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Zions Bancorporation (NASDAQ:ZION)
Q1 2020 Earnings Call
Apr 20, 2020, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to Zions Bank Corporation's first-quarter 2020 earnings results webcast. [Operator instructions] Please be advised that today's conference may be recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, director of investor relations, James Abbott. Sir, please go ahead.

James Abbott -- Director of Investor Relations

Good evening, and thank you, Latif. We welcome all of you to this conference call to discuss our 2020 first-quarter earnings. For our agenda today, Harris Simmons, chairman and chief executive officer, will provide a brief overview of key strategic and financial performance, after which Ed Schreiber, our chief risk officer, will review the condition of the loan portfolio, the allowance for credit losses and the way in which we are engaging with our customers during this period of disruption. After Ed's comments, Paul Burdiss, our chief financial officer, will provide additional detail on Zions' financial condition.

Finally, Scott McLean, president and chief operating officer, will provide some brief detail regarding our SBA lending activities, progress on our technology initiatives and other areas of progress. Additional executives with us on the broadcast today include Michael Morris, our chief credit officer. Referencing Slide 2, I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck dealing with forward-looking information, which applies equally to the statements made during this call.

A copy of the full earnings release as well as a supplemental slide deck are available at zionsbancorporation.com. We will be referring to these slides during this call. The earnings release, the related slide presentation and this earnings call contain several references to non-GAAP measures, including pre-provision net revenue, the efficiency ratio and other terms which are common industry terms used by investors and financial services analysts. The use of such non-GAAP measures are believed by management to be of substantial interest to the consumers of these disclosures and are used prominently throughout the materials.

A full reconciliation of the difference between such measures and GAAP financials is provided within the published documents, and participants are encouraged to carefully review this reconciliation. We intend to limit the length of this call to one hour during the question-and-answer session of the call after our prepared remarks. [Operator instructions] With that, I will now turn the time over to Harris.

Harris Simmons -- Chairman and Chief Executive Officer

Thanks very much, James, and we want to welcome all of you to our call today to discuss our first-quarter results. I'd like to just start by making a brief comment about the extraordinary employees we have in this organization. Throughout the course of the past month, as we've all been across the industry, working from home, etc., we've had some employees, particularly over the last couple of weeks with this paycheck protection program, who've been working nearly around the clock and delivering great results. We will talk about this a little later, but in this first round of $349 billion of funding, we were able to receive approvals for $4.4 billion of these paycheck protection loans for our clients and for others.

And it's over 14,000 loans that we have approved, and we have more to go in what we anticipate will be another round of funding. And it's been a herculean effort. We've ranked ninth in the industry in terms of the volume of these deals that we've delivered, and that's way outsized to our size in the industry, as you know. But I think it reflects just a great team, and I want to publicly congratulate them for what they have accomplished and what they yet will.

So with that, Slide 3 is a summary of several key highlights for the quarter. We've anticipated that the usual items such as loan-to-deposit growth are of lesser concern to most of you today while credit and other issues related to the pandemic were of greater concern and interest, and we'll cover those in the next few slides. I mentioned that we have processed over 14,000 of these paycheck protection loans. I expect that we'll roughly double that, and we have a lot of volume ready to go when the window opens back up, which we hope will be later this week, assuming that Congress takes action.

But it's been a very, very busy quarter responding to customer needs. Slide 4 shows a time series of the bottom-line earnings per share results. We reported earnings per share of $0.04. As noted in the first quarter of 2020, there are three items that stand out that significantly and adversely affected the earnings per share, namely the large provision for credit losses, a mark-to-market adjustment on the value of customer-related swaps and a mark-to-model investment on our SBIC investment portfolio.

Some of the prior quarters also had some notable items as noted on the slide and in prior presentation materials. Turning to Slide 5. Adjusted pre-provision net revenue was $299 million. This is adjusted primarily for the unfavorable impact of the derivative valuation gain on client-related interest rate swaps of $11 million and the SBIC securities portfolio loss of $6 million.

You can see the outsized provision's relative effect on profitability in the chart on the right, especially when compared with prior quarter provisions. Paul will be addressing our provision and allowance in more detail later in his prepared remarks. On Slide 6, we highlight our common equity tier one capital ratio, which is strong relative to regulatory minimums and also healthy compared to our peers. When combined with the allowance for credit losses, Zions ranks stronger than most peers.

Of course, several of our peers have not yet released earnings and this may move around somewhat. Nevertheless, the point is that we have entered this economic downturn with a robust capital position. Advancing to Slide 7. Charge-offs remained low in the quarter, although we are expecting an increase in subsequent quarters as a result of the effects of COVID-19.

Any historical figures on problem loans and losses are less relevant, given the sudden and sharp downward shift in the economy due to the pandemic. And it's worth noting that we headed into this downturn with relatively pristine credit ratios, both on an absolute and a relative basis, a result of what we believe are really strong risk management practices. Moving to Slide 8. We have presented this slide at various conferences over the years, but I felt it was important at this time to reiterate the fact that Zions has generally experienced a much lower loss rate relative to nonaccrual loans than most of our peers.

