Operator: Greetings. Welcome to Zions Bancorp third 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Jason Arbuckle. Thank you. You may begin.
Jason Arbuckle: Thank you, Cleo, and good evening, everyone. Welcome to our conference call to discuss Zions Bancorporation's Q3 2026 results. My name is Jason Arbuckle, Senior Director of Investor Relations. Before we begin, I would like to remind you that during the call, we will make forward-looking statements. Actual results may differ materially. We encourage you to review the forward-looking statements and non-GAAP disclosures in our press release 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 on our website, zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris's comments, Chief Financial Officer, Ryan Richards, will review our financial results and outlook. Also with us today are Scott McLean, President and Chief Operating Officer, and Derek Steward, Chief Credit Officer.
Jason Arbuckle: After our prepared remarks, we will hold a question and answer session. This call is scheduled for 1 hour, and I will now turn the time over to Harris Simmons.
Harris Simmons: Thanks very much, Jason, and good evening, everyone. We are reasonably pleased with our financial results for Q3, which reflect meaningful year-over-year earnings improvement and continued progress on our strategic priorities. Going to the slides, slide 3 summarizes Q2 results versus the prior quarter and last year's Q3. Net earnings available to common was $262 million, or $1.78 per share, an increase of 20% compared to $1.48 in last year's Q3 and an increase of 2% compared with $1.74 last quarter, after adjusting for that quarter's large equity securities gains. The increase from a year ago was due to growth in net interest income and customer-related non-interest income, modest loan growth, and exceptional credit performance. The net interest margin was 3.23%, down 4 basis points from the prior quarter and down 5 basis points from a year ago.
Harris Simmons: When compared to the prior quarter, average loans grew 3.7% on an annualized basis, led by commercial lending. Average customer deposits grew 8.8% on an annualized basis. Credit losses were modest at 2 basis points annualized of average loans. Slide 4 presents the recent history of 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 $338 million. It increased 2% from the prior quarter, reflecting improvement in adjusted taxable equivalent revenue, which more than offset a modest increase in adjusted non-interest expense. Adjusted pre-provision revenue declined $14 million, or 4%, from the prior year period, which represented a particularly strong comparison quarter.
Harris Simmons: In addition, results for the current quarter included $4 million of expense associated with a recently acquired multifamily agency platform that was not included in our original forecast. Turning to slide 6, our Capital Markets division continues to be an important driver of fee income growth. Since launching the business in 2020, we have nearly doubled the annual fee income contribution by investing steadily in talent, technology, and product capabilities, including investment banking, commodities hedging, real estate capital markets, and multifamily agency capabilities, which I will discuss in more detail on the next slide. Before moving on, I will note that the $136 million fee income number shown for 2026 is annualized based on our performance through 30 September. Given the momentum we are seeing across the business and our expectations for the Q4, we anticipate the full year results to come in somewhat above that level.
Harris Simmons: Turning now to slide 7, I would like to highlight the acquisition of Basis Investment Group's multifamily agency lending business, which closed during the Q3. This acquisition represents an important step in building what we believe can be a highly differentiated multifamily franchise. Our goal is straightforward: to provide clients with a single source of financing solutions across market rate, affordable, construction, bridge, agency, and CMBS products. With this acquisition, we are now one of only 4 banks in the country that combines direct access to both Fannie Mae Delegated Underwriting and Servicing and Freddie Mac's Optigo programs, together with originations to third-party CMBS conduit platforms. When combined with the broader capabilities of the bank, this creates a differentiated one-stop multifamily platform capable of serving clients throughout the life cycle of an asset.
Harris Simmons: In addition to the talented team that joined us from Basis, we have added seasoned lenders with deep experience in multifamily agency lending and servicing to help scale the platform. We are excited about the opportunities this creates and the talent that we have assembled. This acquisition enhances our ability to serve commercial real estate clients, and in particular, those in the Western United States, where we see a real market opportunity with population growth and housing affordability issues that drive demand for multifamily products. Included in the quarter were approximately $4 million of expenses associated with our newly acquired multifamily agency platform, including personnel and other integration-related costs and approximately $300,000 of revenue. We expect the financial benefits to build gradually over time as the platform is integrated and production ramps up.
Harris Simmons: For 2027, we anticipate approximately $17 to $20 million of revenue and $12 to $13 million of expense, recognizing that we are in the early process of scaling the business. Over the medium term, we expect the business to generate approximately $30 to $40 million of annual revenue. The pace of growth and ultimate revenue potential will be influenced by market conditions, including the interest rate environment. Moving to slide 8, we see wealth management as a compelling growth opportunity given our broad customer base and the size of wealth assets under management relative to the size of our banking franchise. We have seasoned affiliate and wealth leadership teams focused on continuing to enhance coordination between our banking and advisory businesses, which we believe positions us to deepen client relationships and capture additional growth opportunities.
Harris Simmons: A key component of our strategy is a product we call Wealth Select, which is a new offering that expands our addressable market by allowing us to serve clients with approximately $100,000 to $1 million of investable assets through a scalable advisory model. Wealth Select helps us engage clients earlier, deepen relationships over time, and create a pathway for those relationships to grow alongside their financial needs. Slide 9 provides more information about what we refer to as our strategic six products. While each serves a different client segment and business need, they all share a common objective, which is strengthening sustainable growth through our branch footprint and core deposits, small business relationships, and fee income. We continue to be encouraged by the early results. For example, year to date at 30 September, we have opened over 14,000 Gold accounts for consumers, totaling approximately $275 million in new-to-bank deposits.
Harris Simmons: 1,300 Business Beyond accounts, bringing in about $120 million in new deposits. In addition, we currently rank number 10 nationally in SBA 7(a) lending based on approval volume, and number 9 in SBA 504 loans. While the near-term financial contribution is modest relative to the size of the bank, these products are helping us grow long-term relationships and creating opportunities to deliver additional banking payments, lending, and wealth management solutions over time. With that overview, I will turn the call over to our Chief Financial Officer, Ryan Richards, to walk through the quarter in more detail and walk through our outlook. Ryan?
