Zions Bancorporation, National Association ($ZION)

Okay. Last stop for today, we have Zions Bank, Scott McLean, President and CEO of Zion. Scott, welcome to the conference.

Thank you, Manan. It's great to be here with you. .

Perfect. Yes, let's get right into it. Let's start at a higher level. It feels like Zion has done a lot of blocking and tackling over the past 2 years, setting up the bank for growth. How would you characterize where Zions is today from a growth perspective versus, say, where the company was maybe a year ago?

Sure. No, that's a great place to start. We really kind of have to look at the journey we've been on over the last 3 or 4 years. So we've completed our big core conversion, the only U.S. bank now that has replaced its core loan and deposit systems. And that is huge for us to be real-time, natively to have 1 data model for all of our loans and deposits. It's just a big advantage, and no 1 will really catch up for years now at this point. To get through the Silicon Valley disruption, March 10, 2023, that had a disproportionate impact on us. We lost about $400 million in revenue in about a 6-month period just in repricing of deposits. And we said it would take 2 or 3 years to totally heal from that and investors have seen that now. Net interest margin now back up to 3.3%. And so we've made it through that and our relationship with regulators has never been better. The technology foundation of the company gives us a lot of flexibility. So the foundation of where we are today is just terrific. And it's really allowed us about 18 months, 24 months ago to just totally orient to growth. We've always been interested in growth. We've always been focused on it, but we just don't have any external or internal distractions right now. And that's -- it's just a huge breadth of fresh air and you can -- it's palpable inside our company. And Harris Simmons, our CEO, has really led the charge on just reorientation to growth, and it's really manifesting itself in initially energizing, reenergizing everything about our branches. We have about 407 branches. And our branch model has always been absolutely critical to supporting our small- and medium-sized businesses that make up 2/3 of our revenue. And they've certainly been selling and bringing in new clients. But the primary orientation was just to do a great job for these medium and small businesses. The focus we're changing to is just adding a broader set of products, testing off existing products. We've had 6 key strategic products, 2 of which are important granular depository products and doubling the advertising that we do. You've never heard Zions talk about advertising. Have you ever heard me -- have you heard about us talk about advertising ever?

I have not. No.

So this is the first. But we've -- we will double the dollars we spend on advertising in '26 versus 2024, and it will be almost entirely product advertising, where our advertising before was brand principally. And we've totally reshaped the way in which we go about marketing and the company have brought in a lot of expertise. Eric Lucero, our Head of Marketing, came from First Republic, which we don't plan on having asset dislocations like they did. But we -- they had a great brand. They had a great marketing activity there and he's brought in colleagues from Starbucks and JPMorgan and a collection of other really high advertising-oriented firms. So that's definitely part of it. And then a number of new businesses we're investing in, we've just announced this acquisition of the DUS licenses, Fannie and Freddie from Basis Finance. And we'll be 1 of 4 banks in the U.S. to offer a CMBS platform and then a Fannie and Freddie DUS license. JPMorgan, Wells and Key are the other 3. That still has to close. It's under regulatory review, but it's going to be an exciting way to expand the product set that our commercial real estate bankers have had. Still investing in capital markets, still investing in treasury management and we'll be investing more in wealth as we go forward. So we just are spending a lot of time talking about growth internally, and it's been a lot of fun.

So yes, so a lot to be excited about. I think we can dig into some of those. You started out by talking about the core systems conversion and now that's complete. Maybe talk a little bit about what owning and controlling that modern core means for Zions? And what does it allow you to do differently versus peers and prepare you for a more digital world out there?

