Zions Bancorporation (ZION) Q4 2021 Earnings Call Transcript

Zions Bancorporation (ZION 3.51%)
Q4 2021 Earnings Call
Jan 24, 2022, 5:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Zions Bancorporation fourth quarter 2021 earnings results webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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 speaker for today. Mr. James Abbott, you may begin.

James Abbott -- Senior Vice President, Director of Investor Relations

Thank you, Twanda, and good evening, everyone. We welcome you to this conference call to discuss our 2021 fourth quarter earnings and full year earnings results. 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 slide deck on Slide 2 dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call.

A copy of the earnings release, as well as the slide deck, are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide 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 is Keith Maio, our chief risk 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. I will now turn the time over to Harris.

Harris Simmons -- Chairman and Chief Executive Officer

Thank you very much, James, and we want to welcome all of you to our call this evening. Beginning on Slide 3 are themes that are particularly applicable to Zions in recent quarters, as well as those that are likely to be themes over the near-term horizon. Loans, exclusive of PPP loans, increased $1.4 billion during the quarter, roughly double the dollar amount of growth in the third quarter. One of our primary goals is to increase new-to-bank customers, and our promotional campaigns during the fourth quarter were successful at facilitating that, which Scott McLean will discuss more in his section.

In addition, we saw improved demand for revolving credit for the first time in several quarters, with line utilization improving somewhat. We saw strong deposit growth, which continued in the fourth quarter. It's positioned Zions well relative to many of our peers to be able to invest in securities and offer promotions on loan products to core customer segments. As reported by the Federal Reserve, domestic commercial banks grew deposits by 12% over the past year while Zions accomplished growth of 19%.

Third, we're well-positioned for rising interest rates. When we met in this forum three months ago, the interest rate futures market had implied a single quarter-point rate hike by mid-2022. Today, we have approximately doubled that, and by year-end, the futures market is pricing in four rate hikes. We're well-positioned for this environment, with each quarter-point increase in rates experienced in parallel across the curve adding approximately $60 million of net interest income over the subsequent year, or about $0.30 per share.

Paul will add some additional detail on this topic in his prepared remarks. 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 relative to the largest U.S. banks, the fintechs, and to well-established community banks. Turning to Slide 4.

We are pleased with the quarterly financial results. We'll touch on all of these items in subsequent slides, so I'll move on to Slide 5. Diluted earnings per share was $1.34. Comparing the fourth quarter to the third quarter, the single most significant difference was in the provision for credit loss, which was $0.34 per share variance, which can be seen on the bottom left chart.

Although we had only one basis point or one one-hundredth of a percent of annualized net loan charge-offs in the fourth quarter and a substantial linked-quarter improvement in problem loans, we judged that the environment was somewhat more uncertain than last quarter, especially with respect to the potential impact of the omicron variant of the COVID virus. Consequently, we slightly increased our allowance for credit loss from the prior quarter. Our provision this quarter reduced our earnings per share by $0.12, as shown on the bottom left chart, whereas in the prior quarter, the negative provision lifted earnings per share by $0.22. Additionally, there were other items noted on the right side of the page that had a significant effect on earnings per share.

Adjusting for those items, the linked-quarter earnings per share was relatively stable. We think this is encouraging, given the decline of about $0.10 per share in income from PPP loans. On Slide 6, we highlight some balance sheet profitability metrics, which you can review on your own. Turning to Slide 7.

Our fourth quarter adjusted preprovision net revenue was $288 million. The adjustments, which most notably exclude the gain or loss on securities, are shown in the latter pages of the press release in the slide deck. However, the gain on the sale of buildings and the expense associated with a contribution to our charitable foundation have not been excluded. Both of those items were similar in size.

The PPNR bars are split into two portions. The bottom portion represents what we think of as generally recurring income, while the top portion denotes the revenue, net of direct external professional services expenses we've received from PPP loans. We saw a $20 million decline in such income in the fourth quarter relative to the third quarter. However, we were able to offset that impact with growth in recurring net interest income from both securities and loans made possible through strong deposit growth.

Moving to Slide 8. A significant highlight for us this quarter was the strong performance in average and period-end loan growth. Average non-PPP loans increased $1.2 billion, or an annualized 2.5% when compared to the third quarter, and on a period-end basis, that growth was $1.4 billion, or 2.9%. The yield on average total loans decreased slightly from the prior quarter, which is attributable to a shift in the mix of loans, with average PPP loans declining $1.4 billion and being replaced by non-PPP loans.

