Swedish Orphan Biovitrum AB (publ)

Greetings, and 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 star zero 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.

Thank you, Vaughn, and good evening, everyone. Welcome to our conference call to discuss a 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 for slide two of the presentation dealing with forward-looking information, and a 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 zionsbankcorporation.com. For our agenda today, Chairman and Chief Executive Officer Harris-Simmons will provide opening remarks. Following Harris' comments, 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 Stewart, Chief Credit Officer, Chris Kiriakakis, 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.

Thanks very much, Shannon, and good evening, everyone. As you'll see on slide three, 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%. 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 from certain guarantors of two related C&I loans. We charged off $50 million of the combined balances of the loans at the end of the quarter. Additionally, we have established a full reserve against the remaining $10 million. We view this as an isolated situation resulting from a 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 four basis points annualized on average loans, and credit quality generally improved for the quarter as well. Moving to slide four, delivered 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 five 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? Thank you, Harris, and good evening, everyone. Beginning on slide six, You will see the five-quarter trend for net interest income and net interest margin. Net interest income increased by $52 million or 8% relative to the third quarter of 2024. We continue to see the benefit from fixed asset repricing and favorable shifts in the composition of average interest earning assets. Growth in average customer deposits and 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 lean 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 improvements in the net interest margin, which benefit from the improved cost of deposits. Moving to non-interest income and revenue on slide eight, 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 impact for 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 that CDA, 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 non-interest 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 non-interest expense for the third quarter of 2026 is moderately increasing relative to the third quarter of 2025. The expense outlook considers increased marketing-related costs, continued investments in revenue-generating businesses, and increased technology costs. We continue to expect future positive operating leverage. Slide 10 presents 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 five basis points sequentially. Our outlook for period and loan balances for the third quarter of 2026 is slightly to moderately increasing relative to the third quarter of 2025 and assumes growth will be led by commercial loans. Average deposit balances are presented on the right side of the slide. Relative to the prior quarter, total average deposits were relatively flat, including 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 imbalances in the third quarter and will be fully represented in average balances in our fourth quarter results. The cost of total deposits declined sequentially by one basis point to 1.67%. Further opportunities to reduce deposit costs will depend on the timing and speed, a short-term benchmark rate changes, growth in customer deposits, and market competition and deposit behavior. Slide 11 provides additional details on funding sources and total funding cost trends. Presented on the left are period and deposit balances, which grew by $1.1 billion versus the prior quarter. Total borrowings declined $1.8 billion during the quarter. Short-term FHLB advances decreased $2.3 billion, partially due to the issuance of a $500 million senior note in addition to customer deposit growth. On the right side, average balances for our key funding categories are shown with the total funding costs. As seen on this chart, our total funding costs declined by five 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 were $596 million in the quarter, or $291 million when considered net of reinvestment. The paydown and reinvestment of lower-yielding securities continues to contribute to the favorable mix of our earning assets. The duration of our investment securities portfolio is estimated at 3.7 years. We begin our discussion of credit quality on slide 13. Realized net charge-offs in the portfolio were $56 million this quarter, or 37 basis points annualized, driven principally by the $50 million charge-off 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 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 locations. 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 local value per share by 17% versus the prior year period. Slide 16 summarizes the financial outlook provided over the course of our prepared remarks for the third quarter of 2026 as compared to the third quarter of 2025. Our outlook represents our best estimate of financial performance based on current information, and we expect to continue to produce positive operating leverage as revenue growth outpaces non-interest 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?

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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 Manan 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. Thanks. This is Derek. Just as far as what we've reviewed, we've reviewed a gone through the portfolio, and we think it's an isolated incident. As we've gone through it, we haven't found similar loans or other issues, so we're very confident that this is an isolated incident.

I think I just add, I think the 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 we had some unusual things going on that really are not commonplace. And this we've 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 that our care and extending credit and monitoring the collateral, et cetera, speaks for itself.

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 amongst subcategories. Are there any lumpier exposures or any high-risk categories there that you'd point out?

Sure. Thanks for the question. We actually, for transparency purposes, cut the steric in. We added in the appendix slide 36 that details the NDFI exposure. It's actually about 3% of our total launch. 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. It covers a lot of different a lot of different segments. What I would say the majority of it would be equipment leasing type transactions. You can think about yellow iron trucks, things like that. 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 a business that we've actually been in for a long time. I don't think we're intending to grow it significantly, but, you know, it's an area that we've been in for a very long time and had good experience with.

Great. Thank you.

Our next question comes from Dave Rochester from Cantor. You may proceed with your question.

