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Greetings, and welcome to the Zions Bancorp Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the call over to David 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 David 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 Henry 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, 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 one hour. We will now turn the call over to Harris Henry Simmons.
Thanks very much, David, and good evening, everyone. We are pleased with our financial results for the second quarter, which reflect meaningful year-over-year improvement and continued progress on a variety of strategic priorities. Net earnings available to common shareholders was $452 million, or $3.05 per share, including a couple of exceptional items. The first was a $215 million pretax gain on the liquidation of Visa Class B1 shares. The other was 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 second quarter. Our capital markets division continues to be an important driver of fee income growth since launching the business in 2020. We have 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, further strengthening our capital markets franchise. This transaction is not closed yet, and 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 are marketing as the Business Beyond account. It is 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 are pleased with the early results of the campaign, and between Gold and Business Beyond, we have opened over 10,000 new accounts so far this year. Turning to the slides: 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. This growth was 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 with 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 tax-equivalent revenue and adjusted noninterest expense, which last quarter included seasonal compensation expense. With that overview, I will turn the call over to our Chief Financial Officer, Ryan Richards, to walk through the quarter in more detail and our outlook. Ryan?
Thank you, Harris, and good evening, everyone. Getting to Slide 6, 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 $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 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 third quarter of 2026, 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, interest income growth could exceed this guide and result in NII growth in the upper single digits. Moving to noninterest income on Slide 8, customer-related noninterest income was $182 million, up from $172 million in the prior quarter and $164 million a year ago. Excluding net credit valuation adjustment, adjusted customer-related noninterest income was $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 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 fee related to this investment that was recorded in other non-interest expense, the net unrealized gain was $37 million. For the third quarter of 2026, 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 continuing 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 expenses prudently while investing to support growth. Our third quarter 2026 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 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-end deposit balances were relatively stable compared to the prior quarter, and short-term borrowings increased $837 million linked-quarter and declined $4.6 million 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. 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 nonaccruals and delinquency. Our capital position remains strong as shown on Slide 15. 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, which resulted in a 22% increase in tangible book value per share versus the prior year. Slide 16 summarizes the outlook we have 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.
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.
分析師問答
Thank you. And with that, this is the question-and-answer session. Our first question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.
Good afternoon. On the deposit side, I wanted to see if you can give us a little bit of color on what you are seeing in terms of deposit pricing. Deposit costs were relatively stable, down a bit in the quarter. How does this influence your outlook in terms of the competitive backdrop you are 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.
Hi, John.
Yes, thanks, John. I appreciate the question. Having heard some of the other earlier reports, I do not think our message is going to be very different. It is a competitive environment on both sides of that equation. We are seeing that reflected in the mix on the deposit side. On a period-end basis, we saw noninterest-bearing balances decline. We have seasonality in the second quarter, so some of that can be expected, but it was supplanted by growth in interest-bearing balances. It is 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 executing on the marketing and product initiatives that we've been discussing. On the loan side, we are seeing a little bit of spread compression. Earning asset yields were largely stable sequentially. We had some underlying factors that helped counteract spread compression: benefits from terminated cash flow swaps—this quarter had about an $8 million headwind from those—which we expect will continue to diminish through the remainder of 2026; by 2027 only about $8 million will remain. The remix we've discussed for quarters now continues. We do see continued upside from fixed asset repricing, though some of that was a bit masked this quarter by compression. We still see at least one basis point of earning asset yield improvement playing through there. Also, securities are coming in at better front-book rates than back-book rates and can contribute another basis point or better on investment security yields. There are helpful things working on our behalf. One nuance this quarter was our most important repricing benchmark—one-month SOFR—was at the low end of a range in the market, which was a little softer on the loan side. Without Fed funds rate decreases, it was harder to push that through on the deposit side. All of that equated to a very stable net interest margin this quarter. We do not typically provide deposit or NIM guidance for the future, but suffice to say, we believe there is some upside here, tied to our core strategic initiatives to drive deposit growth.
John, this is Scott. I would add that the marketing initiative we have with these strategic products is focused on granular deposits. We are doubling advertising in 2026 compared to 2024 and taking a company-wide approach to product advertising. We are still early into that, but our branch teams and business bankers are highly focused on these efforts to grow granular deposits. On the larger side, we still have net average broker deposits plus net overnight borrowings of about $2.5 billion. We have room to bring in larger deposits at rates that are meaningfully accretive to that overnight borrowing rate. So we expect continued improvement. Those higher-priced deposits are prospective clients; we are not just buying money in the open market.
