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

Joining us, we have Zions Bancorporation next. We have Paul Burdiss, the Chief Financial Officer; and James Abbott is with us as well, who's the Head of Investor Relations. Paul and I who've been here before, but live in the past. And this one is a little bit different, but I think it's going to work well. Paul, I really appreciate your attendance. And also James here as well, long time IR Head. He's been in our spot. My spot as a sell-side as well. So he clearly understands what we all want and does a great job in his role as well. I was explaining to Paul a little bit earlier, we have a lot more generalist interest in the banks. And so typically, we maybe wouldn't do this, but I'm going to ask Paul to give a little bit more of a big picture overview of Zions, the company, and then we'll get into some of the Q&A. So go ahead, Paul. Thank you.

Thank you, Jon, and thanks a lot for having me and us, and thanks, everyone, who's listening. Thanks for your interest in Zions Bancorporation. Just as a quick refresher, Zions Bancorporation is a regional bank here in the Western United States. We have about $80 billion in assets in the fourth quarter. If you were to draw a line from Texas to Washington, and look at all of the states west of that line, that's basically where we're at. Something a little unique about our franchise is that we operate in each state with a distinct name and brand. So for example, in Texas, we're known as Amegy Bank. In California, we're known as California Bank & Trust. In Utah, we're known as Zions Bank. We are largely a business lender -- largely a small business lender. We -- because we have -- nearly half of our deposits are noninterest-bearing demand deposits, we maintain a natural orientation toward asset sensitivity. And with all of the deposits we've seen, asset sensitivity is something that we are continuing to manage. We're not a mass market retail bank. Again, we're really focused on small businesses, really in the Western United States. From a credit perspective, credit profile, credit performance has been, I think, solid throughout the pandemic. We increased significantly our allowance for credit losses in the second and third quarters of last year with all of the uncertainty that occurred in the economy. But in the fourth quarter, you saw us begin to release that as what I might describe as the cone of uncertainty of economic growth began to come in. And then on top of that, you saw, in the first quarter, we recommenced our share repurchase program, which we had suspended in the second quarter of 2020. We recommenced that in the first quarter of '21 with a $50 million share repurchase, which we completed in February. The other one thing, Jon, if I could note, the other thing that's maybe a little unique about us is that we have been making a massive investment in our technology now for almost the last 10 years. The centerpiece of that is replacement of our core systems. So I think most of you know the banks operate on very old and some might say brittle core systems. We have been in the process of replacing our core systems here, as I said, for the last 5 to 8 years. All of our loans that were in scope are on that new core system. The last phase of that is deposits, which is, in order of magnitude, more complicated than loans just due to the interfaces and complexities of dealing -- of connecting with every part of the bank. But we expect that to be finished in 2023. So we've got about 2 years left on that last phase of it. And in the middle of doing that, we've also been investing in enabling technologies to improve our customer experiences. So Jon, I think that's a very quick high level.

Very helpful. Very helpful, Paul. I appreciate that. And we'll get into a lot of these other topics as well. But maybe also just as a way to set this up, can you maybe take us across some of your geographies in terms of how each of those geographies are performing? And then we can get into some of the other topics like loans and margin.

Yes. Sure. So I'll start in Texas. Texas has been in the headlines lately. Obviously, we've got a lot of colleagues in Texas who have gone through some pretty difficult times as the power grid nearly collapsed. I think everyone knows that. But if we exclude that, and that's a little bit unfair, but if we exclude that and take sort of a longer term view of what's happening in Texas, the Texas economy is strong and has been strong. And so it's true across our footprint that loan growth has moderated, particularly in the last year. That's also true in Texas. But Texas, we went through kind of a mini energy recession. Jobs are continuing to recover there. And then if we move west, we're in Arizona, we're in Nevada, we're in California, sort of across the Southern U.S. and all of those economies, really, even Nevada, which was particularly hard hit kind of a Las Vegas-centric -- in Las Vegas -- in the sort of the Las Vegas area, the tourism-driven economy there. It has been rough, I think. But like so many of our other geographies and our customers within our geographies, our customers have found a way to balance cash flows. And what I mean by that, we'll talk a little bit more about credit. But these economies and our businesses within the economies have really found a way to sort of live in the pandemic and continue to exist and balance cash flows. And so we could go -- continue to go around the horn, California has had the most restriction. I started with Texas with sort of maybe the least restrictive from a government involvement perspective due to the pandemic. California has been the most restrictive. But if you take a step back and you look at credit performance and you look at loan growth, and you look at other kind of key performance measures, it feels like these economies and the people within the economies have really sorted out how to balance kind of living kind of within the pandemic and within the government rules that are applying locally.

