Zions Bancorporation, National Association Q3 2021 Earnings Call Transcript

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October 18, 2021
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Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Zions Bancorporation's Third Quarter 2021 Earnings Results Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. James Abbott. You may begin.

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Thank you, Towanda, and good evening, everyone. We welcome you to this conference call to discuss our 2021 third quarter earnings. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck on slide 2 dealing with forward-looking information and the presentation of non-GAAP measures, which apply equally to statements made during this call. A copy of the earnings release as well as the slide deck are available at zionsbancoporation.com.

For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide operating remarks -- opening remarks, followed by comments from Scott McLean, our President and Chief Operating Officer. Paul Burdiss, our Chief Financial Officer, will conclude by providing additional detail on Zions' financial condition. With us also today are Keith Maio, our Chief Risk Officer; and Michael Morris, our Chief Credit Officer. We intend to limit the length of this call to one hour. During the question-and-answer section of the call, we request that you limit your questions to one primary and one follow-up question to enable other participants to ask questions.

With that, I will turn the time over to Harris.

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Thanks very much, James. We want to welcome all of you to our call. Beginning on slide 3, the themes that are particularly applicable to Zions' most recently as well as -- we believe in the near term horizon are listed here. We are seeing continued strong deposit growth continued in the third quarter has positioned Zions well relative to many of our peers to be able to invest in securities that offer promotions on loan products to core customer segments. Secondly for more than a decade, we worked to position the company to perform very well during an economic downturn. We're really pleased with the result, what you see in our credit outcomes again this quarter.

Third, we, along with most in the industry have experienced net attrition of loan balances excluding PPP loans. But over the last quarter, we started to see some new commercial loan growth and our strong deposit growth enabled us again to launch some promotional campaigns in June that have resulted in favorable initial results. These customers are coming from other banks and we've also seen new demand from existing customers. All of it is accretive to net interest income relative to leaving the liquidity and money market accounts and all of this is helpful to our goal of generating positive operating leverage.

We're well positioned for rising interest rates, which is helped by strong deposit growth but also reflects the careful deployment of liquidity during earlier, more uncertain points in time. As the outlook becomes more certain we have begun to deploy the liquidity into higher yielding assets. The final item on this slide refers to our ongoing significant investment in technology, which is designed to enable Zions to remain very competitive in the future both relative to the largest U.S. banks, the fintechs and to well-established community banks.

Turning to slide 4, we are pleased with the results on most fronts. Our campaigns on owner occupied commercial loans, as well as consumer home equity lines of credit resulted in strong growth in both categories, each increasing at an annualized rate exceeding 10% relative to the prior quarter. Excluding PPP loans, our period end loans and total increased an annualized 5.6%. Deposit growth remained very strong, up an annualized 9.3%, moderately outpacing the growth in the industry, which includes all domestic commercial banks. Over the prior year, deposit growth was 16% which compares to the industry's rate of 12%.

It is particularly notable that credit quality continued to improve again, reporting net loan recoveries in a nearly 30% decline and special mention loans from the prior quarter. These, along with other factors led to a further release of loan loss reserves. We indicated last quarter that we would continue to increase the size of the securities portfolio at a rate greater than what we did in 2020. And in the third quarter, we increased the size of the securities portfolio by nearly $2.3 billion or 12% and that's not annualized. That's relative to the prior quarter. Diluted earnings per share decreased to a $1.45 per share from $2.08 from the prior quarter.

There were two primary factors that accounted for the decline, the change in the provision expense and the change in the gains and losses on securities. Combined, those two contributed about $0.76 per share less than the third quarters compared to the second. One way we and perhaps some of you look at our earnings is to look at adjusted pre-provision net revenue, which excludes securities gains and losses and subtracting from that actual net charge offs. On that basis, it was unchanged relative to the prior quarter of $290 million. Turning to slide 5, at the top left is a chart of our recent earnings per share results.

The chart on the bottom left shows the per share amount for the provision for credit losses during that same period. The provisions defect on earnings per share was quite variable throughout the pandemic and is a major factor in the linked quarter decline in earnings per share. On the right side are some notable items that may be of interest. As previously noted, unrealized losses from securities, less the partial offset from a reduced success fee accrual to the SBIC fund manager equaled $0.12 per share as compared to unrealized gains of $0.25 per share in the prior quarter. Most of the recent gains and losses on securities are attributable to an investment in small business investment company fund.

One of the company's within the fund successfully completed an IPO in April, which we described in our first quarter 10-Q with a strong unrealized gain in the second quarter followed by a partial retracement in the third quarter. On slide 6, we highlight the balance sheet profitability metrics. The healthy results were attributable to items that I've previously described. As previously noted, another significant highlight for the quarter was the credit quality of the loan portfolio as illustrated on slide 7. Relative to the prior quarter, we saw a further improvement in problem loans. Using the broadest definition of problem loans, criticized and classified loans dropped more than 17%.

Although not shown relative to the prior quarter, special mentioned loans declined at 29% and classified loans declined 10%. Many of you have seen our slide in the past showing our average net charge-off ratio relative to average non-performing assets plus 90 -- plus days past due loans, which is an indicator of loss severity. And shown in this metric relative to our peers can be seen in the appendix. During the five years ending 2020, our average annual loss severity was 15%, while the peer median was 32%. Over the last 12 months, that ratio for Zions is just 6%. We experienced net credit recoveries on loans, which was also true of the prior quarter.

Perhaps one of the more interesting credit measures to highlight this quarter is that gross charge-offs were very low, $8 million or just 7 basis points and annualized of average non-PPP loans. Shown in the chart on the bottom right, one can see the volatility of the provision contrasted with the relative stability of net charge-offs. This is mostly the result of changing economic forecasts. Our capital position is depicted on slide 8. We increased our share buyback to $325 million in the third quarter and have indicated that ultimately, we expect a target of common equity Tier 1 ratio at a level moderately above the peer median. We expect to announce any capital actions for the fourth quarter in conjunction with our regularly scheduled board meeting this coming Friday.

