管理層發言
Greetings, and welcome to the Zions Bancorp Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Shannon Drage, Director of Investor Relations. Thank you, Shannon, you may begin.
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 will be launching the product in other markets later this quarter. This product provides customers with a variety of high-value benefits and is designed for the mass affluent market, pairing well with our existing wealth offerings, which are also tailored to clients beginning kind of in the mass affluent stage of wealth accumulation. We're really pleased by the enthusiastic response we've seen so far from customers in the matter with respect to this offering. It was launched on May 12, and through early July, we had a 78% increase in sales of this product versus the predecessor, with average balances in these accounts of around $30,000.
And this is before we really started, in late June, to do paid marketing. So we're really excited about the prospects for this as we roll this out across the entire enterprise. Turning now to key financial metrics for the quarter, Slide 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 lockup 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 quarters 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 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 compensation 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. 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, 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 dynamics. 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 net reinvestment. 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 commercial real estate classified levels from improving leasing activity and cash flows, re-margins, and payoffs.
We expect the commercial real estate classified balances will continue to decline going forward through payoffs and upgrades. During the second quarter, we recorded a negative $1 million provision for credit losses, which when combined with net charge-offs, reduced the allowance for credit losses by $11 million relative to the prior quarter. The reduction reflects reduced emphasis on certain portfolio specific risks such as commercial real estate and changes in portfolio mix, offset somewhat by the change in economic forecast. The allowance for credit losses as a percentage of loans and leases declined to 1.2%, and the low loss allowance coverage with respect to nonaccrual loans was 224%. Slide 14 provides an overview of the $13.6 billion commercial real estate 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 commercial real estate 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 loan-to-value distribution of classified commercial real estate loans, with approximately half of those classified loans having loan-to-values less than 60% when calculated using either recent appraisal or index adjusted values. Overall, we continue to expect the commercial real estate portfolio to perform well with limited losses, based on the current economic outlook, the types of problems being experienced by borrowers with 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 the AOCI improvement will continue through unrealized loss accretion in the securities portfolio as individual securities pay down and mature. Importantly, our organic earnings growth when coupled with AOCI 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 1 primary and 1 follow-up question to enable other participants to ask questions. Alicia, please open the line for questions.
分析師問答
Our first question comes from Manan Gosalia with Morgan Stanley.
Harris, I was wondering, what are you hearing from clients in the small business and middle market side? You sound a lot more positive than 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. When we last discussed this, it seemed like a wave of tariffs was about to hit the entire economy. However, over the last 90 days, the administration has shown a willingness to be more flexible. The situation keeps shifting, and it's not clear where it will ultimately settle. Nonetheless, it has become clearer that they are attempting to balance the situation without significantly disrupting the economy. They appear to be mindful of the markets. We conducted a survey of many small businesses early on, and while just over half felt that tariffs would be problematic, we also discovered that some smaller businesses actually saw opportunities arising from it. As we examine our portfolio, we're noticing that while some businesses are being negatively affected, others are benefiting. The economy seems to be handling this better than we anticipated a quarter ago, leading us to believe that the situation will be more favorable than we expected 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. The challenge is always trying to find the sweet spot between protecting your margin and making sure 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, cost of funding the balance sheet, and that's continued to come down nicely. It's down roughly 40 basis points over the last year. That's how we'll continue to look at it, but we're certainly working hard on the deposit front. I mentioned this consumer deposit effort, which I'm enthusiastic about; it's too early to know what that can bring, but I think it represents a foray into the consumer market that has been less of a priority for us in years past than it's becoming today. Incrementally, there's opportunity there, as there is with small businesses. So that’s where we're primarily focused, 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 costs should come down a little bit, even without Fed rate cuts?
It's all going to depend on what the Fed does. If they remain static, it could get stickier, but we still have repricing going on in the asset side of the balance sheet that should give us some boosts. I’m not going to suggest that this number can continue to just come down. If you look at our total deposit costs, we already tend to be better than the industry, so I'm not sure there's a lot of additional room there. I think the greatest room is probably on the asset side.
Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank.
Just on loan growth, it looks like it was really solid in the quarter led by commercial and industrial, some term financing in commercial real estate and mortgage from consumers. Just any color you can provide on the increase in loan growth and where you expect that to continue from here?
Derek, do you have any thoughts?
