Zions Bancorp sees net interest margin growth and positive operating leverage despite $49 million credit loss provision in Q3 2025.

OPERATOR - (00:02:20)

Welcome to Zion's Bancorp Earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star0 on your telephone keypad. Please note this conference is being recorded now. I will turn the conference over to Shannon Drage, Senior Director of Investor Relations. Thank you and you may begin.

Shannon Drage - Senior Director of Investor Relations - (00:02:50)

Thank you Vaughn 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@zionsbancorporation.com for our agenda today, Chairman and Chief Executive Officer Harris Simmons will provide opening remarks following Harris comments. Following Harris's 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 Stewart, 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 one hour. I will now turn the time over to Harris Simmons.

Harris Simmons - Chairman and Chief Executive Officer - (00:04:09)

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, 3.28% to. 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 Commercial & Industrial loans. We charged off $50 million of the combined balances of 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 particular 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 five 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.

Ryan Richards - Chief Financial Officer - (00:06:55)

Ryan 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 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 two 25 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 non interest income was 163 million for the quarter versus 164 million in the prior period and 158 million one year ago. This quarter's results include an 11 million dollar 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 non interest income, which excludes net CBA 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 credit valuation adjustment 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 five 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 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 the five 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 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 non interest 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 non interest 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 non interest 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 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 and 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 cost 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 five years. Maturities, principal amortizations and prepayment related cash flows from our securities portfolio or $596 million in the quarter or $291 million when considered net of reinvestment. The pay down 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 point. 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 non performing assets remain 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 CNI 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 remains stable at 1.2% and the loan loss allowance coverage with respect to non accruals was 213%. slide 14 provides an overview of the 13.5 billion dollar CRE portfolio which represents 22% of total loan balances. Notably, this portfolio continues to maintain low levels of non accruals and delinquencies. 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 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 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 . Compared to the third quarter 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 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. Additionally, if you are considering questions surrounding the events Described in our 8K and Public Complaint filed on Wednesday of last week, please note that while litigation is active, our comments on these matters will be limited to what can already be found in those filings? Vaughn, could you please open the line for questions?

OPERATOR - (00:17:57)

Thank you. We will now be conducting a question and answer session. As a reminder, the format will be one question and one follow up. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Manon Gosalia from Morgan Stanley Investments. You may proceed with your question. I wanted to start on the announcement in the 8K. 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. Thanks.

Ben - (00:19:09)

Ben.

Manon Gosalia - Equity Analyst at Morgan Stanley - (00:19:11)

Thanks.

Derek Stewart - Chief Credit Officer - (00:19:11)

This is Derek. Just as far as what we've reviewed, we've reviewed, gone through the portfolio. And. We think it's a isolated incident. You know, as we've gone through, we haven't found similar loans or other issues. So we're very confident that this is an isolated incident. I think I'd just add, I think for most observers, our credit history over a number of years speaks for itself in terms of I think we do credit well. This was a case where. You had. Some unusual things going on that really are not commonplace. And so, and as we noted, we're going to continue reviewing with an external party to make sure that we're learning from the experience and seeing what we can continue to improve upon. But I think our care and extending credit and monitoring, collateral, et cetera, speaks for itself.

Manon Gosalia - Equity Analyst at Morgan Stanley - (00:20:41)

Got it. Maybe if you can expand on that and take us through your NDFI exposure as we look through 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?

Derek Stewart - Chief Credit Officer - (00:21:00)

Sure. Thanks for the question. We actually, for transparency purposes, cut the start. And we added in the appendix slide 36 that details the NDFI exposure. It's actually about 3% of our total loans. And as you can see on the slide, the growth actually has been fairly minimal over the last several years. As far as the breakout of what's in there, it's a very, very broad regulatory definition, covers a lot of different segments. You know what I would say the majority of it would be equipment leasing type transactions. You can think about yellow iron trucks, things like that. You know, there's capital call lines, subscription lines. There's just a number of different areas within that. It's very well diversified actually within the portfolio across a lot of the various lending segments. And this is, it's a business that we've actually been in for a long time. I don't think we're intending to grow it significantly, but it's an area that we've been in for a very long time and had good experience with.

