Zions Bancorporation, National Association (ZION) Earnings Call Transcript & Summary

All right. Well, Up next, we are pleased to have Zions joining us once again. The company has had a strong year returning to top line growth while continuing to manage cost and credit in a disciplined manner. Here to tell us more about the road ahead is Chairman and CEO Simmons. Going to have a fireside chat. So let's kick it off. Great to have you here once again here Harris.

Thank you.

So -- since we last heard from you, there's obviously been a lot of change in the market and on the political side, where we could potentially be in a more friendly business environment -- as you think about the next year, maybe just start off with how you feel the bank is positioned to win in the environment we're about to enter?

Yes, I'm very excited about what's ahead because -- and maybe -- I guess we all feel particularly persecuted in our own. But the last dozen years or so in the wake of the financial crisis with the passage of Dodd-Frank and then a decade of 0% interest rates and inverted yield curve and what happened with SVB last year, et cetera. I mean it's one thing after another. Through it all, we have been very internally focused. Coming out with financial crisis, we were the smallest of the SIFIs, some of you may recall, when Dodd-Frank was passed, we were about $53 billion in assets. And so we were responding to all the requirements of Section 165 -- Dodd-Frank, all Prudential Standards. -- building out kind of the second line of defense. I mean we had a little bit of that, but nothing near what was going to be required. Stress testing, liquidity stress testing, the whole gamut. And -- all of that got some relief in 2018, but have continued those disciplines, and along the way, we have spent over the last decade -- replace core systems we're at a point today where I would debate anybody with respect to the fact that I think we have probably the most modern systems architecture in the industry among any of the larger banks. And we completed that back in July. And it puts us, I think, in a position where we feel like we've -- we've dealt with a lot of kind of tech debt. We are in very good shape in terms of we -- credit is good. And we have a franchise in markets that are growing faster than the rest of the country. And it's feeling like a time it will be -- I hope further enabled and -- even emboldened by change in the leadership and the regulatory agencies, when we can start to really become much more externally focused. And -- and there are opportunities for growth in these markets that we'll take advantage of with the investments we've made.

Got you. Helpful oversight. So when you think about sort of the bread and butter of your customer base. Small business activity has actually been slower for the last handful of quarters. There's obviously renewed optimism that -- maybe just talk about what you're hearing from clients and how are they thinking about their business post election?

I mean -- like I've talked to a lot of small businesses post election. My gut tells me, I just -- knowing a lot of these kinds of people that they are feeling like we are probably going to be -- see an era where risk taking is more encouraged where government is getting out of the way. And -- so I'm quite excited about what I think it's going to present. They -- they are -- I think they've been waiting for this, and this is going to be an exciting time for all of us.

Obviously, there has been great loan growth across the industry given all the uncertainty that we experienced in -- not only '23, but obviously still into 2024 with the passage of the election, waiting for rates to be lowered. I guess, is what we've seen enough to get clients off the sideline and start borrowing again? And how long do you think it's going to take for us to see a pickup? And are you seeing any indicative of improvement across any of your geographies?

Well, first of all, I don't -- I think interest rates are -- at extremes, they make a difference, but a rate cut or two, one way or other, a hike -- I think is less consequential than simply feeling like there's a little bit of certainty with respect to the operating environment that we've probably accomplished a soft landing. And I think everybody had this kind of sword over the head with respect to -- we have a recession around the corner Been really constructive to hear Chairman Powell suggesting he thinks that we can kind of declare victory maybe not. But all that -- plus the election results, seeing that we have maybe a more business-friendly environment coming from government, I think is I think, is going to be energizing for -- as I told some folks today, the phrase drill baby drill actually really resonates in the place like Houston. But I think it's symbolic of an attitude. It's not about fracking. This is about -- let's get to work and get out of people's way.

Yes, that makes sense. So when thinking about performance, we've seen a pickup in net interest income in the past couple of quarters. And you've given expectations of growth looking out 4 quarters, driven by varieties of factors. I think when we last heard from you, it was as of 9/30, markets were assuming more rate cuts. Can you maybe just talk about drivers of net interest income from here. you think less cuts and higher term rates will support your expectations? What do you see as the main drivers from here?

