We're going to get started here. I'm pleased to have Zions joining us at the conference. They've had a strong year, posting improving top-line growth driven by margin expansion, continued growth in fee income, all while maintaining a tight hold on expenses. Well, there was some noise during 3Q regarding credit that appears to have been a one-off, hopefully. And its credit performance continues to be among the best in the industry. Here to tell us more about what's ahead is Chairman and CEO Harris Simmons. Welcome, Harris.
Thank you.
So, Harris, obviously, there's been a lot going on out there. We had tariffs, we had the government shut down, mixed numbers on jobs. It feels like the Fed is still in an easing cycle. So, lots of different things going on in the macro, I guess. Given that as background, maybe start off how you're feeling about how the bank is positioned for this environment they're about to enter.
I think I'm pretty sanguine about what the environment looks like. I mean, if I go back to earlier in the year and the tariffs and Liberation Day, et cetera, I mean, I think there was a lot of anxiety about what this could do to the economy. I think what's played out, and my view is that owners of businesses have started to realize that Donald Trump is among beyond anything else, that he's basically transactional, that there's a lot of plasticity to his approach to solving problems. And so you've seen tariffs come, go, change, up, down, and it's become kind of almost noise that a lot of people filter out. Now, there are some businesses that are actually impacted by it, and for them, it's a challenge.
But I think in terms of creating anxiety broadly across the economy, it hasn't played out as badly as I might have expected. And so what we're seeing is probably some improving just appetite to borrow, to expand. And I'm optimistic about what the coming year holds.
I guess just as a follow-up, as you're out talking to clients, what are you hearing in terms of sentiment across your different geographies and any differences in terms of size or location?
I don't think a lot of difference. I guess pretty consistently, it's not sort of rabid bullishness, but it's an economy that's working. It keeps churning out results, and I think businesses, the conversations I have, tend to be reasonably upbeat about this coming year, and we see it in small businesses and large businesses alike.
You seem to have a relatively positive tone. I know you don't like to provide mid-quarter updates, so I'll get this out of the way quickly. Just given all that's been happening over the course of the quarter, government shutdown, reopening, movements in the macro, any trends that you're seeing in the market, whether it's willingness to borrow, deposit competition, or activity that has changed over the last 60 days? I would say despite loans shrinking in the third quarter, you sounded pretty upbeat as we move into the end of the year. Any thoughts on how things have shifted over the last?
The first thing I'd say, I mean, deposit growth, you can kind of make what you want to make of it, the pricing. Loan growth is a little different. I've always believed that forecasting loan growth is something of a fool's errand because having done it for a long time, you tend to extrapolate what you've seen recently. That said, if I extrapolate what I've seen recently, it makes me feel like we're going to probably have a little better loan growth than I might have expected, say, three months ago. So I think we had slightly to moderately increasing loan growth. I think it's probably today, I'd try to say it's in the moderately strike zone. That's probably with stronger commercial loan growth and still pretty measured what happens in some other parts of the portfolio, so.
So, I guess given that, as you said, the guide had been for slightly to moderately, now you're saying it could be moderately or maybe I'll call it mid-single digits. Maybe just talk about what's driving the improvement in commercial. Is it greater borrowing from small businesses? Is it larger corporates seeing more confidence? What are sort of the areas where you're starting to pick up an activity that's giving you more confidence around that?
Yeah, well, I mean, we're kind of seeing both. I mean, we're seeing increased activity. Oil and gas is an area, for example, we've seen some increased activity. But C&I generally, we're seeing on the small business side, we just had a record year in terms of the number of SBA 7(a) loans we did, for example. We were up strongly over the prior year, and I expect that that's going to continue into the next year. And so some of it is kind of specific to kind of what we are really focused on internally in terms of promoting with incentives and marketing dollars, which is mostly on the small business side. But we're seeing a little better demand from middle market and larger customers too.
So, an area that's kind of gone in and out of favor for Zions in terms of growth has been commercial real estate, right? And obviously, over the last few years, as the market's been focused on office and multifamily, it's been less of a focus. And obviously, we've seen things like private credit and the like coming into the market. Maybe just talk about either your expectations or your view on the growth of that asset class. And what are you seeing from alternative forms of capital there, and is it impacting the way you approach the business?