Recall, the PPP loans have experienced yields near 7% due to accelerated amortization of capitalized fees, and the loans that are replacing them have yields generally in the 3% to 4% range. Excluding PPP loans, the yield declined three basis points to 3.56% from 3.59%. Deposit costs remain low. Shown on the right, our cost of total deposits was stable at just three basis points in the fourth quarter.

Deposit growth remained strong, with an average total deposits increasing $4 billion, or 5.2% unannualized, and period-end deposits increasing $4.9 billion, or 6.3%. In part because of the quantitative tapering by the Federal Reserve, we do not expect deposit growth to remain as strong in coming quarters. As previously noted, another significant highlight for the quarter was the credit quality of the loan portfolio as illustrated on Slide 9. Relative to the prior quarter, we saw significant improvement in problem loans.

Using the broadest definition of problem loans, criticized and classified loans dropped to 19%, and classified loans declined 11%. Although not shown relative to the prior quarter, special mention loans declined 34%. Of course, the metric that matters, in the end, is the net charge-off to average loans ratio. We experienced just one basis point of annualized loan losses relative to average total non-PPP loans, and the same holds true of the full year figure.

Shown on 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. Now I'd like to turn the time over to Scott McLean, our president and chief operating officer, and he'll provide an update on certain fee income and growth initiatives and our technology initiatives. Scott.

Scott McLean -- President and Chief Operating Officer

Thank you, Harris. Regarding Slide 10, if you turn to Slide 10, as Harris reported, we were pleased with our loan growth as it was one of our strongest quarters in many years. Excluding PPP loans, period-end loans grew $1.4 billion, or 3%. Loans to businesses increased over $1.2 billion with considerable strength in C&I, with more than $600 million of linked-quarter growth in C&I, nearly $300 million of owner-occupied growth, and more than $250 million of municipal finance.

Additionally, we saw growth with our home equity lines of credit and CRE terms. This growth was partially offset by a slight contraction in our CRE construction, 1-4 family, and energy portfolios. Our loan portfolios in all markets showed growth with particular strength in California this quarter. Our utilization rates on approximately $32.4 billion in revolving commitments increased 1.2 percentage points compared to the third quarter, with strength coming largely in C&I.

We expect that we will see some further line utilization as businesses seek to rebuild their inventories. Finally, recall that we launched two promotional campaigns on 6/1 -- on June 1, 2021 for owner-occupied and home equity lines of credit, both focused on our core small business and affluent customer bases. These campaigns have created significant energy with our bankers and have represented about 40% of our loan growth in the third and fourth quarters. During this six-month period, our owner-occupied campaign originated approximately 400 loans with commitments of $550 million, and the HELOC campaign originated over 6,000 loans, exceeding $1.6 billion in commitments.

Measured by dollars, approximately one-third of each loan type was extended to new customers to the bank. Moving on to noninterest income on Slide 11. We were able to sustain the strength we experienced in the third quarter. Customer-related fees were $152 million, which was a 10% increase over the year-ago quarter.

Activity-based fees such as card, merchant services, and retail and business banking service charges remained strong and recovered from pandemic softness to exceed our 2019 levels. This improvement is additive to continued strength in capital markets, wealth management, and treasury management fees. Turning to Slide 12. Our mortgage activity continued at both a quarterly and record -- at both a quarterly and annual record-setting pace, with fundings reaching $4 billion for 2021.

This represents a 16% increase for the year, compared to an 8% decline for the MBA industry market index. While low-interest rates certainly contributed to this strong performance, the outperformance versus the industry would largely be attributable to the attractiveness of our mortgage product to our core small business and affluent clients; the success of our digital platform, representing now 95% of all applications, which is up from 100% paper in 2018; and significant process enhancements tailored to improve the experience for all customers, and especially our affluent segment. Although mortgage fees finished the year at $33.4 million versus $55.4 million in 2020, they are still almost double 2019 levels, $17.1 million. One additional benefit is that we should start to see, on balance sheet, 1-4 family outstandings grow as our fundings are returning to a more traditional mix of two-thirds held for investment, one-third held for sale.

