Zions (ZION) Q2 2025 Earnings Call Transcript

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DATE

Monday, July 21, 2025, at 5:30 p.m. ET

CALL PARTICIPANTS

Chairman & Chief Executive Officer — Harris Simmons
Chief Financial Officer — Ryan Richards
President & Chief Operating Officer — Scott McClain
Corporate Treasurer — Matt Tyler
Director, Investor Relations — Shannon Drage
Executive Vice President, Commercial Banking — Derek Stewart

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TAKEAWAYS

Net Earnings-- $243 million in net earnings (GAAP) for Q2 2025, Net earnings rose 28% year-over-year to $243 million in Q2 2025.
Diluted EPS-- $1.63 in diluted earnings per share for Q2 2025, up from $1.13 in the prior quarter and $1.28 in Q2 2024, including a $0.05 per share benefit from an SBIC portfolio investment in Q2 2025.
Net Interest Margin-- Expanded for the sixth consecutive quarter to 3.17% in Q2 2025, reflecting lower funding costs and improved earning asset mix.
Net Interest Income-- Net interest income increased by $51 million, or 9%, year-over-year. It also rose by $24 million from the prior quarter.
Customer-Related Noninterest Income-- $164 million in customer-related noninterest income for Q2 2025, reflecting a 4% sequential increase and a 7% year-over-year rise, with capital markets activity highlighted as an outsized contributor.
Adjusted Noninterest Expense-- Adjusted expenses decreased by $12 million year-over-year, reflecting seasonally higher first-quarter compensation and lower technology costs in the second quarter. However, they increased $15 million, or 3%, year-over-year in Q2 2025 due to higher incentive accruals.
Efficiency Ratio-- The efficiency ratio improved to 62.2% in Q2 2025.
Average Loans-- Average loans rose 5.6% annualized from the prior quarter in Q2 2025 and 3.7% year-over-year, led by commercial and industrial lending.
Average Deposits-- Average deposits increased 0.5% year-over-year in Q2 2025 but declined 1.4% annualized from the previous quarter, with a 0.9% linked-quarter decline attributable to seasonality and an 8% drop in brokered deposits.
Noninterest-Bearing Deposit Ratio-- Stable at 34% of total deposits in Q2 2025, bolstered by migration from a consumer product launch in Nevada.
Deposit Costs-- Deposit costs declined eight basis points sequentially to 1.68% for total deposits in Q2 2025; Interest-bearing deposit costs were 2.52% in Q2 2025, down from 2.61% in Q1 2025.
Total Funding Cost-- Total funding cost fell four basis points quarter-over-quarter to 1.97% in Q2 2025; Ending deposit balances declined $1.9 billion sequentially, driven by an $837 million reduction in brokered time deposits and partially offset by a $621 million increase in noninterest-bearing deposits.
Loan Losses & Credit Metrics-- Net loan losses were $10 million (seven basis points annualized) in Q2 2025. Nonperforming assets were 0.51% of loans and OREO in Q2 2025; Allowance for credit losses as a percentage of loans declined to 1.2% in Q2 2025.
Commercial Real Estate (CRE) Portfolio-- $13.6 billion (22% of loans) in Q2 2025; Classified CRE balances fell by $196 million during Q2 2025, primarily in multifamily, with ongoing low levels of delinquencies and nonaccruals.
Common Equity Tier 1 (CET1) Ratio-- Reported at 11% in Q2 2025.
Tangible Book Value-- Tangible book value per share grew by 20% compared to the prior period, aided by organic earnings and AOCI improvement.
Operating Leverage Outlook-- Management projects continued positive operating leverage, anticipating revenue growth to outpace expense growth in Q2 2026 compared to Q2 2025 with a targeted range of 100–200 basis points of positive operating leverage.
Strategic Initiatives-- A notable 91% increase in SBA 7(a) loan deals booked in the first nine months of the SBA’s FY2025; The new consumer “gold account” launched in Nevada saw a 78% rise in sales versus its predecessor through early July 2025 and average balances near $30,000.
Expense Management-- Ongoing efficiency gains through automation and AI, with approximately 2% of expense base eliminated annually via continuous process improvement.
Capital Markets Growth-- Segment revenue grew from $81 million in 2023 to $107 million last year; targeted to double over four to five years, with recent business line expansions including M&A advisory and expected oil and gas derivatives launch by late Q3.

SUMMARY

Zions Bancorp. (ZION -0.68%) Management noted growing optimism around loan and deposit growth, citing a moderated risk outlook on trade policy and tariff impact during Q2 2025. Executives projected further margin expansion beyond the second quarter of 2025, supported by asset repricing and limited remaining room for deposit cost reductions. The CRE portfolio remained stable in Q2 2025, with classified assets declining and risk metrics staying low. The bank highlighted ongoing investment in technology infrastructure that enables real-time transaction processing and prepares the firm for digital asset and blockchain-based product integration. Tangible book value growth of 20% compared to the prior period was attributed to internal capital generation and improvement in accumulated other comprehensive income (AOCI).

Chairman Simmons stated, "We are incrementally more sanguine about potential growth in our outlook for Q2 2025, which Ryan will elaborate on in his remarks."
Chief Financial Officer Richards said, "Our outlook for net interest income for 2025 is moderately increasing relative to the second quarter of 2025," reflecting anticipated support from loan and deposit growth, asset remix, and repricing.
Management’s guidance assumes two 25-basis-point Fed funds cuts in the second half of 2025 and one in April 2026.
Executives specified "positive operating leverage" is targeted in the range of "100 to 200 basis points" as expense discipline is paired with revenue-generating investment.
The “gold account” product rollout is scheduled for full launch across markets by mid-September, following customer enthusiasm and early sales traction in Nevada.
Deposits from noninterest-bearing accounts increased in Q2 2025, driven in part by product migration and the new consumer strategy.
Capital markets revenues remain on pace to double within the targeted four- to five-year timeframe, rising from $81 million in 2023 to $107 million last year, driven by broad-based loan syndication, risk management, and new product introductions in oil and gas derivatives.
Executives reaffirmed the commitment to organic growth and disciplined, selective M&A based on strategic fit rather than size targets.
Buybacks remain "somewhat conservative" pending further improvement in AOCI and greater clarity on regulatory capital changes from Basel III endgame proposals.
Bank’s current technology and AI investments position it favorably for programmable payments, tokenized deposits, and potential stablecoin applications as market infrastructure evolves.

