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

We're going to get started here. Up next, we're pleased to have Zions joining us at the conference. They've had a strong year, posting improving top line growth driven by margin expansion, continued growth in fee income, all while maintaining a tight hold on expenses. While there was some noise during 3Q regarding credit that appears to have been a one-off, hopefully. And its credit performance continues to be amongst the best in the industry. Here to tell us more about what that is Chairman and CEO, Harris Simmons. Welcome, Harris.

Thank you.

So Harris, obviously, there's been a lot going on out there. We had tariffs. We had the government shutdown, mix numbers on jobs. It feels like the Fed is still in an easing cycle. So lots of different things going on in the macro. I guess given that as background, maybe start off how you're feeling about how the bank is positioned for this environment that we're about to enter.

Well, I think I'm pretty sanguine about what the environment looks like. I mean if I go back to earlier in the year and the tariffs and the Liberation Day, et cetera, I mean, I think there was a lot of anxiety about what this could do to the economy. I think what's played out and my view is that owners of businesses have started to realize that Donald Trump is among -- beyond anything else that he's basically transactional that he's -- there's a lot of plasticity to his approach to solving problems. And so you're seeing tariffs come, go, change, up, down, and it's become kind of almost noise that people -- a lot of people filter out. Now there are some businesses that are actually impacted by it and for them, it's a challenge. But I think as -- and in terms of creating anxiety broadly across the economy, it hasn't played out as badly as I might have expected. And so what we're seeing is probably some improving just appetite to borrow, to expand. And I'm optimistic about what the coming year holds.

So I guess just as a follow-up, as you're out talking to clients, what are you hearing in terms of sentiment across your different geographies? And any differences in terms of size or location?

I don't see a lot of difference. I just -- pretty consistently, it's not sort of rapid bullishness, but it's an economy that's working. It keeps kind of churning out results. And I think businesses are -- the conversations I have tend to be reasonably upbeat about this coming year. And it's -- we see it in small businesses and large businesses alike.

So you seem to have a relatively positive tone. I know you don't like to provide mid-quarter updates, so I'll get this out of the way quickly. But just given all that's been happening over the course of the quarter, government shutdown/reopening, movements in the macro. Any trends that you're seeing in the market, whether it's willingness to borrow deposit competition or activity that has changed over in the last 60 days? And I would say, despite loans shrinking in the third quarter, you sounded pretty upbeat as we move into the end of the year. So any thoughts on how things have shifted...

Yes. The first thing I'd say, I think -- I mean, deposit growth, you kind of make what you want to make of it the pricing. Loan growth is a little different. And I've always believed that forecasting loan growth is something of a fool's errand because having done it for a long time, you tend to extrapolate what you've seen recently. That said, if I extrapolate what I've seen recently, it makes me feel like we're going to probably have a little better loan growth than I might have expected, say, 3 months ago. And so I think we had slightly to moderately increasing loan growth, something like that. And I think it's probably, today, I'd try to say it's in the moderately strike zone and that's probably with stronger commercial loan growth and still pretty measured what happens in some other parts of the portfolio. So...

So I guess given that, as you said, the guide had been for slightly to moderately, now you're saying it could be moderately or maybe, I'll call it, mid-single digits. Maybe just talk about what's driving the improvement in commercial? Is it greater borrowing from small businesses, is it larger corporates seeing more confidence? What are sort of the areas where you're starting to seeing pick up in activity that's giving you more confidence around that?

Yes. I mean we're kind of seeing both. I mean we're seeing increased activity. Oil and gas is an area, for example, we've seen some increased activity. But C&I, generally, we're seeing on the small business side. We just had a record year in terms of the number of SBA 7(a) loans we did, for example. We were up strongly over the prior year, and I expect that that's going to continue into next year. And so some of it is kind of specific to kind of what we are really focused on internally in terms of promoting with incentives and marketing dollars, which is mostly on the small business side. But we're just -- we're seeing a little better demand from middle market and larger customers, too.

So an area that's kind of gone in and out of favor for Zions in terms of growth has been commercial real estate, right? And obviously, over the last few years, as the market has been focused on office and multifamily, it's been less of a focus. And obviously, we've seen things like private credit and the like coming into the market. Just maybe just talk about your expectations or your view on the growth of that asset class? And what are you seeing from alternative forms of capital there? And is it impacting the way you approach the business?

