Zions Bancorporation, National Association ($ZION)

Today, our next fireside chat is with Scott McLean from Zions, an old friend.

Old friend.

Scott reminded me 24 years. So it's been a while.

Yes. It has. It's been a good time.

Yes. No nick names up here. We discussed that. But -- just Scott, for the benefit of people on the line and in here, just give us a 30,000-foot view of Zions and the franchise.

Sure. So Zions Bancorporation, we have 7 affiliates. They operate by different brands. We're Zions Bank, obviously, in Utah and Idaho. We are California Bank & Trust in California, National Bank of Arizona in Arizona, Nevada State Bank in Nevada, Vectra in Colorado, Amegy in Texas, Commerce Bank in Washington. These are great names. People often say, "Well, why don't you just go to one name?" Well, we love our names. I mean who want to be California Bank & Trust in California, or Nevada State Bank or -- and Zions in Utah and Idaho is an awesome brand. We've got about 9,200 colleagues. We have about 900,000 consumers, 250,000 small and medium-sized businesses. Pound for pound, no brag, we're probably the largest bank for small and medium-sized businesses in the country. We -- $90 billion and there's just a lot of very distinctive -- nationally distinctive things about our company. If you look at our presentation each time we meet with analysts and investors, you'll see what's nationally distinctive about us, and I'll have a chance to talk about some of that. But most banks have nothing this nationally to think of about them. We actually have 5, 6 things that are truly observable in nature and nationally distinctive about our franchise.

Okay. Perfect. And then before we dig into some of the other topics, just key priorities for Zions for 2026. What are you guys focused on?

Yes. We're excited about 2026. We're always a highly energized group. But I think it's important to kind of look at the journey up until 2026 to kind of get a sense of where we are right now. And if you look at that journey, from a technology standpoint, we finished our big core transformation project, replacing our core loan and deposit systems. No other bank in the United States has done this. It's been done about 300 times around the world, but it's never been done in the U.S. I say this in public all the time. I've never had another CEO or President of a bank come up and say, "You can't say that. It's not true." It's absolutely true. We finished that on July 13 of 2024. And so we have a totally modern core loan and deposit system, one data model, which is really important. It's real-time, natively real-time. It's API-enabled. It is built for the future. During this time that we replaced our core, we also totally modernized our digital front end. And so a lot of technology stuff going on and more that will be coming forward. Our deposit franchise, which is central to the value of our company, it weathered a 500 basis point rate increase in 2022. It weathered the Silicon Valley March 10, 2023 issues. And we've come through all of that, and we still have one of the leading low-cost deposit franchises and our demand deposits, noninterest-bearing to total deposits continue to be peer leading. And so our deposit franchise has come through that. Credit quality has been strong. We've weathered the CRE issues. Customer satisfaction ratings are higher. Our regulatory relationships are high. And we're bringing a really nice extended period of positive operating leverage into 2026. So we come into 2026 with a really solid foundation and a lot of momentum. And quite frankly, what we've said, what Harris and I have said internally in our town hall meetings, which we just finished in January, is that we have never had fewer distractions, externally, or internally. We just don't have a lot of distractions. And so our whole focus is on growth. And you'll hear us talk about growth in our core markets, small and medium-sized businesses that make up about 2/3 of our revenue. That's where we're focused. We've got 6 key products that we've energized. We're doubling the amount of advertising spend that we had versus 2024. So we are kind of full on go from a growth standpoint.

Okay. Good. How do you feel about the economy? I mean, it's -- obviously, there are cross currents. We can talk about energy prices given your energy book. But given the small business exposure that you have, what's your take on how things are going economically?

It's such a great question. Compared to when we announced earnings in third week of January, there's been a lot of news. You can't read the news and not go, "Well, it's got to be a little softer economy going forward this year or a little more cautionary." I mean you just -- anybody would have that reaction. We -- fundamentally though, if you were going to have a banking franchise in the United States, you'd want to be in our 11 markets, you'd want to have our approach to banking, you'd want to have our focus on small- and medium-sized businesses that's ever so slightly protected from the global banks and ever so slightly protected from what fintechs can do. And so even if the economy is softer than what we might have thought, we generally have the ability to grow in any kind of economy because it's just based on your call programs and the intentionality you have about growing. And because we have a small share in most markets, we generally feel pretty optimistic. And small and medium-sized business owners, which is our foundation, they're used to this noise. Since the pandemic, they are used to this kind of noise. Now clearly, the kind of military actions we've been taking are not something that you're used to or you want to see, but they're used to this kind of noise. And so they're just very resilient. They know how to grow. They know how to create cash when they need it and liquidity. And I think they're fundamentally cautiously optimistic. I don't think any small business owner ever gets really frothy about what they're doing, but they're fundamentally optimistic.

