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

Good morning, everyone, and thank you for joining us at the Raymond James 43rd Annual Institutional Investors Conference. We're really excited this morning to be hosting an in-person event after taking a year off and been running the conference virtually last year. We're also excited to have Zions Bancorp here today with us. Zions is a $93 billion bank headquartered in Salt Lake City, with a market cap just over $10 billion. Joining me today for our fireside chat is Scott McLean, President and COO of Zions; and James Abbott from Investor Relations. Scott was named President in 2014 after spending 12 years with Zions' subsidiary Bank in Texas, Amegy, where he was CEO up until 2014. Prior to joining Zions, Scott was with Texas Commerce Bank and JPMorgan for 23 years. And with that, why don't we go ahead and get start with our discussion today. Scott, Zions has a very attractive footprint in the western part of the U.S. Maybe just talk a little bit about what you're hearing from your customers in your footprint and what you're seeing on the ground in the Western part of the U.S.

Thank you, Dave. It's great to be with you. Thank you for having us here also. And if it's all right, it's really hard to start this morning without thinking about what's going on in Europe and in Ukraine and Russia as well. And I just -- there are a lot of interesting things we'll talk about now and later, but all of it is sort of overshadowed by this tragedy that's going on over there. So I just would lift up all of those folks all throughout Europe and in Russia, too, in a hope for peace. And so if it's all right, I wanted to start there. And kind of rewinding back to the United States, in particular, where we are, our footprint is in really the Western United States. And I often tell people, I think if you parachuted onto the planet from Mars and you had to pick a place to have a banking franchise, you'd pick ours. Who would not want to be in the 11 states that we're in? In terms of just the historical growth, the outlook for the future and almost any demographic you would want to look at would -- it's very favorable to our footprint. And so we're just delighted to be where we are. And we're there on a very intentional basis. So it is a great footprint as you... [Technical Difficulty] A quick mic failure there. And we're back. Okay, thank you. And so it's certainly a region, though, that's been hit by the pandemic, different states at different times, have had -- have issues greater than or less that have been experienced across the country. But generally speaking, the economies are opening back up. You can see that in the economic data, the job growth data, and you can see it in terms of in-migration into our major states. Tremendous in-migration into Utah and Colorado and Texas and Arizona. And that's a very positive long term. It's still kind of a muted impact, but very positive long term. So I think we've come through the pandemic, assuming we're coming through the other side, who knows what the rest of the year will hold. But assuming we're coming through it, I think the economic outlook is very positive. The business environment, it's just remarkable what businesses have done to survive during this period. And as you know, about 65% to 70% of our revenue comes from banking businesses, principally small businesses. And the small business environment in our country and particularly in our states and among our customer base, is very strong, very resilient. They did what they had to do to create liquidity and to prepare for a long downturn, and they're coming out of this period with really strong balance sheets, good liquidity and I think an eagerness to just grow again. So I think we're all ready to see some real positive momentum.

Yes, yes. Good, good. The Zions put up a real nice loan growth in the fourth quarter, annualized on a core basis, you're in the double digits. Is that something that you can maintain? Or what needs to happen to continue to have -- put up such attractive loan growth?

Yes. I -- our company for years has been built to do well financially with mid-single-digit type loan growth. We saw loans contract during the pandemic. Many in the industry were calling for loans to start growing in the second half of the year. We basically said, hey, we need to see the decline settle for a quarter, which it did in the second quarter, and then we started to grow. We had nice growth in the third quarter, really strong growth in the fourth quarter. And it was principally about 35% to 40% of that growth came from 2 promotional programs, and we had 1 for owner-occupied loans, which are basically the facilities of our small and middle market type business and then home equity loans. And we picked both of those categories to focus on because they are aimed right at the heart of our customer base. We're big bank for small businesses. And so owner-occupied financing their facilities was a primary thing to do. And most of those business owners are our -- do their personal banking with us. So to provide home equity loans to them as well was really attractive. So these 2 programs were not just kind of marginally focused on where we could get a quick hit. They were laser-focused on the heart of our customer base and they have proved to be really successful, again, about 35% to 40% of our loan growth. And then the rest of our growth, we've seen just coming along nicely throughout really all areas of the portfolio. And I think in terms of sustainability, I think there are 2 -- a couple of things that are going to provide good loan growth for the industry and I think for us, too. One is that utilization rates, in general, are kind of at all-time lows, utilization of revolving commitments. And we'll -- we are starting to see those utilization rates increase. Happy to talk about that more if you want to go down that trail. But we're starting to see some increases there, but there's a lot of room for that just to contribute organic growth. And then secondly, there's going to be a rebuilding of inventories unlike we've ever seen. And I think that's going to contribute to loan growth because those are big dollars unlike any period we can remember because the main way that companies, small businesses, created liquidity and cash in the short term is as the revenues declined, they yanked way back on their receivables and their inventories to create liquidity. So inventories are at an all-time low. And with the supply chain issues, they've had a hard time rebuilding. So I think we're going to see a really solid contribution from just fundamental inventory build in our economy. And I think we'll see that in our loan growth, too.