Yes. We started about a dozen years ago. After the financial crisis, we basically said, look, over time, we just want to bend the arc of growth in CRE and to have it grow a point or 2 slower than the rest of the portfolio, and we did that. And we brought it down from roughly 1/3 of the portfolio down to something just about 22%. And I expect that will continue for a while yet. So I see it growing, but at a measured pace. I think that's actually been a really good strategy. It's forced better credit selection by kind of rationing our appetite for it. It's created really good quality. I mean in terms of actual realized losses, it's run less than -- run seven tenths of 1 basis point on average in the last 5 years. And that's been through a period where everybody is concerned about not only multifamily but certainly office. And so it's actually played out very nicely. And it's a portfolio that I like. I think if it's disciplined done well, you've seen more equity in deals certainly in the last decade than had been the case I think earlier in my career. And so I think it's fundamentally healthy. We see some impact from private credit, but it's probably actually -- we see as much opportunity in it in that when you're trying to exit a credit, it's actually a source of capital credits you're trying to exit, and that's proven to be useful. So all in all, I think it's kind of a neutral. I don't see it impacting growth.

So you guys have had -- despite limited loan growth, you've had lots of success in terms of driving revenue growth, right? And we've seen the net interest margin expand 7 straight quarters, up almost 40 basis points over that time. Talk about what's driving that? How are you thinking about it going forward? And can this momentum continue in the most updated rate environment?

Yes. Well, certainly, post SVB's collapse, that was kind of a 8 or 9 on the Richter scale in terms of its impact on us and some other regionals. And what had always -- we view it as a strength, which was this really good beta on our deposit base kind of quickly flip almost in the liability because it meant that we had a lot of catching up to do just to maintain what -- it was like kicking a sleeping dog. And so we've been building back from that. So a lot of what you're seeing, I think, is just trying to get back to normal -- some kind of normalization in terms of pricing and restoring that deposit base. So that's probably been as important as anything. There's also been just a real focus on a continual remix in the -- on the asset side. We've had probably excessive liquidity relative to what we've needed. We've been bringing the securities portfolio down a little bit, trying to stabilize 1 to 4 family and municipal credit and replace that with better yielding commercial credit. And all of that's been helpful. The other thing that's helped is our demand deposit base, which we kind of expected might continue to drift lower, stabilized. And that's been a real source of strength. I mean we bank lots of small to midsized businesses. A big portion of that deposit base that DDA base is subject to account analysis kind of pricing where the customers are paying for services with it, which makes it stickier. As we see rates drift lower, earning credit rates probably come down a little bit, and that should help further stabilize and even build it a little bit. So I'm sanguine about that.

You talked a little bit about deposits and funding costs. I mean, I think historically, you had a big advantage over peers in terms of your deposit cost, annual overall funding, that narrowed during the regional banking crisis, and you've been working to improve that over time. I think you're back having lower overall funding costs. As we progress through the cycle, how do you think about your funding costs, in particular deposit costs, relative to peers? And can we see that advantage sort of widen out again as it had been before all the noise in the banking environment?

Yes. I mean I think that's clearly what we're trying to do. And I think it would be a reflection of kind of what our customer base looks like. And -- so I mean, one of the things we're doing, we are working with larger clients that have -- I mean, there was a period before SVB where we were -- we and others, we were actively managing money off the balance sheet and of money market sweeps, et cetera. We've been working to try and bring some of that back on, which will probably incrementally increase deposit costs but reduce overall funding cost is what we're trying to do. But maybe a little further we can go with that. But fundamentally, our focus is on building the business with the kinds of smaller -- kind of granular small businesses and mass affluent kind of consumer base that generates a deposit franchise that I think is where most of the value for regional banks ought to come from.

Yes. So maybe one last question to round out the balance sheet and rates and the like. If I look at your recent disclosures, the bank still appears relatively asset sensitive based on your emergent disclosure. Maybe just talk about your position and given how where rates are, have you thought about the benefits of doing more hedging versus less in terms of shifting the overall positioning of the balance sheet?

