Zions Bancorporation N.A (ZION) — Q4 2021 Earnings Call Transcript

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 1 hour. During the question-and-answer session, we request that you just limit your questions to 1 primary and 1 follow-up question to enable other participants to ask questions. I will now turn the time over to Harris.

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 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 3 months ago, the interest rate futures market had implied a single 0.25-point rate hike by mid-2022. Today, we have approximately doubled that, and by year-end, the futures market is pricing in hikes. We are well positioned for this environment, with each 0.25-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, fintechs, and 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 a $0.34 per share variance, which can be seen on the bottom left chart. Although we had only 1 basis point or 0.01% 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 and 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 2 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 3 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 3 basis points in the fourth quarter. Deposit growth remained strong, with average total deposits increasing $4 billion or 5.2% 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 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 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.

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 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 2 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 this 6-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 1/3 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-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 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 2/3 held for investment, 1/3 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 2 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 3x 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 6 instances of Salesforce to 1 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 non-siloed bank like us, the power of Salesforce is so much greater on 1 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, et cetera. 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-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, 1 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.

Thank you, Scott, and good evening, everyone, and thanks for joining. Approximately 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 5 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 book 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 5-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 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 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 3 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 5 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 10.0%. 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 dividends or share repurchases, sums to about 1/3 of the market value of the company in just 3 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 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 2 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?

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 basis points or 50 basis points hikes versus the back half? Anything that we should be mindful of?

This is Paul, and I’ll begin with that. Regarding cash deployment, as mentioned earlier, our top priorities are loan growth, and that remains our focus. If we’re unable to achieve our loan growth targets, we have been gradually allocating cash to our investment portfolio. As we monitor fund flows through 2022, I expect this trend to continue. Importantly, we have confidence in our cash deployment strategy as we conduct thorough analyses on the quality of our depositors. We have observed that most incoming deposits are being actively used by our customers, which historically indicates that these deposits tend to remain stable. Consequently, we intend to maintain our current pace of cash deployment, reflecting what has occurred over the last four to six quarters. The second part of your question pertains to our interest sensitivity and whether there may be more or fewer opportunities with the first 25 basis points compared to the last 25 basis points. This area is somewhat speculative because it largely depends on how quickly the Federal Reserve raises short-term rates and withdraws liquidity from the system. There are many variables involved. My estimation is that the effect on net interest income for the first 100 basis points should be quite consistent, and I emphasize net interest income over net interest margin in this context.

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.

Well, I think your guess is as good as ours in terms of the impact of inflation on loan demand. I do think that 2022 is going to be a pretty good year for loan demand because we are seeing many businesses that are somewhat low on inventory. Therefore, I believe there will be a significant inventory build this year. However, there are also uncertainties, and the pandemic and its effects are certainly one of them. So, while we're optimistic, it's a bit difficult to know precisely what this year will look like.

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 kind of the dent 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 of your mind, Paul you would hope to be in terms of liquidity balance when we're speaking this time of year…?

Thank you, Brad. You're cutting out a bit, but I think I understood your question about our confidence in deposits and how we plan to deploy them over the next year. It's certainly an uncertain environment. As I mentioned earlier, the speed at which the Federal Reserve removes liquidity will definitely impact overall bank deposits. We gain confidence from the nature of the deposits we have been acquiring. The good news is that, from a liquidity standpoint, we have a considerable amount of room for error, as we still had $10 billion invested in short-term deposits at the Federal Reserve at the end of the year. We've been gradually increasing the size of our portfolio by about $1 billion to $1.5 billion each quarter over the last several quarters. Unless there are significant and rapid changes, I would anticipate continued deployment of liquidity at that rate.

Okay, great. Hopefully, more clear now. Just as a follow-up, are there any areas or any industries 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?

This is Keith. I'll begin by saying that we are particularly cautious about the commercial real estate sector, especially in the office space. It’s challenging to predict the long-term future for office properties, particularly Class A offices, due to the long lease terms; tenants are fulfilling their lease obligations but we are uncertain about what renewals will look like. Therefore, this is a sensitive area for us, along with retail commercial real estate, which was already a concern even before the pandemic. These are the two areas where we feel the most sensitivity.

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

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 a 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 a reaction as opposed to a cause. And so again, I'll just reiterate that 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.

Yes, I would like to add that if we experience increased revenue from higher rates, it may have some effect on incentive compensation. We have incentive plans that are connected to profitability, which could influence that. However, I don't believe this will be significant, and I don't expect it will fundamentally alter our other investment decisions.

Yes, this is Scott McLean. I would like to emphasize that regardless of interest rates or the PPP, we are experiencing strong growth in several businesses where we have made investments over the past three to four years. This, along with the organic loan growth and fee income growth we have discussed, should create a favorable environment for organic growth when you exclude interest rates and the PPP.

I'm looking at Slide 18, where you discuss the cadence and changes in the ACL. I'm curious about the $22 million figure; could you estimate how much of that was attributed to new loan growth versus the overlay mentioned due to COVID this quarter?

