Ryan Richards
Chief Financial Officer at Zions Bancorporation, National Association
Thank you, Harris, and good evening, everyone. I will begin with a discussion of the components of pre-provision net revenue. Nearly 80% of our revenue is derived from the balance sheet through net interest income. Slide 7 includes our overview of net interest income and the net interest margin. The chart shows the recent 5 quarters trend for both. Net interest income is reflected on the bars and the net interest margin is shown in the white boxes.
Both measures reflect improvement for two consecutive quarters as the repricing of earning assets outpaced the increase in funding costs. Additional detail on changes in the net interest margin is included on Slide 8. On the left-hand side of this page, we provide a linked quarter waterfall chart outlining the changes in key components of the net interest margin, incorporating changes in both rate and volume. 12 basis point combined beneficial impact associated with money market, investment securities, loans and borrowings was partially offset by the adverse impact of deposits.
Noninterest-bearing deposit volume declines resulted in a slight reduction in the contribution of these funds to balance sheet profitability. Right-hand chart on the slide shows the net interest margin comparison to the prior year quarter. Higher rates were reflected in money market and loan yields, which contributed an additional 50 basis points to the net interest margin. The value of noninterest-bearing deposits and lower borrowing levels contributed another 69 basis points to the margin.
These positive contributions were largely offset by increased deposit costs, which adversely impacted the net interest margin by 113 basis points. Overall, the net interest margin increased 6 basis points versus the prior quarter. Moving to noninterest income and revenue on Slide 9. Customer related noninterest income was $154 million compared to $151 million in the prior quarter with higher commercial account, card and loan-related fees, somewhat offset by lower capital market fees. Customer fee income growth has been slower than expected through the first half of 2024, given reduced loan activity and flat wealth management fees.
Looking ahead, we are optimistic that our new and expanding capital market capabilities will allow us to grow this area meaningfully over the next four quarters. Our outlook for customer-related noninterest income for the second quarter of 2025 is moderately increasing relative to the second quarter of 2024. The chart on the right side of this page includes adjusted revenue, which is the revenue included in the adjusted pre-provision net revenue and is used in our efficiency ratio calculation.
Adjusted revenue decreased slightly from a year ago due to lower noninterest income and increased 4% versus the first quarter due to the factors previously noted. Adjusted noninterest expense shown in the lighter blue bars on Slide 10 decreased $5 million to $506 million, attributable largely to seasonal increases in compensation for the prior quarter, offset by higher technology and marketing and business development related expense in the current quarter. Reported expenses at $509 million, decreased $17 million.
As a reminder, the fourth quarter of 2023 included $90 million of FDIC special assessment costs, while another $13 million and $1 million were recognized in the first and second quarters of this year, respectively. Our outlook for adjusted noninterest expense for the second quarter of 2025 is slightly increasing relative to the second quarter of 2024. Risks and opportunities associated with this outlook include our ability to manage technology costs, vendor contractual increases and employment costs.
Slide 11 highlights trends in our average loans and deposits over the past year. On the left side, you can see that average loans increased slightly in the current quarter. Customer sentiment and pipeline suggests we can expect growth to improve as more clarity materializes with respect to the political and economic environments, though higher interest rates are impacting near-term growth. Our expectation that loans is that loans will be stable to slightly increasing in the second quarter of 2025 relative to the second quarter of 2024.
Now turning to deposits on the right side of this page. Average deposit balances for the second quarter increased slightly, notwithstanding a slight decline in the average noninterest-bearing balances. Cost of total deposits shown in the white boxes increased 5 basis points to 211 basis points. As measured against the fourth quarter of 2021, the repricing beta on total deposits, including broker deposits and based on average deposit rates in the second quarter, was 40% compared to 39% in the first quarter and the repricing beta for interest-bearing deposits remained at 60%, unchanged from the previous quarter.
Slide 12 includes a more comprehensive view of funding sources and total funding cost trends. The left side chart includes ending balance trends. Broker deposits were stable compared to the first quarter at $4 billion and were down $4.2 billion compared to the year ago quarter, as customer deposits have grown by $3 million versus the prior year period. Compared to the preceding quarter, customer deposits were down slightly, reflecting seasonal trends in the second quarter.
