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

Pleased and excited to have Zions Bancorp. Zions has an excellent job managing its credit exposure during the COVID time frame, building reserves early while also holding tight on expenses and maintaining industry-leading capital. Here to tell us more about the story is Chairman and CEO, Harris Simmons. Today's presentation is going to be a fireside chat. Just before we get started, Harris, you recently announced news of a medical diagnosis. And I just wanted to say on behalf of myself and the investor community, we obviously wanted to wish you the best of luck during your treatment and really appreciate you taking the time to be with us today, and we just wanted to wish you the best of the walk.

Ryan, thank you very much. Good to be here.

Absolutely. With that, maybe to kick it off, we've gone through an environment that I don't think any of us were really anticipating. But despite this -- this has obviously been a tough time for things like small businesses, but the bank has done a really excellent job managing the downturn. So can you just help us understand, given the backdrop we live in, where do you think we go from here? And what are the biggest priorities for Zions as we move through 2021?

Yes. Well, again, helping customers through the tail end of this is going to remain a priority. And I mean there -- I expect we'll probably see some additional stimulus aimed at small businesses. I -- there may -- I would expect we'll see another round of PPP, and we'll -- if that's the case, I'm certain that we're going to be very engaged in helping to deliver that additional relief to some small businesses. But more fundamentally, it's the technology projects. Working through the replacement of core systems is coming along nicely. We expect to finish that up in 2022. It's been pushed back maybe 3 or 4 months by the pandemic and having to pivot not only here domestically, but in some outsourced locations internationally, where security was an issue. So we've -- that's slowed it down a little bit, but I still expect that we'll be well into the implementation in 2022 and gearing up for that through the next 12 months. We are going to continue to focus on -- really laser like on small businesses. It's such a strong part of our sort of persona and in our DNA. And so continuing to train bankers to provide them a skill set out in the field in branches that we think will be best of the industry is an important thing for me. We'll be very focused on continuing to build out our municipal finance business. That's been a really good initiative for us. And things just we've been working on, wealth management, capital markets, we're making, I think, some real inroads there. That's been slowed somewhat by the pandemic in terms of doing syndicated deals, but we think there's quite a lot of waterfront there that we can cover. So -- and just keeping balance in what we do. But credit -- and credit is going to be a continuing really strong focus given the uncertainty that's out there.

Got it. Harris, the first thing you highlighted was small businesses, just given they've historically been the bread and butter of the client base across your footprint. And I guess, as you look forward, can you maybe just talk broadly about the health of your small business clients? Any way you can maybe segment them? How are they doing? Which industries are facing the greatest challenges? Where do they need further stimulus to make it to the other side? And maybe where are you actually seeing a lot of success across the footprint.

Yes. Well, it's -- there are -- a lot of them are actually doing quite well. I mean we read about lots of small businesses closing down, and certainly, we're seeing some of that. You have to start with the understanding that this line of business is very deposit intensive. I mean 70% of them don't borrow. And so business closures doesn't necessarily translate immediately into a lot of losses that are uncontrollable. We're collateralized lenders for the most part. I mean that's really the focus of what we do. And so that helps on the credit front. But there's still -- it's very spotty, right? You take something like restaurants. Some of them are in really dire straits. Some of them are doing marvelously well. Any place that you can -- you've got to drive through or drive up, they're -- this is probably -- this is a banner year for them. And I think a lot of small businesses, certainly restaurants, but others, they're learning, just as we all -- we're learning work from home and things like that, they're learning how to think about their businesses differently, about how to market curbside dining, right? And things that I think will actually become probably strengths down the road for a lot of small businesses. So yes, it's a tough time. But even within these troubled industries, hotels, for example. If you got a downtown convention hotel, you got a real challenge. We don't bank a lot of that I believe. But on the other hand, if you have a lodging business around a national park or near the beach or -- they're doing actually quite well. So it's very -- it's hard to have a common thread through it all other than everybody is learning how to adapt. And so far, it's not showing up in our losses. We're very pleased with that.

So one of the things that we've heard thus far today, Harris, is just in the near term and really the intermediate term over the next few quarters is just real weakness and given the uncertainty in loan growth. I know you've tried to get out of the business of giving intra-quarter updates. But I guess just given all the uncertainty, I think you've noticed that there's -- you've commented there's an expectation that we're going to see continued softness in balances. So that wouldn't be a surprise. But just any high-level thoughts on what you're seeing from your clients as it pertains to loan demand?

Well, without getting too much into the business of doing it...

Well, I think I'll ask you to be.

