Ladies and gentlemen, thank you for standing by and welcome to Zions Bancorporation’s Second Quarter 2020 Earnings Results webcast. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's [conference is] recorded. [Operator Instructions] I would now like to hand the conference over to your host Director of Investor Relations, James Abbott. Sir, please go ahead.

Thank you, Latif and good evening everyone. We welcome you to this conference call to discuss our 2020 second 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 loss, and the way in which we are engaging with our customers during this period of economic disruption. After Ed's comments, Keith Maio, our Chief Banking Officer will provide detail regarding our participation in the small business administration's Paycheck Protection Program, as well as progress made in the mortgage banking division. Paul Burdiss, our Chief Financial Officer will conclude by providing additional detail on Zions financial condition. Additional executives with us on the broadcast today include Scott McLean, President and Chief Operating Officer; and Michael Morris, Chief Credit Officer. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. Additionally, the earnings release, the related slide presentation, and this earnings call contain several references to non-GAAP measures. We encourage you to review the disclaimer in the press release or the slide deck on Slide 2, dealing with this forward-looking information and the presentation of non-GAAP measures, which apply equally to the statements made during this call. A copy of the full earnings release, as well as the supplemental slide deck are available at zionsbancorporation.com. We will be referring to the slides during this call. 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 related follow-up question to enable other participants to ask questions. I will now turn the time over to Harris Simmons. Harris?

Thanks very much, James. And we welcome all of you to our call this afternoon. Beginning on Slide 3, we're about four months into the economic effects of the pandemic and we felt it might be helpful to provide our assessment regarding areas of strength and areas of weakness. My summary comments here should help frame the rest of our discussion today. I have a very strong belief that strong banks are instrumental in building strong communities. And I think the evidence of that is perhaps never been more apparent than what we've experienced during the past four months since the pandemic took hold. Speaking not only of our own institution, but of the entire industry, it's nearly miraculous to me that we could also quickly and dramatically alter how we work employing technology and working from home and still deliver unprecedented amounts of aid to individuals, businesses, nonprofits, municipalities, and others. I couldn't be more proud of our team who delivered aid and volumes that significantly outpaced our market share, and they did it with grace and a singular focus on serving both customers and prospects. One of my favorite stories from the past three months came from a new customer whom we provided a PPP loan up in Idaho's Wood River Valley. This person had experienced nothing but frustration with his own bank, so he tried us. The result was so satisfying that he took out this ad at his own expense in the local newspaper. It's times like these that the fine relationship the bank has with its customers and with its community, and I couldn't be more proud of bankers who’ve delivered a great deal of value in this past quarter. Earnings were substantially lower than last year's result primarily due to the reserve gold as…

Thank you, Harris, and good evening, everyone. As an overarching comment, given the depth of the decline in GDP and the increase in unemployment, the portfolio's credit quality is holding up well. We recognize that there is significant monetary and fiscal stimulus that is supporting the quality of credit, but we are nevertheless pleased with the resiliency of so many of our customers as they have adjusted for their circumstances that have been able to maintain a much more stable level of profitability than we might have expected despite what has been in some cases, large declines in revenue. If you please direct your attention to Slide 8, because of the relatively minimal credit risk with the PPP loans and because prior quarters would not be comparable, we have presented the credit quality ratios excluding PPP loans, charge offs bumped up in the quarter to 25 basis points. About two-thirds of the gross charge-offs were attributable to two loans that have been experiencing distress prior to the development of the pandemic, which then accelerated the decline in the value of these companies. I might also highlight the time series of the chart. To help put the recession in perspective, we've included the average of those same credit ratios in global financial crisis, 2008 to 2009, and during the oil and gas downturn, 2015-2016. Noted in the text, loans and deferral status reached 8.5% of loans, excluding PPP loans. Most of the deferrals are granted on a 90 days to 120 days ago, and had been rolling off over the course of the past month or so. Accordingly, it's too early to provide much color on the payment performance of these loans post deferral. However, the volume of referrals has been very modest. It's also worth noting that the revolving credit…

