Zions Bancorporation, National Association (ZION) Earnings Call Transcript & Summary

Okay. Why don't we go ahead and get started? Welcome, everyone. Good afternoon. My name is David Long. I'm one of the senior bank analysts here at Raymond James. I'm very excited to introduce Zions Bancorp to the Raymond James Institutional Investor Conference for the first time. Zions is a $69 billion asset bank headquartered in Salt Lake City, Utah. It operates in several Western states with California Bank & Trust and Amegy Bank in Texas as its 2 largest subsidiaries outside of its home state of Utah with Zions Bank. Presenting on Zions' behalf will be its Chief Financial Officer, Paul Burdiss. He joined Zions in 2015 as the Chief Financial Officer, coming over from SunTrust, where he was its Corporate Controller.

Treasurer.

Corporate Treasurer, sorry about that. And prior to SunTrust, he was the Executive Vice President and Treasurer for Comerica.

Right.

Also here on Zions' behalf is James Abbott, Director of Investor Relations. And with that, I'll let Paul go ahead.

Great. Thank you, David, and thanks, everyone, for joining. I have a few slides to go through. We've only got 30 minutes and about 20 slides, so I'll try to go through them somewhat quickly. But for those of you maybe who don't know Zions well, yes, we're a bank that's been around for a long time. We have got a footprint in the Western United States. You can see on this page, and I don't know if the slides are being webcasted or if it's just audio. But you can see on this page, it's Page 3 of the materials that are available on our website. You can see the markets that we're in. A particularly unique aspect of our franchise is that while we are one bank without a holding company, we are the largest publicly-traded national bank. We operate in all of our geographies, defined by states under different brand names. And so you see, as David said, in Texas, we're known as Amegy Bank; in Utah, we're known as Zions Bank; California, we're known as California Bank & Trust. And the reason is that our go-to-market strategy is a very local, be integrated into the market and we want to be seen as the local bank in each of our markets. And that shows up in the composition of our loan deposit book, which I'll talk about in just a minute -- in just a little bit. The economic footprint that we're in is really strong. So in the Western U.S., we've sort of weighted the job growth, unemployment rate, GDP growth relative to our peers. You can see where we rank. We are the green bar on these pages. You can see where we rank relative to peers. And the markets that we are in have particularly good and strong growth rates. We are also particularly focused on small business lending. And you're going to see a few more pages on this. But you can see that we really sort of punch above our weight in small business, commercial loan size, this is total dollars of commercial loans between $100,000 and $1 million. On the left-hand side of that chart, you can see where we rank relative to peers, and even the much larger banks than us on a scale basis. This is not scale, it's in dollars. And on the right-hand side, when you look at sort of proportion of the portfolio, again, those smaller loans between $100,000 and $1 million, you can see where we rank relative to peers. We are the green bar on both of those pages. Because we're local, because we're seen as the local bank, because we provide a very high level of service, we win a lot of awards and a lot of awards tell us that our customers really like what we do. So you can see we've got some Greenwich Excellence Awards, which I'll talk about in just a little bit. But in Arizona, the National Bank of Arizona is recognized. In Nevada, the Nevada State Bank is recognized. California Bank & Trust is recognized, particularly in San Diego. And likewise, Zions Bank in Utah. So this is -- it's a really -- it's a strong indicator of how our customers see us in the markets -- in our market. And then when we think about kind of ranking, so this is based on Greenwich data and it's -- I'm not going to read through all the boxes, but you can see overall satisfaction, satisfaction with our bankers, satisfaction with the credit process, how we rank relative to particularly our larger competitors, we are in a spot where we are competing with the very largest banks and the very smallest banks. But you can see how our customers -- again, how our customers see us relative to those large competitors, and we rank and have continued to rank for years really, really well, a very high service model. So we talked a little bit about loans. Let's talk about deposits. Deposits are the