Greetings. Welcome to Zions Bancorp Fourth Quarter Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to Shannon Drage, Senior Director of Investor Relations. Thank you, and you may begin.

Thank you, Bonn, and good evening, everyone. Welcome to our conference call to discuss the fourth quarter and full year earnings for 2025. My name is Shannon Drage, Senior Director of Investor Relations. I would like to remind you that during this call, we will be making forward-looking statements. Please note that actual results may differ materially, and we encourage you to review the disclaimer in the press release or Slide 2 of the presentation dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release as well as the presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Ryan Richards, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Steward, Chief Credit Officer; and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session, and the call is scheduled for 1 hour. I'll now turn the time over to Harris Simmons.

Thanks very much, Shannon, and good evening to all of you. You've seen on Slide 3, our fourth quarter results reflected continued progress and steady improvement across a variety of key financial metrics. Earnings of $262 million were up meaningfully, 19% from the prior quarter and 31% from a year ago, driven by stronger revenues and notably lower provision for credit losses. Our net interest margin expanded for the eighth consecutive quarter to 3.31%, benefiting from an improved funding mix as customer deposit initiatives reduced our reliance on short-term borrowings. Customer deposits grew at a healthy pace, up 9% annualized. Average loans were essentially flat compared with last quarter, reflecting the payoffs we saw at the end of last quarter, though period-end balances increased by $615 million on solid production. Credit quality was strong with net charge-offs of just 5 basis points annualized of total loans. This quarter's results also included a $15 million donation to our charitable foundation to be spent down over the next 3 years to make charitable donations that we expect would otherwise have been nondeductible for tax purposes as a result of the recent tax law changes. Turning to Slide 4. Full year results were similarly improved relative to the prior year. Earnings grew 21% and net interest margin expanded by 21 basis points. Adjusted PPNR increased 12%. And when excluding the charitable contribution, we achieved over 300 basis points of positive operating leverage. After several years of industry-wide disruption from the 2020 pandemic to the 2023 regional bank crisis and stress in the commercial real estate sector, we're pleased with the resilience of our performance, particularly the stability in credit outcomes throughout that period. Tangible book value per share increased 21% this year, the third straight year of growth greater than 20%, and we believe that we are nearing the point where we'll be able to increase capital distributions while continuing to further strengthen capital. On Slide 5, diluted earnings per share was $1.76, up from $1.48 last quarter and $1.34 a year ago. This quarter's figure includes an $0.08 per share headwind from the charitable contribution, offset by a positive $0.11 per share combined impact from the reversal of the FDIC special assessment and net gains in our SBIC portfolio. As shown on Slide 6, adjusted PPNR of $331 million was down 6% sequentially and up 6% year-over-year. When further adjusted for the aforementioned charitable contribution, it was down 2% versus last quarter and up 11% versus the year ago quarter. With that high-level overview, I'm going to turn the time over to our Chief Financial Officer, Ryan Richards, for additional details related to our performance.

