Moving right along. Very pleased to have Zions Bancorporation with us. I want to say this is the 24th consecutive year they have been at this conference, and we have only done it 24. Let me double-check that. But Harris Simmons has been Chairman and CEO for every one of those years. Probably one of the very few companies of the 220 we have here that can say that. So Harris, welcome back.
Thank you.
Maybe the best place to start is just the macro environment. You operate in many markets that are traditionally above average growth on the western part of the U.S. The environment today feels a lot different than the environment we talked about when you were here last year. I was going to just talk about your outlook for the U.S. economy, your expectations for interest rates over the next few months, and just how you think that will overall impact customer behavior.
Yeah. Well, I think the economy continues to just chug along. I think in each of the markets we operate in, we are kind of everything Texas up to the Pacific Northwest and south and west of that. So it is a pretty good cross-section of the Southwest. We are not seeing signs of any kind of fraying in terms of credit. Nothing is on fire other than a lot of forests this summer. But the economy just kind of cranks it out. It is kind of the Energizer Bunny of economies, which has surprised me. I had really expected that the combination of tariffs and what is happening in the Middle East, et cetera, would slow things down. But we are just not really seeing it. It is hard to know how much of that is sort of spillover from data centers and everything else, but it does not feel that way.
It feels like Main Street businesses are in pretty decent shape right now. We'll see probably a hike or two. I don't think that's going to materially change anything. I think it's going to take some bigger shock. It's so widely anticipated that I don't think it's going to be a big deal.
You mentioned Texas, which is a market we've heard a lot about at this conference. You entered there, I want to say 15 + years ago-
20 years ago.
20 years ago with the Amegy purchase. Now it seems like everyone wants to be there. There's a bunch of, whether it's Veritex going to Cadence going to Huntington, Fifth Third with Comerica. There's been some other smaller transactions. Just how has that landscape changed? Do those kind of mergers create opportunities for you, either for employees or customers, and just how you're tackling that?
Yeah, it has created some opportunity, probably so far, mostly in terms of employees. We have had a few hires. I think we have probably seen more opportunity coming out of some of the larger banks, Wells Fargo, U.S. Bank, in terms of people and bringing some nice business with them. Probably just their sheer size relative to a Veritex or even a Comerica. We would run into them, but not that frequently, kind of in the smaller end of the middle market, which is where a lot of our activity takes place.
Got it. Maybe just talk about the overall lending environment. C&I growth has been strong. I think you are up like 5% last quarter. You talked to higher utilization of revolving credit lines. Maybe just talk to kind of what industries, client segments, geographies are kind of driving growth and just how you are thinking about the near-term outlook for C&I.
Well, what I would say is what we are seeing most recently is C&I is probably Lending generally has flattened growth. We are seeing a nice pickup in deposit growth. You kind of hope over time that they stay somewhat in sync. But very late, we are seeing lending growth slow and deposit growth pick up. The growth that we have seen year to date has been pretty broad-based. We are really working at taking the one-to-four family portfolio and keeping that kind of stable to even coming down a little bit. The reason for that is just to keep it from becoming a source of more rate risk and kind of convexity that you find sometimes in that product. But the rest of the portfolio, we have seen just been geographically and by industry. I cannot point to any single thing that is driving it. It has been across the board.
Interesting.
I can talk about where we are not growing-
Okay
is NDFI. We have been very flat there. We are trying to kind of sit that one out. I tend to believe that there is quite a lot of risk building in that sector. We have some exposure, but it tends to be very seasoned kind of long-time customers that I think know what they are doing. But we are not kind of trying to build balances that way.
Got it. Maybe you could talk a bit more just on commercial real estate. Balances have been going up, obviously more kind of construction maybe migrating to term or maybe some new term. Just provide some color in terms of what you are seeing kind of across the portfolio and where you see opportunities or, and maybe where you do not see opportunities.
Well, there again, our goal over the last 15 years has been to build that portfolio kind of at a slower pace than the rest of the balance sheet. We have brought our concentrations and CRE down from, it was about a third of the balance sheet coming out of the financial crisis. It is down to about 22% or something like that today. I think that discipline is going to be useful when we hit a bump. The categories that we have been building in, I mean, multifamily has been active over the last number of years. Again, we are trying to keep that kind of a little bit restrained. We have capacity to do more than we are doing.
One of the reasons we acquired an agency lending franchise from Basis Investment Group gives us Fannie and Freddie multifamily origination licenses that we think are going to be really useful tools, kind of managing that and catering to a great client base we have there. But we have also seen, it has been reasonably broad-based. We are seeing retail, some growth there. Industrial, and multifamily have been most predominantly where we are seeing growth.