On the right side, average balances for our key funding categories are shown along with the total cost of funding. As seen on this chart, the rate of increase in total funding costs at 2 basis points in the current quarter has continued to decline compared to the prior four quarters. Moving to Slide 13. Our investment portfolio exists primarily to be a ready store house of funds to absorb customer-driven balance sheet changes.
On this slide, we show our securities and money market investment portfolios over the last 5 years. Investment portfolio continues to behave as expected. Maturities, principal amortization and prepayment related cash flows were $840 million in the second quarter. With this somewhat predictable portfolio of cash flow, we anticipate the money market and investment security balances combined will continue to decline over the near term.
Serving as a source of funds for the balance sheet and contributed to net interest margin as those funds are reinvested into higher-yielding loans. The duration of our investment portfolio, which is a measure of price sensitivity to changes in interest rates, is estimated at 3.7%. This duration helps to manage the inherent interest rate mismatch between loans and deposits, but the larger deposit portfolio assumed to have a longer duration in our loan portfolio, fixed rate term investments are required to balance asset and liability durations.
Slide 14 provides information about our interest rate sensitivity. While we provided standard parallel interest rate shock sensitivity measures on Slide 27 in the appendix of this presentation, we present again our more dynamic view of latent and emergent interest rate sensitivity given the current environment. In particular, latent interest rate sensitivity, which reflects model changes in net interest income based upon past rate movements that have not yet to be fully realized in revenue, is estimated to be 8.3%.
When combined with the emergent sensitivity, which includes the incremental impact of future rate changes included in the implied forward curve at June 30, modeled net interest income in the second quarter of 2025 is 6.3% higher when compared to the second quarter of 2024. This is a meaningful increase over our model projections from the previous quarter. 100 basis point parallel shock of this implied forward outcome suggests a sensitive range between 4.6% and 7.7%.
Importantly, these sensitivities assume no change in the size or composition of our earning assets, but do consider how our changes in our deposit mix could influence the net interest income path. The observed slowing of the migration of noninterest-bearing deposits to higher cost deposits is reflected in a change in our assumed through-the-cycle beta from 49% shown in our first quarter sensitivity to 44% shown here.
This beta reflects $3.5 billion of assumed migration of noninterest-bearing deposits into higher cost deposits. Utilizing this modeled outcome and applying management expectations for balance sheet changes and deposit pricing, we believe that net interest income in the second quarter of 2025 will be slightly to moderately increasing relative to the second quarter of 2024. Risks and opportunities associated with this outlook include realized loan growth, competition for deposits and deposit behavior and the path of interest rates across the yield curve.
Moving to Slide 15. Credit quality remains strong, and the portfolio is performing in line with expectations. Annualized net charge-offs were 10 basis points of loans in the quarter. The allowance for credit losses is 1.24% of total loans and leases, a 3 basis point decrease over the prior quarter. Notwithstanding continuous raw net charge-off performance, we observed continued deterioration of some of our credit metrics. Nonperforming assets increased $14 million or 4 basis points as a percentage of loans and other real estate owned, while classified and criticized loan balances increased by $298 million and $284 million, respectively.
We continue to expect that ultimate realized loan losses will be very manageable over the remainder of the year. As we know it as a topic of interest, we have included information regarding the commercial real estate portfolio with additional detail included in the appendix of this presentation. Slide 16 provides an overview of the CRE portfolio. CRE represents 23% of our total loan portfolio, with office representing 14% of total CRE or 3% of total loan balances.
Credit quality measures for the total CRE portfolio remained relatively strong, though criticized and classified levels increased during the quarter. Overall, we continue to expect the CRE portfolio to perform reasonably well with limited losses based on the current economic outlook. Our loss-absorbing capital is shown on Slide 17. The CET1 ratio continued to grow in the second quarter to 10.6%. This, when combined with the allowance for credit losses, compares well to our risk profile as reflected in the low level of ongoing loan net charge-offs.
We expect our common equity from both a regulatory and GAAP perspective to increase organically through earnings and that AOCI improvement will continue through natural accretion of the securities portfolio regardless of rate path outcomes. Slide 18 summarizes the financial outlook provided over the course of this presentation. As a reminder, this outlook represents our best current estimate for the financial performance for the second quarter of 2025 as compared to the second quarter of 2024.
