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

It's my last session of the day, second to last for the conference, but it's been an eventful day. And we have Zions up here and Scott McLean from Zions. We were talking earlier, an old friend from 2002.

Yes, we're friends...

We've known each other since 2002 through a couple of different banks. But I'm happy to have you here to represent Zions and excited to hear what you have to say.

Well, thank you, Jon. And it's just like sitting and visiting with an old friend. So you can hit me with whatever tomatoes you want, but it's great to be here, and we appreciate the relationship with RBC.

All right, good. And I've said this in other sessions, but our attendance is up quite a bit. We have a lot more generalists, and most people know Zions, but give us an overview of Zions and the markets you're in and how you go to market.

Yes, sure. So we're about $90 billion in assets, about 9,500 colleagues, about 840,000 consumer customers, a couple of hundred thousand business customers. What's distinctive, most banks don't -- and we're in basically 11 states. We're Zions Bancorporation in Utah and Idaho, but we're California Bank & Trust in California, Nevada State Bank in Nevada, National Bank of Arizona in Arizona, Vectra in Colorado, Commerce Bank in Washington and Amegy Bank in Texas. I probably left somebody out, I don't think I did, but we fly under different brands. We have no desire to create one brand. Over time, our employees and our customers feel like these brands, they're great names, and they just connote our commitment to the community and to being local, as local as a bank can possibly be. And the other thing I would say is, this will be disparaging, so don't -- please don't tell anybody. I know it's just you and me here.

Yes.

Most banks, when they get up in front of you, they don't really have anything that's nationally distinctive about their organization. We actually do have many things. The fact that pound for pound, we're one of the largest banks for small- and medium-sized businesses in the country. About 65% to 70% of our revenue comes from banking, small- and medium-sized businesses. It's what creates fundamentally the deposit franchise that we have. This deposit mix of noninterest-bearing to total deposits has kind of been industry-leading, peer-leading for decades no matter what the rate environment is. The way these customers feel about us, Greenwich Research has been sort of the gold standard for evaluating how business customers feel about their bank since 2009. There's only 3 other banks in the country that have scored as high in their ratings for national distinction, as we have, and only one of them operates in one of our markets, and it's -- they only operate in one of our markets. So we've had this kind of national distinction in terms of how customers feel about us. And I think credit quality has proved out to be a standout for us. You can see it in our charge-off ratios and then the loss content in our loan portfolios going back 15 years, 20 years, however long you want to go. And then technology, and we'll talk a little bit more about technology, but it's hard to imagine a bank like Zions actually has national distinction in technology, but we do, and I look forward to talking about it. Those would be a few things I would tell you about our company.

Okay. Great. And like all sessions, we're open for questions, so if you have a question, put your hand up and we'll get you a microphone. A lot of different geographies that you walked through. I don't know how to best tackle it, but how are you feeling about the economy overall? I mean maybe today is a bad day to ask about that, but it feels like things are going well for you based on recent commentary. But how do you feel about the economy and that lens...

