Zions (ZION) Q2 2025: Net Interest Margin Expands to 3.17% as Asset Remix Drives Profitability

July 21, 2025 | By EarningsIQ Research

Six straight quarters of net interest margin expansion highlight Zions’ disciplined asset remix and expense control, with management signaling a more constructive growth orientation amid easing tariff risk. The bank’s rollout of its Gold Account and deepening focus on small business and commercial lending are beginning to reshape its deposit and loan mix, while AI-driven efficiency and capital markets momentum underpin a shift toward scalable, revenue-generating growth. Management’s tone was notably more optimistic, as the operating environment and regulatory outlook improve, but deposit competition and asset sensitivity remain key forward watchpoints.

Summary

• Margin Expansion Momentum: Net interest margin climbed again as lower funding costs and loan remixing took hold.
• Growth Orientation Accelerates: Investments in marketing, talent, and new products signal a strategic pivot toward scalable revenue growth.
• AI and Core Modernization: Efficiency gains from automation and a new core platform position Zions for real-time settlement and digital asset opportunities.

Performance Analysis

Zions delivered a 28% YoY increase in net earnings, driven by a sixth consecutive quarter of net interest margin (NIM) expansion to 3.17%. This margin improvement was fueled by a favorable shift in earning asset mix—more loans, fewer low-yield securities—and lower funding costs, as the cost of total deposits declined eight basis points sequentially. Non-interest income, particularly from capital markets, continued to rise, with customer-related fee income up 7% YoY, reflecting both greater client activity and new business wins.

Expense control remained disciplined, with adjusted non-interest expense up just 3% YoY, primarily from higher incentive accruals tied to profitability. Zions’ efficiency ratio improved to 62.2%, and pre-provision net revenue rose 14% YoY. Loan growth was healthy at 5.6% annualized, led by commercial and industrial (C&I) utilization and originations, while average deposits declined modestly due to seasonal outflows and a deliberate reduction in brokered balances. Credit quality remained solid, with net charge-offs at just seven basis points and commercial real estate (CRE) exposures showing continued improvement.

• Asset Remix Drives NIM: Favorable earning asset mix and fixed loan repricing supported margin gains, with more cash flows from securities reinvested into higher-yielding loans.
• Fee Income Broadens: Capital markets and customer fees contributed outsized growth, validating recent investments in these businesses.
• Expense Growth Targeted: Higher spending is focused on revenue producers and marketing, with AI-enabled process improvements offsetting back-office and compliance costs.

With positive operating leverage and tangible book value up 20% YoY, Zions is demonstrating the ability to grow earnings organically while investing for future growth.

Executive Commentary

Strategic Positioning

1. Asset and Funding Remix

Zions is deliberately shifting its balance sheet toward higher-yielding loans and away from low-yield securities and brokered deposits. The bank’s ability to reduce brokered balances and replace them with non-interest-bearing deposits—helped by new consumer products like the Gold Account, a mass-affluent checking product—has been instrumental in lowering funding costs and supporting margin expansion. Management expects further upside as more securities mature and are reinvested into loans.

2. Small Business and Commercial Lending Focus

The strategic emphasis on small business banking and commercial lending is yielding tangible results, with SBA 7A loan originations up 91% and C&I utilization driving most of the loan growth. Zions’ branch call programs and new producer hires are intensifying client acquisition, especially in key affiliate markets like California and Texas, where commercial lending is outpacing other segments.

3. AI-Driven Efficiency and Core Modernization

AI and automation are now embedded in Zions’ operating model, from document processing to fraud detection and credit analysis. The migration to a unified, cloud-enabled core banking system (TCS) has eliminated legacy tech debt and enabled real-time settlement capabilities, positioning Zions for digital asset custody, tokenized deposits, and programmable payments as these markets evolve.

4. Capital Markets Expansion

The capital markets business is on track to double revenue over a four- to five-year period, with growth in loan syndications, FX, and the upcoming launch of an oil and gas derivatives business. Early success in M&A advisory, particularly for mid-market clients, and the build-out of real estate capital markets are broadening fee income streams and reducing reliance on spread income.

