Zions Bancorporation NA (ZION) 2021 Q1 法說會逐字稿

Thank you for standing by, and welcome to the Zions Bancorporation's First Quarter 2021 Earnings Results Webcast. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. James Abbott, Director of Investor Relations. Sir, you may begin.

Thank you, and good evening, everyone. We welcome you to this conference call to discuss our 2021 first quarter earnings.

I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. Additionally, the earnings release, the related slide presentation and this earnings call contain several references to non-GAAP measures. We encourage you to review the disclaimer in the press release or the slide deck on Slide 2, dealing with forward-looking information and the presentation of non-GAAP measures, which apply equally to the statements made during this call. A copy of the full earnings release as well as a supplemental slide deck are available at zionsbancorporation.com. We will be referring to the slides during this call.

For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide a brief high-level overview of key financial performance of the company. Subsequent to Harris' comments, Paul Burdiss, our Chief Financial Officer, will conclude by providing additional detail on Zions' financial condition. With us also today are Scott McLean, our President and Chief Operating Officer; Keith Maio, our Chief Risk Officer; and Michael Morris, our Chief Credit Officer. (Operator Instructions)

I will now turn the time over to Harris.

Thanks very much, James, and we welcome all of you to our call this evening. Beginning on Slide 3 of the presentation that we distributed, we are pleased with the overall results of the quarter, particularly on the credit quality front. Diluted earnings per share increased to $1.90 from $1.66 per share in the prior quarter. The increase can be attributed to the change in the provision for credit losses. This reserve release, which is almost double the size of the release in the prior quarter, was made possible by the combination of a low 7 basis points of annualized loan losses relative to average non-PPP loans, 6 basis points on total loans -- total average loans. And it's also the result of continued improvement in the economic outlook.

Our capital improved with common equity Tier 1 capital ratio increasing about 40 basis points to 11.2%. Period-end loans were flat with the prior quarter, helped by additional growth in PPP loans from the 2021 round of the program. When viewed through the lens of Federal Reserve H.8 data and from other reporting banks' recent earnings releases, it appears that we held up better than a great many banks, viewed both with and without the effect of PPP loans. Period-end deposits increased 6% or 24% annualized, and noninterest-bearing deposits increased more than 10% or 42% annualized.

Slide 4 reflects recent earnings per share results, along with some notable items on the right-hand side of the chart there -- of the slide there that may be of interest to you.

And then turning to Slide 5, adjusted pre-provision net revenue was $253 million in the first quarter. The decrease from the prior quarter was largely, although not entirely, attributable to seasonal factors such as reduced revenue from fewer days in the quarter and increased expense, primarily from an increase in long-term incentive compensation. We've also displayed the provision for credit losses, which has been the most volatile component of our earnings. Paul Burdiss will provide additional detail in his prepared remarks about some of these items.

On Slide 6, we highlight the balance sheet profitability metrics. They're very strong results over the past 2 quarters, in large measure, reflect the partial reversal of credit loss provisions in the first 2 quarters of 2020.

Turning to Slide 7, we highlight the increase in our common equity Tier 1 capital ratio, which, as I noted, increased more than 11% from 10% a year ago. Much of this is attributable to the fact that we suspended share repurchases during the most uncertain period of the pandemic while maintaining our common stock cash dividend. In the first quarter, we repurchased $50 million of our stock. And although it's premature to announce anything today, the company is well positioned to be more active in our capital management over the next several months, we believe.

Slide 8 highlights our Paycheck Protection Program lending success. We've been very pleased with the results of our efforts, ranking tenth overall in origination volume when combining last and this year's results. We are well into the forgiveness process with $4.4 billion of applications received and $2.8 billion approved by the SBA. During the first quarter, an additional $1.5 billion was forgiven by the SBA, a slight increase over the prior quarter's rate, leading to a moderate increase in the yield of those loans. The 2021 round has been a continued success, although fewer of our borrowers have needed the funds. Still, of the more than 28,000 applications submitted in the current round, nearly 4,000 of the applications are from customers that are new to the bank in the current round, in addition to the nearly 15,000 new customers from the 2020 applicants.

Turning to Slide 9, we can see the status of customers that, as a result of the PPP, are new to the bank as well as those who were existing customers who obtained a PPP loan from us. We have an active calling program that is designed to introduce these customers to our frontline bankers, who then can assess the customers' financial services needs and offer products and services that might be a good fit for their business. As shown in the chart on the right, these customers have added various products and services outside of their PPP loan and related deposit account. We are encouraged by the progress we are making on this front and look forward to more progress in the months and quarters ahead.

