Okay. Hey, good morning. It is my pleasure to welcome you to the Zions 2020 Investor Day Investor Conference.
We're excited to have all of
you here. We my name is James Abbott, and I am the Director of Investor Relations for Zions. I've been here for about 10 years, and it's been just a it's been
a good
run. When I started here, I think the stock price was about 11 or so and it's up 5 times since then and just it's a fabulous it's been a very, very good experience over the last little while. The conference theme for today is building a premier business bank with highly skilled bankers, great technology and a solid risk management foundation. And I think you'll find that that theme is consistently woven throughout. Every speaker will probably touch on every one of those parts as they go through that.
And you'll just see how integrated this really is. Let me go over a couple of housekeeping items before we get started. The presentation materials are found on our website, which is zionsbancorporation.com and also can be found on the Securities and Exchange Commission's website, sec.gov. We are broadcasting the audio of this conference for those of you who are not in the room today. That can be accessed by linking the link on our website and there are there may be some folks and I know that there there is a I believe there is a real time transcription going on of this as well.
And so if you are unable to hear the audio and you're reading this through a transcription and you may want to check your settings on your firewall or your maybe change your browser or use your iPhone or something to get the audio. Sometimes that is a potential problem. The broadcast is being recorded and will be available on our website tomorrow. Next, I want to enter into the record our forward looking statement, which is on Slide 2. Do we have we don't have our slides up.
Okay, we'll get our slides going here in just a second. So let me just kind of highlight a couple of things about the forward looking statement that
pertain to
these are the same forward looking statements, terms such as believes, anticipates, continue, could, Will expects those types of terms, anything related to that would be a forward looking statement and the actual results may differ materially from what we anticipate things to be at this time due to your potentially due to unforeseen circumstances. We also make reference to non GAAP financial statements here. We try to make GAAP financials the most prominent and that is the directive of the Securities and Exchange Commission. But in a couple of cases like in the example being the efficiency ratio, something that the industry uses, it's actually not a GAAP term and but we do but everybody uses that and so we do reference that. And so we would encourage you to look at the GAAP, non GAAP reconciliation tables that are at the end of the presentation.
So with that exciting news behind us, I want to introduce the main event today. The opening comments this morning will be given by Chairman and CEO, Harris Simmons. And following Harris' remarks, we will move to a presentation by our Chief Banking Officer, Keith Mio. After Keith's presentation. There will be a brief question and answer session.
We will have several question and answer sessions strung throughout the day today, 5, 10, 20 minutes of those and at the very end of the day there will be a wrap up question and answer session where we'll try to take any questions that you can come up with as at least as much as we have time. If you are listening to this at home or at your office outside of this location, if you want to send a question to me, if the people in the room are not asking your question and you'd like to, please feel free to send me an email. It's james. Abbottzionsbancorporation.com and we'll try to get it in if we have time. After Keith Mio's question and answer session.
We will then move to a discussion about technology. Scott McLean will make the opening comments for our technology session. And at that point, we'll move into the meat of the technology session and we're excited to we'll take it to that we're excited to have you today. Thank you again for coming. With that, Harris, I'll turn the time over to you.
Well, good morning. It's great to have all of you here. Welcome to Salt Lake City on a very snowy February morning. This is the greatest snow on earth, we boast. We used to get sued by Ringling Brothers for that, but no longer around.
They thought that was too close to the greatest show on earth. We hope to give you one of the greatest shows on earth during the day today to accompany the greatest snow on earth. We're really delighted to have all of you here and we appreciate the several of you followed this company for a very long time and we appreciate the depth and the quality of the understanding of this company that so many of you bring to investors and for some of you who are here as investors, we greatly appreciate your investment in the company.
I want to talk
most of you here in this room know a lot about the company. There may be you on the online who know a little less about it. Science Bancorporation is a we fashion ourselves a collection of great community banks. We try to operate as community banks and the markets we serve, we try to have very strong connections to the business community, to the political leadership in the community, to nonprofits. We developed very deep roots in the communities that we're in and we think that that is really the hallmark of a great community bank.
The homework of a bank that is creating solutions in their communities and we really pride ourselves on doing that. We PAV great local management teams. We try to keep the CEOs of what we call affiliate banks, we're all part of 1 charter, but we operate in this local fashion with local management teams for most all of our customer facing colleagues. And we think we've got some fabulous local leaders. The focus today is less on them and more on technology and some of the initiatives we're engaged in.
So we didn't invite them to joining us today, which saves us a little bit of money. But I don't want to start without acknowledging the really important role that they all play. We are fundamentally a business bank. About 2 thirds of our revenues come from serving commercial customers. That's both with commercial lending, commercial real great in all of the depository and fee line of business activities that we conduct with them.
But this fundamentally primarily a business bank. We have some strong consumer franchises in some of our markets less so in others. The common thread that we've through this organization is a real focus on small to middle market businesses in particular. We operate in a very strong part of the country. If you look at if you want to advance that slide, James, our footprint is nearly unparalleled in terms of its exposure to growth.
You can see here that real GDP growth over the past 5 years as been this is weighted by deposits in each of the markets that we and the peers that we show on these slides operating and we've had a 5 year compounded GDP growth about 3 0.7% in the markets that we serve. We've got some of the strongest job growth in the nation. Here in the state of Utah, our it's just been really, really strong to the point that and I think this is you're hearing this from others certainly, but the major problem that a lot of our customers are facing is just finding qualified, talented labor. That's certainly true here in the Utah market where our unemployment rate is 2.3%, which is I think tied for the lowest in the nation. Idaho, I think is about the same.
And you see on the right hand slide here you see the current unemployment rates for again weighted by deposits in the footprints of some of our competitors ourselves. I mean, obviously, the nation is in pretty good shape as are we. We are a I said we're fundamentally a commercial bank. We're really a leader in small business lending. Many of you have seen these slides before, but it's really important to kind of there's a snapshot of what we do.
This is pulled from call report data and these are commercial loans from $100,000 to $1,000,000 in size and it's not meant to represent all of the small business lending we do. It's really kind of a slice a service lever, but it's an important slice because we know it's reported in call reports attested to by everybody who's signing them. And what you see there on the left hand side is just aggregate loans of that size. And first of all, for some of the largest banks in the nation, then for Zions and some of our peers. We stack up really well against some banks that are multiples of our size.
And if you look at commercial loans in that size bracket 100,000 to 1,000,000 as a percentage of total commercial loans also very, very strong. This is typical really of a lot of regional banks certainly community banks, but it tends to be even more true here. We have a not only a very granular deposit base, very viable to us and gives us one of the lowest deposit costs in the industry. But we also have a pretty granular commercial loan portfolio. And if you were to take, I say this is kind of a slice, if you were to look at, if we had a view into kind of the rest of the iceberg, I mean, what you'd see is we do a lot of lending kind of in the $1,000,000 to $5,000,000 kind of range.
It's a really important part of our business. We do, as I said, with local brands and management teams and we think that gives us a very distinctive kind of posture in the markets that we serve. We are consistently recognized in various ways and almost every in most local markets you have whether it's a local business journal or some local organization just compiles a list of the best of this and that. We consistently show up in some very large markets, including Southern California, in the Phoenix market throughout Arizona and elsewhere as being the best bank in the market we're the best business bank in the market. Greenwich Associates, which has done research for many, many years the investment banking industry started doing commercial bank customer research about 10 years ago.
And we have consistently shown really well in the Greenwich surveys. We're one of only 6 banks received into the average 15 Greenwich Excellence Awards since its inception. If you look at drilling if you drill down into some of this Greenwich information, this is showing both on the top middle market companies revenues from $10,000,000 to $500,000,000 and then small business customers revenues of less than $10,000,000 What you I think what really stands out is that especially when you look at overall satisfaction, the very far left bar there in the chart for both middle market and small business customers. We're really very, very strong relative to some of the national players that they include in their surveys. You also note that same kind of strength when it comes to a bank you can trust.
Look at cash management or treasury management capabilities. These are some this is something we really focus on probably in a much greater way than most banks, most regional banks and certainly most larger banks with some of these smaller middle market and even small business customers and giving them some tools that we think really state of the art. And then this total customer satisfaction in terms of our willingness to extend credit, our willingness to work with customers in a way that is I think more personal and when you look at our credit results, I think they we're not cutting corners in terms of credit to get there.
We're going to talk a lot today
about some of the themes that James mentioned. I want to I'm going to just set the stage by saying that first, over the last a few years really since 2014.
We have been doing
a lot of work to change this organization in some really fundamental ways to simplify it, to reduce its relative profile, to improve its technology and we've made a lot of progress. We've achieved pretty healthy profitability. We're not where we'd like to be, but we're getting there and we will get there. And we find ourselves right now in a very challenging environment. I found myself looking recently at
going back and looking over
the last 30 years at how many times we've seen a flat or an inverted yield curve over the last 3 decades. And it's happened a handful of times. This is actually, I guess, if you kind of micro measure it, it's about the 6th time we've seen this, I believe. But every other time that we've had a flat yield curve or even a slightly inverted yield curve. We've had the Fed funds rate that was between 5.25% and 8 point 0.25%.
This is the first time in a very, very, very long time that we've had such a flat yield curve with such low interest rates. And I think that's what's particularly challenging for banks that produce earnings primarily with their balance sheet. We're certainly working hard on fee income initiatives, but the bulk of our revenues are certainly coming from the intermediation of credit and it's a tough environment to be doing that in. We are focusing on a lot of initiatives to improve our revenue. We've took to improve the customer experience, to improve the rate on deals from customer supply, better digital delivery of small business loans, streamlined account opening.
More than one bank in this country that can open a checking account in 5 minutes. And we've been doing that for some time now. We are working on initiatives in capital markets in mortgage. You'll hear today about some of the things that we've been doing in the mortgage area that really streamlined how customers are receiving mortgage credit in wealth management and other areas. And we expect that all of this is going to pay a lot of dividends and especially in an environment where the yield curve normalizes.
I would certainly hope that history will be a guide and that a flat yield curve is not going to be the new norm. It may be briefly, but history shows us that that's not how a yield curve is generally going to be constructed. We're going to talk a lot today about technology and about some of the things that we're doing, some of which including the core transformation project that we're going through. We're about 7 years into it. These are really long, hard, expensive projects, but they're fundamentally important for the long term health of any organization.
And so you'll hear a lot about that. And we think that we're really at the vanguard of the industry in terms of tackling some of the toughest problems in technology, which the rails that everything else rides on. You'll hear about how we're working to provide a better experience with our people in our branches because we're so small business oriented, a lot at least we still have a lot of connections with our lots of our customers through branch managers, business bankers, people out in the field. And we're really intent on making sure that we're investing in their community and their skills creating an environment in which they want to make a career in a branch, which isn't something you hear a lot of banks talking about today, but that's actually where customers are and especially in a bank like this. And we want to be sure that we have employees that are empowered, that are educated, that understand our products and understand how to talk to a customer about their financial situation to read a financial statement that we can deliver data to them so they can talk about here's how you might compare to others similarly situated.
We think there are a lot of opportunities there.
And then finally, you're going
to hear about risk management. We have done a whole lot over the last few years to strengthen our risk management, more about that in just a moment. If you look at some of the profitability metrics over the last 5 years since we embarked on this a series of initiatives. We've come out of the great recession and exposures places like Arizona, Nevada, Southern California, where there was a lot of damage done to those economies. We're also dealing with the effects of the Dodd Frank Act as at the time the smallest Sify in the industry.
And I'll tell you for a period of about 4 years, it just took all the energy in this organization to deal with all of that. We found and as we're coming out of that in about 2014, we said, okay, we've got to pivot and focus on customers and on streamlining this place and making sure that we're really strong for the long haul, including the technology. And the result is that you can see the efficiency ratio, which was up around 74% back in early 2014, came down to just under 60% and ticked up in the Q4 and this is reflecting some of this margin compression from the yield curve. But we're really intent on making sure we continue to be intent on making sure that we're focused on getting down into the mid-50s and not taking forever to do that, but it's going to take some help from the yield curve, I think, before we really achieved that goal. You can see the return on assets, which was decidedly subpar back in 20 14, it's now kind of middle of the pack.
Part of the reason that we've been able to accomplish that is we've had much lower credit losses and thus provisions. We've had exceptional credit quality over the last couple of years and we expect that that's going to continue and it will be a positive outlier in this whatever the next credit cycle brings us. We've had this real drive to simplify, as I say, this organization. A couple of notable things we did. We consolidated the charters with the 8 different bank charge we had into a single charter, a national charter.
And then just over a year ago we consolidated the holding company into that bank charter. And that's really been a very good thing. I was looking the other day at the last year that we were under the oversight of the Federal Reserve as a holding company. We had 43 different communications from the Federal Reserve that we were having to respond to deal with examinations and we were having to deal with the effects of those. Those are now gone.
But we continue to have a lot of oversight from the OCC. We had in 2019, 45 supervisory letters from the OCC. So there's still a lot of examination going on. But we're not getting the doubling up. That was taking a lot of time and was just not particularly productive.
And so that's been I think a very good thing and I can tell you honestly, none of us feel like there have been any corners cut in terms of supervision and regulation in this company. We have a very strong team from the OCC and we think a very good relationship with that agency. It's a very respectful one. They've got quality people and they do a good job. We've gone through a lot of reorganization of I mean, this is a process that it started 20 years ago, but has continued to evolve of consolidating back office functions around the organization and most recently, a reorganization of finance human resources in several business lines to make them more congruent with the new structure that we have.
And of course the future core project is a replacement of our core loan and deposit systems has been a huge catalyst for simplification because you don't embark on something this complex without first stopping and saying, okay, let's first see if we can make sure that we've got the process right that we're converting this over to. And so there's been a lot of work on simplifying our product set, particularly with deposit products. There's been a lot of work on cleaning up the way we both the chart of accounts and our general ledger and the way we use those accounts and creating data definitions and data governance and a lot of structure around that and really about reengineering of data flows that in some respects will culminate with the implementation of the customer data hub, which will be really a critical piece of allowing us to support a variety of digital initiatives that we think are really going to be 1st class. We've had an ongoing list and Scott MacLean has really this effort and done a magnificent job of it, of what we call kind of a top 40 list. We have a continual list of 40 projects with an executive officer in the company as a sponsor we track it.
Typically, we will have a project manager associated with it. And we're tracking these all the time. When we complete one, we have a backlog and we'll pull another one out of the list and we go at it, we've got the bandwidth to be focused on about 40 of these. I think Casey Casey may have had something to do with this. But we've really knocked out some fabulous projects in automation and simplifying credit processes and streamlining how we underwrite smaller loans that produce both a better experience internally and externally.
And that's a process that will continue. I'm not going to go through all of these, but this will give you kind of a sample. We've absolutely been focused on making sure that this place is much safer going into whatever the future brings us. Some of this but certainly is brought on by the Dodd Frank Act and the enhanced prudential standards in Section 165. And though with the elimination of the holding company and for that matter with the reg reform bill that was passed about a year and a half, a couple of years ago now.
A bank of our size is no longer subject would no longer been subject to Section 165 of the Dodd Frank Act. The OCC created really a companion set of standards with what they call their heightened standards, which mimic a lot of what was in Section 165 and it's resulted in, we think really a major upgrade in terms of the risk management structure that we have in the company and it's become part of the culture. There is there's been with the elimination of the enhanced prudential standards, compliance with CCAR stress testing, etcetera. We've eliminated much of the tedium associated with those standards, but we've retained the tools and we continue to do stress testing and liquidity measurement and stress testing and a lot of things that came out of Dodd Frank, but we're doing them in a less tedious way and it's just again part of the streamlining that's going on. But we think that it's left us much stronger.
We've also been very focused on concentration limits and reposition the portfolio. So we've gone through kind of a decade long process of improving our risk profile. James, if you go to that next slide. You'll see a number of things listed here. One of the things I focus on, maybe 1st and foremost are concentrations.
We came through the excuse me, this is a great recession. And I think what we one of the things great lessons we learned is as we look back, we said, look, we didn't do fundamentally a bad job at underwriting. What we did what we needed to really improve was on penetration management. We had too much exposure to the wrong kinds of products in the wrong markets. And so we have dramatically reduced, I mean, we've nearly eliminated land development financing as an activity around here.
We have in recent years dramatically changed the profile of our energy portfolio. And we have a lot of limitations on commercial real estate generally and kept the growth of that portfolio from overwhelming the growth of other portfolios the company. I think we've had a lot of discipline around CRE and that's important when you're 10 years plus into a cycle. We've been growing some lower risk categories, jumbo mortgages to very strong clients, Municipal Finance, where we've had a long history of almost no losses in that portfolio through multiple cycles, focusing on smaller deals, typical deal size about $3,000,000 So we've seen growth in some of these categories. They tend to compress margins a little bit compared to some of the things we were doing a decade ago.
They also tend to consume less capital and so we think in the balance, these are actually quite good lines of business. Dramatically strengthened our capital. Now in the last year, we've brought that down. We think that we overshot that and that was again part of the aftermath of Dodd Frank. But we have a common equity Tier 1 ratio today of about 10.2% and after buying back $1,100,000,000 in shares last year, you saw in our Q1 in our Q4 earnings announcement.
And well, I guess it was really the announcement
we paid a couple
of weeks ago after our Board meeting. We announced a $75,000,000 buyback in the Q1. And so we're pulling back in the buybacks. We're getting to a point where we think we're closer to where we're going to want to be. We absolutely want to go into the next down cycle with really strong capital and with a clean balance sheet and we think that's going to put us in a great position.
We have very strong liquidity. We have very low market risk. We have the liquidity that we have on balance sheet, our mortgage backed securities portfolio is high quality and then reasonably short duration. And so we've been doing a lot to change the profile of the company. And then and I guess maybe almost finally.
We've reduced the asset sensitivity quite significantly. So that we're a little better balanced in terms of our exposure to changes in interest rates. The last thing I talk about in terms of just risk management is what we've done with the Board of Directors. We've brought on some phenomenal directors over the last 5 years. Ed Murphy.
He was the CFO of the New York Fed and had been the Chief Auditor to Jay Morgan and then CFO of the Retail Division, Suren Gupta, had been the former EVP and Group Chief Information Officer at Wells Fargo and our consumer lending business is now the EVP at Allstate Insurance and oversees all technology and a lot of shared services there. Vivian Lee, she's running a health platform business for Alphabet Verily and a very bright, really savvy Board member. Who's managing in our own world in healthcare through a lot of the kinds of changes that we're seeing in financial services, it's actually kind of a lot of interesting parallels. Gary Quittenden.
Gary is a former
CFO at Citigroup during the crisis, had been CFO at American Express and other assignments and a phenomenal Board member, Barbara Steve, former CEO at Ally Bank and CFO at Credit Suisse First Boston. Aaron Skonnard who just joined our Board very recently. He's an entrepreneur who founded a business Pluralsight, which is the quickly become, I believe, the largest provider of online technology education to technologists in Fortune 500 Companies and others around the world. And he brings a lot of insight about technology, about small business scaling up businesses and about working in a digital world. So we're developing a really interesting skill set on our Board.
I want to finally
I want to just make one comment this last slide before I turn things over to Keith. Let me talk a little about technology and innovation. We hear a lot about a lot of hand wringing and concern about the ability of smaller banks, regional banks and others to compete with technology. And I'll tell you my own biases, I think it misses the mark. I think there may be other things where it's going to be a challenge, including branding, including competing with big platform companies.
I mean, I think that's where the real risk is. Technology, as anybody if you look around at the whole financial technology world, there's a paradox that this notion that you have to be huge to do it, but all the innovations coming out of these upstart FinTech businesses. They don't have the capitalization that they don't have fundamentally a lot of the understanding of the financial ecosystem that I sit around in meetings with our people. I look around the table at any meeting I'm in and they've got a lot more depth and I'm where most of the people starting these businesses have. So I think it's not a matter of size, it's a matter of just taking initiative.
We've actually had a really interesting history in this company of doing some innovative things. We were one of the early banks in the industry to provide back in 1995 called PC Banking. We have experimented with a variety of things. Some of them technical in nature, technology related and others not, including things like underwriting municipal revenue bonds and creating a secondary market in SBA five zero four for mortgages. And I mean, this doesn't always involve bits and bytes.
But in the technology realm, we've done some interesting things in our history. I was digging through the file the other day. This thing I'm holding up here, this is a what is known under the Check 21 Act as an image replacement document. An IRD. It's actually just a it's a photocopy of a check.
It's a check I wrote myself back on August 5, 2002, and that was a little over a year before the Check 21 Act was passed made law by Congress. We were really instrumental in going to the Federal Reserve. Some of you heard the story, but it's kind of it's really fascinating story. We went to meet Dan Buchanan, our the IO at the time, conceptualized the idea of why don't we figure out how to clear checks without moving all this paper. And I said, a way to do that, it might sound kind of clunky except it kind of works.
If you just take a photocopy of it, send the image to the paying endpoint and present the duplicate. And we started playing with that idea and saw some use cases for it, ended up taking it working with the Fed with a woman by the name of Louise Roseman down in the Atlanta Fed, which is kind of their center of excellence repayments. Took that to Roger Ferguson, who was the Vice Chairman of the Fed back in July of 2001 and did a demo. We built some software, we had scanner. And we knew that we figured out ultimately to make this really useful, we needed a change in federal law.