Yes. Notwithstanding what's happened with bank stocks today, I've never found that volatility to be -- necessarily have a direct correlation to what the economy is doing. And so if you think back 2 years ago, what we were all worried about was an impending national recession, we were worried about the CRE, commercial real estate exposure, particularly office. And yes, you fast-forward to now, we didn't really have that national recession, and interest rates had already gone up 2 years ago. It happened in 2022. Interest rates went up 500 basis points in a year. You'd have to go back quite a ways to find many other periods where interest rates went up that fast in such a short period of time. And so from an economy standpoint, the economy is in pretty good shape. The CRE, the commercial real estate issues particularly with office are real, but we've now lived through that for a couple of years, particularly the office component of that. And at least for us, you've not seen a blip in our net charge-offs over the last 2 years. And that's 2 years of higher interest rates, et cetera, et cetera. So you've seen an increase in classifieds but not really an increase in nonperformings and not an increase in net charge-offs over a 2-year period. So the whole fear and worry about commercial real estate was real, it's out there, but I would say it's manageable. And I think business owners, again, so if you think 65%, 70% of our $3.2 billion in revenue comes from banking small- and medium-sized businesses, I think their sentiment -- this isn't a political comment at all. It's just I think they feel like this administration is going to be more business-friendly, put a little sticky note on tariffs for just a second, but business-friendly. I think they think regulation is probably not going to continue to accelerate whatever it is that impacts them. As for banks, I think we think regulation may simplify a bit and may be a little less politically inspired. And so I think that gives them directionally confidence. I'll go back to the sticky note on tariffs. We can debate, we could just have a lively debate on what the impact of tariffs is going to be. I actually think for small- and medium-sized business owners, which is the largest part of our client base, I think whether tariffs are an episodic thing or whether they're a long-term thing, there's enough rhetoric so far that most small- and medium-sized business owners are going to remember what 2020 and 2021 felt like where they had serious supply chain interruption. And if you're a small, medium-sized business owner and you don't have inventory, you don't have a business. If you're in a big company or a services company, you can get through that. But for -- what we found during the pandemic was you -- business owners, small- and medium-sized business owners, if they don't have that product in their inventory, then they don't achieve a 20% to 40% gross profit margin and they just don't have a business. So you saw this inventory rebuild coming out of the pandemic, and that's now kind of settled down. But I think a lot of small- and medium-sized business owners are sitting there thinking right now, "Okay, I am not going through that movie again. I'm going to get ahead. I'm going to build inventory maybe ahead of what I need. Maybe I shift a little back to the U.S. in terms of my supply chain. Maybe I source or backwardly integrate to control some of that inventory." I think you're going to see small- and medium-sized business owners really focusing on inventory. And I think fundamentally, it will be a tailwind for loan growth. I don't know if it's going to be a great tailwind or a big tailwind. It's going to be a tailwind, though, I think.

Interesting. Okay. Yes. And I guess it's not new. The tariff talk isn't new. Maybe it's more acute today, but it's been around for a while.

Right. And I just think it's more present at the moment. And I think supply chain risk has been around since the pandemic. And so we actually, in our credit presentations, we've been evaluating supply chain risk on all of our customers since the pandemic. So that's not new, and we have a pretty good database on all that. Now supply chain risk related to Mexico or Canada or China or -- you pick your trading partner. We'll find a way to quantify that and we try to lead the league in disclosures and probably not this first quarter, but we'll find a way to make sure name by name, we know where that risk is and can aggregate that.

Okay. And your loan growth expectations, you've called for slightly increasing loan growth for the year. Help define that for us and then maybe the sources of that from what you see today.

Yes. I think loan growth is really hard to predict. A lot of banks will jump up here and they'll say, "Hey, it's -- the big increase is coming." And we just have strayed away from that. And I think we're kind of modeling towards, we've guided towards mid-single-digit loan growth. We've actually guided towards that since June 1, 2015, when we announced our kind of multiyear performance improvement plan a long time ago. But we guided to mid-single-digit loan growth, mid-single-digit fee income growth, et cetera. And I think that C&I, CRE growth, which is about -- CRE loans, which are about 20%, 22% of our loan portfolio, going to be pretty flat probably. New underwriting will probably not replace payoffs. So that portion of the portfolio is going to be flat. I do think C&I, which represents about 50% of our -- which C&I is loans to small- and medium-sized businesses, some corporate lending but not much, that represents about 50% of our outstandings, a huge part of our deposit base. And I think that growth is going to be nice. We think business owners are kind of leaning forward right now, notwithstanding tariffs. So I think it's fundamentally going to come from C&I.

I mean your geographies feel pretty healthy. I was in -- we were talking about it in Texas last week, it's incredible, but you feel like the economies are generally healthy.