Got it. On the earnings call, you mentioned some load spread compression products. Can you provide an update in terms of what you are seeing currently and just how competitive the lending environment is?
Yeah, I think it is very competitive right now. You get used to hearing your people talk about it is competitive out there, but probably more so as we came into the summer and early fall here. You see it in individual deals. It is less so as you go down market, smaller sized deals. But the corporate lending market is you are seeing real spread compression, credit spread compression going on today.
Is that just a lot of banks chasing the same credit?
I think so, yeah. I think you are seeing more banks showing. You are seeing in commercial real estate, you are seeing banks that were sort of sitting it out, concerned about office exposure and those kinds of things, that are coming back in. You are seeing Wells Fargo more active. They are a big force in the West, and with the asset cap gone, they are showing up more frequently. So yeah, it is a very competitive market.
I guess so it we kind of talked about price competition. Are we also seeing kind of companies get more aggressive on standards and terms, or is it more so on price?
No, I think it has been price. We are not seeing sloppy competition. I think that is where I have a concern with private credit because I think they tend to be probably more covenant-lite, less kind of rigid around guarantees and that kind of thing. Maybe just easier to navigate. But I think that is also a source of risk. But I think commercial bank competitors are we are not seeing sloppy lending taking place.
Morgan Stanley was just speaking about this CapEx investment cycle, and obviously you guys play in different games, but how does that translate into the need for concrete or need for HVACs, and clearly
Yeah
you are lending to companies
Yeah
that do those. Are you seeing any of this AI-related spillover? If so, how do you think about that?
Yeah. I think it's hard to know because it's an ancillary part of a lot of these middle-market companies' businesses. I was mentioning this morning to one of the groups we were visiting with, and I was on a call to a customer up in Logan, Utah recently. It's an electrical contractor, and it is a fabulous business. But they got 4,000 employees. They got 80% of these electrical contractors in their business are doing data center work. It's all over the country. I think there's quite a lot of that that's going on. It's not just the hyperscalers that are spending. There is a real trickle-down effect that's taking place. It's hard to know how much for any, but transmission line contractors, and all kinds of folks that are supporting this build-out.
Earlier, you talked about deposit growth accelerating in the back half of the year. I know on the consumer side you rolled out new Gold Account last year. This year, you followed up with that Business Beyond Account. On the commercial side, you've mentioned doubling the marketing spend from 2024 to 2026. Are those initiatives driving the growth, what differentiates those products? Just maybe more color around that.
Yeah. They're contributing to it. This Gold Account product, it's a great, we think a really well-constructed, mass affluent product. Our goal this year is to do 20,000 new to bank clients in that account. We'll come close to that. I'm not sure if we'll quite hit it. We had a companion product for small businesses. It's a tiered product set, and we're doing 70% beyond what we expected there. They're really great accounts. It's the type of activity that is a real marathon. It's not a sprint. In any given year, it's not going to move the needle, but we think over time will continue to strengthen what we think is already one of the great deposit franchises in the industry.
Got it. With this kind of pickup in deposit growth, there has obviously been concern to talk about kind of upward pressure deposit costs. Maybe just talk about kind of deposit mix you are seeing, deposit costs you are seeing, and just the competitive landscape around that.
Well, again, it has been a competitive market. We went through a period where everybody was washing deposits, and we are all kind of driving them away, and that has flipped. What we are doing is we are incentivizing bankers to think about kind of First of all, we price locally. In each market, we have our management teams locally who price. They do it against an internal yield curve that basically reflects our marginal cost of funding the place. Our focus is really on displacing borrowings from the home loan, broker deposits, kind of the wholesale kind of sources, and to pick up a few basis points where we can, doing it with customers through deposits.
The goal is to focus on total funding cost, not just the cost of interest-bearing deposits, because we will see pressure on that and bringing down the cost in total is what we are basically trying to accomplish right now.
Got it. Last quarter, I guess loan growth outpaced deposit growth, then we saw broker deposits borrowings go up. This quarter sounds like deposit growth outpaced loan growth. Just how do you think about balancing the two?
Well, you're always trying to build both, and sometimes the emphasis shifts a little bit in terms of what you're spending a lot of time talking about internally. But, I think our capital is in increasingly quite good shape, and we have the capacity to organically grow. I talked about commercial real estate. We're trying to moderate the growth of that, but not to cap it by any means. One-to-four family, we are trying to fundamentally keep that reasonably flat to even down. So that's a drag on growth, but we just think it's the right thing to do to continue to get the mix optimized, particularly in an environment where rates probably are going to be higher, I think, in the future.