And Roger Ferguson was very gracious, but not it wasn't going to be at the top of this list of priorities to pursue this until a couple of months later and you had 911 in all of the Fed's fleet of planes that were ferrying checks all over the country to get cleared were grounded. And the Fed quickly realized we actually have a weakness in the payment system and that's called us up and said we want to talk further about this and led to the Check 21 Act, which is the basis for every check that you take a picture of on a phone today and deposit originated with that insight that you don't need to clear a physical item these days. And so we became an early leader, particularly small businesses in rolling out scanners and letting them deposit checks from their places of business. I call it the greenest thing we ever did because I think it's saving this technology is saving millions of trips to the bank and it's actually led to the ability to reduce the branch footprint in this industry because you don't have to present physical items anymore. We had another early venture you see up here on the top right here, it's digital signatures.
As the Internet was taking hold, we said we thought, if you're going to do commerce or the Internet, you're going to have to figure out how to authenticate transactions and identify that the person at the other end is who they hold themselves out to be. And the answer to that is really found in public key infrastructure and encryption. And so we started an initiative, we commercialized it, we ended up selling the business, it was called Digital Signature Trust Company to a competing venture that was started by some very large banks globally when they saw what we were doing and we saw the writing on the wall and said, probably Barclays and Citigroup and others are going to beat us at this game of scale. So we sold our business. But we back in the year 2000, Bill Clinton signed the electronic commerce, the Electronic Signatures in Global and National Commerce Act with a card we provided him, he's got his signature, we embossed on it a presidential seal and a chip.
It was actually encrypted his signature. He actually signed it behind the curtain with a wet the signature, then came out, did it ceremoniously with this because it was a little bit of a chicken and egg problem. You couldn't sign the bill electronically until he'd signed it with a pen. But just a couple of examples of what companies our size and at the time much smaller can do. We are doing something very different now with this core replacement project.
We're in the last lap and it's a tough lap because it's deposits. We now have all the loans that are in scope done. But it's I hope that it would again to be an initiative where we are creating something that is ahead of the industry, at least in this corner of technology and something that will serve us well for many years to come. This can be done by smaller banks, but you have to focus on it and unleash people's creative powers. It's tougher these days.
There's a lot more oversight. Used to be you could launch a new product in a couple of weeks. Today there's a lot of process and appropriately so. But there's a need for banks our size to be innovating and we hope to do that. Okay, I'm going to turn the time over to Keith Myo, and he's going to expand on some of these themes.
Keith is our Chief Banking Officer and he responsible for several lines of business, including all of our retail banking Keith and Olga Hoff who works with him and Mortgage and Wealth Management. And so Keith, we'll turn the time over to you.
Morning. James, do you put
the most? Thanks. So before everybody gets a
little too wound up about the title of my presentation today. Last I looked, we're about 400 miles from Las Vegas. There are no table games this morning, okay? So, but the presentation ought to be exhilarating. I want to welcome all of you as well.
And interesting to just kick this off with several references Harris made to small business, the leadership we have in our markets of small business. It's clearly something we're known for. So as we have been thinking about key strategies for the company to grow our revenue, we talked about the fact that we're good at small business, we can be better and it's extremely valuable. So, let's double down on what we're doing. And I'll talk a little bit about what that means and how we go about thinking about Double Down.
But essentially, we start by really better understanding our customers, doing some segmentation work and actually listening to our customers. Many banks, including us several years ago, treated commercial customers as a one size fits all. And the reality is not unlike consumers, businesses of different scale have different needs. So we really wanted to go through a segmentation process with our customer base and then listen. And then from there, we then decided, okay, what is it we should invest in?
What have we learned from these customers? And then what do we want to invest in strategically to move the needle? And then as well think about some of our complementary businesses and making sure they align with our core strategy. And Harris mentioned a couple
of those that I'm going
to touch on, that's wealth management and mortgage banking. So all of this with a goal of a meaningful revenue outcome. So as we look at segmentation that we've done first. James, can we hit the next one, please? We go through analysis and it's different for every bank, but how do we go to think about our customers?
And for us, we decided that this small business segment is going to be a combination of micro businesses, which there are large numbers of, but those have under $1,000,000 of revenue. Business banking, which becomes a real core customer for us is up to $10,000,000 of revenue and then commercial beyond that. And it's measured by gross annual revenue of the company. And so, you might look at that and say, okay, that's pretty simple to figure out. Well, the reality is when you get down in the Business Banking and Micro Business segments, most of those companies don't borrow money from us.
And that's really the only opportunity we have to gather gross annual revenue information. So, we spent a lot of time with our data science team tuning up various algorithms to look at deposit activity, etcetera, other attributes to determine where our customers fell in these segments. And then we back tested that by taking actual customer names and going to our affiliate banks in our markets and just checking that against what they knew about those companies. So, actually a lot of work went into this, but what I mentioned was one of the learnings that we so we tend as bankers to think about customer needs and we start with the loan first. And the reality is as we think down market about the small business customers, that's business banking and micro.
Most of them don't borrow money. So, as they're looking at us to provide banking services. What's important is things other than loans. I mean, clearly, when somebody needs a loan, they want to have somebody who's responsive. But the reality is if we only focused on the loan, we're missing the mark.
So, something we learned there. And so, at our core, I had to sum that up and Harris mentioned this, but 2 thirds of our revenue comes from these business customers. So, if we look at and break this down just a little bit more, business customers, we have 207,000 of them out of about 1,060,000 total customers. It's not quite the eightytwenty rule, but this is about 20% of our customers in total when you add them commercial real estate representing again 2 thirds of our revenue. So, at our core, we are a business bank first in every way, shape and form.
Interestingly of that 207,000, again, back to the smaller customers, the micro segment and Business Banking segment, 90% of that $207,000 is in that $10,000,000 and less gross annual revenue. And so, first question, I think that's not really a relevant part of our customer base, but I'm going to talk about and show you why it's extremely relevant. Again, learning that most of those customers don't borrow is important. And then lastly, let me touch on, there's a big elephant at the bottom of slide that's 800 plus 1,000 consumer customers. That's the biggest number out there.
Don't we care about them? Yes, we care about and love our consumer customers. And we're really good at consumer banking in a couple of our markets. We're focused here and we're focused in Nevada. The rest of our banks have plenty of consumer customers.
I would term it as a more opportunistic approach in those markets, but as we started to we are starting to drill down in that consumer segment. And where we're doing that is with another strategic initiative that has launched recently and it's an affluent initiative. It's really how do we understand our affluent customer base. And just some additional learnings that we have there, and we haven't clearly defined what that affluent box looks like, what are the attributes, but we're finding it but what we're finding is that about 25000 ish of that 840 plus 1,000 customer base, so 3% of that customer base represents about 40% of consumer revenue. And guess what, many if not most of those affluent customers are tied to the businesses that we bank.
So there's going to be a clear tie there. We'll be doing some work in the future to really drill down there, but clearly affluent customers represent another significant revenue component for our company. And we'll be doing more to define how we can build better products and channels for those customers. Okay, so we've got we're a business bank first and foremost. And so how do we do in the business banking side?
Let's touch on a couple of things here. So first, this will show you that we're better than most at acquisition. This is over the last couple of years. We net acquire about 2,000 business customers a month sorry, each quarter. So, we out pace our attrition and we also outpace business formation in the markets that we serve.
Okay, so we're doing a
pretty good job of acquiring customers. If you look at the attrition statistics, at first, they might seem kind of high, because that is a reasonably high attrition rate, again, not for business, but when you think about these smaller business markets and smaller business customers, and looking at attrition, the number one reason customers are trite because they go out of business. Again, think about that micro Segment, that large number of customers we got, they go out of business. There's a second reason though, a second learning we had here, and I'll touch on what we're going to do about it later. And that is that these small customers tend to get lost once in a while in our organization or any organization.
Officers change. We have branches, many of them are the branch managers have assigned to them business customers. We have branch managers that have as many as 800 plus business customers assigned to them along with running the branch and consumer customers. They just can't touch them all the time. So, what we found, what we learned from this and have applied some changes that there's a reasonable number of our smallest business customers that don't know a banker.
And so when they have a need all of a sudden and they don't know who their banker is, they don't really know who to call, they talk to some other business person they know and said, oh, you can get this product over at Wells Fargo, they leave, they have tried. And so it's not that we've really done anything wrong, we just haven't been there in front of them and communicating clearly. So that's another learning we have about acquisition. So we're going to talk about one thing we're doing to deal with what we call affectionately the orphans, those that we're just not in front of. So, let's talk about why small business, because I mentioned that at a distance you might look at these smallest customers, these micro customers, business banking customers and why would we really care about them.
And this is going to point to the biggest single reason why. Harris touched on this, mentioned what we did from a lending effective how we were very engaged in a lending market to small businesses, but deposits is really ultimately where the action is. And it's really why you see other banks in the last several years deciding they want to chase small business. So a couple of things you learned from this slide. One is that 70% of the deposits that we have, the $12,500,000,000 is DDA.
And if you remember, the entire company were in the low 40s, which is tremendous, but this segment is 70% DDA, it's very DDA rich. It also is a net funder, meaning the amount of the deposits for that segment minus the amount they borrow is that $5,600,000,000 so it's $5,600,000,000 to help fund other activities in the company that maybe aren't just deposit rich like commercial real estate. These companies and their size, if you think about it, they tend not to have the corporate treasurer. So, there's not disintermediation going on as rates rise. They're not changing the next highest interest rate.
They're busy running their businesses. And so, if we're taking care of them in other ways, these deposits tend to be quite static. The other thing was we talk about how granular they are in that micro business segment, again, that under $1,000,000 segment. Average deposit balance for a customer is about $20,000 but there are 173,000 of them in this company. So the numbers are big.
And if you think about that business banking segment, the next segment up, the average deposit balance, 70% of which is DDA, is $275,000 and it's made up of 64,000 customers. So large numbers of customers with deposits that in aggregate really provide a lot of value to the company, but individually don't pose a lot of customer risk. The only other thing I'd mention about deposits, just to give you a frame of references to their value is that for these micro and small business customers in 2019, our average interest rate paid across that 13 basis points, and that compares to 45 basis points across all of our customer segments. So, again, these are really cheap deposits. They are net depositors for us.
As I mentioned earlier, that's a learning we had as a takeaway here as to how to focus on being even better with this segment is really understand where the value is. You saw this slide earlier from Harris, but I threw it in here anyway, just because I think that when we think about our reputation in our markets and both from a commercial banking standpoint and a small a standpoint. The fact we rank number 1 across most of these and those that we aren't number 1, we're number 2 on as compared to our large bank competitors is really important and the importance is in trust. Something else that I think the market thinks we're better at that we have is just our digital capabilities. And importantly, we're going to touch on this in a little bit, but the perception of our bankers is superior.
And so, when you think about that, so what does it mean as we talk about this initiative? What it really means is that and these results are consistent, but that consistent solid reputation that we have really provides what I would think about as a launching pad to double down or go deeper into the business of banking businesses. It provides for our bankers, a confidence and conviction. It provides a tailwind. They have a positive reputation.
They don't hit the water swimming up dream because the reputation is so positive. Okay, so let's switch now and let's say, okay, so we've learned something about our customers, we've segmented them. We've listened to them. We understand where relative value is for the company in all of this. So now where do we invest to be even better than we've been?
So it starts with really what I would call a strategy waterfall. So, we think about this from a product perspective. And when we think about products, we're going to think about products that are specifically fit or sized for small business. Again, it's not the one size fits all. So really good example is we've got a very robust treasury management offering for our commercial and middle market customers, but it's not a fit for small business customers, it's too complex.
So, we're going to talk just a little bit about how we think about products and solutions that are more fit for purpose or fit for size. From a technology perspective, there's a lot we're doing from a technology or particularly a digital technology Vectiv. And what customers tell us there is, they really want us to provide solutions that are efficient. Again, if you think about it, these are people running their own business. Time is so important.
In fact, saving time is probably the single most important thing to them when they think about using bank product. And they want it to be easy. Don't overwhelm them with complexity, kind of back to that treasury example, keep it simple. And then lastly, when we think about people, we're going to talk about this quite a bit and Harris mentioned it a couple of times. But really fundamentally want to just make sure we arm our bankers with the right tools as they're out in front of these customers.
And really importantly, and I think a big takeaway today is going to be just that we want to develop the best frontline bankers for small business and that will be a key differentiator. That really is different then what most of our competitors are doing and we're going to talk about specifically the things we're doing with our people to differentiate them. And then we're also from a people perspective thinking about a again fit for purpose, fit for scale segment service center. So differentiating a service center for the small business customers, different than our consumer care center because their needs are different and unique. So just to drill down on these individually just a little bit, if we think about products and solutions, I'm not going to go through all of these.
But again, I mentioned earlier just focusing a set of treasury management products for down market, again for customers kind of in this under $10,000,000 segment we've got specially prepared ACH products, positive pay, business banking, a business online banking, smaller, less sophisticated that we got treasury management set. So we've designed some treasury products that are down market. Business access is a loan product that we kicked off about 2 years ago. Business Access is really our FinTech competitive loan product that's up to $50,000 unsecured, a $175,000 secured. It's a 4 hour turnaround.
It's a when you sign your application in either manually or digitally, that is your loan document. So, it's a really quick turn, floor based product. We've had great results with that product. Express CRE is something we are actually launching this week here. This is not an attempt to double down, if you will, our commercial real estate portfolio, but we found that there is a much simpler way to provide small commercial real estate product to professionals we bank or sometimes our business owners want to own a building or 2.
So, this is a solution really to help those kinds of customers in a much easier way navigate financing for that kind of purchase. And then the last one I'll touch on is this Business Complete and it's really a it's a complementary a set of products from non bank partners that will be on our web. It's launched in Q2. This is one of the things we heard is that the smallest customers don't necessarily know where to go for services other than banking. So, in listening to them, we're launching the most important products to them first.
So, that's a payroll provider, accounting services and business and marketing supplies. So, in listening to them, that's where their priorities were. I'm sure we'll go further with this over time, but that's initial launch Q2. So, those are some examples of how we're thinking about different products and solutions, again, with a focus on this business banking customer and
what we learned. Okay, when we
think about technology, I'm going to stay really light here. It's actually much deeper than this, but Jennifer and her team are going to go through a presentation right for this where they'll be making a much deeper dive. But I think just a couple of things that really stand out from a technology perspective as it relates to business banking. First is we have this digital own app for that business access product I referenced earlier. That's been in use for a little over a year and right about maybe just little bit more than 2 thirds of our applications for that product are now coming in digitally.
And so when those things come in digitally, and by the way, is a very conversational kind of application. It's very easy for customers to fill out. It's very easy for bankers that want to help their customers fill it out. But it's a great solution to simplify things for customers, obviously, it eliminates paper and frankly it makes us much more on the back end. So everybody wins.
We're going to expand that digital application in the business banking space to what we think about as the next level of a credit or underwriting a little bit more than that $50,000,000 $175,000,000 We'll be doing that in 2020. We also have a bank card digital application that's been used. Importantly, we're revamping and enhancing our small business online and mobile banking application and that launches first half of twenty twenty one. So that will be becoming a replacement for that business online banking product that I mentioned. So, and I think one other thing I would a technology that is going to be a theme of what we're going to talk about today and that is that the digital assets we talk about.
So let's use the one that was the application for our business lending product. We don't do that in we don't provide that in a way to necessarily or in any way really replace our banker. It's really meant to augment what our bankers are doing with their customers. So many times, as an example, when we're taking that application, it's being taken alongside with the banker. So these are not applications we're trying to take where there's absolutely no relationship with a bank.
It's really meant as a tool to augment what our bankers are doing with our customers. And I think from a technology standpoint, that's a theme. Okay. And then let's talk about people. And so I'm going to start with a quote from our Chairman in last year's annual report because I think this sets the tone for what our goal is.
And Harris said, and I quote, we want to ensure that our branches are staffed with real bankers with much longer than average tenure who can solve problems and build to maintain the kinds of relationships customers value. That's really our goal. And that, again, I'm going to tell you is a differentiator. So how are we going to do that? First of all, we've got a series of banker capability and authority building programs we put together and I'm going to go through those in a little more detail later because they're really important, but primarily that's where that starts.
I think secondly, we've built what we call centralized relationship manager teams. And we've got them and we just rolled them to our 3rd market. So, we've got some in Utah, Nevada and now in Arizona. And so why is that important? The reason it's important is that go back to attrition and the fact that one of the reasons we attract customers is because they don't know who their banker is.
They don't have a connection to the bank. And then I mentioned that we have just so many of these business customers that we can't effectively down market. When you think about those smallest customers, we can't effectively assign bankers like you would think about traditional business bankers or commercial lenders to go call on these customers twice a year, spend time in their businesses, it's just not cost effective. But if those customers have a touch point, they know somebody, they've got built some element of relationship with the bank, that's of value. So, we set up decentralized groups.
These RMs then take lists of customers. They tend to be smaller. They work with the individual markets to decide say in a branch what customers branch managers are going to keep, maybe we think about branch managers can handle 250 business customers, anything over that gets moved to the centralized RM group. Those centralized RMs reach out to those customers, introduce themselves, how often would you like for me to work with you, anything you need today, but just creating that touch point, so when a customer needs something, they have a contact. They know in the bank who they can talk to.
And we're already seeing that it's making a difference. We talked to some of these customers, it's interesting. Some of the anecdotal feedback is, gee, I was about ready to leave the bank because I don't know anybody. Again, I don't think the expectation they have is somebody is out visiting their business 2 or 3 times a year, but just that somebody cared enough to touch base. So it's in a maturing pilot stage, I would say, but it's been very successful for us.
So that centralized RM team is really what we put together to address what I mentioned earlier, those orphans that are out there. And then lastly, I would mention Business Banking Service Center. And this is a centralized group that we set up really to focus only on these business banking customers and really to help them from a service perspective. So the bankers that are in there are only focused on small business and also to help either the customers or our branch managers, business bankers onboard products for those customers. Okay, so those are some of the things we're doing.
Let's talk about branches for a minute. Harris mentioned branches, and this is an annual Barlow survey and you can see that the last 4 years are stacked up and the most recent year 2019 is what is in blue. But it points out that business customers continue and this is not a dramatic change, but they continue to value the branch and a relationship banker. They're just they're 2 of the key features the businesses are looking for when they're looking for a bank. So we think about technology again with these smallest customers and it's not that the technology is irrelevant obviously from the finding.
But I think the takeaway we all need to have is that branches and relationship bankers as important as technology when these businesses select a bank. So, again, just another takeaway from us and other learning about small businesses and what are we going to do with it. So I think the takeaway for us is that investing in our people is important. When we think about branches, something we've been doing for a while and this validates, while we're not rapidly reducing the number of branches we have, there is transition in our branch network. And so when we think about transition or relocation, we really now in the last a few years, our thinking about locations where business is primarily.
So there may be some new subdivision being built out north of town. That isn't necessarily where we're going to race to be in the future, okay? What works best for us is let's go where business is because again that's our core customer and it's how we might reorient how we look at branches. And then lastly is, again, a validation that we just talked about a minute ago, and that is that we need additional RM opacity. We can't do it by putting people out, again, calling on the smallest customers, but we can create that touch like that centralized banker so that every customer has a banker.
Every customer knows a banker in this company. That's important. Okay, now so we've been talking about branch and digital. So if we switched now to what's going on with branches and digital. If you look at the right side of this slide, it essentially says that as we think about customers that work with the branch only or branch and digital or digital only, the customer satisfaction, and this is for our bank.
The satisfaction customers have with us is pretty much the same, and it's actually very, very good. But if you look at the left side of this, what it tells us is that those customers that have a branch and a digital and branch being personal as well, but a branch person human connection along with digital connection a trite at a much lower rate than digital only. And that probably isn't completely shocking to all of us, it just further validates that we need to make sure that that human, that branch connection is part of what we do with customers every day. It also confirms for us something that I think we all know intuitively and that is that those customers that engage with us or others digital only, the ability to which is very easy and it happens a lot more often. So, our goal is to for obvious reasons have that multiple connection point with our customers.
It's that digital connection along with that personal connection. So again, that's where we're going to go. Okay, so we talked about bankers. I said come back to what we're doing from a frontline development perspective with our bankers. And I'm going to reiterate this probably for the 4th or 5th time, but this is really a key differentiator for us.
It's something we're doing very different. It's a contrary approach to what goes on the front line with bankers, but we think it's critically important and I we've demonstrated why for our customers they think it's important. But
so when
we think about banker development, here's some things we're doing. We've created a multilevel and a proprietary program that both has a credit component. So learning about lending, learning about business, learning about financial statements and a relationship management learning component. It's got 3 levels. And so for people in our branches, level 1, the base level is going to be a requirement.
Everybody will have gone through that or have tested out of it. There's just there's a base element of learning that's just we think is so valuable as our bankers are engaging with businesses that we're making that mandatory. There are 2 other levels that can be achieved. And I think what is valuable about those is it really gives 2 different paths to people in the retail business today. The first is, those that aspire to be commercial bankers, they now have a career path to go through additional credit learnings and some relationship management learnings, but it's a lot more in-depth credit as they move along the next two levels.
Or and I think Harris mentioned this, it really creates the opportunity for certain branch managers, those in the retail business want to remain in a branch and want to remain engaged with those customers, but want to advance their career and be able to deal with more sophisticated customers. It gives them an opportunity to do that yet remain in that branch position. So anyway, so that's where we're really heavily investing in those customers. The outcome is that those bankers, as they go through these different levels, will be granted authority and that authority is a credit authority and also various operational authorities. And so why is that important?
I don't know that our bankers are going to be using their credit authority left and right, but they really we'll develop a level of confidence. If they really do need to take care of a customer that they know well, we run into this sometimes that one of the policies we have in our card area. Business wants a card. We have a requirement that they've been in business 2 years. It might be that this customer has banked at this branch for 20 years, had 3 different businesses.