Okay. Well, that's good. It's good to hear. I mean it's good to hear that. On the earnings call of the fourth quarter, you talked about your ability to grow maybe faster than you have historically. Do you feel like that's still the case? And what gives you that optimism?

Well, it really relates back to this lack of distractions. We just don't have any right now, internally or externally. And so again, focusing on the core of our business, small and medium-sized businesses and an additional focus we've taken on the affluent side of our consumer base that we service through about 410 branches across our footprint. We are we -- if you asked our employees, I think they'd say they've never seen us this focused on that client base with really specific -- these 6 very specific products that are designed to build small business deposits and consumer deposits. And so I think it bodes well for the year.

One of the categories that's been in focus over the last few years is commercial real estate. Do you expect it to contribute to growth this year? Are you seeing a turn there?

If you look at our CRE growth over the years -- last 15 years, all of our peers have been gulping down real estate loans. Our CRE growth has been about 3% to 5%. We could grow CRE loans 10% to 15% easily in our footprint. But our CRE loans were about 33%, 34% of loans 15 years ago. It's now down to the low 20s. That was intentional. But our peers during this time have been growing real estate loans 70% to 100% faster than we have, okay? So when you look at our loan growth, you need to kind of think about quality of loan growth. Now to grow our CRE book 3% to 5% this year, even in kind of still slightly challenging markets, I think we very much have a chance to do that. And in many cases, it's going to be retaining existing loans that we have that have hit a 3-year maturity or a 5-year maturity.

Okay. The energy vertical, obviously, topical. What's your take on it? Can you grow energy balances? And what's the offset of high energy prices in terms of how that could flow through the portfolio?

Yes. We've been an energy bank for 30 years, and we're one of the top energy banks in the country.

Just size it for people.

Yes, it's about $4 billion in commitments, $2 billion in outstandings. We'd be very happy for that portfolio to grow 10% a year for 3 or 4 years. I it is really conservatively underwritten. We have about 70 what are called reserve-based loans. We're lending against the reserves of our independent exploration companies. And the number of banks that will do this has dropped by half over the last 5 years. So there's fewer banks, there are fewer customers and the market is in a really strong position, and it's a good position for banks. So I think we're in a good spot to grow. We've just introduced a new oil and gas hedging business. We were in it 15 years ago. We got out of it. We've now gotten back ended on a large-scale basis. And literally, in 4 months, we've had 30 plus of those 70 customers already do hedging with us. So that hedging business in our capital market stack is probably -- it's a $5 million to $10 million business for us as we get up and running at it. And it's with customers that we're willing to do this with us all along. So I don't think investors should -- the major players in the energy industry are really disciplined and the banks are really disciplined. This is very different than 30 years ago. And so I don't think you'll see big energy companies lean much farther in just because we've had a spike. Same reason when we have a fall in prices, you don't see companies totally pull back on production.

Do you expect more competition?

We've already seen it a little bit, but oh my goodness, we've seen the movie. People that come in and out of the business, they just take the highest risk and they get creamed. So we'll have to continually communicate what the energy business is to us. And -- but I think most people understand. I tell you the other thing, our power and alternative energy business, which we didn't have 12 years ago, started about 7, 8 years ago, it now has $2 billion in commitments and about $1.5 billion in outstanding. So we're both -- we're a major bank for fossil fuels. We're a major bank for utility-grade power. And we see continued opportunity with that business, too. It's about $1.5 billion in outstanding. So it's about 75% of what our oil and gas outstanding are.

Okay. So despite all the noise, economic noise, you feel pretty good about the growth outlook?