Dave Rochester - Equity Analyst at Kantor - (00:22:31)

Great, thank you. Our next question comes from Dave Rochester from Kantor. You may proceed with your question. Good afternoon guys. 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 a part of that? That'd be great.

Ryan Richards - Chief Financial Officer - (00:23:10)

Thanks Dave. Appreciate the question and happy to provide some texture there. It would point you to our, you know, to the slight to moderately increasing guide on our loan growth. I think you've seen the patterns trajectory that we've put up for going on years to quarters now on the security sides and certainly we see the opportunity for the securities remix to continue into loans. But what that translates to on the fixed asset side, things there's still fully play through both as it relates to loans. And then for some of our fixed rate securities, we see the potential for two to three basis points on earning asset yields to to play through. That's sort of embedded in our guidance. Gotcha.

Dave Rochester - Equity Analyst at Kantor - (00:23:57)

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 like rough dollar amounts of those?

Ryan Richards - Chief Financial Officer - (00:24:05)

You know, it breaks across because it's not just those things that were born as fixed rate things. There are things that are behaviorally like fixed rates. So 517110 year arms are embedded in there. So it's sort of a mix of things across cre, CNI and then mortgages that sort of behave more like fixed rate loans. That's embedded and that fixed what we call fixed rate asset repricing. Okay.

Dave Rochester - Equity Analyst at Kantor - (00:24:30)

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, maybe you have some more clarity on portfolio and growth. Thanks.

Ryan Richards - Chief Financial Officer - (00:24:46)

Yeah, thanks David. Listen, hopefully we're staying on the same key here, you know, so we do and we've been Talking about this as including aoci. When we think about our total capital levels, kind of keeping that in the realm of where peers are staying in the mix. So as we sort of stare even this quarter kind of where the peers are including things like AOCI, there tends to be a central tendency around 10% 12 months or so away from when we would be start looking at those levels, approaching those levels, including aoci, based upon current projections. So that's when we would probably be more in the thick of things with piers. Got it. Great. Thanks guys.

Ken Usten - Equity Analyst at Autonomous Research - (00:25:41)

Our next question comes from Ken Usten from Autonomous Research. Ken, your line is live and you may proceed with your question. Hi, good afternoon. Just wanted to ask about on the guidance, you know you have kind of moderate, moderate, moderate. I heard your compare comments. You're still talking about operating leverage looking out a year. What's the gap that we think that you think you're aiming for in terms of the magnitude of operating leverage that you can see being able to do. As you look ahead. Thanks.

Ryan Richards - Chief Financial Officer - (00:26:10)

Thanks again. Very, very fair question. Listen, I first want to just reiterate what Harris said and emphasize in his spoken comments and also in his quote about the strength of our core earnings this quarter. You know, I think showing up with five 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 positive operating leverage. Where exactly that lands is not perfectly clear yet, but we know it's there. So I'll probably stop short or give you a hardened 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.

Ken Usten - Equity Analyst at Autonomous Research - (00:26:50)

Got it. Sorry. My second question, just last quarter you were talking about a 350 NIM over time. 328 this quarter and then kind of commentary might have changed a little bit after you had said that. I just want to kind of ask you to come back on that, that commentary that you gave and help us think about what the right zone is for your kind of long term Nim thinking. Thanks again. I think Ms. Harris, I think I'm the one that put that concept out there. I think that over, you know, like an economist given a number or a date but never both. I think it's kind of where we ultimately would expect to land. I, you know, I think I didn't intend to convey that that's going to be 12 this quarter next year type of thing.