Okay. Did you comment on loan pricing? You did. Okay, with the spread compression, got it. And then, Ryan, you alluded to not really guiding on deposit growth or margin, but how should we think about the reliance on wholesale here or short-term borrowings? I know you have capacity to bring in larger deposits as Scott mentioned, but how might the funding picture look as you continue to see some strengthening trends on the loan side?
John, we certainly hope for deposit growth and expect it based on our initiatives. My guidance on NII one year out is constructive and reflects our expectations for a decent amount of average deposit growth that would support that guide, but we do not give specific deposit targets. We believe deposits will grow sufficiently to achieve our outlook, but the exact pace will depend on execution of our campaigns and market conditions. We have capacity and several levers including securities reinvestment strategy and the ability to replace wholesale funding with deposited funds over time. We aim to drive deposit growth through our core strategic initiatives.
Fully understand. Thank you so much, Ryan. Appreciate it.
Thank you. Our next question comes from the line of David Smith with Truist Securities. Please proceed with your question.
Hey. Good evening. 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. The forward curve we referenced as of June 30 assumed an interest rate increase over the next 12 months. Our guidance for moderately increasing NII incorporates that expectation. We continue to screen asset sensitivity relative to peers, and you will see sensitivity materials in the appendix showing results on a parallel shift. Internally, we think about latent emergence and would show roughly a 3.2% lift above latent sensitivity that could be implied by having one or more rate increases in the curve.
Okay. And just following up on deposits — I hear you have initiatives to reignite growth. In the short term, though, your loan-to-deposit ratio was up a couple points to 82%. That is not very high, but how high would you feel comfortable taking that ratio in the current environment if deposit growth takes longer to transpire?
We have been considering investment securities reinvestment versus letting cash flows run off. We are getting closer to selectively reinvesting less than we had previously, but not there yet. We probably have one or two quarters before fully reinvesting investment securities. We consider liquidity stress tests and contingent liquidity needs and believe we have sufficient buffer. At an 82% loan-to-deposit ratio, there is still room to run, and we remain comfortable with our liquidity and funding posture while pursuing deposit growth.
Thank you.
Thank you. Our next question comes from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.
Can you give us a sense of the trajectory of deposit costs through the quarter? I know that spot deposit rates were up about 6 basis points quarter-on-quarter, but I recognize seasonality in there, especially related to noninterest-bearing deposits. How did deposit costs evolve through the quarter and how did competition evolve?
Competition is certainly present, Manan. Slide 10 shows total cost of deposit spot rate at the end of the quarter at 1.49%, so you can get a feel for direction of travel. It is competitive, and our success will depend on driving the core campaigns we've discussed.
And maybe talk a little about loan growth and the drivers there. C&I growth was clearly good this quarter. Any sense of acceleration and what we should think about for the next year or so?
Sure. This is Derek. We had good loan growth for the quarter, primarily driven by commercial and industrial (C&I). It was fairly well diversified across segments within the commercial and industrial book. We saw a decent increase in utilization on revolving lines of credit from companies that were growing and had additional working capital needs, which was positive. We also had new originations tied primarily to middle market and some upper middle market activity related to capital markets syndication activity that we are trying to grow. We saw good growth in the term CRE book as well. Our construction mix is down as a percentage of total CRE to 16%, in part because construction loans rolled into term, but also from new originations in our term book, which we think has opportunities to grow.
Thank you.
Thank you. Next, we have Bernard Von Gizycki from Deutsche Bank. Please proceed with your question.
Hi, good afternoon. On expenses, I think you called out that credit-related expense rose $4 million due to increased loan-related legal costs. Was this mostly due to the legal issues with the Cantor fund, or any updates on that?
Yeah, Bernard, that is certainly a prominent component of that expense item.
Any thoughts on that continuing? Will there still be some spilling into the second half?
I do not think we have anything further to offer at this point on that.
Maybe one last follow-up: on fees, Ryan, you mentioned attractive opportunities in capital markets and strong pipelines going into 3Q, with real estate capital markets investment banking fees strong. How do you see that trending? And any color on wealth management fees that were down slightly this quarter?