This is the 4th business. Guess what, the 4th business hasn't been in business for 2 years. We know the customer well, we bank them before, we ought to be able to override that and make it happen. It's those kinds of things that these bankers will be able to do practically speaking, but it helps them develop a confidence when they're dealing with their customers. They don't feel neutered.
They don't feel like somebody who is just checking some boxes on a list as they grab application materials and send it off to who knows where to be approved or declined. That's just absolutely don't want. We want them invested in the process. We want them to own that relationship. And so to do that they've got to have this kind of understanding and granting them that authority they've earned, I think really helps them own that customer and own the responsibility.
At the end of the day, just this will give them the tools and the confidence to better assist our clients and it will clearly differentiate them from bankers that customer may work with at other banks, particularly other large banks. So that's a really important program. We've invested a lot of time in it. It kicked off late last year. And as I mentioned, this first wave, we've got basically a year to get all of our frontline bankers trained in the first level of this program.
Okay, so lastly then, the other piece of this is how do we think about some of our complementary businesses. And There's not time to focus on all of them, but a couple of the key ones are mortgage and wealth. So I thought I'd talk about those real quickly and how do we think about those in the context of this core customer that we have. So, we've got the mortgage offering James, you go to the next one. The mortgage offering really has 2 key components and both of these, again, fit with who this core customer is we've defined.
The first is to be the bank of choice for self employed. And that's the non W-two borrower. Sounds simple, okay. You want to focus on business owners that is generally the self employed, right. It's not easy.
As you all probably have some sense, mortgage rules changed years ago, calculating debt to income is critically important to take some complex tax return and try and figure out what their income is to calculate DTI. It's tough, but we're focused on it. So we've got specific teams that focus on it. It comprises 40% of our volume, so we're doing it and doing it well. We have the QM and non QM product sets fit for those customers.
And I think one of the things specifically that
we did here is we've got
a proprietary mortgage portfolio product. Terry Mortgage Portfolio product that ties specifically to a proprietary cash flow model we use when we're dealing with customers the side of the bank, commercial real estate side of the bank, private banking, etcetera. We use those cash flow analytics that drive this proprietary product that we've got. Is there's an ease of a customer transition in what can be a very difficult space. Secondly, in the mortgage area, the other thing we do and do really well we got a one time close product, that construction perm product, again, it's somewhat unique, everybody isn't doing it.
That ends up being about 25% of our volume. Again very targeted to professionals and business owners. And then in terms of mortgage experience and bringing in technology, and this just goes with a theme that you have been and will be hearing all day. It goes with the theme of pairing our great bankers with technology. So we introduced Zip, which is our digital mortgage application in 2018.
Our adoption rate of customers that are using this Zip is about 75%. Things unique about it or digital applications. You digitally obtain verification deposit, verification of employment. We've got the technology will also go grab their income tax transcript from the IRS, makes things very simple. And again, if you go back to what was important to these small business customers, keeping it simple, keeping it efficient, respect my time, does all that.
Not uploading documents like some of the older digital applications are all about uploading documents. There's no uploading. You can just go pull everything automatically. It also creates a very transparent process for the customer. So again, just in terms of efficiency and ease for that business owner, the process is very transparent.
You can look at any point in time and see what's going on. And so there's a really there's a great customer experience involved here. But the other thing gets done is because all that information comes in digitally. It's actually since the launch of this just over a year ago, it's allowed us to reduce our cost per loan, our CPL by 10%. It's actually made us a good bit more efficient as an outcome.
So, and then the other thing I would just say to tie this to everything else we're doing is that that our bankers, when we think about our mortgage loan officers, are much more knowledgeable than what you generally see in the industry. And so, you say, well, why is that? And the great. And so you say, well, why is that? And the why is that is because if you think about the volume I just described, they routinely deal with lending clients, every one of them does.
So, they understand the construction component of lending. And secondly, we talked about the business owner, the non W2, 40% of our volume. So again, our bankers are routinely dealing with what is the more difficult set of customers to understand and deliver to. So they're just more savvy. And so we have a differentiated experience with our bankers and the technology.
And again, as noted, most customers want to deal where they want the technology, but they also want a banker riding shotgun with them to help them out. And that's what we find in the mortgage space. That's again consistent with what we find everywhere else. So I think we're delivering well on the mortgage side. And if you see the outcomes of that, we've had portfolio growth of 9% per year over the last several years.
The credit quality in this portfolio is nothing less than exceptional. Our loss rate over the last 8 years has been oneten of 1%. Virtually nil. Market delinquency rates, when you look at the mortgage market and delinquencies measured as 60 days past due the delinquency rates run-in the high 2s or low 3s. Our delinquency rates have routinely run about 35 basis points.
Our delinquency is less, our loss is far less. So, we're doing this with a very high quality portfolio. And then lastly, I would touch on in the mortgage based that going back to Zip Mortgage and what we're doing there, we have found that we can be so much more efficient with that digital application. And it's much easier for people to understand. We're actually rolling that to our branch managers in 2020 as an initiative to give them one more tool to work with their customers.
Our branches are now they either are or will be I have iPads in every one of them. And why that's important is then a branch manager can sit down with a customer and start the application process with them and turn it over to them later or completed there. So we're going to engage our branches as we try to find more that they can do with customers directly in originating mortgages. Okay. Then we'll touch on the wealth space last.
And obviously, on its surface, wealth
management is a real natural
fit with banking business. Is a real natural fit with banking business. And where we position this is to lead with planning first. So so if we think about succession planning for companies, that's critically important. We have a leg up.
We've got customers that trust us. They've had a good relationship with us. So, introducing the advisory component is relatively easy. We think our business transition really occurs in 3 ways. These micro businesses tend to shut down.
Remember, we talked about how businesses are trite and those small customers, a lot of them shut down. And so, we think about that on the wealth side with helping those customers plan for retirement outside of their business activities. When we think about business banking customers, that next step up or commercial customers, they're either going to transition to family generally or they're going to sell. So again, there's a planning component that we bring there and things you introduce on that side tend to be insurance kinds of products. We offer family business is something again that's proprietary to us that we offer to these companies.
If they're thinking about transitioning to family, there's a completely different set of dynamics and issues that come up. So we've got experience there and we provide that to them.
But if you look around the
wheel, you see that we have a full suite of that we offer. And I think a couple of things are important. One is that our offering is free of any conflict. We don't accept compensation from any fund companies. It's all advisory.
And then we've done this with some strategic partnerships, something we've done a little bit differently. So our advised brokerage and mass affluent advisory product is offered by the largest independent broker in the world. We're the largest independent research firm that offers advice for our mass affluent high net worth offering. And then finally, we've had for a number of years of Signs Direct, which is our self directed broker dealer and we have in the last couple of years paired that with 1 of the largest broker dealers to run the back end of that. So we can do it more efficiently, but still have that breadth of offering for our clients.
We think about our wealth model and how that has changed, before 2016, we offered wealth, but we offered it through a variety of affiliates and disparate offerings that were disjointed. We had 3 broker dealers, 3 trust companies, we used 7 clearing firms, Dan, we had 3 RIAs in this company. So we simplified the structure dramatically. It was very confusing to our bankers. And I would say not in its entirety, but many parts of this were not really again targeted at who is your core customer.
We talked a lot who's our core customer, we needed to target it there. So we revamped what we're doing in the wealth business, targeted the offering for who that core customer is, but yet have an entire breadth of an offering up to the ultra high net worth. So, the outcome over these last few years is that we've been growing revenue at a nice low teens clip, importantly reducing cost all the way along in complexity from the things I described. But along with that, what's happened is we've used technology and automation on the back end to make things more efficient and redeployed some of those assets into more highly skilled customer facing people. More advisors we have out there, but also more planners than we ever had.
I talked about how important planning is when you want to serve this market, portfolio managers and trust professionals. So we've reduced cost, reduced complexity, but by the way, also reallocated resources to the front end. And lastly, again, just along the theme of everything we've been talking about and we'll talk about today, we have a next generation offering that's launching this year. It's called Wealth Select and it's essentially an advisor assisted digital offering. So it's not digital, it's not robo on its own, but it's advisor assisted digital offering that again pairs people with technology.
Going to hear that all day, but it's about pairing people with technology. So, then just in terms of looking at the advisory growth we've had, we all know that the landscape is changing. There's a regulatory push. There's going to always there constant pressure these days about moving things more away from brokerage more to fiduciary. We have an incredibly high level of recurring income.
So we built our offering and our growth on advice, not commissions, which I think will serve us well in the long run and also positions us, I think, best to take Karabar, our clients' best interest. We've grown AUM substantially. And really, we think about brokerage in a way that we provide it, but it's for customers that need or want brokerage as opposed to a primary product offering. So I think we've got this well positioned today and going forward and this recurring revenue piece that you see on the right hand of that slide, I think really tells the story. So let me wrap this up and try and bring this together.
So clearly what we learned is our business customers and particularly the small business customers are the core of who we are. We continue to acquire those customers and we have a positive reputation in that market. So we've got some momentum there. We have provided and continue to think about providing technology and products that are scaled for that I think is one takeaway for us. We're repositioning ourselves to provide products and technology that are scaled for them.
And that doesn't just small customers, but improving their level of sophistication for our large commercial customers. But a big takeaway is that they equally value the branch and relationship manager with the technology, whether it's sophisticated or simple. So, we double up our efforts on building business savvy customer our business savvy bankers who work with our customers and giving them real authority. And we believe that's going to be a key differentiator that real authority, that a savvy banker in the market in front of customers will be a differentiator. We align our complementary businesses, okay, with that customer base, which is something we've done and continue to do.
And the result is that we think we'll be able to accelerate our growth in revenue with this valuable customer segment. So
with that, questions, we have time for questions.
No, James. Let's go ahead
and do
thanks, Keith. We're going to go ahead and do a few questions and we're obviously running a little bit behind schedule, but that's we're going to that's okay. We're going to be all right with that. You guys have come a long way. We're going to take some questions.
So we're going to have 2 microphones that are going to run around the room. Anne, Solanta and Julia, thank you very much for your help. And so let's go ahead and just raise your hand and we'll run the microphone to you. Over here to Ken Zerbe from Morgan Stanley.
Great, thanks. I guess, the slide you talked
you had on there about empowering the employees, right,
to help them make more lending better lending decisions themselves, more pricing decisions themselves.
There's also been
a trend in the rest of
the industry that is kind
of said, okay, we tried that. It didn't really work out as well as we expected. Like let's centralize everything. Let's really to make sure the bank you guys, like the bank management has a much better handle on what the
pricing decisions are, the lending decision.
So you're not getting too far out of the credit box. The question is why if a lot of other banks have moved towards centralizing after trying what you're doing. Why is doing it this way the right choice resigns?
So I think there's a couple of things. One is, let me paint the reality of how this plays out. There's not a unilateral pricing authority that everybody in the field is going to get, it's limited. And the same with credit authority. So, I don't want
you to
go with the impression that every branch manager in our all 425 of them are going to have $1,000,000 of credit authority. It doesn't work that way. And the reality of how the credit process works is their best off having that underwriting done Centrally. But they have the ability at a very low level and largely probably in the card space to make a credit decision. So I just want to make sure from a scale standpoint, I'm clear about that.
But I think what's different is, Ken, you have to be willing to engage in educating helping train up our bankers. I think that's what's difficult, particularly with the churn that you typically see in retail banks at the branch level. There are so many people coming in and out, but to keep up with some kind of really consistent quality training program is difficult. And so that's where we've spent most of our time frankly in this initiative in the last 12 months is developing a robust training program that can live beyond an initial training period that we'll live working with or training up that next group of bankers that comes in. Clearly, that is the most labor intense part of this.
And that's where frankly the big commitment is.
Next question. James, I might just add to that that.
Yes, Scott and Harris and Paul, if you want to jump in here, feel free. I might just
Just add to that, that it is a contrarian view that we're taking and it's based on the fact that our customers already see us making decisions. They see us doing something that's different today. So this isn't a new thing we're taking on. It's Our customers already experienced this. This is what surveys tell us and this is what they tell us.
And in addition to the branch manager, We have this layer of what we refer to as business bankers, okay. They are credit trained, highly experienced. They have more authorities and they're the ones that are really facing off with our borrowing the 20% of our small business customers that borrow 80% are deposit only. And so they a much longer tradition of actually making credit Decisions. And so we just think it's what customers have expected of us.
It's why they bank with us. And rather than go away from we're going to based on what Harris noted in the shareholder letter last year that Keith read, we're going to lean into it, not lean away from it.
Marty. Two quick questions and then something very specific. These employees that you're getting, when we're talking to banks across the country,
the hardest thing is to get
employees with some history or experience with these credits. You're sending them through a training program, but are you seeing you're being able to, because your system is different, attract other employees from other places or kind of just some other places or just tell us a little bit
about where these employees are going.
So, I think we'll find that a good observation. I think we'll find that across the enterprise. What I would say is that we're actually a few years into this programmed for a different reason in Arizona and in parts of California. And what we find is, at first we just need to recognize you have to attract a different kind of person, somebody who actually has an affinity for this, who has a desire to learn and grow as a banker. But once you do, then you're able to you get known in your market for that, that it is a different kind of position.
It does have a different kind of opportunity. It becomes a positive thing. But there's clearly a transition period that goes on.
Then the value you're adding
to these customers, do you
see that they're less price sensitive? Because that's the other thing that we're hearing is
the
the price competition that's out there.
Yes. I think the biggest thing we see they feel there is a value add. And so when we look at those attrition statistics, I think most particularly that's where we have started to see and I think we'll continue to see less attrition, which net that means you grow customers. We historically have thought as a company that this kind of approach, particularly on the commercial banking side yields something on the order of 25 basis points of value that we can sell over just based on relationship, and I think that's kind of what our history has shown.
And then lastly on Page 32, it was interesting that your actual satisfaction across those 4 categories wasn't very different. I mean, it was 8.6 at the top to 8.2, but the attrition rate was 3 times higher. So I just was curious why the satisfaction rate wasn't picking up some of the difference there as well.
I think the satisfaction, you're absolutely right, you touched on this, it's the same. I think the big thing is that the ability to unplug here and plug in somewhere else when you are a digital only customer and you don't have any kind of real relationship you've developed is so easy that that's why we see that happen. And I think it goes back to what I was mentioning early that it's not that we've necessarily done anything to anger a customer, but they see a bright shiny object down the street. They don't really know anybody here. And if you only bank with us or anybody else digitally, unplugging here and plugging in there is not a big deal.
I think that's why you see that churn at more than 2 times.
John Pancardi, Evercore. Keith, just a question on wealth.
A lot of other banks are also focusing on it. Could you give us an idea about what your target is there? I mean, it's about 2% of revenue here, so not the largest contributor. How big do you think you can get it and what's the timeframe?
Rebecca Robinson runs our wealth management. Rebecca, come on up. And so my answer is going to be it needs to be a whole lot more. I think it's got a longer sales cycle than most products. And so we need to recognize that, but Rebecca is the one that's led this complete realignment.
And so it just takes time. We've now had things realigned. We have momentum, but where do you think this ought to go?
I mean, I think realistically right now just with our own organic growth, and right now all of this growth is organic. We're not out acquiring books and we're not paying for it. It's not unlikely to see it be 4 to 5 times the size it is just to put us on par with our competitor banks. So there's a lot of organic opportunity there. The other piece is because we're focused on the advisory piece and the recurring revenue, we do see a slower obviously burn in from that, but it's also the type of revenue that we start with that base every year.
It's also less fee sensitive and it is a much longer term relationship as well.
What's the timeframe to get that 4 to 5 times the size?
Well, I can't commit to that now.
It's very good. I think within a 5 year period, we will see significant growth, but it really depends on our integration at this point.
So, I think the other thing comes back to as we talked for a minute about business transition. So we've got all these businesses. And so the first thing we've had to do is just get introduced to these business from a wealth planning perspective. And so as we have done more and more of that now, if these businesses transition, we've been there. It's just that's an investment in time.
So I think if that transition accelerates, that's where you really see acceleration in
the wealth business. Thank you.
Steven Alizopoulos, JPMorgan. Hi. So,
so far this morning, this is in Harris' presentation, you showed us that Zions is in one of the best geographies in the country. You're leading in technology. Customer satisfaction is better than the average bank. You're putting experienced bankers in front of your customers. Why are you not showing better growth?
When I look at fee income growth, you're half of peers. You look at loan growth with municipal, you're in line with peers, but ex that you're trailing?
I think Scott's Brian to jump on
that one. I'm happy to, happy to. No, it's a great question, Stephen, I think. I think part of The answer lies in what we don't do. And I think what we don't do is going to serve us well if and when we go into another downturn.
And so what we don't do is we have really slowed and reduced our construction lending. I think we have a slide later in the risk section that shows the growth of construction lending of banks our size and smaller and it's ours is virtually flat for the last 4 or 5 years. Our peers are through the roof. So what we don't do, we are not nearly the construction lender that we used to. We're not a big card company, okay.
We don't have big growth in card. We don't have big growth in auto. We don't have big growth in leverage lending. Our leverage lending portfolio is by Moody's estimate materially smaller than our peers. So the answer is more in what we don't do.
And what we don't do, I think, is going to serve us really well in the next downturn. But what we're basically shooting for is kind of midtomodermodoresingledigitgrowthincommercial. That's 50% of our portfolio C and I, kind of mid to moderate single growth. That's what we've done recently. And to see our 1 to 4 family
portfolio, which is about our residential portfolio, 1 to 4
family in HELOCs, a portfolio, 1 to 4 family and HELOCs to see that portfolio growing mid to moderate single digit growth. And we'll see CRE coming along at kind of mid to less than single digit growth. And that we can operate just fine with mid single digit loan growth, the way we're structured. We're having great deposit growth And happy to talk about fee income more, but I think I'll stop there and allow another question. Yes.
So at the last Investor Day 2 years ago, we spent a lot of time talking about fee initiatives. So it's a little bit like Groundhog Day hearing these again. And you've compounded it less than 2% over 2 years, peers are double that. So I hear you why some
of your lending has been slower. Why haven't you seen better traction on
the fee income side? Yes. We'd have to unpack fees for you, but our customer fees, okay, if you look at customer fees, which is about 95% of our fee income. Customer fees over the last 4 or 5 years, it's been growing actually about 4%. And when you take out businesses we've sold and accounting changes That we've made, we don't disclose a lot of that, but the way we look at our customer fees are growing about 4% to 5% over this 4 or 5 year period, which is the mid single digit growth that we stated back on June 1, 2015.
And that's nothing to write home about. It's not terribly exciting, okay. But it's what we said we would do and that's what we based our financial model around. We're seeing really strong growth in the area of capital markets, which is about an $80,000,000 revenue business for us. It was a $40,000,000 revenue business for us 2 years ago.
This is foreign exchange, syndications, interest rate swaps. It's almost doubled in revenue in the last two years. That's about $78,000,000 last year. We are seeing growth in wealth, as Rebecca talked about, and as you saw some of those numbers. We're seeing growth in our Corporate Trust business, a small business for us, but a really a nice growing business.
And we think we're going to see really nice growth in our consumer conventional mortgage business with this new Zip mortgage. We have originated very few traditionally consumer conventional mortgages, which is where you generate mortgage fee income, okay. We think it's one of the single largest fee income opportunities we have in terms of short term growth is the origination of conventional consumer mortgages. In our traditional businesses, our big workhorse businesses like tracery management, personal and business service charges, etcetera, those are all going to be kind of low single digit to mid growth businesses, but they are outstanding businesses for us. I'd just add,
I think the other observation I would make is that if you take the whole portfolio of fee income businesses, there's still a big chunk of consumer kind of deposit based the revenue there and it is a real drag. I mean, it's just not growing. I think that's probably kind of generally the case across much of the industry. Customers are becoming much, much better at avoiding overdrafts. We're giving them tools to do that.
They back in the day, you just kind of routinely increase over graft service charges every year. I mean, it was and they just topped out. You just can't do that. We've reached the point where customers won't take that. So that's a challenge.
I mean,
it's kind of an anchor.
We've got some other businesses that are growing actually really well. We're seeing really good growth in corporate trust. We're seeing really good growth in capital markets. Wealth management is coming along nicely. I think some of the places we're really trying to focus are coming along nicely.
But boy, it's the consumer piece is a heavyweight to drag around in terms of the total number.
Thanks, Harris. Brock Vandervlietz, UBS.
Just a follow-up for Keith. You talked a lot about many different things, but you didn't touch on comp. And some of your competitors, particularly some of the smaller banks have done, I think, some pretty radical things to incentivize bankers to really require deposits even going so far as writing them into loan agreements or that they required the operating account or have liquidity requirements for a loan relationship. And how much have you worked around comp and how you
just a couple of things there. I mean, one, all of our bankers, particularly think about the frontline and the more retail business banker focused have comp plans that generally have multiple components in them. It's not just loan driven because we've recognized that's not where the value is. They typically have a deposit component. They typically have the income component that they're responsible for.
I think that when I think about comp and what we talked about, the one thing we're going to be working on in 2020 is revamping the comp structure for our frontline, again, branch manager, business banker, employees because if we're going to go so far as to invest as we talked about in making them better bankers and giving them better opportunity, we need to think about compensation a little bit differently or what's going to happen is those bankers are going to get picked off and taken away. So that's probably the biggest thing on my mind from a comp standpoint right now.