As we enter 2021, I'm encouraged with the progress made on the technology front that has enabled us to do things faster and at a lower cost. We are currently rolling out our new front-end online and mobile banking platform for consumers. And in 2023, we expect to complete the transition to our new core deposit system. Chair Jelena McWilliams of the FDIC recently noted, "I would say that if we could scratch every legacy computer system and start anew, that would be wonderful." Although we've not replaced every legacy system, we've come a long way, and we believe we're doing some really leading work there. We're further along in the process than any of our peers that we're aware of. We expect this will give us a long-term competitive advantage in staying relevant and allowing us to be nimble and fast in adopting new technologies from vendors and, ultimately, making the experience for the customer very user-friendly.

I'll now turn the time over to Paul Burdiss, our CFO, to provide some additional detail on our financial results. Paul?

Thank you, Harris, and good evening, everyone. I'll begin my comments on Slide 10 with average loans and deposits. Loan growth has been elusive for banks recently, and our first quarter results are consistent with that trend. As shown on the left side of the page, average total loans were nearly flat in the first quarter when compared to the fourth quarter. The same is true for period-end loans. Excluding PPP loans, average loans are essentially unchanged from the prior quarter and are down $1.3 billion or approximately 2.5% from the prior quarter.

Incidentally, the majority of the loan declines that we've seen have been in revolving lines of credit, which is consistent with the deposit growth we've seen, and I'll describe that in a few moments. Within the loan portfolio, average non-PPP C&I loans are down $149 million or about 0.5% from the prior quarter and down $782 million or 3% from the year ago period. Average consumer loans are down $403 million or 3.6% from the prior quarter and are down $1.1 billion or 9% from the prior year period. Consumer loans are down in each category, most notably in residential mortgages as refinancing activity has added to fee income while reducing outstanding loans on our books. The notable increases came from PPP loans, municipal lending and commercial real estate.

While credit trends are generally improving across the portfolio, the credit quality in our municipal lending portfolio continues to stand out as being exceptional. The increase in PPP loans reflected the production of $2.6 billion of round 2021 loans, partially offset by $1.6 billion round 2020 PPP loan forgiveness and paydowns, netting growth of nearly $900 million between the first and the fourth quarter period end. As Harris noted earlier, we're particularly pleased with being able to assist and support so many thousands of small businesses in obtaining the government stimulus money through our internally developed, simple, easy, fast and safe process.

Turning to deposits on the right side of this page, average deposits increased 4.7% from the prior quarter, while period-end deposits increased at a moderately stronger pace. Relative to the year ago period, average deposits increased over 25%. Average noninterest-bearing deposits increased at a slightly stronger pace in both the quarter and year-over-year comparison. And at this point, our average noninterest-bearing deposits are 47% of total average deposits, up from a ratio in the low 40s prior to 2020. This mix shift has provided support to our net interest margin, although noninterest-bearing deposits are not as valuable when interest rates are low.

Before I advance to the next slide, I will highlight loan and deposit yields. The yield on average total loans increased slightly from the prior quarter, which is attributable to the PPP loan portfolio. Excluding PPP loans, the yield declined slightly to 3.69% from 3.74%. As noted in the press release financial, the yield on new loan production is moderately lower than the loans rolling off. And the dilution is generally consistent with the levels we've seen in prior quarters. There remains continued pressure on pricing in most of our markets, which is what one would expect given the significant increase in liquidity throughout our banking system. Deposit yields continue to be very well behaved as our cost of total deposits have fallen to 5 basis points in the first quarter.

On Slide 11, we show our securities and money market investment portfolios over the last 5 quarters. You'll notice we increased the size of the period-end securities portfolio by about $2.4 billion over the past year to $17.2 billion, while money market investments increased $7.9 billion to $9.7 billion, which is 12% of earning assets. The growth in cash is attributable in part to the forgiveness of PPP loans, the origination of new PPP loans where the proceeds have not been -- have been placed into a deposit account and have not yet been used by our customers and general increases in the liquidity of our customers. We continue to grow our investment portfolio at a measured pace during the first quarter, reflecting unprecedented growth in deposits and helped by the steepening of the yield curve. As the longevity of recently-added deposits remain uncertain, we will exercise extra caution and will likely hold more in money market investments than we would at times of greater certainty.

Slide 12 is an overview of net interest income and the net interest margin. The chart on the left shows the recent 5-quarter trend in both. The net interest margin in the white boxes has declined over the past year, reflecting both falling rates and rising excess liquidity. Notably, average deposit growth has exceeded average loan growth by $10 billion over the past year. This growth in excess liquidity is referenced in the chart on the right, as strong growth in deposits has impacted the composition of earning assets through a larger concentration in lower-yielding money market and securities investments. In the current quarter, the effect of lower rates and a greater concentration of cash and securities drove 9 basis points of linked quarter net interest margin compression, with excess cash driving 8 of those 9 basis points.