Good afternoon, guys. Hi, Dave. I wanted to start on your NII guide. How much fixed rate asset repricing are you factoring into that NII guide outlook? Can you possibly go through the balances that you're expecting to roll for loans and securities and what that yield pickup is? and then what your expectations for longer-term interest rates are as part of that, it'd be great.

Hey, thanks, Dave. Appreciate the question, and happy to provide some texture there. I 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 the 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 for things that are still fully played 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 play through that's sort of embedded in our guidance.

Gotcha. 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 rough dollar amounts of those?

You know, it breaks across because it's not just those things that were born as fixed-rate things. They're things that are behaviorally like fixed-rate. So 5-1, 7-1, 10-year arms are embedded in there. So it's sort of a mix of things, you know, across CRE, CNI, and then mortgages that sort of behave more like fixed-rate loans. That's embedded in And that's what we call fixed rate asset repricing.

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

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 at this quarter, kind of where the peers are, including things like AOCI, there tends to be a central tendency around 10%. That's, well, months or so away from when we would 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 peers.

Got it. Great. Thanks, guys.

Our next question comes from Ken Uston from Autonomous Research. Ken, your line is live, and you may proceed with your question.

Hi, good afternoon. I just wanted to ask about on the guidance, you know, you have kind of moderate, moderate, moderate. I heard your comments. You're still talking about operating leverage looking out a year. What's the gap 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.

Again, 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 of giving you a hardened number or a hardened range at this point, but we're happy to return to it once we've landed our whole year process for 2026. But I understand the struggle with the guy. Yeah.

Sorry, didn't mean to cut you off there. My second question, just from 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 wanted to kind of ask you to come back on that commentary that you gave and help us think about what the right zone is for your kind of long-term NIM thinking. Thanks again.

I think I was, Mr. Harris, I think I'm the one that put that concept out there. I think that over, you know, like an economist, give them a number or a date, but never both. I think it's kind of where we ultimately would expect to land. I think I didn't intend to convey that that's going to be this quarter, next year type of thing. I would expect that we'll continue to see improvement. And we're working really hard at making sure that the pricing well on the asset side of the balance sheet We'll see some of this improvement coming out of the securities portfolio, just the pricing, 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 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. All right, so not doable, but we'll see what the timing is. Yeah, I think to Harris' point, I think it's really pulling through on some of the core initiatives that we have at play to drive through deposit growth that have yet to play out fully.

Our next question comes from Ben Gerlinger from Citigroup. Please proceed with your question.

Thanks. Good afternoon. Hey, Ben. So just kind of sticking with everyone's favorite slide of 26 of the latent emergence implied, it seems like the implications come down quite a bit quarter to 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 50 bps on the outlook. but since it's 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 kind of casting over and you might see a margin compression as we kind of recognize the full 100 basis points? Or is it more just kind of giving an optic view? I get there's a lot of scenario analysis of the positive betas and and everything within that too. So I'm just kind of curious, considering the implied is roughly one-third of what it was.

Yeah, listen, 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, you know, 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 difficult tougher from an interest income basis, but even with the backdrop of this sensitivity, when layered on top of that with the 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 is not, including things like migration from non-interest-bearing deposits elsewhere, including the 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 yielding than some of the other places that we could invest our loan dollars. So, yes, there is an impact from the forward curve. We try to put some bookends around that from a down 100, up 100. What we're trying to show is even in a place where the Fed could be lowering rates, we still stand to have some upside on our NII from our forecast view when you layer on all the other more dynamic aspects, including loan growth and other assumptions that one could assume moving forward.

Gotcha. That's helpful. And then in terms of capital there's been some M&A in kind of your footprint or footprint adjacent you could say when you look at the opportunity set in front of you and you now have a better capital foot hold if you were to do M&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 M&A is on the table at all at this point well I think uh

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 where we already have a presence would be kind of 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'd 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. You 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.

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 monitor collateral in general, just with the collateral kind of moving around in this case?

This is Derek again. Upon learning the facts during the quarter, we commenced to review as we described in our 8K. In connection with the event of this type, it took a little while for our analysis and review. Once we discovered where we thought we were, we felt it was appropriate for transparency purposes just to put it out there, what we had found.

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

Understood. Okay. 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. Maybe just speak to the runoff in CNI and and maybe the related pipeline and how you expect to kind of restore that growth.

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 the first quarter of 24. And, you know, if you just think back over that time period, there's a lot of concerns about the commercial real estate kind of 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, to have, investors should expect us, we expect ourselves 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, 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 7A loans as of September 30th, 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, caring 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, you know, will achieve moderate single-digit loan growth, which we've done, you know, for many years.