Thank you, Harris, and good evening to all. Beginning on Slide 7, you will see the 5-quarter trend for net interest income and net interest margin. Net interest income increased by $56 million or 9% relative to the fourth quarter of 2024 and increased by $11 million relative to the prior quarter. For the second consecutive quarter, growth in average customer deposits in excess of loan growth aided our ability to improve funding mix and reduce overall funding costs. As a result, net interest margin expanded for the eighth consecutive quarter to 3.31%. Our outlook for net interest income for the full year of 2026 is moderately increasing relative to the full year of 2025, supported by favorable earning asset and interest-bearing liability remix in addition to growth in loans and deposits. Our guidance assumes 225 basis point cuts to the Fed funds rate occurring in June and September of this year. Slide 8 presents additional details on changes in the net interest margin. The linked quarter waterfall chart on the left outlines changes in both rate and volume for key components of the NIM. The net interest margin expanded by 3 basis points sequentially as improved funding mix and lower borrowing costs offset reductions in asset yields. Against the year-ago quarter, the right-hand chart on this slide presents the 26 basis point improvement in the net interest margin, which benefited from the improved cost of deposits. Moving to noninterest income and revenue on Slide 9. Presented on the left in the darker blue bars, customer-related noninterest income was $177 million for the quarter versus $163 million in the prior period and $176 million 1 year ago. You'll recall that last quarter's customer-related noninterest income results included an $11 million impact from the net CVA loss, primarily driven by an update in our valuation methodology. Adjusted customer-related noninterest income, which excludes net CVA, was $175 million for the quarter, representing a new record quarter for the company. This increased $1 million versus the prior quarter and $2 million versus the year-ago quarter. The chart on the right side of this page presents both total revenue and adjusted revenue for the most recent 5 quarters, which were impacted by the factors previously noted for net interest income and customer-related fee income. While not presented on this page, it is notable that on a full-year basis, capital markets fees, excluding net CVA, increased 25% compared to the full year 2024, driven by higher customer swaps, investment banking, and loan syndication fee revenues. As was mentioned in prior earnings calls, we set an aspirational goal to double capital markets fees when Zions Capital Markets was formally launched in 2020, consolidating existing product offerings under new executive leadership with a mandate to invest in additional capabilities. We have accomplished that goal and see continued opportunity for outside growth in this business. Our outlook for customer-related fee income for the full year 2026 is moderately increasing relative to the full year 2025. We currently expect that we will be at the top end of that guide. Growth will continue to be led by capital markets, followed by loan-related fees with broad-based growth in the remaining categories from increased activity. Slide 10 presents adjusted noninterest expense in the lighter blue bars. Adjusted expenses of $548 million increased by $28 million or 5% versus the prior quarter and increased 8% versus the year-ago quarter. As presented here, adjusted noninterest expense includes the aforementioned $15 million charitable donation. When further adjusting for the donation, expenses were up 2% versus the prior quarter and up 5% versus the year-ago quarter. Expense increases for the quarter include increased marketing and business development expenses, higher costs associated with application software licensing and maintenance costs and normalization of legal fees after an approximate $2 million reimbursement of attorney fees last quarter. We expect to continue to manage expenses prudently while investing in revenue generation to support growth. Our outlook for adjusted noninterest expense for the full year 2026 is moderately increasing relative to the full year of 2025. The expense outlook considers increased marketing-related costs, continued investments in revenue-generating people and business lines, and increases in contractual technology costs. We continue to expect positive operating leverage in 2026 that we currently estimate around 100 to 150 basis points. Slide 11 presents the 5-quarter trend in average loans and deposits. Average loans were flat over the previous quarter and increased 2.5% over the year-ago period. Average loans increased by $615 million sequentially with strong commercial growth in our Texas, California, and Pacific Northwest markets. Total loan yields decreased 15 basis points sequentially. Our outlook for period-end loan balances for the full year of 2026 is moderately increasing relative to the full year of 2025 and assumes growth will be led by commercial loans, primarily in the C&I and owner-occupied subcategories with additional growth from commercial real estate loans. Average deposit balances are presented on the right side of the slide. Relative to the prior quarter, total average deposits increased 2.3%. Average noninterest-bearing deposits grew $1.7 billion or 6% compared to the prior quarter. This was partially as a result of the approximate $1 billion of migration into a new customer interest-bearing product at the end of the last quarter, which is now being fully reflected in average balances, but also represents the success our bankers have had this quarter in executing on deposit gathering initiatives. The cost of total deposits declined by 11 basis points sequentially to 1.56%, aided somewhat by the lag effect from the time deposit repricing from benchmark rate cuts in the latter part of 2025. Slide 12 provides additional details on funding sources and total funding costs. Presented on the left are period-end deposit balances, which grew by $766 million versus the prior quarter, enabling us to reduce higher-cost short-term borrowings, which declined by $653 million or 17% during the quarter. As seen on the chart on the right, our total funding costs declined by 16 basis points during the quarter to 1.76%. The trending in our securities and money market investment portfolios over the last 5 quarters is presented on Slide 13. Maturities, principal amortizations, and prepayment-related cash flows from our securities portfolio were $554 million during the quarter or $288 million when considered net of reinvestment. The paydown and reinvestment of lower-yielding securities continues to contribute to the favorable remix of our earning assets. The duration of our investment securities portfolio, which is a measure of price sensitivity to changes in interest rates is estimated at 3.8 years. Credit quality is presented on Slide 14. Realized net charge-offs in the portfolio were $1 million this quarter or $7 million, which represents 5 basis points annualized. Nonperforming assets remained relatively low at 52 basis points of loans and other real estate owned compared to 54 basis points in the prior quarter. Classified loan balances declined sequentially by $35 million, driven by a $132 million reduction in CRE, offset in part by a $92 million increase in C&I classified loans. We expect the CRE classified balances will continue to decline going forward through payoffs and upgrades. During the fourth quarter, we reported a $6 million provision for credit losses, which when combined with our net charge-offs, reduced the allowance for credit losses by $1 million relative to the prior quarter. The allowance for credit losses as a percentage of loans declined 1 basis point to 1.19% and the loan loss allowance coverage with respect to nonaccrual loans increased to 215%. Slide 15 provides an overview of the $13.4 billion CRE portfolio, which represents 22% of loan balances. Notably, this portfolio continues to maintain low levels of nonaccruals and delinquencies. The portfolio is granular and well diversified by property type and location with its growth carefully managed for over a decade through disciplined concentration limits. As it continues to be of interest, we have included additional details on certain CRE portfolios in the appendix of this presentation. Our loss-absorbing capital position is shown on Slide 16. The common equity Tier 1 ratio for the quarter was 11.5%. This, when combined with the allowance for credit losses, compares well to our risk profile as reflected in performance for loan losses. We expect our common equity, both from a regulatory and GAAP perspective, to continue increasing organically through earnings and the AOCI improvement will continue through unrealized loss accretion in the securities portfolio as individual securities pay down and mature. Importantly, our organic earnings growth when coupled with AOCI unrealized loss accretion has enabled us to grow tangible book value per share by 21% versus the prior year. And as Harris noted earlier, is our third year of tangible book value growth in excess of 20%. We believe that we are nearing a position to increase capital distributions while continuing to invest in our franchise to support profitable growth. Slide 17 summarizes the financial outlook slide over the course of our prepared remarks for the full year of 2026 as compared to the full year of 2025. Our outlook represents our best estimate of financial performance based upon current information.