Next, Scott McLean, our President and Chief Operating Officer, is going to provide an update on the PPP program and our technology initiatives. Scott?

Scott J. McLean
President and Chief Operating Officer at Zions Bancorporation, National Association

Thank you, Harris. Turning to slide 9, our third quarter adjusted pre-provision net revenue was $290 million net of the effects of the previously noted IPO. The PPNR bars is split into two portions, the bottom portion represents what we think of as generally recurring income while the top portion denotes the PPNR we've received from PPP loans. During the course of the Paycheck Protection Program, our performance of producing on a relative basis three times more than the industry average, will result in approximately $460 million in additional income to the company, which represents capital that ultimately benefits all shareholders.

To be specific, PPP-related revenue has equaled $380 million, and there remains $83 million in capitalized income net of origination costs that will be recognized over time. Although PPP-related revenue will decline, we're enthusiastic about the longer-term benefit of adding approximately 20,000 small business customers and strengthening relationships with 57,000 existing customers. Turning to slide 10 reflects some of the highlights from our times performance that I noted earlier. Regarding forgiveness, we've received $7.9 billion of applications or nearly 80% of the total volume.

$6.7 billion has been approved for forgiveness by the SBA, and $3.1 billion of PPP loans remain on our balance sheet at quarter-end. Turning to slide 11, this slide illustrates the longer-term benefit of this activity. Specifically, as a result of our outreach, we see growing relationships with many of the 77,000 PPP participating customers. These customers collectively have contributed approximately $6 billion of our deposit growth, and new non-PPP loan balances exceed $550 million to this collection of customers. More specifically, of the PPP 2020 vintage, the spring 2020 vintage, 14,000 new-to-bank customers, approximately 54% are now appear to be utilizing us as their primary -- for their primary operating accounts.

This percentage as we've noted previously has been growing nicely each quarter, and we are seeing similar growth trends with the PPP 2021 vintage of 5,000 new-to-bank customers, which started earlier this year. Turning to slide 12, recall that in our investor presentations we provide a detailed slide of our major technology projects. Today, we want to just highlight two. Many of you may recall in April, FDIC Chair, Jelena McWilliams was quoted as saying that her number one concern for the banking industry was its reliance on aging core loan and deposit systems. So where do we stand on this topic? As of February 2019, you'll recall that we completed the replacement of our three legacy core loan systems and now have virtually all of our loans on our new modern core.

In 2023, we expect to complete the final phase of our core modernization journey with a conversion from our legacy deposit systems to our new enterprise core system. To put this in perspective, a big core accounting firm recently reported that of the top 100 banks in the United States, 93 remain on one or more older first generation cores. Six are utilizing a modern core on only a portion of their loan and deposit ecosystem. And Zions is the only bank approaching the ability to utilize a modern core for the entire enterprise. Interestingly, you were starting to hear about some digital first core systems.

While these provide the most advanced architectural elements available and were generally designed for digital-only banks, none have yet to be proven usable on a scale or complexity required by the largest banks. So, why does this matter? At a high level, implementation of one core solution across all lines of business, all products, and all geographies greatly reduces complexity, enhances our resiliency, and creates adaptability for a rapidly-changing technology environment that lies ahead. More specifically, the architecture is, as noted on this slide, parameter driven, meaning we can quickly turn off and on or adjust features without reprogramming or testing for months.

It utilizes one data model, a huge advantage in the digital world, and it is natively real-time and API-enabled. This collection of characteristics and others will greatly reduce the time it takes to introduce new products and capabilities. As an example, our new core was an important contributor to producing PPP revenue exceeding $460 million. Within a matter of days, we were able to introduce the PPP product and increase the number of business-related loans on our system from approximately 40,000 to over 95,000, with loan boarding occurring in minutes.

Most would agree this represents a significant early return on our core replacement investment. As you talked to other banks, they will say that their older first generation core loan and deposit systems have been adapted to mimic real time, utilized API, and synthesized dozens of data models. Well, we were doing that as well in our loan systems and continue to do that in our deposit system until we convert. But all of these technologies -- all of these technology gymnastics that take place generally and what is referred to as middleware absolutely introduce complexity, risk, and cost. Regarding one additional highlight, I'd like to note that our core systems seven-day processing capability.

Most of the world outside of the United States operates on seven-day processing. When we implemented the loan portion of our new core, we adopted seven-day processing. However, as the U.S. deposit market has still not adopted seven-day processing, we chose to convert back to five-day processing in advance of our 2023 deposit conversion. The point is that we were literally able to turn this global capability off over a weekend in August and can turn it back on when the U.S. adopts seven-day processing.

This slide also conveys numerous other customer and employee facing benefits which I'd be happy to expand on the Q&A. Turning to slide 13, my last slide. While we have been highly focused on our industry leading work regarding core modernization, I wanted to highlight one of our numerous new customer-facing capabilities. Earlier in the year we converted 610,000 consumers to our new online mobile platform.

While time does not allow us to review all the details of this new platform, we are gratified with the early acceptance by consumers as measured by ratings in the Apple App and Google App stores. You can see that we are on par with the largest U.S. banks and are top tier with our peers. The rollout of this new online mobile system to approximately 150,000 small business clients will occur in 2022. And with this client base, we are already perceived to be on par with or superior to our global competitors.

With that, I'll turn the remainder of the time over to Paul Burdiss, our Chief Financial Officer.

Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association

Thank you, Scott, and good evening, everyone, and thanks for joining us. More than three quarters of our revenue is in the form of net interest income, which is significantly influenced by loan and deposit growth and associated interest rates. As such, I'll begin my comments on slide 14 with a review of these results. Although the average total loans were down in the third quarter by 3.7% when compared to the second quarter, we experienced average loan growth when excluding PPP loans. And on a period end basis, that growth was $661 million or 1.4%. The strongest linked quarter growth was in commercial construction at nearly $270 million.

This is a result of increased construction activity on previously established lines of credit. We reported strength in commercial and industrial loans, which increased more than $280 million or 2%. We ran promotions during the quarter on owner occupied and home equity loans, which increased $250 million and $107 million respectively. Declines were reported in PPP loans, down $1.4 billion, as Scott previously noted and term commercial real estate which declined more than $220 million. In the third quarter, we reported a more modest decline in residential mortgage balances than we have in recent quarters, down nearly $130 million.

With a strong held-for-investment pipeline of mortgages, we may see some further stabilization or possibly growth in residential mortgages in the near term. One final note on loan growth. Relative to periods prior to the pandemic, revolving line of credit utilization has declined several percentage points. Using the third quarter of 2019 as the benchmark quarter, our revolving line utilization rate was 39.5% as compared to 33.7% in the third quarter of 2021, which was essentially from the prior quarter. Although revolving loan balances did increase from the prior quarter of about $200 million, the lending commitments increased about $700 million. As I've noted in the past, deposits have been and remain the driver of balance sheet growth over the past several quarters and in the third quarter.

On the right side of this page, average deposits increased 3.7% from the prior quarter relative to the year ago period. Average deposits increased 16%. Average noninterest-bearing deposits increased 4.9% over the prior quarter and 24% compared to the prior-year period. Our noninterest-bearing deposits make up one-half of average total deposit. The yield on average total loans increased slightly from the prior quarter, which is attributable to the 6.7% yield in the PPP loan portfolio. Excluding PPP loans, the yield declined 8 basis points to 3.59% from 3.67%. Deposit costs remain low. Our cost of total deposits fell to 3 basis points in the third quarter.

Moving to slide 15, we show our securities and money market investment portfolios over the last five quarters. The size of the period end securities portfolio increased by $6 billion over the past year to $21 billion, while money market investments increased more than $7.5 billion to $11.9 billion. The combination of securities and money market investments has risen to nearly 40% of total earning assets at period end, which compares to an average level in 2019 prior to the pandemic of 26%. We continue to exercise caution regarding duration extension risk by purchasing bonds with relatively short duration both in the current and in an upward shock rate shock scenario.

The $3.6 billion of security purchases from the quarter had an average yield of 1.53%. Slide 16 is an overview of net interest income and the net interest margin. The chart on the left shows the recent five quarter trend for both. The net interest margin in the white boxes has declined over the past year, reflecting the rise in excess liquidity as described on the prior page. For the third quarter, this growth in excess liquidity is referenced in the chart on the right as the strong growth in deposits has impacted the composition of earning assets to a larger concentration and lower yielding money market and securities investments. The weighted average yield of our securities and money market investments is just 1.07% and with that concentration increasing by 4 percentage points in the quarter, it weighed on the net interest margin.

In fact, I estimate that the increase in money market investments has accounted for 33 basis points of the 45 basis point net interest margin compression over the past year. Slide 17 shows information about our interest rate sensitivity. Focusing on the upper left quadrant as a general statement, our asset sensitivity has increased as deposits have been invested in short term money market assets. This increase in estimated rate sensitivity assumes that the incremental deposits have modestly shorter duration characteristics when compared to deposits on our balance sheet prior to the recent deposit surge.

We are continuing to deploy deposit driven cash into securities which helps to moderate the natural the natural asset sensitivity. However, with continued strong deposit growth and higher prepayment rates on mortgage loans and securities, our estimated interest rate sensitivity was similar to the second quarter level, such that in an interest rate environment that has shocked immediately 100 basis points higher than the current level, our net interest income at the 12 month horizon is estimated to be higher by 12%. As previously noted, we may continue to add interest rate swaps, including forward starting swaps, which would help to temper our natural asset sensitivity.

On slide 18, building on a good second quarter, customer related fees increased an additional 9% in the third quarter to $151 million. Notably, activity based fees such as card fees, merchant services and retail and business banking fees remain strong and have grown to the level of two years ago prior to the pandemic. This improvement added to continued strength in loan related, capital markets, and wealth management revenues. Non-interest expenses on slide 19 were essentially unchanged from the prior quarter at $429 million. Adjusted no-interest expense increased 3% or $13 million to $432 million.

The linked quarter increase in adjusted non-interest expense is primarily due to employee compensation. The increase was associated with higher base salaries and profitability driven long- and short-term compensation. Other noninterest expense includes a $4 million success fee reversal associated with the mark-to-market loss in our SBIC as compared to the $9 million success fee accrual recognized in the second quarter. Slide 20 details our long term credit losses or ACL. In the upper left we showed the recent declining trend in the ACL to $529 million at the end of the third quarter or 1.11% of non-PPP loans.

The chart on the lower right side of this page shows the three broad categories that resulted in a decline of $45 million. More than 60% of the change was attributable to changes in the portfolio mix and composition. Our updated outlook is found on slide 21. And as a reminder, this is our outlook for financial performance in the third quarter of 2022 as compared to the actual results reported for the third quarter of 2021. The quarters in between are subject to normal seasonality and my comments are subject to our earlier reference to forward-looking statements found on slide 2.