Got it. In the past, you talked about not fully reinvesting the securities portfolio, but at some point you get back to that.
Yeah.
I guess maybe when do you think that is?
I think we're still a little ways out. We're probably a few quarters out before we need to do that, but it's not too far away.
All right. Let me tie together the loan and deposit discussion. In the last quarter earnings call, you talked about the 2Q25 NII outlook of moderately increasing, but then kind of told us that maybe we can get to this high single-digit growth with some Fed cuts, I think. Now we are going to get these Fed cuts. Just how are we thinking about the NII
The Fed bumps.
Yeah. I think there was some confusion in terms of how you were kind of framing the NII outlook. Just maybe just
Yeah.
Tell us what you are thinking.
Yeah. I think fundamentally we're built for. The way we'd model it is 100 basis point. The parallel shift upward in the curve should generate about a 4% increase in net interest income, and everything else being equal. Everything else isn't equal, obviously. We're talking about credit spreads. Could be a little bit of a headwind. But I think that fundamentally, we're in quite good shape for where Kevin Warsh is likely to take the bus here over the next year. I feel pretty good about how we're positioned right now.
Got it. I guess just maybe to clarify, to get to that high single-digit year-over-year growth, what rate backdrop would it take?
I think that's anticipating what we're seeing in the forward curve, which I think at the last call, we're starting to see more outlook for probably with the cuts are behind us, and we're probably going to see some steepening. I think we had. David, you can remind me, but I think we had two rate hikes in that, I believe. Yeah. Anyway, so it's building in the anticipation of one to two quarter point hikes.
Makes sense.
Yeah.
Let me just talk to net interest margin. I fully appreciate this is an output, not an input, but you had nine quarters of expansion. Last quarter, we were kind of stable-ish at 327. I think last year we talked about normalized maybe closer to 3.5. I am not sure if we can get there. Just how are you thinking about managing NIM against everything we have talked about so far?
Yeah. There are a couple of comments I would make. One is that underlying it all, particularly as we start to build the securities portfolio at current yields, that will help. I got to say that is maybe still a little way off. In the meantime, with better deposit growth and without offsetting loan growth, that is probably a little bit of a headwind on the NIM, but not on the net interest income. Incrementally, what is happening, deposits coming up, but some of that is going into cash because we are not seeing the loan growth. So I expect it is going to be reasonably stable through the next few months. But as we start getting into a place where we see better loan growth and start replacing securities with higher yielding current yields, I think that should continue to help improve the margin.
Ultimately, I think I said here a year ago, and I do think that probably kind of somewhere in the mid threes, 3.5 or so is about where our sort of mix of deposits we have and the kind of business we are running should take us. But it will take a little bit of time to get there.
Maybe moving to the fee income side. You certainly have been building out a bunch of those capabilities. Wealth management comes to mind. Hired Mike Selfridge from First Republic earlier this year, a name any of us know. Maybe talk about kind of what his mandate is and what we could just expect from that business.
Yeah.
It seems like a big opportunity given your footprint.
Yeah, we think it is. We are really delighted to have Mike on board with us. The mandate is really to integrate wealth management into our private banking operation. We have a lot of business owners. We think there is a huge untapped opportunity there. I think we have the leadership in Mike to be able to continue to build that. Rebecca Robinson, who had been building this the last few years, did a great job taking what was really a very kind of a ragtag operation, getting it making money. Mike, we think, will take it to a new level. Really pleased with him. We have accompanying kind of the larger kind of wealth clients. We are also doing something on the retail front with wealth. Call it Wealth Select. It is really designed for somebody that has $100,000 to $600,000 or $700,000 to invest.
There are just a lot of people out there. Particularly given kind of all the small businesses we bank, we think there is a lot of opportunity there to build managed asset balances as well.
Got it. Then maybe turning to capital markets, the business you built up over the last five, six years. Maybe just talk about the progress you have made there. You mentioned the Basis acquisition, just how that fits in.
Yeah. Mike MacDonald, who is building that business, is first-rate. We have kind of doubled the revenue over the last four years, and have added in the last year a commodities hedging business. It is coming along very nicely. An investment banking capability. We have a handful of bankers who are now working with some really great opportunities. These are deals that generate fees for $2 million or $3 million to $6 million, $7 million fees. They are not large in the scheme of things, but there are a lot of them, we think. We think there is a lot of opportunity there. He has some great people we have added. They have come out of some major banks. We have a team in Charlotte, down in Houston, Los Angeles. We are really pleased with what he is building. This Basis acquisition gives us a new set of tools.