This concludes our prepared remarks. Please let the operator open the line for questions.

Our first question comes from Manan Gosalia with Morgan Stanley.

I wanted to start with a clarification question regarding the expense guidance. What is the basis for the moderately increasing guidance? I noticed that in the earnings release, there's an adjusted noninterest expense number of $2.1 billion, specifically $2.122 billion. Is that the correct base? Or do we also need to exclude the charitable contribution for this quarter?

Yes. I would ask you to think about the base stripping out the charitable contribution for this quarter and then rolling forward into next year, thinking about really that activity relates to, as Harris mentioned, the 3 years forward look about things that might otherwise be tax-deductible with the spend outlay at that time. So that's probably where I would anchor you.

Got it. So basically take that $2.122 billion number and then strip out the charitable contribution from that and then to moderately increasing off of that.

Yes, that's certainly how I think about our core result, yes.

Got it. All right. Perfect. And then just a broader question on expenses. You guys operate in a pretty attractive footprint, and we've seen a lot of larger banks come out and highlight growth in branches in new markets and including some of yours. Are you seeing any increased competition in your markets? And if you are, is that the driver behind some of the increased marketing and tech spend that you called out in the deck?

I think we have faced new competition for as long as I can remember, especially during favorable times, and these times are reasonably good. Sometimes this competition diminishes when times get tough. However, that is not the primary reason for our increased focus on marketing spend. We are refreshing some of our products and believe that after investing nearly a decade in internal reengineering and resolving many foundational issues, we are now positioned to grow at a better pace than we have over the past decade. We intend to approach this growth prudently and thoughtfully, as we value the credit culture within the company. We are determined to spend more on growth initiatives, which is evident from our actions over the past year and will continue in the upcoming year. This increase in spending is not directly tied to any specific new competitor, even though there are certainly new entrants. We operate in markets that are quite appealing, and while that is positive, it also attracts potential competitors who are not yet present. This is always part of the overall narrative.

Our next question comes from Dave Rochester with Cantor Fitzgerald.

Just want to start on the NII outlook for '26. I appreciate all the color on the rate cuts. I was just wondering what you're assuming for the funding of loan growth if you're assuming that securities runoff continues and you fill in the rest with deposit growth. And then the magnitude of any kind of funding remix out of broker deposits or out of wholesale funding that you're assuming within that guide. Any color on any of that would be great.

