Executive Summary / Key Takeaways

• Zions Bancorporation's first quarter 2025 results demonstrated meaningful year-over-year improvement, driven by expanding net interest income and margin, lower funding costs, and growth in customer-related fee income, despite increased expenses and a one-time tax charge.
• The company has completed a multi-year, foundational investment in replacing its core loan and deposit operating systems, alongside significant digital front-end enhancements, positioning it for improved operational efficiency, enhanced customer experience, and future technological innovation.
• Deposit costs continue to decline, contributing significantly to net interest margin expansion, while the deposit base remains relatively stable, with management observing a slowing migration from noninterest-bearing accounts.
• While classified loan balances have increased, particularly in commercial real estate, management maintains confidence in the portfolio's underlying strength, citing strong borrower equity and sponsor support, and expects realized losses to remain manageable, supported by a stable allowance for credit losses.
• The outlook for the first quarter of 2026 anticipates stable to slightly increasing loan balances, slightly to moderately increasing net interest income and customer-related fee income, and slightly to moderately increasing adjusted noninterest expense, pointing towards continued positive operating leverage.

Setting the Scene: A Regional Powerhouse with a Modern Foundation

Zions Bancorporation operates as a prominent regional financial institution across 11 Western and Southwestern states. Its distinctive business model centers on seven separately managed affiliate banks, fostering deep local relationships and tailoring services to community needs. This decentralized approach emphasizes local authority and customization, aiming to cultivate strong customer loyalty and drive profitability within its specific geographic markets.

Within the competitive landscape, Zions positions itself against a mix of larger national banks like U.S. Bancorp (USB) and PNC Financial Services Group (PNC), as well as other regional players such as Regions Financial Corporation (RF) and Fifth Third Bancorp (FITB). While these larger institutions often possess advantages in scale and broad digital reach, Zions leverages its localized model and relationship-focused banking to carve out a niche, particularly within commercial and small business banking, where personalized service is highly valued. However, this regional structure can sometimes lead to higher operating costs compared to more centralized models, and the pace of digital innovation across the entire footprint can be a challenge when competing with digitally native offerings or large banks with significant technology budgets.

A pivotal strategic undertaking for Zions has been a multi-year, enterprise-wide modernization of its core technology infrastructure. This ambitious project, culminating in July 2024 with the final major conversion, transitioned substantially all loan and deposit accounts onto a modern, integrated core system. This move was not merely an upgrade but a fundamental shift designed to replace aging legacy systems, reduce operational risk, and create a foundation for future growth and efficiency. Complementing this core work, Zions also invested heavily in its digital front-end, enhancing online and mobile banking for consumers and businesses and digitizing application processes.

This technological transformation is a critical differentiator. The new core system operates on a single data model, enabling real-time fraud detection and error correction – a significant advantage over older systems that rely on batch processing. It is API-enabled and cloud-deployable, facilitating integration with emerging technologies and supporting seamless omnichannel customer experiences. Employees benefit from a more intuitive interface, faster processing, reduced need to switch between applications, and improved access to customer data, leading to more efficient service delivery. The digital front-end investments have already yielded tangible results, such as moving over 90% of mortgage and small business applications from paper to electronic within 12-18 months. While precise, directly comparable quantitative metrics on the efficiency gains or cost reductions from this new core system across all operations are not yet fully detailed, management expects incremental operational efficiencies and is freeing up capacity for further technology investments. The capitalized cost associated with this core system replacement project totaled $251 million at March 31, 2025, amortized over ten years, indicating a significant, long-term investment. This strategic focus on technology is aimed at enhancing the customer experience and improving operational performance, areas where Zions seeks to strengthen its competitive standing against rivals who may have different technological architectures or investment priorities.

Financial Performance and Operational Strength

Zions' financial performance in the first quarter of 2025 reflected the positive impacts of strategic execution and a favorable interest rate environment, particularly when viewed against the prior year. Net earnings applicable to common shareholders rose to $169 million, or $1.13 per diluted common share, an 18% improvement year-over-year. This growth was primarily fueled by a $38 million, or 6%, increase in net interest income, reaching $624 million. The net interest margin expanded to 3.10%, up from 2.94% in the first quarter of 2024 and 3.05% in the preceding quarter, marking the fifth consecutive quarter of margin improvement. This expansion was largely driven by a decrease in funding costs, with the total cost of deposits falling 30 basis points year-over-year to 1.76% and the rate paid on average interest-bearing deposits decreasing 55 basis points to 2.61%. While the yield on average interest-earning assets did decrease by 17 basis points, the decline in funding costs outpaced this, benefiting the margin.

