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

Right up. Next up, I'm very pleased to have the Zions Bancorp with us from the company, Harris Simmons, Chairman and CEO. There is a slide deck that they put out this morning. I haven't seen it, and we're not going to go through it, but definitely feel free to look at it. There's usually a lot of good information in there.

Harris, maybe we'll start big picture. Zions is obviously Western U.S. focused, very kind of, I would say, a leader in small business lending. Maybe just talk to kind of what you're hearing, seeing from your customers. It's obviously a high interest rate, moderating inflation, economic uncertainty type backdrop that seems to be evolving each day. So any thoughts you can provide would be helpful.

I'd start by saying the markets in which we operate, which are kind of Texas on the West -- Southwest, Northwest up the Intermountain region. The economy is in pretty healthy shape. But we certainly feel kind of evidence of slowing. We're seeing that in -- we see it in the labor market. I think a lot of us are feeling that. We're seeing it in turnover in our own company. I'm hearing that from customers that where it used to be really tough to fill jobs it's getting a little easier. We're seeing it in kind of evidence of slowing in -- certainly in loan demand, which has been pretty tepid. We see it in multifamily projects. They are leasing up, but they're leasing up probably a little more slow even than had been expected at the outset. And so it feels -- I'm talking to customers, they -- I think a lot of customers have arrived at this point with pretty strong balance sheets. And so that's kind of helping in terms of kind of dampening loan demand. So that's kind of a high level kind of what I'm seeing and hearing. But nonetheless, everything is going pretty well. We're not really seeing credit cracks developing that are causing any concern.

Helpful. Maybe we do put the first ARS question, which I was asking this for all the companies. Loan demand it certainly feels like it's been relatively soft, at least from some of the commentary thus far. Just any thoughts to kind of what you're seeing? And what you think maybe needs to happen to accelerate that is at lower rates? Is it getting to the election? Is it a confirmation that we can actually achieve a soft landing here? Just any more color you could provide.

Yes. No, I think -- I think if we get through the election and have some certainty in terms of what policy is going to be, not only from the administration, but from Congress, that's -- I think that's going to be very helpful. That lower rates will help marginally, but I don't think that's been the impediment. I think it's really just getting business owners comfortable that the next 2 or 3 years, they can kind of see what that looks like and feeling like it's a good time to actually start expanding again. I think there's a lot of -- been a lot of uncertainty coming out of the pandemic, and it's getting beyond that and getting back to some kind of semblance of normalcy. So yes, I think that's the recipe for it.

Got it. And maybe we'll go to the next ARS question and just maybe kind of shift to the other side of the balance sheet with respect to deposits. In terms of maybe just kind of cool, what you're seeing, we've seen kind of sluggish deposits throughout the industry, kind of a shift out of the interest-bearing into -- sorry, at a noninterest-bearing, interest-bearing deposit costs have been kind of going up at a slowing pace. Just maybe any context you could provide there?

Yes. I mean deposits -- clearly, the Silicon Valley in the events of last -- a year ago this past spring was just a total kind of grenade into the pudding that really unsettled depositors. It created a reaction where we were -- where large depositors were kind of taking flight, shooting first and asking questions later kind of environment. And I think certainly, some of us were scrambling probably maybe even overreacting a little bit in terms of paying up. We'd induced a lot of larger depositors to take funds off balance sheet and the money market sweeps. We are calling them back up and saying, "hey would like to get that get your deposit back, and we're paying a full market rate to do it." And I think there's been a lot of healing that's taken place since then, everybody's calm down. But that healing takes time. And so in our case, we've had interest-bearing deposit costs a little lower than our peer group and the demand deposits sort have consistently been stronger than peer as a percentage of total deposits. We're -- in the wake of Silicon Valley interest-bearing deposit costs, we've been north of peer. We're working to get that back into shape. So we've made a lot of progress. We continue to see improvements in the margin quarter-to-quarter and expect that will continue. The demand deposit migration has really decelerated. And I think that's going to be pretty manageable. I expect that that's -- it's got a little ways to go, but particularly in a down rate environment that will really slow and be a benefit. There's still opportunity to bring rates high. I expect that the beta on -- this market rate money is going to adjust very quickly. Probably the beta on the way down is going to be somewhat symmetrical what it was on the way up. That's kind of my best guess.

And when you kind of think about maybe loans and deposits together, you have kind of run the separate brands across each of the main regions. Kind of -- any kind of noticeable differences I mean the loan growth, deposit growth with a different segment if you look at it?