Well, first of all, I mean clearly, we've seen over the last couple of months, we've seen term rates kind of creeping back up a little bit after the election. I actually think that if we get to something that is a little more normal of a yield curve with some -- if we saw another cut or two with the 10-year remaining, where it is today, that's going to be a pretty healthy environment certainly for regional banks. And it's part of what I would hope and expect will take us back to a net interest margin that is -- in the close mid-3s over the next couple of years. And so there'll be some remixing of our balance sheet. We've -- I'd see us probably letting the securities runoff somewhat one before family residential lending, probably starting to run off somewhat and replaced with probably a greater degree of C&I in the mix. And I think it's going to be a pretty good C&I market. Small business is something that we really focus on. We'll be really promoting that, and I expect we'll see growth there.

One area that you did not touch upon with commercial real estate, which hasn't seen much growth in the last few years, putting office aside, which has been a problematic asset class, -- have you reached a point where you're willing to start growing this portfolio again? And if so, where would the focus for growth mean? And -- or is it being impacted by things like pay downs, which you're going to prevent you from generating growth.

Yes. I mean I think generally, refinancing is probably going to be something of a headwind in CRE and '25. But we're still doing business. And I think it's going to be a slow growth category, probably for the next couple of years. Multifamily is probably modestly overbuilt in some markets, but there is a real housing basis out there. And so I think that will take care of itself. The deals generally, not just us, but I think across the industry. Deals have been well structured. There's a lot of equity in these deals. So I think it's going to end up ultimately performing pretty well. even as we're watching it carefully because lease-ups have probably slowed down a little bit with some oversupply. But -- it will come back around, like everything -- at cycles. Even Office will come back around. It might be a while. It might be a while. But what you see in central business district might be quite a while -- but you'll see demand for smaller office product, I think.

Got you. Maybe let's shift gears and talk about Deposits. They bottomed early last year, and you've been able to generate solid growth, and there's been a lot of remixing under the hood. I know you've aggressively moved to take balances from off the balance sheet and brought them on, which I'm assuming maybe came a little bit of a higher cost. Maybe just talk about your views on deposit growth from here. Talk about the opportunities to re-remix the balance sheet, if that's the strategy at all?

Yes. I mean, clearly, SVB's failure and the related challenges at the spring of last year post problems for regionals, particularly some reason those in the Western United States, maybe a little more acutely. AOCI clearly a factor in all of that. We're watching that kind of a [indiscernible] back and getting to a much better place. But the we were coming into the spring of '23. We've had, I think, probably among the very best deposit betas in the industry, and what had been a strength immediately turned into a liability, because we were certainly playing catch-up to try to address, I mean it's like kicking a sleeping dog and try to [indiscernible]. And so we're still in that process. I got a little ways to go, but we've traditionally had -- I'd argue one of the best deposit franchise in the industry in terms of the mix -- core deposits, demand deposits percent of total. That obviously comes down as rates have gone up, but it's still -- it's around 33% today, still really strong relative to the universe. And I expect that it will be just a continued kind of healing process of getting interest-bearing deposit rates back to somewhat better than peer in terms of funding costs. And we continue to -- we have a real focus on just continuing to build a very granular deposit base in the company. That's where I think you build franchise value on a regional bank.

Absolutely. You referenced noninterest-bearing being at 33%. Obviously, it's been they've been under a lot of pressure for the bank and the industry. Do you think we've reached the point yet where we're seeing signs of stabilization and you guys saw some good results at the end of last quarter. Are you expecting further migration from here are clients still putting money to work? What's sort of driving the pluses and minuses in your noninterest bearing?

Yes. I mean the third quarter was actually -- it has clearly really stabilized. I don't know that -- is that the end state, I don't know. And depending on rate path from here, I mean, rates continue to come down a notch or 2. That's going to help. I'll say if it remains stuck kind of where they are short-term rates start to rise a little bit, maybe it hurts a little bit. But I think that probably -- certainly, the pace of decline has really shallowed out. And this is really interesting to me. I mean we're in a much better place than we were back to -- I mean it goes back in. I go back to like 2006 before the financial crisis, in kind of a similar rate environment, we're down -- some 25%, 26% deposit. So it's actually strengthened over time. And -- and I think we're probably getting pretty close to where the trough is.

