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

Moving right along. Very pleased to have Zions Bancorp with us. From the company, Harris Simmons, CEO, probably one of the longest, the most tenured -- one of the most tenured CEOs at the conference this year, not the most tenured. So Harris, thanks for coming back.

Thank you. Good to be here.

The first ARS question on the screen that we've been asking all the companies. But just how is the best place to start? Obviously, your franchise is kind of focused on the western part of the country, more of maybe a small business kind of customer focus. Maybe talk to just kind of what you're hearing from your borrowers against this backdrop of elevated inflation, higher-than-normal rates, tariff uncertainty. Just kind of in that perspective.

Yes. I think we were -- I was expecting a beginning of April when all these tariffs were announced, this was going to be running into a brick wall. It hasn't played out that way. I'm still -- I'm cautious about what we'll see as the year drags on not only tariffs, but I think that the entire environment, what we're seeing the jobs numbers, et cetera, is -- it's becoming probably more challenging for a lot of these businesses. That said, so far, and all things continue to chug along in a reasonably decent shape. And so I think everybody is -- folks I talked to, I was visiting a prospective customer, I hope to be a new customer in Northern California a couple of weeks ago. And we're talking about this, and they -- they said in their case they're not yet seeing a lot of input pressure kind of price pressure, but they're preparing for it. They expect as it comes through the supply chain, it's going to happen. So I think there's still -- some of this hasn't shown up yet. And companies are -- they all have their different situations. But I think a general rule is everybody is still kind of waiting for a shoe to drop a little bit.

And I guess, how has that impacted maybe their decision-making, wanting to borrow, expanding? And just kind of that impacting the psyche, you think? And I guess when -- what do you need to -- think they need to see to maybe engage more?

Well, I think the -- first of all, I think the tax bill, I have trouble calling it the big beautiful bill.

The BBA.

That's -- it has -- there's certainly some things in that, that are probably helpful in terms of some of the tax treatment of investment. But the -- I think the smaller businesses, in particular, by their nature, they're just they're conservative. They don't have a lot of deep sources of capital and liquidity and everything else. And so they hold off until they need to borrow. But we're not seeing a lot of stress and strain at this point in that portfolio. So I don't know, we'll see what happens. It's hard. I think projecting -- I've always said that projecting the loan demand is one of the greater fool's errand in the industry. They're just it's -- you tend to extrapolate from what your recent experience and then things change. And -- but like I said, I'm a little cautious about how their behavior borrowers is likely to change as some of this really starts to come through the system.

Right, right. And I guess as you think about your markets, whether it's Texas, Utah, Idaho, California, Pacific Northwest, any kind of differences that you kind of highlight?

No, the entire region continues to be in pretty good. I mean, Texas is kind of a gift that keeps on giving in terms of growth in that economy. The Utah economy remains very healthy. In California, California is a challenging place to do business. But given our size, relative to the size of that market, I mean, we still find a lot of opportunity there and I'm not seeing real pockets of slowdown. Las Vegas might be a little bit of a counter to that. They mean clearly, foreign tourist visitor numbers are down in Las Vegas, and that's -- I mean, you're seeing actually advertising by the Las Vegas convention tourism bureau that -- I mean they've been out of the market for a while. They're having to go back out and they're spending money trying to bring visitors to Las Vegas because they're not seeing the foreign travel. So I mean, there are pockets of things like that, but overall, I think things are in pretty good shape.

Got it. And then I think there's guys like we're going to cut next week, so we'll see how banks respond. We're just trying to talk to what you're seeing in kind of expectations around that.

Well, I think clearly with the jobs numbers, be quite a surprise if the Fed doesn't cut. And I think it's been quite -- it's been so expected and kind of built into the curve that I don't think it's going to have any significant impact. We'll all be changing deposit pricing as fast as we can, trying to respond to that. But otherwise, I think it's -- if we see more than 25 basis points, we'll read into that the economy, the Fed is more concerned about the economy than anybody has been recently.