real jewel of this franchise. It's highly granular, and you can see largely commercial oriented. The left-hand chart and the left-hand bar, that's consumer deposits. That's about a 1/3 of our total deposits are consumer. Therefore, 2/3 are really commercial. And you can see the focus on small business and commercial. This is not large corporate, vis-à-vis the kind of the small end of middle market. On the right-hand side, you can see the interest-bearing deposits as a percent of total deposits. And it's really interesting to note that we are easily in the top quartile in that proportion. Over 40% of our deposits are noninterest-bearing demand deposits. And what has been, I think, striking over the course of the last 5 years, 3 years, as interest rates rose, of course, they're not rising now, but as they rose over the course of the last several years, those noninterest-bearing deposits stuck with us. And we get a lot of questions around why. Why are your customers willing to hold money with you, bearing a rate of 0? And the reason is when you dig into it, is the granularity of the portfolio. These are the operating accounts, largely of the small business customers that we serve. And because they are the operating accounts, they are relatively price inelastic and relatively sticky. I mean, it's like your own checking account. There is some minimum balance that you probably maintain in your checking account. These are the checking accounts for the small business customers. And when you glue them all together, it is a very, very powerful source of funds for us. And then let's look at small business acquisition trends. So this is over the course of the last 2 years by quarter. And what we're trying to show here is acquisition and attrition of our small business customers. And you can see, on average, kind of a net increase of about 1% a quarter, a little over 4% annually and you compare that to what we see as sort of a net small business creation rate of about 2% in our markets. So we continue to grow business customers at a rate that's faster than our markets. And I would also note that we've got about 200,000 or so small business customers. So looking ahead, thinking about who -- kind of who we are and where we are focused in terms of business and in terms of capital allocation, across the top of this page, which is Page 10 of the materials, across the top of this page, are the key elements of our strategic focus for the next couple of years. So we do a lot of other things. We're not saying that the other things are not important. But we are really focused on small business, we're really focused on commercial, we're really focused on affluent, and we're really focused on capital markets. All of those tied together, right, small business and commercial, I think, for obvious reasons, because small business ends up being the feeder for commercial, and it's all really important to us. Affluent, these are -- a lot of these are privately-owned businesses. A lot of these businesses will have wealth events over the course of their histories. And we want to be there through deep relationship banking to really build on that. I would say, affluent banking is one of our biggest opportunities. We are very underpenetrated in that market. And then capital markets. Capital markets, for a bank of our size, I would say we're relatively underdeveloped in our capital markets product offerings. When we consider sort of the number of commercial clients we have, we need to get better at that, and we are. And we're doing that through foreign exchange and swaps. We're doing that through loan syndications and other things, trying to ensure that we're able to provide a full suite of products for those core commercial clients. All of this is built on what we call the strategic enablers, and I could spend half an hour on this page. I'm not going to. But it's all based on data and analytics. Banks are data businesses ultimately. We are making a massive investment in data and enabling technologies. Risk management is a strong foundational element. Simplification, as we have been replacing our core systems, we have found opportunities to continue to simplify the business. And so that's something we spend a lot of time on, particularly, our President and Chief Operating Officer, Scott McLean. He jumps on that and is managing that very, very effectively. And then building on technologies, enabling technologies, we're making a lot of investment there, and of course, people and empowerment. And that's a really important aspect to our strategy that I'm going to describe a little bit more. Dave, can I get a time check? I don't have a clock up here.

Sure. 11 minutes left.