Sure. It was a really solid quarter. Recent quarters have been solid in customer fee income. What is different from a year or two ago is that the growth is broader now, not just principal growth in capital markets. Our largest source of fee income—about 30%—comes from treasury management activities, which are up nicely year-over-year. Loan-related businesses are seeing increases in fees, and our mortgage business shifting to held-for-sale from held-for-investment will continue to support year-over-year mortgage fee growth. Wealth management was actually up compared with the June quarter of last year; we've had a couple of flat years, but we are encouraged by what our teams are doing. Rebecca Robinson, who ran that business for many years, did a wonderful job improving core profitability and has retired. We hired Mike Selfridge, formerly Chief Banking Officer at First Republic, to run our wealth business. He brings significant experience, and we expect wealth to become a high-single-digit to low-double-digit growth business for us in revenue.
Great. Thank you.
And next, we have a question from Benjamin Gerlinger with Citi. Please proceed with your question.
Hi, good afternoon. I want to unpack a bit on deposits. Since everything gets lumped together, are there any silos that are growing? Is any particular silo performing better given the net was down a little bit? Are targeted campaigns or specific strategies working better?
We have an ongoing targeted deposit campaign inviting people to bank with us with somewhat more generous rates but still focused on client relationships, as Scott mentioned. Harris talked about Business Beyond and other initiatives; we cited 10,000 new accounts. It takes time for these initiatives to play through, but we are putting significant energy and resources behind them. Recent growth is coming from focused outreach efforts, with nice underlying green shoots from our strategic initiatives.
These initiatives are a marathon, not a sprint. Over time, sustained growth from these efforts should meaningfully strengthen the consumer and small business parts of the franchise.
Gotcha. And Ryan, just to double-check: the operating leverage of 100 to 150 basis points — is that excluding the Visa gain?
Yes, we would not include the Visa gain for that purpose. That is a reaffirmation of what we shared last quarter. We still see that operating leverage for the full year, but we need deposits to pull through for it to stick.
Got you. Thank you.
Thank you. Our next question comes from the line of David Chiaverini with Jefferies. Please proceed with your question.
Hi, thanks for taking the question. Wanted to start on NII guidance clarification. So the 'moderately increasing' includes one hike; if we get two hikes, is that when you get to upper single digits? Is that the right way to think about it?
I would think of it as one full hike embedded in our guidance. Sometimes the market anticipates and prices in moves ahead of time; when we looked, it was between one and two hikes in terms of market pricing. If we saw two full hikes, it would be more constructive than what I described in the prepared remarks.
Okay. And a follow-up on positive operating leverage: the 100 to 150 basis points is for 2026 core. If we pencil out 12 months forward, how should we think about positive operating leverage over the next 12 months?
I don't have the precise statistic in front of me, David, but think about our guidance as steering the market: moderate loan growth, fee income that was strong year-over-year, and for NII, with the forward curve, potential upper-single-digit growth if the curve plays out. Moderate expense growth combined with the revenue outlook positions us for positive operating leverage. The exact 12-month number would depend on execution and deposit growth.
Very helpful. Thank you.
Thank you. Our next question comes from the line of Christopher McGratty with KBW. Please proceed with your question.
Thanks. Ryan, a bigger picture question on margin: many peers are saying NII is more important than margin and managing to margin is an output. You guys walked back the 3.5% NIM commentary previously; conceptually, what's more important over the next 6 to 12 months — NII growth or leaning into growth even if margin is pressured?
I think it comes back to NII. While margin is an interesting metric, NII is ultimately where profitability comes from. We want to grow responsibly. Loan growth outpacing deposit growth can constrain margin, but given the rate curve and that we're asset sensitive, we see opportunities for NII growth. My focus is on NII growth, executed responsibly.
On the allowance for credit losses (ACL), your credit numbers look strong. With ACL approaching 1.1%, how should outsiders think about willingness to bring that down — mix shifts, CECL day-one considerations? That 1.06 number, how should we think about it?
Our ACL position feels well reserved. Movement will depend on the economic forecast: if the economy improves, we have room to reduce it somewhat; if it deteriorates, we would increase it. Coverage for six years of gross charge-offs feels appropriate given the tenor of our portfolio. These ratios are sensitive to forecast changes but we feel well reserved today.
Thanks. And Ryan, on the tax rate, any outlook there?
