Executive Summary / Key Takeaways

• Zions Bancorporation has successfully completed a multi-year, foundational technology modernization, replacing core loan and deposit systems and enhancing digital capabilities, positioning it for improved efficiency, risk management, and customer experience compared to peers reliant on older infrastructure.
• Despite increased classified loan balances, particularly in CRE and C&I, management maintains confidence in credit quality and the adequacy of the Allowance for Credit Losses (ACL), citing strong underwriting, borrower equity, sponsor support, and a more conservative risk grading approach.
• Net interest income and margin have shown consecutive quarterly improvements, driven by disciplined deposit pricing and favorable asset mix shifts, with management anticipating this trend to continue, supported by latent rate sensitivity and strategic funding management.
• Strategic investments in Capital Markets and targeted initiatives like SBA lending are expected to drive future customer-related fee income and commercial loan growth, although overall loan growth may remain stable to slightly increasing in the near term due to economic uncertainty and portfolio management.
• A strong capital position, with CET1 capital and tangible book value showing year-over-year growth and AOCI losses improving, provides financial flexibility, although regulatory uncertainty regarding Basel III Endgame and long-term debt proposals influences the pace of capital return actions like share buybacks.

Setting the Scene: A Regional Banking Powerhouse Modernizing for the Future

Zions Bancorporation, National Association, operates as a prominent regional bank across 11 Western and Southwestern states through its network of seven separately managed affiliate banks. This decentralized model emphasizes local authority and customer relationships, offering a wide array of commercial, retail, and small business banking products, alongside specialized services like capital markets and wealth management. This approach aims to maximize customer satisfaction and strengthen community ties, distinguishing Zions in markets where larger national banks may lack the same local depth.

The banking industry, however, is in constant flux, driven by technological evolution, shifting economic conditions, and evolving regulatory landscapes. Zions has proactively addressed one of the most significant challenges facing legacy financial institutions: operating on outdated core technology. Over several years, the company undertook a substantial modernization journey, culminating in the completion of the final major conversion to its new core operating system for loans and deposits in July 2024. This initiative, in partnership with Tata Consultancy Services, transitioned virtually all loan and deposit accounts onto a modern, integrated platform. Concurrently, Zions revamped its digital front-end, enhancing online and mobile banking for consumers and businesses and digitizing previously paper-based application processes.

This technological overhaul is not merely an operational upgrade; it is a fundamental strategic shift. The new system operates on a single data model, enabling real-time fraud detection and error correction, is API-enabled for seamless integration, and cloud-deployable for scalability and flexibility. Employees benefit from an intuitive interface that reduces training time and provides more data at their fingertips, enhancing efficiency and customer service. For customers, this translates to a better experience across channels, including improved digital product capabilities, which Coalition Greenwich data in 2023 indicated Zions' customers already ranked higher than those of major bank competitors. This foundational investment significantly reduces the risk associated with antiquated systems and frees up capacity to pursue further technological advancements, serving as a critical differentiator in a competitive landscape increasingly defined by digital capabilities.

Competitive Landscape: Regional Strength vs. National Scale

Zions operates in a competitive environment populated by both national giants and other regional players. Key competitors include large national banks like Wells Fargo (WFC) and U.S. Bancorp (USB), as well as other significant regional institutions such as PNC Financial Services Group (PNC). These competitors often overlap with Zions' geographic footprint and target customer segments (commercial, small business, retail).

Compared to national banks like WFC and USB, Zions operates at a considerably smaller scale. While WFC boasts assets around $1.9 trillion and USB around $670 billion, Zions' asset base is approximately $90 billion. This difference in scale impacts various aspects of the business. Larger competitors can often leverage their size for greater operational efficiencies, potentially achieving lower costs per transaction or unit through advanced automation and broader infrastructure. For instance, national banks may have faster digital processing speeds or more diversified revenue streams.

However, Zions counters this scale disadvantage with its deep regional focus and established local brand strength. Its network of affiliate banks fosters strong community ties and customer loyalty, particularly among small and medium-sized businesses. This regional expertise can translate into advantages such as potentially higher pricing power in specific local markets or better customer retention rates compared to national banks that may have a more standardized, less personalized approach. Zions' historical presence in the Western states also provides a foundation of trust and familiarity.

Against other regional banks like PNC, which also pursues strategic expansion and digital initiatives, Zions' competitive standing is more nuanced. While PNC has diversified revenue streams and is expanding its geographic reach, Zions' completed core system modernization provides a distinct technological advantage over peers still grappling with legacy system replacements. This modernized infrastructure can support faster innovation cycles and potentially lower long-term operational costs related to core processing, offering a competitive edge in efficiency and agility.

Financially, Zions' performance metrics reflect its position. Its TTM net profit margin of 16.11% is competitive within the regional banking space but generally trails the higher margins often seen at larger, more diversified national banks (e.g., WFC's TTM net margin around 16%, USB's around 15%, PNC's around 17%). Zions' Return on Equity (ROE) of 11-12% is broadly in line with peers. However, metrics like Return on Invested Capital (ROIC) and Debt-to-Equity ratios (TTM Debt/Equity 0.70) indicate areas where scale and operational efficiency differences may exist compared to some competitors.

