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

Good morning, everyone. We can start with what James has in the bag here, all the secrets of Zions Bancorporation.

Nuclear codes here.

That's good. Well, thank you guys for being here. From Zions Bancorporation, we have Chairman and CEO, Harris Simmons; and James Abbott, Senior Vice President and Director of Investor Relations. I was telling Harris on the way up here. We have a lot of generalists, believe it or not, that are interested in the space. I think most of you that are in the financials every day understand what Zions is all about. But maybe Harris, a big picture view, describe Zions for us, and then we'll next go into talking about the economy and the company specifically.

Sure. Well, Zions Bancorporation is a regional bank. We operate from kind of across the Western United States, kind of Houston on the west. And celebrating our 150th year in business this year. We have a an operating model that is very -- locally focused. We operate under seven different brand names in local markets. We really try to operate the company like a group of big community banks that are locally managed, locally branded with a lot of back-office kind of consistency in terms of the products, the technology, the risk management, everything kind of behind the scenes, that's highly centralized. And we do that, in part, because we have a very major focus on small to midsized businesses. It's a big part of our business, kind of the sweet spot of our business. It's serving small and midsized businesses. And we think we do that really exceptionally well. We have about 220,000 business clients that provide us with a really fabulous deposit base and opportunities to provide a lot of different kinds of services to them. So that's in a nutshell kind of who we are, about $85 billion to $90 billion in size.

Perfect. 1873. You said 150 years.

1873.

I'd like to see -- Utah, in 1873, probably pretty interesting pictures.

Yes.

So -- well, you mentioned the deposit base, and we'll get into that as well.

But give us kind of an overview of the economy, and maybe it differs a little bit regionally. But the message from a lot of your peers has been it's actually surprisingly resilient?

Yes, we are not seeing sort of signs of a slowdown in activity. I think we -- fundamental economic activity, we're probably seeing -- I think we're starting to see probably some slowing in terms of loan demand. There's more caution out there. But in terms of just the customers' sales, just the activity kind of on the street, you're not feeling it at all. And it's one of the reasons I think probably the Fed has got some more work to do. I mean it's -- so -- and we'll see it. Clearly, we're going to see it in commercial real estate, we're going to see slowing. But it doesn't feel like -- I mean the labor markets are tight enough that I don't think this is going to be an ugly kind of scenario ahead of us.

Yes, it feels different. Yes. Yes, it does feel different. Okay. you've talked about mid-single-digit growth or moderate growth, I believe, is the term. Is that right, James?

Yes.

Yes. What are the key drivers to that? And you talked about a little bit of slowing. It doesn't sound like you're saying massive amounts of slowing, but what are the drivers of that growth? Where do you see the opportunities?

It remains -- it's commercial. It's -- and some consumer. On the consumer side, we're still seeing -- actually pretty good activity for us, at least in the 1-4 family category. These are jumbo arms that we're originating for clients. And -- so we're still seeing activity there. And commercial real estate is going to be reasonably flat. I don't think -- probably it doesn't shrink, but I don't think it probably grows this year.

I'd just add that we've actually got a slide that you normally wouldn't see banks maybe tell the fact that they've been growing very slowly in commercial real estate in the bottom quartile. But it's one of the things that we've spent years really, about over a decade, really trying to keep the growth in commercial real estate very, very muted. And so we do have a slide in our slide deck. It's on our website. It shows that we're one of the slower growers in commercial real estate, which actually may prove to be a benefit for us going through a downturn here, depending on how severe the downturn is.

Yes. There's a good article in the Journal 2 days ago talking about how the recession is always 6 months out. And It feels like it's 6 months out. We'll have to see. But have you tightened underwriting in areas and you've talked about maybe being a little bit more cautious in commercial real estate? Is there anything where you're...