Like most other banks, we underwrite loans based upon stressed cash flow assumptions, but as is more common with small business lending, we most often secure the loan with an alternative source of collateral, such as real estate or other business and personal assets. We also ask for and often receive personal guarantees on many 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. We saw a great deal of sponsor support, for example, during the 2015, '16 downturn in the oil and gas industry, as well as in the construction segment a decade ago. While each cycle is different, the secured nature of our loan portfolio may once again reduce our loss content relative to some other lenders.

With that brief summary, I will turn the time over to Ed Schreiber, our chief risk officer, to provide some additional detail about our credit portfolio. Ed?

Ed Schreiber -- Chief Risk Officer

Thank you, Harris. I will begin my prepared remarks on Slide 9. Shown on this slide is a selected list of industries that, in our estimation, have elevated risks than most other categories. In total, these industries account for $5.6 billion of total loan balances outstanding or approximately 11% of loans.

Some of these industries are intuitive, such as airlines, where card spend data of our customers shows a drop of more than 95% in early April relative to early March. Other categories have some mixed qualities with restaurants being a good example. Again, using card spending data and looking at early April relative to early March, we can see that fastfood restaurants are holding up much better than fine dining, although both segments are stressed. Not surprisingly, payment deferral or loan modification requests have been somewhat elevated within these industries relative to other portfolios, although as of the end of last week, more than 95% of the loans within these industries are not currently deferring payment.

Notably, line utilization increased only modestly within this group relative to the level at December 31, '19. Slide 10 is a brief overview of our loan deferral request and line utilization. The loan deferral request information is as of mid-April. The line utilization data is through March 31, largely because we have seen general stability since the end of March.

I will note some key takeaways here. First, on portfolio deferrals, only about 2% of the total portfolio has requested and been approved for deferral or modification. The request for such action has slowed significantly. With regard to line utilization rates, the overall increase in line utilization has been very modest, up only about two percentage points.

The ranking of industries that have drawn underlines both with the COVID-elevated risk grouping and the rest of the portfolio are shown on the slide, along with some industries that may be surprising to see that have not, at least for now, increased the line utilization to a material degree. Advancing to Slide 11. In addition to our COVID-elevated risk list, we have an additional $2.6 billion of oil and gas-related loans. The credit ratios look reasonably healthy, but as Harris noted earlier, historical credit ratios are not indicative of our expectations, given the significant supply and demand in shocks to this industry.

Notwithstanding, there are several risk mitigants to keep in mind, including the presence of hedges on about three-fifth of the total 2020 production that is in the mid-$50 per barrel of oil and a high of $2 MMcf for natural gas. The futures curve has the prices in the mid- to high $30s and a strong allowance for credit losses approaching 6%. On the bottom of the slide, we've noted key differences between the downturn and the prior 2014 through '16 downturn. Slide 12 continues with additional detail about the oil and gas portfolio.

Notably, in the bottom right chart, you can see the remixing of the portfolio away from the services which had a net loss rate of 9.4% during the last cycle and toward the midstream, downstream companies that had a much lower loss experience. As indicated in the second bullet on the top left, if we were to apply the sub portfolio loss rate from the prior cycle to the current portfolio mix, the loss would be about $90 million or roughly half the amount we experienced. Our allowance today is $145 million, a reflection of the uncertainty during this time frame or period. Slide 13 speaks to some of the actions we are taking actively to manage and mitigate the risk within the portfolio.

We are approaching the process holistically with a proactive effort to provide the needed and temporary relief to customers while their cash flows are low and, in some cases, negative. We are adjusting our staffing and asking our bankers to work closely with their customers to help find a good solution. The long hours our employees are working to help the customers base of more than 1 million is truly amazing thing to watch. We're requiring borrowers and sponsors each to contribute to the solution so that we are not the only party making adjustments.

And finally, we've tightened our underwriting at this time in part so that we are able to focus on our existing customer needs. That concludes my prepared remarks. Paul, I'd like to turn the call over to you for commentary on certain financial performance measures.

Paul Burdiss -- Chief Financial Officer

Thank you, Ed, and good evening, everyone. I'll begin on Slide 14 with a discussion of net interest income. The chart on the left shows the trend in net interest income. While average earning assets increased by 2% when compared to the year-ago quarter, the 27 basis point compression in net interest margin led to a 5% decrease in net interest income.

The year-over-year net interest margin change was driven by a 44 basis point lower yield on earning assets, partially offset by a 31 basis-point decline in the cost of interest-bearing liability. The resulting 13 basis-point decline in rate spread was accompanied by a 14 basis-point decline in the contribution of noninterest-bearing sources of funds due to the overall decline in the value of money. The waterfall chart on the right depicts the elements that resulted in a linked-quarter five basis-point compression in the net interest margin. The lower interest rate environment was reflected in lower asset yields and liability costs.

A 13 basis-point decline in earning asset yield was more than offset by the 16 basis-point decline in the cost of interest-bearing funds. The resulting three basis-point improvement in the rate spread was offset by an eight basis-point decline in the value of noninterest-bearing funds. The decline in the cost of funds was largely attributable to the 13 basis-point decline in the cost of interest-bearing deposits and less reliance on wholesale borrowings. By way of update for the second quarter of 2020, we expect the yield on earning assets to decline, reflecting the reduction in interest rates observed in March.