And I think, Matthew, in your question there as well, I think you asked a question about the CNI being down perhaps a 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 paydowns and payoffs. And so I think you prompted for the CNI piece of that. So we did see some actually activity there in bringing down balances for NDFIs, for health care and pharmaceuticals. but there were also some reductions in other categories, including CRE multi-family 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.

Great. Thanks for the color.

Our next question comes from John Pancari from Evercore ISI. You may proceed with your question.

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 policies, procedures to see what we can learn. And so we will be doing that. It's prudent for us to do that. As far as the question of collateral, 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 field exams or audits of customers. But in most cases, we will monitor it in-house.

Okay. 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?

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 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 customers 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 Derek, 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 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, his 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 D.A. Davidson. You may proceed with your question.

Thank you. Don, 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.

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, you know, if you look back over the 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 sorry, some of the low 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 been up in most months this year compared to 2024. And 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 a 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 guess, Ed, as term rates have come down a little bit, we have seen some accelerated refinance of the commercial real estate and even the unemployment. And 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 this project. proceeds, the equity goes in first, and so there's some lag effect there, but, you know, that'll expect a little rebuild, but the payoffs come a little faster than the new balance is 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 golden, 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, uh, again next year?

I, I, I, I'd expect, you know, the, uh, We're going 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 you know, non-revenue-producing kinds of functions. So, we're working at both at the same time.

Kevin O' Okay. Thanks, Harris.

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

Chris McGrady Oh, great. Thanks for the question. Harris, on deregulation,

big picture what does that mean for Zion at this point deregulation you say yeah yeah 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 regulation 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 the climate, trying to, you know, giving 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 I, for one, I welcome the attitudes we're seeing currently out of the regulatory agencies to get back to basics and to the 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 more next quarter, or is it something beyond that that I'm missing?

Thanks. 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 to 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 on that growth agenda that Scott talked about before. to really invigorate that program?

Hey, Chris, this is Scott. I think the bigger picture with non-interfering deposits is that they're stable, and we saw that stability in the earlier quarters this year, and everybody was wondering going into this year, will non-interfering deposits continue to go down? And so I think the story is they're stable. Ours appear really stable now. I mean, if three quarters is a trend, I think it is. And that kind of peer-leading mix of non-interest-bearing to total deposits, which we've had for three decades, if that's any indicator, we've gone through, you know, yet again another rate cycle and have maintained that peer-leading mix of non-interest-bearing to total deposits. I think that's the second headline. at least that we're pleased about showing this year.

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

All right. Thanks so much. Very helpful.

Our next question comes from David Smith from Truist. You may proceed with your question.

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

Thanks for the question. This is Derek. We're going to continue doing underrate the way we've done historically. So this will not change how we look at growth now. Can we learn? Sure. But we're going to continue doing what we've been doing, and it shouldn't impact our lung growth. As Harris did indicate, I mean, we have been working through some some commercial real estate criticizing classifieds that we've seen those successfully, you know, pay off or improve over the last six months. So that's something that will continue.

Thank you. Our next question comes from Bernard Von Giske from Douche Bank. You may proceed with your question.

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

Why not put credit more broadly in perspective? Well, I think we weren't in a position where we wanted to pre-release the quarter and kind of getting it out there a piece at a time wasn't the intent. The intent, I think, was we'd filed a lawsuit. That lawsuit is a matter of public record. We didn't want... to have somebody stumble across that and have information that the market didn't have. So I think that was a primary factor in our determination to file an 8-K at the same time so that everybody would have the benefit of seeing what somebody could have found in the courthouse. It's about that simple.

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

Sure. This is Scott. I'd be happy to respond to that. Yeah, our capital markets business has been growing nicely, which we two or three years ago said we were leaning into when it was kind of $70 million-ish a year. we reflected that we would try to, you know, perhaps double it over a three-, four-year period, and we're well on our way to doing that. But we have seen this year broader growth, treasury management kind of account analysis revenues up about 4%. Our business and retail service charges, which had been decreasing for some years or flat to decreasing, actually have shown nice growth this year. And our mortgage, kind of the change in how we are pursuing our mortgage business to more of a help for sale approach as opposed to help for investment is generating more fee income. And we saw that pull through in the third quarter. So anyway, our wealth business, which is an important business for us, It's a little bit flat right now, but we believe as we look out a year, it'll grow very nicely also. So we're seeing a much broader mix of growing businesses than, say, this time last year.