INDUSTRY GLOSSARY

SBIC: Small Business Investment Company, a venture capital program that partners with private investors to provide funding for small businesses.
CRE: Commercial Real Estate, referring to the loan and property portfolio of non-residential assets, including office, multifamily, and related sub-categories.
SBA 7(a) Program: The U.S. Small Business Administration's primary loan program to support small business financing through bank partnerships; growth in this book signals small business lending strength.
Net Interest Margin (NIM): The difference between interest income generated and interest paid out relative to average-earning assets, a key banking profitability measure.
AOCI: Accumulated Other Comprehensive Income, which reflects unrealized gains or losses on securities and other items that affect tangible common equity.
FHLB Advances: Short-term borrowings from the Federal Home Loan Bank, used as a funding source for bank balance sheets.
TCS Bank System: A core banking technology platform facilitating real-time transaction processing and enhanced compatibility with digital assets and blockchain products.

Full Conference Call Transcript

Harris Simmons: Thanks very much, Shannon, and good evening, everyone. As you've seen, we reported second-quarter net earnings of $43 million, which reflects a 28% improvement over the prior year period. We're pleased with the momentum in core earnings, which includes continued expansion of the net interest margin, customer fee growth, and well-managed expenses. We see some signs of economic slowing, but the magnitude and imminence of tariff-related risks noted in our first quarter call feel like they've abated somewhat. As a result, we are incrementally more sanguine about potential growth in our outlook, which Ryan will elaborate on in his remarks.

We continue to focus on growing customers and customer relationships with a particular emphasis on small business banking that brings with it the kinds of deposits and ancillary services that we find to be very valuable and that build strong relationships. For example, our effort to grow loans made through the SBA seven program has led to a 91% increase in the number of deals booked in the first nine months of the SBA's 2025 fiscal year relative to the same period last year. In mid-May, we began the rollout of our consumer gold account offering in the Nevada market. We'll be launching the product in other markets later this quarter.

This product provides customers with a variety of high-value benefits. It's designed for the mass affluent market and pairs well with our existing wealth offerings, which are also tailored to clients beginning in the mass affluent stage of wealth accumulation. We're really pleased by the enthusiastic response we've seen so far from customers in Nevada with respect to this offering. Though it was launched in May, through early July, we had a 78% increase in sales of this product versus the product that has been its predecessor, with average balances in these accounts of around $30,000.

This is before we really started in late June to do paid marketing, so we're really excited about the prospects for this as we roll this out across the entire enterprise. Turning now to key financial metrics for the quarter, Slide three presents the net earnings for the quarter of $243 million, as noted, up 28% from the same period last year and up 44% compared to the first quarter. The efficiency ratio improved to 62.2%. The net interest margin continued to increase for the sixth consecutive quarter to 3.17% due to lower funding costs and the benefit from an improved earning asset mix and fixed-rate asset repricing.

Net loan losses for the quarter were $10 million or seven basis points annualized. Average customer deposits in the second quarter were up 0.5% relative to last year's number and down 1.4% annualized on a linked-quarter basis. Non-interest-bearing deposits reflect continued stability at 34% of total deposits. Average loans experienced modest growth of 5.6% on an annualized linked-quarter basis and were up 3.7% year over year. Moving to Slide four, diluted earnings per share was $1.63 compared to $1.13 in the prior period and $1.28 in the year-ago period. This quarter's results include a $0.05 per share benefit related to the successful public offering of an investment in our SBIC portfolio.

This investment, net of fees, will be marked to market until our shares, which are subject to a minimum 180-day lockup period from the IPO, are fully divested. Slide five provides a five-quarter view of pre-provision net revenue. On an adjusted basis, our second quarter results of $316 million reflect an improvement of 18% compared to the prior quarter and 14% compared to the prior year period as revenue growth has outpaced expense growth. With that high-level overview, I'll turn the time over to our Chief Financial Officer, Ryan Richards, for additional details related to our performance. Ryan?

Ryan Richards: Harris, and good evening, everyone. I'll begin by breaking down the drivers behind the changes in pre-provision net revenue. Beginning on Slide six, you will see the five-quarter trend for net interest income and net interest margin. Net interest income increased by $51 million or 9% relative to 2024 and increased by $24 million relative to the prior quarter. The increase relative to the prior quarter was supported by lower funding costs and a favorable shift in the composition of average interest-earning assets, reflecting growth in average loans. As a result, the net interest margin expanded for the sixth consecutive quarter to 3.17%.

Our outlook for net interest income for 2025 is moderately increasing relative to the second quarter of 2025, supported by continued earnings asset remix, growth in loans and deposits, and fixed-rate asset repricing. Our guidance incorporates two 25 basis point Fed fund cuts in the second half of the year, in September and December respectively, and an additional 25 basis point cut in April 2026. Slide seven presents additional details on changes in the net interest margin. The linked quarter waterfall chart on the left outlines the changes in both rate and volume for key components of the net interest margin.

The net interest margin expanded by seven basis points sequentially from favorable earning asset remix and loan fixed loan repricing, as well as improvement in total funding costs. Against the year-ago quarter, the right-hand chart on this slide presents the 19 basis point improvement in the net interest margin, which benefited from the improved cost of deposits, as shown on the slide. Moving to noninterest income and revenue on Slide eight, customer-related noninterest income was $164 million for the quarter, an increase of 4% on a linked-quarter basis and a 7% increase versus the year-ago quarter. Capital markets activity continues to be a major driver for fee income growth, with steady growth across most other areas of fee income.

The chart on the right side of this page presents both total revenue and adjusted revenue for the five most recent quarters, which were impacted by the factors previously noted for net interest income and customer-related fee income. Our outlook for customer-related fee income for 2026 is moderately increasing relative to the second quarter of 2025. Growth is expected to be broad-based and driven by increased customer activity and new client acquisition, with capital markets continuing to contribute in an outsized way. Slide nine presents adjusted noninterest expense in the lighter blue bars. Adjusted expenses decreased by $12 million versus the prior year to $521 million.