Customer-related noninterest income also contributed positively, increasing by $6 million, or 4%, to $158 million. This was primarily attributed to higher loan-related fees and improved capital markets fees, including increased investment banking advisory fees. Management noted that the first quarter of 2025 represented the third-best quarter for capital markets in the company's history, highlighting the growing contribution from this strategic focus area. Noncustomer-related noninterest income saw a significant increase, rising $9 million, mainly due to an $8 million increase in net securities gains, influenced by valuation adjustments in the SBIC investment portfolio.

Operating expenses increased by $12 million, or 2%, year-over-year, totaling $538 million. This rise was primarily due to higher salaries and employee benefits, technology and telecom costs, and other noninterest expenses, including a $3 million impairment charge. However, a $12 million decrease in deposit insurance and regulatory expense, related to a prior year special assessment accrual, partially offset these increases. Adjusted noninterest expense, which excludes certain non-recurring items, increased by a more moderate 4%. The efficiency ratio improved to 66.6% from 67.9%, indicating that revenue growth outpaced the increase in adjusted expenses.

The balance sheet remained relatively stable. Total deposits decreased slightly by 1% from the prior quarter to $75.69 billion, although customer deposits excluding brokered deposits saw only a minor decrease to $70.9 billion. The acquisition of four FirstBank branches in Coachella Valley in late March 2025 added approximately $630 million in deposits, partially offsetting other outflows. Noninterest-bearing deposits represented 32.8% of total deposits at quarter-end. Total available liquidity stood at a robust $41.2 billion, providing 125% coverage of estimated uninsured deposits. The investment securities portfolio, with an estimated duration of 4.00 years, serves as a key source of contingent liquidity and is actively managed using strategies like fair value swaps to mitigate interest rate risk.

Credit Quality and Risk Management

Credit risk management is a cornerstone of Zions' operations, emphasizing strong underwriting, early problem detection, and concentration avoidance. While the company's overall credit quality remains sound, recent periods have seen an increase in certain metrics, albeit from a low base.

The provision for credit losses in the first quarter of 2025 was $18 million, up from $13 million in the prior year period. The allowance for credit losses (ACL) remained relatively stable at $743 million, representing 1.24% of total loans and leases. Management indicated that the change in the ACL from the prior year reflected a balance of factors: credit quality deterioration and loan growth increasing reserves, partially offset by lower reserves for specific portfolio risks (like CRE) and improvements in economic forecasts.

Net loan and lease charge-offs totaled $16 million, or 0.11% annualized, in the first quarter of 2025, an increase from $6 million (0.04%) in the prior year. This included an $8 million charge-off of a single commercial and industrial loan, but notably, there were no charge-offs in the commercial real estate (CRE) portfolio during the quarter. Management highlighted the exceptional performance of the CRE portfolio over the past five years, with average annual net charge-offs of just 1 basis point, despite broader industry concerns.

Nonperforming assets totaled $307 million, or 0.51% of total loans and leases plus other real estate owned, remaining relatively stable quarter-over-quarter but up slightly year-over-year, primarily in term CRE, consumer 1-4 family residential, and C&I portfolios. Classified loans, representing loans with well-defined weaknesses, totaled $2.9 billion, or 4.82% of total loans and leases, stable compared to the prior quarter but significantly higher than the prior year ($966 million, or 1.66%). This year-over-year increase was largely concentrated in the multifamily and industrial CRE portfolios. Management attributed this increase primarily to an increased emphasis in risk grading on current cash flows rather than solely relying on collateral values or guarantor strength, as well as weaker performance in certain construction loan vintages from 2021-2023 due to factors like longer lease-up periods and higher costs.

Despite the rise in classified assets, management expressed confidence that realized losses would remain manageable. This confidence is grounded in strong underwriting standards, significant borrower equity in deals, and continued sponsor support. The low level of nonaccrual loans in the CRE portfolio ($58 million) relative to the classified amount ($1.68 billion) underscores that while some properties are experiencing performance issues, the underlying credit quality and loss mitigation factors remain strong. Management is closely monitoring the C&I portfolio, particularly segments potentially exposed to tariff impacts like trucking and transportation, but currently sees stability.

Outlook and Strategic Positioning

Zions' outlook for the first quarter of 2026, relative to the first quarter of 2025, reflects a cautious yet optimistic stance amidst ongoing economic uncertainty, particularly concerning trade policy and tariffs. Management anticipates stable to slightly increasing period-end loan balances, with expected growth in commercial loans potentially offset by managed declines in mortgages and commercial real estate as payoffs outpace new originations in a potentially lower rate environment.