No. I -- but I -- look, we're experiencing what I think most are experiencing. This is not a supply-side problem for credit, it's a demand-side problem. And it makes a whole lot of sense. I mean, most businesses want better certainty. They want to know -- beyond the pandemic, I think there's a lot of interest in what's going to happen in the Georgia runoff races and what that means for tax rates, et cetera. So I think as we get more certainty, there's going to -- I think there's going to be actually a lot of pent-up demand. That said, I also tend to believe that we've never seen so much liquidity in the industry ever, at least in my lifetime. And obviously, it is not equally distributed necessarily, but it's showing up on bank balance sheets. And I think there are going to be some businesses -- a lot of businesses that are going to spend cash before they borrow. But -- and that will dampen overall loan growth, I believe, for the industry over the next couple of years. But underneath that, I think you'll probably see a resurgence of investment that will be really good for the economy and will translate into loan demand and -- for a lot of customers. It just won't be as uniform maybe as in the past because there's a lot of cash on their balance sheets.

So I guess, clearly, customers, as you noted, I think there's been mixed views in terms of whether they'll use the cash. Or remember, coming out of the financial crisis, customers held on to a lot of cash for a period of time. So I guess that remains to be seen. But when you were talking to clients, are you sensing pent-up demand once we get certainty on some of these things you talked about, stimulus, just clarity on the political outcome? And then maybe more specific to Zions, pre pandemic, municipal mortgage and C&I were really the big drivers of loan growth. What are you expecting to be the drivers of growth going forward?

Okay. Well, first of all, in terms of pent-up loan demand, that's my supposition more than enough data points from customers saying they're going to borrow. It's just what I think is going to make sense as they start to see their businesses come back and the economy revive. In terms of what our drivers are going to be, I think that it will continue to be C&I-driven, municipal credit-driven. I mean we've built a really nice mortgage capability, which has been really useful this year. I think that will be somewhat cyclical and will maybe run its course a little bit. Although I'd note that -- I mean, existing home sales are -- I mean, we're not seeing the cyclical decline that we usually see. And so I sort of -- I'm increasingly thinking that maybe mortgage will be strong over the course of the next year, stronger than maybe I might have thought. So those will be the major credit drivers.

So Harris, in response to an earlier question, you talked about some areas that you've been building out on the fee side. And I know fee income has been a major focus of the bank dating back a handful of Investor Days. And more recently, you've talked about treasury management, mortgage as well as wealth and capital markets, as you highlighted. Can you maybe just give us an update on how are things progressing with each of these? And as we return to, hopefully, a world of greater normalcy, like, how should we think about goals in terms of fee income across the organization?

Yes. Well, the first thing I want to tell you is sort of nonfee income related, but I think it ties into it. One of the things that I've been pushing, I care less about kind of deposit and loan growth targets. I'm trying to push everybody to think about customer acquisition targets, and particularly in commercial lines of business. And we did really phenomenally well with the PPP program and bringing in new prospects, new customers. I mean we've got 14,000 new PPP borrowers. And the goal is to turn as many of those as we possibly can into customers that have roots with us. And some of these products that you've talked about will be central to that effort, including -- I mean, treasury really is a workhorse for us. We have -- happily, we'd actually recently completed some really important enhancements to our treasury management offerings to create a down-market offering. We call it Treasury Select that is kind of the most prominent offering. We're trying to work with all these new customers to get that down, actually using treasury tools for a small business. Out of that, we hope will come these deeper relationships that -- where we then can talk to them about mortgages and wealth management and other things. But these businesses are -- they're coming along very nicely. Mortgage, as I mentioned, we have a digital product that we believe -- I just -- I actually recently took out a mortgage with us, and it was actually a delightful experience, maybe -- I hope notwithstanding my title in the company.

That's customer service.

But in terms of just the experience digitally, until I got to a point where somebody needed to talk to me and get things wrapped up, it was really good. We're coming along very nicely in wealth management. We think there's a lot of waterfront yet to cover there, and we've got really good leadership. And so I mean, I think that's just one we just have to be consistent with that over time, and -- but I see real promise for that even in this coming year. And capital markets, as I mentioned, I think that we've built a really nice team, a small team that I think will make us really proud. And I think that's probably like kind of a $40 million year revenue business for us. But -- so it's -- it will be additive. So yes, those are some of the primary areas of focus.

