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

Good morning, everyone, and welcome to the KBW Winter Financial Services Symposium. Once again, this is the 28th straight year that we've done an event like this, and I couldn't be more excited to have Harris Simmons from Zions Bank to come and help us kick off the conference with today's first fireside chat. So welcome back to the conference, Harris. We're delighted to have you with us. I'd like to remind everybody, our goal for today is not only to talk to Harris about Zions, but Harris has just been a great student of the banking industry for many decades. And I'm really eager to hear more about his thoughts about industry trends that are playing out, and I'd like to let everyone know I've got plenty of questions, excited to talk to Harris, but we do have an opportunity for you to ask questions if you would like to submit them via the online opportunity that you have. So Harris, welcome, and thanks for joining us.

Thank you. Good to be with you, Tom. Thanks.

Terrific. So we are now many months into the global pandemic and the recession that it's caused. We, thankfully, got a lot of the major concerns about credit behind us for an industry. But how does the pace of the economic recovery factor into how you think Zions Bank is going to be able to perform going forward. And we get a lot of questions about revenue, for example, whether it's the margin or loan growth. And how -- and then are we going to get another stimulus program. How does the economic flight path really fall into your plans as to how you think the next 12 months or so for Zions are going to play out?

Well, the first thing I'd say is this is -- these are such uncharted waters for everybody. We've never seen anything quite like this. The volume of stimulus is just unprecedented. Back during the financial crisis, we had just under probably $1 trillion of stimulus. We've had about $3.4 trillion. And that's -- and perhaps another $1.9 trillion to come. And it's -- and so this is clearly an economy that's on -- kind of on steroids. You see it in the deposit growth in the industry. This is a nation awash in liquidity. And I do think if there's -- if I have a concern, it's not that customers aren't going to be growing, expanding, sort of the animal spirits will kind of emerge here as people get vaccinated and we get into the latter half of the year, and hopefully start to return to something closer to normal. It's that there is just an enormous amount of cash on a lot of balance sheets, and I think that's going to probably dampen loan demand. I -- in theory, I think it certainly should. You're not going to borrow if you have the cash. So I -- incrementally, I think that's going to be an issue. But I do think that it's been amazing to me how resilient so many customers are. I mean we've gone through and done, as many other banks have, I mean we've kind of developed sort of a high-impact list of industries where customers have been disproportionately impacted adversely by this pandemic. And we've gone through a couple of times, name by name by name, with frontline officers going through numbers and hearing about how customers are faring. And it's been absolutely incredible to me how strong a lot of these businesses are. They came into this with a lot of strength. And as a nation, I think the consumer came into this with a lot of strength. It's been an unusual kind of recession that we've had this last year. And again, people are actually paying down debt. I mean that's -- it's -- so I'm optimistic for the economy, but I think loan demand could be a little bit slow to recover.

And you mentioned just the tremendous amount of liquidity that's fallen on your balance sheet as well as the industry's. But -- so how do you think about that? Do you eventually look to just continue to invest in the securities portfolio if the loan demand isn't there? Do you believe it might be a little temporary? How do you manage around that in terms of like, what are the discussions really important to have around what you do with that?

Well, it's -- yes, I mean we've seen everybody, you look across the industry and deposits are up in a way that's unprecedented. And demand deposits -- I keep thinking, if I -- if you told me back in, when was it, about '81, the Reg Q was eliminated, I thought that was the end of the noninterest bearing deposit. If you told me that 40 years later, we'd have 47% of our deposits in checking accounts, I wouldn't have believed it. I do think that some of the -- probably a lot of this is transitory. It's -- there's a lot -- again, a lot of this stimulus. In our case, we've done a lot of the paycheck protection loans, and we've seen a lot of that cash sitting on the balance sheet. That will get spent. And so yes, I do think a lot of this is transitory. We're keeping -- we're putting it into -- to the extent we're putting it into securities, we're keeping it very short. I think -- I have a real belief that the great risk out there continues to be inflation. I don't know how you -- if you look at the Fed's balance sheet, it's grown by 78% from -- just over the course of kind of the last year. And that's up -- you go back pre-financial crisis, it was a little under $1 trillion, grew to $4.2 trillion, and the last year, it's kind of at $7.4 trillion. And all of that is cash into the economy. And that's on top of fiscal policy that is creating big deficits. And ultimately, that -- all of that cash, if it starts to circulate, it's -- I -- just the physics of monetary theory suggests that it's going to be inflationary to me, anyway. So I think that's -- that ought to be the concern for all of us, is that we're positioned for that kind of a scenario.

So I've been trying to think about what the history books are going to say about this moment, and I -- so I tried to think about those bigger mile markers. And the whole economic recovery story, like you just said, some things are happening that typically haven't -- or haven't happened before. Another item is, the industry was just gearing up on the digital adoption and fintech adoption. Zions has always been a leader in that regard. And then when I -- the statistics that I look at keep showing that what observers thought was going to happen over years has been happening in months. Just given your perspective, as a forward-leaning banking organization on innovation, just from a big picture, what do you think this all means? How permanent is it? And maybe how is it do you think going to change the industry, the profitability of banks? And frankly, the consolidation path even for banks?