Thanks, Ed. And by way of introduction, I'm responsible for small business lending, mortgage, and wealth management among other responsibilities within the bank. I'll begin on Slide 12. As Harris noted earlier, and in his quote in the earnings release, we are particularly pleased with the outcome of our efforts to play a role in providing the much needed support to tens of thousands of small businesses. At the end of round one and round two, we ranked as the ninth largest originator of PPP loans in the country. Yet we’re the 37th largest financial institution in the country measured by deposits. Our share of PPP originations was 3.6 times our deposit market share. This significant market share out performance was a combination of very hard work and long hours by thousands of employees, as well as superior technology. We and our PPP customers were the beneficiaries of our efforts to quickly deploy great technology and pair it with over 2000 great bankers. As Harris noted, but bears repeating, these efforts have provided substantial support to what now is 47,000 businesses. Within our affiliate structure, the SBA PPP loan market share distribution is generally consistent with our deposit market share. On the right hand side, it's important to note that 75% of these loans were less than $100,000 and you can see some statistics on the production. On the bottom you can see some of the statistics on the more than 10,000 loans to new customers, one of which was highlighted by Harris in his earlier comments. With respect to these new customers, we're working quickly and diligently to help solidify those relationships. Each of our affiliate banks is in the midst of a new client outreach campaign, which includes compelling offers, particularly timely with the introduction of [Treasury select],…

Thank you, Keith and good evening everyone. I'll begin on Slide 14, with a discussion of net interest income and the net interest margin. The chart on the left shows the trend in net interest income and the net interest margin, and the net interest margin is in the white boxes has fallen in the current quarter along with benchmark interest rates after a period of relative stability. Conversely, net interest income has improved by $15 million on a linked quarter basis, reflecting balance sheet growth attributable to our participation in the SBA’s PPP lending program. Notably, the $5 billion of PPP loans added in the second quarter on average contributed nearly $40 million to net interest income. The components of the 18 basis point net interest margin decline in the second quarter, compared to the first quarter are contained in the chart to the right. Earning asset yields were down 46 basis points in the linked quarter, reflecting falling benchmark interest rates, while interest bearing sources of funds were down 44 basis points, reflecting active deposit price management and less reliance on wholesale funding sources. Our strong non-interest bearing deposit position is worth less as rates fall and the contribution of these non-interest bearing sources of funds fell 16 basis points in the second quarter. We will continue to work to improve the spreads on loans and lower our deposit pricing where possible. Slide 15 highlights 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 12% over the year ago period, significantly assisted by PPP loan growth, as depicted with the light shaded bar. Shifting to the chart on the right and funding, average total deposits increased 16% over the…

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

Hey. Good afternoon, guys. I was just wondering if you could talk about some of the bigger assumptions you baked into your CECL calculation this quarter, any details there would be great. And if you did any kind of overlay that addressed the acceleration of the pandemic in your footprint, what that could mean for the economic backdrop or the potential for a U or W, that would be great?

This is Paul. I can start with that, and then ask Ed, Michael and whoever else may want to join in to add to it. Broadly speaking, as I said in my prepared remarks, we used results from our internal stress testing to inform those results. And importantly, we use the refreshed loan grading. So, these included unemployment rates that went into the double digits, and I'd say, a fairly extended period of weakness. But as you can imagine, the models are just not built for an environment like this because the dataset that was used to create the models doesn't create – doesn't include the macroeconomic factors as we're seeing today. So, there was also some qualitative judgment applied to the allowance process. Ed or Michael, would you add anything to that or anyone else?

Well, no, I think you covered it well, Paul. The only thing that I would add – this is Michael – is that within the qualitative, we also identified a number associated with our deferred loans where we didn't have a 100% insight into the activity levels of the customer. And so, that was one more element to the qualitative that we considered.

Great. And then, just in terms of how you sort of integrated any kind of outlook on the pandemic, was there any kind of additional overlay from that perspective just in terms of higher probabilities of a W-type recovery or is that not even remotely your base case at this point?

Well, the other thing I would add is that we – I think you probably heard us say – certainly heard Ed just say, we conducted a lot of in-depth reviews of – particularly the stress part of our credit portfolio, and that was real time information in terms of the sort of the stress and the credit worthiness, if you will, their ability to withstand loss of revenues of our customers. And all of that very detailed information was incorporated into that allowance process.