That's encouraging. So maybe one last question on Deposits before we move on to some other initiatives. So you've had real success bringing down deposit costs, you gave some stats and earnings and I think implied about 50% beta. So given the way the book has been split. Can you maybe just talk about how you've been able to execute on this? Have a slower rate cuts and improving loan growth impact this over time. And as we talked about before, is there opportunities to remix back towards a more traditional mix that can help drive deposit costs lower?

Yes. Well, first of all, kind of how we price locally in each market, but we share results very deliberately frequently internally. So everybody -- I mean there's a little bit of internal competition around -- it's a combination of growth and pricing, so that everybody sees each other's results. And -- they -- and our folks appreciate the importance of this in terms of creating margin. I think that if we're seeing growth, we're throwing off about $0.75 billion out of securities portfolio every quarter. And we -- I mean, that actually can absorb quite a lot of loan growth. That 2% a quarter. Yes. So I don't think we're feeling like there's a lot of pressure on deposit pricing. We still have some room.

So fee income has been a real bright spot for the bank -- I can think about the progression over the many years I've followed the company when you guys have consolidated the charters and really made fee income a bigger focus. And recently, capital markets has been really strong. Wealth and obviously, treasury management. Maybe just talk a little bit about these initiatives, where you think to them are in terms of their build out? And as you look ahead, where do you think you see the best opportunity to generate growth in 2025?

I'll start with Capital Markets. We have a really phenomenal team. And we've hired some great people from some of the largest banks that and -- they're really some -- really top people from Wells, from -- and from others. But that's really starting to show. They're working well with our bankers, with our commercial bankers. And the focus is really with companies that probably kind of $50 million to $500 million in revenues. And sometimes larger, sometimes a little smaller, but that's kind of a sweet spot. And we're finding there's -- it's a really good place to play, and they're doing it, it's syndicated lending, it's swaps, it's foreign exchange. We started doing advisory work, M&A advisory work. And I think that's going to grow well over the next couple of years. Wealth management has also been a nice growth story. We had some disruption kind of this year that's kind of flattened it as we've revised some pricing and internal compensation arrangements. But it's made it a more profitable business, and we expect that to grow well. There's going to be -- we will find ourselves investing some marketing dollars and doing some kind of down market business through an arrangement we have with LPL that I think can be really good for that business. So those would be the two horses that I'd bet on.

Interesting. So -- when you think about investing in the company, I think you've got expenses increasing slightly. You made a comment before you've been internally focused for a while. Now obviously trying to be more externally. Maybe just talk about the investments across the franchise. Maybe break it down between tech revenue producing and where are you finding opportunities to -- if any, to control costs?

Yes. So in terms of where we're making investments, I mean, we finished this decade-long really complicated project to replace all of our core consumer loans, commercial loans, commercial real estate loan and deposit systems. This last July, and having that in the rearview mirror is really -- feels great. We had a -- we hosted a conference in Salt Lake City a few days ago and had banks from around the country, we're coming to -- who are starting to think about they're starting to think about this journey -- at a time when we've completed it, and I couldn't be more pleased. The investments we're making going forward tend to be more customer focused, is how do we take this platform and make it and find ways to monetize it, find ways to deliver information about customers to our employees. Creating a 360-degree view of customers. We've made investments in customer relationship management. We have -- I think we may be the only bank in the country that has a single instance of sales force running, where all of our bankers are on the same platform. So we've tried to create a lot of consistency. One of the things that's come out of all of this is in order to do these big systems conversion project. We spent a lot of time and effort working on data governance, data models. We have a single data model for all consumer commercial, all of our business. And that, I think, is going to turn out to be very helpful in age when AI is more prevalent. And so -- and I expect to blind use cases that might be easier for us to implement because of the investments we've made in this. Those would be some examples.

Got you. So the guidance that you laid out in earnings implies positive operating leverage here out in the third quarter. How do you think about it for the full year '25? And over the years, you've been in cost saving mode when revenues are more challenging and then investing mode when things are improving. Where do you think we are now?