Slide 13 has a lot of information about our interest rate sensitivity, but I'll focus on the upper left quadrant. If you compare this to our prior iterations of this page, you'll note that our asset sensitivity has increased as deposits have increased. This, of course, assumes that the incremental deposits have similar duration characteristics as the deposits on our balance sheet prior to the recent deposit surge. Understanding this is one of the greater challenges we currently face when determining the appropriate mix of security to cash. We are generally comfortable with the increase in rate sensitivity because we believe the risk to lower rates is somewhat limited, and the durability of recent deposit growth remains uncertain. As previously indicated, we deployed some of the increase in deposits into securities. Security purchases for the quarter had an average yield of about 1.3%.

On Slide 14, customer-related fees declined modestly in the quarter to $133 million. Relative to the prior quarter, capital markets activity is somewhat weaker, principally due to fewer interest rate swap sales and syndication fees. Several fee income categories were fairly stable compared to the prior quarter, such as commercial account fees and most of the items within retail and business banking, the exception being non-sufficient fund fees. Wealth management fees continue to grow and are now being reported on a separate line item.

Noninterest expense, shown on Slide 15, was $435 million in the first quarter, up $11 million in the prior quarter. Adjusted noninterest expense was up $17 million to $440 million. The quarter-over-quarter adjusted noninterest expense increase can largely be broken down as follows: additions of $10 million for seasonal equity grants to retirement-eligible employees, $9 million for profit sharing and seasonal matching contributions to employee 401(k) accounts and an incremental $5 million associated with PPP loan forgiveness. These additions were partially offset by a decrease in base salaries of $10 million.

A review of credit quality and credit expense begins on Slide 16. Building upon comments from Harris earlier, we saw meaningful improvements in nonperforming loans and net charge-offs when compared with the prior quarter. Not shown here is the criticized loan level, which includes both classified loans and special mention loans. That balance declined 7% from the prior quarter. Overall net charge-offs were 7 basis points in the first quarter, declining from 13 basis points in the prior quarter. I think that is worth repeating. Net charge-offs were $8 million in the first quarter or 7 basis points of average non-PPP loans.

Slide 17 details our allowance for credit losses, or ACL. On the top left, you can see the recent declining trend in our ACL to $695 million at March 31 or 1.48% of non-PPP loans. The chart on the lower right side of this page shows that $110 million of the $140 million change in the ACL quarter-over-quarter, was driven by an improvement in the macroeconomic outlook. We expect that future changes to the ACL will be driven by changes in the macroeconomic outlook as well as loan portfolio, credit performance and growth.

Our outlook can be found on Slide 18. As a reminder, this is our outlook for financial performance in the first quarter of 2022 as compared to the first quarter of 2021. The quarters in between are subject to normal seasonality, and my comments are subject to our earlier reference to the forward-looking statement on Page 2.

Our loan growth outlook, which excludes PPP loans is somewhat uncertain. While our bankers are expressing optimism, the unprecedented level of government stimulus is almost certainly having an adverse impact on the need for credit, particularly among our Main Street borrowers. On balance, we are reasonably comfortable reiterating our slightly increasing outlook, which can be interpreted as non-PPP loan growth in the low single digits.

We expect net interest income, also excluding PPP loan revenue, to increase slightly, with the deployment of cash into securities and the slight growth in non-PPP loans, partially offset by moderate compression of loan yields.

We had established our outlook at slightly increasing for customer-related fees in January, and we are increasing that to moderately increasing. We believe an improvement in economic activity should help to increase card and small business-related fees as well as loan syndication and other commercial lending-related fees. And that wealth management will continue the trend of double-digit growth, and that mortgage banking revenues will remain generally stable at the current level.

I also have a bit of late-breaking news. Based upon current market conditions, we believe that we will recognize a second quarter gain in our SBIC investment portfolio of over $25 million. We will have more to disclose when we file our 10-Q in a few weeks.

We are making a slight change to our outlook for adjusted noninterest expense moving to stable to slightly increasing from generally stable. We will remain disciplined on expense control, but as business activity and profitability increases, expenses may increase. This outlook does not reflect a significant change in inflation from the last several years, which we believe may be a risk to this outlook.

Finally, regarding capital management, we feel good about the strength of our common equity Tier 1 ratio at 11.2%, particularly in the context of excellent credit performance and the results of our internal stress testing. As we consider the balance of risk and capital, we believe there may be room for more active capital management in the near to medium term, so long as the current macroeconomic and credit trends continue or improve.

This concludes our prepared remarks. Valerie, would you please open the line for questions?

(Operator Instructions) Our first question comes from Ken Zerbe at Morgan Stanley.

I guess, Paul, just a couple of questions on guidance. I think you touched on this very briefly, but in terms of the net interest income, stable to slightly increasing, can you just break that out a little bit in terms of how much of that is driven by core balance sheet growth versus PPP runoff over time versus core NIM compression versus the accelerated fee income that you're getting from the PPP, if that's possible? Just it sounds like some of the core parts are a little bit weaker and that this might be being held up by PPP, but just unsure.