Yes. Yes. So what needs to happen in the economy for your utilization to get back to where it was pre-pandemic?

It's a great question. We -- it's really the $64 (sic) [ $64,000 ] question probably. There's been tremendous liquidity put into the banking system. Deposits are up 30-plus percent for the industry since the end of 2019. Our deposits are up more than that, about 6, 7 points better than the industry. And so there's tremendous liquidity. You've seen that. It's in the business environment, it's in -- it's with consumers. And so there's a debate as to whether that cash has to be spent before people start borrowing on their lines of credit. The answer is, I don't have a clue. But -- and neither does anybody else, okay? But I will tell you there is some historical precedents for this, and we can all remember it. In the great recession of 2008, 2009, there was a tremendous increase in liquidity in the banking environment, huge increase in deposits. And that -- those balances never came back out of the economy. They never came back out of the banking industry. So I think what happened then is businesses just had new levels of liquidity or they returned capital to their shareholders, whether they were privately held or publicly held. And they just started borrowing again, short term and long term. They just kept that liquidity kind of off to the side. I think that's -- I actually do think that's what we're going to see this time. Small business owners, private companies, public companies, they'll find a way to push that cash to the side. And they'll go back to utilizing their lines of credit and they'll borrow for capital. And I think we'll see it to a certain degree like we saw it after '08, '09.

Okay. Okay. We'll talk more about deposits in a minute. But on the lending side, let's talk energy and lending for a bit. It's kind of been out of focus for a while, but now it's back in the focus, and everyone is asking about it. So what is Zions' appetite to grow that portfolio? And with the price of oil moving higher, does that change how you think about that business?

Yes. We've been in the energy industry for decades. We don't lean all the way in when it's great. We don't lean all the way out when it's not so great. And it's an industry that has volatility. And so your underwriting has to be built for that volatility and ours is and has been. And so we, at our peak, prior to the 2014, '15 oil and gas price volatility, we had about $3 billion in outstandings. Those outstandings in our energy portfolio are now about $2 billion. So we -- and utilization rates are particularly low there. Particularly on the reserve, about half of our portfolio is reserve-based lending, where you're lending against oil and gas reserves specifically. About 35% is what we call midstream, which is financing the pipelines that get oil and gas to the market, and then less than 15% now is oilfield services. So I think what we're going to see -- we're seeing good underwriting opportunities in the upstream business, this reserve-based lending, 50% of our portfolio. And I think we're going to see utilization go up there, fairly robustly, and we'll see new underwriting. The other important thing that's going on in the energy financing business is that after the last 2 years, the number of banks financing energy companies has dropped by probably half globally. We've been one of the leading energy banks in the country, again, for decades, and we're viewed that way. And the number of competitors has dropped literally by half, in some product areas by more than that. So the underwriting credit metrics, if you will, what we underwrite to have gotten better. And the pricing has gotten better than we've ever seen in our history of doing this. So I think we will see growth. It will be greater utilization of our lines of credit plus new financings. And those -- the credit related to those -- the credit metrics related to those opportunities are better than they have been ever. And the pricing is better than it has been ever. So I think it should be a positive spot for us, but we're not going to -- I suppose we could just dive in head first, but that's never been the way we do business. And so we're going to be conservative as we always have been. Certainly mindful of the environmental issues, but our economy is going to need fossil fuels for many years to come. And as a bank, we have an obligation to participate in that.

Sure. Okay. On the deposit side of things, you talked about the strong growth that Zions has had and even relatively strong to your peers. And you kind of mentioned you think these deposits are going to be sticky. So I guess then, maybe the question comes now is can you -- can Zions grow deposits in 2022 if we're in a rising rate environment?

