Zions Bancorporation N.A (ZION) — Q2 2025 Earnings Call Transcript

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

Thanks very much, Shannon, and good evening, everyone. As you've seen, we reported second quarter net earnings of $243 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 a net interest margin, customer fee growth, and well-managed expenses. While we see some signs of economic slowing, 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 optimistic 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 to build strong relationships. For example, our effort to grow loans made through the SBA 7(a) program has led to a 91% increase in the number of deals booked in the first 9 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, 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 regarding this offering. It was launched on May 12 and through early July, we had a 78% increase in sales of this product versus its predecessor, with average balances in these accounts of around $30,000. This is before we 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 3 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 7 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. Noninterest-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 4. 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 mark-to-market until our shares, which are subject to a minimum 180-day lock-up period from the IPO, are fully divested. Slide 5 provides a 5-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.

Thank you, Harris, good evening, everyone. I'll begin by breaking down the drivers behind the changes in pre-provision net revenue. Beginning on Slide 6, you will see the 5-quarter trend for net interest income and net interest margin. Net interest income increased by $51 million or 9% relative to the second quarter of 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 the second quarter of 2026 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 7 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. Net interest margin expanded by 7 basis points sequentially from favorable earning asset remix and 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 8. 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 5 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 the second quarter of 2026 is moderately increasing relative to the second quarter of 2025. The growth is expected to be broad-based and driven by increased customer activity and new client acquisitions, with capital markets continuing to contribute in an outsized way. Slide 9 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 the second quarter of 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 5-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 2 basis points sequentially. Our outlook for period-end loan balances for the second quarter of 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 this slide. Relative to the prior quarter, total average deposits declined 0.9% due to the seasonal customer deposit outflows early 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 that Harris mentioned previously. The cost of total deposits declined sequentially by 8 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 clients. 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 costs declined by 4 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 securities and money market portfolios over the last 5 quarters. Maturities, principal amortization, and prepayment related cash flows from our securities portfolio were $726 million in the quarter or $427 million when considering a net of reinvestment. The pay down and reinvestment of lower-yielding securities continues to contribute to the favorable remix of our earning assets. The duration of our investment securities portfolio, which is a measure of price sensitivity to changes in interest rates, is estimated at 3.8 years. 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 7 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, re-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. This 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 forecast. The allowance for credit losses as a percentage of loans and leases declined to 1.2%, and the low loss of 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 loan-to-values of 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, the types of problems being experienced by borrowers have relatively low loan-to-value ratios and continued sponsor support. Our loss-absorbing capital is shown on Slide 16. The Common Equity Tier 1 ratio this quarter was 11%. This, when 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 the current information, and we expect to continue to produce positive operating leverage as revenue growth outpaces noninterest expense growth.

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. Alicia, please open the line for questions.

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?

No, I think so. I think when we last spoke, it looked like we were going to have a significant increase in tariffs affecting the entire economy, similar to a tidal wave. Over the past 90 days, however, it seems the administration has shown a willingness to be more flexible. The situation keeps shifting, and while there isn’t a lot of certainty about the outcome, it's becoming clearer that they are trying to manage this without greatly disrupting the economy. They seem to be aware of market sensitivities. We conducted a survey among small businesses early on and discovered that while just over half anticipated that tariffs would be an issue, many smaller businesses actually saw opportunities arising from it. As we analyze the portfolio, we are noticing some positive impacts. While some businesses are suffering, others are finding benefits from the situation. Overall, the economy appears to be coping better than we might have expected a quarter ago. This leads us to believe that the situation is likely to be more favorable than we predicted when we discussed this after the first quarter.

Got it. And then maybe on the other side of the balance sheet, on 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?

I think it's been a really competitive market for deposits. And the challenge is always kind of trying to find the sweet spot between trying to protect your margin while also ensuring that your deposit base remains intact and growing. We're trying to walk that line. But I think we paid particular attention to the total funding cost, and that's continued to come down in a nice way. It's 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 consumer deposit effort, which I'm enthusiastic about it. It's too early to know what that can bring, but I think it represents a foray into the consumer market that has been probably less of a priority for us in years past than it's becoming today. 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.

