Julian: Greetings and welcome to the Zions Bancorp second quarter earnings conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And please note that this conference is being recorded. I'll now turn the call over to Dave Riches. Thank you, Dave. You may begin.
Dave Riches: Thank you, Julian, and good evening, everyone. Welcome to our conference call to discuss Zions Bancorporation'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 two 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' 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 Stewart, Chief Credit Officer. After our prepared remarks, we will hold a question and answer session. This call is scheduled for one hour. I will now turn the time over to Harris Simmons.
Harris Simmons: Thanks very much, Dave, and good evening, everyone. We were recently 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 pre-tax gain on the liquidation of Visa Class B1 shares, and the other being an unrealized pre-tax 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. On 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 is 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 Marketing is 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 slides, slide three 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 5 cents 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 non-interest 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 six basis points annualized of average loans. Slide four 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 five, 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 non-interest expense, which last quarter included seasonal compensation expense. For 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?
Ryan Richards: Thank you, Harris, and good evening, everyone. Getting on slide six, you can see the five-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 seven, excuse me, compared to the prior quarter. Slide seven 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 of 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 30th 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 eight, customer related non-interest 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 non-interest income was $108 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 for 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 rate related to this investment that was recorded in other non-interest 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 nine. just-in-non-interest 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 2027 outlook for adjusted non-interest 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 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 five-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 and 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 pay down 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 in slide 13. Net charge offs were 6 basis points of average loans, annualized, and the non-performing 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 non-accrual 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 delinquencies. 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 purchases, common and preferred dividends paid, and growth and 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.
Dave Riches: This concludes our prepared remarks. As we move on to the question and answer section of the call, we request that you limit your questions to one primary and one follow-up to enable other participants to ask questions. Julian, please open the line for questions.
Julian: Thank you. And with that, this is the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. For any participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. And our first question comes from the line of John Pomkari with Evercore ISI. Please receive your question.
John Pomkari: Good afternoon. Hi, John. Just on the deposit side, let me 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. Thank you.
Ryan Richards: Thanks, John. I appreciate the question. Having heard some of the other earlier reports, 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. The average holding on, but on a period-end basis, we saw non-interest bearing being off. We have seasonality in the second quarter, so 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 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 earring asset 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 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 and fixed asset repricing. Some of that was a little bit masked this quarter by some of the compression and the spreads. but it still remains. We still see at least one basis point of earning asset yields playing through there. We still have the securities coming in at a better front book rates than back book rates that still can contribute, we think, one 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, you know, probably our most important repricing benchmark is one month SOFR. and that was coming at the low end of a 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 a 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 is a very stable net interest margin and it has not been our practice to provide deposit or NIM guides to 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.
Scott McLean: John and Scott, I would – Ryan mentioned it a couple of times there, but this marketing initiative we've had with these kind of strategic six 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. We're not just buying money in the open market.
John Pomkari: Okay, that's helpful, yeah. Go ahead, Scott.
Scott McLean: Did you comment on loan pricing? You did. Okay, sorry. The spread compression. Yeah.
John Pomkari: Got it. And then, you know, Ryan, you kind of alluded to it. They 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 want 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?
Ryan Richards: Hope for that. We certainly expect that based on all the things we're doing initially and internally. Hopefully you heard and the guides I provided was pretty constructive about how we're thinking about NII when you're out. I mean, it's always going to be beholden to our success in driving loan and deposit balances. But, you know, underlying that, you know, we would be showing some, you know, a decent amount of average deposit growth that would be implying that guide, but without getting into any of the specifics, which has not been our practice.
John Pomkari: Yeah, fully understand. Thank you so much, Ryan. Appreciate it.
Julian: Thank you. And our next question comes from the line of David Smith with Truist Securities. Please receive your question.
David Smith: Hey, good evening. I guess, can you confirm that your year-ahead outlook for moderately increasing N.I.I. does not include a Fed hike?
Ryan Richards: No, it's 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. Okay.
David Smith: No, 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?
Ryan Richards: Yeah, 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's 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 and the appendix on a parallel shift. We still internally think about things like late and emergent, and we would show at Lyft of about 3.2% above the latent sensitivity that would be implied by having one or more forward rate increases in the curve.
