Zions Bancorp Third Quarter Earnings Conference Call - ZIONS BANCORPORATION NATIONAL ASSOCIATION

Financial Performance:

• Net earnings available to common: $262 million ($1.78/share), up 20% YoY and 2% QoQ.
• Net interest income (taxable equivalent): $684 million, up 1% QoQ and 2% YoY; Net interest margin (NIM) was 3.23%, down 4 bps QoQ and 5 bps YoY.
• Non-interest income: $192 million, up 5% YoY; Capital markets division generated $136 million annualized fee income.
• Non-interest expense: $549 million (adjusted), up 1% QoQ; included $4 million in integration costs for the Multifamily acquisition.
• Credit quality: Net charge-offs of 2 bps annualized; Non-performing assets ratio at 50 bps; Allowance for credit losses at 1.11% of loans (207% coverage of non-accrual).
• Capital: Common Equity Tier 1 ratio stable at 11.8%; Tangible book value per share increased 13% YoY.
• Balance sheet: Average deposits grew 8.8% annualized vs. 3.7% loan growth; utilized excess funding to pay down $376 million in short-term FHLB borrowings and shift from broker deposits.
• AOCI: Unrealized losses increased by $122 million due to rising interest rates, partially offset by hedging strategies.

Guidance and Future Outlook:

• Q3 2027 Net Interest Income (NII): Anticipated to increase 8% to 12% YoY, assuming three rate hikes (Dec, Mar, Jun) and deposit costs rising to ~2.0%.
• Q3 2027 Adjusted Non-interest Expense: Expected to grow 4% to 6% YoY.
• Q3 2027 Loan Growth: Forecast between 2% to 4%, with tempered growth outlook for Commercial Real Estate (CRE).
• Q3 2027 Fee Income: Adjusted customer-related fee income expected to grow 6% to 9% YoY.
• Full Year 2026 Operating Leverage: Revised to 40–50 bps (including acquisition impact); excluding acquisition, expected near prior 100–150 bps guidance.
• NIM Trajectory: Management targets mid-3% NIM levels by 2027 under a higher rate environment.
• Multifamily Platform (2027): Projected $17–$20 million revenue and $12–$13 million expense; medium-term target of $30–$40 million annual revenue.

Business Segments and Product Lines:

• Capital Markets: Fee income nearly doubled since 2020; driven by investment banking, commodities hedging, and real estate capital markets.
• Multifamily Agency: Acquired Basis Investment Group's agency lending business; creates a unique platform combining Fannie Mae/Freddie Mac direct access with CMBS conduit origination.
• Wealth Management: Launched "Wealth Select" to serve $100k–$1M investable assets; penetration remains low relative to peers, representing a key growth vector.
• Strategic Products: Opened 14,000 "Gold" consumer accounts ($275M deposits) and 1,300 "Beyond" business accounts ($120M deposits) through "Strategic Six" offerings.
• Loan Portfolio: Growth led by Commercial & Industrial (C&I); CRE pipeline remains strong but competitive.
• Texas Market: Disruption from competitor acquisitions (e.g., Comerica, Cadence) viewed as an opportunity for market share gains.

Market and Competitive Landscape:

• Deposit Market: Highly competitive across retail and commercial segments; managing higher cost of funds by shifting from wholesale/brokered funding to client deposits.
• Loan Market: Competition noted as more intense on loan yields/pricing than deposit pricing; maintaining strict underwriting discipline and covenant standards.
• CRE Dynamics: Market conditions show population growth and housing affordability drives demand for multifamily products; pipeline remains robust despite rate sensitivity.
• M&A Environment: Management expects opportunistic M&A activity, focusing on strategic fits with favorable valuations; recently closed the Basis acquisition as a prime example.

Risks and Challenges:

• Interest Rate Risk: NIM compression due to rising funding costs in the near term; potential for asset-yield stagnation if loan growth slows.
• Credit Risk: Potential slowdown in loan growth and increased competition in CRE; however, credit metrics remain strong.
• Integration Risk: Early-stage integration costs and scaling expenses associated with the Multifamily platform acquisition.
• AOCI Volatility: Unrealized losses in Available-for-Sale (AFS) portfolio remain sensitive to interest rate movements, though hedging mitigates some impact.
• Competitive Disruption: Influx of non-regional banks into key markets (e.g., Texas) creating pricing pressure.

Management Commentary and Tone:

• Tone: Management expressed confidence in strategic progress, emphasizing "disciplined underwriting," "prudent expense management," and "long-term relationship building."
• Strategic Focus: Harris Simmons highlighted the "Strategic Six" products as foundational for sustainable growth and low-cost deposit acquisition.
• Capital Allocation: Ryan Richards indicated strong capital generation potential; buyback pace could increase in 2027 if rates rise and operating environment improves, subject to board/regulatory approval.
• Credit Outlook: Derek Stewart and Scott McLean emphasized strong credit performance, with charge-offs at 2 bps, countering concerns about economic headwinds.

Analyst Questions and Answers:

• NII & Deposit Beta: Assumed 40 bps deposit cost increase (beta in upper 40s to low 50s); NII growth driven by rate hikes and asset remix.
• NIM Trajectory: Confirmed mid-3% NIM goal for 2027 contingent on deposit mix and rate environment.
• CRE Growth: Pipeline is strong; slowdown is strategic due to competitiveness and rate environment rather than credit deterioration.
• Wealth Management: Penetration is low; incentive comp changes have aligned teams for future growth; no specific short-term targets given for hires.
• Hedging: Added short-term receive-fixed swaps (duration <2 years) to protect against rate reversals; rolling hedges continuously.
• Capital Deployment: Buybacks may resume or increase in 2027; M&A remains opportunistic with focus on valuation and strategic fit.
• Texas Market: Disruption from competitor acquisitions is viewed as a net positive opportunity for Zions' Texas franchise.

Other Key Points:

• Accounting Change: Reported cost of deposits increased by ~3 bps due to new presentation of interest on cash collateral associated with derivatives, which does not affect overall cost of funds.
• Broker Deposits: Targeting further reduction; ~$2.2 billion in broker deposits maturing in Q4, to be replaced by client-funded deposits.
• FX and Capital Markets: Capital markets revenue includes minimal investment banking this quarter due to lumpy M&A advisory timing; FX and syndication remain steady.
• Slide References: Specific data points regarding loan growth by affiliate (e.g., Amogee softness in Q3 offset by Q2 strength) and detailed hedging sensitivity were discussed in Q&A.