Thank you, Dave. I can provide some general insights. We usually don't break down deposit growth or offer specific guidance for it over the next year. However, we recognize the potential for adjustments on both sides of the balance sheet to impact the net interest income. We think there is still some capacity to expand our investment securities portfolio before we start to feel constrained in terms of liquidity stress testing and liquidity ratios. That said, it's possible that the pace of growth may not be as vigorous as it has been previously, and we might be nearing a point of tapering. Nonetheless, there's still potential for further transition from securities to loans and for reducing broker deposits or wholesale funding. We're dedicating significant effort to align with Harris' comments, reflecting on growth and what we envision for 2026. We have concrete plans to expand our deposit base, concentrating on granular deposit growth and investing in marketing initiatives to support this, with the goal of continuing to decrease our broker deposits, which have shown year-over-year success, as well as other short-term borrowings. While I can't provide a specific number due to various assumptions, this direction is certainly where we aim to be as an organization.

Great. Sounds good. I know we discussed in the last call the goal of reaching a 3.50% margin. We're currently just 19 basis points away from that. Looking ahead to 2026, do you think we can achieve this by the end of 2027?

I'm not going to put a time frame on it. It largely depends on what happens with interest rates. We will have a new Fed Chair and more developments in that area, so I'm hesitant to make a prediction. However, I've previously mentioned that I believe we are approaching a stable state. We've made significant progress, but there is still work to be done. I still think that, over the long term, the risk is leaning towards higher rates. We have decreased our asset sensitivity somewhat and are currently nearer to neutral, while remaining cautious about the potential for higher rates. I want to ensure that we can manage that effectively. In a scenario with moderate short-term rates and some slope to the curve, I believe that's where we can find ourselves. However, whether this occurs in the next seven or eight quarters is difficult to determine.

Our next question comes from John Pancari with Evercore ISI.

On the loan growth front, I appreciate the moderately increasing guide. Underneath that, could you help unpack it a little bit in terms of what type of dynamics you're seeing on the loan growth front? Are you seeing demand strengthen? Are you seeing some pull-through in terms of line utilization? And are any of these growth initiatives that you just discussed, Harris, in response to the question, is that banker hiring that in certain areas that can drive some of this growth?

Yes. We have hired some exceptional bankers, especially in California but also in other locations. Our primary focus is on small business lending, which is central to our growth strategy. These smaller businesses contribute significant deposits, and we believe our history, organizational structure, and team are well-suited for this kind of business. Over the past year, we have nearly doubled the number of SBA 7(a) loans we've issued, and we've seen about a 53% increase in loan amounts. I anticipate strong ongoing growth in this area. We are investing in training and marketing, with a strong emphasis not just on the SBA program but on small business banking overall. For me, watching the developments there is particularly important. A dollar of growth in this segment is often more valuable than a couple of dollars of growth in other areas. It's about quality over quantity. We aim to build a more productive balance sheet while serving more customers simultaneously. That's essentially how I view the situation.

John, this is Scott. I want to add that, like I mentioned last quarter, we expect growth mainly in commercial and industrial sectors and owner-occupied segments. We anticipate some growth in commercial real estate as well. Our goal has always been to grow commercial real estate at a slower pace compared to our overall portfolio growth. Although we've recently fallen short in achieving that, I believe we will start to see some growth in commercial real estate where there has been little before. Our municipal and energy sectors also hold significant upside potential, despite being somewhat stagnant. The current sentiment regarding commercial real estate, tariffs, and the economy has led to lower loan growth across the industry. However, as business sentiment improves, we are well positioned for the reasons Harris mentioned. Additionally, our outreach programs are more dynamic than ever. The advertising and marketing spend that Harris referred to represents a significant change that is highly targeted towards small and medium-sized businesses and focused on granular deposits, including the SBA initiative Harris highlighted.

I'd add one other thing that is if you look across the industry, a lot of the commercial loan growth has come out of increased exposure to the NDFI sector. And notwithstanding having stepped on a landmine in the fourth quarter, we have not been growing that portfolio and don't really intend to in any kind of meaningful way, any deliberate way. And so in a relative sense, that's actually kind of a headwind comparatively to peers. My hope is that we can actually make up for that again, in some of these areas we've been talking about, small business. We will have some CRE growth. And we'll probably see a little bit of municipal growth, but a lot of it will be commercial.