Turning to Slide 13. As we provided in our third quarter call significant detail regarding the benefits of FutureCore, which you can still see on Slide 26 in the appendix, today, we want to provide some color on a few of the numerous other technology investments that are expanding the reach of our bankers and improving our customers and employee experience. In 2021, as you can see in the first sort of horizontal panel there, we replaced our consumer online mobile digital application for 650,000 consumers. The conversion went extremely well, and our ratings in the prominent app stores have been terrific when compared to our global and large regional competitors.

Later this year, 150,000-plus of our small business customers will move on to the small business version of this platform. In a second horizontal panel, we want to highlight two elements of our work with Salesforce. First, on the left-hand side, up until January of 2021, we had a brief partnership with a fintech featuring their digital small business loan application. Shortly after launching, our partner informed us that they would no longer support the application after 2021, some of the vagaries of doing business with fintechs.

Based on technology we developed to produce our record production of PPP loans, recall three times our deposit share in the industry, we launched our own PPP battle-tested small business lending digital application for virtually no upfront cost and no real ongoing cost. This has been a real benefit. It's going to be a real feature part of what we're doing going forward. Later this year, we will merge our six instances of Salesforce to one unified instance.

Salesforce reports that we will be the only one of their 51 major financial institution customers that has accomplished this objective. For a nonsiloed bank like us, the power of Salesforce is so much greater on one enterprise instance as it facilitates referrals across geographies and product groups, provides bankers with a much clearer view of relationships, and offers so many other benefits. This is going to be a big step forward for us, and it will be exemplary in terms of Salesforce's client base. Regarding our use of automation, we are frequently asked how we have been able to keep our expense growth so low when compared to the 2014 or 2015 time period.

The primary reason is our continuous development of a large collection of simplification initiatives and a strong commitment to automation. Our team automated approximately 300,000 hours of back-office activities in 2021, some of which were one-time and some were recurring activities. Several examples included work related to our Paycheck Protection Program, the PPP program, and various processing functions in small business loan originations, loan and deposit operations, mortgage processing, etc. These improvements are supplemented by a significant headway we are making with the automation of our testing protocols and other critical functions in managing our information technology assets.

Finally, this summer, you'll note there on the right-hand side of the slide, bottom right, we will open our 400,000-square-foot technology campus in Salt Lake City, representing a reduction in both our current footprint from 500,000 square feet and 11 buildings to 400,000 square feet, one building. Our occupancy cost will decrease by about 13% as a result of this. The campus will accommodate up to 1,900 technology and operations colleagues and is being designed to achieve a Platinum LEED certification. This will be a significant competitive advantage as the competition for technology, talent will continue to be fierce.

I'll now turn the time over to Paul Burdiss, our chief financial officer. Paul.

Paul Burdiss -- Chief Financial Officer

Thank you, Scott, and good evening, everyone, and thanks for joining. Approximately three-quarters of our revenue is net interest income, which is significantly influenced by loan and deposit growth and associated interest rates. Scott has already discussed loan growth, so if we move to Slide 14, we show our securities and money market investment portfolios over the last five quarters. The size of the period-end securities portfolio increased by more than $8 billion over the past year to nearly $25 billion, while money market investments increased by $5.6 billion to $12.4 billion.

The combination of securities and money market investments has risen to 42% 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 scenario. The durations of both are listed on the bottom left side of this page. The $4.9 billion of securities purchases for the quarter had an average yield of 1.69%.

Also shown on Page 14 is a summary of our interest rate swap portfolio, maturity, and yield information by quarter. This includes both maturing swaps and forward-starting swaps that are in place today but won't be reflected in our financial results until the start date. As the yield on the interest rate swaps both falls over time due to the recent interest rate environment, some of that decline will be dampened by rising notional value. Slide 15 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 change in earning asset mix due to the rise in excess liquidity as described on the prior page. Recently, growth in deposits in excess of loans has impacted the composition of earning assets through a larger concentration in lower-yielding money market and securities investments. The weighted average yield of our securities and money market investments is 1.09%.

And with that concentration increasing by three percentage points in the quarter, it continues to weigh on our net interest margin. In fact, I estimate that the increase in concentration of money market investments from 7% of earning assets a year ago to 15% of earning assets in the most current quarter have accounted for 22 of the 37 basis points of net interest margin compression over the past year. Importantly, this decrease in the net interest margin does not reflect a decline in net interest income as the yield on our investments exceeds the yield on our new deposits. Slide 16 shows information about our interest rate sensitivity.