Net interest income is projected to be slightly to moderately increasing. This outlook is supported by the expected continued benefit from the downward repricing of interest-bearing liabilities and the favorable asset mix resulting from the deployment of securities portfolio cash flows into higher-yielding loans. Management's internal modeling, assuming rates follow the implied forward path as of March 31, 2025 (which suggested the Fed funds target reaching 3.75% by Q1 2026), estimated modeled net interest income in Q1 2026 to be 4.6% higher than in Q1 2025. This incorporates both latent sensitivity from past rate movements and emergent sensitivity from future expected changes.

Customer-related noninterest income is also expected to be slightly to moderately increasing. While management contemplates lower capital markets growth in the near term compared to prior expectations due to economic uncertainty, they remain optimistic about the long-term growth potential of this business and other fee-generating activities like loan-related fees and wealth management.

Adjusted noninterest expense is projected to be slightly to moderately increasing. This reflects ongoing efforts to manage costs while continuing to invest in the business, including planned increases in marketing spend, expenses related to the recent branch acquisition, and investments in revenue-generating initiatives. Despite these investments, the company anticipates achieving positive operating leverage and improved efficiency, with revenue growth expected to outpace expense increases.

The completion of the core system modernization is a key strategic enabler for this outlook. By enhancing operational efficiency and freeing up resources, it supports the goal of driving revenue growth while managing the pace of expense increases. The acquisition of the Coachella Valley branches also aligns with the strategy of strengthening the regional footprint and adding granular deposits and loans.

Capital management remains focused on organic build through earnings and improving tangible book value, which saw strong accretion in the prior year. While the CET1 ratio is robust at 10.8%, management is proceeding cautiously with share repurchases, citing regulatory uncertainty regarding Basel III endgame rules and the potential impact of AOCI on regulatory capital. The significant unrealized losses in AOCI, primarily from fixed-rate AFS securities, are expected to accrete back into income over time as securities pay down, contributing to capital build.

Competitive Landscape and Differentiation

In the competitive arena, Zions differentiates itself through its unique decentralized, affiliate-based model, fostering deep local relationships that larger, more centralized banks may find challenging to replicate. This approach is particularly effective in attracting and retaining small and middle-market businesses, a core focus area where Zions has received national recognition for service quality. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Zions' consistent performance in these segments suggests a strong regional foothold.

However, larger competitors like USB and PNC often possess advantages in technological scale and efficiency. While Zions has made significant strides with its core system modernization and digital front-end investments, closing the gap in certain areas of digital speed and operational cost efficiency compared to the most technologically advanced peers remains an ongoing effort. Zions' investment in its new core, while substantial, positions it favorably against other regional banks still operating on older legacy systems, potentially offering a competitive advantage in terms of agility and future innovation capacity once the platform is fully optimized.

In specific business lines, Zions faces varied competition. In commercial lending, it competes with a wide array of banks, but its specialized units like SBA lending and energy lending (where consolidation has reduced the number of active banks) offer opportunities. In CRE, while facing broad competition, Zions' disciplined underwriting and focus on borrower equity and sponsor support differentiate its portfolio quality, as evidenced by historically low charge-offs compared to broader industry trends. In deposits, Zions competes for funding against banks and non-bank alternatives like money market funds, necessitating disciplined pricing and a focus on relationship-based, granular deposit gathering to maintain a stable and cost-effective funding base.

The recent acquisition in Coachella Valley exemplifies Zions' strategy of strengthening its position in attractive regional markets through targeted inorganic growth, enhancing its competitive density in specific areas. The focus on expanding capital markets capabilities represents a strategic push to grow fee income and offer a more comprehensive suite of services to compete with larger institutions that have historically dominated these areas.

Conclusion

Zions Bancorporation is executing a clear strategy centered on leveraging its modernized technology infrastructure and unique regional banking model to drive efficiency, enhance customer relationships, and expand key business lines. The completion of the core system replacement is a significant milestone, providing a solid foundation for future operational improvements and digital innovation, areas crucial for maintaining competitiveness in the evolving financial landscape.

The company's recent financial performance, marked by expanding net interest margin driven by disciplined deposit pricing and a stable funding base, coupled with growth in strategic fee income areas like capital markets, underscores the effectiveness of its approach. While facing increased classified assets, particularly in commercial real estate, Zions' historical credit discipline and strong underlying portfolio quality suggest that realized losses are likely to remain manageable. The forward outlook anticipates continued positive operating leverage, supported by modest loan growth and controlled expense increases, positioning Zions for enhanced profitability. Investors should monitor the trajectory of loan growth, particularly in light of economic uncertainties and trade policy impacts, the continued optimization of deposit costs, and the pace at which the benefits of the technology modernization translate into tangible efficiency gains and competitive advantages.