Not fundamentally. What we've tightened is to focus on concentrations. I mean what we've always been -- we've been more disciplined, I think than we've ever been before in terms of how much we will do. And so you end up kind of high grading within that kind of a framework. But it hasn't changed the fundamental underwriting guidelines per se. I think we've actually -- even going back to the financial crisis, underwriting wasn't the issue so much as it was concentrations for us. And so -- I mean where we took a lot of losses was in land and construction, land development construction in markets like Clark County, Nevada. And so that's fundamentally -- I mean it's down to a tiny portion of what we do. But underwriting hasn't been something where we've ever been kind of out on the bleeding edge. One of the things I'd note is our charge-offs average loans have been 75% better than the industry average. The industry over the last 10 years shown about 46 basis points. We run between 11 and 12 basis points. And so I mean that's indicative of both mix, which has changed pretty dramatically from where we were back in 2007. And the fact that underwriting has never been kind of the issue for us.

Yes. We've got, again, a slide in our presentation materials that looks at over a decade. And then we've got to done it by 15 years as well, if you include the global financial crisis, product type by product type. So C&I versus multifamily versus other kinds of commercial real estate versus consumer and so forth. And in no category, not one category, are we worse than the industry median or peer median, I should say. So most categories we're better. And in some cases, we're massively better. But in no category or have we been had worse underwriting or worse performance than the peer median.

Okay. So consistency is the message. All right. How about pricing? The competitive environment, but also you guys have some assets that are levered to higher rates. You talked about the Fed maybe having a little bit more work to do. What are you seeing on asset pricing? What are you seeing on the competitive environment? How are the clients reacting to it?

We've been through a period where there's been so much -- over the past couple of years, this is changing. But over the past couple of years, there's been so much liquidity in the industry that everybody's been looking for earning assets. And it's been -- pricing has been very competitive. My sense is that, that is probably changing as liquidity becomes now topical again. And so -- but what we're seeing is the cause to this is underwriting. And I think the industry is remaining pretty disciplined in terms -- nobody's been sloppy. We're just not seeing that. We've seen pricing pressure, but not terms -- not fundamental underwriting. But I think that we're probably approaching a point where pricing starts to get a little firmer.

But you're getting the pricing?

Yes. And we're getting -- we're not seeing anything like I say, I mean, it has been pretty competitive the last couple of years. Anecdotally, you're always hearing bankers complain about the deal they lost. But I don't -- pricing is okay, and I think probably gets better.

Okay. Competition-wise, it's similar? Consistent?

Yes.

Yes. Okay. Just if you can remind us and maybe James, for you, just the cadence of the asset repricing on the loan book. What does that look like over time? I think it's -- we'll get into funding in a bit, but maybe it's a bit underappreciated, but help us understand the cadence of the loan rate pricing.

Yes. So a fairly substantial portion of our loan book, net of swaps, will reprice in the first several months of this year. And that's just a continual process, right? These are loans that are tied to the short-term indices have been LIBOR is moving to SOFR and other sort of indices that are replacing LIBOR. But I think from a messaging perspective, one of the concerns that I hear at least is, "Oh my gosh, all your loans are going to be done repricing and deposits are going to continue to reprice in 2024 and 2025. And there's -- and that's just going to create a lot of pain." And so what we've done is we've got -- we've presented to investors some materials in our slides that talk about how much of our loan book reprices in 2024. It's about 10%, 12%. Another 10% to 12% reprices in 2025. So there's this ongoing upward benefit of loans resetting in future interest, Future years to offset. Hopefully, deposit repricing in those future years. I agree, by the way, the deposits will probably continue to reprice in 2024 and 2025.

Yes. Okay. And we'll get into -- I know you all want to talk about deposit betas. But if any of you have questions at any point in time, feel free to raise your hand as well, and we'll get to them. Just one more thing on loans. PPP, you're very successful with that. The program's faded, but talk about your success in retaining some of those clients? And how material was that to Zions in general in terms of growth the longer-term growth profile?