We become one of a very small handful. There are only four or five banks in the industry that have both Freddie and Fannie licenses as well as TBA/MBS capabilities, and we think that is going to be a really nice combination to build from. We have some good leadership in place for it.
Got it. I think, on the July call, when asked about Basis, you said you were not allowed to talk about the financial impact or contribution from it because the deal had not closed. It has now closed. Any thoughts around what this impact could have?
Well, I think that it is a business that there is a lot of building to do with it. We will continue to work with Basis Investment Group here in New York, who we expect will be referring business to us. They are really good. We will add to that the distribution that we have through a pretty deep client set in the West. We are in a part of the country where you have disproportionate amount of population growth taking place and where affordability has become a real issue. You have families that are starting later, and they are smaller. You just see more multi-family product as part of the housing mix. We think that we are going to be really well-positioned across the Western United States to help address the term financing needs of these clients.
I expect that probably, if I look out three to four years, I think it becomes a $30 million to $40 million kind of revenue business. Kind of ramping up toward that.
Interesting. Maybe on the expense side, I think we're about 5% year-over-year in the second quarter on a core basis. You've talked about getting to 100 to 150 basis points of positive operating leverage this year. Just how are you tracking against that objective, and how should we think about cost in the back half of the year?
Well, I still think that that's probably kind of the right kind of target. The operating leverage is I expect that continues in the next year. I tell our folks, you have to be wary of not painting yourself in a corner with an operating leverage long-term target because it's something that because it's an incremental kind of thing. Everybody hits a wall there eventually. I think we've got some room to run still before we do that. That's with some additional, like I say, some additional marketing expense in the mix.
Got it. Maybe shift gears to just credit quality. It's obviously been a non-event. I think we had just six basis points of charge-offs last quarter, despite good loan growth. Just industries, portfolios that you're being more selective or anywhere that you're kind of avoiding. You mentioned NDFI earlier. For me, what else is on your mind?
We are just steady as she goes. I think it is really notable. On commercial real estate, you go back a couple of years, everybody is freaked out about office and everything else. I have not updated my numbers for a couple of quarters, but the last I looked, and it has gotten better over the last couple of quarters, but we were running on average 0.7 of 1 basis point of net charge-offs in that book over the last five years. It has been a total non-event and as clean as a portfolio can be. I do not see that changing. I think that if we get into a tougher economy, higher cap rates, et cetera, it is going to perform well. It is underwritten well. The concentration relative to our total loan book has been steadily coming down. We got it down to about 22%.
It was a third of the balance sheet, a third of the loan book, go back after the financial crisis. Steadily, we have brought that down. That probably goes a little further, but we like the business. I think we have got good people, and if you do it well, it is good business.
I guess on the reserve side, reserve ACL ratio is now 1.13%. CECL day one is 1.1. As we kind of get back to that level, the economy is good, but just how do you think about is that metric relevant or how do you think about that?
I am a big fan of what Jamie Dimon said a year or two ago. Someone please ask a similar question. He said a reserve is ink on paper. All of our internal metrics, all of our incentive plans, they are all geared. We take the provision out of it. We depoliticize the whole process of it. We plug in net charge-offs. I was joking with Tom Brown recently. We were talking about CECL. When I started my career, I was a CFO years ago at the bank, and I just decided what the reserve was. It was back in the good old days. When you are closing the books, it probably ought to be 110. 110 basis points. Today, we stress test, we go through all, we have got committees and oversight and auditors listening in. Let us go through all the CECL calculations. We get to 110.
I think that Michelle Bowman was actually onto something. That, I mean, CECL has been kind of a whole bunch of nothing. It's important because it goes into a filed financial statement with the SEC. You do build process around it, and we talk about the assumptions that go into it, et cetera. But somehow, you always get back to about the same number.
Got it. I guess maybe on capital, kind of restarted the buybacks, $75 million or so the last few quarters. The regulatory backdrop is more constructive than it's been in a bit. Just maybe just how you're thinking about capital deployment, capital management, share buyback, et cetera.
Yeah. Well, I think we went through a period, it came to a conclusion a couple of years ago with the new administration where there were concerns about what the capital regime was going to look like, about long-term debt requirements and all the rest. Clearly, that's changed a lot. It could change again in a couple of years. You kind of take a breath and grateful for maybe a pause here. But ultimately, what I think the focus is on making sure that if at some point we're going to come into a downturn, I'm concerned that given how long it's been since the last real one, I'm kind of the, if you're familiar with kind of the whole Hyman Minsky school of thought about this.
