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

Welcome to Zions Bancorporation, National Associations 2020 Annual Meeting of Shareholders. Rules of conduct for the meeting are posted on the meeting site. Shareholders wishing to vote, ask questions or offer comments must have logged into the virtual meeting with their shareholder control number and should follow the instructions on the meeting site. The meeting will please come to order. I'm Harris Simmons, Chairman and CEO of the bank. Also participating with me on the call is Thomas Laursen, our General Counsel of the bank and Secretary of the Meeting. Mr. Laursen, do you have affidavits of the notice of meeting and mailing of the notices?

Yes, I have them here.

Thank you. The notice and affidavits will be filed with the minutes. The meeting has been legally called and a quorum is present. Our directors who are also participating virtually with us today are Jerry Atkin, Gary Crittenden, Suren Gupta, David Heaney, Vivian Lee, Scott McLean, Edward Murphy, Stephen Quinn, Aaron Skonnard and Barbara Yastine. Michael Medell and Brandon Byrd have been appointed inspectors of election. Neither is a nominee for the office of director. The first item of business is the election of directors for a term of 1 year. Shareholder Rena Miller will present each of the resolutions. Ms. Miller, please state your name and the fact of your stock ownership for the record.

Mr. Chairman, my name is Rena Miller. I'm a shareholder of record. I move the following resolution: Resolved, that each of the following persons be nominated for director of the bank for a term of 1 year. Jerry C. Atkin, Gary L. Crittenden, Suren K. Gupta, J. David Heaney, Vivian S. Lee, Scott J. McLean, Edward F. Murphy, Stephen D. Quinn, Harris H. Simmons, Aaron B. Skonnard and Barbara A. Yastine.

All right.

This is shareholder Jennifer Johnston. I second the motion.

Thank you very much. We have a motion and the second. The Board recommends voting for these nominees. We are not aware of any shareholders who have complied with the bank's procedures for making any additional nominations. Accordingly, the nominations are closed, and the proposal is now open for discussion. Do we have any submitted questions? I'll ask that of our Assistant Secretary, Jennifer Johnston.

There are no questions.

Thank you very much. Shareholders who have not yet voted on the nominees may do so by marking an appropriate entry after Item #1 on the electronic ballot. Proposal 2 is to ratify the appointment of Ernst & Young LLP as the bank's independent auditors. Ms. Miller will present this resolution.

Mr. Chairman, I move the following resolution: Resolved, to ratify the appointment of Ernst & Young LLP as the bank's independent auditors for fiscal 2020.

I second the motion.

Thank you very much. The Board recommends a vote for this proposal. The proposal is now open for discussion. Are there any submitted questions?

There are no questions.

Thank you very much. There being no further discussion, shareholders who have not yet voted or who wish to change their vote on this proposal may do so by marking an appropriate entry after Item #2 on their electronic ballot. The next item on the agenda is a vote on a nonbinding advisory basis to approve the 2019 compensation paid to the bank's executive officers named in the proxy statement. Ms. Rena Miller will present this resolution.

I move the following resolution: Resolved, that the shareholders hereby approve on a nonbinding basis the 2019 compensation of the named executive officers as disclosed in this proxy statement pursuant to the compensation disclosure rules of the SEC, including the compensation discussion and analysis, compensation tables and related material.

I second that motion.

Thank you very much. The Board recommends a vote for this proposal. The proposal is now open for discussion. Are there any submitted comments or questions?

There are no questions.