Well, so in summary, we did about $10 billion in production, about 77,000 deals. Way above our wage. It was about 1/4 of what Bank of America did, for example. And they tend to be less than a quarter of their size roughly.

Roughly.

Roughly. We brought in about 20,000 new customers. Because from the outset, we said we're going to take all comers. We had -- we said got to open a deposit account. We're going to put the proceeds in that account, and then we've really been fighting to try and turn them into customers. And for the most part, we've succeeded. I mean it we clearly lost some. I expect that we'll end up losing a quarter of them, something like that. But the rest are going to turn into customers. And we've had people -- we made over 100,000, 104,000, to be exact, outbound calls last year to clients, these new ones as well as others, just thanking them for their business and talking about how can we serve you. We're really trying to use that as a point of -- look, let's -- we've been very inwardly focused for the last few years. A lot of systems work. A lot of process change. And we say, okay, this is actually an inflection point. We're going to start really trying to divert all of our energy out towards customers. And that's happening, and I think it's paying dividends in terms of developing these new relationships. And PPP was a great catalyst for this.

Okay. Good. The asset sensitivity and hedging discussion, just to kind of set the table here, just philosophically describe what the goal is whether or not you feel like you've accomplished what you need to accomplish on that? Just help us understand what you're trying to do.

So I'll talk philosophy and James can talk any of the numbers. But philosophically what we're -- we have a naturally asset-sensitive balance sheet. And that's kind of just the small to midsized business focus. We are naturally asset-sensitive. We hedge to try to reduce that sensitivity. We're doing a lot less hedging when interest rates are 0. And as rates move up, we're doing more. And you'll never nail it exactly. But we're -- the idea is that as there becomes more downside risks, as rates coming down, that we want to be less exposed. But we're still somewhat asset-sensitive. And I think have felt that -- yes, that the Fed probably still has another year plus work to do. And so we -- we've been putting on more hedges as we've had some deposit runoff. That's also reduced the asset sensitivity. So it's a combination of hedges and looking at what's happening in the deposit book. But we're trying to manage this to a point where we're probably slightly asset-sensitive would be our kind of natural stance, but we're much less so today than we were 2 years ago.

Yes. that's challenging...

Yes. I mean we talk about deposit betas, all day long, but what are they going to be? There's so much optionality on both sides of a bank's balance sheet that this is -- there's a lot of speculative just kind of estimation that takes place in all of this in terms of how customers will behave. And so we model it out and talk about what we think it's going to look like. The short thing I know for sure is that's not going to be how it actually plays out, but we hope to get pretty close to that. So philosophically, that's kind of where we try to position ourselves.

I think, Jon, what I would add to it is that we did a little bit of a data kind of -- type of analysis of trying to figure out when the Fed is above 3%. At some point, the depositors stopped carrying as much about what they're getting paid on their deposits. And certainly, at zero, people are indifferent whether it's noninterest-bearing, checking account or an interest-bearing account. But above 3%, we said, let's use that as a hypothetical level that customers might care. And what is...

When did you look at this, by the way?

Probably -- we probably first started publishing this 3 to 6 months ago.

Okay.

So we just started saying, "What's our competitive advantage in a higher interest rate environment?" Because one of the concerns is that we hear from investors anyway is, "Oh my gosh, you've got 50% noninterest-bearing deposits." Is the sky going to fall? Is the margin going to completely collapse? If interest rate -- if the demand deposits drain and move into interest-bearing deposits. And we've -- one of the ways that we've approached that is say, "We'll go look at our margin in 2007." 25% of our deposits were in checking accounts, 75% were in interest-bearing accounts and the margin was over 4% -- comfortably over 4%, a lot higher than where it is today. So -- but so we said, look at the funding cost of both total funding costs, which includes borrowings, or just look at deposits. Either approach will give you about a 40 basis point cost of funding advantage for Zions relative to our peer group when the Fed is over 3%. So 40 basis points when 80% of your revenue is spread income, that's actually a quite significant effect on the ROA.

