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Operator: Good morning, ladies and gentlemen. My name is Kevin, and I'm your conference facilitator today. I'd like to welcome everyone to Cleveland-Cliffs First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's prepared remarks, there will be a question-and-answer session. The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the safe harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Form 10-K and 10-Q and news releases filed with the SEC, which are available on the company website. Today's conference call is also available and being broadcast at clevelandcliffs.com. At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I'd like to introduce Lorenzo Goncalves, Chairman, President and Chief Executive Officer. Lourenco Goncalves: Thank you, Kevin, and good morning, everyone. The first quarter of 2026 was the beginning of a sustained improvement progression that will continue through the rest of the year. While Q1 results could be better and they would be better. if not for a couple of one-timers, we can see the clear signs of a positive trend for me. Among these one-timers, the impact of the spiking on energy cost was the most relevant to Q1 results. Now to the good news. Our order book is full and the automotive OEMs are booking more and more steel from Cliffs. Production schedules are tight and lead times have moved out. Historically, Pricing changes took about a month to flow through our realized numbers. Today, the lag is closer to 2 months. In practical terms, -- that means the pricing strength visible in the market today will increasingly show up in our results as we move through the year, quarter by quarter. That combination, strong backlogs, disciplined production and visibility is what a healthy steel market looks like. The extended lead times allow us to optimize production schedules in our mills, improving our overall efficiency, productivity and costs. This market strength is driven by what is happening on the trade front, steel imports into the United States are at their lowest levels, since 2009. By now, it's clear that Section 232 works, the melted and poured mandate works and the enforcement works. Along those lines, we are very encouraged by the recent changes in how derivative product tariffs are being enforced. Distribution transformers were added, which is exactly the right outcome. The Trump administration has given the domestic steel industry what we needed and have been asking for. Union jobs are being protected. -- domestic supply chains are more resilient and mills are running at higher utilization with real predictability. The 1 piece still missing is Canada. There's a robust domestic market in Canada for our Canadian subsidiary, Stelco to sell steel into, but the Canadian market is still oversupplied with steel from countries that are no longer able to dump their excess capacity into the United States. Because of that, they dump steel in Canada. That said, we are confident that Canada will ultimately get to the right place and enhance its own national security defenses against the negative impact of foreign steel causing the destruction of Canadian companies. We truly believe the Canadian government is honest about defending Canadian jobs in Canadian steel workers. We fully expect that Fortress North America can be and will be implemented by Canada because that's totally within their own power. Canada does not depend on anyone else to do so and Canadian jobs are the ones at stake. The national security base for steel tariffs is being validated in real time. The war activity in Iran has disrupted global freight lanes, driven up energy prices and destabilized metal supply chains. Imported steel is now not only subject to tariffs, it is structurally more expensive due to transportation costs, energy volatility and geopolitical risk. And while this global uncertainty is exposing weaknesses elsewhere, it is strengthening the position of domestic steel producers like Cleveland-Cliffs. Nowhere is that more evident than in aluminum. The aluminum industry has been hit repeatedly, fares power shortages, curtailments, geopolitical disruption and customers have taken notice of all that. Automotive OEMs are prioritizing supply certainty, total cost and safety. Our Cliffs Steel delivers all of that without the fragility embedded in aluminum supply chains. In my long career in this business, I have never seen so much momentum and substituting aluminum with steel. And automotive is not the only place, where the shift from aluminum to steel is occurring. Building products, appliances and truck trailer sectors have been recently gravitating toward more steel use as well. As we advance the use of our Cliffs steel, being formed in equipment previously utilized exclusive for aluminum, Cliffs has demonstrated to our clients with real-life results, the most potential benefit to market share gains from aluminum. We are also pleased to inform all of our stakeholders that in February, Cleveland-Cliffs received from our clients, Toyota, the Toyota Quality Excellence Award. Toyota does not hand out quality excellence awards lightly. Their standards are amongst the strictest in the world winning that award is confirmation that our processes, consistency, execution and our overall quality are at the highest level for Toyota's high standards. That strength has drawn attention from companies outside the United States. When we last spoke, we expected to achieve during the second quarter, a mutually satisfactory transaction with POSCO in accordance with the memorandum of understanding signed by both companies last year. This goal remains achievable, but the currency disruption in the Middle East and its impact in the country of South Korea have not helped accelerates the conclusion of our ongoing discussions. That said, our engagement with Post is active, and we still believe a deal can be completed within this time frame or slight later. Our Department of Energy-funded projects, we -- on this side, we continue to make solid progress. The Butler Works electrical steel expansion project is moving along as planned and remains on schedule for 2028 completion. Similarly, our Middletown Works project has received a clear affirmation that the project will proceed once the updated scope is finally approved, and we are now in the final stages of completing that work. The revised scope of the project reflects a modern blast furnace configuration that position in Middletown among the most energy efficient in the world. Taken together, the Butler and Middleton projects underscore our disciplined approach to modernization, investing in critical infrastructure in a way that strength domestic still making improves efficiency and supports long-term competitiveness. At the same time, we are continuing the footprint optimization actions we began last year. At Burns Harbor, we are idling our smaller plate mill as we have successfully been able to consolidate all capabilities of the 110-inch mill into the 160-inch mill. This removes an inefficient line, improved utilization at the efficient 160-inch mill and strengthen our cost performance without sacrificing any capability. We are also idling the Gary plate finishing line, which is no longer needed. There will be no loss in overall steel production or layoffs, as we will backfill those roles in areas where we have seen rate attrition. We expect that these operational changes, coupled with the positive momentum, we have been currently seen in the plate market should enhance our earnings from the plate business. On rare earth, we continue to analyze our potential on these critical minerals. That said, economics hedge on domestic refinement capability. And today, that infrastructure is extremely limited in the United States. Refinement is capital-intensive and not something we intend to pursue ourselves. If and when, viable domestic refinement infrastructure becomes available either through government-supported projects or third-party investments, we see ourselves well positioned to take advantage of the opportunity. We have also partnered with a leading and prominent AI provider to help us take a meaningful step forward in how we run the interface between operations and commercial, particularly by embedding AI into our production planning and order entry processes. Their platform allows us to use machine learning models across our internal data to anticipate constraints optimizing sequencing and making better decisions in real time rather than after the fact. Our people are good, but it's impossible to perfect these processes with humans running Excel spreadsheets. This initiative will ultimately move us from human experience-driven planning toward a new and enhanced AI-assisted decision-making system that scales with the complexity of our operations. We expect to make a full announcement on our AI initiative, including the name of our partner in the next few weeks. One important milestone we will navigate in the coming months is the renegotiation of our labor agreement with United Steelworkers. Our employers are the backbone of this company and their skills, commitment and pride in what they produce are critical to our success. In our evolving and increasing in capital-intensive industry, we must ensure that the structure of our labor agreement supports competitiveness, flexibility and long-term sustainability. We approach these discussions with respect and realism with the goal of reaching an agreement that rewards our workforce, while strengthening the company's ability to invest growth and remain a strong employer for the kings to come. This process represents a meaningful opportunity for both Cleveland-Cliffs management team and our union workforce to demonstrate the depth and the strength of our partnership and we will not disappoint anyone. With that, I'll turn it over to our CFO, Celso Gonsalves, to go over our financial results. Celso Goncalves: Thank you. Good morning, everyone. Our adjusted EBITDA in the quarter was $95 million, a $274 million increase from a year ago due primarily to increased pricing. Starting with the top line. First quarter shipments totaled just over 4.1 million tons, which represents a recovery of more than 300,000 tons sequentially. That improvement was driven by better demand conditions across spot and trade channels and by a more stable operating cadence coming out of the fourth quarter. We were still impacted by weather-related disruptions, but volume strengthened as the quarter progressed. Shipments should increase further into Q2 as this trend continues. That volume recovery is critical because of the fixed cost nature of our business. Every incremental ton we produce and ship has a disproportionate impact on margins. The operating leverage embedded in integrated steelmaking remains substantial. Pricing also moved in the right direction. Average selling prices increased by $68 per ton from a year ago and sequentially by $55 per ton during the quarter, reflecting improving market conditions and better automotive pool. This came in slightly below our original estimate as contractual lags were longer than anticipated based on customers ordering at MAX levels. As mentioned earlier by Lorenzo, what used to be roughly a 1-month realization lag has effectively extended to closer to 2 months as our order book has filled and schedules have stretched. That means price strength visible today will show up more fully in Q2 and Q3 results. In the U.S., about 45% of our sales are linked to the commodity HRC price. The remainder are under fixed price arrangements like in automotive or linked to other indices like we have with plate. In Canada, effectively all shipments are sold on a spot price basis, but that price has completely disconnected with the U.S. price. Historically, pricing in Canada was effectively in line with pricing in the U.S. But in today's market, the Canadian selling price is at a 40% discount to U.S. pricing. This is still margin positive for Stelco, but well below what this entity would have generated historically in this type of pricing environment. On the cost side, the most visible pressure in the quarter came from energy and the impact of the extreme cold weather we felt here in the Midwest during the winter. We lock in most of our natural gas purchases for the following month, 3 days before the start of each month. The day that gas was locked for the month of February was the highest price in 3 years and it very shortly thereafter came back down to historical levels. This piece of the energy spike was known at the time of our last call and was partially offset by hedges, but we also felt an immense impact from the run-up in electricity and industrial gases. We have 3 EAF facilities and 2 integrated facilities in the unregulated states of Ohio and Pennsylvania. And when prices jump like they did during the cold weather months, we feel a direct impact. All factors considered, the energy spike drove an $80 million negative impact to EBITDA in Q1 relative to historical expectations. Since then, natural gas and electricity prices have normalized, but we've seen other cost pressures emerge. The cost of fuel, for example, has impacted mining costs at our iron ore pelletizing operations, and scrap has continued to grind higher as well. Combining these with the impacts of some scheduled outages in Q2, our Q2 cost should tick up another $15 per ton higher before falling meaningfully in the back half of the year. We will update our cost expectations on a quarterly basis. All of our other full year expectations, including volume, CapEx and SG&A remain in line with prior guidance. SG&A has been a clear area of success for us, while earnings have been under pressure. Even after acquiring Stelco in the fourth quarter of 2024, which naturally added to SG&A, we've been operating at essentially an all-time low on a quarterly basis since becoming a steel company after factoring in noncash amortization that is added back to EBITDA. This is good evidence of our cost discipline even after absorbing the impact of acquisitions and normal inflationary pressures. The result is a leaner overhead cost base that positions us well as operating conditions improve and underscores our ability to trim fat and capture synergies. Turning to cash flow. First quarter free cash flow was negative as expected, primarily due to working capital timing. Our first and third quarters are always heavier cash use periods due to the coupon schedule of our high-yield bonds. Accounts receivable increased during the quarter as shipments accelerated into March. This along with higher pricing compared to the prior quarter is a recipe for a large receivable build, but the evidence is clearly there for a major cash collection quarter in Q2. Combining this higher collection with higher EBITDA, sets us up for a return to meaningful positive free cash flow in Q2. From both an EBITDA and cash flow standpoint, Q2 should be our best quarter in nearly 2 years. And that is -- and that will be the quarter where we have a number of outages across the footprint. Because of this, our full shipment and cost potential will not be on full display until Q3, which is an outage light quarter. Q3 will give us maximum operating leverage on volumes and pricing and is where you should expect to see the earnings power of this business become much more apparent. If the steel price curve holds constant, the improvement from Q2 to Q3 will be even better than the sequential improvement from Q1 to Q2. Our job right now is to run reliable operations and let the strong market we're in, take care of the rest. Our outlook on improving leverage position remains firmly supported by the expectations for strong free cash flow generation over the balance of the year, along with the completion of multiple real estate transactions currently in process. Our $425 million cash received expectation from idle property sales remains on target, with 2 more properties going under contract since we last spoke. As we translate earnings into cash, and close on these asset sales, we expect to further strengthen the balance sheet and continue making progress towards our longer-term leverage objectives while maintaining the flexibility to operate the business from a position of strength. We're also pleased to have come out of the most cash-intensive use periods at Cliffs, still with liquidity above $3 billion. I will now turn it back to Lorenzo for his closing remarks. Lourenco Goncalves: Thanks, Celso. In closing, -- what's fundamentally different today is that trade enforcement is working. Our customers are engaged and our order book is full. This company spent the last couple of years fixing what needed to be fixed. That work is largely behind us. The footprint has been rightsized and we finally have the platform to perform and deliver. From here, the focus is on execution, running reliable operations, serving customers at the highest level, generating cash and allowing the strength of this market to flow through the income statement. With that, I will turn it over to Kevin for questions. Operator: [Operator Instructions] Our first question today is coming from Carlos De Alba from Morgan Stanley. Carlos de Alba: The first 1 is maybe. Celso, could you comment what are the price expectations in terms of changes quarter-on-quarter for the first -- for the second quarter Obviously, with the lag moving, maybe this has changed versus what we had expected. So any quarter would be great. And then in the release, you mentioned that you stopped -- you finally ended the shipping material on the Metal slab contract in the first quarter. Can you give us a color as to how many tons did you ship in the first quarter for that contract? And/or what is the impact on EBITDA that you calculate you suffer from steel basically shipping a few months after officially the agreement was ended? Lourenco Goncalves: Carlos, that's Lorenzo here. Let me answer the slab first and then Celso address the previous portion of your question. We had a tale of shipments on these labs. That is not tonnage-wise, is not really meaningful, but it's still a drag. It was 175,000 tons of slabs that are still in the tail end of shipments. But it's over. It's done. And now they do not have any labs from us. ArcelorMittal covered is on their own devices and gaming led from other sources other than Cleveland-Cliffs. Celso, please take the... Celso Goncalves: Sure. Carlos. Yes, let me give you some general guidance on Q2. As I mentioned, Costs are going to tick up a little bit from Q1 to Q2. But the way to think about it is Q1 was much better than Q4. Q2 is going to be much better than Q1 and Q3 should be much better than Q2. From a shipment standpoint, Q2 shipments are expected to improve from Q1 and remain above that 4.1 million tonne mark. The trends that we're seeing here in Q1 are expected to continue into Q2. Automotive shipments are expected to increase after reaching the highest level in almost 2 years during Q1, and that's going to get even better in Q2. Selling prices are expected to be up about $60 a ton from Q1 to Q2. We expect to see the same kind of benefits we saw in Q1 related to pricing. The monthly quarterly and spot pricing are all up Canadian pricing is improving. As we mentioned, the final slab shipments to cover are not on -- we posted a slide deck in our presentation. You can see sort of the updated contract mix -- so right now, it's about 43% on a fixed full year price with the resets throughout the year. 23% is linked to month like indexes. 