Zions Bancorporation Stock

Greetings. Welcome to Zions Bancorp Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Jason Arbuckle. Thank you. You may begin.

Thank you, Cleo, and [ Mibie ] good evening everyone. Welcome to our conference call to discuss Zions Bancorporation's Third Quarter 2026 Results. My name is Jason Arbuckle, Senior Director of Investor Relations. And before we begin, I would like to remind you that during the call, we will make forward-looking statements. Actual results may differ materially. We encourage you to review the forward-looking statements and non-GAAP disclosures in our press release and on Slide 2 of today's presentation, which apply equally to statements made during this call. .

A copy of the earnings release and the presentation are available at our website, zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Chief Financial Officer, Ryan Richards, will review our financial results and outlook. And also with us today are Scott McLean, President and Chief Operating Officer; and Derek Steward, Chief Credit Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for 1 hour, and I will now turn the time over to Harris Simmons.

Thanks very much, Jason, and good evening, everyone. We're reasonably pleased with our financial results for the third quarter, which reflect meaningful year-over-year earnings improvement and continued progress on our strategic priorities. Going to the slides. Slide 3 summarizes second quarter results versus the prior quarter and last year's third quarter. Net earnings available to common was $262 million or $1.78 per share an increase of 20% compared to $1.48 in last year's third quarter and an increase of 2% compared with $1.74 last quarter after adjusting for that quarter's large equity securities gains. The increase from a year ago was due to growth in net interest income and customer-related noninterest income, modest loan growth and exceptional credit performance.

The net interest margin was 3.23% and down 4 basis points from the prior quarter and down 5 basis points from a year ago. When compared to the prior quarter, average loans grew 3.7% on an annualized basis, led by commercial lending, average customer deposits grew 8.8% on an annualized basis. Credit losses were modest at 2 basis points annualized of average loans.

Slide 4 presents the recent history of earnings performance, together with the impact of the provision for loan losses on quarterly results. Notable items in each of the recent quarters are also included on this slide. As shown on Slide 5, adjusted preprovision net revenue was $338 million. It increased 2% from the prior quarter, reflecting the improvement in adjusted taxable equivalent revenue which more than offset a modest increase in adjusted noninterest expense. Adjusted pre-provision revenue declined $14 million or 4% from the prior year period, which represented a particularly strong comparison quarter. In addition, results for the current quarter include $4 million of expense associated with the recently acquired multifamily agency platform that was not included in our original forecast.

Turning to Slide 6. Our Capital Markets division continues to be an important driver of fee income growth. Since launching the business in 2020, we have nearly doubled the annual fee income contribution by investing steadily in talent technology and product capabilities, including investment banking, commodities hedging, real estate capital markets and multifamily agency capabilities, which I'll discuss in more detail on the next slide. Before moving on, I'll note that the $136 million fee income numbers shown for 2026 is annualized based on our performance through September 30. Given the momentum we are seeing across the business, our expectations for the fourth quarter, we anticipate the fully review the results to come in somewhat above that level.

Turning now to Slide 7. I'd like to highlight the acquisition of Basis Investment Group's multifamily agency lending business, which closed during the third quarter. This acquisition represents an important step in building what we believe can be a highly differentiated multifamily franchise. Our goal is straightforward, to provide clients with a single source of financing solutions across market rate, affordable construction, bridge, agency and CMBS products. With this acquisition, we are now 1 of only 4 banks in the country that combines direct access to both Fannie Mae designated underwriter servicer and Freddie Mac's Optigo programs. Together with originations to third-party CMBS conduit platforms.

When combined with the broader capabilities of the bank, this creates a differentiated one-stop multifamily platform capable of serving clients throughout the life cycle of an asset. In addition to the talented team that joined us from basis, we have added seasoned lenders with deep experience in multifamily as lending and servicing to help scale the platform. We're excited about the opportunities this creates and the talent we assembled. This acquisition enhances our ability to serve commercial real estate clients and in particular, those in the Western United States, where we see a real market opportunity with population growth and housing affordability issues that drive demand for multifamily products. Included in the quarter were approximately $4 million of expenses associated with our newly acquired multifamily agency platform, including personnel and other integration-related costs and approximately $300,000 revenue, we expect the financial benefits to build gradually over time as the platform is integrated and production ramps up.

For 2027, we anticipate approximately $17 million to $20 million of revenue and $12 million to $13 million of expense, recognizing that we are in the early process of scaling the business. Over the medium-term, we expect the business to generate approximately $30 million to $40 million of annual revenue. The pace of growth and ultimate revenue potential will be influenced by market conditions, including the interest rate environment.

Move to Slide 8. We see wealth management as a compelling growth opportunity given our broad customer base and the size of wealth assets under management relative to the size of our banking franchise. We have seasoned affiliate and wealth leadership teams focused on continuing to enhance coordination between our banking and advisory businesses, which we believe positions us to deepen client relationships and capture additional growth opportunities. A key component of our strategy is a product we call Wealth Select, which is a new offering that expands our addressable market by allowing us to serve clients with approximately $100,000 to $1 million of investable assets through a scalable advisory model. Wealth Select helps us engage clients earlier, deepen relationships over time and create a pathway for those relationships to grow alongside their financial needs.

Slide 9 provides more information about what we refer to as our strategic 6 products. While each serves a different client segment and business need, they all share a common objective, which is strengthening sustainable growth through our branch for print and core deposits, small business relationships and fee income. We continue to be encouraged by the early results. Example, here today at September 30, we've opened over 14,000 gold accounts for consumers, totaling approximately $275 million in new-to-bank deposits. and 1,300 business beyond accounts, bringing in about $120 million in new deposits.

In addition, we currently rank #10 nationally and SBA 7(a) lending based on approval volume, #9 in SBA 504 loans. While the near-term financial contribution is modest relative to the size of the bank, these products are helping us grow long-term relationships and creating opportunities to deliver additional banking, payments, lending and wealth management solutions over time. With that overview, I'll turn the call over to our Chief Financial Officer, Ryan Richards, to walk through the quarter in more detail and walk through our outlook. Ryan?

Thank you, Harris, and good evening, everyone. Beginning on Slide 10, you can see the 5 quarter trends for net interest income and net interest margin. [indiscernible] equivalent net interest income was $684 million, up $7 million or 1% from the prior quarter and up $12 million or 2% from the year ago quarter. Earning asset yields were relatively stable sequentially, while our cost of funding increased, resulting in a decline in the net interest margin compared to the prior quarter. .

Slide 11 provides additional detail on the drivers of net interest margin, which decreased 4 basis points from the prior quarter and 5 basis points from a year ago. The linked quarter decline was primarily driven by higher deposit costs and growth and lower-yielding assets. As Harris noted in his opening remarks, Deposit growth significantly outpaced loan growth during the quarter, with average customer deposits growing by 8.8% on an annualized basis. This compares with annualized loan growth of 3.7% during the quarter and a slight decrease in ending loan balances. We used this excess funding to pay down short-term FHLB borrowings with the residual deployed into money market investments, which increased meaningfully during the quarter.

Moving forward, these lower-yielding money market balances, which are dilutive to our net interest margin, will be utilized to fund loan growth and/or reduce broker deposits as those balances mature. The total cost of deposits increased 11 basis points to 1.59% during the quarter. This increase was driven in part by a recent change in how we present interest paid on cash collateral associated with our [indiscernible] portfolio.

Earlier this year, we began presenting derivatives and related cash collateral on a net basis. Beginning this quarter, we reflected the interest costs associated with the cash collateral held and the cost of deposits as opposed to short-term borrowings. This increased our reported cost of deposits by approximately 3 basis points but had no impact on our overall cost of funds. As Harris noted in our earnings release, we expect our asset-sensitive balance sheet to produce stronger net interest income in a higher rate environment. For the third quarter of 2027, we anticipate net interest income to increase by approximately 8% to 12%. Our outlook is based on the forward curve as of September 30, which assumes 3 rate increases occurring in December, March and June, respectively. The forecast assumes the cost of deposits rise to around 2% from current levels of 1.59%, which include migration of some noninterest-bearing deposits into interest-bearing products. If deposit pricing and mix trends developed more favorably than we have assumed, there is potential for net interest income to exceed our guidance.

Moving to noninterest income on Slide 12. Customer-related noninterest income was $192 million compared with $182 million in the prior quarter and $163 million a year ago. Excluding the net credit valuation adjustment, adjusted credit -- customer-related noninterest income was $182 million compared with $181 million in our quarter and up $8 million or 5% from the year ago quarter. As Harris mentioned earlier, capital markets continue to deliver strong performance and remains on pace for a strong fourth quarter. In wealth, we are seeing encouraging momentum and remain focused on executing our strategy to drive growth, and deepen client relationships.

Looking ahead to the third quarter of 2027, we expect adjusted customer-related fee income to grow 6% to 9% and relative to the third quarter 2026 results of $182 million. We anticipate broad-based growth across our fee businesses, led by continued momentum in capital markets.

Turning to Slide 13. Adjusted noninterest expense was $549 million, representing an increase of $3 million or 1% from the prior quarter. And as Harris mentioned earlier, included $4 million of expense related to the newly acquired multifamily agency platform. Technology telecom and information processing expense increased $4 million driven by higher application software licensing and maintenance costs. Additionally, deposit regulatory expense increased $5 million related to the decrease to our FDIC special assessment in the prior quarter. Expenses were higher year-over-year, reflecting higher incentive compensation, increased professional outsourced services and higher technology costs.

We will continue to manage expense prudently while investing to support growth. For the third quarter of 2027, we expect adjusted noninterest expense to increase by approximately 4% to 6% relative to the third quarter of 2026. We also continue to expect positive operating leverage for the full year 2026. Our initial outlook of 100 to 150 basis points of operating leverage did not contemplate the acquisition of the multifamily agency platform for basis. Including the impact of that acquisition, we now expect operating leverage of approximately 40 to 50 basis points. Excluding the acquisition, operating leverage would approach to the low end of our prior expectations of 100 to 150 basis points.

Slide 14 presents trends in average loans and deposits. Average loans grew 3.7% annualized during the quarter, primarily within the commercial and industrial portfolio and increased 2.7% year-over-year. Loan yields remained relatively stable sequentially and were down 28 basis points year-over-year. primarily reflecting lower interest rates. Looking ahead, we expect loan growth to be between 2% to 4% for the third quarter of 2027 compared with the third quarter of 2026. Our outlook reflects current pipeline activity, customer utilization trends and the broader economic environment. Given the expected path of interest rates, we are tempering our outlook for loan growth particularly within commercial real estate. Average deposits increased $17 billion from the prior quarter, driven -- excuse me, thank you, average deposits increased $1.7 billion from the prior quarter, driven largely by an increase in interest-bearing deposits. The cost of total deposits was 1.59%. And an increase of 11 basis points sequentially, primarily reflecting deposit repricing and, to a lesser extent, a presentation change related to interest paid on cash lateral associated with our derivatives portfolio.

Our deposit growth allowed us to reduce wholesale funding sources during the quarter, tempering the increase in total cost of funding. Year-over-year, the cost of deposits declined 8 basis points, primarily due to lower interest rates.

Slide 15 presents the 5-quarter trend of our average and ending funding sources. Our total funding cost increased to 1.75% compared 1.69% in the prior quarter. Period-end deposit balances increased by $1.3 billion compared with the prior quarter driven by a $1.8 billion increase in customer deposits, partially offset by a decrease of $448 million in broker deposits. Short-term borrowings decreased $376 million linked quarter and declined by $2.7 billion versus the prior year quarter.

Turning to Slide 16. The investment securities portfolio continues to serve as an important source of on-balance sheet liquidity and a tool to balance interest risk. During the quarter, principal prepayment-related cash flows from investment securities of $631 million were partially offset by reinvestment of $296 million. the continued paydown of lower-yielding mortgage-backed security supports earning asset remix and/or a reduction in wholesale funds. The estimated price sensitive portfolio, inclusive of hedging activity was 3.4 years.

Credit quality remained strong, as shown on Slide 17. Net charge-offs were 2 basis points of average loans annualized, and the nonperforming asset ratio was 50 basis points compared with 48 basis points last quarter. Classified and criticized balances declined 12% and 8%, respectively, during the quarter. The allowance for credit losses ended the quarter at 1.1% and remains well positioned relative to our risk profile with 207% coverage of nonaccrual loans.

Our capital position remains strong, as shown on Slide 18. The common equity Tier 1 ratio remained stable at 11.8% during the quarter, notwithstanding a $229 million increase in goodwill and intangible assets arising from our newly acquired multifamily agency business. We expect continued strong capital generation through earnings, and improvement in AOCI. Related improvements resulted in a 13% increase in tangible book value per share versus the prior year. When compared with June 30, 2026, unrealized losses at AOCI increased by $122 million, reflecting declines in the fair value of AFS securities resulting from increased term interest rates. This mark-to-market impact was tempered by fixed received floating interest rate swaps donated as hedges of our AFS securities to reduce volatility in our AOCI balance. It also bears noting that a significant portion of our unrealized losses recorded in AOCI related to securities previously transferred from AFS to held-to-maturity. The related balance of which does not fluctuate with mark-to-market change.

Slide 19 summarizes the outlook we discussed a cropped loans, net interest income, fee income and expenses. This outlook remains our best estimate based on current information and are subject to the risks and uncertainties discussed in our forward-looking statements. This concludes our prepared remarks. As we move to the question-and-answer section of the call, we request that you limit your questions to 1 primary and 1 follow-up question to enable other participants to ask questions. Cleo, please open the line for questions.

[Operator Instructions] Thank you. Your first question comes from Bernard Von Gizycki with Deutsche Bank.

Just on the first question on the NII guide of up 8% to 12%. Can you just break down some of those assumptions, like the deposit growth and mix beta and just the rate hikes assumed within that period of time?

Yes. Thank you, Bernard, for the question. Listen, I'm trying to call out in my prepared remarks that we are anticipating 3 rate hikes as part of that guidance. So December, March and June, we certainly expect a larger contribution in terms of deposit growth coming from interest-bearing deposits, expecting the interest-bearing deposit growth would be very modest, at that type of rate environment. We also kind of reserve or expected relative to the last freight hike cycle, when we were pretty much a wash with deposits and perhaps could have been more patient. We are now in a position, it's a very competitive market. And so we're anticipating that it will be a slightly different deposit pricing behavior than what we might have experienced last cycle.

And so our guidance that you might have heard in my prepared remarks, we've allowed for an increase in deposit costs to the extent of about 40 basis points increase in deposit costs. That would imply sort of a beta in the upper 40s to low 50s is sort of the assumption that we're thinking of. As in prior quarters, the contributions that you would expect here of course, variable rate repricing of a given fixed rate loans is a significant contributor there. We see a potential for 3 to 4 basis points on earning asset yields arising from the fixed rate loan repricing and of course, the continued remix out investment securities into loans, but also the notion that we continue to kind of reinvest a portion of our investment securities and there we expect 2 to 3 basis points of earning asset pick up as well. So think about sort of a 5 to 7 basis point increase in earning asset yields in that rate environment is what we're thinking about.

Great. Maybe just a follow-up, maybe just longer term, I know you guys have talked about this 350 NIM. And I think in your quarter, maybe you're down the back a little bit maybe with the timing. Just thoughts on maybe when you could reach that? Is it still kind of a goal? Just any commentary you can add on that?

Yes. Thanks, Bernard. Listen, we -- I think when we talked about the mid-3s NIMs, we always sort of conditioned in the past of the kind of rate environment that we would be in. There's tons of certainty in the future about how deposits behave. We know that. But we do see scenarios that would allow us to operate in the mid-3s moving forward with this type of rate environment. Of course, that's always dependent upon deposit growth, the rate paid on those deposits, the beta, but we think with some reasonably conservative assumptions that we can reach those mid-3 levels in 2027.

Your next question comes from John Pecari (sic) [ John Pancari ] with Evercore ISI.

First, yes I commend you on providing the quantitative ranges to the outlook and simplifying your NII outlook, I definitely think it is definitely helpful. So appreciate that. The -- just in terms of the implication to the margin, I know you didn't provide a margin outlook. But given the dynamics that you just walked through, in terms of deposit costs dynamic and some of the earning asset shifts. How do you view the trajectory of the margin, particularly as you see some of the growth on the asset side shifting away from CRE as you indicated.

Yes. Great color, John. And maybe we should have a moment of silence for moderately increasing. [indiscernible] celebrate those terms. Listen, you're right. I mean, we do expect some growth from CRE. It'll probably be a little bit more pressure from the rate environment, but if you think about even not going back that far in time, at a point in time where we're getting a pretty outsized contribution from consumer loan growth. And given our guidance, which is recently modest at $0.02 to $0.04 of loan growth we really pointed to C&I, owner-occupied and a little bit lesser contribution for CRE. That's still typically a better outcome than consumer-like growth.

So that, coupled with the traditional things you've heard us talk about over time, the remix of securities into loans, the less of the headwind of the discontinued swaps, are all contributors to, I think, a brighter prospect for NIM. And of course, you heard Harris talk about our underlying strategic offerings that we continue to grind away at and building that new relationship. That will also be very, very important as we continue to drive down our wholesale borrowing costs. We've been very, very successful year-over-year and driving down our broker deposits and our other short-term borrowings, and we really look for that to continue.

Great, Ryan. And then if I could just hop over to capital. Maybe you could just give a little more color just around how we should think about the pace of buybacks for the coming quarters and not just maybe fourth quarter, but as you look at next year, any reason to think that despite the volatility in the rate backdrop that you can't stay on the $75 million level? Or is there -- should we think about some change in that piece?

John, with all those things, I think we're subject to regulatory approvals and where the Board wants us to go. But listen, with the kind of rate environment that I just described, provided that it holds that can translate, as you can see in our guide to some pretty positive outcomes for us. So I wouldn't be giving up on capital absorption and the potential to potentially grow in that type of operating environment.

But I don't want to prejudge outcomes with our regulators on the board. But I think that we see scenarios where we could actually increase our capital absorption moving forward. If you think about our results this quarter, certainly, the mark-to-market and the runoff of the term rates was challenging for the industry we actually fared pretty well on that basis. A bigger driver of capital absorption this quarter for us was the goodwill and the intangibles that we absorbed through the multifamily agency business, when setting that aside, with the hedges we have in place, in fact, that a very large portion of our AOCI and sort of frozen for the transfer into HTM, we have a very, very good performance on a relative basis.

If you think about the mark-to-market, we had about 50% or better offset with the hedges that we have in place that we call out in the appendix of our materials. So I think with that extra level of protection and a potential for a very positive operating environment there may be room to do a little more.

Your next question comes from Dave Rochester with Cantor Fitzgerald.

On the loan growth outlook, with your reeling in your expectations for CRE loan growth within that, which it sounds like is a driver for slowing. Is that just a function of greater competitive pressures, or is it less activity given higher rates that you're expecting? Or are you becoming somewhat concerned about credit in that area, given your rate and economic outlook? Or is it a little bit of everything? And then if you could talk about the total pipeline today, if that's improved at all versus last quarter and utilization trends that you mentioned as well, that would be great.

Thanks, Dave. This is Derek. And to the commercial risk take side as far as growth there, pipeline is actually pretty good right now. It is competitive, but we're being very disciplined in our underwriting as well as risk selection as far as our approach there. I think just given the competitive environment, given some of the supply/demand issues that are going on in our market as well as just the increase in interest rates could have an impact on the CRE growth.

But as you look in the last quarter, we actually had pretty good growth in CRE. Actually, it was able to offset a number of payoffs that we had that exited from our classified book. As far as the rest of the portfolio, pipeline has been good in the C&I. I think this quarter, just at the period we had a little decrease in utilization. Second quarter was actually strong utilization and just saw a little decline in some capital call usage and number of other just general business activity seems just utilization was down [indiscernible] quarter.

Dave, this is Scott. I might add a little more color to that, too. I think Derek covered the CRE as well as just other topics related to the pipeline. But 3Q, if you look at H8 data, total loan growth was down and C&I growth was down, and we tracked pretty close to what HA data was -- and I don't know why third quarter seem to be soft. They were -- third quarter last year was soft third quarter in '23, was soft, I don't know if it's summer vacation or what it is, but there is something about the third quarter going on.

If you look at Slide 25, just another way to kind of think about what's happening Basically, what you can see there is we're basically no growth for the quarter. You can see that negative $9 million over there in the bottom right-hand corner. And we've kind of fundamentally need about $500 million to -- $500 million to $600 million to get a kind of a good solid 3% to 4% growth rate. And basically, it's happening at Amegy. Amegy was down $293 million for the quarter and as opposed to being up $150 million to $200 million. That's kind of the difference between $500 million to $600 million in quarterly growth, which isn't great. We'd like for it to grow better, but that's kind of 3% to 4% growth. And to put that in additional perspective, if you look at Slide 26, where you see the year-over-year growth, 3Q '26 versus 3Q '25. You'll see that Amegy, those first 2 lines, C&I, excluding oil and gas and owner-occupied it produced over half of the C&I and owner-occupied growth year-over-year.

So they've been outperforming all of our other affiliates for some time in terms of C&I growth, including owner-occupied, they just happened to have a soft quarter. And so I don't -- we're not especially worried about that. It just happened to be a soft quarter for them. Otherwise, I think we would have seen growth more in line with $500 million to $600 million for the quarter. And their pipeline are just fine. There's nothing unusual about their pipeline [indiscernible].

Got it. I thought that you had mentioned CRE is potentially slowing down in terms of growth going forward, and that's why you were a little bit lower on your loan growth expectations, is that...

Right, it's a low-growth number. It's kind of a 1% to 3% sort of growth number as what we're trying to achieve anything slightly less than the growth rate of the overall portfolio. So that's a moderately consistent message for us over time.

And can you just talk about just switching just to wealth and wealth of expansion that you're trying to drive here. What's the penetration of wealth in your current customer base. Can you talk about any recent incentive changes or any new targets you have for hires or anything like that, that will help drive greater growth in that line over the next year?

Sure. Taking incentive comp first, we made some incentive comp adjustments 12 to 18 months -- 12 to 24 months ago, that quite frankly, created some churn in our bankers. And we sort of thought that might happen. And so this kind of no growth period that we've had in wealth fees that total about $58 million, plus or minus right now. And there's been -- we've kind of had a no growth phase. We think the incentive comp elements, both for our wealth colleagues and our private banking colleagues around the company are aligned better now. And that everybody sort of adjusted to it.

The -- and so that's the incentive comp side. The answer to your question of what our penetration and what's the outlook? Our penetration is really low and the outlook is really positive. Any data I would give you, you would say, boy, "your penetration is really low, guys come on now." And part of that is because the dog didn't need our homework papers, but say we just have never had a large trust business that we acquired.

And most of our peers either acquired large trust businesses somewhere in their past for the group on, and we just never did. So we're kind of starting from behind. But we think the calling efforts with our private bankers, wealth bankers, our commercial bankers and the energy level we have there right now is really positive.

[Operator Instructions] Your next question comes from Chris McGratty with KBW.

Great. I'll echo the new guide, thank you for doing that. The operating leverage, I guess a question on operating leverage. Is there anything in the crystal ball that would say that some degree of operating leverage next year wouldn't be possible as well. And I hear you on the full impact from the deal. But I guess, from the NII momentum and the expenses that you may need to invest in the company, any reason why operating leverage shouldn't continue?

Listen, hopefully, I understood that, frankly, Chris, if not just reguide me here. But certainly, based upon how we guided to the third quarter 2027, we see very positive prospects for operating leverage. I mean some of our assumptions and models would point to 6 points or better out that quarter. And we don't typically go too far afield for that. But even for the full year 2027, we're seeing the prospects for a pretty positive spread there. So that's where you're going -- and that's probably the color if you're looking at something else, please let me know.

I think the other thing Yes, I think the other thing, Ryan was talking about was our full year operating leverage in '26. And he was commenting about we were guiding to $100 million, $150 million. We've talked about that all year for 2026. The third quarter has obviously been a little soft here. We actually saw it coming. And -- but we still think for the fourth quarter, I won't repeat what he said, but that's what he was talking about in terms of the operating leverage there being a lower number. .

I think it's a good call, Scott. Thank you for, of course, correcting. I mean -- if we look at the adjusted PPNR that we had this quarter relative to what Harris noted, very strong third quarter 2025. I would just generally remind everybody that, that was actually shaping up to be a very, very strong quarter for us. And on PPNR, it was, but we had the credit matter that presented that quarter that kind of was kind of or tone for that quarter. But underlying that, on a year-over-year basis, certainly a contributor to our softer, keeping -- just keeping our performance and they're kind of eroding some of our potential for operating leverage in this quarter, we saw some increase in incentive accruals.

Our incentive accruals are sensitive to credit performance. So we've had really truly outstanding credit performance this year. So while the core performance is a little bit softer against a strong comp, the credit has been excellent. And there's been some other things that showed up in the third quarter that are different on the noninterest fee income side, noncustomer related. There was a pretty sizable difference in terms of our state securities gains and losses period-over-period, that was about a $15 million delta. And then in the prior year quarter, we also had hired [indiscernible] and other common eventual fee dividends and other matters.

So it would be understandable if people sort of looked at our full year and said, "Hey, tough quarter for operating leverage, tough PPNR versus a strong comp, can you still get there for the full year?" And we do see, as I guided, once you adjust for basis, not having been our run rate, we think we can get close to the lower end of our prior guide of 100 to 150 basis points.

Some things were to break our way, could we fit our way in there? Possibly, but we'll just see how the quarter shapes up.

Okay. And then just a follow-up on capital. And the -- I have you just under 9% on the adjusted [indiscernible] to confirm that one. And then any change in uses of capital, you talked about the [ Basis ] deal, the fee income momentum, depository acquisitions, I guess, would be the question from there. Any change in appetite?

I don't think much -- I would agree with your assessment. I think we would show ourselves on a market capital basis being just shy of 9% as well. So I don't think anything that you would hear from this management team would change about how we would think about capital deployment, other than just what I said already that moving forward, we could have a more constructive operating environment for capital -- capital actions, I should say.

Your next question comes from Ryan Kenny with Morgan Stanley.

Can you walk through some of the dynamics that you're seeing on deposit competition. Is it intensifying significantly? Is it more on the retail side, more on the commercial side? Any geography within your footprint where things are getting significantly more competitive?

I don't think so. I think it's -- I mean it's just a very -- across the board is a competitive environment out there. I don't think we're seeing a lot of impact from kind of [indiscernible] and that kind of thing. And the -- certainly, that's out there, something that [indiscernible] be watching here in the next few years. But No, I think it's -- it's a competitive deposit market, but it's manageable. I think probably more price competition on the asset side than on the liability side. But yes, it's competitive all go over.

And it sounds like the spot rate for interest-bearing deposits was up only a couple of basis points versus the average, so given that the rate hike came in September, does that mean that clients were asking for higher rates throughout the quarter? And could you see that dynamic going forward where deposits reprice ahead of future rate hikes?

I think a lot of -- I mean, a lot of the deposit growth was in kind of higher cost deposits. We've moved a lot of money back on the balance sheet for customers that we chased away a few years ago, and everybody was a wash liquidity. And so bringing that back on, our goal, as we said before, was really just bringing down our total cost of funding. And so it's -- a lot of the growth was higher cost deposits and certainly lower cost than our marginal cost of funding. That was -- that's kind of what you saw this quarter.

Your next question comes from Ken Usdin with Autonomous Research.

Ryan, I just wanted to ask you a question on the swap adds. I'm presuming that Slide 27 with the simulated repricing of earning assets and loans reflects the adds from this quarter? And then just related, do you have any additional purchases in the future built into the 3Q 27 outlook on top of what you already bought in the third quarter?

Ken. I'll speak to it maybe in broad strokes, so we've got Matt Tyler here in the room, our Corporate Treasurer, he could probably drill down maybe another level before I take it. But I think that the message -- the big picture message that we're trying to convey with our hedging activity is we're sensitive to both earnings sensitivity and sort of tangible common equity or EV sensitivity. That's why you see both sides these hedges.

What you've been seeing and I think what you're alluding to on the sort of received fixed side is we do tend to measure on a relative basis as being more asset sensitive than others. I said it before, I'll say it again, these are not common methodologies of measuring things. But we do want to be also thoughtful and perhaps prudent. And what goes up, sometimes goes down. And so while that asset sensitivity is serving us well, we think in this type of environment, things can always reverse. And so we've -- on the C6 side, really trying to think about the downside sensitivity should rates reverse and minus 100, minus 200 rate environment and maybe take a little bit to edge off of how we would measure there. So we did add some hedges during the quarter. I think you would have seen reference to that and that related slide to that end and a little bit more modest activity as we think about that TCE protection on the [indiscernible], and Matt, I'd invite you to add anything if you want to?

Yes. The additional hedging, I mean, we've really been keeping our cash flow hedges, which are the received fixed shorter maturities kind of under 2 years. So we're kind of just rolling those out as time goes on. which has been most of the activity. If you have 2 years hedged 2 months from now, it won't be 1.5 years, so 2 quarters from now. So we've just been kind of rolling those on a continuous basis forward, over time.

I think maybe coming full circle, could there be more hedging activity built into that guidance. Certainly, if we were to persist in adding those short-term receive fixed hedges.

Your next question comes from Timur Braziler with UBS.

Maybe just starting on the funding side. I'm just wondering, what's the remaining portion either on wholesale or broker that you're still looking to reduce going forward? Maybe another way of asking that is how close are we to having asset growth be more closely aligned with deposit growth. .

Yes. That's a great question. I'll get started and invite other members of the team here to jump in. which you called out as a really important part of our story. Our success year-over-year in paying down broker deposits, paying down wholesale borrowing sources. Having this really positive deposit growth story this quarter, enabled us to pay down our FHLB borrowings almost straight away. Where it was a little more tricky is there's, of course, a term structure to broker deposits. And so it takes a little bit more time for those to run off. we show, I believe, in the fourth quarter, we have about $2.2 billion worth of maturity of broker deposits.

And we already said that we're sort of overbuilding our money market position that could be redeployed. So I do think as part of -- as we think about this moving forward is to continue to pay down those sources of funding that aren't with clients. This is kind of what Harris was talking about. We would rather be reaching out to our clients and serving them and even these higher-cost products when they bring net new balances to us, than paying away to a broker or some other wholesale funder. So that's sort of where we see this going on the funding side.

So Ryan, in terms of timing, I would just add that -- on the brokered deposits, their certificates of deposit, they have an average maturity of about 3 months, which think about it, half of it is going to roll off within 3 months. And we're bringing that down as we manage -- we launch it all the time as we manage funding coming in from deposits. It just is an instantaneous like if we had borrowings from the home loan, for example, which would be a payoff. But the -- it will adjust very quickly. And we've seen a lot of it. We brought down a lot so far this quarter as it's matured.

It's versus June 30 of last year. It's down about $3 billion to $4 billion. It was at about our overnight -- our broker deposits and overnight borrowings, net of money market investments was about $6.5 billion, then if you adjust for long-term debt, we've issued, et cetera, it's down about $3 billion to $4 billion. And it's been very intentional. It's not been serendipitous. And we still have about a little over $7 billion in client funds off balance sheet and almost 100% guaranteed, when we bring them back on their -- the cost is accretive to our overnight cost of funding, which Harris was mentioning earlier.

Okay. And then -- maybe I can take another shot at John Pancari's question. So I appreciate the color on deposits. So getting to, call it, 2% a year from now, so 40 basis points higher, let's call it, 10 basis points a quarter. And then average earning assets are going up, call it, 5 to 7 basis points a quarter. I would imply, I think, that you need margin expansion in order to get to your NII guidance. Is there -- is the bulk of that increase from just funding mix, asset mix, I guess, how are you thinking about margin over the course of the next 12 months in terms of that NII guide? .

Yes. Listen, I think it has to be, yes, all of it. It's both funding mix, it's asset mix -- sorry, yes, asset mix, and it's our sensitivity to the rising rate environment. It's the drive of the net new relationships through these very granular things that Harris described, all the things combined with that sensitivity to 3 future rate hikes, sets up pretty well for us if it all pulls through at that level. And again, reiterating that we recognize that, that's a pretty -- that's a stronger price response on the pause in some what we would experience previously, and we hope that there's some conservatism in that, but we'll see.

Our next question comes from David Smith with Truist Securities.

I'll drill down on the funding a little bit more. Could you help us size the impact of the -- on the deposit costs of bringing that off-balance sheet funding back on the balance sheet?

Okay. Deposit costs will increase as Harris was noting, cost of funding will decrease, all things being equal.

And for the impact on the third quarter specifically, though?

Actually, as it relates to sequential quarters, the mountain off-balance sheet deposits didn't change appreciatively. It was pretty across, but there was plenty of evidence of us inviting in other net new balances that we do are away from us to come in the way that exactly how Scott and Harris have described, quantifying that impact. I don't think I have a good number for you now, but that's pretty much I'd say over the last 12 to 18 months, we've attracted certainly north of $3 billion of client deposits that are focused deposit efforts that are accretive to cost of funding. It would be otherwise chose to be higher cost deposits.

And then you had mentioned competition being stronger on the loan side than on the deposit side right now. Would you characterize that as more just on yield and cost or more on covenant dynamics or some of both right now in terms of where you're not just stepping down to where the competition is?

It's some of both. This is Derek, David, yes. I mean we're seeing primarily pricing competition, but I would say on structure, covenants, et cetera, but again, we're maintaining our discipline there on the structural side and maintaining our underwriting and just the risk selection. And we're, again, having good luck at still winning our fair share. It's just a more competitive environment, I'd say, today. .

Is there any change in that assumed in the outlook for deposit growth next year or pretty consistent to where competition levels sit today?

Yes. I don't think I guess, open question that's been discussed, I think by analysts and others about the amount of sensitivity that people report versus the actual sensitivity that people will actually experience because we've had this higher for longer rate environment, and the prospect of rate hikes will there be a stronger price sensitivity on the upside. And so we've allowed for some of that in sort of the guidance that we provided and the deposit beta that I would have communicated earlier on this call.

Your next question comes from David Chiaverini with Jefferies.

I wanted to first start on the capital markets outlook and the pipeline. It sounds positive. Also curious as to what extent could higher rates impact or be a headwind to the new multifamily businesses you acquired as it relates to that $30 million to $40 million contribution over the medium term?

This is Scott. I'll start with it. Related to the Basis business, the $30 million to $40 million was several years out. I can't remember the script, it's -- yes, medium term, and interest rates certainly can have an impact. But the production of multifamily in the country is there's just build vibrant to it still. And so -- but you're right, interest rates can have an impact on it. It is a flow business for most people. So the production builders that are doing this they build and sell. Derek may have more color on that. But it's not a hold and then get lucky on rates kind of thing. And then the interest rate business, the interest rate hedging business that we have, which is about a $30 million-ish revenue business just on interest rate hedging for our clients.

That as rates continue to go up, that could actually be impacted some, although we haven't seen too much weaknesses there. One of the things to notice in this to know in this quarter's capital markets revenue, it included almost no investment banking or M&A advisory work. And that's a practice we started about 18 months ago. And our franchise is really fertile grounds for small- and medium-sized business M&A. And we have a very nice pipeline there. It's just very lumpy. So we're very optimistic about that M&A business going forward. And then our garden variety syndications, foreign exchange, the bond underwriting that we do, et cetera, is -- we think moving along at a pretty nice rate.

I just had, I mean, higher rates will be a little bit of a headwind. But I think we also have the tailwind of we really have a lot of ground to plow here. I think we're seeing a lot of interest from middle market kinds of clients. We've had a long relationship with the investment banking point for example, we think that can turn a really nice business across the West. And so Capital Markets businesses or the nature are kind of lumpy, and we get that. But we think it's it really is a nice value add for us from a client base that needs it. So.

Yes. No, I agree. I think that multifamily acquisition is differentiating, which is a nice segue into my kind of follow-up on the capital question as it relates to M&A, in terms of refreshed thoughts, are other whether nonbank or whole bank M&A, what are your current thoughts there?

Pretty much unchanged. I mean I would be very opportunistic. It's kind of likely to be something many this multifamily agency platform. I mean we've long had a really solid commercial real estate business here. And -- we also know there's kind of a limit to what you can do with a balance sheet with a regional bank and without creating concerns. And so I mean, we -- it was a really nice fit. And we've been looking for some time. We've actually looked at a couple of other opportunities and haven't made it.

So we're really pleased to have this. It's just a really nice strategic fit for us. But over time, we'll look back on this 10 years from now and say, what a fabulous thing that was. I think that's kind of what we're looking for. are things that just fit well. And probably a little on the smaller side and particularly the valuation. Look, we need to see some better valuation before we start thinking about becoming very aggressive. But anyway, I think that's been kind of a consistent theme.

Your next question comes from Janet Lee with TD Cowen.

You talked about the deposit beta in the upper 40s to low 50s. the different launching point for where we are in the rising rate cycle versus the last one? Are you assuming that the NIB mix can stay relatively stable-ish from here the low to mid-30s? Or I know that you said a lot of the deposit growth will be coming from interest-bearing, obviously, but I just wanted to see if there's any thoughts there.

Yes. Thanks for the question, Janet. Listen, I think it would be reasonable to assume that interest-bearing deposits would take a larger share moving forward in that higher rate environment. We're doing a lot of great things. We'll continue to do a lot of great things. building out the granular strategies that Harris discussed. And that's something you do over many months and years and most valuable part of our franchise. But pressing forward, I think those noninterest-bearing balances are going to be harder to come by. So I could anticipate potentially a little bit of a slightly different mix there.

Got it. And sorry to beat on the dead horse, but I just want to make sure that I heard it correctly. I believe you've said to Bernard's question earlier that your net interest margin could reach that mid-3 -- 350 level in 2027. Is that what you're assuming in your NII for the third quarter of next year, year-over-year?