Harris, you said something interesting, and somebody else touched on it this morning during his presentation. He said bankers are used to leading with, for the most part, lending as their product and then they eventually try to build out other services. And it sounds like there's a bit of a mind frame shift, as you highlighted, focusing more on account growth, things that are more transactional in nature. How do you shift the mind frame of the employees to focus more on these new types of goals relative to the old way they used to do things? And what are you doing to kind of facilitate that?

Well, first, you start measuring and showing them numbers. And so we've broken commercial down into segments, and we're showing managers those numbers now with kind of a routine cadence of delivering here's how we're doing. I think it's -- we're going to be really careful about not turning it into the kind of sales-driven culture that's people....

I don't want to ask it.

Yes. And so incentives are actually really important and how you -- I think how you design those. We're trying to be careful that we're turning these into kind of medium-term goals around profitability and really focusing on retention. How do we -- I mean, net relationship growth is largely a function of retention. And again, one of the ways we're working on that is through a lot of training and trying to sort of upskill the people that we have working with customers, getting them comfortable with being able to sell the full product set, but also getting them really comfortable with credit and being able to understand a small business' financial statement. So they can be a financial coach a little bit and help them understand and deliver information to customers. I think all of those things will pay off. I mean they'll take some time, but it's part of building a durable, sustainable kind of business, I think.

So earlier, you talked about the technology transformation. I lose count of how many years it's been going on, at least 5 plus, where you're redesigning the technology of the entire bank. The first major bank to do a core conversion of the larger banks. Can you just talk about what the major initiatives you have for '21? Obviously, as you said, you're slated to end in 2022. And can you maybe just talk about what benefits you're actually starting to see from this? And how we should think about the longer-term benefits of this transition?

Sure. Well, the first thing I would say is that it has been going on for a while. But it's -- one of the things that it forced us to do is -- it was a catalyst for a number of other things, including something we call our Simple, Easy, Fast, Safe Initiative where we -- I mean we have a top 40 list, our President and COO, Scott McLean, [ right, spurred ] on this project, but -- and does a great job of it. We have an executive sponsor for each of 40 different projects, all designed -- and some of them are very simple little things, but -- and then there's a backlog. And when we knock one off, we put the next one on and assign a sponsor, and we track it, we talk about it with a lot of frequency. And that process, which has really been, like I said, catalyzed by this core replacement because it's forced us to focus on things like data governance, cleaning up data, getting it standardized, thinking about processes before we go through a conversion. We don't want to -- we'd like to get the process right and then convert into it. And so that's been really helpful. And I think the evidence of that is the fact that our operating expenses have been very flat for the last 5 years. And that would not have happened -- I would pause it without having engaged in this core conversion project. We -- just this year, I mean, we've reduced head count by about 6% from where we were last year. A big piece of that, we saved about $300,000 through automation just in our back-office functions this year, and that's up meaningfully from where we were last year. So we're finding a lot of places that the core project has had us think about what do we need to do before we get there. When we get there, I expect we'll have -- as we turn these things on, and we actually then have to amortize the capitalized cost of it. It's not like we're have a big cost reduction there. The cost reduction has actually been taking place along the way through all these projects.

So obviously, there -- as you mentioned, there will be a cost element of the capitalized costs being amortized, but maybe you can come up with some creative metric to get around that. But how should we think about, once this is done, just any goals the bank has in terms of efficiency and returns, both on a relative or absolute basis in terms of where would you like to be relative to the peer group? And what do you think the bank could be capable of once we get through this project?

Well, generally, the way I think about it, I've said before, I'd like to see us kind of in the mid-50s in terms of efficiency ratio. I think that's highly doable in a little more normal interest rate environment. It's a little hard to -- for me to talk with a straight face about doing that in a 0 interest rate environment. But in a more normal interest rate environment, we'd absolutely be there. And so it's that, but it's also doing it in a way where risk and more especially credit risk is managed really well. And so I think if we can find ourselves with somewhat stronger capital, a better risk profile, generating that kind of efficiency ratio, those will be the kind of measures where I'll state I think that's a really good bank. It's not necessarily having the highest return on average tangible common equity or it's -- I think you have to think about the risk profile, efficiency ratio, I think, is going -- always going to be important and then how much capital do you have.

I've asked you a similar question a few years ago, but I'm curious to see how your answer has evolved. You've invested a ton of money and resources into FutureCore. You're hoping the efficiency can improve. You probably have close to best-of-breed technology on the other side of this. With most of your initiatives done over, let's say, the next 1.5 years, obviously, I know deposits into '22, does this at all shape the way the bank approaches M&A? Does it allow you to become a choice acquirer in your markets just given you could bring a lot on to your platform that a lot of these small to mid-sized community banks can't offer to their clients?

