Moving right along. Very pleased to have Zions Bancorporation with us from the company, Harris Simmons, CEO, probably one of the most tenured CEOs at the conference this year, if not the most tenured. Harris, thanks for coming back.
Thank you. Good to be here.
We have the first ARS question on the screen that we've been asking all the companies. Harris, I think the best place to start, obviously your franchise is kind of focused in the western part of the country, more of a maybe a small business kind of customer focus. Talk to just kind of what you're hearing from your borrowers against this backdrop of elevated inflation, higher than normal rates, tariff uncertainty. Just kind of love to get your perspective.
Yeah, I think we were, I was expecting back at the beginning of April when all these tariffs were announced that this was going to be like running into a brick wall. It hasn't played out that way. I'm still, I probably, you know, I'm cautious about what we'll see as the year drags on. Not only tariffs, but I think that the entire environment, what we're seeing in the jobs numbers, et cetera, is becoming probably a little more challenging for a lot of these businesses. That said, so far, things continue to chug along in reasonably decent shape. I think everybody is, folks I talked to, I was visiting a prospective customer, hope to be a new customer in Northern California a couple of weeks ago.
We were talking about this and they said in their case, they are not yet seeing a lot of input pressure, kind of price pressure, but they're preparing for it. They expect it's, as it comes through the supply chain, it's going to happen. I think there's still some of this that hasn't shown up yet. Companies all have their different situations, but I think a general rule is everybody's still kind of waiting for a shoe to drop a little bit.
How has that impacted maybe their decision-making, wanting to borrow, expanding, and just maybe kind of that impacting the psyche you think? What do you need to think they need to see to maybe engage more?
I think the tax bill, I have trouble calling the big beautiful bill.
OBBDA.
Yeah, you know, it has, you know, there are certainly some things in that that are probably helpful in terms of some of the tax treatment of investment. I think smaller businesses in particular are by their nature, they're just, they're conservative. They don't have a lot of, you know, deep sources of all, you know, capital and liquidity and everything else. They, you know, they'll hold off until they need to, until they need to borrow. We're not seeing a lot of stress and strain at this point in that portfolio. I don't know, we'll see what happens. It's hard, I think projecting, I've always said that projecting loan demand is one of the greater fool's errands in the industry. You tend to extrapolate from your recent experience and then things change.
I, like I say, I'm a little cautious about how their behavior, you know, behavior of borrowers is likely to change as some of this really starts to come through the system.
Right. If you think about your markets, whether it's Texas, Utah, Idaho, California, Pacific Northwest, any kind of differences that you'd kind of highlight?
No, the entire region continues to be in pretty good shape. I mean, Texas is kind of a gift that keeps on giving in terms of just, you know, growth in that economy. The Utah economy remains very healthy. California is a challenging place to do business, but given our size, relative size of that market, we still find a lot of opportunity there. I'm not seeing little pockets of slowdown. Las Vegas might be a little bit of a counter to that. Clearly, foreign tourist visitor numbers are down in Las Vegas. You're seeing actually advertising by the Las Vegas Convention Tourism Bureau. They've been out of the market for a while. They're having to go back out and they're spending money trying to bring visitors to Las Vegas because they're not seeing the foreign travel.
There are pockets of things like that, but overall, I think things are in pretty good shape.
Got it. Maybe on the deposit side, there's been kind of varying trends in terms of just balances, mix between interest bearing, non-interest bearing. I think that's likely going to cut next week. We'll see what, you know, how banks respond. Just kind of talk to what you're seeing and kind of expectations around that.
I think, yeah, I think clearly with the jobs numbers, it'd be quite a surprise if the Federal Reserve doesn't cut. You know, I think it's been quite, you know, it's been so expected and kind of built into the curve that I don't think it's going to have any significant impact. We'll all be changing deposit pricing as fast as we can, trying to, you know, respond to that. Otherwise, I think it's, you know, if we see more than 25 basis points, you know, we'll lead into that. The economy, the Federal Reserve is more concerned about the economy than anybody has been recently.