Okay, thank you. So this is our -- when we look at what our customers want, right? There are a lot of surveys. These are small business customers, the importance of various channels of interaction. And you can see a conveniently located branch still ranks really high. And so we continue to focus on branch banking, and I'll talk a little bit more about that in a minute. Enablement through internet banking also important. This speaks to our technology investments that we're making. And then access to account officer. This strong relationship banking is a really important aspect of what our customers want. And so we are investing in that. I will say that there are banks out there who are creating a sort of highly homogenized widgets that they just want to run through the system, and their sales force are geared toward that. We are geared towards small business customers, and everyone is different. And so we're going in the opposite direction and enabling education and training, particularly for our frontline bankers. We want our frontline bankers to have credit authority so that if a customer comes to them, a long-time customer, somebody they know really well and they come to them and say, you know what, I've got this opportunity, I need $1 million loan. We want our bankers to be able to say right there, "Yes, I have a high degree of confidence that we can get that for you," as opposed to, "Well, if you fill out the application, we'll see what happens". We want highly engaged, highly trained, highly involved bankers in our communities. And so as trying to show here on this Page 12, we are engaged in a somewhat extensive frontline banker training program, and vesting them with authority in order to fuel superior growth. So when we think about technology, one of the hidden things about our noninterest expenses, our noninterest expenses have been relatively flat over the last 5 years. But the technology portion of that has been steadily increasing. We will see another page or 2 on technology. But the point is, this is how we're going to counter the large-scale competitors. First of all, we are one company. We act like one company. We do not have lines of business. This is really important. Some of our geographies may have lines of business within their geographies. But at the top of the house, we do not have lines of business. We are organized geographically. And that enables us -- it's a little harder. I'll be honest, it's a little harder to manage, but it enables us to all be thinking the same way and prioritizing appropriately at the enterprise level as opposed to the business line level. And so we act as one company. That's kind of the first point. We are looking -- always looking for ways to leverage technology to enable a better relationship with our clients. Interestingly, as shown on that prior slide, our technology is actually already rated pretty good, but we're not resting on that. We're continuing to invest in that. One of the big things we're doing is we're replacing our core system. Our core system, as you know, is kind of a system of record for all your loans and deposits -- all of our loans and deposits. And we've completely replaced our loan systems onto one system for all of the loans that were in scope, and we are in the process now of converting our deposit system into one system. And it will be the same system across loans and deposits with one common customer database. So we're doing that. We're in kind of the seventh or eighth year of that. We've got 2 years left to go. And so we're looking forward to that project concluding so that we can build upon that, and then always looking for ways to continuously improve our efficiencies and our customer experience. Page 14 is a chart that we have been publishing now for a couple of years, and it's starting to get a little tired, and I say that because of all the green check marks on here. All the green check marks are things that we've accomplished. And we've accomplished a lot over the last several years. Starting at the core, the bottom, the basis that everything else is built on, we've replaced our loan systems. We're in the process of replacing -- that is not done on the right-hand side. FutureCore Release 3, that's the deposits piece. But we replaced the loan systems, as I said. We've created an automation center of excellence. So this is looking for ways when we standardize processes, we can automate processes. And we've been doing a lot of that. We've got some really great slides in our Investor Day deck from a couple of weeks ago that if you're interested in more information on that, I will encourage you to look through that. But that's all sort of behind the scenes. Our customers don't see that, that's in that gold section down below. As you work up, though, in the blue section, these are all the things that customers do see. We've changed our public websites. We've changed significantly our mobile banking and a lot more improvement of that is coming here in the next 12 months or so. We've simplified our deposit products. All of our markets has a different set of deposit products. We've simplified that down to a common set, digital business loan applications. These are for relatively small loans. But those can sort of -- you can apply, and with approval, you can get funding in as little as 4 hours. Highly automated. Likewise, with the digital mortgage loan application, we've rolled that out over the last year. A year ago, it was a 100% paper process. This year, recently, it's been about 70% automated, 70% digital. So a massive change in the way that our customers are interacting with us in a much more automated way. Treasury