This decrease reflects seasonally higher first-quarter compensation expense and lower technology costs in the second quarter relative to the first. This is partially offset by higher incentive accruals as a result of improved profitability. Against the year-ago period, adjusted expenses increased $15 million or 3%, primarily in higher incentive comp accruals previously mentioned. Our outlook for adjusted noninterest expense for 2026 is moderately increasing relative to the second quarter of 2025 and continues to reflect expectations of positive operating leverage. The expense outlook considers increased marketing-related costs, continued investments in revenue-generating businesses, and pressure on technology costs. Slide 10 presents the five-quarter trend in average loans and deposits.

Average loans increased 5.6% annualized over the previous quarter and 3.7% over the year-ago period. Total loan yields increased by two basis points sequentially. Our outlook for period-end loan balances for 2026 is slightly increasing relative to the second quarter of 2025 and assumes growth will be led by commercial loans. We also acknowledge that there may be upside opportunities to surpass this outlook depending on the outcome of trade policy negotiations. Average deposit balances are presented on the right side of the slide. Relative to the prior quarter, total average deposits declined 0.9% due to the seasonal customer deposit outflows earlier in the quarter in addition to an 8% decline in average broker deposits.

Average noninterest-bearing deposits grew approximately $480 million or 2% compared to the prior quarter, partially as a result of the migration of a consumer interest-bearing product into a new noninterest-bearing product in mid-May at our Nevada affiliate Harris mentioned previously. The cost of total deposits declined sequentially by eight basis points to 1.68%. On average, the rate on interest-bearing deposits was 2.52% for the quarter, compared to 2.61% in the prior period. Further opportunities to reduce deposit costs will depend on the timing and speed of short-term benchmark rate changes, growth in customer deposits, and market competition and depositor behavior. Slide 11 provides additional details on funding sources and total funding cost trends.

Presented on the left are ending deposit balances, which decreased by $1.9 billion versus the prior quarter, including an $837 million decrease in brokered time deposits that was partially offset by a $621 million increase in noninterest-bearing deposits. Short-term FHLB advances increased during the quarter due to loan demand and the aforementioned deposit decline. On the right side, average balances for our key funding categories are shown along with total funding costs. As seen on this chart, our total funding cost declined by four basis points during the quarter to 1.97%. Moving to Slide 12, our investment portfolio exists primarily to be a storehouse of funds to absorb customer-driven balance sheet changes, allowing for deep liquidity through the repo market.

Presented here are our securities and money market portfolios over the last five quarters. Maturities, principal amortizations, and prepayment-related cash flows from our securities portfolio were $726 million in the quarter, or $427 million when considering a net of reinvestment. Paydown and reinvestment of lower-yielding securities continue to contribute to the favorable remix of our earning assets. The duration of our investment securities portfolio, which is a measure of price sensitivity to changes in interest rates, is estimated at 3.8 years. We begin our discussion of credit quality on Slide 13. Realized net charge-offs in the portfolio continue to be very manageable at $10 million this quarter, or seven basis points annualized.

Nonperforming assets remained low at 0.51% of loans and other real estate owned. Classified loan balances declined quarter over quarter by $194 million, driven by a $196 million reduction in CRE classified levels from improving leasing activity and cash flows, free margins, and payoffs. We expect the CRE classified balances will continue to decline going forward through payoffs and upgrades. During the second quarter, we recorded a negative $1 million provision for credit losses, which, when combined with net charge-offs, reduced the allowance for credit losses by $11 million relative to the prior quarter.

The reduction reflects reduced emphasis on certain portfolio-specific risks, such as commercial real estate, and changes in portfolio mix, offset somewhat by the change in economic forecasts. The allowance for credit losses as a percentage of loans and leases declined to 1.2%, and the loan loss allowance coverage with respect to nonaccrual loans was 224%. Slide 14 provides an overview of the $13.6 billion CRE portfolio, which represents 22% of total loan balances. Notably, this portfolio continues to maintain low levels of nonaccruals, delinquencies, and net charge-offs. The portfolio is granular and well-diversified by property type and location, with its growth carefully managed for over a decade through disciplined concentration limits.

Slide 15 provides a detailed view of the problem loans in our CRE portfolio. The chart on the right-hand side provides a breakout of which sub-portfolios drove changes in criticized and classified assets during the quarter. The decrease in total classified loans was driven by commercial real estate, primarily in multifamily, due to the factors mentioned previously. The chart on the bottom left-hand side of the slide reflects the LTV distribution of classified CRE loans, with approximately half of those classified loans having LTVs, loan-to-values, less than 60% when calculated using either recent appraisal or index-adjusted values. Overall, we continue to expect the CRE portfolio to perform well with limited losses.

Based on the current economic outlook, types of problems being experienced by borrowers, relatively low loan-to-value ratios, and continued sponsor support. Our loss-absorbing capital is shown on Slide 16. The common equity Tier one ratio this quarter was 11%. This, combined with the allowance for credit losses, compares well to our risk profile, as reflected in top-quartile performance for loan losses. We expect our common equity from both a regulatory and GAAP perspective to continue increasing organically through earnings, and that AOCI improvement will continue through unrealized loss accretion in the securities portfolio as individual securities pay down and mature.

Importantly, our organic earnings growth, when coupled with AOCI improvement, has enabled us to grow tangible book value per share by 20% versus the prior period. Slide 17 summarizes the financial outlook provided over the course of our prepared remarks for the second quarter of 2026. As compared to the second quarter of 2025. Our outlook represents our best estimate of financial performance based on current information, and we expect to continue to produce positive operating leverage as revenue growth outpaces noninterest expense growth.

Shannon Drage: This concludes our prepared remarks. As we move to the question and answer section of the call, we request that you limit your questions to one primary and one follow-up question to enable other participants to ask questions.

Manan Gosalia: Thank you.

Shannon Drage: Our first question comes from the line of Manan Gosalia with Morgan Stanley. Please proceed.

Manan Gosalia: Harris, I was wondering, what are you hearing from clients in the small business and middle market side? You sound a lot more positive versus last quarter. Is it just the lower uncertainty in the macro environment that's driving that? Or are you seeing something more that's driving that change?

