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

Yes. I think there was some confusion in terms of how you were kind of framing the NII outlook. Just -- maybe just how you're thinking?

Yes. So I mean, I think fundamentally, we're built for -- the way we'd model it is 100 basis point parallel shift upward in the curve should generate about a 4% increase in net interest income and everything else being equal. Everything else isn't equal, obviously. And we're talking about credit spreads could be a little bit of a headwind. But I think that fundamentally, we're in quite good shape for where Kevin Warsh is likely to take the bus here over the next year. So I feel pretty good about how we're positioned right now.

Got it. So I guess just maybe to clarify, to get to that high single-digit year-over-year growth, what rate backdrop would it take?

No. I mean I think that's anticipating what we're seeing in the forward curve, which I think at the last call, we're starting to see more outlook for probably with cuts or behind us, and we're probably going to see some steepening. So I think we have -- Dave, you can remind me, but I think we had two -- I think, two rate hikes in that, I believe. Yes, -- anyway, so it's building in the anticipation of [ 1 to 2.25 ] point hikes.

Makes sense. And just talk to net interest margin, and I fully appreciate this is an output, not an input. But you had 9 quarters of expansion. Last quarter, we were kind of stable-ish at 3.27%. I think last year, we talked about normalized maybe closer to 3.5%. I don't know -- I'm not sure if we can get there. Just how you're thinking about managing NIM against everything we've talked about so far?

Yes. I mean one of the things -- there are a couple of comments I'd make. One is that underlying it all as -- particularly as we start to build the securities portfolio at current yields, that will help. I say that's maybe still a little way off. And in the meantime, with better deposit growth and without offsetting loan growth, I mean that's probably a little bit of a headwind on the NIM, but not on the net interest income. So incrementally, what's happening, deposits coming up, but a lot of that -- some of that's going into cash because we're not seeing loan growth. So I think I expect it's going to be reasonably stable through the next few months until -- but as we start getting into a place where we see better loan growth and start replacing securities with higher-yielding current yields, I think that should continue to help improve the margin. Ultimately, I think I said here a year ago, I do think that probably kind of somewhere in the mid-3s, 3.5% or so is about where our sort of the mix of deposits we have and the kind of business we're running should take us. But it will take a little bit of time to get there.

Maybe moving to the fee income side. Certainly, you've been building out a bunch of those capabilities. Wealth management comes to mind, hired Mike Selfridge from First Republic earlier this year, a name many of us know. Maybe talk about kind of what his mandate is and what we could just expect from that business. It seems like a big opportunity given your footprint.

Yes, we think it is. And we think -- we're really delighted to have Mike on board with us. The mandate is really to work to integrate wealth management into our private banking operation. We've got -- we have a lot of business owners. We have -- we think there's a huge untapped opportunity there. And I think we have the leadership and Mike to be able to continue to build that. I mean, Rebecca Robinson, who had been building this the last few years was -- did a great job taking what was really a very kind of a ragtag operation, getting it, and making money. And Mike, we think, will take it to a new level and really pleased with him. We have accompanying kind of the larger kind of wealth clients. We're also doing something on the retail front with Wealth, call it, Wealth Select. And it's really designed for somebody that has $100,000 to $600,000 or $700,000 to invest. I mean, there are just a lot of people out there. And particularly given kind of all the small businesses we bank, I mean, we think there's a lot of opportunity there to build managed asset balances as well.

Got it. And then maybe turning to capital markets. It's a business you built up over the last 5, 6 years. Maybe just talk about the progress you've made there. You mentioned the basis acquisition, just how that fits in.

Yes. Well, Mike McDonald, who is building that business is first rate. We've kind of doubled the revenue over the last 4 years. And added in the last year a commodities hedging business. It's coming along very nicely, an investment banking capability. We have a handful of bankers who are now working with some really great opportunities that -- I mean, these are deals that generate fees kind of $2 million or $3 million to $6 million, $7 million fees. They're not large in the scheme of things, but we have -- but there are a lot of them, we think. We think there's a lot of opportunity there. And so he's got some great people we've added. They've come out of some major banks. We've got a team in Charlotte, down in Houston, Los Angeles. And -- we're really pleased with what he's building. This basis acquisition gives us a new set of tools. We've become one of a very small handful. There are only 4 or 5 banks in the industry that have both Freddie and Fannie licenses as well as CMBS capabilities. And we think that's going to be a really nice combination to build from. And we got some good leadership in place for it.

Got it. And I think when you -- on the July call, when asked about basis, you said you weren't allowed to talk about the financial impact or contribution from it because the deal hadn't closed, it's now closed. Any thoughts around what this impact could have?