To emphasize what both Harris and Scott mentioned and to reference Dave's earlier question, the focus is not solely on the trade-off between securities, loans, broker deposits, or wholesale borrowing, but rather the composition of our loan portfolio identified by Harris and Scott, which will positively impact net interest income as we observe. Additionally, I did not address the impact of the terminated swap effect in my previous response. This has been a challenge for us, but it is gradually improving. As we look ahead to 2026, we anticipate approximately $29 million in headwinds from this issue, which is about half of what we faced in 2025 and is expected to contribute to a more favorable net interest income outcome in 2026.

Got it. All right. And then separately on capital, just wanted to get your updated thoughts on the potential timing of a return of share buybacks. I believe you had indicated you're kind of nearing the point where you could consider capital return and increase in it. I think your CET1 ratio, which you've been watching a little more closely, increased about 40 basis points this quarter and then your CET1 up 60 bps. And so both TCE and CET1 heading in the right direction. So curious what your updated thoughts are there.

I think it will probably happen this year, but not in the next quarter. In the second half, I expect that we will be in a position to start to accelerate capital returns. However, I am not going to provide a target amount at this time. Once we are ready, we will announce something, but I don't believe it is too far off.

Our next question comes from Chris McGratty with KBW.

Just following up on that question about the buyback. I know that during the banking issues in 2023, the rating agencies expressed significant concerns about capital levels. When you do announce or are preparing to announce the buyback, how important is that? And again, how do you view it in terms of tangible common equity versus CET1? How are you considering all the stakeholders?

It's clear that this is an important stakeholder for us, and we truly value the engagement we receive. I believe they have recognized that we have been in a rebuilding phase for quite some time. We're not indicating a major shift, but rather acknowledging that we are still on a trajectory to align our AOCI inclusive performance with that of our peers. The timing will determine if there is an opportunity to adjust the pace of this convergence. As Harris mentioned, the outcomes are still pending approval from the OCC and the Board. Nevertheless, we appreciate John's earlier recognition of the positive trends we've experienced, which are reflected in our statistics and our tangible book value growth—everything looks very promising. The headline figure is quite favorable, but we still rank lower than our peer group when considering AOCI. We remain committed to our path of increasing tangible book value; it’s just a matter of exploring any opportunities to expedite the process as we aim for convergence.

I think it's beneficial that a significant portion of this tangible common equity growth is secured and highly predictable. This should be important to rating agencies, as we believe time will play a role in this process. We plan to gradually integrate these changes. It won't be an abrupt shift, but we aim to continue building capital and are considering it in terms of CET1. We view it in a context where AOCI is factored in. From a regulatory standpoint, there doesn't seem to be any immediate changes ahead that would affect the current treatment of AOCI in capital. Therefore, we believe there's some flexibility available.

Great. And then the follow-up would be on the source of deposit growth. You may have touched on it, so I apologize. Ryan, about 5% noninterest-bearing growth in 2025, I hear you on the initiatives. Within your guide for '26, did I miss what are you assuming for NIB growth or NIB mix?

Yes. We don't typically guide on the deposit side of that, Chris. And certainly, we just try to roll it into our NII and how we see that holistically. But suffice to say, based upon the things that we're prioritizing for strategic initiatives that we certainly would expect to see growth across the noninterest-bearing dimension as well as interest-bearing deposits, trying to pull those whole relationships, net new relationships into the bank. So that's where that whole growth orientation you're hearing from us, not just this year, but going into last year, putting some marketing dollars and some real focus behind those campaigns. In terms of the refreshing, as Harris alluded to before, of our offerings, potential to bundle products that we think are really relevant for our clients and the like.

Our next question comes from Bernard Von Gizycki with Deutsche Bank.

Maybe just following up on noninterest-bearing deposits. I'm just curious that most of the growth there, the $1.1 billion year-over-year and then the decline $310 million sequentially. Was there growth from new customer acquisitions within the consumer gold account? And can you just share now that legacy account migration has now ended, how do you expect this to trend from what you've been hearing from the branches?