I do. I just -- again, we're not overly inwardly focused. We have a great relationship with our regulators. And it just feels like a really good time to be highly focused on growth.

Okay. Also, if anybody has questions, feel free to raise your hand, and we'll fetch you a microphone. The margin expansion story has been pretty impressive. I think it's 8 quarters, sequential quarters of that improvement. Talk about maybe the sustainability of that trend, what's ahead where you think the company can eventually go to from a margin perspective?

Yes. After the middle of '23, we saw a damage to the net interest margin because of the repricing of our highest priced deposits. And the whole industry saw, but we saw it had a bigger impact on us. It affected us about $300 million of our total revenue of about $3.1 billion. So we said that would steadily improve, and it has. Our net interest margin has gone from up 2.91% to 3.31% in the most recent quarter. And it's basically been -- as our securities portfolio has repositioned, we have about $600 million in cash flow per quarter. We reinvest about half of that. We may start reinvesting more than that, but that has helped margins. Total interest rate costs are coming down and interest rate deposits. That certainly helped. Our demand deposits, which is a key driver to everything for us, have been stable now for over a year and growing to a certain degree, and all the products that we're bringing to market, we are totally focused on building core noninterest-bearing deposits. And then we've also -- I don't know how many people really noticed this, but we've had an emphasis on attracting what most people would think of as wholesale customer deposits. So we have about $7 billion in customer deposits that are off balance sheet and Fidelity and Dreyfus sweeps as an example. And we have been in the process of bringing those deposits back on balance sheet. So just as an example, on June 30 last year, we had broker deposits and net overnight borrowings of about $7 billion. And in August, we just said we're going to pay our customers. We're tired of paying broker deposits, you don't know them, et cetera. And so at the end of the year, that number was probably a little over $3 billion. So we brought it down from kind of high $6 billion, $7 billion, down to a little over $3 billion in 6 months. And all of that is about 20 to 30 basis points accretive to broker deposits and overnight borrowings. So it's been very intentional. I think you'll see us continue to pull down our usage of broker deposits and that overnight borrowings and just paying our customers. And what comes with that is other business. Customers love it. New prospects give us opportunities to do other things with them. And so it's been an incremental benefit to the NIM. And I think we'll continue to see that.

Okay. Anything else on deposits that you're focused on that you want to talk about and maybe a little bit on pricing and competition.

Yes. I -- a lot of people have asked us today about, boy, is the pricing market more intense today? It's always been intense. I just don't know of a time when pricing on deposits and pricing on loans and the number of competitors, we just deal in an environment with a lot of competition. And so I don't really worry about it, quite frankly. But this wholesale deposit campaign, this $3 billion improvement in overnight borrowings, again, we're able to do that at rates that are accretive to our overnight borrowing costs. And then this whole emphasis on these 6 products, particularly this account that we call the Gold Account which is a consumer-affluent packaged account is all there to drive granular deposits.

Okay. You talked about the hedging program in your energy book. I'd assume that's under capital markets. And you guys have flagged capital markets as the success story. Talk a little bit about that, what's ahead for 2026? How optimistic are you on capital markets in general?

I'm really optimistic about it. It -- we had about $125 million in capital markets revenues in '25. That number was $107 million the year before that. It was about $80 million the year before that. And then it was kind of a consistent $70 million for a number of years. And so what we fundamentally have done over the last 5 years, Mike MacDonald leads that business for us. He's done an outstanding job. He's attracted great talent and -- but we have invested heavily in the foundation of -- we sort of reaffirmed our syndications, foreign exchange, interest rate hedging businesses and make sure we have those built for the future. And then we've added a bond business. We've added a real estate capital markets business. We've added an M&A business and probably I'm leaving something out, but the foundation for all those things are built. So going from $125 million up to a couple of hundred million, which I think, I think we're on a trajectory to get to a couple of hundred million annually, probably in '28. And we don't have to add a lot of incremental infrastructure. The major products are sort of set, the technology and the risk management is all there. We just need to now add more producers to get to that level.

It's a centralized business?

Yes, it absolutely is. And really, all of our fee income businesses are. We have about 21 fee income businesses. They're all run at the enterprise level. That was not what we were like 10 years ago, 12 years ago. We were kind of Noah's Ark before we had sort of 2 of everything. But all of our enterprise fee income businesses that make up $675 million of fee income are all at the enterprise level.