Internet Banking. When you think about the quality of our deposit franchise, the Treasury Management system is like the most critical part of that for a commercial customer. And so we are continuing to invest in that. And actually, we're creating a simplified product set that we're pushing down into small businesses because we think there's a lot of opportunity to continue to help our small businesses by enabling much more sophisticated cash management techniques. And then at the top left, you can see I referred to that earlier, online and mobile banking replacement that's occurring this year and a little bit into next year. So there's a lot going on in technology over the last several years, and we're going to have to, I think, update this chart because we've had so many successes that we need to sort of move on to the next phase. The next couple of charts are meant to highlight a lot of work done. I'm not going to go through all of them, but they're meant to highlight our commitment to continuing to drive efficiency across the company. When I think about the local go-to-market strategy, for those of you who have known us for a long time, 10 years ago, we had a holding company, and we had separate bank charters in every state. As I said at the outside -- outset, we no longer have a holding company, and we've only got one bank. And what that is enabling us to do more and more is to continue to drive efficiencies in operations. That is to say, anything that's not client facing, we can standardize, automate where possible and make more efficient in the back office. We want to keep that high-touch client-facing local part of our strategy in place, but all the things that don't directly touch the customers, we are looking to standardize and automate, make more efficient. And so we do this through what we call our simple, easy, fast and safe process. And that's really what this page is intended to cover. This next page, Page 16, this is just a reminder. If you go back and you knew us 10 years ago, we are a completely different bank, I would argue, than we were 10 years ago because of all of the investment that we've made, not only in simplification, which we talked about, but also risk management. The risk profile of our organization is markedly and significantly different than it was 10 years ago. I'm not going to go through all of these pieces, but it's a really important differentiator for us. We have made, and we can point to all of the investments that we have continued to make in the business and in risk management, and it's significantly changed our risk profile. And we believe it's going to create -- allow us to be differentiated in the next credit cycle. We believe we are going to be a positive outlier. So over the last 5 years, you can see on the upper left of Page 17, revenue growth, the gray bar -- gray line is sort of top quartile. The blue line is bottom quartile. And so you can see in revenue, we're kind of in the middle 50th percentile, on the left. But on the right, you can see that our noninterest expenses have been really -- this is all scale to 100, have been really relatively flat over the course of the last 5 years. Again, these are relatively flat expenses with a lot of technology investment going on. We are not achieving expense control by under-investing in the business. We are massively investing for the future. But you put those 2 things together in the lower left, and you can see our adjusted pre-provision net revenue has generally been in the top quartile for these last 5 years. And then when you combine it with the active capital management, particularly the $1.1 billion in stock that we bought in 2019, you can see that our earnings per share growth and I should say, with exceptional credit quality, you can see that earnings per share growth is clearly it has been in the top quartile. So let's talk a little bit about credit quality. Credit quality is and has been very good. You can see the trend. There's a little blip, which is noted on the left-hand side there. That is our -- related to our energy portfolio. 5 years ago, our energy portfolio was $3 billion. 40% of that was oilfield services. Today, the energy portfolio is about $2.3 billion, and 20% of that is oilfield services. Services is where we ended up having some of this credit stress that is noted on the left-hand side of the chart. And on the right-hand side, we have what really matters -- sorry, the left-hand is 90 days past due and nonperforming divided by loans and other real estate. But on the right-hand side is really the chart that matters more and that's your net charge-offs -- our net charge-offs as a percent of loans. And as you can see for the last year, they've been almost 0, those net charge-offs as a percent of loans. So very, very, I'd say, exceptionally strong credit quality. So look, the efficiency ratio, you can see if you go back to 2014, our efficiency ratio got as high as kind of 75%. We have worked that down. It was below 60% in the fourth quarter or in the -- in all of 2019. We think we can continue to do better. As you can see, banks generally have trended down. We've trended down faster. We think we can continue to do better over the medium to long term. And return on assets you can see, if you go back 5 years ago, our return on assets was kind of in the worst quartile. Now most recently, we're kind of solidly in the middle. Again, we think we can do better than that, and we want to. As it relates to common equity Tier 1, as I said, we bought back $1.1 billion of stock last year, but we still have one of the stronger common equity Tier 1 ratios among banks, particularly regional banks. And so