Ryan Richards: Thank you, Harris, and good evening, everyone. Beginning on slide 10, you can see the five-quarter trends for net interest income and net interest margin. Tax-equivalent net interest income was $684 million, up $7 million or 1% from the prior quarter, and up $12 million or 2% from the year-ago quarter. Earning asset yields were relatively stable sequentially, while our cost of funding increased, resulting in a decline in the net interest margin compared to the prior quarter. Slide 11 provides additional detail on the drivers of net interest margin, which decreased 4 basis points from the prior quarter and 5 basis points from a year ago. The linked quarter decline was primarily driven by higher deposit costs and growth in lower-yielding assets. As Harris noted in his opening remarks, deposit growth significantly outpaced loan growth during the quarter, with average customer deposits growing by 8.8% on an annualized basis.
Ryan Richards: This compares with annualized loan growth of 3.7% during the quarter and a slight decrease in ending loan balances. We used this excess funding to pay down short-term FHLB borrowings with the residual deployed into money market investments, which increased meaningfully during the quarter. Moving forward, these lower-yielding money market balances, which are dilutive to our net interest margin, will be utilized to fund loan growth and/or reduce broker deposits as those balances mature. The total cost of deposits increased 11 basis points to 1.59% during the quarter. This increase was driven in part by a recent change in how we present interest paid on cash collateral associated with our derivatives portfolio. Earlier this year, we began presenting derivatives and related cash collateral on a net basis.
Ryan Richards: Beginning this quarter, we reflected the interest costs associated with the cash collateral held and the cost of deposits as opposed to short-term borrowings. This increased our reported cost of deposits by approximately 3 basis points, but had no impact on our overall cost of funds. As Harris noted in our earnings release, we expect our asset-sensitive balance sheet to produce stronger net interest income in a higher rate environment. For Q3 2027, we anticipate net interest income to increase by approximately 8% to 12%. Our outlook is based on the forward curve as of 30 September, which assumes three rate increases occurring in December, March, and June, respectively. The forecast assumes our cost of deposits rise to around 2% from current levels of 1.59%, which includes migration of some non-interest-bearing deposits into interest-bearing products.
Ryan Richards: If deposit pricing and mix trends develop more favorably than we have assumed, there is potential for net interest income to exceed our guidance. Moving to non-interest income on slide 12. Customer-related non-interest income was $192 million, compared with $182 million in the prior quarter and $163 million a year ago. Excluding the net credit valuation adjustment, adjusted customer-related non-interest income was $182 million, compared with $181 million in the prior quarter, and up $8 million or 5% from the year-ago quarter. As Harris mentioned earlier, capital markets continue to deliver strong performance and remains on pace for a strong Q4. In wealth, we are seeing encouraging momentum and remain focused on executing our strategy to drive growth and deepen client relationships.
Ryan Richards: Looking ahead to Q3 2027, we expect adjusted customer-related fee income to grow 6% to 9% relative to the Q3 2026 results of $182 million. We anticipate broad-based growth across our fee businesses, led by continued momentum in capital markets. Turning to slide 13, adjusted non-interest expense was $549 million, representing an increase of $3 million or 1% from the prior quarter, and as Harris mentioned earlier, included $4 million of expense related to the newly acquired multifamily agency platform. Technology, telecom, and information processing expense increased $4 million, driven by higher application software licensing and maintenance costs. Additionally, deposit and regulatory expense increased $5 million related to the decrease to our FDIC special assessment in the prior quarter. Expenses were higher year over year, reflecting higher incentive compensation, increased professional outsourced services, and higher technology costs.
Ryan Richards: We will continue to manage expenses prudently while investing to support growth. For Q3 2027, we expect adjusted non-interest expense to increase by approximately 4% to 6% relative to Q3 2026. We also continue to expect positive operating leverage for the full year 2026. Our initial outlook of 100 to 150 basis points of operating leverage did not contemplate the acquisition of the multifamily agency platform from Basis. Including the impact of that acquisition, we now expect operating leverage of approximately 40 to 50 basis points. Excluding the acquisition, operating leverage would approach the low end of our prior expectations of 100 to 150 basis points. Slide 14 presents trends in average loans and deposits. Average loans grew 3.7% annualized during the quarter, primarily within the C&I portfolio, and increased 2.7% year over year.
Ryan Richards: Loan yields remained relatively stable sequentially and were down 28 basis points year over year, primarily reflecting lower interest rates. Looking ahead, we expect loan growth to be between 2% to 4% for Q3 2027 compared with Q3 2026. Our outlook reflects current pipeline activity, customer utilization trends, and the broader economic environment. Given the expected path of interest rates, we are tempering our outlook for loan growth, particularly within CRE. Average deposits increased $17 billion from the prior quarter, driven
[Company Representative] (Zions Bancorporation): 1.7.
Ryan Richards: Excuse me. Thank you. Average deposits increased $1.7 billion from the prior quarter, driven largely by an increase in interest-bearing deposits. The cost of total deposits was 1.59%, an increase of 11 basis points sequentially, primarily reflecting deposit repricing and, to a lesser extent, the presentation change related to interest paid on cash collateral associated with our derivatives portfolio. Our deposit growth allowed us to reduce wholesale funding sources during the quarter, tempering the increase in total cost of funding. Year over year, the cost of deposits declined eight basis points, primarily due to lower interest rates. Slide 15 presents the five-quarter trend of our average and ending funding sources. Our total funding costs increased to 1.75% compared with 1.69% in the prior quarter.