Nothing unusual. We had a small item in the first quarter that was a one-time normalization, but otherwise business as usual on the effective tax rate. Nothing to call out.
Thank you. Our next question comes from the line of Kenneth Usdin with Autonomous Research. Please proceed with your question.
Ryan, sorry to come back on this again, but can you make sure we understand that your main guide to focus on for NII includes one hike, and you think you can do upper single-digit year-over-year NII growth to 2Q 2027 if that happens? Just want clarity because of the language on the slide.
You nailed it, Kenneth. Sometimes words get in the way. Our guidance assumes roughly one full hike embedded in the forward curve we referenced. If you see more hikes than that, the outcome would be more constructive for NII.
Okay, thanks. On capital, you had the Visa gain and you are around 9.2% with AOCI. I know capital return is a board decision, but $75 million in buybacks — is that the type of return we can expect going forward? Do you feel comfortable with AOCI and could we see an increase from here?
If the economy cooperates and our plans play out, I would expect incremental increases in capital repatriation to shareholders. I would not expect anything sudden or dramatic, but the current pace of buybacks is sustainable and I would expect some increase over the coming year in both buybacks and dividends, consistent with our forecast.
From a reported perspective, we look healthy. The Basis transaction we referenced will absorb some capital when it closes, but on a reported basis we expect to be favorable relative to peer medians. The ALTI accretion has been predictable, and we see a glide path that allows for capital flexibility as Harris described.
Okay. Thanks a lot.
Thank you. Our next question comes from the line of Peter Winter from D.A. Davidson. Please proceed with your question.
Thanks. I wanted to follow up on AOCI because Scott talked at a recent conference about capital building with AOCI accretion and more capital available for acquisitions. Harris, can you provide an update on your thoughts about bank M&A?
I would not say M&A is off the table, but it is not something we focus on daily. Any acquisitions would be opportunistic, strategic, and likely in markets where the economics are favorable through consolidation and are additive to our franchise. Over the past years we've focused on strengthening the foundation—systems, people, risk management. We are in a different place now with stronger capital and fundamentals. There is a lot of organic opportunity, and that is our primary focus.
I made similar comments at investor conferences: Harris and I are not waking up every Monday focused on M&A. We are focused on growing the company through initiatives and projects. When opportunities present, we can move quickly to assess them. On AOCI, the accretion has been predictable; on a reported basis our CET1 is favorable to peers and, including AOCI, we are at or above peers. You can make your own assessment about buyback capacity given that trajectory.
Got it. One housekeeping item: Derek mentioned line utilization increased. Can you give the number this quarter versus last quarter and roughly how much one percentage point of utilization equals in loan growth?
I don't have the exact numbers at my fingertips versus last quarter, but utilization drove a meaningful portion of the loan increase. Ballpark, a decent amount—perhaps 40% to 50% of the quarter's loan growth—came from increased utilization across portfolios.
Broad strokes, close to 1 to 2 percent utilization overall contributed to the quarter's growth across C&I, CRE and consumer segments.
Got it. Thank you.
Thank you. Our next question comes from the line of David Rochester from Cantor. Please proceed with your question.
Hey, good afternoon. Just wanted to go back to the NII guide one more time. Can you state what the NII guide is without rate hikes for 2Q to 2Q? Is that 'moderately increasing' or roughly 4% to 6%?
Even without a rate increase, we believe NII would be moderately increasing given loan growth and other dynamics. The forward curve as of June 30 did include a hike assumption, but absent hikes, we still saw moderate improvement driven by loan growth, remixing of assets and some securities reinvestment dynamics.
And a follow-up: are you still focused on pulling off-balance-sheet deposits back on to the balance sheet? How much is there, what's the funding advantage vs. wholesale, and is any of that baked into the guide?
We have about $6.5 billion in off-balance-sheet deposits; at one point that number was as high as $12 billion. Bringing those deposits back on balance sheet is accretive to our overnight borrowing costs. When we bring deposits in through targeted wholesale campaigns, they typically come in 30 to 40 basis points accretive to our overnight borrowings. We currently have about $2.5 billion average brokered deposits plus net overnight borrowings, and the idea is to replace those over time with deposits that are accretive.
Sounds good. Thanks, guys.
Thank you. Our next question comes from the line of Anthony Elian with JPMorgan. Please proceed with your question.