Got it. I think you're one of the few banks that have had six consecutive quarters of just net interest margin expansion. Some of that's been kind of bringing down deposit costs. Can you maybe talk to the opportunity to continue to drive that higher going out or just how we should think about that, particularly as the Federal Reserve begins to maybe cut multiple times this year, maybe multiple times next year?
Yeah. I mean, we're somewhat asset sensitive and, you know, anomaly is that, well, that's going to hurt, but there's enough, you know, we actually break out, some of our investors love it, some hate it, because it maybe makes it more confusing, but we actually try to disaggregate kind of the impact of changing rates into kind of the lag effect of, you know, what we call the latent stuff that's built in, but it hasn't just, hasn't changed yet. Then what's going to change kind of quickly to what we call the emergent. Even with a, you know, the rate cut, at least, you know, cuts that have been built into the curve, we see, you know, if we see a cut, which we will, we still expect that we'll see margin expansion. We think we've built the balance sheet pretty well for that.
We've got a ways to go to get back to what we think sort of our natural net interest margin ought to be, which I think is probably up closer to 3, you know, 3.5, thereabouts, given the nature of our balance sheet. It took, you know, there was a lot of damage done in the wake of the Silicon Valley failure. It's been just kind of climbing out of the hole. It takes some time, but we think we're on the path to get there.
On that vein, why don't we put up the next ARS question? Maybe before we kind of get to that, Harris, I guess, you know, in your.
I guess I answered your question.
We'll see what they come out at. This is for, you know, I guess, 2026, when you kind of think about the 3.5% number. Let's just assume, you know, two cuts this year, two to maybe three cuts next year. I guess, when do you think you'd kind of get back to that 3.5% number?
Do you want to wait till they voted?
No, go ahead.
I think we're probably back there by about the end of next year, going into 2027, something like that.
Interesting. I guess you give us that 12-month forward slide. I think you kind of improved your loan growth and outlook last quarter, slightly increasing for period end loans, moderately increasing for NAI. As you kind of think about that slide when you reput it back up in October, any changes or what I would say?
No, I think we're in an environment where, given what's happened with jobs numbers, et cetera, it's still kind of a cautious environment. I think we'll see some growth. We've been hiring bankers. We had some really good hires. We're really promoting small business lending. We're promoting Small Business Administration lending and making progress there. It's not an environment in which we see kind of rampant enthusiasm for borrowing out there.
Maybe shifting gears to the income side, you guys have been certainly working hard to grow that. Just maybe talk about some of the bigger drivers there and what you're doing to continue that momentum.
Yeah. Some of the most significant growth, the most pronounced growth we're seeing is in capital markets. We really started down this road about four years ago. We'd been doing some little elements of it here and there, but really getting some good leadership in place, hiring some really good bankers. We've seen revenue, kind of an apples-to-apples basis, that's gone from about $40 million in 2020 to what'll be about $90 million. It's excluding a foreign exchange business, which we now include in capital markets. On an apples-to-apples basis, we'll have seen kind of a doubling plus through this year. We think there's still quite a lot of opportunity. We've just started to do commodity hedging. We have enough energy business in Texas to start to build that piece of the capital markets around that customer base, and then we'll use it with others as well.
We are very early on a journey to build an advisory business, investment banking with middle market kinds of customers. We have a great customer base for this. We have a couple of bankers who've been working on it. We're starting to hire, do some selective hiring to expand that team. I expect we'll see some nice growth there. I think our capital markets business, I expect, has some nice room to run. We've been working on wealth, given our customer base. We think, I think there's a particular opportunity and something that I get excited about is our really small business owners that many of them have two or three or $500,000 that they're trying to manage. We have a really nice offering for that. We work with LPL, and they provide the backend of that.
I think that's something that has a lot of opportunity for us in addition to kind of a traditional wealth business with higher-end clients. As rates come down a little bit, I expect we'll see some resurgence in mortgage banking. We're really trying to move much more of that to an originate to sell kind of model. I expect that we'll see income growth there as, if and when, term rates kind of fall off down here a little bit as they've kind of recently started to do.
