管理層發言
Greetings. Welcome to Zions Bancorp Fourth Quarter Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to Shannon Drage, Senior Director of Investor Relations. Thank you, and you may begin.
Thank you, Bonn, and good evening, everyone. Welcome to our conference call to discuss the fourth quarter and full year earnings for 2025. My name is Shannon Drage, Senior Director of Investor Relations. I would like to remind you that during this call, we will be making forward-looking statements. Please note that actual results may differ materially, and we encourage you to review the disclaimer in the press release or Slide 2 of the presentation dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release as well as the presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Ryan Richards, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Steward, Chief Credit Officer; and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session, and the call is scheduled for 1 hour. I'll now turn the time over to Harris Simmons.
Thanks very much, Shannon, and good evening to all of you. You've seen on Slide 3, our fourth quarter results reflected continued progress and steady improvement across a variety of key financial metrics. Earnings of $262 million were up meaningfully, 19% from the prior quarter and 31% from a year ago, driven by stronger revenues and notably lower provision for credit losses. Our net interest margin expanded for the eighth consecutive quarter to 3.31%, benefiting from an improved funding mix as customer deposit initiatives reduced our reliance on short-term borrowings. Customer deposits grew at a healthy pace, up 9% annualized. Average loans were essentially flat compared with last quarter, reflecting the payoffs we saw at the end of last quarter, though period-end balances increased by $615 million on solid production. Credit quality was strong with net charge-offs of just 5 basis points annualized of total loans. This quarter's results also included a $15 million donation to our charitable foundation to be spent down over the next 3 years to make charitable donations that we expect would otherwise have been nondeductible for tax purposes as a result of the recent tax law changes. Turning to Slide 4. Full year results were similarly improved relative to the prior year. Earnings grew 21% and net interest margin expanded by 21 basis points. Adjusted PPNR increased 12%. And when excluding the charitable contribution, we achieved over 300 basis points of positive operating leverage. After several years of industry-wide disruption from the 2020 pandemic to the 2023 regional bank crisis and stress in the commercial real estate sector, we're pleased with the resilience of our performance, particularly the stability in credit outcomes throughout that period. Tangible book value per share increased 21% this year, the third straight year of growth greater than 20%, and we believe that we are nearing the point where we'll be able to increase capital distributions while continuing to further strengthen capital. On Slide 5, diluted earnings per share was $1.76, up from $1.48 last quarter and $1.34 a year ago. This quarter's figure includes an $0.08 per share headwind from the charitable contribution, offset by a positive $0.11 per share combined impact from the reversal of the FDIC special assessment and net gains in our SBIC portfolio. As shown on Slide 6, adjusted PPNR of $331 million was down 6% sequentially and up 6% year-over-year. When further adjusted for the aforementioned charitable contribution, it was down 2% versus last quarter and up 11% versus the year ago quarter. With that high-level overview, I'm going to turn the time over to our Chief Financial Officer, Ryan Richards, for additional details related to our performance.
