Zions Bancorp NA (NASDAQ: ZION) Q4 2021 earnings call dated Jan. 24, 2022
Corporate Participants:
James Abbott — Senior Vice President of Investor Relations and External Communications
Harris H. Simmons — Chairman and Chief Executive Officer
Scott J. McLean — President and Chief Operating Officer
Paul E. Burdiss — Chief Financial Officer
Analysts:
Ebrahim Poonawala — Bank of America — Analyst
Brett Milsaps — Piper Sandler — Analyst
Chris McGratty — KBW — Analyst
Gary Tenner — D.A. Davidson — Analyst
John Pancari — Evercore ISI — Analyst
Jon Arfstrom — RBC Capital Markets — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the 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 of Investor Relations and External Communications
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 H. 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 or scenes that are particularly applicable to Zions and 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 who were successful of 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 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 are 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 specific 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 1 basis point or 1/100th 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 pre-provision 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 the 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 a 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 3 basis points to 3.56% from 3.59%. Deposit costs remain low. Shown on the right are cost of total deposits was stable at just 3 basis points in the fourth quarter. Deposit growth remain 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 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-offs to average loans ratio. We experienced just 1 basis point of annualized loan losses relative to average total non-PPP loans and the same holds true of the full year figure.
Shown in the chart in 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 J. 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 business has 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 term. 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 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 the 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 non-interest 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 remain 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 — both the 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 NBA industry Market Index. While low interest rate 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 in affluent clients, the success of our digital platform representing now 95% of all applications which is up from a 100% paper in 2018, and significant process enhancements, tailored to improve the experience for our customers in 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 of $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 future core, 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 the 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 3 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 real featured part of what we’re doing going forward.
Later this year we will merge our six instances of Salesforce to one unified incidence. Salesforce reports that we will be the only one of their 51 major financial institution customers that has accomplished this objective. For a non-siloed 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 offer so many other benefits. This is going to be a big step forward for us and it will be exemplary in terms of Salesforces’ 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 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 feet 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 1900 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 E. 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 our 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 swaps 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 footfalls 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 and 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 3 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 has 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 the decline in net interest income as the yield on our investments exceeds 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 would 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 damper our natural asset sensitivity.
Non-interest expenses on Slide 17 grew by $20 million from the prior quarter to $449 million. Adjusted non-interest expense increased $14 million or 3% to $446 million. The linked-quarter increase in adjusted non-interest expense was primarily due to a $10 million donation to the Zions Bancorporation 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 year before the pandemic in order to provide a better perspective. In the chart at the top, you will 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 10.0%.
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 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 dividend or share repurchases, sums to about one-third of the market value of the company in just three years.
From the other 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 timeframe, 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 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 a positive momentum, we are increasing our outlook for customer-related fees to slightly increasing from stable to slightly increasing. For adjusted non-interest 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 and 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 — 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 E. 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 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, 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 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 — Analyst
That was helpful. And just as a follow-up, around the loan growth outlook, it feels 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 H. 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 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 would be lot of inventory built this year. But there are also — there are uncertainties and I — certainly the pandemic and its impact is one of them. So, I mean, 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 — Analyst
Got it. Thanks for taking my questions.
Operator
Thank you. Our next question comes from the line of Brett Milsaps with Piper Sandler. Your line is open.
Brett Milsaps — Piper Sandler — Analyst
Thank you.
Harris H. Simmons — Chairman and Chief Executive Officer
Hi, Brett.
Brett Milsaps — Piper Sandler — Analyst
One is kind of on the deposit discussion, that’s kind of the most difficult area to predict. You touched on a little bit, but just want to get a better sense of kind of the types of debt you think you can make in the liquidity over the next 12 months and obviously knowing deposits are tough to predict, but just kind of want to get a sense in your mind, Paul, what you would hope to be in terms of liquidity balance when we’re speaking this time of year around?
Paul E. Burdiss — Chief Financial Officer
Yeah, thanks, Brett. 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 withdrawals 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 $1 billion to $1.5 billion a quarter sort of net acquisition over the course of last several quarters. Unless things change very quickly and very significantly, I would expect to see that kind of continued deployment of liquidity.
Brett Milsaps — Piper Sandler — Analyst
Okay, great, thank you. Hope I’m more clear now. Just as a follow-up, are there any areas or any industry that you guys are sort of pushing back from or is it pretty much all systems go in terms of areas that you’re lending into at this point?