As a result, we are continuing to work to reduce our cost of funds. For example, the current cost of interest-bearing deposits is about 32 basis points. This is a 30 basis-point reduction from the 62 basis-point average reported in the first quarter. The combination of these changes will likely result in further compression of the net interest margin over the course of 2020 as the dramatically lower interest rate environment will result in a decline in earning asset yields, which is expected to exceed the decline in our cost of funds.

The one caveat I would attach to this outlook is related to loans generated through the paycheck protection program. The fees generated through that program, which will flow into revenue through the net interest income and the length of time those loans will remain outstanding, could introduce notable volatility in the net interest margin as we consider the 1% yield on the loans and the fees attached to the loan. Slide 15 highlights the key components of net interest income, loan and deposit growth and breaks them down by both rate and volume. The chart on the left shows average loans grew 3% over the year-ago period, and average loans in the first quarter were essentially flat to the prior quarter.

As we have noted previously, it is not unusual to observe a quarterly ebb and flow to balance sheet growth due to several factors, including customer demand, the balance of loan growth and payoffs and seasonality. The first two months of the quarter saw very little loan growth, followed by draws on existing lines of credit in March as Ed has just discussed. Loans generated through the paycheck protection program and the possibility of the Main Street lending program are expected to positively impact average loan growth in the second quarter. Shifting to the chart on the right and funding, average total deposits increased 6% over the prior-year period and 1% annualized growth rate when compared to the prior quarter.

As I have noted in previous quarters, we do not expect to maintain deposit growth rates in the high single digits. Turning to Slide 16. Our interest rate sensitivity has increased relative to the prior quarter. This change is primarily due to lower assumed deposit betas as rates have fallen.

Asset sensitivity was also impacted by the cancellation of $1 billion of interest rate swaps. Those swaps effectively converted our fixed rate senior notes to variable rate. We have essentially taken advantage of the very low and flat yield curve to fix the cost of those senior notes at the current market rate. Our interest rate sensitivity continues to be driven by a relatively large portfolio of noninterest-bearing deposits.

On Slide 17, customer-related fees were up 17% from the year-ago period as the low-interest rate environment is contributing to improved sales of interest rate-sensitive products. Most notably, we have seen strength in loan-related fees and income of more than 60% from the prior year primarily from residential mortgage-related revenue, which is up more than 300% from the trailing four-quarter average. We also saw strength in capital markets product sales, which were up 19% from the prior year and wealth management and trust fees, which were up 14% from the prior-year period. As shown on Slide 18, the decline in noninterest expense reflects our ongoing efforts to reduce expenses and streamline operations.

Noninterest expense was down $22 million or 5% to $408 million from $430 million in the year-ago period. The most notable reductions versus the prior-year period were in salaries and employee benefits due in large part to the reduction in positions announced in the fourth quarter of last year and lower expected incentive compensation payouts in 2020 versus 2019. As previously reported, we adopted the new Current Expected Credit Loss model, or CECL accounting standard on January 1. Slide 19 highlights the components of growth in our allowance for credit losses this quarter, which has gone from 1.08% of loans at January 1 to 1.56% of loans at March 31.

The provision for credit losses of $258 million, combined with $7 million in net charge-offs, grew our allowance for credit losses to $777 million. The 50% increase in the allowance for credit losses reflects a prolonged recession due to the impact of the COVID-19 pandemic and includes prolonged stress in energy prices. When triangulating on the appropriate allowance for credit losses in this very uncertain environment, we considered a wide variety of economic scenarios and also incorporated our own stress test results. Importantly, we used a 12-month reasonable and supportable period to construct our allowance and a 12-month reversion period.

We readily acknowledge that the great cessation of economic activity followed by unprecedented government intervention, deferrals and modifications designed to help customers through this difficult environment and substantial activity by the Federal Reserve to support liquidity has made life of loan credit losses, and therefore, the allowance for credit losses, difficult to establish. In addition, we have also adopted the interim final rule, which allows a transition adjustment related to the change in the allowance for credit losses to be applied to the regulatory capital ratio calculation. The impact on our common equity tier one ratio in the first quarter of 2020 is an improvement of eight basis points. The complexity and nonstandard nature of the CECL accounting standard makes meaningful disclosures regarding underlying assumptions difficult.

Given this, we are providing the information on Slide 20 to be a helpful framework when considering the adequacy of our allowance for credit losses. This chart compares data in the left-hand set of columns, which were the annualized net charge-off rates by major product type during the 2009 to 2010 great recession, comparing those to the updated composition of a loan portfolio at March 31, 2020. Circled in red are some of the major changes in loan portfolio components. If one were to assume that the current economic downturn is equally severe to the 2009 to 2010 time frame in each of these component categories, our loss rate would be lower by about 30%, which would have resulted in net charge-offs of about $890 million.