Okay. A little bit on expenses in tech. We don't look like tech guys, but I think you're a tech guy, and I'll ask you the question.

I'm from Oklahoma, but I'm pretty -- I'm probably one of the best tech guys from Oklahoma, I think.

Okay. Well, good. That's perfect. You guys modernize the core. I think it sets you up in a way to maybe lean into AI and digital and some of the other things that banks are talking about. What are you seeing on that front? How does it help Zions become more efficient over time?

Right. There is no question that our investment in our core loan and deposit systems is a massive advantage because it is still out in front of everybody else. And if you want to survive in a digital world, you have to be digital at the core, okay? You have to be data driven. And the fact that we have all of our loans and deposits on one data model sounds kind of boring, but it's a big deal. And so AI, as an example, we've been using AI for 40 years like the rest of the industry. I mean it's in our fraud work. It's in how we prepare credit presentations. It's in client authentication. It's in a lot of different places. But the pace of using AI is accelerating rapidly. And we're seeing benefits across the company in reducing manual touches, reducing amount of multiple data entry. These are little things that add up to really quite significant evenings through the course of the year. And then if you go a little bit further out, there's all this talk with about stable coins and programmable tokens. And because of our relationship with TCS, Tata Consulting Services, the company that is our partner on our core loan and deposit systems, they have an application called Quartz, which is a -- it's a tokenized deposit, stable coin platform that they've used elsewhere in the world, just never in the U.S. We we will have their Quartz application in our innovation lab in the next 30 days, 60 days. And we'll be experimenting with stable coin and tokenized deposits later this year. There is no other regional bank that I think is going to be able to do that because this application is directly tied into our core loan-to-deposit system. Everybody else is going to have to create that linkage. And because we're real time, you have to be real time to live in a tokenized deposit, stable coin world, and we already are real-time. So I think -- this is going to be another example of David versus Goliath. I think you're going to end up a year from now hearing us say things that the global banks are doing, and we're able to do it on scale with our client bases at a lower cost.

How does that manifest itself through the P&L?

Well, it will be another revenue stream. And -- but the big issue with programmable coins and stable coin is finding the use case. Everybody is still searching for the use cases, okay? So we're going to be like Don Quijote out there trying to find the use cases. Although, I think we're going to find them. We're not going to have to get all the way to the windmill to find them. And we have customers that want to experiment with us right now. So -- and I'm not talking about bitcoin. These are stable uses. And I think for us to be competitive in the future, the fact that we can deploy this at such a low cost on scale is going to put us in a very good competitive position.

It'd be interesting with the small business and...

I think small businesses, absolutely will find their way into this and in some cases, faster than really large businesses.

Okay. Anything else on expenses as this kind of technology journey allowed you to reposition people out of cost centers into revenue production?

It has. If you just look at full-time equivalent employees, FTEs for us, our peak was in August of 2019. We had about 10,300 colleagues. At the end of the year, we were about 9,190 colleagues, a little less than 9,200. So a big decrease over this period of time. I think we'll be well less than 9,000 by this time next year. And some of it is this continuous focus on simplification and on the use of automation and AI. We've also been using outsourcing. We did a survey with PwC about 3 years ago with us and 7 other banks, 8 other banks, and it was a confidential survey. And most of our peers, which we knew have been using outsourcing in managed services for decades and 10% to 15% of their -- 10% to 20% of their FTEs are offshore. We were at about 3%. We'll be at about 10% by the end of this year. So -- and it's more than just business process outsourcing. What we're able to do on managed services where they're able to provide expertise in complicated areas of technology where it would take us 90 days to 6 months to find the expertise in key technology domains, they can spin up in 60 days for us. And so it's really allowed us to go after and spend less money to do the basic evolution that we're doing.

So it's a very positive operating leverage message?

It is. And we're bringing nice positive operating leverage into the new year. And it's such a -- I mean, it's kind of the way to continue to improve return on assets and return for shareholders. And so -- and I think the interest rate environment is going to help us here maybe more so than we thought this year.