Zions' strategic response to this competitive landscape involves leveraging its regional strengths, investing in technology to close efficiency gaps, and expanding key business lines like Capital Markets to diversify revenue. The recent acquisition of FirstBank branches in California is a clear example of strengthening its position in attractive local markets. While facing competition from both traditional banks and emerging fintechs (which offer alternative digital solutions), Zions' combination of local expertise, a modern technological foundation, and targeted growth initiatives positions it to compete effectively within its chosen markets.

Financial Performance: Navigating Rate Cycles and Strategic Shifts

Zions' financial performance in the first quarter of 2025 demonstrated meaningful year-over-year improvement, reflecting the impact of strategic initiatives and evolving market conditions. Net earnings applicable to common shareholders rose to $169 million, or $1.13 per diluted share, an 18% increase compared to the first quarter of 2024. Adjusted Pre-Provision Net Revenue (PPNR) also saw growth year-over-year, reaching $267 million.

A key driver of this performance was the Net Interest Income (NII) and Net Interest Margin (NIM). NII increased by $38 million, or 6%, year-over-year in Q1 2025, reaching $624 million. The NIM improved to 3.10%, up from 2.94% in the prior year period and 3.05% in the prior quarter. This expansion was primarily attributed to a decrease in funding costs that outpaced the repricing of interest-earning assets, alongside a favorable shift in the mix of average interest-earning assets. The total cost of deposits decreased by 30 basis points year-over-year to 1.76%, and the rate paid on total deposits fell by 33 basis points to 2.01%. Management noted that the sequential decrease in funding costs also contributed significantly to the NIM expansion.

Noninterest income also contributed positively, increasing by $15 million, or 10%, year-over-year to $171 million in Q1 2025. Customer-related noninterest income grew by $6 million, or 4%, driven by higher loan-related fees and improved capital markets fees, notably increased investment banking advisory fees. Noncustomer-related income saw a larger percentage increase, primarily due to an $8 million rise in net securities gains, influenced by valuation adjustments in the SBIC investment portfolio.

Noninterest expense increased by $12 million, or 2%, year-over-year to $538 million. This was mainly due to higher salaries and employee benefits, technology and information processing costs, and other expenses. However, this increase was partially offset by a $12 million decrease in deposit insurance and regulatory expense, as the prior year quarter included a $13 million FDIC special assessment accrual. Adjusted noninterest expense, which excludes certain volatile items, increased by 4% year-over-year. The efficiency ratio improved to 66.60% in Q1 2025, down from 67.90% in the prior year period, indicating that revenue growth outpaced the increase in adjusted expenses.

Balance sheet trends in Q1 2025 showed modest shifts. Total loans and leases increased by $531 million, or 1%, from December 31, 2024, reaching $59.94 billion, primarily driven by growth in consumer 1-4 family residential mortgage and term commercial real estate portfolios. Total deposits decreased by $531 million, or 1%, sequentially to $75.69 billion, with a decrease in interest-bearing deposits partially offset by an increase in noninterest-bearing demand deposits. Customer deposits, excluding brokered deposits, totaled $70.90 billion at quarter-end, including approximately $630 million acquired from the FirstBank branch purchase. The estimated amount of uninsured deposits stood at $32.90 billion, or 43% of total deposits, down from 45% sequentially. The loan-to-deposit ratio was 79%.

The investment securities portfolio's amortized cost decreased slightly by 1% sequentially to $20.05 billion, primarily due to principal reductions. The portfolio had a significant unrealized loss position in AOCI ($2.30 billion loss at March 31, 2025), largely reflecting the impact of higher interest rates on fixed-rate securities. However, AOCI improved by $130 million sequentially due to paydowns, amortization of unrealized losses on transferred securities, and derivative valuation changes. Total borrowed funds decreased 18% year-over-year, reflecting reductions in short-term borrowings.

Credit quality metrics presented a mixed picture. Net loan and lease charge-offs remained low at $16 million, or 0.11% annualized, for Q1 2025. Nonperforming assets were relatively stable sequentially at $307 million, or 0.51% of total loans and leases and OREO. However, classified loans remained elevated at $2.90 billion, stable sequentially but significantly higher year-over-year. This increase was primarily concentrated in the multifamily and industrial CRE portfolios, influenced by a change in risk grading methodology emphasizing current cash flow and weaker performance in certain construction loan vintages. Despite this, management emphasized that the loss content in the CRE portfolio is mitigated by strong underwriting, borrower equity, and sponsor support, contributing to low net charge-offs. The Allowance for Credit Losses (ACL) was $743 million, or 1.24% of total loans and leases, relatively stable sequentially and year-over-year, with management deeming it well-aligned with the current economic outlook and reflecting expectations regarding potential tariff impacts.