Right. We -- well, I do think rates are going to rise. That's not a difficult bet at this point. And -- but what you saw in the last rate increase is that our deposits were stickier than most of our competitors. Our deposit beta was more favorable to the rest of the industry. And the reason for that is, again, it gets back to the way we do business, that the vast majority of our customers are small and medium-sized businesses. So this industry-leading deposit mix that we've had for decades. Demand deposits, noninterest-bearing deposits divided by total deposits. Industry-leading mix. It is not by accident. It's a direct reflection of the customers we do business with. And because these small- and medium-sized businesses, they may have an operating account of $50,000 or $100,000 or $25,000. And those business owners are not sitting around trying to figure out how to get another 0.25% or 10 basis points on their deposits. They're focused on the top line. They may have a 20% to 40% gross profit margin, they're trying to drive revenue. They really aren't thinking about their -- and they shouldn't be overly managing their short-term deposits. So that's why our deposits are stickier. That's why they have been historically. I think they will be in this next cycle, too. And in terms of deposit growth, I mean, we've had this extraordinary growth. I don't think it's going to continue, but I do think we will probably stay very consistent with our historical deposit growth, which is kind of a 3%, 4%, 5% number, and we can fund our business rate at that level. But it's really based on what our customers are doing. And I -- so I think we will see deposit growth, but I think it will be modest. And they could even go down. I don't -- if they were flat to down this year, we wouldn't be disappointed about that. That's just what the economy is doing. But I think longer term, we'll see that deposit growth. It's been interesting, though, to see the growth, this growth, shareholders should be encouraged by the fact that it's directly related to what we do. 75% of it has come from the businesses that we bank. But interestingly, of the success we had with the Paycheck Protection Program, the PPP loan program, where we outperformed the industry by 3x in terms of our pound for pound origination of those loans. Those customers, those 77,000 loans that we made, it was about 58,000 customers and new-to-bank customers. They contributed 1/3 of this deposit growth, which is kind of cool when you think that, that initiative to support businesses in our markets served as a lifeline for those. And they've now increased their liquidity, both as a result of the loans, but also on their own. And it's represented about 1/3 of this deposit growth we've seen since December of '19.

Yes. So even prior to the pandemic, Zions was a big SBA lender. When the PPP program came out, and you guys obviously knew what you were doing, took advantage of it. What is it that Zions did so much differently to gain some market share through that program?

Yes. I'll tell you what I was a -- you're nice to ask about it because it's now kind of becoming a distant memory, but it's had a huge impact on our company. And to say we knew what we were doing, I'd like to say, yes, we knew what we were doing, but we really didn't. And we figured it out. I mean that was the thing about April of 2020. Nobody really knew what they were doing, okay? The government didn't know what they were doing. That program was launched on a Friday and the final writings of the program were completed on Thursday. So to say anybody knew what they were doing was kind of -- would be a stretch. But it's one of the great stories about our company, sort of the nimbleness that we have, the entrepreneurial spirit that we have because we had a group that was meeting all day long, every day for about 60 days. And literally, in about 10 days, put together a collection of technologies that we had never put together before in terms of creating a portal for our customers to apply, to decision their loans, to run it through our loan operations group and ultimately fund, all in 1 streamlined process. But it was about 3 technologies that had to be put together that had never been put together before. And our folks figured it out. And the key thing was -- and this is what differentiated us, I think, from the rest of the industry, and allowed us to produce really 3x our relevant size in terms of these loans, is we put about 1,500 to 2,000 bankers on the front end of this. So if you were one of our 77,000 PPP borrowers, you talked to a human being on the front end, throughout and at the closing. And so I think a lot of our global bank competitors, they figured out the technology but they didn't really figure out how to put people on the front end. Our smaller bank competitors figured out how to put the people in the process, but they couldn't really figure out the technology. These are generalizations, but I think generally speaking, this is accurate. And we were able to do both. And I credit Harris Simmons with -- our CEO, with the idea of getting our 1,500 to 2,000 bankers on the front end. I'll never forget a conversation we had very late on a Tuesday night. And we had gone through about Plan A, B, C in terms of trying to iterate to make this whole thing work. And I affectionately refer to this as Plan H. It was the Harris plan. When he said, Scott, we just -- we got to get our bankers in the front end of this. And the next morning, we did and off we went. 2,000 bankers on the front end of this thing. It was really cool.