Got it. And then I think you're one of the few banks that have had 6 consecutive quarters of just net interest margin expansion. Some of that's been kind of bringing down deposit costs. Can you maybe talk to just the opportunity maybe to continue to drive that higher going out or just how we should think about that, particularly as the Fed begins to maybe cut multiple ones this year, maybe multiple times next year?

Yes. So I mean we're somewhat asset sensitive. And nominally, you say, well, that's going to hurt. But there's enough we actually break out some of our investors love it. Some hate it because it maybe makes it some more confusing, but we actually try to disaggregate kind of the impact of changing rates and to kind of the lag effect of what we call the latent stuff that's built in, but hasn't just -- hasn't changed yet. And then what's going to change kind of quickly to probably emergent. And even with the rate cut, at least cuts that have been built into the curve, we see -- if we see a cut which we will, we still expect that we'll see margin expansion. We think we've built the balance sheet pretty well for that and that we felt a ways to go to get back to what we think sort of our natural net interest margin ought to be, which I think is probably a closer to 3.5% thereabouts given the nature of our balance sheet. It took -- there was a lot of damage done in the wake of the Silicon Valley failure. And it's been just kind of climbing out of the hole. And it takes some time, but we think we're on the path to get there.

On that then, why don't we put up the next ARS question and maybe before we kind of get to that Harris, I guess in your ...

No, I guess I answered your question.

Well, let's see where they come out. And this is for, I guess, 2026, when you kind of think about the 3.5% number, let's just assume 2 cuts this year, 2 to maybe 3 cuts next year. I guess when do you think you'd kind of get back to that 3.5% number?

Well, do you want to wait until they voted?

No, go ahead.

I think we're probably back there by about the end of next year going into '27 something like that.

Interesting. I guess you gave us that 12-month forward slide. I think you kind of improved your loan growth NII outlook last quarter, slightly increasing for period-end loans, moderate and increasing for NII. As you kind of think about that slide when you put it back up in October, any changes or too early to say?

No. I think -- again, I think it's -- we're in an environment where given -- given what's happened, again, with jobs numbers, et cetera, and I think it's still kind of a cautious environment. I think we'll see some growth. We've had some -- we've been hiring bankers. We had some really good hires. We're really promoting small business lending. We're promoting SBA in and making progress there. But it's not an environment in which we see kind of ramp and kind of enthusiasm to -- for borrowing out there.

Got it. Maybe shifting gears to the fee income side, you guys have been certainly working hard to grow that. Just maybe talk about some of the bigger drivers there and what you're doing to continue that momentum.

Yes. So -- well, some of the most significant growth. The most pronounced growth we're seeing is in capital markets and we really started down this road about 4 years ago. And we've been doing some little elements of it here and there, but really getting some good leadership in place, hiring some really good bankers. And we've seen revenue kind of an apples-to-apples basis, that's gone from about $40 million in 2022 what will be about $90 million excluding a foreign exchange business, which we now include in capital markets. But on an apples-to-apples basis, we'll have seen kind of a doubling plus through this year and we think there's still quite a lot of opportunity. We've just started to do commodity hedging. We have enough energy business in Texas to start to build that piece of the capital markets around that customer base and then we'll use it with others as well. We are very early on a journey to build an advisory business investment banking with middle market kinds of customers. We have a great customer base for this and we have a couple of bankers have been working on it. We're starting to hire -- to do some selective hiring to expand that team. I expect we'll see some nice growth there. So I think mean our capital markets business, I expect has some nice room to run. We've been working on wealth given our customer base. We think -- I think there's a particular opportunity is something that I get excited about is are really small business owners that many of them have $200,000 or $300,000 or $500,000 that they're trying to manage, and we have a really nice offering for that. We work with LPL, and they kind of provide the back end of that. But I think that's something that has a lot of opportunity for us in addition to kind of a traditional wealth business with higher-end clients. And as rates come down a little bit, I expect we'll see some resurgence in mortgage banking. We're really trying to move much more of that to an originate to sell kind of model. And I expect that we'll see complete income growth here as if and when term rates kind of fall off down here a little bit, as they've kind of recently started to do.

