Okay, okay, perfect. Wait up. Next up, we're very pleased to have Zions Bancorporation with us. From the company, Harris Simmons, Chairman and CEO. There is a slide deck that they put out this morning. I haven't seen it, and we're not gonna go through it, but definitely feel free to look at it. There's usually a lot of good information in there. Yeah, Harris, maybe just start big picture. You know, Zions is, you know, obviously Western U.S.-focused, very kind of, I would say, a leader in small business lending. Maybe just talk to kind of what you're hearing, seeing from your customers. You know, it's obviously a high interest rate, moderating inflation, economic uncertainty type backdrop that seems to be evolving each day. So any thoughts you provide would be helpful.
I'd start by saying, you know, the markets to which we operate, which are kind of Texas, and West and the Southwest, Northwest, up the Intermountain West, you know, the economy's in pretty healthy shape, but we, you know, we certainly feel kind of evidence of slowing. We're seeing that in the labor market. I think a lot of us are feeling that. We're seeing it in turnover in our own company. I'm hearing that from customers that where it used to be really tough to fill jobs, it's getting a little easier. We're seeing it in, you know, kind of evidence of slowing, certainly in loan demand, which has been pretty tepid.
We see it in multifamily projects. They're leasing up, but they're leasing up probably a little more slowly than had been expected at the outset, and so it feels, you know, in talking to customers, I think a lot of customers have arrived at this point with pretty strong balance sheets, and so that's kind of helping in terms of kind of dampening loan demand, so that's kind of at a high level, kind of what I'm seeing and hearing, but nonetheless, you know, everything's going pretty well. We're not really seeing credit cracks developing that are causing any concern.
Helpful. Maybe, we could put the first ARS question, which is asking this for all the companies. You know, loan demand, it certainly feels like it's been relatively soft, at least from some of the commentary thus far. Just want you talk to kind of what you're seeing and what you think maybe needs to happen to accelerate that. Is it lower rates? Is it getting through the election? Is it, you know, confirmation that we can actually achieve a soft landing here? Just any more color you can provide.
Yeah. I, you know, I, you know, I think, I think if we, we get through the election, have some certainty in terms of what policy is going to be, not only from the administration but from Congress, that's. I, I think that's going to be very helpful. You know, beyond that, lower rates will help marginally, but I don't think, you know, I don't think that's been the impediment. I think it's really just getting business owners comfortable that the next two or three years, they can kind of see what that looks like and feeling like it's a good time to actually start expanding again.
I think there's been a lot of uncertainty coming out of the pandemic, and it's getting beyond that and getting back to some kind of semblance of normalcy, so yeah, I think that that's the recipe for it.
Got it, and then maybe we'll go to the next ARS question, and just maybe kind of shift to the other side of the balance sheet with respect to deposits. You know, in terms of maybe just kind of color what you're seeing, you know, we've seen kind of sluggish deposits throughout the industry, kind of a shift out of the interest-bearing into... I'm sorry, out of non-interest-bearing into interest-bearing. You know, deposit costs have been kind of going up at a slowing pace. Just maybe any context you could provide there?
Yeah. I mean, deposits, you know, clearly, Silicon Valley and the events of last a year ago, this past spring, was just a total kind of grenade into the pudding that really unsettled depositors. It created a reaction where we were, you know, where large depositors were kind of taking flight, shooting first and asking questions later, kind of environment. You know, and I think, you know, certainly some of us were scrambling, probably, maybe even overreacting a little bit in terms of paying up. You know, we'd induced a lot of larger depositors to take funds off balance sheet in the money market sweeps.
We were calling them back up and saying, "Hey, we'd like to get that, get your deposit back, and, and, you know, we're paying a full market rate to do it." You know, I think there's been a lot of healing that's taken place since then. Everybody's calmed down, but, you know, that healing takes time, so in our case, we've had interest-bearing deposit costs a little lower than our peer group, and the demand deposits that have consistently been stronger than peer as a percentage of total deposits. You know, we're, you know, in the wake of Silicon Valley interest-bearing deposit costs, we've been north of peer. We're working to get that back into shape.