Yes. Thanks for your question, Ken. So what we tried to do is provide an outlook that excludes PPP. And the reason for that is exactly what you described that PPP is absolutely augmenting current levels of net interest income. But because of forgiveness and other factors can be somewhat volatile. And so the outlook that we provided was really meant to speak to the underlying trends in net interest income, which are going to be defined by what's happening on our core balance sheet, that is loan and deposit growth and then also the absolute level of rates.

We believe, as activity improves, we're going to, as we say in the loan growth outlook, which also excludes PPP loans, we are expecting some level of economic activity to translate to increased loan growth over the course of the next year. We think that will be additive. And then there's also an expectation that interest rates and/or the yield curve may continue to steepen over the course of the year, which we think would also be additive.

Got it. Appreciate it. Maybe I should rephrase my question. I probably stated it incorrectly, but how -- like, what would you expect for PPP? You're obviously one of the biggest PPP lenders in the mid-cap space, and it should be pretty meaningful for your results over the course of the year. Just would be great help to get some clarity around that.

Yes. So I can't make a specific prediction on PPP because of all the things we've outlined, but you can see in our financials that we've got over $6 billion of loans today related to the PPP program. Those are yielding 1%. There is also $168 million of unamortized fees, which will be recognized into net interest income as those loans either amortize, mature or are forgiven.

And so those are the pieces that are going to flow into our net interest income, but the timing of that is just a little bit uncertain because it's somewhat dependent upon, as I said, kind of a forgiveness or repayment of those loans.

Understood. No, I know it's hard to answer that question. All right. Appreciate it.

Our next question comes from John Pancari of Evercore ISI.

I want to see if you can give a little bit more color on your margin expectation. Just curious what's embedded in your stable to slightly increasing NII outlook and how that margin expectation might differ in terms of what -- factoring in PPP or excluding PPP, I guess, however you're able to help us kind of set that out.

Yes, I'll take that, John. Thanks for your question. This is very similar to the response I just gave relative to net interest income. That's really where we're focused in revenue and net interest income. But margin is being significantly impacted by all the cash we have on the balance sheet. As I said, loan growth -- or deposit growth exceeded loan growth by $10 billion over the course of the last year. And on our balance sheet, that's significant. Of the approximately 55 basis points of margin compression we've experienced over the last year, about half of that is related to an increase in cash balances. So that is to say the underlying trend on the margin isn't nearly as bad, I will say, as the headline outcome. And in fact, given what rates have done and how much they've fallen, I feel pretty good about where our margin is.

So looking ahead, again, trying to exclude PPP because of the volatility, our expectation is that we will see a little loan growth, and that is helpful from a volume perspective on net interest income. And then also, to the extent the yield curve steepens a little bit from here, which is possible, we think that would also be additive. So it's really those pieces of the core net interest income reflected in the net interest margin that we're focused on.

All right. Got it. And then separately on the capital front, I heard your comments around potentially becoming more active on capital management. Can you help us kind of how we should think about that? Like what type of -- if you can remind us of the priorities and clearly, that could imply a much more active buyback program. How should we think about the upside to that program and how substantial it could be as you look at where you stand right now at the 11.2% CET1?

Yes. I'll start with that, and Harris will probably provide his perspective as well. I will say, we have said pretty consistently kind of up until the pandemic that -- the start of the pandemic, that we believe that we've got lower-than-average risk on our balance sheet, and we think that a combination of kind of lower-than-average risk and average to slightly better-than-average CET1 ratio is the best outcome for us and our shareholders. And so as you can see that despite the pandemic, we have significantly grown our CET1 ratio over the last year. In fact, our CET1 is up 120 basis points from 10% to 11.2%.

And so it feels to me like we're getting a little further away from that sort of peer median performance or peer median level that we think is important relative to the risk on our balance sheet. So over the sort of medium term, John, I think that's -- that might be a decent yardstick, but I'll let Harris provide a few comments.

Well, I'd just add, we got -- currently, risk-weighted assets are about $55 billion. And so CET1 is at 11.2%. And I think that -- my own assessment is that we have room to bring that down by about 1 percentage point. So you can kind of do the math. The timing of that is really going to depend on what happens with loan growth and obviously, profitability as we go through the year here. But I would expect that we'll try to work that back down to something that's closer to kind of a strong showing relative to peers, but not as high as we are today.

Our next question comes from David Rochester of Compass Point.

Paul, you talked about this earlier, but can you just maybe frame the magnitude of that difference in the front book, back book on the yield on new loans and the securities purchases? It's a little bit closer to maybe 10 bps versus like 50 basis points. I know it may seem like splitting hairs, but with the cost of funds where it is, as low as it is around 9 bps, there just isn't a whole lot of room to offset that pressure outside of just deploying a lot of cash. So I was just wondering how close we are to parity there. And I know you mentioned the 1.3% on the -- I guess that was probably over the quarter, right? You might be a little bit higher on that now?