Outlook and Growth Trajectory: Building on Momentum

Looking ahead, Zions' management has provided guidance for the first quarter of 2026 compared to the first quarter of 2025, signaling expectations for continued, albeit potentially moderate, improvement. The outlook anticipates Adjusted Pre-Provision Net Revenue, Net Interest Income, Customer-related Noninterest Income, and Adjusted Noninterest Expense to be slightly to moderately increasing. Management expects to achieve positive operating leverage and improved efficiency, with revenue growth projected to outpace expense pressures.

The outlook for period-end loan balances is stable to slightly increasing. Management expects growth to be led by commercial loans, leveraging strategic initiatives like targeted SBA lending programs and customer outreach. However, this growth is anticipated to be partially offset by managed declines in mortgages and commercial real estate exposures, as payoffs are expected to outpace new originations, particularly if interest rates decline and facilitate refinancing activity. The near-term pace of loan growth is expected to be slower as businesses await clarity on the impact of tariffs and broader economic uncertainty.

Net interest income is expected to benefit from continued favorable trends in funding costs. Management believes there is still room for deposit costs to decrease, even without further Fed rate cuts, due to the embedded repricing dynamics of term deposits. The latest modeling suggests that latent interest rate sensitivity, reflecting past rate movements not yet fully realized, is estimated to increase NII by approximately 8.9% in Q1 2026 compared to Q1 2025. When combined with emergent sensitivity based on the implied forward curve as of March 31, 2025, the model suggests NII could be 4.6% higher year-over-year. This outlook is subject to risks related to realized loan growth, deposit competition and behavior, the path of interest rates, and the impact of tariffs.

Customer-related noninterest income is expected to be slightly to moderately increasing, although the outlook contemplates lower capital markets growth than previously anticipated due to current economic uncertainty. Strategic investments in expanding Capital Markets capabilities remain a key focus for driving fee income growth, building on the strong performance seen in recent quarters.

Adjusted noninterest expense is also projected to be slightly to moderately increasing. This outlook incorporates planned increases in marketing spend, expenses associated with the recently acquired California branches, and continued investments in revenue-generating businesses. While technology costs are a component of expense, management emphasizes that the completed core system modernization, while a significant investment, positions the company for long-term efficiency gains and frees up capacity for future strategic technology investments.

Capital management remains a priority, with the focus on building common equity organically through earnings. The CET1 capital ratio and tangible book value per common share have shown positive year-over-year trends, benefiting from retained earnings and improving AOCI balances. While management is building capital, they are maintaining a cautious approach to aggressive share buybacks, awaiting further clarity on potential changes to regulatory capital rules, particularly regarding the treatment of AOCI. The redemption of preferred stock in Q4 2024 and the issuance of lower-cost subordinated notes are expected to positively impact future earnings per share.

Key Risks and Considerations

While Zions has demonstrated resilience and strategic progress, several risks warrant investor attention. Economic uncertainty remains a significant factor, potentially impacting loan growth, credit quality, and business sentiment, particularly given concerns around tariffs and trade policy. Interest rate risk persists, although management actively uses hedging strategies and portfolio management to mitigate volatility in net interest income and economic value of equity.

Credit risk is a continuous focus. Although overall net charge-offs remain low, the increase in classified loans, particularly in CRE and C&I portfolios, signals potential future losses. While management is confident in the adequacy of the ACL and the mitigating factors of strong underwriting and sponsor support, a prolonged economic downturn or specific sector stress could lead to higher-than-expected credit losses. The performance of construction loan vintages and the impact of higher rates on refinancing activity in CRE remain areas to monitor.

Regulatory risk continues to evolve. Proposals related to Basel III Endgame and long-term debt requirements could impact capital requirements and funding strategies, although Zions believes its current capital levels exceed requirements and is preparing for potential changes. Legal proceedings, including ongoing civil cases and arbitration matters, also present potential financial exposure, although management believes current accruals are adequate for estimable losses.

Competition from both traditional banks and fintech firms poses ongoing challenges to market share and profitability. Zions' ability to leverage its technological investments and regional strengths to attract and retain customers and grow market share will be critical. Finally, the successful integration and performance of acquired assets, such as the FirstBank branches, are important for realizing the strategic benefits of such transactions.

Conclusion

Zions Bancorporation is executing a deliberate strategy centered on leveraging its regional banking model, enhancing its technological capabilities, and maintaining disciplined risk management. The successful completion of its core system modernization provides a foundational advantage, positioning the company for improved efficiency and competitiveness in an increasingly digital banking landscape. While facing headwinds from economic uncertainty and increased classified loan balances, Zions' strong underwriting practices, robust capital levels, and strategic focus on granular deposit gathering and targeted loan growth areas like Capital Markets and commercial lending provide a solid basis for navigating these challenges. Management's outlook anticipates continued improvement in financial performance, driven by favorable funding cost trends and revenue growth outpacing expenses. For investors in ZIONP, the story is one of a regional bank building on its core strengths, strategically investing for the future, and demonstrating resilience in managing risk, aiming for sustained profitability and value creation despite the dynamic operating environment.