Harris Simmons: No, I think so. I, you know, I think when we last spoke, it looked like we were going to have this wall of tariffs coming at the entire economy, kind of like a tidal wave. And I think that what we've seen over the last ninety days has been a willingness on the part of the administration to be more flexible. They've, you know, the ball keeps kind of moving around the court a little bit in terms of, you know, what any, you know, I don't know if there's still a lot of certainty as to where it lands.

But it's become, I think, a little more clear that they are trying to kind of thread a needle here and do this without unduly disrupting the economy. I think they're sensitive to markets and so, you know, we went out and actually we surveyed a lot of small businesses early on. And found that, while you know, just over half thought that this was going to be, tariffs were going to be problematic, we also saw that there were a number of businesses, smaller businesses who actually saw opportunity in it. And as we kind of dig into the portfolio, we're seeing some of that.

It's not there are some businesses being hurt, but there are others that are actually being helped by this. And the economy seems to be weathering this in better shape than I think we might have anticipated a quarter ago. So that leads us to believe that probably things are going to be better than we expected when we talked about this after the first quarter.

Manan Gosalia: Got it. And then maybe on the other side of the balance sheet, the deposit side, are you seeing any elevated competition? I mean, it looks like the spot rate is lower than the average. It looks like things are moving the right way. But with more banks talking about loan growth improving, are you seeing any early signs of higher competition?

Harris Simmons: I think it's been a really competitive market for deposits. And the, you know, the challenge is always kind of trying to find the sweet spot between trying to protect your margin, you're also trying to make sure that your deposit base remains intact and growing. And so we're trying to walk that line, but I think we pay particular attention to the total funding cost of funding the balance sheet, and that's continued to come down in a nice way. Down roughly 40 basis points over the last year. And that's how we'll continue to look at it. But we're certainly working hard on the deposit front.

So I mentioned this, you know, this consumer deposit effort, which I'm enthusiastic about. It's too early to know kind of what that can bring, but I think it represents a foray into the consumer market that has been probably less on our priority list in years past than it's becoming today. And we think that incrementally, there is opportunity there. As there is with small businesses. So that's where we're working at it primarily. And I expect we'll continue to see progress there.

Manan Gosalia: So are you saying that deposit costs should come down a little bit or total funding costs should come down a little from here even without Fed rate cuts?

Harris Simmons: Well, obviously, it's all going to be dependent on what the Fed does. If they remain static, it could get stickier, but we still have repricing going on in on the asset side of the balance sheet that should give us some boost. So I'm not going to suggest that this number can continue to just come down. If you look at our total deposit costs, we tend to be better than the industry, and so I'm not sure there's a lot of additional room there. I think probably the greatest room is going to be on the asset side.

Manan Gosalia: Great. Thank you.

Shannon Drage: Yep.

Harris Simmons: Thank you.

Shannon Drage: Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please proceed.

Bernard Von Gizycki: Hey, guys. Good afternoon. Just on loan growth, it looks like it was really solid in the quarter led by C&I. Some term financing and CRE and mortgage from consumer. Just any color you can provide on the increase in loan growth and where you expect to continue from here? Eric, do you have any thoughts? Yes. Well, thank you.

Derek Stewart: Good afternoon. Yes, so we had nice loan growth for the quarter, about $191 million. As you indicated, the majority of it was from commercial and industrial. What we saw during the quarter was probably about half of it was from increased utilization as well as newer and then the other half from new origination, some nice new originations on the commercial industrial side. CRE was up slightly, but not very much. We are seeing increased activity, though, in the commercial real estate space for new origination volume. The consumer side, mortgage was up about $120 million and home equity was up $114 million.

Both, you know, mortgage was just new origination activity as well as some loans continuing to move from our one-time close construction book into the mortgage book. And then originations on the home equity side combined with some increased utilization there. But I would anticipate that will continue, you know, in the near future as we continue to have a number of initiatives around small business as well as commercial and industrial and again, the increased activity that we're starting to see in commercial real estate.

Ryan Richards: Bernard, this is Ryan. One of the views that we brought this quarter that we sometimes have in our travel decks is the view of where the growth is coming from across our affiliates. So I would just point you to Slide 23 in the materials, and we'll be clear to the growth we're seeing sort of when the Zions market, California Bank of Trust Amagi, we're seeing a lot of growth with the top line growth coming out of commercial, as you noted. And that is certainly what we expect to see in the growth. Got it. And that's just for a follow-up on just the regulation.

Bowman has laid out a number of items that likely need to be dialed back. And will likely see an overall easing of the regulatory framework. Can you just talk to any specific items that could be beneficial for Zions? Obviously, tiering is an area that could be beneficial if the $100 billion asset threshold is moved to $130 billion or so or to $250 billion. But just wanted to hear your thoughts if this could lead to a more willingness to pursue M&A. Obviously, I understand your focus on more organic growth. Maybe it's just a benefit to the industry. That could still obviously be some benefit to your bank. Just any thoughts here would be great.

Harris Simmons: Yeah. I, you know, this is Harris. From my perspective, probably the most encouraging thing is the tiering you're talking about and the, you know, I think that this all the proposals that have been out there also three endgame, etcetera. The long-term debt requirement was probably, you know, it's going to maybe have the biggest impact. And just because of spreads on that for regional banks are substantial relative to alternative funding costs. And so having that, if not off the table, at least back on the back burner and probably subject to a lot of additional thought about tiering is maybe the most encouraging thing that I see in the landscape.

As for M&A, I just point anybody to in my shareholder letter, it was published in February. It's on pages thirteen and fourteen. I do a little treatise there on M&A and I just simply point anybody there. It's consistent with how I think we're going to think about it. We don't think that we need to grow for growth's sake. There are going to be occasions we've demonstrated that deal we did last quarter down in the Coachella Valley, Southern California, kind of a tuck-in deal that is really a nice fit for us. It gives us a really nice market presence and a great market.

And so I think strategically about it, but not strategically in terms of, hey, we just got to get bigger at any cost. So for more, go to what I go to my essay. Okay, great. Thanks for taking my question.

Shannon Drage: Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed.

John Pancari: Good afternoon.