Right. If you just think simply about it, if you're going to survive and be successful in a digital world, we think you need to be digital to your core. And virtually no other bank in the United States can say that because their core loan and deposit systems are not real-time, they operate on many, many different data models. We have all of our loan and deposits on 1 data model, which is unheard of. And it's real-time, it's API-enabled, it's very intuitive on the front end. And so it's offering us advantages. It's taking half as long to open a new account in branches. It's helping us real-time, helps us with detecting fraud for clients, which is like the #1 client concern right now, and it is the #1 concern for us is helping clients protect themselves from fraud. And so just -- this has been done 300 times around the world. It just hadn't been done in the U.S., this kind of core conversion. So the other thing it does is, as the narrative has shifted to stable coins and tokenized deposits, our partner, Tata Consulting Services, TCS, out of India, arguably the largest IT consulting firm in the world. They have a stable coin tokenized deposit platform called Quartz. We've now brought Quartz into our environment, and we have it in our innovation lab. And we'll be experimenting it with it this year. As the rest of the banking industry is figuring out where will this all go, we actually have a platform we can go live with. And so again, it's hard to know where stable coins and tokenized deposits will go. But because it's TCS' application, it integrates into our core system just like that. Nobody else is going to be able to do that. And nobody else has real-time natively and digital currencies, tokenized deposits need real-time to be successful. You can mimic it, you can spend money, you can have a higher risk environment, technology to support it. But being digitally native is really a strength when you think about moving into digital currencies.

So how do you expect that will help drive more business, whether it's revenue opportunities, whether it's on the expense side, maybe talk about some of the benefits of having that core platform?

Yes. So because it's API-enabled, we are -- our ability to integrate automation and AI into the core to simplify our loan and deposit operations, as an example, is greatly enhanced. So we have a continuous flow of activities that we're automating into this core because it is structured the way it is. And so that's 1 of the biggest. I mentioned fraud is a big benefit, fraud detection. And again, being positioned for stable coins and tokenized deposits. It is a benefit that's hard to quantify right now, but I'd rather have the flexibility than be wondering where we're going to get it from as a $90 billion company.

Because these are investments for the longer term here. So it gives you a lot more flexibility over the next several years. Let's take a step back. Let's -- if you can talk about what the competitive environment is like out there? What is the client sentiment that you're seeing within your footprint? Talk about pricing structure, new entrants. What are you seeing out there?

Right. I think customer sentiment is basically, it's cautious, but it's forward-leaning. You can't help but read everything that's in the news and not be ever so slightly cautious. But I think most small- and medium-sized business owners, they're leaning forward. They know they have to keep going forward. They learned that from the pandemic. They couldn't stop in the middle of the pandemic. They had to keep going and solve for inventory problems and supply chain disruptions and et cetera. So most of our client base, we see them forward-leaning, continuing to invest in growth. Competition. There's a lot of talk that competition is really peaking, et cetera, I don't know. Having done this for 47 years, it's -- I've never seen a period where it wasn't highly competitive. And so I just think you either get used to dealing with competition or it scares you. And for us, we're just used to it. And whenever things get more competitive, and bankers talk about losing business because of competition, what they don't talk about is the quality of their call programs. Because if you have a strong sales culture and strong call programs, even when it's highly competitive, you'll see more opportunities and your hit rate may be lower, but you generally have more opportunities if you really focus on sales practices. So I think -- you mentioned new entrants. We've certainly seen that in Texas with Fifth Third acquiring Comerica, Huntington acquiring Cadence and Veritex. Prosperity has made a recent acquisition of Stellar. We've seen it in Colorado, another important market, PNC acquiring FirstBank there. Those are all great acquiring banks, and they're great bankers, and they'll do a good job. But we live in competitive markets. So having more competitors, it just -- it doesn't change how we react. The opportunity though is no matter how good a job they do with integration, it creates disruption, it puts their bankers in play, and it puts their customers in play. And so we -- not in a predatory way, but in a competitive way, we have playbooks we've run for decades on banks that are being acquired because they go through a volatile time. And they'll be wonderful competitors long term, but over the short and intermediate term, I think it offers opportunity to us, particularly in Texas and Colorado.

And then you focus more on, say, the small and midsized business clients. Is there anything different there in terms of what you're seeing in the competitive environment? Or how does that -- your positioning with these small and midsized businesses drive your or shape your ability to compete?