Yes. Our 3 biggest markets, so 70% of the company, plus or minus, is Utah and Idaho, economy is very good, Texas and California. Those 3 of our markets make up about 70% of the company. And California is a -- can be an odd place for people to think about doing business because it just -- again, not a political comment, but it can be a challenging environment for businesses. But our bank there just has done great year in, year out through every cycle, and whether it's -- with just every cycle, every type of lending, we have an awesome team there. Our CEO, Eric Ellingsen, there does a fabulous job. Our commercial lenders do a fabulous job, and our real estate lenders. Just year in, year out despite the cycle, we operate well in California. So I think -- Paul Burdiss leads our bank. He was our Chief Financial Officer in Utah, Idaho. And it's just a really strong market, and he's doing a great job of kind of continuing to help grow our presence there. And Steve Stephens runs our bank in Texas. He's probably the most tenured CEO in Houston of any bank, and he has to be one of the best bankers there is in Texas in terms of commercial and middle-market banking.

Okay. Good. In terms of net interest income, you've talked about moderately increasing. So that suggests some lift in the margin. You've had a good sequential quarterly run of margin expansion several quarters. Talk a little bit about some of the margin expectations and what's driving that expansion. Do you expect that to continue?

Yes. So the -- March 10, 2023, was when Silicon Valley Bank failed. That was kind of a lightning bolt through the industry and particularly for regional banks. And what we've said for -- ever since then is every quarter we get farther away from March 10, 2023, we'll see kind of a repairing of our -- kind of our earnings model, the pricing of our deposits, and that's what's playing out. And so more specifically, we have had -- and you know this, and I'm not overstating it, you'd catch me if I did, we've had better than peer median, I would say, top quartile, over a long period of time, cost of interest-bearing deposit, cost of total deposits for a long period of time, either first quartile, second quartile, really strong. And we've had beta, deposit betas, which are the amount of deposit pricing change that occurs when rates change, that have been really better than peer median over this period of time. All that got disrupted with Silicon Valley. And it's not that the dog ate our homework papers. We just did -- just had an impact on us. We weren't a victim. It just happened, and it happened to some other regional banks, too. So we're repairing from that. And I think what you're starting to see in the second half of last year and what we're kind of guiding to in our guidance is that those 2 realities, which have been long-term strengths of our company should, over time, return to what that historical relationship relative to peers were. So our cost of interest-bearing deposits, total cost of deposits, the deposit beta we have should get back to better than peer median and be solidly in the second quartile, maybe the first quartile. The other piece of this is everybody is focused on the decline in noninterest-bearing balances in the industry. And our noninterest-bearing balances have come down, but you got to remember they're worth more. So we have fewer noninterest-bearing deposits, but they're worth more than they were 4 years ago. But more important than that, what we saw in the second half of last year was kind of a flattening of that decline. So we saw noninterest-bearing balances, just like the rest of the industry, declining in '23 and the first half of '24, but the second half of '24, we started to see it stabilizing a bit. There's always a first quarter seasonality to noninterest-bearing deposits and deposits in general in the banking industry, so hard to know what the first quarter will be. But I think we've seen kind of a balancing out now of noninterest-bearing deposits. The most important thing is even with that decline, our mix of noninterest-bearing deposits to total deposits, which is really an important driver of value in any bank, is still peer-leading. And we have a page in our investor presentation that shows that going back to the year 2000. I don't know why we stopped at 2000. We really need to go back to 1990 or pick some other date, but it's a really important ratio. And so despite DDA coming down, that fundamental relative value for us is really strong.

You're checking some questions off my list, which is good.

I'm sorry, I didn't mean to...

It's good. And I mean deposit betas are a little below 60% in the fourth quarter. How do you think that plays out in 2025?