David Smith: Okay. And then just following up on deposits, you know, hear you that, you know, you've got some initiatives in place to, you know, 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 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?
Ryan Richards: Yeah, 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, you know, 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 four or two away before we think about fully reinvesting investment securities. That's just another way of saying, as it stands now, if 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% low 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 stable funding sources.
Dave Rochester: All right. Thank you.
Julian: Thank you. And our next question comes from the line of Manan Gosalia with Morgan Stanley. Please receive your question.
Manan Gosalia: Hi, good afternoon. 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 six basis points or so quarter on quarter, but I recognize that there might be some seasonality in there, especially related to NIV deposits. So if you could just help us with how deposit costs evolved through the quarter and how competition evolved through the quarter.
Ryan Richards: Yeah, I mean, the competition is certainly there, Manon. You know, the reference we have, it's in the mice type in the presentation on slide 10 about total cost of deposit spot rate at the end of 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.
Manan Gosalia: Got it. And then maybe if you can talk a little bit about loan growth and the drivers there. You know, C&I growth was fairly good this quarter. Any sense of, you know, how things are progressing, whether there's some acceleration there, and how we should think about the next year or so?
Derek Stewart: Sure. Thanks, Manoj. This is Derek. Yeah, 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. Yeah, primarily, you know, middle market and and some upper middle market activity tied to some capital market syndication activity 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.
Manan Gosalia: Good. Thank you.
Julian: Thank you. And next, we have Bernard Von Gesicki from Deutsche Bank. Please proceed with your question.
Bernard Von Gesicki: Hi, good afternoon. 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 Cancer Fund or any updates on this?
Ryan Richards: Yeah, Bernard, that's certainly a prominent component of that. That factors into that expense item.
Bernard Von Gesicki: Any thoughts on that continuing? Will there still be some probably spilling out in the The second half, maybe that's mostly in your guidance, but just thoughts there?
Ryan Richards: You know, I don't think we really have anything to offer at this point on that one, Bernard.
Bernard Von Gesicki: Okay. Maybe just the last follow-up, just on fees. I think, you know, Ryan, you mentioned the attractive opportunities and 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.
Scott McLean: Sure. This is Scott. And, you know, 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 two ago is that a year or two ago, the growth was principally in capital markets. The rest of our major fee income categories were We're 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, some of our loan-related businesses, you're seeing increases in fees, shifting our mortgage business to help for sale from help for investments. will continue to see nice year-over-year mortgage fee growth. And wealth management actually was up over the June quarter of last year, and we're encouraged about it. We've had a couple of flat years, and we're encouraged about what our teams are doing there. And as we've mentioned, and 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 should become, again, a high single-digit growth, low double-digit growth business for us in revenue.
Bernard Von Gesicki: Great. Thank you.
Julian: Thank you. And next, we have a question from Ben Gerlinger with Citi. Please proceed with your question.
Ben Gerlinger: Hi. Good afternoon. I just want to unpack a little bit on deposits. I know you don't want to give a full guide to get that. Since we only really see three line items, I was curious, is 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?
Ryan Richards: 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 capacities that 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. He 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 resource behind these initiatives. So I'd say most recent periods, The growth is probably coming from more of those focused outreach efforts. There's some really nice underlying green shoots that are coming through our strategic efforts that we'll look for more growth moving forward.
Harris Simmons: I'd just add, I mean, these initiatives we have, it's a marathon, not a sprint. So over time, if 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.
Ben Gerlinger: Gotcha. That's helpful. And then Ryan, I just want to double check. You said operating leverage of 100 to 150. I feel like that is in line to what you said in one cue. I just wanted to confirm, is that GAAP or is that CORE? How should we deal with the visa gain?
Ryan Richards: Oh yeah, we would not be including visa gain for that purpose. That was just reaffirming what was shared last quarter. But we still see it for the full year. And then if you sort of think about the words I used in guiding things for 2Q27, it would apply I think quite a bit better than that for the one year for a quarter. But again, we need deposits to pull through for that to stick.
Ben Gerlinger: Gotcha. Thank you.
Julian: Thank you. and our next question comes from the line of David Shevarini with Jefferies. Please proceed with your question.