Thank you, Harris, and good evening to everyone. On Slide 7, you will see the trend over the last five quarters for net interest income and net interest margin. Net interest income rose by $56 million or 9% compared to the fourth quarter of 2024 and increased by $11 million compared to the previous quarter. For the second quarter in a row, growth in average customer deposits exceeding loan growth helped us enhance our funding mix and lower overall funding costs. Consequently, net interest margin grew for the eighth consecutive quarter to 3.31%. We anticipate a moderate increase in net interest income for the full year of 2026 compared to 2025, supported by favorable changes in earning assets and interest-bearing liabilities and growth in loans and deposits. Our guidance allows for 225 basis point cuts to the Fed funds rate in June and September of this year. Slide 8 provides more details on the changes in net interest margin. The waterfall chart on the left outlines the changes in both rate and volume for key components of the margin. Net interest margin expanded by 3 basis points sequentially, as an improved funding mix and reduced borrowing costs balanced out declines in asset yields. The right-hand chart on this slide shows a 26 basis point increase in net interest margin compared to the same quarter last year, thanks to lower deposit costs. Moving to noninterest income and revenue on Slide 9, customer-related noninterest income for the quarter was $177 million, up from $163 million in the prior period and $176 million a year ago. It's important to note that last quarter's results included an $11 million impact from the net CVA loss due to an update in our valuation methodology. Adjusted customer-related noninterest income, excluding net CVA, reached a record $175 million for the quarter, which was an increase of $1 million from the previous quarter and $2 million from the same quarter last year. The chart on the right side illustrates both total revenue and adjusted revenue for the most recent five quarters, which were influenced by factors affecting net interest income and customer-related fee income. Although not on this page, it is notable that on a full-year basis, capital markets fees, excluding net CVA, rose 25% compared to the full year 2024, driven by higher revenues from customer swaps, investment banking, and loan syndication. As mentioned in previous earnings calls, we set a goal to double capital markets fees since the launch of Zions Capital Markets in 2020. We have achieved that and see further growth potential in this area. Our outlook for customer-related fee income for the full year of 2026 is moderately increasing compared to 2025, with expectations to reach the upper end of the guidance. Growth will primarily come from capital markets, with loan-related fees following, along with broad-based growth across other categories due to increased activity. Slide 10 shows adjusted noninterest expenses in lighter blue bars. Adjusted expenses totaled $548 million, up by $28 million or 5% from the previous quarter and increased by 8% year-over-year. This includes a $15 million charitable donation mentioned earlier. Adjusting for this donation, expenses rose by 2% from the previous quarter and by 5% year-over-year. The rise in expenses for the quarter reflects increased marketing and business development spending, higher software licensing and maintenance costs, and a return to normal legal fees after last quarter's reimbursement of approximately $2 million in attorney fees. We plan to continue managing expenses carefully while investing in revenue-generating initiatives. We expect a moderate increase in adjusted noninterest expenses for the full year of 2026 compared to 2025, incorporating increased marketing costs, ongoing investments in revenue-generating personnel and business lines, and rising technology costs. We foresee positive operating leverage in 2026, currently estimated to be around 100 to 150 basis points. Slide 11 shows the trend over five quarters in average loans and deposits. Average loans held steady compared to the previous quarter and grew by 2.5% year-over-year. Average loans rose by $615 million sequentially, driven by robust commercial growth in Texas, California, and the Pacific Northwest. Total loan yields decreased by 15 basis points from the previous quarter. Our outlook for year-end loan balances for 2026 is a moderate increase compared to 2025 and anticipates growth primarily in commercial loans, focusing on C&I and owner-occupied segments, with additional growth from commercial real estate loans. Average deposit balances, shown on the right side of the slide, increased by 2.3% compared to the prior quarter. Average noninterest-bearing deposits grew by $1.7 billion or 6% versus the prior quarter, partly due to about $1 billion migrating from a consumer interest-bearing product to a noninterest-bearing product at the end of last quarter. This also reflects our bankers' successful deposit gathering efforts this quarter. The cost of total deposits declined by 11 basis points sequentially to 1.56%, aided by the lag effect from time deposit repricing following benchmark rate cuts at the end of 2025. Opportunities to further reduce deposit costs will depend on the timing of short-term benchmark rate changes, growth in customer deposits, market competition, and customer behavior. Slide 12 offers more details on funding sources and total funding costs. Period-end deposit balances increased by $766 million compared to the previous quarter, allowing us to reduce higher-cost short-term borrowings, which fell by $653 million or 17% during the quarter. The chart on the right indicates that total funding costs declined by 16 basis points during the quarter to 1.76%. The trends in our securities and money market investment portfolios over