Ryan Richards: Period-end deposit balances increased by $1.3 billion compared with the prior quarter, driven by a $1.8 billion increase in customer deposits, partially offset by a decrease of $448 million in broker deposits. Short-term borrowings decreased $376 million linked quarter and declined by $2.7 billion versus the prior year quarter. Turning to slide 16, the investment securities portfolio continues to serve as an important source of on-balance sheet liquidity and a tool to balance interest rate risk. During the quarter, principal prepayment-related cash flows from investment securities of $631 million were partially offset by reinvestment of $296 million. The continued paydown of lower yielding mortgage-backed securities supports earning asset remix and or a reduction in wholesale funds. The estimated price sensitivity of portfolio, inclusive of hedging activity, was 3.4 years. Credit quality remains strong, as shown in slide 17.
Ryan Richards: Net charge-offs were 2 basis points of average loans annualized, and the non-performing asset ratio was 50 basis points compared with 48 basis points from the last quarter. Classified and criticized balances declined 12% and 8% respectively during the quarter. The allowance for credit losses ended the quarter at 1.11% and remains well-positioned relative to our risk profile with 207% coverage of non-accrual loans. Our capital position remains strong, as shown on slide 18. The CET1 ratio remained stable at 11.8% during the quarter, notwithstanding a $229 million increase in goodwill and tangible assets arising from our newly acquired multifamily agency business. We expect continued strong capital generation through earnings and improvement in AOCI.
Ryan Richards: Related improvements resulted in a 13% increase in tangible book value per share versus the prior year. When compared with 30 June 2026, unrealized losses in AOCI increased by $122 million, reflecting declines in the fair value of AFS securities resulting from increased term interest rates. This mark-to-market impact was tempered by pay fixed receive floating interest rate swaps designated as hedges of our AFS securities to reduce volatility in our AOCI balance. It also bears noting that a significant portion of our unrealized losses recorded in AOCI relate to securities previously transferred from AFS to held to maturity, the related balance of which does not fluctuate with mark-to-market changes. Slide 19 summarizes the outlook we have discussed across loans, NII, fee income, and expenses.
Ryan Richards: This outlook remains our best estimate based on current information and is subject to the risks and uncertainties discussed in our forward-looking statements. This concludes our prepared remarks. As we move to the question and answer section of the call, we request that you limit your questions to one primary and one follow-up question to enable other participants to ask questions. Cleo, please open the line for questions.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, we ask that you please limit yourself to one question and one follow-up. One moment, please, while we poll for questions. Thank you. Your first question comes from Bernard von-Gizycki with Deutsche Bank. Please proceed with your question.
Bernard von-Gizycki: Hey, good afternoon. Just on the first question on the NII guide of up 8% to 12%, can you just break down some of those assumptions like the deposit growth and mix, beta, and the rate hikes assumed within that period of time?
Ryan Richards: Yeah. Thank you, Bernard, for the question. Listen, I try to call out my prepared remarks that we are anticipating three rate hikes as part of that guidance. So December, March, and June. We certainly expect a larger contribution in terms of deposit growth coming from interest-bearing deposits. Expecting the non-interest-bearing deposit growth would be very modest in that type of rate environment. We also sort of observed or expected relative to the last rate hiking cycle when we were very much awash with deposits and perhaps could have been more patient. We are now in a position that is a very competitive market. We are anticipating that it will be a slightly different deposit repricing behavior than what we might have experienced in the last cycle.
Ryan Richards: Our guidance that you might have heard in my prepared remarks, we have allowed for an increase in deposit costs, to the extent about 40 basis points increase in deposit costs. That would imply sort of a beta in the upper 40s to low 50s is sort of the assumption that we are thinking of. As in prior quarters, the contributions that you would expect there, of course, variable rate repricing is a given. Fixed rate loans is a significant contributor there. We see potential for 3 to 4 basis point on earning asset yields arising from the fixed rate loan repricing. Of course, the continued remix out of investment securities into loans, but also this notion that we continue to reinvest a portion of our investment securities, and there we expect 2 to 3 basis points of earning asset pickup as well.
Ryan Richards: Think about sort of a 5 to 7 basis point increase in earning asset yields in that rate environment as we are thinking about it.
Bernard von-Gizycki: Great. Thanks for that color. Maybe just to follow up, maybe just longer term, I know you guys have talked about this 350 NIM, and I think intra-quarter, maybe you've dialed it back a little bit maybe with the timing. Just thoughts on maybe when you could reach that. Is it still kind of a goal? Just any commentary you can add on that. Thank you.
Ryan Richards: Yeah. Thanks, Bernard. Listen, I think when we talked about the mid-threes NIMs, we always sort of conditioned in the past that the kind of rate environment that we would be in. There's tons of uncertainty in the future about how deposits behave, we know that. But we do see scenarios that would allow us to operate in the mid-threes moving forward with this type of rate environment. Of course, that's always dependent upon deposit growth, the rate paid on those deposits, the beta. But we think with some reasonably conservative assumptions that we can reach those mid-three levels in 2027.
Bernard von-Gizycki: Great. Thanks for taking my questions.
Ryan Richards: You bet.
Operator: Your next question comes from John Pancari with Evercore ISI. Please proceed with your question.
John Pancari: Good afternoon. First, I commend you on providing the quantitative ranges to the outlook and simplifying your NII outlook. I think it is definitely helpful. So appreciate that. Just in terms of the implication for the margin, I know you didn't provide a margin outlook. But given the dynamics that you just walked through in terms of deposit costs dynamic and some of the earning asset shifts, how do you view the trajectory of the margin, particularly as you see some of the growth on the asset side shifting away from CRE, as you indicated?
Ryan Richards: Yeah, great call-out, John, and maybe we should have a moment of silence for moderately increasing. Let's take this moment to celebrate those terms. Listen, you're right. We do expect some growth from CRE. It'll probably be a little bit more pressure from the rate environment. But if you think about even not going back that far in time, there was a point in time where we were getting a pretty outsized contribution from consumer loan growth. And given our guidance, which is recently modest at 2% to 4% of loan growth, we really pointed to C&I, owner-occupied, and then to a little bit lesser contribution from CRE. That's still typically a better outcome than consumer-like growth.