7% is on a quarter lag indices. 12% is U.S. spot and 15% is Stelco spot. So that should give you a view on mix. We talked about pricing. We talked about costs and we talk about shipments. So I think with that, you should have enough for Q2 and then Q3 should get even better from there. Operator: next question today is coming from Nick Giles from B. Riley Securities. . Nick Giles: Yes. Thank you, operator. So you built working capital in 1Q that's somewhat expected. But to what extent could we see that unwind in 2Q? And can you just describe if or how you'll need to further build just to meet the increasing demand, higher shipments later in the year? Celso Goncalves: Nick. Yes. So the Q1 build of working capital, about $130 million was primarily driven by AR as pricing continued to rise in March. Shipments were strong and it was offset by a reduction in inventory. As we look towards Q2, you should see a slight release in working capital as we further reduce inventory. That's the way to think about it. Nick Giles: Got it. And then just on POSCO, at this point of the negotiations, do you feel that there are certain aspects of any deal that are already decided? Or is there really still active dialogue around different structures? Any color there would be great. Lourenco Goncalves: Let me take that one, Nick. I think what -- the biggest change that happened between when we first start talking to POSCO and now is the outside of the negotiation between us and POSCO, the world surrounding us changed a lot. Remember, when we were first approached by POSCO, we were in a price environment that was a lot weaker demand was a lot weaker in the United States. And POSCO was coming with a proposal of bringing businesses from Korean companies to be reestablished or established from the first place in the United States in the short term because the the [ new ], the Hyundai [ milk ] in Louisiana is a long-term proposition at best. It's not a short-term thing that can resolve things right away. So we would be their lifelines. That said, the situation in South Korea changed a lot. Even though I'm not by any stretch in possession of any information -- internal information about South Korea, it's clear that things are a lot more complicated for all Asian countries, including South Korea right now, than they were 2 or 3 years ago. And that's the lag. On the other hand, from our side here in the United States, markets be prices are stronger. Automotive OEMs are producing more cars in the United States, and they rely on Cliffs to build those cars in the United States. It's not like they want us to supply steel to Mexico because they will use our steel to produce parts in Mexico and then bring back to the United States. They want to do it in the United States. And we do have the capacity right now, idle available, not so much it anymore because we're getting more and more and more orders from the auto OEMs. So our situation is getting better. And that is changing our perception on how this deal should be taken care of. We are still engaged, we're still talking. We still like each other. We still want to deal that is accretive for our shareholders. And I assume that they want the same thing for their site. Let's see what happened next. But we are -- by any stretch, we are no longer in a hurry. We are not before. We are a lot less in a hurry now. I hope I gave you the overall picture. If not, please go ahead and ask a follow-up question, Nick. Nick Giles: And that's great. I really appreciate that perspective and give you best of luck. Operator: Next question is coming from Martin Englert from Seaport Research Partners. Martin Englert: Hello. Good morning, everyone. question on unit cash costs, if you could touch on your exposure to diesel through the upstream mining operations and implications on unit cash costs. And if there's any hedging activity that we should take into consideration there. Celso Goncalves: Yes. Martin, yes, we're seeing some impact. Diesel is a meaningful cost component of the mining operations. We don't hedge diesel anymore. We hedge natural gas, primarily 50% of our exposure, but since we became a steel company, we don't hedge diesel anymore. So the impact -- the annual impact on kind of truck and rail services overall is about a $50 million annual impact on mining costs, which is about $6 per ton. Martin Englert: Okay. And then net... Celso Goncalves: Consume about 25 million gallons per year of diesel. Martin Englert: And the natural gas component in the mining operations, that's around like 8%, 10% of overall natural gas for the company? Celso Goncalves: The natural gas associated with mining specifically is about 20%. Martin Englert: Okay. And then within auto, can you touch on the degree that you're seeing a shift back towards steel from aluminum, if any yet? And if it's meaningful volume, when this might be occurring is this something that might be happening after summer shutdowns in automotive or anything like that? I'd be curious on more color if you have any to share. Lourenco Goncalves: Yes. It's happening as we speak. And it's -- I don't have tonnage from the top of my head here, but it's meaningful for the fact that once you break the dam it goes because lets us [ to a car ] that we are now in this -- I can't give you, of course, names or details. But we are supplying the tenders that used to be aluminum vendors and now our steel vendors. Then they need to rethink a bunch of riveting operations and the type of welding and things like that. That's a difficult part, and we are beyond that part. So now instead of not having aluminum, they have steel -- so the engineering departments of these OEMs. And by the way, I'm not talking about any 1 specific, but it's happening across the -- the board in terms of all OEMs we serve and we serve them all. They now see how feasible it is to step still even using the previous equipment that they had to stamp aluminum. And it's easy to assemble the changes are not meaningful and they do have the material instead of not having the material. So it's happening. It's growing -- and we are already seeing the opportunity to run lines that we are not running before. We brought back the EGL line -- the electrogalvanizing line at new Carlile. There was do for a long time. So we are seeing all that happening as we speak. So it will be an ongoing process as the year progresses. Martin Englert: And presumably with gravitation back towards that might move your auto mix a little bit and to more favorable mix/margin overall for the steelmaking business. Is a fair assumption? Lourenco Goncalves: Well, the automotive business continues to be a profitable business for us. The fixed prices are not by any stretch detrimental to our profitability. So we just need to get more tons, and that's exactly what not only just the substitution of aluminum [ distis ] bringing. But the fact that the clients are a lot less excited about cost, cost, cost and then they are seeing the the beauty about reliability, quality, the material that they can count on and things like that. So it's back to basics. Back to the important factors that were in place before every single OEM decided that they would be like Tesla and they would produce only electric vehicles. And that ship has say then left a very bad experience with all OEMs -- at that point, everybody was focused on costs. And that's when the less prepared competitors started to participate in automotive more than they should -- and that's being fixed and that is being corrected. So that's what we're seeing right now. Operator: Our next question is coming from Nick Cash from Goldman Sachs. Nicklaus Cash: Lorenzo and also I guess my first question is on the slab contract. Last quarter, we were talking about, I think, about a $500 million increase in EBITDA when prices were at around $90 million. with prices where they are today, I think back of the envelope math gets you about $100 million in revenue higher. Is that all operating leverage and are conversion costs sticky? Or is that not the way to think about? Celso Goncalves: Yes. Sorry, it was a little hard to hear your audio, but I think we captured your question around the slab math. But yes, it sounds like your math is reasonable. There are some offsets on scrap pricing, energy costs and things of the like. But I think your assumptions are in line. Nicklaus Cash: Awesome. I appreciate that. And then just 1 quick follow-up, hopefully, you can hear me. got it for another 15% increase per ton in cost in 2Q due to higher scrap and fuel for, I think, a drop-off in 3Q, '26. What gives you confidence in that drop off? And I guess where does that kind of put you for full year guidance on cost increase or decrease per ton, if you can give that color. Celso Goncalves: Yes. So you got to remember that Q2 is a big outage quarter. So pricing -- I'm sorry, costs naturally would tick up on a per ton basis due to the outages. And then Q3 is a very outage light quarter. So inventory from the high-cost period has sort of worked down into the subsequent quarters. And then we're continuing to see automotive volume ramping. Every unit is running at higher utilization. So as that materializes into Q3, that's when you're going to see the benefit of the cost dilution. Operator: Your next question is coming from Albert Realini from Jefferies. Albert Realini: Would you be able to just walk us through some of the break costs or just any broader economics if a scenario where the possible opportunity were or not materialize? I just -- I know you had mentioned previously some of the larger-scale asset sales like Toledo and certain FPT assets would be off the table while discussions with POSCO were ongoing. So just kind of wondering how you think about Wayne continued discussions with POSCO versus the ability to go out to the market with some of these higher valued assets in the current strong steel price environment? Lourenco Goncalves: Yes. Look, we can't try to create hypothetical scenarios here to the costs come home. But I don't think it's productive because, for example, right now, yes, you're right. The HBI sale, I'm not considering anymore. And it started because -- at least for now. It started because of the discussions with POSCO. But right now, HBI stretched my ability to produce hot metal and helps me increase production. You saw that shipments were higher, production was higher and Q2 shipments will be higher and production will be higher. And HBI is helping us get there. because we loaded the HBI in blast furnaces, for example. And we also use them in our EAFs. We still have 3, EAFs. So it's not like it's a burden. It's a positive. And we are discussing here cash flow, and we are going to continue to generate cash flow grow cash flow, you're going to start seeing that happen in Q2. So that's why I don't like playing a hypothetical scenarios. Things continue to be the way they are shaping up right now, and shipments continue to go more toward the 16.5 million to 17 million tons for the year. We're going to need the HBI to get there. And that will be very, very accretive to the company. So we like cash flow generated by operations. and we will continue to pursue that. All the rest is hypothetical that there is no real meaning on trying to speculate. Operator: Next question is coming from Lawson Winder from Bank of America Securities. Lawson Winder: Thank you, operator, good morning, Lourenco and also, it's nice to hear from you both. And it's nice to see the solid Q-over-Q EBITDA improvement. If I could just drill down a little bit on some of the discussion we've already had on the unit cost guidance for -- so just thinking through the different moving parts, we're adding back $80 million from the onetime energy spike. That's about $1,950 per ton at 4.1 million tons. And then there's an additional $15 million. So net, we're getting about a $35 million gross increase in cost Q2 to Q1. I mean pushback, if you think that's the wrong way of thinking about it. But if you could just kind of walk me through what the different pieces are, I think you mentioned $6 per ton for diesel, but there's obviously some other pieces there. Could you just help us think through those components? Celso Goncalves: Yes. Sure. Lawson, I appreciate the comments. So let me drill down here. We saw these production issues in Q1 from kind of onetime extreme weather and energy-related issues. And some of that, there's a little bit of carryover from that high energy cost via just the inventory carryover. And then further to that, into Q2, you also have a richer product mix as we continue to improve on automotive. So we're seeing some impact -- there's carryover impact from Q1 to Q2. You have the outages in Q2 and you have a richer mix in Q2. And then we're starting to see some of the impact from the kind of the war-related costs related to diesel and freight and things like that. So that sort of explains why Q2 costs are ticking up a little bit higher by $15 a ton. And then when you get to Q3, the cost benefit a lot from improved utilization, lower outages, lower energy costs, continued asset optimization, lower coal pricing, and a lot of reduced repair and maintenance costs. So while Q2 ticks up from Q1, Q2 -- Q3 should tick down meaningfully from Q2. So that's the cadence of the sequence of events as we look forward for the next couple of quarters. Lawson Winder: Okay. Yes, that helps. And is that the correct assumption that you're effectively also getting a Q2 quarter-over-quarter $80 million tailwind in EBITDA from the reduction of those onetime energy costs, so something like $1,950 per short ton benefit? Celso Goncalves: Yes. I mean it's not really 1 to 1. It's not like -- like I said, some of that carries over and gets carried through the inventory costs. So it's not like -- I can't tell you that you just remove that entirely quarter-over-quarter? Lourenco Goncalves: But you should remove for Q1 -- you should remove for Q1. That's what you should do because that should not happen, would not have happened without the external factors, and that's real. We use our procedure to buy the stock that we buy in the market, hedging the same way we always hedge it. We did everything by the book and we are unlucky things happen. And I'm sure we are not the only 1 that we're unlucky. Let's see how others will report as we go. But the fact of the matter is that it hurt and it hurt badly. Q1 was supposed to be better without that. That's why we point out because it's a real number that we can pinpoint and show. But going forward, yes, there is inventory impact and things like that. But on the other hand, we're going to get a lot more value-added material from automotive. We are acting on other things that we will offset. So it's very difficult to identify like that, but it was very easy to identify Q1. That's why we point out in our press release. Lawson Winder: Okay. That's very helpful. And then if I could just ask very quickly on the land sales. I appreciate that predicting the precise timing of those can't be easy. But are they still all expected to close in 2026? Lourenco Goncalves: Yes. Yes, we are very confident that the counterparts are acting to get their problems solved and their financing in place. We continue to sign enforceable contracts. So we have 2 more in the quarter. So all going -- all these deals are going very well. Operator: Our next question today is a follow-up from Carlos De Alba from Morgan Stanley. Carlos de Alba: Yes. It's basically a follow-on precisely on the last question, Lawson. So you have received $70 million already this year on asset sales. So should we expect you have any color on the cadence of the remaining, what is it, EUR 350 million in proceeds throughout the year or just this year is the expectation, but no further details from that. Lourenco Goncalves: Let's put $50 million in Q2 and $100 million in Q3, with the remainder in Q4. Operator: Our next question today is coming from Timna Tanners from Wells Fargo. Timna Tanners: I wanted to ask a little bit about the mix, if I could. Have plate market is really strong. And I just wanted to get a little more color on why the actions you took in -- if -- just talk about how that keeps your capability similar despite some of the closures? And then similarly, Stanson Electrical down year-over-year? And I thought Electrical was sold out for a couple of years. So just a bit more color on those products would be great.p Lourenco Goncalves: On plate, we shut down a bill that was basically taking care of 1 client and associated with the Q&T line that is inside Garyworks that doesn't belong to Cliffs. So the logistics was not very enticing. So all the rest remains the same. So what you said about the plate market is right. But we are talking about 1 specific client that was used in the 110 and the Q&T line at Garworks. So that's that -- so we could reconsolidate that and do another way. So there is nothing wrong with that because the 160 is now -- the 160-inch mill is now fully utilized. So that's all good we played. As far as electrical still we got to differentiate grain-oriented electrical steels that there is only 1 company that produced in the United States that's Cliffs, and oriented electrical steel that we have ourselves and a cup of Bs that are not producing very good material, but they are trying. But on the other hand, the biggest utilization of non-oriented electrical steel is electric vehicles. So good luck with that for the ones that made investments to produce non-oriented electrical steels. As far as grain-oriented electrical steels, we are the ones not only the ones that produce but the ones that are growing production with our project in Butler. I hope I answered your question, Tim. Operator: We ran have our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Lourenco Goncalves: Thank you very much. Have a great day. Bye now. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day. Thank you for standing by. Welcome to the Bank of Hawaii Corporation first quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chang Park, Executive Vice President, Investor Relations. Please go ahead. Good morning and good afternoon. Chang Park: Thank you for joining us today for our first quarter 2026 earnings conference call. Joining me today is our President and CEO, [inaudible], CFO, Bradley S. Satenberg, and Chief Risk Officer, Bradley Shairson. Before we get started, I want to remind you that today's conference call contains some forward-looking statements. And while we believe our assumptions are reasonable, the actual results may differ materially from those projected. During the call today, we will be referencing a slide presentation as well as the earnings release. Both of these are available on our website, boh.com under the investor relations link. And now I would like to turn the call over to [inaudible]. Unknown Speaker: Thanks, Chang. Good morning and good afternoon, everyone. Thank you for joining us today. Before I get into the quarter, as this is my first earnings call as CEO, I want to say a few words about my predecessor, Peter S. Ho. Peter built something truly special here. A franchise defined by discipline, consistency, and a genuine commitment to the people of our island communities. With 16 years as CEO, he left this institution much stronger in every way that matters. I am grateful for his confidence in me, and I am honored to carry this forward. Now on to the quarter. Bank of Hawaii Corporation delivered another solid set of results to open 2026. Net interest income and our net interest margin expanded for the eighth consecutive quarter driven by continued fixed asset repricing and a meaningful decline in total deposit costs. NIM increased 13 basis points as our fixed asset repricing engine continues to perform as expected. During the quarter, we remixed $643 million in fixed rate loans and investments from a roll-off yield of approximately 4% to a roll-on yield of 5.6%, continuing to lift the overall yield on earning assets. We remain on track toward our stated goal of approaching 2.9% NIM by the end of the year and we feel good about that trajectory even against an uncertain rate backdrop. Deposit trends continue to be encouraging, as our average cost of total deposits declined 17 basis points, achieving a beta of 36%. Normalizing for nonrecurring expenses and noninterest income, our EPS came in at $1.39, reflecting the steady underlying earnings power of the franchise. We maintained strong capital and excellent credit quality while continuing to build on our leading deposit market share position here in Hawaii. The strategic formula has not changed. Bank of Hawaii Corporation operates in one of the most distinctive banking markets in the country. Concentrated and relationship driven where four locally headquartered banks hold more than 90% of FDIC-reported deposits. In that environment, brand and trust are our structural advantages. They allow us to price deposits attractively, manage funding costs actively, and generate superior risk-adjusted returns across cycles. Turning to our home market, Hawaii's economy entered 2026 on solid footing: near record low unemployment, strong visitor spending, and an active construction pipeline anchored by significant military and public infrastructure investment. That said, we are watching the environment carefully. Tensions in the Middle East, rising energy costs, and the potential for sustained inflation are headwinds that could affect consumer confidence and travel demand as the year progresses. Our credit portfolio continues to reflect the underwriting discipline this bank has maintained through many cycles. I want to briefly address the recent Kona low storm in Hawaii and Typhoon Sinlaku in the West Pacific. First and foremost, Bank of Hawaii Corporation remains focused on supporting our employees, customers, and communities impacted by these events. We are in the early stages of assessing the potential impact of Typhoon Sinlaku and it will take several weeks to gain clearer insight. Bradley Shairson will cover the potential impact of the Kona low storm as well as our overall credit profile in more detail shortly. I also want to highlight the progress we are making in wealth management, an area I expect will become an increasingly important part of the franchise's story. Through Bankoh Advisors and our partnership with Cetera, we continue to expand investment capabilities for our retail and private banking clients. Simultaneously, we are deepening coordination between our commercial and private banking teams around our high net worth client relationships. Importantly, we recently opened the Center for Family Business and Entrepreneurs, where we provide dedicated planning resources to Hawaii's family-owned businesses encompassing financial and estate planning, succession planning, business valuation, and M&A advisory capabilities. For many of these families whose wealth is largely concentrated in their company, these are among the most consequential decisions they will face. It is a capability uniquely suited to Bank of Hawaii Corporation's depth of relationships and trusted role in this market. I will close with this. We remain focused on the strategy, the culture, and the values that have made Bank of Hawaii Corporation successful. I fully intend to carry forward the intensity of execution, the continued investment in our people and technology, and an unwavering commitment to the island communities that have trusted this institution for 128 years. I am proud to be in this role, and I look forward to the work ahead. With that, I will turn the call over to Bradley Shairson to discuss credit, after which Bradley S. Satenberg will walk through the financials in detail. We will then be pleased to take your questions. Bradley Shairson: Thanks. I will begin with an overview of our credit portfolio and conclude with asset quality metrics. And as you will see, our performance has remained strong, consistent with prior quarters. Turning to our lending philosophy, Bank of Hawaii Corporation is dedicated to serving our local communities, lending primarily within our core markets where our expertise allows us to make informed and disciplined credit decisions. Our portfolio is built on long-tenured relationships, with approximately 60% of both our commercial and consumer clients having been with the bank for more than 10 years. Geographically, our loan book is concentrated in markets we know well. Approximately 93% of loans are based in Hawaii, with 4% in the Western Pacific and just 3% on the Mainland, primarily supporting existing clients who operate both locally and on the Mainland. Our loan portfolio remains well balanced between consumer and commercial exposure. Consumer loans represent 56% of total loans, or approximately $8 billion. Within the consumer portfolio, 86% consist of residential mortgage and home equity loans with a weighted average LTV of 48% and weighted average FICO score of 798. The remaining 14% of consumer loans are comprised of auto and personal lending. Credit quality in these segments also remains strong, with average FICO scores of 729 for auto loans and 760 for personal loans. Turning to commercial lending, the portfolio totals $6.2 billion, representing 44% of total loans. 73% is secured by real estate, with a weighted average LTV of 55%. This reflects our ongoing emphasis on collateral protection. CRE remains the largest component of the commercial book, totaling $4.3 billion or 31% of total loans. And in Oahu, the state's largest CRE market, a combination of consistently low vacancy rates and flat inventory levels continues to support a stable real estate market. Across industrial, office, retail, and multifamily property types, vacancy rates remain below or close to their 10-year averages. Total office space on Oahu has declined by approximately 10% over the past decade, driven primarily by conversions to multifamily residential and lodging. This structural reduction in supply combined with the return-to-office trend has brought vacancy rates closer to long-term averages and well below national levels. Our CRE portfolio remains well diversified with no single property type exceeding 9% of total loans. Conservative underwriting practices continue to be applied consistently, with weighted average LTVs below 60% across all CRE categories. In addition, diversification within each segment remains strong, supported by modest average loan sizes. Scheduled maturities are also well balanced, with more than 60% of CRE loans maturing in 2030 or later, reducing any near-term refinancing risk. Looking at the distribution of LTVs, there is not much tail risk in our CRE portfolio. Less than 3% of CRE loans have greater than 80% LTV. C&I accounts for 11% of total loans, totaling $1.6 billion. This portfolio is diversified across industries, characterized by modest average loan sizes, and there is very little leveraged lending. Turning to asset quality. Credit metrics continue to perform exceptionally well. Net charge-offs totaled $1.1 million, or just 3 basis points annualized, down 9 basis points from linked quarter and 10 basis points lower year over year. Three basis points is abnormally low. This was driven by a small net recovery in commercial as well as a slight decline in consumer net charge-offs. Nonperforming assets declined to 9 basis points, down 1 basis point from linked quarter and 3 basis points year over year. Delinquencies increased to 40 basis points, up 4 basis points from linked quarter and up 10 basis points year over year. And criticized loans remained flat to the linked quarter at 2.12% of total loans. That is up 4 basis points year over year. Notably, 84% of criticized assets are real estate secured, with a weighted average LTV of 53%. And as an update on the allowance for credit losses on loans and leases, the ACL ended the quarter at $147 million, up $200,000 from linked quarter. The ratio of our ACL to outstandings remained flat at 1.04%. This ACL coverage does include a $3.2 million qualitative overlay specifically related to the recent 15 to 20 properties in our portfolio net of anticipated insurance recoveries. We are monitoring these exposures closely, but can already see that the potential loss would not deviate greatly from the amount we have reserved. And in light of recent industry discussions around private credit, I want to provide clear assurance that we do not lend to private credit funds or providers. Our exposure to nonbank financial intermediaries is negligible, totaling about $80 million or 0.6% of total loans, with the vast majority of this tied to diversified publicly traded equity REITs. This concludes my remarks. I will now turn the call over to Bradley S. Satenberg for a discussion of our financial performance. Bradley S. Satenberg: Thanks, Brad. For the quarter, we reported net income of $57.4 million and EPS of $1.30, a decrease of $3.5 million and $0.09 per share as compared to the linked quarter. These declines were primarily the result of elevated noninterest expense as compared to the fourth quarter. Q1 included the annual bump in seasonal payroll taxes and benefits, as well as a nonrecurring compensation-related charge incurred in connection with the accelerated vesting of restricted stock awards under the retirement provision of the company's share-based compensation plan. As it relates to NII and NIM, we continue to see a positive, expanding trend in both. This is the second quarter in a row that we achieved a double-digit increase in NIM with a 13 basis point pickup this quarter and an aggregate 28 basis points over the past six months. And despite two fewer days this quarter, NII grew by $5.6 million. Consistent with the previous quarter, NII and NIM benefited from the combination of our fixed asset repricing, the continued repricing of our deposits following the Fed rate cuts, as well as the deposit mix shift, which was a positive $94 million this quarter. Compared to the linked quarter, average noninterest-bearing deposits are up by $84 million. During the quarter, the yield on our interest-earning assets declined by 4 basis points as the effect of the rate cuts at the end of last year were fully recognized during the current quarter. This impact was partially offset by our fixed asset repricing, which contributed $2.6 million to our NII. Our cost of interest-bearing liabilities improved by 21 basis points during the quarter, as our deposits continued to reprice down following the rate cuts. The cost of deposits declined to 1.26%, representing a 17 basis point reduction as compared to the linked quarter. The spot rate on our deposits was 1.5% at the end of Q1, and as mentioned in earlier comments, our deposit beta improved to 36%, which exceeds our prior target of 35%. While I still anticipate that we will see some modest improvements in cost of deposits going forward, any material changes will likely be contingent upon future Fed rate adjustments. At the moment, we are currently forecasting no rate cuts in 2026. Contributing to our declining deposit costs was the continued repricing of our CD book. During the quarter, the average cost of CDs declined by 29 basis points to 2.89%, and at the end of the quarter, the spot CD rate was 2.8%. Over 50% of our CDs will mature within the next three months at an average rate of 2.91%. The majority of these CDs are expected to renew at rates ranging from 2.25% to 3%. During the quarter, we terminated $400 million of our active swaps. We finished the quarter with an active pay-fixed, receive-float portfolio of $1.2 billion at a weighted average fixed rate of 3.3% and an average life of 1.5 years. $900 million of these swaps are hedging our loan portfolio while $300 million are hedging our securities. In addition, we have $400 million of forward-starting swaps with a weighted average fixed rate of 3.1% and an average life of 2.4 years. $200 million of these forward swaps became active in April, while the remaining $200 million become effective during the third quarter. We finished the quarter with a fixed-to-float ratio of 59%, which keeps us well positioned for any changes in the rate environment. Noninterest income was $41.3 million during the quarter compared to $44.3 million during the linked quarter. This quarter includes a $200,000 charge related to a Visa B conversion ratio change, while the fourth quarter included a similar Visa B charge of $770,000 as well as a $1.3 million net gain in connection with the combined impact from our merchant services portfolio sale and an AFS securities repositioning. Adjusting for these normalizing items, noninterest income was down $2.3 million. This decline was primarily caused by lower loan and deposit fee income as well as a dip in earnings within our wealth management division due to less-than-favorable market conditions. My expectation is that second quarter noninterest income will be $42 million. Noninterest expense was $116.1 million compared to $109.5 million during the linked quarter. The first quarter tends to be the highest expense quarter of the year, and as discussed earlier, this quarter included a seasonal payroll tax and benefit charge of $2.8 million and a nonrecurring charge related to the accelerated vesting of restricted stock awards of $3.5 million. In addition, the quarter also contained an unrelated severance charge of $750,000. The linked quarter had a $1.4 million reduction in our FDIC special assessment and a nonrecurring $1.1 million donation for our Bank of Hawaii Foundation. Compared to my previous forecast, reported (non-normalized) noninterest expense was lower than expected, mainly due to a reduction in our quarterly FDIC insurance assessment. Going forward, I expect that this assessment will be approximately $3.2 million, or $0.5 million less per quarter than our recent run rate. As a result, I am lowering my forecasted range for annual growth in overhead to between 2.5% and 3%, or 0.5% lower than my previous forecast. Second quarter normalized noninterest expense is expected to be approximately $112 million. As a reminder, the second quarter expense will include the annual merit increases of approximately $1.2 million per quarter. During the quarter, we also recorded a provision for credit losses of $1.8 million, resulting in an unchanged coverage ratio of 1.04%. Further, we reported a provision for taxes of $17.1 million during the quarter, resulting in an effective tax rate of 22.9%. Our capital ratios remained above the well-capitalized regulatory thresholds during the quarter, with Tier 1 capital and total risk-based capital ratios of 14.4% and 15.4%, respectively. And consistent with the linked quarter, we paid dividends of $28 million on our common stock and $5.3 million on our preferreds. During the quarter, we repurchased approximately $15 million of common shares at an average price of $77 per share. I am currently planning to repurchase an additional $15 million to $20 million of stock during the second quarter, and at the end of the first quarter, $106 million remained available under our current repurchase plan. Finally, our Board declared a dividend of $0.70 per common share that will be paid during the second quarter. Now I will turn the call back over to [inaudible]. Unknown Speaker: Thanks. We would now be happy to answer any questions that you may have. Operator: Thank you. As a reminder, to ask a question, please press 11. To withdraw your question, please press 11 again. Our first question comes from the line of Jeffrey Allen Rulis with D.A. Davidson. Jeffrey, your line is now open. Jeffrey Allen Rulis: Thanks. Good morning. Maybe just on that last expense mentioned, I just want to catch that real quick. The expense guide, does that include the stock expense and severance? I mean, are you carving that out for this, or is that included in the full-year growth expectation? Bradley S. Satenberg: No. That is inclusive of that. So we are saying approximately $112 million, all-inclusive of every expense that we are aware of today. Jeffrey Allen Rulis: Got it. Okay. Thanks. And then I guess on maybe just a broader growth question. It looks like the consumer book has been either growth or more moderate runoff. I guess, looking forward, that has kind of been an area that maybe has not been adding to net production. Are you any closer to comfort there of that sort of flattening out that maybe a look at your full-year growth numbers possibly has some upside to kind of the low single-digit guide, or still waiting to see more confidence before inching that up? Unknown Speaker: Yeah. Hey, Jeffrey Allen Rulis, this is [inaudible]. The way I look at it is, resi has been coming along okay. We had a good quarter for resi in Q4. It was a decent quarter in Q1, just given that it was all purchase activity. And we see some continued strength in the resi side going forward. I think our challenge has really been on the home equity line and the indirect books. So we have got a number of different initiatives we are pursuing in both of those in an attempt to kind of stabilize those books. I think the reality is—and you hit it on the head in the last part of your comment—I think we need a little bit more certainty in the overall environment. A little bit of rate relief would be helpful. Not sure we will get that. So in the meantime, with respect to home equity line, we have got a number of different direct mailing activities that we are doing, looking at some special programs to try and retain some of the balances that are coming off of, say, fixed rates. And then in the indirect space, we have implemented digital contracting, and we are trying to speed up funding time frames. We are hoping that those can give us a little boost on that side. But I think until we get better clarity in the overall environment, from a loan perspective, we are still in that low single-digit growth outlook. Jeffrey Allen Rulis: Thanks, and if I could squeeze just one last one on the capital side. I appreciate the guide on the buyback for the second quarter. It seems like pretty steady activity. I guess as earnings continue to ramp here, and the dividend payout, I guess, could