Yes. I mean it's something we review fundamentally monthly. I mean, we -- it is -- I mean, we do have -- we have a naturally asset-sensitive balance sheet. We do some hedging to try to minimize that. But a lot of what is there -- I mean, it's baked into the pricing in the market, and you're going to -- I mean I guess my fundamental belief is I think even though you're going to end up probably with a more dovish Fed, I think there's a real risk that they actually get boxed in by what happens on the long end of the curve. You've had -- in the cuts that have taken place since September of last year, come down 150 basis points on the short end, the long end has actually gone up 40 or 50 basis points. And -- so as long as you've got inflation out there, and I think there's going to be a lot -- it's going to be a very interesting time in the history of the Fed to see how a new Chair works with this crowd to navigate this because the last thing that Trump needs is higher term rates that make mortgages totally unaffordable for -- it's already a tough -- really tough housing market for buyers out there. So I think we try to position ourselves. There's modest damage that can be done by downward pressure. I mean we expect that it will -- it's a little bit of a headwind, but it won't blow us backwards in the new year. And we're trying to leave room for what I think is still, I believe, kind of a reasonably inflationary environment given what's happening with immigration, with tariffs, with the federal debt, et cetera. So we're also trying to protect against that.

So let's shift gears and talk a little bit about fee income and some of the growth initiatives. Zions, like a lot of banks, I think it's growing in 3 main areas: capital markets, wealth and payments. Maybe just spend a little bit of time talking about each, where are you in your evolution? What type of growth businesses should these be versus history? And really, what are your points of differentiation in your go-to-market strategy? And how does this all fit into your 2026 expectations?

Yes. I mean we've had -- we've built a really good capital markets team. And we're really comfortable with the way they're building this business. They have -- these are people who've typically -- all of them come out of large banks with a lot of experience, and so their progress so far has been right on target. I expect we'll see good growth out of them in 2026 and beyond. We're investing in it, systems, people, risk management, and they're being really well received by customers. And we've got bankers that are working really well with them. So probably our strongest growth comes out of that in the 3 you're mentioning in 2026. Wealth is -- we think there's a lot of opportunity. I tend to think there's particularly a lot of opportunity kind of on the lower end of that the spectrum. We have lots and lots of small business owners, and they're not well served. I mean these are people -- a lot of people have $200,000, $300,000, $400,000 to invest. We have a really good arrangement with LPL. And we've built, I think, quite a good mousetrap in terms of being able to serve that clientele with good pricing. And my hope is that, that will actually be a driver of what happens in the wealth space. On the payments prong. A lot of that actually shows up -- doesn't actually show up as noninterest income. It shows up through net interest income because it's paid for with balances. But it contributes a lot to what I think is probably one of the leading DDA franchises in the industry, and we expect that's going to grow nicely. We're going to be introducing in March a new small business kind of bundle of deposit-based products that I think is going to be really attractive. And part of what you have to do is you just have to get your people in branches on the retail side of the house excited about selling things. And I think it's going to be a good year for that with our folks.

So I think back over the years, the bank has kind of gone back and forth on making lots of investments to grow, then there have been periods of time you've been in cost-cutting mode, just given what's happening in the environment. I guess, maybe talk about where we are now and now that we've become later in your tech transformation, including the completion of FutureCore, what are the next big areas of investment for the bank that we should all be thinking about?

Yes. Well, I mean, first of all, I'd say you're always in both modes. You'd like to be. I mean -- and you can do 2 things at the same time. I mean we're down -- we got about 9,300, 9,400 full-time equivalent employees, and we're down about 1,000 from its peak. And some of that has been -- there's been some outsourcing and offshoring. But most of it is just figuring out how to do things more productively. And that continues. And I think we've got things going on with AI that I think will be productive, et cetera. But at the same time, I mean, we've been very much in investment mode with systems over the last decade. We've replaced, I think a lot of you know, we made what I think was kind of an industry-leading kind of push to replace all of our fundamental core loan deposit systems with something that's much more modern from TCS that we're really pleased with. And that kind of infrastructural investment, we think, is really prime to be able to allow us to grow faster. And the investment probably switches -- I mean, we'll keep investing in technology, that's just going to be always a constant. But a lot of the kind of discretionary spend is going to be on marketing producers. We've hired some really good producers in recent times and capital markets. So those are some of the primary areas where we're going to be spending.

When you think about those areas that you just talked about, technology, producers, marketing, maybe just expand a little bit about how do you think about the payback on these investments? Should they start showing up in revenues over the short to medium term?

Yes. I mean I expect producers -- it probably takes kind of 6 months before it starts to sort of show up and -- but yes, I expect some of the -- some of my optimism about next year in C&I is grounded in the fact that I think we've added some good people.