You kind of cut out there at the end, Dave, but I'm going to answer the question that I think you asked, and then you can correct me. I will provide some numbers, although I'm a little reluctant to do that because there is, you can imagine, sort of a lot of volatility in these figures. But the trends that we're seeing on that, what we refer to as the front book, back book, that is loans and securities coming on versus loans and securities coming off. It's sort of in the range of 25 basis points in the loan portfolio and sort of 50 basis points or 50-plus basis points on the securities portfolio. And that's, as I said, that's kind of consistent with what we've seen over the course of the past several quarters. So no change in trend there.

Our next question comes from Jennifer Demba of Truist Securities.

Harris, could you talk about the company's interest in acquisitions in the future? There have been some very high-profile deals in the industry over the last several months as companies look to add more scale.

Sure. I think that I wouldn't count anything out, but it's not something that we're out actively trying to pursue. I do expect that as we complete some of the systems work that we're doing and get out here just a few quarters, I think we could find ourselves perhaps more interested if the fit is right and the price is right, et cetera.

But it is not -- it's not a high priority for us right at the moment. And so I don't -- I don't really expect we'd see anything significant in the near future. But as you know, there are a lot of things happening and as the economy picks up, in particular, if we see some increase in interest rates, some modest increase could put us in a much better position to be thinking about that. So I -- I guess that's how I characterize where we are at the moment.

What kind of transaction would be of interest to Zions if the conditions became right for it?

Well, it would -- probably most prominently in-market, western U.S.-centric that -- I've noted in various forums over -- in recent times that a lot of smaller banks, even some of the large community banks and smaller midsized banks have probably an overabundance of commercial real estate exposure, that would not -- I mean that would be something that we'd not probably be very interested in. I would look for a franchise that has a reasonably strong commercial orientation. And -- there are not that many of them, but there are some out there that kind of fit that profile.

Our next question comes from Ken Usdin of Jefferies.

Paul, just wondering if you could talk a little bit more about that great Slide 11 you have about the securities and interest rate sensitivity. So you mentioned that you're a lot more sensitive now because of all the deposit inflows, and I see that table of your planned swap runoff. Just wondering how you might intend to navigate going forward with either adding incremental swaps, putting on more floors and how you manage that against just what you're doing on the traditional ALM side?

Sure, Ken. Thanks for your question. So a couple of things. One, on the traditional securities, as I tried to lay out in the prepared comments, we're really -- we're not going crazy in terms of adding either volume or duration there. We're really sticking to our knitting and sort of incrementally adding. So the real opportunity to sort of change interest sensitivity is really on the interest rate swap side, sort of the synthetic extension of duration with swaps, which is what your question keys on. I will say, as the curve has steepened, we, the ALCO Committee, have discussed the maturity profile of the swaps and sort of the duration that's created by that, and we are incrementally adding to that.

And so in terms of activity, when I think about balancing the duration of the assets and liabilities, we are going to be much more focused on the swap side to the extent that yield curve remains somewhat attractive. I think that's -- the uncertain part -- the reason I paused is the uncertain part is, again, I tried to say it in my prepared remarks, what we don't know is what the sort of real average life or duration of the surge in deposits has been or will be, right?

So we've got this incremental $10 billion of deposit growth in excess of loan growth. That's creating a lot of interest sensitivity in our models. But as managers, the ALCO's job is to look at that with some level of skepticism. And that's what we're doing. So we're marginally adding duration, either in portfolio size or interest rate swaps, but we haven't added a lot yet. Looking ahead, I would look for more activity in swaps than securities.

Okay. Great. Yes. And that's what I'm getting at. And is that -- would that -- those potential adds be built into your forward forecast, like, the potential to add? And what kind of -- how in the money are swaps today versus what you saw them being 3, 6 months ago? Is it a clear winner to do it?

It's a much different risk return profile today than it was 3 or 6 months ago. And you can see that very clearly in the shape of the curve. Now we don't go out much beyond kind of 5 years on swaps. And so you look at where that point of the curve, how that point of the curve has changed over the last 6 months, and you can see there is absolutely carry there now where there was almost no carry there, for example, 6 months ago.

So the issue that we had, let's say, 6 months ago, about kind of trying to put on some protection against lower rates was, one, we didn't think the rates were much lower or could go much lower; and two, we weren't getting paid at all for adding that duration. Now there is a -- we're getting paid a little bit for, if you will, every duration dollar that we're putting on, which is why we're a little more active. So nothing too exciting yet, but we're absolutely paying a lot of attention to that.

Okay. And that was in your forward -- that's built into your forward guide was my first part of it. I got away from forward guide.