Okay. And if -- so what's different, I guess, today than what you were thinking about 3 months ago in terms of the views on your rate and your margin management and your rate management? Is this higher -- potential for higher rates and mill cuts. Does that impact how you're thinking about this and how you're...

I don't think really. It's -- we've known that because this is a matter of elasticity. And I just kind of -- to James' point, at what point do people start to start to say, "I'm going to move money." And we've known that in the early innings that things are going to be reasonably elastic. And as you get into the later innings, less so. And so we expect -- we fully expect that this wasn't going to be linear. It's going to pick up and put it in and then level off. But I think the thing that is easy to forget that you'll have a lot of deposit repricing. But you also have a lot of deposits that won't put price. And the value of those becomes much greater in a higher rate environment. And so there's that offset -- and so we spend a lot of energy trying to model all of this. And net-net, we think we remain somewhat asset-sensitive. Like I said, not as much as we were a couple of years ago, but don't expect that we're going to be in a position where it's going to be painful. So I'm not concerned about seeing the Fed pick things up a little bit. That shouldn't be -- what you don't -- what we don't want to see is rate hikes that start to really do damage in the real economy. You'd like -- everybody wants to see things slow and get kind of back into equilibrium. But it's not a concern so much about how it affects our rate sensitivity is so much in my mind is how it affects just the real economy.

I know a lot of the faces in this room, and there are a lot of fans. And I think that the consensus is your deposit betas will be lower than a lot of your peers, James, you kind of alluded to, the pricing advantage that you have. And it sounds to me like higher rates don't really bother you. It doesn't -- you don't feel like you need to alter what you're telling us in terms of the outlook. Is that fair?

That's how I feel about it.

I see. Okay. Any follow-ups on betas? Good. You've kind of alluded to it, Harris, the curve inversion, you didn't allude to the curve inversion. But I think we think about the curve inversion of the Fed going higher and impacting credit. Just on the margin curve inversion longer-term impacts on the industry and on your company? Does it bother you that were 100 basis points inverted?

No, not particularly. I think -- look, I mean, yield curve is a group set of bets on what the Fed is going to be doing over the next few years and how the economy responds. And I don't think it -- I mean, the first thing I'd say, I think about this a lot. I went back and looked recently at the average effective Fed funds rate over the course of my lifetime, and it was like 4.63%. And everybody is freaking out today, it's actually could be-- I mean this isn't normal folks unless you're -- if you are kind of a Gen Z type and I've never seen this before. But I mean, we don't want to see 1981 again. So we've had these highs, these lows. I actually think that the world would be a pretty good place if this was kind of a new normal. And because I don't think that rates today are at levels that are doing a lot of damage in the economy I think it's a great environment.

It's been interesting, doesn't it?

Yes. I mean it's just weird to me that across the whole industry, the valuations, a 40-year low relative to the S&P. And it's -- we're actually back into a rate environment where we can all make money and where nobody is really directly concerned about credit. So it's just strange time.

Anything bothering you on credit or anything you worry about?

No, I mean, listen, I think we all worry about -- particularly about office in commercial real estate and what's going to -- how that's going to play out. We have very little in the way of kind of sort of downtown high-rise kind of exposure, which I think is probably going to be where the greatest potential for pain is. But that's going to be -- that's going to play out as leases roll and everybody's kind of rearranging space, et cetera. That, I mean that's the one thing that I think we kind of get -- that we are concerned about. Our total office exposure is about $2 billion. But so far, we're not seeing -- we are not seeing stress in it. But we know that, that's probably a storm that's still out there.

And I would guess your style was not a lot of downtown office?

Yes. So it's almost no downtown office exposure.

Okay. A little bit on capital and buyback. You've had a small buyback. James, I was out with you and Scott, in December, and it's kind of this AOCI buyback, , whatever you want to call it. What's the philosophy today on capital? And how do you think about the AOCI marks? Because I think they'll call it rear their ugly head, again, like they did 2 quarters ago at this time.