Ryan Richards: So that, coupled with the traditional things you've heard us talk about over time, the remix out of securities into loans, the less of the headwind of those discontinued swaps are all contributors to, I think, a brighter prospect for NIM. And of course, you heard Harris talk about our underlying strategic six offerings that we continue to grind away at and building net new relationships. That will also be very important as we continue to drive down our wholesale borrowing costs. We've been very successful year-over-year in driving down our broker deposits and our other short-term borrowings, and we certainly look for that to continue.
John Pancari: Great, Ryan. Thank you. If I could just hop over to capital, maybe you could just give a little more color just around how we should think about the pace of buybacks for the coming quarters, not just maybe Q4, but as you look at next year. Any reason to think that despite the volatility and the rate backdrop, that you can't stay around the $75 million level, or should we think about some change in that pace?
Ryan Richards: Hey, John. With all such things, I think we're subject to regulatory approvals and where the board wants us to go. But listen, with the kind of rate environment that I just described, provided that it holds, that can translate, as you can see in our guide, to some pretty positive outcomes for us. So I wouldn't be giving up on capital absorption and the potential even for it to potentially grow in that type of operating environment. But I don't want to prejudge outcomes with our regulators and the board. But I think that we see scenarios where we could actually increase our capital absorption moving forward. If you think about our results this quarter, certainly in the mark-to-market and the run-up of the term rates was challenging for the industry. We actually fared pretty well on that basis.
Ryan Richards: A bigger driver of capital absorption this quarter for us was the goodwill and the intangibles that we absorbed through the multifamily agency business. When setting that aside, with the hedges we have in place and the fact that a very large portion of our AOCI is sort of frozen from the transfer into HTM, we had very good performance on a relative basis. If you think about the mark-to-market, we had about a 50% or better offset with the hedges that we have in place that we call out in the appendix of our materials. So I think with that extra level of protection and a potential for a very positive operating environment, there may be room to do a little more.
John Pancari: Great. Thank you, Ryan.
Operator: Thank you. Your next question comes from Dave Rochester with Cantor Fitzgerald. Please proceed with your question.
Dave Rochester: Hey, good afternoon, guys.
Ryan Richards: Hey.
Dave Rochester: On the loan growth outlook, with your reeling in your expectations for CRE loan growth within that, which it sounds like is a driver for it slowing, is that just a function of greater competitive pressures, or is it less activity given higher rates that you are expecting? Or are you becoming somewhat concerned about credit in that area, given your rate and economic outlook? Or is it a little bit of everything? If you could talk about the total pipeline today, if that has improved at all versus last quarter and utilization trends that you mentioned as well, that would be great.
Derek Steward: Thanks, Dave. This is Derek. To the commercial real estate side, as far as growth there, pipeline is actually pretty good right now. It is competitive but we are being very disciplined in our underwriting as well as risk selection as far as our approach there. I think just given the competitive environment, given some of the supply-demand issues that are going on in our market, as well as just the increase in interest rates, it could have an an impact on the CRE growth. But as you look in the last quarter, we actually had
Derek Steward: Pretty good growth in CRE. Actually, it was able to offset a number of payoffs that we had that exited from our classified book. As far as the rest of the portfolio, pipeline's been good in the C&I. I think this quarter, just at the period end, we had a little decrease in utilization. Q2 was actually strong utilization, and just saw a little decline in some capital call usage and number of other just general business activity. Seemed just utilization was down quarter-over-quarter.
Scott McLean: Hey, Dave, this is Scott. I might add a little more color to that too. I think Derek covered the CRE as well as just other topics related to pipeline. Q3, if you just look at H.8 data, total loan growth was down, and C&I growth was down. We tracked pretty close to what H.8 data was. I do not know why Q3s seem to be soft. Q3 last year was soft. Q3 in 2023 was soft. I do not know if it is summer vacation or what it is, but there is something about Q3 going on. If you look at slide 25, just another way to kind of think about what's happening. Basically, what you can see there is we're basically no growth for the quarter. You can see that -$9 million over there in the bottom right-hand corner.
Scott McLean: We kind of fundamentally need about $500 million to $600 million to hit a kind of a good solid 3% to 4% growth rate. Basically, it's happening at Amegy. Amegy was down $293 million for the quarter, as opposed to being up $150 million to $200 million. That's kind of the difference between $500 million to $600 million in quarterly growth, which isn't great. We'd like for it to grow better, but that's kind of 3% to 4% growth. To put that in additional perspective, if you look at slide 26, where you see the year-over-year growth, Q3 2026 versus Q3 2025, you'll see that Amegy, those first two lines, C&I, excluding oil and gas and owner-occupied, it produced over half of the C&I and owner-occupied growth year-over-year. So they've been outperforming all of our other affiliates for some time in terms of C&I growth, including owner-occupied.
Scott McLean: They just happen to have a soft quarter. We're not especially worried about that. It just happened to be a soft quarter for them. Otherwise, I think we would've seen growth more in line with $500 million to $600 million for the quarter. Their pipelines are just fine. There's nothing unusual about their pipelines at the moment.
Dave Rochester: Got it. I thought that you had mentioned CRE is potentially slowing down in terms of growth going forward, and that's why you were a little bit lower on your loan growth expectations.
Scott McLean: Right. I mean, it's a low growth number. It's kind of a 1% to 3% sort of growth number is what we're trying to achieve, anything slightly less than the growth rate of the overall portfolio. So that's a moderately consistent message for us over time.
Dave Rochester: Can you just talk about just switching gears to wealth and wealth expansion that you're trying to drive here. What's the penetration of wealth in your current customer base? Can you talk about any recent incentive changes or any new targets you have for hires or anything like that that'll help drive greater growth in that line over the next year? Thanks.