Due to the degree of uncertainty on the timing of customers submitting requests and the SBA approving those requests, our outlook for loan growth excludes PPP loans. We are more optimistic about loan growth now than we were in July, and as such, we are increasing our outlook to moderately increasing from slightly to moderately increasing led by core C&I including our promotional owner occupied loan products. We expect net interest income also excluding PPP loan revenue to increase over the next year as compression of loan and securities yields will be more than offset by continued deployment of cash into term securities and our more favorable outlook for growth in non-PPP loans.

The current quarter's customer related fees are the highest we have reported. Building on such a strong third quarter, we are reducing our outlook for customer related fee one year from now to be stable to slightly increasing from moderately increasing. We are adjusting our expectation for adjusted noninterest expense to be moderately increasing from slightly increasing. We remain disciplined on expense control. However, increased business activity, emerging inflationary trends, and continued investment in enabling technologies will place upward pressure on noninterest expense over the near term.

And finally, with respect to capital management, we remain comfortable that our philosophy of lower-than-average risk, combined with stronger-than-median capital, is the right formula for creating long-term shareholder value. Our capital, measured by common equity Tier 1 relative to risk-weighted assets, remains well above the peer median. As we consider the balance between capital ratios and our risk profile, we believe that we have capacity for continued active capital management in the near to medium term, so long as the current macroeconomic and credit trends continue to be favorable.

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

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Operator

Thank you. [Operator Instructions] Our first question comes from the line of Ebrahim Poonawala with Bank of America. Your line is open.

Ebrahim Poonawala
Analyst at BofA Securities

Hey. Good afternoon. I was wondering, Paul, if you could just, again, guide a little bit. Just help us understand in terms of what are you assuming in terms of how much cash you expect to deploy into securities over the next 12 months, where you see that liquidity levels going? And does the increase imply 4% to 6% or somewhat higher in the high single-digit range when you think about the growth year-over-year? Thanks.

Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association

Yeah. Sorry. I missed the second part of your question on 4% to 6%. What was that question?

Ebrahim Poonawala
Analyst at BofA Securities

Yeah. I was just increasing -- does that imply mid-single digits or high-single digits NII growth?

Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association

Oh, right. Sorry. So, first, let me talk about deposits because that's really the driver here, right? We have had -- deposits across the industry are up. I think we have been able to garner more than our fair share of deposits. And as we are analyzing these deposits over time, what we're finding is a year ago I would have thought that these deposits were more transitory to borrow a word from the Fed than they're proving to be. What we're actually observing is that many of these new deposit accounts are being used in an operating nature, which history tells us means that they're more sticky than they otherwise would be.

So this is what's giving us confidence to be -- I don't want to say aggressive, but certainly buying more securities than we might otherwise would, i.e. putting those deposit dollars to work. So as we're thinking about our net interest income outlook next year -- and, again, remember this excludes PPP loans, right? So taking them out of the base and not considering them going forward, but we have increased confidence that loans -- loan growth will pick up and -- so we're going to use part of the cash that way and as that cash continues to prove to be somewhat stable, that is the deposits continue to improve to somewhat stable, we will continue to deploy that in investment securities.

We -- our asset sensitive position is such that we can afford to continue to add duration on the asset side for some time to come without really adversely impacting our risk profile. In fact, I would argue it kind of improves our risk profile as we reduce volatility. So, it's those key factors. It's the continued deployment of securities and growth in loans that we believe will ultimately drive growth in net interest income over the course of the next year, excluding PPP.

Ebrahim Poonawala
Analyst at BofA Securities

That was helpful. And does that imply mid-single digits or high single digits NII growth?

Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association

Well, we have a tendency to not try to put dollars on it, but generally speaking, increasing would be mid to above mid.

Ebrahim Poonawala
Analyst at BofA Securities

Got it. Thanks for taking my questions.

Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association

Yeah, thank you.

Operator

Thank you. Our next question comes from the line of Dave Rochester with Compass Point. Your line is open.

David Rochester
Analyst at Compass Point Research & Trading

Hey. Good afternoon, guys. Was just wondering on the liquidity front what the minimum cash level you want to hold, either as a balance or percent of assets? Just trying to figure out how much excess cash you think you have that you can deploy into securities or loan?

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Yeah, so. Yeah, so, Dave, hey. So it depends on what we're assuming for deposits, right? Everything's centered around those. As we gain confidence in those deposits, that amount of sort of cash we need to hold for what I would characterize as a liquidity risk, can go down. And what we're seeing is that, as I said, the stability of that cash appears to be improving. If you look back over time, you can see that it would not be uncommon at all for us to run with a sort of cash position, i.e., the money market investments line on our balance sheet of kind of $2 billion to $3 billion.

And in fact, a year ago, that's where it was. So I wouldn't -- as we gain confidence in the stability of those deposits I would expect and I should also add that there is an enormous amount of liquidity in our investment portfolio. So we're investing relatively short. What that means is it that we've got about $400 million of cash flow every month that we're continuing to reinvest. So when we think about our cash position, it's not only cash on the balance sheet, but the cash flow that's churning through the investment portfolio. So a long way of saying that if you look historically, we have run with a cash position that's much, much lower than today. And over time, I would expect to get back to something closer to that.

David Rochester
Analyst at Compass Point Research & Trading

Yeah, okay. And then just switching gears to the loans on the teaser rate products. Just curious where those rates are today, what they step up to in a year or so? And then, what's your appetite is for total production there? How long you think you're going to run those? Maybe details there would be great. Thanks.

Scott J. McLean
President and Chief Operating Officer at Zions Bancorporation, National Association

Yeah. Thank you, Dave. It's Scott McLean. The home equity line of credit program we ran from June 1 to the end of August and that rate was 90 basis points for the first year, and then it converted to 99 to the extent they were new loans out to 10 years. The -- and similarly, on the owner-occupied program that also started June 1 and it's tentatively scheduled to conclude at the end of this year. That promotional rate was 90 basis points and it converts out to 10 years from there, another nine years at 299.

