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

Good afternoon. I'm Jason Goldberg. I cover the U.S. large-cap bank stocks here at Barclays. As we wrap up day 2 of our 18th Annual Global Financial Services Conference, very pleased to have Zions Bancorporation with us. [Operator Instructions] Also, we have our audience response polling questions on the left-hand panel of your screen. There's 4 of them. Feel free to click through and answer those. And time permitting, we'll go through them at the end or, at very at least, publish those results this evening. From Zions today, I'm very pleased to have Scott McLean in, Chief Operating Officer; also on the line, James Abbott, Director of Investor Relations. And with that, Scott, let me turn it over to you.

Great. Jason, thank you very much, and welcome everybody. I know we're coming at the end of probably a long day of presentation, so we appreciate your interest and we welcome your questions. I'm not going to drill down on every slide in this deck, but I'll try to touch most of them at least briefly. For those that are familiar with us, you know that we're about a $75 billion regional bank. We operate in 11 states in the Western United States. We operate a community bank model being as local as we can possibly be in virtually everything. You can see in the bottom left-hand corner of this slide the brands that we fly under in each state. They're outstanding brands, and we've received a lot of recognition for those. There are really 4 elements that we traditionally received national distinction -- or that we demonstrate national distinction, and I want to highlight these and you'll see these as they come through the presentation. First is that, pound for pound, we're one of the largest banks in the United States in terms of banking small businesses. And about 2/3 of our revenue comes from banking businesses, of which most of it is small businesses. Secondly, our deposit mix, the relationship of noninterest-bearing deposits to total deposits has been industry-leading for decades. If you have a choice, you'd rather not have to pay for deposits than pay for them, obviously. And we have an industry-leading mix. Thirdly, our customer satisfaction ratings for years has been high relative to our largest peers. And finally, we have an evolving technology story that really points to our ability to be able to compete very successfully with our global competitors for many, many years to come. I think you'll sense these themes as I go through the slides. If we go to Slide 4 -- Page 4, you'll see a little bit -- kind of a little context around the pandemic. The pandemic has been a time of remarkable resiliency in our company, I think in our country certainly as well but absolutely at Zions Bancorporation. We entered the pandemic and the significant economic stress with very strong levels of capital on a relative basis and an absolute basis. Our pretax preprovision profit, our core operating earnings are about double 2014 levels. About 70% to 80% of our colleagues -- we have about 10,000 employees. About 70% to 80% have been working remotely since mid- to late March. We made that transition almost seamlessly. And when the Paycheck Protection Program came along, the PPP program, we finished ninth in the United States in terms of originating those mortgages that our production of units and dollars were about 25% to 50%, depending on what you measure, of the units or dollars produced by the top 3 banks in the country, JPMorgan, BofA and Wells. Those banks are 35x our size. The -- when you look at our deposit share nationally, our deposit share is a little less than 1%. Our share of the PPP originations was 3.5x that. We clearly punch way above our weight in this category. And it's because we were able to marry together the outstanding relationship management skills of about 1,500 to 2,000 frontline bankers along with outstanding technology, all of which was forged together in a very short period of time in April and was able to produce this truly remarkable result when you compare it to other industry participants. And finally, I think you see our customers are proving to be very resilient. And as you can see on the right-hand side of this slide, they have a sense of humor as well. We love to advertise like anybody else, but it's even better when your customers pay for the advertisement. This is an ad that one of our PPP loan recipients in Idaho put in the newspaper, and I just would suggest that you read it. It's -- we had a lot of examples of this. This was not the only example, but it is a fun one. If we go to the next slide, I noted our orientation to banking small businesses. This slide, both on the left and the right, gives you an absolute dollar and a mix sort of sense. And again, on the left, where you're looking at absolute dollars of loans between $100,000 and $1 million, this is public information. It's about the only public information that's available that kind of demonstrates a bank's orientation to banking small businesses. And when you look at the left-hand side, I would just ask that you remember that Wells, BofA, JPMorgan, particularly, they're 35x our size, plus or minus. So it just gives you a sense of our relative orientation to it. If you go to Slide 6. We continue to be recognized regionally and nationally. And I'll talk about Greenwich in a minute, but we received terrific recognition in all of our states for what our bankers are doing there and their ability to really deliver on their community banks' local commitment, and that is recognized in these communities. If you go to Slide 7, Greenwich Research. We've used this information for years. Greenwich Research is arguably the gold standard for measuring bank customer satisfaction and relative performance in terms of customer perception in the country. And we rank, have for a decade, among the top banks in the country in terms of being consistently among Greenwich's highest award winners for national distinction. I think this slide is particularly interesting. There's a lot here, but we're basically comparing ourselves to JPMorgan, BofA, U.S. Bank and Wells. Why did we pick those banks? It's because in almost all of our markets, they represent 50% to 60% of the deposits, the customer relationships, if you will, in our markets. And so how we compare to them is really important. And what you see here, we're measuring middle-market companies, generally companies with revenues over $10 million in the top panel. The bottom horizontal panel is small businesses. The results are virtually the same. Overall, for middle market, overall satisfaction, you'll see that these are -- when it comes to surveying, these are very distinct differences. But if you were going to start a bank in the United States, a bank you can trust -- there's another question that goes along