the past five quarters are illustrated on Slide 13. Maturities, principal amortizations, and prepayment-related cash flows from our securities portfolio totaled $554 million during the quarter, or $288 million when netted against reinvestment. The paydown and reinvestment of lower-yielding securities continue to enhance our earning asset mix. The estimated duration of our investment securities portfolio is about 3.8 years, reflecting its sensitivity to interest rate changes. Slide 14 presents credit quality. Realized net charge-offs for the quarter were $7 million, or 5 basis points annualized. Nonperforming assets remained low at 52 basis points of loans and other real estate owned, compared to 54 basis points in the previous quarter. Classified loan balances decreased by $35 million, largely due to a $132 million reduction in commercial real estate, partially offset by a $92 million rise in classified C&I loans. We anticipate that classified CRE balances will continue to decrease going forward through payoffs and upgrades. In the fourth quarter, we recorded a $6 million provision for credit losses, and when combined with our net charge-offs, this reduced the allowance for credit losses by $1 million from the prior quarter. The allowance for credit losses as a percentage of loans declined by 1 basis point to 1.19%, and the coverage for nonaccrual loans increased to 215%. Slide 15 provides an overview of the $13.4 billion commercial real estate portfolio, representing 22% of total loan balances. This portfolio consistently maintains low levels of nonaccruals and delinquencies. It is granular and diversified across property types and locations, with controlled growth managed through strict concentration limits over the past decade. Additional details on specific CRE portfolios can be found in the appendix of this presentation. Our loss-absorbing capital position is shown on Slide 16. The common equity Tier 1 ratio for the quarter was 11.5%. When combined with the allowance for credit losses, this aligns well with our risk profile related to loan losses. We expect organic growth in our common equity from earnings, and improvements in AOCI will continue through the accretion of unrealized losses in the securities portfolio as individual securities pay down and mature. Importantly, our organic earnings growth, along with AOCI unrealized loss accretion, has allowed us to increase tangible book value per share by 21% compared to last year. This marks our third consecutive year of tangible book value growth exceeding 20%. We believe we are close to a position where we can increase capital distributions while still investing in our franchise for profitable growth. Slide 17 summarizes the financial outlook for the full year of 2026 compared to 2025.
This concludes our prepared remarks. Please open the line for questions.
分析師問答
Our first question comes from Manan Gosalia with Morgan Stanley.
I just wanted to begin with a quick clarification question regarding the guidance for expenses. What is the basis for the moderately increasing guidance? I see that the adjusted noninterest expense number provided at the back of the earnings release is $2.1 billion, or $2.122 billion. Is that the correct base? Should we also exclude the charitable contribution for this quarter?
Yes. I would ask you to think about the base stripping out the charitable contribution for this quarter and then rolling forward into next year, thinking about really that activity relates to, as Harris mentioned, the 3 years forward look about things that might otherwise be tax deductible with the spend outlay at that time. So that's probably where I would anchor you.
Got it. So basically take that $2.122 billion number and then strip out the charitable contribution from that and then to moderately increasing off of that.
Yes, that's certainly how I think about our core result, yes.
Got it. All right. Perfect. And then just a broader question on expenses. You guys operate in a pretty attractive footprint, and we've seen a lot of larger banks come out and highlight growth in branches in new markets and including some of yours. Are you seeing any increased competition in your markets? And if you are, is that the driver behind some of the increased marketing and tech spend that you called out in the deck?
I think we have faced new competition for as long as I can remember, especially during favorable times, and these times are reasonably good. Sometimes that competition fades when conditions become challenging. However, that's not the main reason for our increased marketing spend. We're revamping some of our products and believe that after spending nearly a decade on internal reengineering and fixing many foundational issues, we are now positioned to grow at a faster rate than we have over the past decade. We intend to approach this growth prudently and responsibly, as we care deeply about the company's credit culture. Nonetheless, we are committed to increasing our investment in growth initiatives, which has been evident over the past year and will continue into the next. This decision is not driven by any specific new competitor, although we acknowledge their presence. We operate in appealing markets, which is positive, but it also draws interest from potential new entrants, adding complexity to the situation.
Our next question comes from Dave Rochester with Cantor Fitzgerald.
Just want to start on the NII outlook for '26. I appreciate all the color on the rate cuts. I was just wondering what you're assuming for the funding of loan growth if you're assuming that securities runoff continues and you fill in the rest with deposit growth. And then the magnitude of any kind of funding remix out of broker deposits or out of wholesale funding that you're assuming within that guide. Any color on any of that would be great.