What we said was that our deposit betas going up would look like our deposit beta is coming down, and that's fundamentally what's happening. And so what we're really focused on -- the biggest driver of earnings for us right now is the deposit lever. Can we bring our deposit costs down? Partially with lower rates in the industry but also just trimming what we pay our highest depositors, so in a thoughtful customer-centric sort of way. And so if you look at our interest-bearing deposits, the top third -- about 1/3 of them, $15 billion, are -- we're paying kind of our highest rates to. And what we said when rates started -- when the Fed started to move rates was we thought we'd see a 90% to 100% beta on that $15 billion. And we did. The good news is we did. And you might think, "Well, that ought to be easy. The Fed moves rates, and $15 billion of deposits, you just lower them, and it's easy to do." It's not. It's operationally complicated. But we prepared for it. We rehearsed for it. And when the Fed lowered rates that day, we made the change. So we're not sitting here today going, "You know what, our earnings could have been a little bit better if we'd been a little more nimble on adjusting to those rate declines." And then as the next rate decline came and the next one, we were right there again. And customers expect it, and so to the extent you don't adjust, they're like, "What are you guys doing?" Yes. So the beta on that part we said would be 90% to 100%, and it's been kind of 90% to 100%, which is a good thing.

Yes. Okay. So it feels pretty good from a net interest income outlook point of view.

It does. And we've guided towards that. And so I think, again, we're getting farther away from March 10, '23, and the net interest income outlook, I think, relatively speaking, is a positive one.

Just finishing up on revenues, the fee outlook moderately increasing, big drivers there, capital markets, any other things to call out?

Yes, we have about $635 million in customer fees. There's -- if you look at total fee income, there's some other noncustomer-related fees in there. It's not a big number usually. But true customer fee is about $635 million, plus or minus. And the capital markets has received a lot of attention because we've been talking about it for 3 or 4 years and we've been building out that array of products which really fits our largest clients, but some of it fit our smaller clients, too. And Mike MacDonald has been leading that business for us. It -- reports to Paul Burdiss. Mike and Paul have done an awesome job of just staying with it, building out the business. The most important thing they've done, which is hard in a lot of banks, is the relationship between our capital markets bankers and our corporate finance bankers and our frontline relationship managers is really strong. It's not a we and they sort of thing. They work together. They want to win together, succeed together. These are new products for us. And so I think that's kind of the most important thing that they've done. Mike and Paul have done an awesome job of that. But we've been building out the platforms for -- we've had the platform for syndications, the platform for foreign exchange, 2 really good businesses. Interest rate hedging, we've had, but we've built out real estate capital markets business that just started in '24 to see some real nice growth. We built out a small bond underwriting business that is just a nice attachment to some of the larger loans we do. And then we've started an M&A practice, which takes time. But if you think about our customer base, small- and medium-sized businesses, it's -- I think it's an exciting opportunity for us. So the capital markets thing is a very good story. And every year, you start over from zero. It's not like a lending or deposit business. And so -- but I think we've got some real nice legs there and a lot of upside, a lot of upside potential, including some additional commodity hedging, oil and gas hedging that we'll get into late in the year that will fit our energy practice. The other thing I would say is our wealth business, we've been building, great leadership there, totally works for our small- and medium-sized business owners. And there's an affluent product called Wealth Select that we're rolling out that is going to be a really nice complement for smaller customers that are looking for kind of a high-touch but easy-to-use product. And a lot of banks have this. We have not really positioned it. I think it's a good add and it's a good fee income business. And then treasury management is our largest -- the operating services we provide to our customers, big commercial customers and small businesses. That's our workhorse. That is our year-in, year-out workhorse. It is recognized nationally, has been recognized nationally. And it's chugging along at kind of mid-single-digit growth rates, and it's just -- again, it's a workhorse for us. And it's totally aligned on the small- and medium-sized business customer base. I could talk about others, but I'm encouraged about the scale we have in some of these larger fee income businesses and that they can continue to be a source of nice growth.

Okay. Good. So plenty of directions we could go here, but just on expenses, slight to moderately increasing. Maybe talk about the toggle between slight to moderate. And then the $100 billion in asset threshold is -- you're right there. How do you think about that? How expensive is it? How do you -- what kind of messaging do you want to send around going over $100 billion?