Focusing on the upper-left quadrant as a general statement, we remain very asset-sensitive. While we've deployed deposit-driven cash into fixed-rate securities, as previously noted, deposit growth has been even stronger, which has resulted in $1.1 billion of growth in lower-yielding short-term money market assets. While not new to the fourth quarter, this estimated rate sensitivity assumes that the incremental deposits have modestly shorter duration characteristics when compared to the 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 our natural asset sensitivity.

Our estimated interest rate sensitivity was similar to that reported in the third quarter, such that our annual net interest income will improve by about 12% if rates were to rise by 100 basis points. As previously noted, we may continue to add interest rate swaps, including forward starting swaps, which would also help to dampen our natural asset sensitivity. Noninterest expenses on Slide 17 grew by $20 million from the prior quarter to $449 million. Adjusted noninterest expense increased $14 million, or 3%, to $446 million.

The linked-quarter increase in adjusted noninterest expense was primarily due to a $10 million donation to the Zions Bank Corporation Foundation. If the charitable contribution were excluded, our adjusted noninterest expense increased about 1%. Slide 18 details our allowance for credit losses, or ACL. In the upper left, we show the recent declining trend in the ACL over the past several quarters, with a slight uptick in the fourth quarter of 2021.

At the end of the fourth quarter, the ACL was $553 million, or 1.13% of non-PPP loans. The chart on the lower right side of this page shows the three broad categories that resulted in the ACL increase of $24 million. Nearly all of the change was attributable to concerns over the impact that the omicron variant may have on the overall economy, as well as changes in the portfolio mix and composition, such as the replacement of nearly risk-free PPP loans with more traditional commercial loans. Our capital position is depicted on Slide 19.

We repurchased $325 million of common stock in the fourth quarter. And with the loan growth we achieved, we believe that our capital position is generally aligned with balance sheet risk and operating risk. We typically show the trailing five quarters in our slides, but in this case, we went back to a year before the pandemic in order to provide a better perspective. In the chart at the top, you'll note that we had reduced our common equity Tier 1 ratio to 10.2% in the fourth quarter of 2019.

And with the onset of the pandemic and with line draws in the first quarter of 2020, we saw that ratio decline to 10%. As we temporarily suspended share repurchases during the most uncertain period of the pandemic, the capital ratio climbed, and as the economic outlook improved, we have actively managed our capital pool -- capital to be more aligned with our risk profile. On the bottom left, we've displayed the quarterly return of shareholders' equity measured as a percentage of our daily average market capitalization. The total capital returned, either through common dividends or share repurchases, sums to about one-third of the market value of the company in just three years.

From another perspective, one can consider the reduction in average diluted shares. Recall, we had warrants outstanding that expired and resulted in no dilution to shareholders during this time frame, as well as an active share buyback program. The results of these efforts was a reduction in average diluted shares of more than 45 million shares, or 23%, from 109 -- 199 million diluted shares outstanding in the fourth quarter of 2018 to just under $154 million in the current quarter. On the bottom right chart is an illustration of a significant divergence in the risk profile of our assets beginning in the fourth quarter of 2019, as measured with our risk-weighted assets and our total assets.

The total risk-weighted assets have increased 10% while our average total assets have increased 34%, which is again attributable to the strong inflow of deposits. Our financial outlook can be found on Slide 20. This is our best current estimate for financial performance in the fourth quarter of 2022 as compared to the actual results reported for the fourth 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 on Slide 2.

Consistent with our outlook provided in recent quarters, due to the degree of uncertainty on the timing of customers submitting requests and the SBA approving those requests, our outlook for loan and net interest income excludes PPP loans. We reiterate our outlook for loan growth to be moderately increasing. We expect net interest income, again excluding PPP loan revenue, to increase over the next year. In addition to earning asset growth achieved from loans, we expect continued deployment of cash into medium-term securities with limited duration extension risk.

As highlighted on the page, this outlook does not assume an increase in short-term interest rates. We had another successful quarter for customer-related fees, and as Scott noted, still with the positive momentum, we are increasing our outlook for customer-related fees to slightly increasing from stable to slightly increasing. For adjusted noninterest expense, we are reiterating our expectation of moderately increasing. One factor in this outlook is persistent wage and price pressure.

Despite this headwind, we expect positive operating leverage in 2022. As noted in the comments column on this page, this outlook excludes the charitable contribution made in the fourth quarter of 2021. Finally, regarding capital management, we have repeatedly stated that it is our objective to operate with lower-than-average risk combined with a stronger-than-median common equity Tier 1 capital ratio. We believe that we have generally reached a point at which these two considerations are coming into balance.