Yes, it is. Although I'll say there isn't a lot of speculation around a continued steepening of the curve. That outlook is really based on sort of what we know today and how we think the -- how we expect the balance sheet to change over the next year.

Our next question comes from Steven Alexopoulos of JPMorgan.

I wanted to start on the expense side. If I just look at the big picture, so adjusted noninterest expenses were up 8% year-over-year, parts, legal and professional fees, but the comp line is still up 5% year-over-year. Maybe for Paul, can you run through why the comp expense has risen so much?

Yes, sure. As we noted in the press release, a lot of that was related to long-term incentives. So first, let me say, year-over-year, base salaries are down $5 million, okay? I think that's really important. But year-over-year, you do see sort of increases in profit sharing and the company -- sort of company match on 401(k). We have been encouraging our employees to participate more fully in 401(k). And the good news is that they're doing that. But that does create some incremental expense as we are contributing to that. So there's almost $6 million of year-over-year change, just in those, what I'll characterize as 401(k)-related items between the profit sharing and the profit sharing in the 401(k) match.

And then the other big piece is really in what we call our value-sharing plan. So this is kind of a 3-year -- it's a -- if you look at our proxy statement, you can see how it's calculated. It's a very quantitatively derived 3-year and therefore, somewhat long-term incentive compensation program. And this is really largely our financial performance relative to peers. And what we saw this year in the first quarter was that the financial performance looks much better this year than it did a year ago, with all of the uncertainty related to the pandemic. And so there were increases in accruals associated with those long-term incentive plans. Those are the key drivers, really, year-over-year.

Okay. So if we assume that base salaries don't decline moving forward again, should we assume that mid-single digit is where growth of the comp line should remain? It doesn't sound like anything you really described to be temporary? So meaning employees continue to contribute.

Well, it's dependent on earnings is the key, right? So it's sort of metered to earnings. So as performance improves, and I -- this is what I tried to say in my outlook on expenses, as performance improves, there is a meter on expense and comp that is related to performance. But that, as it relates particularly to compensation expense, the key -- sort of key performance indicator is really financial performance, if that makes sense.

Otherwise, we feel, like, we have a pretty good handle, and we'll remain really disciplined on expenses. As noted, there was an incremental $5 million, a total of $8 million of PPP-related forgiveness expense that is sort of third-party help with forgiveness, because it is somewhat complicated. And that's the kind of thing that doesn't show up every quarter.

Okay. That's helpful. And then for my follow-up question, on the loan outlook, so you're calling for a slight increase in loans over the next year despite, one, an economic boom expected fairly widely; and two, you're picking up quite a few new customers through PPP. Why are you expecting only a slight increase in loans?

I'll start and then maybe Scott can jump in on that, too. I -- as I said, loan growth, it was $10 billion short of deposit growth year-over-year. And so we have a lot of deposits and we have a lot of customers with deposits. As I said in our prepared remarks, our line of credit utilization is down pretty significantly year-over-year. And I think there's a direct correlation to deposits with that.

So I think that there's a little bit of a crowding out, if you will, of the government providing funds such that our customers don't need as much credit, which makes us sort of a little less confident on economic activity translating to loan growth as it is -- as it has in the past. Scott, would you add to that?

Yes. I wouldn't add much to it. I -- Steven, I just think it's -- when you're in a period like this, it's hard to call the bottom. But I would agree with you, once it turns, I think we will see nice growth. It's just a function of when is it going to turn. And as Paul noted, the point-to-point decline in our loan balances is almost entirely related to lower utilization of revolving credits.

So our nonrevolving credits are basically stable with where they were a year ago, which I think is a strength. And if you look through the PPP borrowers specifically, the new loans that we've generated with those borrowers, they represent about 10% of what the existing companies were borrowing pre-pandemic. So we're seeing nice volume there, as you noted.

So I think we're -- we have a much more kind of positive outlook than we had maybe 3 to 4 months ago, but it's just a big ship to turn. And once it turns, I think we'll -- we should expect to be back in the mid-single-digit loan growth process, which is where we were for a number of years.

Our next question comes from Steve Moss of B. Riley Securities.

Just following up on loan growth. Maybe you guys talked about lenders being more optimistic about business activity. Kind of curious where maybe you guys are seeing improvements in the loan pipeline?

This is Scott. And I would just say that in the small business -- the basic C&I and owner-occupied areas. I think we also will see some strength from our 1-4 family mortgages that we hold on balance sheet. We're doing a number of things to get that held for investment percentage back up. We've seen some runoff there. And if you look back over the last 5 years, 1-4 family mortgage growth accounted for about 25% of our growth in almost any time period. And so I think you'll see that return.

You've seen good growth in municipal over the last year. It was one of the really nice growing parts of the portfolio. We love that business. It's a very high credit quality business, and we're just starting to see some of the benefits of ancillary business coming from it. And municipal, historically, like mortgage, contributes about 20%, plus or minus, to our overall loan growth.