Makes sense. I guess on the expense side, the expenses have been controlled. Obviously, some of these fee incomes require investments. Let me just talk to how you kind of fund these investments, efficiency opportunities, just how you're kind of thinking about the 2026 budgeting process, which I'm sure you're kind of diving into.
Yeah. You know, we have been bringing our headcount down about 3% last year. I expect it'll be similar this year. It's just something you know, we're just continuing to work at. I think everybody is trying to figure out how to use AI to produce efficiencies. We've got a variety of projects in the works, which I really believe will have a major impact over the next three or four years. Some of this takes a little time to get built and to prove out. We're doing it in areas like credit examination and treasury management operations. We get 330,000 emails every year with people wanting to change an address or this or that, and we believe a lot of that can be done with AI and automation. I expect that ultimately, there's going to be a lot of opportunity in contact centers and other places.
We've got a lot of things underway, and it's just kind of a march toward continuing to try to reduce that number. I'd like to think that we can keep that going at something like 2% to 3% over the next at least a couple of years.
Makes sense. I guess maybe expand a bit. I don't know in terms of artificial intelligence, definitely a benefit. I guess how much is there a lot of spend more you need to do to kind of truly benefit that? I know you kind of moved to this new FutureCore, I think is what we're calling it, system. Does that like kind of better position you relative to peers in terms of to kind of leverage your data? Or maybe, and just maybe.
Yeah, I'll tell you. This FutureCore project, which is a replacement for our core loan and deposit consumer commercial loan systems, all of our deposit platform, is actually on Tata Consultancy Services. There's TCS, what they call their BaNCS platform. We really love the platform. It's been a 10-year journey to get there. One of the things, there are a lot of ancillary benefits that have come with it. One of them is it forced us to organize data in a way that gets serious about data, probably ahead of where some of our at least pure regional banks had had to do this. We had to, fundamentally, clean house before we moved into a new house. I think we're in quite a good place in terms of being able to, because data is such a big factor in your ability to use some of these tools.
It's not that the platform itself provides an advantage, but what we had to do to get onto that platform kind of forced that. I think we are in a pretty good place.
Got it. Maybe shifting gears to credit quality. We saw a pretty sharp ramp up in criticized classified assets. We did see the decline in the second quarter, but kind of leading into the second quarter and still a lot higher than a year ago. Maybe just talk to, you know, it was driven by, I think, multifamily and CRE. Maybe just talk to what you're seeing there, what trends we expect looking at, what drove the increase, and just more flavors of that.
It was fundamentally, I think some shifting regulatory expectation with respect to how, you know, what you call a classified loan. At least across the regional banking space or the OCC charter banks, the usefulness of a strong guarantor or sponsor, even equity on a deal for deals that weren't performing exactly according to plan. If a project was taking longer to lease up, the expectation developed that that was going to be a classified deal. We don't see loss in those, in that portfolio. In fact, over the last five years, our average annualized net charge-off rate in that portfolio is 0.7 basis points. Frankly, the classified numbers don't tell you much at all these days. I would keep an eye, if I were for us or anybody else, I'd look at the non-performing asset number as being much more indicative of where the problems are developing.
For us, that's been a pretty clean number. It's around $300 million on the entire $61 billion portfolio, so very manageable. I'd also say for us, we see this in our investor deck, but pretty consistently, charge-offs have run about 20% of non-performing assets. It gives you a pretty good idea, short of a real change in the economic environment, what the loss content is likely to be in our portfolio. We think it's one of the better, it's about as clean as portfolios you find in the industry.
Yeah, I mean, if we look at your net charge-offs, anything that's been running like sub 10 bps or maybe 10 bps, give or take. I mean, I guess anything out there on the horizon that kind of worries you that, I mean, it seems like a below normal number. I guess where do you envision normalized losses and any concerns you have at the moment about any particular board? Clearly, tariffs could adversely impact some companies.
Yeah, I mean, I think you always see just episodic losses in a company that gets into trouble for idiosyncratic reasons. There is always a little bit of background noise, but in terms of anything systemic, I would expect that it's going to be problems coming out of a slowing economy and showing up in small business and commercial, which could take charge-offs higher. I think even so, our commercial portfolio is highly collateralized. We do relatively little unsecured lending of the type that really produces larger charge-offs. I'm really, I sleep very soundly.