Yes. I mean -- and we price in each market on the deposit side, in particular, it's very localized. We've seen probably the most pricing pressure on the deposit side, it's been more a function of the composition of deposits in each market. So in Houston, where we've -- we tend to have larger clients there than a place like Phoenix, we've seen more deposit pricing pressure. But I don't think it's inherent in the market. I think it's been -- it's really a function of the kind of customers we have in each market. I mentioned Phoenix, Arizona, has actually been a very good market for us in terms of being able to kind of have price discipline on the deposit side. California has -- Utah has been pretty good. Colorado, Texas have been probably a little more expensive.

Helpful. And maybe kind of tying the 2 together from a net interest income, net interest margin expansion. You guys -- I guess, your net interest income appears to have troughed in the fourth quarter because one of the few banks that have growth in both the first and second quarters of this year as the kind of the NIM trended higher. When you talk to how you see that playing out. We've had some banks kind of got up near [indiscernible] some guys -- banks guide down, some banks more optimistic on next year, some banks less optimistic. Can we just talk to how you kind of think about managing the balance sheet in this evolving rate backdrop?

Yes. I mean I think there's still room for improvement in the net interest margin, and I would generally expect that to happen over the course of the next year. I expect that we'll see -- and again, it's kind of this process of what I think of this process of healing in the wake of what happened last year in the industry, and particularly hit kind of banks in the Western portion of the country, I think, maybe a little harder. And so yes, there's still room there. And I think prior to what happened in spring of last year, we've had -- our beta was really well contained. We had kind of one of the better betas in a rising rate environment that changed overnight. But as it heals, I expect that we'll get back to having a -- the deposit base that we have is a really good one, and I expect that, that will start -- will increasingly show as we move away from the events of last year. I think for us, there's -- there will also be a summary mix of the composition of the loan portfolio. We've seen growth has come probably more than in hindsight. I have -- you said it was a good idea in terms of growth in the 1- to 4-family portfolio. Our strategy there is to move toward more of an originate and sell kind of model and reduce the use of the balance sheet. And that combined with what I expect will be a continued growth in the proportion of the loan portfolio that is in small and midsized business lending, I think will also be helpful to the margin.

Great. We've got the next ARS question. I guess you talked to kind of the latent versus kind of emerging kind of asset sensitivity. It seems like latent kind of is a benefit and emerging is a drag kind of a future impact of rates. I mean, I guess, how confident are you that you kind of will capture the kind of that latent asset sensitivity as a way to kind of lock that in?

Well, the disclosure we've provided anybody who's got our slides here, Slide 12 shows what kind of disaggregates what Jason is talking about here. I mean it reflects our best assessment of what the next year was going to look like as of June 30. I don't think that's changed a lot. I mean, the prospect of rate cuts is certainly more real today than it was then, but it was -- I don't think it's really going to fundamentally change our assessment of being able to capture a lot of that latent as we call it revenue that is sort of baked in. And the -- if anything, in a falling rate environment, I think the assumptions about demand deposit migration probably improve a little bit. So I'm reasonably tangent about continued path of improvement to the margin.

Got it. The room seems to think you have some upside as well. Maybe shifting gears to the fee income side. I feel like that's something you've always kind of been trying to grow as a proportion of revenue. Just maybe talk to kind of where you are on that capital market seems to be more of a focus of late and just kind of what you're doing to move the revenues.

I mean capital markets has been a focus. We've got some really good people. We've got a really good team that we put together. And I mean we've been involved in a lot of kind of elements. We're really -- we put them together into a business that's really starting to work well. We have a very commercially oriented portfolio. A lot of it is kind of towards small business, but out of those come some really great companies that over time, turn into larger businesses that you have really strong relationships with where we've been banking them for generations literally. And we're finding opportunities in capital markets that are really exciting to me. Wealth Management is another business where we would really operated as a collection of community banks and none of them really had the strong wealth management capabilities. That has really changed over the last decade, and we've got a really good wealth management business that I think there's a lot of growth potential in. We -- I think we're helped by the fact that we're not as reliant on consumer fee income, which is certainly been under attack. So to the extent there's -- there are headwinds there, I think that's less an issue for us than it is for some. But those are a couple of the areas where I see fee income growing. And then another one is going to be mortgage banking just because I think we'll probably see more kind of gain on sale kind of activity in that book. So those are some of the principal areas we're working on.

And then maybe on the expense side, Zions has kind of been running in the kind of the mid-60s type percent efficiency ratio? I guess kind of where do you kind of see the company running longer term? I know last year, you kind of announced more of expense program to some severance charges. Just kind of where are you with respect to the cost base?