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 just increased utilization, as well as new originations, with the other half coming from new origination volume on the commercial and industrial side. Commercial real estate was up slightly, but we're seeing increased activity in that space. The consumer side, mortgages were up about $120 million, and home equity was up $114 million; both from new origination activity, as well as some loans continuing to move from our one-time close construction book into the mortgage book. I would anticipate that this will continue in the near future as we 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, especially the growth we're seeing from our affiliates like California Bank and Trust and Amegy. We're seeing a lot of growth with the top line 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 just 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.
From my perspective, probably the most encouraging thing is the tiering you're talking about. Of all the proposals out there, the Basel III Endgame, et cetera, the long-term debt requirement was probably going to have the biggest impact. Just because of spreads on that for a regional bank or substantial relative to alternative funding costs. Having that is not off the table, at least on the back burner and probably subject to a lot of additional thought about tiering is maybe the most encouraging thing that I see in the landscape. As for M&A, I'd just point anybody to my shareholder letter that was published in February. On Pages 13 and 14, I do a little treatise on M&A, and I simply point to that. It's consistent with how we think about it. We don't believe we need to grow for growth's sake. There are occasions where we demonstrated a deal we did last quarter down in the Coachella Valley, Southern California, kind of a tuck-in deal that is really a nice fit for us. It gives us a nice presence in a great market. We think strategically about it, but not in terms of needing to get bigger at any cost.
Our next question comes from the line of John Pancari with Evercore ISI.
Regarding expenses, you mentioned that your outlook suggests confidence in achieving positive operating leverage. Could you clarify how much positive operating leverage you find reasonable, considering your growth opportunities and necessary investments? If you anticipate greater revenue pressure than what is currently reflected in your guidance, do you still believe you can achieve positive operating leverage due to your flexibility with expenses?
John, thanks for that. Pretty good question. Yes, we updated some of the guidance 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 do see it. We sort of size it in the 100 to 200 basis points range. There’s a lot of things that we do internally to ensure we stay focused on the expense side. I don’t think that's ever going to change. When we came into this year with more of a growth orientation, turning the page and putting more money into marketing dollars and revenue producers, that pull-through is going to show on the revenue side. It's hard for us to project exact loan growth, but we're a bit more upbeat, as Harris alluded to before. If you think about what we've been producing on the revenue side, and compare it to the expense growth, we have been disciplined.
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 in the last couple of weeks. Not that we're going to always be working at that pace, but we're finding some great talent who through disruption in other places are looking for a good home. We’ll see increases in what I consider good expense, which is not compliance, regulatory, or back-office, but actually people who are really good revenue producers. Increased marketing spend, I mentioned a couple of initiatives around small business and consumer that could be meaningful for us, but it'll take some marketing to get there. Those are where we're going to see spend. It doesn't always produce revenue on day one, but should turn into revenue quickly.
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 set to illustrate where we've been heading in revenue. We compare that to the 3% adjusted expense growth year-over-year. We've been disciplined. Just reiterating what Harris said, it would be good kind of expense growth while also building on our revenue momentum.
John, this is Scott. I would just add, you can tell from Ryan and Harris' comments there's a lot of momentum and energy behind investing in revenue growth in our key segments, products, marketing, et cetera. So 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 for the better part of the last 10 years of this continuous improvement process. For the expense growth you see, we eliminate about 2% of our base of expenses each year through continuous improvements, such as how we process documents, how we're using AI. We processed 21,000 W9 forms and signature cards a year. There’s a significant expense related to that, and we're finding great benefit from AI in that space. 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 created there. We’re using AI actively in both the false positives in our wire room, as well as in AML/BSA. We are pursuing the use of AI to not only reduce expense but also redirect colleague work to create more revenue or minimize losses. So those are a few examples of this big bucket of small improvements we've been focusing on for over a decade now.
Got it. And then one quick follow-up. I know M&A was already discussed, but regarding the M&A aspect, you mentioned the advantages of the smaller Coachella Valley deal you completed. Have you noticed any benefits from the new core system in terms of integrating and closing that deal more quickly, as well as potentially saving on costs and achieving greater cost savings through such a transaction?
Yes, John, this is Scott again. Absolutely. If you just think about it at a high level, we had 3 loan systems: 1 for consumer, 1 for commercial, and 1 for real estate, with all systems being 40 years old and highly customized. Now we have one integrated loan and deposit system with one data model, eliminating all that tech debt. Merging like these branches we just did in the Coachella Valley was much simpler due to our clean and modern environment.