David Shevarini: Hi, thanks for taking the question. So I wanted to start on NII guidance, a clarification here. So the moderately increasing, that includes one hike and if we get two hikes is when we get to upper single digits. Is that the right way to think about it?
Ryan Richards: No, I think with the one hike is what we had embedded in our guidance. And, you know, with probably some pole four, it was probably between one and two hikes is kind of how we were seeing the four curve at a point in time. But if you saw two 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.
David Shevarini: Okay, so moderately increasing is one to two hikes. and then two to three is when we get to, I heard you mention upper single digits, so I just want to take a look at that.
Harris Simmons: It's one full hike.
Ryan Richards: Yeah, 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 one full hike. If we get two full hikes, then it will be more constructive than what I spoke about in my script.
David Shevarini: Got it, thank you for that. And then a follow up on the positive operating leverage. So the 100 to 150 is 2026 core. If we pencil out 12-month forward since the other items you're giving 12-month forward, how should we think about positive operating leverage over the next 12 months?
Ryan Richards: Yeah, 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 one year's quarter, 12-month advanced quarter, that's where we provide our guides 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 Kara's quoted in the script of 7% 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, you know, 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.
David Shevarini: Very helpful. Thank you.
Julian: Thank you. And our next question comes from the line of Chris McGrady with KBW. Please proceed with your question.
Ben Gerlinger: Oh, great. Thanks. Ryan, just kind of a bigger picture on the margin discussion at NII. We've heard a lot of discussion this quarter from your peers about, you know, N.I.I. kind of being more important than margin and managing what margin is more of an output. I know you guys have walked back that three and a half NIM that you previously talked about, but conceptually, what's more important to the bank over the next six to 12 months? The N.I.I. growth or maybe you leaned into growth a little bit and you have a little bit more pressure on the margins?
Ryan Richards: Yeah, listen, I think it always comes back. I mean, there are various components. Margin's interesting, but N.I.I. is ultimately what the juice is in terms of profitability. So, you know, I know the commentary in the marketplace, and I get it. You know, 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 guy, coupled with the way that the gray curve is being constructed. 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.
Ben Gerlinger: Okay. Maybe just on the ACL, your credit numbers are fantastic, but just your ACL approaching one. How should we as outsiders think about, I guess, willingness to bring that down, either maybe relative to Cecil day one or mixed shifts, but that 106 number, how do we think about that?
Derek Stewart: 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 look 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.
Ryan Richards: You think about having coverage for six years of growth charge-offs. It feels pretty good given the tenor of our portfolio.
Harris Simmons: We also know that the weather changes and the economy, all those ranges, these ratios are pretty sensitive. 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.
Ben Gerlinger: Thanks for that. And then Ryan on the tax rate, could you just help us about the outlook for the tax rate?
Ryan Richards: Sorry, on the tax rate? Yeah. Was that the question? Yeah, 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.
Ben Gerlinger: Great. Thank you.
Julian: Thank you. And our next question comes from the line of Ken Oosden from Autonomous Research. Please proceed with your question.
Ken Oosden: Hey, good afternoon. 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 The main guide to focus on for NII is with one hike included, do you think you can do upper single digit year over year to 2Q27 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'd be helpful. Thank you.
Ryan Richards: You nailed it, Ken. And listen, sometimes the work's getting in the way, and that's why we try to come over the top with some additional narratives. We don't really have a great word for it. 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 AOCEI.
Ken Oosden: I know it's a board decision and they usually make that announcement separately, but the $75 million 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? Thanks.
Harris Simmons: I think, Harris, 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 dividends. You know, all consistent with kind of the forecast we're giving you kind of a year out here.
Ryan Richards: Yeah, 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 transactions. There were sort of some of the capital on the way, but we still think we're going to be setting in a place that will be a little bit better than what we see in our peer median. So in our reported basis, it looks like there's some capacity. And to your point, you know, 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 reporting CET1, which allows for the opportunity that Harris alluded to.
Derek Stewart: Great. Thanks a lot.
Julian: Thank you. And our next question comes from the line of Peter Winter from DA Davidson. Please proceed with your question.
Peter Winter: Thanks. Good evening. 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?