Yes. So our head count in terms of full-time equivalent employees is down about 4% from what it was mid-'23. So that's helping. The efficiency ratio is not where we want it, but it's -- a lot of that is -- it's as much a revenue issue as it is an expense issue. Our expense growth has actually been pretty well contained for the last several years. And if you look at kind of expenses all kind of how you measure things in part. And if you look at expenses to assets, we actually look pretty good. It's asset yields interest-bearing deposit cost is where a lot of the issue is for us. And that's why kind of this continued margin healing is an important part of our story. I think there's still -- I mean there's still opportunities -- absolutely, opportunities we're pursuing on the expense front that I think are going to keep expenses pretty contained in the coming year. And structurally, I think there are opportunities. We completed the conversion of all of our core deposit loan systems as they have projects been underway for the last decade and really completed that in July. And so that removes some pressure going into next year. I mean, we'll move on to other projects, et cetera, but the -- that's crowded out some other things that we've wanted to do. It gives us a lot of kind of freedom to be able to manage that number as we get into next year. So I'm basically pretty sanguine that expenses are going to be really well controlled next year.

You referenced the future core transition being completed in July. Maybe just -- I'm not sure everyone in the room is kind of familiar with kind of what that allows you to do maybe talk to what other banks -- I mean, how many banks have actually made that journey? Or where is the industry -- that journey is really helpful as well?

Well, core systems are -- they are really the workhorses of your technology stack. I mean you have lots of applications, front-end applications, customer-facing stuff, applications that are helping with compliance, all kinds of things. But the workhorses is your core deposit and your core loan systems where transactions are processed where you store customer balances where payments are processed and recorded systems of record. They become kind of a -- almost like a mainframe kind of if I use an analogy, I mean that's -- it is the central repository for much of what goes on in a bank. Most all of the industry is on very old technology that dates back 30 and 40 years in terms of their core systems. And we found ourselves in a situation and are looking ahead, we could see that our deposit system was going to be end of life, end of support coming into a couple of years ago. And made the decision over a decade ago that we were going to move to an integrated system, one of the frustrations that we've had is -- what I had over time is that you buy a solution from a vendor and the vendor is sold to a private equity firm who flips it after about 2 or 3 flips of the ownership of your vendor, it's been milked of any kind of support, becomes end of life, you're back looking for a new system. We selected TCS, Tata Consultancy Services, out of India as our vendor. -- by the way, just -- I mean it's a phenomenal company. This is a company that has -- I was visiting with a North American CEO recently. They have in TCS 600,000 employees, 500,000 of them are engineers. They are the largest employer of engineers in the world. They hire 60,000 software engineers every year. And this is a company that isn't going away. They're going to be there for a very, very long time. They've got a very big installed base globally. This was their first installation, what's called the banks platform here in the United States, and we're loving it. Our people love it. And the benefits of it have been -- so anyway, we're -- I think there have been other pieces of cores that have been replaced around the industry. To my knowledge, we are the most extensive core system replacement that's taking place among any of the larger companies in the industry over the last decade. It gives us the ability to process in real time. It gives us the ability to process 7 days a week. If and when the United States were to move to that kind of a standard, it gives us something that's API-enabled, that is being invested in all the time by the vendor. A lot of the benefit of it has come along the way because it really forced us to deal with a lot of kind of house cleaning issues, simplifying our product set, deposit products, loan products. It creates a huge focus on data. It creates a single data model for both loans and deposits that as we started into this, nobody certainly was thinking about AI. But as we think about AI use cases, having data that is clean, that is universally defined the same across various systems becomes a -- we think, it's going to be a really significant advantage to us in being able to employ third-party solutions. In some cases, moving things into the cloud, using Google and Microsoft and other big tech vendor solutions, but doing it kind of off-the-shelf data that's actually cleaned up. So those are some of the advantages. It's giving us the ability to much easier to serve customers and branches and contact centers where it used to be that an employee had to learn several different systems and green screens, and it's now a single interface, it's a point-and-click and so training costs, things like that. We think it's going to create a lot of sort of benefits that -- some of which I'm not sure we fully understand yet, but those are some of them.

Helpful. And then is there -- we're going to quantify maybe an expense or revenue impact?

Yes. I mean it's -- much of the run rate is -- first of all, the cost has been kind of just roughly equally split between costs were capitalized and costs were expensed along the way. But the capitalized cost will start to come down. It's not a meaningful number in the next year, but it's -- it starts to come down because parts of this, we put into service 5 or 6 years ago with some of the loan systems. I think fundamentally, the tech spend in the company, I expect, is going to be reasonably flat because even though some of this spending is coming down, we're moving on to other things. So tech spend will always be with us. But that the -- it gives us probably more optionality than we've had to address other needs or to pull back if we had to. So...