Okay, great. Thanks, guys.

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

Great. Thanks. I guess maybe just a first question; can you just walk us through how you guys get to a 3.14% loan yield on the PPP loans? I guess I was listening for something probably a little bit lower like maybe the 2% to 2.5% range, so this does seem a little bit higher?

Sure, this is Paul. I can give you the kind of a broad framework of how it works. As you know, the fees associated with the loans are capitalized against the loans and then amortized over the expected life of the loan. Also incorporated into that are sort of the direct expenses incurred in the production of the loans that under ASC 310 or FAS 91, as it's otherwise known as. But all these things are capitalized and then amortized over the life. And so, we need to look at because we don't have any assumptions around forgiveness baked in here. We looked at the contractual terms of the loan. Our contractual terms happen to be a six-month interest-only period followed by 18 months of amortization. And if you sort of capitalize our fees and amortize it as defined in the loan documents – that's where we come up with the 3.14%. Importantly, and it says in the press release, as forgiveness does come about or these loans are repaid early, we would recognize more fee income in those quarters as all of those capitalized net fee income gets recognized in the quarter of either forgiveness or repayment. And so, my expectation is that we will see some volatility in that loan yield.

Sure. No, totally – I think – thank you for that explanation, I think we all generally understand the concept of it. I guess to get a 3.14% and I'm asking a little more for specifics; you have the 1% of your loan yield, but then even assuming your average PPP fees were 4%, which would be 2% per year, that would only put your average loan yield at 3% and then – but you already said your average loan size was bigger than the average loan for the industry, and certainly 4% would be at the higher end of sort of any other bank we cover, but then you minus fees, you would have to be something less than 3%. So, I'm not trying to nitpick the details, but unless your average fee is 5% on your loans, it makes it really hard to get to that 3.14%, does that makes sense?

Right. Yeah, it does make sense. And the other, I actually, I sat for a couple of hours with some people proving this to me because I was where – my head was where ears was a month ago. The answer though is not – it doesn't lie in the fee, in the numerator, but the answer lies in the denominator because the weighted average life of the loans is much shorter than 24 months because of the amortization. And as a result the fee ends up getting amortized over a shorter period. And so it ends up being higher than the math you just laid out. The yield ends up being higher than the math you just laid out. And we can, maybe James can kind of put together a numerical example of that.

Perfect. That's very helpful. I do appreciate that. And then sort of my second question for you, I guess one of your slightly smaller bank peers just sold a large block of their oil and gas loans to a non-bank. What would it take for Zions to consider doing something similar, just given the size of your portfolio and sort of the challenging outlook for the energy industry?

Well, I'll start out – I'll say we're very comfortable with our energy portfolio, but Scott; yeah I was going to turn it over to you to take that.

Sure. Ken, this is Scott. Yeah, if you really dig into what their portfolio – what they were doing and their desire to exit the business is just very different, very different set of circumstances to our portfolio. So the short answer is, there is really not a lot of similarity and we're not thinking about selling off a portion of our portfolio to reduce the risk. Their exposures were pretty different than ours and they had a more regionalized portfolio as well. I don't – I'm not an expert on their portfolio. You have to really evaluate it, but when you look at the mark they took against it, it is a little eye popping, but it's just a very different fact set.

Understood. All right. Just wanted to check. Thank you so much, and Paul I'll definitely follow-up with James on the calculation of the PPP fees. So, thank you.

Great. Thanks.

Thank you. Our next question comes from the line of John Pancari of Evercore ISI. Your line is open.

Good afternoon. On the loan loss reserve, I know the reserve total is about 1.88% ex-PPP loans. So, I guess, how are you thinking about the potential for incremental reserve additions here, just given the backdrop? Is this where you think the reserve should peak at this level?

Well, John as you know under – in CECL land, if there is anything that we know with respect to losses, we would have had to incorporate it in this particular cycle, this allowance cycle. So the things that would add to the allowance from here are a deterioration of the credit quality of the portfolio more than we believe will already occur and/or a deterioration of the economic environment more than we have forecast. So, beyond that, it's hard for me to say sort of what the direction is other than I feel confident that based on what we know today this is our best estimate for the life of loan losses.

