管理層發言
Greetings, and welcome to Zions Bancorp's First Quarter Earnings Conference Call. Please note that this conference is being recorded. It is now my pleasure to turn the conference over to Andrea Christoffersen. Thank you. You may begin.
Thank you, Julian, and good evening, everyone. Welcome to our conference call to discuss Zions Bancorporation's First Quarter 2026 Results. My name is Andrea Christoffersen, Director of Investor Relations. Before we begin, I would like to remind you that during this call, we will make forward-looking statements. Actual results may differ materially. We encourage you to review the forward-looking statements and non-GAAP disclosures in our press release and on Slide 2 of today's presentation, which apply equally to statements made during this call. A copy of the earnings release and presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Chief Financial Officer, Ryan Richards, will review our financial results and outlook. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Steward, Chief Credit Officer; and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for one hour. I will now turn the time over to Harris.
Thanks very much, Andrea, and good evening, everyone. We are reasonably pleased with our performance and financial results for the first quarter, which reflect meaningful year-over-year improvement and continued progress against our long-term strategic priorities. Our Capital Markets division continues to be an important driver of fee income growth. Since launching the business in 2020, we have invested heavily in talent, technology, and product capabilities, expanding our presence across investment banking, sales and trading, and real estate capital markets. In late March, we announced an agreement with Basis Investment Group to acquire their Fannie and Freddie lending programs. Related mortgage servicing rights and an experienced team supporting those platforms. Subject to regulatory and customary closing approvals, we expect this transaction will meaningfully enhance our ability to serve commercial real estate clients across the Western United States and beyond, and to further strengthen our capital markets franchise.
We continue to invest in our consumer and small business franchises. Following the launch of our new gold account consumer deposit product in the second half of 2025, we recently introduced its companion offering for small business customers, branded as "beyond the business." We began piloting the product in Colorado and Arizona late in the quarter, and it's expected to roll out more broadly across our affiliate banks later this quarter. This tiered checking solution is designed to support clients as they grow from basic banking needs to more complex cash flow and money movement capabilities. Our focus on small business is also reflected in continued momentum in SBA lending, where we now rank 11th nationally in SBA 7(a) loan approvals during the first half of the SBA's fiscal year. Shifting now to the financial results for the quarter, slide 3 presents certain first quarter results versus the prior quarter and prior year.
First quarter results reflected typical seasonal expense patterns, while revenue and profitability improved meaningfully relative to the prior year period. Net earnings were $232 million or $1.56 per diluted share, up 37% from a year ago, driven by revenue growth, a lower provision for credit losses, and a lower effective tax rate. Compared to the fourth quarter of 2025, earnings declined 11%, primarily reflecting lower revenue, including the impact of two fewer days in the period and significantly lower securities gains as well as seasonal compensation expenses. The net interest margin was 3.27%, down 4 basis points from the prior quarter, reflecting lower earning asset yields and the decline in average demand deposits, partially offset by improved funding costs. Average loans grew 2.4% on an annualized basis, led by commercial lending. While average customer deposits showed a modest seasonal decline, period-end customer deposits grew $1.3 billion or 1.8% from year-end.
Credit losses were very modest at 3 basis points annualized of average loans. On Slide 4, diluted earnings per share were $1.56, down from $1.76 in the prior quarter and up from $1.13 a year ago. As a reminder, the year-ago quarter included an $0.11 per share headwind related to the revaluation of deferred tax assets due to newly enacted state tax legislation. There were no notable items in the first quarter with an impact greater than $0.05 per share. As shown on Slide 5, adjusted preprovision net revenue was $301 million, declined 9% from the prior quarter, reflecting some of the items noted earlier, including a slightly lower day count adjusted tax equivalent net interest income. Pre-provision net revenue increased 13% versus the year ago quarter on improved revenue and positive operating leverage. With that overview, I'll turn the call over to our Chief Financial Officer, Ryan Richards, to walk through the quarter in more detail and to walk through our outlook.
Thank you, Harris, and good evening, everyone. Beginning on Slide 6, you can see the five-quarter trend for net interest income and net interest margin. Taxable equivalent net interest income was $662 million, down $21 million or 3% from the prior quarter and up $38 million, or 6% from the year ago quarter. Earning asset yields fell faster than funding costs during the quarter, most notably in January, and loan repricing reflected the impact of the December rate cuts. Term deposit costs also moved lower, but with a lag over the quarter. Net interest margin was 3.27%, down 4 basis points linked quarter and up 17 basis points year-over-year. Slide 7 provides additional detail on the drivers of net interest margin. The linked quarter walks reflect the lower asset yields mentioned previously as well as a lower contribution from average demand deposit balances. These factors were partially offset by improved deposit costs.