But you know, so we've made a lot of progress, continue to see improvements in the margin quarter to quarter, and expect that will, you know, that will continue. The demand deposit migration, you know, has really decelerated. And I, you know, think that's gonna be pretty manageable. I expect that that's, you know, it's got a little ways to go, but you know, particularly in a down rate environment, that it will, that will really slow and be a benefit. There's you know opportunity to bring rates. I expect that the beta on this market rate money is gonna adjust very quickly.
You know, probably the beta on the way down is gonna be somewhat symmetrical with what it was on the way up. That's kind of my best guess.
When you kind of think about maybe loans and deposits together, you have kind of run the separate brands across, you know, each of the main regions. Kind of any kind of noticeable differences, either in loan growth, deposits growth with the different segments you look at?
Yeah. Yeah, I mean, and we price in each market. On the deposit side, in particular, it's very localized. We've seen probably the most pricing pressure on the deposit side. It's been more a function of the composition of the deposits in each market. So in Houston, where we tend to have larger clients there than a place like Phoenix, we've seen more deposit pricing pressure. But I don't think it's inherent in the market. I think it's been really a function of the kind of customers we have in each market. I mentioned Phoenix. Arizona has actually been a very good market for us in terms of being able to kind of have price discipline on the deposit side.
California has. Utah's been pretty good. Colorado, Texas have been probably a little more expensive.
Helpful. And maybe, kind of tying the two together from a net interest income, you know, net interest margin expansion. You guys, I guess your net interest income appears sort of dropped in the fourth quarter, because you're one of the few banks to have growth in both the first and second quarters of this year as to kind of the NIM trended higher. Maybe talk to, you know, how you see that playing out. We've had some banks kind of guide up near-term net interest income reservations, some guide, banks guide down, some banks more optimistic on next year, some banks less optimistic. Let me just talk to you how you kind of think about managing the balance sheet in this evolving rate backdrop.
Yeah, I mean, I think there's still room for improvement in the net interest margin. And I would generally expect that to happen over the course of the next year. I expect that we'll see. And again, it's kind of this process of what I think of as this process of healing, you know, in the wake of what happened last year in the industry. Now, you know, and particularly hit kind of banks in the western portion of the country, I think maybe a little harder. And so, yeah, there's still room there. And I think, you know, prior to what happened in the spring of last year, we'd had our beta was really well contained.
We had kind of one of the better betas in a rising rate environment. That changed overnight. But as it heals, I expect that we'll get back to having a, you know, the deposit base that we have is a really good one, and I expect that that will start, it will increasingly show as we move away from the events of last year. I think for us, there's a, there will also be some remix of the composition of the loan portfolio. We've seen, you know, growth has come, probably, more than in hindsight, I'd have said was a good idea in terms of, growth from a one to four family portfolio.
Our strategy there is to move toward more of a originate and sell kind of model, and reduce the use of the balance sheet, and that, combined with what I expect will be a continued growth in the proportion of the loan portfolio that is in small and mid-sized business lending, I think will also be helpful to the margin.
Great. We'll go to the next ARS question. You know, I guess you talked to kind of the latent versus kind of emergent kind of asset sensitivity. It seems like latent kind of is a benefit and emergent is a drag, kind of a future impact of rates. I mean, I guess, how confident are you that you kind of will capture the kind of that latent asset sensitivity? Is there a way to kind of, you know, lock that in?
The disclosure we've provided, you know, if anybody's got our slides here, I think it's slide 12, shows what kind of disaggregates what Jason's talking about here. I mean, it reflects our best assessment of what the next year is gonna look like as of June thirtieth. I don't think that's changed a lot. I mean, you know, the prospect of rate cuts is certainly more real today than it was then, but I don't think it's really gonna fundamentally change our assessment of being able to capture a lot of that latent, as we call it, revenue that as is sort of baked in.
And if anything, in a falling rate environment, I think, you know, the assumptions about demand deposit migration probably improve a little bit. So I'm reasonably sanguine about continued path of improvement for the margin.