Well, I think, the whole -- the fintech phenomenon, first of all, I'd pause that it's actually not new. I mean, it's -- we've been applying new technologies in this industry for decades. And I think if there's anything new about it, it was probably that we started to see a lot of kind of small start-ups. And most of them have figured out that they're not going to make it as a stand-alone competitor to the industry. They're going to end up partnering with the industry. And we and others around the industry are doing lots of, in some cases, partnerships, but in most cases, it's simply a vendor relationship, like we've always had. And so in some respects, I think it's nothing new sort of under the sun. I do think one of the things that is -- that feels different about this is what I might call the modularization of technology. I mean the ability of maybe an increasing tendency of some of these companies to find a niche and to insert themselves into the value stream, partnering with a bank who may -- so they may originate the deal, somebody else may fund it. So you see new kinds of business models arising. And so it's a period of real experimentation. I think at the end of the day, a lot of this is going to depend on how regulators and Congress, for that matter, react to all of this, and whether they allow our industry to turn into a utility that's sort of low-value add and everybody else is kind of siphoning off the -- has a -- the connection with the customer. I don't think that, that's going to happen that much. I think that relationships still matter. I think you saw this with -- in many respects, with this PPP program. I -- we learned a lot, and I think it confirmed a lot of our thinking about sort of the importance of relationships, coupled with technology. And the relationship piece is something that I think banks are able to do generally well and particularly regional community bank. I mean that's something that is a real strength. And move across the spectrum to pure fintech players and it's total technology. And at the end of the day, I think it's the marriage of the 2 that's going to be a winning combination. That's my own belief, and especially for kind of higher value clients, for businesses, et cetera.

Well, you mentioned the PPP program, which it's -- Zions has really excelled. You far outpunched your weight. I think you're like the 37th largest bank in deposits, but you're a top 10 provider of PPP loans. What was the secret ingredient that made that happen?

Well, like I say, I think we quickly applied good technology to it. We created not only a digital application, but a straight through kind of digital process from the initial application through to boarding the loan. But that -- that was important, but the -- without applying people to it, it wouldn't have happened. I mean we quickly -- I remember the first weekend we started taking applications, we -- it suddenly struck me, I said the only way this's going to work is if we take a couple of thousand bankers. And to put that in context, it's about kind of 20% of our workforce. We've got to take about 2,000 bankers and train them. And every customer that applies for this needs to get a call from the banker, somebody that's going to help them answer questions and watch that deal to make sure that we're communicating with the customer. And it was a powerful -- had a powerful impact, I think, not only on getting these done, but on the satisfaction that customers were experiencing with the process. The only dissatisfaction came when -- I mean the SBA had never seen anything like this with their credit. They were responding quickly, but they were having to shut down their portal for a week at a time, and customers were applying at multiple places. And they -- so there were some challenges arising from that. But I think those that applied once and through our process were really pleased with it.

And obviously, it's a financial advantage to have made these loans a revenue generator for the bank. But I think what could really be the bingo, for lack of a better phrase, is if you've gotten permanent clients out of it because of what you're able to do in a moment of crisis. Are you focused on that? I hear that a lot from many banks that they need a lot of new potential clients in this process, but it looks to me like you've done a really good job of being very data-driven on that. Any just comment about what that could mean for the bank?

Well, yes, we -- one of the things that we did is we -- and many larger banks did not do this, but we determined from the outset, we're going to open this not only to our own customers, but we wanted to use it to reach out to businesses that were not going to be successful in other places. So we -- about 30% of all the deals that we did, we did 47,000 loans and 14,700 of those were new-to-the-bank customers. And so yes, we've been reaching out to them. We have been selling them additional services, account and other -- we're tracking that pretty carefully. And so far, we've sold about 5,000 new services to those close to 15,000 customers. And over time, we'll be tracking that. But I think we'll turn a lot of them into long-term good customers.

That's terrific. Great opportunity. Zip mortgage. By the way, whoever is in marketing who came up with the name, I love it. I love the name of Zip mortgage, but that's had a lot of progress. And it looks like you've used technology there to really be on the forefront of the mortgage business. Just any comments about where you think the growth in that business is going to go. And where you expect Zip mortgage to be over time?

Well, it's -- first of all, I'd say that we're taking in the fourth quarter -- I mean, it's been steadily increasing. But we're up to -- 87% of all of our mortgage applications are now done digitally. That's up just over a couple of years, it's up by 30 percentage points. And so I expect that by the end of this year, it will be the rare exception that we're not doing this, every deal, with a digital application and process. And we're continuing to improve the process. It's allowed us to reduce turnaround time by about 25% and has certainly allowed for a lot of additional volume with lower cost. At the end of the day, interest rates are probably the big determinant in terms of what mortgage volumes look like. More than a great process is a great rate. But it's become a really good business for us. Half of what we do is sold. The other half has been going on to our balance sheet. And the deals going on, on our balance sheet are really high-quality deals with really strong equity, and they tend to be jumbo ARMs that are really high-quality paper. So I expect it's going to continue to be a growing and great business for us, although it's hard to imagine we'll continue to have just uninterrupted growth as interest rates eventually start to rise. But it will go through cycles, but it's a big part of our business today.

Do you have any designs? I mean because there's been -- Rocket Mortgage is probably the best-known high digital recent entrant into the market. But now that you've got it so digitally enabled, I mean, is this something you think that could, over time, really be a market share grabber over time, because of how you've designed it? Or are those right? Are you happy with something that's maybe not as portfolio...

Yes, it's not something that we presently have any intention of trying to compete nationally or that -- our target market is largely our own customer base. And it's -- a big target market are the owners and operators of businesses that we bank, and that's where a lot of these jumbo ARMs are coming from. I think that the technology -- and it goes back to kind of the whole fintech thing. Technology doesn't remain proprietary for very long. I mean it has a way of catching up in the marketplace pretty quickly. And so I think that you're going to see this will be the norm even for smaller banks. We'll be using technology to originate mortgages, either for themselves or to fund elsewhere. It's too big a market not to see technology providers littering the landscape with good technology.

Understood. So we've seen some bigger mergers happen in the industry. And quite often, they'll be described as wanting to use scale to help them build more profitable companies as well as to make sure that they can afford the required investments on the technology side. How do you feel about the scale dimension for profitability in the banking industry?