Okay, thanks for taking my questions.

Our next question comes from Anthony Elian from JP Morgan. You may proceed with your question.

Hi, everyone. On a follow-up on NDFIs more broadly, Harris, you've been in the industry for many years now, which I think gives you a unique perspective relative to other CEOs in the industry. Given the scrutiny by investors on banks' NDFI portfolios, I'm wondering if, in your view, the concerns that investors have on this loan category are overblown or if their concerns are reasonable.

Well, I'd start by saying, I mean, the NDFI spectrum is pretty broad. It includes some categories that I think are proven to be quite safe. Capital call lines would be a good example of that. You know, it's... And personally, if I have... If I think there's risk out there, I think it's probably in private credit. And I say it because... Given the rate of growth and the lack of regulation, the dearth of covenants and sometimes more liberal structures that I think we see in that kind of credit, I think FSOC, Financial Disability Oversight Council, and others have been expressing greater concerns about that growth in private credit because when you get something growing, it's as quickly as that's been growing and with magnitude of the size of that sector, it's, you know, at least there's kind of a yellow flag. I don't think that direct exposure that most banks have to private credit are particularly worrisome. The greater risk, I think, is going to be this kind of spillover risk if if or when that private credit sector finds itself in a period of stress. They don't have the structural backstop of liquidity that the banking sector does with the Fed, et cetera. And so again, given the high rate of growth in the sector, I think it's not unreasonable to think that it could pose some increased risk to credit markets. But I do think that we've had the tricolor and then the first brands issues, and I think that kind of had the market a little on edge. When we had our announcement last week, everybody was connecting dots, maybe more than is warranted. I don't think there's a necessary relationship between these three credits. Other than, I do think, again, just me speaking, but we've been through a prolonged period without a lot of stress in the markets. We're now sort of 15 years out from the financial crisis. Pandemic looked like it could have been one of those moments, but there was enough government assistance flooding the markets to stave that off. I'm not wishing for a recession, but there's something that's kind of inherently healthy about cycles. too, and we, you know, so I worry about what we haven't seen that will hit when we go through a cycle. And, again, given the growth, sort of the lack of oversight, and I think there's some very responsible lenders in private credit, don't get me wrong, but I also think there's a lot of pressure to keep growing. Once you get on that treadmill, it gets hard to get off the growth treadmill. So, anyway, those are a few thoughts that I think about.

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

This is Derek again. I'd say we pay attention to all of them, all of the segments. I think, you know, with any – again, this is a very broad regulatory definition, so you really have to go credit by credit. You know, just within there, I think we, you know, pay attention to leveraged lending. There's a number of other just areas to focus on, but – It's hard to just focus on, you know, say there's one segment here that I would call out. I think it's important that we focus on all of them. Thank you for the comment. Certainly the capital call lines and subscription lines, those have proven over time to, even though they're a lower return opportunity, typically they've proven to be a little more stable.

Fair enough. Thank you.

Our next question comes from Janet Lee from TD Cohen. You may proceed with your question.

Hello. In terms of your NII guide, am I correct to assume that there will be a two to three basis point lift to earning asset yields per quarter based on the forward curve? It feels like that two to three basis point earning asset yield increase has been the color We've pretty much consistently heard for a while now. So, and also, can we assume that the half of the runoff from the securities is going to get reinvested in the coming quarters? Would appreciate any details on the underlying assumptions for your NII guide.

Yeah, thank you for that, Janet. Listen, on the yearning asset yields, whether on a latent or an emerging perspective, we still see the same kind of range there. the pickup of earning assets, you might be on one end of the range versus the other, but still within the range that I alluded to before. Maybe on a late, maybe be on the high end, on emergent, maybe on the low end when you combine the repricing for loans and securities. In terms of what's to come, you can see where we've been in more recent quarters. And reasonably consistently, we've been reinvesting about half of the gross cash flows that come out of the portfolio. I think we sort of signaled that, you know, that we'll probably need a taper at some point. We've spoken broadly, you know, about, you know, kinds of rules of thumb, but what it really comes down to is when you go run your liquidity stress test, have the things hold up on that basis. So is there more room to run on the securities portfolio? Yes, there is, but it's probably not the same extent as what we would have said a year or two ago. So, you know, I guess we're going on quarter upon quarter, probably closer to a year or more where we've done reinvesting half. I would expect us to continue to reinvest in some. To what extent will depend on other factors as we go. Including the opportunity for reinvesting in loan growth and or paying down wholesale funding sources.