This simplified analysis considers only changes in portfolio concentration and does not give any credit for the changes we've made to upgrade our risk management, including the use of stress testing to identify industries or borrowers that contribute disproportionately to credit losses in times of economic stress. We are not claiming that the upcoming economic environment will be worse, the same or better than the last recession. But we do believe this framework is helpful to understand the adequacy of our allowance for credit losses. On Slide 21, the impact on diluted share count of the 29 million warrants outstanding is shown.

As a reminder, these warrants expire on May 22, 2020. The warrants are a key determinant of the difference between basic shares and diluted shares. This chart shows the dilution relative to the share price. At the current stock price, in the high $20s, there is no dilutive effect on shares outstanding.

By way of comparison, in the first quarter of 2020, the warrants increased diluted shares by about 5.5 million shares. Ultimately, the Zion common share price in the month of May will determine the permanent dilutive effect from the ZIONW warrant. Lastly, given the uncertainty in the economy due to the COVID-19 pandemic, we have temporarily withdrawn our financial outlook. We look forward to reinstating the outlook as economic conditions, including the impact of government intervention becomes more clear.

I will now turn the call over to Scott McLean, our president and chief operating officer, who will report on the status of a few key programs and initiatives.

Scott McLean -- President and Chief Operating Officer

Thank you, Paul, and good evening to everybody. I'd like to highlight some of the successes we have experienced in 2020. At the top of Slide 22, as Harris noted in his opening remarks, we highlight gaining SBA approval of approximately $4.4 billion of SBA paycheck protection loans for more than 14,000 customers. Zions ranked ninth by dollar volume of all the participating financial institutions as cited by the SBA late last week.

Our volume represented about one-third to one-half of the unit and dollar volume of the top three banks. Consistent with our small business customer base, the median-sized loan was a bit below $80,000, and about 20% of the loans were less than $25,000 with our smallest loan being $500. Additionally, our share of the $350 billion SBA PPP program was approximately three times our share of deposits in the country. To put this volume in perspective, processing 14,000 small business loans in less than 30 days is a significant multiple of what we would normally process.

To make this possible, we redirected the efforts of over 2,000 colleagues, combined with the outstanding work of our automation and technology teams, to respond to this unprecedented volume. Our colleagues welcomed this unique opportunity to help our small business customers with this much needed liquidity. We've also been putting in some serious overtime in mortgage. You can see the numbers on Slide 22, I won't read them to you.

But the production statistics there are quite meaningful. Certainly, much of this is the result of the decline in interest rates, but another very important key to this volume is the development of our digital customer-facing technology that takes the largest customer pain points out of the application process as we have automated the IRS tax information requirements, employment verification and bank statement retrieval. Our residential mortgage financing products continue to be strategically important to our role as a community bank, serving small business customers and consumers on a local basis. Regarding the status of our technology initiatives, we continue to make progress on many fronts.

Our FutureCore Phase 3, the replacement of our deposit system, has experienced some delays related to COVID-19, although we remain confident in the rollout of Phase 3 beginning in 2022. While we continue to have a solid reputation with our business customers regarding their perception of our digital customer-facing technologies, we anticipate the replacement of our online and mobile banking platform for consumer customers later this year and small businesses in 2021. This system is a workhorse for our company as it is utilized by about 60% of our consumers and 60% of our business customers. Finally, the investments we have made in robotic process automation are continuing to have a meaningful impact on improving the customer experience and creating operational efficiency.

The institutional knowledge we have developed on this topic in the last couple of years has proven to be especially helpful as we have ramped up to handle the significant volume of loans associated with the SBA program. That concludes our prepared remarks, and we will now take your question. Latif, I will throw it back to you.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Brad Milsaps of Piper Sandler. Your line is open.

Brad Milsaps -- Piper Sandler -- Analyst

Hey good afternoon. Paul, I was curious. I appreciate the detail you gave around the spot rate on the deposit side or the interest-bearing deposit, I think you said 32 basis points. I'd be curious if you might also have the spot rate on the other side of the balance sheet, the yield on earning assets if you'd be so kind of disclose that.

Paul Burdiss -- Chief Financial Officer

Well, as you know, as it relates to deposits, especially the nonspecific maturity deposits, we have the ability to control those pretty readily. On the earning assets side, largely apart from the fixed rate pieces, the variable rate stuff floats, as you know, largely with prime or LIBOR. And so given the different times of the month if they change and things like that, I don't have that figure, nor do I think it would be particularly meaningful today. I think the key takeaway is that just by way of review, on February 29, the Fed Fund targets rate was 150 to 175 basis points.

And so it really wasn't that long ago, and just within the last kind of 30 to 45 days that we have seen interest rates fall so much. And so it is going to take a little bit of time for that to flow through the earning asset yields, which is why I said I fully expect the earning asset yields to fall pretty significantly in the second quarter, but I didn't quantify that.

Brad Milsaps -- Piper Sandler -- Analyst

OK, great. Thank you. Understood. And just as my follow-up, Ed mentioned that three-fifth of the E&P book is hedged through the end of 2020.

I'd be curious if you had the number that's hedged through the end of '21. And then to the extent that you are hedged, will you require those customers to pay down principal? Or will you allow the excess cash flow to potentially do other things? I'm just kind of curious what your plans are around some of that excess income, maybe half from the hedging they have in place?