Harris Simmons: Yeah, I will. I mean, I think it's irresponsible. Many measurements they were 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, you know, anything we do is likely to be opportunistic. It's going to be likely to be highly likely that in markets we're serving where we're the economics are easier through through consolidation um where they have you know a good deposit base uh where it's just additive strategically to us but um there's I think you know I I think the I I I rather suspect and there was a period in our history if you go back 25 plus years we were doing a lot of deals and the math worked and and uh You know, I think we've been going through a period of repair, you know, 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, you know, I think if we need to demonstrate to owners that we have the kind of capacity Financial returns that justify our being out in the market doing deals. We can be competitive doing deals, maybe more to the point. 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.
Scott McLean: 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 two 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. 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 and 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 2020 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, you know, talk yourself into whatever level of buybacks or other capital usage you want to think about. That's what I said.
Peter Winter: 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 one percentage point equals in terms of loan growth.
Derek Stewart: Oh, boy. I don't have all those numbers above my head versus last quarter. But, you know, just ballpark, yeah, it was a Decent amount of the increase, I'd say, you know, 40 to 50% of the increase from the utilization.
Peter Winter: Got it. Yeah, and how much is it?
Ryan Richards: It's broad strokes, you know, close to an increase of 2% utilization for all. With varying dimensions across. subportfolio C&I, CRE, and consumer.
Peter Winter: Got it. Thank you.
Julian: Thank you. And our next question comes from the line of the Dave Rochester from Cantor. Please proceed with your question. Hey, good afternoon, guys.
Dave Rochester: I just want to go back to the NIA guide one more time in case we hadn't beaten it to death. Can you just state what the N.I.I. guide is without rate hikes? 2Q to 2Q? Or 4% to 6%?
Ryan Richards: 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 at 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 is low growth.
Dave Rochester: Okay, great. All right, thank you. And just to 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'd be great. Thanks.
Scott McLean: Sure, Dave. This is Scott. We have about and a half seven billion dollars in off-balance sheet policies. These are clients that we've asked to move off balance sheet at other points in time, like 2020, 2021, etc. And that number was as high as 12 billion. So we've moved some of that back on balance sheet. And generally speaking, and many more. deposits into this kind of wholesale deposit campaign we've been focused on. They're coming in anywhere from 30 to 40 basis points accretive to our overnight borrowing. And we currently have about 2.5 billion average broker deposits plus net overnight borrowings.
Dave Rochester: Okay, great. So the idea is sort of replace those over time.
Scott McLean: With deposits that are accretive, it makes no sense to do it if it's not accretive to our overnight borrowings.
Dave Rochester: Yep. Yep. Sounds good. All right. Thanks, guys.
Julian: And our next question comes from the line of Anthony Ellion with J.P. Morgan. Please proceed with your question.
Anthony Ellion: Thank you. Just following up directly on that previous question. So on the deposit initiatives, 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?
Scott McLean: It's been doing it for the last nine months.
Harris Simmons: Yeah. I mean, so far you've brought in $3.5 billion. $3.5 billion. but it's maybe the inverse of a fat guy losing weight.
Julian: Whoa, whoa, whoa. Come on now. Who are we talking about?
Harris Simmons: I'm talking about Scott. The first few pounds are easier than the last few. It's not a straight line. You get to a point of diminishing returns where you've talked to customers and and, you know, some of what's left off balance sheet is going to be a little stickier than it was originally. So, all apologies to anybody overweight. Just a friend of mine. Apology taken.
Anthony Ellion: None taken. Thanks, Harris. 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 deposit competition remaining intense with no signs of slowing down. 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.
Scott McLean: 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 five years. It's been muted by the fact that 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. and many more. Thank you. are all very solid opportunity to keep funding costs, which is a significant competitive advantage for us, very much intact. We have, over about three decades, our cost of deposits relative to peers.
Ryan Richards: and Scott Seda. 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 Scott alluded to, we've been very successful in managing that over time.
Dave Rochester: Thank you.
John Arkstrom: Thank you.
Julian: And our next question comes from the line of Janet Lee with TD Cowen. Please proceed with your question.
Janet Lee: Good afternoon. On your NII, sorry about this NII question again, but on your NII growth assumptions of, you know, 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 in to your baseline.