Harris Simmons - Chairman and Chief Executive Officer - (00:27:56)

I think. I would expect that we'll continue to see improvement in the nim. We're working really hard at making sure that we're pricing well on the asset side of the balance sheet. We'll see some of this improvement coming out of the securities portfolio just repricing, et cetera. But. The number I conveyed is I think in kind of the strike zone of where we probably ultimately would expect to be ought to be and consistent with our history. So that's, I hope that's helpful but I'm not wanting to suggest that's going to happen in 12 months 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. And I think to Harris's point I think it's really pulling through on some of the core initiatives that we have at play to drive through deposit growth that have yet to play out fully.

Ben Gerlinger - Equity Analyst at Citigroup - (00:29:23)

Our next question comes from Ben Gerlinger from Citigroup. Please proceed with your question. Good afternoon. Hey Ben. So just kind of sticking with everyone's. Favorite slide of 26 so the latent emergence seems like the implications 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 funds is lower by 50bps on the outlook. I think the two 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're kind of casting over you might. See margin compression as we kind of. Recognize the full 100 basis points or is it more just just kind of giving an optics view And I get 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 one third of what it was.

Ryan Richards - Chief Financial Officer - (00:30:27)

Yeah thank you for the question and I think I got 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 try 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 as I included in my prior response building upon Harris's it does make It a little tougher from a net interest income basis. But even with the backdrop of this sensitivity when layered on top of that with a slightly to moderately increasing loan growth prospects and the fact that there's 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 non interest 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 the 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 of view when you layer on all the other more dynamic aspects and including loan growth and other assumptions that one could assume moving forward. Gotcha. That's helpful.

Ben Gerlinger - Equity Analyst at Citigroup - (00:32:32)

And then in terms of capital there's been some M and 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 a better capital. Foothold if you were to do M. And A, could you kind of target the potential size you might look at. And maybe dilution impact that you might. Be willing to stretch to if MA is on the table at all at this point?

Harris Simmons - Chairman and Chief Executive Officer - (00:32:59)

Well, I think, I mean there are a variety of factors that would play into decisions about doing anything. I think most typically kind of smaller deals that increase our density and markets were but we already have a presence would be top of the list. I'm not going to. This isn't a place where I'm going to talk about any metrics that would drive a deal. I think every deal has got its own kind of story. But I say that at least I am quite sensitive to the concept of pollution and would want to make sure that it was a really sound strategic fit for a deal. And so I don't know. We're open to looking at opportunities but it's not Anything that is driving us, we feel no compulsion to get anything done that way.

OPERATOR - (00:34:10)

Thank you. Our next question comes from Matthew Clark from Piper Sandler. You may proceed with your question. Hey, good afternoon. Thanks for the questions. Just back to the 8K. 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 two credits were adversely rated previously or not? And then just how you, how you monitor collateral just in general, just with the collateral kind of moving around in this case.

Matthew Clark - Equity Analyst at Piper Sandler - (00:34:56)

This is Derek again. You know, upon learning the facts during the quarter, we commenced to review as. We described in our 8K. You know, with the connection, in connection with an. Event of this type, it took a.

Derek Stewart - Chief Credit Officer - (00:35:13)

Little while for our analysis and review. And once we discovered, you know, where. We thought we were, we felt it was appropriate for transparency purposes. Just to put it out there that we, what we had found. I think it's the process. 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 do 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.

Matthew Clark - Equity Analyst at Piper Sandler - (00:36:31)

Understood. Okay, thank you. And then just the other question for me, just 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 cni. Can you just speak to the runoff in circumstances, P and I and maybe the related pipeline and how you expect. To kind of restore that growth?