Yes, thanks, Dave. I can provide some general insights. We usually do not break down deposit growth or offer specific projections for the coming year. However, in response to your earlier question, we definitely see potential for changes on both sides of the balance sheet that could influence the net interest income outcome. We still believe there is capacity to adjust our investment securities portfolio before we feel significant pressure regarding liquidity stress testing and liquidity ratios. That said, I think the pace may not be as strong as it has been previously, and we are likely approaching a tapering point. There is still potential for reallocating from securities to loans and for reducing broker deposits or wholesale funding. We are actively discussing growth strategies informed by Harris’ comments, particularly focusing on what growth will look like in 2026. We have both aspirations and concrete plans to expand our deposit base, emphasizing granular deposit growth and marketing initiatives to support that goal, while also aiming to reduce broker deposits, where we have seen consistent success, as well as addressing other short-term borrowings. While I refrain from providing a specific number due to multiple assumptions, this outlines our intended direction as an organization.
Great. Sounds good. I know we discussed a 3.50% margin in the last call, and we're currently only 19 basis points away from that. We're in '26. Do you think we can achieve this by the end of '27?
I'm not going to put a time frame on it. I think it heavily depends on what happens with rates. With a new Fed Chair, there will be more developments that I prefer not to speculate on. But as I mentioned earlier, my comment was intended to suggest that over time, we are likely nearing what a stable state could look like for us. We've made significant progress, but there's still more to accomplish. I believe that over a longer period, the risk leans towards higher rates. Consequently, we've reduced our asset sensitivity somewhat. We're closer to neutral at this point, but I'm very aware of the potential for higher rates and want to ensure we can manage that. In a scenario with moderate short-term rates and some slope to the curve, I believe that's where we can aim to be. However, it's difficult to predict whether that will occur in the next seven or eight quarters.
Our next question comes from John Pancari with Evercore ISI.
On the loan growth front, I appreciate the moderately increasing guide. Underneath that, could you help unpack it a little bit in terms of what type of dynamics you're seeing on the loan growth front? Are you seeing demand strengthen? Are you seeing some pull-through in terms of line utilization? And are any of these growth initiatives that you just discussed, Harris, in response to the question, is that banker hiring that in certain areas that can drive some of this growth?
We've hired some excellent bankers, especially in California, but also in other areas. Our focus is strongly on small business lending, which is central to our growth strategy. Small businesses provide significant deposits, and we believe our history, organizational structure, and team are well-suited for this type of business. This past year, we nearly doubled the number of SBA 7(a) loans and saw about a 53% increase in loan amounts. I anticipate continued strong growth in this area as we invest in training, marketing, and overall support for small businesses. For me, a dollar of growth in this segment is more valuable than several dollars of growth elsewhere. It's not just about percentages; it's about quality. We are committed to building a more productive balance sheet while serving more customers. That’s essentially my perspective on it.
John, this is Scott. I would like to add that, similar to what I mentioned last quarter, the growth will mainly come from commercial and industrial, as well as owner-occupied sectors. We do anticipate some growth in commercial real estate. Our goal has been to grow commercial real estate at a rate slightly lower than our overall portfolio growth, and we have not quite achieved that recently. However, I believe we will witness some growth in commercial real estate where we have not seen much before. Our municipal and energy businesses present good upside potential, although they have been somewhat flat. The overall sentiment concerning commercial real estate, along with tariffs and economic factors, has led the industry to observe somewhat disappointing loan growth numbers. Nevertheless, we are well positioned to benefit as business sentiment improves, for the reasons Harris mentioned. Additionally, our call programs are more energized than ever. The advertising and marketing efforts that Harris referred to represent a significant change and are very targeted towards small and medium-sized businesses, as well as granular deposits and the SBA initiative Harris discussed.
I'd add one other thing that is if you look across the industry, a lot of the commercial loan growth has come out of increased exposure to the NDFI sector. And notwithstanding having stepped on a landmine in the fourth quarter, we have not been growing that portfolio and don't really intend to in any kind of meaningful way, deliberately. And so in a relative sense, that's actually kind of a headwind comparatively to peers. My hope is that we can actually make up for that again, in some of these areas we've been talking about, small business. We will have some CRE growth. And we'll probably see a little bit of municipal growth, but a lot of it will be commercial.
