasn’t been that susceptible to right chasing -- basis point chasing..

Okay. That’s helpful.

And maybe for a follow-up, regarding NIM and the pressure you guys have from securities and fixed rate loans resetting lower, maybe for Paul, how much steep this in a curve would we need to see to more fully alleviate that pressure? And if we get to I don’t know 2% on the 10 years that’s gone like, where does that need to be for this as not to worry about this anymore? Thanks..

It’s hard for me to be really specific about that.

I will say the part of the curve that we are particularly focused on is kind of a three-year to five-year plan in the curve, because that’s where at the margin, that’s kind of where we are investing our discretionary sort of part of the balance sheet, the investment portfolio to the extent we are mitigating or attempting to mitigate the interest rate risk through swaps, that’s kind of where that occurs.

And to the extent we have got fixed rate loans they sort of happen around that that part too. So, it’s hard for me to be really specific around what that looks like. Although I wouldn’t target it to the 10-year, I would probably target it to sort of the three-year to five-year part of the curve..

Okay. Fair enough. Thanks for taking my questions..

Thank you..

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

Thanks. Good afternoon. I guess you had a pretty sizable reserve release this quarter. I appreciate the color in the slide deck on the moving parts for the quarter. Given the positive commentary in terms of PPP 2 vaccinations, et cetera.

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

Well, I will start with that. The -- as you know, under CECL, we need to create lots of credit losses that consistent with our best expectation for the life of loan losses in the book and that’s -- that --that’s the $835 million we set in the fourth quarter.

We also noted that, as the portfolio migrates as risk ratings, as risk ratings improve, as the economic forecast improves to the extent it does, we saw that this quarter to the extent that those things continue sort of over and above where our current expectations are for improvement.

And those are the things that would lead the allowance for credit losses down. And likewise, a reversal of fortunes on any or all of those could be an offsetting factor on the allowance..

I will maybe just add to that, that I think, I can speak for all of us here in saying that the fourth quarter charge-off experience was -- I mean we were elated by it. Certainly, not what we were -- would have expected in a pandemic. I think it’s a little early to know yet whether that was an aberration.

But if we see a continuation of that trend in the first quarter and then on into the second quarter, I mean, I think, absolutely you are going to see some reserve releases. It will simply change our outlook as to what the damage is going to look like.

And then I -- on the stimulus that’s out there, the vaccine, everything that, I think the real test is going to be in the actual experienced charge-offs that we see here this quarter and maybe even into the second quarter..

Okay. Thank you for that.

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

Yeah. This is Paul. That time deposit number largely is sort of a broker CD. So it’s sort of one of many sources of funding for us. So, historically, we have utilized and tried to spread out our sources of funds including broker CDs.

Given the massive amount of liquidity that’s washed of the balance sheet over the last nine months, we are actually just letting that portfolio run off. So I would -- and it’s a relatively short portfolio. So I would expect as evidenced by the change in the balance.

Of course, I would expect that to continue to run-off over the course next several -- of course over the next several quarters and frankly not be replaced..

Thank you..

Thank you..

Thank you. And your next question comes from the line of Ken Usdin with Jefferies..

Hi. Thanks, guys. On the PPP 1.0 slide, I am just wondering, have you tried to or start thinking about sizing that new to bank customer opportunity? It’s just interesting to see how much existing customers have with the bank, but I don’t want to presume that it’s a similar size opportunity.

Do you have a way that you are starting to kind of think through that and how much uplift you might get on top of what you have seen already come in through new to bank customers?.

Yeah. It’s a great question. And we are -- we can absolutely see everything those 14,700 approximately new to bank customers who are doing.

We are tracking their utilization of their DDA account very carefully, because that indicates that, that’s a 30% number that they are actively moving their relationship and so that’s progressed from obviously zero to 30% in a short period of time. So we are having lots of interaction.

This is -- we know these -- we can count these customers in ones not in hundreds and thousands. We are keeping track of the calling effort on them through our contact management system. Our CEOs and our bankers are highly focused on it.

And so it’s hard to know where it will end up, but we are encouraged by the early loan growth and new services growth that we see there. And, but I will tell you it’s always more fun to talk about kind of new customers, it’s a little sexier.

But the approximately 33,000 existing customers, we probably didn’t have that closer relationship with some of those and so this gave us a chance to have a really intimate experience with them and we are seeing a nice pick-up in loans and other services and just a strengthening of the relationship there.