Year-over-year, the improvement in margin primarily reflects deposit and borrowing repricing and our continued focus on optimizing the balance sheet. For the first quarter of 2027, our outlook for net interest income is moderately increasing given the uncertain path of benchmark rates. The forward curve as of March 31 assumed no rate changes over the next 12 months. As that plays out, we estimate net interest income growth of about 7% to 8%, which would exceed our guide. Moving to noninterest income on Slide 8. Customer-related noninterest income was $172 million compared to $177 million in the prior quarter and $158 million a year ago. Excluding net credit valuation adjustment, adjusted customer-related noninterest income was $174 million compared with $175 million in the prior quarter, and up $16 million or 10% from the year ago quarter. We are particularly pleased with the broad-based growth achieved during the quarter relative to the last year, which reflects higher residential mortgage loan sales activity and growth in retail and business banking, commercial account, and wealth management fees.
We continue to see attractive opportunities in capital markets and have strong pipelines going into the second quarter. For the first quarter of 2027, our outlook for adjusted customer-related fee income is moderately increasing versus the first quarter 2026 results of $174 million, with broad-based growth and capital markets 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 $558 million. Expenses increased versus the prior quarter, driven primarily by seasonal compensation and were higher year-over-year, reflecting increased marketing, technology costs, professional and outsourced services, and higher incentive compensation. We will continue to manage expenses prudently while investing to support growth. Our first quarter 2027 outlook for adjusted noninterest expense is moderately increasing versus the first quarter of 2026.
Based on first quarter performance and full-year expectations, we continue to expect positive operating leverage for the full year 2026 in the range of 100 to 150 basis points. Slide 10 presents trends in average loans and deposits. Average loans grew 2.4% annualized during the quarter, primarily within the commercial and industrial portfolio and increased 2.5% year-over-year. Loan yields declined sequentially as benchmark rate cuts in the latter part of 2025 were reflected in variable rate repricing. Average deposits were modestly lower than the prior quarter by $540 million. Approximately half of the decline was due to average broker deposits, while the remainder can be attributed to seasonal runoff across business operating accounts early in the quarter. Importantly, period-end customer deposits increased by $1.3 billion or 1.8% from year-end. The cost of total deposits declined sequentially, benefiting from both repricing and a more favorable mix within interest-bearing deposits.
Slide 11 presents the five-quarter trend of our average and ending funding sources. Our total funding costs declined 8 basis points linked quarter to 1.68%, largely as a result of the aforementioned deposit repricing. Period-end customer deposits grew $1.3 billion and short-term borrowings declined significantly as we continue to replace higher cost wholesale funding with customer deposit growth and securities cash flows, while also remixing into senior debt. Turning to Slide 12. The investment securities portfolio continues to serve as an important source of on-balance sheet liquidity and a tool to balance interest rate risk through deep access to the repo markets. During the quarter, principal and prepayment-related cash flows from investment securities of $493 million were partially offset by reinvestment of $299 million. The continued paydown of lower yielding mortgage-backed securities supports earning asset remix or reduction in wholesale funds.
The estimated price sensitivity of the portfolio, inclusive of hedging activity, was 3.7 years. Credit quality remained strong, as shown on Slide 13. Net charge-offs were 3 basis points annualized of average loans and the nonperforming assets ratio declined to 48 basis points. Classified and criticized balances also declined during the quarter. The allowance for credit losses ended the quarter at 1.16% and remains well positioned relative to our risk profile with a 239% coverage of nonaccrual loans. Slide 14 provides an overview of our $13.7 billion commercial real estate portfolio, which represents approximately 22% of total loans. The portfolio remains granular and well diversified by property type and geography with conservative loan-to-value characteristics. Credit metrics remain favorable, including low levels of nonaccruals and delinquencies. Our capital position remains strong, as shown on Slide 15.
The Common Equity Tier 1 ratio was 11.5%, flat during the quarter as earnings growth was somewhat offset by the $77 million in common shares repurchased and dividends paid in addition to the growth in risk-weighted assets. We continue to expect net capital generation through earnings and continued improvement in AOCI. Tangible book value per share increased 19% versus the prior year, reflecting earnings generation and continued balance sheet normalization. Slide 16 summarizes the outlook we've discussed across loans, net interest income, fee income, and expenses. This outlook reflects our best estimate based on current information and is subject to the risks and uncertainties discussed in our forward-looking statements.