Reiterating what both Harris and Scott mentioned and referring back to Dave's earlier question, the focus is not only on the trade-off between securities, loans, broker deposits, or wholesale borrowing. It's the composition within the loan portfolio that will positively impact net interest income as we've observed. Additionally, I didn't mention earlier the effect of the terminated swap, which has been a diminishing headwind for us over time. Looking ahead to 2026, we anticipate around $29 million in headwinds from this, which is roughly half of what we experienced in 2025, contributing to a more favorable net interest income outcome for 2026.
Got it. All right. And then separately on capital, just wanted to get your updated thoughts on the potential timing of a return of share buybacks. I believe you had indicated you're kind of nearing the point where you could consider capital return and an increase in it. I think your CET1 ratio, which you've been watching a little more closely, increased about 40 basis points this quarter and then your CET1 up 60 bps. And so both TCE and CET1 heading in the right direction. So curious what your updated thoughts are there.
I believe it will likely happen this year, but probably not in the next quarter. In the second half, I expect we will be in a position to start increasing capital returns. However, I won't provide a specific target amount right now. When we are ready, we will make an announcement, and I don't think it will take too long.
Our next question comes from Chris McGratty with KBW.
Just following up on that question about the buyback. I know that during the 2023 banking situation, the rating agencies expressed concerns regarding capital levels. When you announce or prepare to announce the buyback, how significant is that? Also, how do you differentiate between tangible common equity considerations versus CET1? What are your thoughts on all the stakeholders involved?
It's an important stakeholder for us, and we truly value the engagement we receive. They've recognized that we've been in a rebuilding phase for a significant period. We're not indicating a major shift; rather, we acknowledge that we're still in the process of improving our AOCI to align with our peers. The timing and potential to alter the pace of convergence are still to be determined, pending OCC and Board approval. We appreciate John's earlier recognition of our favorable trends, which we are also witnessing in our statistics and growth in tangible book value, all of which is very encouraging. Despite our headline figures showing promise, we still tend to rank lower against our peers when AOCI is included. We remain committed to our path of increasing tangible book value and are exploring opportunities to advance while pursuing convergence.
I think it's helpful that a significant portion of this tangible common equity build has been secured and is highly predictable. This is important to rating agencies, and for us, it means that time is a key factor. We will gradually incorporate changes; it's not going to happen abruptly, but we want to keep building capital, especially regarding our CET1. We view this in a context where AOCI is considered in the calculation. From a regulatory standpoint, there doesn't seem to be any immediate changes regarding the treatment of AOCI in capital, so I believe we will have some flexibility.
Great. And then the follow-up would be on the source of deposit growth. You may have touched on it, so I apologize. Ryan, about 5% noninterest-bearing growth in 2025, I hear you on the initiatives. Within your guide for '26, did I miss what are you assuming for NIB growth or NIB mix?
Yes. We don't typically guide on deposit side of that, Chris. And certainly, we just try to roll it into our NII and how we see that holistically. But suffice to say, based upon the things that we're prioritizing for strategic initiatives that we certainly would expect to see growth across the noninterest-bearing dimension as well as interest-bearing deposits, trying to pull those whole relationships, net new relationships into the bank. So that's where that whole growth orientation you're hearing from us, not just this year, but going into last year, putting some marketing dollars and some real focus behind those campaigns. In terms of the refreshing, as Harris alluded to before, of our offerings, potential to bundle products that we think are really relevant for our clients and the like.
Our next question comes from Bernard Von Gizycki with Deutsche Bank.
Maybe just following up on noninterest-bearing deposits. I'm just curious that most of the growth there, the $1.1 billion year-over-year and then the decline $310 million sequentially. Was there growth from new customer acquisitions within the consumer gold account? And can you just share now that legacy account migration has now ended, how do you expect this to trend from what you've been hearing from the branches?