John, and the room seems to think you have some upside as well. Maybe shifting gears to the fee income side. You know, I feel like that's something you've always kind of been trying to grow as a proportion of revenues. Just maybe talk to kind of where you are with that. Capital markets seems to be, you know, more of a focus of late, and just kind of what you're doing to-
Yeah.
Move the revenues.
I mean, capital markets has been a focus. We've got some really good people. We've got a really good team that we've put together. I mean, we've been involved in a lot of kind of elements. We're really we've put them together into a business that's really starting to work well. We have you know a very commercially oriented portfolio. A lot though, you know, a lot of it's kind of towards small business, but out of those come some really great companies that over time turn into larger businesses that you have really strong relationships with, where we've been banking them for generations, literally. And we're finding opportunities in capital markets that are really exciting to me.
Wealth Management is another business where we had, we'd really operated as a collection of community banks, and none of them really had strong Wealth Management capabilities. That has really changed over the last decade, and we've got a really good Wealth Management business, that I think there's a lot of growth potential in. I think, you know, we're helped by the fact that we're not as reliant on consumer fee income, which has certainly been under attack. So, so to the extent there are headwinds there, I think that's less an issue for us than it is for some. But those, those are a couple of the areas where I see fee income growing.
Then another one's gonna be mortgage banking, just because I think we'll probably see more kind of gain on sale kind of activity in that book. Those are some of the principal areas we're working on.
Maybe on the expense side, you know, Zions has kind of been running in the kind of mid-60s-type percent, efficiency ratio. I guess, kind of where do you kind of see the company running longer term? I know last year, you kind of announced more of expense program, put some severance charges. Just kind of where are you with respect to the cost base?
Yeah. So our headcount in terms of full-time equivalent employees is down about 4% from what it was mid 2023. So that's helping. You know, the efficiency ratio is not where we want it, but it's a lot of that is it's as much a revenue issue as it is an expense issue. You know, our expense growth has actually been pretty well contained for the last several years. And if you look at kind of expenses, you know, it's all kind of how you measure things in part. If you look at expenses to assets, we actually look you know, pretty good.
It's asset yields, interest-bearing deposit costs is where a lot of the issue is for us, and that's why kind of this continued margin healing is an important part of our story. I think there's still... I mean, there, there's still opportunities, absolutely, opportunities we're pursuing on the expense front that I think are gonna keep expenses you know, pretty contained in the, in the coming year. And, you know, so structurally, I think there are opportunities. We completed the conversion of all of our core deposit and loan systems, as that project's been underway for the last decade, and really completed that in July. And, and so that removes some pressure going in the next year.
I mean, we'll move on to other projects, et cetera, but that's crowded out some other things that we've wanted to do. It gives us a lot of kind of freedom to be able to manage that number as we get into next year. So I'm basically pretty sanguine that expenses are gonna be really well controlled next year.
You, you referenced the Future Core, transition being complete in July. Maybe just... I'm not sure everyone in the room is kind of familiar with kind of what that allows you to do. Maybe talk to, you know, what other bank-- I mean, how many banks have actually made that journey? Or where's the industry-
Yeah
On that journey is, was really helpful as well.
You know, core systems are. They are really the workhorses of your technology stack. I mean, you have lots of, you know, applications, front-end applications, customer-facing stuff, applications that help you with compliance, all kinds of things. But the workhorse is your core deposit and your core loan systems, where transactions are processed, where you store customer balances, where payments are processed and, you know, recorded, systems of record. They become kind of almost like a mainframe, kind of, if I use an analogy. I mean, that's it. It is the central repository for much of what goes on in a bank.
Most all of the industry is on very old technology that dates back 30 and 40 years in terms of their core systems. We found ourselves in a situation where, looking ahead, we could see that the, you know, our deposit system was going to be end of life, end of support, you know, coming into a couple of years ago, and made the decision over a decade ago that we were going to move to an integrated system.