Scott McLean -- President and Chief Operating Officer

Brad, this is Scott, Scott McLean. I'll take that question. The hedging in '21 is both for oil and gas is about at kind of the 30%, plus or minus level, a little higher for gas, right about 30% for oil. And the way that, that borrowing base is redetermined, I mean, it's very, very much dependent.

Hedging has a lot to do with it. And so we anticipate that our borrowing base is here in the spring redetermination, which we're very early into, may decline in the 10% to 20% range. Given the amount of discounting that we do and the math behind calculating a borrowing base, it should be manageable. We will certainly see some reserve-based credits experience stress, but we do anticipate this spring redetermination to be pretty manageable.

Brad Milsaps -- Piper Sandler -- Analyst

Thank you.

Operator

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

We lost our line. We'll go to the next question. It comes from Ken Zerbe of Morgan Stanley. Your line is open.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. I guess, maybe starting, in terms of corporate line drawdowns, it looks like yours were a lot lower than other banks. Can you just talk about sort of the characteristics of your customer base? Like why are they borrowing or drawing down their lines less than some of the larger banks? I'm sure it has to do with the large versus smaller customers, but I'm just trying to understand the dynamics.

Harris Simmons -- Chairman and Chief Executive Officer

Yes. Michael, do you want to?

Michael Morris -- Chief Credit Officer -- Analyst

Sure. I'll take that one, Harris. Thanks for the question. We have been in a high state of monitoring for mostly defensive draws.

And so the bigger drawdowns that we've seen, we understand them well. But the profile of our wholesale clients is more operating utilization than it is. Obviously, capex is down so there isn't a lot of spending and borrowing on revolvers today with respect to our wholesale customers. Our small business customers have drawn down quite a bit here and there.

As you would expect, we have a reasonable restaurant portfolio, dentists, other kind of critical industries where they have completely shut down. We've seen higher utilization. But I think it's the fact that we are not a huge wholesale lender. We have some private equity firms that have asked their portfolio companies to draw down.

But oil and gas is really one of the larger PE subsets of our portfolio. And we have seen higher utilization there but we don't have a lot of private equity, where we're seeing the portfolio of companies do more of a defensive draw kind of a scenario. Hope that's helpful.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. No, it is. It is. And then just maybe as a follow-up question.

In terms of expenses, obviously, you guys did a really good job keeping expenses low this quarter. Is this a level of expenses that is sustainable on a go-forward basis? Or were there any adjustments that may kind of bounce back in 2Q or the rest of the year?

Paul Burdiss -- Chief Financial Officer

Ken, we specifically withdrew guidance because the environment is making sort of the trend lines in all of these key categories so difficult to predict. We're really proud of the first quarter. But given everything that's happening over the course of the year, you've got a range of offsets. For example, travel expense is down.

But we've also got additional expenses, for example, related to the paycheck protection program that will be up. And so it's very difficult at this point to net all of those things out as we think about the next several quarters.

Ken Zerbe -- Morgan Stanley -- Analyst

OK, great. Thank you.

Operator

Thank you. Our next question comes from Dave Rochester of Compass Point.

Dave Rochester -- Compass Point -- Analyst

Hey, good afternoon guys. I appreciate all the detail on the COVID-exposed loans. Was just wondering if you could speak to the reserve ratios perhaps on some of those portfolio segments as you did on the energy book. And then just real quick on energy, I know you said you were early in that borrowing redetermination process, but you still bumped up that reserve pretty materially.

I was just wondering if you finish those or as you finish those, if you're expecting to see another pretty hefty bump-up or if you feel like you've already captured that because your CECL assumptions.

Scott McLean -- President and Chief Operating Officer

Maybe I will take the energy question first. And naturally, the answer is we will watch the spring redetermination closely. But just as we did in late 2014, the fourth quarter and the first quarter and second quarter of '15, we have demonstrated a willingness to be very conservative about this portfolio. And we think by increasing it the way we did, we have taken that into account.

I would say, though, just in general about energy, I mean, these are unprecedented market conditions that over the short run are going to be driven by totally unseen-before shifts in demand. And so there's going to be grading risk for the next six to 12 months in the energy portfolio. And then there'll be a new normal for supply and demand on a global basis, probably down, certainly down from where it's been at about 101 million barrels a day. But I think it is, despite what we saw today in prices, it is important to note that NYMEX still in the low $20s, ramping up into the $30s and $40s.

And as you think about our portfolio again, the most vulnerable part before was our energy services portfolio, which is now less than 20% of the total, and term loans well less than $200 million. So the most vulnerable part is really quite small now. The reserve-based portfolio, which we talk about frequently and was asked about a bit ago, it's built to expand and contract. Happy to talk about that more later if you have a question about it, but it is absolutely built to expand and contract.

And the midstream portfolio, you will read more about midstream being under stress, I believe, between now and the end of the year, but they have some really big cash flow levers, both related to distributions and the capital expenditures that they can pull and generally allows them to keep their debt service coverage ratios in pretty good shape.