Let's go to Paul Shiflett from Eaton Vance. Thanks. I'm curious
if you could speak a little bit
about maybe the secular threat from Fintechs like Square. They're kind of expanding their capabilities and serving small businesses beyond payments. Are there parts of your small business and micro business portfolio that are more at risk as a result. And then also thinking about that chart on 32 that Marty referenced, how has that evolved over time in terms of propensity to a trait for
the different reasons. So the second question, we've just started looking at it. So I don't know how it's evolved over time. I don't know if it's any different today than it was 3 or 4 years ago. It's just point in time.
But as we think about the FinTech competitors, I go back to actually that live and this ease of plugging in and unplugging when it comes to a digital only relationship. And the competitors you're talking about are digital only. So I think there are 2 things. 1, they're digital only, but they're very attractive from a digital perspective and from a product set standpoint, they're relatively limited. So, if there's an issue that we see, it's on the smallest end of the scale those customers that we have that have an attractive FinTech alternative.
And if in fact they're digital only with us, it's easy for them to unplug with us and plug in there. But I think as customers, I know and as we talk to our customers and as reflected in the material multiple times, as businesses grow and become a little bit more sophisticated, that relationship with a banker becomes critically important. And as you saw, a located a branch located near them becomes more important. So I think where there's pressure for us, it's down in that micro segment, that smallest segment, but as those
It is customers mature, this is what you see. They want to
branch and if we've got a multitude of touch points with them, we're not going to lose them.
Can we take maybe one more question, if there are, and then we'll move to the back, back in the back.
If you could talk a little bit about just the different regions you operate in and maybe any of the differences in sort of applying some of these plans like, say, in Southern California versus here in Utah. You've got great franchises around the country. So I'm kind of curious if there are areas where, for instance, mortgage is a bigger opportunity here versus, say wealth management in another area. Thanks. Okay.
So a couple of things.
As we think about the geographies a phase we operate in. There are strengths and weaknesses with the organization each one of them. Orientation is a little bit different. So let me start with the strategic objective we talk about this when we spent time on today, this double down on business banking. Every one of our markets is owning that.
It's important to them. What's different is the level of maturity by market. So, again maybe the most mature market with where we want to take this is Utah and Arizona. That's where there are groups of bankers, frontline bankers and the retail side of the bank that really understand businesses and how to deal with businesses. Now, obviously, we need to go deeper in those markets.
But if I think about some other markets we're in, maybe Colorado, where we've had more consumer retail oriented people, we've just got we've got further to go. But that doesn't mean that they're not engaged with this as a strategic objective. So, I hope that helps answer your question. So I think about other product, it's interesting. Mortgage is becoming more universal in its acceptance across the company or adoption as a key product.
3 or 4 years ago, a substantial amount of the mortgage we generated was in Texas. That was kind of where our mortgage team that started. Today, the percentage of production that's out of Texas is a good bit less than it was 3 or 4 years ago, so that adoption is more universal. And I think it comes from all of the regions owning it as an objective and then digesting it and that's the outcome. That's what we hope for on the business banking side.
On the wealth side, I would say it's just it's kind of hit and miss. Ownership in the wealth business by affiliate is almost as much by just ships in those organizations. Rebecca, you get I don't know if you had any comments there, but
Yes, just on the wealth side, predominantly, historically it's been here in Utah, but you look at our markets and you look at the growth in wealth and the transition of businesses, we really see substantial opportunity in all of our markets. Also just because we have a very, very low level of customer penetration at the moment, there's a lot of room in all of those economies to grow.
I would say the
one that stands out particularly though is we talked about how to simplify the business a few years ago. Probably where there was the most damage done internally was in Texas. And I would tell you that in the last couple of years, Texas has reengaged and onboard with the new program and the results out of Texas have been awesome.
Okay. Thanks. Thank you. Thank you, Key. Thank you, Rebecca, for joining us.
We're going to next I'm going to ask Scott McLean, our President and Chief Operating Officer to come up and introduce the next section, which is technology.
Jay, thank you very much and good morning to everyone. We are about to go to take you on a really deep dive into technology. So you need to get ready for that. This is going to be much deeper than just a glossy Power point presentation of a lot of cell phones and what you can do with cell phones. So you're going to get a chance to interact with a lot of leaders in our company that leading these initiatives for us in these technology projects.
And I hope it gives you a better understanding certainly about us. But one of the goals we had in designing this period was to this next section was to help you be better informed by what questions to ask our competitors, okay? So we do have sort of an ulterior motive there and I think that should be good for you. But by you understanding better how to talk to our competitors, I think that will help you understand us better as well. As you can see on this slide, on the right hand side, there are some key themes and I would just they're just 5 buckets.
And I'd really encourage you to just sort of tear this page out and as this next probably close to 90 minutes goes along, I'd really encourage you to just Write some notes because you'll fill up these 5 buckets with examples of what these themes are. And first, acting as one company with no silos, not a company with many silos. Our competitors fundamentally operate with a multitude of silos. They have retail banking, commercial banking, wealth, capital markets blah, blah, blah, blah, blah, okay. And we fundamentally operate as one company.
And that may sound like corporate speak, but I'll tell you what it looks like on a day to day basis. What it looks like when we're making decisions is we make Cision's. It helps us prioritize and it helps us spend less money fundamentally in our technology dollars. But I tell you the other piece that is most important is our customers want to feel that they bank with 1 bank, okay. If you're a customer at a bank that has many silos, which is almost all of our peers, you might be owned by the private bank or owned by the retail bank or owned by the commercial bank.
1st of all, customers don't want to be owned, okay? Secondly, most customers have needs that are well beyond the silo that owns them. And what they will tell you is that if they're a private bank customer and they have known a small business and they happen to need 3 other items. They feel like they have 5, 6 different relationships with that bank. This is how we are fundamentally different.
We are a contrarian in terms of leaning in to building the capabilities and authority of our bankers in the field And we are a contrarian in wanting to be silo free, okay. It absolutely makes a difference. You heard Keith talk about these Greenwich survey slides, they're very nuanced. But when you really get behind the Greenwich data, what says is our customers, our business customers by a significant margin versus our global bank peers, okay. They think that we value relationships more than our global peers, the 4 or 5 big global banks And they believe that we are a bank that they can trust.
Those are 2 really important things. And Harris talked about capability building, Keith said in our bankers. Our customers, our business customers value relationships. And so in our technology spend, what you're going to hear over and over again, we're not trying to replace our bankers. We're just simply trying to extend and enhance their ability to build relationships.
This is really fundamentally a very important element because Many banks will tell you, hey, we're trying to make it totally digital, totally automated. You don't need anyone in a branch.
You don't need to talk
to a human. It's not where we're going. We're simply trying to take what we know our customers value and enhance it with technology. The third item is, I think a great if you're going to compete from a position, it's really nice when your customers believe that you're on par or better when it comes to digital technologies and this is what external surveys say. It's what Greenwich says, which is sort of the gold standard for this kind of surveying and it's what others say.
So our business customers already believed that we're on par or better than our global bank competitors. That's an awesome place to Deepgram when you hear about all the things that we have been rolling out in the last couple of years and the things that we have coming. Finally, well, 4th, this our commitment to our core transformation. We're not just that crazy bank trying to create trying to replace its core loan and deposit systems anymore. We're not the only bank in the United States trying to do this with heavy emphasis on the word trying.
We now have virtually all of our loans on one modern core system. There is not another major bank in the country that can say that, okay? I say this in public all the time. I have never had another CEO or President walk up to me and say, you can't say that anymore. It is true.
And deposits will be here right around the corner. At that point, every other bank in the country is about 6 to 8 years behind us. And why is this important? If you want to survive in a digital world, you have got to be digital to the core. Data is absolutely critical, flexibility is critical.
And in our case, I think we have a powerhouse partner in TCS, TalkTalk Consulting Services, arguably the largest IT consulting firm in the world. This is a distinct strategic advantage for us versus our competitors. And finally, you're going to hear about continuous improvement. This is an awesome topic. We talk a lot about I'm sure we'll talk about expense and cost control later.
The discipline we have around automation and AI and what we're doing in this area, it's just it's creating effectiveness gains, whether it's customer satisfaction, employee satisfaction, work avoidance, cost savings, revenue growth. It's just producing a bucket full of examples that are making a difference in our company. So these are themes. We're about to take you really deep. We're going to dunk your head under the water for about an hour and 15 minutes here.
And I would just keep asking you to refer back to these things because everything you hear will be directionally supportive of this. And I want to introduce Jennifer Smith. Jennifer is our CIO. She joined us about 14 years ago as Head of our audit practice in the company as our Chief Auditor. For the last 4 or 5 years, she has been our CIO, having moved into our technology and operations group several years before that.
She was before joining us 14 years ago, she was with Wells Fargo for 11 years in their operations area, heading up a large part of their risk practice and then had responsibility for audit in their technology and operations group. She brings great experience to us. She's also been recognized by American Banker on a number of occasions as one of the top executives in the country. And every year she's recognized by some technology group either regionally or nationally as one of the top technology executives in our country. So Jennifer is a fantastic leader for our company, a wonderful colleague, and I'm going to turn this part of the program over to her now.
Jennifer?
Thank you, Scott. As you've heard over and over again, relationships are critically important to our organization. Relationships with our community, with our customers, but that ethos starts within these walls. Today, I have the honor of representing the good work of my partners across our entire organization. You will hear from some of them as well in our panel discussions.
Those partners help us deliver on 3 strategic imperatives, customer first, empowered local bankers and digital to the core. As we move through this conversation, we have a few demos to show and unfortunately we can't broadcast those, so we'll get those demos posted on Line while we show them in the room, so be patient as we flip back and forth between them. If you enter into an unnamed global branch in Manhattan, maybe some of you have, you may be you may meet Pepper, a humanoid banking assistant. Pepper will give you product advice just by speaking to her. If that freaks you out a little bit, you can click on her screen and get the product advice that you'd like.
You will not find pepper in our branches. What you will find when you walk into one of our branches is a human And a banker who knows your name. She will know your name not because there is an RFID chip In your credit card in your pocket that just alerted her that you walked in. She will know your name because she has been solving problems with you for years, helping you grow your business. She may know the names of your children.
Soon she will be equipped with digital device that will have insights on how to better serve you And productivity tools that will help her get out from the branch and even go in to your place of business To better serve the work that you're doing. As we continue to hear about, we're spending a lot of time on our core banking replacement. That work it's not work for the faint of heart. It takes the commitment from the Board, It takes the commitment from the CEO and the entire C suite for years. It takes resilience and it takes courage, take some money to do this important work.
As many other banks are now starting To look at replacing their core systems, their ability to stay focused on this for multiple years will be a key to their ability to It won't be easy. Going back to when computer technology actually started to capture the attention of bankers decades ago and I want to share a video of a banker, Lloyds Bank in London, this is a real banker in 19 about 1980. We'll see if that plays back there.
Nowadays, and this is due principally to the increase in the number Customers and the transactions passing through their account. When I joined the bank at First, all of these transactions were recorded in a ledger very laboriously by a clerk, where we set and posted the various entries, debits and credits. Now of course all of the information is contained within the computer And it produces on our behalf and for the benefit of the customer statements on the transactions that we have carried out over a period of a month.
All this information, debits, credits and so on has to be held by the computer.
That takes you back to the early 1980s. The reason I show this is because that's fundamentally the same technology That is running all large banks in the country today. It was running those ATMs, it was running those sorters, it was running those bunker Raimo terminals were put right into the mainframe. That's fundamentally the technology running organizations. Legacy technology is something for any bank that's been around for a long time needs to address.
All right, we'll flip back. Okay. One slide before
this. Okay.
I think we're missing a slide, but what I will share with you in regards to our technology spend, some numbers you might want to write down. Our technology spend is approximately 10% to 12% of our revenue, a third of the total technology budget is on technology new initiatives. We think 10% to 12% is on par with our peer organizations. We after we've made significant investments in what we know as transforming the banking organization we've been able and transforming investments are those investments that are generational in nature. There the investments that our organization has taken on over multiple years.
We've been able to shift some of that spend to digitizing our front end customer experience As well as increasing the spend supporting some of our investments in improving and strengthening cybersecurity controls, reducing end of life system footprints as well. But I mentioned our spend is 10% to 12% of revenue. We think that that's on par with our peers. There's no magic formula to determining what to include in technology spend for apples to apples comparison across organizations. But The fact still remains as we don't have the same scale as these large national banks even though the percentage of And it's similar.
What's important to know is that we have a disciplined process about being deliberate an effective in how we spend our dollars. There are 4 areas to know about how we manage that spend. As Scott mentioned, the first one is how we lead as a leadership team. We debate often, are we aligned with the strategic initiatives of the company? Are we developing common practices so we don't create technology silos?
In a technology silo is when we implement a similar system in different product lines in our organization That increases our spend. It's the ability to knock those silos down that allows us to be more effective. And we also aren't chasing bright and shiny objects. Now we have strong practices here, but we do have some technology debt from years ago prior to Charter consolidation of having some of those technology silos. Next, We are relentless in understanding what our customers want.
This is a developing practice, but it's important because As we look at what a customer wants, it saves us from having to go and invest in areas that are bright and shiny, bright and shiny objects or humanoid banking assistance that are actually pretty cool technology, but they're not cost effective technology at least for us. Next, we leverage our banking relationships. Again, you continue to hear this and I know we spoke about Greenwich data showing that our relationships and trust with our customers is rated very high next to our peers. They also those small businesses and midsized businesses rank our technology digital capabilities higher than our peers. I don't I haven't we haven't broke the news to them, but our digital technology is on par with our peers.
It's the large national banks. The difference is how our customers see us because we're so focused on doing what we need to do for them and we're coupling that with a relationship and their eyes, we win on all measures. That is more cost effective than pursuing some niche investments in the digital space. And then lastly, we are not afraid of making transformative generational investments for the decades ahead continued to ensure we're relevant and that we're able to provide fast solutions In a more cost effective way long term. A couple of years ago as I stood up here in front of you, I shared what our technology roadmap is And we've delivered on what we said we were going to deliver at the time, including replacing all of our treasury internet banking systems, the enrollment process for those treasury customers.
As a reminder, those treasury Customer support 100,000,000 in revenue for our organization. We've also in the last couple of years since we last worked together have replaced or implemented digital account opening channels for almost every product that we have. Again, as Harris mentioned, we can open accounts 5 minutes, have funding quickly for our customers. Our customers rate us 9 out of 10 in the customer satisfaction scores in our digital account opening capabilities. We have a lot more on our roadmap and we're going to get into that in panel discussions and how that's going to work.
We're going to have 3 panels around each of our strategic imperatives. I'll ask some questions to get us going and at the end of each panel, we'll invite you to ask questions on that topic. The first panel will be on customer first, probably spend 20, 25 minutes on that topic. I'd like to invite up to the stage to join me my partners from around our organization who are focused on delivering the right products to our customers. Olga Hoff is our Director of Enterprise Retail Banking Jake Hugel, Director of Fee Income and Commercial Products And Jason Brock, Director of Digital Banking Product and Strategy.
And I think we can grab some mics. In our customer first space, we have 3 key Areas of focus. The first is that welcoming first impression, the front door where our customers land when they come Into our digital channels. The next is fast and easy account opening and finally a digitized end to end customer experience. By the way, I want to comment on this digitized end to end customer experience.
Fintechs are really, really good at that first impression. They're not as good at automating and digitizing the entire experience end to end And having the robustness around compliance and risk and availability that I'm speaking from a banking industry standpoint we'll have in place.
So I
want to jump right into this topic. I mentioned that understanding our customers, relentless focus is important to us not only from a customer standpoint but also And just managing what we're delivering to them. Jake, this is an area that you spend a lot of time focusing on. What do small business and middle market customers want?
Hey, it's a great question. First of all, it's good to be with you here today. When we look at our small business customers, I think we have a really good grasp on what they want from us digitally and in general. In fact, if you were to talk to a lot of small business customers, what they value most is time. That's the limited resource that most of these small businesses when we're in front of them, that's what they complain about is not having enough time.
What they want is access to technology that makes them more efficient, that makes their business run smoother, so they can Pete in a really aggressive environment. Where Zions is unique in the industry is we've invested a lot into our treasury capabilities that Harris and Scott have mentioned. We make those available to all of our customers regardless of size. Keith talked about that not every small business customer is going to use Log Box and all of the different technologies that we have, but they do find value in some of services that are available that are unique to them. That's what the differentiator is.
When you go up market into that middle market space and you talk to those customers, they value data integration, they value cutting edge products and capabilities which we deliver. And it's really today, it's the relationships and the advice that we're partnering with that technology that is a key differentiator in educating those small business customers on what's available. Today, I think what's making us succeed is we're challenging our clients to think differently on how to manage their business.
Thanks, Jake. One of the other areas that we're focused on is bringing a new digital platform to our treasury customers that the landing page which we call treasury gateway and that whole new customer experience front end we've learned a lot as we've completed some of the customer studies and user testing, can you talk about the digital experience platform And what is your view on how Greenwich thinks about our digital capabilities for these treasury and small business customers? Well, first
of all, I think Greenwich is correct. I think we do a great job with our products. We are at parity with our competition. But if you look at the digital Verint's platform. First thing to note is that we've done a great job at continuously improving our digital capabilities over the years.
It's we're consistent at it. And our clients have come to expect that from us and having upgraded technology. What we offer though today is 16 different digital products that our clients leverage from us. That's how they're accessing and working with the bank. The DXP or this gateway or the doorway that they have digitally to enter into the bank is what we're enhancing that experience for them.
I like it to like this. When I used to do my Christmas shopping, I would go to Barnes and Noble, then I would go to Target and I'd go to Gap, I buy those products, it would take me multiple weeks and I'd get it wrong.
My wife would tell me
I did it wrong. Then all of a sudden those websites became available from those companies and I could go online and buy the products. That experience was really improved and I enjoyed it. It took me then a day to get done my Christmas shopping. Now I use Amazon.
Amazon does everything for me. They know who I am. They know what I'm used to using. They know what kind of products that I'm buying for my children. And I love that experience.
The DXP is like that for our customers. They have access to all of the different digital capabilities, with a single entry point. We take the things that they're commonly using to transact their business and making it at their fingertips instead of having to go into Gap and then go into Target and the different websites, we make it available all at the beginning. That's what's changing that experience and we're looking forward to that for our customers.
This is that particular system, one of the systems that sits behind it is a workhorse for us. We have 60 customers log on to that system on average 60 times a month. It's tied to our onboarding process for digital digitally for treasury customers. This is another area that we've been moving like gangbusters on to improve the experience, but it's all fundamentally it's using our digital signature capabilities and the and DocuSign is a key component of it. Everybody here has used DocuSign.
So why is this different for us? Why is this a game changer for us, Jake?
It's a great question. So 1st of all, not all digital signature applications are created equal. You talk to your customers and they'll be the first ones to tell you that with our implementation of DocuSign, we have seen that our wet signature process, what we went through, because remember, we went in and tried to enhance the agreements and try to cut down as many signatures as possible, making that the convenience. That's not what they were looking for. They were looking for a digital signature capability.
That digital signature went from 7 days on average for us to get an agreement back from a client right now we're averaging 2 hours. Think about that 7 days to 2 hours. That's why it's convenient for us. Our customers are getting access to technology quicker than they ever have before. You don't make the sale, you don't get the revenue until the client is using the product.
If it's taking you beyond 7 days in order to get just the signature and the agreements back, you've sometimes lost those clients. The second thing I'll mention is this, our improvement on the abandonment rate has improved by 27%. That's clients who start the application and then say, yes, I'm not interested anymore. They're tired of it. That manual process was cumbersome.
So moving from what we have down to 2 hours is a game changer. The other thing it's making our officers more efficient. Our calling officers aren't going out there and tracking down signatures and following up with the client, they're having additional conversations with their customers.
I have amplify an item here too that goes back To how we lead in our organization. So we had multiple different agreements and it was easier to implement different agreements because then we didn't have to go through the process with the all organizations have to go through with risk and compliance and other bankers out in the field to get consensus. We went through that together in order to arrive at this solution Even though it was hard work to provide a better experience for our customers. In this space we've been speaking about the products that are primarily impacting the deposit and payment side, But we're doing a lot of work as well in the small business lending side, digitizing their onboarding process as well. Credit Cards and Small Business Lending, Olga.
Olga, would you share with
the group here what problems were we seeking to solve? Yes, that's a great question. Happy to do that. So first of all, we looked really at the needs of our customers in the lending space. And as Keith mentioned previously, Lee.
If you look at our business banking customer base starting from the micros to large commercials, 68% of that customer base is really micro businesses. We know that this customer segment is increasingly being targeted by FinTechs and they've come to expected quality of experience that typically gets delivered by Fintech. We also know that given the size of this customer base for us And given the size of their lending request, being able to complete these loan origination requests in a very efficient way was a key priority. So to really summarize it summarize what we were solving for, we were really solving for experience and efficiency. Our digital application was built in partnership with the FinTech.
What's truly amazing about the results we've been able to demonstrate is that in less than a year since its launch, we converted from 100% paper to over 2 thirds of these applications are being completed as digital applications. So I hope the demo plays. Let's take a look. And it does play. Great.
So what you'll see is a clean, uncluttered user experience that creates the perception of simplicity. And it's not just a perception of simplicity. The experience is really fully optimized to render on any device, so the customer can apply from a mobile device. We know that our customers really value mobility and so that was one of the key features we were solving for. In sharp contrast to where we started from and that was a 7 page paper application with intimidating fine print of legal disclosures sprinkled throughout it kind of erupting user flow, which by the way is still very much the experience that many of our competitors offer in this space.