this one -- with this one called a bank that values relationships -- a bank you can trust and a bank that values relationships. We compare very favorably to these 4 large banks. And even if you look at something like digital product capabilities, it's one thing for me to tell you that our -- that we're competing effectively, and we think we're on a trajectory to compete even more effectively when it comes to technology. It's another thing when our customers tell us that. And so that's all I would point out. There's some other nuances to this slide that I think are really interesting, but I'll move on to the next slide. The next slide really outlines our technology road map, which we've been talking about for years now. And on the bottom panel, the very bottom horizontal panel there talks about our FutureCore project. This has been going on for about 7 years. We have about another 2 years to run on it. But for some time, we've told you that we're the only bank in the United States that is actively trying to upgrade its core loan and deposit systems. Virtually every bank that you own or that you think about owning or that you know is sitting on loan and deposit systems that are 30-plus years old, virtually everyone. If you find one that's not, send me a note, I'll apologize to them. This is something where about 225, 250 major banks in the world, around the world have made the commitment and have upgraded their core loan and deposit systems. But we're virtually the first in the United States to do this. We now have -- as of February of last year, 2019, we completed the first 2 phases of this project. And we now have virtually all of our consumer, commercial, commercial real estate loans on one modern core system and would be the only major bank in the country, probably, to be able to say that. In 2022, we'll complete this project with the rollout and the modernization of our deposit system. And at that point, we will be in a position of significant competitive advantage, and it's virtually impossible for anybody to catch us. These projects are very long in nature, for 5, 7, 8 years. So that project continues on. I do want to point out that while we've been investing in the plumbing, so to speak, we've also been investing in our customer-facing digital technologies very successfully. I just want to point to our digital mortgage loan application that you see on the kind of upper right corner of this slide. About 2 years ago, we rolled out this application a little less than 2 years ago. We were taking 10,000 applications a year, and it was 100% paper-based. This year, we'll take 14,000 to 15,000 applications, and it's 85% digital. We've gone in less than 2 years from 100% paper-based to 85% to 90% digital. It's incredible adoption, a very similar story for our small business digital loan app. And in this mortgage app, it does 3 very simple things, but it happens to address the 3 most significant frustrations for mortgage customers: It will validate your employment. It will pull your internal revenue service, your IRS tax documents, and it will pull your bank statements with other banks, all automated. It has been a terrific product for us, and it's having a big impact on our results this year and should continue to. A lot more to talk about on that slide. I'd be happy to do so in Q&A. If you go to the next slide, I mentioned our deposit mix, and this is where you see it on the right-hand side. It's the relationship of noninterest-bearing deposits to total deposits. You can see that we're not only in the top quartile. We're generally the leader in the clubhouse every year in this category, and we have been for decades. It's just, with the quantitative easing in 2008, '09, '10, et cetera, this whole curve has moved upwards and even more just since the pandemic. But this is fundamental strength, is our deposit franchise because it is made up of all of these small businesses. Fundamentally, they're small operating accounts, a real strength of the company. If you go to the next slide, Slide 10, this is the PPP story. And you can see there that we originated 47,000 loans -- a little over 47,000 for about $7 billion. I think a lot of folks are having a hard time figuring out how long are those loans going to be there. And what I would tell you is the forgiveness phase has started out really slowly for the entire industry. We're ready to go. We're set up very efficiently to handle forgiveness of these 47,000 loans or the portion that can be forgiven. But this -- these loans are liable to be outstanding for some period of time. It's not all going to get repaid in 1 quarter or maybe 2 quarters. But it's liable to -- I don't think it'll be here 2 years from now, principally. But it's not all going to get repaid in 1 or 2 quarters. It's also important for how investors model the $210 million, $220 million of fee income that came with these loans that will be recognized in net interest income. The real benefit here is that in a pandemic and in a period of low interest rates, this outsized, oversized success we had with this PPP program is going to give us a cushion with net interest income during this period of time. And you'd rather have a cushion than not, and we certainly generated one with our success in participating in this program. The other intermediate- and longer-term impact, which I think will be far greater, is that of these 47,000 PPP loans, about 14,000, plus or minus, were new customers to the bank, okay? And we are laser-focused on going ahead and bringing the rest of their relationships with them. And so that's an opportunity over the intermediate and longer term. And then the other thing that's interesting is the other 33,000, they were customers originally, but probably 60% to 70% of them didn't borrow. So with those 33,000 customers, we've had a very intimate discussion about these PPP loans and the ability to use that as a way to continue to build our relationship with them. So a lot more to come on the intermediate-, longer-term impact of the success we had during the Paycheck Protection Program. If you go to Slide 11, I won't dwell on this. You know we have strong capital. This just demonstrates we have strong capital. If you go to Slide 12, in the 6-year sort of performance improvement plan that we've been following since June 5 -- June 1, 2015, basically, we're comparing ourselves to our peers, the most favorable quartile, the least favorable quartile. And what you basically see in the upper left is we still aren't achieving the revenue growth that we'd like to achieve. That's the only negative. In the upper right-hand corner, you'll see that consistently for the last 6 years, we have done an outstanding job, clearly in the favorable -- most favorable quartile in controlling expenses, keeping expenses flat, moderately flat to down. You'll see up until the