Today, our next fireside chat is with Scott McLean from Zions. An old friend.
An old friend.
Scott reminded me 24 years.
Yeah.
It's been a while.
It has.
Yeah.
It's been a good time.
Yeah. No nicknames up here.
Exactly.
Discuss that. Just, Scott, for the benefit of people on the line and in here, just give us a 30,000-foot view of Zions, the franchise.
Zions Bancorporation, we have seven affiliates. They operate by different brands. We're Zions Bank, obviously, in Utah and Idaho. We're California Bank & Trust in California, National Bank of Arizona in Arizona, Nevada State Bank in Nevada, Vectra Bank Colorado in Colorado, Amegy Bank in Texas, The Commerce Bank of Washington in Washington. These are great names. People often say, "Well, why don't you just go to one name?" Well, we love our names. I mean, who wouldn't wanna be California Bank & Trust in California or Nevada State Bank or Zions in Utah and Idaho is an awesome brand. We've got about 9,200 colleagues. We have about 900,000 consumers, 250,000 small and medium-sized businesses.
Pound for pound, no brag, we're probably the largest bank for small and medium-sized businesses in the country. We $90 billion and there's just a lot of very distinctive, nationally distinctive things about our company. If you look at our presentation each time we meet with analysts and investors, you'll see what's nationally distinctive about us, and I'll have a chance to talk about some of that. Most banks have nothing that's nationally distinctive about them. We actually have five, six things that are truly observable in nature and nationally distinctive about our franchise.
Okay, perfect. Before we dig into some of the other topics, just key priorities for Zions for 2026. What are you guys focused on?
Yeah, we're excited about 2026. We're always a highly energized group. I think it's important to kind of look at the journey up until 2026 to kind of get a sense of where we are right now. If you look at that journey from a technology standpoint, we finished our big core transformation project, replacing our core loan and deposit systems. No other bank in the United States has done this. It's been done about 300 times around the world, but it's never been done in the U.S. I say this in public all the time, I've never had another CEO or president of a bank come up and say, "You can't say that. It's not true." It's absolutely true. We finished that on July thirteenth of 2024.
We have a totally modern core loan and deposit system. One data model, which is really important. It's real-time, natively real-time. It's API-enabled. It is built for the future. During this time that we replaced our core, we also totally modernized our digital front end. A lot of technology stuff going on and more that will be coming forward. Our deposit franchise, which is central to the value of our company, weathered a 500 basis point rate increase in 2022. It weathered the Silicon Valley Bank March 10, 2023 issues. We've come through all of that, and we still have one of the leading low-cost deposit franchises. Our demand deposits, non-interest-bearing to total deposits, continue to be peer leading.
Our deposit franchise has come through that. Credit quality has been strong. We've weathered the CRE issues. Customer satisfaction ratings are high. Our regulatory relationships are high. We're bringing a really nice extended period of positive operating leverage into 2026. We come into 2026 with a really solid foundation and a lot of momentum. Quite frankly, what we've said, what Harris and I have said internally in our town hall meetings, which we just finished in January, is that we have never had fewer distractions, externally or internally. We just don't have a lot of distractions. Our whole focus is on growth. You'll hear us talk about growth in our core markets, small and medium-sized businesses that make up about 2/3 of our revenue. That's where we're focused.
We've got six key products that we've energized. We're doubling the amount of advertising spend that we had versus 2024. We are kind of full on go from a growth standpoint.
Okay, good. How do you feel about the economy? I mean, it's obviously there are crosscurrents. We can talk about energy prices given your energy book. Given the small business exposure that you have, what's your take on how things are going economically?
It's such a great question. You know, compared to when we announced earnings in third week of January, there's been a lot of news. You can't read the news and not go, "Well, it's gotta be a little softer economy going forward this year or a little more cautionary." I mean, just anybody would have that reaction. We fundamentally, though, if you were gonna have a banking franchise in the United States, you'd wanna be in our 11 markets. You'd wanna have our approach to banking. You'd wanna have our focus on small and medium-sized businesses that's ever so slightly protected from the global banks and ever so slightly protected from what fintechs can do.