Paul Burdiss -- Chief Financial Officer

And this is Paul. As it relates to the allowance for credit loss on the rest of the portfolio, we provided a little incremental disclosure on the part of the portfolio that we think will be particularly adversely impacted by the COVID pandemic. But as you can imagine, going back to the end of March, you will recall that economic forecasts were changing very rapidly. And so there is a very large part of our allowance for credit losses that's qualitative.

Keep in mind, this is a 50%, 5-0, 50% increase in our allowance for credit losses. And so outside of energy, we have not disclosed kind of the specific components and where they belong. But we do believe and as evidenced by that incremental page that we showed comparing the composition of our portfolio to the last economic downturn, we do believe that our allowance for credit losses is adequate. And so we haven't disclosed a lot beyond that.

But I guess the point is that we considered a lot of economic scenarios, and we considered kind of different breakdowns and cross-sections of our portfolio to come up with that allowance for credit loss of $777 million.

Dave Rochester -- Compass Point -- Analyst

Got it. Thanks for all the details guys. And then maybe just a follow-up. I know you said that you considered a lot of different scenarios and whatnot.

Maybe if you could just talk about a couple of the key drivers, I would imagine unemployment and GDP growth or contraction. And then maybe just in terms of those two key factors, what you guys factored into the CECL mark first quarter.

Paul Burdiss -- Chief Financial Officer

The reason that we provided that view of our portfolio composition was specifically because I don't think it's super meaningful for us to get into the details around what our path for unemployment or GDP growth might have been. What I can say is that as many banks have, we've taken the stress test models that we've developed and applied those to the CECL allowance. And in so doing, we looked very closely at Moody's S3 and S4 economic scenarios, which I think everyone is sort of familiar with now, and overlaid on top of that, kind of multiple model runs related to the COVID pandemic scenario that were coming out about once a week at the time. So those are the economic forecasts and the model that we used to develop the ACL.

And then I would also ask you to remember, as I said in my prepared remarks, our reasonable supportable period is 12 months and our reversion period is 12 months. And so you've got kind of effectively an 18-month forecast before our allowance process reverts to the average long-term losses. Hopefully, that's helpful.

Dave Rochester -- Compass Point -- Analyst

Yes, great. All right. Thank you guys.

Operator

Thank you. Our next question comes from John Pancari of Evercore ISI. Please go ahead.

John Pancari -- Evercore ISI -- Analyst

So Paul, I know you just said you reiterated again that you view the of the reserve as adequate. And I just want to get a little bit more into the through-cycle loss assumption that you baked in and arriving at it. I know your latest company-run stress scenario that you performed resulted in about a $2.5 billion through-cycle loss content. I think that was for your 2018 company run and that's about 5.8%.

And but your reserve now is around $730 million or 1.6%. So could you talk to me about, at that level, about 30% of that level, how you view that right now as being the fair amount, given that context?

Paul Burdiss -- Chief Financial Officer

Yes, John, I think we'll have to compare notes on the $2.3 billion or the number that you quoted. That was not my recollection of the published stress test results for the bank's stress test last year, which, by my recollection, were about $1.1 billion. So I'm going to have to go back and check the number that you're referring to because that isn't at the top of my head.

John Pancari -- Evercore ISI -- Analyst

OK. Yes, no problem. So I guess in terms of the adequacy of the reserve at $730 million level, you mentioned you factored in the Moody's data. That does reflect the latest version of the Moody's data that came out toward the end of the quarter as well?

Paul Burdiss -- Chief Financial Officer

What we did was we used the Moody's scenarios from earlier in the quarter and then overlaid those scenarios with results that came out of the subsequent scenarios. So in other words, we didn't use one scenario and say, "This is what we're basing our allowance on." We used a series of scenarios and compared those results to try to again triangulate on a number that we thought made sense for the portfolio.

John Pancari -- Evercore ISI -- Analyst

OK, all right. Got it. And then lastly, from a capital perspective, just want to get if I missed it earlier, thoughts around the dividend here, given I know there's some questions around that.

Harris Simmons -- Chairman and Chief Executive Officer

This is Harris, I can maybe speak to that. I think we expect that given what we know now, we think the dividend is we come into this with a very healthy capital position, and as we've said, a highly collateralized portfolio. And we also think that all the government stimulus, the paycheck protection program is going to help a lot of the small businesses that are important to us. And so it's obviously, quarter to quarter or something that the Board is going to be looking at.

We will not be expecting to be repurchasing any shares in this kind of environment, but we believe that the dividend at its current level is sustainable at the present time.

John Pancari -- Evercore ISI -- Analyst

Got it. All right. Thanks Harris.

Operator

Our next question comes from Jennifer Demba of SunTrust. Your line is open.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good evening. Harris, I have a question for you.

Harris Simmons -- Chairman and Chief Executive Officer

Hi.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Harris, what do you think about the reopening of your Zions' footprint relative to the rest of the U.S. based on the statistics of cases and deaths so far? And what do you think the long-term implications of the shutdown are going to be on the bank?

Harris Simmons -- Chairman and Chief Executive Officer

Well, it's a great question. It's the big question. As a general statement that I think is probably true is that for the most part, the West has fared probably a little better than the East has. I mean, the state of Utah, which is the largest single piece of our business, as markets go, has come through this and in quite a lot better shape so far.

