Zions Bancorporation N.A (ZION) — Q3 2025 Earnings Call Transcript

Thank you, Von, and good evening, everyone. Welcome to our conference call to discuss the third 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 the press release or Slide 2 of the presentation, dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release as well as the presentation are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks. Following Harris' comments, Ryan Richards, our Chief Financial Officer, will review our financial results. Also with us today are Scott McLean, President and Chief Operating Officer; Derek Steward, Chief Credit Officer; Chris Kyriakakis, Chief Risk Officer; and Rena Miller, Corporate General Counsel. After our prepared remarks, we will hold a question-and-answer session. This call is scheduled for 1 hour. I will now turn the time over to Harris Simmons.

Thanks very much, Shannon, and good evening, everyone. As you'll see on Slide 3, the third quarter reflected continued momentum in our core earnings. Relative to the prior quarter, net interest margin expanded by 11 basis points to 3.28%. Customer fees, excluding the net credit valuation adjustment, grew $10 million, and adjusted expenses declined $1 million. The efficiency ratio improved to 59.6%. Average loans and customer deposits increased by an annualized 2.1% and 3.1%, respectively, compared to the prior quarter. These trends, which resulted in positive operating leverage are encouraging. During the third quarter, we recorded a $49 million provision for credit loss. Net charge-offs in the quarter were $56 million or 37 basis points of loans on an annualized basis. As noted in our 8-K filed on Wednesday of last week, legal action has been initiated for the recovery of approximately $60 million and certain guarantors of 2 related C&I loans. We charged off $50 million of the combined balances of the loans at the end of the quarter. Additionally, we have established a full reserve against the remaining $10 million. We view this as an isolated situation resulting from a couple of borrowers. We have no further exposure related to these borrowers or guarantors. I would note that excluding the impact of this matter, net charge-offs were minimal at 4 basis points annualized on average loans and credit quality generally improved for the quarter as well. Moving to Slide 4. Diluted earnings per share was $1.48 compared to $1.63 in the prior period and $1.37 in the year-ago period. This quarter's results include a $0.06 per share negative impact related to the net credit valuation adjustment. Earnings per share also reflects the adverse impact of the elevated credit provision discussed previously. Slide 5 provides a 5-quarter view of the pre-provision net revenue. On an adjusted basis, our third-quarter results of $352 million reflect an improvement of 11% compared to the prior quarter and 18% compared to the prior year period as revenue growth continued to outpace 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, and good evening, everyone. Beginning on Slide 6, you will see the 5-quarter trend for net interest income and net interest margin. Net interest income increased by $52 million or 8% relative to the third quarter of 2024. We continue to see the benefit from fixed asset repricing and favorable shifts in the composition of average interest-earning assets. Growth in average customer deposits in excess of loan growth also contributed to an improved mix in funding relative to the prior quarter. As a result, the net interest margin expanded for the seventh consecutive quarter to 3.28%. Our outlook for net interest income for the third quarter of 2026 is moderately increasing relative to the third quarter of 2025, supported by continued earnings asset remix, growth in loans and deposits, and fixed asset repricing. Our guidance assumes 225 basis point cuts to the Fed funds rate in October and December of this year, with additional 25 basis point cuts in March and July of 2026. Slide 7 presents additional details on changes in the net interest margin. The linked quarter waterfall chart on the left outlines changes in both rate and volume for key components of the net interest margin. The net interest margin expanded by 11 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 of this slide presents the 30 basis point improvement in the net interest margin, which benefited from the improved cost of deposits. Moving to noninterest income and revenue on Slide 8. Presented on the left in the darker blue bars, customer-related noninterest income was $163 million for the quarter versus $164 million in the prior period and $158 million a year ago. This quarter's results include an $11 million impact from net CBA loss, primarily driven by an update in our valuation methodology in addition to changes in other market factors. Adjusted customer-related noninterest income, which excludes net CVA, was $174 million for the quarter, representing a 6% increase versus the second quarter and an 8% increase versus the year-ago quarter. Notably, capital market fees, excluding net CVA, increased 