Harris Simmons: Hi, Shahriar. Guess just on the expense side, I know you're still targeting you're indicating that your expense outlook does confidence in driving positive operating leverage. I wanted to see if you can maybe help us frame the degree of positive operating leverage that you think is reasonable given your growth opportunities in front of you, but also the investments. And if you do see a greater degree of revenue pressure than you currently include in guidance? Or do you still have confidence in the ability to achieve positive operating leverage just given the expense flex?

Ryan Richards: Hey, John. Thanks for that. Pretty question. And yes, we updated some of the guidance there looking forward for the quarter. It wouldn't be immediately obvious just on the words that we choose that the positive operating leverage would be there. I would reaffirm that we see it. We sort of size it in the 100 to 200 basis points. So and we, you know, there's a litany of things that we do internally to make sure that we stay focused on the expense side. I don't think that's ever gonna change.

I think we came into this year, it was with more of a growth orientation, kind of turning the page putting more money into marketing dollars, putting more money into revenue producers. And so that's the pull through you're going to see on the revenue side. It's really hard for us to exactly project what we're going to get in loan growth, but we're a little bit more upbeat as Harris alluded to before.

So if you sort of think about the breadth of what some of the words we use suggest, think about being on the higher end of that range for the revenue pieces and maybe at the lower end for the expense piece of line for some operating leverage. I'd just add one of the things I'm really encouraged by is we have either hired or have offers out to at least 10 really good producers that I have on my desk or have been sent just in the last couple of weeks.

And not that we're going to tell us be working at that pace, but we're finding some really good people who through disruption in other places are looking for a good home. And so where we're going to see increases, I think, are going to be in what I think of as good expense, which is it's not compliance regulatory back office. It's actually people who are actually really good revenue producers. And so that and some increased marketing spend on I mentioned a couple of initiatives we have going in small business consumer that I think can be really meaningful for us, but it's going to take some marketing to get there.

And so those are the kind of places where we're going to see spend. Doesn't always produce revenue day one, but it should kind of pretty quickly turn into revenue.

John Pancari: If you look at the momentum in our reported results for this quarter on a year-over-year basis, the 9% growth in net interest income, the 7% growth in customer fees year over year, that's just illustrative of kind of where we've been heading on the revenue side of the business. And compare that to the 3% adjusted expense growth year over year, we've been disciplined. So I think it reiterating what Harris said, it would be the good kind of expense growth while also building on our revenue momentum.

Scott McClain: John, this is Scott. I would just add, I think you can tell from Ryan and Harris' comment that there's a lot of momentum and energy behind investing in revenue growth. Our key segments, products, marketing, etcetera, hiring. And so that gives us a lot of confidence about revenue going forward. But the other thing I would point back to is, you've heard us talk about for the better part of the last ten years of just kind of this continuous improvement process that we're always going through.

And we have probably for the expense growth that you see, we have every year about 2% of our base of expenses that we're eliminating through just continuous improvement, how we process how we're using AI, we process 21,000 W-nine forms and signature cards a year. It's kind of an inane number, but oh my gosh, there's so much expense related to that and we're finding great benefit from using AI in a place like that. We have a lot of quality assurance and review functions. If you look at our wire transactions, AML, BSA, there's a significant amount of false positives that are created there.

And so we're using AI actively there both in the false positives in our wire room and also in AML BSA. And then if you just look at our credit processes, a huge area of activity in our company and whether it's loan spreading or credit presentations for renewals or new loans, loan reviews, the whole area of activity there.

We are actively pursuing the use of AI to not necessarily, I mean, in most cases, it will reduce expense, but it will also allow us to redirect the work of those colleagues that are in those areas to higher value work actually analyzing the data to create more revenue or reduce expense or minimize losses as opposed to just producing the data and then being so exhausted we don't know what to do with it. So, would just be a few examples of this big bucket of small improvements that we've been about for over a decade now.

John Pancari: Got it. Okay. All right. Thank you for all that detail. And then one quick follow-up. And I know M&A was already asked about. But on the M&A front, I know you mentioned the merits of the smaller Coachella Valley deal that you did and have you seen, you know, as you've as you completed that transaction and, you know, have you seen the benefit of the new core system in terms of the ability to integrate and close the deal faster and ideally save on costs and achieve potentially higher cost savings through a transaction like that?

Scott McClain: Yes. John, this is Scott again. Absolutely. I mean, if you just think about it, 30,000 feet, we had three loan systems, one for consumer, one for commercial, one for real estate, one deposit system, all 40 years old, all customized, customized like crazy. And every other bank in the country has this. We weren't the only one. And dozens and dozens of data models. So, you just think about that on the one hand and then you think about now we have one integrated loan and deposit system with one data model. And the elimination of all that tech debt that is AI-enabled, cloud-enabled, real-time processing.

And then you think about how do you merge like these branches we just did in the Coachella Valley. I mean, there's always complication on the seller side, but on our side, we're merging into a much more clean and modern environment that no one else really has.

Harris Simmons: I might just add, it hasn't come up otherwise come up, but there's obviously a lot of focus on the Genius Act stablecoin, etcetera, tokenized deposits. And this new platform we have, the TCS Bank system, is, I don't know that we're singular this way, but it's probably one of the few cores in The United States where we're actually settling transactions into the core real-time. And what I think you're seeing with developments with stablecoin tokenized deposits, is that we're coming into a world where real-time settlement is going to be really important. Kind of functionality to have. And that's built into what we have. We could define an account type in our core system to custody digital assets.

Tokenized deposits, stablecoins and ECS has a crypto service platform that would allow us to connect to crypto exchanges. So I think a lot of plumbing has been built for however that future unfolds. And I think it's still too early certainly for us to see how that unfolds out, how it affects a regional bank like us. But I think we'll find that a lot of the investment we've made prepares us well for that world.

John Pancari: Got it. All right. Thank you for that. Appreciate it.

Scott McClain: Yes.

Manan Gosalia: Thank you.

Shannon Drage: Our next question comes from the line of Bill Carcache with Wolfe Research. Please proceed. Bill, your line is unmuted. You may be muted on your end.

Bill Carcache: Hi, thank you. Good afternoon. As you think about the interplay between ongoing repricing tailwinds and your funding dynamics that you've discussed, is there anything that gets in the way of your NIM getting back to sort of that three-and-a-half percent level that we saw pre-COVID, the consensus doesn't have you getting there through 2027. Is that too conservative? Perhaps, you know, any thoughts on, you know, on the reversion to that sort of pre-COVID NIM level?