Thank you very much. There being no further discussion, shareholders who have not yet voted or wish to change their vote on this proposal may do so by marking an appropriate entry after Item #3 on their electronic ballot. I now declare the polls closed and would like to present a brief report on the year 2019 and thank -- I'll start by thanking all of you who are participating over our website today. We appreciate your interest in the company and your investment in the company. I'll have the slide advance to Slide 2, which is simply a disclosure around forward-looking statements. And then on to Slide 3. We have a company that is -- I think, as most of you know, we operate across the western United States. We operate as a collection of fabulous community banks. We have a very distinctively commercial bent to our franchise. We -- about 2/3 of our revenue comes from commercial customers. We also have a fabulous deposit base. About 42% of our deposits are noninterest-bearing deposits. At the moment, that number is even higher, but one of the strongest deposit franchises among any of the regional or larger banks in the industry. And a cost of deposits that consistently is highly competitive in the marketplace in terms of being ranked among the lowest of our peers in terms of cost and that's highest in quality. We have an organization that is very local in nature with affiliate banks, as we tend to call them, operating throughout the western United States, and we have some marvelous people operating these banks in local communities. If you go to the next slide, on Slide 4. I'll just provide a brief summary of our financial results. In 2019, our net earnings were $782 million or $4.16 per share that compares to $850 million or $4.08 per share last year. Earnings per share were up about 2%, so up just slightly. We had a much higher credit loss provision. Last year, we actually had a negative provision. We actually put money back into income because credit losses were so low. In 2019, that reversed and went from a negative $40 million to a plus $39 million, still a very modest number for a company our size. But that $79 million swing made a material difference in the earnings per share. The fact that we had fewer shares, however, helped us to achieve a higher earnings per share in 2019 than in 2018. We had loan and lease charge-offs of $37 million. That was up from a net recovery of $16 million the prior year and is more consistent with where we would expect to be normally. Our net interest margin, the net interest income as a percentage of earning assets, was 3.54%, down a little bit from 3.61% in 2018, reflecting what became a more challenging interest rate environment in the latter part of the year. Average loans and leases grew 6.3%, average deposits 3.6%. So it was actually a decent year. Even though earnings were down a little bit because of higher provision, it was still a reasonably good year for us. On Slide 5, you'll see just over the last 5 years we've had a lot of improvement in our financial results. And I'll -- she gets to that slide, there we go. You'll see a couple of arrows on the right-hand side. I'll point particularly to the fact that revenue over the last 5 years has grown by $645 million in 2019 versus what it was in 2014 to a total of $2.8 billion. That $645 million growth in revenue has been accompanied by a growth in expenses of only $68 million. So we've had a lot of emphasis on cost control, and we think we've done a pretty good job with that over the last few years. That's allowed us to see an increase in net income available to common shareholders. It's risen from $327 million in 2014 to $782 million in 2019. If we go to Slide 6, you'll see several charts that reflect the -- some of the performance measures that we tend to look at. You'll see up in the top left-hand corner, net revenue growth. We've been -- these slides are showing Zions in the dark green, the top-tier -- the top quartile performance among our peers in the gray and the peer bottom quartile in blue. So in terms of revenue growth, we've been at about the 25th percentile. Our revenue growth has been a little bit muted in part because of a shift in the composition of the portfolio to a much larger component consisting of residential mortgage loans than we historically had. But if you move on to the top right-hand corner, you'll see noninterest expense, we're in the top quartile and have been consistently over the last few years in terms of expense growth. That's led to, in the bottom left-hand corner, adjusted preprovision net revenue, which has also had us in the top quartile. And earnings per share growth, which combines not only that revenue -- net revenue growth, but also really solid credit performance and a decreasing share count to give us earnings per share growth that's well beyond the top quartile of the industry. It would put us up in the top decile of the industry among our peers. On Slide 7, you'll see our efficiency ratio to the left here in just a moment. It has seen a big improvement over the last few years. And it ticked up in the second half of 2019, but we expect that we'll be able, in sort of a normalized interest rate environment, to see that remain actually quite competitive. We are experiencing a challenging rate environment in 2020 with long-term interest rates as well as short-term interest rates being very low. And that's creating some revenue headwinds. But our focus on costs has allowed us to get our efficiency ratio down to a much better place than it used to be. Return on assets, we're