And I guess, obviously, FutureCore is a big focus now that that's kind of done. Are there other kind of areas of investment you now have the ability to focus on that maybe you didn't get much attention to in the past?

Yes. I mean we -- a couple of areas of focus are -- we're creating -- we use Salesforce as a customer relationship management platform. I expect we're going to be maybe the only larger bank in the industry that's using a single instance of Salesforce for every use case. A lot of focus on kind of simplifying our environment. We are working on the replacement of kind of the front end of our commercial lending process to make it easier, quicker for bankers to get deals done and to address customer needs. Those are a couple of kind of top of my mind, 360 review of customers with FutureCore done, that becomes a much easier task now to give anybody who's talking to the customer the full picture of what they're doing, deposits, loans, wealth management, et cetera. And so getting that kind of reporting completed, those are some of the current imperatives.

Got it. And maybe we will put up the next ARS question as we shift to credit quality. I guess, looking at second quarter results, criticized assets increased on multifamily, classified increase to a bunch of different pockets of C&I. Maybe just kind of talk to where we are.

Yes. The first thing I think you're seeing -- I mentioned multifamily is -- we're seeing kind of pockets of slower lease up. You're going to see probably some continued migration into criticized classified. I don't expect you're going to see a lot of movement in nonaccrual. And I think it's useful to look at the gap between those and see how they're changing because the -- there's a lot of focus on credit by banks, by regulators and trying to find and address problems quickly. And -- but that said, the extent we're seeing problems emerging and particularly in real estate, including office, we're not seeing it really translate into loss. I think it's fundamentally underestimated how different this industry is post Dodd-Frank from what it was pre-Dodd Frank. In terms of -- in many ways in terms of the operational controls that are in place, financial controls, and certainly credit, including concentration -- focus on concentrations around the industry. And we unlike prior to the financial crisis, 15 years ago -- for you -- I did hear about kind of irresponsible conduct by some -- this bank or that, I just don't -- I haven't heard that in the last several years. I -- so I -- it's kind of an advertisement maybe to the industry. I think the industry generally is just in much better shape to deal with the downturn that it's ever been. For us, I think net charge-offs remain very moderate over the course of the next year from everything I can see today, unless the landing is harder than we think it's going to be. And I -- we're not seeing -- we're just not seeing nonaccrual loan totals moving even as we identify problems, what it's doing is actually allowing us -- by the way, I think there's been a lot of discussion. I'm interesting to see how much has been written about kind of a way for a wall of maturities coming in, in like the office. And that isn't all a bad thing. That's actually what brings a borrower to the table and allows you to have a conversation about we need you to remargin, we need you to write a check and doing it while they still have a lot of equity in the deal. So I think good credit people look at that as an opportunity and not as a risk that is one of the ways you actually continue to strengthen your portfolio. And so that's kind of what I see happening. We're seeing that sponsors are stepping up that everybody is playing pretty well. So I think it's going to be a reasonably benign year ahead of us.

So -- all right. So maybe upper pressure to criticized and classified, but NPAs not much movement. And I mean, charge-offs, I know they increased 6 basis points last quarter, but to an industry low 10 basis points, and you kind of feel like credit still remains benign?

Yes. Yes.

I mean one of the things we had bank yesterday said he thought we were in the first inning of this office cycle. And look, you have $1.9 billion in office exposure. Your reserve is 3.8%. So that's well below some of your peers, which some people could say is a bad thing. Others could say, well, maybe it's a better quality portfolio. Maybe you can maybe talk to kind of what differentiates your office exposure needs to be maybe some of these other banks?

Well, I'd start with the fact that the average size deal is about $4 million. And we just don't have -- we have virtually no exposure to kind of the downtown trophy office building kind of -- when people think about office, they tend to think about Midtown Manhattan, and they're not thinking about an office park in Provo, Utah. And there's a world of difference between the 2. There's actually something that would be interesting for some of you. If you Google this, you'll find it. The St. Louis Fed published a study about 2 or 3 months ago, that on the default rates of office building loans for different sizes of office buildings. And it's very demonstrable in terms of the difference between kind of large trophy properties and smaller properties. What we're seeing is that rents are actually stabilizing and even strengthening in many places with respect to the office market and so we've done a lot of -- you imagine because this has been such a focus coming through the portfolio, we're just -- we're very comfortable with what's there. And if I look back over the last 3 years and it was a $2 billion portfolio, it's shrinking, amortizing, et cetera. But we've had less than $15 million in charge-offs over the last 3 years in that portfolio. And I think that's -- we're talking about reserves, you don't just reflexively just put a big number on the wall. You actually go through and you think about it and you analyze it and look at what you have and how it's performing, where the tenants are or when the leases are coming due. And that -- anyway, the reserve is a reflection of what we see.