potentially dip below 50%. Is there—just revisiting the dividend side and your conversations with the Board—is that something you look at in terms of the overall capital return, might want to inch that up as you have kind of broken out on earnings over the last few quarters? Unknown Speaker: It is certainly something that we talk about, but it is not something we are considering at the moment. I think we are comfortable with where our dividend is today. Anything that we are returning back to shareholders beyond that would probably come through the buyback. Jeffrey Allen Rulis: Fair enough. Thank you. Operator: Thanks, Jeffrey. Our next question comes from the line of Robert Andrew Terrell with Stephens. Your line is now open. Robert Andrew Terrell: Good morning. Unknown Speaker: How are you, Robert Andrew Terrell? Robert Andrew Terrell: I am good. How are you guys? Unknown Speaker: Good. Robert Andrew Terrell: I wanted to ask on the—thank you for the CD color, the time deposit color you gave. I think you said 2.80% on the spot cost at end of the period. Do you have the comparable figure for either total deposit costs or interest-bearing deposit costs? And then I wanted to get a sense on, you know, it sounds like there is a still pretty decent opportunity to reprice some of the time deposit portfolio over the balance of the year. Was hoping you could just talk to kind of the competitive landscape for deposits you are seeing in the market right now. Bradley S. Satenberg: Yeah. I mean, our total deposit cost is 2.89% for the quarter. The spot rate, again, you mentioned, was 2.8%. The competitive landscape is reasonable and rational, and we still think there is an opportunity to continue to reprice our CD book. The majority of our CDs are in our three-month portion of our portfolio. We think the majority of that will continue to roll off and reprice into—and renew into—new three-month CDs, and probably, again, at rates between 2.25% to 3%, depending on which CD they go into. But I still think there is an opportunity there, and we will continue to see benefits from that CD repricing. Robert Andrew Terrell: Okay. And I was hoping just to ask on wealth management, maybe just refresh us on kind of where you are at in terms of efforts there? And is it something we should expect—I know you gave the fee income guide for the second quarter. How should we think about growth potential in the wealth business and then overall fees throughout the year? Unknown Speaker: Yeah. I think there are two components to it. The early one that we will begin to see some benefit from is really coming from the Bankoh Advisors side, our former broker-dealer. As you may recall, we spent most of the fourth quarter repapering that business, so activity was pretty low. January, we came out of that, and we began to see some early positive results in February and March. So I think we can continue to see that rise as we work through the end of the year. On the broader wealth management effort, this is really a longer-term effort for us. We are spending a lot of time building out the infrastructure and the capability set, really introducing the concept of business planning and family dynamics planning, succession planning to our client base, and spending a lot of time internally just educating folks and bringing people together to build momentum. We have clearly seen great activity around that. We have got a lot of growth in the valuations pipeline and some M&A activity I think that we will see earlier returns on. But the bigger effort, you are probably not going to see meaningful results until we get into 2027, would be my look. Robert Andrew Terrell: Great. Okay. Thank you for taking the questions. Unknown Speaker: Yeah. Thank you. Operator: Our next question comes from the line of Kelly Ann Motta with KBW. Kelly Ann Motta: Hi, good morning. Thanks for the question. Maybe I would like to circle back to the question of capital. Clearly, you guys are incrementally repurchasing shares and have given color around that. Just wondering if you guys have looked at the proposed capital changes and, given your higher percentage of resi, if you have done any sensitivity around that and if—how that—if relevant, would change potentially your capital outlook. Thank you. Unknown Speaker: Maybe I will start and then Brad can clean up. I think we are comfortable with the way we are looking at dividends and the way we are looking at stock buybacks. We have started to look at the potential impacts of the regulatory changes. We have such a weighting towards risk-weighted already. There will be some favorable movements in it, but I still think it is early, and I think we are really still trying to assess how that would change our posture around what to do with our capital. Bradley S. Satenberg: Yeah, and Kelly, I would just add to that. Obviously, it is just a proposal right now; it is not final. But we have done some early assessments, and it will be positive for us. I anticipate that our regulatory capital ratios will see a 50 to 100 basis point improvement based on the way the current proposal is structured. Kelly Ann Motta: That is really helpful. I appreciate the color. I would like to also circle back to the question of margin. You guys reiterated that 2.9% outlook to exit the year. You had a fantastic first quarter for NIM expansion. And I am just wondering, as you look ahead, clearly there are a lot of variables here in terms of the margin, but it seems like the asset repricing story continues. Wondering if you could provide any commentary or color as to how you guys are thinking about the normalized margin as well as kind of the cadence from here and—would seem to imply somewhat of a slowing versus 1Q—so how we should be thinking about the inputs here. Thank you. Unknown Speaker: Yeah. So again, maybe I will start, and then Brad can clean up. The fixed asset repricing, I think we have shared this before, basically adds about 5 basis points a quarter, or 20 basis points a year. So as we close out this year heading towards that 2.90% number, if the question is really around terminal NIM, we can see that in the 3.25% to 3.50% range based on no rate cuts and just kind of the current outlook that we have. There is upside to that if we do see rate cuts, but we feel confident that that fixed asset pricing engine is pretty mechanical at that 20 basis points a year, given a 10-year in the 4.25% range. Kelly Ann Motta: That is really helpful color. Thank you so much, and I will step back. Unknown Speaker: Thanks, Kelly. Our next question comes from the line of Jared Shaw with Barclays. Your line is now open. Unknown Speaker: Morning, Jared. Operator: Jared, your line is open. Please check your mute button. Jared Shaw: Sorry about that. Thanks for taking the question. I guess maybe just looking at some of the tourism trends, are you seeing any impact on the outlook there just given the sort of the pace of tech layoffs and some of the layoffs that we are seeing on the West Coast? Or is it still sort of marching steadily forward? Unknown Speaker: Yeah. I think it is probably too early to tell. The reality is we started off the year on really strong footing. Visitor counts were relatively flat, but spending was strong relative to previous years, really driven by West and East Coast travelers. I think we are going to need to see a little more data coming out. March will probably be a little messy just because we have the Kona low storm, so I am not sure that will be a clear print. But what we have become more and more aware of is that the market is really being driven by that K-shaped consumer and that top-end consumer, which is why we continue to see the spend increase. So we are optimistic that that trend will continue through the year. But, as we all know, there is lots of noise out there, so we continue to monitor the length of the conflict involving Iran, what that ultimately means for energy prices, how that translates into airfares, and its ultimate impact on tourism. For right now, I think the outlook would be stable, and then we will get a better sense as some of those other items become more clear. Jared Shaw: Okay. Thanks. And then on the expense side, I guess, sort of two parts. One, when we look at that growth guide for the year, is there any assumption that there is some buildout in the wealth management side in that number? And if not, is that something that, longer term, we should be building in? And I guess the second part, how are you looking at AI investments? And is there an opportunity on the tech side at all to maybe make some investments in the near term that could generate some positive operating leverage going forward? Unknown Speaker: Yes. So maybe to the first question, I think the guidance is reasonable guidance based on our current outlook in the wealth management space. As we get further out, you can probably begin to think about greater growth on the fee side. I think previously we have talked about wealth management being in the $60 million annual fee range and the potential to get into double-digit growth on that particular fee item. So that is kind of how I look at that. The AI side, we have spent a lot of time building out our governance and our risk management practices. We have a number of different AI use cases that we are working on right now to implement—some related to wealth management and the discovery process, opportunities within the call center, and a number of others—really with the goal of getting right to your point: how do we create more operating leverage in the organization by creating efficiencies across the company. Still a little early to read on that one, but that is our focus, and we are big believers that it has the opportunity to have a meaningful impact on the expense side. Thank you. Operator: Our next question comes from the line of Matthew Clark with Piper Sandler. Your line is now open. Matthew Clark: Hey. Good morning, everyone. Wanted to circle back to the loan growth commentary. I think in the prior quarter, there was some optimism around approaching mid-single-digit loan growth as we march through the year, if not achieve mid-single-digit loan growth for the year. But I wanted to double check whether or not that low single-digit growth expectation was just for the consumer book or was that for the overall portfolio? Unknown Speaker: It was for the overall portfolio. I think that guidance was given before we started the situation involving Iran, which created a lot greater uncertainty. I think we are really comfortable in that low to mid-single-digit number. I think we are going to need a little more certainty in the environment before we can get comfortable guiding up to the mid-single-digit space. Matthew Clark: Okay. And then how about the loan pipeline, coming out of the quarter relative to year-end? Unknown Speaker: The loan pipe, both on the consumer—at least the resi side—and on the commercial side, have remained strong. They are solid. I think we saw the benefits of that on the commercial side in Q1. And I was reasonably pleased, in a purchase-only environment, without any projects in Q1, that resi did what it did. We have some projects that will be closing out in Q2, which will aid the resi side. And commercial, I doubt we will be able to repeat the strong quarter that we had in Q1, but I am still optimistic that we will see growth to keep us in line with the guide that we shared. Matthew Clark: Okay. And then on the deposit side, your NIB on average was up in the quarter, but in the period, though, NIB and overall deposits were down about 4% annualized. In last year's first quarter, you showed some good growth, but then the year prior, you saw kind of a similar decline. So just wanted to get a sense—was anything unusual in the quarter? Would you chalk it to seasonality, or was there something else going on that we should think about? Unknown Speaker: There are probably a couple things in Q1. Maybe I will back up a bit. We had a really strong deposit quarter in Q4 and a really strong deposit quarter in Q1. If you just go back and look at where we were relative to, say, 9/30, on both the average and the spot, particularly on the NIB, we are still up like 5%. We feel pretty good where we are at, even at the close of the quarter. There were a couple things within Q1 that occurred to bring the deposits down. One was we opted out of some high-cost public monies—we just did not see the need to pay for that—and we let that run off, and that was a pretty meaningful number. And then we had some escrow monies related to some projects that closed out during the quarter that brought NIB down. We still feel good about where we are at. Noting how strong Q4 and Q1 have been, we are probably looking at more flat as we get into Q2 on both the top end and, as we have talked about in the past, low single-digits on low-yield deposits/NIB. Overall, we feel good. I think Q2 is typically a seasonally low period for us. So we think, given how we have grown, if we can maintain a flat top line and a flat NIB, it will be a good quarter for us. Matthew Clark: Okay. Great. Thank you. Operator: Thank you. We have a follow-up question from the line of Robert Andrew Terrell with Stephens. Your line is now open. Robert Andrew Terrell: Hey, thank you for the follow-up. I just wanted to go back to the commentary on margin. You talked about structural, longer-term 3.25% to 3.5% on the margin. Can you just remind us—is that kind of in the current rate environment? Do you feel like rate cuts would help on that? And can you provide a better sense of time frame to get back to that level? Unknown Speaker: Well, if we are at roughly, say, 2.90% at the end of this year and we are growing on the fixed asset repricing at 20 basis points per year, that would put us in that zone at the end of 2028. If we get some rate cuts—as you have been able to see in both Q4 and Q1—if we get rate cuts, we are really able to capitalize on those, so that would accelerate the time frame around that. Does that help? Robert Andrew Terrell: Very helpful. Yeah. No, that is great. I appreciate it. Thank you. Chang Park: Thank you, everyone, for joining us today and your continued interest in Bank of Hawaii Corporation. As always, please feel free to reach out to me if you have any additional questions. Thank you. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the ServisFirst Bancshares First Quarter Earnings Conference Call. [Operator Instructions]. It's now my pleasure to turn the call over to Davis Mange, Director of Investor Relations. Davis, please go ahead. Davis Mange: Good afternoon, and welcome to our first quarter earnings call. We'll have Tom Broughton, our CEO; Jim Harper, our Chief Credit Officer; and David Sparacio, our CFO, covering some highlights from the quarter and then take your questions. I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made, and ServisFirst assumes no duty to update them. With that, I'll turn the call over to Tom. Thomas Broughton: Davis, thank you. Good afternoon, and thank you for joining our first quarter conference call. We're really pleased with our start to the year, and I'm going to highlight a few things before I turn it over to Jim Harper to give credit update. On the loan side, we had pretty solid loan growth for the quarter. Loan growth is usually not very robust in the first quarter, but we did see some pretty good loan growth. We are seeing loan payoffs begin to diminish compared to the last 2 years, which is certainly a great thing. I don't know what kind of trend we'll see in the second quarter, but on a quarter-to-date basis, we've seen some very nice growth in the first 20 days or so of the quarter. And on the forward loan pipeline over 90 days is the 90-plus days. It is the strongest we've ever had in our history. And of course, on a 90-day loan pipeline, the closing rate is much lower than on a 30-day loan pipeline, for example. So -- but it is great to see a long list of new relationships across all of our markets in a variety of industries on that list. On the deposit side, they grew by 8% annualized in the first quarter, which has exceeded our expectations as we typically see our deposit growth in the second half of the year. We continue to try to manage our deposit costs to improve margins. We continue to attract new clients with our strong financial condition, our profitability and our personal service that we provide to commercial clients and correspondent banks. David will elaborate in a few minutes, but our net interest margin continues to improve. Our efficiency ratio continues to be the best-in-class as we dropped below 30% in the first quarter. We do have 161 producers at quarter end. We've hired over the last 12 months, 32 new FTEs and 75% of those FTEs are frontline employees. So we should see obviously some improved productivity over time and profitable growth there. Our Houston team has found an office, they've leased it not ready to move into yet, but they've got a 26,000 square feet to build out. We do have 18 bankers on board there today, and their pipelines are building quite nicely. We actually closed our first loan in Texas, which is a large supply chain company with long-term contracts in March. So we're pleased with the start there. And now I'm going to turn it over to Jim Harper for a credit update. Jim Harper: Thanks, Tom. As noted, loan growth for the quarter was solid at 7% annualized, though we definitely experienced an uptick in loan activity beginning late in the quarter, which reinforces Tom's comments about our forward pipeline. From a credit metric standpoint, net charge-offs for the first quarter were around $8.3 million, most of which was associated with the remaining balance of one credit with the charge representing the final resolution of a loan to a long-time troubled borrower. Our allowance to total loans remained static when compared to the end of 2025, ending the quarter with an allowance compared to total loans of 125 basis points. Nonperforming assets to total assets at quarter end were 100 basis points, which was slightly higher than the 97 basis points we reported at fiscal year-end '25. However, we are confident in some near-term reductions in NPAs of approximately $17 million or just over 9% of our 3/31/26 NPAs stemming from the U.S. Coast Guard's purchase of a private university campus and the assumption of 2 other loans by a long-term customer. As always, we continue to actively and aggressively manage our NPAs in this portfolio. And David will be next with a discussion of our first quarter financial performance. David Sparacio: Thank you, Jim, and good afternoon, everyone. I will walk you through the financial details of our first quarter, and I am pleased to report a strong start to 2026 across virtually every metric we track. The headline numbers reflect continued expansion in the net interest margin, disciplined expense control, solid loan and deposit growth and a meaningful year-over-year improvement in operating leverage, all of which speak to the durability of the ServisFirst model. For the first quarter of 2026, we reported net income of $83 million or $1.52 per diluted share or $1.54 on a normalized basis. To put that in context, we earned $1.16 per diluted