Scott McLean - President and Chief Operating Officer - (00:36:58)

Yeah, this is Scott McLean. And you know, our loan growth has been sort of in a 3% kind of growth mode, plus or minus, for. The last seven quarters. If you go back to 1Q24 and, you know, you just think back over that time period, there's a lot of concerns about the commercial real estate industry issues, concerns about the economy related to that. Tariffs came along as a story. And so, you know, as you think about this time period. It'S not a. Time to be had to have. Investors should expect us, we expect ourselves to, to be very thoughtful about where we're lending into the economy. So you're probably going to see us sort of chop along at these levels. That's what we're kind of guiding to having said that, you know, we're doing a lot of things on the offensive. Our call programs have never been stronger or more active, you know, of our pursuit of the SBA lending activity and our move up the league tables in that regard. Moving to the 14th largest originator of SBA 7 loans as of September 30, the SBA's fiscal year end. We've got new products we're bringing to market both for consumers and small businesses and we've totally revamped our approach to marketing to make it much more of a strategic weapon going forward. I say weapon in a thoughtful carrying kind of way, but I think you understand what I'm saying. So there's a lot that we're doing to really pursue an offensive mindset. So I know that as the economy shows a little brighter, more consistent daylight, I think our portfolio, as it always has, will achieve moderate single digitized by. Google loan growth, which we've done for many years.

Ryan Richards - Chief Financial Officer - (00:39:06)

And I think Matthew, in your question there as well, I think you asked the question about the CNI being down. Perhaps in the quarter. On an average basis, being up on a spot basis, loans being down sequentially. That's against the backdrop. It's not obvious from what we showed you, but actually some really good loan production that was just offset in places by some pay downs and payoffs. And so I think you prompted for the CNI piece of that. So we did see some actually activity there and bringing down balances for NDFIs for healthcare and pharmaceuticals. But there were also some reductions in other categories including cre, multifamily and office and semi consumer. We do have a slide in our appendix that shows where the loans ran off across our affiliates in places and across various categories. That would also point you to.

OPERATOR - (00:40:01)

Great, thanks for the color. Our next question comes from John Pankari from Evercore isi. You may proceed with your question.

John Pankari - Equity Analyst at Evercore ISI - (00:40:14)

Good afternoon. On the credit front, I know you mentioned the third party review here a couple 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 assessments and maybe how frequently is that done? Sure, I can speak to the review. I mean we have a long consistent history of low credit losses relative to the industry. And when these things happen, we're going to do what any prudent bank would do with an event of this type. Which is take the steps to review.

Derek Stewart - Chief Credit Officer - (00:41:00)

Policies, procedures to see what we can learn. And so we will be doing that. It's just prudent for us to do that. As far as the question on collateral, we have mostly we monitor our collateral in house. We have a lot of people in. The bank that do a great job. Every day monitoring the collateral. And we have rarely seen issues like. The ones that we saw with these loans. In some cases we do use, you know, we do field exams or audits of customers. But in most cases, we will monitor it in house. Okay.

John Pankari - Equity Analyst at Evercore ISI - (00:41:43)

All right, thanks for that. And then also on credit, I know a little while after the GFC and as you collapsed your charters and everything, I know you had, I believe you had moved some of your credit decisioning more centralized. Is your credit decisioning still centralized or are there still components of the underwriting and monitoring that are being conducted at the individual banks?

Derek Stewart - Chief Credit Officer - (00:42:12)

So one of the. This is. Derek, again, I mean, one of the. Strengths of our model is we try. To have local decisioning at the affiliates. That's just core to how we operate now. It's centrally monitored. There's second line oversight. There's controls and things in place. And depending on the size of the credit, it may go up to the. Corporate level, but there's.

Scott McLean - President and Chief Operating Officer - (00:42:43)

It just depends on the size of the loan and the type of loan. But again, we try to have local decisioning where they know the customer's the best. I would just add to that. All of our credit executives report up through Derek, and when he's describing local, it's really they all report up to Derick, but they are located in each of our affiliate geographies. And so they're working actively with the team there. They're not, you know, miles away or states away, but they do. They are part of what we call the second line of defense. They report directly to our chief credit officer. And depending on the loan size, you know, Derek, as chief credit officer is. Involved. Once loans get to a certain size. Okay. All right. Thanks, Scott. Appreciate the color. Our next question comes from Peter Winter from DA Davidson. You may proceed with your question. Thank you, John. 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.