We will probably, depending on what happens with the rate environment have each of our affiliates on a cycling basis, keep that HELOC promotion alive. And likewise, if we get to the end of the year and the right environment seems still very flat to stable, we may continue the owner-occupied program for a bit longer as well. Both have been -- we've been really pleased with the energy they both have generated and more than the loans that they've produced. It's given all of our bankers something really exciting to talk about during a pretty challenging time. And so, it's been a really good strategy for us.

David Rochester
Analyst at Compass Point Research & Trading

Yeah. Okay, great. Thanks for the color. Appreciate it.

Operator

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

Peter J. Winter
Analyst at Wedbush Securities

Thanks. I wanted to ask just two questions on the asset sensitivity. Can you just remind us what percentage of loans have floors and how many fed rate hikes you need to go above those loans worth?

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

James, do we still have that on the slide off the top of my head. I think we may have the exact percentage. Do you have it handy, James?

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Yeah. I'll get it by the end of the call, Peter. It's $6 billion or $7 billion of wherewithal, but we'll find the number really quickly.

Peter J. Winter
Analyst at Wedbush Securities

Okay.

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

And it's -- it's only about -- Peter, it's only about 50 basis points or so in the money. So it's not a huge group. And I guess my final thought on that would be it is incorporated in our interest rate sensitivity outlook. So, as we think about an up 100 scenario, that is incorporated in that.

Peter J. Winter
Analyst at Wedbush Securities

Got it. And I'm just wondering about the deposit betas. I saw on the slide what your forecast is. I'm just wondering if the deposit betas come in lower. I'm just wondering if there's any type of sensitivity analysis just given how much growth you've had in non-interest-bearing deposits.

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Yeah. Well, we certainly do a lot of sensitivity analysis and I think we have some in -- that we published quarterly in our 10-Q. I think there's a couple of key assumptions in there. One is that the duration of the deposits that we've recently put on is actually a little shorter than the duration of sort of the -- what I might call the heritage portfolio of deposits. That's one point. And the other point is there's so much liquidity in the market that we believe that when rates start to rise, we do not believe we will need to be very aggressive in raising rates, perhaps less than historically perhaps. And that feeds into our asset sensitivity.

Peter J. Winter
Analyst at Wedbush Securities

Got it.

Scott J. McLean
President and Chief Operating Officer at Zions Bancorporation, National Association

On the question about loans with floors, we have about $35 billion plus or minus in variable rate loans and about $24 billion -- these numbers are not exactly at September 30, but about $24 billion have floors. And the floors are generally at zero or rates, say, 100 basis points higher than that.

Peter J. Winter
Analyst at Wedbush Securities

Okay. Thanks, Scott. Thanks for taking my question.

Operator

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

Jennifer H. Demba
Analyst at Truist Securities

Thank you. Good evening. A question on the loan loss reserve now down 122 basis points of non-PPP loan. Just wondering given the economy should continue to improve and sounds like you're pretty confident your loan losses are going to stay pretty low, how much lower could that go?

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Hi, Jennifer.

Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association

Go ahead, Harris.

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Well, it sounds like a game of limbo. How low can you go? I think it's the very nature of CECL as -- we everything that we think about the future of that reserve is incorporated into it. But you know, if we -- look, if we saw a permanent, I don't think that the -- what we're seeing right now in terms of credit quality with you mentioned gross charge-offs coming in at 7 basis points is probably as sustainable or even where we should be.

But if we found that we -- that we're just -- that losses are not materializing, then it will continue, I presume, to come lower. I don't think there's any -- there's no sort of arbitrary limit or threshold or anything of the sort. I mean, we're just doing our best every quarter to try to understand what future losses inherent in that portfolio can look like over the life of the underlying loans. So I think it's a tough question to answer. In theory, I think it can come lower. I'm not sure I would really expect it, again just given the nature of the portfolio and the times we're in.

Jennifer H. Demba
Analyst at Truist Securities

Thank you. Second question is on your lending pipeline. Could you just talk about the pipeline outside the promotions that you had during the quarter? And what you're seeing in terms of demand right now?

Scott J. McLean
President and Chief Operating Officer at Zions Bancorporation, National Association

Sure. Jennifer, this is Scott. As you think about the categories, Paul noted our utilization rate and on revolving credits. And I think it's reasonable to expect, and that's just generally C&I credits principally but it has some consumer and some CRE related to it. And I think our general thought is over the next 12 months, we'll see revolving usage start to go up again. I don't think we have to work through all this cash. If we go back to the 2008-2009, the monetary easing then, that liquidity fundamentally stayed in the system and utilization rates were not we're not overly burdened by that. So customers just got used to dealing with a higher level of liquidity.

Secondly, I would say that our municipal finance business is continuing to grow nicely. We're seeing increases in other C&I pipelines related to larger transactions, syndications, etc. And CRE in general, I wouldn't look for CRE to grow faster than our portfolio grows, but CRE in general has been growing nicely. And finally, one of the places where we've seen the most decreases in our portfolio has been one to four family mortgages. And based on the mix of our portfolio, the mix of that pipeline, excuse me, we should start to see 1-4 family growing again. If you look back over the last five or six years before the pandemic, 1-4 family mortgage products were generally about 20% to 25% of our growth, and I don't think it's unreasonable to think that that will return as well.

Jennifer H. Demba
Analyst at Truist Securities

Thanks, Scott.

Operator

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

Ken Usdin
Analyst at Jefferies & Company, Inc.

Hi, thanks. Good evening. I just want to ask on capital. This quarter you guys did that, the extra step up and still had room to grow loans. And you've talked to us about trying to get your CET1 ratio down over time, closer to peers and directionally. So I guess what's the trade-off now if you're starting to see a little bit better loan growth with regards to how fast the pace of capital return could be and that kind of waiting or hoping or expecting the loan growth to come back in terms of RWA usage?