It hasn't come up, but there’s been a lot of focus on the GENIUS Act, stablecoins, et cetera. This new platform we have, the TCS BaNCS system, is probably one of the few cores in the United States that settle transactions into the core in real-time. Developments with stablecoins and tokenized deposits mean real-time settlement will be important functionality to have. We could define an account type in our core system to custody digital assets, tokenized deposits, stablecoins. I think a lot of the plumbing we've built prepares us well for the future.
Our next question comes from the line of Bill Carcache with Wolfe Research.
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 net interest margin 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? Any thoughts on the reversion to that pre-COVID net interest margin level?
Thanks, Bill. I'll take that in parts. You're right to remember us talking about a mid-3% type NIM hopefully having a more constructive yield curve. We have some things working in our favor. As Harris noted earlier, on the deposit side, not much more opportunity on that side, but we do have some lagging repricing dynamics on the fixed asset side. There’s potential for 2 to 3 basis points to come through each quarter. We’ve had cash flow hedges that were discontinued that have been a drag on our NIM. We've always talked about the remix; we still have room on beneficial trades of reinvesting into loan growth. This has allowed us to generate higher yielding loans on the balance sheet and to pay down borrowing costs. We feel confident we can push forward on NIM growth after 6 consecutive quarters of NIM expansion, with this one being particularly strong.
That's helpful. And then, Harris, following up on your gold account comments, can you give a little more color on some of the features of that? What's contributing to its success, and how you're thinking about expanding that offering into your other markets?
Some of the features of the account include unlimited ATM access, which, by the way, people are using less and less, so the cost of giving away something that people use less becomes easier. We have lots of safe deposit boxes available for free where we have availability. There are discounts on consumer loans and a premium on money market accounts. We're trying to say, hey, we want all of your business and really embrace these customers. It has a $2,500 minimum balance and is a noninterest-bearing account. What we're finding is people who are going to open an account with that minimum balance carry much higher balances. That's why we think this will be a real winner. We plan to roll it out across the rest of the company starting mid-September.
I would just add, 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.
Our next question comes from the line of Ken Usdin with Autonomous Research.
Just a couple more follow-ups on the remix points. On the liability side, you've had a great path toward getting down some of those broker deposits, and this quarter, I see a little remixing into FHLB. Can you give us an update on where your brokerage stands at the end of the quarter? How much more remixing can you do, especially if the demand deposit account balances look like they've bottomed or started to increase a little?
Thanks, Ken. I'm happy to get going on that. Thank you for noticing that. It is something we've been actively working on. 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, and repos, with trade-offs between those various funding sources. This quarter, we saw an opportunity on some of the Federal Home Loan advances. We used to factor in the stock dividends we receive as being a member of that, which was more advantageous and useful in working down that balance. It’s certainly something we intend to continue doing, but our success will depend on generating net new client relationships and driving through that channel.
Got it. And on the loan side, very interesting to see all 3 loan categories' yields go up. I know there's obviously a little swap impact on the C&I book, but the CRE and the consumer. 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 that area?
Yes, I’ll start, and I’ll let my colleagues jump in as they see fit. From a front book, back book perspective, the yield on what's coming on is at 7.38% compared to a back book at 7.31%. There's been repricing, as you might expect. In the back of our materials, we show the repricing pattern of our earning assets and loans. A lot reprices within a year, significantly for loans. As we reach a point now in the consumer books, we've had some 5/1 ARMs that are starting to remark and reprice to a level that's helpful for us. For commercial loans, our terms typically are not extended; however, we've had some opportunities that have been beneficial in the repricing up of commercial fixed relationships.
Our next question comes from the line of Peter Winter with D.A. Davidson.
If I look at Slide 27, the latent, emergent scenario, the hypothetical simulation does seem conservative with the assumption of a $1.4 billion migration of noninterest-bearing deposits. Could you 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 we find it quite interesting for ourselves as a management team. We don’t want to force feed people things they don’t care to consume. Our assumption does provide some bounce in other places as well, like when overlaying the emergent piece of that kind of getting to a more forward path view and then adding some book ends at 100 basis points and other ends around that implied rate path, we do show some breadth of that.
You can probably take $1.4 billion minus zero based on the current short-term rates.
Yes, that’s right. You can work it out.
If you assume whatever DDA runs off is replaced with funding near the Fed funds rate, you get your sensitivity that you're looking for.