Yes, there has been growth. We've opened about 4,000 new accounts since our relaunch a few months ago, and I expect that number to increase in 2026. The average balance is around $10,000 per account, while established accounts average about three times that amount. This suggests we're attracting a clientele that could lead to significant balances. The total deposit relationship across nearly 50,000 accounts averages around $125,000 per customer, making this group very appealing to focus on. However, it's important to note that noninterest-bearing accounts are influenced by interest rates, and a significant portion of our commercial loans supports services through account analysis. There are various factors that can affect these figures. We aim to build a solid base of accounts that are smaller but insured, and not insignificant, as they represent good business. This is our objective moving forward.

And I would just add that the number Harris referenced on new accounts, we're really just kicking this campaign off. We were piloting it in the second half of '25 and but it's now rolling out with greatly enhanced marketing across the entire company.

I understand, thank you. For my follow-up, I recall you previously mentioned anticipating 2 to 3 basis points of fixed-rate asset repricing each quarter. You also noted two rate cuts expected in 2026. Could you provide an update on that assumption? Additionally, if the Federal Reserve pauses on rate cuts, how would that affect your estimate, if at all?

Yes. Thanks, Bernard. I mean what we're currently seeing now, obviously, with the changes we had later last year, we're not seeing quite that level in terms of fixed loan repricing impacts on our earning asset yields. Right now, we would say is that around 1 basis point as opposed to where we were previously. And then with additional cuts in the future, you can imagine that it would erode that value opportunity for us.

Our next question comes from Ken Usdin with Autonomous Research.

I was curious about the topic of tailoring, which has been discussed in previous calls. Given the ongoing conversations from regulators regarding the possibility of indexing levels or fully raising the bar, are you considering any changes in your approach towards the asset base, which is still around $90 billion? Specifically, how do you view future growth investments and potential acquisitions as we anticipate a more formal change than what we've experienced in recent years?

Yes, Ken, as we've mentioned periodically over the last few years, the threshold of $100 billion doesn't pose any significant threat to us. We were actually the smallest systemically important financial institution when Dodd-Frank was passed in 2011. We were subject to the same scrutiny as larger banks like JPMorgan Chase. We developed the necessary capabilities and models for credit stress testing, balance sheet stress testing, and liquidity management, along with a robust risk management infrastructure. We have no intention of dismantling that because it has proven valuable. Although some aspects were taken to extremes and certain documentation was burdensome and costly, we've retained these capabilities, which I believe strengthen our company. Crossing the $100 billion mark won't be much of a challenge, akin to crossing $80 billion, which was almost uneventful. This threshold doesn’t inhibit our thoughts on potential deals; we only consider acquisitions if they are genuinely attractive. As of now, we aren't expecting anything compelling, and we need to improve our valuation. If an exceptional opportunity arises, we'll certainly evaluate it, but we won't confine our thinking to specific thresholds. Our approach should reflect good long-term business ownership, and the $100 billion threshold isn't a deciding factor in that regard.

Understood. Ryan, I have a follow-up regarding the point about operating leverage. Is it correct to approach it this way? You mentioned the core base and then exclude the charitable contribution. Is that the base when discussing the 100 to 150 basis points of operating leverage?

Yes, that's correct.

And just the range, it's great to hear you guys focusing to the $100 billion, $150 billion. But what would be the difference on your expense growth? Would it just be like how revenues come out and you have some flex to triangulate up and down? Sorry for that extra one.

Yes. It's important to acknowledge that if the revenue environment shifts, we need to reevaluate our approach to expenses. I included this in both my written and spoken remarks because it wasn't evident from our forward guidance whether there was positive operating leverage. We definitely believe that current conditions support this view. If you examine our results over time, we've consistently driven customer fee growth at a compound annual growth rate of about 4%, which is what we also achieved last year. We see potential for even better performance in this area moving forward, leveraging the momentum we've built in our businesses. This will be beneficial in driving leverage. However, we will remain vigilant regarding expenses throughout the year. As Harris has mentioned, we plan to manage this organization with a long-term perspective, investing in growth initiatives even when they don't immediately yield returns. Nevertheless, we've seen solid returns from our investments in recent years. This encapsulates our current thinking.

Our next question comes from David Smith with Truist.