Makes sense. I guess on the expense side, expenses have been controlled. Obviously, some of these fee income require investments. Let me just talk to just how you kind of fund these investments, efficiency opportunities, just how you're kind of thinking about the 2026 budgeting process, which I'm sure you're kind of looking into.

Well, we have been bringing our head count down about 3% last year. I expect it will be similar this year and it's just something we're just continuing to work at. We're all -- I think everybody is trying to figure out how to use AI to produce efficiencies. And we've got a variety of projects in the works, which I really believe will have a major impact over the next 3 or 4 years. I mean some of this takes a little time to get built and to prove out but we're doing it in areas like credit examination and treasury management operations. We get 330,000 e-mails every year with people wanting to change and address or this or that. We believe a lot of that can be done with AI and automation. I expect that ultimately, there's going to be a lot of opportunity in contact centers and other places. Anyway, we've got a lot of things underway. And it's just kind of a march toward continuing to try to reduce that number. I'd like to think that we can keep that going at something like 2% to 3% over the next at least couple of years.

Makes sense. I guess maybe expand a bit in terms of AI, definitely a benefit. I guess how much -- is there a lot of spend more you need to do to kind of truly benefit that? I know you kind of moved to this new future core, I think, is what we're calling it, system. Does that like kind of better position you relative to peers in terms of to kind of leverage your data and maybe -- and just ...

So it's a future core project, which is a replacement of a core loan and deposit consumer commercial loan systems, all of our deposit platform. It's actually on product consultancy services, there's TCS, what they call their banks platform and we really love the platform. It's been a 10-year journey to get there. One of the things -- there's a lot of ancillary benefits that have come with it. One of them is it forced us to organize data in a way that you get serious about data probably ahead of where some of our at least per regional banks have had to do this. Because we had -- fundamentally, we had to clean the house before we moved into a new house. And so I think we're in quite a good place in terms of being able to -- because data is such a big factor in your ability to use some of these tools and it's not that the platform itself provides an advantage. But what we had to do to get out of that platform kind of force that. And so I think we are in a pretty good place.

Got it. And then just maybe shifting gears to credit quality. We saw a pretty sharp ramp-up in criticized, classified assets. We did the decline in the second quarter, but kind of leading into the second quarter and still a lot higher than a year ago. So maybe just talk to -- driven by the multifamily and CRE, and just let me just talk to what you're seeing there, what trends we should expect looking out? What drove the increase? Just more flavor on that.

Well, it was fundamentally, I think some shifting regulatory expectation with respect to how -- what you call a classified loan at least across the regional banking space with the OCC charter banks, the usefulness of a strong guarantor or sponsor, even equity on a deal for deals that weren't performing exactly according to plan. So if a project was taking longer to lease up the expectation developed that, that was going to be a classified deal. We don't see loss in those in that portfolio. And in fact, I mean, the -- over the last 5 years, our average annualized net charge-off rate in that portfolio is 0.7 basis point. And so I think the -- frankly, the classified numbers don't tell you much at all these days. I would keep an eye if -- for us or anybody else, I look at the nonperforming asset number as being much more indicative of kind of where the problems are developing and for us, it's been a pretty clean number. It's about -- it's around $300 million on the entire $61 billion portfolio. So very manageable. I'd also say for us, you see this in our investor deck, but pretty consistently, charge-offs have run about 20% of nonperforming assets. So it gives you a pretty good idea. Short of a real change in the economic environment, kind of what the loss content is likely to be in our portfolio. We think it's one of the better is about as clean a portfolio as you find in the industry.

Yes. I mean if we look at your net charge-offs, anything that's been running like sub 10 basis points or maybe 10 basis points, give or take. I mean, I guess, anything out there on the horizon that kind of that, I mean, it seems like you have a below normal number. I guess kind of -- I guess, where do you envision normalized losses and any concerns you have at the moment about any particular port. Clearly, tariffs could adversely impact some companies.

Yes. I mean I think you always see kind of just episodic loss as a company that gets into trouble for idiosyncratic reasons. And so there's always a little bit of background noise. But in terms of anything systemic, I would expect that it's going to be problems coming out of coming out of a slowing economy and showing up in small business and commercial, which could take charge-offs higher, but I think even so our commercial portfolio is highly collateralized. We do relatively little kind of unsecured lending of the type that gets into -- that really produces larger charge-offs. I'm really -- I sleep very soundly.