Okay, got it. And then separately on – also on the credit side, classified loans, I know they were up sharply in the quarter, up about $600 million or so in the COVID-19 sensitive areas. And can you just elaborate a little bit more on what specific areas drove the spike there? Thanks.

Sure. Michael, would you like to take that?

Sure. Yeah, this is Michael. I'll take it. The big drivers are sort of the obvious hospitality, CRE-retail, some commercial airline, modest commercial airline exposure, dental drove it initially at the beginning of kind of the CECL process. We started to see dentistry recover quite quickly. Retail in itself was a driver, gaming, casinos were drivers as well. Those were some of the industries that were the bigger contributors.

Okay, all right, thanks. And if I could just ask one more, I guess Paul back to you just on the reserve again. Based on your comment if there is no change in the economic backdrop, but the charge-offs continue to come in and rise. Is it therefore next quarter, fair to assume that we see loan loss reserve releases or a reduction in the reserve ratio?

Yeah, well if everything progresses in accordance with our expectation, John, then I think that's probably a fair assessment, right, because we expect adverse credit migration, we expect charge-offs that's all baked into that $914 million number. It's really the variations in that forecast that are going to create changes in the overall allowance.

Yep, got it. Thanks Paul.

Thank you.

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

Thank you. Good evening. You said that net charge-offs were driven primarily by two loans. Wondering what industry those loans were in and what kind of severities you saw?

Michael, would you like to take that?

Yeah, sure. One of the industries was leisure and recreation, somewhat of an unusual credit. The other – we had a couple of others that were a little more modest. One was a contractor, an electrical contractor and another was a small tech company. It was quite diverse. No systemic, no real trend behind it.

I think the two largest losses, one was leisure and recreation you mentioned and the other is – was in retailing.

And do you know what kind of severities you saw in those credits-those two credits?

Well, on the leisure and recreation we saw some pretty significant severity, but it was the credit that was already troubled going into COVID. And the secondary market for, call it, not just take outs but private equity shrunk, and so it became even less valuable. So it's pretty high loss on that particular credit. And the retail would be characterized as same in a way because it was secured mostly by [FF&E] and valuations during COVID made the [FF&E] this less valuable.

Thank you.

Thank you. Our next question comes from the line of Peter Winter of Wedbush Securities. Your line is open. Please go ahead.

Thanks. Good evening. Excluding the most stressed COVID industries, I'm just curious what you're hearing from your small business customers about today's business environment?

Maybe I'll...

Go ahead, Harris. Yeah. Go ahead, Harris.

Yeah. I'll take a stab at it. I think it's obviously a time where businesses of all – not just small businesses, businesses of all types are experiencing things that they wouldn't have – certainly wouldn't have predicted. And there is a lot of – there's clearly a lot of stress with a lot of smaller businesses, but it's all over the board in terms of how they're going to get through this. And when we underwrite, we're fundamentally a collateral lender. We underwrite to stress cash flows, but take collateral as it's kind of a second way out, if you will. And as we've done a lot of portfolio review, I mean, at this point, we're also seeing quite a lot of strength in a lot of businesses. They came into this with strong balance sheets. You have to consider the fact that we came into this with the longest – on the heels of the longest expansion that we’ve seen in our lifetimes. And that put a lot of businesses in pretty strong shape. We've reviewed hundreds of credits. And I think the takeaway for us as we came out of these reviews was – at least for me personally – it was – I was probably really pleased with how much strength was there, not that they're not going to have – not that we're not going to see some losses – I think the losses will be commensurate with the reserves we've set up likely, you know over the course of the next few quarters. Could things get worse? Well, yeah, if the pandemic continues this very serious rate of infections that we're seeing and leads to prolonged additional shutdowns, I could see things getting worse. I do think that most states even though we're seeing this upturn in infections, a lot of businesses are figuring out how to get back to business. Places I go, I suspect it's true for – place of things you're seeing as well. I mean, people are wearing masks. They're doing the things that probably will have to be done for the next several months to allow business to carry on in this country, but I do think that most businesses came into this with, you know in a pretty strong position. We see a lot of cash, certainly reflected in deposits. We've seen a lot of proceeds from PPP loans that were deposited into deposit accounts and that it remains there. I mean, I expect that will get spent now, but again, a source of strength for a lot of these businesses. So, all-in-all, I think they're in better shape than I might have guessed would be the case if you explain what we are going to be going through this year.