It's a great question. And I think it's why our core franchise is so valuable because if you were just to close your eyes and say, where do you -- what segments do I really want to compete in? I would pick small business and in the lower end of middle market, which is exactly what we are. And the reason is that they greatly value relationships. Surveys have said this, clients say this. They greatly valued relationships, and they greatly value access to bankers -- local bankers. And that's what we do. That's what we're known for. And so the -- when you think about our major competitors, fintechs on the low end, they have a hard time reaching up into -- they can do consumer great then do micro businesses okay. But when you get up into small businesses and medium-sized businesses, they can't really put a banker with their technology. They can't put a relationship with it. So they have a hard time playing up into our segments. And the global banks are awesome, but they have a hard time playing down into our segments. And so it's a -- I'd rather be doing this than mass consumer, where the fintechs are alive and well and the global banks are alive and well. And I think everybody just eats each other for lunch.

So it's perfect niche for...

It is a perfect niche. And so when you think, again, that 2/3 of our revenue comes from banking, medium-sized businesses and small businesses, and then you think about something like SBA lending, we -- SBA 7(a) lending, we're now ranked 11th in the country in origination of 7(a) loans. We are larger than JPMorgan. We are larger than Wells. We are larger than BofA. That's kind of incredible. When you think about little old Zions at $90 billion, we originate more small business 7(a) loans than they do. And we're not happy with being at 11th. We'd love to continue to aspire to be up in the top 5, ultimately, of SBA loans. JPMorgan, BofA and Wells they're 45, 50x our size. And so when we say arguably pound for pound, we're the largest bank for small businesses in the country. This SBA statistic, our origination of small loans, loans less than $1 million would suggest this as well. And it's a great market to be in, I think.

So let's talk about deposits. When -- how are you thinking about deposit trends more broadly? And as you think about deposit mix and funding cost trends, how are you thinking about that as we move through the year?

Yes. So everybody that follows our business, you especially know that for decades, we've had top quartile performance in total cost of deposits, lowest cost of deposit, lowest cost of overall funding and the highest mix of noninterest-bearing deposits to total deposits. Those are 3 really important value drivers. And those are as much intact today as they ever have been. This is why the deposit franchise of our business is so important. In terms of current trends, [ noninterest-bearing ] deposits have been coming down since rates went up in 2022. Ours came down also. But in '25, they stabilized. And we're actually now seeing growth. First quarter '26 versus first quarter of '25, noninterest-bearing deposits are up about $1 billion on average. Period end to period end, it's more than that, but I'm kind of deal with averages guy. And on average, if you adjust for the Coachella of acquisition we made in the first quarter of '25, they're up about $1 billion and on a base of 25 day in noninterest-bearing deposits, it's really nice growth. And it's just coming from our core small business franchise. The other thing we've been focused on for the last 9 months, which I think is really important, is that we're turning our focus a little more to lowering our overall cost of funding, not just total cost of deposits. And what that means is that if you go back to June 30 of last year, we had about $7 billion in brokered deposits and net overnight borrowings. So overnight borrowings, less short-term investments, $7 billion. It's down to $2.4 billion in March. The way we're doing that is we're going to our larger clients, bringing in larger wholesale deposits that are priced 30 to 40 basis points accretive to broker deposits and overnight borrowings. It really is -- it's kind of a declaration that we'd rather pay our clients higher rates than broker deposits and overnight borrowings. And it's -- so it's basically creating earnings from higher-priced deposits that are relationship oriented. And when we do that, other business comes with it. And when we bring in new prospects with it, other business comes with it. So we're using it more as a tool than ever before, and you can see a real material difference.

So a lot of the other initiatives that you've also introduced are the Gold Account and the Business Beyond Campaign. Can you talk about the objectives behind those programs and how they're contributing to the overall deposit strategy?