Ryan Richards: Hey. Thanks, Bill. Let's take that in parts. And let me know if we don't get all the way there. I think you're right to remember us talking about a three mid through mid-three type NIM. You know, hopefully having a more constructive yield curve is useful and all that as well. But we do have some things working in our favor. Harris was right earlier on the call noting on the deposit side, there's not much more to play through on that side that we're seeing in terms of fixed type of repricing on CDs. So that has more or less played out. The asset side, there are still things that are lagging through on the fixed asset repricing.

That we see the potential for two to three basis points just lagging through each quarter on that basis for things that just haven't quite fully manifest. We also make a point to talk about the fact that we've had these cash flow hedges that were just discontinued and it's been a headwind for our NIM over time. But it's been negating an impact. So I think in this quarter, there was $16 million negative impact associated with that. You can think about that diminishing roughly $2 million per quarter over time until you get basically to the end of 2027. So that's a dimension in that. We've always talked about the remix.

We still have room to run as it relates to the trading out of the rundown of our investment securities portfolio and the beneficial trade that we've had in reinvesting a lot of those dollars into loan growth. So we've said in my prepared remarks, and it's been pretty consistent here for the last few quarters, of generating anywhere between $700 million and $800 million worth of cash flows from investments securities portfolio and more recent periods reinvesting about half of that while allowing us to have higher-yielding loans come on the balance sheet and or to pay down borrowing costs. So those are dynamics that we think all kind of work in our favor.

To kind of keep pushing forward from here on the backs of six consecutive quarters NIM. NIM expansion, with this one being pretty pronounced. So that's what kind of gives us some feelings that we can we can press forward from this level.

Bill Carcache: Thank you. That's helpful. And then Harris, following up on your gold account comments, can you give a little bit more color on some of the features of, you know, of that? You know, what's contributing to its success, how you're thinking about expanding that offering into your other markets.

Harris Simmons: Yeah. I mean, some of the features of the account include unlimited ATM free ATM access. Which by the way, you know, people are using ATMs less and less. And so it becomes, I mean, the cost of giving away something that people are using less becomes easier over time. We have lots of safe deposit box inventories. We're giving people access where we have availability to a free safe deposit box. Some discounts on consumer loans, some premium on money market accounts. You kind of get the idea. It's we're really trying to say, hey, we want all of your business and really embrace these customers. It's got a $2,500 minimum balance. It's a non-interest-bearing account.

And what we're finding is, people who will open an account that has a $2,500 minimum balance carry much higher balances than that. And that's why we think this is going to be a real winner. We'll be rolling it out starting here in mid-September across the rest of the company. That's the current plan. I would just add there's additional credit card bonuses related to it as well as access to wealth planning capabilities, investment management capabilities that at with less friction associated with it.

Bill Carcache: Thank you for the details. That's very helpful.

Shannon Drage: Thank you. Our next question comes from the line of Ken Usdin with Autonomous Research. Please proceed.

Ken Usdin: Great. Thanks, guys. Just a couple more follow-ups on remix points. On the liability side, you've had a great path towards getting down some of those broker deposits. And, this quarter, see a little remixing into FHLB. Can you just kind of give us an update of where your brokerage stands at the end of the quarter? And how much more remixing can you do especially if the DDA balances look like they've bottomed, if not started to increase a little bit? Thanks.

Ryan Richards: Yeah. Thanks, Ken. I'm happy to get going on that. You know, thank you for noting that. It is something that we've been working down, and certainly the balance on a spot basis was down just over $800 million this quarter. We sort of think about opportunities across broker deposits, think about federal home loan bank borrowings and think about repos. Think about the relative trade-offs between those various funding sources. And this quarter, we saw an opportunity on some of those federal home loan advances used to factor in the stock dividends that we received. I think a member of that, that was more advantageous and useful. Helping to work down that balance.

So it's something that we're, you know, it's been part of our calculus that we'll continue to work down. And we've demonstrated an ability to do that. But of course, our success in doing so will depend a lot on where Harris opened this call. And our success in generating net new client relationships. And driving through that channel. So that's what I that's how I'd respond to your question.

Ken Usdin: Got it. And on the loan side, very interesting to see all three of the loan categories yields go up. I know there's obviously a little swaps impact on the C&I book but the 7.38%.

Ryan Richards: Compared to a back book at 7.31%. What you see there, and I think you understand this intuitively, Ken, is there's been a lot of repricing the back of our materials. We show the repricing pattern of our earning assets and our loans. You'll see a lot of that reprices within a year, certainly the majority of earning assets that you could even more pronounced for loans. So that's why you don't see a stark of difference between the front book and back book. Interesting.

We are reaching a point now in the consumer books, as you pointed to that, where we had some of those 5.1 arms that are now starting that were priced at lower rates, they're now starting to remark and reprice. To elevated level that's really helpful to us. And you would also note that even for our commercial book that our terms of our commercial lending typically are not very extended, and we've had some opportunities there that have been really useful in the repricing up of commercial fixed relationships. Those are just a couple of dynamics I would point to that are kind of probably pointing to the pattern that you're seeing in the results, Ken.

Ken Usdin: Okay. Great. Thanks a lot, Ryan.

Scott McClain: Thank you.

Shannon Drage: Thank you. Our next question comes from the line of Peter Winter with D.A. Davidson. Please proceed.

Peter Winter: Thanks. Good afternoon. If I look at Slide 27, the latent emergent scenario that the hypothetical simulation it does seem conservative with the assumption of $1.4 billion migration of noninterest-bearing deposits. Maybe could you, Ryan, maybe provide some sensitivity if DDA deposits stabilize, which has kind of been the trend the last few quarters?

Ryan Richards: Thanks, Peter. We didn't know if this would go quietly into the night. But as it turns out, no interest in it, which is fine. We actually find it quite interesting for ourselves at a management team. But we don't want to force feed people things that they don't really care to consume. So for what it's worth, we'll let you judge how conservative that is. There was a time when migration assumption was as high as $5 billion. And over time, we've sort of tightened that up. We like some of the stability that we've been seeing over periods. In noninterest-bearing deposits.