Yes, there has been growth, and it's important to note that these new accounts we’ve opened are not just conversions of existing ones. We’ve added nearly 4,000 new accounts since our relaunch a few months ago, and I anticipate this number will increase in 2026. The average balance for these new accounts is around $10,000, while established accounts average about three times that amount. This indicates that we are attracting a clientele that has the potential to build substantial balances. The overall deposit relationship across nearly 50,000 accounts averages about $125,000 per customer, which we view as an attractive focus. It's important to mention that noninterest-bearing accounts are affected by interest rates, and a significant portion of commercial loans is linked to the provision of services through account analysis. There are many factors that can impact these numbers, but our aim is to create a robust foundation of accounts that, while smaller and insured, represent solid business opportunities. This is our objective moving forward.
I would just add that the number Harris referenced regarding net new accounts is something we are just starting to roll out. We piloted this campaign in the second half of '25, and it is now launching with significantly enhanced marketing efforts across the entire company.
Got it. I appreciate that. Just my follow-up. I think you've indicated in the past that you expect 2 to 3 basis points a quarter of fixed rate asset repricing. You mentioned the 2 rate cuts assumed in '26. Just update us here, same assumption. And if the Fed is at a rate cut pause, how does that estimate change, if at all?
Yes. Thanks, Bernard. I mean what we're currently seeing now, obviously, with the changes we had later last year, we're not seeing quite that level in terms of fixed loan repricing impacts on our earning asset yields. Right now, we would say is that around 1 basis point as opposed to where we were previously. And then with additional cuts in the future, you can imagine that it would erode that value opportunity for us.
Our next question comes from Ken Usdin with Autonomous Research.
I am curious about your thoughts on tailoring, especially with the recent regulatory discussions regarding the potential for indexing levels or possibly raising the requirements completely. Given that your asset base remains around $90 billion, are you approaching future growth investments and acquisitions any differently as we anticipate a more formal change than what we've experienced in the last couple of years?
Yes, Ken, as we've mentioned over the past few years, even without the announcements from the OCC regarding their heightened expectations rule and similar changes that have been proposed or implemented, we didn't see the $100 billion threshold as a significant threat. We were actually the smallest systemically important financial institution after the Dodd-Frank Act was passed in 2011, and we have been subject to the same regulatory demands as larger banks like JPMorgan Chase. This has led us to develop the capabilities and models for credit stress testing, liquidity management, and a comprehensive risk management infrastructure. Our intention is to maintain these robust capabilities, which we believe strengthen our company. We don't see crossing the $100 billion threshold as a major obstacle; it won't impact our decision-making regarding acquisitions. We only consider deals that are truly attractive, and as of now, we don't anticipate any compelling opportunities. Our focus is on improving our valuation rather than on the threshold itself.
Understood. And Ryan, I have a follow-up on the point about operating leverage. Is it correct to think that you mentioned the core base and then subtract the charitable contribution? That would be the base you are referring to for the 100 to 150 basis points of operating leverage.
Yes, that's correct.
And just the range, it's great to hear you guys focusing to the $100 billion, $150 billion. But what would be the difference on your expense growth? Would it just be like how revenues come out and you have some flex to triangulate up and down? Sorry for that extra one.
Yes, it's important to recognize that if the revenue environment changes, we need to rethink our approach to expenses. I mentioned this in both my written and spoken remarks because it wasn't immediately clear from our forward guidance whether there was positive operating leverage. We strongly believe there is. Historically, we've been consistent in achieving customer fee growth at a compound annual growth rate of about 4%, which is what we achieved last year as well. We see the potential to improve on that moving forward, leveraging the momentum in our businesses. This will be helpful in driving that leverage. However, we will be mindful of our expenses throughout the year. As Harris has mentioned, we intend to manage the company for the long term by investing in growth, even if some investments may not yield immediate returns. We have seen good returns on our recent investments, which informs our perspective.
Our next question comes from David Smith with Truist.
On credit, you highlighted an expectation for CRE classified to continue to decline. There had been an uptick in C&I classified offsetting some of the CRE decline we had this past quarter. Is there anything chunky in that $92 million C&I increase this quarter in terms of like a few big particular names? And just as a follow-up, would you also expect general stability in the C&I classified size of the portfolio? Or would there be a bias towards an increase or a decrease as you see things today?