25% compared to the prior year period, driven by higher loan syndications and customer swap fee revenue. We continue to see solid contributions and growth from our newer capital markets offerings, including real estate capital markets, securities underwriting and investment banking advisory fees. The chart on the right side of this page presents both total revenue and adjusted revenue for the most recent 5 quarters, which were impacted by the factors previously noted for net interest income and customer-related fee income. Our outlook for customer-related fee income in the third quarter of 2026 is moderately increasing relative to the third quarter of 2025. The growth is expected to be broad-based and driven by increased customer activity and new client acquisition. Capital markets continue to contribute in an outsized way. Slide 9 presents adjusted noninterest income in the lighter blue bars. Adjusted expenses of $520 million decreased by $1 million versus the prior quarter and increased 4% versus the year-ago period, with the latter increase driven largely by technology and salary-related costs. Our outlook for adjusted noninterest expense for the third quarter of 2026 is moderately increasing relative to the third quarter of 2025. The expense outlook considers increased marketing-related costs, continued investments in revenue-generating businesses and increased technology costs. We continue to expect future positive operating leverage. Slide 10 presents 5-quarter trend in average loans and deposits. Average loans increased 2.1% annualized over the previous quarter and 3.6% over the year-ago period. Total loan yields increased by 5 basis points sequentially. Our outlook for period-end loan balances for the third quarter of 2026 is slightly to moderately increasing relative to the third quarter of 2025 and assumes growth will be led by commercial loans. Average deposit balances are presented on the right side of the slide. Relative to the prior quarter, total average deposits were relatively flat including an 11.5% reduction in average broker deposits. Average noninterest-bearing deposits grew approximately $192 million or 0.8% 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, which is now being fully reflected in average balances. Near the end of September, our remaining affiliates completed the same migration of legacy interest-bearing deposits into the new noninterest-bearing accounts. The approximately $1 billion of migrated deposits from the remaining affiliates are reflected in period-end balances in the third quarter and will be fully represented in average balances in our fourth quarter results. The cost of total deposits declined sequentially by 1 basis point to 1.67%. Further opportunities to reduce deposit costs will depend on the timing and speed of short-term benchmark rate changes, growth in customer deposits, market competition, and depositor behavior. Slide 11 provides additional details on funding sources and total funding cost trends. Presented on the left are period-end deposit balances, which grew by $1.1 billion versus the prior quarter. Total borrowings declined $1.8 billion during the quarter. Short-term FHLB advances decreased $2.3 billion, partially due to the issuance of a $500 million senior note in addition to customer deposit growth. On the right side, average balances for our key funding categories are shown with the total funding costs. As seen on this chart, our total funding costs declined by 5 basis points during the quarter to 1.92%. 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 investment portfolios over the last 5 years. Maturities, principal amortizations, and prepayment-related cash flows from our securities portfolio were $596 million in the quarter or $291 million when considered net of reinvestment. The paydown and reinvestment of lower-yielding securities continues to contribute to the favorable mix of our earning assets. The duration of our investment securities portfolio is estimated at 3.7 years. We begin our discussion of credit quality on Slide 13. Realized net charge-offs in the portfolio were $56 million this quarter or 37 basis points annualized, driven principally by the $50 million charge-offs that Harris described previously. Nonperforming assets remained relatively low at 0.54% of loans and other real estate owned compared to 0.51% in the prior quarter. Classified loan balances declined sequentially by $282 million driven by a $143 million reduction in CRE and a $141 million reduction in C&I classified levels. We expect the CRE classified balances will continue to decline going forward through payoffs and upgrades. During the third quarter, we recorded a $49 million provision for credit losses, which, when combined with net charge-offs, reduced the allowance for credit losses by $7 million relative to the prior quarter. The reduction reflects lower reserves associated with CRE portfolio specific risks. The allowance for credit losses as a percentage of loans remained stable at 1.2%, and the loan loss allowance coverage with respect to nonaccruals was 213%.