This concludes our prepared remarks. Please open the line for questions.
分析師問答
Please open the line for questions. And our first question comes from the line of John Pancari from Evercore ISI.
On the margin side, I know your loan yield compressed about 14 basis points linked quarter. I think you had mentioned that it was largely a function of the rate cuts and variable rate repricing. I guess that linked quarter change, was that all the benchmark rate change? Any other impact to loan yields in the quarter? And maybe if you can give us your new money loan yields, just to give us an idea of where originations are coming on the books.
Thanks, John. I really appreciate that. Yes. So listen, I think you picked up on the main thrust of it. We would have had some benchmark repricing and expectation of the rate cut that came in the middle of December, and some of that trailed thereafter. Where we remain just skewing a little bit more on the asset-sensitive side, that was the biggest contributor. In terms of the repricing characteristics, of course, we've got the nice material in our appendix that I know you're familiar with, but I think maybe the question that you're getting at on front book versus back book for the loan portfolio is really the most meaningful part of that as we sort of think about the trajectory moving forward. For those fixed-rate loan portfolios, or things that have yet to reprice through, and there, we're seeing a 72 basis point spread on the front book versus the back book.
Okay. All right. And then I guess, in terms of your positive operating leverage expectation of 100 to 150 basis points, that is that's for the year. And so what rate assumption does that imply? I know you mentioned if there's no rate changes consistent with the forward curve, your next 12-month NII outlook could come in at 7% to 8% above the range. Does that 100 to 150 basis points expectation imply the forward curve? And maybe if you can give us a little bit more detail in terms of that NII expectation.
Yes. Thank you for that, John. Listen, in the past, we've brought a view of kind of latent emergent. It's less interesting this quarter since there's not much to talk about in the forward curve in terms of rate changes that were implied at least as of the quarter end. So those are kind of right on top of each other. We were able to firm up our guide for the full year. As you think about the trajectory of that, we normally guide on a one-year, four-quarter basis. We believe you'll see a much more powerful positive operating leverage, probably not unlike what we've seen this quarter relative to last quarter, where, as Harris quoted in his remarks, you will see positive operating leverage of 270 basis points. We expect that as our repricing plays through from the investment securities into loans, as we have less of those headwinds associated with our terminated swaps. Some of the other things play through, we do see really good prospects for the foreseeable future.
And our next question comes from the line of Manan Gosalia with Morgan Stanley.
On the deposit cost side, deposit costs, I guess, they came down quarter-on-quarter, but they were pretty flat relative to the spot rate as of December 31. And it looks like the spot rate as of March 31 has moved lower again. So can you just help us connect the dots on the trajectory there? Maybe give us an update on deposit pricing and competition and also what you're expecting in terms of CD rolls coming up?
And I'll try to unpack that in a few places and invite my colleagues to jump in as well. Listen, I think I've seen the questions coming in other calls in this earnings cycle about where deposit costs go if rates stay static here for the remainder of the year. There are still some trailing activities, some repricing down on term deposits, thinking about customer time deposits that have yet to play through. You will have heard us talking increasingly quarter-over-quarter about some of our strategic initiatives. We think those are going to be really valuable to us in driving deposit balances as well. So you heard Harris talk about in his prepared remarks the gold account and the business beyond. There's a lot that we've talked about with SBA lending that brings deposits with us. We think that's useful. There are some other work we've been doing around wholesale deposits with customers relative to other sources of wholesale funding that we think can defray deposit costs moving forward. So while we don't have explicit deposit guidance, we don't explicitly guide towards deposit costs. All of that would be embedded into our, I believe, to be very constructive for your NII guidance. I think there's a deposit proposition comment on that too.
Yes, this is Scott McLean. I would just add that our deposit campaign aimed at bringing some of our off-balance sheet deposits back onto the balance sheet has been quite successful. We've seen between $7 billion and $12 billion in off-balance sheet deposits, and it ultimately comes down to client preferences. We've effectively encouraged more of those deposits back onto our balance sheet at attractive rates that are better than broker deposits and overnight borrowing costs. We've focused on this at various times and have had good success in returning those deposits. This return has generally been 25 to 35 basis points more favorable compared to brokered deposits, and we plan to continue this approach. Overall, deposit costs have been competitive except for maybe 2020 and 2021. Most of the deposits we’re bringing in are relationship deposits, which are not only coming from off-balance sheet sources but also from new clients or existing clients whose deposits we didn't previously have.