So CRE, we -- it will grow, but it will probably grow equal to or less than the overall growth rate of the loan portfolio. But I think the incrementally positive growth will be in C&I small business, kind of our core markets, mortgage and municipal.

Okay. And then I guess for Paul, just kind of curious as to you held the securities balances steady at 20% of assets. Could we tick up a couple of percentage points here? It sounds like you're a bit reluctant to do that. And kind of also wondering where are investment securities yields here purchases today? Is it kind of in the 1.5% range maybe versus the 1.3% for the quarter?

Well, on the yield at any given day, obviously, that changes. But yes, it's probably in the sort of 1.4%, maybe 1.5%, generally speaking.

As it relates to the portfolio -- the investment portfolio itself, we have been holding back on growing that a little bit, as we've noted, just because we're just uncertain as to the sort of the durability or sustainability of the -- what we kind of are characterizing as the surge deposits that have come on as it relates to not only all of the fiscal programs, but also all of the monetary programs put on by the federal government.

So -- but nonetheless, we -- it's not like we're doing nothing. I mean we have added to the portfolio. As we noted on Slide 11, the portfolio has gone from, on period-end basis, $14.8 billion to $17.2 billion over the course of the last year. So as we're moving through time and we become -- either cash continues to grow and/or we become more confident in the sustainability of the cash, we are marginally adding the portfolio. But we're not going to go out and put on $5 billion in a quarter. If you're going to see increases there, they'll be marginal increases. That certainly has been the trend, and I expect that trend may continue over the near term.

Our next question comes from Brad Milsaps from Piper Sandler.

Paul, I just wanted to follow up on the discussion on securities. I did notice that the yield this quarter on the available-for-sale portfolio held in pretty flat, I think, 1.69% versus 1.70%. Just kind of curious if there's anything in there from a onetime perspective that helps you in a positive way that we might see reverse out of the near term, especially talking about where new money yields are coming in?

I don't recall anything in there that's sort of onetime in nature. I think it more -- maybe is more reflective of changes in prepayment speeds and the way those affect yields. As the yield curve ticks up, prepayment slow down, premiumization slow down, yields go up, that kind of thing. If I remember correctly, and I apologize that I'm just a little fuzzy right now, that's probably the key driver sort of offsetting some of the front book, back book stuff that we've described previously.

Okay. Great. That's helpful. And then just on asset quality, clearly, you guys have seen improvement. Just kind of curious if there's a level to think about in terms of the overall level of the reserve that you might see as sort of a floor as you think about your CECL model and kind of where the reserve is today relative to where you think it could be?

Well, I would love to be that confident that I could predict something like that. In CECL land, as you know, this really is just so highly dependent not only on the underlying credit quality of the portfolio, but maybe and what you saw this quarter, more importantly, dependent upon the macroeconomic forecast. So it's really hard for me to put any kind of floor on that figure. It's hard for me to give color beyond that, because it's just going to be so dependent on largely the macroeconomic forecast on any given quarter end.

Our next question is Gary Tenner of D.A. Davidson.

I appreciate all the color and discussion about the loan outlook. I did have one follow-up. And I wonder if you could kind of discuss where the kind of stance on appetite for lending, in particular, areas are maybe compared today to pre-pandemic areas that you're maybe still wanting to steer clear of? Or any that maybe have changed your perception over the last year?

Yes, I think we're -- not sure it's changed a lot. I -- it's -- we're interested in kind of across the board in commercial and C&I. We continue to have a lot of interest in building a municipal loan portfolio as municipal loans and leases. And so I expect we'll see continued growth there. I agree with Scott as the economy continues to improve, I think we'll see more demand from small businesses.

The issue that Paul spoke about with respect to all the liquidity, I do think, is an issue and a headwind. And it's a little hard to go -- I mean we've just never quite seen this before with as much liquidity out there so it's kind of hard to know what kind of headwind that's going to be as the economy starts to pick up. But I think we're interested across the board in commercial.

Commercial real estate, we're trying to be a little more careful there because of some of the well-understood challenges with respect -- in retail, CRE and office. Most notably, and I -- and I also tend to believe that multifamily is -- you just have to be careful with it right now. We've seen a lot of growth there in terms of just activity in the economy.

And I think that we'll see -- I agree with what Scott said earlier, we'll -- I hope we'll see a little more growth in 1-4 family on the balance sheet, jumbo ARMs that performed really exceptionally well. But the consumer has had a lot of -- I mean we've seen paydowns on home equity credit lines and a lot of refinancing activity. But I think that will probably kind of bottom out here, and I would hope start to grow a little bit. So I don't know if Michael, if you have any particular thoughts there, Chief Credit Officer?