Got it. So when I think about the financial performance, you guys have been, for a period of time, been very good about generating positive operating leverage. I think you were talking about 100 to 200, four quarters out. More recently, I think you're just talking about positive operating leverage. But just broadly, how are you thinking about the pace of operating leverage, and that is achievable for the bank on a sustained basis? And maybe just talk about how you think about the drivers and what sounds like it's going to be an improving environment?

Well, I think -- I mean, ultimately, there are -- I have to do the math to see how long you can continue to do positive operating leverage at any given level before you...

Before you start to burn out.

Yes, before you just -- before you have to reset. But I think we've got a ways to run from where we are today, and we're showing good positive operating leverage this year. I absolutely think that continues into next year, probably not at the same pace. I mean, I think -- another part of this is it's -- I mean, on the revenue side, the rate environment plays a big factor where you get most of your revenue from your balance sheet. But we think that there's enough momentum going into this new year that we're going to see reasonable positive operating leverage. I think my expectation is going to be north of 100 basis points and beyond that, we'll talk about it next year.

Absolutely. So maybe shifting gears to capital, capital allocation. You obviously have strong stated ratios. The adjusted ratios have been improving. And I think you guys have talked about reaching peer levels, hopefully in about a 12-month time frame. I guess a couple of different questions. One, talk about capital priorities; two, maybe just talk about how you're viewing what the binding constraint is for you right now? And then third, how do you balance getting to peer levels and maybe taking a little bit longer versus being opportunistic and using some of the capital to buy back shares while they're cheaper?

Yes. Well, I'd start by saying, I mean, we've had a really strong tangible common equity accretion over the past couple of years. It will be about 19 -- close to 19% this year, which I think is about as good as you find among the regionals. And so a lot of progress being made. But we'd like to -- and I think that just as a general statement, we want to be -- I want to be sure that when the next storm hits that we're in a good place coming into it. And so our #1 priority has just been building capital to make sure that marked capital is in a reasonably good place. And I think you have to view that in the context of the risk in your balance sheet and other things. But I think we're quickly getting there. The binding constraint is -- typically, I think of it as CET1 on -- a sort of on a marked basis, but also knowing that just tangible common equity ratios in times of stress are something that you have to pay attention to. Our priorities, I mean, right now, it's just building back. I wouldn't -- I think we did a deal -- we did a small deal in California down in Palm Desert area about a year ago. I think it's a really good little deal for us. I mean it's a kind of thing that it's minimally disruptive to other things we're trying to do. The numbers worked well. And I'm not want to take pledges does it not do this or that. I think we're going to -- I hope we're going to think about carefully and thoughtfully. I think we have historically. I have most of my networth tied up in what we do. And I think probably about a sensitive dilution, et cetera, as everybody -- anybody is going to be. But it's all about price. I tell people [indiscernible] earlier today, I mean the best deal I ever did was done at the worst time in our history. It was during the financial crisis. And it was a deal that was with the FDIC. And not that you're going to find those kinds of economics in this environment. But it's a reminder that you want to be deeply thoughtful about what you're doing and try to make sure that it's really creating value. The one thing I'd pledge is, I mean, we will never grow -- as long as I'm around, we'll never grow for the sake of just growing. I mean it's not about that. It's really about -- you think you can really fundamentally create better value, particularly at the very local level, the branch level at the -- the economics of what happens in a very local market. And so I don't see us doing anything large at all and being very careful about it. And I'm hopeful that here in the next year, we're going to be in a position where we actually start buying back shares. I don't think we need to get to our target before we start doing that, I think these are feathering it in, that's my own view, it's going to be our Boards to determine, but that's kind of how I'm thinking about it.

I guess maybe as a follow-up. So in the presentation before you, Bill Demchak from PNC was saying that tangible book value dilution earn back he thinks are the wrong metrics that I think all of us are focused on. Maybe just talk about the parameters that you focus on, whether you do like a dilution, earn back or any financial metrics that could get investors comfortable that you use to think about if you were to engage in doing some tuck-in M&A like it sounds like the focus would be?

Well, it's interesting because, I mean, you get kind of the fads among all of you folks in terms of what's being looked at. And the notion of 3 years are under okay, 3 years over on tangible book value earned back you get these -- and I'd probably agree with Bill. I mean, I think the world is a little more nuanced than that. And that fundamentally -- and I guess short answer is, I'm not sure there's a given measure where I say, yes, okay, this is green light, red light. I think a lot of what makes a deal ultimately successful has to do with how well you're going to be able to integrate it, how distracting it's going to be, did you have a cultural fit? I've done quite a lot of this. I've been around for a while, and I've seen -- you get a feel for what's actually going to work and I'd pay a lot more attention to do the cultures work than I am, is it 2.5 or 3.5 years of tangible dilution.