So are you saying that deposit costs should come down a little bit or total funding cost should come down a little bit even without Fed rate cuts?

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 the asset side of the balance sheet that should give us some boost. 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. 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.

Just on loan growth, it looks like it was really solid in the quarter led by C&I, some term financing in 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?

Derek, do you have any thoughts?

So we had nice loan growth for the quarter of about $891 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 originations, and the other half from new originations, some nice new originations on the commercial and industrial side. CRE was up slightly, but not very much. We are seeing increased activity 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 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. So I would anticipate that that will continue 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.

Bernard, this is Ryan. One of the views that we brought this quarter that we sometimes have in our travel decks is a view of where the growth is coming from across our affiliates. So I would just point you to Slide 23 in the materials and particularly to the growth we're seeing sort of in the Zions market, California Bank and Trust, Amegy. We're seeing a lot of growth with the top-line growth coming out of commercial, as you noted, and that is certainly where we expect to see growth going forward.

Okay. Got it. And then just for a follow-up on deregulation, Bowman has laid out a number of items that likely need to be dialed back and we'll 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. The $100 billion asset threshold has moved to $130 billion or so, or to $250 billion. But just wanted to hear your thoughts if this could lead to 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.

This is Harris. I find the tiering discussion very positive. Among the various proposals, the long-term debt requirement could have the most significant effect on regional banks due to the spreads compared to alternative funding costs. It's encouraging that this is still a possibility, even if it's not a priority right now. I see this as a positive development in our industry. Regarding M&A, I direct everyone to my shareholder letter from February, specifically pages 13 and 14, where I've shared my thoughts on the matter. Our approach is consistent; we don't believe in pursuing growth just for the sake of growth. We have made strategic moves, like our recent acquisition in Coachella Valley, Southern California, which fits well and enhances our market presence. Our strategy is focused, but we’re not just looking to expand at any cost. For more details, please refer to my essay.

On the expense side, I know you are still targeting your expense outlook, which implies confidence in achieving positive operating leverage. Could you help us understand the extent of positive operating leverage that seems reasonable, considering the growth opportunities ahead and the necessary investments? Additionally, if you anticipate more revenue pressure than what is currently reflected in your guidance, do you still believe you can achieve positive operating leverage given the flexibility in your expenses?

John, thanks for that. Pretty good question. Yes, we updated some of the guidance there looking forward for the quarter, and 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. We do a litany of things internally to ensure that we stay focused on the expense side. I don't think that's ever going to change. I think when we came into this year with more of a growth orientation, turning the page, putting more money into marketing dollars, putting more money into revenue producers. 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 think about the breadth of some of the words we use, think about being on the higher end of that range for the revenue pieces and maybe at the lower end for the expense piece 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, like I have on my desk or have been sent just in the last couple of weeks. Not that we're going to always be working at that pace, but we are finding some really good people who through disruption in other places are looking for a good home. Where we're going to see increases, I think, are going to be in what I think of as good expense, which is not compliance, regulatory, back office, but people who are really good revenue producers. That and some increased marketing spend. I mentioned a couple of initiatives we have going in small business and consumer that I think can be meaningful for us, but it's going to take some marketing to get there. Those are kind of places where we're going to see spend. It doesn't always produce revenue day 1, but it should kind of quickly turn into revenue.

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 where we've been heading on the revenue side of the business. When we compare that to the 3% adjusted expense growth year-over-year, we've been disciplined. I think just reiterating what Harris said, it would be the good kind of expense growth while also building on our revenue momentum.