What you see here is a conversational style application that expands dynamically based on the questions that the customer is completing. We know that Security of that data is incredibly important to our customers. So, we highlight these capabilities during the application experience in a very prominent way. And finally, with less than just 2 minutes of their time invested in this process. We are able to give the client certainty about the product they're applying for in their pre qualification.
What we found is that this prequalification approach is fundamentally incredibly helpful for us In transitioning this client from a prospect to a customer and helping them complete their shopping journey with us. Thanks,
Lobo. One of the things I love about this product is a mom who's at home late at night after kids have gone to Ed, she can apply for a small business loan for that business that she may be running out of her home or if she gets stuck. She can go in and speak to her banker the next day at the branch. Olga, how is it different though from FinTech Experian.
That's a great question. I think we've demonstrated that we're really happy to deploy the best of what the FinTech community offers in terms of user experience, but what we're truly focused on is what makes us different and that's really the expertise and experience of our bankers. So this particular experience was really built as a collaborative experience between the banker and the customer. So the customer can start the application themselves and if they, for example, encounter a problem, it will be picked up by the banker who will help them complete process. The banker could start the dialogue and kind of the selling process with the customer in a different context and then invite the customer to apply digitally.
And finally, in an experience that No Fintech is really positioned to replicate. The customer can come into a branch, learn about the product and apply at a branch. So what makes this experience really truly unique is the fact that we've given our bankers the ability to start building a relationship, really explore the customers' needs, understand their business, and really move beyond just the origination of a single financial transaction.
Thank you, Olga. What we've been speaking about it has yes, what we've been speaking about is new product offerings for our small business customers, for some of our larger treasury customers. But at the end of the day, The real workhorse is our digital banking platform. We are in the middle of a replacement of That platform and we are really excited about it, Jason, of what we're going to be able to deliver. We're closing some gaps As well.
Perhaps you could walk through what we're doing there.
Yes. I think we have a demo for this as well. We could play that and I'll just speak over you'll see here kind of a modern look and feel. But beyond that modern look and feel, as Jennifer mentioned, we're going to close over 50 competitive gaps just out of the gate kind of day 1. As Keith mentioned earlier, launching with small business in the first half of next year, but we're already live with the platform in production kind of taking a minimum viable product approach here.
And so it's live software. It's not just vaporware. And consumers should largely be migrated by the end of this year onto this new platform. But you may be asking, so how does this stack up, right? What's the baseline?
What's the benchmark versus big banks and how does this compare? And I'd say in the eyes of our customers, this is going to be just as good as what big banks offer. How that's possible is really kind of twofold. One is, again, this is really based on open technology and it's a modern platform and so it's highly flexible, highly extensible. We can build on it ourselves.
We're not tied to the roadmap of a vendor. If you've heard of you've heard from probably other CEOs at smaller banks who complain about their vendors and their dependency on their vendors. And this is really a platform that small banks aren't sophisticated enough to really build on themselves and so they'll still kind of be behind in this in the sense, but for us, we're large enough and we're sophisticated enough that we can actually extend this. So if it's an integration with the FinTech solution and we want to plug that into this platform. We can do that without having to wait for a vendor.
And so really out of the gate, it's on par with the best technology out there. Secondly, we and Jennifer spoke a lot about this earlier. We avoid chasing the very tail end of a diminishing return curve. And I'd say 2 things about that. One is we avoid chasing the tail, all those shiny objects, all those really marginally impressive features that a big bank or a fintech may provide.
We avoid chasing that by understanding our customers and what they really value and what they'll actually use. The other thing is I would challenging you to think about the differences between a big bank's diminishing return curve and ours. And I'll give you an example. As we replaced our commercial loan origination system several years ago, we dealt with like 5 or 6 integrations. And a competitor bank recently merging.
I guess you can guess which of the 2 I'm talking about. But when they moved, they had 70 plus integrations that they had to deal with. So we have far less complexity. Big banks have to spend fundamentally more to get to the same place just because of their complexity than we do. But again, the other part of that story is that we're not chasing every bell and whistle out there.
We're really focused on understanding our customers, what they'll we use what they actually value.
Can you give an example of a bell and whistle we may not be chasing?
Yes. So when you think about what's in digital banking, you've got alerts, you've got card controls today, you've got personal financial management capabilities, so that's budgeting and personal financial management tools. This platform will have a very strong PFM offering out of the gate. But there's a lot that you can build around that, lots of, again bells and whistles on there. We know that only about 3% of our customer base will actually use that functionality when we go live, it's important to have, right?
It can be viewed as a competitive disadvantage not to have something in that space. We're not going to chase every last little feature that you could build around in personal financial management tougher because we understand that our customers largely aren't going to use it.
Just to punctuate maybe this point from a effective of how we think about product development. What we learned from listening to our customers is that interesting and compelling products come from solving interesting and relevant problems for the customers. So that's what we're really chasing, not really overloading applications with features that essentially create feature bloat that creates maintainability, supportability and long term cost. So
Thank you. As we think about our customers, I hope you've heard our focus on a relentless understanding of what our customers want, what problems they want us to solve and how we use our relationships To augment our digital capabilities. Let's open it up to questions from the group.
Chris Fargo, Wells Fargo.
Thank you. So, does the different affiliates cause any problems with implementation or rollout or have you had any customer confusion? Obviously, your customers are not going to be stuck to just one particular boundary.
That's a really great And on
a related note, I mean, just doing a quick search, all of your ratings on the apps have different scores across your different affiliates.
Great question and great observation. Jason's team studies this and actually As been deeply involved in implementation. So Jason, I'll let you answer that.
Yes. To be honest, it adds a little bit of work. I would challenge you and I think Harris speaks to this frequently to find a large organization that doesn't have some sort of matrix to it, right, where you're dealing with across one dimension or another layers of complexity. So for us, the affiliates and having to work with multiple partners there is it's a slight drag. I won't say it's pretty nominal.
We also have partners like Olga for enterprise retail banking that helps it kind of in between to help us kind of consolidate the different affiliate views. But when we release technology. It is the same technology across our affiliates. So that wasn't always the case, but we no longer have differences in the versions or the things. The App Store ratings, longer conversation there in terms of root causes to why you may see different ratings there, but it is effectively the same technology.
Ryan Nash, Goldman Sachs.
Jennifer, this is more of a bigger picture question for you. So when Harris spoke earlier, he talked about the 7 year technology journey you guys
have been on and then the
hope over time to potentially get to a mid-50s efficiency ratio. I guess, when I look at the listing of all the things that you've done and things that are still on the come, it seems like over the next 2 to 3 years, should hit an inflection point with most of the major initiatives being completed. So given where you are from a you Bar and will be from a technology standpoint. What does this mean for both the cost structure and the efficiency of the organization? Does all this investment eventually result in better than peer profitability, better than peer efficiency?
Help us understand what this does for the overall bank over time. Thanks.
Yes, really good question. First, I expect our technology spend to remain about the 10% to 12% of revenue where it's at because as we complete our major projects, there's a depreciation process schedule and then We continue to need to reinvest it. Next is the technology spend is actually helping us be more efficient. And whether that's talking about as Olga was mentioning some of the benefits we've received by automating the end to end process with the digital loan application that Keith mentioned in terms of our mortgage application That it cost us less now to produce a loan. You'll hear more in another panel about the benefits Automation that we're seeing and I won't give away that punch line yet, but in very specific places technology on its own will absolutely help us in reducing our efficiency ratio, but As you know, there's an entire there's a lot of complexity that goes into those numbers and technology is only one driver
I'd probably add on to that. I mean, there's obviously the 2 major components to an efficiency ratio. She spoke, I think, largely about the hot side of it. I think what we've been doing for the last several years is really kind of winding up the spring and really kind of loading it up from a revenue standpoint. And I think that those take time to develop.
We've got a lot of building blocks that we've been working on. I think you'll see us over the next year in particular, but over 2 years really increasing our focus on digital marketing. But all of these tools that you're seeing demos of right now, they're either recent or forthcoming in the next. I think your observation is accurate. In the next 2 years, I think you'll see a big lift on the revenue side.
I guess just as a follow-up to that.
I mean, cost is just one part of the equation, but what do you think this means over time for revenue enhancement, getting products to market faster and the overall customer experience.
Yes, as it relates to the overall customer experience and essentially everything that we're putting out there from a digital standpoint is helping the customer experience. And we have to couple that with the banking relationship as well because those 2 together create the best customer satisfaction scores, the best retention scores. As Jason mentioned, we're making investments in digital marketing that will help on the acquisition side. That's really critical as well from a revenue growth standpoint. And I think I missed one element of it.
Okay.
Other questions, Marty?
I think this will lead us to the next Section 2, but I think there's 2 ways in technology. If you're a big national firm, you have to use artificial intelligence and technology to run the whole decisioning process. I mean, the reputational issue that's haunted one of our peers in the industry, I think, has taken away the ability for people in those franchises to be autonomous. So you have to be controlled what's happening in the control center. Whereas what we're talking about, I think in the next section is engaging the person.
And I think that's a completely different technological rollout and model. Costs are different. The whole experience will be different. And just explain those 2 different avenues because to me, I think that's pretty critical in understanding what you're saying and how you're trying to automate and engage a person versus take away the person's ability to help in the process?
Thank you. And you're right, we will get into that a little bit more in the next section, so I'll just briefly touch on it and then We can go deeper later. I mean, first, I mean, you heard Harris talk about putting more out into our with our bankers and giving them some authority to make some decisions that in the past have been more central. So that's one aspect. The other around the intelligence, artificial intelligence, it's really analytics and analysis That we have at play here is going to be focused initially on offering insights to help our bankers better serve and sell to our customer base.
In terms of using intelligence around like credit decisioning process. We're still relying on the models that we have in place.
Can we be one more? Jennifer, is that Does that keep us on time?
Yes, one more. Okay.
I was curious on the new digital offerings, Jake, I think you
said there were 16 of them. How much of this are you doing on your own? How much are you doing using FinTechs?
Thanks. Great. Chase, can I think I'll let you take that
yes, so to be clear, the 16 are underlying applications within our treasury portfolio of offerings? And so that was specific to the Treasury Gateway discussion with Jake on the Digital Experience platform. I think where you're going though is really important point that these platforms now, technology has really evolved. And this goes back to scale, right in this kind of supposed advantage that big banks have in scale. It's a lot of it actually doesn't take a lot of dollars anymore because of the openness of the technology and the architectures out there.
And so we have a digital experience platform vendor for the Treasury Gateway that sure they help us, they give us some advice, but we're doing basically all of the build ourselves on that platform. So the platform just a bedrock of accelerated development. So it's a really powerful platform, but we effectively own it. Beyond the experience. We build whatever we want on that platform.
It's the so the digital you'll hear a little bit more about our platform strategy in so like I keep deferring to the next conversation. But the Digital experience platform is essentially a concept and tools, multiple tools that allow us to control the relationship with our customer And not outsource it to a vendor, a vendor's interface. And so what we can do is we can plug in all sorts of products into that platform and create a cohesive experience for the customer from a UX standpoint.
And this is James Abbott. I'll just add that one of the comments that I've heard from other banks is that it's really critically important to build our own from scratch, so that it's universal and it looks the same across the board and the customers value that and so forth and the smaller banks can't possibly compete against that.
It's a really good point. The large national banks do have The ability they may not have a platform, they may do all the development themselves. So this platform approach allows us to do To control that user experience by accelerating our capabilities as Jason said. Going down market To small business and middle market customers, this is the place where small community banks aren't able to offer the same kind of experience that we can and large national banks aren't spending the time to build a relationship with these customers. So it's those two things together that allow us to win in that space.
Thank you. I'd like to thank Jake Olga and Jason for joining me and we'll move to the next panel. 2 repeat panelists up here and I'd like to welcome Brandon Thomas as well to our panel. Brandon is the Chief Data Officer for the company. We are going to spend some time talking about empowered local bankers and this is a subject that has been enlightening to me as I hear from my partners on the business requirements.
A few months ago, Jake, you shared with me how the cell cycle has drastically changed in the last decade and the reliance on technology for selling and actually Customer acquisition has changed from a banker standpoint, not only a customer standpoint. Can you share more about
yes, we were talking about how the buying dynamics have really changed from our customers and it's forcing us to pivot on how we engage our clients and having conversations with them. If you looked at it 2 decades ago, I would tell you that the sales folks when they would go out and talk to clients, they focused on the features and the and the benefits of the product. They were trying to raise the awareness of what we had built because if you build it, they don't come. You got to get out and have a conversation with them and use what technology or ways to engage clients to educate them. If you look at what
they did last decade, the sales folks would focus
on value selling. Gabe. The sales folks would focus on value selling. They would increase the importance of the product, the value of that, so that they didn't focus a lot on the price where they looked at the cost of what we were offering and making sure that there was a higher value to cost ratio. Today, the dynamics have really changed and it's on insight.
It's finding information and trends and things that our clients care deeply about and educating them, making them smarter. There was a study done by Gartner recently that did talk about a customer purchasing journey. They said that 57% of that journey is completed before we walk through the door now. Years ago that wasn't the case. It was a matter of just trying to raise some of the awareness and the education.
If we don't change our bankers mentality in getting the team focused on the 43% and partnering with Brandon and the other groups in our company with information, we're going to find ourselves as a commodity. And that's why we've really differentiated ourselves. It's not a race to the bottom when you're adding value and discussion around where we can help make our clients smarter. Salesforce
is a tool that everybody, every bank uses. Jason, this is an area where we actually believe we're doing something different Then other banks are doing with the Financial Services Cloud our Financial Services Cloud implementation. Can you share why it's different?
Yes. Thanks. It definitely is different. And we've talked already today about why we're taking a contrarian kind of approach and being more people oriented than large banks and kind of I hope that you see this when we talk about Salesforce. But before
I get into this, I just want to
make sure everyone in here familiar with Salesforce? Okay. All right. Good. How many of you know what positive pay is?
Anyone? None. Okay. So that's why we have people like Jake sitting here because as much technology is already out there as much digital is already out there. None of you know one of our top treasury management products that we sell day in and day out and we sell it as well as big banks.
In fact, we outpaced them on that product by a long shot. We have almost as many positive pay users as the big banks do, I'm at a fraction their size. This is why there is this coupling and it's so critical to get the coupling right between what you're doing digitally, right? And I don't actually, let me take that back. Digital is pervasive across everything, okay?
So there isn't a non digital. Think of what's not digital today. I mean, you can't open an account in a branch without using a digital tool. So to say there's this kind of dichotomy or this tug and pull between digital and not digital. I don't even know what not digital means.
There's really a spectrum of self-service kind of totally on your own banking transactions and activity that go on and then there's something that leans heavier to human assisted. There really isn't a digital side of that spectrum. It's all digital. What we're doing with Salesforce really is unique and this is not just by kind of the competitive intelligence we receive from bankers coming to Jake's team, for instance, from large banks and kind of what we learn about what they're doing there, but also on Salesforce itself in terms of what we're doing. We are getting to their latest and greatest financial services cloud built for banks a version of Salesforce and we're going to one solution.
At other big banks, you will see that they have deployed multiple versions of Salesforce. Each business unit tends to have its own version. They've customized, the data around it. They have different function features of it, and it makes really taking a holistic approach to relationship management. It really makes it difficult, if not impossible.
Linking different versions of Salesforce is actually really hard if they've been customized like you find it pretty much all large institutions. So that's very unique. Why is that important? Well, think about your favorite doctor's office experience, okay. So you call up, got a pain, you explain to the person on the phone, hey, I need to I got this pain, who do I need to see, set the appointment.
Days later, you walk into the office, the doctor's office, you fill out a form, you re explain everything you've already told the first person you talk to on the phone. You wait in the waiting room, you get into the doctor's office finally, you sit down, a nurse comes in, you explain to him everything you've already explained on the forum and when you made the appointment, it goes on and on, right? Doctor comes in, you explain everything. This is probably something we all can relate to. Oftentimes, what do you get?
You get a prescription. You get, hey, you need to get a brace for your knee that you can buy on Amazon. It's kind of a very frustrating, painful experience to go through. This is actually the small business experience at large banks today. They get tossed around, they go from one product group or business unit to another.
And that's not what a small us once. We've talked a lot about the fact that they're very time constrained. Time is kind of the highest value commodity they have. And they don't have the time to get tossed from department to department to get their problems solved, right to get that pain solved. And our installation of the Financial Services Cloud will be unique in the industry.
Again, don't take it from me. You can ask Clearbanks. You can ask Salesforce directly. But it will allow us to get to that more seamless when a human is involved, right, which again, Granite shows that they care about. All the surveys show that they care about it, not all the time, some stuff they want to do on their own, right?
And we'll have those self-service capabilities as well. But when the bankers important to the discussion when they want to get a holistic approach to solving their problems. Our version of Salesforce will be very different and unique and it will couple again the technology to our human interaction and personal relation management.
Let me jump in real quick
on that. From the sell side, I can tell you what Jason is talking about is a game changer. Having the information available at the fingertips is what we're doing today and empowering our bankers with information through their mobile capability. One of the surveys that I did recently to our new hires, we asked those who had been new to our organization within the last two years, how many of you used a tablet in order to conduct your daily sales activities, only 20% used a tablet in their day to day activities. And of those, the majority only had preloaded marketing material or a demo that was available to them.
So if you think about that, that's just digitizing a brochure and they would put it in front of the customer. That's not really empowering the banker. And so when we've had an attractive talent over here and showing them that we issue an iPad or a mobile capability, putting Salesforce this type of information in addition to all the other tools, the productivity tools that we're adding to it is going to be a difference maker. In fact, when we did a survey to those who currently have our tablets that have been out there, they've seen a 50% improvement in getting out in front of customers. The name of the game is getting in front of the clients and having these conversations, augmenting them with this insight and the data that Brandon's team has done a fabulous job head providing for us.
Thanks, Jake. And I didn't give Jake an adequate introduction. I think he's one of our best salespeople in the company and when I hear him speak, I want to go out and start selling myself. Brandon, on for to do all the work that Jake and Jason were talking about, it requires a lot of data. Data has been characterized as the new oil and that's a lot riding on your shoulders as a Chief Data Officer.
So How are you approaching this?
Thanks, Jennifer. Jake has put a lot of pressure on us as well as Jason, so and it's good pressure.
So I wanted to maybe spend
a minute with you just on the foundation and get you thinking about the foundation that needs to be put in place. And to do that, I thought I'd Pekka an example that you might relate to. So it's how many of you are using SNL or it's new, I don't know, I know it changed hands. So many of you are relying on that. So I want to walk through a scenario with you, just if you play along with me a little bit.
Imagine if today I was to just right now remove your access to SNL or any of its competitors. And you
no longer have the ability to
have that data just right at your fingertips. So that means you're in a scenario where now banks are sending you call reports or you're going and hunting them down, financial statements, press releases, you're coalescing all this data yourself. So while you're thinking about that, I want to take it one step darker and imagine that I also removed from you the regulatory definitions that exist around all this data today that all of you rely on. So now you're in a scenario where banks are producing their own net interest margin definitions, they're not disclosing it or maybe you're arguing with one of your fellow analysts about the total asset size of the bank. That's the kind of scenario that banks are dealing with and have for a long time.
And I just wanted to paint that picture for you, so you can understand why this role and what doing so foundationally important to the analytics that Jason has been speaking
about. I mean, our when
I was putting this role about in 2015, it's not that the bank wasn't focused on data governance and on this foundation, but in order to deliver the real time, the expanded data needs, we needed to strengthen it. So we've been hyper focused on delivering the most critical data elements to our company so that we can do that, focused on not only just general data governance stewardship, but data lineage, understanding these definitions, understanding and being able to speak to them in a very specific way. I know today that we have 4,000 data elements in our company, how it's our universe of update elements and 575 of those are critical to our business, and we're monitoring and watching those and delivering those in a way that's new and unique and for me exciting.
All of that work creates the insights that Jake Spoke about and Jason did as well. So our bankers have the information at their fingertips to drive increased production. We will turn the time over to you now for questions to this panel.
Questions? Going back to Chris. Chris, we should have had you said at
the front.
Thanks. So of the 4,000 data elements that you're talking about, I mean, how much do you think that they're completely leverageable usable now? How is I guess you have this coming up in the next presentation, future core impacting that? And I mean, are you going back and going through and rethinking how all the old data you have been? What I'm getting at is like how sophisticated is your data
yes, that's a great question.
So I mean, the way to
do that is to work with all of our partners in the company with the business have them help us define what's most critical. So you can't just attack all 4,000 at once. So that's why I called out that 575. We have to allow our partners to say this is what I have to have in place. So has our ecosystem been changing?
Absolutely. We've been expanding it to deliver those data elements faster than ever before. But we're really letting our partners drive what's critical.
Does that answer your question?
I'd like to add to that is we have so we have one We are an organization that has multiple data lakes or data warehouses sitting around the organization. We've brought that together for us to leverage. Next, our lending data is in better condition than it ever has been because of the work of FutureCore. We went through an enormous amount of effort to make sure it was consistent across all of our affiliates as we went from 6 instances of our lending systems to one could actually maybe say that was more when we consider construction lending as well. So our data is in a pretty particularly in the lending space in really good shape.
Maybe if I could add, I
mean that's something that's unique. Big banks really struggle with. So big banks have multiple data warehouses
there. What they're doing data from
this perspective, but often is just business line focused. What we're talking about with you today is enterprise wide and we think that's competitive advantage for us.
Next question. Jennifer Dembo with Truist. SunTrust Robinson Humphrey.
So this may be a stupid question. You've talked about where you think all these investments are, they're giving going to give you an advantage.