Okay. I want to touch on credit and capital a little bit. But on credit, just the prior session was the BDC panel and it's usually a ghost town, and it was packed. And everybody wants to talk about NDFI. Just remind us of your exposure and share a feel about it -- share how you feel about it.

Sure. We have about $2 billion in NDFI loans, and it's been flat. We've had about $2 billion for the last 5 years. So it's not been growing. The rest of the industry has been gulping down NDFI loans. If you haven't paid attention to that, you really should. The -- ours has been flat, and our peers are just gulping it down, okay, and they have been for years. Our exposure is about 60% of it is business credit or consumer mortgage-type credit and it's been a very stable book for us. We clearly had an issue in the third quarter of last year. We lost $60 million on a customer that -- whose name has been disclosed. And that was very painful for us. And it was total fraud. It's hard to imagine fraud on that scale, but it was total fraud. And we brought in an external adviser to look at it, and we've done all that with our Board and regulators. But it was a one-off. And you saw that in our credit metrics in the fourth quarter. So even with that, we were -- our charge-offs or there were -- net charge-offs were about 15 basis points, which still almost leads a league in our peer group. Our peers are much higher than that, as you know. And in the fourth quarter, we returned to below 10 basis points, which is kind of -- we try to live in 5 basis points to 15 basis points over long periods of time. And I think you'll see that. And we feel good about the credit book. If you think about 2, 3 years ago in this conference and the discussion about real estate and all the disclosures about real estate, et cetera, et cetera, we've had virtually zero charge-offs in our $13 billion real estate book over this 5-year period.

Okay. On capital, you guys have had tremendous TBV growth as AOCI has burned off. And you have a $75 million buyback authorization that you put out for the first quarter. Talk a little bit about share repurchase appetite and overall priorities for capital.

Well, we've been -- in the last couple of years, we've been doing a buyback in the first quarter that was pretty much equal to the stock we had to issue for executive -- employee compensation, about $35 million and some change. And we've done that for several years. We did $75 million now. So that's more than double what we needed to cover the employee compensation issuance. And we've said we're -- we can see what investors can see. And we're going to lean into returning capital to shareholders. But we're not going to go out 12 months necessarily and project it out that far. But I think the market can see that we're leaning into it. And...

This is a signal.

I think as it -- did you say signal?

Signal. Yes.

I don't know whether it's a signal or not, but it should be. It's signal like. Yes. And you've seen us do this before. We -- well, you've seen us, we've always wanted to keep our CET1 higher than peer median. And you saw us do that as we reduced shares from $210 million to where they are today, about $145 million. And I think you'll see us continue to do that going forward. We want to be a little bit higher than peer median, and we have the capacity to return capital, barring any other situation that could come up.

You always make us wait a couple of days after earnings for the announcement.

Well, that's our Board. We've made a habit of not trying to front run our Board.

Okay. Last question, just been on it a ton of time here, but M&A is the topic. Could M&A ever make sense for Zions?

You can look at our past, we've not been overly active in M&A. The M&A that we've done has been very opportunistic. We see almost everything that gets done. So you can tell what we're not doing. We're very conscious of our long-term investors like our deposit franchise. They like our low cost of deposits. They like our mix. They like the fact that real estate is a smaller portion of what we do. Those are dimensions that we think are important to our long-term investors. So I don't think you'll see us do anything that changes that dynamic. But we think investors want us to be entrepreneurial. They want us to make decisions. They want us to use our heads. And Harris said that on our first quarter earnings call. So we don't wake up every morning talking about M&A. We won't do that. But as a management team and executive team, we know how to muscle up around it when we need to.

Okay. So you feel good about growth. You feel you can fund it. You like the margin profile. You like the fee profile, feel good on expenses and...

That is a great recap. I think we -- and then you just look at our price that trades at a discount to peers, and you have to ask yourself why. And I think I think for some reason, people still think about capital or the tangible capital issue, but you can see that accreting. It's just kind of a math thing. And so you look at credit quality and our credit quality is outstanding, and you look at our regulatory relationships and the interest rate environment, positive operating leverage, everything you just said. And I think if you like buying value, things that are at a discount and you can't explain the discount. I think those are all things that are very constructive for long-term story.

Okay. Thanks, Scott. We appreciate it.

Thanks. Jon, it's good to be with you.