Slide 14 provides an overview of the $13.5 billion CRE portfolio, which represents 22% of total loan balances. Notably, this portfolio continues to maintain low levels of nonaccrual and delinquencies. The portfolio is granular and well diversified by property type and location, with this growth carefully managed for over a decade through disciplined concentration limits. As it continues to be of interest, we have included additional details on certain CRE portfolios in the appendix of this presentation. Our loss-absorbing capital is shown on Slide 15. The Common Equity Tier 1 ratio this quarter was 11.3%. This, when combined with the allowance for credit losses, compares well to our risk profile. We expect our common equity from both a regulatory and GAAP perspective to improve 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 unrealized loss accretion, has enabled us to grow tangible book value per share by 17% versus the prior year period. Slide 16 summarizes the financial outlook provided over the course of our prepared remarks for the third quarter of 2026 as compared to the third 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.

This concludes our prepared remarks. Additionally, if you have questions regarding the events mentioned in our 8-K and the public complaints filed last Wednesday, please be aware that while litigation is ongoing, our comments on these topics will be restricted to what is already available in those filings. Von, could you please open the line for questions?

I wanted to start on the announcement in the 8-K. I guess you noted that the charge this quarter is an isolated incident. Can you talk about what gives you conviction that this is isolated? Maybe walk us through your internal review process since this came to light. How many loans have you reviewed? Are there any lumpy exposures to real estate funds within your NDFI book that you've come across? Any color there would be helpful.

This is Derek. Just as far as what we've reviewed, we've gone through the portfolio, and we think it's an isolated incident. As we've gone through it, we haven't found similar loans or other issues, so we're very confident that it's this is an isolated incident.

I would like to add that our credit history over the years clearly demonstrates our expertise in managing credit. This particular situation involved some unusual circumstances that are not typical for us. We plan to continue working with an external party to ensure we learn from this experience and identify areas for improvement. Our careful approach to extending credit and monitoring collateral speaks for itself.

Got it. Maybe if you can expand on that and take us through your NDFI exposure, as we look to the call report disclosure, I think that's about 4% of loans. It seems to be pretty spread out among subcategories. Are there any lumpier exposures or any high-risk categories there that you'd point out?

Sure. Thanks for the question. We added in the appendix Slide 36 that details the NDFI exposure, which is about 3% of our total loans. As you can see on the slide, the growth has been fairly minimal over the last several years. The breakdown includes a broad regulatory definition that covers various segments, with the majority being equipment leasing transactions like yellow iron trucks. There are also capital call lines and subscription lines, among other areas. It's very well diversified across different lending segments. This is a business we've been in for a long time. While we don't intend to grow it significantly, we have good experience in this area.

Wanted to start on your NII guide. How much fixed rate asset repricing are you factoring into that NII guide outlook? Can you possibly go through the balances that you're expecting to roll for loans and securities and what that yield pickup is and then what your expectations for longer-term interest rates are as part of that? That would be great.

Thanks, Dave. I appreciate the question and I'm happy to provide some insights. I would highlight our slightly to moderately increasing guidance on loan growth. You may have noticed the trend we established over the years regarding our security side. We definitely see room for the securities strategy to transition into loans. This will have implications for our fixed asset side, and as everything continues to evolve, we anticipate a potential increase of 2 to 3 basis points in earning asset yields, which is reflected in our guidance.

Got you. So in terms of the amount of loans, fixed-rate loans and fixed-rate securities that you're expecting over the next year, do you happen to have a rough dollar amount to those?

It breaks because it's not only those items that were established as fixed-rate. There are aspects that behave similarly to fixed rates. For example, 5/1, 7/1, and 10-year ARMs are included in this mix. So, it's a combination of factors across commercial real estate, commercial and industrial loans, and then mortgages that act more like fixed-rate loans, which contributes to what we refer to as fixed-rate asset repricing.

Okay. And then just as a follow-up on capital, last quarter, you mentioned you weren't that comfortable with the buyback yet. Can you give us your updated thoughts now that capital ratios are a little bit higher and maybe you have some more clarity on portfolio and growth?

Yes. Thanks, David. Hopefully, we're aligned here. We have been discussing the inclusion of AOCI when considering our overall capital levels, aiming to remain in line with our peers. As we evaluate this quarter and observe where our peers stand, particularly with AOCI included, there seems to be a common trend around 10% about 12 months from now when we would begin to assess those levels. That would likely be the period when we are closely aligned with our peers.

I would like to inquire about the guidance. You have mentioned moderate expectations. However, in your prepared comments, you continue to discuss operating leverage for the coming year. What is the target you are aiming for regarding the level of operating leverage you anticipate being able to achieve in the future?

That's again. Very fair question. Listen, I first want to just reiterate what Harris said. He emphasized in his spoken comments and also in his quote about the strength of our core earnings this quarter. I think showing up with 5 points of operating leverage was an indication of some of the good things that have been happening at the bank. We're still really refining how we think about how the numbers are coming together for next year. We see enough to know that there's going to be a positive operating leverage. Where exactly that lands is not perfectly clear yet, but we know it's there. So I'll probably stop short of giving you a hard number or a hardened range at this point, but we're happy to return to it once we've landed our full-year process for 2026. But I understand you struggle with the guide. Go ahead, Ken.