I think the things we're talking about, the gold accounts had a hand on that in most recent periods. We haven't gone to further lengths of talking about what happens if there's zero. Migration here. We're just we're feeding you with an assumption. We do try to give you some bounds in other places. To try to show, you know, when you overlay the emergent piece of that kind of getting to more of a four forward path view, and then putting some bookends at 100 basis points and other ends around that implied rate path.

We do show some breadth of that, but I don't have a statistic in front of me that would show, you know, what assumption would be at, like, a zero billion migration. So but we can go You could, like, take one 0.4 zero times the current short term. Yeah. That's right. And you can solve it. You can solve for it. But Matt may have you This is Matt Tyler. Corporate treasurer. I think if you if you just assume that whatever DDA runs off is replaced with funding near fit very close to the Fed funds rate. You get your sensitivity that you're looking for.

Peter Winter: Okay. Got it. And if I could ask, just speaking about balance sheet still asset sensitive, could you talk about maybe some of the plans going forward to manage the balance sheet sensitivity clearly seems like the next Fed chairman's likely gonna take a more dovish stance on rates.

Ryan Richards: Yeah. Thank you for that, Peter. Happy to provide some perspectives there. Listen, we have some materials to talk about where we are with hedges. We try to remain balanced here, as balanced as we can, and we think we're in a reasonably good place. But we do recognize that we screen, tend to screen on the higher end of asset sensitivity in our peer set. And we recognize that methodologies can be different, and how people think about their deposit assumptions can drive various outcomes there. But, you know, we also want to be attuned to the net interest income impacts of if there is a more dovish Fed and a downturn there.

So it is something we talk about internally. We do think there's probably some room to do a little bit of management to decrease that asset sensitivity at the margin. But we also couple that with considerations about the value considerations and fair value of equity, intangible common equity, so you've seen over time us pivot and put on more pay fixed hedges on our loans and securities. To also protect about to the extent the term rates were to run up on us to make sure that we manage that to a level that we feel is appropriate. So it's sort of a dual fold explanation about how we're managing the balance sheet right now.

Peter Winter: Got it.

Shannon Drage: Thank you. Our next question comes from the line of Chris McGratty with KBW. Please proceed.

Chris McGratty: Great. Thanks for the question. Tom, can you speak about the outlook for your capital markets business, your fee income that you spent a lot of time building? Interested in how that business is progressing relative to expectations and where you think that could be over time? Thanks.

Scott McClain: Sure, Chris. This is Scott McClain. And now the business is growing really nicely for us. Recall that in 2023, had about $81 million in revenue. It grew to $107 million last year and we're on a good pace this year. And we've said for three years now, as you'll recall that this is a business that we thought we could double in size in a four-year period, five-year period, that kind of range. And I think we're on our path to doing that. The major contributors clearly, loan syndications, interest rates interest rate risk management, foreign exchange, those have been three businesses we've been in a long time and they're continuing to grow at a nice pace.

Depending on the economic circumstances. But then we've added a real estate capital markets business, as you'll recall, about two years ago, we added it in kind of a rough time period for real estate capital markets, but it started to show some growth last year. And we believe we'll continue to move towards the expectation that we had over time. You will also see us, we have we've had some early success on the M&A front in terms of doing M&A advisory work. For our small and medium-sized client base. We think that's going to be a nice active source of new revenue going forward. We commented on that with the success we had with one particular transaction.

The first quarter. And then commodity risk management is another area moving into. In Texas, we have about 80 reserve-based loans there. Outstanding relationships where we do a lot for these companies. And we will later in the third quarter I'm sorry, later in late second quarter I'm sorry, late third quarter we'll be launching our oil and gas derivatives business with and we have 80 clients that we've actively called on almost all of them now and they because we're in their reserve-based borrowing transactions, they are very open to including us on that front. And that is going to be, we think, have a lot of potential for us.

So those would just be some of the major categories. We have other parts of capital markets that we're involved in, like bond underwriting, etcetera. But I think the ones I mentioned would be the highest growth potential. So we're very optimistic investing significantly in systems and risk management and just the quality and depth of our people. So it's an exciting part of the story.

Chris McGratty: Thank you for the color. I appreciate it. I may have missed it, just going back to capital. Including the tiering conversation. How should we be how are you trying to message potential resumption of buybacks? Again, if I missed it, I'm sorry.

Harris Simmons: Well, I think look, we're going to be somewhat conservative for the next little while. I think we're all our nominal CET1 ratio, we think is very strong at 11%, but in times of stress, people don't care about nominal numbers. Look at Mark's numbers and we still have some AOCI that needs to work off. And does that I mean, we a 20% increase in tangible common equity over the last twelve months. So it's a pretty fact combined with earnings at a pretty good clip, but we're just not there yet in terms of where we're comfortable starting to take our foot off the off the pedal yet and start buying shares.

Ryan Richards: We certainly don't know the full profile of what will come out of the Basel III in game. You know, I think it's re-exposed, what dimensions of that are. But to Harris' point, the AOCI has been coming back in. And certainly, you've seen other calls and heard others talk about an ex AOCI view something with a nine handle. It's something that people are solving for. We have not made any such commitment. But we can see a glide path in the next year that would get us to something with a nine handle X AOCI. The pattern that we've seen in our earnings generation.

Chris McGratty: That's helpful. Thank you so much.

Ryan Richards: Thank you.

Shannon Drage: Our next question comes from the line of Anthony Elian with JPMorgan. Please proceed.

Anthony Elian: Hi, everyone. Your deposit balances have declined for two straight quarters now on a period-end basis. I know on the slides you called out the headwinds in 2Q from seasonal April outflows and brokered balances. Do you think the third quarter could be a growth quarter for total deposits?

Harris Simmons: Just, you know, could be. I think it's too soon to know. I don't think yet we're starting to see the kind of deposit growth we'd like. So I don't think it's going to be a big driver but we're sure working hard at it. And just doing everything we can. It's again, I think we start a little behind the goal line in that's why I said earlier, kind of threading the needle of getting this right in terms of pricing, maintaining the deposit base. I'd look through to the whole the total funding structure of the company and the cost of it.