if you look at the left-hand side, that's where we rate at 10.2% at the end of the year on CET 1 ratio. On the right-hand side, this is under the old incurred loss method, not CECL. But on the right-hand side, you can see common equity Tier 1 plus the allowance for credit losses divided by risk-weighted assets. So they're scaled the same. So that you can see that they’re both really there to absorb loss, right? And so we think it's important to look at the combination of CET1 and allowance. And even on that basis, you can see here, that we compare well relative to peers. Some interesting statistics down below, most notably in 2019, we bought back 170% of earnings through payout. So this is something that I want to make sure everyone is paying a little bit of attention to, and it's very unique for us. We strive very hard to be a shareholder-friendly organization. And so when we went into the credit stress of 10 years ago, we and every other bank needed to go out and raise capital. One of the ways that we did that was through the issuance of warrants. So when you think about it, volatility is high, what do you do? You sell volatility. So that's what we did. I would love to take credit for the strike, by the way, but I can't because I wasn't there. But the point is that these warrants are 10-year warrants, the strike is around $35, okay? But as you're thinking about earnings per share and earnings per share outlook, it's important to keep in mind that a source of earnings per share volatility for us over the last several years has been the dilutive impact of these warrants, the 30 million warrants, right? The dilutive impact of these warrants on earnings per share. And interestingly -- and so these things mature on March 21, 2020. And the kind of the final resolution price compared to the stock price -- the strike price is sort of the last 10 days of trading compared to the strike. And again, the strike is around $35. But the dilutive nature of these warrants was probably about 9 million shares. That's on a base of about 180. About 9 million shares in the fourth quarter. Right now, with the stock at about $40, don't know where it is right this second, but let's say the stock is about $40, that approximately $9 to $10 a share differential is the equivalent of about a 5 to 6 million share reduction in our diluted shares outstanding. And so it's important to keep in mind, again, these things mature in about kind of 90 days or so or 60 in the third week of May, but it's something to keep an eye on as you think about earnings dilution and earnings per share. And so finally, our outlook. This outlook is really unchanged relative to what we published in January, along with the fourth quarter earnings. And as a reminder, that outlook was unchanged from the third quarter. In fact, it was exactly the same as the outlook that we provided in the third quarter. I will note, it's really important to note, I think, that through our quarterly forecasting process, when the Federal Reserve's pivot occurred in the second quarter, we picked up on that. And our forecasting process really quickly realized that there were going to be revenue headwinds in 2020. And so we moved very quickly to architect an expense cutting program, which included a 5% reduction in our position -- a 5% position elimination. We announced those in the fourth quarter with -- along with our October earnings call. But importantly, those position eliminations didn't take effect until January 1. And so you will see the expense run rate of that position elimination beginning this quarter, beginning in the first quarter of 2020. So I hope that, that conveys to our investors that the management team is actively thinking about operating leverage, actively thinking about revenues, actively thinking about expenses relative to those revenues. And I'm really proud of the fact that we took some proactive actions in the fourth quarter that has set us up for what is going to be probably a fairly difficult 2020 relative to the last couple of years. So those, I think, are my prepared remarks. I think I'm just about out of time, David. I don't know if I should end it now or if I should take a question?

Yes. I just want to ask you one question. Given that prior slide, Slide 22, you take the NII [ profit ] decreasing based on forward curve. I just want to confirm, is that forward curve based on forward curve as of December 31?

That was based on the forward curve as of the -- basically the earning, which would be like third.

[indiscernible]

Yes, yes, yes. So this does not take [ into effect ] what happened today, right? But the point is, is that we have been calling for sort of slightly decreasing NII for the last quarter or 2 quarters. And so yes, the environment is marginally more difficult. Loan growth is going to be an important factor as we think about the degree to which, in addition to rates, loan growth is good and deposit growth are going to be important factors as we think about the decline of net interest income. The other side of it, though, and the biggest lever we have right now is deposit pricing. And so just today, we are actively working on reducing our deposit pricing today. We've got a loan-to-deposit ratio that's enviable. We've got one of the lowest priced deposit franchises in the industry, as I mentioned. But also, we've got a relatively sticky deposit base. And so even though our rates are very, very low, I do think we continue to have some room to move those deposit rates lower in the face of the declining value of money.

That's it, thank you.

Good.

We'll take the discussion down to [ Cordoba 6 ] for additional questions. Thank you all.