I would – this is Scott, I just add to that that I think unlike in other downturns and other downturns, the banks are generally the shock absorber. In this case, I mean, we all know the unprecedented level of government support, but I think what we're seeing particularly with a lot of industries is that suppliers are providing longer terms. Every landlord are providing flexibility. Everybody realizes that they have to help out in terms of extending payments or deferring payments, etcetera, etcetera, just to keep the process going. And so, I don't think we've ever seen another period of downturn where you have this much support coming from this many directions to support small and medium-sized businesses.

I might ask also just two other, one for Scott. And that is, as John Pancari noted, there was a substantial increase in classified loans. A lot of that coming as we went through industry-after-industry and did reviews on a lot of our exposures. What’s interesting to me is that as we went through those reviews, the non-accrual numbers have not really changed that much. I mean, certainly they're up, but they're not up commensurate with classified numbers, which is indicative of the fact that we – yes, we think businesses are going to be experiencing some stress, but we also think there’s a lot of coverage there that will probably help us get through it that provide the basis by which I will be able to work with our customers to get through it. So, I think that's good news.

And Harris, this is Ed – Peter, my apologies to you. Do you have any other comments?

No.

Peter, just the other thing is, you've seen us do before in our history in the last oil and gas downturn. We were very conservative in initially addressing the issues and we downgraded credit as we saw. So, we've followed the same methodology, and hence all those deep reviews that are done by each of the segments. And hence, the reason for the shifts were proactive in trying to be realistic about grading the portfolio.

That's great. Thanks very much.

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

Oh! Great. Thanks very much. If we could just turn to the energy portfolio, I was curious with – I'm assuming the redetermination process over where you see the balance is going over the next year. And relatively where do these borrowers really make money? I know there is a lot of discussion about the hedges and the hedge performance, but as you look at your borrower base, do they need $45 or $50 oil to make money or are they cash flowing here? Thanks.

Sure. Brock, this is Scott. I'll take that. And to start with, we have about 70-plus borrowing-based redeterminations that we do. And we've, for the most part, completed our spring redetermination. We have a few left to complete based on the way in which information comes in. And generally speaking, those borrowing base is because of the price volatility in the first part of the year. Generally speaking, borrowing bases are down about 15%. Now, remember that our average advance rate going into the quarter was kind of 50% to 60% against what a borrower could borrow. So, in most cases, out of the 72, we had about seven to eight or nine, what we call, deficiencies, which means that the amount outstanding is greater than what the borrowing base would allow. And the borrower has two quarters to bring their borrowing back in line with the borrowing base. And we believe with those deficiencies and it's not unusual, we've had other periods in time back in the 2015-2016 time frame where it's not unusual to have seven to 10 deficiencies, 10% of your portfolio with deficiencies. And knowing these companies as we do, we believe virtually all of them – we'll be able to deal with it in an appropriate way. And so in terms of our upstream portfolio, we had an increase in classifieds; that's generally principally where the increased classifieds came from in energy was just due to the volatility and pricing and few more deficiencies than we would normally have. But other than that, we think the portfolio is performing just fine on the upstream side. And in terms of hedging – we're now sitting with about 81% of our oil production for the remainder of the year is hedged in the low 50s, about 70%…

Got it.

And having said that, again, the result of that is you're not going to see nearly as much exploration; CapEx budgets are being cut way back, rig count would be really low. And remember that on all of this shale-type exploration, the decline curves are about three years. And so, production will come down significantly, and that will start to have a good impact on the amount of supply that's available which will be supportive of higher prices.

Okay.

Scott, this is Michael. Can I just add one thing, one comment to the oil and gas portfolio that really started to correct pre-COVID? The delinquency rate on 60 days past due is only 1% on the entire book.

Okay. That's great color. Appreciate it. You don't sound like you're off side’s even ex-hedges because of the price of the commodity switches. That's good. Thank you.