Thank you. Regarding deposit initiatives, how quickly could you see those efforts translate into deposit growth to reignite growth in total customer deposits, which have held flat the past couple of quarters?
We've been working on these initiatives for the last nine months. So far we've brought in $3.5 billion through these efforts and targeted campaigns.
It is akin to the early phase of a longer effort — the first gains can be easier and the remaining pockets can be stickier. Execution continues and we expect progress over time.
My follow-up: loans are expected to moderately increase over the next year, but given competitive deposit pricing and the likelihood of continued intense deposit competition, how do you avoid a surge in funding costs in the coming quarters and still achieve the NII goals?
Our loan growth has been disciplined. We have not chased the fastest-growth strategies that create concentration risk. Peer CRE growth has been substantially higher than ours; we choose to manage concentrations and grow prudently. With the loan growth projection we have, we see opportunities to keep funding costs — a competitive advantage for us — largely intact. Historically, over decades, our cost of deposits relative to peers has been a competitive benefit.
There will be pressure in the marketplace, but we expect to manage it. We are seeing competition and some pressure on funding costs, but our approach and the levers available give us confidence in managing that pressure.
Thank you.
Thank you. Our next question comes from the line of Janet Lee with TD Cowen. Please proceed with your question.
Good afternoon. On your NII growth assumptions of roughly 4% to 6% without rate hikes and upper single digits with hikes — are you assuming noninterest-bearing deposits stay in the ~34% of total range? You mentioned seasonality in Q2; what is baked into the baseline?
We do see seasonality, particularly in the second quarter, and typically expect a stronger second half of the year. That expected seasonality is factored into our planning and guidance. Recent trends show interest-bearing balances growing faster than noninterest-bearing balances, and we expect that to continue in the near term as we execute our campaigns.
Thanks. One more: the securities portfolio has been decreasing for some time. How should we think about its trajectory going forward?
We are getting closer to a point where we may stop fully reinvesting principal and prepayment cashflows into securities, which would allow redeployment into loans or paying down wholesale funding. But we are probably a quarter or two away from that. We'll continue to consider our funding structure, regulatory expectations, and where capital markets financing makes sense as we manage the portfolio.
Thank you.
Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Hi, good evening. The technology expense comment — is that a quarter-over-quarter or year-over-year trend? Technology expense has been elevated the last few quarters.
There is a bit of both. The disclosure in the earnings release is primarily a year-over-year observation, reflecting investments to stay current. It is a continuing trend driven by investments and vendor costs.
There has been vendor price pressure and software maintenance increases. One potential bright spot is that AI may eventually temper some of those vendor pricing dynamics, though many firms will increase spending on AI. It remains to be seen how quickly meaningful benefits will be realized.
About a quarter of your expenses are tech related per disclosures. Do you see tech spend moving toward 30% temporarily, or tracking with natural expense growth? Could it go lower over time?
I don't expect a significant change in the trend immediately. We're continuing to invest. One trend to watch: outsourcing has been a lever to manage FTE costs, and as AI capabilities evolve, there may be an opportunity to replace some outsourcing with AI-driven solutions, which could reduce expenses. That dynamic may create expense opportunities as firms replace outsourced costs with AI.
Next question coming from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Thanks. Scott or Ryan, anything to call out in the capital markets revenue line this quarter? Do you feel that is granular, repeatable? Harris, anything you can share about sizing the agency acquisition?
Our capital markets product groups have had significant investment in colleagues, risk and technology. We see a long runway to grow those businesses. The revenue can be lumpy, but having multiple product groups makes the business more durable and we are comfortable with the trajectory for further growth.
On the Basis Investment Group transaction, contractually we cannot provide projections until the deal closes. I expect we will be able to discuss it more next quarter after close.
To add, historically our capital markets bread-and-butter has been risk management products. This quarter we are seeing complementary skill sets in real estate capital markets and investment banking advisory fees. That diversity makes the business less lumpy and more durable, which is encouraging.
Just one final question: do you think the Fed should or needs to hike rates? Do you have a bias on rates?
I tend to think the Fed under Chairman Waller is focused on inflation, and the leadership wants flexibility rather than being boxed in by forward guidance. I expect they will be responsive to inflation developments and transparent about it. If inflation is sticky, there will be upward pressure on rates. My view is that the Fed will remain responsive and data-driven.
Thank you. And with that, I will pass the floor back over to David 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 press 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.