Well, I think that it was -- it's a business that there's a lot of building to do with it. But we'll continue to work with Basis Investment Group here in New York. We expect will be referring business to us. They're really good. And we'll add to that the distribution that we have through a pretty deep client set in the West. I mean we're in a part of the country where you have a disproportionate amount of population growth taking place and where affordability has become a real issue. You've got families that are starting later, and they're smaller. And so you're just seeing more multifamily product. as part of the housing mix. And we think that we're going to be really well positioned across the Western United States to help address the term financing needs of these clients. I expect that probably, if I look out 3 to 4 years, I think it becomes a $30 million to $40 million kind of revenue business, and kind of ramping up towards that. So...

Interesting. And maybe on the expense side -- I think we're about 5% year-over-year in the second quarter on a core basis. You've talked about getting to 100 to 150 basis points of positive operating leverage this year. Just -- how are you tracking against that objective? And how should we think about costs in the back half of the year?

Yes. Well, I expect that -- and I still think that that's probably kind of the right kind of target. And the operating leverage is -- and I expect that continues into next year. It's -- I tell our folks, you have to be worry of not painting yourself in a corner with an operating leverage, long-term target because it's something that because it's an incremental kind of thing, everybody hits a wall there eventually. And -- but I think we've got some room to run still before we do that. And that's with some additional, like I say, some additional marketing expense in the mix.

Got it. Maybe shift gears to just credit quality. It's obviously been a nonevent. I think we 6 basis points of charge-offs last quarter, despite good loan growth. Just industries portfolios, are you being more selective or anywhere that you're kind of avoiding. You mentioned NDFI earlier, but maybe what else is on your mind?

It's -- we're just steady as she goes. I mean, we -- I think it's really notable. On commercial real estate, everybody was -- if you go back a couple of years, everybody has freaked out about office and everything else. I haven't updated my numbers for a couple of quarters. But I mean, the last I looked, and it's gotten better over the last couple of quarters, but we were running on average 0.7 basis point of net charge-offs in that book over the last 5 years. And so it's been a total nonevent, and as clean as the portfolio can be. And I don't see that changing. I mean, I think that if we get into a tougher economy, higher cap rates, et cetera, it's going to perform well. It's underwritten well. And the concentration relative to our total loan book has been steadily coming down. We got it down to about 22%. It was 1/3 of the balance sheet, 1/3 of the loan book go back after the financial crisis. And so steadily, we've brought that down. That probably goes a little further. But I find -- we like the business. I think we've got good people. And if you do it well, it's a good business.

I guess on the reserve side, reserve ACL ratio is now 1.13%. CECL day 1 is 1.1. As we kind of get back to that level, the economy is good, but just how do you think about that metric relevant? Or how we think -- how do you think about that?

I don't -- I'm a big fan of what Jamie Dimon said a couple a year or 2 ago, somebody asked a similar question. The reserve is -- he said a reserve is ink on paper. I mean -- and all of our internal metrics, all of our incentive plans, they're all geared -- we take the provision out of it. We depoliticize the whole process of it. We plug in net charge-offs. And I was joking with Tom Brown recently, we were talking about CECL. When I started my career, I was the CFO years ago of the bank and I just decide what the reserve was. I mean, it was back in the good old days when closing the books probably ought to be 110 -- 110 basis points. Today, we stress test, we go through all committees and oversight and auditors listening in and go through all the CECL calculations, we get to 110. So I think that Mickey Bowman is actually on to something that -- I mean, CECL has been kind of a whole bunch of nothing. And -- so I -- it's important because it goes into a filed financial statement with the SEC. And so you do build process around it, and you -- we talk about the assumptions that go into it, et cetera. But somehow, you always get back to about the same number.

Got it. I guess maybe on capital, kind of restarted the buyback $75 million or so in the last few quarters. The regulatory backdrop is more constructive than it's been in the bit. Just maybe just how you're thinking about capital deployment, capital management, share buyback, et cetera?