share in the first quarter of 2025. So we are up 33% year-over-year on earnings per share. On a linked-quarter basis, EPS stepped back from the $1.58 we reported in the fourth quarter of '25, and I want to briefly explain why. Fourth quarter included a $4.3 million nonrecurring BOLI death benefit that flowed through noninterest income and fourth quarter also had more calendar days to earn net interest and fee income. During the first quarter, we also had a prior period adjustment to BOLI income of $1 million, which was a headwind. Excluding those items, the core earnings trajectory is clearly upward. Our return on average assets was 1.89% for the quarter, which was essentially in line with fourth quarter and well above the 1.45% we delivered 1 year ago. Return on average common equity was 17.91%. These are strong industry-leading returns and they reflect the operating leverage inherent in our model when loan growth, deposit repricing and expense discipline all move together in the right direction. In net interest income for the first quarter, it was $148.2 million, which is up from $146.5 million in the fourth quarter and up from $123.6 million a year ago. The net interest margin expanded to 3.53%, 15 basis points better than linked quarter and 61 basis points better than the same quarter last year. That progression reflects 2 drivers working in tandem. Continued repricing of our low fixed rate loan portfolio and a full quarterly impact of the Fed rate cuts from the fourth quarter. As we have mentioned in previous quarters, we continue to see opportunities on loan repricing. For the next 12 months, we have about a $2 billion opportunity for low fixed rate loans renewing, normal payment cash flows, covenant violations and modifications. In fact, we have about $2.9 billion in fixed rate loans maturing in the next 3 years at a price below our current going on rate for loans. On the deposit side, average interest-bearing deposit costs fell to 2.79%, down 22 basis points from fourth quarter and 61 basis points from over a year ago. That repricing is still working through the book, and we continue to expect meaningful benefit as higher rate time deposits mature and renew at current market rates. On the asset side, loan yields were 6.18%, an 11 basis point step down from quarter 4 that reflects the normal variability in the declining rate environment, and it does not represent any systemic pricing pressure. Investment yields of 3.78% were essentially flat versus fourth quarter and up meaningfully from a year ago. I would also note that during the fourth quarter, we redeemed the $30 million and 4.5% subordinated notes due in November of 2027, which was a cleanup item that removed an above-market funding cost as we entered 2026. From a noninterest income perspective, our income was $10.8 million for the quarter compared to $15.7 million in fourth quarter. The linked quarter decline is explained almost entirely by a $4.3 million nonrecurring BOLI death benefit that boosted the fourth quarter. Stripping that out and the negative adjustment this quarter to BOLI, noninterest income was essentially up 4% versus fourth quarter and continues to show solid organic growth year-over-year. Service charges were $3.3 million, which is flat versus linked quarters despite fewer days and up 29% year-over-year, fully reflecting the service charge rate increases we implemented in July 2025. Mortgage banking revenue was $1.9 million, a 14% increase on a linked-quarter basis, driven by higher secondary market volumes. Net credit card income grew 12% year-over-year to $2.2 million, and underlying BOLI income was up $2.8 million, up 32% from a year ago, which is in line with the growth in our portfolio assets. These fee lines reflect genuine relationship deepening across our markets. From a noninterest expense perspective, the total was $47.4 million in the first quarter, which is up modestly from $46.7 million in fourth quarter and up 2.8% versus quarter a year ago. We are very pleased that the efficiency ratio came in at 29.81%, the second consecutive quarter below 30%. This is a benchmark that very few banks our size can claim, and it reflects the fundamental scalability of the ServisFirst model. Primary driver of the salary increase, up 13% on a linked quarter basis and up 17% year-over-year is the combination of the continued build-out of our Texas banking team and the seasonally higher payroll taxes in the first quarter. We are investing intentionally in Texas and expect the revenue contribution to more than justify the cost over time. Offsetting this, other operating expenses fell 37% year-over-year to $4.3 million and third-party processing costs were modestly lower, keeping overall expense growth a fraction of our revenue growth rate. Our effective tax rate for first quarter was 17.83%, down considerably from 19.72% in fourth quarter and 20.06% a year ago. This reduction reflects the purchase of investment tax credits during the quarter, a tax planning strategy that delivers immediate recognized benefit and fits well within our capital deployment framework. We continue to evaluate similar opportunities selectively and expect the full year effective rate to remain modestly below our peers. Our capital position continued to strengthen in the first quarter. Common equity Tier 1 capital to risk-weighted assets reached 11.86% on a preliminary basis, up 21 basis points from year-end and up 38 basis points from 1 year ago. Total capital to risk-weighted assets was 13.13%. Our Tier 1 leverage ratio was 10.71% and tangible common equity to total tangible assets stood at 10.46%. We are building capital organically while supporting balance sheet growth, and we believe the current capital trajectory is highly sustainable. Book value per share was $34.99 at quarter end, reflecting annualized growth of 13.4% from year-end and 14.5% year-over-year growth. Tangible book value per share was $34.74. Shareholders are seeing real compounding growth in intrinsic value. On liquidity, we ended the quarter with $1.84 billion in cash, approximately 10% of total assets. We have no FHLB advances. We have no broker deposits. Our funding base is entirely core and relationship-driven, which we believe positions us well to support continued organic growth, especially as we build out our Texas market. In summary, the first quarter was a quarter that demonstrated the strength and consistency of the ServisFirst franchise. Net interest margin continues to expand. The efficiency ratio came in below 30% for the second consecutive quarter. Normalized earnings per share are up 33% year-over-year. Capital is building and our liquidity position remains strong. We remain focused on what we control, deepening relationships, building the Texas franchise and sustaining the operational discipline that has driven these results. Now I will turn it back over to the operator to begin the question-and-answer session. Operator: [Operator Instructions]. Our first question today is coming from Stephen Scouten from Piper Sandler. Stephen Scouten: Tom, it sounds like you're pretty encouraged about the trends you're seeing around loan and deposit growth for the remainder of the year. What would you anticipate that, that could translate to? And maybe getting specific on it, how much have you seen out of the New Texas team now that they've kind of started booking loans. I know you mentioned first loan closing in March. Just kind of how you feel about the potential of that team now that you know a little bit more about their potential within the franchise. Thomas Broughton: Yes. I think they have a robust pipeline. I don't know exactly what the closing percentages would be on that, Stephen. But it's a lot of names. It's a lot of new deals with people they've worked with over the years. So we are optimistic that they'll end on -- it takes time to build a pipeline, but towards the end of the year, we think we'll certainly see some success in closing and help -- if we fall short in our pipeline of where we think we are already, we think it will certainly help push us to a more optimistic tone of loan growth for the whole year. And I don't -- loan growth is not great. I mean I give it a B+ if I had to rate it. It's not easy, and there's a lot of -- a fair amount of price and credit term competition that we try not to take part in. If you don't say, if a competitor is happy with a 10% return on equity, you're trying to get a 20% return on equity, he's probably going to beat you on some terms and rates. So that's certainly still the case today, and we see it today probably more than you think we would, given that the economy is pretty good, things are progressing nicely. So I mean, I guess the wildcard on everything with the consumer is, of course, going to be gas prices. So I don't -- I think that could trickle into the whole economy if we don't see some moderation in gasoline prices in the next 60, 90 days. But that's far afield from your question, Stephen. Did I answer your question? Stephen Scouten: Yes, you did. That's helpful directionally for sure. And then if I can think about maybe the kind of what you would expect from average earning assets this year relative to maybe the loan book. The past year, you saw really nice loan growth, but average assets were kind of flat and average earning assets trended down a little bit over the course of the year. So I'm curious if this year, you think maybe that average earning asset growth can more closely match the growth in loans that you expect to see? David Sparacio: Yes. I would agree with that, Stephen. This is David. And I mean, we're going to continue to see growth in our assets. We saw about 8% in loan growth year-over-year. And so we continue to look at investments, and we have good deposit growth, which is going to obviously drive the asset growth. So we are looking at investments with the offset that loan demand is not there. And so we can continue to do that. So I would expect average assets to rise in line with loan growth. Stephen Scouten: Okay. Great. And then maybe just last thing for me. I was curious on the expense side of things, obviously, continue to be best-in-class there. There was a particularly large move. I think you guys called out in the release on the other noninterest expense. Just curious if you can give any detail on that and if this is kind of a good run rate to think about into the second quarter or beyond? David Sparacio: Yes. So there were 2 things that were going on in other operating expense. If you recall, first quarter of 2025, we had a pretty large operational loss. It was about $1.8 million. So that inflates first quarter of 2025 operating -- other operating expense. And then this quarter, we saw, which I think I've seen other banks come out in their releases as well and noted was a reduction in the special assessment from the FDIC from the spring of 2023 crisis. And so we saw a $1.2 million benefit from that. And so I would advise you not to use the $4.4 million number as an other operating expense kind of a go-forward model. I think it's closer to a $5.5 million number. Stephen Scouten: Got it. That's extremely helpful David. Thank you guys for the color and congrats on the quarter. Operator: Next question today is coming from Steve Moss from Raymond James. Stephen Moss: Tom, maybe just following up on expenses here and the efficiency ratio. You guys came in sub-30%. I hear you a little bit of extra benefit from the FDIC expense here. But going forward, you talked about margin expansion, loan growth. And just kind of curious, it seems like you guys can run around 30% or maybe a little bit below. Just how do you guys think about the expense trajectory for the remainder of the year as you make investments? David Sparacio: Yes. So I know we talked to you in Chicago last year and told you that you were aggressive on our efficiency ratio right in [ mean 30% ], dropping below 30%, I think, is kind of a flattening point, right? I mean we're going to continue to grow as an organization. Built into that, we have a fairly sizable complement of the Texas franchise, right, and they're not producing revenue. So as they produce revenue as the year goes on and they build out their book of business, that's going to help us. But I mean, we don't have any major investments to do in the back office side. But as we continue to grow, there will be increases in expenses. I mean our biggest expenses are employees. We're not on a one cycle for merit increases. So you'll see each month, you'll see employees get merit increases, and that will drive the salary and benefit expense up. So I think if you're using that 30% mark, we're not going to dip too much lower than where we are at a high 29% efficiency ratio today. Stephen Moss: Right. And then just kind of thinking about expense growth for the year, like high single digits to low double digits is kind of a fair assumption based on what you see? David Sparacio: Yes. I would say mid- to high single digits. I wouldn't put it in the double digit on expense growth. Stephen Moss: Okay. Appreciate that. And then on the margin here, I guess just a couple of questions. David, in your comments, you said continue to see core margin expansion. Kind of curious how much additional margin expansion you expect? And also on the $2 billion in loans repricing maturing cash flow as you name it. Just kind of curious as to what that incremental pickup is versus on the roll-off yields versus the roll-on yields. David Sparacio: Yes, absolutely, Steve. So I stand by my comments that I've made for a while now and that I expect the margin to expand 7 to 9 basis points given a flat rate environment, right? Obviously, in fourth quarter, we had a few rate cuts, and we had the full impact of the September rate cut in the fourth quarter as well. So we saw a pretty dramatic decrease in our deposit costs. And even this quarter, the last rate cut was, I think it was December 10. And so we didn't get much of an impact of that in the fourth quarter, but we saw it this quarter. And nobody obviously knows what the Fed is going to do with rates, right? I mean the latest projection that the Fed released it was in early March, mid-March, and they -- it was a prediction that they're going to raise -- I'm sorry, lower 25 basis points one time this year. I don't know if that's going to hold true today or not. I mean that's -- as Tom's point, I mean, that was before the war in the Mid East and gasoline prices started to rise. And so I'm not sure what the Fed is going to do on the rate side. If they do reduce rates once, we're going to aggressively drop our rates as well on deposits, and we'll see a significant benefit given the beta that we realized in the fourth quarter. On the asset side, you talked about the $2 billion we have. And yes, I mean, for instance, we have $1.2 billion in loan maturities at a fixed rate -- low fixed rate loan maturities in the next 12 months. And their weighted average yield is 5.19% today. Our going on rate for new loan activity is 6.5%. So we have substantial pickup. I'm not saying we're going to get 131 basis points on every single loan that we reprice, but we're going to see some decent sized pickup on that loan repricing. And so we continue that to -- for that to happen for the next 12 months. So that's kind of what we're seeing on the margin side, Steve. Stephen Moss: Okay. Appreciate that color there. And then just on credit here, just kind of curious with regard to the large borrower, $100 million borrower, just kind of curious as to what the status of that work is. I know you guys mentioned last time it's going to take a lot longer. I believe they may have filed for bankruptcy. So just kind of curious as to is it still a couple of quarters to get to resolution or how that could play out? Jim Harper: So just keeping in mind that there are literally dozens of special purpose entities within that family of borrowers. None of our borrowers to date have filed bankruptcy. So just an important distinction so far, so good on that front. We're continuing to proactively work with the borrower and related entities to try to find the best path forward on all 8 of the loans that we have. And slow and steady is probably the way I'd characterize it. Tom or Rodney may have a different approach, but we're working on it as diligently as we can, try to produce the best outcome we can. Thomas Broughton: We think we'll see good progress in the next 2 quarters, [6] months. Stephen Moss: Next question today is coming from David Bishop from Hovde Group. David Bishop: Tom, quick question circling back to the Texas market expansion. You're pretty -- you hired some pretty senior lenders out of their former franchise. When you ring-fence it looking out a couple of years, is the sort of opportunity set in terms of growth in the hundreds of millions? Could it approach the billions of dollars? Just curious how big you think that Texas market could get for you over time? Thomas Broughton: Over what time period, Dave? David Bishop: Let's say, over 3- to 4-year period. Thomas Broughton: 1 year? 3 to 4. Yes. I would think it would be more like a [ B instead of an M ] on the number in terms of opportunity in that time frame. David Bishop: And the types of loans that the team can then, is it more C&I in nature versus CRE, your legacy portfolio? Just curious how you see that mix coming out of that franchise. Jim Harper: It's virtually all C&I at this point. David Bishop: Got it. And you started to see the deposit relationships migrate yet? Or is it still too early? Thomas Broughton: Yes, C&I deposit relationships as well. So... David Bishop: Got it. And then a couple of quarters ago, I think, Tom, you mentioned in terms of the loan payoffs, I think it was like $0.50 for every dollar of new loans. Is that still trending down in terms of loan payoffs versus originations? Thomas Broughton: It's trended down. It's more like $0.30. And we think we'll see it continue to moderate from there, Dave. So that's helpful to us. First quarter just kind of slow. I mean, right? But we're seeing much better moderation in loan -- probably 30% is too high is probably 20%, 25% of bookings. So it's not the 50% payoff. David Bishop: Got it. And then maybe a question for Dave. You talked about the -- some of the impacts and puts and takes on the operating expense side. And then you mentioned the BOLI headwind, I think it was about $1 million. Does that imply like a $3.8 million is a good run rate for the BOLI line moving forward? David Sparacio: Yes. That's correct, David, because we had, like I said, a $1 million headwind related to the fourth quarter prior period adjustment. So $3.8 million would be a more realistic trend going forward. David Bishop: Got it. And then from a credit perspective, you noted the charge-offs there. Just curious if there was any significant sort of new nonaccrual inflows or backfills on the nonaccrual side that you could point out? Jim Harper: 1 or 2 relatively small ones, but to be honest with you, I wouldn't classify any of them that's terribly material. They were both pretty small in the quarter. David Bishop: Got it. I think I heard in the preamble, we expect about a near-term $17 million reduction in NPAs, if I heard you right. Jim Harper: That's right. We've got some really good visibility into 3 assets that will be paid off or taken out by a better quality borrower here in the really, really short term. So... David Bishop: Got it. Maybe one final question for Dave on the margin outlook. If I'm looking at the supplemental information deck, it looks like deposit costs were pretty much on top of the average for the quarter. Has most of the expected margin expansion predicated more on the earning asset side or a combination of earning asset and funding costs going lower? David Sparacio: I mean it's predominantly on the earning assets. We do have about a $1.3 billion book in time deposits that are going to reprice, right? I mean, those are maturing. I think there's like a 5-month remaining duration on those. So they're going to reprice in the next couple of quarters, and they may reduce funding costs a little bit, but it's not going to be significant enough to really move the needle on deposit costs. It's going to come from the asset side. Operator: We reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Greetings, and welcome to Zions Bancorp's First Quarter Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. It is now my pleasure to turn the conference over to Andrea Christoffersen. Thank you. You may begin. Andrea Christoffersen: Thank you, Julian, and good evening, everyone. Welcome to our conference call to discuss Zions Bancorporation's First Quarter 2026 Results. My name is Andrea Christoffersen, Director of Investor Relations. Before we begin, I would like to remind you that during this call, we will make forward-looking statements. Actual results may differ materially. We encourage you to review the forward-looking statements and non-GAAP disclosures in our press release and on Slide 2 of today's presentation, which apply equally to statements made during this call. A copy of the earnings release and presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Chief Financial Officer, Ryan Richards, will review our financial results and outlook. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Steward, Chief Credit Officer; and Chris Kyriakakis, Chief Risk Officer. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for 1 hour. I will now turn the time over to Harris. Harris Simmons: Thanks very much, Andrea, and good evening, everyone. We are reasonably pleased with our performance and financial results for the first quarter, which reflect meaningful year-over-year improvement and continued progress against our long-term strategic priorities. Our Capital Markets division continues to be an important driver of fee income growth. Since launching the business in 2020, we have invested heavily in talent, technology and product capabilities, expanding our presence across investment banking, sales and trading and real estate capital markets. In late March, we announced an agreement with Basis Investment Group to acquire their Fannie and Freddie lending programs. Related mortgage servicing rights and an experienced team supporting those platforms. Subject to regulatory and customary closing approvals, we expect this transaction will meaningfully enhance our ability to serve commercial real estate clients across the Western United States and beyond and to further strengthen our capital markets franchise. We continue to invest in our consumer and small business franchises. Following the launch of our new gold account consumer deposit product in the second half of 2025, we recently introduced its companion offering for small business customers, branded as "beyond the business." We began piloting the product in Colorado and Arizona late in the quarter, and it's expected to roll out more broadly across our affiliate banks later this quarter. This tiered checking solution is designed to support clients as they grow from basic banking needs to more complex cash flow and money movement capabilities. Our focus on small business is also reflected in continued momentum in SBA lending, where we now rank 11th nationally in SBA 7(a) loan approvals during the first half of the SBA's fiscal year. Shifting now to the financial results for the quarter, slide 3 presents certain first quarter results versus the prior quarter and prior year. First quarter results reflected typical seasonal expense patterns, while revenue and profitability improved meaningfully relative to the prior year period. Net earnings were $232 million or $1.56 per diluted share, up 37% from a year ago, driven by revenue growth, a lower provision for credit losses and a lower effective tax rate. Compared to the fourth quarter of 2025, earnings declined 11%, primarily reflecting lower revenue, including the impact of 2 fewer days in the period and significantly lower securities gains as well as seasonal compensation expenses. The net interest margin was 3.27%, down 4 basis points from the prior quarter, reflecting lower earning asset yields and the decline in average demand deposits partially offset by improved funding costs. Average loans grew 2.4% on an annualized basis, led by commercial lending. While average customer deposits showed a modest seasonal decline, period end customer deposits grew $1.3 billion or 1.8% from year-end. Credit losses were very modest at 3 basis points annualized of average loans. On Slide 4, diluted earnings per share were $1.56, down from $1.76 in the prior quarter and up from $1.13 a year ago. As a reminder, the year-ago quarter included an $0.11 per share headwind related to the revaluation of deferred tax assets due to newly enacted state tax legislation. There were no notable items in the first quarter with an impact greater than $0.05 per share. As shown on Slide 5, adjusted preprovision net revenue was $301 million, declined 9% from the prior quarter, reflecting some of the items noted earlier, including a slightly lower day count adjusted tax equivalent net interest income. Pre-provision net revenue increased 13% versus the year ago quarter on improved revenue and positive operating leverage. With that overview, I'll turn the call over to our Chief Financial Officer, Ryan Richards, to walk through the quarter in more detail and to walk through our outlook. Ryan? R. Richards: Thank you, Harris, and good evening, everyone. Beginning on Slide 6, you can see the 5-quarter trend for net interest income and net interest margin. Taxable equivalent net interest income was $662 million, down $21 million or 3% from the prior quarter and up $38 million, or 6% from the year ago quarter. Earning asset yields fell faster than funding costs during the quarter, most notably in January, and loan repricing reflected the impact of the December rate cuts. Term deposit costs also moved lower, but with a lag over the quarter. Net interest margin was 3.27%, down 4 basis points linked quarter and up 17 basis points year-over-year. Slide 7 provides additional detail on the drivers of net interest margin. The linked quarter walks reflect the lower asset yields mentioned previously as well as a lower contribution from average demand deposit balances. These factors were partially offset by improved deposit costs. Year-over-year, the improvement in margin primarily reflects deposit and borrowing repricing and our continued focus on optimizing the balance sheet. For the first quarter of 2027, our outlook for net interest income is moderately increasing given the uncertain path of benchmark rates. The forward curve as of March 31 assumed no rate changes over the next 12 months. As that plays out, we estimate net interest income growth of about 7% to 8%, which would exceed our guide. Moving to noninterest income on Slide 8. Customer related noninterest income was $172 million compared to $177 million in the prior quarter and $158 million a year ago. Excluding net credit valuation adjustment, adjusted customer-related noninterest income was $174 million compared with $175 million in the prior quarter, and up $16 million or 10% from the year ago quarter. We are particularly pleased with the broad-based growth achieved during the quarter relative to the last year, which reflects higher residential mortgage loan sales activity and growth in retail and business banking, commercial account and wealth management fees. We continue to see attractive opportunities in capital markets and have strong pipelines going into the second quarter. For the first quarter of 2027, our outlook for adjusted customer-related fee income is moderately increasing versus the first quarter 2026 results of $174 million, with broad-based growth and capital markets continue to contribute in an outsized way. We currently expect results towards the top end of that range. Turning to Slide 9. Adjusted noninterest expense was $558 million. Expenses increased versus the prior quarter, driven primarily by seasonal compensation and were higher year-over-year, reflecting increased marketing, technology costs, professional and outsourced services, and higher incentive compensation. We will continue to manage expenses prudently, while investing to support growth. Our first quarter 2027 outlook for adjusted noninterest expense is moderately increasing versus the first quarter of 2026. Based on first quarter performance and full year expectations, we continue to expect positive operating leverage for full year 2026 in the range of 100 to 150 basis points. Slide 10 presents trends in average loans and deposits. Average loans grew 2.4% annualized during the quarter, primarily within the commercial and industrial portfolio and increased 2.5% year-over-year. Loan yields declined sequentially as benchmark rate cuts in the latter part of 2025 were reflected in variable rate repricing. Average deposits were modestly lower than the prior quarter by $540 million. Approximately 1/2 of the decline was due to average broker deposits while the remainder can be attributed to seasonal runoff across business operating accounts early in the quarter. Importantly, period-end customer deposits increased by $1.3 billion or 1.8% from year-end. The cost of total deposits declined sequentially, benefiting from both repricing and a more favorable mix within interest-bearing deposits. Slide 11 presents the 5-quarter trend of our average and ending funding sources. Our total funding costs declined 8 basis points linked quarter to 1.68%, largely as a result of the aforementioned deposit repricing. Period end customer deposits grew $1.3 billion and short-term borrowings declined significantly as we continue to replace higher cost wholesale funding with customer deposit growth and securities cash flows while also remixing into senior debt. Turning to Slide 12. The investment securities portfolio continues to serve as an important source of on-balance sheet liquidity and a tool to balance interest rate risk through deep access to the repo markets. During the quarter, principal and prepayment-related cash flows from investment securities of $493 million were partially offset by reinvestment of $299 million. The continued paydown of lower yielding mortgage-backed securities supports earning asset remix or reduction in wholesale funds. The estimated price sensitivity of the portfolio, inclusive of hedging activity was 3.7 years. Credit quality remained strong, as shown on Slide 13. Net charge-offs were 3 basis points annualized of average loans and the nonperforming assets ratio declined to 48 basis points. Classified and criticized balances also declined during the quarter. The allowance for credit losses ended the quarter at 1.16% and remains well positioned relative to our risk profile with a 239% coverage of nonaccrual loans. Slide 14 provides an overview of our $13.7 billion commercial real estate portfolio, which represents approximately 22% of total loans. The portfolio remains granular and well diversified by property type and geography with conservative loan-to-value characteristics. Credit metrics remain favorable, including low levels of nonaccruals and delinquencies. Our capital position remains strong, as shown on Slide 15. The Common Equity Tier 1 ratio was 11.5%, flat during the quarter as earnings growth was somewhat offset by the $77 million in common shares repurchased and dividends paid in addition to the growth in risk-weighted assets. We continue to expect net capital generation through earnings and continued improvement in AOCI. Tangible book value per share increased 19% versus the prior year, reflecting earnings generation and continued balance sheet normalization. Slide 16 summarizes the outlook we've discussed across loans, net interest income, fee income and expenses. This outlook reflects our best estimate based on current information and is subject to the risks and uncertainties discussed in our forward-looking statements. Andrea Christoffersen: This concludes our prepared remarks. [Operator Instructions] Julian, please open the line for questions. Operator: [Operator Instructions] And our first question comes from the line of John Pancari from Evercore ISI. John Pancari: On the -- just on the margin side, I know you -- your loan yield compressed about 14 basis points linked quarter. I think you had mentioned that it was largely a function of the rate cuts and variable rate repricing. I guess that linked quarter change, was that all the benchmark rate change? Any other impact to loan yields in the quarter? And maybe if you can give us your new money loan yields, just to give us an idea of where originations are coming on the books. R. Richards: Thanks, John. Really appreciate that. Yes. So listen, I think you picked up on the main thrust of it. So we would have had some benchmark repricing and expectation of the rate cut that came in the middle of December, and some of that trailed thereafter. And where we remain just skewing a little bit more on the asset-sensitive side that, that was the biggest contributor. In terms of the repricing characteristics, of course, we've got the nice material in our appendix that I know you're familiar with, but I think maybe the question that you're getting at on front book versus back book for the loan portfolio is really the most meaningful part of that as we sort of think about trajectory moving forward is for those fixed rate loan portfolios, or things that have yet to reprice through. And there, we're seeing a 72 basis point spread on the front book vis-a-vis the back book. John Pancari: Okay. All right. And then I guess, in terms of your positive operating leverage expectation of 100 to 150 basis points, that is -- that's for the year. And so what rate assumption does that imply? I know you mentioned if there's no rate changes consistent with the forward curve, your next 12-month NII outlook could come in at 7% to 8% above the range. Does that 100 to 150 basis points expectation imply the forward curve? And maybe if you can give us a little bit more detail in terms of that NII expectation. Harris Simmons: Yes. Thank you for that, John. Listen, we -- in the past, we've brought a view of kind of latent emergent. It's less interesting this quarter since we -- there's not much to talk about in the forward curve in terms of rate changes that were implied at least as of the quarter end. So those are kind of right on top of each other. So we were able to firm up our guide for the full year. As you sort of think about the trajectory of that, where we normally guide on a 1-year, 4-quarter basis. We believe you'll see there is a much more powerful positive operating leverage, probably not unlike what we've seen this quarter relative to last quarter, where and Harris' quoted in his remarks, you will see positive operating leverage of 270 basis points. So we think that as our repricing plays through from the investment securities into loans, as we have less of those headwinds associated with our terminated swaps. Some of the other things play through, we do see really good prospects for 1 year fourth quarter. Later when we were with you, we were anticipating as part of our sensitivity in our guidance that we could have had great cuts. I think we were anticipating in June and September. And based upon the forward curve, those are now off the table. So that having no cuts is embedded into our full year positive operating leverage guide. Operator: And our next question comes from the line of Manan Gosalia with Morgan Stanley. Manan Gosalia: On the deposit cost side, deposit costs, I guess, they came down quarter-on-quarter, but they were pretty flat relative to the spot rate as of December 31. And it looks like the spot rate as of March 31 has moved lower again. So can you just help us connect the dots on the trajectory there? Maybe give us an update on deposit pricing and competition and also what you're expecting in terms of CD rolls coming up? Harris Simmons: And I'll try to unpack that in a few places and invite my colleagues to jump in as well. Listen, I think -- and I've seen the questions coming in other calls in this earnings cycle about where deposit costs go if rates kind of stay static here for the remainder of the year. There's still some trailing activities, some repricing down on term deposits, thinking about customer time deposits that yet to play through. So that would definitely be an element of this. You will have heard us talking increasingly quarter-over-quarter. And when you catch us at conferences about some of our strategic initiatives. We think that those are going to be really valuable to us and driving deposit balances as well. So you heard Harris talk about in his prepared remarks, the gold account, the business beyond, there's a lot that we've talked about with SBA lending that brings deposits with us. We think that's useful. There's some other work we've been doing around wholesale deposits with customers relative to other sources of wholesale funding that we think can defray deposit costs moving forward. So while we don't have explicit deposit guidance, then we don't explicitly guide towards deposit costs. All of that would be embedded into our , I believe, to be very constructive for your NII guidance. I think there's a deposit proposition comment on that too. Scott McLean: Yes. Manan, this is Scott McLean. And I would just add to that, that this deposit campaign we've had going on to bring some of our off-balance sheet deposits back on balance sheet. We've had anywhere from $7 billion to $12 billion in off-balance sheet deposits and it's really just a client decision as to where they want to sit. But we've been successful at bringing more of those back on balance sheet at rates that are attractive, they're accretive versus broker deposits and overnight cost of borrowings. At various points in time, we focused on that. And so we've been very successful at bringing those deposits back on. And all of it is I would say 25 to 30, 35 basis points accretive to brokered deposits. You'll see us continue to do that. And in terms of deposit costs in general, it's I'm not sure I've ever seen a time when it wasn't real competitive other than maybe 2020 and 2021. So -- but we -- all of these -- almost all of this, our relationship deposits that we're bringing on, and it's not just coming from off balance sheet. Quite a bit is coming from new clients or existing clients that we didn't have their