Listen, we do see very healthy NIMs. We don't provide them guide. It certainly has been our practice because of all the variables that go into it. But as a general matter, just restating what I mentioned before, it really is behold the operating environment. And if we do see the rate hikes that we see in our forecast with the type of deposit behavior we described, we think it's realizable to be operating at that level.

Your next question comes from Anthony Elian with JPMorgan.

Ryan, I know you don't guide on deposits. Any more color you can give us on what drove the strength in deposits in 3Q and really trying to get at the degree to which you expect this high single-digit annualized level to persistent 4Q and beyond. If I look at Slide 9 the products you online. It just seems like the momentum you have should continue.

Yes. Listen, thanks for the question. I mean -- if you look across the past 2 quarters, it's been a little uneven, right? So the last quarter, we showed up with really, really healthy loan growth. Utilization picked up really, really positive, but we fell a little bit flat on deposits. This quarter, we showed up with a really strong deposit growth and not a whole lot of period end loans to show for. So it is useful to kind of step back, zoom out a little bit and kind of think of longer time horizons. If I think back a year-over-year period, you think about loan growth around 4%, customer deposit growth, about 5% when we talk about ending balances, that's pretty solid, right? It's -- and if you think about the growth of our market, that probably tells you we're getting the growth in our market, we're probably not reaching for it.

So going forward, does it persist at an 8.8% average annualized growth? I'm not sure. It's a lot of -- and probably not, but it's a lot of the same type of deposit gathering that Harris alluded to before. There's -- a lot of the growth came from money market balances. There was what we referred to as our gold suite balances. And these are higher cost deposits. The most important part is we just keep grinding away at what you referenced to that slide and those more granular deposit gathering strategies. That's where I think we'll be having a chance to delight shareholders over a longer period of time.

Yes. I mean we could see 0.75%, 1% growth and our total deposits coming from these things that we're really focusing on the small business, consumer noninterest-bearing kinds of accounts or low interest-bearing kinds of accounts. It's not just about deposit growth, it's about the quality of the deposits, the cost of the deposits, the stickiness of the deposits.

Over time, that really makes a difference, but it takes -- I mean, it's like tell people around here, this is a marathon. This isn't a sprint. We'll be talking about this 10 years from now. as a consistent kind of the kind of foundation we're trying to create under everything else that goes on, corporate deposits, everything else. So I hope that's helpful. But that's where a lot of our focus is, but it's a longer-term in some of this will be watching bank vary a little bit.

Yes, that's fair. And then on basis, you pointed to $30 million to $40 million of annual revenue over the medium term. What's the level of expense you expect to firm that business in the medium term? I think you pointed Ryan to $12 million to $13 million of expense in '27?

Yes. I mean a very reasonable question. I think we just want to be careful not to get too far over our skis. It's pretty early on here. We closed the deal at the end of July. We certainly want to have some experience. So we did quote all those numbers you cited, and we said we expect this to scale over time. that requires investment to continue to build out the talent against a very good backdrop [indiscernible] as now. So probably would hold off or a little bit more experience before we guide more deeply into the expense, how that grows through 2027 through 2028. We did say for full year 2027, $12 million to $13 million of expenses. Beyond that, it will just depend on the pacing of how much we add in talent and further capability. .

Fair enough. And echoing the comments on the updated guidance presentation. Thank you for that.

Your next question comes from Jon Arfstrom with RBC Capital Markets.

Just 1 -- 2 quick ones. On Basis, the smaller revenue number for the quarter, I think I understand it, you just closed the deal, but do you expect contributions from the revenue side to step up as soon as the fourth quarter?

Yes. I mean look, we're still kind of setting the table. But I expect better fourth quarter revenue than the third quarter. It closed kind of the end of July, and there's a little bit there in the pipeline. But I mean, it's just building. So I don't think we thought a lot about what the fourth quarter is going to look like. We talk more about next year's like look like. That's where we sit in the 17% to 20%. We think it's kind of the target. But I don't think we have anything we'd say about the fourth quarter yet.

Yes. I just -- it was just a small number, Harris, and I didn't know if it was acquisition, and there is some other reason behind that.

Yes.

Scott, just 1 for you. You mentioned Slide 25, the Amegy loan trends earlier in the call. This has come up? And is it any more or less competitive in Texas. There have been questions around those markets because of new regional bank entrants there? And just confirming you weren't seeing anything new impacting your ability to grow in Texas, just such a growth.

The only thing we're seeing now is that the disruption there because of these acquisitions, the acquisition of America clearly the acquisition of Cadence, the acquisition of Veritex, a few other small, that is all opportunity for us. I've said this for several quarters. And -- it just -- it's opportunity and it's not just because I'm saying it and its corporate speak, if we had our fellows from Texas on the phone, he would they would not speak with granularity that we can't talk about on a call like this, but that's what we hear internally. And there is disruption. We've already seen it.

And so our calling programs are highly focused those -- they've always been on those banks, but we especially focused on it right now. And there will be competition for people, too. So there's a negative side of this, but we've seen that for decades with folks parachute into Texas.

Yes. So more positive than negative from your point of view?

Absolutely. I'm sorry. The bottom line is yes, more positive.

This now concludes our question-and-answer session. I would like to turn the floor back over to Jason Arbuckle for closing comments.

Great. Thank you, Cleo, and thank you all for joining today and participating. We appreciate your interest in Zions Bancorporation. If you have additional questions, please reach out to the Investor Relations team at the e-mail and phone numbers provided on our website. We look forward to connecting with you throughout the coming months. This concludes our call.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.

Moving right along, very pleased to have Zions Bancorp with us. I want to say, this is the 24th consecutive year they've been at this conference, and we've only done 24, I check that. But -- Harris Simmons has been Chairman and CEO for every one of those years, probably one of the very few companies of the 220 we have here that could say that. So Harris, welcome back.

Thank you.

Maybe the best place to start is just the macro environment. You operate in many markets traditionally kind of above-average growth on the western part of the U.S. The environment today feels a lot different than the environment we talked about when you were here last year. Maybe just talk about your outlook for the U.S. economy, your expectations for interest rates over the next few months, and just how you think that will overall impact customer behavior?

Yes. Well, I think the economy continues to just chug along. I mean it's -- I think in each of the markets we operate in, we kind of everything kind of Texas up to the Pacific Northwest and south and west of that. So it's a pretty good cross-section in Southwest. And it -- we're not seeing signs of any kind of fraying in terms of credit. It's not -- nothing is on fire other than a lot of forests this summer, but the economy is just kind of cranks it out. It's kind of the Energizer Bunny of economies, which has surprised me. I really expected that the combination of tariffs and what's happening in the Middle East, et cetera, would slow things down. But we're just not really seeing it.

It's hard to know how much of that is sort of spillover from data centers and everything else, but it doesn't feel that way. It feels like Main Street businesses are in pretty decent shape right now. We'll see probably a hike or two, I don't think that's going to materially change anything. I think it's going to take some bigger shock to then it's so widely anticipated that I don't think it's going to be a big deal.

You mentioned Texas, which is a market we've heard a lot about at this conference. You entered there, I want to say, 15-plus years ago.

20 years ago.

20 years ago, the Amegy purchase. Now it seems like everyone wants to be there. There's a bunch of -- whether it's Veritex going to and Cadence going to Huntington, Fifth Third with Comerica, there's been some other smaller transactions. Just how has that landscape changed? Do those kind of mergers create opportunities for you, either for employees or customers? And just how you're tackling that?

Yes, it's created some opportunity probably so far, mostly in terms of employees. We've had some hires, a few hires. It has -- I think we've probably seen more opportunity coming out of some of the larger banks, Wells Fargo, U.S. Bank in terms of people and bringing some nice business with them. And just probably just their sheer size relative to a Veritex or even a Comerica. We'd run into them, but not that frequently kind of in the smaller end of the middle market, which is where a lot of our activity takes place.

Got it. Maybe just talk about the overall lending environment. C&I growth has been strong. I think you're up like 5% last quarter. You talked to higher utilization of revolving credit lines. Maybe just talk to kind of what industries, client segment, geographies are kind of driving growth and just how you're thinking about the near-term outlook for C&I?

Yes. Well, what I'd say is what we're seeing most recently is C&I is probably -- lending generally has flattened growth. We're seeing a big -- a nice pickup in deposit growth. And so you kind of hope over time that they stay somewhat in sync. But -- very late. We're seeing lending growth slow and deposit growth pick up. The growth that we've seen year-to-date has been pretty broad-based. It's -- we're trying to -- we're really working at taking the 1- to 4-family portfolio and keeping that kind of stable to even coming down a little bit. Just because I think -- and the reason for that is just to keep it from becoming a source of more rate risk and kind of convexity that you find sometimes in that product. But the rest of the portfolio is we've seen just been -- geographically and by industry, I can't point to any single thing that is driving it. It's been across the board...

I can talk about where we're not growing as NDFI. I mean, we've been very flat there. I mean we're trying to kind of sit that one out. I tend to believe that there is quite a lot of risk building in that sector. And so we have some exposure, but it tends to be very seasoned kind of long-time customers that I think know what they're doing, but we're not kind of trying to build balances that way.

Got it. Maybe you could talk a bit more just on commercial real estate balances have been going up. Obviously, more kind of construction, maybe migrating to term or maybe some new term. Just provide some color in terms of what you're seeing kind of across the portfolio and where you see opportunities and maybe where you are don't see opportunities.

Yes. Well, again, it's -- our goal over the last 15 years has been to build that portfolio kind of at a slower pace than the rest of the balance sheet. And so we brought our concentration in CRE down from -- about 1/3 of the balance sheet coming out of the financial crisis. It's down to about 22% or something like that today. And I think that discipline has been really -- it's going to be useful when we hit a bump.

The categories that we've been building in. I mean, multifamily has been active over the last number of years. Again, we're trying to keep that kind of a little bit restrained. We have capacity to do more than we are doing. One of the reasons we acquired an agency lending franchise from Basis Investment Group gives us Fannie and Freddie multifamily origination licenses that we think are going to be really useful tools kind of managing that and catering to a great client base we have there. But we've also seen -- it's been in -- it's been reasonably broad-based. It's been -- we're seeing retail, some growth there, industrial, and multifamily have been most predominantly where we've seen growth.

Got it. And then on the earnings call, you mentioned some loan spread compression -- provide an update in terms of what you're seeing currently and just how competitive the lending environment is?

Yes. I think -- I mean, it is very competitive right now. You get used to hearing your people talk about it's competitive out there, but probably more so. And -- as we came into the summer and early fall here. And you see it in individual deals. It's less so as you go down market and smaller-sized deals, but the corporate lending market is -- you're seeing real spread compression -- credit spread compression going on today.

Is that just a lot of banks chasing the same credit?

I think so. Yes. I think you're seeing more banks showing -- you're seeing in commercial real estate, you're seeing banks that were sort of sitting out concerned about office exposure and those kinds of things that are coming back in. You're seeing Wells Fargo more active. They're a big force in the West. And with the asset cap gone, they're showing up more frequently. So yes, it's a very competitive market.

I guess, so we kind of talked about price competition. Are you also seeing kind of companies get more aggressive on standards and terms? Or is it more so on price?

No, I think it's been price. We're not seeing sloppy competition. I mean I think that's where I have a concern with private credit because I think they tend to be probably more covenant-light, less kind of rigid around guarantees and that kind of thing and maybe just easier to navigate, but I think that's also a source of risk. So -- but I think commercial bank competitors are -- we're not seeing sloppy lending taking place.

One of -- Morgan Stanley was just speaking about this CapEx investment cycle. And obviously, you guys play in different games. But how does that translate into the need for concrete or need for HVACs? And clearly, you're lending to companies that do those. Just are you seeing kind of this AI -- any of this AI-related spillover? And if so, kind of how do you think about that?

Yes, I think -- and it's hard to kind of know because it's an ancillary part of a lot of these middle market companies' businesses. I was mentioning this morning, one of the groups we're visiting with. I was on a call with a customer to a customer up in Logan, Utah recently, it's an electrical contractor and it's a fabulous business. But they have got 4,000 employees. They got 80% of these electrical contractors in their business are doing data center work. And it's all over the country. And I think there's quite a lot of that that's going on. It's not just the hyperscalers that are -- I mean, they're spending. There is a real trickle-down effect that's taking place. It's hard to know how much for any -- but I transmission line contractors and all kinds of folks that are supporting this build-out.

Earlier, you talked about deposit growth accelerating in the back half of the year. I know on the consumer side, you rolled out new Gold accounts last year. This year, you kind of followed up with that Business Beyond banking account. On the commercial side, I think you mentioned doubling the marketing spend from '24 to '26. I mean, are those initiatives kind of driving the growth, kind of what differentiates those products? And just maybe kind of more color around that.

Yes. I mean they're contributing to it. This Gold account product is -- it's a great -- we think a really well-constructed mass affluent product. And -- our goal this year is to do 20,000 new-to-bank clients in that account. We'll come close to that. I'm not sure if we'll quite hit it. We had a companion product for small businesses. It's kind of a tiered product set, and we're doing 70% beyond what we expected there. And they're really great accounts. It's the type of activity that is a real marathon. It's not a sprint. It in any given year is not going to move the needle. But we think over time, we'll continue to strengthen what we think is already one of the great deposit franchises in the industry.

Got it. And then with this kind of pickup in deposit growth, there's obviously been concerns to talk about kind of upward pressure to deposit costs. Maybe just talk about kind of deposit mix you're seeing, deposit costs you're seeing and just the competitive landscape around that.

Yes. Well, it's -- again, it's been a competitive market. I mean, we went through a period where everybody was washing deposits, and we're all kind of driving them away, and that's flipped. What we -- what we're doing is we're really -- we're incentivizing bankers to think about kind of -- first of all, we price locally. In each market, we have our management teams locally who price, they do it against an internal yield curve that is built around our -- basically reflects our marginal cost of funding the place. And our focus is really on displacing borrowings from the home loan, brokered deposits, kind of the wholesale kind of sources and to pick up a few basis points where we can doing it with customers through deposits.

And so the goal is to focus on total funding cost, not just the cost of interest bearing deposits because we will see pressure on that and bringing down the cost in total is what we're basically trying to accomplish right now.

Got it. And then -- last quarter, I guess, loan growth outpaced deposit growth, and we saw brokered deposits borrowings go up. This quarter, it sounds like deposit growth outpaced loan growth. Just how do you think about balancing the two? And maybe...

Well, I mean you're trying to -- you're always trying to build both. And sometimes the emphasis shifts a little bit in terms of what you're spending a lot of time talking about internally. But -- no, we've got -- I think our capital is in increasingly really good -- quite good shape, and we have the capacity to organically grow. And so we're -- we -- I talked about commercial real estate. We're trying to moderate the growth of that, but not to cap it by any means. 1- to 4-family, we are trying to fundamentally keep that reasonably flat to even down. So that's a drag on growth, but we just think it's the right thing to do to continue to get the mix optimized, particularly in an environment where rates probably are going to be higher, I think, in the future.

Got it. And in the past, you talked about not fully reinvesting the securities portfolio, but at some point, you get back to that, I guess maybe when do you think that is?

I think we're probably -- we're still a little ways out. We're probably a few quarters out before we need to do that, but it's not too far away.

All right. Maybe tie together the loan and deposit discussion. But in the last quarter's earnings call, you talked about the 2Q '27 NII outlook of moderately increasing, but then kind of told us that maybe we can get to this high single-digit growth with some Fed cuts, I think. And now we're going to get these Fed cuts. How are we thinking about that...

Fed bumps.

Yes. I think there was some confusion in terms of how you were kind of framing the NII outlook. Just -- maybe just how you're thinking?

Yes. So I mean, I think fundamentally, we're built for -- the way we'd model it is 100 basis point parallel shift upward in the curve should generate about a 4% increase in net interest income and everything else being equal. Everything else isn't equal, obviously. And we're talking about credit spreads could be a little bit of a headwind. But I think that fundamentally, we're in quite good shape for where Kevin Warsh is likely to take the bus here over the next year. So I feel pretty good about how we're positioned right now.

Got it. So I guess just maybe to clarify, to get to that high single-digit year-over-year growth, what rate backdrop would it take?

No. I mean I think that's anticipating what we're seeing in the forward curve, which I think at the last call, we're starting to see more outlook for probably with cuts or behind us, and we're probably going to see some steepening. So I think we have -- Dave, you can remind me, but I think we had two -- I think, two rate hikes in that, I believe. Yes, -- anyway, so it's building in the anticipation of one to two 25-point hikes.

Makes sense. And just talk to net interest margin, and I fully appreciate this is an output, not an input. But you had 9 quarters of expansion. Last quarter, we were kind of stable-ish at 3.27%. I think last year, we talked about normalized maybe closer to 3.5%. I don't know -- I'm not sure if we can get there. Just how you're thinking about managing NIM against everything we've talked about so far?

Yes. I mean one of the things -- there are a couple of comments I'd make. One is that underlying it all as -- particularly as we start to build the securities portfolio at current yields, that will help. I say that's maybe still a little way off. And in the meantime, with better deposit growth and without offsetting loan growth, I mean that's probably a little bit of a headwind on the NIM, but not on the net interest income.

So incrementally, what's happening, deposits coming up, but a lot of that -- some of that's going into cash because we're not seeing loan growth. So I think I expect it's going to be reasonably stable through the next few months until -- but as we start getting into a place where we see better loan growth and start replacing securities with higher-yielding current yields, I think that should continue to help improve the margin. Ultimately, I think I said here a year ago, I do think that probably kind of somewhere in the mid-3s, 3.5% or so is about where our sort of the mix of deposits we have and the kind of business we're running should take us. But it will take a little bit of time to get there.

Maybe moving to the fee income side. Certainly, you've been building out a bunch of those capabilities. Wealth management comes to mind, hired Mike Selfridge from First Republic earlier this year, a name many of us know. Maybe talk about kind of what his mandate is and what we could just expect from that business. It seems like a big opportunity given your footprint.

Yes, we think it is. And we think -- we're really delighted to have Mike on board with us. The mandate is really to work to integrate wealth management into our private banking operation. We've got -- we have a lot of business owners. We have -- we think there's a huge untapped opportunity there. And I think we have the leadership and Mike to be able to continue to build that. I mean, Rebecca Robinson, who had been building this the last few years was -- did a great job taking what was really a very kind of a ragtag operation, getting it, and making money. And Mike, we think, will take it to a new level and really pleased with him.

We have accompanying kind of the larger kind of wealth clients. We're also doing something on the retail front with Wealth, call it, Wealth Select. And it's really designed for somebody that has $100,000 to $600,000 or $700,000 to invest. I mean, there are just a lot of people out there. And particularly given kind of all the small businesses we bank, I mean, we think there's a lot of opportunity there to build managed asset balances as well.

Got it. And then maybe turning to capital markets. It's a business you built up over the last 5, 6 years. Maybe just talk about the progress you've made there. You mentioned the Basis acquisition, just how that fits in.

Yes. Well, Mike McDonald, who is building that business is first rate. We've kind of doubled the revenue over the last 4 years. And added in the last year a commodities hedging business. It's coming along very nicely, an investment banking capability. We have a handful of bankers who are now working with some really great opportunities that -- I mean, these are deals that generate fees kind of $2 million or $3 million to $6 million, $7 million fees. They're not large in the scheme of things, but we have -- but there are a lot of them, we think. We think there's a lot of opportunity there.

And so he's got some great people we've added. They've come out of some major banks. We've got a team in Charlotte, down in Houston, Los Angeles. And -- we're really pleased with what he's building. This Basis acquisition gives us a new set of tools. We've become one of a very small handful. There are only 4 or 5 banks in the industry that have both Freddie and Fannie licenses as well as CMBS capabilities. And we think that's going to be a really nice combination to build from. And we got some good leadership in place for it.

Got it. And I think when you -- on the July call, when asked about Basis, you said you weren't allowed to talk about the financial impact or contribution from it because the deal hadn't closed, it's now closed. Any thoughts around what this impact could have?

Well, I think that it was -- it's a business that there's a lot of building to do with it. But we'll continue to work with Basis Investment Group here in New York. We expect will be referring business to us. They're really good. And we'll add to that the distribution that we have through a pretty deep client set in the West. I mean we're in a part of the country where you have a disproportionate amount of population growth taking place and where affordability has become a real issue. You've got families that are starting later, and they're smaller. And so you're just seeing more multifamily product. as part of the housing mix. And we think that we're going to be really well positioned across the Western United States to help address the term financing needs of these clients.

I expect that probably, if I look out 3 to 4 years, I think it becomes a $30 million to $40 million kind of revenue business, and kind of ramping up towards that. So...

Interesting. And maybe on the expense side -- I think we're about 5% year-over-year in the second quarter on a core basis. You've talked about getting to 100 to 150 basis points of positive operating leverage this year. Just -- how are you tracking against that objective? And how should we think about costs in the back half of the year?

Yes. Well, I expect that -- and I still think that that's probably kind of the right kind of target. And the operating leverage is -- and I expect that continues into next year. It's -- I tell our folks, you have to be wary of not painting yourself in a corner with an operating leverage, long-term target because it's something that because it's an incremental kind of thing, everybody hits a wall there eventually. And -- but I think we've got some room to run still before we do that. And that's with some additional, like I say, some additional marketing expense in the mix.

Got it. Maybe shift gears to just credit quality. It's obviously been a nonevent. I think we 6 basis points of charge-offs last quarter, despite good loan growth. Just industries portfolios, are you being more selective or anywhere that you're kind of avoiding. You mentioned NDFI earlier, but maybe what else is on your mind?

It's -- we're just steady as she goes. I mean, we -- I think it's really notable. On commercial real estate, everybody was -- if you go back a couple of years, everybody has freaked out about office and everything else. I haven't updated my numbers for a couple of quarters. But I mean, the last I looked, and it's gotten better over the last couple of quarters, but we were running on average 0.7 basis point of net charge-offs in that book over the last 5 years. And so it's been a total nonevent, and as clean as the portfolio can be.

And I don't see that changing. I mean, I think that if we get into a tougher economy, higher cap rates, et cetera, it's going to perform well. It's underwritten well. And the concentration relative to our total loan book has been steadily coming down. We got it down to about 22%. It was 1/3 of the balance sheet, 1/3 of the loan book go back after the financial crisis. And so steadily, we've brought that down. That probably goes a little further. But I find -- we like the business. I think we've got good people. And if you do it well, it's a good business.

I guess on the reserve side, reserve ACL ratio is now 1.13%. CECL day 1 is 1.1. As we kind of get back to that level, the economy is good, but just how do you think about that metric relevant? Or how we think -- how do you think about that?

I don't -- I'm a big fan of what Jamie Dimon said a couple a year or 2 ago, somebody asked a similar question. The reserve is -- he said a reserve is ink on paper. I mean -- and all of our internal metrics, all of our incentive plans, they're all geared -- we take the provision out of it. We depoliticize the whole process of it. We plug in net charge-offs. And I was joking with Tom Brown recently, we were talking about CECL. When I started my career, I was the CFO years ago of the bank and I just decide what the reserve was. I mean, it was back in the good old days when closing the books probably ought to be 110 -- 110 basis points. Today, we stress test, we go through all committees and oversight and auditors listening in and go through all the CECL calculations, we get to 110. So I think that Miki Bowman is actually on to something that -- I mean, CECL has been kind of a whole bunch of nothing. And -- so I -- it's important because it goes into a filed financial statement with the SEC. And so you do build process around it, and you -- we talk about the assumptions that go into it, et cetera. But somehow, you always get back to about the same number.

Got it. I guess maybe on capital, kind of restarted the buyback $75 million or so in the last few quarters. The regulatory backdrop is more constructive than it's been in a bit. Just maybe just how you're thinking about capital deployment, capital management, share buyback, et cetera?

Yes. Well, I think the we went through a period came to a conclusion a couple of years ago with the new administration, where there were concerns about what the capital regime is going to look like about long-term debt requirements and all the rest. And clearly, that's changed a lot. It could change again in a couple of years. And so it's -- you kind of take a breath and grateful for maybe a pause here. But ultimately, what I think the focus is, is on making sure that if -- at some point, we're going to come into a downturn. I'm concerned that given how long it's been since the last real one. I'm kind of the -- if you're familiar with kind of the whole Hyman Minsky school of thought about this, an old Fed economist from years ago that I mean, the longer we go, the worse it probably will be.

And that when we get to that point, you want to be -- we want to be a company that's known as having been disciplined in terms of how we built the book of credit we have. And we have solid capital and a good deposit base. I mean, it's the meat and potatoes of regional banking, I think. And so it's -- just really a matter of thinking about how our capital is going to look relative to peers as it's looked at by the market and not by regulators. Because it's a market that's really reacting to it in a visible way. And so you want to be in a place -- and I think -- we're quickly getting there. Tangible book value per share has been increasing at north of 20% for the last 3 years. And we're getting to a pretty good place. I think that's going to facilitate more in the way of buybacks next year. It's a Board decision, but we did this Basis deal that it was done with cash. That took some -- but fundamentally, it's building at a nice pace. And CET1, excluding -- well, including AOCI, without -- excluding the exemption, if you will, is getting to a place where it's going to be in the high 9s, close to 10%, I think, during the next quarter or 2. And so I think we're going to be in a position where we can start to accelerate it.

I guess on AOCI, AOCI losses were like, I think, $2 billion-ish last quarter. Given the move in rates that goes up, does that matter some...

Not a lot. I mean, a lot of what we have is hedged. And so it should be pretty predictable.

Got it. And maybe talk about bank consolidation. There's been a few transactions in your footprint. We saw the First Hawaiian, Tri Counties deal, EverBank [ WaFd ], maybe it's a bit unique. But I guess why -- despite that, I feel like we all came into the year thinking there'll be a lot more bank consolidation. So I guess, first off, why do you think there hasn't been more? And then given -- which we've talked about in prior years, all the significant investments you've made in technology on your systems, I guess why haven't you been more active?

Well, we've looked. I think the deals that have been done have been -- there are a couple of deals that have been done that we'd have been interested in that we -- you can think Colorado, what's taking place there. I mean that would have been a great addition, but not at the price for us. I mean I think that's a deal that a PNC can do and digest in a way that somebody our size relative to that size can't.

So I am not one who believes -- we've talked about this before. We probably maybe have actually a difference of opinion I don't think that size is that it ever will finally solve the problem of efficiency in banking. And the data, I think, really demonstrates, if you look at kind of the weighted average efficiency ratios or different buckets of $5 billion to $10 billion, $10 billion to $25 billion, $25 billion to $100 billion to $500 billion on up. I mean, it's all pretty consistent really in terms of now the mix is different. And so -- and you get into capital efficiency, it's a little different issue. And we have to kind of scale that. That's why we have to work on fee income. But I don't think it's one where you have to get -- just have a larger balance sheet to be better at what you do. And I think -- I do think we've made investments in technology that I think lead the industry.

I think we're in a great position to be able to do a deal to acquire larger community banks, et cetera. But it's got to be on terms that work for us. And -- so I don't wake up every morning saying, how do we get to $150 billion or whatever. I don't think that's how value gets created.

I guess from a financial perspective, when you're evaluating deals, like is there a metric or two that you kind of look at that like, "Oh, I want to buy First Bank, but I can't pay more than X," like, what...

Well, obviously, everybody is really focused on kind of tangible equity dilution and earn-back and everything. And so you look at those things. But fundamentally, it's -- because I'm not sure it's always necessarily the best measure. And it's one that frankly, once you scramble the egg, it's kind of hard to always figure it out anyway. But you look at what I think about is the quality of the deposit franchise is very much on my mind as I look at anything. What kind of -- and then on the asset side, if it's all commercial real estate, it's probably -- that's less interesting, I mean we could digest that if it's smaller. But the ability to actually take products that we have that's geared towards small to midsized businesses and pump it through there. That's where I think the opportunity is for a bank like us.

Makes sense. And just maybe in our final minute, in the second quarter, you did 16%, 16.5% ROTCE kind of ex the items. Just how do you think about the longer-term kind of profitability of the company? And how do you kind of balance returns versus growth?

Well, ultimately, returns need to come before growth because you -- and I think that needs to be -- the priority is you're creating value before you start doing more of whatever you're doing. And so -- but listen, I think that if we -- I would expect us to be thinking about something that's kind of 15 and north as sort of reasonably decent performance that you can grow with. And I think -- especially if you think about what the -- I know everybody might have a different opinion about what the real cost of equity is in the industry. But with -- particularly in an environment where you've got still pretty historically low long-term rates, if you're doing 15%, I think you're creating real value.

Sounds good. On that note, please join me in thanking Harris for his time today.

Next up is lunch. We have a very interesting panel. So please attend.

Greetings, and welcome to the Zions Bancorp Second Quarter Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Dave Riches. Thank you, Dave. You may begin.

Thank you, Julian, and good evening, everyone. Welcome to our conference call to discuss Zions Bank Corporation's Second Quarter 2026 results. My name is Dave Riches, Interim Director of Investor Relations. Before we begin, I would like to remind you that during this call, we will be making forward-looking statements. Actual results may differ materially. We encourage you to review the forward-looking statements and non-GAAP disclosures in our press release and on Slide 2 of today's presentation, which apply equally to statements made during this call.

A copy of the earnings release and the presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris's comments, Chief Financial Officer, Ryan Richards, will review our financial results and outlook. Also with us today are Scott McLean, President and Chief Operating Officer; and Derek Steward, Chief Credit Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for 1 hour. I will now turn the time over to Harris Simmons.

Thanks very much, Dave, and good evening, everyone. We are reasonably pleased with our financial results for the first quarter, which reflect meaningful year-over-year improvement and continued progress on a variety of strategic priorities. Net earnings available to common was $452 million or $3.05 per share, including a couple of exceptional items, the first being a $215 million pretax gain on the liquidation of Visa Class B-1 shares and the other being an unrealized pretax gain on an SBIC investment, which net of a success fee accrual totaled $37 million.

Excluding such items, earnings per share totaled $1.74 compared to $1.58 in last year's first quarter. Our Capital Markets division continues to be an important driver of fee income growth. Since launching the business in 2020, we've invested steadily in talent, technology and product capabilities, expanding our presence across investment banking, sales and trading, and real estate capital markets.

Last quarter, we announced an agreement with Basis Investment Group to acquire its Fannie Mae and Freddie Mac multifamily lending business line, related mortgage servicing rights and an experienced team supporting those businesses. We expect the transaction to close here in the third quarter. Upon closing, we believe the acquisition will enhance our ability to serve commercial real estate clients across the Western United States and beyond, while further strengthening our capital markets franchise.

As this transaction has not closed yet, any revenue or other financial contribution from the business is not included in our current outlook or forecast. Additionally, we expect the financial benefits of the acquisition to build gradually over time as the platform is integrated and production volumes ramp up. We also continue to invest in our consumer and small business franchises.

In the second quarter, we introduced an upgraded feature-rich deposit and payments account for small businesses, which we're marketing as the Business Beyond Account. It's a companion offering to the Gold Account we launched for consumers last year. The Business Beyond Account is designed to support clients as they grow from basic banking needs to more complex cash flow management and money movement capabilities. We're pleased with the early results of the campaign. And between Gold and Business Beyond, we've opened over 10,000 accounts so far this year.

Going to the slide, Slide 3 summarizes second quarter results versus the prior quarter and last year's second quarter. As noted earlier, earnings per share was $3.05. When excluding net equity investment gains of $1.31 this year and $0.05 in last year's quarter, adjusted quarterly earnings per share grew 10% to $1.74 from $1.58 a year ago due to growth in customer-related noninterest income, modest loan growth and margin improvement, expense discipline, and solid credit performance.

The net interest margin was stable to the prior quarter at 3.27% and up 10 basis points from a year ago. When compared to the prior quarter, average loans grew 4.7% on an annualized basis, led by commercial lending. Average customer deposits grew 4.0%. Credit losses were modest at 6 basis points annualized of average loans.

Slide 4 presents the recent history of our earnings performance, together with the impact of the provision for loan losses on quarterly results. Notable items in each of the recent quarters are also included on this slide.

As shown on Slide 5, adjusted pre-provision net revenue was $332 million. It increased 10% from the prior quarter, reflecting improvement in both adjusted taxable equivalent revenue and adjusted noninterest expense, which last quarter included seasonal compensation expense. With that overview, I'll turn the call over to our Chief Financial Officer, Ryan Richards, to walk through the quarter in more detail and walk through our outlook. Ryan?

Thank you, Harris, and good evening, everyone. Beginning on Slide 6, you can see the 5-quarter trend for net interest income and net interest margin. Taxable equivalent net interest income was $677 million, up $15 million or 2% from the prior quarter and up $29 million or 4% from the year ago quarter. Earning asset yields, cost of funding and the net interest margin were all stable compared to the prior year. Slide 7 -- excuse me, compared to the prior quarter.

Slide 7 provides additional detail on the drivers of net interest margin. The linked quarter walk reflects minimal change. Year-over-year, the 10-basis point improvement in margin primarily reflects lower cost of funding for deposits and borrowings. For the second quarter of 2027, our outlook for net interest income is moderately increasing. The forward curve as of June 30 assumed an interest rate increase over the next 12 months. If that plays out, net interest income growth could exceed this guide and result in NII growth in the upper single digits.

Moving to non-interest income on Slide 8. Customer-related noninterest income was $182 million compared with $172 million in the prior quarter and $164 million a year ago. Excluding net credit valuation adjustment, adjusted customer-related noninterest income was $108 (sic) [ $181 ] million compared with $174 million in the prior quarter and up $17 million or 10% from the year ago quarter. These results reflect broad-based growth across nearly all revenue streams.

Capital markets fees increased by $8 million with higher real estate capital markets and investment banking advisory fees. We continue to see attractive opportunities in capital markets and have strong pipelines going into the third quarter. Securities gains in the quarter included, as Harris alluded to before, a $44 million unrealized gain related to a single investment within our small business investment company portfolio.

Including the $7 million success fee related investment that was recorded in other noninterest expense, the net unrealized gain was $37 million. For the second quarter of 2027, our outlook for adjusted customer fee-related income is moderately increasing versus the second quarter 2026 results of $181 million, with broad-based growth and capital markets continue to contribute in an outsized way. We currently expect results towards the top end of that range.

Turning to Slide 9. Adjusted noninterest expense was $546 million. Expenses decreased versus the prior quarter, driven primarily by seasonal compensation. Additionally, deposit and regulatory expense decreased $8 million with $6 million of that related to a decrease to our FDIC special assessment. Expenses were higher year-over-year, reflecting increased professional and outsourced services, higher incentive compensation and increased technology costs.

We will continue to manage prudently expenses while investing to support growth. Our second quarter of 2027 outlook for adjusted noninterest expense is moderately increasing versus the second quarter of 2026. Based on second quarter performance and full year expectations, we continue to expect positive operating leverage for the full year of 2026 in the range of 100 basis points to 150 basis points.

Slide 10 presents trends in average loans and deposits. Average loans grew 4.7% annualized during the quarter, primarily within the commercial and industrial portfolio and increased 2.3% year-over-year. Loan yields remained stable sequentially and declined year-over-year as benchmark rate cuts in the latter part of 2025 were reflected in variable rate repricing. Average deposits increased $779 million from the prior quarter, driven by an increase in interest-bearing balances. The cost of total deposits was flat at 1.48% sequentially and declined by 20 basis points year-over-year, benefiting from both repricing and a more favorable mix within interest-bearing deposits.

Slide 11 presents the 5-quarter trend of our average and ending funding sources. Our total funding cost was stable at 1.69% compared with 1.68% in the prior quarter. Period-end deposit balances were relatively stable compared to the prior quarter and short-term borrowings increased $837 million linked quarter and declined $4.6 billion versus the prior year quarter.

Turning to Slide 12. The investment securities portfolio continues to serve as an important source of on-balance sheet liquidity and a tool to balance interest rate risk through deep access to the repo markets. During the quarter, principal and prepayment-related cash flows from investment securities of $514 million were partially offset by the reinvestment of $297 million. The continued paydown of lower-yielding mortgage-backed securities supports earning asset remix and/or reduction in wholesale funds. Estimated price sensitivity of the portfolio, inclusive of hedging activity, was 3.6 years.

Credit quality remains strong, as shown on Slide 13. Net charge-offs were 6 basis points of average loans annualized, and the nonperforming assets ratio was unchanged sequentially at 48 basis points. Classified and criticized balances both declined modestly during the quarter. The allowance for credit losses ended the quarter at 1.13% and remains well positioned relative to our risk profile with 227% coverage of nonaccrual loans.

Slide 14 provides an overview of our $14.1 billion commercial real estate portfolio, which represents approximately 22% of total loans. The portfolio remains granular and well diversified by property type and geography with conservative loan-to-value characteristics. Credit metrics remain favorable, including low levels of non-accruals and delinquency.

Our capital position remains strong, as shown on Slide 15. The common equity Tier 1 ratio improved to 11.8% during the quarter from strong earnings and the exceptional items referenced by Harris, partially offset by $75 million in common share repurchases, common and preferred dividends paid and growth in risk-weighted assets. We continue to expect net capital generation through earnings and improvement in AOCI, which resulted in a 22% increase in tangible book value per share versus the prior year.

Slide 16 summarizes the outlook we've discussed across loans, net interest income, fee income and expenses. This outlook reflects our best estimate based on current information and is subject to risks and uncertainties discussed in our forward-looking statements.

This concludes our prepared remarks. [Operator Instructions] Julian, please open the line for questions.

[Operator Instructions] And our first question come from the line of John Pancari with Evercore ISI.

On the -- just on the deposit side, I wanted to see if you can give us a little bit of color on what you're seeing in terms of deposit pricing. The deposit costs were relatively stable, down a bit in the quarter. How would your -- how does this influence your outlook in terms of the competitive backdrop you're seeing? And maybe if you can comment also on the competitive side on the lending side as well with how loan spreads are shaping up.