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Well, I'll start with that, Ken. The fact is, is we reported an estimated CET1 at 10.9% this quarter. I think you know that we compare -- we have a list of peers which we publish, and we compare our CET1 to those of peers, and we remain sort of significantly above that median peer level. Over time, as we have said, we expect to have lower-than-average risk and slightly better-than-median capitalization, and therefore we've got some room to go on that ratio. So my point of saying that is that we can absolutely absorb accelerating loan growth and continued share repurchases. But as a reminder, as Harris noted, that capital activity is subject to board approval.

Ken Usdin
Analyst at Jefferies & Company, Inc.

Okay. And then, Scott, another good update on the -- on future core and the timing, and I guess we're still waiting for that time period when you get that double spend out of the way. So how much closer are we to starting to sunset some of the older stuff? Is there -- are you still expecting costs to go up? So I'm just wondering the ins and outs in terms of the moderately increasing cost base you're still expecting from here versus when do we really start to see some of those synergies from the platform banks?

Scott J. McLean
President and Chief Operating Officer at Zions Bancorporation, National Association

Yeah. Thank you for that question. Pretty similar to what we said during the third quarter and earlier in the year, the future core-related P&L costs will actually be kind of flat to down a little bit next year. It should increase in '23 by about $7 million to $10 million, $10 million over our current run rate just because that is the implementation year. And you'll generally see expenses go up because of accounting treatment there and then in '24 it'll drop about $10 million. So to kind of put a fine point on your question.

I would, however, note that when you think about overall technology spend, and we've said this for a long time. I don't know that it's going to abate for many reasons. The investments that all banks need to make in cyber protection, the investments you have to make to be cloud-ready and utilize the benefits of cloud. The investments you need to make around data, etc. And so I don't know that that's where you'll see it. Where I think you'll see it will in operational expenses. And as we continue to see the benefits of the system, it'll come on operational expenses. Not necessarily in technology spend.

Ken Usdin
Analyst at Jefferies & Company, Inc.

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Steven Alexopoulos with J.P. Morgan. Your line is open.

Steven Alexopoulos
Analyst at J.P. Morgan Securities

Hey, everybody. In terms of my first question, Scott, in responding to Jennifer's question, the one area that you didn't really touched on was energy which I'd imagine of you'd probably get good risk adjusted returns given most banks are still restricting exposure there. So question, do you guys have an appetite for energy lending here or are you seeing increased demand just given the surge in energy prices overall?

Scott J. McLean
President and Chief Operating Officer at Zions Bancorporation, National Association

The answer is yes and yes, if I can say that without being politically insensitive. Our energy loans outstanding are about $1.9 billion right now. You'll recall that we got down to about this level after the 2015-2016 energy price volatility period, and then we were able to grow back up to about $2.5 billion and now we've run back down to about $1.9 billion. At these prices, which were predictable, for both oil and natural gas, we will start to see drilling increase and you will see line utilization going up and there are far fewer players today. And the market pricing has gone up on reserve-based loans and credit quality structures have improved.

They were not bad before, but they've become more conservative as the number of banks globally and particularly in the U.S. has shrunk by probably half, it will do energy financing today from kind of 25% to 30% down to sort of the mid-teens. We'll continue to see some midstream growth. Basically, the portfolio is about 40%, 45% upstream reserve-based loans, which is what we specialize in, about a similar position of about 40% for midstream and a smaller percentage around 15% for oil field service. But Steven, you're absolutely right, we will see growth there. We anticipate it, we're feeling it and I -- if you do go back to $2.5 billion or slightly higher will not be an unreasonable expectation over the next year and a half.

Steven Alexopoulos
Analyst at J.P. Morgan Securities

Okay. That's really helpful color. Separately, if I look at slide 13, Scott, can you give more color on what customers responded to so favorably that drove the increase in the app store ratings? Thanks.

Scott J. McLean
President and Chief Operating Officer at Zions Bancorporation, National Association

Yeah. That's a great question. When you look at it -- well, first of all, our ratings were not very favorable before. So they may be reacting to, hey, this is a whole lot better. But they're ranking us on a level, as I said, very close to the global banks, which are clearly terrific in this regard and top tier for our peer banks. And it really is the items noted there, that we have a unified platform for online and mobile. That may sound kind of simple, but a lot don't, and it means that you have to constantly be synchronizing your online and mobile product. It's one platform for us now.

The alerts option, particularly, are attractive when you think about fraud and the increase of fraud in our environment. And I would also note that this is just the start for us. We can now push upgrades, new capabilities daily if we want, okay? That's a huge difference from where we were. We can now push daily if we like, and we have a really tight punch list of enhancements that we didn't make part of the initial offering that we'll roll out over the next 12 months which we think will do nothing but support these favorable ratings and possibly increase them.

Steven Alexopoulos
Analyst at J.P. Morgan Securities

Yeah. We look -- it's pretty high across all of the sub-banks, too, pretty consistent there. Thanks for all the color.

Scott J. McLean
President and Chief Operating Officer at Zions Bancorporation, National Association

Yeah. Thank you. Yeah. It's basically an average. I don't think it's a weighted average. I think it's just an arithmetic average. But it's a little artistic, as you can imagine.

Operator

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

John Pancari
Analyst at Evercore Group

Good afternoon, guys. On the calling effort, I mean, on the calling -- on the promotion effort around the home equity and the commercial real estate, are there similar promotions or a similar sales push that given the success of these promotions that you can focus on in other products in either small business or on other parts of C&I?