Ryan Richards: Yeah, 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 would be part and parcel to our guidance. So, that Is that, again, part of what you're asking?
Harris Simmons: I think it's on the non-interest bearing deposits and the proportion that that is.
Ryan Richards: Yeah, listen, I think if you look at more recent trends, interest bearing has been growing faster than the non-interest bearing. I personally expect that to continue in the near term. Maybe longer term, I don't know. We'll see. But 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 that 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, the marathon, not the sprint. So, 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.
Janet Lee: 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? Thanks.
Ryan Richards: Yeah, thanks, Shannon. I do think we're getting closer to the time where it's not a trining, where we'll need to start reinvesting 100% of those securities cash flows. But again, I think we're still a quarter or two out. We're always thinking about our funding structure and how to approach it from a rating agency perspective or how 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 two 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.
Janet Lee: Thank you. You're welcome.
Julian: Thank you. And our next question comes from the line of Raul Zarma with Biochem Unlimited. Please proceed with your question. Raul, if your line is live.
Ryan Richards: I think a biochem question would be most welcome.
Harris Simmons: I've got a biochem incident. Shall we go to the next question? Let's move on.
Julian: Sounds good. and the next question is coming from the line of Christopher Spahr with Wells Fargo. Please proceed with your question.
Christopher Spahr: Hi, good evening. So the technology expense comment, was that related to the trend, like a quarter over a quarter or a year over year just because it's been elevated the last few quarters?
Ryan Richards: It's a little bit of both. I think that if you look at our narrative that severe earnings releases typically a year over year observation. We talked 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.
Harris Simmons: I 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 a vendor price increase, software maintenance, et cetera. I'd like to think that, you know, that may be one of the, Right spots coming out of AI for a lot of folks is maybe that gets tempered a little bit. I think some of the vendors can start to feel the pinch of that, maybe lose some of the pricing leverage they've had. On the other hand, I mean, everybody's going to be spending more on AI. The question is, you know, how quickly we actually see meaningful results from it. But I think one thing that sure is you're going to, you know, More and more technology is going to be applied to this industry.
Christopher Spahr: Got it. And so about one-fourth of your expenses, if you look at the technology spend disclosures in the queue, which are very helpful, so one-fourth 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? Is it going to kind of just increase with the natural growth rate of expenses? And could it go lower over time? Thank you. Yep.
Scott McLean: This is Scott. 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 two or three years, but you can see a world where that becomes more controllable, where they're searching for revenue and not searching for peer price increases.
Ryan Richards: Then I guess the 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 forums about all of our peers generally report that they have used outsourcing to the extent of 10 to 15 percent of their FTE base and we were
Scott McLean: probably lagging considerably on that front, 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. And as we're able to bring that outsource total down, we're bringing down 100% dollars as opposed to when you go to an outsourcer. So I think there's gonna 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.
Harris Simmons: Next question.
Julian: And our final question comes from the line of John Arkstrom with RBC Capital Markets. Please proceed with your question.
John Arkstrom: Hey, thanks, everyone. 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?
Scott McLean: I'll take the easier part of that and just say that I think the different major capital markets product groups that we have, we've invested in several of them significantly in recent years, 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.
Harris Simmons: Yeah, 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.
Ryan Richards: And if I can just double up, 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, 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 this quarter is we're talking about a whole other 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. It's something I hope doesn't get lost in this. When we're seeing lots of other people showing really strong capital markets results this quarter, it's really nice to have that part of our narrative as well.
John Arkstrom: Okay. Just one thing maybe to end the call. It's kind of an N.I.I. 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? No.
Harris Simmons: I mean, far be it from me to, you know, 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 that, you know, things that are, you know, 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 and 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. And I think he's trying to be careful not to paint himself into a corner. I really think it's going to be I've said that under his leadership, he's going to be very responsive to what's happening with inflation and pretty transparent about it.
John Arkstrom: Okay, fair enough. Thank you.
Julian: Thank you. And with that, I will pass the floor back over to Dave Urchis for any closing comments.
Dave Riches: Thank you, Julian, and thank you to all for joining us today. We appreciate your interest in Zions Bank Corporation. 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.
Julian: 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.