Thanks, John. I appreciate the question. And having heard some of the other earlier reporters, I'm not sure our message is going to be very much different. It is a competitive environment on both sides of that equation. We're seeing that. You'll see that in also a little bit of the mix that's showing up on the deposit side, average holding on. But on a period-end basis, we saw noninterest-bearing being off. We have seasonality in the second quarter. So we -- some of that can be expected.

But supplanting that with interest-bearing balances, it's competitive. And some of those targeted deposit campaigns are approaching closer to wholesale rates in places. So it really underscores the importance of us doubling back to our core strategic initiatives and pulling through on the things you've been hearing about us talk about in recent calls, coupled with the marketing dollars that come with that. Same thing that you're seeing on the loan side. We are seeing a little bit of spread compression there.

So the earning assets yields sort of hung on quarter-over-quarter sequentially. We had some good underlying things that helped counteract some of that spread compression, things that you would have heard us talk about in prior quarters. We still get some benefits there in terms of those terminated cash flow swaps. This quarter, we had about $8 million of headwind. That's going to continue to diminish through the remainder of 2026. And for all of 2027, we'll only have $8 million remaining there.

The remix that we've been talking about for quarters on end continues. We do see continued upside in fixed asset repricing. Some of that was a little bit masked this quarter by some of the compression in the spreads, but that still remains. We still see at least 1 basis point of earning asset yields playing through there. We still have the securities coming in at a better front book rate than back book rates.

That's still going to contribute, we think, 1 basis point or better on investment security yields. So there's still some helpful things working on our behalf. The other thing that we saw play out this quarter is probably our most important repricing benchmark is 1-month SOFR, and that was coming at the low end of kind of a range that you could think about in the market.

So that was a little bit softer on the loan side vis-a-vis without having any Fed funds rate decreases, it was kind of harder to push that through on the deposit side. So all that kind of equates to what came in this quarter as a very stable net interest margin, and it has not been our practice to provide deposit or NIM guidance in the future. But suffice to say, we do believe that there's some upside from here, again, going back to our core strategic initiatives to drive deposit growth.

John, this is Scott. I would -- Ryan mentioned it a couple of times here, but this marketing initiative we've had with this kind of strategic 6 products they are all focused on granular deposits. And the fact that we're doubling advertising in '26 compared to '24 with, I think, a better company-wide approach to product advertising. We're still very early into that, but our whole branch teams and our business bankers, et cetera, are highly focused on these efforts to grow granular deposits.

And on the larger side, the fact that we still have net sort of average broker deposits plus net overnight borrowings of about $2.5 billion. We've got room to bring in larger deposits at rates that are meaningfully accretive to that overnight borrowing rate. So I think we'll continue to see improvement there. And those higher-priced deposits, they are clients. They are clients or prospective clients, as we're not just buying money in the open market.

Okay. Go ahead, Scott.

Did you comment on loan pricing? You did. Okay. Sorry.

On the spread compression.

Yes.

Got it. And then, Ryan, you kind of alluded to it that you don't really guide on the deposit growth or the margin. But I guess I'm just trying to get a little bit more color on how we should think about the reliance on wholesale here or short-term borrowings. I know you have the capacity to, as you just mentioned, Scott, but I wanted to get a sense of how the funding picture may look here as you continue to see some strengthening underlying trends as you cited on the loan side, what the funding side of the picture may look like as that plays out, if there's going to be a greater reliance we should expect on the wholesale side of things? Or is there a way to assume a pace of deposit growth that's reasonable here?

John, we certainly hope for that. We certainly expect that based upon all the things we're doing initially internally. Hopefully, you heard, and the guidance I provided was pretty constructive about how we're thinking about NII 1 year out. I mean it's always going to be beholden to our success in driving loan and deposit balances. But underlying that, we would be showing some -- a decent amount of average deposit growth that would be implying that guide. But without getting any of the specifics, which has not been our practice.

And our next question comes from the line of David Smith with Truist Securities.

I guess can you confirm that your year ahead outlook for moderately increasing NII does not include a Fed hike?

No, it is part of our guidance. Sorry if I wasn't as clear about that. But so the implied sort of forward rate at the time that we kind of struck the chalk line would have allowed for one rate increase and kind of -- yeah, that's right.

Okay. And then so it would just be kind of your report sensitivity to a 25-basis point shock of about 1% if we're assuming more or fewer hikes in there?

Yes. I'm glad that you called this out. So that's an important point. We do continue to screen asset sensitive relative to our peers, recognizing that methodologies aren't necessarily common across all. But on that basis, and it gets day-to-day, week-to-week in terms of where the market is implying these rates. But yes, I mean, we still -- you'll see some of the sensitivity materials towards the back of our materials in the appendix on a parallel shift. We still internally think about things like latent emergent, and we would show a lift of about 3.2% above the latent sensitivity that would be implied by having one or more forward rate increases in the curve.

Okay. And then just following up on deposits. I hear you that you've got some initiatives in place to try to reignite that growth. I guess if it remains competitive in the short term, though, your loan-to-deposit ratio was up a couple of points from last quarter to 82%. I recognize that's not very high, but how high would you feel comfortable taking that ratio in the current environment if it does take a little bit longer for the deposit growth to transpire?

Yes. Good point, good question. We still have -- and I didn't mention this as much, but in the past, we've talked about investment securities and how much we need to reinvest in those versus letting them roll off to other useful purposes. And I think we said maybe in the last call that we're getting closer. We're not there yet. We're probably still a quarter or 2 away before we think about fully reinvesting investment securities.

That's just another way of saying, as it stands now, as we think about liquidity stress tests and deposit behaviors and how much contingent liquidity we need to hold, we do think we have sufficient with buffer. So we're sitting here at 82% loan to deposit. That suggests that there's probably a little bit more room to run in that ratio before we would start thinking about other things to do to support us stable funding sources.

And our next question comes from the line of Manan Gosalia with Morgan Stanley.

Can you give us a sense of, I guess, the trajectory of deposit costs through the quarter? I know that the spot deposit rates were up about 6 basis points or so quarter-on-quarter, but I recognize that there might be some seasonality in there, especially related to NIB deposits. So if you could just help us with how deposit costs evolved through the quarter and how competition evolved through the quarter?

Yes. I mean the competition is certainly there, Manan. The reference we have is in the MCI type in the presentation on Slide 10 about total cost of deposit spot rate at the end of the quarter at 1.49%. So you can kind of get a little bit of feel for the direction of travel there. It's competitive. So again, I don't think our story is any different than some of the earlier reporters. Our success will be really driving through these core campaigns.

Got it. And then maybe if you can talk a little bit about loan growth and the drivers there. C&I growth was clearly good this quarter. Any sense of how things are progressing, whether there's some acceleration there and how we should think about the next year or so?

Thanks, Manan. This is Derek. Yes, we had good loan growth for the quarter, primarily driven by C&I. It was pretty diversified across segments in the commercial and industrial book. One thing we did see is a decent increase in utilization on revolving lines of credit just from some companies that were growing and having additional working capital needs.

That was a positive as well as just new originations, primarily middle market and some upper middle market activity tied to some capital market syndication activity that we're -- that's an area that we're trying to really grow. We did see a good growth in the term CRE book as well. You'll see our construction mix is actually down as a percentage of CRE to 16%. And some of that is just construction loans rolling into term, but also new originations in our term book, which is an area that we think we have some opportunities to grow at this time.

And next, we have Bernard Von Gizycki from Deutsche Bank.

Just wondering on expenses. I think you called out the credit-related expense rose $4 million due to the increased loan-related legal costs. Was this mostly due to the legal issues with Cantor Fund or any updates on this?

Yes, Bernard, that's certainly a prominent component of that, that factors into that expense item.

Any thoughts on that continuing? Will there still be some probably spilling out into the second half? Maybe that's mostly in your guidance, but just thoughts there.

I don't think we really have anything to offer at this point on that one, Bernard.

Okay. Maybe just the last follow-up, just on fees. I think, Ryan, you mentioned the attractive opportunities in cap markets and the strong pipelines going into 3Q. And obviously, the real estate cap markets, investment banking fees are strong. Just thoughts on how that trends? And just anything on wealth management fees. It was down slightly in the quarter. Just wondering what drove that and thoughts on the second half as well.

Sure. This is Scott. And it was a really solid quarter. The recent quarters have been in fee income, customer fee income. And what's different from a year or 2 ago is that a year or 2 ago, the growth was principally in capital markets. The rest of our major fee income categories were growing a little bit, but not much. And we're seeing broader growth now. our largest source of fee income, about 30% of it comes from our treasury management activities, and they're up very nicely year-over-year.

And similarly, our -- some of our loan-related businesses, you're seeing increases in fees, shifting our mortgage business to held for sale from held for investment. We'll continue to see nice year-over-year mortgage fee growth. And wealth management actually was up over the June quarter of last year. And it's -- we're encouraged about -- we've had a couple of flat years, and we're encouraged about what our teams are doing there.

And as we've mentioned, Rebecca Robinson, who ran that business for us for many years, did a wonderful job of creating a strong foundation, improving our core profitability in that business. And she has retired from the organization. And Mike Selfridge, we hired, who was the Chief Banking Officer at First Republic, and he's now running our wealth business, and I think just brings a great deal of experience also for this next phase of growth. Wealth should become, again, a high single-digit growth, low double-digit growth business for us in revenue.

And next, we have a question from Ben Gerlinger with Citi.

I just want to unpack a little bit on deposits. I know you don't want to give a full guide; I get that. But since we only really see 3-line items, I was curious, are there any silos that were growing because everything kind of gets lumped together? Like is there pricing strategy or any individual silos that seem to be doing better than others considering the net was down a little bit?

We've had an ongoing targeted deposit campaign that I sort of alluded to a little bit before, which is sort of inviting people to bank with us through whatever capacity, the rates are a little bit more generous, but are still with clients, as Scott alluded to. I think it's also important to say that Harris talked about this business beyond and some of the other things that we're doing.

You cited 10,000 new accounts. I mean it takes a little while for all this to play through, but we're putting a lot of energy and resources behind these initiatives. So I'd say most recent periods, the growth is probably coming from those -- more of those focused outreach efforts. There are some really nice underlying green shoots that are coming through our strategic efforts that we'll look for more growth moving forward.

Yes, I'd just add, I mean, these initiatives we have are -- it's a marathon, not a sprint. So over time, we keep these kinds of growth rates going on, over time, I expect it will be a meaningful contributor to really strengthening the consumer and small business part of the franchise.

Got you. That's helpful. And then, Ryan, I just want to double check. You said operating leverage of 100 basis points to 150 basis points. I feel like that is in line to what you said in 1Q. I just wanted to confirm that's -- is that GAAP? Or is that core? How should we deal with the Visa gain?

Yes, we would not be including the Visa gain for that purpose. And so yes, that was just reaffirming what was shared last quarter that we still see it for the full year. And then if you sort of think about the words I used in kind of guiding things for 2Q '27, it will imply, I think, quite a bit better than that for the 1-year forward quarter. But again, we need deposits to pull through for that to stick.

And our next question comes from the line of David Chiaverini with Jefferies.

So I wanted to start on NII guidance, a clarification here. So the moderately increasing, that includes 1 hike. And if we get 2 hikes is when we'd get to upper single digits. Is that the right way to think about it?

No, I think with the 1 hike is what we had embedded in our guidance. And with some -- probably some pull forward, it was probably between 1 and 2 hikes is kind of how we were seeing the forward curve at a point in time. But if you saw 2 rate hikes coming through, then it would be better on an emergent basis. It would be even more constructive than what we were talking about.

Okay. So moderately increasing is 1 to 2 hikes and then 2 to 3 is when we get to -- I heard you mention upper single digits. So I just want to take...

Yes, it's one full hike. But sometimes the market tends to peek ahead and anticipate what could be coming. So I would just think about it as 1 full hike, if we get 2 full hikes, then it will be more constructive than what I spoke about in my script.

Got it. And then a follow-up on the positive operating leverage. So the 100 basis points to 150 basis points is 2026 core. If we pencil out 12 months forward since the other items you're giving 12 months forward, how should we think about positive operating leverage over the next 12 months?

Yes. I don't really have that statistic in front of me right now, David. But what I was trying to point you to is if you just think about that 1 year's core, 12-month advance quarter, that's where we provide our guidance to kind of steer the market. And so we said loan growth moderate looks good. We said fee income. We just came off of a really nice year-over-year performance.

I think Harris quoted in his script of 11% growth. We think we can be at the upper end of our guide moderately there. And then for NII, with that forward curve we just talked about, we said upper single digits with -- kind of think about a true moderate for expense growth sort of gets you to a place that's pretty healthy relative to what we're talking about on a full year basis here.

And our next question comes from the line of Chris McGratty with KBW.

Ryan, just kind of a bigger picture on the margin discussion, NII. We've heard a lot of discussion this quarter from your peers about NII kind of being more important than margin and managing to a margin is more of an output. I know you've walked -- you guys have walked back that 3.5% NIM that you previously talked about. But like conceptually, like what's more important to the bank over the next 6 to 12 months? The NII growth or maybe you lean into growth a little bit and you have a little bit more pressure on the margin?

Yes. Listen, I think it always -- it comes back. I mean, there are various components. Margin is interesting, but NII is where ultimately what the juice is in terms of profitability. So I know the commentary in the marketplace, and I get it, we certainly saw in our performance with loan growth outpacing deposit growth, and that could potentially constrain your margin.

But I think there's a lot to like in our loan guide, coupled with the way that the rate curve is being constructive at a time when we are asset sensitive. So I would say for me, at least, and you might ask a different member of management team, they might reach a different conclusion. But for me, it comes back to NII. And we hear that, too, from investors. They just say, we want to see you grow and grow responsibly. And I think that, that will show up in the NII print moving forward.

Okay. Maybe just on the ACL, it's -- your credit numbers are fantastic with just your ACL approaching 1. How should we as outsiders think about I guess, willingness to bring that down, either maybe relative to CECL day 1 or mix shifts, but that 106 basis points number, how do we think about that?

Sure. This is Derek. Our ACL, I mean, we feel we're very well reserved at this point. It's all just going to depend on what the forecast, the economic forecast looks like. If the economy continues to improve, then we have room to move it down. If it deteriorates, then we move it up. It just really depends on where the economy is headed in the forecast. But at this point, we feel like we're very well reserved.

You think about having coverage for 6 years of gross charge-offs, it feels pretty good given the tenor of our portfolio.

We also know that the weather changes in the economy, all those range -- the ratios are pretty sensitive to there's a lot of leverage in those numbers. So I think we're well reserved, but I don't think it's out of line with where we ought to be.

And then just, Ryan, on the tax rate, could you just help us about the outlook for the tax rate?

Sorry, on the tax rate?

Yes.

Was that the question? Yes, nothing unusual. We had a little bit going on in the first quarter that was a bit of a good guy to kind of normalize. But otherwise, it's business as usual from an effective tax rate perspective. Nothing to call out.

And our next question comes from the line of Ken Usdin from Autonomous Research.

Ryan, I'm sorry to come back on this one more time, but I think there's still a little confusion out there. Can you just make sure we understand that your -- the main guide to focus on for NII is with 1 hike included, you think you can do upper single-digit year-over-year to 2Q '27 NII growth? Is that the main thing? Because people are still comparing it to the moderately that's on the slide. If you could just square that, I think that would be helpful.

You nailed it, Ken. Listen, sometimes the words get in the way, and that's why we try to come over the top with some additional narrative. We don't really have a great word where the better part of moderately increasing and potentially overachieve. We could say increasing, but what are you talking about? So that's why I just try to provide a little extra color to help you kind of see where we're going here.

Okay. Thank you for just restating that. I appreciate it. Second question, just on capital. You had the nice Visa gain. I think you're around what looks like 9.2% with AOCI. Can you -- I know it's a Board decision, and they usually make that announcement separately, but the $75 million you did in terms of capital return, is that the type of return we can expect going forward? Do you think you're at the point where you're at that comfort zone with AOCI that we can start to see an increase from here?

I think, Ken, if the economy continues to cooperate with our plan kind of plays out as we expect, I would expect that we'll incrementally continue to increase the capital repatriation to our owners. And -- so I don't expect anything very sudden or dramatic. But I think the current pace of buybacks is certainly sustainable and probably you'll see some increase. I would expect to probably see some increase in that over the coming year as well as with the dividend. So all consistent with kind of the forecast we're giving you kind of a year out.

Yes, Ken, the numbers we see, we always want to look around and see where peers are at. And on a reported basis, looking pretty healthy at this level. Harris talked about closing of a transaction in the third quarter that will absorb some of the capital on the way, but we still think we're going to be sitting in a place that will be a little bit better than what we see in our peer median.

So on a reported basis, it looks like there's some capacity. And to your point, the AOCI has been coming in well and reasonably predictably. And we see the glide path for that to keep coming in while still being able to manage the amount of reported CET1, which allows for the opportunity that Harris alluded to.

And our next question comes from the line of Peter Winter from D.A. Davidson.

I just wanted to follow up on this AOCI because, Scott, at a recent conference, you talked about how the capital is building with the AOCI accretion, giving you more capital available for acquisitions. Can you or Harris just provide an update on your thoughts about bank M&A?

Yes, I will. I mean it's -- I think it's irresponsible if any management say we're just not going to do it. But that said, it's not something that we wake up every morning saying what can we buy? I think anything we do is likely to be opportunistic. It's going to be likely to be highly likely in markets we're serving where the economics are easier through consolidation, where they have a good deposit base where it's just additive strategically to us.

But there's -- I think the -- I would rather suspect -- there was a period in our history, if you go back 25-plus years, I mean we're doing a lot of deals. And the math worked. And I think we've been going through a period of repair, and it's been going on now for some years. And it's not just capital. It's also -- it was really strengthening the foundation of this place with systems, with people, with risk management. There's a lot that's been going on. So I think we're in a very different place.

We're getting back to a place where our capital is really strong. And I think if -- we need to demonstrate to owners that we have the kind of financial returns that justify being out in the market doing deals where we can be competitive doing deals, maybe more to the point. But -- so we're not -- I wouldn't say that that's not going to happen, but it's not something that we are particularly focused on. There's a lot of just organic opportunity for us, and that's where our real focus is.

I would just -- we're commenting on a comment I made at one investor conference in June, but I made the same one in March. And that was really 2 things, and Harris just noted it. But what I said was that Harris and I don't -- the first call we make to each other on a Monday morning is not to talk about M&A. We just -- that's just not a call we make. We're talking about how to grow the company and projects that are going on and initiatives, et cetera.

And when opportunities present, we're not an overly bureaucratic shop. We can get folks together quickly to make a quick assessment. And we see most deals that are going on in our markets, not every deal, but most. The other comment was that -- the math isn't that difficult. As Ryan said, the AOCI accretion has been very predictable for multiple years now. And so it's not hard to look out to this quarter in '27 or this quarter in '28, CET1 is already very favorable to peers and CET1, including AOCI, is no longer a story and, in fact, is above peers by probably a predictable margin.

And so you can just make your own assessment of, okay, well, they're not going to stay way above peers. We've always said we want to be above peer median, but not way above. So you can almost talk yourself into whatever level of buybacks or other capital usage you want to think about. That's what I said.

Got it. I appreciate that. And then just one housekeeping item. Just, Derek, you mentioned that line utilization increased. I was just wondering if you can give what the number was this quarter versus last quarter and maybe how much 1 percentage point equals in terms of loan growth?

Oh, boy, I don't have all those numbers at the top of my head versus last quarter. But just ballpark, it was a decent amount of the increase, I'd say, 40% to 50% of the increase from the utilization.

Just broad strokes, close to an increase of 2% utilization with varying dimensions across sub-portfolio, C&I, CRE and consumer.

And our next question comes from the line of Dave Rochester from Cantor.

I just want to go back to the NII guide one more time in case we haven't beaten it to death. Can you just state what the NII guide is without rate hikes, 2Q to 2Q? Is that moderately increasing or 4% to 6%?

That's a good way of putting that. Listen, as we look at sensitivity, which is different than forward guidance, even without a rate increase, I believe we would still be moderately increasing to give you some indications about how we're seeing it. When you layer over the top of our sensitivity, what we're seeing in loan growth.

Okay. Great. All right. And just a follow-up. On the deposit side, are you guys still focused on pulling some of the off-balance sheet deposits back on balance sheet? Can you just give us an update how much you have there, what the funding advantage is versus wholesale? And if you're baking any of that into the guide, that would be great.

Sure, Dave. This is Scott. We have about $6.5 billion, $7 billion in off-balance sheet deposits. These are clients that we've asked to move off balance sheet at other points in times like 2020, 2021. And that number was as high as $12 billion. So we've moved some of that back on balance sheet. And generally speaking, when we bring those deposits back on balance sheet, it is definitely accretive to overnight -- net overnight borrowing rates.

And then -- but that's not the only place these higher-priced deposits are coming from. Generally speaking, when we bring deposits into this kind of wholesale deposit campaign we've been focused on, they're coming in anywhere from 30 basis points to 40 basis points accretive to our overnight borrowing. And we currently have about $2.5 billion on average brokered deposits plus net overnight borrowings.

Okay. Great. So the idea is sort of just to replace those over time.

With deposits that are accretive. It makes no sense to do it if it's not accretive to our overnight borrowings.

And our next question comes from the line of Anthony Elian with JPMorgan.

Just following up directly on that previous question. So on the deposit initiatives, right, how quickly could you see those efforts make their way into deposits to ultimately reignite growth in total deposits, customer deposits, which has held flat the past couple of quarters?

It's been doing it for the last 9 months.

Yes. I mean so far, you brought in...

$3.5 billion.

$3.5 billion. But it's maybe the inverse of a fat guy losing weight.

Come on now. Who are we talking about here?

I'm not talking about Scott. No, I mean the first few pounds are either in the last few. And so I mean -- so there -- it's not a straight line. It's -- you get to a point of kind of diminishing returns where you pick through, you've talked to customers and some of what's left off balance sheet is going to be a little stickier than it was originally. So, well, all apologies to anybody overweight.

Apology taken.

None taken. And then my follow-up -- so look, loans are still expected to moderately increase over the next year. But given that the company's funding costs are below those of peers, many banks, including you guys, are talking about the level of deposit competition remaining intense with no signs of slowing down. I'm just -- if I put it bluntly, I'm just struggling to see how you won't see a surge in funding costs in the coming quarters to support your loan growth outlook and ultimately get you into that upper single digits range for NII?

On this, I would say that our loan growth has been really disciplined. It's been muted by the fact that we've not been gulping down NDFI loans for the last 5 years. It's been muted by the fact that our -- the peer median of CRE growth is about 60% higher than our growth, the upper quartile, the most fastest-growing peer banks are growing at about 2x our CRE growth.

We're just not -- we can grow loans faster, but we're choosing to be very disciplined about concentration management, and we're not growing unsecured at a rapid rate, which investors hate when you go into a recession. And so I think with the loan growth projection that we have, we have a very solid opportunity to keep funding costs, which is a significant competitive advantage for us, very much intact. We have over about 3 decades, our cost of deposits relative to peers.

Yes. Listen, I think all agreed with what Scott said. I mean, certainly, there's pressure, right? I don't know if I would say surge, but we're seeing it in the marketplace. And so there is going to be some pressure on funding costs. But as Scott alluded to, we've been very successful in managing that over time.

And our next question comes from the line of Janet Lee with TD Cowen.

On your NII -- sorry about this, NII question again. But on your NII growth assumptions of 4% to 6%-ish in a rate hike or upper single digits in a rate hike assumption, are you assuming your NIB deposits stay in that 34% of total range? It sounded like you were attributing some seasonality to a second quarter decline. Just wanted to see what is baked into your baseline.

Yes. Thank you, Janet. I think just broadly speaking, as we work with our businesses, we do see some degree of seasonality that presents from time to time in the second quarter. And typically, when we work with our bankers and our affiliates and our businesses, it usually is a stronger second half of the year. So that would certainly be factored into how we think about projecting into the future, and that will be part and parcel to our guidance. So that -- does that get to part of what you're asking?

I think it's on the noninterest-bearing deposits and the proportion of that...

Yes. Listen, I think if you look at more recent trends, interest-bearing has been growing faster than the noninterest-bearing. So a lot of that will -- I personally expect that to continue in the near term and maybe longer term, I don't know, we'll see. But the -- again, it really comes back to the things that we're prioritizing as a management team and as an institution.

There's a reason why we talk about these targeted focused campaigns on the wholesale side, but the real franchise will be made on those granular deposits and the efforts that we're making on retooling our commercial deposit accounts, our small business deposit accounts and getting at those granular relationships that we are building over time. And it does take a little bit of time to play through, as Harris said, it's the marathon, not the sprint. So that -- I mean, that's really where I'm going to be training my eyes in the coming quarters and years is how successful are we in advancing the ball there.

Got it. Appreciate all the color. And just on the securities portfolio size, I mean, that's been grinding down for a few quarters and I guess, for some years. How should we think about the trajectory of the security portfolio going forward?

Yes. Thanks, Janet. I do think we're getting closer to the time where it will -- it's not a trading where we'll need to start reinvesting 100% of those securities cash flows. But again, I think we're still a quarter or 2 out. We're always thinking about our funding structure and how -- like approach it from a rating agency perspective or how the regulators think about stable funding.

You've seen that we've been in the capital markets. I wouldn't rule that out in the future. We sort of see what the market bears. But notwithstanding that, I think we probably have a quarter or 2 where there's still some cash flows that we can reinvest to other things that are not securities, whether that be continued loan growth or paying down some of these wholesale funding sources. There's still some movement there.

And our next question comes from the line of [ Raul Zarma ] with BioChem Limited. Raul, your line is live.

I think a BioChem question would be most welcomed at this time.

We got a BioChem incident there. Shall we go to the next?

Let's move on.

And the next question is coming from the line of Christopher Spahr with Wells Fargo.

So the technology expense comment, was that related to the trend like a quarter-over-quarter or year-over-year just because it's been elevated the last few quarters?

It's a little bit of both. I think that if you look at our narrative that's in the earnings release, that's typically a year-over-year observation where we talk about the increase in technology costs, but I think it's -- I mean, it's just with the world we're living in now where things are, the investments we're making to stay current, it's a continuing trend.

I'd just add. I mean, there's been a lot of -- we talked in prior quarters, there's been a lot of pressure coming in terms of just vendor price increases, software maintenance, et cetera. I'd like to think that that may be one of the bright spots coming out of AI for a lot of folks is that maybe that gets tempered a little bit. I think some of the vendors start to feel the pinch of that and maybe lose some of the pricing leverage they've had. On the other hand, I mean, everybody is going to be spending more on AI. Question is how quickly we actually see meaningful results from it. But I think one thing that's sure is you're going to -- more and more technology is going to be applied to this industry.

Got it. And so about 1/4 of your expenses, if you look at the technology spend disclosures in the Q, which are very helpful. So 1/4 of the total expenses are tech related. Where do you see that going? Are you spending more? Is it going to go towards 30% temporarily? Or is it going to kind of just increase with the natural growth rate of expenses? And could it go lower over time?

This is Scott. I think -- I don't think the trend will change significantly. We're continuing to invest across the board in technology in all ways. But as Harris noted, there are definitely elements of the business that we see from providers that is changing. And they have clearly had the upper hand in the last 2 or 3 years, but you can see a world where that becomes more controllable, where they're searching for revenue and not searching for pure price increases.

And then I guess the open question becomes where does the token math go eventually over time if people are pivoting to more AI large language models. There's a lot more that's showing up in various CFO forms about ROI from token math that will probably be the new battleground over time.

I think one other trend you'll see is that all of our peers generally report that they have used outsourcing to the extent of 10% to 15% of their FTE base. And we were probably lagging considerably on that front and maybe around 3%, but we've been moving that number up using it as a lever. But the point I want to make is that what's happening with outsourcing broad-based is that AI is replacing the need for having to outsource at all.

So -- and as we're able to bring that outsourced total down, we're bringing down 100% dollars as opposed to when you go to an outsourcer. So I think there's going to be a real expense opportunity there as companies replace outsourcing with AI. You hear this from AI -- outsourcing vendors and that's why many of their stocks are being hurt in the market right now.

And our final question comes from the line of John Arfstrom with RBC Capital Markets.

Scott or Ryan, anything you would call out in the capital markets revenue line this quarter? Do you feel like that's granular, repeatable-type number? And then maybe, Harris, anything you can share with us in terms of maybe sizing the agency acquisition?

I'll take the easier part of that and just say that, no, I think the different major capital markets product groups that we have. We've invested in several of them significantly in recent years and both in colleagues and in risk and technology structure. And I think we've got a long runway on growing those businesses. So I'm not worried about, and I don't think our teams are worried about having to repeat the revenue level that we have. I think they can see a nice upward trajectory, and we'll see the benefit of many of our products hitting on all cylinders at the same time as opposed to just one.

Yes. With respect to the Basis Investment acquisition, contractually, we are not able to talk about -- make any projections about that until we close the deal. And so I expect that this time next quarter, certainly, we'll be able to talk about that, but I can't today.

And if I can just double up, I think those are really important. And what Scott said is valuable. I mean if you think about this history here and the investments that Harris talked about at the beginning part of this call, if you think about what the bread and butter has been for our capital markets business historically, risk management through swaps, FX, loan syndications. The neat part of the story in this quarter is we're talking about a whole another set of complementary skill sets in real estate capital markets, investment banking advisory fees.

Harris talked about what's coming on the multifamily side. So it makes the business overall more durable. And it's still going to be lumpy. We know that, but it makes it a little bit less lumpy when you have that many businesses to draw upon. So I think that's really, really encouraging, something that I hope doesn't get lost in this. When we're seeing lots of other people showing really strong capital market results this quarter, it's really nice to have that part of our narrative as well.

Okay. Just one thing maybe to end the call. It's kind of an NII question, but maybe not. But Harris or really any of you, do you think the Fed should hike or needs to hike rates? And do you guys have kind of a preference or a bias on rates?

I mean, far be it from me to. I will say, I think that the new Fed chair, just me speaking, but I think Kevin Warsh brings -- I tend to be a fan. I think the Fed over the last 20 years has kind of painted themselves into corners with their own forward guidance. I mean, I'm talking to a group of folks who love forward guidance, and I understand that. But one of the problems with it is it creates pressure to do something sometimes things that are unnatural. I think it takes away degrees of freedom. And I tend to think that hard, Kevin Warsh is what he says he is, and that is focused, first and foremost, on inflation.

I think he's closer to a Milton Friedman kind of a guy than anybody we've seen there for the last couple of decades. And as long as we have inflation that's kind of sticky, I think the pressure is going to be probably upward on rates. I just think that's who he is. So -- and I think he's trying to be careful not to paint himself into the corner or -- I really think it's going to be a Fed that under his leadership is going to be very responsive to what's happening with inflation and pretty transparent about it.

And with that, I will pass the floor back over to Dave Riches for any closing comments.

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

Thank you, ladies and gentlemen. We thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.

Okay. Last stop for today, we have Zions Bank, Scott McLean, President and CEO of Zion. Scott, welcome to the conference.

Thank you, Manan. It's great to be here with you. .

Perfect. Yes, let's get right into it. Let's start at a higher level. It feels like Zion has done a lot of blocking and tackling over the past 2 years, setting up the bank for growth. How would you characterize where Zions is today from a growth perspective versus, say, where the company was maybe a year ago?

Sure. No, that's a great place to start. We really kind of have to look at the journey we've been on over the last 3 or 4 years. So we've completed our big core conversion, the only U.S. bank now that has replaced its core loan and deposit systems. And that is huge for us to be real-time, natively to have 1 data model for all of our loans and deposits. It's just a big advantage, and no 1 will really catch up for years now at this point.

To get through the Silicon Valley disruption, March 10, 2023, that had a disproportionate impact on us. We lost about $400 million in revenue in about a 6-month period just in repricing of deposits. And we said it would take 2 or 3 years to totally heal from that and investors have seen that now. Net interest margin now back up to 3.3%. And so we've made it through that and our relationship with regulators has never been better. The technology foundation of the company gives us a lot of flexibility. So the foundation of where we are today is just terrific. And it's really allowed us about 18 months, 24 months ago to just totally orient to growth. We've always been interested in growth. We've always been focused on it, but we just don't have any external or internal distractions right now. And that's -- it's just a huge breadth of fresh air and you can -- it's palpable inside our company. And Harris Simmons, our CEO, has really led the charge on just reorientation to growth, and it's really manifesting itself in initially energizing, reenergizing everything about our branches. We have about 407 branches. And our branch model has always been absolutely critical to supporting our small- and medium-sized businesses that make up 2/3 of our revenue. And they've certainly been selling and bringing in new clients. But the primary orientation was just to do a great job for these medium and small businesses.

The focus we're changing to is just adding a broader set of products, testing off existing products. We've had 6 key strategic products, 2 of which are important granular depository products and doubling the advertising that we do. You've never heard Zions talk about advertising. Have you ever heard me -- have you heard about us talk about advertising ever?

I have not. No.

So this is the first. But we've -- we will double the dollars we spend on advertising in '26 versus 2024, and it will be almost entirely product advertising, where our advertising before was brand principally. And we've totally reshaped the way in which we go about marketing and the company have brought in a lot of expertise. Eric Lucero, our Head of Marketing, came from First Republic, which we don't plan on having asset dislocations like they did. But we -- they had a great brand. They had a great marketing activity there and he's brought in colleagues from Starbucks and JPMorgan and a collection of other really high advertising-oriented firms. So that's definitely part of it.

And then a number of new businesses we're investing in, we've just announced this acquisition of the DUS licenses, Fannie and Freddie from Basis Finance. And we'll be 1 of 4 banks in the U.S. to offer a CMBS platform and then a Fannie and Freddie DUS license. JPMorgan, Wells and Key are the other 3. That still has to close. It's under regulatory review, but it's going to be an exciting way to expand the product set that our commercial real estate bankers have had. Still investing in capital markets, still investing in treasury management and we'll be investing more in wealth as we go forward.

So we just are spending a lot of time talking about growth internally, and it's been a lot of fun.

So yes, so a lot to be excited about. I think we can dig into some of those. You started out by talking about the core systems conversion and now that's complete. Maybe talk a little bit about what owning and controlling that modern core means for Zions? And what does it allow you to do differently versus peers and prepare you for a more digital world out there?

Right. If you just think simply about it, if you're going to survive and be successful in a digital world, we think you need to be digital to your core. And virtually no other bank in the United States can say that because their core loan and deposit systems are not real-time, they operate on many, many different data models. We have all of our loan and deposits on 1 data model, which is unheard of. And it's real-time, it's API-enabled, it's very intuitive on the front end. And so it's offering us advantages. It's taking half as long to open a new account in branches. It's helping us real-time, helps us with detecting fraud for clients, which is like the #1 client concern right now, and it is the #1 concern for us is helping clients protect themselves from fraud. And so just -- this has been done 300 times around the world. It just hadn't been done in the U.S., this kind of core conversion.

So the other thing it does is, as the narrative has shifted to stable coins and tokenized deposits, our partner, Tata Consulting Services, TCS, out of India, arguably the largest IT consulting firm in the world. They have a stable coin tokenized deposit platform called Quartz. We've now brought Quartz into our environment, and we have it in our innovation lab. And we'll be experimenting it with it this year.

As the rest of the banking industry is figuring out where will this all go, we actually have a platform we can go live with. And so again, it's hard to know where stable coins and tokenized deposits will go. But because it's TCS' application, it integrates into our core system just like that. Nobody else is going to be able to do that. And nobody else has real-time natively and digital currencies, tokenized deposits need real-time to be successful.

You can mimic it, you can spend money, you can have a higher risk environment, technology to support it. But being digitally native is really a strength when you think about moving into digital currencies.

So how do you expect that will help drive more business, whether it's revenue opportunities, whether it's on the expense side, maybe talk about some of the benefits of having that core platform?

Yes. So because it's API-enabled, we are -- our ability to integrate automation and AI into the core to simplify our loan and deposit operations, as an example, is greatly enhanced. So we have a continuous flow of activities that we're automating into this core because it is structured the way it is. And so that's 1 of the biggest. I mentioned fraud is a big benefit, fraud detection. And again, being positioned for stable coins and tokenized deposits. It is a benefit that's hard to quantify right now, but I'd rather have the flexibility than be wondering where we're going to get it from as a $90 billion company.

Because these are investments for the longer term here. So it gives you a lot more flexibility over the next several years. Let's take a step back. Let's -- if you can talk about what the competitive environment is like out there? What is the client sentiment that you're seeing within your footprint? Talk about pricing structure, new entrants. What are you seeing out there?

Right. I think customer sentiment is basically, it's cautious, but it's forward-leaning. You can't help but read everything that's in the news and not be ever so slightly cautious. But I think most small- and medium-sized business owners, they're leaning forward. They know they have to keep going forward. They learned that from the pandemic. They couldn't stop in the middle of the pandemic. They had to keep going and solve for inventory problems and supply chain disruptions and et cetera. So most of our client base, we see them forward-leaning, continuing to invest in growth.

Competition. There's a lot of talk that competition is really peaking, et cetera, I don't know. Having done this for 47 years, it's -- I've never seen a period where it wasn't highly competitive. And so I just think you either get used to dealing with competition or it scares you. And for us, we're just used to it. And whenever things get more competitive, and bankers talk about losing business because of competition, what they don't talk about is the quality of their call programs. Because if you have a strong sales culture and strong call programs, even when it's highly competitive, you'll see more opportunities and your hit rate may be lower, but you generally have more opportunities if you really focus on sales practices.

So I think -- you mentioned new entrants. We've certainly seen that in Texas with Fifth Third acquiring Comerica, Huntington acquiring Cadence and Veritex. Prosperity has made a recent acquisition of Stellar. We've seen it in Colorado, another important market, PNC acquiring FirstBank there.