about at the median position among our peers. As you go to Slide #8, this is a look at our net interest margin over the last 15 years. We're in the dark blue bars and the peer median is the line that you'll see running through the center of the page. And what you'll see is that we've consistently had a little bit stronger net interest margin than our peers, a little less so over the last few years because of these very low interest rates, which has compressed margins and made the value of our core deposits somewhat less than they would be in a normal interest rate environment. We're, nevertheless, better than peers the last 3 or 4 years, and I expect that, that will continue. You'll see notably that there's been kind of a downward trend, and that reflects this very low interest rate environment we've now been in for over a decade. So it's a challenging -- it's been a challenging decade in the industry, but we've fared relatively well in part because of stronger loan yields, which you'll see on the next chart on Page 9 as well as disciplined deposit costs and a good deposit mix. The -- on page -- Slide 9, you'll see risk-adjusted loan yields, which is really taking our yields less charge-offs. And you'll see on the left-hand side, for the -- over the last 5 years that we've had very strong performance, 4.28% versus a peer median of about 4.02% and risk-adjusted loan spreads which are about 0.5 point higher than our peers. So we tend to do well on loan pricing, and this is despite the fact that we have, as I mentioned, an increasing proportion of our balance sheet committed to residential mortgage lending, which typically has skinnier spreads and lower yields than other types of loans, but also less risk. Moving to Slide 10. This is, I think, a really important slide as we think about the recession that we are now in as a result of the COVID-19 health crisis that the United States economy and the world economy is now dealing with. On the top here, you'll see our net charge-offs in 2019, which amounted to 8 basis points of total loans or 0.08 percentage point, much better than our peer group. And if you look at this over the last 29 years, over a very long-term period, you'll see that we were just about median performance. And that's despite the fact that it includes the Great Recession years in hard hit areas like Nevada and Arizona, where there were a lot of real estate losses, and we had a lot of concentration in hard hit markets. We think that fundamentally, we actually have a very strong balance sheet in terms of the risk profile of our loans and the discipline we have around underwriting. Going to Slide 11. Further detail on credit quality. You'll see that our nonperforming loans plus 90-day delinquent loans on the left-hand side of this chart at 0.54% are better than peer averages at the end of 2019. And the next 2 charts are -- again, they're looking at net charge-offs as a percentage of our nonaccrual loans, and you'll see that they're also much better than peers. When we have problems, we tend to have lower charge-offs because we're largely a very collateralized lender. And that shows up in the reduced charge-offs relative to loans that get into trouble, these nonaccrual loans. And you see that both over the last 5 years and then over a longer period of time that captures the Great Recession years of 2009 and '10, for example. So we think we come into this period in pretty strong shape. Going to Slide 12. I wanted to just mention that this past year, we've had a lot of focus on digital transformation of the business. We've introduced new products. We talked last year about our digital mortgage application. That is now accounting for the lion's share of all of the mortgage applications we are taking, and it's helping us to turn those deals around faster and lower cost. We have a digital business loan application. We, in 2019, had about 4,000 applications for $2 billion of balances. We are rolling out this year a new online and mobile banking platform that will really modernize the experience for everybody who's using our online -- our mobile tools and will be consistent with our online banking platform. And down at the bottom of the chart, without going through all of these, I'd just also note that the work continues on our core transformation project, which we call FutureCore, the replacement of our core loan and deposit systems. In 2019, we completed the second of 3 phases of this project, and we expect to have this completed -- the third phase of our deposit system replacement in 2022. On page -- on Slide 13, I just emphasize in terms of where we're trying to head with this organization. Our competitive advantage really does stem from the relationships we have with clients. At core, we are a business bank, as I noted. We have a very strong community banking model that's really focused on local leadership teams and great teams of employees in each of these local markets. We have a very high customer satisfaction ratings, a very favorable deposit mix that make us distinctive among our peers. And if we go to Slide 14, you'll see some of -- just the evidence of this fact that we are a very business-focused bank and particularly with respect to small business lending. We have commercial loans between $100,000 and $1 million in size, which would be kind of the bread-and-butter product for a lot of small businesses who are borrowing that relative to a lot of regional peer banks across the country, places at the very high end of the regional banking crowd and relative to the largest