John, this is Scott. I would just add, I think you can tell from Ryan and Harris' comments that there's a lot of momentum and energy behind investing in revenue growth in our key segments, products, marketing, et cetera, hiring. That gives us a lot of confidence about revenue going forward. The other thing I would point back to is you've heard us talk about this continuous improvement process that we're always going through for the better part of the last 10 years. We eliminate about 2% of our base expenses every year through continuous improvement, how we process documents, how we're using AI. We processed 21,000 W9 forms and signature cards a year. It’s kind of in any number, but, oh my god, there's so much expense related to that, and we're finding a 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. We’re using AI actively there both in the false positives in our wire room and AML/BSA. Just a huge area of activity in our company, whether it's loan spreading or credit presentations for renewals or new loans, loan refuse. We are actively pursuing the use of AI to not just reduce expenses, but also to redirect the work of those colleagues that are in those areas to higher value work, actually analyzing data to create more revenue or reduce expense or minimize losses as opposed to just producing data and then being so exhausted we don’t know what to do with it. So those would just be a few examples of this big bucket of small improvements that we've been about for over a decade now.

Got it. Okay. All right. And then one quick follow-up. I know M&A was already asked about. But on the M&A front, you mentioned the benefits of the smaller Coachella Valley deal that you completed. Have you seen advantages from the new core system in terms of integrating and closing the deal more quickly, saving on costs, and potentially achieving higher cost savings through this transaction?

Yes, John, this is Scott again. Absolutely. If you think about it at 30,000 feet, we had 3 loan systems, one for consumer, one for commercial, and one for real estate, one deposit system, all 40 years old, all customized, customized like crazy. Every other bank in the country has this; we weren't the only one. Dozens and dozens of data models. 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. Think about how we merge branches, like we just did in the Coachella Valley. 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.

I might just add, it hasn't come up. It might otherwise come up, but there's been a lot of focus on the GENIUS Act, stablecoin, et cetera, tokenized deposits. This new platform we have, the TCS BaNCS system, 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 in real time. What you’re seeing with developments with stablecoin, tokenized deposits is that we’re coming into a world where real-time settlement is really important 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. TCS has a crypto service platform that would allow us to connect to crypto exchanges. I think a lot of plumbing has been built for however that future unfolds. 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.

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 3.5% level that we saw pre-COVID? The consensus doesn't have you getting there through 2027. Is that too conservative? Perhaps, any thoughts on the reversion to that sort of pre-COVID NIM level?

Thanks, Bill. I'll take that in parts. When we - you're right to remember us talking about a mid-3 type NIM hopefully having a more constructive yield curve, it's useful in all that as well. 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 on that side. On the asset side, there are still things that are lagging through on the fixed asset repricing that we see the potential for 2 to 3 basis points just lagging through each quarter. We also make a point to talk about the fact that we've had these cash flow hedges that were 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 a $16 million negative impact associated with that. You can think about that diminishing roughly $2 million per quarter over time until you get to the end of 2027. 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. We said in my prepared remarks, and it's been pretty consistent here for the last few quarters, generating anywhere between $700 million to $800 million worth of cash flows from investment securities portfolio, 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. Those dynamics that we think all kind of work in our favor to keep pushing forward from here on the backs of 6 consecutive quarters of NIM expansion with this one being pretty pronounced.

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 that, what's contributing to its success, how you're thinking about expanding that offering into your other markets?

Yes. Some of the features of the account include unlimited ATM access, which, by the way, people are using ATMs less and less. The cost of giving away something that people are using less becomes easier over time. We have lots of safe deposit box inventories and 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 get the idea. We're really trying to say, hey, we want all of your business and embrace these customers. It has a $2,500 minimum balance and is a non-interest-bearing account. What we're finding is people who open an account with that minimum balance carry much higher balances than that. That's why we think this will 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 that there are additional credit card bonuses related to it, as well as access to wealth planning capabilities and investment management capabilities with less friction associated with it.

Just a couple more follow-ups on the remix points. On the liability side, you've had a great path towards getting down some of those broker deposits, and this quarter I 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?