One of the frustrations that we'd had is, that I'd had over time, is that you buy a solution from a vendor, and the vendor is sold to a private equity firm who flips it to, you know, and after about two or three flips of the ownership of your vendor, you know, it's been milked of any kind of support, becomes end of life. You're back looking for a new system. We selected TCS, Tata Consultancy Services, out of India, as our vendor. By the way, just a footnote, I mean, it's a phenomenal company. This is a company that has ... I was visiting with the North American CEO recently. They have, in TCS, 600,000 employees.
500,000 of them are engineers. They're the largest employer of engineers in the world. They hire 60,000 software engineers every year. And this is a company that isn't going away. They're gonna be there for a very, very long time. They've got a very big installed base globally. This was their first installation of what's called a BaNCS platform here in the United States, and we're loving it. Our people love it. And the benefits of it have been... So anyway, I think there have been other pieces of cores that have been replaced around the industry. To my knowledge, we're the most extensive core system replacement that's taken place among any of the larger companies in the industry over the last decade.
It gives us the ability to process in real time. It gives us the ability to process seven days a week, if and when the United States were to move to that kind of a standard. It gives us, you know, something that's API-enabled, that is being invested in all the time by the vendor. A lot of the benefit of it has come along the way because it really forced us to deal with a lot of kind of housecleaning issues, simplifying the, you know, our product set, the deposit products, loan products. It created a huge focus on data. It creates a single data model for both loans and deposits that, you know, as we started into this, nobody certainly was thinking about AI.
But as we think about AI use cases, having data that is clean, that is, universally defined, the same across various systems. We think it is gonna be a really significant advantage to us in being able to employ third-party solutions. In some cases, you know, moving things into the cloud, using Google and Microsoft and other you know big tech vendor solutions, but doing it kind of off the shelf with data that's actually cleaned up. So those are some of the advantages. It's giving us the ability to much easier to serve customers in branches and contact centers. Where it used to be that an employee had to learn several different systems and green screens, and it's now a single interface. It's point and click.
Training costs, things like that, we think it's gonna create a lot of sort of benefits that some of which I'm not sure we fully understand yet. But those are some of them.
Helpful. And then, is there a way to quantify maybe expense or revenue impact?
Yeah. I mean, it's you know, much of the run rate is... First of all, the cost has been kind of just a roughly equally split between costs were capitalized and costs were expensed along the way. But the capitalized cost will start to come down. It's not a meaningful number in the next year, but it's you know, it starts to come down because parts of this we put into service five or six years ago with some of the loan systems. I think you know, fundamentally, the tech spend in the company I expect is gonna be reasonably flat because even though some of this spending is coming down, we're moving on to other things. So tech spend will always be with us.
But it gives us probably more optionality than we've had to address other needs or to pull back if we had to, so.
I guess, obviously, Future Core is a big focus. Now that that's kind of done, are there other kind of areas of investment you now have the ability to focus on that maybe you didn't give as much attention to in the past?
Yeah. I mean, a couple of areas of focus. We use Salesforce as a customer relationship management platform. I expect we're gonna be maybe the only larger bank in the industry that's using a single instance of Salesforce for every use case. A lot of focus on kind of simplifying our environment. We are working on the replacement of kind of the front end of our commercial lending process to make it easier, quicker for bankers to get deals done and to address customer needs. I don't know. Those are a couple of kind of top of mind.
I got 360 view of customers. With Future Core done, that becomes a much easier task now to give anybody who's talking to the customer the full picture of what they're doing: deposits, loans, Wealth Management, et cetera. And so, getting that kind of reporting completed, those are some of the current imperatives.
Got it. Maybe we'll put up the next ARS question as we shift to credit quality. I guess, looking at second quarter results, you know, criticized assets increased on multifamily. Classified increased to a bunch of different pockets of C&I. Can we just kind of talk to where we are?
Yeah. You know, the first thing I'd say, I think you're seeing. I mentioned, like, multifamily is, we're seeing kind of pockets of slower lease up. You're gonna see, probably some continued migration into criticized classified. I don't expect you're gonna see a lot of movement in nonaccrual. And I think it's useful to look at the gap between those and see how they're changing, because, you know, there's a lot of focus on credit by banks, by regulators, trying to find and address problems quickly. And but that said, you know, the extent we're seeing problems emerging, and particularly in real estate, including office, we're not seeing it really translate into loss.