Fair enough -- we go up the next ARS question. I'm not going to ask you about this just yet, Harris, but maybe just kind of shift gears to capital. If we look at your CET1 ratio, it's on solid footing. Obviously, the AOCI mark changes that a little bit. But I guess just -- I guess how do you think about that how AOCI contract, obviously, you don't have to include capital now maybe 1 day in the future, you do. But when that future comes, its losses, but I suspect won't be there. So just your thoughts around that.

Yes. I mean, look, my expectation is that it will find that, that market will find its way into regulatory capital one way or the other. I think given what happened in the wake of Silicon Valley. I think it's probably the right thing to do. Our tangible capital, I mean, it's growing nicely organically about 20% over the last 12 months. And we have fair value hedges on a lot of the securities that are producing that in such a fashion that it's pretty predictable. I mean we've got a pretty predictable ramp to a higher number. We weren't alone in kind of legging into a larger securities portfolio. It's probably too early. But it hurt. And we -- we got the end of '22 and moved a lot into held to maturity, just to kind of freeze things in place and then to kind of hedge that. But -- so anyway, there's a pretty well-defined path to get to where we need to be. I think that I'm much more concerned -- I'm not so much concerned about regulatory capital. I think we'll be fine there. It's just making sure that we feel comfortable that when the next storm arrives that our market capital is in good shape, combined with a credit culture and a portfolio that withstands it well. So that's how we're thinking about it.

Makes sense. I guess on the subject of capital, I was reading your annual letter when it came out earlier this year and I sense and maybe just a shift in tone around bank M&A kind of -- you kind of seem maybe more open to it or kind of talk about the importance of scale. And just reading that and also the regulatory environment feels a bit better. Are we starting to see deals get done a couple in your markets? Can you just maybe just talk to kind of about how you're thinking about that?

Well, I mean -- I think you and I probably have a little different cluster on scale and efficiency. I think data is on my side.

I got my chart deck in the back. I'll look at it after.

Mine's in my 2023 shareholder letter beginning of '24. I mean because you look at weighted average efficiency ratios across the industry, it's from $5 billion banks to multitrillion-dollar banks. I think it's pretty consistent. And it's not to say that there aren't economies of scale. I think they tend to be more at the branch level. I think that gets and are certainly in certain lines of business, no question about it. But the fact of the matter, I think there -- what I don't believe is that getting incrementally larger is always the solution to problems. And what I wrote in my shareholder letter, which I think was -- I keep thinking it was a pretty good analogy. I talked about going to a dog race when I was -- to get the mechanical rabbits just out all those 20 yards in front of the dogs, and they're always chasing this thing that is unreachable. And that's a little like some people think about scale in the industry, which is if I just get larger, everything is going to be okay. And the fact of the matter is there are very small banks that do -- that are well run that create a lot of value for their owners and there are some very large banks that don't. And so it's incumbent, I think, on all of us say, what do we do with our own operation to make sure that it's actually the kind of business that's durable and sustainable, and it's creating value in our communities and our customers and for our shareholders and M&A can be a factor in that. And I think that there are deals that are always matter pricing. But beyond that, it's just fit. I'm a believer that if you can find a deal where you can have in-market consolidation and create larger average branch sizes that absolutely that's useful in terms of creating more productivity. And there are places where you can add product lines or they can to you, et cetera, where I think that -- where it gives you operating leverage. But it's not something that I wake up at least every day, saying how do we get that much larger inorganically. I'm not at all adverse to doing deals. I've done a lot of deals in my day. And I think generally, most of, not all of them, but I think most of them have created pretty good value. But it's not an automatic solution to anything.

When we first met many, many years ago, you were almost pulled off a big MOE, that did happen for better or worse. And then more recently, you just did a really small branch deal. I guess what when you kind of think about the ideal opportunity, which one does it look like more?

The deal that Jason is referencing was 25 years ago, and it was for Security Corporation.

We both started at a very young age.