An old Fed economist from years ago that, I mean, the longer we go, the worse it probably will be. When we get to that point, we want to be a company that's known as having been disciplined in terms of how we built the book of credit we have, and that we have solid capital and a good deposit base. I mean, it's the meat and potatoes of regional banking, I think. It's just really a matter of thinking about how our capital's going to look relative peers as it's looked at by the market and not by regulators. Because it's the market that's really reacting to it in a visible way. You want to be in a place, and I think, and we're quickly getting there.
Tangible book value per share has been increasing at north of 20% for the last three years. We are getting to a pretty good place. I think that is going to facilitate more in the way of buybacks next year. It is a board decision, but we did this Basis deal that it was done with cash. That took some. Fundamentally, it is building at a nice pace. CET1 including AOCI, without excluding the exemption, if you will, is getting to a place where it is going to be in the high nines, close to 10%, I think, during the next quarter or two. I think we are going to be in a position where we can start to accelerate it.
I guess on AOCI losses were like I think $2 billion-ish last quarter. Given the move in rates, that goes up. Does that matter from a-
Not a lot. I mean, a lot of what we have is hedged. It should be pretty predictable.
Got it. Maybe talk about bank consolidation. There has been a few transactions in your footprint. We saw the First Hawaiian Tri Counties deal, EverBank WaFd, maybe that is a bit unique. I guess despite that, I feel like we all came into the year thinking there would be a lot more bank consolidation. I guess first off, why do you think there has not been more? Given, which we have talked about in prior years, all the significant investments you have made in technology on your systems, why have not you been more active?
Well, we've looked. I mean, I think the deals that have been done have been. There are a couple of deals that have been done that we've been interested in. You can think Colorado was taking place there. I mean, that would've been a great addition, but not at the price for us. I mean, I think that's a deal that a PNC can do and digest in a way that somebody our size relative to that size can't. I am not one who believes, we've talked about this before. We probably maybe have actually a difference of opinion about it. I don't think that size is that it ever will finally solve the problem of efficiency in banking.
The data, I think really demonstrates, if you look at kind of the weighted average efficiency ratios of different buckets of $5 billion-$10 billion, $10 billion-$25 billion, $25 billion-$100 billion, to $500 billion, on up. I mean, it's all pretty consistent really in terms of. Now the mix is different. You get into capital efficiency is a little different issue, and we have to kind of scale that. That's why we have to work on fee income. I don't think it's one where you have to just have a larger balance sheet to be better at what you do. I do think we've made investments in technology that I think lead the industry. I think we're in a great position to be able to do a deal to acquire larger community banks, et cetera, but it's got to be on terms that work for us.
I don't wake up every morning saying, "How do we get to $150 billion or whatever?" I don't think that's how value gets created.
I guess from a financial perspective, when you're evaluating deals, is there a metric or two that you kind of look at that like, "Oh, I want to buy First Bank, but I can't pay more than X." What?
Well, obviously, everybody's really focused on kind of tangible equity, dilution and earn back and everything. You look at those things. But fundamentally, because I'm not sure it's always necessarily the best measure, and it's one that, frankly, once you've scrambled the egg, it's kind of hard to always figure it out anyway. But you look at what I think about is the quality of the deposit franchise is very much on my mind as I look at anything. And then on the asset side, if it's all commercial real estate, that's less interesting. I mean, we could digest that if it's smaller. But the ability to actually take product that we have that's geared towards small to mid-size businesses and pump it through there, that's where I think the opportunity is for a bank like us.
Makes sense. And just maybe in our final minute, in the second quarter, you did 16.5% ROTCE, kind of ex the items. Just how do you think about the longer-term kind of profitability of the company and how do you kind of balance returns versus growth?
Well, ultimately, returns need to come before growth. And I think that needs to be the priority is you're creating value before you start doing more of whatever you're doing. So, listen, I think that I would expect us to be thinking about something that's kind of 15% and north as sort of reasonably decent performance that you can grow with. And I think, especially you think about what the everybody might have a different opinion about what the real cost of equity is in the industry, but particularly in an environment where you've got still pretty historically low long-term rates, if you're doing 15%, I think you're creating real value.
That's good. On that note, please join me in thanking Harris for his time today. Next up is lunch. We have a very interesting panel, so please attend.