Where do you
think once all that is complete based on what you know about your larger bank competitors today, where do you You could still be at a competitive disadvantage versus those larger competitors once all the dust shakes out here.
That's an excellent question. The As long as we stay focused on what problems we're trying to solve for small businesses and middle market customers because the national banks are focusing, They serve this client segment poorly or at least in a fractured way. As long as we keep focused there. We're going to be in really good shape. If I think about just from a digitally competitive standpoint, There's likely something that's going to grab hold that we're going to have to catch we may have to play catch up on.
But there's not anything immediately coming to mind, Jennifer. I'll give it some thought to see if something pops up. Anything you would like to add?
The additional thing I'll say is on the large competitors that the biggest challenge, I go back to a story years ago, when I was talking to a customer, the customer said, I'm tired of hearing from your competition what products that you have to offer. I I think the biggest challenge is making sure that we continue to educate our clients and our bankers and keeping them informed of what we've built, what we're making available. And that's why the strategy and having everyone talking to each other around this table is what's making it a competitive advantage. We're not built in silos where I don't know what I'm doing in foreign exchange and what we're doing in international, what we're doing in card. We have awareness on all of that.
So when we have conversations with clients, not feeling left out that they're not getting the full technology. That's how we're competing against the bigs.
A quick unscripted question. Jake, you're talking about Salesforce and one instance of Salesforce may not sound like a big deal, but I think we hit this pretty hard. When you're operating in a company that has 6, 7, 8, 10 different instances of sales force that really don't talk to each other, described the friction that exists for fee income groups that are just trying to get referrals from the line, pursue referrals, close business, just that friction because there's no communication. For a fee just that friction because there's no communication for a fee income group.
So I have a lot of
the different fee income product groups. And Scott your point is well said. It is really difficult when you have multiple sales force instances in trying to get referrals routed to the right people, making sure that people are monitoring the right cues, integrating the data into one instance that uses definitions differently. It is extremely challenging. And what we're doing with the sales force unification as it puts everybody the definitions are the same.
The way that we talk from a fee income standpoint, we're going to get that information in our employees' hands quicker. You don't have Texas who understands really well what's going on in treasury and maybe California who doesn't. When you consolidate those sales force instances, you get access to all of that information across the board from all of the product groups. It's going to help us be more effective in generating revenue.
Rick Roberts, Spoken Capital.
The bank sits at this unique nexus of having all commercial relationships or predominantly commercial relationships and you have this 2 sided network really embedded in your client base. I'm just curious on the digital side, how you are thinking about monetizing that from a digital perspective? And the second part of the question is, is the process of building tools prescriptive for the bankers Or is it just data for them to use on their own in ways that they choose?
So if I could restate your question to make sure I understand it is, I really hear you saying how we're giving them these capabilities, how do we monetize the investments that we're making and
that's the second question.
And the first I may need you to clarify.
The first one is that you've got commercial relationships and you're building this digital platform and I'll pick on a specific example that may or may not be on your roadmap, but like accounts payable AR type automation, auto rec capabilities for financial statements, gives you information and insights into the business for credit. I mean, there's just a host of ways and interchange and all sorts of things. And I'm just curious whether things like that are on the roadmap and how you think about it?
You have to let me know if I don't answer your question, but I'm actually really excited by what I'm hearing in your question is, you're right, there's a lot of information that banks That we gather on our customers' payment information, we can offer insights to a customer on how they're performing against their peers simply from the information that we have. There's real Power and the data that we can offer to our customers, that's an opportunity for us. 2nd, I think Keith spoke about this too which is the investments that we're making into our digital ecosystem and an open architecture allows us to plug in providers around the entire financial lifecycle whether it's payroll providers or other providers maybe insurance providers into one place that allow our small business and middle market customers to be served by a marketplace overall. That's the opportunity with the investments that we're making now and that we'll be bringing online further down the road. Did that answer your question?
Yes, the Wood Marketplace answers the question. Okay. Thank you.
An integrated receivables, integrated payables, those types of solutions are absolutely what we offer to our customers today. They're part of that 16 different digital capabilities that we spoke about and taking the information, the data that Brandon's team is doing and making it actionable, we're doing that today and informing our bankers not just providing the data. We're not giving them call sheets and saying good luck and call these and see what they're out there. Being very prescriptive on who we want them to talk to, what kind of conversations to have.
And as you know, I'll go up as JPMorgan. We'll take this after this, we'll move on.
So I
get the strategy of empowering bankers, right, to Exxon the robot. When you think about the capabilities you're building, what are the thoughts on a national digital only bank to selling to that digital only channel to small businesses even separately branded from Zions.
Yes, I mean, we certainly are in those conversations on an ongoing basis. If that would make sense in our marketplace and it there I we're discussing if that's viable, it's probably all I have to say on that unless someone else wants to say something. Okay.
Thanks very much. Thanks, Steven, for your question and thanks to this panel. Thank you so much.
All right. Thank you very much. We are going to move into our digital to the core a conversation and I'd like to welcome to the stage my colleagues, Dave Sterling, Head of Technology Governance and our Chief Information Security Officer, Ken Collins, our Director of Business Technology and Christiane Koontz, our Director of Banking Transformation and Future Core. We'll jump right into this dialogue. The whole everything we've been talking about is powered by being digital to the core.
And I know that sometimes talking about the fundamental architectures and infrastructures of technology could be kind of boring, but I get really excited about it because of what it's going to create for our organization. It will allow us to move with much more speed. It will allow us to get features out to our customers when we are and I really I feel like about 2022 is when we really start to see fast, fast acceleration from these investments. We're already seeing the benefits from them today. Legacy systems in banks is a huge issue.
All you need to do is simply Google legacy core banking systems and you will get a a plethora of information on the size of this challenge for our industry. As I mentioned earlier in the day, we believe we are 6 to 8 years ahead of our peers in replacing our core banking systems and the Others are going to need to do it and it is a huge investment of time and it can't be accomplished unless you have a dedicated, a committed leadership team and board to be successful. So we're going to jump right into the history of core systems to set some context Kristian? Thanks, Jennifer. And I think we saw this in the video, but I just want to unpack it a little bit.
This is the video that Jennifer shared earlier. And so if we go to the next slide, you can see here, and before the 1970s, banks, bankers had paper ledgers and branches to record customer transactions and balances. In the '70s '80s, this became mechanized through terminals in those branches, And these were systems that were built for internal use only. They were designed for high accuracy and reliability And they required these long overnight batch processing systems to be able to open the bank the next day. As new technologies were developed over the coming decades, These channels were layered on top of these core systems channel over channel.
The difference here was that these are often designed for internally oriented communication instead of those internal ledger functions that these cores were originally designed for, particularly in the 1990s when we got to the advent of online banking and mobile banking. So we're now in the era of the Internet of Things or in our context, I'll call it the Internet of everything and yet no bank in the country has fully re architected their 40 year old core systems to be compatible with this modern era of real time externally oriented interaction. Quite frankly, these systems there. I'm outing myself a little bit here. They're older than me, and they've been here longer than 95% of our employees.
Maybe you can share a little bit more about what are the imperatives around replacing a core system? It's a big investment. Why do it? Absolutely. So we see 4 key drivers, Jennifer.
One is just simply the legacy vendors here, especially those big four, They're either ending their support for the platforms or they're forcing costly upgrades on to the banks. 2nd, over time, these systems have come heavily customized and that customization becomes very expensive to support and to integrate and take advantage of all of these new digital technologies that we've spent the morning talking about. 3rd is because of that heavy customization, these systems are inherently risky. They've been stretched to their limits over 4 to 5 decades of customization. They're prone to code flaws, To lack of understanding internally about how these systems work.
And just due to their age, the folks Do you understand how they work are now retiring? The last key driver is really the exciting one that I think we've been touching a lot on today that actually many of your questions Are starting to get at and that's around those digital customer experiences, digital regulations and that next gen digital operating model. In the context of the core, this is partly about speed and it's partly about function. So on the speed side, with these old cores, banks are finding that they can't integrate new technologies and solutions quickly or cost effectively. And then on the functionality side, they can't do those truly digital, data driven, real time products and services.
So a modern core, I mean, can you put this on a lay person terms a little bit? Yes, please. Definitely. And I'm going to try an analogy here. I want to be clear and actually some of the really wonderful questions earlier were hinting at this as well.
This core investment is just one component. It's one investment that gets paired with many other investments that you heard my colleagues speak about earlier to create a digital operating model. And this digital operating model when paired with the investments in data and our digital front doors and in our API platforms is what will help us to create a model that's optimized to cost effectively deliver on those customer needs, while also supporting the ability to double down on our bankers like Keith and others spoke to earlier this morning. So I'm going to try an analogy, bear with me. Dave, will you
take out your phone for me?
Sure.
Bear with me on this. Okay. Now, I want you to think about your phone like it's a modern core System. And for many of us, it's a pretty sleek one. For many of us, we've become sort of inseparable from our phones over the last a decade.
What makes your phone so essential to your daily life?
Well, I guess like all
of us, it's got everything I need. It's easy to use, it's versatile and it integrates. So whether I'm doing communication or business travel or
whatever it is, it's all right here.
Got everything you need. There's an app for that. Awesome. So in that example, for Apple, for them to create all that customer value And all that revenue, they didn't have to go out and create all those apps themselves. If they did, it would have taken them years longer to do that.
So instead what they did is they created the platform and then they allowed developers to build on top of that in a controlled way So that they could actually answer all of those customer needs. The app store, right. And those apps, They pull data directly from the phone system as well as from across the internet in order to deliver those rich customer experiences. And so when you combine that really easy to use user interface of the iPhone with the richness of the App Store. It's one of the things that continues to give Apple Devices a leg up Over other smartphones.
And so in our future, we'll have that same thing. This is maybe you Touch on this
as well.
Yes. And this actually goes to the question that was just being asked. So we think about how do we use this, right? How do we use this combination of investments that we just saw here in order to create those incremental opportunities. And so this shows this is actually our API marketplace from TCS.
It's one of our partners. We've also just launched into production Google's Apogee API Management platform, but we're looking at different ways. So with our customers, we can pull data out of the core and do advanced insights, analyzing those transactions in order to offer them Cash flow analysis, someone was talking about accounts receivable, procurement, etcetera, all of these sort of value added services that either we develop and deliver that we And then internally, we'll use this to very seamlessly and quickly connect new applications, new technology capabilities into our environment without having to repeatedly rebuild the same thing by being able to pull those out through APIs. This is one of the advantages, as Scott mentioned, having a partnership with TCS. There aren't other core providers who are thinking about creating a marketplace like that That allows us to tap into their API environment.
This has been a long journey, Christian. Where have we been? Where are we going? When will we get there? That's a fantastic question.
So as was mentioned, I think a few times this morning, We're about 70% of the way through our journey with the completion of all of our loans onto a single integrated modern core platform. We're in the 7th inning, so to speak, and this will be, as you can see here, a 10 year journey for us. This is really hard work, And it's work that not every CEO or leadership team will sign up for because the benefits of this type of work take years to realize and oftentimes at many other banks, the CEO won't be there to take advantage of the benefits. And so it really takes a very different kind of leadership and kind of organization to be committed to these sorts of long term investments. I'll also say I think that we've arguably now because of the 7 years that we've been on this journey, we've developed one of the best teams in the industry at doing technology driven banking transformation.
And I don't say that to brown nose to my boss or to toot my own horn, but I hear that because every single one of our peers is going to have to go through that kind of transformation. And We are years ahead of them in the making. They may not find that they have the capability or quite frankly the stomach to do this kind of really difficult work. That is true. I'm going to shift gears here.
There are some questions on The digital experience platform, Stephen, you had some questions about that too and the marketplace capabilities that we will have the treasury gateway that you saw earlier was using this technology, but it's a little bit broader than just treasury gateway. Can you share more about that, please?
Yes. We're focused on eliminating legacy system architecture from our environment and building solutions where we can Control the Experience that we give to both our customers and bankers. Our digital experience platform allows to do a lot of things. It allows us to create portals, intranets, extranets, websites, forms, workflows, and it allows us to integrate with other systems and other FinTech solutions to create a and deliver a cohesive and connected customer experience. That's different than many banks we talked about that are dependent on reliant on numerous vendor point solutions that deliver disconnected inconsistent variance that's no longer acceptable to customers nor does it allow bankers to effectively service customers.
This is in Christian's analogy of the iPhone, so the iPhone operating systems, the core banking system and on top of that You have the experience that Apple offers through that digital their digital experience interface and then eventually you Start to plug applications into that interface to create a great experience for our customers. If you recall early way back when we were on the customer first segment, there was an element around digitizing and experience end to end. And what we can do differently than what we think fintechs are doing, and this is true probably for the banking industry of digitizing that experience. Automation is a key area for us to win To reduce our costs and take advantage of these technology investments, Ken, Share some of the work we're doing in the automation space.
Sure. Automation, when I'm talking about automation, it includes artificial intelligence, IQ bots, machine learning, robotic process automation, all types of different technology and tools. And automation a lever just like other levers like lean process, redesign, digitization or advanced analytics. And all these levers are creating tremendous value. But just to step back and talk a little bit about what Scott said, the driving force creating operational effectiveness and efficiency for our company is our culture.
And our culture is more important than any program or lever because it enables and empowers our team members and teams to improve their work, utilizing all the various levers. Speaking specifically about automation, as you guys know, most big banks have dozens of automation solutions spread across their organization. In order to maximize value. We've created an automation center of excellence, and they use a variety of automation platforms and tools to deliver value. Everyone in the organization has access to the Automation Center of Excellence.
And so far, it's delivering tremendous results. In 2019 alone, we automated over 200 processes have saved us 78,000 manual hours of work.
That's huge in terms of the impact that your team is having. But could you take it down a level and share an example of some of the automation that the teams accomplished?
Sure. I'll share a couple of examples. The first one, which was on the slide earlier, we're leveraging robotic process automation bots. And these bots don't look like Pepper, but they have digital skill sets and they interact with systems just like people do. And in the Q4 of 2019, we updated over 2,000 telephone numbers to our core systems that were provided through customers.
200. What did I say? 2000, 2000, there's nothing, 200,000 phone numbers provided by customers through digital channels. This would have taken 1 person 1500 hours to complete, which is half a year over half a year. And the great thing about these RPA bots is we program them to do this work in less than 2 days.
Another example is leveraging our automation platforms to streamline the end to end process. When a customer changes their name, address or tax identification number in the branch, the previous process looked like this. The banker would fill out the change information on a form. They would send it to the back office. A person would key all those changes into numerous systems.
How it works now is the banker enters the changes, they hit a button, it automatically populates all those systems. In that example, it saved 4,000 hours eliminated 4,000 hours in back office work. In addition to eliminating the work, it drastically improved for quality because you don't have 2 people entering the same data. Just a couple of examples.
Thank you, Ken. When we were putting this presentation together, there's a lot of dialogue. Should we talk about cybersecurity or should we not talk about cybersecurity because it's something that Organizations don't want to put a target on themselves as they talk about it. We knew we would be remiss though when we're speaking about digital And not acknowledging how that footprint is expanding and the risks it can create for an organization. So Dave, as our What's happening in this space that you will share?
Yes. Thank you, Jennifer. Cybersecurity is top of mind. You just see it every day, right? And so when you look at the world and some of the data here on the slides is a little alarming in the trend.
What we're doing at Zions is really homing in on those areas that are most relevant to what we're trying to do. Our businesses, our processes, the way we do business and where those threats are. And that threat intelligence takes a lot of work. We've got a great team that puts a lot of effort into this. But we look at where we target those investments And focus our energy there where it's going to give us the best return.
In the 2018 annual report last year, the statement that Harris made was that our cybersecurity capabilities have a nearly unconstrained budget. But that creates its own challenge of how do we focus and what do we do with that. And so what we've really focused on is a formal framework where we measure across all the cyber security domains and figure out where we can strengthen and improve. And this is things like how we respond to an incident, how we secure the bank with these various controls that are available. And not only do we measure, but we bring in independent advisors to give us guidance.
And they measure us and they score us and they give our executive team and our Board that information. And that really helps us guide the investment along with our threat intelligence that's kind of real time seeing what's going on around the world. You've seen all the headlines just as we have and that helps us to prepare appropriately. But the last thing I'll say on our investment is with all these technologies and capabilities we've been discussing today, the cyber team is embedded and very closely today. The cyber team is embedded and very closely engaged in all of these.
It's certainly the OneTEAM concept. And our goal is to just make cyber part of our regular dialogue here. So all of these initiatives are advancing with cybersecurity top of mind in the investment in
what should these what should this community ask other banks as it relates to cyber?
Yes, certainly. I mean, I
think every bank or every company will tell you all the bright and shiny new technology they're buying. But I would encourage every institution to look at this holistically. And by that, I mean, they look at both sides of the equation, both the technology and the people. So at Zions, we've really put an emphasis on building the cyber literacy of our workforce and we do this in a number of different ways. There's a very aggressive fishing program, fishing testing and simulation program, which my colleagues will routinely me in the hall and note how distasteful they find it, but it's helpful in building awareness.
We're also taking a lot of steps for training, both baseline training for our workforce around cyber literacy and then advanced training for our technical people. Much of that's delivered electronically. And then lastly, we have a very strong culture and commitment of playing the way we practice. So it seems like every other month or so we're spinning out kind of a tabletop or a test or a simulation just to keep these things top of mind for folks. And so I would say other institutions that naturally gravitate toward writing the checks to technology vendors and thinking that's going to solve the problem.
They need
to look at the big picture
and make sure that their people side of the equation is coming up to speed as well.
Thank you. Let's open it up, James, to the audience.
Hey, thank you, everyone. Let's see. I've got all kinds of people. I'm going to go to John Ash. Ken, you already asked a question.
I'll come back to you in a second, though.
I'll tell you my question. I guess you talked about the richness of the App Store as one of the keys of the iPhone and that in the future Zions Bank will have the same thing. But I didn't hear any examples of you positioning
partnering right now with FinTechs.
And I guess is TCS currently not able to add FinTechs To the product suite because a lot of the examples and I could be wrong that you gave in terms of offerings you're talking about developing on their own.
Yes. I'm so glad you asked that question. So first we're creating of course the ecosystem as you alluded to plugging And FinTechs into our environment. What I'll speak specifically about TCS and then just more broadly. We TCS has a significant investment in their innovation work.
They have an entire network called the coin, the coin network which is our FinTechs not TCS but FinTechs that are part of their environment to order to help create that marketplace to plug in and we haven't taken advantage yet because our platforms aren't completely built, but we'll be able to take advantage of those offerings once we get through this aspect of our work. I also want to clarify, we We are leveraging FinTechs for some of the development that you heard my colleagues speak to earlier. So these are not all homegrown systems. We're building on top of platforms, but we're plugging in already with some of these investments, Especially around origination capabilities. That's what Jason and others spoke to earlier using other fintechs.
Let's see, let's go to Lana Champ.
Thanks. Two questions. 1, I was wondering if we could get an update on what the end cost is going to be for this digital core banking system by the end of 2020. I'm sorry, the total cost of the upgrade of the digital banking system.
I might For the core banking system. Yes, I might defer 2 teams on what we've disclosed.
Yes, this is Scott. I'll be happy to take that. Basically what we've said is that in our P and L run rate, we're spending about we expense about $40,000,000 a year, okay. That's our current run rate. We expect that number to go up slightly in 2020 2021, but it's going to stay in that same area code.
And to think about it, We expense about half of our investment each year, okay? And most of this is the part that we capitalize is being amortized over a 10 to 15 year period. So we've not said how much the total project will cost over the total time period. And one reason we don't put a number out there, this is like it's similar to when banks reveal their technology spend, there's a lot of voodoo in that math, okay. We've said ours is about 10% to 12% of revenue and a lot of the voodoo is being taken out of this in the industry, but still if I told you a number, I'd have to force you to sit there while I explain to you, okay, we changed our general ledger as part of this process.
We upgraded certain utilities like our customer data hub. We did all this other work that Harris talked about that goes into kind of our overall cost base. So but we do fast forward to what consultants would say. You can go to a lot of different consultants and they'll tell you what they think big banks are spending around the world because this hasn't been done in the United States. And if you read what they say, you'll find that what we're spending overall, what they think we're spending is going to be right in line and comparable to what other major banks in the world have spent.
Okay. Thank you. Just What other major banks in the world have spent.
Thank you. Just one more question. Other banks have talked about using these technology investments to offset or get expenses in areas like reduced headcount, reducing branches and it may be a little bit different for you guys because of these business focus. But could you talk about how if there is opportunity over time with this technology spend to see savings in other areas like headcount personnel and
Can you let Brian answer that question?
The answer is yes. Just the example I gave in relation to the back office, keying information in. That's for 4000 hours that was eliminated. That's essentially 2 FTE. And as we continue to automate, improve as digitize things, we're going to need fewer people doing things that they've historically done.
And for instance, in several back office areas, they've on an annual basis, we continue to reduced headcount by 10%, and it's all due to continuous improvement automation, digitization of services. So it will continue to really help drive down operational expense.
I would just add to that real quickly that the question how do you monetize this investment, this big of an investment? And the first thing you have to get your head around is, this is a utility. It's like your plumbing or your electricity in your house. It is a utility fundamentally, but it's a really critical utility that you have to have. Secondly, as Ken said, It supports automation, whereas our current legacy systems in the industry don't really support automation.
And the third thing is what Christy Ann was talking about, which is it supports in a much lower cost and quicker time to market the rollout of new products, etcetera, etcetera. And so those are the 3 ways that you monetize kind of investment.