Scott McLean: Sure. Taking incentive comp first, we made some incentive comp adjustments 12 to 24 months ago that, quite frankly, created some churn in our bankers. We sort of thought that might happen. So this kind of no growth period that we've had in wealth fees that total about $58 million plus or minus right now. We've kind of had a no-growth phase. We think the incentive comp elements both for our wealth colleagues and our private banking colleagues around the company are aligned better now and that everybody's sort of adjusted to it. So that's the incentive comp side. The answer to your first question of what's our penetration and what's the outlook, our penetration is really low, and the outlook is really positive. Any data I would give you would say, "Boy, your penetration's really low, guys.
Scott McLean: Come on now. Part of that is because the dog didn't eat our homework papers, but we just have never had a large trust business that we acquired. Most of our peers either acquired large trust businesses somewhere in their past or they grew one, and we just never did. So we're kind of starting from behind. But we think the calling efforts with our private bankers, wealth bankers, our commercial bankers, and the energy level we have there right now, is really positive.
Dave Rochester: Great. It's good to hear. Thanks for all the color.
Operator: Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the queue. You may press star two to remove your question from the queue. We please ask that you limit yourself to one question and one follow-up. Your next question comes from Chris McGratty with KBW. Please proceed with your question.
Chris McGratty: Oh, great. Thanks. I'll echo the new guide. Thank you for doing that. On the operating leverage, I guess a question on operating leverage. Is there anything in the crystal ball that would say that some degree of operating leverage next year wouldn't be possible as well? I hear you on the small impact from the deal, but I guess from the NII momentum and the expenses that you may need to invest in the company, any reason why operating leverage shouldn't continue?
Ryan Richards: Oh, listen, hopefully I understood that correctly, Chris. If not, just re-guide me here. But certainly based upon how we guided to Q3 2027, we see very positive prospects for operating leverage. Some of our assumptions and models would point to six points or better that quarter. We do not typically go too far afield for that. But even for the full year 2027, we are seeing the prospects for a pretty positive spread there. So if that is where you are going, then that is probably the color. But if you are looking at something else, please let me know.
Scott McLean: I think the other thing Ryan was talking about was our full-year operating leverage in 2026.
Ryan Richards: Yes.
Scott McLean: He was commenting about we were guiding to 100 to 150. We have talked about that all year for 2026. Q3 has obviously been a little soft here. We actually saw it coming. But we still think for Q4, I will not repeat what he said, but that is what he was talking about in terms of the operating leverage there being a lower number.
Ryan Richards: I think it is a great call out, Scott. Thank you for course correcting. If we look at the adjusted PPNR that we had this quarter relative to what, as Harris noted, a very strong Q3 of 2025. I would just gently remind everybody that that was actually shaping up to be a very strong quarter for us. On PPNR it was, but we had the credit matter that presented that quarter that was kind of a dour tone for that quarter. But underlying that, on a year-over-year basis, certainly a contributor to our softer adjusted PPNR performance and then kind of eroding some of our potential for operating leverage in this quarter. We saw some increase in incentive accruals. Our incentive accruals are sensitive to credit performance, and we have had really truly outstanding credit performance this year.
Ryan Richards: So while the core performance is a little bit softer against a strong comp, the credit has been excellent. There has been some other things that showed up in Q3 2025 that were different on the non-interest fee income side, non-customer related. There was a pretty sizable difference in terms of our equity securities gains and losses period over period. That was about a $15 million delta. In the prior year quarter, we also had higher dividends and other income, FHLB dividends and other matters. So it would be understandable if people sort of looked at our full year and said, "Hey, tough quarter for operating leverage, tough PPNR versus a strong comp.
Ryan Richards: Can you still get there for the full year?" We do see, as I guided, once you adjust for Basis not having been our run rate, we think we can get close to the lower end of our prior guide of 100 to 150 basis points. If some things were to break our way, could we fit our way within there? Possibly. We will just see how the quarter shapes up.
Chris McGratty: Okay. Thanks for all that color. Then just to follow up on capital, Ryan, I have you just under 9% on the adjusted CET1. Just wanted to confirm that one. Then any change in uses of capital? You talked about the Basis deal, the fee income momentum. Depository acquisitions, I guess, would be the question from there. Any change in appetite?
Ryan Richards: I would agree with your assessment. I think we would show ourselves on a market capital base as being just shy of 9% as well. So I do not think anything that you would hear from this management team would change about how we would think about capital deployment, other than just what I have said already, that moving forward, we could have a more constructive operating environment for capital. Capital actions, I should say.
Chris McGratty: Great. Thank you very much.
Operator: Your next question comes from Ryan Kenny with Morgan Stanley. Please proceed with your question.
Ryan Kenny: Hi. Good afternoon. Could you walk through some of the dynamics that you are seeing on deposit competition? Is it intensifying significantly? Is it more on the retail side, more on the commercial side? Any geography within your footprint where things are getting significantly more competitive?
Scott McLean: I do not think so. I think it is just a very across the board competitive environment out there. I do not think we are seeing a lot of impact from neobanks and that kind of thing. Certainly that is out there, something the whole industry will be watching here the next few years. But no, I think it is a competitive deposit market, but it is manageable. I think we probably more price competition on the asset side than on the liability side. But it is just competitive all over.
Ryan Kenny: It sounds like the spot rate for interest-bearing deposits was up only a couple of basis points versus the average. Given that the rate hike came in September, does that mean that clients were asking for higher rates throughout the quarter? Could you see that dynamic going forward where deposits reprice ahead of future rate hikes?
Harris Simmons: I think a lot of the deposit growth was in kind of higher cost deposits. We have moved a lot of money back on the balance sheet for customers that we chased away a few years ago when everybody was awash with liquidity. Bringing that back on, our goal, as we said before, was really just bringing down our total cost of funding. A lot of the growth was higher cost deposits, but certainly lower cost than our marginal cost of funding. That is kind of what you saw this quarter.
Ryan Kenny: Thank you.
Operator: Your next question comes from Ken Usdin with Autonomous Research. Please proceed with your question.