Fair enough. We can put up the next ARS question. I'm not going to ask you about this just yet, Harris, but maybe just kind of shift gears to capital. You know, if we look at your CET1 ratio, it's on solid footing. Obviously, the AOCI mark changes that a little bit. I guess just how do you think about that, how AOCI contract, obviously, you don't have to include in capital now. Maybe one day in the future you do, but when that future comes, it's losses, but it's just that won't be there. Just your thoughts around that.
Yeah, I mean, look, my expectation is that it will find that that mark will find its way into regulatory capital one way or the other. I think given what happened in the wake of Silicon Valley, I think it's probably the right thing to do. Our tangible capital, I mean, it's growing nicely organically, about 20% over the last 12 months. We have fair value hedges on a lot of the securities that are producing that in such a fashion that it's pretty predictable. I mean, we got a pretty predictable ramp to a higher number. We weren't alone in kind of legging into a larger securities portfolio. It's probably too early, but it hurt. We got to the end of 2022 and moved a lot into held to maturity just to kind of freeze things in place and then to kind of hedge that.
Anyway, there's a pretty well-defined path to get to where we need to be. I think that I'm much more concerned, I'm not so much concerned about regulatory capital. I think we'll be fine there. It's just making sure that we feel comfortable that when the next storm arrives, our market capital is in good shape, combined with a credit culture and a portfolio that withstands it well. That's how we're thinking about it.
Makes sense. I guess on the subject of capital, I was reading your annual letter when it came out earlier this year. I sensed, and maybe you can opine on this, just a shift in tone around bank M&A. You kind of seem to be more open to it, more talking about the importance of scale. Just reading that, and then also in the regulatory environment feels a bit better. We're starting to see CCL deals get done, a couple in your markets. Can you maybe just talk to how you're thinking about that?
I mean, I think you and I probably have a little different posture on scale on efficiency, although I think data's on my side.
I think I got my chart deck in the back. I'll look at it after.
Mine's in my 2023 shareholder letter that came out at the beginning of 2024. You look at weighted average efficiency ratios across the industry, and it's from $5 billion banks to multi-trillion dollar banks. I think it's pretty consistent. It's not to say that there aren't economies of scale. I think they tend to be more at the branch level. It gets in, and they're certainly in certain lines of business, no question about it. The fact of the matter, what I don't believe is that getting incrementally larger is always the solution to problems. What I wrote in my shareholder letter, which I think was a pretty good analogy, I talked about going to a dog race when I was a kid. The mechanical rabbit's just out almost 20 yards in front of the dogs, and they're always chasing this thing that is unreachable.
That's a little like some people think about scale in the industry, which is if I just get larger, everything's going to be okay. The fact of the matter is there are very small banks that are well run, that create a lot of value for their owners. There's some very large banks that don't. It's incumbent on all of us to say, what do we do with our own operation to make sure that it's actually the kind of business that's durable and sustainable and is creating value in our communities and for customers and for our shareholders. M&A can be a factor in that. I think that there are deals, always a matter of pricing, but beyond that, that's just a strategic fit.
I'm a believer that if you can find a deal where you can have in-market consolidation and create larger average branch sizes, absolutely that's useful in terms of creating more productivity. There are places where you can add product lines or they can to you, et cetera, where it gives you operating leverage. It's not something that I wake up at least every day saying, how do we get that much larger inorganically? I'm not at all adverse to doing deals. I've done a lot of deals in my day. I think generally, most of them, not all of them, but I think most of them have created pretty good value. It's not an automatic solution to anything.
Yeah. When we first met many, many years ago, you were almost pulled off a big MOE. It didn't happen for better or worse. More recently, you just did a really small branch deal. I guess when you kind of think about the ideal opportunity, which one does it look like more?
You know, the deal that Jason's referencing was 25 years ago, and it was for Security Corporation.
You both started at a very young age.