Got it. I appreciate the color there. And then maybe on the buyback side, buybacks were up this quarter, but the CET1 ratio is still relatively flat as you accrete more capital through earnings. So maybe if you can talk about the level of buybacks that you think you can do for the rest of the year, especially as you narrow the gap with peers in that CET1 including AOCI ratio?
Manan, thank you. I think you said that very well because our nominal CET1 ratio has been hanging in there, and as we said before, we see the path for AOCI coming in is becoming unreasonably predictable over time, and something that's really contributed to our outperformance on tangible book value year-over-year. So I think those are all encouraging. We've also taken note of the Basel III end game proposal. As others have noted in this earnings cycle. There are some good things in that proposal for us and others, in terms of what it would imply about RWA moving forward. So I never like to get in front of our Board, Head of our Board. It's usually a pretty poor practice for management. But it looks like we could be in a position to talk about share repurchases moving forward responsibly as our Board will allow and as regulators sign off. As Harris mentioned during his remarks, we're really, really excited about the acquisition of the multifamily agency program that's still pending, it's pending regulatory approvals.
Should that see all the way through as we expect, not knowing the timeline for all that, not trying to predict any of that, that would be a source of consuming capital. But there are some other things that are happening in the environment, including things like these exchanges that could be considered by our team as well. So that's a long-winded way of saying, I think the prospect of share repurchases are still on the table, subject to Board approval.
And our next question comes from the line of Dave Rochester from Cantor Fitzgerald.
On the guidance, I know we shifted back to the one year ahead quarter-over-quarter look, but I was curious how you feel about the annual guide for '26 you gave last time. It seems like given everything that you're saying together, you would still feel pretty good about that and maybe with a little bit of upside. Is that fair?
Yes, Dave, I think your observation is reasonable, especially in light of my earlier comments regarding the two rate cuts we would have discussed last quarter. So, we don’t typically do this throughout the year, but I want to emphasize that the points we discussed last quarter have improved.
Yes. Yes. Sounds good. Maybe just as a follow-up on the loan outlook. I was wondering how things were shaping up in 2Q at this point. How does the pipeline look overall heading into the quarter versus where you started at the beginning of the last quarter? And what are you seeing on the C&I front that has you excited? And maybe if you could talk about a little bit of a pullback on the consumer side, that would be great.
Sure. Thanks, Dave. This is Derek. The pipeline's looking healthy at this point. We're seeing lots of activity in small business, middle market, corporate banking syndications. Just general C&I, we're just seeing lots of activity. Another thing that's coming back is we're seeing increased CRE activity. We're cautious there, but we are seeing increased activity as some of the markets have reached more stabilization. I think we'll continue to see growth coming from those areas.
So probably pricing pressure on CRE. I mean, I hear our people talking about the pricing pressure in CRE as they've seen for some time.
I would add that investors really need to closely examine the type of loan growth that banks are experiencing. The issue with non-bank financial institutions has highlighted significant differences in how much banks depend on this kind of growth. It should be a solid asset class if managed responsibly. For us, it represents about $2 billion of our portfolio, and it hasn't grown in five years. In contrast, our peers, regardless of their size, seem to be heavily investing in these loans, similar to the differences seen in commercial real estate growth. If investors take a deeper look, they will find that concerns regarding non-bank financial institutions, rapid commercial real estate growth, and personal unsecured lending do not apply to us. It just requires further investigation into the matter.
And our next question comes from the line of Bernard Von Gizycki with Deutsche Bank.
I know we're talking about deposit balances earlier. You had a nice pickup in the noninterest-bearing deposits of about $1.3 billion versus 4Q. I believe the migration of the legacy gold accounts was done last quarter. But Harris, you mentioned the rolling out of the companion offering for small business customers, beyond the business. Just what drove the sequential increase? And any color you can share on customer acquisitions on the goal and the beyond the business accounts for the quarter?
Yes. So first of all, I'm dyslexic with this product. It's actually a business beyond is what we feel the product is called. I can't read my own words here on the front page. The Business Beyond product suite, it's too new to have had any impact in the first quarter and won't have much in the second. We rolled it out in Arizona and Colorado beginning on March '26. But the early reaction to it with a very limited sample is the first really new product offering we've had for small businesses for quite some time, and it's been really well received. I'm excited about its prospects. But we'll be rolling it out across the rest of the organization in late May, and it will be kind of in the third and fourth quarter before we start to understand what the impact might be. On the Gold Account, the first quarter, I mean, we started rolling this out in the second half of last year and really the full impact started to come kind of in the fourth quarter.