So if you were going through a pandemic, you would rather have had 47,000 really intimate interactions than just sitting back on your couch in your jammies. So we are watching it closely. We are measuring it closely.

And when you think about the fact that we have got another 150,000 business customers with revenues less than a $1 million that did not apply for a PPP loan, we are pretty energized about the progress we can make during this time period..

Got it. Thanks. And a follow up for Paul, Paul, so if you do the math that you implied before you get the starting point I think around $500 million ex-PPP NII and then we will grow it on top of that.

My question is presuming that’s right, how do you even start to think about like what PPP lumpiness looks like in terms of reported NII as the next year progresses.

Obviously, with more forgiveness with PPP 2.0 coming out, I presume there might be some left by the end of next year, but is it as much of a guessing game for you guys as it is for us at this point when you think about the out year for that?.

Well, we -- I think we have provided some pretty good statistics on the first round of PPP and sort of the level of forgiveness that we saw in the first quarter. As we noted that -- and as you know there’s a 1% coupon attached to those loans. We had $141 million of unamortized sort of net fees at September 30.

That was down to $102 million with $26 million of sort of accelerated amortization associated with that. So we are trying to provide all the pieces it. You can kind of provide your own estimates on how that forgiveness is coming in. I would say that fourth quarter was a good quarter kind of when you think that that was the first quarter of forgiveness.

My expectation is that we are going to see it -- we are going to see that continue into 2020 or 2021. So that is, you can kind of get your arms around that.

But to your point, the hard part will be the second round of PPP and sort of how fast those come on the books and then to the extent the borrowers meet the threshold, how quickly those are forgiven by the SBA. That is a lot murkier to me.

But all that being said, I think, 2021 will be for the next several quarters at least significantly impact, net interest income will be significantly impacted by the existence of the PPP program. And your math is approximately right. I came up with a slightly different answer when I did this a couple of weeks ago.

If you look at the yield $6.3 billion and 3.5% yield for a full year that’s $220 million and so I divided that by 4 and it’s like $55 million associated with PPP..

Right. And I was just taking it away from the FTE number. So I was just doing 557 minus 55. So I think we are on the same page there..

Right. Got it. Yeah..

Yeah. Okay. Thanks a lot, Paul..

Okay. Thanks..

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

Hey. Good evening..

Hi, Brad..

Hey. Just wanted to follow up on expenses, you guys have done a great job for several years really keeping a really tight lid on expenses. It looks like the guidance is for flat expenses at least on a GAAP basis in 2021. However, I know in 2020 you had about $60 million related to the donation and I think the termination of the pension.

Just kind of curious that that would imply about a 3% or 4% growth rate, did some of that attributable to some of the things that Scott talked about being delayed with all the technology spend that you guys have going on, are there other things there sort of just opposed against sort of what the ongoing expense initiatives that you guys have in place?.

Paul, do you want to speak to that?.

Yeah. Yeah. Yeah. Sure. So, yeah, as we reported, we expect kind of GAAP expense to be roughly similar. You did point out some unusual items in 2020. But as we look ahead to 2021, that continue to build out of our technology stack is a really important part of kind of what we are doing an important part of who we are going to.

So that is a contributor certainly to the expenses we expect to see in 2021.

Scott, would you add to that?.

Yeah. I just -- I think you got to have to look at the longer time period. You go back to 2014, 2015 and on an absolute basis our expenses are up about 5%, not annually just absolute basis from that prior time period. And so we are continuing to invest in technology.

But at the same time, you saw us reduce our FTE count by 5% in the fourth quarter of last year and you can absolutely see that in our FTE numbers.

So we are pretty encouraged about our ability to continue to keep expenses relatively flat and because we are -- we just have this again huge bucket of smaller type initiatives like Paul referenced with automation that are creating savings.

Not necessarily savings that any one particular one you go wow that’s going to change the course of the company. But what changes the course of a company is when you have a culture of that continuous improvement and it’s happening and little pieces all along the way..

Yeah. I just -- I -- I’d also just -- I said earlier but just to remind. Expenses in the quarter were impacted by the fact that credit quality is reflected in the charge off number is better than expected throughout. And so we did increase accruals for incentive compensation as a result of that and that had about $7 million impact on the quarter.

We also had some addition costs kind of professional fees associated with the PPP program. So there were not is a really messy quarter or a noisy quarter but it was so, there were a couple of items in there that took expenses little higher..

Great. Thank you, guys..

Thanks..