Meanwhile, with customer loan demand returning, it seems likely that during the next few quarters, more of the capital that we generate will be used to support loan growth and less will be used for share repurchases. Notably, share repurchases and dividends are decisions left to the Board, and as such, we expect to announce any capital actions for the first quarter when that information becomes available. This concludes our prepared remarks. Twanda, could you please open the line for questions?

Questions & Answers:

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 -- Bank of America Merrill Lynch -- Analyst

Good afternoon. I guess I just wanted to dig into the NII guidance. I guess it implies somewhere around mid-single-digit year-over-year growth. Talk to us, what are you assuming in terms of cash deployment as part of that guidance? And then what's the rule of thumb when you think about a Fed rate hike in terms of what it means to the margin as we think about? Is there any difference in the first 25 or 50 basis points hikes versus the back half? Anything that we should be mindful of?

Paul Burdiss -- Chief Financial Officer

This is Paul. I'll start with that. As it relates to the deployment of cash, as we said in our prepared remarks, our kind of first, second, and third choices for cash deployment is loan growth, and so we're very focused on achieving that. To the extent we don't achieve that, we have been deploying our cash in a measured way into the investment portfolio over time.

And so as we see the fund flows develop in the -- across 2022, my expectation is that we will continue to do that. It's important to note that, you know, we have confidence in the deployment of cash because we perform a lot of analytics on the quality of our depositors. And what we're finding is that the majority of deposits coming in are being utilized in an operational way by our customers, which -- if history is any guide, means that those deposits are relatively sticky. And so as a result, you know, we will be continuing to deploy that cash, I would say at a pace that is consistent with what you've seen over the past four to six quarters.

The second part of your question had to do with our interest sensitivity and whether or not there may be kind of more or less opportunity for the first 25 basis points as to the last 25 basis points. This is a little bit speculative because it highly depends on sort of the speed with which the Federal Reserve not only increases short-term rates but also begins to draw withdrawal of liquidity from the system. So there are an awful lot of variables in there. My best guess is that for the first 100 basis points, the impact, the flow-through to the net interest income, and again I would focus on net interest income as opposed to net interest margin, the flow-through to net interest income should be pretty consistent for the first 100 basis points.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

That was helpful. And just as a follow-up around the loan growth outlook. It seems conservative given the quarter you had. Maybe Paul, Harris, just give us a sense of customer sentiment.

And do you see inflation as being a risk in terms of business activity when it comes to investment spend and the outlook for loan growth? Any color would be helpful.

Harris Simmons -- Chairman and Chief Executive Officer

Well, I think -- I mean, your guess is as good as ours probably in terms of the impact of inflation on loan demand. I do think that -- and I think that '22 is going to be a pretty good year for loan demand because we are seeing a lot of businesses that are reasonably short in terms of inventory. And so I think there'll be -- I tend to believe there going to be a lot of inventory build this year. But there are also -- there are uncertainties, and I -- you know, certainly, the pandemic and its impact is one of them.

So I -- and I think we're optimistic, but it's a little hard to know with much precision what this is going to look like this year.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Brad Milsaps with Piper Sandler. Your line is open.

Brad Milsaps -- Piper Sandler -- Analyst

Thank you. 

Paul Burdiss -- Chief Financial Officer

Hi, Brad.

Brad Milsaps -- Piper Sandler -- Analyst

Yeah, sorry. Just wanted to kind of follow up on the deposit discussion. I know that's kind of the most difficult area to predict. You touched on it a little bit, but just want to get a better sense of, you know, kind of the type of, you know, dent you think you can make, you know, in the liquidity over the next, you know, 12 months.

And obviously, knowing, you know, deposits are, you know, tough to predict, but just kind of want to get a sense of your mind, Paul, as what you would hope to be in terms of liquidity balance when we're speaking this time of year around.

Paul Burdiss -- Chief Financial Officer

Yeah. Thanks, Brad. I -- you're breaking up a little bit but I think I got the gist of your question. It had to do with our confidence around deposits and the degree to which we expect to deploy that over the course of next year.

I would say it is an uncertain environment. As I said earlier, the sort of the speed with which the Federal Reserve withdraws liquidity from the system, I think, will absolutely have an impact on overall bank deposits. We get confidence from the operating nature of the deposits that we have been bringing on. And the good news is from a liquidity perspective, we have a lot of room -- a lot of margin for error, I'll say, because we still, at the end of the year, had $10 billion invested in short-term deposits at the Federal Reserve.