Hey, Scott. This is Ed. Just one other supplement to Scott's comments. Like every other company, you have a price deck. When we started doing the redetermination, we adjusted the price deck, right, to be more conservative. So Scott's numbers with regards in the determination and how many had that deficiency balance was actually based on the more conservative price deck. So in light of that, we still fell in line with our normal fall-out even with having a more conservative price deck just as a side bar.

Got it. Thank you.

Thank you. Our next question comes from the line of Steven Alexopoulos of J.P. Morgan. Please go ahead.

Hi everybody. On the PPP program, the new customers you're acquiring, are they all in footprint? And what's your sense as to why they're going to you versus their primary bank?

Keith, do you want to take that?

Sure, I'd be happy to. I don't have the exact number handy as to what are in footprint. They're substantially in footprint and we believe just from anecdotal conversation with a number of them that what we've been the beneficiary of is frankly stress with their existing bank, stress getting their PPP loan done. I think PPP experience was all over the map with different banks. I think our experience that our customers had as I mentioned earlier was a good experience. It was digitally based and so we ended up being just the beneficiary of a lot of customers that couldn't get it done at their existing institution.

Okay. That's helpful. And then for a follow-up as you talk to these customers on the PPP program, I know you're not assuming your assumptions that get forgiven, but what's your sense at this point in terms of what does ultimately get forgiven? Thanks.

I'll start with that because we've started the forgiveness process not through the SBA but internally through our own website and our portal with some customers. And again, there is a very diverse group. I think the majority of the customers we're seeing applying for forgiveness are going to get or expecting certainly complete forgiveness. And then there are others that are expecting more in the 50% range, but we've been talking internally. Well clearly, as we get details about statistics as we have enough of a base asking for forgiveness we'll have better information, but right now we're kind of thinking it's going to be in the 10% to 15% of total balances remaining.

That don't get forgiven. That's what you are assuming.

That don't get forgiven, right, Steven, right.

Okay. All right. Thanks for the color.

I'll just reinforce that that's somewhat speculative and as Keith said it's really early days on that. Yeah.

Yeah. Got it. Appreciate the color.

Hi. Thanks. This is James again. We just wanted to switch over to the lightning round as we call it at the end of the call here. So, Latif, if we can keep each question from here on out to just one question and we'll hold the follow-up question for after the call if that's needed. I'll be available after the call. But just go to one question and we'll keep our answers kind of quick.

Thank you, sir. Our next question comes from Gary Tenner of D.A. Davidson. Your line is open.

Thanks. Good afternoon. Just got a question about the C&I portfolio. Obviously, most banks are large draw downs in the first quarter and repayments in the second quarter, but your period end C&I portfolio kind of blew through even the year-end or year-ago bubbles of outstanding C&I. So, wondered if you could talk about how the downward pressure in that portfolio?

This is Scott. I'm happy to take that. Yeah, we're down about a $1.4 billion versus the first quarter on C&I and well, it'd total loans actually. And C&I as you know it is a big part of it and line usage is just last, which you would expect and the volume of request is last. So, it's pretty much what you would think of in a – in this kind of environment, which we've never experienced before pandemic. Everybody is sitting back, they are retaining cash, they're not borrowing, they're decreasing leverage, they're not moving forward with new activities. And everybody is in a wait and see mode. So, we've also seen declines in the application rates that we have on all of our consumer products and our small business products. And we believe that'll all come back in time. But all of it contributes to just lower total outstandings for the portfolio with C&I kind of leading the way on that.

I'll just add real quickly that because of the focus of our portfolio being largely small business related and the confluence of the PPP loan program with the portfolio, I think that also had an impact on loan growth.

Thank you. Our next question comes from Brian Foran of Autonomous. Your line is open.

Hey, how are you? I know you said lightning round, but I've got this phenomenal seven-part question written down here. But on the PPP, I guess maybe the way to frame it, I've got some people emailing me and saying, look, this is a home run, key customer acquisition, lower the probability default on struggling borrowers. And NII is going to stick around for the rest of this year, maybe a little bit of next. So, big positive numbers go up. And then I've got another group of investors emailing me saying, hey, this is good, but there is – the true NII run rate ex-PPP probably more like $520 million for the quarter and so this is kind of masking all of the low rate and other loan shrinkage that's happening and people are going to overestimate the stickiness of NII. And I guess those aren't mutually exclusive, but for people having that debate tonight how would you frame it? How do you see PPP overall? Good, because lots of customers and everything or should we think about that ex-PPP NII basis is maybe offset?