On credit, you highlighted an expectation for CRE classified to continue to decline. There had been an uptick in C&I classified offsetting some of the CRE decline we had this past quarter. Is there anything chunky in that $92 million C&I increase this quarter in terms of like a few big particular names? And just as a follow-up, would you also expect general stability in the C&I classified size of the portfolio? Or would there be a bias towards an increase or a decrease as you see things today?

Sure, David. This is Derek. Let me answer the second question first. It's hard to say exactly where the C&I downgrades may come from or improvement. It just generally depends on the economy. We do see CRE improving throughout the year. We have a good line of sight on that. We just continue to see it taking a little longer for some companies to perform. One thing I will say because we're not concerned with losses, I think we're going to try to retain a lot of the loans. We may be willing to carry some of the criticized and classified real estate loans a little bit longer just because they're on their way to performance and an upgrade. As far as the C&I downgrades, I wouldn't say there's anything chunky in there. It's pretty broadly distributed across industries. And it's something we're watching. Again, it depends on where the economy goes. I would point out that while we've seen the uptick this quarter in the C&I classifieds, we're actually down since year-end 2024 for C&I classifieds. So it's not jumping out as concern at this point, but something that we're paying attention to.

Our next question comes from Anthony Elian with JPMorgan.

A follow-up on operating leverage. You gave us the base for expenses backing out the foundation contribution. But just to clarify the base for revenue, Ryan, does the base for fee income exclude the adjusted noncustomer fees? I think that was $44 million you have in the back of the press release.

Yes, can you say that one more time?

Yes. I'm just curious if you can give us the base for fee income, right? You have some items you back out on Slide 5 and the back of the press release. So if you can give us the base to use for operating leverage, that would be great.

I think the customer fee income.

It's hard to predict year-to-year what we're going to get on the security gains and losses. So that's just kind of how we think about core expenses.

Yes.

Okay. For my follow-up, it seems that there's a greater focus on growth initiatives this year, including hiring, which I really appreciate. However, you didn't change the expense outlook. I'm curious if you can provide a directional range for expenses within your guidance of moderately increasing.

Yes. About a year ago, we were in a phase of maintaining tight controls, and we slowly started to allow some increases to support our growth agenda. While I'm not pinpointing a specific figure, we typically discuss moderate increases as being in the mid-single digits range. I would suggest we aim for something in that ballpark. Our goal is to engage in strategic initiatives, and if we are successful in achieving our growth targets, things should look and feel different. The figures Scott mentioned may not be immediately clear, but we have significant ambitions for driving commercial loan growth and increasing our CRE exposure. We also previously discussed our strategy regarding 1 to 4 family residential loans, shifting towards a held-for-sale approach, which we believe could contribute positively this year. If that doesn't materialize, we still expect to present solid loan numbers.

On the expense guide, I want to mention that there are approximately $40 million in savings initiatives that help maintain our current expense growth rate. This approach is similar to last year, but with some added improvement. We are focusing on ongoing efficiency gains and optimization, particularly through AI and the implementation of new technologies, as well as outsourcing, which allows us to manage costs effectively. We have several strategies to leverage, which have consistently contributed to keeping our expenses down over the years. This is a continuation of our established practices.

Our next question comes from Janet Lee with TD Cowen.

For clarification on NIM. So if I look at your earning asset yields in the fourth quarter, it looks like lower rates had an impact on your earning asset yields declining about 15 basis points. And you talked about 1 basis point of fixed-rate asset repricing lift. So if I assume 2 to 3 rate cuts in 2026, is it fair to say earning asset yields are declining through 2026 and the NIM trajectory is really dependent on the shape of the yield curve and what you can do on the deposit front?

Yes. I believe those are all valid points, and our deposit production will significantly influence our performance on net interest margin. Our year-over-year achievements have allowed us to reduce our funding costs more significantly than what we observe on the asset side, thanks to some beneficial adjustments that counterbalance the effects of changing benchmark rates. We haven't provided guidance yet, and it seems we can't have this call without mentioning both current and potential future factors. We do include relevant materials at the end of our presentation. As mentioned by Harris earlier, we've slightly lowered some of our asset sensitivity measures through hedging actions we've taken to prepare for possible near-term rate cuts. Our asset sensitivity suggests that there are still opportunities for adjustments on a delayed basis, particularly for fixed assets that haven't yet reached market pricing. Approximately 60% of our term deposits are set to reprice in the first quarter of 2026. However, as a group that remains overall asset sensitive, we believe that, looking at the forward curve, we could achieve a more favorable outcome in the next year despite the possibility of two additional rate cuts. This outlook doesn't account for our potential for loan growth and an adaptable balance sheet, the composition of our loans, and our strategy for reinvesting cash flows from securities into loans and other productive uses. There are many factors at play, and I hope this provides some clarity on our expectations for net interest income a year from now.