Yeah. It was a deal that ultimately didn't happen. It's a whole saga in itself, but ultimately that deal came unglued and they sold to Wells Fargo. There were some regulatory delays, et cetera. Coming out of it, it was an exceptional education. When I came out of it, I actually did what I called my mea culpa tour. I went around, did town hall meetings with all of our folks, and I apologized for the nuisance it created for a lot of them. We were going to have to divest a lot of branches and everything, and everybody's lives were in disarray for a year. I said, you know, in terms of lessons learned, first of all, I said, I'm going to promise you, you know, in the future, we'll maybe be a buyer, maybe someday we'll be a seller.
What I'll promise you always is in the future, you'll know who the buyer is. I'm a big believer in that because what I found is, in fact, I told our board at the time, they asked me after this was over, they said, okay, let's talk about what we learned from this. I said, well, one of the things I learned, I reflect on it, we're doing little mergers, or we're doing mergers almost every day of the week. We're hiring somebody from Wells Fargo or from this bank or that or whoever, and it's like a little micro merger. They come to us and they bring their expertise. Sometimes they'll bring some customers, but they don't bring the expectation that we're going to change our culture to accommodate theirs. Our policies are a, you know, so they adapt to us.
The larger the deal, the more you find that you're trying to adapt two cultures into a third culture that nobody's ever seen before. At the top of the house, what I saw was we could agree on major things, but there are thousands of little decisions that get made that are fought, you know, and it's hand-to-hand combat down in the trenches between people from both sides. If you don't know clearly kind of who the buyer is, everybody thinks they have license to try to jockey for the, and it was really, really hard. I came out of that experience thinking, you know, I think just whatever the numbers look like, and you can make the numbers look great, you're dealing with lots and lots of human beings who all have hidden agendas and motivations and things they're trying to protect. They're really tough.
I wish anybody well who's trying to do them, but anyway, that was the commitment I made is you'll never see another MOE from me.
It's an interesting perspective. I guess on the branch deal that you did, were those potentially opportunities or just, you know, smaller banks that are now, you know, whether it's the technology and AI investments we talked about, the notion that we maybe have a small window here that the regulatory environment's better, but we don't know what it's going to look like in three years. I guess have you seen more kind of pitch books cross your desk, and how would you kind of characterize it?
I think it's going to be a period of some opportunity. I have nothing in mind particularly, but I do think it's going to be a period where there's absolutely going to be more consolidation. I think in the community bank space, as there always has been, it may get accelerated by increasing concerns not only about artificial intelligence, but about payments and stable coin and tokenized deposits and all kinds of things. I think that there'll probably be a lot of kind of interesting little opportunities with smaller banks. My hope is that we'll actually be quite good at being able to do that and to provide something that is not going to be interesting to the largest banks, and where we're a really good partner for some of these smaller ones that still probably are going to be looking for a home.
I think it's your $90 billion in assets. Presumably, when you cross $100 billion, things change. Maybe that gets changed and adjusted for inflation. There's been talk, I'm not sure if you have a view on that, but just if you got to $100 billion, is there anything significantly different you'd have to do? Are you kind of ready for that now or is there more to be done?
No, we could cross it, we could cross it tomorrow and be without losing any sleep at all. The only thing that we'd have to do that we have, so when Dodd-Frank was passed, we were, we called ourselves the smallest SIFI, a systemically important financial institution that was subject to Section 165, the Enhanced Prudential Standards. We spent an enormous amount of time and money, you know, building the capabilities, stress testing, a lot of stuff operationally to become highly resilient, et cetera. All of that's still there, and we continue to use it. The only thing that we are not doing that we had to do for a period of time was resolution planning. We'd have to resume that, but that's a reasonably easy exercise for us, in part because we don't have a holding company.
We're a publicly traded national bank, and resolution in our case is probably less complicated. No, it's breaking $100 billion, and like you say, the line may move. I'm really, by the way, highly encouraged by the new regulatory cast we have in D.C. right now and their understanding of, look, we need to create some breathing room for these companies, and tailoring is very much going to be alive and well with this crowd. I don't think there's anything that's going to cause any problems that way.