No, Harris. I think you've covered most of the bases. I think if you look at utilization on the consumer side, it's down equal to or greater than the other domains that you think about consumer, C&I, CRE. So I think consumer is going to come back quite quickly, both in utilization and new originations outside of 1-4 and small business. We've recently taken some of the measures off that we put in during, I'd call it, kind of the heart of the crisis, so we'd lose some a little bit on small business and consumer, and we're getting back to sort of the pre-COVID place. So I would expect there would be growth there as well.

And I just -- I'd also add, owner-occupied real estate -- commercial real estate is a category that I expect we'll see some growth there. That's something we're really comfortable with and we're trying to emphasize in some of the markets. So a little of all of the above, I guess.

Harris, I'd just add -- this is Scott, I'd just add to that that there are some things you won't see us do. If you go back into time and you look at other periods of low loan demand and low interest rates, we've seen other banks reach for credit and reach for yield. You won't see us do things out of the norm on taking larger share of credit. You won't see us dramatically increasing our leveraged finance book. We've been very modest in that regard. You won't see us growing rapidly our construction loan portfolio to -- you won't see us lean into things that other banks traditionally lean into when they're faced with low loan demand and low interest rates taking higher risk.

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

Just one question for me. Your peers that have upgraded their expense outlook during this earnings season, either also upgraded their revenue outlook or had much bigger fee beats. I hear you loud and clear that there is a significant amount of conservatism baked into the revenue outlook. But if we enter a stronger period for either the curve -- in terms of the curve steepening or loan demand picks back up greater than low single digits, what should your investors expect in terms of that guidance for expenses if your revenue expectations do prove to be conservative?

Maybe I...

Go ahead, Harris.

Paul, I was just going to say, I don't think to see a lot of change other than probably incentive compensation, which, as Paul noted earlier, has some linkage to profitability. We'd see higher profit-sharing contributions, et cetera. But I don't think it's going to otherwise -- we don't -- I don't think of them as otherwise being particularly linked. I mean we're going to work on expenses really hard regardless of what happens in the rate environment.

And I'll -- if I could, I'll just note that we have not changed our expense outlook, our noninterest expense outlook. There were clearly some items in the first quarter that we thought we need to talk about. And then in my prepared remarks, I also talked about sort of the risk of inflation and what might happen there. But our expense -- noninterest expense outlook hasn't changed from the prior quarter.

And our next question comes from Peter Winter of Wedbush Securities.

I just had a quick question on PPP. I was just wondering if you could say how you're thinking about it in the second quarter? And if there was any impact this quarter with the loan portal close for part of the quarter?

Scott, do you want to take that?

Well, the new loan volume is down to a trickle. So we don't anticipate, unless something happens new that you'll see us reporting at the end of the second quarter significant change from what we've reported other than more forgiveness. But we're not seeing a lot of new PPP volume nor do we -- nor is the rest of the industry.

Right. I was looking more for an interest income number relative to the $60 million in the first quarter.

Sorry about that. Paul?

Well, this -- Sorry, Scott.

No, sorry.

This gets to forgiveness. The -- and it's really hard to predict, right? And so there was a little bit -- as you pointed out, there wasn't a little bit of a slowdown by the SBA. But really -- like, in the middle of the quarter, and the new administration put on some sort of different rules and things around forgiveness and access to the program. And there were several things that happened in the quarter, but I think things really accelerated again by the end of the quarter. So I'm not sure on balance that it was significantly different than otherwise would have been.

And then I think it would be somewhat speculative to start getting into what's happening in the second, third or fourth quarters, which is why we've tried to provide an outlook that excludes the impact of PPP, because it's really hard to predict. It's not up to us. You know what I mean? And so as a result, it's a little hard to predict.

But that's why we've given you the component pieces. We've given you the PPP loan balances, as I said, it's -- those earn 1% as long as they're on the books, and then we've got $168 million of unamortized fees. So those are the pieces, and then it's really a matter of, I think, your guess is as good as mine as it relates to how efficiently -- or effectively all of that stuff works through the process.

I might just add, Paul. I mean it's -- and I'm just reflecting on the fact that it's been over a year since we made our first PPP loan, and we still have -- I mean this time a year ago, we were really busy pumping these things out. And we still have a lot of those round 1 or 2020 loans that have not yet applied for forgiveness. And so I wouldn't have expected that. I would have expected that these would have kind of melted off much more quickly than they have. So we're just -- we're watching and learning as we go, but just to underscore what Paul was saying.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Abbott for any closing remarks.

Thank you, Valerie, and thank you all of us -- thank you to all of you, rather, for joining us on the call today. If you have any additional questions, please contact me by e-mail or phone number that's listed on our website. Again, it's jamesabbott@zionsbancorporation.com. We look forward to connecting with you throughout the coming months, and thank you for your interest today in Zions Bancorporation. This concludes our call. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all participating. You may all disconnect. Have a great day.