Yes, thanks, Ken. I'm happy to get going on 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 think about opportunities across broker deposits, Federal Home Loan Bank borrowings, repos, and the relative trade-offs between those funding sources. This quarter, we saw an opportunity on some of those Federal Home Loan advances. We used to factor in the stock dividends that we receive as being a member of that, which was more advantageous. 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.

Got it. On the loan side, very interesting to see all 3 of the loan categories yields go up. I know there's obviously a little swap impact on the C&I book, but the CRE and consumer. So can you help us walk through what that front book, back book benefit continues to be and just what's your natural state of competition like in terms of spreads?

Yes. I'll get started, and I'll invite my colleagues to jump in as they see fit. From a front book, back book perspective, what's coming on is coming on a yield at 7.38% 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. In the back of our materials, we show the repricing pattern of our earning assets and our loans, and you’ll see a lot of that reprices within a year, certainly the majority of earning assets. It's even more pronounced for loans. We are reaching a point now in the consumer books where we had some of those 5/1 ARMs that were priced at lower rates, that are now starting to remark and reprice to a level that's helpful to us. For our commercial book, the terms of our commercial lending typically are not extended. We've had some opportunities that have been really useful in the repricing of commercial fixed relationships. Those are just a couple of dynamics I would point to that are probably pointing to the pattern that you're seeing in the results.

If I look at Slide 27, the latent, emergent scenario, 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 stabilized, which has kind of been the trend the last few quarters?

Thanks, Peter. We didn't know if this would go quietly into the night. But it seems to be showing some interest for ourselves as a management team, but we don't want to force-feed people things that they don't really care to consume. We'll let you judge how conservative that is. I know people have made those points before. There was a time when the net migration assumption was as high as $5 billion. 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 certainly the things we're talking about, the gold accounts had a hand in that in the most recent periods. We haven't gone to further lengths of discussing what happens if there’s zero migration here. We just don't want to overcomplicate it. You can solve that if you think about it.

You can probably take 1.4 minus 0x the current short-term...

You can solve it.

This is Matt Tyler, Corporate Treasurer. I think if you just assume whatever DDA runs off is replaced with funding very close to the Fed funds rate, you get your sensitivity that you're looking for.

Okay. Got it. And if I can 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? It clearly seems like the next Fed Chairman is likely going to take a more dovish stance on rates.

Yes. Thank you for that, Peter. I'm happy to provide some perspectives there. Listen, we have 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. We do recognize that we screen at the higher end of asset sensitivity in our peer set. We recognize that methodologies can be different and how people think about the deposit assumptions can drive various outcomes. We want to be attuned to the net interest income impacts of if there is a more dovish Fed and a downturn there. It’s something we talk about internally. We think there is probably some room to decrease that asset sensitivity at the margin. We couple that with considerations about the value considerations and fair value of equity and tangible common equity. You've seen us pivot and put on more paid fixed hedges on our loans and securities to also protect to the extent that term rates were to run up on us to make sure that we manage that to a level that we feel is appropriate. This is a dual-fold explanation about how we’re managing the balance sheet right now.

Can you speak about the outlook for your capital markets business, your fee income that you've 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.

Sure, Chris. This is Scott McLean. Now the business is growing really nicely for us. Recall that in '23, we had about $81 million in revenue, it grew to $107 million last year, and we're on a good pace this year. We've said for three years now that this is a business that we thought we could double in size in a 4 to 5-year period. I think we're on our path to doing that. Major contributors are clearly loan syndications, interest rate risk management, foreign exchange. Those have been 3 businesses we've been in for a long time, and they continue to grow at a nice pace depending on the economic circumstances. We added a real estate capital markets business about 2 years ago. It started to show some growth last year, and we believe it will continue to move toward our expectation over time. 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 source of new revenue going forward. We commented on that with the success we had with 1 particular transaction in the first quarter. Commodity risk management is another area we're moving into. In Texas, we have about 80 reserve-based loans there, outstanding relationships where we do a lot for these companies. Later in the third quarter, we'll be launching our oil and gas derivatives business, and we have 80 clients that we've actively called on, and they are very open to including us on that front, which we think has a lot of potential for us. Those would just be some of the major categories. We have other parts of capital markets that we're involved in, like bond underwriting. 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 quality and depth of our people. It’s an exciting part of the story.