Yes and it was a deal that ultimately didn't happen. The -- it's a whole saga in itself. But ultimately, that deal came unglued and they sold to Wells Fargo. There's some regulatory delays and et cetera. But coming out of it, it was an exceptional education. And I -- when we came out of it, I actually did what I called my mea culpa tour. I went around the town hall meetings to all of our folks and I apologize for the -- for the nuisance that is created for a lot of them, we're going to have to divest a lot of branches and everybody's lives were in disarray for a year. But I said in terms of lessons learned, first of all, I said I'm going to promise you, we -- in the future, we will maybe be a buyer, maybe someday would be a seller. But what I'll promise you always is in the future, you'll know who the buyer is. And I'm a big believer in that because what I found is -- and in fact, and I told our Board at the time they asked me after this was over, I said, they said, "Okay, let's talk about what we learned from this." And I said, well, one of the things I learned and reflect on it. We're doing a little merger were to do mergers almost every day of the week. We're hiring somebody from Wells Fargo or from this bank or that or whoever. And they -- it's like a little micro merger and they come to us and they bring their expertise, sometimes they'll bring some customers, but they don't bring the expectation that we're going to change our culture to accommodate theirs. Our policies are applied, so they adapt to us. The larger the deal, the more you find that you're trying to adapt 2 cultures into a third culture that nobody has ever seen before. And you can -- at the top of the house, what I saw was we could agree on who -- on major things, but there are thousands of little decisions to get made is that our fought and it's hand-to-hand combat down in the trenches between people from both sides. And if you don't know clearly kind of who the buyer is, everybody thinks they have license to try to jockey for the -- and it was really, really hard. And I came out of that experience thinking, I think just whatever the numbers look like, you can make the numbers look great. You're dealing with lots and lots of human beings who all have hidden agendas and motivations and things they're trying to protect. And it's -- they're really tough. I wish anybody well who's trying to do them, but anyway, that was a commitment I made is you'll never see another MOE from me.

An interesting perspective. I guess on the branch deal that you did, or more of those potentially opportunities or just smaller banks that are now whether it's the technology investments we talked about the notion that we maybe have a small window here that the regulatory environment is better, but we don't know what it's going to be like in 3 years. I guess have you see more kind of pitch books across your desk? And how would you kind of characterize it?

Yes. I mean I think it's going to be a period of some opportunity. And as I say that, I have nothing in mind particularly, but I do think it's going to be a period where there's absolutely going to be more consolidation. I think in the community bank space, as there always has been, but it may get accelerated by increasing concerns not only about AI, about payments and staple coin and tokenized deposits and all kinds of things. And -- and so I think that there'll be -- there'll probably be a lot of kind of interesting opportunities with smaller banks. And my hope is that we'll actually be quite good at being able to do that and to do it to provide something that is not going to be interesting to the largest banks and that -- and where we're a really good partner for some of these smaller ones that still probably we're going to be looking for a home.

I think your $90 billion in assets, presumably when you cross $100 billion, things change, maybe that gets changed and adjusted for inflation, that's been the talk. I'm not sure if you have a view on that. But just if you get to $100 billion, is there anything significantly different you'd have to do, you're kind of ready for that now? Or is I think --

We could cross it tomorrow and without losing any sleep at all. The only thing that we'd have to do that we have. So when Dodd-Frank was passed, we were -- we called ourselves the smallest, SIFI, systemically important financial institution that was subject to Section 165 to enhanced prudential standards. And we spent an enormous amount of time and money building the capabilities, stress testing, a lot of stuff operationally to become highly resilient, et cetera. And all of that is still there, and we continue to use it. The only thing that we are not doing that we had to do for a period of time was resolution planning. So we'd have to resume that, but that's a reasonably easy exercise for us in part because we don't have a holding company. We're a publicly traded national bank. And so resolution in our case is probably less complicated. So no, it's breaking $100 billion. And like you say, the line may move. I really, by the way, highly encouraged by the new regulatory cast we have in D.C. right now. And their understanding of, look, we need to create some breathing room for these companies and tailoring is very much going to be alive and well with this crowd. So I don't think there's anything that's going to cause any problems that way.