Perhaps. I would continue, in my gut, to believe that -- as I told somebody the other day with some dark humor, I've learned what cancer looks like, and growth for growth's sake is not always -- that's kind of what cancer is all about. And I think that you can -- so growth for growth's sake is not -- well, as long I'm around will never be an objective. I think there's got to be a good fit. I think that what we'll have to offer in terms of product and systems is going to be -- and the way we generally operate. I think we've got a great culture. And so I hope that we will be the kind of buyer of choice for some sellers where they say that would actually be a really good organization. They've done a lot of the work. They've got a good culture. They've got a good credit culture. They're customer-focused, a very relationship-oriented bank. That's where we want to be, and I think that, that will make us that. But it's always a matter of price, et cetera. I mean as long as there's as much liquidity, we're not going to be looking for someone who's get a truckload of commercial real estate. That -- so we'd be -- I'd want to be kind of particular about what we do.

If I think about some of the things you mentioned, 6% reduction in head count. When we were here last year, we were talking about workforce reductions as part of controlling costs. As I noted, the bank has done a great job managing expenses in this 0 rate environment, in this crazy environment in 2020. And given your comments that we're likely to be in a 0 rate environment for a period of time, how are you managing the bank for the current environment and from an expense perspective? And how do you balance both investing in the business and making the necessary investments with managing a really challenging revenue backdrop?

Yes. I'll tell you, I just -- personally, because you'll find it in the proxy statement, but I own about 0.8% of the company. And so I frequently find myself just doing the math in my head because it's pretty easy to do. We're spending $1 million, it just cost me $80,000. And if we can make that -- so my hope is I can get everybody to internalize that way and say -- and then the question is, how do you manage a company that isn't looking to try to make -- hit a quarterly number in a -- particularly in an environment like this. And I -- so a good example. We have a competitor that's going through a lot of turmoil and disruption. And not naming names, some of you...

You're not the first to quote it.

Yes. And I said, look, we've got an open checkbook for the right kind of producers that want to be in our kind of environment because that's the kind of business that we do. And yes, we've got expense targets. And I -- kind of expense targets be damned if you have the opportunity to bring somebody on that's -- where the investment -- the accounting doesn't work for how we account for all this stuff. I mean you start paying a salary and bonuses and sign-on bonuses and stuff. The benefits come down the road. And so at some level, I want our people thinking about this like we were not publicly traded, like they owned the business. And at some level, you have to say, okay, we are publicly traded. And people like Ryan Nash are writing about us. And so I don't know how you -- there's any formula, but you try to keep your eye on both balls.

Got it. That makes sense. So Harris, when I think about the product offering and how it's evolved and how it's different from the last time we saw a downturn. Commercial real estate, particularly in construction, was what got you guys in trouble. You've obviously made a ton of changes in terms of underwriting and concentration risk with -- as 2 things to highlight. I guess, as we come out of this downturn, the way we use office space, retail, both could look dramatically different. So just given this dynamic, how do you think about managing commercial real estate exposure? And do you expect this to be an avenue of growth for the bank in the future?

Yes. I mean it's a really relevant question. I -- the first thing I would do is point out that over the last decade, our -- first of all, our total loans are up 32%. Commercial real estate is up 2.3%. And within -- up to $12 billion, $12 billion out of $48.2 billion. And within commercial real estate, term commercial real estate is up about $2.2 billion and construction development is down about $1.9 billion. So we both held it pretty flat. I mean it's over a decade. And we have -- in holding it flat, we've changed the composition of it quite a lot. And we're certainly -- even before the pandemic, we were starting to look carefully about an office space and kind of the hoteling concepts taking place in offices and the WeWork kind of phenomenons, et cetera. And so there -- it's still a really important line of business for us. We're trying to be really careful with it. We're looking at sponsors and tenants and lease rolls and kind of the credit behind the credit fundamentally. A bigger piece of it is multifamily than it was a while back. But even there, we're trying to be pretty careful. So I expect that it will grow, but it will grow -- probably continue to grow a little slower than the rest of the balance sheet.

Got it. We've made it almost 30 minutes without really talking about credit. And I think if we would have done this 6 months ago, it would have been a very different discussion. But the performance of Zions' credit has been outstanding. Deferrals were down to 60 basis points, and you were of the few banks actually had delinquency improvement last quarter. So can you maybe just talk high level about how you're feeling about the exposures? And then more specifically, do you have a better sense for the range of outcomes in 2021? We've heard a lot of regional banks talking about, let's call it, I'll put a wide range, 50 to 70 basis points of losses. I'm not looking to corner you into a number, but is there anything that you're seeing in your portfolio that would make you believe that you would be materially different from the peer group? Or could you maybe even be better than the overall pie -- the overall peer growth?