Right. The this Gold Account for consumers is -- it's not rocket science. It's just -- it's a bundled account of products for consumers with terrific marketing associated with it and it's been very popular with clients. We started -- really launched it in the fall of last year. And our goal is to originate about 20,000 of these accounts over a 12-month period. And we're not quite at that rate yet, but we're about 85%, 80%, 85% of that rate, which I think is actually pretty good right out of the gate. And the balances associated with these Gold Accounts is better -- significantly better than what we've traditionally oriented in terms of consumer accounts. The business -- corollary of this is called Business Beyond and it's a bundled business account, and we literally just launched it in May. And so it's kind of too early to really quote any numbers other than to just say we're pleased with how it's going. And they -- they're just both very attractive offerings. There's nothing unique about having a bundled account, but in our environment where we've not offered anything like this, we think it's going to be very retentive and it's going to speak to our small business owners and affluent clients in a way that we have not been as aggressive. And then if you put the advertising against it, which we have, we're just telling our story better. So they're going to be exciting, I think.

Is this bringing in new clients? Is it deepening relationships with existing clients?

We -- unfortunately, the answer is both. And we haven't quoted any of the stats related to that. So I think you'll hear us talk about that more in the second and third quarter, but we haven't quoted any statistics about new versus existing or conversions, et cetera, other than to say that we are pleased with it. And so I think that's kind of the situation on.

Got it. Okay. So stay tuned.

Yes.

On the lending side, let's move to that side of the balance sheet, how are you thinking about loan growth as we move through this year? And as we talk about potentially a higher for longer rate environment this year, forward curve is pricing in a rate hike maybe towards the end of the year. What are you seeing in terms of pipeline trends and line utilization on the lending side?

Sure. Higher for longer rates and a possible short-term rate increase, where that just wasn't even on the radar a year ago. And so I -- from a business sentiment standpoint and a pipeline standpoint, I don't think higher tenure rates and slightly higher short-term rates is going to impact customer demand. I mean, really, if you go back to 1970 -- go from 1970 to 2008, the tenure for almost that entire period was over 5%. So the U.S. business economy can work great with 5% or less that range of tenure rates. The reason people complain about it now is we had about 10, 12 years of 0 interest rate. And so it's kind of a wine -- it's a little bit of a wine without distinction. I think most business owners are like, yes, I'd rather have 0, but I can operate with 5%. They absolutely can. GDP can grow nicely. So I don't think it's going to be a deterrent. And if short rates go up a quarter, I don't think that's going to be a big deterrent either. So I think neither will really impact loan growth, except for maybe residential mortgages. So the tenure will sort of mute short-term residential mortgages. Loan growth in general for us, we've always sort of guided to mid-single-digit loan growth, and we're not performing to that level right now. So we're not meeting our expectations right now about loan growth. We'd like to see instead of the 2.5%, 3% range closer to 5%. And I think that can happen. The biggest message that I have for investors and have been -- we've been saying this for some time, is you really need to look at what HA data really means. You've got to unpack the components of it. And when you do, you need to make sure you understand what you're investing in. I know that sounds kind of arrogant or maybe it's not arrogant, but just a little critical of folks that just think, okay, well, HA data is growing at 7% or 6% or whatever and we're growing less than that. You got to unpack MDFI, look at MDFI. Our exposure to MDFI is among the lowest in the industry of major banks. It's about 3%. We've had 0 growth in 5 years of $2 billion of MDFI, almost 0 growth in 5 years. Our peers have been gulping down in MDFI. The numbers are all public. We actually have been in our presentation, you show them. And look at CRE, commercial real estate. For 15 years, our commercial real estate growth by design has been half of what our peer group medium has been. It's 25% of the fastest-growing peers in CRE, 25%. Our peers are gulping down CRE growth, okay? They're easy loans to make. It's much harder to make a C&I loan. And so I just think -- and what do people worry about when you see a recession on the horizon? They worry about unsecured lending. We're not a big unsecured lender. It's about $600 million for us. We've never been a big unsecured lender, personal unsecured. So I think when investors look at our results versus HA, they need to really be careful to think, well, what do I want? And if I want a lot of MDFI and I want a lot of CRE and I want a lot of unsecured, well go invest in our peers. If you want really high-quality commercial, small business loan growth with a credit track record that is top quartile for a long time, then that's who we are.