I guess on that vein, just in terms of the host supervisory regulatory backdrop. I guess maybe talk to kind of what you've seen, what you expect to see. Does it kind of make your day-to-day life a bit easier?

Yes. And look, I'd start by saying, I mean, what I think I want -- I think most -- all of my peers that I would and kind of knowing them, I mean, we know this is a regulated industry that needs to be regulated. We want good regulation. We want people who are smart and thoughtful who understand. I've had one, by the way, over a long career, I've had one regulator has ever explain to me what the difference between safety and soundness was. And he said, soundness is, you've got to make money. He said, and I said that's really refreshing to hear and he say, "Yes, we need to make sure that we don't hug this industry so tight that you can't operate." And it gets into areas like private credit and what's creating the conditions for that. So I do think -- I'm really encouraged by this crowd. It makes a difference you've had in the past, in the recent times, you've had regulators, including most certainly at the CFPB, Mr. Chopra just -- he was just a little nuts in terms of some of the things that he was worried about. I was in the meeting with a big group of bankers,, Board members, and he started talking about what was kind of on his agenda. He was worried -- he started talking about the Ellipsis. And you've got a chatbot on a website and somebody's chatting with somebody in the call center, you've got -- he said, you've got the dot, dot, dot while you're waiting for the answer. He says that he said, "I think that suggests there's a human being on the other end of the transaction. I think that's unfair and deceptive." And we're all looking at him like this man is nuts. But that was -- I mean when you find your days consumed with responding to that kind of idiocy, I hope he's listening in. It's -- it distracts you from spending your time on how you actually build better more competitive, how do you help your customers grow. And so getting back to regulators who are thoughtful, who want to make sure that you've got the basics right, liquidity, capital, that solid earnings stream. That's all really important. It's when you get off into the weeds that things got just kind of ugly and awful.

Got it. Maybe we'll put up the last ARS question. In the waiting minutes or anyone in the audience that has questions for Harris. I guess, just lastly, just maybe just talk to the competitive landscape. As the regulatory environment gets maybe easier for some of the bigger banks on capital and not as concerned and the AOCI loss has come down. any changes in the competitive landscape, people are maybe getting a bit more aggressive? Are you seeing some banks kind of show up more that hadn't shown up in the past?

I mentioned private credit. I think that's -- we don't see that a lot on a day-to-day basis, but I worry about that industry and particularly about kind of late comers. I mean, you've got some big sophisticated, I think, well-managed companies in that space, they'll probably be fine. But I find myself thinking about the run up to the financial crisis and kind of the subprime lenders who are -- and the problem is you get -- when you build contraptions that need to be fed and have to grow and where do we get assets and they start to -- I mean, first of all, I start with the premise that banks have the lowest cost of funding of anybody out there. I mean the FDIC insured deposits and pretty good leverage and -- and so we ought to -- by all rights, we ought to be kind of the first place of borrower comes if they're looking for the best deal in terms of price. And that when they go to private capital that it's because it's going to be covenant light, no guarantees, yada, yada, yada. And I think it's been a long time since we've had a real storm. The pandemic looked like it was going to be that and then the government throw so much money at it that it didn't. But at some point, when something really starts -- it breaks in a big way, I do worry about the lack of kind of a liquidity backstop. I mean they've got lockup periods and everything else that will help. But at some point, those chickens come home to roost. People will want their money out. And if it happens at the wrong time, I worry about kind of the spill over effects into banking and the size and the growth rate of that industry. I -- there are a lot of nonbank competitors, credit unions in the West, Utah market in particular, are really tough to compete with. And there are things that ought to be reformed there, but -- but we do really well against the largest banks. We offer differentiated experience, I think, in branches. We get people that come to work for us from these places who are really good bankers that say they like to do relationship banking and find that a company like ours, a place they can do that. And so I think there's still a lot of value that can be created by banks like ours, not just science but other regionals as well.

Perfect. On that note, please join me in thanking Harris for his time today. Next up is lunch in the main room. I suggest you all attend. We'll have a nice wrap-up panel. Thank you.