My second question just from last quarter, you were talking about a 3.50% NIM over time, 3.28% this quarter. And then kind of commentary might have changed a little bit after you had said that. I just wanted to kind of ask you to come back on that commentary that you gave and help us think about what the right zone is for your kind of long-term NIM thinking.

I think I introduced that concept. While I can’t provide a specific number or date, I believe it's where we ultimately expect to be. I want to clarify that I didn’t mean to imply that this will happen in the current quarter or next year. I anticipate that we will see continued improvement in the net interest margin. We are putting in significant effort to ensure we are pricing effectively on the asset side of the balance sheet. Some of this improvement will come from the securities portfolio due to repricing, among other factors. The number I mentioned is likely in the range of what we would expect, consistent with our historical performance. I hope that's helpful, but I want to emphasize that I’m not suggesting this will occur within the next year.

And I think the pacing of that is a little bit harder in a lower rate environment. But listen, I think just...

All right. So not doable, but we'll see what the timing is.

Yes. So I think to Harris' point, I think it's really pulling through on some of the core initiatives that we have at play to drive through deposit growth but have yet to play out fully.

So just kind of sticking with everyone's favorite slide of 26 of the latent, emergent and implied. It seems like the implication has come down quite a bit quarter-over-quarter. Obviously, some of that is your margin went up, so you recognize it, which is good. And then the Fed fund is lower by 50 bps on the outlook. I think there's 2 measurements kind of point to point a little apples-and-oranges comparison. The implied seems to suggest like minimal improvement. But is it maybe a fact of you kind of casting over and you might see margin compression as you kind of recognize the full 100 basis points? Or is it more just kind of giving you an optics view? I guess there's a lot of scenario analysis of deposit betas and everything within that, too. So just kind of curious, considering the implied is roughly 1/3 of where it was.

Yes, thank you for the question. And I think I caught most of that. It was coming through just a little bit faint, but I think that the rest of it is talk us through kind of where things are landing at the 1.4% based upon the implied forward based upon maybe the change period-over-period. I would just try to reinforce, as I tried to every chance, illustrative to show the various interest rate dynamics that we've highlighted in times gone by. And certainly, in a down-rate environment, included in my prior response, building upon Harris' is it does make it a little tougher from a net interest income basis, but even with the backdrop of this sensitivity, we layered on top of that was a slightly to moderately increasing loan growth prospects. And the fact that there are some assumptions underlying this sensitivity that can be seen as being relatively conservative, I'll let you judge whether it is or it is not, including things like migration from noninterest-bearing deposits elsewhere, including assumption that securities are 100% reinvested in securities when, in fact, we've shown that we've actually had opportunities to reinvest at least half of those gross cash flows in other gainful places. It wouldn't allow for dynamic aspects of where we might reinvest in higher-yielding loans. As we look to remix our loan book, we've kind of pointed to commercial loans being a primary driver moving forward in 2026 for growth. Those tend to be a bit more yieldy than some of the other places that we could invest our loan dollars. So yes, there is an impact from the forward curve. We try to put some bookends around that from a down 100, up 100. What we're trying to show is even in a place where the Fed could be lowering rates, we still stand to have some upside on our NII from our forecast view when you layer on all the other more dynamic aspects, including loan growth and other assumptions that one could assume moving forward.

Got you. That's helpful. And then in terms of capital, there's been some M&A in kind of your footprint or footprint adjacent, you could say. When you look at the opportunity set in front of you and you now have better capital footholds, if you were to do M&A, could you kind of target the potential size you might look at and maybe the dilution impact that you might be willing to stretch to if M&A is on the table at all at this point?

There are a variety of factors that influence our decisions regarding potential actions. Typically, smaller deals that enhance our presence in markets where we are already established are at the top of our list. I'm not going to discuss specific metrics that would drive a deal, as each deal has its own unique circumstances. However, I am quite aware of the concept of dilution and would want to ensure that any deal is a solid strategic fit. We are open to exploring opportunities, but we don't feel pressured to pursue anything aggressively at this time.