Well, I'll start with that and invite my rest of the group here to join in. I really – when you think about where our average customer lies – the preponderance of our customers are small business customers, right? And so, I really don't think you can separate the PPP loan program from our loan portfolio. I understand that it's a special program. We are clearly separating it because we think it's informative for investors but we are not separating it because we think it is sort of unrelated to the rest of the book. In fact, it's highly related to the rest of the book. So in my mind at least the fact that we have been able to help our communities and help so many of our customers and bring in a lot of new customers along the way, we think is a positive story for our organization and for the communities that we serve.

I would just – this is Scott, I'd just add to that too that as part of that whatever your assumptions are about what will look like when the PPP loans have been forgiven and that story is over and hopefully the pandemic is starting to move into the rearview mirror whatever your assumptions are about that. Basically our borrowers are going to have a lot less liquidity than they had going into it. They're going to be more prone to borrow. Line usage probably goes up and I think you're going to see a lot of people that postponed investing in things or borrowing for either personal reasons or business reasons. Once they see more clarity you're liable to see, I don't know six-to-nine-month period of kind of heightened activity. So there's some assumption about growth one has to make when you come out of this as well.

Thank you.

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

Hey. Thanks, guys. I was wondering if you could just elaborate a little bit more on the infrastructure delays in terms of the tech implementations? What does that mean both operationally and what does it mean in terms of expense control and the direction of costs? Thanks.

Yeah, Ken. This is Scott. FutureCore is our big core replacement project. We've finished the first two phases of three phases on that as you know. The third phase is our deposit phase, which is scheduled for kind of 2022. We don't think the delay is significant either from a time standpoint or a P&L standpoint. It could certainly cost a bit more. But the relative cost of – the relative higher cost we believe will be moderately small again in the context of what we're spending. Basically our partner, TCS in India, they had a lot of challenges as did everybody in that country and around the world, but they have been doing a remarkable job. And we are committed – our team is committed to delivering on our original timing. We may have to spend a little bit more to make up for this period and that's what Harris was trying to reference and the period could get extended by a quarter or two also, but none of that would have a real material impact on what we're doing we don't believe. The other project is our online and mobile replacement. It was certainly – it's being impacted by COVID, but also just the complexity of the project and our online and mobile systems work well today. There's no real customer issue associated with that project being extended if it requires another six to nine months to complete.

Latif, this is James. If we can just take one more question, we're already over time a little bit. We want to let people get to their evening. So, we'll go ahead and take one more question and we'll take follow ups offline.

Yes sir. The next question comes from Erika Najarian of Bank of America. Your line is open.

Hey, I just made it. Thank you. This question is for Harris. So, you've stressed to us that in anticipation of a recession that it was prudent for Zions to hold capital levels or higher than peers. And as you've demonstrated in your results today – your PPNR is fairly solid. Your reserves seem to be higher than a lot of analyst two-year cumulative loss assumptions. And so as we think about Zions getting through this crisis profitable and start thinking about the other side, is 10.2% still a proper capital level to hold? And at one point – at what point do you think it's proper to move closer to peer average?

Well, I don't know. Good question, but I'm not sure it's a good time to be answering it because they will – we'll know a lot more I suspect in six months and – but I'll tell you, it does – it's really kind of amazing to me. Nobody really foresaw what we're all dealing with in this really weird year, but the fact that we came into it with stronger capital feels great and so I expect if we want to kind of maintain that posture we'll have to look at kind of relatively what that means maybe as we go through time, but it's way premature to be speculating as to where we take the capital ratio once we're through with this.

Thank you.

Yeah, thank you.

Latif, thank you very much for hosting the call today and thank you to all of the investors and analysts who have joined us on the call today. If you have additional questions please contact me, James Abbott, at the email address or phone number listed on our website. We look forward to connecting with you throughout the coming months. Typically we do this in person in conferences, but we'll be doing these things virtually for a while and we – again, we appreciate and thank you for your interest in Zions Bancorporation. With that, this concludes our call for today.

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