deposits to begin with. Manan Gosalia: Got it. I appreciate the color there. And then maybe on the buyback side, buybacks were up this quarter, but the CET1 ratio is still relatively flat as you accrete more capital through earnings. So maybe if you can talk about the level of buybacks that you think you can do for the rest of the year, especially as you narrow the gap with peers in that CET1 including AOCI ratio? R. Richards: Manan, thank you. I think you said that very well because our nominal CET1 ratio has been kind of hanging in there and as we said before, we see the path for AOCI coming in is becoming unreasonably predictably over time and something that's really contributed to our kind of outperformance on tangible book value add year-over-year. So I think those all things are encouraging. We've also taken note of the Basel III end game proposal. As others have noted in this earnings cycle. There are some good things in that proposal for us and others, in terms of what it would imply about RWA moving forward. So I never like to get in front of our Board, Head of our Board. It's usually a pretty poor practice for management. But it looks like that we could be in a position to talk about share repurchases moving forward responsibly as our Board will allow and as regulators sign off. As Harris mentioned during his remarks, we're really, really excited about the acquisition of the multifamily agency program that's still pending, it's pending regulatory approvals. Should that see all the way through as we expect, not knowing the time line for all that, not trying to predict any of that, that would be a source of consuming capital. But there's some other things that are happening in the environment, including things like these exchanges that could be considered by our team as well. So that's a long-winded way of saying, I think the prospect of share repurchases are still on the table, subject to Board approval. Operator: And our next question comes from the line of Dave Rochester from Cantor Fitzgerald. David Rochester: On the guidance, I know we shifted back to the 1 year ahead quarter-over-quarter look, but I was curious how you feel about the annual guide for '26 you gave last time. It seems like given everything that you're saying together, you would still feel pretty good about that and maybe with a little bit of upside. Is that fair? R. Richards: Yes. Dave, I think it's a reasonable observation, particularly given my earlier comments here about having those two rate cuts off the table that we would have been talking about last quarter. So definitely -- I mean, we don't make a practice of doing this all the way through the year, but firming up that the things that we talked about last quarter were better. David Rochester: Yes. Yes. Sounds good. Maybe just as a follow-up on the loan outlook. I was wondering how things were shaping up in 2Q at this point. How does the pipeline look overall heading into the quarter versus where you started at the beginning of the last quarter? And what are you seeing on the C&I front that has you excited? And maybe if you could talk about a little bit of a pullback on the consumer side, that would be great. Derek Steward: Sure. Thanks, Dave. This is Derek. The pipelines looking healthy actually at this point. We're seeing lots of activity in small business, middle market, corporate banking syndications. Just general C&I, we're just seeing lots of activity. Another thing that's coming back is we're seeing increased CRE activity. We're cautious there, but we are seeing increased activity as some of the markets have reached more stabilization. And so I think we'll continue to see growth coming from those areas. R. Richards: So probably pricing pressure on CRE. I mean, I hear our people talking about the you're seeing as much pricing pressure in CRE as they've seen for some time. Scott McLean: I would -- Dave, I would just add also, and I made this comment at the RBC conference back in early March that I think investors increasingly really need to peel back the onion on the type of loan growth that banks are producing. The NBFI kind of issue that has sprung up has just -- I mean, there are massive differences in bank's reliance on NBFI growth. It should be a good asset class for many, many reasons, managed responsibly, as you know, for us, as we report, it's about $2 billion of our portfolio outstandings and has not grown in 5 years. And you can see that our peers and banks smaller and larger are pretty much gulping down these loans just as there has been a difference in CRE growth. And so I think what investors if they'll really peel back the onion will find that if they're worried about NBFI, if they're worried about rapid CRE growth, if they're worried about personal unsecured lending, that's not us. So again, I think it just requires a little more investigation of the topic. Operator: And our next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Bernard Von Gizycki: I know we're talking about deposit balances earlier. You had a nice pickup in the noninterest-bearing deposits of about $1.3 billion versus 4Q. I believe the migration of the legacy gold accounts was done last quarter. But Harris, you mentioned the rolling out of the companion offering for small business customers beyond the business. Just what drove the sequential increase? And any color you can share on customer acquisitions on the goal and the beyond the business accounts for the quarter? Harris Simmons: Yes. So first of all, I have -- I'm dyslexic with this product. It's actually a business beyond is what we feel the product is called. And I can't read my own words here on the front page. But the business beyond, this product suite, it's too new to have had any impact in the first quarter and won't have much in the second. We rolled it out in Arizona and Colorado beginning on March '26. But the early reaction to it with a very limited sample of -- it's the first really new product offering we've had for small businesses for quite some time, and it's been really well received. And so I'm excited about the prospects for it. But we'll be rolling it out across the rest of the organization in -- later in May. And it will be kind of in the third and fourth quarter before we start to understand what the impact might be. On the Gold Account, the first quarter, I mean we -- again, we started rolling this out in the second half of last year and really the full impact started to come kind of in the fourth quarter. We've -- in terms of new account activity, we opened about 4,000 new accounts in the first quarter. And I'm hopeful that we'll see that kind of ramp up to kind of 20,000 new accounts for the year. What we're seeing is over time, the total relationship balances are somewhere around $100,000. And it's not immediate, but it's kind of -- we're seeing accounts build up to that. And so anyway, we think that this is a really great opportunity for us, and we have a lot of energy, and we'll be devoting a lot of marketing to it. So it's still early innings, but I'm hopeful that, that will really contribute to not only a well-priced deposit base, but one that's granular and really sturdy with the kinds of customers that we can do a lot of business with. Bernard Von Gizycki: Great. And just on capital markets fees, the $28 million, slightly higher year-over-year, but down $9 million versus a strong 4Q. Just anything to call out during the quarter and Ryan, I think you called out the strong pipelines in capital markets going into 2Q. So if you could just unpack the quarter and trends you're seeing right now? Scott McLean: Yes. This is Scott. I'd be happy to do that. we had a -- it was a tough quarter to compare against last year because of a really large M&A transaction fee that we reported on. So we were delighted with the quarter as it ended and really all of the businesses continue to show good opportunity. In the first quarter, we saw real strength with our syndications and our interest rate hedging businesses and also with a new commodity hedging, oil and gas hedging practice that we started in the third, fourth quarter of last year. We think it has the potential to generate, I don't know, $7 million to $10 million a year in revenue, and we're just getting started there. But it's -- basically, that business is positioned against about 80 of our energy reserve-based lending clients. We've already had about 30 of those, 35 transact with us on this interest rate -- this oil and gas hedging activity. And so I think between syndications interest rate hedging, our foreign exchange business, commodity hedging. Our real estate capital markets business, it was a soft quarter for them. And -- but the second quarter that can kind of ebb and flow, they're still very confident they're going to have a real solid second, third and fourth quarter. In our M&A business, again, which is sporadic, we've invested quite a bit in new colleagues there and deal flow looks good. So we -- it's been a high-growth business for us. We've made a lot of investments there, and we don't anticipate it will disappoint this year. Operator: And our next question comes from the line of David Chiaverini with Jefferies LLC. David Chiaverini: Wanted to go back to -- you alluded to the Basel III end game benefit of a -- it sounded like a modest net benefit. But are you able to quantify what that benefit could be for Zions? R. Richards: Thanks for the question, David. I'm happy to provide some color there. Listen, we're still working all the way through the process, but our scoping on the standardized approach would suggest some RWA relief as others have reported. Right now, we would size that between 9% to 10% of RWA relief, would I contribute all else being equal, about 93 basis points to common equity Tier 1. We are still studying the ERBA just to understand the puts and takes there with the risk sensitivity compared to the operational risk RWA. So probably more to be said there in future quarters. As you know, we've been sort of talking capital, both nominally and including AOCI and by formalizing AOCI into the standard moving forward, albeit with a pretty lengthy phase-in. Of course, that cuts the other way, but we've already been operating as though AOCI is something that we're cognizant of in setting our capital glide path. So hopefully, that helps. David Chiaverini: Yes, very helpful. And then you alluded to pricing pressure on the CRE side, could you talk about the C&I pricing environment? Derek Steward: Sure. This is Derek again. Yes. I mean we're -- while the activity levels are healthy and it certainly is a competitive market out there today. So we're seeing some price competition. But it's not significant, but it's something that we're definitely very aware of. Operator: And our next question comes from the line of David Smith with Truist Securities. David Smith: Can you please talk a little bit about where you're spending the most time managing credit today? Obviously, it was a really strong quarter with just 3 basis points of net charge-offs and criticized, nonaccruals, pretty much all the forward indicators all trending down versus the fourth quarter. But to the extent that you're seeing problem or areas of concern in the portfolio, where those might be and what trends you're seeing specifically for those subportfolios. Derek Steward: Yes. Thanks for the question. Overall, we're seeing -- continuing to see improvement in commercial real estate and as you can see from the number of criticized and classified and nonaccruals continue to decrease there. If anything, we're focused on the commercial and industrial space, it's over -- actually, year-over-year, our criticized and classifieds have improved there, saw a slight increase this quarter. But that's the area where we're -- our attention -- where we're paying the most attention. We are not seeing a lot of impact from tariffs or from the events in the Middle East at this point, but watching really just focused on some just increases to expenses in certain areas such as restaurants and consumer-focused businesses that seems to be what we're watching the most these days. David Smith: Do you have a sense of how long oil prices might have to be elevated before that plays through more broadly with some of your industrial client base? Derek Steward: Yes. It's a great question. The forward curve on oil right now is going out a year at a little higher level, but it starts to drop actually pretty fast. And by next year, it's back to a lower level. So we'll just have to watch and see where the curve goes. Operator: And our next question comes from the line of Ken Usdin with Autonomous Research. Kenneth Usdin: Ryan, can I just ask a follow up on the NII comments. When you mentioned the 7% to 8% growth with no rate cuts, were you referring to the full year 2026 commentary? Or were you referring to the 1Q '27 over 1Q '26? R. Richards: Yes. For our NII guide, that's the shorter view is how we guide that. So certainly at the upper end of moderately increasing and we think the ability to overachieve if rates hang in for us. Kenneth Usdin: Okay. Got it. And then I just wanted to make sure because it was a little bit back and forth between talking about like the full year versus the standard guide. So it's on the standard guide. Okay. And then on the -- as you go forward, the earning asset base has been pretty steady for the last couple of quarters. And as you kind of have reworked the mix of the balance sheet from here, do we start to see more AEA growth? Or is the benefit that you get from NII going to come more from the margin expansion from here? R. Richards: It's a very fair question, Ken, because you're right. I mean, if you look year-over-year, average earning assets are kind of hanging in around the same levels. And so the loan growth that we're seeing has sort of been offset by the average investment securities and money market funds. Listen, one of the things that we're probably getting closer to, I talked about in my prepared remarks, the reinvestment that's occurring for investment securities, where we've still been allowing a decent amount of that to flow over to paying for loans or paying down wholesale funding. We're getting close to the point in time when we would think about reinvesting fully, just to make sure we keep the same comfortable headroom on our liquidity measures and the like. But if you see in our guide, we certainly expect for loans to build from here. And you all, I think, are very attuned to where we expect to see that. One of the things that maybe it could be potentially a little bit lost in the message this quarter is we had a really nice loan fee result. You'll see that and that was on the back of some of the things that we said we were going to do. Part of our strategy was saying, hey, going forward, we want to do more held-for-sale activity around residential mortgage loans. And that showed up in this quarter. So we had a pool in excess of $500 million that we sold out of the book that would have otherwise been part of our story for loan growth. Another thing that we haven't yet featured on this call, but would be in the earnings release, is we did roll out an accounting change this quarter moving forward on the netting of derivative assets and derivative liabilities and cash collateral things associated with that. And that would also have sort of a knock-on effect on some netting down of some loan balances to the tune of about $100 million difference. So I acknowledge that our loan growth looks modest. But there were some other pieces in there that were they in our base results would have looked like a stronger loan growth story. So moving forward, it's going to be both, long-winded answer. It's definitely going to be a margin expansion and growth in average earning assets. Harris Simmons: I'd just add that the consumer book, the 1 to 4 family residential jumbo arms, I'd expect that, that will remain flat to kind of drifting down over time. We're just trying to remove some of the risk in a world where higher rates may be the norm and so some of the convexity risk there. So really trying to focus more on a held for sale and turning that activity into more fee-based activity. So that will be a little bit of a drag, but we think that we'll see moderate loan growth despite that. Operator: And our next question comes from the line of Peter Winter with the D.A. Davidson. Peter Winter: I was wondering, with the outlook of fee income coming in at the upper end of your range and you continue to make these investments, which are clearly working. Would you expect expenses to also come in at the upper end of that range of moderately increasing? R. Richards: And I'm sure the others will have something to say here but my spoken remarks, I purposely kind of guided towards the upper end of the range and NII and fee income. I'm glad you picked up on that. I didn't do that for expense so we'll see. But from where I sit here today, I think it's a reasonable guide just as it is. I wouldn't guide on the operator or the lower end. I just leave the degrees of freedom within that. Scott McLean: I would just add that most of the broad-based growth we're seeing in fees now is -- I mean, capital markets, we clearly have invested a lot. The others we're not having to -- the incremental investment is not that significant. We're just -- I think we're seeing a lot of our sales practices flowing through. I think we're seeing our call programs are stronger. And we're just -- this is the best broad-based growth we've seen in a long time. Peter Winter: I just thought with the growth in the fee income, also maybe higher incentive comp as well. That's why I was thinking about it. Scott McLean: Well, that's true. That's true, and you can see that a little bit in the first quarter. Harris Simmons: But it's in the context of a $2.1 billion expense number. So it's not going to move it materially. Peter Winter: Okay. And then just if I can ask a separate question but with these growth initiatives under way, is there anything tangible that you can point to that the investments that you made in the FutureCore to modernize the core systems. Has that been additive to your growth or helping attract more customers, just given -- we're seeing some nice organic growth from you guys. And I'm just wondering if the FutureCore is playing into that? Harris Simmons: Yes, although it's -- I think it's hard to quantify exactly, but it's helping us just get things done faster. I mean customers don't choose a bank because of your core systems, especially the lending side. They're looking for execution and price and relationship, et cetera. But it's giving us -- I mean, I go back in time. We did an exceptional job during old PPP thing and that's ancient history now, we couldn't have done it without this new core. We are quickly doing the real land office business in PPP with a great process. So that's just an example of how it's allowing us to get things done faster. Scott McLean: Well, the other couple of other points that I would add is the real-time data and the fact that all of our loans and deposits are on one data system, again, that doesn't send tingles through clients' minds. But in a data-driven world, it's absolutely critical that it'd