Sure, David. This is Derek. Let me answer the second question first. It's hard to say exactly where the C&I downgrades may come from or improvement. It just generally depends on the economy. We do see CRE improving throughout the year. We have a good line of sight on that. We just continue to see it taking a little longer for some companies to perform. One thing I will say because we're not concerned with losses, I think we're going to try to retain a lot of the loans. We may be willing to carry some of the criticized and classified real estate loans a little bit longer just because they're on their way to performance and an upgrade. As far as the C&I downgrades, I wouldn't say there's anything chunky in there. It's pretty broadly distributed across industries. And it's something we're watching. Again, it depends on where the economy goes. I would point out that while we've seen the uptick this quarter in the C&I classifieds, we're actually down since year-end 2024 for C&I classifieds. So it's not jumping out as concern at this point, but something that we're paying attention to.
Our next question comes from Anthony Elian with JPMorgan.
A follow-up on operating leverage. You gave us the base for expenses backing out the foundation contribution. But just to clarify the base for revenue, Ryan, does the base for fee income exclude the adjusted noncustomer fees? I think that was $44 million you have in the back of the press release.
Yes, can you say that one more time?
Yes. I'm just curious if you can give us the base for fee income, right? You have some items you back out on Slide 5 and the back of the press release. So if you can give us the base to use for operating leverage, that would be great.
I think the customer fee income.
It's hard to predict year-to-year what we're going to get on the security gains and losses. So that's just kind of how we think about core expenses.
Yes, related noninterest income.
Okay. And then my follow-up is that it seems there is a greater focus on growth initiatives this year, including hiring, which I fully appreciate. However, you kept the expense outlook unchanged. So I’m curious if you can provide any guidance regarding the range for expenses within your outlook of moderate increase.
Yes. About a year ago, we were in a phase where we were keeping things fairly tight, with slight increases that sometimes became moderate as we began to pursue our growth agenda. I can't pinpoint a specific figure, but we generally consider moderate increases to be in the mid-single digits range. I would suggest we're likely somewhere in the middle of that. Our focus is on strategic initiatives that should feel and look different as we work towards our growth goals. The numbers that Scott mentioned may not be completely clear, but we have significant aspirations to drive commercial loan growth and increase our commercial real estate loans. Additionally, we've discussed our strategy regarding 1 to 4 family residential loans and a stronger focus on held-for-sale properties. We believe there's potential for more of that to emerge this year, and without those factors, we could still achieve solid loan numbers.
On the expense guide, there are about $40 million in savings initiatives that help us maintain our current expense growth rate. This isn't just a repeat of last year with a slight increase; we are actively working on improving efficiency and optimizing processes, especially through AI and other technological advancements that allow us to reduce costs and utilize outsourcing. We have multiple strategies to manage expenses, which has been effective for us over the years. There’s nothing new in our approach.
Our next question comes from Janet Lee with TD Cowen.
For clarification on NIM. So if I look at your earning asset yields in the fourth quarter, it looks like lower rates had an impact on your earning asset yields declining about 15 basis points. And you talked about 1 basis point of fixed rate asset repricing lift. So if I assume 2 to 3 rate cuts in 2026, is it fair to say earning asset yields are declining through 2026 and the NIM trajectory is really dependent on the shape of the yield curve and what you can do on the deposit front?
Yes, those are all valid points. Our deposit production plays a significant role in influencing our net interest margin. Year-over-year, we've managed to lower our funding costs more aggressively than we've seen in asset pricing, thanks to a favorable remix that offsets some adjustments resulting from benchmark rate resets. While we haven't given specific guidance yet, we typically discuss both short-term and emerging factors. We included some relevant materials in the back. As previously mentioned by Harris, we've slightly reduced our asset sensitivity metrics through hedging strategies to prepare for potential near-term rate cuts. The asset sensitivity indicates we still see opportunities for latent factors to affect pricing on fixed assets. Approximately 60% of our term deposits will reprice in the first quarter of 2026. However, as a group still sensitive to asset changes overall, we believe that, based on the forward curve, we could achieve a more favorable outcome in the upcoming year, even if there are additional rate cuts. This assessment does not consider our potential loan growth and a flexible balance sheet, including how we reinvest cash flows from our securities into loans and other beneficial uses. There are many factors at play here. I hope this provides some clarity on how we view our net interest income a year from now.