Thank you for that. You touched a little bit on loan growth. And when I look at your guidance, and I know you guys spend a lot of time on this, seems pretty positive. And the loan growth that you're talking about for the year, modest loan growth. Can you talk a little bit about where are you seeing the demand? And maybe some of the cadence of the growth that you're expecting? There's a big thought process that the second half of 2021 is when the growth is going to pick up. But maybe kind of walk us through kind of where and what you're thinking for loan growth.

Yes. Well, certainly, my view is, and it's a personal view, that there's a lot of monetary stimulus now followed by fiscal stimulus that is absolutely going to catch on, particularly as I think the country becomes vaccinated and opens up even more. So the view that you articulated is certainly my view that by the time we get to the second half of the year, we're really going to start to see loan growth engage. Now the caveat to that perhaps is that with all of the monetary and fiscal stimulus, a lot of the dollars that are being flooded into the economy are ending up on bank's balance sheets, including ours. And so there's an open question around, well, if there's so much liquidity on the balance sheet, does that mean that, that liquidity needs to go away before folks start borrowing again? I can tell you, based on my experience back in the sort of 2008 to '11 time frame, there was, you may remember the TAG, the transaction account guarantee program, created all this influx of cash or enabled influx of cash into the banking system. And many of us thought that loan growth wouldn't pick up until all of those deposits went away. In fact, what happened was much of that liquidity stayed and loan growth returned. And so I think the answer is, Jon, and this isn't sort of perfectly data-driven, but I think the answer is that the liquidity exists in pockets and the need for capital exists in other pockets. And so it's entirely possible to me that we could see loan growth in the second half of the year before the liquidity -- the massive liquidity position that's in our balance sheet and other banks' balance sheets completely erodes.

So the message is somewhat stable in the near term with some acceleration later. And maybe that's just obvious, but that's essentially what you're telling us?

Well, it's excluding PPP. We -- loan growth hasn't been strong except for PPP, and we can talk a little bit about that. But generally speaking, it's sort of modest to weak, right? But my expectation is by the time we get to the second half of the year, we will see some acceleration. I would expect that to be centered in commercial, commercial real estate, probably not residential mortgage, given where -- what the yield curve is doing, but that remains to be seen.

Okay. Touch a little bit on PPP. You guys have been extraordinarily successful in that program. Talk about what you're seeing in terms of some of the forgiveness and also the latest round of PPP?

Yes. Well, I'll start with sort of a philosophy. Our CEO, he got out in front really fast internally inside the bank on PPP and said, "Hey, this is a program that is meant to help our communities and our core customers. And if we are the bank that we think we are, we really need to be out in front of this." And when I say the bank, we think we are -- we are -- our whole strategy is to be integrated into our communities, provide support and capital to grow in all of our communities. PPP is a mechanism to do that. And so from a sort of a philosophical view of our company, it was very important to us that we'd be successful in this program. And I think we have achieved a reasonable level of success there. We had -- in the first round, we had 47,000 loans and included in that, probably 14,000 to 15,000 of those loans were to new customers. We sort of do a lot of work through a lot of people. We had 20% of the company engaged in this program at some point over the course of the last summer. We sorted out a way to take in new customers quickly and safely and really provide capital in our communities in a way that some banks just weren't able to do. So we're really proud of that. And as we're starting to see that forgiveness roll in, what you're seeing is that the yield on those PPP loans is reflecting the upfront fees that were capitalized as part of the -- basically, they're sort of prepaid loan interest. So you're starting to see that flow through. And so you see that in the yield on our PPP loans. PPP Round 2 showed up here in the first quarter. It's interesting because there hasn't been nearly, I would say, the level of activity in PPP 2.0 as there was in the first round of PPP due to many reasons. One of them is, I think the SBA has changed the rules a little bit and been a little more restrictive in terms of the funds that they're willing to put out. But nonetheless, I think we continue to rank seventh overall in the PPP 2.0 program. So we're continuing to see some success there. And it's funny, I -- the town that I live in, I was downtown a couple of weeks ago, and this is not an uncommon occurrence where you'll meet a small business owner and tell them where you work, and they will say, "Oh, my gosh, you guys saved my bacon. I couldn't get a loan at XYZ Bank. I came to you, you were able to provide it in 48 hours." It's really great as an employee of a bank. It's really great to know that we have been able to help so many communities and business owners in a time when they really need it.