be accurate. And we -- it also, we're -- we said on our last call that we were close to closing a transaction with TCS to bring their Quartz -- to have a product called Quartz that is a tokenized deposit, stable coin application. And because we're on their platform, the ability to start innovating with tokenized deposits or stablecoin is infinitely cheaper than anybody else trying to do this. And so we think it's going to be an interesting way to compete way beyond our size in that arena should we choose to. We've not announced that we are, and we just -- we've got a platform that we would not have had if it not been our core conversion. Operator: And our next question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: Just to go back on -- just to go back on your 7% to 8% NII growth, assuming no rate cuts. Is it fair to say that, that assumption is baking in moderately increasing loan growth, so call it mid-single digit or so. But that would also imply a pretty meaningful step up in net interest margin expansion throughout the course of 1Q '26 to 1Q '27 in order to get to the 7% to 8%? R. Richards: Yes. Listen, I think you're right about that. In terms of allowing for loan growth to be embedded in that figure and margin expansion. We don't guide -- it hasn't been our practice to guide on margin. But we see ample opportunity to expand the margin throughout the course from this point in time to that point in time in the years, hence -- so both of those are encompassed within our guide. And I can rehearse all those different contributing factors, if you like. But I gave you the short form answer. Sun Young Lee: I would take that. R. Richards: So yes, listen, I think there's different things that are playing through and you've heard us probably talk a little bit about this before. We do have the latent effect of those fixed asset repricing that has yet played through. There's still some sizable books that have longer repricing cutoff patterns. So if you think about things like muni, if you think about owner occupied, if you think about some 1 to 4 family resi. So all that, together with things like less -- these headwinds for those terminated swaps, this quarter, we had about a $10 million headwind through the fourth quarter this year, it goes down to about $5 million. We've got some disclosures in our 10-K that talked about that. All those things blend to an improvement in earning asset yields kind of 1 year in and along the way. We've sort of sized that about 2 to 3 basis points improvement in earning asset yields. We are doing some roll-off of our investment securities portfolio to other gainful places like loan growth and paying down wholesale sources of funding. We sized that as a 1 basis point kind of accretive earning assets. So it's that together with some -- a little bit of a taper of things yet to play through and repricing down of term deposits are all things that contribute to a better NIM story moving forward. Sun Young Lee: Got it. That's very helpful. And your 150 basis points POL for 2026, you seem very comfortable achieving it in a no rate cut scenario. I would -- is it fair to assume that's still the case if we were to get a change in -- if we do end up getting a rate cut? Or does it get more challenging? R. Richards: So we were prepared with something analogous to that last quarter where we were seeing 2 rate cuts. So I wouldn't necessarily back away from that. I would just say, as with all things, it will all depend on our success in driving through those lower-cost bonds and our deposit growth through the course of the year. That's our biggest variable and not knowing day-to-day, week-to-week, what the forward markets are going to tell us. I just feel like we're at least as good or better place than we were last quarter. Operator: And our question comes from the line of Anthony Elian with JPMorgan. Anthony Elian: On M&A, last month, you announced the acquisition of the agency lending business from Basis. right? Last year, you acquired 4 branches in the Coachella Valley. Harris, are these the types of acquisitions we should expect going forward? Or would you cast a wider net at some point, inclusive of bank acquisitions for what you'd look at? Harris Simmons: Well, the first thing I'd say is it's not so much that we're casting a net. We're waiting for fish to swim into the pond that we are comfortable with. We're not out looking to try to -- it's not an objective to do M&A to grow. I've been pretty consistent about that. But I -- but as we see opportunities, we ask ourselves the question, is it a good fit strategically? Is it something that strengthens the franchise and it's all about price at the end of the day, too. And so we'd be opportunistic about it. I think both of these kind of hit that. These agency relationships, the Fannie, Freddie business, we've been talking about here. That is something we have been looking to do. We live in a part of the country where you have a combination of a reasonably young population, a high-cost housing affordability. All of that creates demand for more multifamily over time. It's about -- where about 80% of the population of the nation is taking place. through the Mountain West, the Southwest, et cetera. And so being able to be a one-stop shop for developers of multifamily product fits really nicely into the capital market strategy we have. And fits nicely with the real estate talent we have in-house to originate that kind of product. So I would expect that anything we do would have kind of a story to it in terms of how it fits with the strategy of becoming a stronger presence in the Western United States. Anthony Elian: Okay. And then my follow-up on deregulation. So Harris, you addressed this in your annual letter. We had the capital proposals a few weeks ago. I know we have the comment period now, but I'd like to get your thoughts on if you think those proposals are largely sufficient or what more you'd like to see from those proposals? Harris Simmons: No, I think we're pretty pleased with what -- I -- one of the things -- what I said in the shareholders letter is, the pendulum -- what happens is you get a crisis and a reaction. And that's the history of bank regulation. And the statutes that are passed to turn that into law. And the -- what happened in the wake of the passage of Dodd-Frank was there were a lot of things that I think that with the benefit now of looking back over the last 1.5 decade, regulator sensible people looking at this would say, okay, some of that was actually really useful and needed necessary. And some of it is overkill. And from my perspective, I think the current cast in place and the agencies is doing a really nice job of trying to say, let's focus on the basics because the risk is you get so involved in the thick of thin things that you missed the main event. And I think that's one of the things that happened with the bank failures 3 years ago, things that are kind of hiding in plain sight. It wasn't about some of the -- I mean, everybody -- the industry is actually pretty good at self-regulating. I mean after you've been through the great financial crisis, you don't need to be told a lot about how you adjust your portfolio to make sure that doesn't happen again. And yet that's kind of where the system tends to pile on. And so a lot of things were done in terms of ability to repay qualified mortgages and everything that it's part of the housing affordability problem we have today. It's just more expensive to get a mortgage, for example. I think they're trying to be sensible about how do we get back to kind of the center point. And so I'm actually quite pleased with what we're seeing. Operator: And our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: I wanted to ask you about the agency businesses, but you -- I think you cleared those up, Harris, but that's just a P&L. It's not really use of balance sheet on those businesses. Is that correct? Harris Simmons: Yes. Yes. That -- it shouldn't -- I mean we use the balance sheet for the origination of the deal, the construction, the stabilization, but without fail, our customers who are developing this kind of product, they need a long-term takeout. And so it just allows us to be in the stream for that. R. Richards: One way of maybe stitching together, Harris' a very good response on the regulatory environment. And if there was anything on the wish list, going back to Basel III end game, getting some more risk sensitivity on the commercial loan side of the business would be helpful. It looks like they may have MSRs and scope of things to at least nominally reconsider getting away from the dollar -- for dollar exclusion above certain levels and maybe rethinking of the risk weighting. For this type of business, it's agency multifamily business, there will be some MSR generation that would come from it. So we'll have to see where that falls out. Jon Arfstrom: Yes. I know there are rare licenses and very valuable, so that will be good. Scott, maybe just to go back on lending, energy and lending appetite. Just curious how you're approaching the business with so much volatility. And then can you touch a little bit on the Texas or Amegy C&I growth and what's driving that? Scott McLean: Sure, Jon. Let me -- on the Amegy side, they had -- I'll take the second one first. They had really strong loan growth last year, really broad-based C&I growth and their CRE is holding in there. Energy really did not grow much last year for them. They are seeing better growth in smaller businesses. Principally, they've played more in the middle market, the kind of middle of the middle market and the upper end of it. But just good progress there. Their call programs are great. The bank in the metroplex, their activities in the Dallas-Fort Worth metroplex and in San Antonio are doing well. And so they just have a lot of momentum that they brought into this year, and I know they feel very optimistic about leading the way in terms of loan growth for the company this year, too. On the energy side, holy cow, we've been sitting at $2 billion in outstanding for a long time. And we would love to see that grow, the credit metrics, the pricing metrics have never been better as probably 40% of the banks that play in the reserve-based lending, what I would call middle market of energy lending, about 40% of the banks that used to have exited. And a lot of this business is originated by private equity firms that we know extremely well and have decades of experience with. And so -- and the way we do it, we have about 75 reserve-based loans. So these are highly secured, they modulate based on pricing. And the -- that has done very well through many cycles. What didn't do well was financing oilfield service companies. We have long since reduced our engagement with those companies dramatically. It's about 12% of the book now. It was as high as 35%, 40% at one time. So that was decades it was 15 to 18 years ago. So anyway, I think we've got the portfolio structured right. The midstream side of the portfolio is very good. And we have a great energy lending team. They're widely recognized across the industry as being pros. And adding this oil and gas commodity hedging activity, it just has been terrific, and we'll see a lot of strength from that because our clients want to do business with us. So anyway, I'm optimistic about it. And if that business grew 10% a year for 3 or 4 years, we'd be really happy with it. We had outstandings of $3 billion some years ago. So it's the level that we're not afraid to the level. We just need to see the activity. Operator: Thank you. And our next question comes from the line of Chris McGratty from KBW. Christopher McGratty: Great. Harris, on AI, could you speak to perhaps the near-term opportunity for the company, but maybe over time, any risks that you see out there on the revenue side? Harris Simmons: Sure. I mean we have a variety of things going on with where we're using AI. I don't suspect we're particularly different than most peers this way other than the fact that I think we have -- going back the core replacement project over the last decade, I mean it forced us to do something that I think few others were forced to do. And that is to dramatically focus on the quality of data and its organization. So I felt -- we cleaned the house before we moved into a new house. We threw away a lot of the junk. We organize things. And that's proving to be -- I think that's going to really prove to be useful, in terms of speeding up our -- the delivery of solutions. The kinds of things we're using it for -- I mean just examples, we're using it for things like appraisal review all kinds of document review, contract review, we're using it in our credit exam or credit review function to expand the population of deals that we're looking at and to basically, instead of having people finding needles in the haystacks. They're now -- people are now looking at the needles that we find with other tools. And so the -- I mean, the use cases go on. People are looking for savings through technology. I came across something earlier today. I was looking -- I came across just our headcount back in 2008, that was 18 years ago, there's nothing magic about the year, except that our headcount is down 20% and our -- back then, we were about $54 billion company, you have to inflation adjust that. But even with that, I mean, it's about a 25% improvement in productivity per dollar of real assets. And AI is becoming a part of that. So my view is AI isn't -- it's a new shiny object, but a lot of different technologies have led to improvement in productivity over the years. I think this has the promise of accelerating it somewhat. I mean, we'll be looking at it in -- we -- I touched on the surface of a few things, but we've got a variety of projects going on. As to the threat from AI, there's certainly, there's a concern about agentic AI on margins, et cetera. But I also think that some of these things get overplayed. I think that's probably going to be the case in some places. But a lot of the balances we have -- a lot of the free balance we have actually aren't free balances, they're paying for services. A lot of it's analyzed. And in a world where if you see more agentic AI optimizing, you'll see -- I mean the economies, I'm a great believer that the magic of our free enterprise economy is it's really resilient and responsive to change. And so you'll see things priced that maybe are free today that maybe get charged for. Everybody will kind of figure out their way. And I think back to -- I've been around long enough. I remember when Reg Q was removed. And if you told me that 4 years later, we have more in way of noninterest-bearing demand deposits as a percentage of total deposits and we had in 19 -- in the early 1980s, I'd have said that's impossible. And yet that's the case. And so I think the -- you have to take with a grain of salt, sort of the sky is going to fall because companies adjust, pricing adjust, et cetera. So I think the important thing is to make sure that you're not -- you don't have your head in the sand, you're keeping focused on what customers want that you're supplying solutions and that's where it is right now is kind of how do we develop and participate in solutions that actually help customers and improve the relationships we have with them. I think as long as we're doing that, it's going to work out fine. Operator: Okay. And with that, it looks like that's all the questions we have. I would like to now turn the floor back over to Andrea Christoffersen for closing remarks. Andrea Christoffersen: Thank you, Julian, and thank you to all for joining us today. We appreciate your interest in Zions Bancorporation. If you have additional questions, please contact us at the e-mail or phone number listed on our website. We look forward to connecting with you throughout the coming months. This concludes today's call. Operator: Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.
Sell In May? 5 Reasons Why
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Banks and chip names kicked off earnings season with robust results last week. The S&P 500 is projected to deliver its sixth consecutive quarter of double-digit earnings growth at 13.2%, fueled largely by a powerhouse 45% expansion in the Information Technology sector. CEOs appear confident as the earnings season kicks off, according to our latest LERI reading.
Implied volatilities normalized across asset classes last week as momentum built toward a peace deal between the US and Iran. When the equity market bottomed at the end of March, options traders were initially skeptical of the rally.
The S&P 500 has rallied from March lows to record new highs, pricing in the promise of an end to the war, despite persistent supply disruptions and geopolitical uncertainty. Physical oil flows remain severely constrained, with 500M barrels removed from the market, a widening gap between paper and physical prices, and a closed Strait.
President Donald Trump's Fed pick Kevin Warsh hints at a shake-up, drawing a line on independence while signaling changes to the central bank's broader role.
Current ProShare Ultra Short to Long fund flows show near-record short positioning, historically a very bullish sign. The AAII Sentiment Survey reveals individual investors are significantly bearish, supporting expectations for a substantial rally.
Federal Reserve chair nominee Kevin Warsh said Monday that the central bank must be largely independent of political influence but also should stay focused on its primary goals. Warsh's speech, to be delivered Tuesday to the Senate Banking Committee during a confirmation hearing, also features a familiar criticism that the Fed on multiple occasions has overstepped its boundaries.
The Middle East crisis led to a broad selloff in Russell equity segments in March halting the year-long rally. 12M forward P/Es derated broadly but more so for Russell 1000, Top 200 and the large- and small-cap Growth indices partly due to their heavy Tech exposure and valuation expansion over the last three years.
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The record-breaking 13-day Nasdaq 100 winning streak answers the question of the market being confident or complacent. As we reported for weeks leading up to the rally, market signals (price action, sector rotation, and inter-market relationships) indicated a bottom was forming, even as headlines remained bearish and uncertainty around war and inflation persisted.
Tom Lee, Fundstrat head of research, joins 'The Exchange' to discuss market trends since the U.S.-Israel attacks on Iran, recent behaviors among retail investors, the state of the U.S. consumer, and more.
Greg Martin, managing director of private markets at Rainmaker Securities, discusses the signs of life the IPO market is showing and what impact the expectations of large listings from Anthropic, OpenAI and SpaceX are having on investors. Martin speaks with Caroline Hyde and Ed Ludlow on “Bloomberg Tech.
Both companies are investment grade, internally managed, and have demonstrated dividend stability across multiple credit cycles.
The Investment Committee debate the uncertainty in the Middle East and how it will affect the markets and your money.