I appreciate it. I may have missed it, but can you clarify how you plan to communicate the potential resumption of buybacks in relation to the tiering conversation? If I overlooked this, I apologize.

We're going to be somewhat conservative for the next while. Our nominal CET1 ratio is very strong at 11%. In times of stress, people don't care about nominal numbers; they look at mark-to-market numbers. We still have some AOCI that needs to work off. We had a 20% increase in tangible common equity over the last 12 months. It’s accreting back combined with earnings at a good clip. But we're just not there yet in terms of where we're comfortable starting to take our foot off the pedal and start buying shares.

We certainly don't know the full profile of what will come out of the Basel III Endgame. 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 it talked about in other calls. An ex-AOCI view might lead to something with a 9 handle, something that people are solving for. We have not made any such commitment. But we see a glide path in the next year that would get us to something with a 9 handle ex-AOCI and the pattern we've seen in our earnings generation.

Your deposit balances have declined for 2 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. But do you think the third quarter could be a growth quarter for total deposits?

It could be. I think it's too soon to know. I don't think 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. We're working hard at it, just doing everything we can. It's... that's why I said earlier, kind of threading the needle of getting this right in terms of pricing and maintaining the deposit base. Looking through to the total funding structure of the company and the cost of it. Bring down broker deposits – we'd like to see more of that; less reliance on short-term borrowings, et cetera. We’re working on the deposit side, but too soon to know whether we're going to make a significant difference this quarter.

Then my follow-up, actually on your comments earlier on stablecoins. 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 Zions' deposit growth at some point?

Listen, I think stablecoins will have a place for cross-border payments, et cetera. Beyond that, maybe. I think the better case will be in tokenized deposits, and I believe that it will be healthier for the economy because it's going to allow for the creation of private credit that the banking system is so important for. I’m not sure how stablecoin might have a leg up on tokenized deposits. I think we’re coming into a world where the programmability of payments is key, and we're watching carefully at how it unfolds. I think we've got probably less work to do than some will have in terms of operationalizing it.

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

Thanks for that, David. Yes, we don't feel capital constrained from taking such organic growth action. What I've tried to call out in some of my remarks is we are wanting to have a growth orientation here. Some of the things that would show up in our guide for noninterest expense are meant to be more growth-oriented, more marketing dollars, more revenue producers. We need the economy to be constructive. In my prepared remarks, I sort of indicated we could see upside from our outlook if the tariffs settle into a place that’s not disruptive. If you look at what we produced this quarter with a 5.6% loan growth, it was a pretty healthy quarter. There are no guarantees that this persists, but we like the markets we're in, and we kind of like the strategy moving forward.

David, this is Scott. I would just add that our calling programs have been more intensified. We have a real focus on calling existing customers but also calling on prospective clients. That is ramping up, and we think we're going to have as many good looks, if not more than anybody. We need to see how the economy and everything else balances out, but I think we’ll compete effectively.

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 an interplay?

Yes, thanks, Jon. This is Derek. On Slide 23, what you're seeing there is for the commercial real estate, the C&D construction - that'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.

Okay. Good. 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. 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 fair?

Thank you for that. Glad you raised that question because it gives me a chance to clean up something I said previously and to reinforce the point I wanted to make on this call. That fixed asset repricing is good for 2 to 3 basis points on earning asset yields quarter to quarter. I think I may have said NIM before, and the reason why we don’t want to force-feed to our audience is we actually don’t think it’s that interesting when the Fed could be changing their posture. The important thing is that sensitivity view shows, while it’s not guidance and it’s a static balance sheet, it all shows that even when you allow for 3 rate decreases and adjust for 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.

Thank you, Alicia, and thank you 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 in the coming months, and this concludes our call.