Those are all great acquiring banks, and they're great bankers, and they'll do a good job. But we live in competitive markets. So having more competitors, it just -- it doesn't change how we react. The opportunity though is no matter how good a job they do with integration, it creates disruption, it puts their bankers in play, and it puts their customers in play. And so we -- not in a predatory way, but in a competitive way, we have playbooks we've run for decades on banks that are being acquired because they go through a volatile time. And they'll be wonderful competitors long term, but over the short and intermediate term, I think it offers opportunity to us, particularly in Texas and Colorado.

And then you focus more on, say, the small and midsized business clients. Is there anything different there in terms of what you're seeing in the competitive environment? Or how does that -- your positioning with these small and midsized businesses drive your or shape your ability to compete?

It's a great question. And I think it's why our core franchise is so valuable because if you were just to close your eyes and say, where do you -- what segments do I really want to compete in? I would pick small business and in the lower end of middle market, which is exactly what we are. And the reason is that they greatly value relationships. Surveys have said this, clients say this. They greatly valued relationships, and they greatly value access to bankers -- local bankers. And that's what we do. That's what we're known for. And so the -- when you think about our major competitors, fintechs on the low end, they have a hard time reaching up into -- they can do consumer great then do micro businesses okay. But when you get up into small businesses and medium-sized businesses, they can't really put a banker with their technology. They can't put a relationship with it. So they have a hard time playing up into our segments. And the global banks are awesome, but they have a hard time playing down into our segments. And so it's a -- I'd rather be doing this than mass consumer, where the fintechs are alive and well and the global banks are alive and well. And I think everybody just eats each other for lunch.

So it's perfect niche for...

It is a perfect niche. And so when you think, again, that 2/3 of our revenue comes from banking, medium-sized businesses and small businesses, and then you think about something like SBA lending, we -- SBA 7(a) lending, we're now ranked 11th in the country in origination of 7(a) loans. We are larger than JPMorgan. We are larger than Wells. We are larger than BofA. That's kind of incredible. When you think about little old Zions at $90 billion, we originate more small business 7(a) loans than they do. And we're not happy with being at 11th. We'd love to continue to aspire to be up in the top 5, ultimately, of SBA loans. JPMorgan, BofA and Wells they're 45, 50x our size. And so when we say arguably pound for pound, we're the largest bank for small businesses in the country. This SBA statistic, our origination of small loans, loans less than $1 million would suggest this as well. And it's a great market to be in, I think.

So let's talk about deposits. When -- how are you thinking about deposit trends more broadly? And as you think about deposit mix and funding cost trends, how are you thinking about that as we move through the year?

Yes. So everybody that follows our business, you especially know that for decades, we've had top quartile performance in total cost of deposits, lowest cost of deposit, lowest cost of overall funding and the highest mix of noninterest-bearing deposits to total deposits. Those are 3 really important value drivers. And those are as much intact today as they ever have been. This is why the deposit franchise of our business is so important.

In terms of current trends, [ noninterest-bearing ] deposits have been coming down since rates went up in 2022. Ours came down also. But in '25, they stabilized. And we're actually now seeing growth. First quarter '26 versus first quarter of '25, noninterest-bearing deposits are up about $1 billion on average. Period end to period end, it's more than that, but I'm kind of deal with averages guy. And on average, if you adjust for the Coachella of acquisition we made in the first quarter of '25, they're up about $1 billion and on a base of 25 day in noninterest-bearing deposits, it's really nice growth. And it's just coming from our core small business franchise.

The other thing we've been focused on for the last 9 months, which I think is really important, is that we're turning our focus a little more to lowering our overall cost of funding, not just total cost of deposits. And what that means is that if you go back to June 30 of last year, we had about $7 billion in brokered deposits and net overnight borrowings. So overnight borrowings, less short-term investments, $7 billion. It's down to $2.4 billion in March.

The way we're doing that is we're going to our larger clients, bringing in larger wholesale deposits that are priced 30 to 40 basis points accretive to broker deposits and overnight borrowings. It really is -- it's kind of a declaration that we'd rather pay our clients higher rates than broker deposits and overnight borrowings. And it's -- so it's basically creating earnings from higher-priced deposits that are relationship oriented. And when we do that, other business comes with it. And when we bring in new prospects with it, other business comes with it.

So we're using it more as a tool than ever before, and you can see a real material difference.

So a lot of the other initiatives that you've also introduced are the Gold Account and the Business Beyond Campaign. Can you talk about the objectives behind those programs and how they're contributing to the overall deposit strategy?

Right. The this Gold Account for consumers is -- it's not rocket science. It's just -- it's a bundled account of products for consumers with terrific marketing associated with it and it's been very popular with clients. We started -- really launched it in the fall of last year. And our goal is to originate about 20,000 of these accounts over a 12-month period. And we're not quite at that rate yet, but we're about 85%, 80%, 85% of that rate, which I think is actually pretty good right out of the gate. And the balances associated with these Gold Accounts is better -- significantly better than what we've traditionally oriented in terms of consumer accounts.

The business -- corollary of this is called Business Beyond and it's a bundled business account, and we literally just launched it in May. And so it's kind of too early to really quote any numbers other than to just say we're pleased with how it's going. And they -- they're just both very attractive offerings. There's nothing unique about having a bundled account, but in our environment where we've not offered anything like this, we think it's going to be very retentive and it's going to speak to our small business owners and affluent clients in a way that we have not been as aggressive. And then if you put the advertising against it, which we have, we're just telling our story better. So they're going to be exciting, I think.

Is this bringing in new clients? Is it deepening relationships with existing clients?

We -- unfortunately, the answer is both. And we haven't quoted any of the stats related to that. So I think you'll hear us talk about that more in the second and third quarter, but we haven't quoted any statistics about new versus existing or conversions, et cetera, other than to say that we are pleased with it. And so I think that's kind of the situation on.

Got it. Okay. So stay tuned.

Yes.

On the lending side, let's move to that side of the balance sheet, how are you thinking about loan growth as we move through this year? And as we talk about potentially a higher for longer rate environment this year, forward curve is pricing in a rate hike maybe towards the end of the year. What are you seeing in terms of pipeline trends and line utilization on the lending side?

Sure. Higher for longer rates and a possible short-term rate increase, where that just wasn't even on the radar a year ago. And so I -- from a business sentiment standpoint and a pipeline standpoint, I don't think higher tenure rates and slightly higher short-term rates is going to impact customer demand. I mean, really, if you go back to 1970 -- go from 1970 to 2008, the tenure for almost that entire period was over 5%. So the U.S. business economy can work great with 5% or less that range of tenure rates.

The reason people complain about it now is we had about 10, 12 years of 0 interest rate. And so it's kind of a wine -- it's a little bit of a wine without distinction. I think most business owners are like, yes, I'd rather have 0, but I can operate with 5%. They absolutely can. GDP can grow nicely. So I don't think it's going to be a deterrent. And if short rates go up a quarter, I don't think that's going to be a big deterrent either. So I think neither will really impact loan growth, except for maybe residential mortgages. So the tenure will sort of mute short-term residential mortgages.

Loan growth in general for us, we've always sort of guided to mid-single-digit loan growth, and we're not performing to that level right now. So we're not meeting our expectations right now about loan growth. We'd like to see instead of the 2.5%, 3% range closer to 5%. And I think that can happen.

The biggest message that I have for investors and have been -- we've been saying this for some time, is you really need to look at what HA data really means. You've got to unpack the components of it. And when you do, you need to make sure you understand what you're investing in. I know that sounds kind of arrogant or maybe it's not arrogant, but just a little critical of folks that just think, okay, well, HA data is growing at 7% or 6% or whatever and we're growing less than that. You got to unpack MDFI, look at MDFI. Our exposure to MDFI is among the lowest in the industry of major banks. It's about 3%. We've had 0 growth in 5 years of $2 billion of MDFI, almost 0 growth in 5 years. Our peers have been gulping down in MDFI. The numbers are all public. We actually have been in our presentation, you show them. And look at CRE, commercial real estate. For 15 years, our commercial real estate growth by design has been half of what our peer group medium has been. It's 25% of the fastest-growing peers in CRE, 25%. Our peers are gulping down CRE growth, okay? They're easy loans to make. It's much harder to make a C&I loan.

And so I just think -- and what do people worry about when you see a recession on the horizon? They worry about unsecured lending. We're not a big unsecured lender. It's about $600 million for us. We've never been a big unsecured lender, personal unsecured. So I think when investors look at our results versus HA, they need to really be careful to think, well, what do I want? And if I want a lot of MDFI and I want a lot of CRE and I want a lot of unsecured, well go invest in our peers. If you want really high-quality commercial, small business loan growth with a credit track record that is top quartile for a long time, then that's who we are.

Yes. I was just going to say that as we look back as well, there has been that credit outperformance at Zion relative to PS.

For over a decade, 15 years. Our net charge-off ratio generally is kind of around 10 basis points, plus or minus, and our peers are in the 20 to 30 basis points. Peer median is in the 23. That's a huge difference. And someone might say, well, you're not taking enough risk. I don't know. We take the risk we want in the segments we want, and we want to be really disciplined, and we think investors should value that long term, particularly as they see these oversized loan growth numbers in categories that can be pretty high risk.

Got it. Okay. Let's talk a little bit about revenues and -- how are you thinking about the key drivers of net interest income growth from here? And what are the most important factors that could drive performance over the next year or so relative to expectations?

Sure. We -- higher rates for longer are definitely a good thing for us. Short-term rates staying where they are rising is it -- I think the interest rate environment is very constructive for us. We've -- the fact that our demand deposit base is stable and growing is a large contributor to net interest margin and earnings in general. But in our first quarter call, we did something we haven't done before. We basically said net interest income would grow 7% to 8%, 1Q '27 over 1Q '26. We've never quoted a number like that. We've used elliptical...

Qualitative, yes.

The qualitative terms. And that's without higher rates. It's without higher tenure year or higher for longer. It's without unusual balance sheet remixing. It's just what should happen naturally as we go through this period.

And so if you think about 7% to 8% net interest income growth and you think about our fee income growth right now, which is a 6% to 7% to 8% range, total revenue looks like 7% to 8% revenue growth. And pick any expense number you want, you can see this case for continued positive operating leverage at levels that are probably higher than what the street has built in.

So I do want to dig in on the operating leverage side, but maybe to just finish up that conversation on NII. So as we think about that 7% to 8% growth you're out from here, what are the most important drivers behind that?

Right. So the -- again, higher for longer helps, demand deposits help, the fact that they're stable to growing. And then this attraction of wholesale deposits at rates that are accretive to overnight cost of funding is beneficial. We have -- securities portfolio runs off about $600 million a quarter, we're reinvesting half of that. So there's about a 120 basis point plus or minus pick up on that. We may decide to reinvest all of the $600 million each quarter. We still have some benefit, a tailwind from canceled swaps that have been well documented. And so those would be some of the major contributors to it.

Got it. So then you mentioned the operating leverage. I think you generated about 300-plus basis points of operating leverage in 2025. And then you've guided to another 100 to 150 basis points in 2026. You ran through some of the drivers in the revenue side. Can you run through some of the drivers for the overall operating leverage, maybe based on the expense side as well?

Sure. On the expense side, we generally have guided to kind of less than mid-single-digit growth. And our expenses through the first quarter were growing at about 4.5%, 5%. And that's largely driven by investments we're making in these growth strategies. So new products, higher advertising, the investments we've been making in capital markets, continuing to build that out. Our capital markets revenues grew 50% from 2023 to 2025. 2-year period, up 50%. We think we've got a lot of runway on that. Mike McDonnell, who runs our Capital Markets business has brought in a lot of great colleagues. We've invested a lot in our platforms, our technology risk. And we think there's -- we're going to keep spending money there. And on other areas like wealth, we just hired a fellow named Mike Selfridge, who was the Chief Banking Officer at First Republic for many years, and he was very much a part of what First Republic built in terms of private banking and wealth management. A terrific hire for us, and he'll be running our wealth business. And so we'll keep investing there with people principally.

Got it. Okay. So as I think about NII, there's benefits from solid loan growth, nice deposit growth, a little bit of NIM expansion there as well. And then as we think about the expense side well -- and actually on the NII side, there's also the benefit of the terminated swaps as well.

Right.

Got it. And then the expense benefit as well. So you've guided to about 100 to 150 basis points of operating leverage this year and fairly confident that you can get there.

Yes.

All right. Perfect. Since we -- maybe let's talk about the capital side. You recently announced a $300 million buyback target for 2026. What are the drivers that went into that decision? I know you had originally said about $75 million for the first quarter, which you executed on and then you came out with a $300 million target for the whole year, what are the drivers that went into that decision? And how do you assess your capital priorities from here?

We really want to set the signal that we're back. We're reentering the buyback process. And so 1 year as opposed to quarterly, just we hoped would send that signal. It doesn't mean we're going to do anything after that. Our Board will decide. But we -- you can look at our CET1, which is really high relative to peers. What people have been focused on is our CET1 ratio less AOCI, okay? We're currently at about 8.8% in that regard. So it's continued to heal really nicely. And if you just do the math of AOCI accretion and picking the earnings number you want, our CET1 AOCI adjusted will be over 11% in June of 2028, 2 years from now.

And that's from earnings accretion?

That's from AOCI accretion back into earnings and from basic earnings during that 2-year period.

At that point, we're no longer the bank that had a big AOCI hole to fill, okay? That will have completely healed. And our peers are sitting -- they're basically stating they want their CET1 AOCI adjusted in kind of a 9.5%, 10% range, mid 9s to low 10s. I don't think we're going to get to 11-plus percent, but that's the math. It just says we should be able to have capital available for acquisitions or return capital, because there wouldn't be any reason for us to hold that much. It also doesn't include the positive impact of the new Basel proposal, which favors traditional banks. And it if you do the math on that, which will become more evident, it definitely benefits our CET1 anywhere from 50 to maybe 90 basis points. So that benefited and isn't included in that calculation either.

So I think -- I don't think investors have been worried about our capital, AOCI adjusted. But that story is like going into the rearview mirror fast and it gives us more freedom from a capital return standpoint.

And especially when you think about the solid like 4-ish percent loan growth that you typically run at, right? Like that's what -- that would be the biggest driver of what's consuming capital from a growth perspective. And then you clearly have more than that, that you were creating with earnings accretion and AOCI on back. That's what drives the buyback decision. And I guess you're not -- what you're saying right now is $300 million for 2026. But beyond that...

Our Board will decide at the end of this year. And then we'll probably go a year at a time, so that people know we are conservative about this. And -- but I think the odds are good that we'll continue this process into next year, given that math. But again, it's a board decision, and I would never front-run our board.

Perfect. All right. So then, Scott, maybe in closing, as you think about the next several years for Zions, what you believe is most underappreciated by investors? I think we've gone through some of that already, but maybe in a nutshell, what would you ask investors focus on?

Sure. I think it very simply -- and I -- we're undervalued on a PE basis and a price to tangible book, and we have been for many years. I don't know if it's because we look too conservative or -- I don't know exactly the source. But what I do know is most banks have nothing about them that is nationally distinctive. We have many things that are nationally distinctive about us. The fact our model is truly different. And I'll -- we'll play with a local model and we'll go to the market with that, and we will not change that, okay? All the other big banks have gone away from that years ago because it's just too difficult. It's easier to run a silo structure than it is a geographic or locally oriented structure. And our competitors say they're local and God bless them for doing that. I respect them, but I don't see it in the market and I don't think others do either.

So it's nationally distinctive how we're organized. It's nationally distinctive that 65% to 70% of our revenue comes from banking small- to medium-sized businesses. It's nationally distinctive that how those customers feel about us is so much stronger than how they feel about our global bank competitors that control 60% of the market, plus or minus. It's nationally distinctive the deposit franchise that, that orientation manifest. And it's nationally distinctive when you think about our technology platform, how could a $90 billion bank have the technology platform that we have? And yet, it's an advantage, and it's real and people know it. And nobody has ever come out and said, "Everything Zions saying about their core is just not true." They know it's true. So these are elements of national distinction. And when you combine that with a capital story that is improving, has improved significantly and will totally not be an issue 2 years from now, it's really not an issue today. And a story about positive operating leverage even if modest, I think just gives us a value proposition that should be very attractive to investors.

All right. Perfect. With that, we're out of time. Scott, thanks so much for joining us.

Thanks, Manan. And good to be with you. .

Thank you for joining the Zions Bancorporation Corporation, National Association's 2026 Annual Meeting of Shareholders. Rules of conduct for the meeting have been distributed. The meeting will please come to order.

I'm Harris Simmons, I'm the Chairman and Chief Executive Officer of the bank. Also participating is Rena Miller, General Counsel of the bank and Secretary of the meeting. Ms. Miller, do you have affidavits of the Notice of Meeting and mailing of the notices?

Yes, I do.

The notice and affidavits will be filed with the minutes. The meeting has been legally called and a quorum is present. In addition to myself, our director nominees who are here today are Maria Contreras-Sweet, Gary Crittenden, Suren Gupta, Claire Huang, Vivian Lee, Scott McLean, Edward Murphy, Stephen Quinn and Barbara Yastine. Director, Aaron Skonnard is also participating remotely. William Wilcox and Ryan Silvester have been appointed inspectors of election, neither is a nominee for the office of director.

The first item of business is the election of directors for a term of 1 year and shareholder, [ Sam Torggeson ] will present each of the resolutions. [ Mr. Torggeson ], would you please state your name and the fact of your stock ownership for the record?

Mr. Chairman, my name is [ Sam Torggeson ]. I'm a shareholder of record. I move the following resolution: Resolve that each of the following persons be nominated for director of the bank for a term of 1 year. Maria Contreras-Sweet, Gary L. Crittenden, Suren K. Gupta, Claire A. Huang, Vivian S. Lee, Scott J. McLean, Edward J. Murphy -- Edward F. Murphy, excuse me, Stephen D. Quinn, Harris H. Simmons, Aaron B. Skonnard and Barbara A. Yastine.

I second the motion.

All right. Got a second. The Board recommends voting for these nominees. We are not aware of any shareholders who have complied with the bank's procedures for making additional nominations. Accordingly, the nominations are closed. The proposal is now open for discussion. Is there any discussion?

Shareholders who have not yet voted on the nominees may do so by marking an appropriate entry after item #1 on their ballot. Proposal #2 is to ratify the appointment of Ernst & Young LLP as the bank's independent auditor. Shareholder [ Shelly Johnson ] will present this resolution. [ Ms. Johnson ], would you please state your name and the fact of your stock ownership for the record?

Mr. Chairman, my name is [ Shelley Johnson ]. I am a shareholder of record. I move the following resolution: Resolve to ratify the appointment of Ernst & Young LLP as the bank's independent auditors for fiscal 2026.

I second the motion.

The Board recommends a vote for this proposal. The proposal is now open for discussion. Any discussion?

There being no further discussion, shareholders who have not yet voted or who wish to change their vote on this proposal may do so by marking an appropriate entry after item #2 on your ballot. The next item on the agenda is a vote on a nonbinding advisory basis to approve the 2025 compensation paid to the bank's executive officers named in the proxy statement. Shareholder, [ Arthur Newell ], will present this resolution.

Mr. Chairman, my name is [ Arthur Newell ]. I'm a shareholder of record. I move the following resolution: Resolve that the shareholders hereby approve, on a nonbinding basis, the 2025 compensation of the named executive officers as disclosed in the proxy statement pursuant to the compensation disclosure rules of the SEC, including the compensation discussion and analysis, compensation tables and related material.

I second the motion.

Thank you very much. The Board recommends a vote for this proposal. The proposal is now open for discussion. Is there any discussion?

There being no further discussion, shareholders who have not yet voted or who wish to change their vote on this proposal may do so by marking an appropriate entry after item #3 on their electronic ballot. The last item is a shareholder proposal submitted by the Heritage Foundation requesting a report on risks of misalignment between company policies and our customer base. Is there a representative here from the Heritage Foundation to present this resolution?

Okay. It's included in the proxy materials. There being no representative in attendance to present the proposal, we will submit it for a vote without further discussion. The Board recommends a vote against this proposal. The bank's commitment to serving its customers and communities and its adherence to its code of conduct, guiding principles, policies and banking regulations provide ample support for the Board's recommendation of a vote against the proposal. Shareholders who have not yet voted or wish to change their vote on this proposal may do so by marking an appropriate entry after item #4 on their ballot.

I now declare the polls closed. With that, just I would like to spend just a few minutes giving a brief update on the company and its results for this past year and I'll have Chris, if you would advance the slides to the next slide. We had a good year this past year. I want to go on there. The company is -- we've -- after a decade of a lot of internal work replacing systems and building a risk management framework that is consistent with some of the larger banks in the nation, is very much in a growth mode. We've introduced new products. Many of you who are in our markets will see the marketing we're doing for a new Gold Account, which is a really fabulous product for kind of a mass affluent market.

We've introduced a new suite of products for small businesses that are really feature-rich and are off to a really good start, started rolling this out just 1 month ago. New products such as Wealth Select, which is an investment product for individual consumers that have between about $50,000 and $0.5 million in assets to invest and it's meeting with good success. We're expanding our 7(a) and small business lending efforts and really pleased to report that we're now the 11th largest SBA 7(a) lender in the nation and have surpassed some of the very largest banks in the country on that measure. We've seen good growth in our capital markets business. And so a lot of good things are happening.

If you go to the next slide, Chris, our net income this past year increased 15% to $899 million. Earnings per share increased 21% to $6.01 per share. Our adjusted pre-provision net revenue, which is a measure of our operating income before credit costs, was up 12% to $1.266 billion. Our return on assets was 1%, continued improvement on that measure. Our efficiency ratio was 62.6%, measuring how much it costs us to generate $1 of revenue. And our net charge-offs have been rising. They are 15 basis points or hundreds of percentage points this past year, largely due to a single larger loss. But even at that level, much better than the average around the industry and credit has been a strength for us over the last decade.

The next -- this next slide shows our earnings per share growth over the last 5 years. It took a dip back in 2023 because of an FDIC special assessment assessed in conjunction with the Silicon Valley Bank and other bank failures 3 years ago. But you can see that over the last 5 years, our growth places us near the top quartile in earnings growth. And on the right side, you'll see our risk-adjusted return on tangible common equity and it's running at about 15%, which has been competitive. The next slide I'll show you here is -- shows our noninterest-bearing deposits as a percentage of our total deposits. One of the measures of kind of the strength and health of a bank's deposit base is how much it has in the way of noninterest-bearing deposits. And you can see that, at close to 35%, we've consistently been toward best-in-class in the industry. And that leads in turn to a total cost of deposits that is also among the best in the industry, a little better than the top quartile.

And the next slide here is showing net loan losses. As noted, this last year, they were a little bit elevated from where they've been over the last 2 or 3 years. I think notably, if you look at the -- on the right-hand side of this chart, the average charge-offs as a percentage of total loans over the last decade, it's been 11 basis points. And within our peer group, similarly sized banks, we're toward the very top of the group in terms of credit quality as measured by realized losses. There's been concern about commercial real estate holdings by banks. And the next slide here shows our really disciplined commercial real estate loan growth over the last decade. You can see that the -- toward the top end of the growth among peers that you've had growth that's about -- that's about 3.5x where they were a decade ago.

Ours has risen very, very gradually. We try to keep it rising a little slower than the rest of the balance sheet. As a result, our commercial real estate exposure has gradually come down and it's created a discipline that's resulted in very, very low losses. You should -- go to the next slide there. The -- I think we've flipped over -- anyway, the -- our commercial real estate loan losses have been less than $5 million in a $13 billion portfolio over the over the past 5 years. So it's really an extraordinary performance in a portfolio where there's been some concern in recent years and that's been a nonevent for us.

This slide is showing our -- just our capital and allowance for credit losses. Our common equity Tier 1 capital ratio, which is probably the most prominent ratio looked at by regulators is 11.5% and a little better than the peer median. It's been strengthening. And when combined with our strong loss reserve, you can see the charge-offs, actually loan losses relative to capital and our allowance has remained among the best in the pack on the right-hand side there.

Next slide. And finally, I just want to express my appreciation to the over 9,000 bankers that -- it's our privilege to work with as a management team here at Zions. They do extraordinary work. They're recognized in virtually every market we're in and nationally by groups such as Coalition Greenwich, by local publications in each of our markets as being really an exceptional bank, best bank. You can see some of these accolades. Our people do great work. They provide a great experience to customers and it's producing great results.

With that, I'll open the meeting up to questions. Are there any questions from shareholders that we can address?

Okay. If not, we will ask -- I'll ask the Secretary to give the results of voting as contained in the report of the inspectors of election. Ms. Miller?

Thank you, Harris. Each of the nominees for director has received over 95% of votes cast and has been elected a director for a 1-year term. Proposal 2, the resolution to ratify Ernst & Young has been approved by approximately 96% of the votes cast and has passed. Proposal 3, the resolution to approve, on a nonbinding basis, the compensation paid to the bank's executive officers, has received approximately 95% of the votes cast and has been approved. Proposal 4, the shareholder resolution requesting a report on misalignment between company policies and customer base has received approximately 2.2% of the votes cast and has failed.

Okay. Thank you very much. There being no further business, the annual meeting is now concluded and a motion for adjournment is in order.

I move that the meeting be adjourned.

Okay. It's been moved and seconded. The meeting is adjourned. Thank you very much for attending.

Greetings, and welcome to Zions Bancorp's first quarter earnings conference call. [Operator Instructions]. Please note that this conference is being recorded.

It is now my pleasure to turn the conference over to Andrea Christoffersen. Thank you. You may begin.

Thank you, Julian, and good evening, everyone. Welcome to our conference call to discuss Zions Bancorporation's First Quarter 2026 Results. My name is Andrea Christoffersen, Director of Investor Relations.

Before we begin, I would like to remind you that during this call, we will make forward-looking statements. Actual results may differ materially. We encourage you to review the forward-looking statements and non-GAAP disclosures in our press release and on Slide 2 of today's presentation, which apply equally to statements made during this call. A copy of the earnings release and presentation are available at zionsbancorporation.com.

For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Chief Financial Officer, Ryan Richards, will review our financial results and outlook. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Steward, Chief Credit Officer; and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for 1 hour.

I will now turn the time over to Harris.

Thanks very much, Andrea, and good evening, everyone. We are reasonably pleased with our performance and financial results for the first quarter, which reflect meaningful year-over-year improvement and continued progress against our long-term strategic priorities.

Our Capital Markets division continues to be an important driver of fee income growth. Since launching the business in 2020, we have invested heavily in talent, technology and product capabilities, expanding our presence -- investment banking, sales and trading and real estate capital markets.

In late March, we announced an agreement with Basis Investment Group to acquire their Fannie and Freddie lending programs. related mortgage servicing rights and an experienced team supporting those platforms. Subject to regulatory and customary closing approvals, we expect the transaction will meaningfully enhance our ability to serve commercial real estate clients across the Western United States and beyond and to further strengthen our capital markets franchise.

We continue to invest in our consumer and small business franchises. Following the launch of our new gold accounts consumer deposit products in the second half of 2025. We recently introduced its companion offering for small business customers, branded as beyond the business. We began piloting the product in Colorado and Arizona late in the quarter, and it's expected to roll out more broadly across our affiliate banks later this quarter. This tiered checking solution is designed to support clients as they grow from basic banking needs to more complex cash flow and money movement capabilities. Our focus on small business is also reflected in continued momentum in SBA lending, where we now rank 11th nationally in SBA 7(a) loan approvals during the first half of the SBA's fiscal year.

Shifting now to the financial results for the quarter.

Slide 3 presents certain first quarter results versus the prior quarter and prior year. Third quarter results reflected typical seasonal expense patterns, while revenue and profitability improved meaningfully relative to the prior year period. Net earnings were $232 million or $1.56 per diluted share, up 37% from a year ago, driven by revenue growth, a lower provision for credit losses and a lower effective tax rate.

Compared to the fourth quarter of 2025, earnings declined 11%, primarily reflecting lower revenue, including the impact of 2 fewer days in the period and significantly lower securities gains as well as seasonal compensation expenses. The net interest margin was 3.27%, down 4 basis points from the prior quarter, reflecting lower earned asset yields and a decline and average demand deposits partially offset by improved funding costs.

Average loans grew 2.4% on an annualized basis, led by commercial lending. While average customer deposits showed a modest seasonal decline, period end customer deposits grew $1.3 billion or 1.8% from year-end. Credit losses were very modest 3 basis points annualized of average loans.

On Slide 4, diluted earnings per share were $1.56, down from $1.76 in the prior quarter and up from $1.13 a year ago. As a reminder, the year-ago quarter included an $0.11 per share headwind related to the revaluation of deferred tax assets due to newly enacted state tax legislation. There were no notable items in the first quarter with an impact greater than $0.05 per share.

As shown on Slide 5, adjusted pre-provision net revenue was $301 million, declined from the prior quarter, reflecting some of the items noted earlier, including a slightly lower day count adjusted tax equivalent net interest income. Pre-provision net revenue increased 13% versus the year ago quarter on improved revenue and positive operating leverage.

With that overview, I'll turn the call over to our Chief Financial Officer, Ryan Richards, to walk through the quarter in more detail and to walk through our outlook. Ryan?

Thank you, Harris, and good evening, everyone. Beginning on Slide 6, you can see the 5-quarter trend for net interest income and net interest margin. Taxable equivalent net interest income was $662 million, down $21 million or 3% from the prior quarter and of $38 million or 6% in the year ago quarter. Earning asset yields fell faster than funding costs for the quarter, most notably in January, and loan repricing reflected the impact of the December rate cuts. Term deposit costs also go lower, but with a lag over the quarter. Net interest margin was 3.27%, down 4 basis points linked quarter and up 17 basis points year-over-year.

Slide 7 provides additional detail on the drivers of net interest margin. The linked quarter walks reflect the lower asset yields mentioned previously as well as a lower contribution from average demand deposit balances. These factors were partially offset by improved deposit costs. Year-over-year, the improvement in margin primarily reflects deposit and borrowing repricing and our continued focus on optimizing the balance sheet.

For the first quarter of 2027, our outlook for net interest income is moderately increasing given the uncertain path of benchmark rates. The forward curve as of March 31 assumed no rate changes over the next 12 months. As that plays out, we estimate net interest income growth of about 7% to 8%, which would exceed our guide.

Moving to noninterest income on Slide 8. Customer related noninterest income was $172 million compared to $177 million in the prior quarter and $158 million a year ago. Excluding the credit valuation adjustment, adjusted customer-related noninterest income was $174 million compared with $175 million in the prior quarter and up $16 million or 10% from the year ago quarter.

We are particularly pleased with the broad-based growth achieved during the quarter relative to the last year, which reflects higher residential mortgage loan sales activity and growth in retail and business banking, commercial account and wealth management fees. We continue to see attractive opportunity in capital markets and have strong pipelines going into the second quarter.

For the first quarter of 2027, our outlook for adjusted customer-related fee income is moderately increasing versus the first quarter 2026 results of $174 million. With broad-based growth and capital markets continue to contribute in an outsized way. We currently expect results towards the top end of that range.

Turning to Slide 9. Adjusted noninterest expense was $558 million. Expenses increased versus the prior quarter, driven primarily by seasonal compensation and were higher year-over-year, reflecting increased marketing, technology costs, professional and outsourced services, and higher incentive compensation. We will continue to manage expenses prudently, while investing to support growth.

Our first quarter 2027 outlook for adjusted noninterest expense is moderately increasing versus the first quarter of 2026. Based on first quarter performance and full year expectations, we continue to expect positive operating leverage for full year 2026 in the range of 100 to 150 basis points.

Slide 10 presents trends in average loans and deposits. Average loans grew 2.4% annualized during the quarter. primarily within the commercial and industrial portfolio and increased 2.5% year-over-year. Loan yields declined sequentially as benchmark rate cuts in the latter part of 2025 were reflected in variable rate repricing. Average deposits were modestly lower than the prior quarter by $540 million. Approximately 1/2 of the decline was due to average broker deposits while the remainder can be attributed to seasonal runoff across business operating accounts early in the quarter. Importantly, period-end customer deposits increased by $1.3 billion or 1.8% from year-end. The cost of total deposits declined sequentially, benefiting from both repricing and a more favorable mix within interest-bearing deposits.

Slide 11 presents the 5-quarter trend of our average and ending funding sources. Our total funding costs declined 8 basis points linked quarter to 1.66%, largely as a result of the aforementioned deposit repricing. Period end customer deposits grew $1.3 billion and short-term borrowings declined significantly as we continue to replace higher cost wholesale funding with customer positive growth and series cash flows while also remixing into senior debt.

Turning to Slide 12. The investment securities portfolio continues to serve as an important source of on-balance sheet liquidity and a tool to balance interest rate risk through deep access to the repo markets. During the quarter, principal and prepayment-related cash flows from investment securities of $493 million were partially offset by reinvestment of $299 million. The continued paydown of ore yielding mortgage-backed securities supports earning asset remix or reduction in wholesale funds. The estimated price sensitivity of the portfolio, inclusive of hedging activity was 3.7 years.

Credit quality remained strong, as shown on Slide 13. Net charge-offs were 3 basis points annualized of average loans and the nonperforming assets ratio declined to 48 basis points. Classified and criticized balances also declined during the quarter. The allowance for credit losses ended the quarter at 1.16% and remains well positioned relative to our risk profile with a 239% coverage of nonaccrual loans.

Slide 14 provides an overview of our $13.7 billion commercial real estate portfolio, which represents approximately 22% of total loans. The portfolio remains granular and well diversified by property type and geography with conservative loan-to-value characteristics. Credit metrics remain favorable, including low levels of nonaccruals and delinquencies.

Our capital position remains strong, as shown on Slide 15. The Common Equity Tier 1 ratio was 11.5%, and flat during the quarter as earnings growth was somewhat offset by the $77 million in common shares repurchased and dividends paid in addition to the growth in risk-weighted assets. We continue to expect net capital generation to earnings and continued improvement in AOCI. Tangible book value per share increased 19% versus the prior year, reflecting earnings generation and continued balance sheet normalization.

Slide 16 summarizes the outlook we've discussed across loans, net interest income, fee income and expenses. This outlook reflects our best estimate based on current information and is subject to the risks and uncertainties discussed in our forward-looking statements.

This concludes our prepared remarks. As we move to the question-and-answer section of the call, we request that you limit your questions to 1 primary and 1 follow-up question to enable other participants to ask their questions. Julian, please open the line for questions.

[Operator Instructions]. And our first question comes from the line of John Pancari from Evercore ISI.

Just on the margin side, I know you -- your line compressed about 14 basis points linked quarter. I think you had mentioned that it was largely a function of the rate cuts and variable rate repricing. I guess that linked quarter change, was that all the benchmark rate change? Any other impact to loan yields in the quarter? And maybe if you can give us your new loan yields, just to give us an idea where originations are coming on the books.

Thanks, John. Really appreciate that. Yes. So listen, I think you picked up on the main thrust of it. So we would have had some benchmark repricing and expectation of the rate cut that came in the middle of December, and some of that trailed thereafter. And where we remain just skewing a little bit more on the asset-sensitive side that, that was the biggest contributor.

In terms of the repricing crisis, of course, we've got the right material our appendix that I know you're familiar with, but I think maybe the question that you're getting at on front book versus back book for the loan portfolio is really the most meaningful part of that as we sort of think of trajectory moving forward is for those fixed rate loan portfolios or things that have yet to reprice through. And there, we're seeing a 72 basis point spread on the front load vis-a-vis the backlog.

Okay. All right. And then I guess, in terms of your operating leverage expectation of 100 to 150 basis points, that is -- that's for the year. And so what rate assumption does that imply? I know you mentioned if there's no rate changes consistent with the forward curve, your next 12-month NII outlook come in at 7% to 8% above the range. Does that 100 to 150 basis points expectation imply the forward curve? And maybe if you can give us a little bit more detail in terms of that NII expectation.

Yes. Thank you for that, John. Listen, we -- in the past, we've brought a view of kind of late and emergent. It's less interesting this quarter since we -- there's not much to talk about in the forward curve in terms of rate changes that were applied at least as of the quarter end. So those are kind of right on top of each other. So we were able to firm up our guide for the full year. As you sort of think about the trajectory of that, we normally guide on a 1-year quarter basis. We believe you'll see there is a much more powerful positive operating leverage, probably not unlike what we've seen this quarter relative to last quarter, where and Harris' quoted in his remarks, you will see positive operating leverage of 270 basis points. So we think that as our repricing plays through from the investment securities into loans, as we have less of those headwinds associated with our terminated swaps. Some of the other things play through, we do see really good prospects for 1 year fourth quarter.

Later when we were with you, we were anticipating as part of our sensitivity in our guidance that we could have had great cuts. I think we were anticipating in June and September. And based upon the forward curve, those are now off the table. So that having no cuts is admitted into our full year positive operating leverage guide.

And our next question comes from the line of Manan Gosalia with Morgan Stanley.

On the deposit cost side, deposit costs I guess they came down quarter-on-quarter, but they were pretty flat relative to the spot rate as of December 31. And it looks like the spot rate as of March 31 has moved lower again. So can you just help us connect the dots on the trajectory there? Maybe give us an update on deposit pricing and competition and also what you're expecting in terms of CD roles coming up?

And I'll try to unpack that in places and invite my colleagues to jump in as well. Listen, I think -- and I've seen the questions coming in other calls in this earnings cycle about where deposit costs go if rates kind of stay static here for the remainder of the year. There's still some trailing activities, some repricing down on term deposits, thinking about customer time deposits that yet to play through. So that would definitely be an element of this. You will have heard us talking increasingly quarter-over-quarter. And when you catch us at conferences about some of our strategic initiatives. We think that those are going to be really valuable to us and driving deposit balances as well.