And then -- or could you also -- is there any consideration around? You mentioned that syndicated lending has been picking up. Have you been evaluating your hold levels in that firm? Just looking at different ways that you can capitalize on some of this improvement in demand that you're mentioning? Thanks.

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Just a quick -- I'll just give you a quick answer [Indecipherable] go ahead. John, I'd say that I don't think -- we're not going to allow it to get into our thinking about old limits. Let me start there. I think that's just a -- that's really an important kind of risk management consideration, not one that's we're going to let revenue drive. And I'm comfortable with where our limits are, but I don't want to conflate how we use this liquidity to justify taking on a lot more risk.

I think the -- we may find ourselves looking at other opportunities in terms of how we use commercial pricing. We think that a big consideration is just systemically how we can support products, how we introduce pricing and some are typically easier because of the nature of a fixed rate or a term deal or you know that it's going to be outstanding for period of time you've been held a teaser rate for the first portion.

But you're pretty confident you're going to get a sizable annuity in the out-years. That's not always true with some other loan types, which can be shorter term in nature and a little more challenging to manage in terms of making sure that ultimately this is going to provide some really solid benefit for us. So, anyway, I appreciate your comment. Something we should think about, but I think the couple of products that we've focused this on are probably the right ones at the present time.

John Pancari
Analyst at Evercore Group

Got it. That's helpful. And then, separately, Harris, just you've been discussing your capital optionality. And I just want to see if we can get your updated thoughts around M&A. We've seen a number of your bank peers complete deals and there's been a bit of a kind of race here to gain scale in what's clearly and highly competitive space. So, curious of your thoughts there as you look at potential M&A, either bank or non-bank as well. Thanks.

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Yeah. I think our thinking hasn't really changed relative to bank M&A. I don't think that you can win this race by just getting larger, bigger isn't better, better is better. It's absolutely the way we think about this. There could be deals that make sense. There are a lot of deals that probably don't. We continue to be I think pretty cautious about any activity given all the internal focus we have on getting this feature core project behind us.

As we emerge from that, I think we'll have certainly an opportunity to do things that would be appealing to customers and it will provide some capabilities that might be incrementally enticing to the sellers. But at the end of the day, we just want to get through that project, clear our minds and then look at the economics of what's out there. And if it makes sense and if they particularly end in market consolidation that improves incrementally economics that, that's something we certainly look at. But it's not, it's not going to be a driver of our not -- strategically, it's not something that's kind of front burner for us.

John Pancari
Analyst at Evercore Group

Got it. All right. Thanks, Harris. Appreciate the color.

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Thanks.

Operator

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

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Hi, Gary, you might be.

Gary Peter Tenner
Analyst at D.A. Davidson & Co.

Hey, guys. Yeah, sorry. Can you hear me now?

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Yes, we get you. That was great. Go ahead.

Gary Peter Tenner
Analyst at D.A. Davidson & Co.

Hi. I apologize. So, my first question just a quick one on PPP. Looks like about a third of the remaining balances have forgiveness applications or really in. Could you -- can you kind of ballpark where you think the year-end level could be given that there's still sizeable amount of fees to be collected split between the fourth quarter and next year?

Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association

Yeah, Gary this is Paul. It's pretty speculative. We've -- it's not only -- it's not up to us, right? The customer -- the clients need to submit for and then the SBA needs to act on it. So, my expectation is largely that PPP loans, it's going to have sort of probably a half-life aspect through it but I'd say the vast majority of our loans are going to be gone by the middle of next year, is my personal estimate. But again, it's pretty speculative.

Gary Peter Tenner
Analyst at D.A. Davidson & Co.

Okay, great. And then, Scott, if I heard your answer to the question of rate sensitivity in floors correctly, it was $35 billion in variable rate loans, $24 billion of which have floors. And did you say that the floors are generally in the money by less 100 basis points or was that a different figure?

Scott J. McLean
President and Chief Operating Officer at Zions Bancorporation, National Association

James made the comment about in the money, and what I failed to say was the LIBOR floors were generally at 1%, some as low as 0%. The prime floors, probably at 3.75% to 4%, but that was the guidance. And I think James made a comment about what was in the money.

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Can I clarify that just a little bit, Scott? The number of loans with floors in the money is $5.6 billion in the average -- in the moneyness, we call it, is just over 50 basis points. It's about 60 basis points. As Scott correctly pointed out, we have a lot of loans with floors that are kind of out of the money. I think your question is really about the in the money floors, and it's about $5.6 billion and about 60 basis points.

Gary Peter Tenner
Analyst at D.A. Davidson & Co.

Okay, great guys. Thank you.

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Thank you.

Operator

Thank you. Our next question comes from the line of Chris McGratty with KBW. Your line is open.

Christopher McGratty
Analyst at Keefe, Bruyette & Woods

Oh great. Thanks for the question. Just want to make sure I understand the remixing strategy that has the potential to unfold. I guess the question is what is the kind of the level of security to earnings assets that you would anticipate the money comes out of cash? How does it flow into the loans versus securities, I guess is the question proportionately?

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

Well, look, I want to grow and I think we all want to grow loans, first and foremost and we're all very, very focused on that. And so that loan growth is going to be the driver, and that's our anchor, right? Everything around that is how we invest our deposits into earning assets. And so, first and foremost is loans. And then, second priority would be securities. And again, it's relatively short term. So to the extent these deposits stay sticky, the answer is going to be, first, we'll fund the loans and then sort of whatever is left over, leaving a kind of a storehouse of cash for immediate liquidity will over time be invested into longer term securities. I hope that helps. It's a little -- and I know it's not precise. But that's the thought process. And so, as you're thinking about the balance sheet and modeling, I would encourage you to use that sort of thought process.