5. Regulatory and Capital Flexibility

With a common equity tier one (CET1) ratio of 11% and tangible book value up 20%, Zions is well-positioned for future growth, though management is cautious about resuming buybacks until AOCI (accumulated other comprehensive income) further improves. The potential easing of regulatory burdens, especially around long-term debt requirements and asset thresholds, could support more aggressive capital allocation or M&A in the medium term.

Key Considerations

This quarter marks a decisive pivot toward growth, with management prioritizing revenue-producing investments while maintaining a focus on efficiency and risk discipline. The following points are critical for understanding Zions’ evolving trajectory:

Key Considerations:

• Deposit Mix Evolution: Gold Account rollout and small business initiatives are reshaping deposit composition, potentially increasing low-cost, sticky funding.
• Loan Growth Drivers: C&I and small business lending are leading loan growth, supported by intensified producer hiring and targeted marketing.
• Technology Leverage: AI-enabled process improvements and a modern core system create structural cost advantages and future-proof the bank’s digital capabilities.
• Capital Markets Diversification: Fee income streams are diversifying, with capital markets, M&A advisory, and derivatives poised for further growth.
• Asset Sensitivity and Rate Risk: The bank remains asset sensitive, with NIM momentum benefiting from asset repricing but exposed to rate cuts and deposit migration.

Risks

Persistent deposit competition, especially for non-interest-bearing balances, could constrain funding cost improvements if market rates remain sticky or competitors become more aggressive. Asset sensitivity remains a double-edged sword: while current repricing supports margins, rapid Fed rate cuts or unexpected deposit outflows could compress NIM. Regulatory uncertainty, particularly around capital standards and digital asset frameworks, adds complexity to strategic planning. Finally, the pace of loan growth is contingent on macroeconomic stability and client sentiment, both of which could shift quickly.

Forward Outlook

For Q2 2026, Zions guided to:

• Moderately higher net interest income, supported by continued asset remix and loan growth
• Broad-based, modestly rising customer-related fee income, with capital markets as a key driver
• Slightly increasing period-end loan balances, led by commercial lending
• Moderately higher adjusted non-interest expense, reflecting growth investments and marketing

For full-year 2026, management maintained a positive operating leverage outlook, expecting revenue growth to outpace expense increases. Key factors influencing guidance include:

• Fed rate path, with two cuts assumed in H2 2025 and one in April 2026
• Deposit cost and mix evolution, especially from new product rollouts
• Continued reinvestment of maturing securities into higher-yielding loans

Takeaways

Zions is executing a strategic shift toward scalable, high-quality growth, balancing targeted investments in talent and technology with disciplined risk and expense management.

• Margin and Fee Expansion: The bank’s ability to expand NIM and fee income, even in a competitive funding environment, underscores effective asset remix and capital markets execution.
• Growth Investments with Discipline: Increased spending is focused on revenue-generating activities, with AI and core modernization providing a structural efficiency tailwind.
• Watch Deposit Flows and Rate Sensitivity: Future performance will hinge on Zions’ ability to grow core deposits, manage asset sensitivity, and translate new product momentum into sustainable funding and loan growth.

Conclusion

Zions’ Q2 2025 results highlight a bank in transition—leveraging asset remix, technology, and targeted growth initiatives to drive margin and earnings expansion. Management’s more optimistic tone, coupled with disciplined capital and risk management, positions Zions to capitalize on a more favorable macro and regulatory backdrop, though funding costs and rate risk remain key execution challenges.

Industry Read-Through

Zions’ sustained NIM expansion and shift toward diversified fee income provide a template for regional banks navigating a high-rate, competitive deposit environment. The successful rollout of mass-affluent deposit products and AI-driven efficiency initiatives signal a broader industry pivot toward technology-enabled growth and funding stability. Capital markets investments and a focus on scalable, high-value client segments are increasingly critical for regional banks seeking to offset spread compression and regulatory headwinds. The cautious approach to buybacks and capital deployment underscores persistent sector-wide uncertainty around regulatory reform and balance sheet resilience.

ZION Financials Regional Banks Deposit Growth Net Interest Margin Capital Markets AI Asset Sensitivity