So you've been seeing us, at the margin, increase the size of our portfolio by, you know, $1 billion to $1.5 billion a quarter sort of net acquisition over the course of the last several quarters. Unless things change very quickly and very significantly, I would expect to see that kind of continued deployment of liquidity.

Brad Milsaps -- Piper Sandler -- Analyst

OK, great. Thank you. Hopefully, more clear now. Just as a follow-up, are there any areas or any industries that, you know, you guys are, you know, sort of pushing back from, or is it pretty much all systems go in terms of, you know, areas that you're lending into at this point?

Keith Maio -- Chief Risk Officer

Hi, this is Keith. If I could start with that.

Brad Milsaps -- Piper Sandler -- Analyst

Yeah. Go ahead, please. Go ahead.

Keith Maio -- Chief Risk Officer

I would just say if there's anything that we're sensitive about, it's in the commercial real estate space and really centered in office. We just -- it's hard to tell what the long-term future of office, particularly Class A office, is going to be just because you've got long tenor to leases, people are obligating or they're paying their obligation under leases, just don't know what renewals are going to look like. So that's a sensitive area as well as -- even pre-pandemic -- retail, commercial real estate. Those are the two areas I can think of that we're a little bit sensitive to.

Brad Milsaps -- Piper Sandler -- Analyst

Great. Thank you.

Operator

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

Chris McGratty -- KBW -- Analyst

Great. Good afternoon. I'm interested in how the expense trajectory may trend if we do get the forward curve. Obviously, the upside, I think you said $60 million per hike on net interest income, Paul.

How would -- how should we be thinking about maybe accelerated investment or additional incentive comp in that scenario?

Paul Burdiss -- Chief Financial Officer

Well, you know, I'll let Scott and Harris speak to the incentive comp. As it relates to investment in the business, my expectation is that much of the net interest income that we would get from rate hikes, you know, should fall to the bottom line. The big question mark in my mind, you know, incentive comp is part of it, but also, you know, salaries is also a part of it. You know, we and other organizations, including other banks, are seeing increasing pressure as it relates to wages.

And so as I look ahead to next year, you know, it's not a definitive trajectory, but it's certainly something that we are paying a lot of attention to as it relates to those expenses. But I don't think that that's going to be driven by the change in rates, right? I think the change in rates are a reaction as opposed to a cause. And so, again, I'll just reiterate that, you know, I am hopeful that much of the revenue that we derive from an increase in rates due to our asset sensitivity would drop to the bottom line.

Harris Simmons -- Chairman and Chief Executive Officer

Yes, I just --

Chris McGratty -- KBW -- Analyst

Thank you.

Harris Simmons -- Chairman and Chief Executive Officer

I'd probably just add, I think, you know, if we see increased revenue from higher rates, you know, some of that will have some impact on incentive compensation. We have, you know, some incentive plans that's obviously tied to profitability and -- so that could have some impact. I don't think it's going to have -- I don't think it's going to be very material and I don't think it's going to change other investment decisions in any fundamental ways.

Scott McLean -- President and Chief Operating Officer

Yeah, this is Scott McLean. I would just add that, I think irrespective of rates, we had -- irrespective of PPP, we have really good growth going on in a number of the businesses that we've invested in over the last three or four years. And that, combined with just the organic loan growth and fee income growth that we've talked about, should provide a nice environment when you strip out interest rates and PPP for organic growth. 

Chris McGratty -- KBW -- Analyst

And then my follow-up, I'm looking at Slide 18, you know, the walk through the cadence and the change in the ACL. I'm interested of that $22 million. The -- you know, if you had an estimate between how much was for new loan growth versus the overlay that you mentioned due to COVID this quarter.

Paul Burdiss -- Chief Financial Officer

Well, we -- this is Paul. We haven't necessarily disclosed the breakdown of all those component parts. There are several component parts there. Some of it is loan growth, as noted, and some of it is a qualitative reserve, you know, forward-looking under the CECL sort of guidance and rules around our expected impact of, you know, kind of the rise of the new variant of COVID.

So there are several factors included in there. And at $22 million, we didn't feel it was necessary to try to break it down into its subcomponents.

Chris McGratty -- KBW -- Analyst

Ok. Thank you.