I guess on that vein, just in terms of the host supervisory regulatory backdrop, when you talk to kind of what you've seen, what you expect to see, does it kind of make your day-to-day life a bit easier?
Yeah. Look, I'd start by saying, what I think I want, I think most all of my peers that I feel would, and kind of knowing them, we know this is a regulated industry that needs to be regulated. We want good regulation. We want people who are smart, thoughtful, who understand. I've had one, by the way, over a long career, I've had one regulator who's ever explained to me what the difference between safety and soundness was. He said, "Soundness is you got to make money." He said, and I said, "That's really refreshing to hear." He said, "Yeah, yeah, we need to make sure that we don't, you know, that we don't hug this industry so tight that you can't operate." It gets into areas like private credit and what's creating the conditions for that. I do think I'm really encouraged by this crowd.
It makes a difference. You've had in the past, in recent times, you've had regulators, including most certainly at the CFPB, Mr. Chopra, just a, he was just a little nuts in terms of some of the things that he was worried about. I was in a meeting with a big group of bankers, board members, and he started talking about what was kind of on his agenda. He was worried. He started thinking about the ellipsis, you know, when you've got a chatbot on a website and somebody's chatting with somebody in a call center and you've got, he said, "You've got the dot, dot, dot," while you're waiting for an answer. He said, "I think that suggests there's a human being on the other end of the transaction. I think that's unfair and deceptive." We're all looking at it.
He's like, "This man is nuts." When you find your days consumed with responding to that kind of idiocy, I hope he's listening in. It distracts you from spending your time on how you actually build better, become more competitive, how you help your customers grow. Getting back to regulators who are thoughtful, who want to make sure that you've got the basics right, liquidity, capital, that you know, a solid earning stream, that's all really important. It's when you get off into the weeds that things got just kind of ugly and awful.
We'll put up the last ARS question in the waiting minutes. Is there anyone in the audience that has questions for Harris? Harris, maybe just lastly, maybe just talk to the competitive landscape. You know, as the regulatory environment gets maybe easier for some of the bigger banks on capital and not as concerned, and the AOCI losses come down, is any changes in the competitive landscape? People may be getting a bit more aggressive. You're seeing some banks kind of show up more that hadn't shown up in the past.
I mentioned private credit. I think that's, we don't see that a lot on a day-to-day basis, but I worry about that industry and particularly about kind of latecomers. I mean, you've got some big, sophisticated, I think well-managed companies in that space. They'll probably do fine. I find myself thinking about the run-up to the financial crisis and kind of the subprime lenders who are, and the problem is you get when you build contraptions that need to be fed and have to grow. They're, you know, where do we get assets? They start to cut. First of all, I start with the premise that banks have the lowest cost of funding of anybody out there. I mean, the FDIC-insured deposits and pretty good leverage.
We ought to, by all rights, we ought to be kind of the first place a borrower comes if they're looking for the best deal in terms of price. When they go to private capital, it's because it's going to be covenant light, no guarantees, yada yada yada. I think it's been a long time since we've had a real, a real storm. The pandemic looked like it was going to be that, and then the government threw so much money at it that it didn't. At some point, when something really starts, it breaks in a big way. I do worry about the lack of kind of a liquidity backstop. I mean, they've got lockup periods and everything else that will help. At some point, those chickens come home to roost. People will want their money out.
If it happens at the wrong time, I worry about kind of the spillover effects into banking and the size and the growth rate of that industry. There are a lot of non-bank competitors, credit unions in the West, and the Utah market in particular are really tough to compete with. There are things that ought to be reformed there. We do really well against the largest banks. We offer a differentiated experience, I think, in branches. We get people to come to work for us from these places who are really good bankers that say they like to do relationship banking and find that a company like ours is a place they can do that. I think there's still a lot of value that can be created by banks like ours, not just Zions, but other regionals as well.
Perfect. On that note, please join me in thanking Harris for his time today.
Thank you.
Next up is lunch in the main room. I suggest you all attend. We'll have a nice wrap-up panel. Thank you.