Scott J. McLean — President and Chief Operating Officer
Hi, this is Scott. I’ll start. [Speech Overlap] 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 the 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, are 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 that I can think off that we’re a little bit sensitive to.
Brett 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 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 should we be thinking about maybe accelerated investment or additional incentive comp in that scenario?
Paul E. Burdiss — Chief Financial Officer
Well, 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 should fall to the bottom line. The big question mark in my mind, incentive comp is part of it, but also salaries is also part of it. 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, 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 reaction as opposed to a cause. And so again I’ll just reiterate that I am hopeful that much of the revenue that we derived from an increase in rates due to our asset sensitivity, would drop to the bottom line.
Harris H. Simmons — Chairman and Chief Executive Officer
Yeah, I just. I’d probably just add, I think if we see increased revenue from higher rates some of that will have some impact on incentive compensation. We have some incentive plans that are obviously tied to profitability. And so, they could have some impact. I don’t think it’s going to have, 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 J. McLean — President and Chief Operating Officer
Yeah, this is Scott McLean, I would just add that I think irrespective of rates, we had — and 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
Great. And then my follow-up. I’m looking at Slide 18 that you walk through the cadence and the change in the ACL. I’m interested of that $22 million, the — if you had an estimate between how much was for new loan growth versus the overlay that you mentioned due to COVID in this quarter?
Paul E. 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 its loan growth as noted and some of it is qualitative reserve forward looking into the CECL sort of guidance and rules around our expected impact of kind of the rise of the new variant of COVID. So, there’s several factors included in there and at $22 million, we didn’t feel it was necessary to try to break it down into its sub components.
Chris McGratty — KBW — Analyst
Okay, 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 a loan growth outlook for the year. 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 will drive loan growth in the back half of the year, are any of those still active or have those come to an end?
Scott J. 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 is still being 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, it 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 and 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 and 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. 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 of the 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 E. Burdiss — Chief Financial Officer
Yes, John, I think that’s fair. This is Paul. 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 should improve our positive operating leverage, a rise in rates that is.
John Pancari — Evercore ISI — Analyst
Got it, thanks. Yeah, I just wanted to confirm that. And then secondly on the buyback front, I know you indicated that 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 a fair amount of decline that you think is reasonable to consider when you look at your loan growth expectation for 2022?
Paul E. Burdiss — Chief Financial Officer
Well, I’ll make couple of comments. First of all, I don’t want to get in front of the Board, who makes these decisions. And we’ve — that hasn’t been decided yet. But I did say in my remarks that 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 that current positioning of sort of capital and risk.
John Pancari — Evercore ISI — Analyst
Okay, great. Thanks, Paul.
Paul E. Burdiss — Chief Financial Officer
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
Hey, thanks, good afternoon.
Harris H. Simmons — Chairman and Chief Executive Officer
Hi Jon.
Jon Arfstrom — RBC Capital Markets — Analyst
Yeah, hi. Question for you on Slide 28 that the gap that you have between you and your major competitors on the feedback. How do you think that looked, Harris, pre-pandemic or may be before you started this journey of kind of revamping the company from a technology perspective?
Harris H. 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 it’s been helpful. And we are increasingly delivering as 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 to have on in — on the mobile device for example and consistent with what they see online.
So I think that, 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 around. One of the things that I care greatly about is the investment we’re making in people and our branches and frontline bankers in their skill set, their ability to make decisions and to get problem 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 J. McLean — President and Chief Operating Officer
Jon, this is Scott. I would just add that we had the 2018-2019 version of this in a number of decks until about 9 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 officially in autos [Phonetic] 50 plus is considered excellent and those that study Net Promoter Scores generally say, hey, if you can just stay 50 plus, there’s no great value necessarily in being 60 or 70 or 80, just stay excellent is part of the — is part of the battle ground.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay. So, I guess the message, you’re saying your — you had a gap, but you’re definitely keeping up in your competitive. Is that fair?
Scott J. McLean — President and Chief Operating Officer
We are not [Speech Overlap].
Harris H. Simmons — Chairman and Chief Executive Officer
Yeah, I think we’re highly competitive.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay. And then Scott, can you touch on muni and oil and gas in terms of some of your expectations there? Thanks.
Scott J. 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 there originating are small by most people’s standards. They are $2 million to $5 million, maybe $10 million on the upper end. They are small municipalities. They are police car fleets, they are 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 will 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 and 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, 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 basis 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 year. 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
Okay, 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 of Investor Relations and External Communications
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 Closing Remarks]