Operator

Thank you. [Operator instructions]. Our next question comes from the line of Gary Tenner with D.A. Davidson.

Your line is open.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good afternoon. Just wanted to ask a little more about kind of the loan growth outlook for the year, you know, pretty broad-based this quarter, and you're talking about a bit more moderate over the next year. So are you thinking -- I guess two questions.

One, are you thinking about energy becoming a contributor to loan growth over the next year? And then number two, in terms of the campaigns that help drive loan growth in the back half of the year, are any of those still active, or have those come to an end?

Scott McLean -- President and Chief Operating Officer

Sure. Let me -- this is Scott McLean. Let me address the campaigns first. Our owner-occupied campaign is ongoing and we've raised rates a bit, but the volume has still been good.

And our HELOC campaigns, even though we don't have a promotional campaign period like we did from June 1st to November 1st, our -- each affiliate is kind of rotating through the year with a campaign. So I think what we'll see is continued nice growth in owner-occupied and municipal -- I'm sorry, owner-occupied and HELOCs. And then as Harris noted, I think the C&I growth that we've seen this quarter was very strong and I think we'll see it going forward. I don't really believe that interest rate increases, I think it's interesting to read about, write about.

I think most CEOs, they have been living in a time when interest rates were zero. It's unlike any other time -- very few other times in their career. So I don't think they're afraid of higher rates to run their business. I would also note on energy that, yes, I think we could see some growth there.

We're down -- we've dropped to about $2 billion, but we've seen an increase in commitments. And so on the reserve-based lending that we do that's performed really well in midstream, I think we'll see some growth there. And then 1-4 family is the other one that we've had a contraction in over the last 18 months during the pandemic because we were originating a much higher percentage of held-for-sale as opposed to held-for-investment. And you can see that linked-quarter, that was down $90 million, down year-over-year about $900 million.

And traditionally, if you go back over the last five years prior to the pandemic, 1-4 family and HELOCs, those residential products contributed about 20%, 25% of our growth. I think we'll get back to that. And so you'll see some input coming on the 1-4 family side and I think on energy as well.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks for the color, Scott.

Operator

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

John Pancari -- Evercore ISI -- Analyst

Good afternoon. On the -- one other thing on the positive operating leverage front. I know you mentioned that you would expect that the benefit of rate hikes should fall to the bottom line. So is it fair to assume that the operating leverage under that scenario of a higher rate scenario should widen?

Paul Burdiss -- Chief Financial Officer

Yes, John, I think that's fair. I -- this is Paul. I -- you know, we outlined that we expect to continue to be able to grow net interest income, in particular, even without rates going up. And as we note, we expect positive operating leverage there.

And so given our asset-sensitive position, I think it's a fair assumption, given my prior comments on much of that revenue falling to the bottom line, that that should improve our positive operating leverage, a rise in rates that is.

John Pancari -- Evercore ISI -- Analyst

Yep. Got it. Thanks. Yeah, I just want to confirm that.

And then secondly, on the buyback front, I know you indicated the potential for reduced buybacks, given the balance sheet opportunity you're seeing, can you maybe help size up that impact? I mean, I know you bought back, it looks like around 800 million in shares in 2021. It looks like consensus is looking for about 500 million to 600 million in 2022. Is that the fair amount of decline that you think is reasonable to consider when you look at your loan growth expectation for 2022?

Paul Burdiss -- Chief Financial Officer

Well, I'll make a couple of comments. I -- you know, first of all, I don't want to get in front of the board who makes these decisions. And we -- you know, that hasn't been decided yet. But I did say in my remarks that, you know, we've worked really hard over the course of 2021 to bring our CET1 ratio back down to sort of where we would like for it to be over the medium to long term, and that is with a sort of slightly better than median CET1 and we believe a lower-than-average risk profile.

And as I said in my comments, I think we're really close to that level now. And so looking ahead, any expected share repurchase would reflect, you know, that current positioning of sort of capital and risk.

John Pancari -- Evercore ISI -- Analyst

OK. Great. Thanks, Paul.

Paul Burdiss -- Chief Financial Officer

John, thank you.

Operator

Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Great. Thanks. Good afternoon.

Paul Burdiss -- Chief Financial Officer

Hi, John.

Jon Arfstrom -- RBC Capital Markets -- Analyst

A question for -- yep, hey. A question for you on Slide 28, that, you know, the gap that you have between you and your major competitors on the, you know, feedback. How do you think that looked, Harris, you know, pre-pandemic or maybe before you started this journey of kind of revamping the company from a technology perspective?