So you heard Harris talk about in his prepared remarks, the gold account, the business beyond, there's a lot that we've talked about with SBA lending that brings deposits with us. We think that's useful. There's some other work we've been doing around wholesale deposits with customers relative to other sources of wholesale funding that we think can defray deposit costs moving forward.

So while we don't have explicit deposit guidance, then we don't explicitly guide towards deposit costs. All of that would be embedded into our , I believe, to be very constructive for your NII guidance. I think there's a deposit proposition comment on that to.

Yes. Manan, this is Scott McLean. And I would just add to that, that this deposit campaign we've had going on to bring some of our off-balance sheet deposits back on balance sheet. We've got anywhere from $7 billion to $12 billion in off-balance sheet costs and it's really just a client decision as to where they want to sit. But we've been successful at bringing more of those back on balance sheet at rates that are attractive, they're accretive versus brokered deposits and overnight cost of borrowings. At various points of time, we focused on that. And so we've been very successful at bringing those deposits back on.

And all of it is I would say 25 to 30, 35 basis points accretive to brokered deposits. You'll see us continue to do that. And in terms of deposit costs in general, it's I'm not sure if everything time it wasn't real competitive other than maybe 2020 and 2021. But we -- all of these -- almost all of this, our relationship deposits that we're bringing on. And it's not just coming from off balance sheet. Quite a bit is coming from new clients or existing clients that we didn't have their deposits to begin with.

Got it. I appreciate the color there. And then maybe on the buyback side, buybacks were up this quarter, but the CET1 ratio is still relatively flat as you accrete more capital through earnings. So maybe if you can talk about the level of buybacks that you think you can do for the rest of the year, especially as you narrow the gap with peers in that CET1 including AOCI ratio?

Manan, thank you. I think you said that very well because our nominal CET1 ratio has been kind of hanging in there and as we said before, we see the path for AOCI coming in is becoming unreasonably predictably over time and something that's really contributed to our kind of outperformance on tangible book value add year-over-year. So I think those all things are encouraging. We've also taken note of the Basel III end game proposal. As others have noted in this earnings cycle. There are some good things in that proposal for us and others, in terms of what it would imply about RWA moving forward.

So I never like to get in front of our Board, Head of our Board. It's usually a pretty poor practice for management. But it looks like it. We could be in a position to talk about share repurchases moving forward responsibly as our Board will allow and as regulators sign off. As Harris mentioned during his remarks, we're really, really excited about the acquisition of the multifamily agency program that's still pending, it's pending regulatory approvals. Should that see all the way through as we expect, not knowing the time line for all that, not trying to predict any of that. That would be a source of consuming capital.

But there's some other things that are happening in the environment, including things like these exchanges that could be considered by our team as well. So that's a long-winded way of saying, I think the prospect of share repurchases are still on the table, subject to Board approval.

And our next question comes from the line of Dave Rochester from Cantor Fitzgerald.

On the guidance, I know we shifted back to the 1 year ahead quarter-over-quarter look. I was curious how you feel about the annual guide for '26 you gave last time. It seems like given everything that you're saying together, you would still feel pretty good about that and maybe with a little bit of upside. Is that fair?

Yes. Dave, I think it's a reasonable observation, particularly given my earlier comments here about having those 2 rate cuts off the table that we would have been talking about last quarter. So definitely -- I mean, we don't make a practice of doing this all the way through the year, but firming up that the things that we talked about last quarter were better.

Yes. Yes. Sounds good. Maybe just as a follow-up on the loan outlook. I was wondering how things were shaping up in 2Q at this point. How does the pipeline look overall heading into the quarter versus where you started beginning of the last quarter? And what are you seeing on the C&I front that has you excited? And maybe if you could talk about a little bit of a pullback on the consumer, that would be great.

Sure. Dave, this is Derek. The pipelines looking healthy actually at this point. We're seeing activity in small business, middle market, corporate banking syndications. Just general C&I, we're just seeing lots of activity. Another thing that's coming back is we're seeing increased CRE activity. We're cautious there, but we are seeing increased activity as some of the markets have reached more stabilization. And so I think we'll continue to see growth coming from those areas. So probably pricing pressure on CRE. I mean I pear people talking about the you're seeing as much pricing pressure in CRE as they've seen for some time.

I would -- Dave, I would just add also, and I made this comment at the RBC conference back in early March that I think investors increasingly really need to peel back the onion on the type of loan growth that banks are producing. The NBFI kind of issue that has sprung up has just -- I mean, there are massive differences in bank's reliance on NBFI growth. It should be a good asset clients for many, many reasons, managed responsibly, as you know, for us, as we report, it's about $2 billion of our portfolio outstandings and has not grown in 5 years. And you can see that our peers are -- and banks smaller and larger pretty much going down these loans just as there has been a difference in CRE growth. And so I think what investors if they'll really peel back the onion will find that if they're worried about NBFI, if they're worried about rapid CRE growth, if they're worried about personal unsecured lending, that's not us. So again, I think it just requires a little more investigation of the topic.

And our next question comes from the line of Bernard Von Gizycki with Deutsche Bank.

I know we're talking about deposit ounces earlier. You had a nice pickup in the noninterest-bearing deposits of about $1.3 billion versus 4Q. I believe the migration of the legacy gold accounts was done last quarter. But Harris, you mentioned the rolling out of the companion offering for small business customers beyond the business. Just what drove the sequential increase? And any color you can share on customer acquisitions on the goal and the beyond the business accounts for the quarter?

Yes. So first of all, that I have -- I'm dyslexic with this product. It's actually a business beyond that's what we in the product is called. And I can't read my own words here on the front page. But the business beyond this product suite, it's too new to have had any impact in the first quarter and won't have much in the second. We rolled it out in Arizona and Colorado beginning on March '26.

But the early reaction to it with a very limited sample of -- it's the first really new product offering we've had 4 small businesses for quite some time, and it's been really well received. And so I'm excited about the prospects for it. But we'll be rolling it out across the rest of the organization in -- later in May. And it will be kind of in the third and fourth quarter before we start to understand what the impact might be.

On the gold account, the first quarter, I mean we -- again, we started rolling this out in the second half of last year and really the full impact started to come kind of in the fourth quarter. We've -- in terms of new account activity, we opened about 4,000 new accounts in the first quarter. And I'm hopeful that we'll see that kind of ramp up to kind of 20,000 new accounts for the year. What we're seeing is over time, the total relationship balances are somewhere around $100,000. And it's not immediate, but the extent we're seeing accounts build up to that.

And so anyway, we think that this is a really great opportunity for us, and we have a lot of energy, and we'll be devoting a lot of marketing to it. So it's still early innings, but I'm hopeful that, that will really contribute to not only a well-priced deposit base, but one that's granular and really sturdy with the kinds of customers that we can do a lot of business with.

Great. And just on capital markets fees, the $28 million, slightly higher year-over-year, but down $9 million versus a strong 4Q. Just anything to call out during the quarter and Ryan, I think you called out the strong pipelines in capital markets going into 2Q. So if you could just unpack the quarter and trends you're seeing right now?

Yes. This is Scott. I'd be happy to do that. we had a -- it was a tough quarter to compare against last year because of a really large M&A transaction fee that we reported on. So we were delighted with the quarter as it ended and really all of the businesses continue to show good opportunity. In the first quarter, we saw real strength with our syndications and our interest rate hedging businesses and also with a new commodity hedging, oil and gas hedging practice that we started in the third, fourth quarter of last year. We think it has the potential to generate, I don't know, $7 million to $10 million a year in revenue, and we're just getting started there.

But it's -- basically, that business is positioned against about 80 of our energy reserve-based lending clients. We've already had about 30 of those 35 transact with us on this interest rates, oil and gas hedging activity. And so I think between syndications interest rate hedging, our foreign exchange business, commodity hedging. Our real estate capital markets business. It was a soft quarter for them. But the second quarter that can kind of ebb and flow, they're still very confident they're going to have a real solid second, third and fourth quarter. In our M&A business, again, which is sporadic, we've invested quite a bit in new colleagues there and deal flow looks good. So we -- it's been a high-growth business for us. We've made a lot of investments there, and we don't anticipate it will disappoint this year.

And our next question comes from the line of David Chiaverini with Jefferies LLC.

Wanted to go back to -- you alluded to the Basel III end game benefit of a -- it sounded like a modest net benefit. But are you able to quantify what that benefit could be for Zions?

Thanks for the question, David. I'm happy to provide some color there. Listen, we're still working all the way through the process, but our scoping on the standardized approach would suggest some RWA relief as others have reported. Right now, we would size that between 9% to 10% of RWA release, We contribute all being equal, about 93 basis points to common equity Tier 1.

We are still studying the ERBA just to understand the puts and takes there with the risk sensitivity compared to the operational risk RWA. So probably more to be out there in future quarters. As you know, we've been sort of talking capital, both not only and including AOCI and by formalizing AOCI into the standard moving forward, albeit with a pretty lengthy phase-in -- of course, that cuts the other way, but we've already been operating as though AOCI is something that we're cognizant of in setting our capital glide path. So hopefully, that helps.

Yes, very helpful. And then you alluded to pricing pressure on the CRE side, could you talk about the C&I pricing environment?

Sure. This is Derek again. Yes. I mean we're -- while the activity levels are healthy and it certainly is a competitive market out there today. So we're seeing some price competition. But it's not significant, but it's something that we're definitely very aware of.

And our next question comes from the line of David Smith with Truist Securities.

Can you please talk a little bit about where you're spending the most time managing credit today? Obviously, it was a really strong quarter with just 3 basis points of net charge-offs and SIs, nonaccruals, pretty much all the forward indicators all trending down versus the fourth quarter. But to the extent that you're seeing problem or areas of concern in the portfolio, where those might be and what trends specifically for those sub-portfolios.

Yes. Thanks for the question. Overall, we're seeing -- continuing to see improvement in commercial real estate as -- and as you can see from the number of criticized and classified and nonaccruals continue to decrease there. If anything, we're focused on the commercial and industrial space, it's over -- actually, year-over-year, our curated classifieds have improved there. I saw a slight increase this quarter. But that's the area where we're our attention where we're paying the most attention. We are not seeing a lot of impact from tariffs or from the events in the Middle East at this point, watching really just focused on some just increases to expenses in certain areas such as restaurants and consumer-focused businesses that seems to be what we're watching the most these days.

Do you have a sense of how long oil prices might have to be elevated before that plays through more broadly with some of your industrial client base?

Yes.it's a great question. The forward curve on oil right now is going out a year at a little higher level, but it starts to drop actually pretty fast. And by next year, it's back to a lower level. So we'll just have to watch and see where the curve goes.

And our next question comes from the line of Ken Luton with Autonomous Research.

Ryan, can I just ask and follow up on the NII comments. When you mentioned the 7% to 8% growth with no rate cuts. Were you referring to the full year 2026 commentary? Or were you referring to the 1Q '27 over 1Q '26?

Yes. For our NII guide, that's order view as how we guide that. So that certainly at the upper end of moderately increasing and we think the ability to overachieve if rates hang in for us.

Okay. Got it. And then I just wanted to make sure because it was a little bit back and forth between talking about like the full year versus the standard guide. So it's on the standard guide. Okay. understood. Yes. And then -- on the -- as you go forward, the earning asset base has been pretty steady for the last couple of quarters. And as you kind of have reworked the mix of the balance sheet from here, do we start to see more AEA growth? Or is the benefit that you get from NII going to come more from the margin expansion from here?

It's a very fair question, Ken, because you're right. I mean, if you look year-over-year, average earning assets are kind of hanging in around the same levels. And so the loan growth that we're seeing has sort of been offset by the average investment securities and money market funds. Listen, one of the things that we're probably getting closer to, I talked about in my prepared remarks, the reinvestment that's occurring for investment securities, where we've still been allowing a decent amount of that to flow over to paying for loans or paying down wholesale funding. We're getting close to the point in time when we would think about reinvesting fully, just to make sure we keep the same comfortable headroom on our liquidity measures and the like. But if you see in our guide, we certainly expect for loans to build from here. And you all, I think, are very attuned to where we expect to see that.

One of the things that maybe it could be potentially a little bit lost in the message this quarter is we had a really nice loan fee result. You'll see that in -- and that was on the back of some of the things that we said we were going to do. Part of our strategy was saying, hey, going forward, we want to do more held for sale activity around residential mortgage loans. And that showed up in this quarter. So we had a pool in excess of $500 million that we sold out both that would have otherwise been part of our story for loan growth.

Another thing that we haven't yet featured on this call, but would be in the earnings release, is we did roll out an accounting change this quarter moving forward on the netting of derivative assets and derivative liabilities and cash collateral things associated with that. And that would also have sort of a knock-on effect on some netting down of loan balances to the tune of about $100 million difference. So I acknowledge that our loan growth looks modest. But there were some other pieces in there that were they in our base results would have looked like a stronger loan growth story. So moving forward, it's going to be both, along with its answer. It's definitely going to be a margin expansion and growth in average earning assets.

I'd just add that the consumer book, the 1 to 4 family residential jumbo arms, I'd expect that, that will remain flat to kind of drifting down over time. We're just trying to remove some of the risk in a world where higher rates may be the norm and so some of the can next derisk there. So really trying to focus more on a held for sale turning that activity into more fee-based activity. So that will be a little bit of a drag, but we think that we'll see moderate loan growth despite that.

And our next question comes from the line of Peter Winter with the D.A. Davidson.

I was wondering, with the outlook of fee income coming in at the upper end of your range and you continue to make these investments, which are clearly working. Would you expect expenses to also come in at the upper end of that range of moderately increasing?

And I'm sure it was there are others we say my spoken remarks, I purposely kind of guided towards the upper end of the range and NII and fee income. I'm glad you picked up on that. I didn't do that for expense so we'll see. But for where I sit here today, I think it's a reasonable guide just as it is. I wouldn't guide on the operator or the lower end. I just leave the degrees of freedom within that.

I would just add that most of the broad-based growth we're seeing in fees now is -- I mean, capital markets, we clearly have invested a lot. The others we're not having to -- the incremental investment is not that significant. We're just -- I think we're seeing a lot of our sales practices flowing through. I think we're seeing our call programs are stronger. And we're just -- this is the best broad-based growth we've seen in a long time.

I just thought with the growth in the fee income also maybe higher incentive comp as well. That's why I was thinking about it.

That's true.

That's true. And you can see that a little bit in the...

But it's in the context of a $2.1 billion expense number. So it's not going to move it materially.

Okay. And then just if I can ask a subquestion but with these growth initiatives under way, is there anything tangible that you can point to that the investments that you made in the future core to modernize their core systems. Has that been additive to your growth or helping attract more customers, just given -- we're seeing some nice organic growth from you guys. I'm just wondering if the future care is playing into that?

Yes, although it's -- I think it's hard to quantify exactly, but it's helping us just get things done faster. I mean customers don't choose a bank because of your core systems, especially the lending side. They're looking for execution and price and relationship, et cetera. But it's giving us I mean I go back in time. We did an exceptional job during old PPP thing in that ancient history now, we couldn't have done it without this new core. We are quickly doing the real land office business in PPP with a great process. So that's just an example of how it's allowing us to get things done faster.

Well, the other couple of the points I would add is the real-time data and the fact that all of our loans and deposits are on 1 data system, again, that doesn't send tingles through clients' minds. But in a data-driven world, it's absolutely critical that it'd be accurate. And we -- it also were -- we said on our last call that we were close to closing a transaction with TCS to bring their courts to have a product called Courts that is a tokenized deposit, stable coin application. And because we're on their platform, the ability to start innovating with tokenized deposits or stable coin is infinitely cheaper than anybody else trying to do this. And so we think it's going to be an interesting way to compete way beyond our size in that arena should we choose to. We've not announced that we are, and we just -- we've got a platform that we would not have had if it not been our core conversion.

And our next question comes from the line of Janet Lee with TD Cowen.

Just to go back on -- just to go back on your 7% to 8% NII growth, assuming no rate cuts. Is it fair to say that, that assumption is baking in moderately increasing loan growth, so call it mid-single digit or so. But that would also imply a pretty meaningful step up in net interest margin expansion throughout the course of 1Q '26 to 1Q '27 in order to get to the 7% to 8%?

Yes. Listen, I think you're right about that. In terms of allowing for loan growth to be embedded in that figure and margin expansion. We don't guide to that hasn't been our practice to guide on margin. but we see ample opportunity to expand the margin throughout the course of this point in time to at that point in time in a years, hence. So both of those are encompassed within our guide -- and I can rehearse all those different contributing factors, if you like. But I gave you the short form answer.

I would take that.

So yes, listen, I think there's different things that are playing through and you've heard us probably talk a little bit about this before. We do have the latent defect of those 6 asset repricing that has yet played through. There's still some sizable books that have longer repricing cutoff patterns. So if you think about things like muni, if you think about owner occupied, if you think about some 1 to 4 family ready. So all that, together with things like less those headwinds for the -- this quarter, we had about a $10 million headwind through the fourth quarter this year, it goes down to about $5 million. We've got some disclosures in our 10-K that talked about that.

All those things blend to an improvement in earning asset yields kind of 1 year hands along the way we've sort of sized that about 2 to 3 basis points improvement in rig asset yields. We are doing some roll-off of our investment securities portfolio to other gainful places like loan growth at paying down wholesale sources of funding. We size that as a 1 basis point kind of credit earning assets. So it's that together with some -- a little bit of a taper of things yet to play through and repricing down of term deposits are all things that contribute to a better NIM story moving forward.

Got it. That's very helpful. And your 150 basis points POL for 2026, you seem very comfortable achieving it. no rate cut scenario. I would -- is it fair to assume it's still the case if we were to get a gain if we do end up getting a rate cut? Or does it get more challenging?

So we were prepared with something in August of that last quarter where we were seeing 2 rate cuts. So I wouldn't necessarily back away from that. I would just say, as with all things, it will all depend on our success in driving through those lower-cost bonds and our deposit growth through the course of the year. That's our biggest variable and not knowing day-to-day, week-to-week, what the board markets are going to tell us. I just feel like we're at least as good or a better place than we were last quarter.

And our question comes from the line of Anthony Elian with JPMorgan.

On M&A, last month, you announced the acquisition of the agency lending business from basis. right? Last year, you acquired 4 branches in the Coachella Valley. Harris, are these the types of acquisitions we should expect going forward? Or would you cast a wider net at some point, inclusive of bank acquisitions for what you'd look at?

Well, the first thing I'd say is it's not so much that we're casting a net. We're waiting for fish to momentum into the fund that we are comfortable with. We're not out looking to try to -- it's not an objective to do M&A to grow. I've been pretty consistent about that. But I -- but as we see opportunities, we ask ourselves the question, is it a good fit strategically? Is it something that strengthens the franchise and all our price at the end of the day to -- and so we'd be opportunistic about it. I think both of these kind of hit that.

These agency relationships, the Fannie, Freddie business, we've been talking about here. That is something we have been looking to do -- we live in a part of the country where you have a combination of a reasonably young population, a high-cost housing affordability. All of that creates demand for more multifamily over time. It's about -- yes, we're about 80% of the population of the nation is taking place. through the Mountain West, the Southwest, et cetera. And so being able to be a one-stop shop for developers of multifamily product fits really nicely into the capital market strategy we have. And fits nicely with the real estate talent we have in-house to originate that kind of product. So I would expect that anything we do would have kind of a story to it in terms of how it fits with the strategy of becoming a stronger presence in the Western United States.

Okay. And then my follow-up on deregulation. So Harris, you addressed this in your annual letter. We had the capital proposals a few weeks ago. I know we have the comment period now, but I'd like to get your thoughts on if you think those proposals are largely sufficient or what more you'd like to see from those proposals?

I think we're pretty pleased with what I -- one of the things -- what I said in the letter, the pendulum -- what happens is you get a crisis and a reaction. And that's the history of bank regulation. And the statutes that are passed to turn that into law. And the what happened in the wake of the passage of Dodd-Frank was there were a lot of things that I think that with the benefit now of looking back over the last decade, regulator sensible people looking at this would say, okay, some of that was actually really useful and needed necessary. And some of it is overkill.

And from my perspective, I think the current cast in place and the agencies is doing a really nice job of trying to say let's focus on the basics because the risk is you get so in full in the thick of in things that you missed the main event. And I think that's one of the things that happened with the bank failures 3 years ago, things that are kind of hiding in plain sight. And it wasn't about some of the -- I mean, everybody -- the industry is actually pretty good at self-regulating. I mean after you've been through the great financial crisis, you don't need to be told a lot about how you adjust your portfolio to make sure that doesn't happen again. And that's kind of where the system tends to pile on. And so a lot of things were done in terms of ability to repay valid mortgages and everything that it's part of the housing affordability problem we have today. It's just more expensive to get a mortgage, for example. I think they're trying to be sensible about how do we get back to kind of the center point. And so I'm actually quite pleased with what we're seeing.

And our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

I wanted to ask you about the agency businesses, but you -- I think you cleared those up, Harris, but that's just a P&L. It's not really use of balance sheet on those businesses. Is that correct?

Yes. Yes. That it shouldn't -- I mean we use the balance sheet for the origination of the deal, the construction, the stabilization, but without fail, our customers who are developing this kind of product, they need a long-term takeout. And so it just allows us to be in the stream.

One way of maybe stitching together, Harris is a very good response on the regulatory environment and if there was anything on the wish list, going back to Basel III in game, getting some more risk sensitivity on the commercial loan side of the business would be helpful. It looks like they may have MSRs and scope of things to at least nominally reconsider getting away from the for dollar exclusion above certain levels and maybe rethinking of the risk weighting -- for this type of business, this agency multifamily business, there will be some MSR generation that would come from it. So we'll have to see where that falls out.

Yes. I know there are rare licenses and very valuable, so that will be good. Scott, maybe just to go back on lending, energy and lending appetite. Just curious how you're approaching the business with so much volatility. And then can you touch a little bit on the Texas or Amegy C&I growth and what's driving that?

Sure, John. Let me -- on the AMD side, they had -- I'll take the second one first. They had really strong loan growth last year, really broad-based C&I growth and their CRE is holding in there. Energy really did not grow much last year for them. They are seeing better growth in smaller businesses. Principally, they've played more in the middle market, the kind of middle of the middle market and the upper end of it. But just good progress there. Their call programs are great. The bank and the Metroplex. They're activities in the Dallas-Fort Worth Metroplex and in San Antonio are doing well. And so they just have a lot of momentum that they brought into this year, and I know they feel very optimistic about leading the way in terms of loan growth for the company this year, too.

On the energy side, holy cow, we've been sitting at $2 billion in outstanding for a long time. And we would love to see that grow the credit metrics, the pricing metrics have never been better as probably 40% of the banks that play in the reserve-based lending, what I would call, middle market of energy lending, about 40% of the banks that used to have exited. And a lot of this business is originated by private equity firms that we know extremely well and have decades of experience with. And so -- and the way we do it, we have about $75 million reserve-based loans. So these are highly secured, they modulate based on pricing. And the -- that has done very well through many cycles. -- what didn't do well was financing oilfield service companies. We have long since reduced our engagement with those companies dramatically. It's about 12% of the book now. It was as high as 35%, 40% at 1 time. So that was decades it was 15 to 18 years ago.

So anyway, I think we've got the portfolio structured right. The midstream side of the portfolio is very good. And we have a great energy lending team. They're widely recognized across the industry as being pros. And adding this oil and gas commodity hedging activity, it just has been terrific, and we'll see a lot of strength from that because our clients want to do business with us. So anyway, I'm optimistic about it. And if that business grew 10% a year for 3 or 4 years, we'd be really happy with it. We had outstandings of $3 billion some years ago. So it's the level that we're not afraid to the level. We just need to see the activity.

Thank you. And our next question comes from the line of Chris McGratty from KBW.

Great. Harris, on AI, could you speak to perhaps the near-term opportunity for the company, but maybe over time, any risks that you see out there on the revenue side?

Sure. I mean we have a variety of things going on with where we're using AI. I don't suspect particularly different than most appears this way other than the fact that I think we have -- going back the core replacement project over the last decade, I mean it forced us to do something that I think few others were forced to do. And that is to dramatically focus on the quality of data and its organization. So I felt -- we cleaned the house before we moved into a new house. We threw away a lot of the junk. We organize things. And that's proving to be -- I think that's going to really prove to be useful, in terms of speeding up our -- the delivery of solutions.

The kinds of things we're using it for -- I mean just examples, we're using it for things like appraisal review all kinds of document review contract review. We're using it in our credit exam or credit review function to expand the population of deals that we're looking at and to basically, instead of having people finding needles by haystacks. They're now -- people are now looking at the needles that we find with other tools.

And so the -- I mean, the use cases go on. People are looking for savings or technology. I came across something earlier today. I was looking -- I came across just our headcount back in 2008. I was 18 years ago, there's nothing magic about the year, except that our headcount is down 20% and our -- back then, we were about $54 billion company, you have to inflation adjust that. But even with that, I mean, it's about a 25% improvement in productivity for dollar real assets. And AI is becoming a part of that. My view is AI isn't -- it's a new shiny object, but a lot of different technologies have led to improvement in productivity over the years. I think this has the promise of accelerating it somewhat. I mean, we'll be looking at it. And we on the surface of a few things, but we've got a variety of projects going on.

As to the threat from AI, certainly, there's a concern about agentic AI, on margins, et cetera. But I also think that some of these things get overplayed. I think that's probably going to be the case in some places. But a lot of the balances we have, a lot of the free balance we have actually harm free balances, they're paying for services. A lot of it's analyzed. And in a world where if you see more agentic AI optimizing, you'll see -- I mean the economies, I'm a great believer that the magic of our free enterprise economy is it's really resilient and responsive to change. And so you'll see things priced maybe you're free today that maybe get charged for you. everybody will kind of figure out their way. And I think back to -- I've been around long enough. I remember when rec was removed. And if you told me that 4 years later, we have more in way of noninterest-bearing demand deposits as a percent of total deposits and we had in 19 -- in the early 1980s I'd have said that's impossible. And yes, that's the case. And so I think the -- you have to take with a grain of salt, sort of the sky is going to fall because companies adjust pricing adjust, et cetera. So I think the important thing is to make sure that you're not -- you don't have your head in your sand in the sand, you're keeping focused on what customers want that you're supplying solutions -- and that's where it is right now is kind of how do we develop and participate in solutions that actually help customers. and improve the relationships we have with them. I think as long as we -- yes, we're doing that, it's going to work out fine.

Okay. And with that, it looks like that's all the questions we have. I would like to now turn the floor back over to Andrea Christoffersen for closing remarks.

Thank you, Julian, and thank you to all for joining us today. We appreciate your interest in Zions Bancorporation. If you have additional questions, please contact us at the e-mail or phone number listed on our website. We look forward to connecting with you throughout the coming months. This concludes today's call.

Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.

Today, our next fireside chat is with Scott McLean from Zions, an old friend.

Old friend.

Scott reminded me 24 years. So it's been a while.

Yes. It has. It's been a good time.

Yes. No nick names up here. We discussed that. But -- just Scott, for the benefit of people on the line and in here, just give us a 30,000-foot view of Zions and the franchise.

Sure. So Zions Bancorporation, we have 7 affiliates. They operate by different brands. We're Zions Bank, obviously, in Utah and Idaho. We are California Bank & Trust in California, National Bank of Arizona in Arizona, Nevada State Bank in Nevada, Vectra in Colorado, Amegy in Texas, Commerce Bank in Washington. These are great names. People often say, "Well, why don't you just go to one name?" Well, we love our names. I mean who want to be California Bank & Trust in California, or Nevada State Bank or -- and Zions in Utah and Idaho is an awesome brand.

We've got about 9,200 colleagues. We have about 900,000 consumers, 250,000 small and medium-sized businesses. Pound for pound, no brag, we're probably the largest bank for small and medium-sized businesses in the country. We -- $90 billion and there's just a lot of very distinctive -- nationally distinctive things about our company. If you look at our presentation each time we meet with analysts and investors, you'll see what's nationally distinctive about us, and I'll have a chance to talk about some of that. But most banks have nothing this nationally to think of about them. We actually have 5, 6 things that are truly observable in nature and nationally distinctive about our franchise.

Okay. Perfect. And then before we dig into some of the other topics, just key priorities for Zions for 2026. What are you guys focused on?

Yes. We're excited about 2026. We're always a highly energized group. But I think it's important to kind of look at the journey up until 2026 to kind of get a sense of where we are right now. And if you look at that journey, from a technology standpoint, we finished our big core transformation project, replacing our core loan and deposit systems. No other bank in the United States has done this. It's been done about 300 times around the world, but it's never been done in the U.S. I say this in public all the time. I've never had another CEO or President of a bank come up and say, "You can't say that. It's not true." It's absolutely true.

We finished that on July 13 of 2024. And so we have a totally modern core loan and deposit system, one data model, which is really important. It's real-time, natively real-time. It's API-enabled. It is built for the future. During this time that we replaced our core, we also totally modernized our digital front end. And so a lot of technology stuff going on and more that will be coming forward.

Our deposit franchise, which is central to the value of our company, it weathered a 500 basis point rate increase in 2022. It weathered the Silicon Valley March 10, 2023 issues. And we've come through all of that, and we still have one of the leading low-cost deposit franchises and our demand deposits, noninterest-bearing to total deposits continue to be peer leading. And so our deposit franchise has come through that. Credit quality has been strong. We've weathered the CRE issues. Customer satisfaction ratings are higher. Our regulatory relationships are high. And we're bringing a really nice extended period of positive operating leverage into 2026. So we come into 2026 with a really solid foundation and a lot of momentum.

And quite frankly, what we've said, what Harris and I have said internally in our town hall meetings, which we just finished in January, is that we have never had fewer distractions, externally, or internally. We just don't have a lot of distractions. And so our whole focus is on growth. And you'll hear us talk about growth in our core markets, small and medium-sized businesses that make up about 2/3 of our revenue. That's where we're focused. We've got 6 key products that we've energized. We're doubling the amount of advertising spend that we had versus 2024. So we are kind of full on go from a growth standpoint.

Okay. Good. How do you feel about the economy? I mean, it's -- obviously, there are cross currents. We can talk about energy prices given your energy book. But given the small business exposure that you have, what's your take on how things are going economically?

It's such a great question. Compared to when we announced earnings in third week of January, there's been a lot of news. You can't read the news and not go, "Well, it's got to be a little softer economy going forward this year or a little more cautionary." I mean you just -- anybody would have that reaction. We -- fundamentally though, if you were going to have a banking franchise in the United States, you'd want to be in our 11 markets, you'd want to have our approach to banking, you'd want to have our focus on small- and medium-sized businesses that's ever so slightly protected from the global banks and ever so slightly protected from what fintechs can do. And so even if the economy is softer than what we might have thought, we generally have the ability to grow in any kind of economy because it's just based on your call programs and the intentionality you have about growing. And because we have a small share in most markets, we generally feel pretty optimistic.

And small and medium-sized business owners, which is our foundation, they're used to this noise. Since the pandemic, they are used to this kind of noise. Now clearly, the kind of military actions we've been taking are not something that you're used to or you want to see, but they're used to this kind of noise. And so they're just very resilient. They know how to grow. They know how to create cash when they need it and liquidity. And I think they're fundamentally cautiously optimistic. I don't think any small business owner ever gets really frothy about what they're doing, but they're fundamentally optimistic.

Okay. Well, that's good. It's good to hear. I mean it's good to hear that. On the earnings call of the fourth quarter, you talked about your ability to grow maybe faster than you have historically. Do you feel like that's still the case? And what gives you that optimism?

Well, it really relates back to this lack of distractions. We just don't have any right now, internally or externally. And so again, focusing on the core of our business, small and medium-sized businesses and an additional focus we've taken on the affluent side of our consumer base that we service through about 410 branches across our footprint. We are we -- if you asked our employees, I think they'd say they've never seen us this focused on that client base with really specific -- these 6 very specific products that are designed to build small business deposits and consumer deposits. And so I think it bodes well for the year.

One of the categories that's been in focus over the last few years is commercial real estate. Do you expect it to contribute to growth this year? Are you seeing a turn there?

If you look at our CRE growth over the years -- last 15 years, all of our peers have been gulping down real estate loans. Our CRE growth has been about 3% to 5%. We could grow CRE loans 10% to 15% easily in our footprint. But our CRE loans were about 33%, 34% of loans 15 years ago. It's now down to the low 20s. That was intentional. But our peers during this time have been growing real estate loans 70% to 100% faster than we have, okay? So when you look at our loan growth, you need to kind of think about quality of loan growth.

Now to grow our CRE book 3% to 5% this year, even in kind of still slightly challenging markets, I think we very much have a chance to do that. And in many cases, it's going to be retaining existing loans that we have that have hit a 3-year maturity or a 5-year maturity.

Okay. The energy vertical, obviously, topical. What's your take on it? Can you grow energy balances? And what's the offset of high energy prices in terms of how that could flow through the portfolio?

Yes. We've been an energy bank for 30 years, and we're one of the top energy banks in the country.

Just size it for people.

Yes, it's about $4 billion in commitments, $2 billion in outstandings. We'd be very happy for that portfolio to grow 10% a year for 3 or 4 years. I it is really conservatively underwritten. We have about 70 what are called reserve-based loans. We're lending against the reserves of our independent exploration companies. And the number of banks that will do this has dropped by half over the last 5 years. So there's fewer banks, there are fewer customers and the market is in a really strong position, and it's a good position for banks.

So I think we're in a good spot to grow. We've just introduced a new oil and gas hedging business. We were in it 15 years ago. We got out of it. We've now gotten back ended on a large-scale basis. And literally, in 4 months, we've had 30 plus of those 70 customers already do hedging with us. So that hedging business in our capital market stack is probably -- it's a $5 million to $10 million business for us as we get up and running at it. And it's with customers that we're willing to do this with us all along.

So I don't think investors should -- the major players in the energy industry are really disciplined and the banks are really disciplined. This is very different than 30 years ago. And so I don't think you'll see big energy companies lean much farther in just because we've had a spike. Same reason when we have a fall in prices, you don't see companies totally pull back on production.

Do you expect more competition?

We've already seen it a little bit, but oh my goodness, we've seen the movie. People that come in and out of the business, they just take the highest risk and they get creamed. So we'll have to continually communicate what the energy business is to us. And -- but I think most people understand.

I tell you the other thing, our power and alternative energy business, which we didn't have 12 years ago, started about 7, 8 years ago, it now has $2 billion in commitments and about $1.5 billion in outstanding. So we're both -- we're a major bank for fossil fuels. We're a major bank for utility-grade power. And we see continued opportunity with that business, too. It's about $1.5 billion in outstanding. So it's about 75% of what our oil and gas outstanding are.

Okay. So despite all the noise, economic noise, you feel pretty good about the growth outlook?

I do. I just -- again, we're not overly inwardly focused. We have a great relationship with our regulators. And it just feels like a really good time to be highly focused on growth.

Okay. Also, if anybody has questions, feel free to raise your hand, and we'll fetch you a microphone. The margin expansion story has been pretty impressive. I think it's 8 quarters, sequential quarters of that improvement. Talk about maybe the sustainability of that trend, what's ahead where you think the company can eventually go to from a margin perspective?

Yes. After the middle of '23, we saw a damage to the net interest margin because of the repricing of our highest priced deposits. And the whole industry saw, but we saw it had a bigger impact on us. It affected us about $300 million of our total revenue of about $3.1 billion. So we said that would steadily improve, and it has. Our net interest margin has gone from up 2.91% to 3.31% in the most recent quarter. And it's basically been -- as our securities portfolio has repositioned, we have about $600 million in cash flow per quarter. We reinvest about half of that. We may start reinvesting more than that, but that has helped margins.

Total interest rate costs are coming down and interest rate deposits. That certainly helped. Our demand deposits, which is a key driver to everything for us, have been stable now for over a year and growing to a certain degree, and all the products that we're bringing to market, we are totally focused on building core noninterest-bearing deposits.

And then we've also -- I don't know how many people really noticed this, but we've had an emphasis on attracting what most people would think of as wholesale customer deposits. So we have about $7 billion in customer deposits that are off balance sheet and Fidelity and Dreyfus sweeps as an example. And we have been in the process of bringing those deposits back on balance sheet. So just as an example, on June 30 last year, we had broker deposits and net overnight borrowings of about $7 billion. And in August, we just said we're going to pay our customers. We're tired of paying broker deposits, you don't know them, et cetera.

And so at the end of the year, that number was probably a little over $3 billion. So we brought it down from kind of high $6 billion, $7 billion, down to a little over $3 billion in 6 months. And all of that is about 20 to 30 basis points accretive to broker deposits and overnight borrowings. So it's been very intentional. I think you'll see us continue to pull down our usage of broker deposits and that overnight borrowings and just paying our customers. And what comes with that is other business. Customers love it. New prospects give us opportunities to do other things with them. And so it's been an incremental benefit to the NIM. And I think we'll continue to see that.

Okay. Anything else on deposits that you're focused on that you want to talk about and maybe a little bit on pricing and competition.

Yes. I -- a lot of people have asked us today about, boy, is the pricing market more intense today? It's always been intense. I just don't know of a time when pricing on deposits and pricing on loans and the number of competitors, we just deal in an environment with a lot of competition. And so I don't really worry about it, quite frankly. But this wholesale deposit campaign, this $3 billion improvement in overnight borrowings, again, we're able to do that at rates that are accretive to our overnight borrowing costs. And then this whole emphasis on these 6 products, particularly this account that we call the Gold Account which is a consumer-affluent packaged account is all there to drive granular deposits.

Okay. You talked about the hedging program in your energy book. I'd assume that's under capital markets. And you guys have flagged capital markets as the success story. Talk a little bit about that, what's ahead for 2026? How optimistic are you on capital markets in general?