banks in the industry, here on the left-hand scale, which shows their total loans in this size bracket, position us very strongly against companies like Wells Fargo, Bank of America, JPMorgan Chase, U.S. Bancorp, that are many multiples of our size. On the right-hand side, you'll see these same commercial loans as a percentage of total commercial loans and see that relative to our regional peers, we are very strong in this small business category. On Slide 15, you'll see the -- just a few examples of how our customers view us. This comes from Greenwich Associates, a national research firm that does many thousands of interviews with commercial customers, for middle-market customers and small business customers, showing that against the largest banks in our markets, JPMorgan Chase, Bank of America, U.S. Bank, Wells Fargo, who are shown here in their average scores in blue that we consistently show very, very strongly in terms of overall satisfaction in both middle-market and small business banking, satisfaction with our bankers, with our processes. We think we have a great deal of trust and good relationships with customers. Finally, I just want to take a couple of slides, here on Slide 16 and 17, to talk about our response to the COVID-19 crisis. On Slide 16, you'll see that we have been offering loan deferrals to a lot of customers who are directly impacted by this effective shutdown of big parts of the economy typically for 90 days, and we've empowered a lot of our bankers to be very flexible in meeting with customers, discussing their situations, and deferring loans, waiving fees, providing refunds. We're trying to be very thoughtful and considerate with customers who are going through a hard time right now. This is also true with respect to mortgage forbearance and deferrals. For those that are on our balance sheet, we're able to quickly accommodate those, typically taking the extension and tacking it on to the end of the loan. For those that we're servicing for loans that we've sold to Fannie Mae or Freddie Mac, we offer payment forbearance and doing so in accordance with the programs that they have set forth. On Slide 17, just a few words about this Paycheck Protection Program, which you've heard a lot about probably in the media. These are loans which are forgivable to small businesses that qualify if they keep employees on their payrolls for a period of 8 weeks after they've received the loan. And they're 100% guaranteed by the Federal government through the Small Business Administration, the SBA. We have -- in the first round of funding, which closed a week ago, Thursday, we completed 14,215 applications that were approved by the SBA for a total of $4.36 billion. That ranked us ninth in the nation in terms of total dollar volume. And we were very pleased to be able to provide this relief to many, many customers and even a number of prospects, those who hadn't previously been customers. We had volumes that were about 1/3 to half by both units and dollars of what the 3 largest originators of these loans were, some of the nation's very largest banks. And of course, we're, again, about 3% the size of the 2 or 3 largest banks in the nation. And so we think that pound for pound, we've done pretty well. Nevertheless, we have more to do. I should first note, the median loan size is about $79,000. So a lot of these are smaller loans to businesses that really badly need the help. And about 25% -- actually, I think the figures -- as we've refined this, it's actually turned up to be about 27% of loans we've done to date have been in low- to moderate-income census tracts. So we've provided a lot of relief. We, nevertheless, have about another 24,000 applications for about $2.9 billion that have been submitted to the SBA, and we're awaiting and expect that those will be processed imminently, I would actually expect by the end of the day. And so we're hoping that we'll have good news for those borrowers very, very shortly. We've had a lot of bankers between 2,000, 2,500, almost 1/4 of our workforce engaged in this effort, and we thank them for many, many long hours delivering this relief to customers. With that, I will open the meeting for questions from shareholders. And I would ask Ms. Johnston, do we have any questions that have been posed by shareholders through our website?

We have no questions.

Okay. I would then ask the secretary to give the results of voting as contained in the report of the inspectors of election. Mr. Laursen?

Yes. Each of the nominees for director has received over 90% of the votes cast and has been elected a director for a 1-year term. Proposal 2, the resolution to ratify Ernst & Young has been approved by approximately 97% of the votes and has passed. Proposal 3, the resolution to approve, on a nonbinding basis, the compensation paid to the bank's executive officers has received approximately 94% of the votes cast and has been approved.

Thank you very much for that report. There being no further business, the annual meeting is now concluded, and a motion for adjournment is in order.

I move the meeting be adjourned.

Thank you.

I second the motion.

We have a motion and the second. The meeting is adjourned, and we thank you again for attending, and we look forward to seeing you all in restaurants and grocery stores and movie theaters and other places we hope very soon. We hope that you're all making it through this challenging time safely, and we appreciate, again, your support for this great company. Thanks, again.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.