Ken Usdin: Hi. Thanks. Good afternoon. Ryan, just wanted to ask you a question on the swap adds. Presuming that Slide 27 with the simulated repricing of earning assets and loans reflects the adds from this quarter. Just related, do you have any additional purchases in the future built into the Q3 2027 outlook on top of what you already bought in the third quarter? Thanks.
Ryan Richards: Thanks, Ken. Listen, I'll speak to that maybe in broad strokes, and we've got Matt Tyler here in the room, our Corporate Treasurer, and he could probably drill down maybe another level from where I take it. But I think that the big picture message that we're trying to convey with our hedging activity is we're sensitive to both earnings sensitivity and tangible common equity or EVE sensitivity. That's why you see both sides of these hedges. What you've been seeing, and I think what you're alluding to on the receive fix side, is we do tend to measure on a relative basis as being more asset sensitive than others. I've said it before, I'll say it again, these are not common methodologies of measuring things. But we do want to be also thoughtful and perhaps prudent and what goes up sometimes goes down.
Ryan Richards: While that asset sensitivity is serving us well, we think, in this type of rate environment, things can always reverse. So we've, on the receive fix side, really trying to think about the downside sensitivity should rates reverse in a -100 or -200 rate environment, and maybe take a little bit of the edge off of how we would measure there. So we did add some hedges during the quarter. I think you would've seen reference to that in that related slide to that end. A little bit more modest activity as we think about that TCE protection on the pay fix. Matt, I invite you to add anything you want.
Matt Tyler: Yeah. The additional hedging, we've really been keeping our cash flow hedges, which are the receive fix, shorter maturities kind of under 2 years. So we're kind of just rolling those out as time goes on, which has been most of the activity. If you have 2 years hedged, 2 months from now it won't be a year and a half, so 2 quarters from now. So we've just been kind of rolling those on a continuous basis forward over time.
Ryan Richards: So I think maybe coming full circle, could there be more hedging activity built into that guidance? Certainly if we were to persist in adding those short-term receive fix hedges.
Ken Usdin: Right. Okay. All right. That's good. Thanks a lot, Ryan.
Ryan Richards: Okay.
Operator: Your next question comes from Timur Braziler with UBS. Please proceed with your question.
Timur Braziler: Hi, good afternoon. Maybe just starting on the funding side, I'm just wondering what's the remaining portion, either on wholesale or broker, that you're still looking to reduce going forward? Maybe another way of asking that is how close are we to having asset growth be more closely aligned with deposit growth?
Ryan Richards: Yeah. Listen, great question. I will get started and invite other members of the team here to jump in. What you called out is a really important part of our story. Our success year-over-year in paying down broker deposits, paying down wholesale borrowing sources, having this really positive deposit growth story this quarter enabled us to pay down our FHLB borrowings almost straight away. Where it was a little more tricky is there is of course a term structure to broker deposits. It takes a little bit more time for those to run off. We show, I believe in Q4 we have about $2.2 billion worth of maturity of broker deposits, and we already said that we are sort of overbuilt on our money market position that could be redeployed.
Ryan Richards: I do think as we think about this moving forward is to continue to pay down those sources of funding that are not with clients. This is kind of what Harris Simmons was talking about. We would rather be reaching out to our clients and serving them and even these higher cost products when they bring net new balances to us than paying away to a broker or some other wholesale funder. That is sort of where we see this going on the funding side.
Matt Tyler: Ryan Richards, in terms of timing, I would just add that on the brokered deposits, their certificates of deposit, they have an average maturity of about 3 months, which thinking about it, half of it is going to roll off within 3 months. We are bringing that down as we manage. We watch it all the time as we manage funding coming in from deposits. It just is not instantaneous like if we had borrowings from the home loan, for example, which would be a spout. But it will adjust very quickly and we have already seen a lot of it. We have brought it down a lot so far this quarter as it has matured.
Scott McLean: It is versus
Scott McLean: June 30 of last year. It is down about $3 billion to $4 billion. Our broker deposits and overnight borrowings net of money market investments was about $6.5 billion then. If you adjust for long-term debt we have issued, et cetera, it is down about $3 billion to $4 billion. It has been very intentional. It has not been serendipitous. We still have about a little over $7 billion in client funds off balance sheet. Almost 100% guarantee when we bring them back on, the cost is accretive to our overnight cost of funding, which Harris was mentioning earlier.
Timur Braziler: Okay. Thanks for that. Maybe I can take another shot at John Pancari's question. So appreciate the color on deposits. So getting to call it 2% a year from now, so 40 basis points higher. Let us call it 10 basis points a quarter. Average earning assets are going up, call it 5 to 7 basis points a quarter. It would imply, I think, that you need margin expansion in order to get to your NII guidance. Is the bulk of that increase from just funding mix, asset mix? I guess, how are you thinking about margin over the course of the next 12 months in terms of that NII guide?
Ryan Richards: Yeah. Listen, I think it has to be yes, all of it. It is both funding mix, it is asset mix, and it is our sensitivity to that rising rate environment. It is the driving the net new relationships through these very granular things that Harris described. All those things combined with that sensitivity to three future rate hikes sets up pretty well for us if it all pulls through at that level. Again, reiterating that we recognize that that is a stronger price response on deposits than what we would experience previously. We hope that there is some conservatism in that, but we will see.
Timur Braziler: Great. Thank you.
Operator: Your next question comes from David Smith with Truist Securities. Please proceed with your question.
David Smith: Hi, good afternoon.
Ryan Richards: Afternoon.
David Smith: To drill down on the funding a little bit more, could you help us size the impact on the deposit costs of bringing that off-balance sheet funding back on the balance sheet?
Scott McLean: Deposit costs will increase, but as Harris was noting, cost of funding will decrease, all things being equal.
David Smith: Thank you. And for the impact on Q3 specifically, though?