Well, I've said publicly, I wanted to be sort of in the top quartile in terms of credit quality metrics. And for me, everybody knows me well, well, no, that's charge-offs. I think there's a lot of ways of measuring this stuff. And I'd go into why nonaccruals and consumers versus commercial or -- I mean, there's -- the accounting standards treat things differently than regulators do. I tend to believe that at the end of the day, the -- where the rubber meets the road is when we charge some off. And so that's a really important kind of fundamental metric for me. And we'll come through this, certainly, with higher charge offs, but I think we'll still look reasonably good relative to the crowd. This is a scenario that I wouldn't have imagined and one that's going to hit -- as you noted, it's going to hit small businesses maybe harder than some large businesses. And so that gives me a little bit of pause, but so far, so good. So I'm actually -- I'm guardedly optimistic. And I'd also note, I mean, we're in a kind of a new era of CECL, where kind of our expectations for all of this are probably more precisely baked into what our reserves look like. I mean that's over a longer period, in many cases, than a year. But it continues to reflect caution. But within that caution, I find myself reasonably optimistic, and particularly if we see what I think we'll see in the way of additional stimulus.

1 or 2 topics to get through here in the last few minutes. When thinking about credit, energy, the bank sounded a little bit more upbeat recently just given both the spot price of oil and futures prices. Can you maybe just talk about how the energy portfolio is performing? Anything noteworthy coming out of -- I'm sure the team is going through a redetermination. And just given the cyclicality of the asset class, how do you think about that as a driver of growth? And what are your expectations for credit performance?

Well, it has not been a driver of growth for us. It's actually -- we're down in terms of outstandings about $600 million from where we were half a dozen years ago. And since that point, which was sort of the beginning of the downturn that we saw in kind of '14, '15, there's been a big change in the composition. Portfolio services exposure is down 2/3 from where it was. It was about $1.3 billion. It's down a little over $400 million in outstandings today. And I think the futures curves of today are reasonably encouraging. I think that probably becomes even more so as the recovery establishes itself. And so I think we'll get through it in pretty good shape. We had a couple of charge-offs this past quarter, but nothing that was really material, and I don't see a lot of charge-off potential. And I -- it will be -- I expect it to be a little higher certainly than the norm as a result of this pandemic playing out. But I'm encouraged by what's happening with prices.

So we talked about one use of capital before in terms of M&A you had a very targeted strategy coming into this, we'll call it, downturn, where you wanted to have capital above peers. And I think about James saying, he didn't want people like me running charts having you on the bottom end of it. And so far, that's been a very successful strategy. So can you maybe just talk about what the capital priorities are from here? And given that you're not part of the CCAR process, are you still following that same time frame? And what are you looking to see in the economic backdrop before you'd be willing to start leveraging some of the capital base?

Well, I think that -- first of all, I think the economic backdrop is -- I think we're going to be pretty close to being able to see what the trend is going to look like because, I mean, they'll start delivering vaccines here probably in a week. And not that that's going to change things immediately but I'll -- I'd be willing to bet by the end of the first quarter, we'll have a much better take on wall. So I would hope that if things play out the way I kind of expect they'll play out, which is, first of all, slower loan growth will produce additional excess capital. And we're not subject to CCAR, although we continue to do the stress test and try to -- we're certainly benchmarking ourselves that way. We can increase the dividend without regulatory approval so long as we're within the law for a nationally chartered bank. But buybacks is something I hope we will see ourselves coming back into in 2021. That's something that we pause in a moment if we saw the economy taking a step back. But we -- I'm sanguine about the prospects for being able to return some more capital. I mean we have to apply to the OCC to do buybacks. For a permanent reduction in capital, that's a little -- that's a difference between us and someone that's got a holding company. And so there's still a discussion with the regulator. My hope is that if we can demonstrate that we're generating excess capital, we've got strong reserves, credit quality, that they'll work with us on that.

Great. Well, unfortunately, we are out of time. But on behalf of myself and the rest of the investors, I just wanted to say thank you again for joining us. Best of luck with all of the treatment. And we look forward to speaking with you again in January, and I definitely look forward to seeing you in person next year, and have a happy holiday season.

Thank you very much, Ryan.

Appreciate it. Take care.

Bye.