I'm really optimistic about it. It -- we had about $125 million in capital markets revenues in '25. That number was $107 million the year before that. It was about $80 million the year before that. And then it was kind of a consistent $70 million for a number of years. And so what we fundamentally have done over the last 5 years, Mike MacDonald leads that business for us. He's done an outstanding job. He's attracted great talent and -- but we have invested heavily in the foundation of -- we sort of reaffirmed our syndications, foreign exchange, interest rate hedging businesses and make sure we have those built for the future. And then we've added a bond business. We've added a real estate capital markets business. We've added an M&A business and probably I'm leaving something out, but the foundation for all those things are built.

So going from $125 million up to a couple of hundred million, which I think, I think we're on a trajectory to get to a couple of hundred million annually, probably in '28. And we don't have to add a lot of incremental infrastructure. The major products are sort of set, the technology and the risk management is all there. We just need to now add more producers to get to that level.

It's a centralized business?

Yes, it absolutely is. And really, all of our fee income businesses are. We have about 21 fee income businesses. They're all run at the enterprise level. That was not what we were like 10 years ago, 12 years ago. We were kind of Noah's Ark before we had sort of 2 of everything. But all of our enterprise fee income businesses that make up $675 million of fee income are all at the enterprise level.

Okay. A little bit on expenses in tech. We don't look like tech guys, but I think you're a tech guy, and I'll ask you the question.

I'm from Oklahoma, but I'm pretty -- I'm probably one of the best tech guys from Oklahoma, I think.

Okay. Well, good. That's perfect. You guys modernize the core. I think it sets you up in a way to maybe lean into AI and digital and some of the other things that banks are talking about. What are you seeing on that front? How does it help Zions become more efficient over time?

Right. There is no question that our investment in our core loan and deposit systems is a massive advantage because it is still out in front of everybody else. And if you want to survive in a digital world, you have to be digital at the core, okay? You have to be data driven. And the fact that we have all of our loans and deposits on one data model sounds kind of boring, but it's a big deal. And so AI, as an example, we've been using AI for 40 years like the rest of the industry. I mean it's in our fraud work. It's in how we prepare credit presentations. It's in client authentication. It's in a lot of different places. But the pace of using AI is accelerating rapidly. And we're seeing benefits across the company in reducing manual touches, reducing amount of multiple data entry. These are little things that add up to really quite significant evenings through the course of the year.

And then if you go a little bit further out, there's all this talk with about stable coins and programmable tokens. And because of our relationship with TCS, Tata Consulting Services, the company that is our partner on our core loan and deposit systems, they have an application called Quartz, which is a -- it's a tokenized deposit, stable coin platform that they've used elsewhere in the world, just never in the U.S. We we will have their Quartz application in our innovation lab in the next 30 days, 60 days. And we'll be experimenting with stable coin and tokenized deposits later this year. There is no other regional bank that I think is going to be able to do that because this application is directly tied into our core loan-to-deposit system. Everybody else is going to have to create that linkage. And because we're real time, you have to be real time to live in a tokenized deposit, stable coin world, and we already are real-time.

So I think -- this is going to be another example of David versus Goliath. I think you're going to end up a year from now hearing us say things that the global banks are doing, and we're able to do it on scale with our client bases at a lower cost.

How does that manifest itself through the P&L?

Well, it will be another revenue stream. And -- but the big issue with programmable coins and stable coin is finding the use case. Everybody is still searching for the use cases, okay? So we're going to be like Don Quijote out there trying to find the use cases. Although, I think we're going to find them. We're not going to have to get all the way to the windmill to find them. And we have customers that want to experiment with us right now.

So -- and I'm not talking about bitcoin. These are stable uses. And I think for us to be competitive in the future, the fact that we can deploy this at such a low cost on scale is going to put us in a very good competitive position.

It'd be interesting with the small business and...

I think small businesses, absolutely will find their way into this and in some cases, faster than really large businesses.

Okay. Anything else on expenses as this kind of technology journey allowed you to reposition people out of cost centers into revenue production?

It has. If you just look at full-time equivalent employees, FTEs for us, our peak was in August of 2019. We had about 10,300 colleagues. At the end of the year, we were about 9,190 colleagues, a little less than 9,200. So a big decrease over this period of time. I think we'll be well less than 9,000 by this time next year. And some of it is this continuous focus on simplification and on the use of automation and AI.

We've also been using outsourcing. We did a survey with PwC about 3 years ago with us and 7 other banks, 8 other banks, and it was a confidential survey. And most of our peers, which we knew have been using outsourcing in managed services for decades and 10% to 15% of their -- 10% to 20% of their FTEs are offshore. We were at about 3%. We'll be at about 10% by the end of this year. So -- and it's more than just business process outsourcing. What we're able to do on managed services where they're able to provide expertise in complicated areas of technology where it would take us 90 days to 6 months to find the expertise in key technology domains, they can spin up in 60 days for us. And so it's really allowed us to go after and spend less money to do the basic evolution that we're doing.

So it's a very positive operating leverage message?

It is. And we're bringing nice positive operating leverage into the new year. And it's such a -- I mean, it's kind of the way to continue to improve return on assets and return for shareholders. And so -- and I think the interest rate environment is going to help us here maybe more so than we thought this year.

Okay. I want to touch on credit and capital a little bit. But on credit, just the prior session was the BDC panel and it's usually a ghost town, and it was packed. And everybody wants to talk about NDFI. Just remind us of your exposure and share a feel about it -- share how you feel about it.

Sure. We have about $2 billion in NDFI loans, and it's been flat. We've had about $2 billion for the last 5 years. So it's not been growing. The rest of the industry has been gulping down NDFI loans. If you haven't paid attention to that, you really should. The -- ours has been flat, and our peers are just gulping it down, okay, and they have been for years. Our exposure is about 60% of it is business credit or consumer mortgage-type credit and it's been a very stable book for us.

We clearly had an issue in the third quarter of last year. We lost $60 million on a customer that -- whose name has been disclosed. And that was very painful for us. And it was total fraud. It's hard to imagine fraud on that scale, but it was total fraud. And we brought in an external adviser to look at it, and we've done all that with our Board and regulators. But it was a one-off. And you saw that in our credit metrics in the fourth quarter.

So even with that, we were -- our charge-offs or there were -- net charge-offs were about 15 basis points, which still almost leads a league in our peer group. Our peers are much higher than that, as you know. And in the fourth quarter, we returned to below 10 basis points, which is kind of -- we try to live in 5 basis points to 15 basis points over long periods of time. And I think you'll see that.

And we feel good about the credit book. If you think about 2, 3 years ago in this conference and the discussion about real estate and all the disclosures about real estate, et cetera, et cetera, we've had virtually zero charge-offs in our $13 billion real estate book over this 5-year period.

Okay. On capital, you guys have had tremendous TBV growth as AOCI has burned off. And you have a $75 million buyback authorization that you put out for the first quarter. Talk a little bit about share repurchase appetite and overall priorities for capital.

Well, we've been -- in the last couple of years, we've been doing a buyback in the first quarter that was pretty much equal to the stock we had to issue for executive -- employee compensation, about $35 million and some change. And we've done that for several years. We did $75 million now. So that's more than double what we needed to cover the employee compensation issuance. And we've said we're -- we can see what investors can see. And we're going to lean into returning capital to shareholders. But we're not going to go out 12 months necessarily and project it out that far. But I think the market can see that we're leaning into it. And...

This is a signal.

I think as it -- did you say signal?

Signal. Yes.

I don't know whether it's a signal or not, but it should be. It's signal like. Yes. And you've seen us do this before. We -- well, you've seen us, we've always wanted to keep our CET1 higher than peer median. And you saw us do that as we reduced shares from $210 million to where they are today, about $145 million. And I think you'll see us continue to do that going forward. We want to be a little bit higher than peer median, and we have the capacity to return capital, barring any other situation that could come up.

You always make us wait a couple of days after earnings for the announcement.

Well, that's our Board. We've made a habit of not trying to front run our Board.

Okay. Last question, just been on it a ton of time here, but M&A is the topic. Could M&A ever make sense for Zions?

You can look at our past, we've not been overly active in M&A. The M&A that we've done has been very opportunistic. We see almost everything that gets done. So you can tell what we're not doing. We're very conscious of our long-term investors like our deposit franchise. They like our low cost of deposits. They like our mix. They like the fact that real estate is a smaller portion of what we do. Those are dimensions that we think are important to our long-term investors. So I don't think you'll see us do anything that changes that dynamic.

But we think investors want us to be entrepreneurial. They want us to make decisions. They want us to use our heads. And Harris said that on our first quarter earnings call. So we don't wake up every morning talking about M&A. We won't do that. But as a management team and executive team, we know how to muscle up around it when we need to.

Okay. So you feel good about growth. You feel you can fund it. You like the margin profile. You like the fee profile, feel good on expenses and...

That is a great recap. I think we -- and then you just look at our price that trades at a discount to peers, and you have to ask yourself why. And I think I think for some reason, people still think about capital or the tangible capital issue, but you can see that accreting. It's just kind of a math thing. And so you look at credit quality and our credit quality is outstanding, and you look at our regulatory relationships and the interest rate environment, positive operating leverage, everything you just said. And I think if you like buying value, things that are at a discount and you can't explain the discount. I think those are all things that are very constructive for long-term story.

Okay. Thanks, Scott. We appreciate it.

Thanks. Jon, it's good to be with you.

Welcome to Zions Bancorp Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Shannon Drage, Senior Director of Investor Relations. Thank you, and you may begin.

Thank you, Vaughn, and good evening, everyone. Welcome to our conference call to discuss the fourth quarter and full year earnings for 2025. My name is Shannon Drage, Senior Director of Investor Relations. I would like to remind you that during this call, we will be making forward-looking statements. Please note that actual results may differ materially, and we encourage you to review the disclaimer in the press release or Slide 2 of the presentation 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 presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Ryan Richards, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Stewart, Chief Credit Officer; and Chris Kuriakakas, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session, and the call is scheduled for 1 hour. I'll now turn the time over to Harris Simmons.

Thanks very much, Shannon, and good evening to all of you. You've seen on Slide 3, our fourth quarter results reflected continued progress and steady improvement across a variety of key financial metrics. Earnings of $262 million were up meaningfully, 19% from the prior quarter and 31% from a year ago, driven by stronger revenues and notably lower provision for credit losses. Our net interest margin expanded for the eighth consecutive quarter to 3.31%, benefiting from an improved funding mix as customer deposit initiatives reduced our reliance on short-term borrowings. Customer deposits grew at a healthy pace, up 9% annualized. Average loans were essentially flat compared with last quarter, reflecting the payoffs we saw at the end of last quarter, though period-end balances increased by $615 million on solid production. Credit quality was strong with net charge-offs of just 5 basis points annualized of total loans. This quarter's results also included a $15 million donation to our charitable foundation to be spent down over the next 3 years to make charitable donations that we expect would otherwise have been nondeductible. -- for tax purposes as a result of the recent tax law changes. Turning to Slide 4. Full year results were similarly improved relative to the prior year. Earnings grew 21% and net interest margin expanded by 21 basis points. Adjusted PPNR increased 12%. And when excluding the charitable contribution, we achieved over 300 basis points of positive operating leverage. After several years of industry-wide disruption from the 2020 pandemic to the 2023 regional bank crisis and stress in the commercial real estate sector, we're pleased with the resilience of our performance, particularly the stability in credit outcomes throughout that period. Tangible book value per share increased 21% this year, the third straight year of growth greater than 20%, and we believe that we are nearing the point where we'll be able to increase capital distributions while continuing to further strengthen capital. On Slide 5, diluted earnings per share was $1.76, up from $1.48 last quarter and $1.34 a year ago. This quarter's figure includes an $0.08 per share headwind from the charitable contribution, offset by a positive $0.11 per share combined impact from the reversal of the FDIC special assessment and net gains in our SBIC portfolio. As shown on Slide 6, adjusted PPNR of $331 million was down 6% sequentially and up 6% year-over-year. When further adjusted for the aforementioned charitable contribution, it was down 2% versus last quarter and up 11% versus the year ago quarter. With that high-level overview, I'm going to turn the time over to our Chief Financial Officer, Ryan Richards, for additional details related to our performance. Ryan?

Thank you, Harris, and good evening to all. Beginning on Slide 7, you will see the 5-quarter trend for net interest income and net interest margin. Net interest income increased by $56 million or 9% relative to the fourth quarter of 2024 and increased by $11 million relative to the prior quarter. For the second consecutive quarter, growth in average customer deposits in excess of loan growth aided our ability to improve funding mix and reduce overall funding costs. As a result, net interest margin expanded for the eighth consecutive quarter to 3.31% -- our outlook for net interest income for the full year of 2026 is moderately increasing relative to the full year of 2025, supported by favorable earning asset and interest-bearing liability remix in addition to growth in loans and deposits. Our guidance assumes 225 basis point cuts to the Fed funds rate occurring in June and September of this year. Slide 8 presents additional details on changes in the net interest margin. The linked quarter waterfall chart on the left outlines changes in both rate and volume for key components of the NIM. The net interest margin expanded by 3 basis points sequentially as improved funding mix and lower borrowing costs offset reductions in asset yields. Against the year ago quarter, the right-hand chart on this slide presents the 26 basis point improvement in the net interest margin, which benefited from the improved cost of deposits. Moving to noninterest income and revenue on Slide 9. Presented on the left in the darker blue bars, customer-related noninterest income was $177 million for the quarter versus $163 million in the prior period and $176 million 1 year ago. You'll recall that last quarter's customer-related noninterest income results included an $11 million impact from the net CVA loss, primarily driven by an update in our valuation methodology. Adjusted customer-related noninterest income, which excludes net CVA, was $175 million for the quarter, representing a new record quarter for the company. This increased $1 million versus the prior quarter and $2 million versus the year ago quarter. The chart on the right side of this page presents both total revenue and adjusted revenue for the most recent 5 quarters, which were impacted by the factors previously noted for net interest income and customer-related fee income. While not presented on this page, it is notable that on a full year basis, capital markets fees, excluding net CA, increased 25% compared to the full year 2024, driven by higher customer swaps, investment banking and loan syndication fee revenues. As was mentioned in prior earnings call, we set an aspirational goal to double capital markets fees when Zions Capital Markets was formally launched in 2020, consolidating existing product offerings under new executive leadership with a mandate to invest in additional capabilities. We have accomplished that goal and see continued opportunity for outside growth in this business. Our outlook for customer-related fee income for the full year 2026 is moderately increasing relative to the full year 2025. We currently expect that we will be at the top end of that guide. Growth will continue to be led by capital markets, followed by loan-related fees with broad-based growth in the remaining categories from increased activity. Slide 10 presents adjusted noninterest expense in the lighter blue bars. Adjusted expenses of $548 million increased by $28 million or 5% versus the prior quarter and increased 8% versus the year ago quarter. As presented here, adjusted noninterest expense includes the aforementioned $15 million charitable donation. When further adjusting for the donation, expenses were up 2% versus the prior quarter and up 5% versus the year ago quarter. Expense increases for the quarter include increased marketing and business development expenses, higher costs associated with application software licensing and maintenance costs and normalization of legal fees after an approximate $2 million reimbursement of attorney fees last quarter. We expect to continue to manage expenses prudently while investing in revenue generation to support growth. Our outlook for adjusted noninterest expense for the full year 2026 is moderately increasing relative to the full year of 2025. The expense outlook considers increased marketing-related costs, continued investments in revenue-generating people and business lines and increases in contractual technology costs. We continue to expect positive operating leverage in 2026 that we currently estimate around 100 to 150 basis points. Slide 11 presents the 5-quarter trend in average loans and deposits. Average loans were flat over the previous quarter and 2.5% over the year ago period. Ending loans increased by $615 million sequentially with strong commercial growth in our Texas, California and Pacific Northwest markets. Total loan yields decreased 15 basis points sequentially. Our outlook for period-end loan balances for the full year of 2026 is moderately increasing relative to the full year of 2025 and assumes growth will be led by commercial loans, primarily in the C&I and owner-occupied subcategories with additional growth from commercial real estate loans. Average deposit balances are presented on the right side of the slide. Relative to the prior quarter, total average deposits increased 2.3%. Average noninterest-bearing deposits grew $1.7 billion or 6% compared to the prior quarter. This was partially as a result of the approximate $1 billion of migration into a new customer interest-bearing product -- excuse me, migration of a consumer interest-bearing product into a new noninterest-bearing product at the end of the last quarter, which is now being fully reflected in average balances, but also represents the success our bankers have had this quarter in executing on deposit gathering initiatives. The cost of total deposits declined by 11 basis points sequentially to 1.56%, aided somewhat by the lag effect from the time deposit repricing from benchmark rate cuts in the latter part of 2025. Further opportunities to reduce deposit costs will depend upon the timing and speed of short-term benchmark rate changes, growth in customer deposits and market competition and market deposit behavior. Slide 12 provides additional details on funding sources and total funding costs. Presented on the left are period-end deposit balances, which grew by $766 million versus the prior quarter, enabling us to reduce higher cost short-term borrowings, which declined by $653 million or 17% during the quarter. As seen on the chart on the right, our total funding costs declined by 16 basis points during the quarter to 1.76%. The trending in our securities and money market investment portfolios over the last 5 quarters is presented on Slide 13. Maturities, principal amortizations and prepayment-related cash flows from our securities portfolio were $554 million during the quarter or $288 million when considered net of reinvestment. The paydown and reinvestment of lower-yielding securities continues to contribute to the favorable remix of our earning assets. The duration of our investment securities portfolio, which is a measure of price sensitivity to changes in interest rates is estimated at 3.8 years. Credit quality is presented on Slide 14. Realized net charge-offs in the portfolio were $1 million -- excuse me, were $7 million this quarter or 5 basis points annualized. Nonperforming assets remained relatively low at 52 basis points of loans and other real estate owned compared to 54 basis points in the prior quarter. Classified loan balances declined sequentially by $35 million, driven by a $132 million reduction in CRE, offset in part by a $92 million increase in C&I classified loans. We expect the CRE classified balances will continue to decline going forward through payoffs and upgrades. During the fourth quarter, we reported a $6 million provision for credit losses, which when combined with our net charge-offs, reduced the allowance for credit losses by $1 million relative to the prior quarter. The allowance for credit losses as a percentage of loans declined 1 basis point to 1.19% and the loan loss allowance coverage with respect to nonaccrual loans increased to 215%. Slide 15 provides an overview of the $13.4 billion CRE portfolio, which represents 22% of loan balances. Notably, this portfolio continues to maintain low levels of nonaccruals and delinquencies. The portfolio is granular and well diversified by property type and location with its growth carefully managed for over a decade through disciplined concentration limits. As it continues to be of interest, we have included additional details on certain CRE portfolios in the appendix of this presentation. Our loss absorbing capital position is shown on Slide 16. The common equity Tier 1 ratio for the quarter was 11.5%. This, when combined with the allowance for credit losses, compares well to our risk profile as reflected in performance for loan losses. We expect our common equity, both from a regulatory and GAAP perspective, to continue increasing organically through earnings and the AOCI improvement will continue through unrealized loss accretion in the securities portfolio as individual securities pay down and mature. Importantly, our organic earnings growth when coupled with AOCI unrealized loss accretion has enabled us to grow tangible book value per share by 21% versus the prior year. And as Harris noted earlier, is our third year of tangible book value growth in excess of 20%. We believe that we are nearing a position to increase capital distributions while continuing to invest in our franchise to support profitable growth. Slide 17 summarizes the financial outlook slide over the course of our prepared remarks for the full year of 2026 as compared to the full year of 2025. Our outlook represents our best estimate of financial performance based upon current information.

This concludes our prepared remarks. As we move to the question- Bonn, can you please open the line for questions?

[Operator Instructions] Our first question comes from Manan Gosalia with Morgan Stanley.

I just wanted to start with a quick clarification question. Just on the guide for expenses. What is the base for the moderately increasing guide? I know you have at the back of the earnings release an adjusted noninterest expense number of $2.1 billion, $2.122 billion. Does that -- is that the right base? Or should we also be stripping out the charitable contribution for this quarter?

Yes. I would ask you to think about the base stripping out the charitable contribution for this quarter and then rolling forward into next year, thinking about really that activity relates to, as Harris mentioned, the 3 years forward look about things that might otherwise be tax deductible with the spend outlay at that time. So that's probably where I would anchor you.

Got it. So basically take that $2.1, $2.2 billion number and then strip out the charitable contribution from that and then to moderately increasing off of that.

Yes, that's certainly how I think about our core result, yes.

Got it. All right. Perfect. And then just a broader question on expenses. You guys operate in a pretty attractive footprint, and we've seen a lot of larger banks come out and highlight growth in branches in new markets and including some of yours. Are you seeing any increased competition in your markets? And if you are, is that the driver behind some of the increased marketing and tech spend that you called out in the deck?

I think we have -- for as long as I can remember, we faced new competition, particularly during good times. These times are reasonably good. And sometimes they go away when times turn tough. But it's -- that is not per se what is driving our focus on increased marketing spend. It's a revamp of some of our products. And it's a belief that after spending the better part of a decade doing a lot of internal kind of reengineering and fixing a lot of plumbing that we're really in a position to be able to grow at a better clip than we had been over the last decade. So we want to do it prudently and carefully. We care a lot about the credit culture in the company, et cetera. But we're determined to actually spend more on growth initiatives. And so that's what you've seen this past year. You'll continue to see that in the coming year. it's not because of any particular new entrant or anything like that, although they're certainly there. We're in markets that are pretty attractive. And so that's wonderful, but the dark under side of that is it's attractive to folks who aren't here yet. So that's always part of the story.

Our next question comes from Dave Rochester with Cantor Fitzgerald.

Just want to start on the NII outlook for '26. I appreciate all the color on the rate cuts. I was just wondering what you're assuming for the funding of loan growth if you're assuming that securities runoff continues and you fill in the rest with deposit growth. And then the magnitude of any kind of funding remix out of broker deposits or out of wholesale funding that you're assuming within that guide. Any color on any of that would be great.

Yes. Thanks, Dave. And I can give you some broad strokes. We don't typically deconstruct deposit growth or have any specific guidance about that moving forward to a year. But to your earlier point, certainly, we see the potential for remix on both sides of the balance sheet contributing to the NII outcome. We believe we still have some room to run with the investment securities portfolio before we really feel pinched on the sort of how we think about liquidity stress testing and liquidity ratios. That said, I don't know that we'll continue to see it maybe as forceful as it has been in the past. We're probably getting closer to a taper point. But there is room for additional remixing out of securities into loans and/or paying down broker deposits or wholesale funding. We're spending a lot of time building back from Harris' comments, thinking about growth and what growth looks like for 2026. And we certainly have some aspirations and some plans more than aspirations to build out our deposit base, focusing on granular deposit growth and putting marketing dollars behind initiatives that would help us drive that with the intent, of course, of continuing to pay down those broker deposits where we've had good success year-over-year, but also other short-term borrowings and the like. So stopping short of giving you a specific number because I'd be hazarding a number of assumptions, that is certainly where we're headed -- intend to be headed as an organization.

Great. Sounds good. And then I know you guys have -- we talked about this in the last call, talked about a 3.50% margin. We're only 19 bps away from that now. We're in '26. Is this something you think that we can hit by the end of '27?

I'm not going to hazard put a time frame on it. I think it has so much to do with what happens with rates. And we're going to have a new f here. We're going to have more going on there that I want to hazard a guess about. But as I've said previously, my comment about is really intended to suggest that I think over time that that's probably getting pretty close to what a stable state could look like for us. We've made a lot of progress. We've got a ways to go. I continue to believe that over a longer period of time that the risk is to higher rates. And so we've reduced our asset sensitivity somewhat. We're closer to neutral right now, but I think very mindful of the possibility of higher rates. I want to be careful that we can deal with that. And -- but in a little -- in a prolonged period where you have kind of moderate short-term rates, some slope to the curve, I think that's where we can get to. But whether that happens in the next 7 or 8 quarters, hard to say.

Our next question comes from John Pamcari with Evercore ISI.

On the loan growth front, I appreciate the moderately increasing guide. Underneath that, could you help unpack it a little bit in terms of what type of dynamics you're seeing on the loan growth front? Are you seeing demand strengthen? Are you seeing some pull-through in terms of line utilization? And -- and are any of these growth initiatives that you just discussed, Harris, in response to the question, is that banker hiring that in certain areas that can drive some of this growth?

Yes. I mean we've hired some really good bankers, particularly in the California market, but elsewhere as well. We are very focused on small business lending. That's really central to our thinking about growth is banking smaller businesses. They bring great deposits. We think that our history and our organizational structure and our people are really geared toward that kind of business in a big way. We've seen this past year a near doubling of the number of SBA 7(a) loans that we made and about a 53% increase in dollars produced. I expect that we'll continue to see very strong growth in that category. I mean we're putting training dollars and marketing dollars and a lot of focus into that. It's not just the SBA program, but just banking smaller businesses generally. And so if there's a particular sweet spot for me, it's kind of watching what happens there. $1 of growth there is better than typically than a couple of dollars of growth in a lot of other places. And so it's not always just the percentages, it's kind of the quality -- I mean we're really trying to build a balance sheet that that is more productive and it's growing and serving more customers at the same time. So that's -- anyway, that's in a nutshell, how I think about it.

John, this is Scott. I would just add to that, that similar to what I said last quarter, the growth is really going to come in C&I and owner-occupied. We do think we're going to see some growth in CRE. Our goal for as long as you've been covering us has been that we want to grow CRE a little less than we're growing the overall portfolio. And we've fallen a little short on that recently. But I think you'll see some CRE growth where we haven't seen much in the past. I think our municipal business and our energy business are 2 businesses that have some nice upside potential, and they've been a little flat. And so clearly, the real estate -- the sentiment about CRE and tariffs and economy has caused the whole industry to see sort of sobering loan growth numbers. But I think we're well positioned as business sentiment improves for the reasons Harris said, but also our -- this is going to sound kind of squishy, but it's true. Our call programs are more energized than ever before. And this advertising spend and marketing spend that Harris referenced, it's not just incrementally -- it's not just sort of a sequential thing. I mean it's a significant change, and it's very targeted to small and medium-sized businesses, granular deposits, this SBA initiative that Harris mentioned. So...

I'd add one other thing that is if you look across the industry, a lot of the commercial loan growth has come out of increased exposure to NDI, the NFI sector. And notwithstanding having stepped on landline in the fourth quarter, we have not been growing that portfolio and don't really intend to in any kind of meaningful way, any deliberate way. And so in a relative sense, that's actually kind of a headwind comparatively to peers. My hope is that we can actually make up for that again, in some of these areas we've been talking about, small business. We will have some CRE growth. And we'll probably see a little bit of municipal growth, but a lot of it will be commercial.

And just underscoring what both Harris and Scott have said and bridge you back to Dave's earlier question, it's not just the trade-off between securities and loans or broker deposits or wholesale borrowing, it's the mix within the loan portfolio that both Harris and Scott described that will be beneficial for NII as we're seeing it. The other part that I didn't pick up in my earlier response was, and we talked about it, the terminated swap effect, speaking of headwinds, that's been a headwind for us that's been diminishing thankfully over time that we -- as we chart the year of 2026, we see about $29 million worth of headwind associated with that, about half of what it was in 2025 as being another contributor towards a better NII outcome for 2026.

Got it. All right. And then separately on capital, just wanted to get your updated thoughts on the potential timing of a return of share buybacks. I believe you had indicated you're kind of nearing the point where you could consider capital return and increase in it. I think your CET1 ratio, which you've been watching a little more closely, increased about 40 basis points this quarter and then your CET1 up 60 bps. And so both TCE and CET1 heading in the right direction. So curious what your updated thoughts are there.

I think it's probably this year, but not -- probably not this next quarter. In the second half, I think you'll see -- I would expect we're going to be in a position to start to accelerate capital returns. But I'm not going to give you a target amount, et cetera. At some point, we're in a position to do so, we'll announce something. And -- but I don't think it's a long ways off.

Our next question comes from Chris McGratty with KBW.

Just following up on that question on the buyback. I know during the 2023 banking drama, the rating agencies got pretty loud about capital levels. I guess when you do announce or when you are preparing to announce the buyback, how important is that? And again, what -- is that a tangible common equity consideration versus the CET1? How are you thinking about all the constituents?

Listen, clearly, it's an important stakeholder for us, and we really appreciate the engagement that we get. And certainly, I think they've appreciated the fact that we've been in a build back mode here for a good long time. So we're not suggesting there's a wholesale change here. I think that it's more of a recognition that we're still building back on an AOCI inclusive basis to where we think peers are. It's just the timing, whether there's an opportunity to kind of change the pacing of how long it takes to converge. So as Harris pointed out, it's yet to be determined. all those things are subject to OCC approval and Board approval. But we continue to -- thank you for John's acknowledgment earlier that there's been some really good trending on this basis. We've seen that as well, and it's showing up in our statistics and how we're growing our tangible book value, all really, really positive. And when you look at that headline number, there's a lot to like on it. We still tend to screen lower among our peer set when you include AOCI. So we're not giving up on this kind of tangible book value accretion path that we're pursuing. It's just a question of whether or not there's an opportunity to do something along the way while you're driving convergence.

I think it's helpful that a good portion of this tangible common equity build has been facilitated by -- it's locked in place. I mean it's highly predictable. And that ought to be important to rating agencies. It is to us that it's something that time takes care of as much as anything. So we'll feather things in. It's not going to be a cliff event, but we want to continue to build capital, and we're looking at it CET1. We think about it in a world where AOCI is included in the number. But also from a regulatory perspective, it looks like there's nothing really imminently on the horizon that would change the current treatment of AOCI in capital. So -- and I think we'll have some room.

Great. And then the follow-up would be on the source of deposit growth. You may have touched on it, so I apologize. Ryan, about 5% noninterest-bearing growth in 2025, I hear you on the initiatives. Within your guide for '26, did I miss what are you assuming for NIB growth or NIB mix?

Yes. We don't typically guide on deposit side of that, Chris. And certainly, we just try to roll it into our NII and how we see that holistically. But suffice to say, based upon the things that we're prioritizing for strategic initiatives that we certainly would expect to see growth across the noninterest-bearing dimension as well as interest-bearing deposits, trying to pull those whole relationships, net new relationships into the bank. So that's where that whole growth orientation you're hearing from us, not just this year, but going into last year, putting some marketing dollars and some real focus behind those campaigns. In terms of the refreshing, as Harris alluded to before, of our offerings, potential to bundle products that we think are really relevant for our clients and the like.

Our next question comes from ernard Von Gizycki with Deutsche Bank.

Maybe just following up on noninterest-bearing deposits. I'm just curious that most of the growth there, the $1.1 billion year-over-year and then the decline $310 million sequentially. Was there growth from new customer acquisitions within the consumer gold account? And can you just share now that legacy account migration has now ended, how do you expect this to trend from what you've been hearing from the branches?

Yes, there was -- yes, there has been growth, although it's -- these accounts, we've opened new -- these aren't just conversions of existing accounts, but the new accounts, we've opened close to about 4,000 of them since we kind of relaunched this a few months ago. I expect that number to pick up in '26. We're seeing average balances of about $10,000 per account. For established accounts, we're seeing -- it's about triple that. And so in other words, it's attracting a kind of clientele that we think actually can lead to really substantial balances. The total size of deposit relationship in this whole portfolio of almost 50,000 accounts is -- averages about $125,000 per customer. And so we think it's a really attractive kind of focus that group to be focused on. And that -- yes, it should help. But it also -- I mean, noninterest-bearing accounts are also -- they're subject to what happens to interest rates. A big portion of the commercial loans are supporting the provision of services through account analysis, for example. There are a lot of other things going on that can move these numbers around. But we're trying to make sure that as we think about the long term that we're continuing to build a really solid base of granular accounts that are that are -- they're smaller, they're insured, but they're not tiny. They're actually really good business. So that's what we're trying to do.

And I would just add that the number Harris referenced on sort of net new kind of accounts, we're really just kicking this campaign off. We were piloting it in the second half of '25 and -- but it's now rolling out with greatly enhanced marketing across the entire company. So...

Got it. I appreciate that. Just my follow-up. I think you've indicated in the past that you expect 2 to 3 basis points a quarter of fixed rate asset repricing. You mentioned the 2 rate cuts assumed in '26. Just update us here, same assumption. And if the rate -- if the Fed is at a rate cut pause, how does that estimate change, if at all?

Yes. Thanks, Bernard. I mean what we're currently seeing now, obviously, with the changes we had later last year, we're not seeing quite that level in terms of fixed loan repricing impacts on our earning asset yields. Right now, we would say is that around 1 basis point as opposed to where we were previously. And then with additional cuts in the future, you can imagine that it would erode that value opportunity for us.

Our next question comes from Ken Uston with Autonomous Research.

Just wondering, I know the question of tailoring has come up on prior calls, but now that there's been even more discussion from the regulatory front about the potential to either index levels or maybe even raise the bar fully. Are you thinking about anything differently with the asset base still hanging around $90 billion in terms of either future growth investments you have to make, your outlook on acquisitions, et cetera, as we wait maybe a more formal change than we've seen in a couple of years?

Yes, Ken, I think as we've seen -- as we've said periodically over the last couple of years, the -- even without the announcements from the OCC with respect to their heightened expectations rule and others, similar kinds of changes that have been proposed or made. We didn't see the $100 billion threshold as posing any real kind of a threat to -- as we noted, we were -- because we were the -- we were actually the smallest systemically important financial institution in the wake of the passage of Dodd-Frank back in 2011. I mean, we were subject to all of the industrial strengths that JPMorgan Chase and Bank A, everybody else wants. And so we built the capabilities, the models, not only for credit stress testing and stressing the balance sheet, liquidity, et cetera, all of the work that went into building sort of COSO compliant, 3 lines of defense, risk management infrastructure, et cetera. Our intent is to never dismantle that. We found a lot of value in it. I mean, some of it was taken to extreme, some of it was some of the documentation, et cetera, was painful and overly expensive, et cetera. But we've maintained the capabilities and it, I think, makes us a stronger company. And so we just don't think there's even much of any kind of speed bump going across $100 billion. We don't feel compelled to try and boy, you're going to cross 100, you got to get to 200 or anything like that sort. It's going to be about the same as crossing 80, which was kind of a nonevent. So that's how we're thinking about it. It's not an inhibitor in terms of thinking about deals. It's not a reason that we would think about deals. We only think about deals in the event that they were really attractive. And right now, it's -- I don't know that we're likely to see anything. And we need to improve our valuation. something comes along that is absolutely absolutely compelling, we'll certainly consider it. We're not going to be taking pledges or painted into a corner of thinking about things in a particular way. I hope we'll think about it as good long-term ownership of the business would. But the $100 million threshold isn't a factor one way or the other in that thinking.

Understood. And Ryan, one just follow-up on the operating leverage point earlier. So is it the right way to think about it? You mentioned the core base and then add back the charitable -- take out the charitable contribution. That's the base in which you're talking about the 100 to 150 basis points of operating leverage.

Yes, that's correct.

And just the range, it's great to hear you guys focusing to the $100 million, $150 million. But what would be the difference on your expense growth? Would it just be like how revenues come out and you have some flex to triangulate up and down? Sorry for that extra one.

Yes. I think you always have to recognize that if the revenue environment changes, you have to rethink the way that you approach your expense side of it. But I just -- I included that as part of my written remarks and spoken remarks because it wasn't obvious, of course, with our forward guidance and the words we choose, whether or not there was a positive operating leverage in there. And we absolutely believe that's the case as we see it today. And that's where we -- if you look at what our results have been for quite a long time, we've been pretty consistent in driving customer fee growth on a compound annual growth rate of about 4%. That's really what we showed up with this past year as well. And we think we see an opportunity to do a little better on that dimension moving forward, building on some of the momentum we've been having in our businesses. And that's going to be, we think, really helpful in driving some of that leverage. But we'll pay attention to expenses as we move through the year. Harris has always said we're going to run this place for the long term. We're going to invest in growth and do things that maybe in the moment don't pay for themselves, but we've had some pretty nice returns on the investments we've been making in recent years. So that's how we're thinking about it.

Our next question comes from David Smith with Truist.

On credit, you highlighted an expectation for CRE classified to continue to decline. There had been an uptick in C&I classified offsetting some of the CRE decline we had this past quarter. Is there anything chunky in that $92 million C&I increase this quarter in terms of like a few big particular names? And just as a follow-up, would you also expect general stability in the C&I classified size of the portfolio? Or would there be a bias towards an increase or a decrease as you see things today?

Sure, David. This is Derek. Let me answer the second question first. It's hard to say exactly where the C&I downgrades may come from or improvement. It just generally depends on the economy. We do see CRE improving throughout the year. We have a good line of sight on that. We just continue to see it taking a little longer for some companies to perform. One thing I will say because we're not concerned with losses, I think we're going to try to retain a lot of the loans. We may be willing to carry some of the criticized and classified real estate loans a little bit longer just because they're on their way to performance and an upgrade. As far as the C&I downgrades, I wouldn't say there's anything chunky in there. It's pretty broadly distributed across industries. And it's something we're watching. Again, it depends on where the economy goes. I would point out that while we've seen the uptick this quarter in the C&I classifieds, we're actually down since year-end 2024 for C&I classifieds. So it's not jumping out as concern at this point, but something that we're paying attention to.

Our next question comes from Anthony Elliot with JPMorgan.

A follow-up on operating leverage. You gave us the base for expenses backing out the foundation contribution. But just to clarify the base for revenue, Ryan, does the base for fee income exclude the adjusted noncustomer fees? I think that was $44 million you have in the back of the press release.

Yes. Can you say that one more time?