Yes. Well, I think the we went through a period came to a conclusion a couple of years ago with the new administration, where there were concerns about what the capital regime is going to look like about long-term debt requirements and all the rest. And clearly, that's changed a lot. It could change again in a couple of years. And so it's -- you kind of take a breath and grateful for maybe a pause here. But ultimately, what I think the focus is, is on making sure that if -- at some point, we're going to come into a downturn. I'm concerned that given how long it's been since the last real one. I'm kind of the -- if you're familiar with kind of the whole Hyman Minsky school of thought about this, an old Fed economist from years ago that I mean, the longer we go, the worse it probably will be. And that when we get to that point, you want to be -- we want to be a company that's known as having been disciplined in terms of how we built the book of credit we have. And we have solid capital and a good deposit base. I mean, it's the meat and potatoes of regional banking, I think. And so it's -- just really a matter of thinking about how our capital is going to look relative to peers as it's looked at by the market and not by regulators. Because it's a market that's really reacting to it in a visible way. And so you want to be in a place -- and I think -- we're quickly getting there. Tangible book value per share has been increasing at north of 20% for the last 3 years. And we're getting to a pretty good place. I think that's going to facilitate more in the way of buybacks next year. It's a Board decision, but we did this basis deal that it was done with cash. That took some -- but fundamentally, it's building at a nice pace. And CET1, excluding -- well, including AOCI, without -- excluding the exemption, if you will, is getting to a place where it's going to be in the high 9s, close to 10%, I think, during the next quarter or 2. And so I think we're going to be in a position where we can start to accelerate it.

I guess on AOCI, AOCI losses were like, I think, $2 billion-ish last quarter. Given the move in rates that goes up, does that matter some...

Not a lot. I mean, a lot of what we have is hedged. And so it should be pretty predictable.

Got it. And maybe talk about bank consolidation. There's been a few transactions in your footprint. We saw the first Hawaiian Tri-County deal, EverBank [indiscernible], maybe it's a bit unique. But I guess why -- despite that, I feel like we all came into the year thinking there'll be a lot more bank consolidation. So I guess, first off, why do you think there hasn't been more? And then given -- which we've talked about in prior years, all the significant investments you've made in technology on your systems, I guess why haven't you been more active?

Well, we've looked. I think the deals that have been done have been -- there are a couple of deals that have been done that we'd have been interested in that we -- you can think Colorado, what's taking place there. I mean that would have been a great addition, but not at the price for us. I mean I think that's a deal that a PNC can do and digest in a way that somebody our size relative to that size can't. So I am not one who believes -- we've talked about this before. We probably maybe have actually a difference of opinion I don't think that size is that it ever will finally solve the problem of efficiency in banking. And the data, I think, really demonstrates, if you look at kind of the weighted average efficiency ratios or different buckets of $5 billion to $10 billion, $10 billion to $25 billion, $25 billion to $100 billion to $500 billion on up. I mean, it's all pretty consistent really in terms of now the mix is different. And so -- and you get into capital efficiency, it's a little different issue. And we have to kind of scale that. That's why we have to work on fee income. But I don't think it's one where you have to get -- just have a larger balance sheet to be better at what you do. And I think -- I do think we've made investments in technology that I think lead the industry. I think we're in a great position to be able to do a deal to acquire larger community banks, et cetera. But it's got to be on terms that work for us. And -- so I don't wake up every morning saying, how do we get to $150 billion or whatever. I don't think that's how value gets created.

I guess from a financial perspective, when you're evaluating deals, like is there a metric or two that you kind of look at that like, "Oh, I want to buy First Bank, but I can't pay more than X," like, what...

Well, obviously, everybody is really focused on kind of tangible equity dilution and earn-back and everything. And so you look at those things. But fundamentally, it's -- because I'm not sure it's always necessarily the best measure. And it's one that frankly, once you scramble the egg, it's kind of hard to always figure it out anyway. But you look at what I think about is the quality of the deposit franchise is very much on my mind as I look at anything. What kind of -- and then on the asset side, if it's all commercial real estate, it's probably -- that's less interesting, I mean we could digest that if it's smaller. But the ability to actually take products that we have that's geared towards small to midsized businesses and pump it through there. That's where I think the opportunity is for a bank like us.

Makes sense. And just maybe in our final minute, in the second quarter, you did 16%, 16.5% ROTCE kind of ex the items. Just how do you think about the longer-term kind of profitability of the company? And how do you kind of balance returns versus growth?

Well, ultimately, returns need to come before growth because you -- and I think that needs to be -- the priority is you're creating value before you start doing more of whatever you're doing. And so -- but listen, I think that if we -- I would expect us to be thinking about something that's kind of 15 and north as sort of reasonably decent performance that you can grow with. And I think -- especially if you think about what the -- I know everybody might have a different opinion about what the real cost of equity is in the industry. But with -- particularly in an environment where you've got still pretty historically low long-term rates, if you're doing 15%, I think you're creating real value.

Sounds good. On that note, please join me in thanking Harris for his time today. Next up is lunch. We have a very interesting panel. So please attend.