Ryan Richards: Actually, as it relates to sequential quarters, the amount in off-balance sheet deposits didn't change appreciably. It was pretty across, but there was plenty of evidence of us inviting in other net new balances that we knew were away from us to come in the way that exactly how Scott and Harris have described. Quantifying that impact, I don't think I have a good number for you now. But that's pretty much, I'd say over the last, let's see, 12 to 18 months, we've attracted certainly north of $3 billion of client deposits that are focused deposit efforts that are accretive to total cost of funding.
David Smith: Okay.
Ryan Richards: That would be otherwise charged to be higher cost deposits.
David Smith: Right. Then you had mentioned competition being stronger on the loan side than on the deposit side right now. Would you characterize that as more just on yield and cost or more on covenant dynamics or some of both right now in terms of where you're not interested in stepping down to where the competition is?
Derek Steward: It's some of both. This is Derek, David. We're seeing primarily pricing competition, but I would say on structure, covenants, et cetera. But again, we're maintaining our discipline there on the structural side and maintaining our underwriting and just the risk selection. We're again, having good luck at still winning our fair share. It's just a more competitive environment, I'd say, today.
David Smith: Is there any change in that assumed in the outlook for deposit growth next year, or pretty consistent to where competition levels sit today?
Ryan Richards: Well, it's an open question that's been discussed, I think, by analysts and others about the amount of sensitivity that people report versus the actual sensitivity that people will actually experience because we've had this higher for longer rate environment and the prospect of rate hikes. Will there be a stronger price sensitivity on the upside? We've allowed for some of that in the guidance that we provided and the deposit data that I would have communicated earlier on this call.
David Smith: All right. Thank you.
Operator: Your next question comes from David Chiaverini with Jefferies. Please proceed with your question.
David Chiaverini: Hi. Thanks for taking the questions. I wanted to first start on the capital markets outlook and the pipeline. It sounds positive. Also curious as to what extent could higher rates impact or be a headwind to the new multifamily businesses you acquired as it relates to that $30 to $40 million contribution over the medium term?
Scott McLean: This is Scott. I will start with it. Related to the Basis business, the $30 to $40 million was several years out. I cannot remember the script. It is 2029.
Harris Simmons: Yeah, medium-term.
Scott McLean: Yeah, medium-term. Interest rates certainly can have an impact. The production of multifamily in the country is, there's just a real vibrance to it still. But you're right, interest rates can have an impact on it. It is a flow business for most people, so the production builders that are doing this, they build and sell. Derek Steward may have more color on that, but it's not a hold and then get lucky on rates kind of thing. Then the interest rate business, the interest rate hedging business that we have, which is about a $30 million-ish revenue business just on interest rate hedging for our clients. As rates continue to go up, that could actually be impacted some, although we haven't seen too much weaknesses there.
Scott McLean: One of the things to note in this quarter's capital markets revenue is it included almost no investment banking or M&A advisory work, that's a practice we started about 18 months ago. Our franchise is really very fertile grounds for small and medium-sized business M&A, and we have a very nice pipeline there. It's just very lumpy. So we're very optimistic about that M&A business going forward. Then our garden variety syndications, foreign exchange, the bond underwriting that we do, et cetera, is we think moving along at a pretty nice rate.
Harris Simmons: I understand. Higher rates would be a little bit of a headwind, but I think we also have the tailwind of really have a lot of ground to plow here. We're seeing a lot of interest from middle-market kinds of clients we've had long relationships with. The investment banking point, for example. We think that can turn into a really nice business across the West. So capital markets businesses by their nature are kind of lumpy, and we get that, but we think it really is a nice value add for us from a client base that needs it.
David Chiaverini: Yeah, no, I agree. I think that multifamily acquisition is differentiating, which is a nice segue into my follow-up on the capital question as it relates to M&A. In terms of refresh thoughts are other, whether non-bank or whole bank M&A, what are your current thoughts there?
Harris Simmons: Pretty much unchanged. It would be very opportunistic. I think it is kind of likely to be something. This multifamily agency platform, we have long had a really solid commercial real estate business here, and we also know there kind of is a limit to what you can do with a balance sheet with a regional bank and without creating concerns. So it was a really nice fit, and we had been looking for some time. We had actually looked at a couple of other opportunities and hadn't made it. So we are really pleased to have this. It is just a really nice strategic fit for us. But over time, we will look back on this 10 years from now and say, "What a fabulous thing that was." I think that is kind of what we are looking for, are things that just fit well and probably a little on the smaller side, and particularly the valuation.
Harris Simmons: Look, we need to see some better valuation before we start thinking about becoming very aggressive. Anyway, I think that has been kind of consistent theme.
David Chiaverini: Very helpful. Thank you.
Harris Simmons: Yep.
Operator: Your next question comes from Janet Lee with TD Cowen. Please proceed with your question.
Janet Lee: Hello.
Harris Simmons: Hi.
Janet Lee: You talked about the deposit beta in the upper 40s to low 50s. Just given the different launching point for where we are in the rising rate cycle versus the last one, are you assuming that the NIB mix can stay relatively stable-ish from here in the low to mid-30s? I know that you said a lot of the deposit growth will be coming from interest bearing, obviously, but just wanted to see if there's any thoughts there.
Ryan Richards: Yeah. Thanks for the question, Janet. Listen, I think it would be reasonable to assume that interest-bearing deposits would take a larger share moving forward in that higher rate environment. We're doing a lot of great things. We'll continue to do a lot of great things. Building out the granular strategies that Harris discussed, that's something you do over many months and years and most valuable part of our franchise. Pressing forward, I think those non-interest-bearing balances are going to be harder to come by. So I could anticipate potentially a little bit of a slightly different mix there.
Janet Lee: Got it. Sorry to beat on a dead horse, but I just want to make sure that I heard it correctly. I believe you said to Bernard's question earlier that your net interest margin could reach that mid 3.350 level in 2027. Is that what you're assuming in your NII guide for the Q3 of next year over year?
Ryan Richards: Listen, we do see very healthy NIMs. We don't provide NIM guidance. It certainly has been our practice because of all the variables that go into it. As a general matter, just restating what I mentioned before, it really is beholden to the operating environment. If we do see the rate hikes that we see in our forecast with the type of deposit behavior we described, we think it's realizable to be operating at that level.