Okay. Got it. And if I can ask, just speaking about the balance sheet, still asset sensitive. Could you talk about some of the plans going forward to manage that 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, Peter. I’d be happy to provide some perspectives there. We have some materials to talk about where we are with hedges, aiming to remain balanced as best we can. We think we're in a reasonably good place, yet we do recognize we screen on the higher end of asset sensitivity. We also want to be attuned to the net interest income impacts if there is a more dovish Fed. So it is something we discuss internally. We think there's probably some room to do a little management to decrease that asset sensitivity at the margin. We also couple that with considerations about the value and fair value of equity and tangible common equity. Over time we've pivoted and put on more paid fixed hedges on our loans and securities to also protect ourselves.
Our next question comes from the line of Chris McGratty with KBW.
Can you speak about the outlook for your capital markets business, your fee income that you spent a lot of time building? Interested in how that business is progressing relative to expectations and where you think that could be over time.
The capital markets business is growing 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 3 years that this is a business we believe we can double in size in a 4 to 5 year period, and we're on that path. Significant contributors include loan syndications, interest rate risk management, foreign exchange. We've added a real estate capital markets business, which has started to grow. We believe this will continue, as well as Initial success in M&A advisory work for our small- and medium-sized client base. We think there’s a lot of potential here. So we’re optimistic and investing significantly in systems, risk management, and quality and depth of our people. It’s an exciting part of the story.
I may have missed it, just going back to capital, including your tiering conversation, how should we be messaging potential resumption of buybacks?
We're going to be somewhat conservative for the next little while. Our CET1 ratio is strong at 11%. In times of stress, people don't care about nominal numbers; they look at marked numbers. We still have some AOCI that needs to work off. We’ve had a 20% increase in tangible common equity over the last 12 months, accreting back with combined earnings. We’re just not yet comfortable taking our foot off the pedal to start buying shares.
We don’t know the full profile of what will come out of the Basel III Endgame. We’ve exposed what dimensions of that are. The AOCI has been coming back in, and over the course of our earnings generation, we can see a glide path in the next year that would get us to something with a 9 handle ex-AOCI.
Our next question comes from the line of Anthony Elian with JPMorgan.
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. 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'll be a big driver, but we're working hard at it. We're trying to get the balances right with our total funding structure and the cost of it.
Then on your comments, Harris, earlier on stablecoins. I know you said it's early to see how that could impact Zions. Given you have the leg up with TCS, we saw the GENIUS Act signed into law last week, and there are 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?
My own view is that stablecoins are a fancy form of currency. They are noninterest-bearing. It’s difficult to see how they have an advantage over tokenized deposits. Tokenized deposits are going to allow for the creation of private credit. I think we’ll see a future where many frictions in transactions disappear through programmable payments, including lien filings and property records, with the ability to settle on the blockchain.
Our next question comes from the line of David Smith with Truist Securities.
You had some nice loan growth this month. Looking 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? Just given how credit has performed and that customer sentiment seems solid, it seems like a good time to be leaning into growth. Do you believe you have the capacity to grow as much as you’d like to organically right now?
We don't feel capital constrained in taking organic growth actions. We’re encouraging a growth orientation, and our outlook for noninterest expense indicates more growth focus. We need the economy to be constructive. If the tariffs settle into a non-disruptive place, we believe we could see some upside. The last quarter showed 5.6% loan growth, which was healthy. No guarantees but we like our market position.
David, this is Scott. The calling programs we have with our branch managers, small business bankers, middle market commercial bankers, and private bankers have intensified. We're focused on existing customers and new prospects alike. We’ll get as many good looks as possible, and we have to see how the economy balances out. We believe we’ll compete effectively.
Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.
On Slide 23, can you clarify the construction and CRE term loan activity? Is that just construction loans moving to permanent or is there something else happening?
Yes, Jon. What you're seeing on Slide 23 for commercial real estate is primarily construction loans moving into the term loan bucket as they reach the certificate of occupancy.
Okay, good. And then, Ryan, just to confirm, you’re saying there's a lot of repricing that happens immediately with a rate cut or hike. You're 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 correct?
That's correct. Fixed asset repricing can provide an increase in earning asset yield quarter to quarter. We've been looking primarily at the static balance sheet, but we’ve emphasized that even with projected rate decreases, we can still expect net interest income growth. That's the main point.
Thank you. There are no further questions. I'd like to pass the call back over to Shannon Drage for any closing remarks.
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 through the coming months, and this concludes our call.
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