Yeah. You know, we started about a dozen years ago after the financial crisis. We basically said, "Look, over time, we just want to bend the arc of growth in CRE and have it grow a point or two slower than the rest of the portfolio." And we did that. And we brought it down from roughly a third of the portfolio down to something just about 22%. And I expect that will continue for a while yet. So, I see it growing, but at a measured pace. I think that's actually been a really good strategy. It's forced better credit selection by kind of rationing our appetite for it. It's created really good quality. I mean, in terms of actual realized losses, it's run less than 7/10 of one basis point on average the last five years.
And that's been through a period where everybody's concerned about not only multifamily, but certainly office. And so it's actually played out very nicely. And it's a portfolio that I like. I think if it's disciplined, done well, you've seen more equity in deals, certainly in the last decade than had been the case, I think, earlier in my career. And so, I think it's fundamentally healthy. We see some impact from private credit, but it's probably actually we see as much opportunity in that when you're trying to exit a credit, it's actually a source of capital for credits you're trying to exit. And that's proven to be useful. So, all in all, I think it's kind of a neutral. I don't see it impacting growth.
So, you guys have had, despite limited loan growth, you've had lots of success in terms of driving revenue growth, right? And we've seen the net interest margin expand seven straight quarters up almost 40 basis points over that time. Talk about what's driving that. How are you thinking about it going forward? And can this momentum continue in the most updated rate environment?
Yeah. Well, certainly, post-SVB's collapse, that was kind of an eight or nine on the Richter scale in terms of its impact on us and some other regionals, and what had always we'd viewed as a strength, which was this really good beta on our deposit base, kind of quickly flipped almost into reliability because it meant that we had a lot of catching up to do to just maintain what it was like kicking a sleeping dog, and so we've been building back from that. A lot of what you're seeing, I think, is just trying to get back to normal, some kind of normalization in terms of pricing and restoring that deposit base. That's probably been as important as anything. There's also been just a real focus on a continual remix on the asset side. We've had probably excessive liquidity relative to what we've needed.
We've been bringing the securities portfolio down a little bit, trying to stabilize one- to four-family and municipal credit and replace that with better-yielding commercial credit. And all of that's been helpful. The other thing that's helped is our demand deposit base, which we kind of expected might continue to drift lower, stabilized. And that's been a real source of strength. I mean, we bank lots of small- to mid-sized businesses. A big portion of that deposit base, that DDA base, is subject to account analysis kind of pricing where customers are paying for services with it, which makes it stickier. As we see rates drift lower, earning credit rates probably come down a little bit, and that should help further stabilize and even build it a little bit. So, I'm sanguine about that.
You talked a little bit about deposits and funding costs. I mean, I think historically you had a big advantage over peers in terms of your deposit costs, annual overall funding. That narrowed during the regional banking crisis, and you've been working to improve that over time. I think you're back having lower overall funding costs. As we progress through the cycle, how do you think about your funding costs and particularly deposit costs relative to peers? And can we see that advantage sort of widen out again as it had been before all the noise in the banking environment?
Yeah, I mean, I think that's clearly what we're trying to do. And I think it would be a reflection of kind of what our customer base looks like. And so, I mean, one of the things we're doing, we are working with larger clients that have I mean, there was a period before SVB where we and others, we were actively managing money off the balance sheet and of money market sweeps, etc. We've been working to try and bring some of that back on, which will probably incrementally increase deposit costs, but reduce overall funding costs is what we're trying to do. But so there's maybe a little further we can go with that.
But fundamentally, our focus is on building the business with the kinds of smaller kind of granular small businesses and mass affluent kind of consumer base that generates a deposit franchise that I think is where most of the value for regional banks ought to come from.
So, maybe one last question to round out the balance sheet and rates and the like. If I look at your recent disclosures, the bank still appears relatively asset-sensitive based on your emergent disclosure. Maybe just talk about your position and given where rates are. Have you thought about the benefits of doing more hedging versus less in terms of shifting the overall positioning of the balance sheet?
Yeah, I mean, it's something we review fundamentally monthly. I mean, it is. I mean, we have a naturally asset-sensitive balance sheet. We do some hedging to try to minimize that. But a lot of what is there is baked into the pricing in the market. And you're going to. I mean, I guess my fundamental belief is I think even though you're going to end up probably with a more dovish Fed, I think there's a real risk that they actually get boxed in by what happens on the long end of the curve. You've had, in the cuts that have taken place since September of last year, we've come down 150 basis points on the short end. The long end has actually gone up 40 or 50 basis points.