I just tack on a little thought. I keep thinking about this. It's very much in my mind like building the interstate highway system in country back in the '50s. It was built for by Dwight Eisenhower for defense purposes and as part of our national defense it's become everything but that. I mean, it has facilitated all kinds of things that we never envisioned.
And when we set out on this, it was really to replace systems that we knew were going to be end of life and because we had a complicated environment, we're still going to simplify it. It is fundamentally been critical in allowing us to do something that is if you look and Paul talked about this, but most of you know, I mean, we've held our expenses pretty flat for the last 5 years, 4 years going on 5 years. It would not have happened had we not embarked on the project. So I think of this as something that's already been paying for itself.
And we haven't even begun to
see how it will pay for itself because we haven't seen all the interchanges in the commerce and the shopping malls and sort of the by analogy, the equivalents that will develop around having a modern digital core and an ecosystem that can work with that, that will allow all kinds of things that I'm not sure we even fully understand yet. So anyway, that's my $0.02 I
know we're going to go to Ken Zerbe's question, but and so before we do that though, Ken Collins, you had mentioned to me that for every bot that you employ, it's there's a ratio of bots to people and we love people, but they are expensive. So do
you remember what that what you told me? Yes. Essentially, for every bot that we acquire and bots can do multiple things at the same time. But every single bot is equivalent to 20 to 25 people can do. So as we continue to purchase bots, they're replacing the people that were historically doing those work that work.
And you can't have the bots, the bots don't work unless stuff is streamlined, that's right, automated.
You have to have things standardized, lean process, consistent data before automation really works well.
And just to amplify that point and to amplify a point that Harris made Is when we've embarked on future core, it actually has forced us to get, as I mentioned our data cleaner than it ever has been standardized. It allows us to take advantage more easily on the automation front as Ken mentioned. And the interfaces with the modern system versus a system that was architected decades ago in order to facilitate automation is much simpler for us to deploy.
Okay. Ken,
it's over to
you, Morgan Stanley. Okay, this question
is actually for anyone who wants to answer it. So you guys have mentioned several times you're 6 to 8 years ahead of competition that you're the only bank that's actually done this. So I've heard that for years, right? So I wish I and I believe it to be true. So of course, I use you guys as an example.
I go up to other banks. I'm just going to say banks maybe slightly larger with you and I say, okay, this is what Zions is doing. Do you need to do this too? And when is it going to happen? And their answer pretty much across the board is no, we don't need to do this.
We are whatever they upgrade their Fiserv core system. They kind of downplay it. And I don't know enough to know whether they're lying or like what the truth. I just don't know. Help us understand because other banks literally saying they don't need to do what you're doing, but you tell such a great story.
How do we reconcile?
I'll Start and ask Christiane to jump in as she would like. If you have paid there are some banks just recently that are embarking now on this journey and they've been public about that. And our research is that there are it doesn't have at least that are now actively looking at core banking replacements. I'm curious about who you're asking the question to because it really does require to have someone who has the vision of CEO like Harris around what the possibilities are because it's a large amount of spend and it's a scary project to take on. I'm going to let you, Christian, speak a little bit more about the specific technical reasons that's important.
Yes, that's right, Jennifer. And I think I actually think some of these banks didn't think that they needed to do this for a number of years until they started hitting a wall from a digital perspective. And they realized that they could only go so far. So you can build some good integration loan origination, account opening, etcetera. And you heard how we're doing All of that in parallel with the core.
But when you try to go to a fully digital operating model, that's where you start to hit the wall with These legacy systems because they're not able to pull data in and out as easily, right. And so bringing a customer on through a digital front door, it's a much simpler use Case then, truly knowing and recognizing who your customers are and using that data to bring a differentiated experience To help them find products and services that they know they may not know that they need yet, but that you can help them discover that also deliver incremental revenue opportunities. So that's part of it. We're seeing and I reached out to a big four consulting firm before this week just to get kind of what's their pulse. And they shared with me that they're having conversations or knowledge of about 20 different core banking that are either contemplated or starting to kick off from an RFP perspective just in the United States.
So I think you're going to start to hear a lot more about this.
I'm going to take this down to the 5 foot level, okay. There's a joke among CIOs that CIOs that in any industry that take on core replacements like in the airline industry or the utility industry or The banking industry, CIO stands for career is over, okay. So here's the deal. In our in major banks across this country, go back to what I said. They all operate in silos.
They all have technology executives for each silo and they may report to some technology executive for the whole company, okay. And you think about the length and complexity of these projects and you think the Head of Retail at U Pickett Bank is going to convince the Head of Commercial Technology or Wealth Management Technology or Capital Markets Technology to bet their career on coming up with a core replacement. It ain't going to happen. That's why they don't want to do it. So they say, hey, I can't get that done.
I don't have the political power to do that. I don't I'm not going to be in my job long enough to do that. No one's going to pay me to do that. That's what's happening. And so they say, I got enough bubblegum and string and others tape that I can put around my core I'm going to go another way.
That's what happens at
the 5 foot level. Good. John and Curry.
When you look at this and talk about all the complexity and everything, and this might be something that I'm assuming Harris might want to dial in here, but the once you replace this, once you get the deposit system done, you have this new core system, does it make you
a better acquirer of another bank.
Does it make you a much more efficient acquirer that is more plug and play? And then conversely, and I'm not saying you're going to want to sell yourself, but could a larger bank go on to your system more easily if they were to buy you because you've got this upgraded core system.
I'll speak to the technical aspects of that and Harris do you want to start or? Yes. From Aspect standpoint, our ability to bring people to bring other organizations on will be simplified for us to bring on other organizations. For them To acquire us and convert the conversion process of the data is significant. And so it's there's a bit of it will be a big effort for them to go through
that process Horace. But, Harrison? Yes, I guess I'd say,
that's not why we're doing it. I think it I do think it will make us a more interesting acquirer because I think we'll have really fabulous products and technology. As far as becoming a more being target. That certainly wasn't the intent of it either. Although, I think it does make us a more valuable company that way for sure.
This is this is like building pyramids. It takes a lot of slave labor and a lot of time. Christian drives them pretty hard. No, it's a long hard thing to do. It's not something that anybody does lightly, but I totally agree.
We're going to see more banks having to do this. I mean, how many of you are using Blackberries? Well, you all used to use Blackberries. I I mean BlackBerrys came along way long after most of this technology was developed. Now core systems are designed to last a long time.
So it's not like I mean, different kinds of applications have different life cycles. But still the systems that this industry is build on. We're not designed to handle the kind of real time interactive, we think about it, they're both for batch processes in the middle of the night and all that kind of thing. And everybody's made them work, but this isn't slowing down. And I we don't know what comes next.
One of the things that was actually really appealing to me about the whole venture was partnering with someone like TCS. It's not owned by private equity firms, it's going to flip it, gets flipped again and all of a sudden everybody's gone, they're not supporting the product. They're going to be around forever. I mean, this is like 450,000 people supporting 150 big banks around the globe and building they're going to have to support this technology. And that's one of the really valuable things I pick we pick up out
of this is having a really strong partner. So anyway, just more thoughts. Hey, Harris, can you you've shared this with several investor groups over the years, but can you just share in the decision making process to go with TCS, you called up a person who's recently passed away, Clayton Christensen. I don't know if you'd be willing to share his that discussion that you with him.
Yes, I will. Many of you know the name Clayton Christensen probably. He passed away a week and a half ago and I myself thinking about him a lot last week. He was kind of the father of the whole concept of disruptive innovation, a legendary professor back at Harvard Business School. And he grew up right about 2 miles from here.
His first job and real job in life was as a teller down on the first floor of this building. Ann and somebody I've known for a long time when we went to business school together and a phenomenal human being. But he in fact, he said that Steve Jobs had one business book on the shelf and it was Clay's Innovator's Dilemma, the book he published in 'ninety 7 and Reed Hastings kind of the same thing. I mean, he really changed the landscape of how companies think about innovation. And anyway, he told me one time that he'd gone on TCS' Board because he thought it was going to be a really interesting window into how one understands the economy in India, which is in terms of population, you got China and India are 2 really in places.
When we're talking to TCS, I went to and I said, tell me a little about TCS. Because he was on their board. And I knew he wouldn't sugarcoat things because he's not that kind of guy in the first place and because he was a personal friend. And he said, they are the real deal. This he said, this is and this is somebody Clay is somebody who had dealt with he fundamentally warmed Intel.
Andy Grove, the history of Intel has really wound around Clay's influence there in a lot of important ways another tech companies. And he said TCS is as good a technology vendor as you'll find in the world and they have as much integrity and when they say they'll get something done, they'll get it done. And they're just a great partner and we found that to be the case. So that was kind of instrumental in my own thinking about, yes, this is the kind of partner we want.
Thank you. Appreciate that, Harris. Is there maybe one last question for this panel? Okay.
Paul, Paul Hamelos.
Thanks, James. I'm interested in hearing how much cloud is involved in your strategy. I don't think I heard that word once today, whereas if I listen to Capital One talk about their cloud transformation, their journey to modernize their architecture, it's all around cloud. So can you just talk about how much cloud is included in your strategy here?
Yes, happy to do that and anybody else can weigh into. Most of what we do today is in our data center. We do have some heavy cloud use as you heard about Salesforce. But when it comes to the core, what we're really doing is starting with the capability in the future. The versions of the core platform we have in production today and the version that will be going live with deposits are going to be running out of our data center initially.
But our conversations with TCS and with all the other vendors in the ecosystem are don't box us in, don't make it so that we can't have to be in a hybrid model where what's critical for the cloud, what makes sense for its elasticity or its capabilities, we can't we want to be able to leverage that. And so we're not sticking our head in the sand. But if you look at what happened with Capital One, you can also go too fast, right. And so for us, we're really focused on those capabilities that are going to allow us to do what we need to do. And if you look 3, 5 years down the road, It is going to be cloud pretty much.
That's the way the entire industry is moving. So the decisions we're making today with our base sure. And the technology and the partnership with TCS and others are designed for us to be able to get there at the appropriate time with the appropriate controls at the appropriate cost model.
Jennifer, do you want to just highlight one of the things that I thought was interesting somebody one of your teammates shared with me once upon a time is that there are use cases for the cloud and use cases when you don't want to use the cloud. Recently, a couple of software vendors that I've been using require like Bloomberg, example, those of you who use Bloomberg, if you want to use their Excel feature, it's all done by the cloud. You're actually going out to the cloud and it takes really, really long time to save the file, if it's a big file and to download stuff and update stuff, SNL, Capital IQ, S and P Global has gone to the same thing. So again, the open interface, it takes a while to get to the cloud and come back from the cloud. So maybe walk through the use case of when you should use the cloud and when you should not use the cloud?
This point around going at the right speed, right controls is important and making sure the vendors in good shape. For example, earlier this week we used Teams, Microsoft Teams instance went down around the entire world, impacted our productivity and all of their customers as well. So it has to be implemented very strategically for specific use cases. It's great to help when you have unpredictable demand and we have to offload some of that demand to a different vendor or out used the capacity provided by a cloud provider. Our demand is predictable at this point.
And there's other reasons that allow us for faster deployment. There's some capabilities that we need to build at the right pace to be ready for that future including really speeding up some of our DevOps capability, taking advantage of our automation capabilities. There's not a business imperative right now for us to go to the cloud. It would cost us more money back to chasing what seems really interesting. We're going to do it when it makes financial sense and sense from a risk standpoint as well.
Okay, thanks. I'm going to say thank you to Jennifer, everyone from the technology group. We really appreciate you taking so much time today. Let's just give Jennifer and her team a round of applause.
So we're a little
over time. Let's I'm going to call a little bit of an audible here. If it's okay with everybody to take about 20 minutes to do what you need to do, get some food. And we've brought in some of you have been here before, you know this, it's the good stuff, it's the Red Iguana Mexican food. So go ahead and get your food and then about 20 minutes from now, so about 12:45 Mountain Time, 2:45 Eastern Time, we'll reconvene and we'll do a little bit of a working lunch as we go through risk and credit.
Thanks everyone.
Came back here and got a nice pack and drove home. Are you still? Yes. But it was this morning driving down.
Okay. Thank you very much. I think we're going to go ahead and proceed with the agenda at this point. Thank you again for joining. For our next series of presentations, we have our Chief Risk Officer, Ed Schreiber here and our Chief Credit Officer, Michael Morris.
And so they will both be going through their presentations. I was thinking back 10 years ago for the 1st Investor Day that I was here for, as an employee anyway. It was all about credit and were there any green shoots to be found or to be seen. And we struggled to come up with some green useful. We did find some.
And here we are today and we just we really are in a very, very pristine sort of situation. And so I'm excited even though it's not as controversial as a topic as it was 10 years ago, it is still a critically important topic. So we'll cover that in-depth. And after that, we will there will be a short question and answer session there. We will then turn the time over to Paul Burdas, our Chief Financial Officer, to review some of our financial things and to kind of show you some perspective of the yields on our loans and risk adjusted yields on loans and the securities portfolio and the risk we've taken out of that.
So it will tie in pretty closely with what Ed Schreiber and Michael Morris have been talking about. So with that, without any further ado, I'm going to turn the time over to Ed and Ed's just returning from knee replacement surgery. So he's doing fabulous. But thank you for coming back for this event.
Good afternoon, everybody.
I'm going to
hit some key highlights. Most of you have been around when we talk about risk management. So I'm going to do a couple of highlights and then Michael is going to come in and talk about the credit book and emphasize a couple of things, 1 on oil and gas, the book in general, some of our concentrations and then where we're having some stress in the book, but those book sizes from an asset standpoint are pretty small. The first slide I have in front deals and you've seen this with Harris headed up, but I want to emphasize a couple of things here.
First of
all, on the simplify the processes and all the talk you've heard about technology, data management, etcetera, all of that from my perspective, either being 19 years as a bank examiner and being a Chief Risk Officer in other companies in this one, all of that helps reduce the risk of the company. The better we understand our own data, the better we can stress test and understand potential outcomes and make adjustments on how we approach things. The better the technology is, the faster the response, all of that helps simplified things, but also from a risk perspective helps us manage things better because we know more. On the Simple Life process and you heard Keith earlier today talk about comments around wealth management. We had 2 registered investment advisors.
We had multiple wealth management departments, etcetera, right. So all of that has been simplified, all of that helped reduce risk. So trying to get your arms around from a compliance standpoint, 3 wealth management groups, 2 registered investment advisors, a couple of broker dealers. From my perspective, and I joke with this, some of you heard this before, they don't make enough mail locks in Advil to help me get through that. So all that's helped reduce the risk to the company.
And Rebecca Robinson, who you heard speak, really has done an excellent job of taking all of that simplifying it and bringing it down and making it so, 1, you understand it and 2, you actually make money with it, right? So on this slide, that's really one of the key things I wanted to talk about.
So let's talk about how we've matured
a little bit more our risk management process. So all of you are well aware we have a risk management framework and all that's designed really to help run the bank and keep it in a balanced perspective, right. Before I got to the company, which has now been about over 6.5 years, there's a whole construct that had been built and Harris had led around a 3 legged stool and all those need to be in balance. One of them is risk management, one of us in our expenses and the other one is on income streams, right. So what we've done is after we've identified the risk management framework and developed key triggers where we want to take our time to make sure we do our homework to determine do we need to alter our course, right, and adjust what we're doing from either an underwriting standpoint, a concentration perspective, right.
We've now taken and we really want to push from the second line down to the first line a couple of key things. And on this chart, you'll see a credit risk management framework. So we have an overall risk management framework for the whole company with all our key risks. Probably one of the few companies that have taken cyber risk out of operational risk our technology and moved it as a standalone level 1 risk. So we did that 2 years ago.
So we think enough about cyber risk. And if you're wondering on the proverbial term what keeps me up at night, right, if you read everything on cyber, it's not a matter of if, it's a matter of when you're broken into, right. So the key is developing 2 things in there, and we have a great Chief Information Security Officer, and Jennifer is the CIO spectacular to work with, right, from a team perspective. So the 2 things you need to do is make sure you manage and oversee that correctly. But more importantly, and one of the things that Dave was trying to talk about, and I'd recommend if you asked any bank, what is your playbook when things go wrong because it will happen here?
And then how do you recover quickly from that? And if you followed various banks that have had issues in this space in their recovery time or lack of recovery time, right, that means their playbook and their structure and how they manage that and how they trained for it didn't work well. So that's something from our standpoint from a Cyrus perspective, leveraging off of what we have here that we've developed a really great playbook, and we continue to do what we call tabletop exercises. So we do mock reviews where we put the whole senior management team in a room and we come up with a scenario and it gets played out and then we figure out how we're going to react to it and how we manage it. So if that time comes, we can do that in a very effective manner.
So I'm going to come back to my point here. What we have done now is we have pushed down to what I call the first line to the lenders, right, versus this always being in a risk management. And we've now taken and developed what I'll call a sub risk management framework for various aspects of the company's operations. Since we are not structured like most large banks. You would find that for commercial real estate lending, for whatever type lending or various business lines.
There would be a risk management framework designed for each one of those. We're not structured that way. So what we've done set up a program where we've done for all of credit, and we've developed 2 years and a capacity or an appetite in all of credit, but it's now led by the lender. So Olga, who you met earlier, leads one of these lines in here and develop a key trigger signed off by risk, but we've shifted the focus of the company where the second line was driving it down to the first line, who is the closest probably the best at managing the risk. So that is a huge additional step in maturity in the company and we'll finish out with probably 6, what I call sub risk management frameworks off the master, right, where the first line is actually managing that and running that and escalating it versus where traditionally we've done that over the last 4 years where the risk management group has done that, and that's a huge culture shift in the company, very positive.
And second of all, it's just the right thing to do, right? You get the people closest to it. We've talked a bit about concentrations, Michael is going to do a little bit more discussion on this, but it's a couple of things that we've started to highlight here is one of the key things we put into place that wasn't in place in the last downturn was hold limits. So how much do we want to loan to any one obligor more to combine entities, right, who have financial interdependence. So to us, the fundamentals of managing concentrations, 1st and foremost, starts with your underwriting standards, so that service loan to value, etcetera.
The next is the hold limit, how much do you align out to any one company. So our legal lending limit, right, calculated under a statute, at 15% of the capital structure, right, because we're national banks. State banks actually can have higher lending authorities normally about 20%. Our legal lending for the company is about 1 $200,000,000 right, if you did the calculation of the 15% of Tier 1 capital on
the reserves. There's no way we
can come close to that, but that hold on the grid is trying to figure out how much do you want a loan to a company, right, acknowledging the fact that whoever thought that GM, and I'm not picking on any particular company here, Xerox and other companies all got themselves in trouble, but everybody thought at one point in time that what was the quote for GM, what's good for GM is good for the United States or vice versa, right when they asked to head a GM, you think they'd say that now? I probably ought to let that go like that. So in here, we've taken the stress testing now though and matured this process even further. So as we're looking at our underwriting standards, our hold limits and then our aggregate capacity that we have from a risk based capital standpoint and how much we want in segments. We now and Harris had mentioned this earlier, right, the CCAR process, one could argue or contend, does that really help a bank manage its balance sheet.
It helps the Fed, but does it really help manage the balance sheet? I would argue a contingent does not. But the stress testing itself and the maturity of that does help you manage the balance sheet. So we've embedded stress testing on a regular basis, probably even more than actually we would have done from a CCAR perspective, so we stress test more often, but more importantly, from an ad hoc perspective, if we're seeing trends either in the national economy or within the Western footprint of the United States, right, where we loan our money. We do ad hoc stress testing and then from there, we'll take a look, do we need to adjust our underwriting standards?
Do we need to look at the whole limit grid and make adjustments? And I'm going to come up with a couple of examples of how we manage that or do we want to look at do we adjust the overall aggregate. So we'll talk a little bit more about oil and gas, but exactly in oil and gas, we used to have about 135% as a target exposure to oil and gas lending that's now down at 80%, right, all based upon the stress testing of what we went through in the last oil and gas cycle. On this page, you can see some of the changes in the composition between 'seven Q4 and now. And there's some key highlights that you'll see in that upper grid and changes.
But if you look across and how this looks, right, we have made significant changes, particularly from the last major downturn to what you see here now, right. And all that has to do with our stress testing lessons learned, if you will, too, but really we're guided and driven by stress testing and then the data that we have. And if you remember in the oil and gas segment, we were one of the first banks in the last downturn who said we don't like what we C, and we ran about 5 to 6 different scenarios, and we started provisioning before anybody. There are a fair amount of folks that questioned us that what do we know that anybody else doesn't. I'm not sure if we necessarily knew more, but nevertheless, everything showed us on what we put in for governance and stress testing said, we ought to pay attention here and we started making those adjustments and we're proven right to that cycle.
We're probably overly conservative with our numbers, but I'd rather do that than the other side of the house. So Michael, if you would on this chart, much coming up. So, Nishu, I don't want you to if you want to add some additional color on the concentration and composition of the loan book, if you would.
I'm going to use the red laser pointer here, but
I mean, I think the key slide here over
on the right, as you can see our loan growth and concentration management, but what you see on the left hand outside of the access as you see a real emphasis to decrease our exposure in land and A and D. And that's been a managed process. It's been part of the strategy. You also see a conversion from 2 thirds construction to 2 thirds term. So that also is part of a big part of the strategy in the company.
Over here, you can see owner occupied is something that we are out trying to acquire relationships. We like owner occupied. It comes with 2 repayment sources. Primary as a business, secondary as a real estate. We've had a good LGD experience in this space over the years.