That has to feel good. That doesn't happen very often as a banker.

That's great. That's a really great feeling, yes.

Yes, good. So the Zions' view is that PPP has worked as planned and it's generally been a positive thing for small businesses?

Yes. The other thing I'll say about that, if we take a step back and talk about sort of more of a general and maybe kind of a credit perspective, is that I think, Pete, this is my view, again. PPP sort of provided a bridge to small business customers when the economy kind of collapsed in April and over the successive couple of months. There are a lot of businesses that might not have made it without PPP. PPP provided that bridge that allowed them to sort of rethink their business, rebalance their cash flows. Everyone had to figure out how to reopen in the middle of a pandemic with masks, how to create social distancing within their shops. PPP really provided that time for businesses to rethink how they do it. But look, we're all in this together. Businesses don't want to fail. We don't want them to fail. And so what's happened now, in my opinion, and you see it in credit, is that the small businesses have sorted out a way to rebalance their cash flows. They have balanced expenses to revenues. And what that's created is a deposit situation where we and many other banks are seeing deposits grow rather than shrink. If there were an ongoing, in my opinion, sort of an ongoing sort of intense credit concern occurring, what we would be seeing is that cash flow being negative and the deposits evaporating from our balance sheets, particularly for those small business customers, and that's not what we're seeing today. So I think the program did what it was intended to do, and I think it's really provided a real lifeline and allowed these companies to rebalance their business to make it work in the current environment.

Okay. Good. I want to talk about deposits and margin in a second here. But can you talk a little bit about what you're seeing for the conversion rate? I know you had a lot of new clients that were brought to the bank through PPP. Are you seeing some of those remain as permanent clients? Or are they kind of slowly going away as the forgiveness comes in?

Yes. So what we're doing is we've got a -- so first of all, I should say, and this was important. I probably should have mentioned this earlier. We -- the PPP sort of happened at a time for us where we have been really evolving as a company. And there are 2 main sort of tracks for that, that I'll discuss. One is in technology and one is in strategy. On the technology side, we have been -- and I mentioned this at the very outset. We've been investing a lot in enabling technology. When PPP came in, you may recall, this showed up on like a Thursday, and I think they started taking loans unlike on Monday or something like that. And so we -- it was really important that we had the flexibility -- the technological flexibility to set up a system that worked within the PPP framework, right? And I'm not saying that we set it up and everything worked perfectly. I will say there was a lot of trial and error. There were some fail-fast. We had a couple of different things that we're working, and we found one that worked, and we continued with it and leaned on it hard. So the technology investments that we've made in addition to all the people that we have. And the combination of people and technology is really what made us successful on PPP. In terms of new customers, so we were able to bring in new customers that way. We've also -- as part of our organizational strategy, we've been thinking about how we can serve small business customers better. One of the ways that we have done that is we've taken the more sophisticated treasury management products. They're typically for sort of middle market and up. And we have those products. We've created a slim down version, a different price point, different level of service, that we can sell to our small business customers. And so what's happened now is as we brought in new customers with PPP, we have taken this new product set, which again, has really just been set up in the last probably 18 months. We had this new product set that we could sell into them. And as you know, once you get a commercial customer, a small business or otherwise, on treasury management, they become a much stickier customer. It's kind of like bill pay for your own personal account. It becomes harder and harder to switch banks when you know that you're just going to have to go through all of the friction of switching all of the connections that you've made to your bank. So we're really focused on making those new customers permanent customers.

Okay. Great, great. Touching on the margin and net interest income, you -- as a company, you've talked about slightly increasing net interest income, and there's a lot that goes into that. But bigger picture, Paul, what does the steeper curve do to your outlook for margin and net interest income? I know there's a lot of nuances in that. But just give us the Paul Burdiss view of how this changes your outlook?