Just back to the 8-K. Can you just maybe step back and give us some more color on how things unfolded, when maybe you first discovered that there was a problem and whether or not those 2 credits were adversely rated previously or not and then just how you monitor collateral just in general, just with the collateral kind of moving around in this case?

Yes, this is Derek again. During the quarter, we began our review upon learning certain facts, as detailed in our 8-K regarding this event. It took some time for our analysis and review. Once we identified what we believed to be the situation, we thought it was important for transparency to share our findings.

I think it's the processes. I mean we have a lot of people around here that are looking at collateral and loan documentation, et cetera, et cetera. I think historically, they did a great job. This is obviously one that was not something that came across the radar screen as early as we would have wished, and so one of the reasons that we're doing an outside review. But again, I think, historically, we've got a pretty good track record monitoring and...

Understood. Okay. And then just the other question for me just sort of on the loan growth outlook. It looks like you slightly raised the loan growth guide. It looks like it's going to be predominantly driven by commercial, but there was some runoff in C&I. Can you maybe just speak to the runoff in C&I and maybe the related pipeline and how you expect to kind of restore that growth?

Yes, this is Scott McLean. Our loan growth has been around 3% for the last seven quarters, give or take, since the first quarter of '24. During this time, there have been significant concerns about commercial real estate and the economy, alongside issues related to tariffs. Given this context, we believe it’s crucial to approach our lending activities with care and thoughtfulness. As a result, we anticipate maintaining our current levels of growth. However, we are actively pursuing growth through various initiatives. Our call programs are stronger than ever, and we’re making strides in SBA lending, now ranking as the 14th largest originator of SBA 7(a) loans as of September 30, the end of the SBA's fiscal year. We're also introducing new products for consumers and small businesses and have revamped our marketing strategy to be more effective. While we’re adopting an aggressive mindset, we want to be thoughtful in our approach. As the economy improves, we expect our portfolio to continue achieving moderate single-digit loan growth, a trend we’ve maintained for many years.

I believe you inquired about the decrease in commercial and industrial lending during the quarter. On average, while there has been an increase in spot lending, we experienced a sequential decline in loans. Despite this decline, we actually achieved strong loan production, which was somewhat balanced out by paydowns and payoffs. You specifically mentioned the commercial and industrial segment, and we have seen some activity in reducing balances for non-depository financial institutions in healthcare and pharmaceuticals. However, there have also been reductions in other areas, including commercial real estate, multifamily, office, and some consumer loans. We have included a slide in our appendix that details where loans have decreased across our affiliates and various categories.

On the credit front, I know you mentioned the third-party review here a couple of times. Can you elaborate there a little bit? What exactly is the third-party review looking at? How comprehensive is it? And are your collateral assessments, are they purely done in-house? Or do you also outsource your collateral assessment? And maybe how frequently is that done?

Sure. I can address the review. We have a long-standing record of low credit losses compared to the industry, and in situations like this, we will take the necessary steps to review our policies and procedures to learn from it. This is a prudent course of action for us. Regarding the collateral question, we primarily monitor our collateral internally. Our team does an excellent job every day overseeing this, and we seldom encounter issues like those experienced with these loans. In some instances, we conduct field exams or audits of customers, but generally, we manage the monitoring in-house.

Okay. All right. Regarding credit, I recall that after the financial crisis, as you consolidated your charters, some of your credit decision-making became more centralized. Is your credit decision-making still centralized, or are there still parts of the underwriting and monitoring being handled by the individual banks?

One of the strengths of our model is that we aim for local decision-making at the affiliates, which is fundamental to our operations. This is monitored centrally, with second-line oversight and established controls. Depending on the size and type of the loan, the decision may escalate to the corporate level. Ultimately, we strive for local decision-making where our affiliates have the best understanding of their customers.

I would just add that all of our credit executives report to Derek. When he mentions local, it's important to note that they are situated in each of our affiliate regions and work closely with the local teams. They are not far away, but they do function as part of what we refer to as the second line of defense and report directly to our Chief Credit Officer. Depending on the loan amount, Derek, as Chief Credit Officer, gets involved when loans reach a certain size.

Scott, I wanted to follow up on the loans. And just wondering if you could talk about how loan demand has changed over the last 90 days and what you're seeing in terms of loan spreads.