Harris Simmons -- Chairman and Chief Executive Officer

Well, I think -- I mean, for a long time, we've been receiving really good reviews from customers in both middle market and small business. It's shown up in these Greenwich ratings that we've been talking about for a long time, for example. But I do think that our performance through the PPP episode really did differentiate us from a lot of other banks and has been helpful. And we're increasingly delivering as, you know, certainly as other banks are too.

But I think we're delivering a lot of digital tools, and more of that to come here in 2022 for small business customers. We'll be rolling out a new online and mobile front end or a platform for small businesses that will be a real leap forward in terms of capabilities that they'll have all that in a -- on a mobile device, for example, and consistent with what they see online. So I think that, you know, it's been strong. I think it's getting stronger and we're going to continue to work to make it stronger still.

We're doing a lot of work outside of the technology realm. One of the things that I care greatly about is the investment we're making in people in our branches, in frontline bankers and their skill set, their ability to make decisions and to get problems solved for customers, and that's something, I think, will also be a differentiator in years ahead. So it's something that, I think, we're doing well and I think we'll continue to get better.

Scott McLean -- President and Chief Operating Officer

John, this is Scott. I would just add that we had the 2018, 2019 version of this in a number of decks until about nine months or so ago, and the numbers are very consistent with the pre-pandemic. And I would just remind you also, Net Promoter Score for the Net Promoter Score aficionados, 50-plus is considered excellent. And those that study Net Promoter Scores generally say, "Hey, if you can just stay in 50-plus." There's no great value necessarily in being 60 or 70 or 80, just stay excellent is part of the battle cry.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. So I guess the message is you're saying you're -- you had a gap but you're definitely keeping up and you're competitive. Is that fair?

Scott McLean -- President and Chief Operating Officer

We are now competitive.

Harris Simmons -- Chairman and Chief Executive Officer

Yeah, I think we're highly competitive.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. And then, Scott, can you touch on muni and oil and gas in terms of some of your expectations there? Thanks. 

Scott McLean -- President and Chief Operating Officer

Sure. Our municipal business, this was a business that Harris really identified for -- as a significant opportunity, probably, Harris, I'm guessing, was about four or five years -- maybe five years ago. It's just been an outstanding business. The credit quality is terrific.

We invested a lot in people, and they're out in our affiliates. The transactions they're originating are small by most people's standards. They're 2 million to 5 million, maybe 10 million on the upper end; they're small municipalities; they're police car fleets; they're fire stations, water stations, that kind of thing. And credit quality has just been outstanding.

We've also been successful at selling our other banking services into this client base, so it's not just a deal. So you'll see this continue to be a real focal point because most investment bankers won't go to the places we go to. It's just too small, too dusty. They don't go there.

So -- on -- and so it's been a great business and will continue to be. The energy business, you know, our outstandings are down to about $2 billion. And I think we will see some growth. Credit quality has improved, as you would have guessed significantly, and will -- we should see continued improvement into this year.

We're starting to see borrowing bases in our fall redetermination. Borrowing bases stayed flat and started to increase. I think we'll see that more this year. The equity markets are still close to most energy companies, but most believe they'll open back up later this year.

The public debt and private debt markets were much better in 2021 than they were in previous years. So capital is coming back in the industry. And I think -- and the other big change is that probably half the banks that called on energy companies no longer do it, a half to two-thirds. So the pricing has gone up and the structure has become even more conservative.

So it really is a good time to be in the business on a very conservative basis.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. Thanks. Very helpful. I appreciate it.

Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Mr. Abbott for closing remarks.

James Abbott -- Senior Vice President, Director of Investor Relations

Thank you, Twanda, and thank you to all of you for joining us today for our call. If you have additional questions, please contact me at the email or phone number listed on our website. We look forward to connecting with you throughout the coming months, and we thank you for your interest in Zions Bancorporation. This concludes our call.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

James Abbott -- Senior Vice President, Director of Investor Relations

Harris Simmons -- Chairman and Chief Executive Officer

Scott McLean -- President and Chief Operating Officer

Paul Burdiss -- Chief Financial Officer

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Brad Milsaps -- Piper Sandler -- Analyst

Keith Maio -- Chief Risk Officer

Chris McGratty -- KBW -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

John Pancari -- Evercore ISI -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

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