Sure. We -- so let me start off by saying, we invest at sort of the 3- to 5-year point of the curve, but I'm going to talk about the 10-year because that's where everyone -- sort of that's a common point of reference. In the 10-year, treasury fell to 50 basis points. I will tell you for a bank, as it relates to interest rates, banks historically make money on kind of that carry trade or the maturity transformation of deposits to loans. And when you've got a yield curve that's as flat as that, that does take away a pretty important part of profitability. For a bank like us, where half of our bank -- or half of our deposits almost are noninterest-bearing demand deposits, those deposits are worth a lot of money when rates are higher. But they're worth much less when rates are really low. And when the yield curve was as flat as it was, that was particularly painful. As we're seeing the reinflation of the yield curve and the steepening of the curve, we're finding opportunities to invest more profitably. And so where that's going to show up is two places. One is the investment portfolio. As we're reinvesting, we have a lot of cash flow that comes off of our portfolio. We invest -- it's a $15-plus billion portfolio, but it's got a duration of about 4 years. And so we've got a lot of continuing cash flow on that. We've stayed relatively short on purpose. As that cash flow comes in, we are able to invest at the prevailing higher rate as the yield curve steepens. That's a positive for earnings. The other is asset sensitivity. I talked a little bit about asset sensitivity at the beginning. Again, demand deposit is driving a very large asset-sensitive position. What that means is that we have the capacity to continue to add duration on the asset side of our balance sheet beyond the investment portfolio. And the way we do that is through interest rate swaps largely. So what you're going to see, what I expect to see is as the yield curve continues to inflate, even if short-term rates don't go up, what you'll see is us start to trim down that asset sensitivity through the use of -- largely through interest rate swaps. And those both, in the near term, anyway, those both should be positive for earnings. But over the medium term, as I said, on an asset-sensitive balance sheet that is funded largely with demand deposits, higher rates is absolutely going to lead to better earnings.

Okay. And so the goal in some of the swaps, is that to really neutralize the balance sheet? Or why not just kind of let it ride for a while and see what happens?

You may recall, Jon, you've covered us for a long time. So back in -- when I joined the bank in 2015, we had, I don't know, $8 million in cash, and we were very asset sensitive. And we started to invest over time. And any way that is add duration on that side of the balance sheet. I don't think investors pay us to take a large rate bet. I think investors pay us to manage our balance sheet effectively. And so when that asset-sensitive position gets outsized, look, unless we think we're smarter than the market, unless we think we know more than the yield curve, it only makes sense to take some of that asset sensitivity off the table, either through cash, investment securities or through derivatives. And so I'm not saying that we're going to get down to 0 or below. But with the deposit growth that we've seen, the asset-sensitive position is very large and probably larger than our asset liability management committee is comfortable with. And now that we're seeing the reinflation of the curve, it's much more palatable to take some of that risk off the table.

Yes. Okay. I think we have the same discussion many years ago in New York. I think it was the exact same discussion. But -- so the message is it's positive in the near term, but you just -- you don't want to get too carried away with the asset sensitivity?

Right. Yes. Yes, because the -- what putting the derivatives on or what investing out the curve does? What putting duration on the asset side does is it sort of locks in the expectation of rising rates, right? And so unless we think that -- as I said, unless we think the curve is massively wrong one way or the other, it only makes sense to take some of that off the table. Because what we're doing is there's a large opportunity cost. And the opportunity cost is getting larger as the yield curve steepens. The opportunity cost of maintaining an outsized asset-sensitive position.

Okay. Great. A couple more topics I want to touch on. But let's go to credit. It seems like you're increasingly more optimistic on credit and the outlook, and it started to show up in this most recent quarter. But the big picture, how you're feeling about credit? And then how do you want us to think about reserving going forward and provisions going forward?

Yes. Well, under CECL, we -- the current expected credit loss rule that all the banks started complying with in January, we need to set aside a reserve that we think is representative of the losses that we expect in the portfolio over the life of loans. And so you saw that increase pretty significantly in the second and third quarter, as I said. But by the time we got to the fourth quarter, that uncertainty of outcome had been reduced such that we began to release those reserves. And so as our expectation changes and/or as the macroeconomic forecasts improve relative to the reserve and the -- all of the analytics that went into reserve in the fourth quarter, as those things continue to improve beyond our expectations, that would mean that we would see reserve releases. So I can't predict reserve releases. But what I can say is that it feels like credit is continuing to perform really well. And it feels like the macroeconomic outlook is continuing to improve. And all of that will go into our first quarter allowance for credit loss.