Yes. I'm just curious if you can give us the base for fee income, right? You have some items you back out on Slide 5 and the back of the press release. So if you can give us the base to use for operating leverage, that would be great.

I think the customer fee income.

It's hard to predict year-to-year what we're going to get on the security gains and losses. So that's just kind of how we think about core expenses.

Of noninterest income.

Okay. And then my there's directionally a range you point us to for expenses within your guidance of moderately increasing.

Yes. I mean, listen, if we first the tape about a year ago, we were coming out of a time when we were keeping things, I think, pretty tight, slightly increasing would have been more and maybe at times slightly to moderately, we allowed that to start migrating up because of this growth agenda. So I don't know that would point you to a specific point. We usually talk about moderately being like a mid-single digits type number. I probably just warrant you somewhere in the middle of that. We'll see what we get. But really, the intent here is to do things that feel strategic to us and to -- and it should feel different and look different if we're successful in our growth goals. But the types of numbers that we're talking about that Scott alluded to before, may not be fully evident, but we have some real aspirations in driving commercial loan growth and allowing for some increased CRE. There could be some offsets there in the sense that we've talked a little bit in the past about what we're doing on our 1 to 4 family resi strategy and having more of an orientation to held for sale. So we think that there's potential for more of that to show up this year. But without that, we could really put, I think, some decent loan numbers up.

On the expense guide, also, I would just say that there's -- and we've said this in previous years, but there's probably about $40 million of savings initiatives in there that keep us at the expense growth rate number that we're at. So this isn't just -- it's just the same as last year, plus a little bit more. It's there's quite a bit of work on continued efficiency gains and optimization and particularly with AI and some of the things we're doing with process change and new technologies that can help us lower cost as well as outsourcing. We have a lot of levers to pull on, and that helps keep the expense number down and has for years. There's nothing new about it.

Our next question comes from Janet Lee with TD...

For clarification on NIM. So if I look at your earning asset yields in the fourth quarter, it looks like lower rates had an impact on your earning asset yields declining about 15 basis points. And you talked about 1 basis point of fixed rate asset repricing lift. So if I assume 2 to 3 rate cuts in 2026, is it fair to say earning asset yields are declining through 2026 and the NIM trajectory is really dependent on the shape of the yield curve and what you can do on the deposit front?

Yes. Listen, I think those are all fair observations and deposit production and our success there will always have an outsized impact on how we show up on NIM. Our success year-over-year has been able to manage down our funding costs more aggressively than what we're seeing in terms of on the asset side because we've had some really nice remix that as an offset to some of the things that would otherwise play through on the resetting of benchmark rates. We haven't guided yet, and it's almost like -- I can't imagine we go through a call without saying something about latent and emergent type things. But we do include some of those materials in the back. I think Harris alluded to before, we took a little bit of the edge off of some of our asset sensitivity metrics that you would have otherwise seen us maybe earlier through some hedging activities that we put on, just trying to guard against maybe some near-term rate cuts. What the asset sensitivity would tell you is that we still think there's opportunities for things to play through on a latent basis, things that haven't already found price discovery on fixed assets playing through. We have about 60% of our term deposits that are set to reprice in the first quarter of 2026. So -- but as somebody who as a group that's still asset sensitive on the whole, we say we show with the overlay of the forward curve that, again, just using a sensitivity view that we could stand to have a better 1-year quarter forward outcome even against the backdrop of a forward curve that would apply 2 more rate cuts. And that, of course, doesn't take into account our prospects for loan growth and a dynamic balance sheet, the mix of our loans, how we would be taking cash flows from our securities portfolio and reinvesting them in other places, including loans and other gainful uses. So there's lots of contributing factors in there. Hopefully, that gives you a little bit of direction about how we feel and how we're guiding for NII 1 year hence.

That was very helpful. And clearly, you've made some good strides in improving your capital levels, including AOCI accretion that has happened over the past years. Could you -- and clearly, you're more open to doing buybacks over the near to intermediate term. Could you give us a refresh on your M&A stance?

Well, I think I did a few minutes ago. Our stance is we're not -- we don't have a stance per se. We're not looking for deals. They come along and they make a whole lot of sense, might be interested. I don't see us doing anything really large. That would surprise me at the moment. And so it's just not -- it's not a part of our daily -- day-to-day kind of thinking, frankly, in terms of what we're really focused on. So I've been pretty determined not to say that we're not -- that we would never do a deal or anything of that sort. That said, we're not looking to do deals to -- as I said earlier, to become a particular size or we do things that we think are really, really attractive financially and fit culturally, et cetera, has to check some boxes before I'd be particularly interested.

We have another question from Manan Gosalia with Morgan Stanley.

I think you mentioned in the prepared remarks that you could come in at the top end of the guide on customer-related fees. Can you just talk about what the drivers are there?

Yes. Matt, this is Scott. I think we're inclined to make that comment principally because we're seeing really good momentum across a wide range of our customer fee product areas, and we see that carrying into the new year. So that, combined with this additional advertising in these products, just give us really a nice outlook, we think, on customer fee income. But it's -- instead of capital markets dominating the growth in our fee income, we're very encouraged by what we're seeing across almost all of our fee income businesses. And that's a little bit different story and a little bit different guide.

Relative to what you've said before.

Manan, were...

Our next question comes from Jon Arfstrom with RBC Capital.

A couple of follow-ups. Scott, one for you. When you look in the earnings release, the FTEs are down the last couple of quarters. And you might have just touched on it a few minutes ago, but can you talk a little bit more about what you're doing in terms of AI and tech and just the general FTE outlook? Are you seeing real impacts and that's what's showing up in the FTE count? Or is it?

Yes, John. No, thank you for that question. And you'll remember a high point for us was August, really the third quarter, second quarter of 2019 when we were at about 10,300 colleagues. We're now down below 9,300. And we think that, that number will continue to go down over the next couple of years. And it's -- over the short term here, outsourcing, our outsourcing strategy, we've been reengaging with that and with 3 outstanding partners that work with us in other ways as well. And so that will continue to have momentum. We probably -- a year ago, we were well below where peers are. Most peers would report that they outsource somewhere between 10% to 15% of their stated FTE base, and we were probably around 3% -- so we're really just leaning into a lever that has always been available to us, but we're more encouraged and confident about it. So that's where you're going to see some of it. But the use of AI, again, we've been using AI for a long time for things like fraud detection, client authentication, product recommendations, financial statements spreading, some unstructured document processing, et cetera. And so -- but the proliferation of new ideas that can remove touches, human touches from a process, can remove multiple data entry, can streamline what we do, it's significant. And we're moving kind of from an exploratory phase, which I'd say we've been in for the last 1.5 years to really highly focused on a small couple of handfuls of projects where we can see the most leverage in simplifying what we're doing in end-to-end processes. So those would be the kind of automation, AI, outsourcing would be pretty meaningful contributors.

Okay. And then just one more on loan growth. Just the improved expectations, are the borrowers more optimistic? Or is it you becoming more comfortable or a combination of both? And then I'm just also curious kind of what's going on at Commerzbank. The growth numbers were pretty strong there, if you could touch on that.

I'm happy to take the first one. I mean I think borrowers are business owners, CEOs, they're kind of in the same place they've been for the last couple of years, again, between commercial real estate industry concerns, tariffs, the economy in general, whatever happens to be in the newspaper this morning, it just has people a little uncertain. And so I think that's one piece. And the other piece is just we are -- we feel very encouraged about all the steps we're taking to grow, which we've talked about in this call.

I'd say Commerzbank, their relative size can produce more volatility probably in terms of growth numbers than you'd see in other parts of the company. So I don't think there's anything -- that's probably necessarily trend there.

This now concludes our question-and-answer session. I would like to turn the call back over to Shannon Drage for closing comments.

Thank you, Bonn, and thanks, everyone, for joining us tonight. We appreciate your interest in Zions Bank Corporation. If you have additional questions, please contact us at the e-mail or phone number listed on our website, and we look forward to connecting with you throughout the coming months. This concludes our call.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.

We're going to get started here. Up next, we're pleased to have Zions joining us at the conference. They've had a strong year, posting improving top line growth driven by margin expansion, continued growth in fee income, all while maintaining a tight hold on expenses. While there was some noise during 3Q regarding credit that appears to have been a one-off, hopefully. And its credit performance continues to be amongst the best in the industry.

Here to tell us more about what that is Chairman and CEO, Harris Simmons. Welcome, Harris.

Thank you.

So Harris, obviously, there's been a lot going on out there. We had tariffs. We had the government shutdown, mix numbers on jobs. It feels like the Fed is still in an easing cycle. So lots of different things going on in the macro. I guess given that as background, maybe start off how you're feeling about how the bank is positioned for this environment that we're about to enter.

Well, I think I'm pretty sanguine about what the environment looks like. I mean if I go back to earlier in the year and the tariffs and the Liberation Day, et cetera, I mean, I think there was a lot of anxiety about what this could do to the economy. I think what's played out and my view is that owners of businesses have started to realize that Donald Trump is among -- beyond anything else that he's basically transactional that he's -- there's a lot of plasticity to his approach to solving problems.

And so you're seeing tariffs come, go, change, up, down, and it's become kind of almost noise that people -- a lot of people filter out. Now there are some businesses that are actually impacted by it and for them, it's a challenge. But I think as -- and in terms of creating anxiety broadly across the economy, it hasn't played out as badly as I might have expected. And so what we're seeing is probably some improving just appetite to borrow, to expand. And I'm optimistic about what the coming year holds.

So I guess just as a follow-up, as you're out talking to clients, what are you hearing in terms of sentiment across your different geographies? And any differences in terms of size or location?

I don't see a lot of difference. I just -- pretty consistently, it's not sort of rapid bullishness, but it's an economy that's working. It keeps kind of churning out results. And I think businesses are -- the conversations I have tend to be reasonably upbeat about this coming year. And it's -- we see it in small businesses and large businesses alike.

So you seem to have a relatively positive tone. I know you don't like to provide mid-quarter updates, so I'll get this out of the way quickly. But just given all that's been happening over the course of the quarter, government shutdown/reopening, movements in the macro. Any trends that you're seeing in the market, whether it's willingness to borrow deposit competition or activity that has changed over in the last 60 days? And I would say, despite loans shrinking in the third quarter, you sounded pretty upbeat as we move into the end of the year. So any thoughts on how things have shifted...

Yes. The first thing I'd say, I think -- I mean, deposit growth, you kind of make what you want to make of it the pricing. Loan growth is a little different. And I've always believed that forecasting loan growth is something of a fool's errand because having done it for a long time, you tend to extrapolate what you've seen recently.

That said, if I extrapolate what I've seen recently, it makes me feel like we're going to probably have a little better loan growth than I might have expected, say, 3 months ago. And so I think we had slightly to moderately increasing loan growth, something like that. And I think it's probably, today, I'd try to say it's in the moderately strike zone and that's probably with stronger commercial loan growth and still pretty measured what happens in some other parts of the portfolio. So...

So I guess given that, as you said, the guide had been for slightly to moderately, now you're saying it could be moderately or maybe, I'll call it, mid-single digits. Maybe just talk about what's driving the improvement in commercial? Is it greater borrowing from small businesses, is it larger corporates seeing more confidence? What are sort of the areas where you're starting to seeing pick up in activity that's giving you more confidence around that?

Yes. I mean we're kind of seeing both. I mean we're seeing increased activity. Oil and gas is an area, for example, we've seen some increased activity. But C&I, generally, we're seeing on the small business side. We just had a record year in terms of the number of SBA 7(a) loans we did, for example. We were up strongly over the prior year, and I expect that that's going to continue into next year.

And so some of it is kind of specific to kind of what we are really focused on internally in terms of promoting with incentives and marketing dollars, which is mostly on the small business side. But we're just -- we're seeing a little better demand from middle market and larger customers, too.

So an area that's kind of gone in and out of favor for Zions in terms of growth has been commercial real estate, right? And obviously, over the last few years, as the market has been focused on office and multifamily, it's been less of a focus. And obviously, we've seen things like private credit and the like coming into the market. Just maybe just talk about your expectations or your view on the growth of that asset class? And what are you seeing from alternative forms of capital there? And is it impacting the way you approach the business?

Yes. We started about a dozen years ago. After the financial crisis, we basically said, look, over time, we just want to bend the arc of growth in CRE and to have it grow a point or 2 slower than the rest of the portfolio, and we did that. And we brought it down from roughly 1/3 of the portfolio down to something just about 22%.

And I expect that will continue for a while yet. So I see it growing, but at a measured pace. I think that's actually been a really good strategy. It's forced better credit selection by kind of rationing our appetite for it. It's created really good quality. I mean in terms of actual realized losses, it's run less than -- run seven tenths of 1 basis point on average in the last 5 years.

And that's been through a period where everybody is concerned about not only multifamily but certainly office. And so it's actually played out very nicely. And it's a portfolio that I like. I think if it's disciplined done well, you've seen more equity in deals certainly in the last decade than had been the case I think earlier in my career.

And so I think it's fundamentally healthy. We see some impact from private credit, but it's probably actually -- we see as much opportunity in it in that when you're trying to exit a credit, it's actually a source of capital credits you're trying to exit, and that's proven to be useful. So all in all, I think it's kind of a neutral. I don't see it impacting growth.

So you guys have had -- despite limited loan growth, you've had lots of success in terms of driving revenue growth, right? And we've seen the net interest margin expand 7 straight quarters, up almost 40 basis points over that time. Talk about what's driving that? How are you thinking about it going forward? And can this momentum continue in the most updated rate environment?

Yes. Well, certainly, post SVB's collapse, that was kind of a 8 or 9 on the Richter scale in terms of its impact on us and some other regionals. And what had always -- we view it as a strength, which was this really good beta on our deposit base kind of quickly flip almost in the liability because it meant that we had a lot of catching up to do just to maintain what -- it was like kicking a sleeping dog.

And so we've been building back from that. So a lot of what you're seeing, I think, is just trying to get back to normal -- some kind of normalization in terms of pricing and restoring that deposit base. So that's probably been as important as anything. There's also been just a real focus on a continual remix in the -- on the asset side. We've had probably excessive liquidity relative to what we've needed.

We've been bringing the securities portfolio down a little bit, trying to stabilize 1 to 4 family and municipal credit and replace that with better yielding commercial credit. And all of that's been helpful. The other thing that's helped is our demand deposit base, which we kind of expected might continue to drift lower, stabilized. And that's been a real source of strength.

I mean we bank lots of small to midsized businesses. A big portion of that deposit base that DDA base is subject to account analysis kind of pricing where the customers are paying for services with it, which makes it stickier. As we see rates drift lower, earning credit rates probably come down a little bit, and that should help further stabilize and even build it a little bit. So I'm sanguine about that.

You talked a little bit about deposits and funding costs. I mean, I think historically, you had a big advantage over peers in terms of your deposit cost, annual overall funding, that narrowed during the regional banking crisis, and you've been working to improve that over time. I think you're back having lower overall funding costs.

As we progress through the cycle, how do you think about your funding costs, in particular deposit costs, relative to peers? And can we see that advantage sort of widen out again as it had been before all the noise in the banking environment?

Yes. I mean I think that's clearly what we're trying to do. And I think it would be a reflection of kind of what our customer base looks like. And -- so I mean, one of the things we're doing, we are working with larger clients that have -- I mean, there was a period before SVB where we were -- we and others, we were actively managing money off the balance sheet and of money market sweeps, et cetera.

We've been working to try and bring some of that back on, which will probably incrementally increase deposit costs but reduce overall funding cost is what we're trying to do. But maybe a little further we can go with that. But fundamentally, our focus is on building the business with the kinds of smaller -- kind of granular small businesses and mass affluent kind of consumer base that generates a deposit franchise that I think is where most of the value for regional banks ought to come from.

Yes. So maybe one last question to round out the balance sheet and rates and the like. If I look at your recent disclosures, the bank still appears relatively asset sensitive based on your emergent disclosure. Maybe just talk about your position and given how where rates are, have you thought about the benefits of doing more hedging versus less in terms of shifting the overall positioning of the balance sheet?

Yes. I mean it's something we review fundamentally monthly. I mean, we -- it is -- I mean, we do have -- we have a naturally asset-sensitive balance sheet. We do some hedging to try to minimize that. But a lot of what is there -- I mean, it's baked into the pricing in the market, and you're going to -- I mean I guess my fundamental belief is I think even though you're going to end up probably with a more dovish Fed, I think there's a real risk that they actually get boxed in by what happens on the long end of the curve.

You've had -- in the cuts that have taken place since September of last year, come down 150 basis points on the short end, the long end has actually gone up 40 or 50 basis points. And -- so as long as you've got inflation out there, and I think there's going to be a lot -- it's going to be a very interesting time in the history of the Fed to see how a new Chair works with this crowd to navigate this because the last thing that Trump needs is higher term rates that make mortgages totally unaffordable for -- it's already a tough -- really tough housing market for buyers out there.

So I think we try to position ourselves. There's modest damage that can be done by downward pressure. I mean we expect that it will -- it's a little bit of a headwind, but it won't blow us backwards in the new year. And we're trying to leave room for what I think is still, I believe, kind of a reasonably inflationary environment given what's happening with immigration, with tariffs, with the federal debt, et cetera. So we're also trying to protect against that.

So let's shift gears and talk a little bit about fee income and some of the growth initiatives. Zions, like a lot of banks, I think it's growing in 3 main areas: capital markets, wealth and payments. Maybe just spend a little bit of time talking about each, where are you in your evolution? What type of growth businesses should these be versus history? And really, what are your points of differentiation in your go-to-market strategy? And how does this all fit into your 2026 expectations?

Yes. I mean we've had -- we've built a really good capital markets team. And we're really comfortable with the way they're building this business. They have -- these are people who've typically -- all of them come out of large banks with a lot of experience, and so their progress so far has been right on target.

I expect we'll see good growth out of them in 2026 and beyond. We're investing in it, systems, people, risk management, and they're being really well received by customers. And we've got bankers that are working really well with them. So probably our strongest growth comes out of that in the 3 you're mentioning in 2026.

Wealth is -- we think there's a lot of opportunity. I tend to think there's particularly a lot of opportunity kind of on the lower end of that the spectrum. We have lots and lots of small business owners, and they're not well served. I mean these are people -- a lot of people have $200,000, $300,000, $400,000 to invest. We have a really good arrangement with LPL.

And we've built, I think, quite a good mousetrap in terms of being able to serve that clientele with good pricing. And my hope is that, that will actually be a driver of what happens in the wealth space.

On the payments prong. A lot of that actually shows up -- doesn't actually show up as noninterest income. It shows up through net interest income because it's paid for with balances. But it contributes a lot to what I think is probably one of the leading DDA franchises in the industry, and we expect that's going to grow nicely.

We're going to be introducing in March a new small business kind of bundle of deposit-based products that I think is going to be really attractive. And part of what you have to do is you just have to get your people in branches on the retail side of the house excited about selling things. And I think it's going to be a good year for that with our folks.

So I think back over the years, the bank has kind of gone back and forth on making lots of investments to grow, then there have been periods of time you've been in cost-cutting mode, just given what's happening in the environment. I guess, maybe talk about where we are now and now that we've become later in your tech transformation, including the completion of FutureCore, what are the next big areas of investment for the bank that we should all be thinking about?

Yes. Well, I mean, first of all, I'd say you're always in both modes. You'd like to be. I mean -- and you can do 2 things at the same time. I mean we're down -- we got about 9,300, 9,400 full-time equivalent employees, and we're down about 1,000 from its peak. And some of that has been -- there's been some outsourcing and offshoring.

But most of it is just figuring out how to do things more productively. And that continues. And I think we've got things going on with AI that I think will be productive, et cetera. But at the same time, I mean, we've been very much in investment mode with systems over the last decade. We've replaced, I think a lot of you know, we made what I think was kind of an industry-leading kind of push to replace all of our fundamental core loan deposit systems with something that's much more modern from TCS that we're really pleased with.

And that kind of infrastructural investment, we think, is really prime to be able to allow us to grow faster. And the investment probably switches -- I mean, we'll keep investing in technology, that's just going to be always a constant. But a lot of the kind of discretionary spend is going to be on marketing producers. We've hired some really good producers in recent times and capital markets. So those are some of the primary areas where we're going to be spending.

When you think about those areas that you just talked about, technology, producers, marketing, maybe just expand a little bit about how do you think about the payback on these investments? Should they start showing up in revenues over the short to medium term?

Yes. I mean I expect producers -- it probably takes kind of 6 months before it starts to sort of show up and -- but yes, I expect some of the -- some of my optimism about next year in C&I is grounded in the fact that I think we've added some good people.

Got it. So when I think about the financial performance, you guys have been, for a period of time, been very good about generating positive operating leverage. I think you were talking about 100 to 200, four quarters out. More recently, I think you're just talking about positive operating leverage.

But just broadly, how are you thinking about the pace of operating leverage, and that is achievable for the bank on a sustained basis? And maybe just talk about how you think about the drivers and what sounds like it's going to be an improving environment?

Well, I think -- I mean, ultimately, there are -- I have to do the math to see how long you can continue to do positive operating leverage at any given level before you...

Before you start to burn out.

Yes, before you just -- before you have to reset. But I think we've got a ways to run from where we are today, and we're showing good positive operating leverage this year. I absolutely think that continues into next year, probably not at the same pace. I mean, I think -- another part of this is it's -- I mean, on the revenue side, the rate environment plays a big factor where you get most of your revenue from your balance sheet.

But we think that there's enough momentum going into this new year that we're going to see reasonable positive operating leverage. I think my expectation is going to be north of 100 basis points and beyond that, we'll talk about it next year.

Absolutely. So maybe shifting gears to capital, capital allocation. You obviously have strong stated ratios. The adjusted ratios have been improving. And I think you guys have talked about reaching peer levels, hopefully in about a 12-month time frame. I guess a couple of different questions.

One, talk about capital priorities; two, maybe just talk about how you're viewing what the binding constraint is for you right now? And then third, how do you balance getting to peer levels and maybe taking a little bit longer versus being opportunistic and using some of the capital to buy back shares while they're cheaper?

Yes. Well, I'd start by saying, I mean, we've had a really strong tangible common equity accretion over the past couple of years. It will be about 19 -- close to 19% this year, which I think is about as good as you find among the regionals. And so a lot of progress being made. But we'd like to -- and I think that just as a general statement, we want to be -- I want to be sure that when the next storm hits that we're in a good place coming into it.

And so our #1 priority has just been building capital to make sure that marked capital is in a reasonably good place. And I think you have to view that in the context of the risk in your balance sheet and other things. But I think we're quickly getting there. The binding constraint is -- typically, I think of it as CET1 on -- a sort of on a marked basis, but also knowing that just tangible common equity ratios in times of stress are something that you have to pay attention to.

Our priorities, I mean, right now, it's just building back. I wouldn't -- I think we did a deal -- we did a small deal in California down in Palm Desert area about a year ago. I think it's a really good little deal for us. I mean it's a kind of thing that it's minimally disruptive to other things we're trying to do. The numbers worked well. And I'm not want to take pledges does it not do this or that.

I think we're going to -- I hope we're going to think about carefully and thoughtfully. I think we have historically. I have most of my networth tied up in what we do. And I think probably about a sensitive dilution, et cetera, as everybody -- anybody is going to be. But it's all about price. I tell people [indiscernible] earlier today, I mean the best deal I ever did was done at the worst time in our history.

It was during the financial crisis. And it was a deal that was with the FDIC. And not that you're going to find those kinds of economics in this environment. But it's a reminder that you want to be deeply thoughtful about what you're doing and try to make sure that it's really creating value. The one thing I'd pledge is, I mean, we will never grow -- as long as I'm around, we'll never grow for the sake of just growing.

I mean it's not about that. It's really about -- you think you can really fundamentally create better value, particularly at the very local level, the branch level at the -- the economics of what happens in a very local market. And so I don't see us doing anything large at all and being very careful about it.

And I'm hopeful that here in the next year, we're going to be in a position where we actually start buying back shares. I don't think we need to get to our target before we start doing that, I think these are feathering it in, that's my own view, it's going to be our Boards to determine, but that's kind of how I'm thinking about it.

I guess maybe as a follow-up. So in the presentation before you, Bill Demchak from PNC was saying that tangible book value dilution earn back he thinks are the wrong metrics that I think all of us are focused on. Maybe just talk about the parameters that you focus on, whether you do like a dilution, earn back or any financial metrics that could get investors comfortable that you use to think about if you were to engage in doing some tuck-in M&A like it sounds like the focus would be?

Well, it's interesting because, I mean, you get kind of the fads among all of you folks in terms of what's being looked at. And the notion of 3 years are under okay, 3 years over on tangible book value earned back you get these -- and I'd probably agree with Bill. I mean, I think the world is a little more nuanced than that.

And that fundamentally -- and I guess short answer is, I'm not sure there's a given measure where I say, yes, okay, this is green light, red light. I think a lot of what makes a deal ultimately successful has to do with how well you're going to be able to integrate it, how distracting it's going to be, did you have a cultural fit?

I've done quite a lot of this. I've been around for a while, and I've seen -- you get a feel for what's actually going to work and I'd pay a lot more attention to do the cultures work than I am, is it 2.5 or 3.5 years of tangible dilution.

So last quarter was sort of highlighted by 2 losses related to the Cantor Group. And obviously, that and others shift the markets a bit, thankfully, things have calm down. As you've had time to review what happened, I think you were going to review with external parties, anything that you could have done differently? How do you think about any further risk in your portfolio? And are you confident now that you could say this truly was a one-off?

Well, I'm quite confident it was a one-off. I mean we've tried to scrub through the portfolio. More fundamentally, we've engaged PwC to come in because I didn't want our credit people telling me what they could do better, I want somebody who's not conflicted. And they -- and our credit people agree with that, by the way.

They -- I -- one of the things that was maddening about it, I think we actually do credit really well. I mean absent that Cantor loss, our charge-offs in the third quarter were 4 basis points annualized. And that's -- they've run typically south of 10 basis points pretty consistently in recent years. And so as you said at the outset, I mean I think credit has been a strength of ours. And maybe one of the things that made it a little shocking in the market was it was coming from us.

But there are things that happen where you -- it wasn't just the economy was getting tougher, et cetera. Sometimes bad things happen that -- but we're intent on learning what we can, getting an independent view, making changes, making it sustainable. And beyond that, trying to keep -- we're not going to reengineer our whole credit process because we think it actually works pretty well.

Harris, anything on the regulatory agenda for a bank your size? Clearly, things have eased up from an M&A perspective. But I mean you're usually pretty in tune with what's going on in Washington. Anything that's happened there and is changing the way you think about either approaching investing or thresholds or anything of that nature?

Well, you're seeing a lot of regulators on the ground that have got whiplash from administrations, I think. But -- I mean it's been pretty remarkable to see the -- how quickly this new administration with Micky Bauman and Travis Hill and Jonathan Gould have been working together to try to address what I think was probably just a lot of overreach in terms of almost micro management around banks, which in a way I get, but it got to a point where I think it gave rise to a lot of the growth that's taking place in private credit.

It's -- it sometimes artificially hampered what you ought to be doing. I mean the leverage lending guidelines that were resented in the last couple of days, a good example of that. I mean, it was kind of a one-size-fits-all attempt to -- and the world is more complicated than that. There are some companies that have naturally more leverage, more industry -- some industries do than others.

And so I think and what I'm liking about the new crowd, I think they're asking us all to be -- they're not wanting us to throw caution to the wind. It's going back to that we need to be responsible for managing responsibly the credit we're extending to customers. And they're going to be watching that. But with fewer sort of bright line tripwires that kind of gum the system up, I find it refreshing.

Maybe 2 last questions in the last minute or 2 here. So the bank is putting up solid returns. We've seen lots of peers come out with medium-term return targets. I know it's never been sort of a hallmark of Zions. I'm just curious, have you given any thoughts to any medium-term goals, whether efficiency, ROA, ROTCE and any thoughts on how you view this?

I mean the short answer is yes. The other part of the short answer is probably not for today, but...

Yes, now is a good a time as ever.

No. I mean it's something we'll talk about when we put target or 2 out there. I'm probably getting more comfortable with the concept. But I mean what we've been trying to avoid is the quarter-to-quarter kind of numbers management. That's -- but even talking about capital, kind of what our targets are. I didn't give you a number, but I think I've given you kind of how we're thinking about it. And...

So I guess, Harris, you and I had talked -- we've gone back and forth about whether you're going to start with prepared remarks, we went right into Q&A. And I guess in the last minute here, anything you'd like to leave us with in terms of what you think misperceptions of the bank, the way the bank's position that the market is underappreciating into 2026?

No, I think -- well, if I were to do this a 30-second elevator pitch, I'd say, I think we have something that's very close to unique in the Western United States in terms of a focus on small and midsized businesses and their owners and a bank that really has a strong deposit franchise built on a lot of great relationships.

We've got bankers even in branches, we invest in them. We want them to be -- we give them some credit authority. We actually -- we work at this to try to make them effective in serving the kinds of retail clients that come into our bank who are trying to build businesses and trying to do -- I mean it's a passion of mine. I think it is of all of our people, and we're intent on doing it as well as anybody in the industry does.

Awesome. Well, on that note, please join me in thanking Harris.

Thank you.

I am here with Zions Bancorp. For those of you who do not know them, they are an $89 billion asset bank headquartered in Salt Lake City. They are unique and that they operate several segments within their brand. It includes Zions Bank, Amegy, California Bank & Trust, National Bank of Arizona, Nevada State Bank and Vectra Bank Colorado and the Commerce Bank of Washington. Zions has an excellent profile, mid-teens ROTCE, attractive deposits with noninterest-bearing at 24%, fee revenues at 22%, which I want to talk about later. And then a valuation, very attractive at 8x 2026 earnings and 1/3 of tangible book value. So all of this terrific profitability with cheap valuation. With me again this year is Ryan Reynolds? Richards? It is the second year, 2 years in a row, Ryan, right?

I'm so hopeful. And you always land flat when you...

Ryan Richards. Thanks for having you here.

Great to be back. This is my favorite moderator of all time.

Ryan is Chief Financial Officer of Zions, a position he held since 2024. Prior to the CFO role, he served 3 years, beginning as a Corporate Controller for Zions Bank. Before coming to Zions, he was Chief Accounting Officer and Director of Investor Relations at Truist and Corporate Controller at SunTrust. Ryan has had lots of other interesting positions before joining the bank, including [ royals ] at KPMG, and the [ Feds ] division of Banking and Supervision Regulation and at the Bank for International Settlements. Welcome back, Ryan Richards.

Great to be here. I always love this conference.

I'll start, if we could, on the loan side. Your bank has always had a focus on smaller customers. You might have a slightly lower average loan size compared to the peers of your size. And it seems like you're still interested, even though you've gotten larger, you're still interested in small business lending. So can you start with thinking -- what are you thinking there?

Yes, it's wonderful, and thanks so much for facilitating here. Clearly, as a -- predominantly a commercial bank with a growing consumer presence, our bread and butter, it really is the small middle market customers. And it's a place that we've really been focused on for a very long time. What you've heard us talk increasingly about is kind of restoring back to where I think we've been in prior times and our presence in the SBA loan product. They just cut off the measurement year for the SBA, and we moved up the league tables to the 14th, which was good progress to see.

We're not done. I think there's still quite a lot to be gained there because I think that's a place that we really show well. It's a place that I think we've built the franchise to serve those clients and we think, in a differentiated way. And we think that's really the foundation of everything that we do at the bank. It really is a feeder for a lot of the great things that are happening across our businesses.

So that was a very large business for you at one time and then you sort of took it down a little bit. And now you're seeing opportunity, like what sort of made you go back there?

We do. We do think it's -- again, it fits. It's not a stretch. We've done a lot of things technology-wise that's really focused in that area. It's an area that we think our capabilities translate. It's one that when we were very, very successful in starting our clients at the small business level and when we grow them to the middle market companies all the way up into corporates, there's a great deal of loyalty there. And [ you're -- when ] you're part of their story and your story is kind of getting woven. And then our success in employing through things like our growing capital markets offerings. And bringing to bear when the needs arise. Because they've been very, very successful in growing their business, we don't have to step away from them in their growth because now we've got capabilities on the capital market side to help them with syndications. If they decide it's time to sell and move along, we've got those capabilities. When they become wealthy to the course of their exercise of their business, we're there to help facilitate them.

So it's a great place to build the foundation of our bank, and that's never become more important as we saw going back to the events of a couple of years ago. It's been a differentiator for us. Over time, you size some really nice statistics for us. It's a big part of the reason why our deposit costs are where they've been for a very long time, where we tend to be differentiated on a total funding cost against the base that's built across those small businesses.

Okay. And we started off talking about some of different brands and you're in different geographies or in many states in the west. Are there markets that you're more focused on? Or will you see more opportunity, you kind of have like a very unique footprint there.

Yes. Thank you. It's a question we get quite a lot. We -- we're open for business across all those markets, and they're all very important to us. The way that I often will orient people back -- and we've included some materials in our travel deck -- is rather than peering into the future and making projections, I ask people to say kind of look at where the growth came from in more recent periods. And so we've got some materials that we show across our affiliate banks and across various products where that growth is originating from.

And we've been sort of conveying to investors and to analysts over time that we've been hearing good things, a lot of optimism out of Texas and our Amegy affiliate. We've seen that pull through in C&I growth where we sort of expected it. But we've also seen strong growth across our California affiliates and our Zions First National Bank in Utah, Idaho and Wyoming. So those, there's been leadership there, but there's certainly been growth in other areas as well.

And what you're seeing on the horizon, I know you said you'd rather look back, but what are you seeing in the horizon? Given period-end loans declined this quarter, what do you see that gives you confidence that you can have positive loan growth and maybe it's not next quarter but in 2026 or something?

Yes. As we sort of roll back the tape coming into this year, first quarter, a lot of uncertainty about what was going to be happening in the economic environment, didn't know how severe the tariffs were going to be. We got some feedback after the first quarter that it felt like our team was a little bit down on life. That wasn't purposeful. It was really just not knowing what was coming.

We came into the second quarter, and we had some pretty nice loan print, and the deposits were lagging. Third quarter, deposits showed up in a nice way and the loans would appear to be a little bit lagging on that basis. When you sort of average it in and look at a longer time frame, over the course of the year, the loan growth is there, such over 3%. There's more to be done. The deposit growth was pretty stable year-over-year.

So as we sort of peer forward and see where it does it go, recently in our earnings call, we were able to sort of be a little bit more constructive on how we see our guidance taking shape sort of 1 year hence. And we see some really good things underlying. We said leadership would be coming out of our C&I portfolio. We still believe that. And that we just don't know quarter-to-quarter, what's going to show up on the CRE side or whether or not there'll be enough movement in the 10-year to bring on any refi trends in the 1-4 family.

So if I had to characterize that in total, it was coming into the year, there's a lot of uncertainty in the environment so we're a little bit softer with our guidance. But what we've seen as we've built through the year is the underlying loan production has actually been ramping in a way that gives us -- we're more upbeat on saying, hey, this could be -- we can move up from here. With the wildcards being, what do we get in terms of payoffs on CRE? And how much refi activity do we see? How much of that share can we take, should those things materialize.

Okay. And how do your customers see right now? There was a lot of -- you pointed out first quarter, there's a lot of uncertainty, then maybe we get a little bit more confidence in the second quarter. Are they still carrying a little bit more cash than they were? Are their inventory levels, like are they starting to rebuild inventories and things like that? Like, what is the confidence level look in your customers?

Yes. Thanks. So we've heard some of that. We've had a chance to kind of go back here recently and just do some survey work with our people, relationship managers, credit folks, and kind of hear what they're hearing from their clients. I think what you said there is fair. I think we do hear feedback and indications that yes, we need to keep going here, and we need to be building inventories and taking stock.

What we hear from them is it's neither hot nor cold, right? It's not either one of those bookends. It feels very stable and then constructive against the backdrop of rates continuing to come down. That seems to be sort of an important factor that's giving people incrementally more confidence. When we ask them about the things that they're really, really focused on, it's -- tariffs are definitely in that mix, and it's back in the headlines again. I don't know if it ever left here in the recent days.

But just as important and perhaps cited even more were some macro factors around, okay, what's going on with the rate environment, what are we going to see with inflation? What's the employment picture, how confident are we in that, that's going to take shape? Are we going to lose ground? And then that makes us also tariffs. So I think coming into the year, the worst outcomes that we would have -- or at least envisioned could happen. It feels like we sell it into a place that's not quite that severe. And so that's, I think, been really helpful in kind of building [ Bo's ] point.

Okay. That's helpful. And then just moving over to the other side of the balance sheet on the deposit side, this quarter, particularly, you had some really nice paydowns on broker deposits. And will this continue -- is there still some runway for the deposits can improve? And how you're thinking about the composition? Do you have any federal home loan banks maturing? Would you have a whole slew of [ burger ] deposits? Will you replace all of them? You just kind of give us like a little bit of a...

Yes, you bet. And listen, I think if you go back to a number of years, we certainly weren't running broker deposits at this level. To your point, we've been successful in bringing them down, but we would aspire to continue doing that. There's a number of factors, as you would expect, that would be in play there and seeing our success. But really important to that and something we're putting a lot of energy into internally is driving those core deposits. And where do we get the growth and how do we energize those efforts.

And there's at least a couple of things in play that's worth noting, I think, here, and the folks who have been following us will have heard other references to this. During the course of 2025, we sort of realized that after spending a lot of years focused inwardly, that Harris has referred to at various times, it's kind of our part in our dust era. When we're doing a lot of things on future core, our core financial transformation work. And looking to turn the corner with more of a growth orientation, we sort of said, hey, it's probably time to do a little bit more in retouching the products on the shelf, on the storefront, and to go back and retouch some of our consumer offerings and think about how we're serving our small businesses.