And so in terms of the death rate, just the number of cases, etc., I think Utah has been kind of the head of the pack, and I think that positions the state reasonably well. Well, and the same is true in a variety of other markets, in Arizona. Colorado has been hit a little harder and certainly up in the West Coast, they started off reasonably heavy, but they seemingly have dealt with this in probably a more effective way than we've seen, say, in New York. I'm hopeful that, that will offer some opportunity to maybe get a little ahead of the game.

But what I know is what we all know and it's what's coming from the people we're all watching as we are here at home all day. TV's in the background, it's going to be a function of testing and contact tracing and probably still quite a lot of the social distancing that's going to be part of the background of how we all operate in some way or another for the next perhaps few quarters. And I tend to believe that until we have a vaccine, nothing will get quite back to normal. Although clearly, I think we'll probably learn as a society to deal with this in a way that allows more normalcy but not quite what we all have been used to until we see a vaccine and people and particularly older populations comfortable in getting out and about.

So your guess may be as good as mine but that's kind of how I would read it.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Do you think that the banking industry will end up having more employees working from home on a permanent basis?

Harris Simmons -- Chairman and Chief Executive Officer

Well, I think that it's probably going to train us all to be more flexible in how we think about this. But I was at a little video conference with one of our employees a couple of hours ago, and he was asking me, "When are we going to get back to work?" He said, "I missed being in the office with everybody." I think that it will probably teach us all some new skills in terms of being able to work remotely. But I do think there's a lot that you gain from being face-to-face with people and meetings and the hallways, etc. And I don't think we're going to turn into a hermit economy here, all of us working from home.

But it will certainly change our ability to do so, if not our determination to do so.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Steven Alexopoulos of JP Morgan. Your line is open.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hi everybody. My first question is for Ed. I wanted to follow up on the distressed sectors that you're calling on, on Slide 9. And specific, Ed, to your exposures, what do you see as the most vulnerable portfolios that you're calling out? Maybe can you comment on where you see collateral protection being the strongest?

Ed Schreiber -- Chief Risk Officer

Well, with that, thanks for the question. And without going into great detail on that and we could do that as an additional discussion, but that aside, I mean, most of the industries that you have seen in the press, whether that is airline industry, hotels, etc., are the ones that you would think of come to mind, anything to do with travel and tourism, etc. So our exposures, and we have talked about that before and Michael, I will probably have you add any additional comments in here, but the restaurants seem to be hit pretty hard and our exposures to that. We divided those up between full-service restaurants and fastfood, if you will, restaurants, and those are all reasonably managed without going into great detail on the exacts.

But we have identified, as you can tell on Slide 9, some very key ones that are there. And at this point, we are not seeing anything out of the normal, but I do believe, and most people with that, right now, you are seeing stress but it won't be until a couple more months before you actually see some things really fall out or come to fruition. Michael, you want to add any additional comments?

Michael Morris -- Chief Credit Officer -- Analyst

Well, I would add commercial real estate in the retail sector is getting hit pretty hard with renegotiated leases by small tenants and even some of the credit national tenants now are retrading or trying to retrade lease agreements. So CRE retail yet to come. But as far as commercial real estate investment property, that's behind hospitality and hotels but it is a secured asset class. Dental is getting hit hard as our physicians who are the ones that provide elective surgery and elective operations.

Hopefully, that gets stood up. So medical office buildings are starting to see a little stress. Those would be the primary. Consumers, obviously as unemployment goes up, we expect our deferral activity to increase.

We expect default rates to increase, secured and unsecured. But it's just a matter of the shape of the recovery to see those rightsized. As Harris said, the secured portfolio across the company and every industry should give us additional protection, albeit at discounted loan to values for the time being. And nobody really expects net operating income in investor CRE to come back quickly, especially the hospitality sector in convention and leisure and business.

So there are a lot of different speculations around recovery for all the various industries that are on our watch list. Who comes out first? When do they get back to close to historical EBITDA and NOI? Those will be the real challenges really trying to predict specific recoveries by industry.

Steven Alexopoulos -- J.P. Morgan -- Analyst

That's very helpful. And maybe a follow-up for Paul. What's the funding strategy for the PPP loans? Because the balance is fairly substantial. And then how do you think about a net yield, including the fees you'll receive and then obviously, you need to fund these?

Paul Burdiss -- Chief Financial Officer

As it relates to funding, our deposits have continued to grow nicely. We don't anticipate funding stress due to PPP. The Federal Reserve has set up the PPP, liquidity facility or lending facility, which we could use and we may test but probably won't use as a matter of course because we have enough on balance sheet and off-balance sheet liquidity to be able to support continued growth in that PPP program. As we think about the yield, as you know, all the loans are set at 1%.

And then the fees are basically capitalized against the loan and taken into net interest income over the life of the loan, which is two years. To the extent the guarantee is realized on those or they prepay, then that capitalized fee would be taken into revenue. So when you think about the all-in sort of yield, if you will, attached to the loan, it's going to be heavily dependent on, A, the size of the loan because as you know, it's sort of a metered fee program starting at 5% and declining to 1%. But also the length of the loan, the amount of time that the loan's outstanding will determine the speed with which that fee rolls into revenue and therefore would impact the yield.