Any update on energy?

I wouldn't say there's an update. We've had some charge-offs. In fact, I think all of our charge-offs in the fourth quarter were energy related, if I remember correctly. But nonetheless, I think energy, with oil and gas prices where they are -- I think -- energy, as I said earlier, went through a little rough spot. But with oil and gas prices where they are today, I think that the overall credit in that portfolio is continuing to improve.

Okay. Good. You've dipped your toe back in the water on the repurchase program. Can you talk a little bit more about your confidence in the ability to continue to grow that amount of capital return to shareholders over time?

Sure. Well, first, let me say that any share repurchase we do need to be approved by our Board and the OCC, who is our primary regulator. An important artifact, Jon, that I should have said for those folks who don't follow banking really closely, is that we do not have a holding company. We are a publicly traded bank, a very unique organizational structure for us. As a result, we are not regulated by the Federal Reserve of -- on sort of the things that relate to holding company regulation. Our primary regulator is the Office of the Comptroller of the Currency. And so the OCC needs to also approve any share repurchase we do. So with that as a caveat, our philosophy around capital is that we want to have a better-than-average risk profile in our balance sheet. And we want to have a modestly better-than-average capital position relative to our peers. And so what you're seeing is our -- when we suspended the buyback in the -- after the first quarter last year, even with the reserves and things that we created, we were able to grow capital -- our CET1 ratio pretty significantly. I think we ended the year at close to -- end of last year, end of '19 into '20, I want to say our CET1 ratio was kind of 10.1%, 10.2%, if I remember correctly. It was 10.8% at the end of the fourth quarter. So even in the midst of a very difficult kind of macroeconomic environment, by suspending our buyback, our core earnings are strong enough to continue to grow capital. Now all of that as a backdrop, as I said earlier, our philosophy is to have sort of modestly better-than-average risk profile and maybe modestly better-than-average capital position because we think that creates a good balance. That capital position, in my opinion, is starting to get a little high relative to average, which is why you saw us begin share repurchases. So over the course of the year, I'm hopeful that we'll be able to continue to manage that capital position back to a level that we think makes sense for our risk profile.

Okay. Good. It makes sense to me. One -- 2 more things I want to touch on. Prepandemic, you talked about -- you had some pretty strong PPNR growth goals for the company. And I think you were saying potentially high -- mid- to high single digit PPNR growth longer term. Is that something that's still achievable in your view? Or is there anything about the pandemic that's changed the ability for your company to achieve that?

I don't think there's anything about the pandemic that's changed our ability to achieve it. I think what the -- as you've probably heard many others say, what the pandemic has done is it has accelerated a move to sort of technology solutions. And so my expectation over time is I think about expense management. My expectation over time is that we are going to continue to invest more in technology. And in so doing, creating a lot of -- and sorry, investing a lot in technology and continue to standardize operations, as we -- as the intersection of technology and standardization is automation. And so my expectation is, over time, and I think it's accelerating that we are going to, as an organization, see much more automation. And the automation means that we are going to probably need fewer people. So my expectation is, if you look at the trends -- the underlying trends in our noninterest expenses, is that over time, you're going to see more technology expense and less people expense. And so all -- that's a way of saying that, look, we've held our expenses basically flat, nearly flat for the last 5 years. I get asked all the time, "Boy, how can you continue to do that?" The way we continue to do that is exactly as I described, which is continuing to invest in enabling technologies that allow us to preserve the very good front office customer service part of our model, while going through a massive sort of standardization and automation effort on the things that our customers can't see.

Okay. Great. Just a minute left, and James and I kind of went back and forth on this. But no delicate way to ask it, we all want the best for Harris. But can you give us a quick update on how Harris is doing?

Well, I can't speak specifically to Harris' health. That's his prerogative to discuss. And at a recent conference, he did make some very positive comments about that. But what I can say is Harris is an exceptional leader. He is absolutely engaged in our business. He is on every call. I get e-mails from him all the time. He and I talk all the time. He is not skipping a beat and the company's success really reflects his leadership.

Okay. Great. Well, that's it for the time. Paul and James, I really appreciate it again. And hopefully, we'll see you live in 2022. Thank you.

Great. Thank you, Jon.