Even if the economy is softer than what we might have thought, we generally have the ability to grow in any kind of economy because it's just based on your core programs and the intentionality you have about growing. Because we have a small share in most markets, we generally feel pretty optimistic. Small- or medium-sized business owners, you know, which is our foundation, they're used to this noise. Since the pandemic, they are used to this kind of noise. Clearly, the kind of military actions we've been taking are not something that you're used to or you wanna see, but they're used to this kind of noise, so they're just very resilient. They know how to grow. They know how to create cash when they need it and liquidity.
I think they're fundamentally cautiously optimistic. I don't think any small business owner ever gets really frothy about what they're doing, but they're fundamentally optimistic.
Okay. Well, that's good. It's good to hear. I mean, it's good to hear that. On the Q4 earnings call, you talked about your ability to grow maybe faster than you have historically. Do you feel like that's still the case, and what gives you that optimism?
Well, it really relates back to this lack of distractions. We just don't have any right now, and internally or externally. Again, focusing on the core of our business, small or medium-sized businesses and an additional focus we've taken on the affluent side of our consumer base that we service through about 410 branches across our footprint. If you asked our employees, I think they'd say they've never seen us this focused on that client base with these six very specific products that are designed to build small business deposits and consumer deposits. I think it bodes well for the year.
One of the categories that's been in focus over the last few years is commercial real estate. Do you expect it to contribute to growth this year? Are you seeing a turn there?
We, you know, if you look at our CRE growth over the years, last 15 years, all of our peers have been gulping down real estate loans. Our CRE growth has been about 3%-5%. We could grow CRE loans 10%-15% easily in our footprint. But our CRE loans were about 33-34% of loans 15 years ago. It's now down to the low 20s. That was intentional. But our peers during this time have been growing real estate loans 70%-100% faster than we have, okay. When you look at our loan growth, you need to kind of think about quality of loan growth.
Now, to grow our CRE book 3%-5% this year, even in kind of still slightly challenging markets, I think we very much have a chance to do that. In many cases, it's gonna be retaining existing loans that we have that have hit a three-year maturity or a five-year maturity.
Okay. The energy vertical, obviously topical. What's your take on it?
Yeah.
Can you grow energy balances, and what's the offset of high energy prices in terms of how that could flow through the portfolio?
Yeah. We've been an energy bank for 30 years. We're one of the top energy banks in the country.
Would you size it for people?
Yeah. It's about $4 billion in commitments, $2 billion in outstandings. We'd be very happy for that portfolio to grow 10% a year for three or four years. It is really conservatively underwritten. We have about 70, what are called reserve-based loans. We're lending against the reserves of our independent exploration companies. The number of banks that will do this has dropped by half over the last five years. There's fewer banks, there are fewer customers, and the market is in a really strong position, and it's a good position for banks. I think we're in a good spot to grow. We've just introduced a new oil and gas hedging business. We were in it 15 years ago. We got out of it. We've now gotten back in it on a large scale basis.
Literally in four months, we've had 30+ of those 70 customers already do hedging with us. That hedging business in our capital market stack is probably it's a $5 million-$10 million business for us as we get up and running at it. It's with customers that were willing to do this with us all along. I don't think investors should. The major players in the energy industry are really disciplined, and the banks are really disciplined. This is very different than 30 years ago. I don't think you'll see big energy companies lean much farther in just because we've had a spike. Same reason when we have a fall in prices, you don't see companies totally pull back on production.
Do you expect more competition?
You know, we've already seen it a little bit, but oh my goodness, we've seen the movie.
Right.
People that come in and out of the business, they just take the highest risk, and they get creamed.
Right.
We'll have to continually communicate what the energy business is to us. I think most people understand. I tell you the other thing, our power and alternative energy business, which we didn't have 12 years ago, started about seven, eight years ago. It now has $2 billion in commitments and about $1.5 billion in outstanding. We're a major bank for fossil fuels. We're a major bank for utility grade power, and we see continued opportunity with that business too. It's about $1.5 billion in outstanding, so it's about 75% of what our oil and gas outstanding, sure.
Okay. Despite all the noise, economic noise, you feel pretty good about the growth outlook?
I do. Again, we're not overly inwardly focused. We have a great relationship with our regulators, and it just feels like a really good time to be highly focused on growth.