And that's kind of the North Star for us is trying to, you know, really get that balance right and so, you know, bringing down broker deposits and, you know, we'd like really like to see more of that less reliance on short-term borrowings, etcetera. And so we're working on the deposit side. Too soon to know whether we're going to make the big difference this quarter.

Anthony Elian: Thank you. And then my follow-up actually on your comments, Harris, earlier on stablecoins. So I know you mentioned it's still too early to see how something like that could impact Zions. Given you have the leg up with already being integrated on TCS, right, we saw the Genius Act signed into law last week, and there's only a handful of regional banks that are active in this space today. Could you see stablecoins and digital assets more broadly being an area that contributes to Zion's deposit growth at some point? Thank you.

Harris Simmons: Yeah. Listen, my own view is that it's a little tough to I think the Genius Act thankfully, creates some really good guardrails in terms of not only prohibitions on the payment of interest, but substitutes for that as well. And I think anybody trying to make their way around that is gonna find themselves in court. And so it, you know, stablecoin becomes basically a really fancy form of the currency you carry in our wallet. It's non-interest-bearing. I was it's really non-interest-bearing money market mutual funds is what it kind of what it becomes. I think the better case is going to be in tokenized deposits.

I think that's going to be healthier for the economy because going to allow for the creation of private credit. That the banking system is so important. For. And so I'm not sure. You know, certainly be wrong, but I and I think Sablecoin is going to have a place, cross-border payments, etcetera. Beyond that, maybe but I it's hard for me to see where the advantages relative to tokenized deposits. In both cases, I think the big advantage going to be down the road, it's going to be the programmability of payments. It's going to be payments that settle on the blockchain simultaneously multiple transactions, title companies with you know, with state departments of commerce etcetera, so lien filings.

Property records, those kinds of things. You could certainly see a future where a lot of the friction in financial transactions disappears through programmable payments. But it's hard for me to see how stablecoin has a leg up on tokenized deposits to do that. And so we'll see how it plays out. We'll be watching. I guess my point is I think we've got probably less work to do than some will have in terms of being able to actually operationalize it.

Anthony Elian: Thank you. Yep.

Ryan Richards: Thank you.

Shannon Drage: Our next question comes from the line of David Smith with Truist Securities. Please proceed.

David Smith: Thank you. You had some nice loan growth this month. I'm just thinking ahead about the outlook slightly increasing loan growth a year from now. Do you feel constrained at all on how much you can grow given your current GAAP equity levels, given how credit has been performing and the fact that customer sentiment seems solid, it would seem like a good time really be leaning into growth for a while. And you know, do you have the capacity to do as much of that as you'd like to organically right now? Know if you can maintain these returns, it'll help, obviously, but, any color on that would be really helpful.

Ryan Richards: Hey. Thanks for that, David. Yeah. We've we don't feel capital constrained from taking such organic growth action. As what I've tried to call out in my remarks is we are really wanting to have a growth orientation here. And some of the things that you would be showing up in our guide for noninterest expense are meant to be more growth-oriented. More marketing dollars, more revenue producers. So that is our hope. We need the economy to be constructive. In my prepared remarks, I sort of said we could actually see outlook upside from our outlook if the tariffs settle into a place that's not disruptive.

But we don't know till we get there, but you look at what we produced this past quarter and you analyze that, at 5.6% of loan growth, it was a pretty healthy quarter. So there's no guarantees of that persists, but we like the markets we're in. And we kind of like the strategy moving forward.

Scott McClain: David, this is Scott. I would just add I should have added it earlier. Our call programs, I've mentioned this on the last two calls, The calling programs that we have with our branch managers, our small business bankers, our middle market commercial private bankers, etcetera. They are as intensified as they've ever been. It's just a real focus on calling on existing customers, but calling on pure prospects as well. And that's just ramping up. And so I think we're going to get as many good looks, not more than anybody. And then we just have to see how, again, economy and everything else balances out. I think we'll compete effectively.

David Smith: All right. Thank you.

Shannon Drage: Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed.

Jon Arfstrom: Hey, thanks. I know it's getting late, so we can be quick here. But on Slide 23, can you talk a little bit more about the construction and CRE term loan activity? Is that just construction loans going to permanent or is there something else happening there with that interplay?

Derek Stewart: Yes. Thanks, John. This is Derek. Yes, on Slide 23, what you're seeing there for the commercial real estate, the C&D construction, it's really just construction loans that are moving into the term loan bucket. So as they reach certificate of occupancy, that's when we move them into the term loan bucket.

Jon Arfstrom: Okay. Good. Thank you on that. And then Ryan, just one quick one for you. I think you're saying this, but I just want to make sure I've got it right. On You have a lot of repricing that happens immediately with a rate cut or a rate hike. You're just saying there's enough momentum in your model right now that if we get a couple of cuts, you still feel like there's enough momentum to push the margin higher? Is that Yes. You for that. I'm glad you raised that question because it gives me a chance to clean up something I said previously and reinforce the point I want to make a this call.

So that fixed asset repricing is good for two to three basis points on earning asset yields quarter to quarter. I think I may have said NIM before. And I think the reason why we sort of like some of the things that we put in the back, but we don't want to force feed people with it, is you have kind of a traditional view of assets and sensitivity around like parallel shocks. And we've been not really talking about that very much because we actually don't think it's that interesting. Given the fact that the Fed could be changing their posture.

But what's important about that sensitivity view is it's not guidance, a static balance sheet, all those disclaimers is that it shows that even when you allow for, you know, three rate decreases. And even when you set a 100 basis point bound on the downside from the implied forward curve, that would still allow for an overall increase from kind of the base that we'd be assuming. So is the message that we're trying to convey is there's enough latent things working its way through that even with the Fed cutting rates that we could still show growth in NII one year hence.

Jon Arfstrom: Okay. Okay. Thank you very much.

Shannon Drage: Thank you. There are no further questions. I'd like to pass the call back over to San Andres for any closing remarks. Thank you, Alicia, and thank you all for joining us today. We appreciate your interest in Zions Bancorporation, National Association. If you have additional questions, please contact us at the email or phone number listed on our website. We look forward to connecting with you through the coming months, and this concludes our call. Thank you. At this time, you may disconnect your lines. Thank you for your participation.