I think it's fundamentally underestimated how different this industry is post-Dodd-Frank from what it was pre-Dodd-Frank, in terms of, in many ways, in terms of operational controls that are in place, financial controls, and certainly credit, including concentration, you know, focus on concentrations around the industry, and we, you know, unlike prior to the financial crisis 15 years ago, where you, you know, you'd hear about kind of irresponsible conduct by some, you know, this bank or that. I just don't. I haven't heard that in the last several years. It's kind of an advertisement, maybe the industry. I think the industry generally is just in much better shape to deal with the downturn than it's ever been.
For us, you know, I think net charge-offs remain very moderate over the course of the next year, from everything I can see today. You know, unless the landing is harder than we think it's gonna be. I, you know, we're not seeing, we're just not seeing, nonaccrual loan totals moving, even as we identify problems. It's what it's doing is actually allowing us. By the way, I think there's been a lot of discussion. I'm interested to see how much has been written about kind of the, you know, this, a wave or a wall of maturities coming in, like, office. That isn't all a bad thing.
That's actually what brings a borrower to the table and allows you to have a conversation about we need you to re-margin, and we need you to write a check, and doing it while they still have a lot of equity in the deal, so you know I think good credit people look at that as an opportunity and not as a risk. That is one of the ways you actually continue to strengthen your portfolio, and so that's kind of what I see happening. We're seeing that sponsors are stepping up, that everybody's playing pretty well, so I think it's gonna be a reasonably benign year ahead of us.
So, all right. So maybe upward pressure to criticized and classified, but NPAs, not much movement. And I mean, charge-offs, I know they increased 6 basis points last quarter, but to an industry low 10 basis points, and you kind of feel like credit still remains benign.
Yeah. Yeah.
I mean, it's interesting. One of the things we had, bank yesterday said he thought we were in the first inning of this office cycle, and, you know, I look, you have, you know, $1.9 billion in office exposure. Your reserve is 3.8%, so that's, you know, well below some of your peers. You know, which some people could say is a bad thing. Others could say, well, maybe it's a better quality portfolio. Yeah, maybe can you maybe talk to kind of what differentiates, you know, your office exposure needs to be, maybe some of these other banks?
Yep. Well, I, I'd start with the fact that the average size deal is about $4 million. And we just don't have. We have virtually no exposure to kind of the downtown trophy office building, kind of, you know, when people think about office, they tend to, you know, they tend to think about Midtown Manhattan, and, and there's a world of difference between the two. There's actually something that'd be interesting for some of you, too, if you Google this, you'll find it. The St. Louis Fed published a study about two or three months ago, that on the default rates of office building loans for different sizes of office buildings.
And it's very demonstrable in terms of the difference between kind of large, you know, trophy properties and smaller properties. What we're seeing is that rents are actually stabilizing and even strengthening in many places with respect to, you know, the office market. And so we've done a lot of... You can imagine, you know, because this has been such a focus, you know, combing through the portfolio, we're very comfortable with what's there. And, you know, if I look back over the last three years, and it was a $2 billion portfolio, it's shrinking, amortizing, et cetera. But we've had less than $15 million in charge-offs over the last three years in that portfolio. And I, you know, I think that's...
When talking about reserves, you don't just reflexively put a big number on the wall. You actually go through, and you think about it, and you analyze it. You look at what you have, and how it's performing, who the tenants are, when the leases are coming due. And that, anyway, the reserve is a reflection of what we see.