Yes, loan spreads have shown a slight improvement depending on the category. However, when discussing loan conditions over the past quarter, our perspective differs from yours. Looking back over the last year, my description aligns with the observations Ryan made regarding some of the charge-offs and loan payoffs that occurred toward the end of the quarter, which slightly affected loan growth. Nonetheless, if we examine production, it has increased in most months this year compared to 2024. Typically, we see solid loan growth in the fourth quarter, as we did last year. While this doesn't predict the fourth quarter’s performance, we anticipate a unique loan growth period. We are ready and taking the right steps to facilitate faster loan growth when it happens.

As term rates have decreased somewhat, we have observed an increase in refinancing within the commercial real estate and owner-occupied portfolios, which has presented a slight challenge. While this is one factor, we have also seen an improved pipeline and construction loans, although it takes time for those balances to accumulate as project funding begins with equity. There may be a lag effect in rebuilding, but we anticipate that it will occur, even though payoffs are happening more quickly than new balances are being established.

Got it. And if I could ask, if I think about this year, you ramped up investments, really got more aggressive with marketing, hiring of bankers. You've rolled out some new products such as the consumer Gold and Clearly seeing some good results. But would you expect expense growth to moderate next year? Or do you still plan to kind of heavily invest in various revenue initiatives and see expense growth somewhat elevated again next year?

I expect that we will continue to invest in building the business and hiring producers if we can find good people. We have been doing that consistently. I anticipate some increased marketing expenditure. However, we are also putting in effort to offset those costs as much as possible through savings and optimizing our back office functions, so we are working on both fronts simultaneously.

Harris, on deregulation, big picture, what does that mean for Zions at this point?

Deregulation, you say? Yes, I believe many of my industry peers share my perspective. We are seeking effective regulation rather than getting sidetracked by issues that are trivial or politically motivated, such as the regulation around climate disclosures or the effects of small business lending on climate change. I find these matters unproductive and a distraction from our primary goal, which is to support businesses and individuals in achieving productive outcomes. I welcome the current regulatory agencies' focus on the fundamentals and addressing factors that could genuinely weaken the financial system. However, I don't foresee any significant changes to our credit approach or risk management practices. I believe this renewed focus will help eliminate some distractions, which is positive, but it won't materially affect our operations.

Okay. And then, Ryan, for you on the deposit exposures on the noninterest-bearing. Should we think of those as just a reclass and then a little bit more next quarter? Or is it something beyond that, that I missed it?

Yes. Thanks, Chris. We have completed our review of all our affiliates. This is a reclassification from low-cost consumer interest-bearing accounts to noninterest-bearing accounts. While this may have a slight positive impact on funding costs, the benefit is minimal. However, we are very excited about the positive response in the market and the potential for further investment in marketing to support the growth agenda that Scott mentioned earlier and enhance that program.

Chris, this is Scott. The key point regarding noninterest-bearing deposits is their stability. We observed this stability in the earlier quarters this year, as there were questions about whether these deposits would continue to decrease. The trend shows they are stable. Currently, ours appear very stable, and three quarters is a notable trend. Over the last three decades, we have maintained a strong mix of noninterest-bearing deposits to total deposits even through different interest rate cycles. This is another positive aspect that we are happy to highlight this year.

And really, the real success will be measured by the net new clients that we obtained through these programs, right? So we're happy with what we're seeing so far, but there's still more work to be done.

Thank you. Getting back to the idea of the transition from modest loan growth shrinkage this past quarter to getting back to that low to mid-single-digit growth rate over the next year. Just talk about your current risk appetite today and whether the current situation with those 2 one-off borrowers has had any impact on it and how your overall risk appetite might evolve over the next few quarters as well.

Yes, thank you for the question. This is Derek. We will continue to underwrite as we have historically, and this will not change our approach to growth. While we can learn from our experiences, we will maintain our current practices, and it should not affect our loan growth. As Harris mentioned, we have been addressing some issues in commercial real estate that have shown successful improvements over the last six months, and we will continue this effort.

Just on the 8-K that you released, I know there's a lot of questions on this, but in there, you noted you became aware of legal actions by several banks and other lenders. I know you couldn't announce the borrower, but there were a handful of issues that appeared in the market before this. And I understand the limitations of what you can disclose, but today, credit seems solid outside of this. Why not put this in perspective for us at the time of the 8-K filing?