We've opened about 4,000 new accounts in the first quarter. I'm hopeful that we'll see that kind of ramp up to about 20,000 new accounts for the year. What we're seeing is over time, the total relationship balances are somewhere around $100,000. It's not immediate, but we're seeing accounts build up to that. We think that this is a really great opportunity for us, and we have a lot of energy and will be devoting a lot of marketing to it. It's still early innings, but I'm hopeful this will contribute to not only a well-priced deposit base, but one that's granular and really sturdy with the kinds of customers we can do a lot of business with.
Great. And just on capital markets fees, the $28 million, slightly higher year-over-year, but down $9 million versus a strong 4Q. Just anything to call out during the quarter and Ryan, I think you called out the strong pipelines in capital markets going into 2Q. So if you could just unpack the quarter and trends you're seeing right now?
Yes, this is Scott. I'm happy to provide that update. We faced a challenging quarter compared to last year due to a significant M&A transaction fee that we reported. However, we were pleased with how the quarter concluded, and all of our businesses continue to present strong opportunities. In the first quarter, our syndications and interest rate hedging businesses showed considerable strength, along with a new oil and gas hedging practice that we initiated in the last half of last year. We believe this new venture could generate around $7 million to $10 million annually, and we're just at the beginning stages. This business is targeting roughly 80 of our energy reserve-based lending clients, and we've already engaged about 30 to 35 of them for this oil and gas hedging activity. While our real estate capital markets business had a slower quarter, we remain optimistic about a solid performance in the second, third, and fourth quarters. In the M&A sector, which can be unpredictable, we've invested significantly in new team members, and the deal flow looks promising. It has been a rapidly growing area for us with many investments made, and we expect it to meet our expectations this year.
And our next question comes from the line of David Chiaverini with Jefferies LLC.
I wanted to return to your mention of the Basel III end game benefit, which seemed to indicate a modest net benefit. Can you provide any quantifiable estimate of what that benefit might be for Zions?
Thanks for the question, David. I'm happy to provide some color there. Listen, we're still working all the way through the process, but our scoping on the standardized approach would suggest some RWA relief as others have reported. Right now, we would size that between 9% to 10% of RWA relief, which would contribute all else being equal, about 93 basis points to common equity Tier 1. We are still studying the ERBA just to understand the puts and takes there with the risk sensitivity compared to the operational risk RWA. So probably more to be said there in future quarters. As you know, we've been talking capital, both nominally and including AOCI and by formalizing AOCI into the standard moving forward, albeit with a pretty lengthy phase-in. Of course, that cuts the other way, but we've already been operating as though AOCI is something that we're cognizant of in setting our capital glide path. Hopefully, that helps.
Yes, very helpful. And then you alluded to pricing pressure on the CRE side, could you talk about the C&I pricing environment?
Sure. This is Derek again. Yes. I mean, while the activity levels are healthy and it certainly is a competitive market, we're seeing some price competition. But it's not significant, but it's something that we're definitely very aware of.
And our next question comes from the line of David Smith with Truist Securities.
Can you please talk a little bit about where you're spending the most time managing credit today? Obviously, it was a really strong quarter with just 3 basis points of net charge-offs and criticized nonaccruals, pretty much all the forward indicators all trending down versus the fourth quarter. But to the extent that you're seeing problem or areas of concern in the portfolio, where those might be and what trends you're seeing specifically for those subportfolios?
Yes. Thanks for the question. Overall, we're continuing to see improvement in commercial real estate and as you can see from the number of criticized and classified and nonaccruals continue to decrease there. If anything, we're focused on the commercial and industrial space; overall, year-over-year, our criticized and classified have improved there, but we saw a slight increase this quarter. That's the area where we are paying the most attention. We are not seeing a lot of impact from tariffs or from the events in the Middle East at this point, but watching is really focused on some increases to expenses in certain areas such as restaurants and consumer-focused businesses that seem to be what we're watching the most these days.
Do you have a sense of how long oil prices might have to be elevated before that plays through more broadly with some of your industrial client base?
Yes. It's a great question. The forward curve on oil right now is going out a year at a little higher level, but it starts to drop actually pretty fast. And by next year, it's back to a lower level. So we'll just have to watch and see where the curve goes.
And our next question comes from the line of Ken Usdin with Autonomous Research.
Ryan, can I just ask a follow up on the NII comments? When you mentioned the 7% to 8% growth with no rate cuts, were you referring to the full year 2026 commentary? Or were you referring to the 1Q '27 over 1Q '26?