Yeah. Okay. Also, if anybody has questions, feel free to raise your hand, and we'll get you a microphone. The margin expansion story has been pretty impressive.
Yeah.
I think it's eight quarters, sequential quarters of improvement. Talk about maybe the sustainability of that trend, what's ahead, where you think the company can eventually go to from a margin perspective?
Yeah. You know, after the middle of 2023, we saw damage to the net interest margin because of the repricing of our highest priced deposits. The whole industry saw, but we saw it had a bigger impact on us. It affected us about $300 million of our total revenue of about $3.1 billion. We said that would steadily improve, and it has. Our net interest margin has gone from 2.91% up to 3.31% in the most recent quarter. It's basically been as our securities portfolio has repositioned, we have about $600 million in cash flow per quarter. We reinvest about half of that. We may start reinvesting more than that, but that has helped margins. Total interest rate costs are coming down on interest rate deposits. That certainly helped.
Our demand deposits, which is a key driver to everything for us, have been stable now for over a year and growing to a certain degree. All the products that we're bringing to market, we are, you know, totally focused on building core non-interest-bearing deposits. Then we've also, I don't know how many people really notice this, but we've had an emphasis on attracting what most people would think of as wholesale customer deposits. We have about $7 billion in customer deposits that are off balance sheet in Fidelity and Dreyfus sweeps, as an example. We have been in the process of bringing those deposits back on balance sheet. Just as an example, on June thirtieth last year, we had brokered deposits and net overnight borrowings of about $7 billion.
In August, we just said, "We're gonna pay our customers. We're tired of paying brokered deposits. You don't know them," you know, et cetera. At the end of the year, that number was probably a little over $3 billion. We've brought it down from kind of high $6 billion, $7 billion, down to a little over $3 billion in six months. All of that is about 20-30 basis points accretive to brokered deposits and overnight borrowings. It's been very intentional. I think you'll see us continue to pull down our usage of brokered deposits and net overnight borrowings and just paying our customers. What comes with that is other business. Customers love it. New prospects give us opportunities to do other things with them. It's been a incremental benefit to the NIM, and I think we'll continue to see that.
Okay. Anything else on deposits that you're focused on that you wanna talk about? Maybe a little bit on pricing and competition.
Yeah. I, a lot of people have asked us today about, boy, is the pricing market more intense today. It's always been intense. I just don't know of a time when pricing of deposits and pricing in loans and the number of competitors. We just deal in an environment with a lot of competition. I don't really worry about it, quite frankly. This wholesale deposit campaign, this $3 billion improvement in overnight borrowings, again, we're able to do that at rates that are accretive.
Mm-hmm.
to our overnight borrowing costs. This whole emphasis on these six products, particularly this account that we call the Gold Account, which is a consumer affluent packaged account, is all there to drive granular deposits.
Okay. You talked about the hedging program in your energy book. I'd assume that's under capital markets.
Yes.
You guys have flagged capital markets as a success story. Talk a little bit about that. What's ahead for 2026? How optimistic are you on capital markets in general?
I'm really optimistic about it. It, you know, we had about $125 million in capital markets revenues in 2025. That number was $107 million the year before that. It was about $80 million the year before that. It was kind of a consistent $70 million for a number of years. What we fundamentally have done over the last five years, Michael MacDonald leads that business for us. He's done an outstanding job. He's attracted great talent. We have invested heavily in the foundation of, we sort of reaffirmed our syndications, foreign exchange, interest rate hedging businesses, and made sure we have those built for the future. We've added a bond business, we've added a real estate capital markets business, we've added a M&A business, and probably leaving something out.
The foundation for all those things are built. Going from $125 million up to a couple hundred million, which I think we're on a trajectory to get to a couple hundred million annually, probably in 2028.
Mm-hmm.
We don't have to add a lot of incremental infrastructure. The major products are sort of set. The technology and the risk management's all there. We just need to now add more producers to get to that level.
It's a centralized business?
Yes, it absolutely is. Really all of our fee income businesses are. We have about 21 fee income businesses. They're all run at the enterprise level. That was not what we were like 10 years ago, 12 years ago. We were kind of Noah's Ark before we had sort of two of everything. All of our enterprise fee income businesses that make up $675 million of fee income are all integrated at the enterprise levels.