And so, as long as you've got inflation out there, and I think there's going to be a very interesting time in the history of the Fed to see how a new chair works with this crowd to navigate this because the last thing that Trump needs is higher term rates that make mortgages totally unaffordable, for it's already a really tough housing market for buyers out there, so I think we try to position ourselves. There's modest damage that can be done by downward pressure. I mean, we expect that it's a little bit of a headwind, but it won't blow us backwards in the new year, and we're trying to leave room for what I think is still, I believe, kind of a reasonably inflationary environment given what's happening with immigration, with tariffs, with the federal debt, etc.
We're also trying to protect against that.
So, let's shift gears and talk a little bit about fee income and some of the growth initiatives. Zions, like a lot of banks, I think is growing in three main areas: capital markets, wealth, and payments. Maybe just spend a little bit of time talking about each, where are you in your evolution? What type of growth businesses should these be versus history? And really, what are your points of differentiation in your go-to-market strategy? And how does this all fit into your 2026 expectations?
Yeah, I mean, we've built a really good capital markets team. And we're really comfortable with the way they're building this business. These are people who've typically all of them come out of large banks with a lot of experience. And so, their progress so far has been right on target. I expect we'll see good growth out of them in 2026 and beyond. We're investing in it: systems, people, risk management. And they're being really well received by customers. And we've got bankers that are working really well with them. So, probably our strongest growth comes out of that in the three you're mentioning in 2026. Wealth is we think there's a lot of opportunity. I tend to think there's particularly a lot of opportunity kind of on the lower end of that of the spectrum. We have lots and lots of small business owners.
They're not well served. I mean, these are people that typically a lot of people that have two, three, four hundred thousand dollars to invest. We have a really good arrangement with LPL. We've built, I think, quite a good mousetrap in terms of being able to serve that clientele with good pricing. My hope is that that will actually be a driver of what happens in the wealth space. On the payments prong, a lot of that actually shows up doesn't actually show up as non-interest income. It shows up through net interest income because it's paid for with balances. But it contributes a lot to what I think is probably one of the leading DDA franchises in the industry. We expect that's going to grow nicely.
We're going to be introducing in March a new small business kind of bundle of deposit-based products that I think is going to be really attractive, and part of what you have to do is you just have to get your people in branches and on the retail side of the house excited about selling things, and I think it's going to be a good year for that with our folks.
If I think back over the years, the bank has kind of gone back and forth on making lots of investments to grow. There have been periods of time you've been in cost-cutting mode just given what was happening in the environment. I guess maybe talk about where we are now. Now that we've become later in your tech transformation, including the completion of FutureCore, what are the next big areas of investment for the bank that we should all be thinking about?
Yeah, well, I mean, first of all, I'd say you're always in both modes. I mean, you'd like to be.
Fair enough.
I mean, and you can do two things at the same time. I mean, we're down. I mean, we've got about 93-94 hundred full-time equivalent employees. And we're down about 1,000 from its peak. And some of that has been. There's been some outsourcing and offshoring. But most of it is just figuring out how to do things more productively. And that continues. And I think we've got things going on with AI that I think will be productive, etc. But at the same time, I mean, we've been very much in investment mode with systems over the last decade. And we've replaced, I think a lot of you know, we made what I think was kind of an interesting leading kind of push to replace all of our fundamental core loan deposit systems with something that's much more modern from TCS that we're really pleased with.
That kind of infrastructural investment, we think, is really primed to be able to allow us to grow faster. The investment probably switches. I mean, we'll keep investing in technology. That's just going to be always a constant. A lot of the kind of discretionary spend is going to be on marketing, producers. We've hired some really good producers in recent times and capital markets. Anyway, those are some of the primary areas where we're going to be spending.
When you think about those areas that you just talked about: technology, producers, marketing, maybe just expand a little about how do you think about the payback on these investments? Should they start showing up in revenues over the short to medium term?
Yeah. I mean, I expect productivity, it probably takes kind of six months before it starts to sort of show up. But yeah, I expect some of my optimism about next year and C&I is grounded in the fact that I think we've added some good people.