Well, I think -- yes, I think we'll see operating leverage through '25. I mean, yes, we talked about kind of the order a year from now, but to get there is not a cliff. And I think we're probably in an environment -- I mean, we're watching costs really closely. I mean it's -- and there's more work we are doing every quarter on that. At the same time, we're going to spend more money marketing becoming more externally focused. We really believe we have a reasonably rare, if not unique, model operating in some really great markets in this country. And positioning ourselves as a really quality alternative to the national brands is kind of where we're going to be spending marketing dollars and particularly in further building a focus on smaller businesses, midsized businesses wealth management, et cetera.

Sounds good. So Harris, you talked before about having the bank hoping to have a margin back towards the 350 is that some point in time. I know you historically used to talk about, I believe it was a mid-50s efficiency. Is there a path back to those levels? And if so, over what time frame?

Yes. I mean there absolutely is. Again, if I were to dial back to -- go back and look at the fourth quarter of '22, I think we're well on our way there. And we had a setback. Our issue -- you can triangulate on expenses in various ways. We've done a lot of benchmarking with peers, I think we understand where we're doing well and where we're not and we're focused on where we're not there's more opportunity for some outsourcing of some activity that, where their dollars to be saved. The -- losing my train of thought, the -- In terms of -- yes, cost saves are on everybody's minds as part of our incentives. And so I expect that even with some additional working spend that our expense growth is going to be among the best kind of around the top quartile in the industry. That would be my bet.

So one thing that could be a little bit of a headwind to expenses just been crossing $100 billion in assets. You guys have -- as you mentioned earlier, you've been -- you were there, right? And then we had [ 2155 ] that sort of pulled it back. But given all the changes that are happening does this at all change in down in D.C. and regulatory-wise, does this at all change the way becoming a $100 billion bank impact? You fully recognizing you don't have a Holdco and you're an OCC oriented bank?

Yes. Yes. I mean I think it's a fundamentally good news. I think a primary concern of mine had been the long-term debt proposal. It was going to be expensive. I think it's almost given that that's going to be really dramatically revised. Whether it kicks in or not question. If it does, it's going to be at a much lower level than 6%. And I think you're going to have leadership in the agencies that are going to be more pro-growth than what we've seen in the last 2 years. And crossing $100 billion isn't something that we're all losing much sleep over. I think we've built a fundamentally built the mousetrap. And when it happens, it happens. I mean I'm not anxious to get there. If there's an additional cost of long-term debt requirement. But it's going to happen. What happens, we'll be...

So I know that your favorite part of every conference is giving a near-term update. And I know that's a business practice of yours not to do. But I guess my question is, obviously, there's a lot of enthusiasm coming given the events of the last few weeks, I guess. The question I have is, are you at least hearing at the margin, any changes to customer behavior? Any sort of desire to borrow more? Are you hearing anything as you're out in the field talking to the loan officers.

It's too early. Fundamentally. I think it's still sinking in. But I absolutely believe that -- I mean I think the wild card is going to be tariffs, potentially immigration policy, things like that. I think at present Trump's -- President Elect Trump's sort of darker instinct with respect to the popular strain of economics that the subscribers to don't overcome him, there's a lot of good that will happen. And if you can use it to negotiate -- it's fascinating to see how much of this actually plays out. But -- so I think that's a wildcard. So fundamentally, repopulating agencies with people and the whole DOGE thing. Again, I think it's symbolic of we're going to try and get government do what government should be doing, get it out of people's way and let people become productive and -- that's the kind of thing I'm hearing from people I talk to.

Got you. So I want to spend a couple of minutes on both credit and capital. Maybe we'll start with credit. Obviously, office and multifamily have been the focus office because of the supply and demand in balance. Multifamily there's obviously been some softness because of overbuilding like you talked about. But yes, loss content for the bank has still been very, very low for the year. So question, where -- where do you think we are in terms of either migration or loss content? And what do you think that ultimately looks like for your CRE portfolio?

In CRE, I think -- I mean, we've seen increased classifications, some migration to the substandard but it's really been more a sea change in terms of our thinking about the definition than it has been a fundamental performance portfolio. And I expect that, that's going to continue to perform extremely well. It's far out to '25 as far as I can see. C&I tends to be you kind of have episodic some things that sometimes go bump, but it's been in very good shape as well. And -- so I mean our -- my stated objective is I want to see it in the top quartile as measured by net charge-offs. The thing -- classifications are very much a PD or probably default kind of driven approach to things. What's the risk that somebody could -- you're going to have to sit down and negotiate with them? The -- what you really want to look at is nonperforming assets. I think you'll see those continue to perform quite well, and it should be I think -- a pretty benign '25.