Yeah. Okay. A little bit on expenses in tech. We don't look like tech guys, but I think you're a tech guy, and I'll ask you the question.
Now I'm from Oklahoma, but I'm probably one of the best tech guys from Oklahoma, I think.
Okay. Well, good.
Yeah.
That's perfect. You guys modernized the core. I think it sets you up in a way to maybe lean into AI and digital and some of the other things that banks are talking about. What are you seeing on that front? How does it help Zions become more efficient over time?
Right. There is no question that our investment in our core loan and deposit systems is a massive advantage because it is still out in front of everybody else. If you want to survive in a digital world, you have to be digital to the core. Okay? You have to be data-driven. The fact that we have all of our loans and deposits on one data model sounds kind of boring, but it's a big deal. AI, as an example, we've been using AI for 40 years like the rest of the industry. I mean, it's in our fraud work, it's in how we prepare credit presentations, it's in client authentication. It's in a lot of different places, but the pace of using AI is accelerating rapidly.
We're seeing benefits across the company in reducing manual touches, reducing the amount of multiple data entry. These are little things that add up to really quite significant savings through the course of a year. If you go a little bit further out, there's all this talk about stablecoins and programmable tokens. Because of our relationship with TCS, Tata Consultancy Services, the company that is our partner on our core loan and deposit systems, they have an application called Quartz, which is a tokenized deposit stablecoin platform that they've used elsewhere in the world, just never in the U.S.
We will have their Quartz application in our innovation lab in the next 30 days, 60 days, and we'll be experimenting with stable coin and tokenized deposits later this year. There is no other regional bank that I think is gonna be able to do that because this application is directly tied into our core loan and deposit system. Everybody else is gonna have to create that linkage. Because we're real time, you have to be real time to live in a tokenized deposit stable coin world, and we already are real time. I think this is gonna be another example of David versus Goliath. I think you're gonna end up a year from now hearing us say things that the global banks are doing, and we're able to do it on scale with our client bases at a lower cost.
How does that manifest itself through the P&L?
Well, it'll be another revenue stream. The big issue with programmable coins and stablecoin is finding the use case. Everybody's still searching for the use cases, okay? We're gonna be like Don Quixote out there trying to find the use cases, although I think we're gonna find them. We're not gonna have to get all the way to the windmill to find them. We have customers that wanna experiment with us right now. I'm not talking about Bitcoin. These are stable uses and I think for us to be competitive in the future, the fact that we can deploy this at such a low cost on scale is gonna put us in a very good competitive position.
Be interesting with the small business.
I think small businesses absolutely will find their way into this, and in some cases faster than really large businesses.
Yeah. Okay. Anything else on expenses? Has this kinda technology journey allowed you to reposition people-
out of cost centers into revenue production?
It has. If you just look at full-time equivalent employees.
Yeah.
FTEs for us, our peak was in August of 2019. We had about 10,300 colleagues. At the end of the year, we were about 9,190 colleagues, a little less than 9,200. Big decrease over this period of time. I think we'll be well less than 9,000 by this time next year. Some of it is this continuous focus on simplification and on the use of automation and AI. We've also been using outsourcing. We did a survey with PwC about three years ago, us and seven other banks, eight other banks, and it was a confidential survey. Most of our peers, which we knew have been using outsourcing and managed services for decades, and 10%-20% of their FTEs are offshore.
We were at about 3%. We'll be at about 10% by the end of this year. It's more than just business process outsourcing. What we're able to do on managed services, where they're able to provide expertise in complicated areas of technology, where it would take us 90 days to six months to find the expertise in key technology domains, they can spin up in 60 days for us. It's really allowed us to go faster and spend less money to do the basic evolution that we're doing.
It's a very positive operating leverage message.
It is. We're bringing nice positive operating leverage into the new year. I mean, it's kind of the way to continue to improve return on assets and return for shareholders. I think the interest rate environment is gonna help us here maybe more so than we thought this year.
Okay. I wanna touch on credit and capital a little bit. On credit, just the prior session was the CRE panel, and it's usually a ghost town, and it was packed.
It was packed, yeah.