Yes. For our NII guide, that's the shorter view is how we guide that. So certainly at the upper end of moderately increasing and we think the ability to overachieve if rates hang in for us.
Okay. I wanted to clarify because there was some confusion about whether we were discussing the full year or the standard guidance. So, it's based on the standard guidance. Looking ahead, the earning asset base has remained quite stable over the past few quarters. As you rework the balance sheet mix from this point, should we anticipate more growth in AEA? Or will the increase in NII mainly come from margin expansion?
It's a very fair question, Ken, because you're right. If you look year-over-year, average earning assets are kind of hanging in around the same levels. The loan growth that we're seeing has been offset by the average investment securities and money market funds. One of the things that we're probably getting closer to, I talked about in my prepared remarks, the reinvestment that's occurring for investment securities, where we've still been allowing a decent amount of that to flow over to paying for loans or paying down wholesale funding. We're getting close to the point in time when we would think about reinvesting fully, just to make sure we keep the same comfortable headroom on our liquidity measures and the like. If you see in our guide, we certainly expect for loans to build from here. I think you all are very attuned to where we expect to see that. One of the things that maybe it could be potentially a little bit lost in the message this quarter is we had a really nice loan fee result.
You'll see that, and that was on the back of some of the things that we said we were going to do. Part of our strategy was saying, hey, going forward, we want to do more held-for-sale activity around residential mortgage loans. That showed up in this quarter. We had a pool in excess of $500 million that we sold out of the book that would have otherwise been part of our story for loan growth. We did roll out an accounting change this quarter moving forward on the netting of derivative assets and derivative liabilities and cash collateral things associated with that. That would also have a knock-on effect on some netting down of some loan balances to the tune of about $100 million difference. So I acknowledge that our loan growth looks modest. But there were some other pieces in there that were in our base results would have looked like a stronger loan growth story. Moving forward, it's going to be both, long-winded answer. It's definitely going to be a margin expansion and growth in average earning assets.
I'd just add that the consumer book, the 1 to 4 family residential jumbo arms, I'd expect that will remain flat to kind of drifting down over time. We're just trying to remove some of the risk in a world where higher rates may be the norm and so some of the convexity risk there. We're focusing more on a held for sale and turning that activity into more fee-based activity. That will be a little bit of a drag, but we think that we'll see moderate loan growth despite that.
And our next question comes from the line of Peter Winter with the D.A. Davidson.
I was wondering, with the outlook of fee income coming in at the upper end of your range and you continue to make these investments, which are clearly working. Would you expect expenses to also come in at the upper end of that range of moderately increasing?
I'm sure the others will have something to say here, but my spoken remarks, I purposely kind of guided towards the upper end of the range in NII and fee income. I'm glad you picked up on that. I didn't do that for expense so we'll see. But from where I sit here today, I think it's a reasonable guide just as it is. I wouldn't guide on the operator or the lower end. I just leave the degrees of freedom within that.
I would just add that most of the broad-based growth we're seeing in fees now is due to our significant investment in capital markets. The incremental investment in other areas is not that substantial. I believe we're observing many of our sales practices taking effect and our call programs are proving to be stronger. This is the best broad-based growth we've experienced in quite some time.
I just thought with the growth in the fee income, also maybe higher incentive comp as well. That's why I was thinking about it.
Well, that's true, and you can see that a little bit in the first quarter.
But it's in the context of a $2.1 billion expense number. So it's not going to move it materially.
Okay. If I could ask a separate question, with these growth initiatives in progress, are there any specific examples you can share about how the investments made in FutureCore to modernize core systems have contributed to your growth or helped attract more customers? We're observing some solid organic growth on your end, and I'm curious if FutureCore is influencing that.
Yes, while it's difficult to measure precisely, it's enabling us to complete tasks more quickly. Customers don't select a bank based on core systems, particularly on the lending side. They prioritize execution, pricing, and relationships. Reflecting on our past performance, we managed exceptionally well during the PPP period, which is now behind us. We could not have achieved that without the new core system. We are efficiently conducting significant business in PPP with a streamlined process. This illustrates how it's helping us work more efficiently.
I would like to highlight a few additional points, particularly regarding our real-time data and the integration of all our loans and deposits into a single data system. While this may not excite clients immediately, the accuracy of data is crucial in today's data-driven environment. We are nearing the completion of a transaction with TCS to utilize their Quartz product, which involves a tokenized deposit and stable coin application. Being on their platform allows us to innovate with tokenized deposits and stable coins at a significantly lower cost than others attempting similar initiatives. We believe this could provide us with a unique competitive advantage in this space, should we decide to pursue it. While we have not made any announcements regarding this, our platform is a result of our core conversion, which has positioned us well.