And just to clarify, on your guidance slide, so you are expecting CNI to be a bigger driver for commercial loan growth than CRE over the next 12 months. And also, and if you could confirm that, that would be great. And also, looking into 2026, do you see that the commercial borrowers are getting more excited or getting more optimistic with rate cuts coming and also how much of a bonus depreciation return being likely to return in 2026 with the bill? Like, is that also a positive reinforcement for improved CNI loan growth heading into 2026? Yeah.

This is Scott, and the answer to your first question is yes. The greater portion of growth will come from CNI loans in 2026. That's what we believe. In terms of borrowers, you know, having an uncontrolled enthusiasm about lower rates. I don't think they thought rates where they were were retarding loan growth. I think what you're seeing is not really a rate-driven thing as much as just a concern about the macro economy, whether it was commercial real estate issues or the economy in general or tariffs, possibly the thought of a looming recession I think that's more on people's mind. And certainly, yes, with lower rates, borrowers will be happy about that. But I don't think they were terribly unhappy about where rates were in terms of making economics really work on projects or investments, et cetera.

And I think on maybe your point on the depreciation for the one big beautiful bill, the upfront I've not seen any modeling on that basis. You can imagine that net-net that you would think that that would be supportive of capital investments, all else being equal. But in terms of narrative, I don't know that there's much to offer on that yet.

Got it. Thank you.

Our next question comes from Tim Coffey from Jannie Montgomery Scott. You may proceed with your question.

Good evening, everybody, and thank you for the chance to ask a question. My question had to do with the commercial real estate portfolio and that segment of the portfolio where there's construction on an existing building for property improvements, rehabilitation, et cetera. And so my question is, have you seen any improvement in the time to lease up once those projects are complete? Because if I remember correctly, a couple of quarters ago, Some of those loans had made it to non-accrual, and I'm just wondering if there's been an improvement in at least that time.

Thanks for the question. This is Derek again. Well, not very many have made it to non-accrual. But, you know, what I would say is in 21 and 22, there was a lot of supply. that I point to, at least from our portfolio, which primarily would be multifamily and industrial. And what's just happened, as I've said before, is it's taking longer for those to lease up. But we are seeing them lease up, especially in the multifamily. We see some concessions, so maybe one month, two months of free rent. But the buildings are So it's taken certainly longer than I think sponsors or we would have hoped, but they're still leasing up. And I think, you know, over the next year, as we've said, you know, I think we're going to continue to see our criticizing classified just hopefully improve.

Okay. Great. That was my question. Thank you.

Our next question comes from John Armstrong from RBC Capital Markets. You may proceed with your question.

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

Well, I mean, we reserve for what we expect. So primarily based on the economic scenarios that we use and what we've modeled, and then apply some judgment to it as well. And so our reserve has stayed fairly stable, actually, for a number of quarters. So unless But it would depend upon the economy and where we think that's moving for it to shift.

Okay. I understand what you're saying. Harris, anything else unsaid on credit? I mean, obviously your stock's been really volatile on it. You've talked a lot about it. But anything else on underwriting and credit that you haven't touched on that you'd like to touch on?

Well, I... I was, earlier this afternoon, I have a, I was going through, I was looking at kind of risk adjusted net interest margins for a lot of the banks that have reported so far this quarter. And even, even with, you know, I take the NIM, I subtract actual charge offs, and I You know, we had a risk-adjusted NIM about 3.01. Now, without the $50 million charge-off, it would have been about 3.25. But at 3.01, we'd be, you know, kind of in the top third of kind of the banks, you know, even with this event. And as I noted, I mean, this quarter we had four basis points of other charge-off loss. So it's not like I expect to have an event like this one every quarter. I think that we actually do credit really well. I think it's one of the strengths of this place. I think it may have been one of the reasons that it got everybody's attention is because it was not the kind of thing you'd expect from us. And I hope that we'll always have that kind of reputation. It's something we take really seriously. A few quarters ago, somebody asked, you know, what's the loss you expect to take when you make a loan? I said it was zero. We expect to get it all back. And so we take it seriously when we don't. But anyway, I think we're one of the better ones in the industry. If you look at the track record, I think that's true. If you take out this isolated case, I'm not arguing you should because it happens. But even with it there, you know, 37 basis points isn't out of the realm of what the rest of the industry runs at routinely. So I don't want people to understand that about us. Part of the strength of the place, I mean, you have strength, capital, and everything else, but it's also culture and it's credit. And so I call that to people's attention.

Okay. All right. Thank you.

This now concludes our question and answer session. I would like to turn the floor back over to Shannon Drage for closing comments.

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

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.