Maybe I'll just kick it off with the concept of we moved about half of the securities portfolio into held to maturity with the design or the design behind it was to protect against higher interest rates if they were to happen.

After 10 years, you came down?

And of course, we lapped a little bit. We said as soon as we do this, we'll know that we've top-ticked the market and the yields were down. And they did. And now after yesterday, I'm actually really glad that we did what we did. But we moved about 2/3 or close to 70% of the risk of AOCI exposure into that held to maturity bucket. So even though we only do about half the securities portfolio, we moved the longer duration portion of the securities portfolio, that's helpful. So we did protect ourselves against something like what we are seeing at the moment.

I've just finished writing a shareholder letter, and I write about this, spoiler alert. Because I talk around our company about GAAP accounting and banking is -- I liken it to a Picasso painting. -- where you've got one year that's kind of this size and the other is this -- and so there's -- you can kind of see in this abstraction a face, but it's not the symmetrical face that the vendor was looking at. The fact of the matter is, I mean, what's weird is you got this distinction between accounting and available for sale, held to maturity, how it hits capital -- GAAP capital, at least -- and it doesn't -- but nowhere is there any reflection of what it's doing in the value of your core deposits. I mean, which is actually expanding margins, delivering more actually cash to investors. And so it's one of those things I think you have to kind of look through. And I'd be looking at -- first of all, you have to look at the marks in held to maturity as well as available for sale to make sense of anything. And then you have to ask -- and what is -- and let's talk about the liability side and how is the interest rate environment impacting the value of liabilities. And when you do all of that, I think what you -- again, you come back to the conclusion, I do that this is actually a fabulous time in banking. And it's not reflected in AOCI and it's kind of the GAAP accounting, you have to kind of work through that. So -- we also have to recognize that it's one of those things that some people will talk about. You have to kind of pay attention to it. but it shouldn't logically be kind of what drives you. And so we continue -- our real focus is on CET1. We think that with the possibility of recession, we'd like to see that number up closer to 10 or 10, maybe a little over 10. I think that will happen very naturally here over the next couple of quarters as income remains pretty robust, and loan demand probably slows a little bit. I think we're probably back in a position where we can like to hope that we could accelerate some buybacks.

Okay. Okay. And clearly, no issue with your regulatory agencies because you've been doing it, right? So they're not paying attention as much to AOCI either?

I mean I think they're looking -- I think they look at it because they think all of you are looking at it -- and so we all you have to be kind of mindful of it. But I think anybody is looking at this intelligently I mean you get a lot of people who probably don't understand what I've just talked about. But if you think about the economics of what's actually happening in banking, I don't think there's any concern -- any reason to be concerned about our capital or a dozen other large banks who are south and where we are in terms of the GAAP number.

Yes. Okay. Well, in summary, moderating loan growth, but still decent activity and coming off of a strong year. No real concerns on credit, maybe an acceleration of the buyback at some point. Getting to the bottom of the margin and deposit betas, I'd probably give myself a C+ B- to getting to the bottom of it. But I think you're basically saying -- it may pick up, but it's nothing that you're alarmed about, and you still see an advantage relative to peers. But you're not signaling any kind of change in what you're thinking on deposit betas. Is that all fair?

I think at the end of the day, if you look at a bank and say, what kind of you get out of the kind of the mathematical mindset and say, "Let's talk about what kind of franchise they have. How are they funding themselves? Do they have -- if you take securities, less borrowings, I mean do they have a liquidity? Are they up against the wall? Or is this a franchise that has a lot of core deposit funding?" I think that's going to be a more prominent theme, and I think we're in pretty good shape.

Okay. Good. Well, thank you for being here guys. I really appreciate it.

Thank you.

Good luck today with the conversations. Thank you.