And our next question comes from the line of Janet Lee with TD Cowen.
Just to go back on your 7% to 8% NII growth, assuming no rate cuts. Is it fair to say that that assumption is baking in moderately increasing loan growth, so call it mid-single digits or so. But that would also imply a pretty meaningful step up in net interest margin expansion throughout the course of 1Q '26 to 1Q '27 in order to get to the 7% to 8%?
Yes, I agree with you on that. In terms of incorporating loan growth into that figure and margin expansion, we typically don’t provide guidance on margin. However, we see significant opportunities for margin expansion moving forward, and both aspects are included in our projections. I can go into detail about the various contributing factors if you’re interested, but that’s the brief answer. I think there are various factors at play, and you might have heard us mention this previously. We're still experiencing the effects of fixed asset repricing that have yet to fully materialize. There are significant portfolios with longer repricing schedules, such as municipal bonds, owner-occupied properties, and some one to four family residential loans. Additionally, we faced some headwinds from terminated swaps this quarter, which resulted in about a $10 million impact in the fourth quarter this year, reducing to around $5 million.
We have disclosures in our 10-K regarding this. All these elements contribute to an improvement in earning asset yields, which we estimate at about 2 to 3 basis points for the year. We're also reallocating our investment securities portfolio to more productive areas such as loan growth and reducing wholesale funding, which we assess contributes approximately one basis point to earning assets. Combined with a gradual easing of what needs to be repriced and the reduction of term deposit rates, these factors are expected to enhance our net interest margin moving forward.
Got it. That's very helpful. Regarding your 150 basis points target for 2026, you seem quite confident in achieving it even if there are no rate cuts. Is it reasonable to assume that this confidence remains if we do experience a rate cut, or would that complicate things?
So we were prepared with something analogous to that last quarter where we were seeing two rate cuts. I wouldn't necessarily back away from that. I would just say, as with all things, it will all depend on our success in driving through those lower-cost bonds and our deposit growth through the course of the year. That's our biggest variable and not knowing day-to-day, week-to-week what the forward markets are going to tell us. I just feel like we're at least as good or better place than we were last quarter.
And our next question comes from the line of Anthony Elian with JPMorgan.
On M&A, last month, you announced the acquisition of the agency lending business from Basis. Right? Last year, you acquired four branches in the Coachella Valley. Harris, are these the types of acquisitions we should expect going forward? Or would you cast a wider net at some point, inclusive of bank acquisitions for what you'd look at?
The first thing I want to highlight is that we're not actively seeking out opportunities; rather, we're waiting for suitable options to come our way. Growth through mergers and acquisitions isn't our main goal. However, when opportunities arise, we evaluate whether they align strategically and strengthen our business, with the price being a critical factor as well. We remain open to possibilities. The agency relationships and the business with Fannie and Freddie are areas we've targeted. Our location features a young population and high housing costs, which drives demand for more multifamily developments over time. Approximately 80% of the country’s population growth is happening in regions like the Mountain West and Southwest. Being a comprehensive resource for multifamily developers aligns perfectly with our capital market strategy and complements the real estate expertise we have internally to facilitate these products. I would anticipate that any actions we take will support our strategy of enhancing our presence in the Western United States.
Okay. And then my follow-up on deregulation. So Harris, you addressed this in your annual letter. We had the capital proposals a few weeks ago. I know we have the comment period now, but I'd like to get your thoughts on if you think those proposals are largely sufficient or what more you'd like to see from those proposals?
I believe we're quite satisfied with what I've mentioned in the shareholders letter regarding the cyclical nature of bank regulation. Typically, a crisis triggers a reaction, leading to new regulations that become law. After the Dodd-Frank legislation was passed, retrospective analysis over the last fifteen years suggests that some regulatory measures were genuinely beneficial and necessary, while others may have been excessive. From my view, the current regulatory bodies are doing a commendable job of concentrating on fundamental issues. There's a risk of becoming so engrossed in minor details that we overlook the major concerns. I think this was evident during the bank failures three years ago, where significant issues were somewhat overlooked. The banking industry has become adept at self-regulating, especially after experiencing the financial crisis, so there’s less need for guidance on adjusting portfolios to prevent a recurrence. However, the system often imposes additional layers of regulation. Much of what has been implemented regarding the ability to repay qualified mortgages contributes to the ongoing housing affordability crisis, making mortgages more expensive, for instance. Overall, I think there's a sensible effort to return to a balanced approach, and I'm quite encouraged by the developments we're observing.