That was very helpful. Clearly, you've made good progress in enhancing your capital levels, including the AOCI accretion that has occurred over the past years. Could you provide an update on your M&A stance, especially since you seem more open to buybacks in the near to intermediate term?

Well, I think I mentioned this a few minutes ago. Our position is that we don't have a specific stance. We're not actively seeking deals. If an opportunity arises that makes a lot of sense, we might be interested. However, I don't foresee us making any significant acquisitions at this time, which would be surprising to me. It's simply not a primary focus of our daily operations. I've been careful not to say that we would never pursue a deal, but we’re not looking to make acquisitions just to reach a certain size. We only consider opportunities that are financially attractive and align with our culture. There are certain criteria that must be met before I would be particularly interested.

We have another question from Manan Gosalia with Morgan Stanley.

I think you mentioned in the prepared remarks that you could come in at the top end of the guide on customer-related fees. Can you just talk about what the drivers are there?

Yes. Manan, this is Scott. We believe that our positive momentum across various customer fee product areas will carry into the new year. Additionally, the extra advertising for these products gives us a favorable outlook on customer fee income. Instead of just capital markets driving the growth in our fee income, we are encouraged by the performance across nearly all of our fee income businesses. This presents a somewhat different narrative and guidance.

Relative to what you've said before. Got it.

Our next question comes from Jon Arfstrom with RBC Capital.

A couple of follow-ups. Scott, one for you. When you look in the earnings release, the FTEs are down the last couple of quarters. And you might have just touched on it a few minutes ago, but can you talk a little bit more about what you're doing in terms of AI and tech and just the general FTE outlook? Are you seeing real impacts and that's what's showing up in the FTE count? Or is it...

Thank you for your question, Jon. A significant moment for us was August, particularly in the second quarter of 2019, when we had approximately 10,300 employees. We're currently below 9,300 and anticipate that this number will continue to decrease over the next few years. In the short term, we are re-engaging with our outsourcing strategy alongside three strong partners with whom we collaborate in various ways. This strategy is gaining traction. About a year ago, we were noticeably behind our peers, most of whom outsource between 10% to 15% of their stated FTE base, while we were around 3%. We are now fully capitalizing on an opportunity that has always existed but feel more optimistic and confident about it. Expect to see progress in this area. Regarding AI, we have been employing it for quite some time in areas like fraud detection, client authentication, product recommendations, and processing unstructured documents. The emergence of new ideas has the potential to eliminate unnecessary human interactions, reduce duplicate data entry, and enhance our operations significantly. We are transitioning from an exploratory phase over the last year and a half to concentrating on a few key projects where we can achieve the most impact in streamlining our end-to-end processes. Automation, AI, and outsourcing will play substantial roles in our progress.

Okay. And then just one more on loan growth. Just the improved expectations, are the borrowers more optimistic? Or is it you becoming more comfortable or a combination of both? And then I'm just also curious kind of what's going on at Commerce Bank. The growth numbers were pretty strong there, if you could touch on that.

I’m glad to start off. I believe that borrowers, including business owners and CEOs, are still in a similar situation as in the past few years. There are concerns within the commercial real estate sector, issues related to tariffs, and general economic uncertainty that contribute to their hesitance. That’s one aspect. On the other hand, we are quite optimistic about the steps we are taking to grow, which we've discussed during this call.

I'd say Commerce Bank, their relative size can produce more volatility probably in terms of growth numbers than you'd see in other parts of the company. So I don't think there's anything that's probably necessarily trend there.

This now concludes our question-and-answer session. I would like to turn the call back over to Shannon Drage for closing comments.

Thank you, Bonn, and thanks, everyone, for joining us tonight. We appreciate your interest in Zions Bancorporation. If you have additional questions, please contact us at the e-mail or phone number listed on our website, and we look forward to connecting with you throughout the coming months. This concludes our call.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.