Thank you. And your next question comes from the line of Brian Klock with Keefe, Bruyette, Woods..

Hey. Good evening, guys. And real quick before the bell, two follow-ups for you Paul. On the PPP and the forgiveness, you mentioned that -- you gave some color on the first quarter.

Are you saying that that was the color on the first quarter of forgiveness, so that was the fourth quarter of 2020 that what did you actually say what you think the forgiveness may impact the first quarter of 2021?.

The forgiveness will absolutely impact. So very if I misspoke. I was trying to refer to the fourth quarter and I think that we have some statistics in here in terms of the number of loans that were on the front page of the press release, right, number of loans that were forgiven.

My point is that we still have a lot of loans to work through the process and so I am expecting that absolutely impact net interest income for the next couple of quarters.

And then PPP 2.0, as we like to call it, yeah, that is sort of, as I said earlier, an additional layer of complexity, because I think the forgiveness period on those, by the time we sort of get through midyear or possibly before, I am not sure, we may start to see forgiveness on that second round of PPP.

And as Harris said in his prepared remarks, we have seen a lot of applications coming in on that second round of the program. And it’s really important for us to be open and available to our communities to really help them out with the program and so we are all very focused on doing that..

Okay. Great. Just one follow-up question to Brad’s question on the guidance on the adjusted non-interest expense. So the -- in order to be the guidance of being flat in 2021, it’s based on the 2020 adjusted net interest income, that’s on that side.

It’s a really just excludes the pension expense from that, right? So it’s like a $1 billion six years, seven years the base to compare from?.

Well, there’s two ways to do it. One is to look at the fourth quarter, because that’s why this is kind of fourth quarter to fourth quarter comparison. I think what we are saying is look at the fourth quarter, by the time you get the fourth quarter next year it’s roughly consistent.

The other thing as we say on the slide and we are pretty explicit about that do we expect the full year 2021 GAAP non-interest expense to be approximately stable with the fiscal year GAAP non-interest expense figure which we say right on the slide is $1.7 billion..

Okay.

So does that imply that there is some non-GAAP expenses maybe another Charitable contribution similar to what you had in 2020?.

Well, yeah, so not -- sorry, not to imply that. We are just trying to come up with that. There are a couple different ways that you triangulate on the same number we are expecting expenses -- adjusted expenses to be about $1.7 billion in 2021..

Got it. Okay. That’s helpful. Thank you very much. Thanks for your time..

Yeah. Yeah. Thank you..

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

Good afternoon. Just one follow up question for me on the allowance for credit losses here.

The $59 million decline related to portfolio changes, maybe how a lot of loan growth here driven by municipal and owner occupied over the past 12 months? Just kind of wondering do we think about that a good component of that $59 million being sustainable as we head to the first half of 2021 in terms of reserve release?.

I am sorry. I didn’t quite catch the question.

Could you repeat it?.

Oh! Sure. So just on slide 15 with the $59 million reduction in the ACL from portfolio changes, you guys mentioned there are new loans and portfolio mix as two of the drivers. And just looking at growth over the past four quarters have been driven by municipal loans and owner occupied CRE.

So I am think if that continues into 2021, do we see a good chunk of that $59 million reserve release in the first quarter core continue into the first half of 2021?.

Well, I candidly say that it continues, but what I can -- you are picking up on the theme, which is to the extent we are growing parts of the portfolio that are less risky that absolutely has an impact on sort of the overall average allow for credit loss relative to loan.

The other really important factor though that I -- that we mentioned on the slide and it’s a really important factor, I don’t overlook to the extent, loan growth has slowed, the existing portfolio is shortening and under CECL one of the key sort of -- key determinants of the allowance of credit loss is the lifetime of the loans.

And as loans move through time the probability of default decreases. So to the extent that we have got a shortening portfolio from average life perspective that also absolutely has an impact that may allow for credit loss..

Well, certainly, the credit quality bar on that page, page 15, slide 15, assuming the pandemic we started to see a recovering economic activity, there’s -- net credit quality improvement should be reflected there as well. That’s what I….

Thank you very much..

…saw in the fourth quarter..

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

Thank you everyone. We appreciate you joining us for the fourth quarter earnings call for 2020. We look forward to seeing you and speaking with you in the near-term. If you have any follow-up questions, I will be around this evening and tomorrow and so forth to take any of those questions.

Please just reach out to me at the number at the top of the press release. Thank you and with that we are adjourned. Thank you..

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