That was very helpful. Clearly, you've made significant progress in enhancing your capital levels, including the AOCI accretion over recent years. Could you also provide an update on your stance regarding mergers and acquisitions?
I believe I addressed this a few minutes ago. Our position is that we don't have a specific stance on acquisition opportunities. If the right deals come along that make sense, we might consider them. However, I don’t foresee us pursuing anything substantial at this point. It’s not a primary focus for us. I'm careful not to rule out doing a deal entirely, but we aren't actively seeking acquisitions to reach a certain size. We only pursue opportunities that we find financially appealing and that fit well with our culture. Any potential deal must meet certain criteria before I would show interest.
We have another question from Manan Gosalia with Morgan Stanley.
I think you mentioned in the prepared remarks that you could come in at the top end of the guide on customer-related fees. Can you just talk about what the drivers are there?
Yes, this is Scott. I think we're inclined to make that comment because we're seeing strong momentum across many of our customer fee product areas, and we expect that to continue into the new year. This, along with increased advertising in these products, gives us a positive outlook on customer fee income. Rather than having capital markets be the main driver of growth in our fee income, we are very encouraged by the trends in nearly all of our fee income businesses. This presents a different narrative and guidance.
Relative to what you've said before. Got it.
Our next question comes from Jon Arfstrom with RBC Capital.
A couple of follow-ups. Scott, one for you. When you look in the earnings release, the FTEs are down the last couple of quarters. And you might have just touched on it a few minutes ago, but can you talk a little bit more about what you're doing in terms of AI and tech and just the general FTE outlook? Are you seeing real impacts and that's what's showing up in the FTE count? Or is it...
Thank you for your question, Jon. A significant moment for us was in August 2019 when we had around 10,300 employees. Currently, we're below 9,300, and we believe this number will continue to decrease over the next few years. In the short term, we are re-engaging with our outsourcing strategy and collaborating with three excellent partners who assist us in other capacities as well. This strategy is gaining momentum. About a year ago, we were far behind our peers in outsourcing, who typically report outsourcing between 10% to 15% of their full-time employee base, while we were around 3%. Now, we are leaning more into this opportunity, and we're increasingly optimistic about it. In addition, regarding AI, we've been utilizing it for a long time in areas such as fraud detection, client authentication, product recommendations, and processing unstructured documents. The influx of new ideas that can eliminate human interaction in processes, reduce data entries, and streamline operations is substantial. We're transitioning from an exploratory phase we've been in for the past year and a half to focusing on a few specific projects with the greatest potential for simplifying our end-to-end processes. Therefore, automation, AI, and outsourcing are expected to be significant contributors moving forward.
Okay. And then just one more on loan growth. Just the improved expectations, are the borrowers more optimistic? Or is it you becoming more comfortable or a combination of both? And then I'm just also curious kind of what's going on at Commerce Bank. The growth numbers were pretty strong there, if you could touch on that.
I'm happy to take the first question. I believe borrowers, who are primarily business owners and CEOs, are experiencing similar uncertainties as they have over the past few years. Factors like concerns in the commercial real estate sector, tariffs, and the overall economy, as highlighted in recent news, are contributing to their apprehension. That said, we are quite optimistic about the initiatives we're implementing for growth, which we have discussed during this call.
I'd say Commerce Bank, their relative size can produce more volatility probably in terms of growth numbers than you'd see in other parts of the company. So I don't think there's anything that's probably necessarily trend there.
This now concludes our question-and-answer session. I would like to turn the call back over to Shannon Drage for closing comments.
Thank you, Bonn, and thanks, everyone, for joining us tonight. We appreciate your interest in Zions Bancorporation. If you have additional questions, please contact us at the e-mail or phone number listed on our website, and we look forward to connecting with you throughout the coming months. This concludes our call.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines and have a wonderful day.