Yes. I was just going to say that as we look back as well, there has been that credit outperformance at Zion relative to PS.

For over a decade, 15 years. Our net charge-off ratio generally is kind of around 10 basis points, plus or minus, and our peers are in the 20 to 30 basis points. Peer median is in the 23. That's a huge difference. And someone might say, well, you're not taking enough risk. I don't know. We take the risk we want in the segments we want, and we want to be really disciplined, and we think investors should value that long term, particularly as they see these oversized loan growth numbers in categories that can be pretty high risk.

Got it. Okay. Let's talk a little bit about revenues and -- how are you thinking about the key drivers of net interest income growth from here? And what are the most important factors that could drive performance over the next year or so relative to expectations?

Sure. We -- higher rates for longer are definitely a good thing for us. Short-term rates staying where they are rising is it -- I think the interest rate environment is very constructive for us. We've -- the fact that our demand deposit base is stable and growing is a large contributor to net interest margin and earnings in general. But in our first quarter call, we did something we haven't done before. We basically said net interest income would grow 7% to 8%, 1Q '27 over 1Q '26. We've never quoted a number like that. We've used elliptical...

Qualitative, yes.

The qualitative terms. And that's without higher rates. It's without higher tenure year or higher for longer. It's without unusual balance sheet remixing. It's just what should happen naturally as we go through this period. And so if you think about 7% to 8% net interest income growth and you think about our fee income growth right now, which is a 6% to 7% to 8% range, total revenue looks like 7% to 8% revenue growth. And pick any expense number you want, you can see this case for continued positive operating leverage at levels that are probably higher than what the street has built in.

So I do want to dig in on the operating leverage side, but maybe to just finish up that conversation on NII. So as we think about that 7% to 8% growth you're out from here, what are the most important drivers behind that?

Right. So the -- again, higher for longer helps, demand deposits help, the fact that they're stable to growing. And then this attraction of wholesale deposits at rates that are accretive to overnight cost of funding is beneficial. We have -- securities portfolio runs off about $600 million a quarter, we're reinvesting half of that. So there's about a 120 basis point plus or minus pick up on that. We may decide to reinvest all of the $600 million each quarter. We still have some benefit, a tailwind from canceled swaps that have been well documented. And so those would be some of the major contributors to it.

Got it. So then you mentioned the operating leverage. I think you generated about 300-plus basis points of operating leverage in 2025. And then you've guided to another 100 to 150 basis points in 2026. You ran through some of the drivers in the revenue side. Can you run through some of the drivers for the overall operating leverage, maybe based on the expense side as well?

Sure. On the expense side, we generally have guided to kind of less than mid-single-digit growth. And our expenses through the first quarter were growing at about 4.5%, 5%. And that's largely driven by investments we're making in these growth strategies. So new products, higher advertising, the investments we've been making in capital markets, continuing to build that out. Our capital markets revenues grew 50% from 2023 to 2025. 2-year period, up 50%. We think we've got a lot of runway on that. Mike McDonnell, who runs our Capital Markets business has brought in a lot of great colleagues. We've invested a lot in our platforms, our technology risk. And we think there's -- we're going to keep spending money there. And on other areas like wealth, we just hired a fellow named Mike Selfridge, who was the Chief Banking Officer at First Republic for many years, and he was very much a part of what First Republic built in terms of private banking and wealth management. A terrific hire for us, and he'll be running our wealth business. And so we'll keep investing there with people principally.

Got it. Okay. So as I think about NII, there's benefits from solid loan growth, nice deposit growth, a little bit of NIM expansion there as well. And then as we think about the expense side well -- and actually on the NII side, there's also the benefit of the terminated swaps as well.

Right.

Got it. And then the expense benefit as well. So you've guided to about 100 to 150 basis points of operating leverage this year and fairly confident that you can get there.

Yes.