Why not put credit more broadly in perspective? We weren't in a position where we wanted to prerelease at the end of the quarter, and releasing information gradually wasn't our intention. The main reason for our actions was that we filed a lawsuit, which is public record. We wanted to ensure that no one discovered that information by chance before it was officially disclosed. This led us to file an 8-K at the same time, ensuring everyone had access to the same information that could have been found in the courthouse. It's as straightforward as that.

Okay. Understood. And then just separately, when we think about the outlook on fee income, it looks like it's going to be broad-based. I know the cap market piece is going to be outsized. But with regards to the other areas, like any particular areas that stand out outside the cap markets? Or any commentary or color you can add towards that?

Sure. It's Scott. I'd be happy to respond to that. Our capital markets business has been growing nicely. A few years ago, we indicated that we aimed to double it over a 3- to 4-year period, and we are well on our way to achieving that. This year, we've seen broader growth. Treasury management account analysis revenue is up about 4%. Our business and retail service charges, which had been declining for some years, have actually shown good growth this year. Additionally, a shift in our approach to the mortgage business towards a held-for-sale model rather than held for investment is generating more fee income, which we noticed in the third quarter. Our wealth business, while currently a bit flat, is expected to grow nicely over the next year. Overall, we are seeing a much broader mix of growing businesses compared to this time last year.

On a follow-up regarding NDFIs more broadly, Harris, with your extensive experience in the industry, you have a unique perspective compared to other CEOs. Considering the scrutiny from investors on banks' NDFI portfolios, I would like to know if you believe the concerns investors have about this loan category are exaggerated or if they are justified.

I would begin by noting that the NDFI spectrum is quite expansive, encompassing several categories that seem to be relatively secure, such as capital call lines. Personally, if I perceive any risk, it likely resides in private credit. This concern stems from the rapid growth in that area and the abundant lack of regulation, the scarcity of covenants, and often more lenient structures we observe in such credit. The Financial Stability Oversight Council and others have raised increasing concerns about the growth of private credit because such rapid expansion and the substantial size of that sector serve as a warning sign. While I don't believe that the direct exposure most banks have in private credit is particularly alarming, the greater risk lies in potential spillover effects if the private credit sector experiences stress. Unlike the banking sector, they lack the structural backstop of liquidity from the Fed and similar institutions. Therefore, given the sector's high growth rate, it's reasonable to consider that it could present heightened risks in credit markets. We've encountered issues with Tricolor and First Brands, which may have made the market a bit anxious. Following our announcement last week, it seemed many were drawing connections that might have been overstated. I don't see a direct relationship among these three credits, though I believe we have entered a long phase without significant market stress. We're now about 15 years removed from the financial crisis. The pandemic appeared to be a potential stress point, but government support helped prevent that outcome. While I'm not advocating for a recession, there is something fundamentally healthy about market cycles. I do find myself concerned about the unknown challenges that may arise as we navigate through cycles. Additionally, considering the growth and the lack of oversight, although there are some very responsible lenders in private credit, I also believe there is tremendous pressure to continue growing once you start down that path. Those are some of my reflections on the matter.

Appreciate that. And then my follow-up, if I look at the new Slide 36 you added on NDFI, where are you paying the most attention to within these allocations? And which of these buckets, if any, would you say are of highest and lowest concern from a credit quality perspective? I know you mentioned capital call lines will be on the safer side. But where are you paying the most focus on?

This is Derek again. We pay attention to all segments. The regulatory definition is broad, so we analyze each credit individually. We particularly focus on leveraged lending and a few other areas, but it's challenging to highlight just one segment. It's crucial to consider all aspects, especially the capital call and subscription lines, which, while they typically offer lower returns, have demonstrated more stability over time.

In terms of your NII guide, am I correct to assume that there will be a 2 to 3 basis point lift to earning asset yields per quarter based on the forward curve? It feels like that 2 to 3 basis point earning asset yield increase has been consistently mentioned for a while now. Can we also assume that half of the run-off jump in securities will be reinvested in the coming quarters? I would appreciate any details on the underlying assumptions for your NII guide.

Thank you for that, Janet. On the earning asset yields, whether looking at latent or emerging factors, we still see a similar range for the pickup of earning assets. You might find yourself at either end of the range but still within the parameters I mentioned earlier. It may vary between being on the high end for latent and the low end for emergent when factoring in the repricing for loans and securities. Looking ahead, recent quarters show that we've been reinvesting about half of the gross cash flows from the portfolio. We have indicated that this reinvestment may need to decrease at some point. We've discussed some general rules of thumb, but the key factor is how the liquidity stress test holds up. There is still potential for growth in the securities portfolio, but it may not be as significant as we would have anticipated a year or two ago. We've consistently reinvested half for about a year or more, and I expect that to continue, although the extent will depend on various factors, including opportunities for loan growth and the possibility of reducing wholesale funding.