Everybody wants to talk about Multifamily. Just remind us of your exposure and-
Sure.
How you feel about it.
Sure. How I feel about it. We have about $2 billion in Multifamily loans, and it's been flat. We've had about $2 billion for the last five years, so it's not been growing. The rest of the industry has been gulping down Multifamily loans. If you haven't paid attention to that, you really should. Ours has been flat and our peers are just gulping it down. Okay. They have been for years. Our exposure is about 60% of it is business credit or consumer mortgage type credit, and it's been a very stable book for us. We clearly had an issue in the Q3 of last year. We lost $60 million on a customer that his name has been disclosed.
That was very painful for us, and it was total fraud. It's hard to imagine fraud on that scale, but it was total fraud. We brought in an external advisor to look at it, and we've done all that with our board and regulators, but it was a one-off, and you saw that in our credit metrics in the Q4 Even with that, our net charge-offs for the year were about 15 basis points, which still almost leads the league in our peer group. Our peers are much higher than that, as you know. In the Q4 , we returned to below 10 basis points. We try to live in 5 to 15 basis points over long periods of time, and I think you'll see that.
We feel good about the credit book. You know, you think about two, three years ago in this conference and the discussion about real estate and all the disclosures about real estate, et cetera, et cetera. We've had virtually zero charge-offs in our $13 billion real estate book over this five-year period.
Yeah. Okay. On capital, you guys have had tremendous TBV growth as AOCI has burned off. You have a $75 million buyback authorization.
Right.
that you put out for the Q1 . Talk a little bit about share repurchase appetite and overall priorities for capital.
Well, we've been in the last couple of years, we've been doing a buyback in the Q1 that was pretty much equal to the stock we had to issue for employee compensation, about $35 million and some change. We've done that for several years. We did $75 million now, so that's, you know, more than double what we needed to cover the employee compensation issuance. We've said we're, you know, we can see what investors can see, and we're gonna lean into returning capital to shareholders. We're not gonna go out twelve months necessarily and project it out that far. I think the market can see that we're leaning into it.
This is a signal?
I think it. Did you say signal?
Signal, yeah.
I don't know whether it's a signal or not, but it should be. It's signal-like. Yeah.
Yeah.
You've seen us do this before.
Yeah.
Well, you've seen us. We've always wanted to keep our CET-1 higher than peer median. You saw us do that as we reduced shares from 210 million to where they are today, about 145 million. I think you'll see us continue to do that going forward. We wanna be a little bit higher than peer median, and we have the capacity to return capital barring, you know, any other, you know, situation that could come up.
You always make us wait a couple of days after earnings for the announcement.
Well, that's our board. That's been our.
Yeah.
We've made a habit of not trying to front run our board.
Yeah.
So.
Last question, just, you know, we don't have a ton of time here, but M&A is the topic. When could M&A ever make sense for Zions?
You know, you can look at our past. We've not been overly active in M&A. The M&A that we've done has been very opportunistic. We see almost everything that gets done, so you can tell what we're not doing. We're very conscious of our long-term investors like our deposit franchise. They like our low cost of deposits. They like our mix. They like the fact that real estate is a smaller portion of what we do. Those are dimensions that we think are important to our long-term investors. I don't think you'll see us do anything that changes that dynamic. But we think investors want us to be entrepreneurial. They want us to make decisions. They want us to use our heads. Harris said that on our Q1 earnings call. We don't wake up every morning talking about M&A.
We won't do that. As a management team and executive team, we know how to muscle up around it when we need to.
Okay. You feel good about growth. You feel you can fund it. You like the margin profile. You like the fee profile. Feel good on expenses.
That is a great recap. I think, then you just look at our price that trades at a discount to peers, and you have to ask yourself why. I think for some reason, people still think about capital or the tangible capital issue.
Yeah.
you can see that accreting. It's just kind of a math thing. You look at credit quality, and our credit quality is outstanding. You look at our regulatory relationships and the interest rate environment, positive operating leverage, everything you just said. I think if you like buying value, things that are at a discount and you can't explain the discount, I think those are all things that are very constructive for long-term investing.
Okay. Thanks, Scott.
Thanks.
We appreciate it.
John, good to be with you. That was said.
Yeah. Glad to. Thank you.