Operator: Got it. Thank you. Your next question comes from Anthony Elian with J.P. Morgan. Please proceed with your question.
Anthony Elian: Thank you. Ryan, I know you don't guide on deposits, but any more color you can give us on what drove the strength in deposits in Q3? I'm really trying to get at the degree to which you expect this high single digits annualized level to persist in Q4 and beyond. If I look at slide 9, the products you outline, it just seems like the momentum you have should continue.
Ryan Richards: Yeah. Listen, thanks for the question. If you look across the past two quarters, it's been a little uneven, right? The last quarter we showed up with really, really healthy loan growth. Utilization picked up really positively. Fell a little bit flat on deposits. This quarter we showed up with really strong deposit growth and not a whole lot of period end loans to show for. It is useful to kind of step back, zoom out a little bit, and kind of think of longer time horizons. If I think back a year-over-year period, you think about loan growth around 4%, customer deposit growth about 5% when talking about ending balances, that's pretty solid, right? If you think about the growth for our market, that probably tells you we're getting the growth in our market. We're probably not reaching for it.
Ryan Richards: Going forward, does it persist at an 8.8% average annualized growth? I'm not sure. Probably not, but it's a lot of the same type of deposit gathering that Harris alluded to before. A lot of the growth came from money market balances. There was what we refer to as our gold suite balances, and these are higher cost deposits. The most important part is we just keep grinding away at what you referenced in that slide at those more granular deposit gathering strategies. That's where I think we'll be having a chance to delight shareholders over a longer period of time.
Harris Simmons: Yeah. If we could see 0.75% to 1%, 1% growth in our total deposits coming from these things that we are really focusing on, the small business consumer, non-interest bearing kinds of accounts or low interest bearing kinds of accounts. It is not just about deposit growth, it is about the quality of the deposits, the cost of the deposits, the stickiness of the deposits. Over time, that really makes a difference. But it takes. I tell people around here, this is a marathon. This is not a sprint. We will be talking about this 10 years from now, I hope. Because it is just really the kind of foundation we are trying to create under everything else that goes on corporate deposits, everything else. So I hope that is helpful. But that is where a lot of our focus is. But it is a longer term kind of finances.
Harris Simmons: Some of this will be watching paint dry a little bit, so.
Anthony Elian: Yep, that is fair. Thank you for that. Then on Basis, you pointed to $30 million to $40 million of annual revenue over the medium term. What is the level of expense you expect from that business in the medium term? I think you pointed Ryan to $12 million to $13 million of expense in 2027. Thank you.
Ryan Richards: Yeah. Very reasonable question. I think we just want to be careful not to get too far over our skis. It is pretty early on here. We closed the deal at the end of July. We certainly want to have some experience. So we did quote all those numbers you cited. We said we expect this to scale over time. That requires investments to continue to build out the talent against a very good backdrop of talent as is now. So probably would hold off for a little bit more experience before we guide more deeply into the expense, how that grows through 2027, through 2028. We did say for full year 2027, $12 million to $13 million of expenses. Beyond that, it will just depend on the pacing of how much we add in talent and further capability.
Anthony Elian: Fair enough. Thank you. Echoing the comments on the updated guidance presentation, thank you for that.
Ryan Richards: Glad that's so popular.
Operator: Your next question comes from Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Jon Arfstrom: Hey, thanks for squeezing me in. Just two quick ones. On Basis, the smaller revenue number for the quarter, I think I understand it, you just closed the deal. Do you expect contributions from the revenue side to step up as soon as Q4?
Harris Simmons: Yeah. Look, we're still kind of setting the table there, but I'd expect a better Q4 of revenue than we had in Q3. Closed kind of the end of July, and there's a little bit there in the pipeline, but it's just building. I don't think we've thought a lot about what Q4 is going to look like. We've thought more about what next year's like to look like. That's where we said kind of 17 to 20 we think is kind of the target.
Jon Arfstrom: Okay.
Harris Simmons: I don't think we have anything we'd say about Q4 just yet.
Jon Arfstrom: Yeah. It was just a small number, Harris, and I didn't know if it was.
Harris Simmons: Yeah. I totally get it.
Jon Arfstrom: the acquisition or there was some other reason behind that.
Harris Simmons: Yeah.
Jon Arfstrom: Scott, just one for you. You mentioned slide 25, the Amegy loan trends earlier in the call. Has it any more or less competitive in Texas? There have been questions around those markets because of new regional bank entrants there. Just confirming you are not seeing anything new impacting your ability to grow in Texas. It is such a growth area.
Scott McLean: The only thing we are seeing new is that the disruption there because of these acquisitions, the acquisition of Comerica, clearly the acquisition of Cadence, the acquisition of Veritex, a few other small. That is all opportunity for us. I have said this for several quarters, and it is opportunity, and it is not just because I am saying it and it is corporate speak. If we had our fellows from Texas on the phone, they would not speak with granularity that we cannot talk about on a call like this. That is what we hear internally. There is disruption. We have already seen it. Our calling programs are highly focused on those. They have always been on those banks. We are especially focused on it right now. There will be competition for people, too. So there is a negative side of this. We have seen that for decades with folks parachuting into Texas.
Jon Arfstrom: More positive than negative from your point of view.
Scott McLean: Absolutely. No, I am sorry. The bottom line is, yes, more positive.
Jon Arfstrom: Yep. Okay. All right. Thank you.
Operator: This now concludes our question and answer session. I would like to turn the floor back over to Jason Arbuckle for closing comments.
Jason Arbuckle: Great. Thank you, Cleo, and thank you all for joining today and participating. We appreciate your interest in Zions Bancorporation. If you have additional questions, please reach out to the investor relations team at the email and phone numbers provided on our website. We look forward to connecting with you throughout the coming months. This concludes our call.
Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.