And just to clarify, on your guidance side, you are expecting commercial and industrial loans to be a bigger driver for commercial loan growth than commercial real estate over the next 12 months. If you could confirm that, that would be great. Additionally, looking into 2026, do you see that commercial borrowers are becoming more optimistic with the anticipated rate cuts? How likely is the return of bonus depreciation in 2026 with the bill, and could that positively impact C&I loan growth as we head into 2026?

Yes, this is Scott. The answer to your first question is yes. We believe a greater portion of growth will come from C&I loans in 2026. Regarding borrowers and their enthusiasm for lower rates, I don’t think they felt that the previous rates hindered loan growth. The current situation seems less driven by rates and more influenced by concerns around the macro economy, such as issues in commercial real estate, the overall economy, tariffs, and the potential of a recession. Those are more prominent in people's minds. Certainly, borrowers will appreciate lower rates, but I don’t think they were particularly dissatisfied with the previous rates in terms of making projects or investments work.

I believe regarding the depreciation for the One Big Beautiful Bill, I haven't seen any modeling based on that. It seems that, overall, you might expect it to support capital investments if other factors remain constant. However, I don't have much to add to that narrative at this time.

My question had to do with the commercial real estate portfolio and that segment of the portfolio where your construction on an existing building for property improvements, rehabilitation, et cetera. And so my question is have you seen any improvement in the time to lease up once those projects are complete because if I remember correctly, a couple of quarters ago, some of those loans had made it to nonaccrual. And I'm just wondering if there's been an improvement in the lease-up time.

Thanks for the question. This is Derek again. Not many have reached nonaccrual, but there was a lot of supply in '21 and '22, particularly in our portfolio, which mainly includes multifamily and industrial. What's happening is it's taking longer for those properties to lease up, but we are seeing progress, especially in the multifamily sector. We are offering some concessions, such as one or two months of free rent, but the buildings are being filled. It's certainly taking longer than we or the sponsors would have hoped, but leasing is still occurring. I believe that over the next year, we will continue to see our credit size classified hopefully improve.

Derek, just a question for you. How do you want us to think about the reserve level from here? I think you're saying despite the drama of the past week, I'm sure the antenna is up, but just confirming you're saying you're not seeing anything else abnormal at this point on credit and confirming that. And then how are you thinking about the reserve level?

We set our reserves based on our expectations, which are primarily influenced by the economic scenarios we've modeled, along with some judgment. Our reserve levels have remained quite stable over several quarters. However, this could change depending on the economy and our outlook for future trends.

Yes, I understand what you're saying. Harris, is there anything else regarding credit that you haven't mentioned? Your stock has experienced a lot of volatility, and you've discussed it extensively. Is there anything about underwriting and credit that you'd like to address?

Earlier this afternoon, I reviewed the risk-adjusted net interest margins for several banks that have reported this quarter. Our risk-adjusted NIM sits at approximately 3.01% after accounting for actual charge-offs. Without the $50 million charge-off, it would have been around 3.25%. Even at 3.01%, we would rank in the top third of banks despite this incident. This quarter, we incurred 4 basis points in other charge-off losses. I don’t anticipate experiencing such a significant event every quarter, as we manage credit quite effectively, which is a strength of our organization. This incident may have drawn attention precisely because it was unexpected from us, and I hope we maintain this reputation. A few quarters ago, when asked about expected losses on loans, I stated we anticipate recovering all our loans, so we take it seriously when that doesn’t happen. Overall, I believe we are among the stronger performers in the industry when excluding this isolated incident. While I understand it’s significant, a 37 basis point charge-off is not unusual for the industry as a whole. I want to clarify this aspect about us. Our strength lies not only in capital but also in our culture and credit practices, which I think is important to emphasize.

All right. Thank you, Von, and thank you all for joining us today. We appreciate your interest in Zions Bancorporation. If you do have additional questions, please contact us at the e-mail or phone number listed on our website. We look forward to connecting with you throughout the coming months, and this concludes our call.