All right. Perfect. Since we -- maybe let's talk about the capital side. You recently announced a $300 million buyback target for 2026. What are the drivers that went into that decision? I know you had originally said about $75 million for the first quarter, which you executed on and then you came out with a $300 million target for the whole year, what are the drivers that went into that decision? And how do you assess your capital priorities from here?

We really want to set the signal that we're back. We're reentering the buyback process. And so 1 year as opposed to quarterly, just we hoped would send that signal. It doesn't mean we're going to do anything after that. Our Board will decide. But we -- you can look at our CET1, which is really high relative to peers. What people have been focused on is our CET1 ratio less AOCI, okay? We're currently at about 8.8% in that regard. So it's continued to heal really nicely. And if you just do the math of AOCI accretion and picking the earnings number you want, our CET1 AOCI adjusted will be over 11% in June of 2028, 2 years from now.

And that's from earnings accretion?

That's from AOCI accretion back into earnings and from basic earnings during that 2-year period. At that point, we're no longer the bank that had a big AOCI hole to fill, okay? That will have completely healed. And our peers are sitting -- they're basically stating they want their CET1 AOCI adjusted in kind of a 9.5%, 10% range, mid 9s to low 10s. I don't think we're going to get to 11-plus percent, but that's the math. It just says we should be able to have capital available for acquisitions or return capital, because there wouldn't be any reason for us to hold that much. It also doesn't include the positive impact of the new Basel proposal, which favors traditional banks. And it if you do the math on that, which will become more evident, it definitely benefits our CET1 anywhere from 50 to maybe 90 basis points. So that benefited and isn't included in that calculation either. So I think -- I don't think investors have been worried about our capital, AOCI adjusted. But that story is like going into the rearview mirror fast and it gives us more freedom from a capital return standpoint.

And especially when you think about the solid like 4-ish percent loan growth that you typically run at, right? Like that's what -- that would be the biggest driver of what's consuming capital from a growth perspective. And then you clearly have more than that, that you were creating with earnings accretion and AOCI on back. That's what drives the buyback decision. And I guess you're not -- what you're saying right now is $300 million for 2026. But beyond that...

Our Board will decide at the end of this year. And then we'll probably go a year at a time, so that people know we are conservative about this. And -- but I think the odds are good that we'll continue this process into next year, given that math. But again, it's a board decision, and I would never front-run our board.

Perfect. All right. So then, Scott, maybe in closing, as you think about the next several years for Zions, what you believe is most underappreciated by investors? I think we've gone through some of that already, but maybe in a nutshell, what would you ask investors focus on?

Sure. I think it very simply -- and I -- we're undervalued on a PE basis and a price to tangible book, and we have been for many years. I don't know if it's because we look too conservative or -- I don't know exactly the source. But what I do know is most banks have nothing about them that is nationally distinctive. We have many things that are nationally distinctive about us. The fact our model is truly different. And I'll -- we'll play with a local model and we'll go to the market with that, and we will not change that, okay? All the other big banks have gone away from that years ago because it's just too difficult. It's easier to run a silo structure than it is a geographic or locally oriented structure. And our competitors say they're local and God bless them for doing that. I respect them, but I don't see it in the market and I don't think others do either. So it's nationally distinctive how we're organized. It's nationally distinctive that 65% to 70% of our revenue comes from banking small- to medium-sized businesses. It's nationally distinctive that how those customers feel about us is so much stronger than how they feel about our global bank competitors that control 60% of the market, plus or minus. It's nationally distinctive the deposit franchise that, that orientation manifest. And it's nationally distinctive when you think about our technology platform, how could a $90 billion bank have the technology platform that we have? And yet, it's an advantage, and it's real and people know it. And nobody has ever come out and said, "Everything Zions saying about their core is just not true." They know it's true. So these are elements of national distinction. And when you combine that with a capital story that is improving, has improved significantly and will totally not be an issue 2 years from now, it's really not an issue today. And a story about positive operating leverage even if modest, I think just gives us a value proposition that should be very attractive to investors.

All right. Perfect. With that, we're out of time. Scott, thanks so much for joining us.

Thanks, Manan. And good to be with you. .