So there's so many variables to it. I wouldn't want to venture a guess as to what the ultimate yield will be. But I think hopefully, I've provided at least a little insider flavor into the key components of what will drive the yield.

Steven Alexopoulos -- J.P. Morgan -- Analyst

I appreciate all the color. Have a good night.

James Abbott -- Director of Investor Relations

Hey Latif, this is James. We are close to the end of our time. So we're going to go, what we call the lightning round here, and we're going to try to be quick with our answers. And we'd ask the questioners, the remaining ones that we'll be able to be just limit their question to one question at this time.

Thanks.

Operator

Thank you. Our next question comes from David Long of Raymond James. Your question please.

David Long -- Raymond James -- Analyst

Thank you. Good afternoon everyone. So just as a follow-up to Steve's question, can you share with us the level of fees that you will generate through this initial $4.4 billion or maybe the initial percentage of fees based on that $4.4 billion of loans?

Harris Simmons -- Chairman and Chief Executive Officer

Yes, I can. This is Harris Simmons. I'll tackle that. The initial phase of this is about $118 million.

But there's also, as has been noted, I mean, there's going to be some cost attendant to that and including some overtime and some bonuses that we're going to pay for people who are working seven days a week, 18 hours a day kind of schedule. So there are going to be some costs there. And we have not determined the amount yet but I expect that we're going to take a piece of this and turn it back toward the community through a donation to our charitable foundation. So I mean, we have another round of this to go.

And we don't know quite how that's going to play out, but I expect that the $118 million becomes a larger number, and we do expect we'll take a piece of that. But I sort of expect it will be between 10% and 15% of it and turn it into a charitable contribution. So I just do that heads up for you guys.

David Long -- Raymond James -- Analyst

Thanks for the call Harris. I appreciate it.

Harris Simmons -- Chairman and Chief Executive Officer

Yes. All right.

Operator

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

Brock Vandervliet -- UBS -- Analyst

Oh, thank you. Hey Scott, this one's for you. You talked earlier about the redetermination process. The dropping of the borrowing box, 10% to 15%, was that just on the reserve-based loans? It sounded like a pretty low percentage, given the amazing dislocation we've seen in the commodity.

Scott McLean -- President and Chief Operating Officer

Yes. We've got about, as you know, about $1 billion in outstandings that are reserve-based, and that's the portfolio I'm talking about. There's about 75 reserve-based loans in that portfolio, and so that's the group that goes through the redetermination. Midstream and energy services that don't have those portfolios do not have that kind of calculation.

And one of the reasons, again, why it doesn't drop as much as you might think is because of the hedging, certainly has a meaningful impact on it. There are other reasons as well.

Brock Vandervliet -- UBS -- Analyst

OK. Thank you.

Operator

Thank you. Our next question comes from the line of Erika Najarian of Bank of America. Your line is open.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Hi. Good afternoon. Just one last question for me. I just wanted to confirm that the data that you presented on Slide 20 when you're applying the global financial crisis loss rate to your current portfolio, that 1.8% is over nine quarters so it is a cumulative loss?

Paul Burdiss -- Chief Financial Officer

That was a cumulative loss rate, right.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

James Abbott -- Director of Investor Relations

That 1.8% actually, I was going to say, the 1.8% is an annualized loss rate, just to be clear. So in the global financial crisis, it was the 2.5% on the left-hand side is you'd have to more than double that to get to our worst nine quarters. And then you would do the same thing with the 1.8%.

Harris Simmons -- Chairman and Chief Executive Officer

It was a loss rate over that nine quarters, so divided by nine and multiplied by four, I think, is what you're saying, James?

James Abbott -- Director of Investor Relations

Yes. Yes, exactly. Thanks, Harris.

Paul Burdiss -- Chief Financial Officer

Yes. Sorry if I wasn't clear but thank you.

Operator

Thank you. At this time, I'd like to turn the call back over to James Abbott for closing remarks. Sir?

James Abbott -- Director of Investor Relations

Thank you, everyone, for joining the call today. We appreciate your attendance. There were a handful of folks that were still in the queue, but due to time constraints, I will take those calls off-line in the order in which they were coming in. And so stand by your phones and I'll be with you shortly.

And any other questions, please feel free to reach out to either myself or others within the company, and we'll be happy to respond to them as quickly as we can. And thank you again for your time this evening.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

James Abbott -- Director of Investor Relations

Harris Simmons -- Chairman and Chief Executive Officer

Ed Schreiber -- Chief Risk Officer

Paul Burdiss -- Chief Financial Officer

Scott McLean -- President and Chief Operating Officer

Brad Milsaps -- Piper Sandler -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Michael Morris -- Chief Credit Officer -- Analyst

Dave Rochester -- Compass Point -- Analyst

John Pancari -- Evercore ISI -- Analyst

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

David Long -- Raymond James -- Analyst

Brock Vandervliet -- UBS -- Analyst

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

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