Got it. So, when I think about the financial performance, you guys have been for periods of time very good about generating positive operating leverage. I think you were talking about 100-200 four quarters out. More recently, I think you're just talking about positive operating leverage. But just broadly, how are you thinking about the pace of operating leverage? And is that achievable for the bank on a sustained basis? And maybe just talk about how you think about the drivers in what sounds like is going to be an improving environment.
I think I mean, ultimately, there are I'd have to do the math to see how long you can continue to do positive operating leverage at any given level before you start to burn out. Yeah, before you just have to reset. But I think we've got a ways to run from where we are today. And we're showing good positive operating leverage this year. I absolutely think that continues in the next year, probably not at the same pace. I mean, I think part of this is it's I mean, on the revenue side, the rate environment plays a big factor where you get most of your revenue from your balance sheet. But we think that there's enough momentum going into this new year that we're going to see reasonable positive operating leverage. I think my expectation is going to be north of 100 basis points.
Beyond that, we'll talk about it next year. Yeah.
Absolutely. So, maybe shifting gears to capital allocation. You obviously have strong stated ratios. The adjusted ratios have been improving. And I think you guys have talked about reaching peer levels, hopefully, in about a 12-month time frame. I guess a couple of different questions. One, talk about capital priorities. Two, maybe just talk about how you're viewing what the binding constraint is for you right now. And then third, how do you balance getting to peer levels and maybe taking a little bit longer versus being opportunistic and using some of the capital to buy back shares while they're cheaper?
Yeah. Well, I'd start by saying, I mean, we've had a really strong, tangible common equity accretion over the past couple of years. It'll be about 19%, something close to 19% this year, which I think is about as good as you find among the regionals. And so, a lot of progress being made. But we'd like to, and I think that just as a general statement, we want to be. I want to be sure that when the next storm hits that we're in a good place coming into it. And so, our number one priority has just been building capital to make sure that our capital is in a reasonably good place. And I think you have to view that in the context of the risk in your balance sheet and other things. But I think we're quickly getting there.
The binding constraint is typically, I think of it as CET1 on a sort of marked basis. But also knowing that just tangible common equity ratios in times of stress are something that you have to pay attention to. Our priorities, I mean, right now, it's just building back. I think we did a small deal in California down in the Palm Desert area about a year ago. I think it was a really good little deal for us. I mean, it's the kind of thing that it was minimally disruptive to other things we're trying to do. The numbers worked well. I'm not one to take pledges to not do this or that. I hope we're going to think about it carefully and thoughtfully. I think we have historically.
I have most of my net worth tied up in what we do. And I think probably about as sensitive to Lucia, etc., as everybody anybody's going to be. But it's all about price. I tell people I was telling somebody earlier today, I mean, the best deal I ever did was done at the worst time in our history. It was during the financial crisis. And it was a deal that was with the FDIC. And not that you're going to find those kinds of economics in this environment. But it's a reminder that you want to be deeply thoughtful about what you're doing and try to make sure that it's really creating value. One thing I'd pledge is, I mean, we will never grow as long as I'm around. We'll never grow for the sake of just growing. I mean, it's not about that.
It's really about do you think you can really fundamentally create better value, particularly at the very local level, the branch level, at the economics of what happens in a very local market? And so, I don't see us doing anything large at all and being very careful about it. And I'm hopeful that here in the next year, we're going to be in a position where we actually start buying back shares. I don't think we need to get to our target before we start doing that. I think we're feathering it in. That's my own view. It's going to be our boards to determine. But that's kind of how I'm thinking about it.
I guess maybe as a follow-up, so in the presentation before you, Bill Demchak from PNC was saying that tangible book value, dilution, earned back, he thinks are the wrong metrics that I think all of us are focused on. Maybe just talk about the parameters that you focus on, whether you deal with dilution, earned back, or any financial metrics that could get investors comfortable that you use to think about if you were to engage in doing some tuck-in M&A like it sounds like the focus would be.
It's interesting because, I mean, you get kind of fans among all of you folks in terms of what's being looked at. And the notion of three years or under are okay, three years over on tangible book value, earned back, you get these and I'd probably agree with Bill. I mean, I think the world is a little more nuanced than that. And that fundamentally, I guess short answer is I'm not sure there's a given measure where I say, "Okay, this is green light, red light." I think a lot of what makes a deal ultimately successful has to do with how well you're going to be able to integrate it, how distracting it's going to be, do you have a cultural fit. I've done quite a lot of this. I've been around for a while.