pandemic success and certainly in the favorable quartile in terms of growing pretax preprovision earnings. And then on the next slide, Slide 13, you'll see the impact on the efficiency ratio as well as return on assets. And basically, during this time, PPNR virtually doubled during this period from 2014 to where we are today. To drill down a little bit further, on Slide 14, a lot of commentary about net interest income. Happy to take questions about this. Clearly, there's pressure on the margin. But in terms of net interest income dollars, this $7 billion PPP performance and the related income, $210 million, $220 million of income that will come into the net interest income line will be a nice cushion for us. If you go to the next slide, Slide 15, you'll see that with the additional liquidity -- and I'm happy to talk about loan and deposit outlook in the Q&A. But basically, with the liquidity in the marketplace, clearly, we've become a bit more asset sensitive today. And you'll see that noted on that slide. Let's turn to risk now, and I'll sort of round third base in the presentation as it relates to risk and finish up. As you look at Slide 16, this is really a depiction of -- kind of get to answering the question, what have you done since 2008 to make sure that you're prepared for the next downturn, to make sure that you're a positive outlier in the next downturn? And clearly, the -- we've made significant changes in how we manage concentrations in the company related to CRE, related to energy, principally. Our risk infrastructure, our investment in risk infrastructure and risk professionals is dramatically different than it was in 2008. And finally, I would note, I'd really encourage you to go to our website and look at our Board of Directors. It is an outstanding group of highly experienced banking professionals and financial professionals and marketing and technology professionals. It's just a great group that has evolved over the last 6, 7 years, and they are a tremendous asset to this company in terms of building the resiliency and the competitiveness that we believe we have today. Now if you go to Page 17, a little bit, you've seen this data on our credit quality. Happy to take questions on it. Clearly, in the first half of the year, like the rest of the industry, we saw an increase in criticized, classified assets, not so much in nonperformings yet, not so much in charge-offs, and we've built our reserve related to that. But you'll see a comment about deferral rates here. We offered 90-day deferrals to virtually all of our customers, and by loan balance, it's only about 8%. 8.5% took us up on it. Most of that -- those 90-day deferrals have now matured, and we'll comment on it in our October release. But the redeferral rate has been low. So we started out with 8% deferrals. The redeferral rate is just low. And so we think that's been a positive kind of representation of the resiliency of our customer base also. If you go to the next slide, the next 2 slides really look at our historical credit performance versus our peers. And you can see on the left-hand side the level of nonperformings. I think really the best -- most industry observers think that the very best measure of credit quality is actual net charge-offs, not reserve build, not credit metrics, not on criticized and classified, but what did you lose? And what you can see on this slide is that our performance historically over the 6-year period has been good in terms of loss history. And then if you go to Slide 19, you really see it. The 2 vertical panels, the middle one and the one to the right, look at net charge-offs as a percentage of nonaccrual loans. This speaks to this loss severity. So when you have a problem loan, a nonaccrual loan, what is your loss severity when it gets to that point? You can see that both for 5 years and 15 years, our loss severity is really low. We talked a lot about this in our Investor Day conference back in February. We talk about it all the time. But this is largely a result that we are principally a secured lender. We have very little unsecured exposure in the company, and that has contributed to this performance in terms of loss severity. When we do get into a problem and we have a problem loan, generally, our loss severity is less. And that has stood up for 15 years and I think will stand up in this next downturn. When you go to the next slide, Slide 20, you'll see the -- we've exposed this collection of about 12 industries that make up our COVID portfolio, the C19ER portfolio, $4.2 billion. And then you'll see oil and gas, which has been under pressure given the price volatility in the first quarter of this year. And then you'll see the rest of the portfolio. And basically, what you see is, other than the COVID portfolio and the oil and gas portfolio that have both seen credit deterioration in terms of criticized and classified, the rest of the portfolio has been pretty resilient at this point. Again, it's early in the game. If you look at Slide 21, again, you'll see more on the select industries, these COVID-19 industries. And what I'd point out to you is in the second bullet on the right-hand side of this page. It's also down in the chart under C19ER, that 97% of our COVID industry, so $4.2 billion, 97% of those loans are secure. So if you go back to what I was saying about our history of loss severity on secured loans, it's just typically a lot less than our peers. The next 2 slides, Slide 22 and 23, I'm happy to take questions on. It's just a little more granular detail on these COVID industries. And Slide 24 gets at our reserve. You can see the real -- the additions we made to the reserve in the first and second quarter, where we stand relative to loans. And I just would point out that the commercial line there does include our oil and gas reserve, which we provide a lot of transparency on. And then on Slide 25, and I'll wrap it up here. Happy to take questions. The -- you'll see our general level of reserve versus peers. And I guess just in conclusion, Jason, before I turn it back to you, this has been a time of significant agility on the part of our bankers. We're really proud of them that they remain present, and they remain relevant for our customers and our communities. We're clearly watching credit closely. We're seeing the underwriting standards and risk practices that we've been very diligent putting in place. We're seeing those in practice right now, and the early days, the early signs of that are encouraging to us. We're also on a continued path to be highly competitive with technology. We haven't slowed down that investment process, and those projects are continuing on. And we have a certain degree of optimism about what the longer-term impact of our success with the PPP program will be. So with that, I would be happy to open up for questions.