Got it. And maybe on, you know, capital. I know, maybe, I guess, last year when we were here, very large unrealized losses, and you were kind of telling people, "Don't worry, it's going to come back." And I think this quarter we'll probably see a big pull to par, or at least a portion of that, given the rate backdrop has changed. Just how you're kind of thinking about capital in the current environment. Obviously, you're not subject to the, whatever the Basel-
Yeah
... three things happens, if it happens. So just, yeah, how you think about capital, kind of the-
Yeah. You know, and I understand Michael Barr spoke, I guess, this morning and gave, maybe provided some clarity with respect to where they're headed with AOCI, which will come into play with $100 billion-$250 billion banks. You know, I expect that we're kind of two to three years away from probably crossing the threshold. But by that time, AOCI should be kind of a reasonably non-issue for us. And so, yeah, it's coming in at a pretty good clip. So I don't think the AOCI issue is going to be a major issue.
You know, it's having us curtail buybacks until we get to a stronger tangible common equity ratio, but again, that's coming at us at a pretty good pace. In the meantime, you know, we're generating, you know, reasonable earnings with kind of, you know, if we saw a lot of loan growth, that could strain things a little bit, but I don't expect that in the next year, so I think capital's gonna be a benign issue for us.
Got it. You know, you're one of the at least few banks I look closely at that opted not to monetize your Visa shares.
Yep.
In the most recent tender. Can you talk to why? It could have been a sizable capital gain.
Yeah. I mean, I'll say my thought process about it was fundamentally, it's like borrowing out of your 401(k). I mean, it, you know, you monetize it, you. First of all, it didn't remove the downside risk because you had to enter into an indemnification agreement with respect to their litigation. And so you're still gonna have a downside risk, and what you had was a taxable event that.
I said to our board, "You know, the way I think about it is, as long as we got it sitting there, we've got an unrealized gain, and you've got, you got something that's actually, if you know, I don't know what's going to happen with Visa," but in theory, let's say if they, if the value of that stock is growing at what I expect would be the case, that. It's one of the better-yielding assets we have, and I'm not sure why you'd take that off the table. It's one of the few places you can actually have an equity investment in a bank get equity-like returns.
And so, yeah, there's a temptation to say, "Let's, let's, let's, let's grab it now." I'd like to think it's kind of a manifestation of long-term thinking that we all ask for and seldom, seldom, seldom actually see companies behave that way. Right? So.
... That's, that's fair. Maybe put up the next ARS question. You know, you touched on it, you know, plan crossing the $100 billion marker in the next couple of years. You know, is there a big cost associated with that, policies, procedures? I know you were at CCAR bank back in the day, you know, is there a lot of heavy lifting that needs to be done in front of that?
We think not. You know, a lot of the heavy lifting would have been with stress testing, but we were subject to that back prior to two thousand and eighteen, and we've maintained the team and the machinery, and you know, we keep the models current. We engage in stress testing. We share the results with regulators. Some of the other areas. I mean, resolution planning, we're gonna have to dust that off, but I think that's not a huge lift for us. It's. We've got a fairly what looks like a complicated structure because we operate with multiple names or brands, but it's actually one of the simpler structures in the industry, in that we don't have a holding company.
We don't have all the single point of entry kinds of issues, et cetera, that other banks have to think through. We've got a bank, a publicly chartered bank charter, and so the resolution planning thing will require some effort, but you know, a lot of the things, operational resilience, that regulators have been very focused on has been a lot of what we've been focusing on for the last few years, and I think we're in quite good shape that way, so I don't see other than the... I mean, the long-term debt proposal is a concern. I think that's gonna be an incremental cost. I expect that that will be modified because it doesn't. There's no tailoring in it.
I think to do it in its present form would invite a lot of litigation, so I expect that to be toned down. It'll be a cost, but it's not one that, you know, it's just a fact of getting larger, and it's not one that, by the way, there are any economies of scale, if any, become twice as large that solves the problem, because it's a linear formula, at least as proposed today, that increases your cost as you grow, so.
Got it. I know, I gotta try, but as we sit here, you know, any kind of thoughts on the current quarter or any kind of thoughts to kind of give us that 12-month ahead outlook? Any changes just based on the evolving interest rate backdrop and the like?
That's a good try. No, if we had anything really material to say, we'd say it, but, I... That's, that's where I'd leave it.
Great. On that note, please join me in thanking Harris for his time today.