Yes. And when I look, you're one of the most well reserved banks in terms of your charge-offs relative to the allowance. I guess, what do you think it's going to take for us to actually see those reserves come down? Or is that you're going to continue -- you're given all the uncertainty and continue to hold on to qualitative reserves?

Well, I mean, the truth of the matter is, I mean, we go through quite a process we've been putting generally, qualitatively saying, look, we think there's a lot of risk in the environment out there. I continue to think in a lot of respects that continues to be true. I think there's inflationary risk that could have rates higher. And so we come at it -- everybody has their secret sauce in terms of how they come out of reserve. But a lot of quantitative history, modeling, stress testing and asking what do we think for the next kind of 3 years could hold. And it's allowed us to bring it down a little bit. But yes, relative to the charge-offs can change quickly. And so you have to be careful about anything that has denominated is small. And so you got to be careful about that ratio in isolated -- I think.

Maybe shifting to talk a little bit about capital I know the industry has been building for the last few years in anticipation of some new rules, TBD, whether -- what ends up coming of that. But maybe just how you think about capital priorities from here? And does the environment we are going to move into change what the priorities are at all?

Well, I think the given in our minds is that AOCI will come back into capital one way or the other. I think there's not much debate about that. And that's probably warranted and a good thing. And expecting one way or another, that's going to happen. As I said, we have -- our AOCI is accreting back at a pretty good pace -- tangible book share -- book value per share has been growing in the high 20s, 20% range the last year. I expect that will continue. And -- so at the end of the day, what we want to do is be ahead of the curve somewhat. I -- what I don't want to find us ever doing -- is being kind -- at the back of the bus when the economy sinks and that's just not a good place to be. And so maintaining strong capital is something -- one of the things that we do, we tend not to use like return on equity as internally as incentives, things like that. We try to depoliticize how we use capital. We get people focused on returns on risk-weighted assets, for example. So that we're trying to get people focused on value creation. But hey, if we hold more capital -- that's not going to be on our people. It's going to be on us. So anyway, I don't think we're going to be very aggressive doing anything with capital distributions this next year. But I would hope that as we come into '26 a lot of this will be behind us and should be in place unless we have really good loan growth -- better loan growth than I think.

So I think I've asked you this question in some way or form of the last 10 years. You recently announced a small branch deal in California, I think, $730 million of deposits, $420 million loans in California. I guess, given the potential changes in bank regulations more favorable environment, plus the completion of future core, does this at all change the way you think about acquisitions? You said you talked about having a lot of banks and you could have invited them to the platform as opposed to building it. But how are you thinking about M&A that's a strategic fit for Zions going forward, given all the stuff you've done on the tech side to position the bank?

Yes. I mean I think what we've done with technology puts us in a really position to be able to do it. It's not a reason to do it. The reason to do it is fit. It's strengthening the deposit franchise in market. And so deals with the right economics that would do that is there are things that we'd look at typically, I don't see us doing anything really large.

How would you define that?

Yes, anything about -- $90 billion. Anything more than 1/3 of our size would probably be beyond what we'd be interested in.

Got you. All right. Maybe one last question for me. When you talked about capital wanting to be in a good position. Obviously, the stated capital was good. The TCE fell a lot. I know that's not a regulatory metric. But as you look back on the events of the last few years, any way you think you're going to run -- you're going to allocate your capital or manage the capital differently given the events of the last few years?

Yes. I mean one of the things I think everybody will manage liquidity a little differently with an eye toward how do they hedge things we had more available for sale in our securities portfolio than I wish we'd had. We've moved a slug of that into held to maturity. We still have a lot of flexibility. It's still available for secured borrowing. So you can have a lot of liquidity even out of an HTM portfolio. So I think that you'll see us reducing the amount of 1 to 4 family we have on the balance sheet. It has too much optionality on it in. You get into a rising rate environment. And the depositor behavior changes and all of a sudden you've got the problem.

Great. Well, over time, but please join me in thanking Harris.