Got it. And maybe on capital I know maybe -- I guess last year we were here, very large unrealized losses and you're kind of telling people don't worry, it's going to come back. And I think this quarter, we'll probably see a big pull to par or as a portion of that given the rate backdrop has changed. Just how are you kind of thinking about capital in the current environment? Obviously, you're not subject to whatever the boggle things happens, if it happens -- but just how you think about top of capital...

Yes, -- and I understand that Michael Morris spoke, I guess, this morning and gave maybe -- provide some clarity with respect to where they're headed with AOCI, which will come into play over the $100 billion -- $250 billion banks. The -- I expect that we're kind of 2 to 3 years away from probably crossing the threshold. But by that time, AOCI should be kind of reasonably nonissue for us. And so it's coming in at a pretty good clip. And so I don't think the AOCI issue is going to be a major issue. It's having us curtail buybacks until we get to a stronger tangible common equity ratio. But again, that's coming at us at a pretty good pace. And in the meantime, we're generating reasonable earnings with kind of -- if we saw a lot of loan growth, that could strain things a little bit, but I don't expect that in the next year. So I think capital is going to be a benign issue for us.

Got it. You're one of the -- at least a few banks look closely at that opted not to monetize your Visa shares.

Yes.

In the most recent tender, talk to why it could have been a sizable capital gain.

Yes. I mean I say in my thought process about it was fundamentally like borrowing out of your 401(k). I mean you monetize it, you -- first of all, it didn't remove the downside risk because you had to enter into an indemnification agreement with respect to their litigation. So you're still going to have a downside risk and what you had was a taxable event that -- and I said to our board, I said the way I think about it is as long as we got it sitting there, we've got an unrealized gain and you've got something that's actually -- if -- I don't know what's going to happen with Visa, but -- and in theory, let's say, if the value of that stock is growing that what I expect would be the case. It's one of the better yielding assets we have, and I'm not sure why we take that off the table. One of the few places you can actually have an equity investment in a bank, get equity-like returns. And so yes, there's a temptation to say, let's grab it now. I'd like to think it's kind of a manifestation of long-term thinking that we all ask for and sell them. So I actually see companies behave that way, right? So...

That's fair. Maybe put the next ARS question. You touched on it crossing the $100 billion marker in the next couple of years. Is there a big cost associated with that, policies, procedures. I know you were a CCAR bank back in the day, is there a lot of heavy lifting that needs to be done in front of that?

We think not. We -- a lot of the heavy lifting would have been with stress testing, but we were subject to that back -- prior to 2018. And we've maintained the team and the machinery and we keep the models current. We engage in stress testing. We share the results for the regulators. Some of the other areas where -- I mean, resolution planning, we're going to have to dust that off. But I think that's not a huge lift for us. It's a -- we've got a fairly -- what looks like a complicated structure because we operate with multiple names or brands but it's actually one of the simpler structures in the industry and that we don't have a holding company. We don't have all the single point of entry kinds of issues, et cetera, that other banks have to think through. We've got a -- publicly chartered bank charter. And so the resolution planning thing will require some effort, but a lot of the things, operational resilience that regulators have been very focused on has been a lot of what we've been focusing on in the last few years. And I think we're in quite good shape that way. So I don't see -- other than -- I mean, the long-term debt proposal is a concern. I think that's going to be an incremental cost. I expect that, that will get that -- that will be modified because it doesn't -- there's no tailoring in it. I think it's -- I think to do it in this present form would invite a lot of litigation. And so I expect that to be toned down. It will be a cost, but it's not one that it's just a fact of getting larger. And it's not one that, by the way, there are any kind of scale that become twice as large that, that solves the problem because it's a linear -- at least as proposed today, it's a linear formula that increases your cost as you grow.

Got it. I know I got to try. But as we sit here, any kind of thoughts on the current quarter or any kind of thoughts you kind of give us a 12-month ahead outlook? Any changes just based on the evolving interest rate backdrop and the like?

That's a good try. If we had anything really material to say, we'd say it, but that's where I'd leave it.

Great. And on that note, please join me in thanking Harris for his time today.

Thank you.