So last quarter was sort of highlighted by 2 losses related to the Cantor Group. And obviously, that and others shift the markets a bit, thankfully, things have calm down. As you've had time to review what happened, I think you were going to review with external parties, anything that you could have done differently? How do you think about any further risk in your portfolio? And are you confident now that you could say this truly was a one-off?

Well, I'm quite confident it was a one-off. I mean we've tried to scrub through the portfolio. More fundamentally, we've engaged PwC to come in because I didn't want our credit people telling me what they could do better, I want somebody who's not conflicted. And they -- and our credit people agree with that, by the way. They -- I -- one of the things that was maddening about it, I think we actually do credit really well. I mean absent that Cantor loss, our charge-offs in the third quarter were 4 basis points annualized. And that's -- they've run typically south of 10 basis points pretty consistently in recent years. And so as you said at the outset, I mean I think credit has been a strength of ours. And maybe one of the things that made it a little shocking in the market was it was coming from us. But there are things that happen where you -- it wasn't just the economy was getting tougher, et cetera. Sometimes bad things happen that -- but we're intent on learning what we can, getting an independent view, making changes, making it sustainable. And beyond that, trying to keep -- we're not going to reengineer our whole credit process because we think it actually works pretty well.

Harris, anything on the regulatory agenda for a bank your size? Clearly, things have eased up from an M&A perspective. But I mean you're usually pretty in tune with what's going on in Washington. Anything that's happened there and is changing the way you think about either approaching investing or thresholds or anything of that nature?

Well, you're seeing a lot of regulators on the ground that have got whiplash from administrations, I think. But -- I mean it's been pretty remarkable to see the -- how quickly this new administration with Micky Bauman and Travis Hill and Jonathan Gould have been working together to try to address what I think was probably just a lot of overreach in terms of almost micro management around banks, which in a way I get, but it got to a point where I think it gave rise to a lot of the growth that's taking place in private credit. It's -- it sometimes artificially hampered what you ought to be doing. I mean the leverage lending guidelines that were resented in the last couple of days, a good example of that. I mean, it was kind of a one-size-fits-all attempt to -- and the world is more complicated than that. There are some companies that have naturally more leverage, more industry -- some industries do than others. And so I think and what I'm liking about the new crowd, I think they're asking us all to be -- they're not wanting us to throw caution to the wind. It's going back to that we need to be responsible for managing responsibly the credit we're extending to customers. And they're going to be watching that. But with fewer sort of bright line tripwires that kind of gum the system up, I find it refreshing.

Maybe 2 last questions in the last minute or 2 here. So the bank is putting up solid returns. We've seen lots of peers come out with medium-term return targets. I know it's never been sort of a hallmark of Zions. I'm just curious, have you given any thoughts to any medium-term goals, whether efficiency, ROA, ROTCE and any thoughts on how you view this?

I mean the short answer is yes. The other part of the short answer is probably not for today, but...

Yes, now is a good a time as ever.

No. I mean it's something we'll talk about when we put target or 2 out there. I'm probably getting more comfortable with the concept. But I mean what we've been trying to avoid is the quarter-to-quarter kind of numbers management. That's -- but even talking about capital, kind of what our targets are. I didn't give you a number, but I think I've given you kind of how we're thinking about it. And...

So I guess, Harris, you and I had talked -- we've gone back and forth about whether you're going to start with prepared remarks, we went right into Q&A. And I guess in the last minute here, anything you'd like to leave us with in terms of what you think misperceptions of the bank, the way the bank's position that the market is underappreciating into 2026?

No, I think -- well, if I were to do this a 30-second elevator pitch, I'd say, I think we have something that's very close to unique in the Western United States in terms of a focus on small and midsized businesses and their owners and a bank that really has a strong deposit franchise built on a lot of great relationships. We've got bankers even in branches, we invest in them. We want them to be -- we give them some credit authority. We actually -- we work at this to try to make them effective in serving the kinds of retail clients that come into our bank who are trying to build businesses and trying to do -- I mean it's a passion of mine. I think it is of all of our people, and we're intent on doing it as well as anybody in the industry does.

Awesome. Well, on that note, please join me in thanking Harris.

Thank you.