And our next question comes from the line of Jon Arfstrom with RBC Capital Markets.
I wanted to ask you about the agency businesses. I believe you clarified that, Harris, but it's primarily a profit and loss matter. It's not really an issue of using the balance sheet for those businesses, correct?
Yes, it shouldn't. We utilize the balance sheet for deal origination, construction, and stabilization, but consistently, our customers developing this type of product require a long-term takeout. This enables us to remain engaged in that process.
One way of maybe stitching together, Harris' very good response on the regulatory environment. If there was anything on the wish list, going back to Basel III end game, getting some more risk sensitivity on the commercial loan side of the business would be helpful. It looks like they may have MSRs and scope of things to at least nominally reconsider getting away from the dollar-for-dollar exclusion above certain levels and maybe rethinking of the risk weighting. For this type of business, it's agency multifamily business; there will be some MSR generation that would come from it. So, we'll have to see where that falls out.
Yes, I know there are rare licenses and very valuable, so that will be good. Scott, maybe just to go back on lending, energy and lending appetite. Just curious how you're approaching the business with so much volatility. And then can you touch a little bit on the Texas or Amegy C&I growth and what's driving that?
Sure, Jon. On the Amegy side, they had strong loan growth last year, specifically in C&I, and their CRE is performing well. However, energy did not see much growth for them last year. They are experiencing better growth in smaller businesses, primarily focusing on the middle market. Their call programs are effective, and their activities in the Dallas-Fort Worth metroplex and San Antonio are successful. They have momentum going into this year and feel optimistic about leading loan growth for the company. On the energy front, we've maintained $2 billion in outstanding loans for a while, and we would like to see that increase. The credit and pricing metrics are at their best, especially as many banks have exited reserve-based lending, which we define as the middle market of energy lending. A significant portion of this business is generated by private equity firms with whom we have a long-standing relationship.
We manage about 75 reserve-based loans that are highly secured and adapt to pricing fluctuations. This approach has been resilient through various cycles. We have significantly reduced our involvement with financing oilfield service companies, which now make up about 12% of our book, down from 35% to 40% in the past. I believe our portfolio is well-structured, with a strong midstream component, and we have an excellent energy lending team recognized industry-wide. The introduction of oil and gas commodity hedging has been beneficial, and we anticipate strong growth from that since our clients want to partner with us. I'm optimistic; if that business grows 10% annually for the next 3 to 4 years, we will be very pleased. We've had outstandings of $3 billion in the past and are prepared to scale to that level again; we just need to see more activity.
Thank you. And our next question comes from the line of Chris McGratty from KBW.
Great. Harris, on AI, could you speak to perhaps the near-term opportunity for the company, but maybe over time, any risks that you see out there on the revenue side?
We have various initiatives related to our use of AI. I don't think we're particularly unique from our peers in this regard, but our core replacement project over the last decade compelled us to focus significantly on data quality and organization. We restructured our data before transitioning to new systems, discarding unnecessary information and organizing what remained, which has been beneficial in accelerating our solution delivery. For instance, we are applying AI in appraisal and document reviews, as well as in our credit examination process to broaden our analysis of deals, allowing our team to focus on the useful insights generated by other tools. The range of applications keeps expanding, as we are seeking efficiencies through technology. Interestingly, I noticed that our headcount has decreased by 20% since 2008, when we were generating around $54 billion in revenue, and after adjusting for inflation, this reflects about a 25% improvement in productivity per dollar of real assets.
AI is contributing to this trend. While I see AI as a promising development, it’s important to note that various technologies over the years have driven productivity improvement. We are only beginning to explore its potential, and multiple projects are underway. Regarding concerns about AI impacting margins, I believe these issues are sometimes overstated. Our free enterprise system is resilient and adapts well to change. There may be shifts in pricing for what are currently free services, but eventually, the market finds its balance. The key is to remain aware of customer needs and focus on providing solutions that enhance our relationships with them. As long as we maintain this focus, we should be well-positioned for success.
Okay. And with that, it looks like that's all the questions we have. I would like to now turn the floor back over to Andrea Christoffersen for closing remarks.
Thank you, Julian, and thank you to all for joining us today. We appreciate your interest in Zions Bancorporation. If you have additional questions, please contact us at the email or phone number listed on our website. We look forward to connecting with you throughout the coming months. This concludes today's call.
Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.