Yes. Let me take that part first, and then I'll come back to expenses because we love the expense story. But we're not worried about $100 billion. We're just not. And we don't think about it. We don't obsess about it. We're not trying to get over it. We're not trying to get under it. It's just an artificial thing, and the reason we don't is because back in 2008, 2009, we were a SIFI. We were the smallest SIFIs at $53 billion. And so we had to comply with the Federal Reserve's CCAR process and stress testing and everything else since 2009, 2010. And even though we were relieved of that designation of a SIFI, I don't know, 6, 7 years ago, 8 years ago maybe, we didn't disband any of that. So we have -- we've had all this stuff in place. And it's really important. It's part of our management process. And so when we get to $100 billion, if that stays a thing, may not, may get up to $250 billion, but if it stays a thing, there are some additional elements we'll have to add, but they're not costly. And so these banks that have said their expenses may go up $30 million to $50 million a year if they hit $100 billion, it's just not us. I mean I can't explain why that is for them. I can surmise why it is. It's just not us. And so we don't think about it. And the cost, we don't think is material. Expenses in general, we -- we're the same guys that from 2015 to '21, expenses grew about 7% gross over that period of time, not compounded growth rate, gross. So in our peer group, we led our peer group during that 6-, 7-year period with a discipline around expense growth. And generally, we're in the top 1 or 2 of our peer group. And it was not one big layoff after another. It was just this commitment to simplifying how we do business. And we don't have enough time, but you know a lot of the story we -- it's just simplifying every component of how we do business, reducing the number of touches, reducing the number of different ways we do things. There were just a lot of opportunities. And so we have that same opportunity, we have that same DNA today and that same opportunity going forward. So our expenses are up about 3% or 4%. We're going to keep trying to bend that curve down, assuming inflation doesn't kind of ramp up again. And I think to have our future core project, the replacement of our core loan and deposit systems behind us, that is -- every other bank in the country now is going, "Oh, my gosh, they did it, they did it," the only bank in the United States that's replaced its core loan and deposit systems. And they know the regulators have now said, "Oh, my gosh, they did it." And it's been done about 300 times around the world, just never in the United States. Our competitors are like, "Oh, my goodness, we got to launch off into that expensive process." And so we have that behind us, and so anyway, I feel good about the expense level.

So it sets up well. It's a good positive operating leverage setup for you is what it feels like.

It should be, and that's what our guidance is saying, but we -- that's just -- the guidance we've given would suggest that.

Okay. A couple of minutes left. Last topic maybe is credit. There's been a little bit of credit migration. It hasn't really pulled through to losses, but ease some fears, talk a little bit about that in a minute, 57...

I'll make it quick, and I -- funny that you left that for the last question because it's been on everybody's mind and it should be, it's appropriate. But we've seen an increase in classifieds over the last 18 months. The first part of that was office loans coming out of our office portfolio, pretty understandable. In the third and fourth quarter, we saw another uptick, and about 2/3 of it was related to multifamily and industrial, and then the other 1/3 was kind of broader stuff. But you didn't see an increase in nonperformings. Nonperformings are pretty much flat. And so special mention, and classified and substandard are going up, but nonperformings are pretty flat. Some of this has been a result of kind of an industry shift in grading, how we grade loans, the protocol for that. And that added some to this. All banks in the country kind of went through this in the second half of the year, and I think it's a pretty well-understood story. And we did, and it produced more of these classified loans. But nonperformings didn't go up, and our charge-offs over the last 2 years in real estate have been really low, pretty negligible. So when you think about higher interest rates after 2022, we went through '23, '24, real estate challenges, higher interest rates and our net charge-offs have been really low. So I think what we've said is we think our classifieds -- and we don't go out on a limb very often, but we think they will peak in the first or second quarter of this year, maybe third, we said it over the near term. And we feel pretty confident about that, and we don't necessarily see a spike in net charge-offs.

It feels like the rate of growth is potentially slowing.

Yes, in classifieds, certainly. So may not be this quarter, maybe next quarter, but by this time next year, we absolutely think we won't see classifieds higher than today, and they should be a little lower.

Okay. Well, that's it for time. Thank you, Scott, for being here. Very good messages...

Thanks, Jon. It's great to be with you as always.

Thank you.