And I've seen you get a feel for what's actually going to work. And I'd pay a lot more attention to the culture's work than I am. Is it two and a half or three and a half years of tangible dilution?
So, last quarter was sort of highlighted by two losses related to the Cantor Group. And obviously, that and others shook the markets a bit. Thankfully, things have calmed down. As you've had time to review what happened, I think you were going to review with external parties, anything that you could have done differently? How do you think about any further risk in your portfolio? And are you confident now that you could say this truly was a one-off?
I'm quite confident it was a one-off. I mean, we've tried to scrub through the portfolio. More fundamentally, we've engaged PwC to come in because I didn't want our credit people telling me what they could do better. I want someone who's not conflicted. And our credit people agree with that, by the way. One of the things that was maddening about it, I think we actually do credit really well. I mean, absent that Cantor loss, our charge-offs in the third quarter were four basis points annualized. And they've run typically south of 10 basis points pretty consistently in recent years. And so, as you said at the outset. I mean, I think credit has been a strength of ours. And maybe one of the things that made it a little shocking in the market was it was coming from us.
But there are things that happen where it wasn't just the economy was getting tougher, etc. Sometimes bad things happen. But we're intent on learning what we can, getting an independent view, making changes, making it sustainable. And beyond that, trying to keep we're not going to re-engineer our whole credit process because we think it actually works pretty well.
Harris, anything on the regulatory agenda for a bank your size? Clearly, things have eased up from an M&A perspective. But you're usually pretty in tune with what's going on in Washington. Anything that's happening there and changing the way you think about either approaching investing or thresholds or anything of that nature?
You're seeing a lot of regulators on the ground that have got whiplash from the change in administrations, I think. But I mean, it's been pretty remarkable to see how quickly this new administration with Miki Bowman and Travis Hill and Jonathan Gould have been working together to try to address what I think was probably just a lot of overreach in terms of almost micromanagement around banks, which in a way I get. But it got to a point where I think it gave rise to a lot of the growth that's taking place in private credit. It sometimes artificially hampered what you ought to be doing. I mean, the leveraged lending guidelines that were rescinded in the last couple of days are a good example of that. I mean, it was kind of a one-size-fits-all attempt. The world is more complicated than that.
There are some companies that have naturally more leverage, some industries that do than others. And so, I think what I'm liking about the new crowd. I think they're asking us all to be. They're not wanting us to throw caution to the wind. It's going back to that we need to be responsible for managing responsibly the credit we're extending to customers. And they're going to be watching that, but with fewer sort of bright line trip wires that kind of gum the system up. And I find it refreshing.
Maybe two last questions, the last minute or two here. So, the bank's putting up solid returns. We've seen lots of peers come out with medium-term return targets. And it's never been sort of a hallmark of Zions. I'm just curious, have you given any thoughts to any medium-term goals, whether efficiency, ROA, ROTCE, and any thoughts on how you view this?
I mean, the short answer is yes. The other part of the short answer is probably not for today. But.
Now is a good time as ever.
No. I mean, it's something we'll talk about, whether we put the target or two out there. I'm probably getting more comfortable with the concept. But I mean, what we've been trying to avoid is the quarter-to-quarter kind of numbers banishment. But even talking about capital kind of where our targets are, I didn't give you a number, but I think I've given you kind of how we're thinking about it. And.
I guess, Harris, you and I had talked. We've gone back and forth about whether we're going to start with prepared remarks. We went right into Q&A. I guess in the last minute here, anything you'd like to leave us with in terms of what you think misperceptions of the bank, the way the bank's position that the market's underappreciating into 2026?
If I were to do the 30-second elevator pitch, I'd say I think we have something that's very close to unique in the Western United States in terms of a focus on small and mid-sized businesses and their owners and a bank that really has a strong deposit franchise built on a lot of great relationships. We've got bankers, even in branches, we invest in them. We want them to be. We give them some credit authority. We work at this to try to make them effective in serving the kinds of retail clients that come into our bank who are trying to build businesses and trying to do. I mean, it's a passion. It's a passion of mine. I think it is of all of our people, and we're intent on doing it as well as anybody in the industry does.
Awesome. Well, on that note, please join me in thanking Harris.
Thanks.