Yes. Okay. Back to deposits, there's a lot talking -- a lot of talk about deposit betas in a rising rate environment. And how aggressive do you think you have to be to keep up with the rate hikes? Assuming we get what the forward curve is telling us, how quickly do you need to follow that up on the deposit side with the rates there?

Yes. I -- for us, where -- again, back to our deposit base, so much of it is business operating accounts. I -- we are certainly going to be competitive. I mean we've got 860,000 consumers, so we will absolutely be competitive. But I don't think we have to lead the way. If we were in the mass consumer business where the competition is, it just comes from every direction. I think we would have a lot of risk from a rate sensitivity standpoint. I don't think that is true when you bank the kinds of businesses that we do. It's not that we don't have to pay them more. They don't -- sure, they want more. But I think, generally, the betas will be more favorable than in the consumer business, in general. And so we'll see rates go up on the deposit pricing side, but I think we'll fare well. And shareholders can look at previous interest rate periods and see that our deposit base has acted pretty similar during periods of rising rates. And I -- people are worried about will the economy be able to withstand higher short-term interest rates. Every business owner or CEO that I know has been operating for decades. And these intensely low interest rates we've had recently and then since the '08, '09 downturn, they're almost laughable. I mean, the business environment is ready for higher interest rates. You can do business at interest rates 300 to 400 basis points higher than this on the short end. So I just don't -- I think the idea that somehow it's going to slow the economy down, I think people don't really understand long term, the kind of interest rates the businesses are able to operate with.

Okay. Zions, when you look at the bank internally, you've got in the fourth quarter, maybe 15-plus percent of your earning assets were cash, essentially. How quickly does the bank want to invest that? And what can you invest in today? Obviously, you have some loan growth, but when you think about the securities portfolio, what type of yields can you get today?

Well, the yields -- the yields today are...

Probably about 2.25%.

About 2.25%. Yes. And we're not -- our duration is pretty short. It's always been kind of a 3- to 4- to 5-year duration. And so...

About a 3-year duration on the securities portfolio, just under 2 years on the loan portfolio. So total earnings assets is probably something -- including the cash, it's somewhere around 2.5 years at the very most [ for the whole ] portfolio.

But when you think about $20-plus billion growth in deposits over the last 2 years, we -- we're considered one of the most asset-sensitive banks. We're poised for rising interest rates. We didn't intentionally try to get there, but when you have deposit growth that's that significant in that short period of time, you've got to be careful how you invest it longer term. I think we do believe that most of these deposits are going to stay. And so, you've seen us continue to increase our securities portfolio and our use of swaps. But we still are very asset sensitive. And I think that's a good thing. I mean we're going to go into a period of rising rates here. And about 65% of our loan portfolio reprices in the next year, the vast majority of that is in the first 3 months. So depending on what the Fed ends up doing, we're poised for rising rates. But you'll see us continue to build our securities portfolio also.

Sure. Sure. Okay.

Dave, we've been pushing pretty aggressively to try to invest those -- that cash into securities over the last 6 months, maybe 9. We've been trying to be very aggressive. The problem has been actually on the deposit side, is that deposits have been growing far faster than we had expected. And you mentioned it or Scott mentioned that we've grown -- deposit growth has been 7 percentage points more than the industry. So we're doing something right. I have a lot of ideas as to what we're doing, right? Greenwich recently gave us second best performance out of all the banks in the whole industry for all the things that we're doing right. So -- but it's resulted in a very -- it's a first-class problem or first world problem, as they say. We've had this huge -- we thought, well, maybe if we invest $1 billion this quarter, we'll kind of catch up and then we'd have $1.5 billion of deposit growth. Okay. Well, let's try $3 billion this quarter. And then we'd have $4 billion worth of deposit growth. That's what we've been chasing. So we feel very comfortable. We look at the quality of the deposits that are coming in, and we do believe that they will be sticky. Last point I'd make on deposits is that even when the Fed tightened last time, quantitative tightening, they shrank their balance sheet by $500 billion, a little bit more than $500 billion. Money supply, which is what drives deposit growth for the whole United States, money supply grew by $1.2 trillion during that period of time. Deposits grew while the Fed was tightening. It's not a foregone conclusion that just because the Fed is going to tighten $1 million to $2 trillion that deposits are going to shrink. That would be a good MythBusters topic.