Peter Winter - Equity Analyst at DA Davidson - (00:44:07)

Yeah, loan spreads have actually improved just a little bit, depending on the category. But, you know, boy, to talk about loan conditions over the last quarter, we just don't really think about it quite that way. I know you all do. But if you look back over the.

Scott McLean - President and Chief Operating Officer - (00:44:27)

Last year, it's very much the way. I described it and the way Ryan described some of the charge offs we had, you know, in the last, I'm not sorry, some of the loan payoffs that we had in kind of the last portion of the quarter muted the loan growth just a bit. But production, if you actually look at. Production. It'S, you know, it's been up in most months this year compared to 2024. And we, you know, we generally see pretty good loan growth in the fourth. Quarter of the year. We certainly did last year. And so none of that would guide. Towards the fourth quarter. It's going to be, you know, differentiated loan growth period. But. We'Re poised, we're prepared, we're doing. The right things to experience loan growth. At a faster pace when it occurs. I just add as term rates have come down a little bit, we have seen some accelerated refinance of the commercial real estate and even the owner occupied portfolio that's been a little bit of a headwind. So that's a factor. But with that said. Improved pipeline. And construction loans which it takes time. For. Those balances to build. As the project proceeds, the equity goes in first. And so there's some lag effect here but you know, that'll spectra will rebuild, but the payoffs come a little faster than the new balances built. Got it. And if I could ask, if I think about this year, you ramped up investments, you know, really got more aggressive with marketing hiring of bankers. You, 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, you know, various revenue initiatives and see, you know, expense growth somewhat elevated again next year? I'd expect, you know, the, to continue to invest in building the business and. Building. Hiring producers if we can find good people. We've been continuing to do that. I expect we'll see some increased marketing spend but at the same time we're working really hard to try and offset that with as best we can with saves and back office kinds of non revenue producing kinds of functions. So we're working at both at the same time.

OPERATOR - (00:47:46)

Thanks, Harris. Our next question is from Chris McGrady from KBW. You may proceed with your question.

Chris McGrady - Equity Analyst at KBW - (00:48:00)

Oh great. Thanks for the question, Harris. Deregulation, big picture. What does that mean for Zion at this point? Deregulation, you say? Yeah, yeah.

Harris Simmons - Chairman and Chief Executive Officer - (00:48:15)

Well listen, I think, I suspect that I speak for a lot of my counterparts around the industry. You know, we're looking for solid regulations. We're not looking to, you know, and we've seen instances where you know, regulators have really started focusing on stuff that's kind of, it's trivia, it's been politically motivated, the whole debanking kind of thing. Regulation around, you know, disclosures around climate, trying to get, getting us to try and figure out what the impact of small business lending is on climate change. I consider all of that to be not particularly productive and a distraction from doing what we ought to be doing, which is figuring out how we lend to businesses, individuals to do productive things. And for one, I welcome the. The. Attitudes we're seeing currently out of the regulatory agencies to get back to basics and to focus on the things that can create material weakness in the financial system. But you know, it's not going to change much about how we if anything it's not going to change anything really materially how we think about credit, how we think about managing risk, et cetera. I think it's going to be helpful in eliminating some of these distractions. So I think it's a good thing but won't have any material impact on how we operate. Okay, thank you for that. And then Ryan for you on the deposit disclosures on the non interest bearing, should we think of those as just a reclass and then a little bit.

Chris McGrady - Equity Analyst at KBW - (00:50:20)

More next quarter or is it something. Beyond that that I'm missing? Thanks.

Ryan Richards - Chief Financial Officer - (00:50:25)

Yeah, thanks Chris. Listen, we've rolled through all of our affiliates at this point and it is a reclass over something that was a pretty low cost consumer interest bearing into non interest bearing. So while maybe being slightly accretive to funding costs are beneficial but not a great degree, but we're really enthusiastic about the pull through and the market receptivity that we're seeing so far. And to the earlier point there's still an opportunity to put some more marketing dollars behind that and that growth agenda that Scott talked about before.