And one of the focal points we've had there is really a rollout of a demand deposit product that is really feature-rich, that we've been in the marketplace, that allows clients to have really nice opportunities in terms of our consumer lending products at reduced rates, have nice deposit features and other kind of wealth tie-ins and roll that out as sort of a way to supplement our demand deposits and growing our noninterest bearing. What you will see through the course of the year is in the second quarter, we had the first sort of migration of that in our Nevada affiliate. And so if you kind of use rough round numbers, about $500 million sort of migrated out of what was sort of a premier interest checking account that paid a very modest interest rate into a noninterest-bearing that was again, feature rich.

And we were able to continue that effort through the third quarter. And so we saw a good bit of geographical migration on that basis. But the -- I'd say some of the very early things that we were seeing coming out of our Nevada affiliate in the second quarter are encouraging. We still need to see that play through over multiple quarters. But the early evidence would say that compared to its predecessor product, the new account openings were 2x or more week over week over week and what we were seeing. The average deposit balances were coming in pretty healthy for a mass affluent strategy averaging around $20,000. And then the pull-through on some of these offerings that would be part and parcel to that offering, whether that be like a HELOC program or a money market mutual fund type program were also promising. So that's a new offering for us that we've been rolling out for the course of the year.

Complementing that on the small business side would be something that we have our eyes trained on in 2026, in the early part of 2026, which will very much be a small business bundle, not unlike what we're talking about on the consumer side. And one of the things that we're -- I think as we said in our last earnings call and that we're conveying at the course of our investor meetings is we think those are helpful things in sort of retouching and bringing something compelling to the marketplace from the product side, but coupling that also with a renewed presence and investment in our marketing programs and the build-out of our marketing teams with the new Chief Marketing Officer, putting a lot of effort and resource behind that.

So that -- sorry, I will come to where I think you want me to go. Those core deposit programs will then be in place to help us supplant what we've been relying upon, things that are approaching wholesale deposits rates.

Okay. If I could just go back to this new product, you had called out Nevada as place where it's unveiled right now. When was it launched? Was it just in Nevada? Or is it in all your markets? And if it's not, when will it go to all of the markets?

Yes. So Nevada in the second quarter. And in the third quarter, basically essentially the bulk of the remaining affiliates came on board. But it was really, really late in the third quarter. So it would have shown up in period end balances, but it would not have been averaged then in the third quarter. So we can look forward to that moving forward in the fourth quarter.

Okay. And this similar success, I guess, early readings are positive. It's hard to say because we said it...

Because that came really at the tail end of the third quarter, it would be kind of -- it's really hard to judge. And the other part of that is we haven't put the full force of the marketing dollars behind those programs.

It's such an excellent segue to marketing behind this. How much of the whole budget have you spent in the -- in these -- the Nevada market to start with and then everywhere else? Like, are you 10% of the way through? Or you...

So the way I would characterize that is, I would say, through the course of 2025, it's really been about the full build-out, and we're not exactly all the way there of the reimagined marketing team with some campaigns coming later in the year. And I was looking forward to 2026, I see more of those campaign dollars being put behind those products. So it will probably be more evident externally about what we've been working on for those campaigns.

So more expense, but hopefully much more -- even greater success in the...

It's sort of getting -- the important thing when we talk about expenses with this growth orientation, this more external is -- are we getting good expense growth? And by good expense growth, I mean expense that's aligned with revenue. And in this case, I very much see it as expense aligned with revenue growth.

Okay. And then just going to noninterest income. In a recent conference and actually on your conference call as well, you spoke about this 3.5% margin kind of target. We have some questions about it, follow-up questions. Can you talk about the drivers, the environment you need to have? And does this feel more aspirational? Or you feel like you're going to get there?

Yes. Thank you for that. I mean, we've gotten a lot of questions on that topic. To be clear, we've never really had NIM guidance. There has been commentary in the past that's also fair that said that we think we have the potential to be a mid-3s NIM performer. And there was more recent dialogue about what it might take to get to that point. That also came up in our last earnings call.

So the conditions that I think help you get to mid-3s, there's a number of things that are just playing through that are helpful to us. We've talked quite a lot about the balance sheet healing. And we've had a couple of years of that. Now we were able to through our third quarter, our earnings point to 7 consecutive quarters of NIM expansion. So evidence of all these things occurring.

So by that, we mean, first, let's start on the funding side. We saw after the events of March 2023 and sort of some of the shock and awe that came with that to the marketplace, a need to participate and kind of pay up for deposits relative to where we've been traditionally. And so we found ourselves sort of towards the end of 2023 as being a little bit north of peer median on interest-bearing deposit costs. And that's not where we've traditionally functioned.

And so we recognize that there would be an opportunity in a down rate environment to kind of get back to something that looks more normal for Zions. And so you will have seen that play out in some of the price response and the down rate environment in the beta, where it's come through pretty strong. So this most recent quarter, if you look at what the trending was on loan yields, loan yields were up 5 basis points because we had the fixed asset pricing still playing through. And our total funding costs were down 5 basis points. That's a good outcome for us.

So as we've gotten back to having more managed deposit costs, having that underlying kind of spot period-over-period deposit growth is helping driving through our deposit growth initiatives. Those things are all really, really helpful. The other things that you'll hear me talking about quite a lot on our calls -- and for those who stay close to our name, you will see play out over the course of years now -- is this remix of earning assets, where we've been able to go for where our investment security portfolio has been outsized for where we've been historically. And we've been working that down over time, allowing it to run off. In more recent periods, only reinvesting about half of those gross cash flows that are coming from that securities portfolio and we've been able to reinvest that in loan growth. So that's been really useful for us.

And then within the loan growth category itself, we see an opportunity as another contributing factor to think about the mix within our loans. We said as part of our guidance that we're a bit more constructive, more upbeat about where loan growth goes, we think that's going to be on the backs of C&I growth. And not knowing exactly where CRE is going to come in terms of payoffs. But what we've seen over the course of time is going back some years, we had an outsized amount of growth that showed up in muni there for a number of years, municipal loans. We've seen a little bit more concentration that was our historical norm on 1 to 4 family resi. The munis are typically pretty thin. Spread-wise, the 1-4 families spreads have gotten better. But relative to where you would see growth in the C&I book, maybe not as healthy.

And so if we sort of think more about that model that we've been talking about externally of, hey, let's have more of an orientation towards held for sale as opposed to inventoring as much on our balance sheet on the 1 to 4 resi side, but that can also help with the loan yield remix. So -- and 1 more factor, again, people probably get tired about hearing us talking about because it's a little bit of a pointy-head accounting topic is this notion about we had some terminated hedges that go back for some time that we've had this headwind that's been tapering off going on for some years. And so the headwind associated with that will continue to diminish. You couple that with the prospect of marketing dollars behind those deposit programs driving deposit growth, those are all the things that combine.

The other part of that is we actually need some help, too, to help us get there to get to our place where we want to be where we think we're going to operate with the yield curve. I mean, it's always -- in prior times, whenever we talked about a mid-3s NIM, it's usually been against the backdrop of a more constructive yield curve. And that's not really the yield curve we see now. It doesn't mean that we can't get there. It's just going to take longer with this type of yield curve. And where -- if you believe the forward curve and you think that rates are coming down, the Fed's going to persist on this path. I mean, we show our asset sensitivity. We show and we screen relative to others as being a bit more asset sensitive.

Now these methodologies are not common across all banks, right? So it's also a useful thing to look at realized sensitivity. But at least on how we report, you would say, well, it may take a little bit longer to get to that mid-3s if we're going to have a -- if the curve is going to take the shape of the forward curve.

Can you just remind us when the hedges actually -- you said it's been a little bit of a headwind, but it's going to taper off. When did they go away forever?

So -- thank you for ever never return. No. So right now, we would show the residue of that out to 2027. I think there's like a $7 million headwind in that year. And we have some disclosures in the 10-K for people who really want to go deep into that topic.

Okay. Great. I am going to stop for a minute and see if there are questions. Yes, it looks like there's lots. I don't know if you can bring the microphone forward. Great. One moment.

Ryan Nash, Goldman Sachs. So on the earnings call, there was a discussion about capital and you talked about peers at around the 10% adjusted level and it would take you guys around -- I think you said around 12 months you got in there. I guess, is CET1 the binding constraint for returning capital? Are you looking at other ratios like TCE? And do you need to get all the way there before you start returning incremental capital?

Great question, Ryan. Thank you for that. Listen, I think we do spend most of our time talking about CET1. But there is -- implicitly, when we talk about including AOCI, there's a read-through for TCE. So I think what the market -- we believe what the market has told us, irrespective of what happens on Basel III in game, is sort of we're going to look at your capital inclusive of AOCI. And so that's definitely part of the equation.

And so when we talked about the roughly 10%, it was where our peers -- where is peer median including AOCI? Now what we don't know is whether or not there's going to be convergence. Whether we're going to hear -- and you all have been to more of these sessions than I have -- whether peers are going to judge whether they can run leaner on a capital ratio basis, including AOCI. And then we could stare at that as well.

But just -- we've been building back this tangible book value at a really quick clip. It's actually a really nice part of our story. The AOCI has been coming in quickly. And so what we were just sort of saying out loud was when we look at sort of our own internal projections and where we think peers are, not knowing where they're ultimately going to be, it looks like that would be roughly around 12 months out when we would be in the same kind of close clustering of peers. But we don't -- we'll have to watch peer behavior.

When we look internally and you'd say you really want to start from a capital policy of, well, what do you need to withstand stress losses? When we do all that math, including things that we did when we were subject to CCAR and we run scenarios like the Fed's severely adverse scenario, running all that math tells us we have ample capital. It's more of an environmental concern. We just don't know what any day is going to bring anymore. We hope for a really bright future. When we were here about a year ago, things were looking at really upbeat, really bullish. And we just want to be in a position that should we hit a bumpy air in the future, that we don't want to be screened as being an outlier on any of those dimensions.

Chris Spahr with Wells Fargo. So can you tell me which markets are having the most competition? And how do you handle potential disruptive mergers that are -- overlap with your footprint?

Yes. Thank you for the question. Or questions. Listen, I -- because we were in the markets we're in, I think people would generally judge us and other people have written notes about that we're in a good footprint, right? So that's been established. We have slides to say 35% of GDP are in our footprint.

So there's not a single market to -- I would point to if it doesn't feel like we have really solid competition. Texas, everybody knows the Texas stories. People know that the multiples the Texas banks trade at. It's a pretty strong backdrop of growth to be in. So we're going to see it there. But we're in lots of fast growth markets where people tend to pour into and are very interested in. And what we said publicly, as long as people are being rational competitors, we totally get it. And we think there's a niche for us to serve there and continue to serve and we're good with that.

In terms of the competitive M&A environment and what that means, we certainly have seen that in our footprint here recently. There's been a number of deal announcements, whether in Texas or Colorado or otherwise. And so we, we're going to be present in those markets. We're going to be open for business. It's not our intent ever to be predatory in those kinds of things. But if there are things that we stand for that resonates with our clients where we can suit their needs very, very well and if people make a judgment that said, hey, I kind of like being at a community bank or like being at a regional bank, I like the service model that I got there, and I didn't sign up to be part of a larger institution. And if they're looking for that white glove service that comes from a Zions model for the small middle market, we would be happy to serve those customers. So -- but we'll see.

Janet from TD Cowen. So you've been limiting buyback as you were accruing capital to get to the CET1 ex AOCI. But in recent quarters, you -- it also sounds like you're a little bit more open to M&A opportunities from an acquired standpoint outside of branch opportunities. So what is your current stance right now? And what makes sense to you and what does not?

Thank you, Janet. I really appreciate the question. Listen, yes, we've done -- you alluded to it, we've done some branch deals in the last 3, 4 years, most recently in the Coachella Valley of California. What we've said and remains true is that even when we were doing our part in the dust era and we're really focused on our core transformation, that means that things didn't cross our desk. Of course it did. And there are things that you would look at, nothing of a very large size came of that. But we're really happy with the tuck-in deals that we were able to do.

So I think that the message -- and I have nothing different to say. I think when Harris says, we want to be a great Western bank, that is our -- who we are and who we can strive to continue to be. It's getting more -- there's more energy, as you might expect out in the marketplace. I think when we have a number of very, very good investment bankers that calling us, and I'm sure they call on a lot of different people in this room. And they would tell us that this is a beat of a deal environment as they've seen in a while.

So we'll continue to look at things as they come through. We're not dying to do a deal. We'll keep saying that every time that we have a microphone. The things that we've talked about that make strategic sense or could make strategic sense for us, and I'm parroting here, some things that I think that Harris shared about a year ago that I think they're still very relevant, which is it's -- in footprint, we like really strong deposit franchises that densify where we're at currently, strong management teams. We're not looking to pay up for what we would judge to be lesser quality assets. Although some of those things, you can kind of cure through purchase accounting and kind of rebalance.

We're not looking for sprawl. That's really been our posture. We really like kind of the Western footprint. We -- Kevin say a friend of mine, so it's kind of fun coming behind him on this panel. We're not -- we're personally interested in doing mergers of equals. I think they made a reference to others in the Southeastern market. So we've been through that. I was -- I participated in that at a former life, and that wasn't particularly fun. So that gives you any kind of idea about where we're at.

But the other challenge in all this is you start with strategic fit. And the deal math has to work, right? And you shared in your opening remarks that our multiple is bargain price. For all of you here who are -- your Bloomberg Terminals at a bargain price. So our multiple is not exactly back where we would want it to be. That doesn't mean that deals can't be done, but you got to be really smart about where you play in doing deals with the currency that we currently have.

Manan Gosalia of Morgan Stanley. Ryan, as a follow-up to the two capital questions. You're accreting more capital. You will accrete more through AOCI and through earnings. At the same time, there's a higher bar for deals. So when you think about as you get closer to peers next year, how do you manage the asset sensitivity of the balance sheet? It looks like you are getting more asset sensitive as you move from those securities to C&I loans. So how are you thinking about managing that over the medium term?

Excellent question, Manan. Thank you for it. We are doing things currently, right? So then again, I want to return to what I said before. We have published statistics, and we have our models and we report asset sensitivity, and we're consistent in how we think about that. Others also have published statistics. And these -- we're not common across institutions on how we model these things. So -- but notwithstanding that, I will acknowledge that we tend to screen more asset sensitive. And we don't care to be an outlier across these dimensions.

And so what we said is we've been doing some very balanced hedging strategies, right? So I think as we kind of go back in time, when there were bumps, we didn't like screening on the lower cyber tangible common equity. That's why we've been allowing us to build back. And we've had hedges in place, a lot of pay-fix hedges to guard against -- to the extent that term rates or longer-term rates start running on us to make sure that we have some protection in place to guard against that. And there's no magical level that says that above or below this level, you're kind of in harm's away from the market perspective. But we didn't even want to enter the fray. We didn't want to have that conversation. So we've had those hedges in place for a while.

Going directly back to your point on the asset sensitivity side, we've also had an opportunity to start putting in some more received fixed hedges on our commercial loans to try to take the edge off of where we tend to be showing up a little bit more on asset sensitivity. And that's a tool that we can continue to deploy, depending on where our sensitivity moves as we press forward.

Okay. Are you ready for credit?

Let's go. Come on.

The moment you've all been waiting for. Zions made headlines before the third quarter earnings with a charge-off for a large NDFI loan. Let's spend a few minutes on this. We got some details. Can you talk about, I guess, just talk about that quickly and why you decided to charge off what you charge off and set aside a provision? And then two follow-ons.

Yes. Thanks. That wasn't very much fun. I'd prefer not to be in the press for any of those reasons, coming on the heels of some other announcements. And the timing, it was just really regrettable. It's never a good time to announce anything that way, but I think it was a very tenuous kind of marketplace, I think, to have that 8-K announcement.

So we were pretty assertive, I say, in terms of how we've handled it based upon all the information that we currently had in our possession. We'd rather be on the side that says, let's go ahead and reserve for this. So we went and put the full reserve on the full $68 million amount. And again, knowing what you know at a point in time, we went and charged 50 of that off. And we released our 8-K to coincide with the timing of our complaint that was filed in the state of California. And a lot of the philosophy for why, why did you do the 8-K, why don't you just wait? I mean, we get that question, is sort of the democratization of information. We don't know how many people will be scouring the litigation records in some court in California. And given some of the other things that have transpired in the environment, we said, well, let's go ahead and share so that people can see some of the things that we're working on and show folks that we're taking a pretty conservative posture here, and we're going to go pursue this actively and try to do the best we can to get a recovery here.

So that's what that was about. Some people have asked, well, why couldn't you just bundle that with your earnings. And because I think once our earnings were released, people said, well, that was actually pretty strong core earnings. And so I understand that philosophy. But at a minimum, we want to make sure that we allow people to see the information more equally across the various space.

So we're in active litigation there. The complaint was filed against the guarantors. So I'm really quite guarded on how deeply we can go into that. But suffice to say that there's a body of work that would continue, which is sort of getting deep into what happened, what happened when, what representations were made, what was known at a point in time, building the time line that would be really useful as you go through a litigation process.

As an extension of that work, there's also an opportunity to say, okay, what can we learn here? What do we know about this spec pattern? Let's take a look at our nondepository financial institution lending practices. Let's look at -- for people to do this also for a living, and maybe they do this on an advisory basis, let's go have an independent review of folks today, look at policies, look at processes and see what can be learned, as any prudent institution would. They're saying, what is the best practice in around these areas because we want to make sure that we're at that level.

So the review that you did and the one that's ongoing with some of these outside third-party leads you to believe that this is an isolated incident, that it isn't -- there aren't more case to come?

No, and that's a really fair question. And we continue to -- everything that we've seen so far would tell us that this is not a systemic topic, right? So -- and it's just incumbent upon us to keep doing the work and make sure that we see it all the way through. But heretofore, nothing else to report.

And this is a relatively small piece of your overall loan portfolio. It's 3%?

Yes. Yes. So our total -- if you think about dimensioning across non-depository financial institutions, there, we run about $2 billion in exposure. And with the subcomponent, we sort of -- we included a slide in our most recent earnings material that kind of breaks that down across the 5 sort of main subcomponents that kind of follows from like the call report approach. And so if you think about that mortgage lending subcomponent, it's running a touch under $400 million, and that's where these [ Cantor ] exposures would have been reported.

Okay. And this has been a pretty low growth area for you. We've had some other folks say the business, they really like this NDFI lending. It's been growing in other banks, but it's been quite small for you. The rate of growth has been quite small. Why is that?

It absolutely has. And we have no real aspirations currently to grow that in any different way. It's something that's been very modest. Mind you, it's a very diversified portfolio. There's lots of different things that are featured there.

But part of -- I think part of the philosophy is -- and layering this gets to my earlier comments about kind of the bread and butter offering at Zions being starting with the small and middle market clients and helping them grow. When we -- that's core to our business because we can bring the whole bank in serving those clients. A part of Ryan's view is why this has been more an ancillary offering for ours is that there can be value in these relationships. It's not the same bringing the full bank to those relationships that you can -- when you grow, your relationships from the small middle market clients up. And not to say that it's always fully transactional, but probably not as much relationship lending in that portfolio for us.

Yes. Okay.

So when we look at the whole of it -- and there will be more disclosures forthcoming, for those who are close followers of our 10-Qs. We'll have some more information there about credit exposures and the like. But by and large, when you go back over time, our credit loss history is actually not bad here. It's held up reasonably well, and it tends to be smaller than the types of loans we've been talking about externally on average. So it's not a growth area for us. This is a regrettable episode that we're working our way through, and it's not really -- our history hasn't shown out this way.

Okay. We're almost out of time. We didn't get a chance to talk about fees, which I know is something that you guys have focused on for a while, but maybe next year, we'll start with fees and talk about that.

That's good. Sounds good. Less credit, more fees.

That's right. Okay. Please join me in thanking Ryan for joining us today.

Greetings and welcome to Zions Bancorp Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. Now I will turn the conference over to Shannon Drage Senior Director of Investor Relations. Thank you, and you may begin.

Thank you, Von, and good evening, everyone. Welcome to our conference call to discuss the third quarter earnings for 2025. My name is Shannon Drage, Senior Director of Investor Relations. I would like to remind you that during this call, we will be making forward-looking statements. Please note that actual results may differ materially. We encourage you to review the disclaimer in the press release or Slide 2 of the presentation, dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. Copy of the earnings release as well as the presentation are available at zionsbancorporation.com.

For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments -- following Harris' comments, Ryan Richards, our Chief Financial Officer, who will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Steward, Chief Credit Officer; Chris Kyriakakis, Chief Risk Officer; and Rena Miller, Corporate General Counsel. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for 1 hour.

I will now turn the time over to Harris Simmons.

Thanks very much, Shannon, and good evening, everyone. As you'll see on Slide 3, the third quarter reflected continued momentum in our core earnings. Relative to the prior quarter, net interest margin expanded by 11 basis points to 3.2%. And Customer fees, excluding the net credit valuation adjustment, grew $10 million and adjusted expenses declined $1 million. The efficiency ratio improved to 59.6%. Average loans and customer deposits increased by an annualized 2.1% and 3.1%, respectively, compared to the prior quarter. These trends, which resulted in positive operating leverage are encouraging.

During the third quarter, we recorded a $49 million provision for credit loss. Net charge-offs in the quarter were $56 million or 37 basis points of loans on an annualized basis. As noted in our 8-K filed on Wednesday of last week, legal action has been initiated for the recovery of approximately $60 million and certain guarantors of two related C&I loans. We charged off $50 million of the combined balances of the loans at the end of the quarter. Additionally, we have established a full reserve against the remaining $10 million. We view this as an isolated situation resulting from a particular a couple of borrowers.

We have no further exposure related to these borrowers or guarantors. I would note that excluding the impact of this matter, net charge-offs were minimal at 4 basis points annualized on average loans and credit quality generally improved for the quarter as well. Moving to Slide 4. Diluted earnings per share was $1.48 compared to $1.63 in the prior period and $1.37 in the year-ago period. This quarter's results include a $0.06 per share negative impact related to the net credit valuation adjustment. Earnings per share also reflects the adverse impact of the elevated credit provision discussed previously. Slide 5 provides a 5-quarter view of the pre-provision net revenue.

On an adjusted basis, our third quarter results of $352 million reflect an improvement of 11% compared to the prior quarter and 18% compared to the prior year period as revenue growth continued to outpace expense growth. With that high-level overview, I'll turn the time over to our Chief Financial Officer, Ryan Richards, for additional details related to our performance. Ryan?

Thank you, Harris, and good evening, everyone. Beginning on Slide 6, you will see the 5-quarter trend for net interest income and net interest margin. Net interest income increased by $52 million or 8% relative to the third quarter 2024. We continue to see the benefit from fixed asset repricing and favorable shifts in the composition of average interest-earning assets. Growth in average customer deposits in excess of loan growth also contributed to an improved mix in funding relative to the prior quarter. As a result, the net interest margin expanded for the seventh consecutive quarter to 3.28%. Our outlook for net interest income for the third quarter of 2026 is moderately increasing relative to the third quarter of 2025, supported by continued earnings asset remix, growth in loans and deposits, and fixed asset repricing.

Our guidance assumes 225 basis point cuts to the Fed funds rate in October and December of this year, with additional 25 basis point cuts in March and July 2026. Slide 7 presents additional details on changes in the net interest margin. The linked quarter waterfall chart on the left outlines changes in both rate and volume for key components of the net interest margin. The net interest margin expanded by 11 basis points sequentially from favorable earning asset remix and fixed loan repricing as well as improvement in total funding costs. Against the year ago quarter, the right-hand chart of this slide presents the 30 basis point improvement in the net interest margin, which benefited from the improved cost of deposits.

Moving to noninterest income and revenue on Slide 8. We Presented on the left, in the darker blue bars, customer-related noninterest income was $163 million for the quarter versus $164 million in the prior period and $158 million 1 year ago. This quarter's results include an $11 million impact from net CBA loss, primarily driven by an update in our valuation methodology in addition to changes in other market factors. Adjusted customer-related noninterest income, which excludes net CVA was $174 million for the quarter, representing a 6% increase versus the second quarter and an 8% increase versus the year ago quarter.

Notably, capital market fees, excluding net CVA increased 25% compared to the prior year period, driven by higher loan syndications and customer swap fee revenue. We continue to see solid contributions and growth from our newer capital markets offerings, including real estate capital markets, securities underwriting and investment banking advisory fees. The chart on the right side of this page presents both total revenue and adjusted revenue for the most recent 5 quarters, which were impacted by the factors previously noted for net interest income and customer-related fee income. Our outlook for customer-related fee income in the third quarter of 2026 is moderately increasing relative to the third quarter of 2025.

The growth is expected to be broad-based and driven by increased customer activity and new client acquisition. Capital markets continue to contribute in an outsized way. Slide 9 presents adjusted noninterest income in the lighter blue bars. Adjusted expenses of $520 million decreased by $1 million versus the prior quarter and increased 4% versus the year ago period. with the latter increase driven largely by technology and salary-related costs. Our outlook for adjusted noninterest expense for the third quarter of 2026 is moderately increasing relative to the third quarter of 2025.

The expense outlook considers increased marketing-related costs, continued investments in revenue-generating businesses and increased technology costs. We continue to expect future positive operating leverage. Slide 10 presents 5-quarter trend in average loans and deposits. Average loans decreased 2.1% annualized over the previous quarter and 3.6% over the year ago period. Total loan yields increased by 5 basis points sequentially. Our outlook for period-end loan balances for the third quarter of 2026 is slightly to moderately increasing relative to the third quarter 20 and assumes growth will be led by commercial loans. Average deposit balances are presented on the right side of the slide. Relative to the prior quarter, total average deposits were relatively flat including 11.5% reduction in average broker deposits.

Average noninterest-bearing deposits grew approximately $192 million or 0.8% compared to the prior quarter. partially as a result of the migration of a consumer interest-bearing product into a new noninterest-bearing product in mid-May at our Nevada affiliate, which is now being fully reflected in average balances. Near the end of September, our remaining affiliates completed the same migration of legacy interest-bearing deposits into the new noninterest-bearing accounts. The approximately $1 billion of migrated deposits from the remaining affiliates are reflected in period end balances in the third quarter and will be fully represented in average balances in our fourth quarter results. The cost of total deposits declined sequentially by 1 basis point to 1.67%.

Further opportunities to reduce deposit costs will depend on the timing and speed of short-term benchmark rate changes, growth in customer deposits and market competition and deposit behavior. Slide 11 provides additional details on funding sources and total funding cost trends. Presented on the left are period-end deposit balances, which grew by $1.1 billion versus the prior quarter. Total borrowings declined $1.8 billion during the quarter. Short-term FHLB advances decreased $2.3 billion, partially due to the issuance of a $500 million senior note in addition to customer deposit growth. On the right side, average balances for our key funding categories are shown with the total funding costs.

As seen on this chart, our total funding costs declined by 5 basis points during the quarter to 1.92%. Moving to Slide 12. Our investment portfolio exists primarily to be a storehouse of fund to absorb customer-driven balance sheet changes, allowing for deep liquidity through the repo market. Presented here are securities and money market investment portfolios over the last 5 years. maturities, principal amortizations and prepayment-related cash flows from our securities portfolio were $596 million in the quarter or $291 million when considered net of reinvestment. The paydown and reinvestment of lower-yielding securities continues to contribute to the favorable mix of our earning assets.

The duration of our investment securities portfolio is estimated at 3.7 years. We begin our discussion of credit quality on Slide 13. Realized net charge-offs in the portfolio were $56 million this quarter or 37 basis points annualized, driven principally by the $50 million charge-offs that Harris described previously. Nonperforming assets remained relatively low at 0.54% of loans and other real estate owned compared to 0.51% in the prior quarter. Classified loan balances declined sequentially by $282 million driven by $143 million reduction in CRE and a $141 million reduction in C&I classified levels. We expect the CRE classified balances will continue to decline going forward through payoffs and upgrades.

During the third quarter, we recorded a $49 million provision for credit losses, which, when combined with net charge-offs, reduced the allowance for credit losses by $7 million relative to the prior quarter. The reduction reflects lower reserves associated with CRE portfolio specific risks. The allowance for credit losses as a percentage of loans remained stable at 1.2% and the loan loss allowance coverage with respect to nonaccruals was 213%. Slide 14 provides an overview of the $13.5 billion CRE portfolio, which represents 22% of total loan balances. Notably, this portfolio continues to maintain low levels of nonaccrual on delinquencies. The portfolio is granular and well diversified by property type and location. With this growth carefully managed for over a decade through disciplined concentration limits.

As it continues to be of interest, we have included additional details on certain CRE portfolios in the appendix of this presentation. Our loss-absorbing capital is shown on Slide 15. The Common Equity Tier 1 ratio this quarter was 11.3%. This, when combined with the allowance for credit losses compares well to our risk profile. We expect our common equity from both a regulatory and GAAP perspective and that AOCI improvement will continue through unrealized loss accretion in the securities portfolio as individual securities pay down to mature. Importantly, our organic earnings growth when coupled with ALCI unrealized loss accretion has enabled us to grow tangible book value per share by 17% versus the prior year period.

Slide 16 summarizes the financial outlook provided over the course of our prepared remarks for the third quarter of 2026 as compared to the third quarter of 2025. Our outlook represents our best estimate of financial performance based on current information, and we expect to continue to produce positive operating leverage as revenue growth outpaces noninterest expense growth.

This concludes our prepared remarks. As we move to the question-and-answer section of the call, we request that you limit your questions to 1 primary and 1 follow-up question to enable other participants to ask questions. Additionally, if you are considering questions surrounding the events described in our 8-K and public complaints filed on Wednesday of last week, please note that while litigation is active, our comments on these matters will be limited to what we can to what can already be found in those filings. Von, could you please open the line for questions?

[Operator Instructions]. Our first question comes from Manan Gosalia from Morgan Stanley Investments. You may proceed with your question.

I wanted to start on the announcement in the 8-K. I guess you noted that the charge this quarter is an isolated incident. Can you talk about what gives you conviction that this is isolated, maybe walk us through your internal review process since this came to light how many loans have you reviewed? Are there any lumpy exposures to real estate funds within your NDF book that you've come across? Any color there would be helpful.

This is Derek. Just as far as what we've reviewed, we've reviewed -- gone through the portfolio, and we think it's an isolated in Yes. As we've gone through it, we haven't found similar loans or other issues. So we're very confident that it's -- this is an isolated it.

I think I'd just add, I think the most observers our credit history over a number of years is -- speaks for itself in terms of -- I think we do credit well. This was a case where -- we had some unusual things going on that really are not kind of a commonplace. And so and this we've noted we're going to continue reviewing with an external party to make sure that we're learning from the experience and seeing what we can continue to improve upon. But I think that our care and extending credit and on the collateral, et cetera, speaks for itself.

Got it. Maybe if you can expand on that and take us through your NDFI exposure. As we look to the call report disclosure, I think that's about 4% of loans. It seems to be pretty spread out among subcategories. Are there any lumpier exposures or any high-risk categories there that you'd point out?

Sure. Thanks for the question. We actually, for transparency purposes -- this is Derek again. We added in the appendix Slide 36 that details the NBFI exposure. It's actually about 3% of our total loans. And if you -- as you can see on the slide, the growth actually has been fairly minimal over the last several years. As far as the breakout of what's in there, it's a very, very broad regulatory definition. It covers a lot of different segments. What I would say the majority of it would be equipment leasing type transactions you can think about yellow iron trucks, things like that. there's capital call lines, subscription lines. There's just a number of different areas within that. It's very well diversified actually within the portfolio. across a lot of the various lending segments.

And this is -- it's a business that we've actually been in for a long time. I don't think we're intending to grow it significantly, but it's an area that we've been in for a very long time and had good experience with.

Our next question comes from Dave Rochester from Cantor.

Wanted to start on your NII guide, how much fixed rate asset repricing are you factoring into that NII guide outlook? Can you possibly go through the balances that you're expecting to roll for loans and securities and what that yield pickup is? And then what your expectations for longer-term interest rates are as part of that, that would be great.

Thanks, Dave. I appreciate the question and happy to provide some texture there. I would point you to our -- to the slight to moderately increasing guide on our loan growth I think you've seen the pattern trajectory that we've put out for the going on years to quarters now on the security side. And certainly, we see the opportunity for the securities remix to continue into loans. But what that translates to on the fixed asset side if things are still fully play through, both as it relates to loans and then for some of our fixed rate securities, we see the potential for 2 to 3 basis points on earning asset yields to play through that's sort of embedded in our guidance.

Got you. So in terms of the amount of loans, fixed rate loans and fixed rate securities that you're expecting over the next year, do you haven't have a rough dollar amount to those?

It breaks across because it's not just those things that were born to fixed rate things here things that are behaviorally like fixed rates. So 10-year arms are embedded in there. So it's sort of a mix of things across CRE, C&I and then mortgages that sort of behave more like fixed rate loans that's embedded. And that what we call fixed rate asset repricing.

Okay. And then just as a follow-up on capital. Last quarter, you mentioned you weren't that comfortable with the buyback yet. Can you give us your updated thoughts now that capital ratios are a little bit higher and maybe you have some more clarity on portfolio and growth.

Yes. Thanks, David. Listen, hopefully, we're staying on the same key here. So we do -- and we've been talking about this, including AOCI when we think about our total capital levels kind of keeping that in the real mode where our peers are. thing in the mix. So as we sort of stare even this quarter, kind of where the peers are, including things like AOCI, there seems to be a central tenant around 10%. At 12 months or so away from when we would start looking at those levels, approaching those levels, including AOCI, based upon current projections. So that's when we would probably be more in the thick of things with peers.

Our next question comes from Ken Usdin from Autonomous Research. You may proceed with your question.

Just wanted to ask about on the guidance, you have kind of more moderate. I heard your premier comments, you're still talking about operating leverage looking out a year what's the gap that you think you're aiming for in terms of the magnitude of operating leverage that you can see being able to do as you look ahead?

That's again, very fair question. Listen, I first want to just reiterate what Harris said. He emphasize in has spoken comments and also in its quote about the strength of our core earnings this quarter. I think showing up with 5 points of operating leverage was an indication of some of the good things that have been happening at the bank. We're still really refining how we think about how the numbers are coming together for next year. We see enough to know that there's going to be a positive operating leverage. Where exactly that land is not perfectly clear yet, but we know it's there.

So I'll probably stop short of give you a hard number or a hard end range at this point, but we're happy to return to it once we landed our full year process for 2026. But I understand you got to struggle with the [indiscernible].

My second question just from last quarter, you were talking about a 350 NIM over time, 328 this quarter. And then kind of commentary might have changed a little bit after you had said that. I just wanted to kind of ask you to come back on that commentary that you gave and helped us think about what the right zone is for your kind of long-term NIM thinking?

I think it was -- this is Harris. I think I'm the one who put that concept out there. I think that over in economy is given a number or a date but never both I think it's kind of where we ultimately would expect to land. I think I didn't intend to convey that that's going to be [indiscernible] this quarter, next year type of thing. I think we -- I would expect that we'll continue to see improvement in NIM. We're working very hard at making sure that the pricing well on the asset side of the balance sheet. We'll see some of this improvement coming out of the securities portfolio, just repricing, et cetera. But it's -- the number I conveyed is I think in kind of the strike zone of where we probably ultimately would expect to be ought to be and consistent with our history. So that's -- I hope that's helpful. But I'm not wanting to suggest that's going to happen in 12 months.

And I think the pacing of that is a little bit harder in a lower rate environment. But listen, I think just...

All right. So if not doable, but we'll see what the timing is.

Yes. So I think to Harris' point, I think it's really pulling through on some of the core initiatives that we have at play to drive through deposit growth, but have yet to play out fully.

Our next question comes from Ben Gerlinger from Citigroup.

So just kind of sticking with everyone's favorite slide of 26 of the latent merger and like the implication has come down little bit quarter. Obviously, some of that is your margin went up so you recognize it, which is good. The Fed fund is lower by 50 bps on the outlook. I think there's 2 measurements kind of point-to-point a little apples and orders comparison. The implied seems to suggest like minimal improvement, but is it maybe a fact of you kind of casting over -- you might see margin compression as you kind of recognize the full 100 basis points or is it more just -- just kind of giving you a view, I guess there's a lot of scenario analysis of deposit betas everything within that, too. So just kind of curious, considering the implied is roughly 1/3 of where it was.

Yes, thank you for the question. And I think I caught most of that was coming through just a little bit faint, but I think that the rest of it is talk us through kind of where things are landing at the 1.4% based on the implied forward based upon maybe the change period-over-period. I would just try to reinforce, as I tried to every chance illustrative to show the various interest rate dynamics that we've highlighted in times gone by. And certainly, in a down rate environment or included in my prior response, building upon Harris' is it does make it a little tougher from a net interest income basis. But even with the backdrop of this sensitivity, we layered on top of that was a slightly to more increasing loan growth prospects and the fact that there's some assumptions underlying this sensitivity that can be seen as being relatively conservative.

I'll let you judge whether it is or it's not, including things like migration from noninterest-bearing deposits elsewhere, including assumption that securities are 100% reinvested in securities when, in fact, we've shown that we've actually had opportunities to reinvest at least half of those gross cash flows in other [ Gainesville ] places. It wouldn't allow for dynamic aspects of where we might reinvest in higher-yielding loans as we look to remix our loan book, we've kind of pointed 2 commercial loans being a primary driver moving forward in 2026 for growth. Those tend to be a bit more yields than some of the other places that we could invest our loan dollars. So yes, there is an impact from the forward curve. We try to put some bookends around that from a down 100 up 100.

What we're trying to show is even in a place where the Fed to be lowering rates we still stand to have some upside on our NII from our forecast view when you layer on all the other more dynamic aspects, including loan growth and other assumptions that one could assume moving forward.