Yes. Well, you mentioned the Greenwich surveys. And if you look at that, those surveys, you'll see that Zions scores very well, even compared to the biggest banks on some of the digital capabilities. Maybe talk a little bit about future core, what that has done for the bank, how it's provided you with some opportunities to compete better.

Yes. And not to dwell too much on this Greenwich thing, but it is -- they are the gold standard for bank-customer satisfaction ratings. And as James noted, we finished second of all the banks in the country this last year for ratings from small businesses and middle market businesses. We actually finished first in 2015. And over this -- since they started this in 2009, we're 1 of 4 banks, the only 1 in our markets that has consistently had over 15 -- averaged over 15 of these excellence awards a year. So it's great to see that. And they -- what they, basically -- their highest level of awards, their brand awards are given for -- in both middle market and small business for a bank that you can trust, a bank values long-term relationship and ease of doing business. And we won those 3 brand awards, the only 3 that they have for both small business and middle market. And so when you describe even against our global bank competitors, it is our global bank competitors that I think the comparison is most important because in any of our markets, they represent 55% to 65% of the deposits. So it's important that we compare well there. And on the digital front, interestingly, you wouldn't think that a large regional bank like us would compare that favorably to globals on anything digital. Well, in fact, we do, at least among -- in the minds of our business customers. So this future core project, to put it in perspective, every bank you own in the United States, every bank in the United States is sitting on 30- to 40-year-old loan and deposit systems. And everybody kind of laughs. I've never -- in all the public presentations I've made, I've never had a CEO come up to me and say, "Scott, you can't say that. It's just not true." They know it's true, okay? Literally, every bank in the country, their loan, core loan and deposit systems are 30 to 40 years old. Around the world, about 300 banks around the world, outside of the United States, have gone to new more modern cores, what are called -- where the U.S. industry operates on, what's called Generation 1 cores. Most of the world -- 300 banks in the world have now gone in these generation 2 cores. And it just hasn't been done in the United States. We are -- in the first half of '23, we'll roll out the third phase, which is our deposits -- the deposits release. We've already replaced our core loan systems as of February of '19. And so virtually all of our loans, not all but virtually all, are on this new modern core. There's not another bank in the country that can say that. And we'll have our deposits on the same core platform in the first half of next year. Why does it matter? Okay. Why does it matter? Well, just think about this. First of all, it's real time. And if you close your eyes and just think, what do you need to survive in a digital world? You'd like it to be real time. Okay. The U.S. banking industry mimics real time. It mimics it. It mimics it throughout the day and then reverses out real-time adjustments that are made at night in batch processes. The whole industry does it. We will -- and that's okay, it works. But do you want the complexity of having to mimic real time? We'll be real time. It has significant advantages for our company and for our customers. All of our loans are on 1 data model now. Our deposits will fit into the same data model. We'll have 1 data model for all of our loans, virtually all of our loans and deposits. In a digital world, managing data is the #1 thing. And to be able to work with 1 data model from the core out to the customer is a big advantage. The system is really intuitive. We're not going to have to bolt-on things to the system to make it user-friendly for our employees. It's just native to the application. It has 7-day processing. And you may go, well, is that important? It's not important to the United States today, okay? Loans, deposits don't operate on 7-day processing today. But guess who does? The rest of the world. The rest of the world works with 7-day processing. I think it's unimaginable that it will not come to United States. When it comes, we'll shift our loans and our deposits to 7-day processing, and it will happen like that. It's there. It's ready to go. These are just a few of the advantages in addition to being fully API-enabled. Why is that important? Because as you're plugging in new functionality, new applications that benefit customers, new products, new offerings, the data flows through APIs, okay? Core loan and deposit systems, the 30- to 40-year-old cores were not built -- APIs didn't exist. Now they've been made to operate with APIs, but it's kind of like mimicking batch. Would you rather have it be native to the application? Or would you rather have to have bolted-on the capability? And I think the answer is you'd rather have it native to the application. So it's going to be a big strategic advantage for us.

Yes. Got it. And with that, we have run out of time. I'd love to sit up here and talk for another 20 minutes, but let's take the conversation, we'll go downstairs to [ corridor ] 6. Thank you, everyone, for participating today. And Scott, James, thank you very much for your time.

Thank you.

Thanks.