Well, this is Paul. We haven't disclosed the breakdown of all those component parts. There are several components involved. Some of it is loan growth, as mentioned, and some is a qualitative reserve forward-looking under the CECL guidance concerning the expected impact of the rise of the new variant of COVID. There are several factors included in this amount. Given that it's $22 million, we didn't feel it was necessary to break it down into its subcomponents.

I would like to ask for more information regarding the loan growth outlook for the year. It seems fairly broad-based this quarter, but you're indicating a more moderate trend for the coming year. I have two questions: first, are you anticipating that energy will play a role in loan growth next year? Secondly, regarding the initiatives that have been driving loan growth in the latter half of the year, are any of those still ongoing or have they concluded?

Sure. This is Scott McLean. Let me address the campaigns first. Our owner-occupied campaign is ongoing, and we've raised rates slightly, but the volume remains strong. Our HELOC campaigns continue as each affiliate rotates through the year, even without a promotional period like we had from June 1 to November 1. I believe we will continue to see good growth in owner-occupied and HELOCs. As Harris mentioned, the growth in C&I this quarter was robust, and I expect that to continue. I don't see interest rate increases as a hindrance for most CEOs, who have adapted to operating in a low-interest environment. Regarding energy, I think we can anticipate some growth. Although we have dropped to about $2 billion, we are seeing an increase in commitments. The reserve-based lending we do in the midstream has performed well, and I believe we will see growth in that area as well. The 1-4 family sector has contracted over the past 18 months during the pandemic because we were originating a higher percentage of held-for-sale rather than held-for-investment. Linked to the previous quarter, that area was down $90 million, and year-over-year, it has decreased by about $900 million. Traditionally, prior to the pandemic, 1-4 family and HELOCs contributed around 20% to 25% of our growth, and I expect we will see a return to that trend. Therefore, we should see some positive movement in the 1-4 family sector and in energy as well.

On another note regarding positive operating leverage, you mentioned that you expect the benefits of rate hikes to contribute to the bottom line. Should we assume that operating leverage will increase in a higher rate environment?

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, that should improve our positive operating leverage, a rise in rates that is.

Yes, got it. Yes, 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?

I want to make a few remarks. First, I don't want to speak on behalf of the Board who makes these decisions, and that hasn't been finalized yet. However, I mentioned that we've put in considerable effort throughout 2021 to bring our CET1 ratio to where we would like it to be for the medium to long term, which is slightly better than the median CET1 and aligns with a lower-than-average risk profile. As I stated, I believe we are very close to achieving that level now. Looking ahead, any anticipated share repurchase will reflect our current position regarding capital and risk.

A 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 maybe before you started this journey of kind of revamping the company from a technology perspective?

We’ve been receiving positive feedback from customers in both the middle market and small business sectors for a long time. This is evident in the ratings we have discussed previously. Our performance during the PPP episode set us apart from many other banks and contributed positively. We are increasingly delivering results, and we're introducing many digital tools for small business customers in 2022. We will be launching a new online and mobile platform for small businesses that will significantly enhance their capabilities. This platform will provide a consistent experience across mobile and online interfaces. I believe we are performing strongly and will continue to improve. We are also investing heavily in our people, specifically our branch staff and frontline bankers, enhancing their decision-making skills and problem-solving abilities for customers. I believe that this focus on personnel will distinguish us in the future, and we are confident that we will keep progressing.

John, 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 aficionados, 50-plus is considered excellent. And those that study Net Promoter Scores generally say, hey, if you can just stay 50-plus as there's no great value necessarily in being 60 or 70 or 80 to stay excellent is part of the battle story.

So to clarify, you're indicating that despite a gap, you are definitely maintaining your competitiveness. Is that correct?

We are….

Yes, I think we're highly competitive.

Sure. Our municipal business is one that Harris identified as a significant opportunity about five years ago. It has become an outstanding business with excellent credit quality. We have invested heavily in our team and they are actively working with our affiliates. The transactions they are originating are small by typical standards, usually ranging from $2 million to $5 million, with some going up to $10 million. These transactions involve small municipalities, including police car fleets, fire stations, and water stations. The credit quality in this area has been exceptional. We have also been successful in offering our other banking services to this client base, so it’s more than just one-off deals. This will continue to be a key focus for us, as most investment bankers avoid these smaller, less conventional opportunities. Our energy business has seen outstanding balances decrease to about $2 billion, but I think we will see some growth. Credit quality has significantly improved, as expected, and we should see continued enhancement this year. Our borrowing bases remained flat initially but are starting to rise. I anticipate further increases this year. The equity markets remain inaccessible for many energy companies, but most expect them to open up later this year. Both public and private debt markets were significantly better in 2021 compared to prior years, indicating that capital is returning to the industry. Furthermore, a notable change is that about half to two-thirds of the banks that previously worked with energy companies have pulled back, resulting in higher pricing and a more conservative approach. This makes it an advantageous time to operate in this sector, provided we maintain a conservative strategy.

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.