Christopher McGratty
Analyst at Keefe, Bruyette & Woods

Okay. That's helpful. And maybe I could just ask one in terms of the guidance. I'm just at the moment trying to understand the outlook. Could you just maybe provide a key or kind of a little bit more guidance on each of the outlook moderating, increasing, increasing? I know you don't tend to give specifics, but just kind of stack rank and kind of ranges would be helpful for us. Thanks.

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

I think James typically does that. He's got a whole lexicon and Rubik's Cube that we use to interpret them. But on the -- as it relates to our outlook, we are being intentional around not applying specific percentages around these numbers. If we wanted to fly percentages, we would just flip them out there, right? And so, the language is intended to convey relative measures from slight to moderate to increasing without being overly specific on the percentage changes.

Christopher McGratty
Analyst at Keefe, Bruyette & Woods

Okay, great. Thanks.

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Yeah. Go ahead, Harris.

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

I say its special because we're likely to be wrong. I mean, this is a -- this is an outlook, it's not a crystal ball. And there's so many factors that can influence all of this. So, I know everybody is looking for precision. You're looking in the wrong corner if you're coming to us.

Christopher McGratty
Analyst at Keefe, Bruyette & Woods

Thank you.

Operator

Thank you. Our next question comes from the line of Tim Coffey with Janney. Your line is open.

Timothy Norton Coffey
Analyst at Janney Montgomery Scott

Great. Thank you. I just wanted to ask a question about the liquidity that you've got on the balance sheet. Relative to your size, you've operated at kind of higher levels of liquidity in previous years. And if I look back to 2015 again on a relative basis, you were able to bring that liquidity down about four to six quarters. And given the comment on the today's conference call regarding the deposit stickiness, the opportunities for loan growth across the franchise, I'm wondering do you think the allocation of liquidity could occur faster this time?

Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association

Well, yeah. So, if we go back in time, you may recall we had about round numbers in -- at the beginning of 2015, about $8 billion of cash equivalents. And you're right, over the ensuing kind of six-ish to eight-ish quarters, we brought that down. And if you think about the pace with which we are buying today, I mean we're buying not-only are we reinvesting all that cash flow and remember we're -- portfolio is bringing our cash flow for about $400 million a month. We're adding $1 billion to $2 billion a quarter.

So, there is a natural I would say limit in terms of how much positioning we want to be in any given quarter because that quarter, that vintage of purchases is defined by the rate environment in that quarter. And so we're trying to be measured as we were then. We're trying to be measured in the deployment of the liquidity. Perhaps we could accelerate it a little bit, but just like we said back then, we don't want to take a very large position in the rate environment in any given quarter which is why we're sort of lagging into the position as opposed to putting all of our chips on rent, if you will.

Timothy Norton Coffey
Analyst at Janney Montgomery Scott

Right. That was my question. Thank you very much.

Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association

Thank you.

Operator

Thank you. Ladies and gentlemen, due to the interest of time, our final question comes from the line of Brock Vandervliet with UBS. Your line is open.

Brock Vandervliet
Analyst at UBS Group

All right. Thanks for the question. This is an advantage being at the end of the call. I just -- going back to the question to before in terms of an answer key around the script is I think a number of us are kind of struggling with specifically NII and expense guidance and just worried -- I'm worried whether I'm a little ahead of my skis on numbers. And I'm just looking for I guess one on NII, just clarification. So we should be growing off of the 499 number that is ex-PPP and low, I'm thinking low-single digit expenses kind of growth on that.

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Yeah. Brock, this is James. What we've tried to convey in the past is like slightly increasing is kind of low-single digits and then moderately increasing is mid-single digits. We've never had to use a high like a rapid growth sort of situation, at least not in a while. But -- so just increasing would be pretty healthy and robust growth in net interest income, which is fundamentally driven by pretty strong securities growth as Paul just discussed, and the improved outlook on loan growth. And somewhat -- and maybe a little bit of offset on price on the loans as the loans -- as the front book, back book dynamic plays out. But it's -- that was a little hard to gauge because that's a competitive environment situation. Does that help a little bit?

Brock Vandervliet
Analyst at UBS Group

Okay. That's helpful. Yeah, it is. It does, James. And on expenses, it's guiding off of $432 million of the adjusted total, and that's moderately increasing.

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Correct.

Brock Vandervliet
Analyst at UBS Group

That again is?

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

That pertains to kind of this recognition that there is inflationary pressures in the environment and also the technology expenditures that Scott referenced earlier in the call.

Brock Vandervliet
Analyst at UBS Group

Got it. Okay. All right. Thank you. That's helpful.

Harris H. Simmons
Chairman and Chief Executive Officer at Zions Bancorporation, National Association

If I could, I would say note the color code on that page 21. I don't think it's a stretch to say increasing is a bigger number than moderately increasing, which is a bigger number than stable or slightly increasing, right? So that's sort of the nomenclature in the way to think about this. And therefore, you could see net interest income is showing up clearly in the increasing camp. And that is because, again, excluding PPP we see the opportunity to invest -- continue to grow the size of the portfolio, and increasing confidence about the loan outlook as key drivers. And then top of all of that, while we're not expecting any increases in short-term rates in 2022, it is an opportunity for Zions Bancorp due to the again deposit-driven asset sensitivity on our balance sheet.

Brock Vandervliet
Analyst at UBS Group

Okay, thank you.

Operator

Thank you. I will now like to turn the call back over to Mr. James Abbott for closing remarks.

James R. Abbott
Senior Vice President, Investor Relations and External Communications at Zions Bancorporation, National Association

Thank you very much. Appreciate that, Towanda. Thank you all for joining us today. If you do have any additional questions, please contact me at either my e-mail or phone number listed on our website. Look forward to connecting with you throughout the coming months and thank you again for your interest in Zions Bancorporation. With that, this concludes our call.

Operator

[Operator Closing Remarks]

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