Thanks, Scott. Do you want to close out? Yes, there we go.

You teed this up so I'm going to ask it. I think you said happy to talk about loan and deposit outlook right after you kind of glossed over the net interest margin slide. So as we got you, maybe just talk to kind of what you're seeing currently in those areas.

Yes. Let me start with deposits. So we -- like the rest of the industry, we've seen big deposit growth. But the $7 billion of PPP loans, the majority of those fundings are still sitting in our customers' accounts. That is really important when you think about it because it's a nice thing to have, okay? But more important, when you think about what's the resiliency of the small business market over the next couple of quarters, many of those businesses are still sitting on those balances. So I think, one, it's a nice feature. Secondly, it's a nice cushion against further economic stress over the next 2 or 3 quarters. Secondly, we have seen organic deposit growth. Small businesses pivoted hard to liquidity, okay? And so they've shepherded these PPP funds they've received. And then as their revenues have shrunk and their working capital has shrunk, that has generated liquidity, generated cash, and they're watching that very carefully. So I -- we're seeing that in our deposit growth, and I think we'll continue to see it. But it's also a measure of health and I think, resiliency as these companies continue to deal with whatever the economy throws at us over the next 2 or 3 quarters. On the loan growth side, similarly, when you take out PPP loans and exclude them completely, basically, what you're going to see is that our loans are going to be flat to slightly down. I think we'd all think that was the right thing. I'm not going to apologize for our loans being flat to down. There -- we're seeing -- there's obviously limited economic activity. We're seeing continued paydowns, which you always have. And then we're not seeing customers moving as much right now, although I think that will pick up next year. But usually, about 60% of our volume comes from customers coming -- bringing customers over from other banks, and that has slowed down, too. So all of that's been going on. And I think we would normally expect and be happy to see some softness in loan demand. But I do think as we start to see some clarity next year, there's a lot of pent-up demand that we should see come back into the lending market and relationships that are going to be eager to move because this PPP experience was an ugly one for a lot of customers. And they -- there's just -- that's created some turmoil, which I think will result in greater movement of clients next year and the year after.

When we -- when you come back to this conference next year, what percentage of the 14,000 kind of new PP customers should we expect you to have won over?

We will probably have metrics on that. We may even want to expose some metrics to you in October. But I -- we are watching it like a hawk. They are all in our contact management system. They -- every one of them. That's the system we use on the front end of this origination. So the data is all there, and our affiliates are -- they absolutely are focused on how to capture and how to keep and expand those relationships.

And I guess while on the topic of loans and deposits, how should we think about Zions managing the net interest margin in this kind of persistent low-interest-rate environment? And just maybe talk to your expectations around that.

Yes. In terms of just the repricing of our portfolio, we have data in here on that. There's some continued repricing that is going to create downward pressure, and it's going to be a tough margin environment. Again, I think the PPP program is going to help balance out and be sort of a shock absorber on the net interest income side, but the margin clearly is under pressure. And so what can you do about that? Well, we can't change the Fed. We can't change loan demand, principally. So we're going to have to take what has become a strength, which is our ability to control expenses, and we're going to have to be very, very active at that because that is a lever we can pull.