And then you can also see oil and gas. This is where it grew. This is where it is today. General C and I is something that we've focused on. As everybody has mentioned before me, we're a business bank, we're a commercial bank for the most part.
Although we have a great consumer book too, which I'll get into. And then you see here the emphasis on municipal lending, which has been a real growth engine for us. Harris talked about it a little earlier. It's one of his brainchilds actually. And we have really fanned out across the country, mostly in our footprint, but even outside of our footprint because of the granularity of it, the credit quality and the way it maps in our risk grade system.
And then CRE, again, you can either deemphasis of Land and Andy here and you can see the shift of construction. So this is the 2 thirds, 1 third over here to more of a 2 thirds term, 1 third construction, which is all again by design.
Thanks, Michael. This slide actually shows the same thing in the adjustments regarding CRE, but then looking at it for less than 1,000,000. Let's talk a little bit more about how we really truly manage things when we see concentrations and we look at our stress testing. So on this slide, you can see our risk rating system. So we do a probably default ratings with our models between a 1 and a 10, right, with 10 being the lowest of the past grades or the weakest of the past grades.
So when we have found when we start doing our stress testing, we start seeing things. So we'll start making adjustments for either debt service coverage or on the bottom bullet here. Here. We are not a bank who's going to abandon necessarily an industry. So growing up, so to speak, in the industry and being on the East Coast, most of you will be familiar with the bank called Fleet, right, that eventually was bought.
The Fleet Bank was notorious, my terminology, not the company's, right? I should have my legal disclaimers all up here. The fleet was notorious for when they reached their target or their limits on concentrations, they would just shut the damn thing down, right, and no longer do any lending in that book. So if you are a customer and you are in the pipeline, you are just completely shut off. So we take a completely tact or approach to this and we'll say we'll make adjustments.
So for instance, if we see some things, we'll say on that PD pass grade, we'll no longer do 10s, 9s and 8s, right, and we'll only do 7s or better, and
we won't allow exceptions to policy or if there's going to
be an exception to policy, Michael has to approve it. If it's a big enough deal, Michael and I will sit down and have a discussion. So we'll stay in the industry and what ends up happening over time when we go do that, it ends up improving the quality of the book, particularly on the probably default basis, but it keeps us in that line of business and it keeps our customers, right, knowing that we will back them, but we're not going to just cut them off right when things are starting to go back. So the key is when do you invoke that and we are that's where we use all our data that we have, the stress testing and we use a couple of major companies, Reese and some others, and I'm not endorsing anything here, to help us and guide us on how we make all these adjustments. But as you can tell, and what we've given you here are actually real life examples without telling you what segment that we've done it in, right, but we've actually made adjustments, particularly an investor commercial real estate where we've made adjustments like this already and we did that 2 years ago.
All right, so based upon everything we saw with low cap rates and a couple particular industry types in Mercio Commercial Real Estate, we have already made these adjustments 2 years ago on one asset class, about 18 months ago on another, we're not trying to outguess the market, but what we're trying to do, and this goes with the theme that's been mentioned earlier by various folks, is particularly compared to the last downturn. We want to make sure that we are going to be a positive outlier and we perform better, right, through a downturn. The downturn is going to happen at some point, but the adage is crystal balls are made of glass, they break, so who knows when. The key for us is making sure that we thought about it and we're prepared for it, right, as best as we can be.
I'm going to go
a little bit more about losses and we've talked a little bit about this and Harris had mentioned it, but through everything here, right. Our loss history here is really good and one could potentially argue right now, particularly given how low our loss history is, are we taking enough risk? Beto in a discussion last night that was raised and our CFO, every once in a while will remind me, are we taking enough risk? So you probably have seen in other areas that we've made some adjustments in how we're going to loan money on the installment side. So we do try to keep a balanced approach here, right, and we're maybe slightly to the conservative side, but from our perspective and at least from my memory, through all the downturns, what you earn typically in 3 years in interest income on loans can be wiped out in 6 months.
So keeping that in mind, we're making sure we're balanced and we might tweak things up and down, but we're using that on an informed basis, particularly with the models compared to what we didn't do in the previous cycle.
I want to try to finish this
up here. So a couple of things here, and this still goes the past dues, oreo and everything. And you can see through all of these charts, right, that we're in the green that we have typically been out equal to or better in performance than our peers, right? And our goal here is to make sure still with that theme that we get this right as possible, but we're trying to be a positive outlier because it gives us flexibility. The one thing that Paul will be talking about here in a little bit and you'll see that is even with what we have put into place from a risk management framework, right and how we govern this company with that, right.
The risk adjusted loan yields and spreads even with this, right, are actually better than our peers. So you can accomplish 2 things at once here. 1, have a great governance and structure put into place to manage the company and make sure you get early warning signs quick enough, early enough to make adjustments in your path, but you can still get yields, right? We had great loan growth for 2 quarters last year, and there's always this balance, have we tightened things down too much from a risk perspective that it slows growth, that is a tension level, a natural one that gets done between the lenders and Michael and I all the time, right? And it ought to be done.
So it makes this question to make sure do we have it right, is it balanced. So but I will tell you that I think we've struck a pretty clean balance in the approach of making sure that we've, right, have a well done balance sheet and it's geared toward ensuring hopefully that if we have a downturn, we will perform better, particularly much better than what we did in the last downturn and compared to our peers that we should fare well. So I'm going to turn it over to Michael to go through more detail on the book and then we'll take at the end. So thank you all for your time.
I'm going to stand over here and use a laser pointer a little more for the group. But I want to start out by giving a pitch to our snow. If you weren't thinking about skiing tomorrow, tomorrow is what would be considered in this area an epic day. And there are people all over the world that watch weather patterns and try and yet here by following the weather pattern, you happen to be here. So that's just a pitch for the greatest snow on earth.
I wanted to cover 3 things. I want to first talk about some thoughts and comments that you heard earlier about how does credit fit into some of the other discussions around technology, breaking down silos and some of the things that you've heard already. Scott talked a lot about simple, easy, safe, fast fast, safe. And that has been a very collaborative process. So when he talks about breaking down silos, it's really about the technology side, the risk side, the credit side, the business side, operations all coming together I'm thinking about how can we speed the process up without really sacrificing credit quality or making risk oriented mistakes along the way.
And so all of that has been really well thought out. I'll just give you a couple of examples. Sometimes we'll been 40 pages on a write up to process a $2,000,000 CRE deal. And so what we have done over the past couple of years is we've taken a look at forms and wet signatures and ways that we exchange information internally and we've cut out a lot of the bureaucracy again without really sacrificing credit risk and credit process, a good example of how we have teamed up really with the technology side is if you think about spreading of financial statements, whether it's C and I or CRE, we kind of view the wholesale book as almost all the way down to $1,000,000 Even though we talked about micro and we talked about small business, we get pretty much really into the weeds and we risk grade almost everything down to $1,000,000 whether it's C and I or commercial. It's a process spreading was a process that 8 years ago was very distributed, done in the field, done at the affiliates, done by various lines a business.
The next stage for us was outsourcing spreading, which sped the process up, improved quality and lowered cost a bit. And I want to talk about an initiative right now that's underway that's very exciting. Jason, who you heard from earlier in the technology side is working on a project, it's a pilot, which is to create a portal for customers, prospects to scan a financial statement, feed it into our work queue, turn the spread within an hour inside of an hour, risk grade it And give the banker a head start on the front end of the end to end process, the underwrite process. That can be done. And we're looking hard at that.
We're spending money and resources to invest in that. It's not a great spend. It's not a huge spend, but it will be very noticeable to the client and the banker. So that's how we work together, one of the ways that we work together with our technology partners and other senior managers. So I wanted to cover that before we got into some of the metrics that I know a lot of you see, you see them in our earnings, you hear us talk about them.
And like I said, we'll take questions later. The other thing I want to mention is how the credit organization is structured. So the independence functions of appraisal, valuation of enterprise value, the valuation functions are in credit. It's an independence function. We have about 70 people in that world.
And I think you probably know that we're about 85% secured in the lending we do across the company, whether it's consumer. Consumer, we're 95% secured. So we spend a lot of time on the valuation aspect of that and that's got that has to be independent of the line and it is and it's run very well. The special assets group also is in the credit organization. A lot of people ask, I think it was asked on the earnings call and our regulators ask us, what is your playbook for the downturn?
We actually have a playbook for the downturn. A lot of the attributes of the playbook we have learned through the cycles. We learned from the oil and gas turn down or downturn a few years ago. And so we've incorporated into a playbook how we're going to respond when things come. And if they come hard and fast, we think we'll be very well prepared.
You know about our reduction in force initiative that we undertook last year. We spent a lot of time on special assets to make sure we weren't taking a lot out of that, if anything, out of that because we know where we are in the cycle, we know it's going to come. And then I have a credit down line that really focuses on the wholesale book. So approvers throughout the country, really throughout our footprint, 3 regional credit execs and then they each have their downlines and they each partner with bankers down to $1,500,000 So every banker that is originating $1,500,000 and above has a credit partner and we call them partners. We don't call ourselves credit administration.
We view it as a partnership. Our approvals are a dual sign off process. We don't use committees. Some of our affiliates like a committee process to get a deal ready to be approved, but it's the banker and a credit partner that approve every transaction. It's a dual signature process, doesn't get hung up in a committee.
Committees can be good, But they can also be bureaucratic. When you get below $1,500,000 as the Chief Credit Officer, I delegate authority to centers. And so we talked a little bit about branch managers and the authority and the empowerment that we want to give them to React in the marketplace and React in the branches. That authority isn't going to be super high, but it has to be earned. And Keith talked a little bit about what it means to earn it and what your credentials need to look like and we spend a lot of time on that.
A lot of the delegated authority in centers is by job hype. We have a log of everybody who has credit authority in this company, secured lending authority, unsecured lending authority, overdraft authority. It's in our system. We track every exception. We track breaches in exception thresholds.
We dial in to where it came from. Every banker has their own banker code. So if we have a banker that might be a little reckless, we'll have a conversation. If we have a business unit that might have inflated delinquencies, non performing sets. We know where it comes from.
And a lot of it comes up through what Ed talked about, which is an enhanced risk management framework with key risk indicators, trigger levels and a whole escalation process that goes right up through the ranks, let's us zero in on where there might be some weaknesses in the company, also where there would be strengths. Also in my organization, I have a credit analytics group and tied to that is the ACL or the ALLL function that you know about and
that we talk about often.
And then the risk grade function and the spreading function are also in the credit organization. This is a little bit of a repeat of the slide we saw before, but here is kind of a time series of where you see our growth is taking place. The way to read this is left to right here up each one of these bar charts. So you can see C and I, non oil and gas growing. You can see a pretty flat real estate growth curve.
Over here you see our net charge offs, which we talked a little bit about relative to let's see, on the right, yes. So relative to our peer group, we've always hovered below the industry and below our peer group average in gross charge offs and net charge offs. There have been times when we spiked, oil and gas would be an example, back in the day A and D. But the way we are organized now, we think that we're managing our exposures a lot more expertly with second line of defense shifting some of the accountability for credit quality and authority out to the first line of defense. And Ed mentioned the build out of the risk management frameworks, which came from the bottom up.
Those work groups got together. They made recommendations on their KRIs. They had to be approved by credit, they had to be approved by risk, and it was a very collaborative effort. But the first line of defense really owns those risk management frameworks. This shows our weighted average great.
Over time, in the C and I portfolio, you can see our problem loan trends where we are in criticized, classified, monocruals. This is the energy
downturn here.
Outstanding balance by industry in the commercial book, diversified, very much in line with the strategy of the company. So none of this growth and none of the proportional balances in here are accidental. This is where we want to take the company, where Harris wants to take the company and where leadership has sent us in this direction. This is our commercial real estate weighted average risk grade. You see a little bit of an upward trend here.
We went from one risk grade platform to another right about here. And the model for non stabilized commercial real estate, which is basically our structuring book, hits vacancy very hard and it should in certain asset classes, office, if you don't have pre leasing and you have some vacancy, a construction deal, you need to know about that. It needs to be heavily weighted. Multifamily is a little different. And so our risk grade model for multifamily construction has a pretty heavy weight on vacancy, but multifamily absorbs.
And you can't just call it 0 vacancy on day 1. You really have to look at some kind of future vacancy, which is something we're going to do and tweak the model, but this is not natural degradation of the credit quality in the portfolio. Multi family is holding up very, very well for us in spite of the warnings and in spite of potentially a little bit of oversupply in the market. Okay. Problem on trends in the CRE book, I mean, you can see where we are on criticized, classified, non accrual, very low, very positive comparative to the rest of our C and I book.
You can see where our exposure is by asset class. We've got a little of everything over in here. These are the big four that most other banks would call their big four food group asset classes here. No real stress in any of these today.
And then this is
the term book. You can see where our weighted average LTVs are. We look at this monthly. We have a data tape that we run to try and know where we are at any one time. Sam with debt coverage ratio.
We just converted to a different methodology and what we and how we characterize a term loan. We did it to sync up with call reports. Call reports ask you to call a term loan, a term loan when you get certificate of occupancy. We used to say certificate of occupancy and some kind of minimum stabilized DCR is what we need to call it a term loan and move it over into this category. So this less than 1.0 is on properties that are Sorby.
Got their CFO, certificate of occupancy and are now absorbing trying to get to these ratios here. So that would be a change from prior charts that you might have seen. Again term loan by collateral type and I talked about the 2 thirds to 2 thirds shift construction to term. It's a good thing. We like our term book.
We have bankers and business units trying to go out and compete on the term loan side that's very hard for us to get. There are mostly many firms, hard for us to compete with CMBS and the agencies. To do that sometimes you have to take a little bit lower coupon, but sometimes the risk profile is that much stronger. And we have more and more clients that are liking the LIBOR spreads of today and then swapping with us into fixed, so that the tenor and the fixed rate give them an opportunity to warehouse the loan in between real long term markets and stabilization. Consumer portfolio, I just want to say one thing about the consumer portfolio.
Through the CCAR process, we've always felt we had strong underwriting and we haven't a lot of our underwriting boxes by the way through the simple, easy, fast, safe process. Our boxes have stayed relatively static relative to our total experience of going through the cycles. The consumer book. It was interesting through CCAR in the 30 CCAR banks at the time, the Fed black box after we produced our stress test thought that we had a great consumer book. We had the lowest loss output of all 30 banks through CCAR through the black box.
We think we do a couple of things that might be a little different than other banks do. First of all, I mentioned 95% secured. So it's really a jumbo mortgage book, a heckle book with about fifty-fifty first and second trust deeds secured And then some card and some other unsecured term. And so we think that's different. We think that other banks would have a higher profile of unsecured to the consumer.
And we may become a little more aggressive in that space if we decide to grow card. But as we said, we're mostly a footprint lender, we're a relationship lender. Most of the card growth comes inside the footprint. In fact, the mortgage portfolio is 98% in our footprint. We're not Rocket Mortgage, it's not a commodity.
It's a relationship business, which I think is really important and really helps us in our local markets, especially when a downturn comes, we know how to collect those. Our special asset philosophy by the way is to work with the client. It's to rehab the business. It's to work with the consumer to get them on their feet. Ed mentioned, we don't abandon industries.
That's not our first action. We don't look at big portfolio sales. We don't outsource collections to 3rd parties. We like to stay on our footprint and get the positive reputation from doing that. So you can see the consumer loan book and it has been talked about earlier, it's very strong.
Our FICO averages are great. Our underwriting is really good. We as we go up the LTV curve, I should say it a different way. The higher the balance in the consumer world, the more there is a grid that kicks in that lowers LTVs, even if you have strong DTIs and FICOs, we have an exception process in these centers that could go 12 up in the center, but sometimes there are loans that we should make, want to make that might be a little bit out of the center and it gets kicked up to corporate credit to approve, but it could be 1 or 2 percentage point LTV kind of issues or a couple of bans on FICO. Here you can see again in consumer, our DTI distribution, we refresh FICO in some instances monthly and in some instances quarterly, but no less frequent than that.
And so we always kind of know where the health of the FICO, at least one metric is in our portfolio at a given time. We also use a BK score. A lot of banks don't think about the BK score and there are bureaus that offer a BKscore. And BKscore is really a measure of utilization on consumer credit and gives you an idea of propensity potentially to see a personal bankruptcy down the road. We have score bands for that.
We again stay within that. I think that has helped us that and being secured in our consumer book, I think are 2 real positive strengths that we have. We've talked a little bit about this in earnings. Where are the weaknesses in our portfolio? We don't have lines of business that focus on Ag.
Ag may be a little bit more of a line of business. A lot of it is in Idaho, and we have a group there that finances a lot of potato and beet sugar beet farmers. We've been tracking this for probably 3 years, elevated criticizing classified loans, but the net charge off rate hasn't been high or really out of the box. Commodity price is a big factor. Weather is a big factor.
And we've stuck with our ag clients through about a 5 year commodity depressed cycle. Starting to come back a little bit. Potato came back a little bit this year or in 'nineteen. We're seeing some improvement in the ag book. When we see criticizing classifieds double what our core portfolio is, that's what gets our attention.
This is sort of NAICS driven. So we do a complete portfolio scan and say, okay, where is all the ag in the book, 7 affiliates. And what are we going to do about it? So what we did here in all three instances is we put these in what we call a cautionary category. It's through policy, all the bankers know about it, policy bulletins are sent.
Cautionary for us means you need to have a credit partner sign off on your originations and your renewals. In many cases these loans are small enough that field authority is where the credit approval is. In these industries, you need to have a credit partner sign
off with
you on these transactions. And of course, these can move in and out industry subcontractors kind of nowhere to the list. We have our series and realities of what our borrowers are telling us about where the stress is coming from. I won't belabor that, it's in your packets. Oil and gas, we've talked about there have some headline issues over the past 9 months.
You cover other banks, you're hearing about either stream or midstream kind of issues, oilfield services, of course, in the supply chain of that gets impacted. We did a couple of things through the oil and gas downturn. First of all, Ed mentioned we lowered our a concentration from a risk based capital standpoint. But we also learned a few things through the cycle. You know that in the E and P side that we have 6 month redetermination events where we go through the entire book, we look at the borrowing base, we right size with our sponsors.
Learned I think for this company was some of our loss, a good deal of our loss came through generalist private equity funds versus specific private equity. And so whether they were moonlighting or whether they were really great and have a lot of equity and a lot of capacity and a dedicated fund for oil and gas. We've moved more toward financing the specialty funds. We also changed our mix. We had about 40%, 45% oilfield services in the entire oil and gas book.
We're down to about 20%, 21%. That's by design. We code Oilfield Services as a contractor basically that has more than 50% of the revenue coming from that industry.
I don't think all the
banks do that. There might be some that isn't captured in other banks, but some would say that might be a little conservative. But that's the way we do it and so that's captured in here. Most of our loss through the downturn came from Oilfield Services. So we've changed the underwriting there a little bit and the selection process.
You've seen that some of the oil and gas book has grown over the last year. Some of that is utilization of existing lines. There was some M and A activity where we ended up on the buyer side. And then there has been a little bit of new growth, where it's again, it's a specific company, maybe a new platform company from an existing PEG that we decided to get into. And Scott, of course, has a deep history in oil and gas.
When we get to Q and A, maybe Scott could stand up and take a few of the questions about what's really happening on the ground. Still has a house in Houston, still is close to our bankers. One of the things that we did about 3 or 4 years ago is we saw alternative energy come online, wind, solar, gas fire. And we had an opportunity to hire a banker who, in my opinion, maybe his opinion too, he's one of the best subject matter experts in alt energy in the country, has a great history, great story. So we when we hired him kind of set a limit like we do when we go into newer industries, fill this bucket and then come talk to us.
Let's look at the credit quality. Let's look at your process. So we're growing that book of business. We like it. It's a counterbalance to fossil fuel and more and more ESG Green philosophies are entering the business industry in the banking space.
So we like it. It may overtake our oil and our traditional fossil fuel oil and gas book someday, maybe not
in my lifetime in the
bank or others that are more tenured here, most would say it's really the future, so we've got a really good start on it. Leverage lending, there was a lot of talk about it. We know that most of leverage is outside of the banks. It's taken a lot research to get there. I think the regulators were quite concerned initially when they heard that there were some big bank originators that were originating some fairly iffy credits, some highly leveraged credit and that banks in the participation world, we're out there buying it, just kind of hanging paper.
So we have our own leverage book. We're comfortable with it. We know it's high risk. We know it's mostly unsecured for the most part. Some of it sits in oil and gas, but we have a very tight limit on it, concentration limit.
There's very little capacity for it, so that creates a higher selection when the bankers are considering it. We have this independent valuation process now. We really dig in on projections. And if clients' misprojections and there will be a grading action that takes place. This has some grading risk.
It also has some LGD risk. But we think we manage it well and we think we're where we want to be. Muni lending we talked about. You can see the weighted average risk rate here. And you saw the conversion table earlier about how our PD grades map over to standard S and P or Moody's risk grades our ratings.
These are very, very straightforward credits. They're small, they're large, a fire truck, it's a school district, but really, really high credit quality, as Harris mentioned, a little bit lower coupon. Mortgage book, can't say enough good things about it, their process to take 7 banks, 7 affiliates and merge this book a missed operation into an overall center and unit, great leadership, worked through some early operational issues and is really flying well right now. The ZIP mortgage program as was mentioned, a way to integrate the technology into the origination side. And average balance reasonable.
Like I said, the higher up we go on balance, the lower down we go on LTV And the stronger our DTIs and stronger our FICO's. And then this just shows our LTV and FICO distribution on the mortgage loans. You can see that there's heavy emphasis on the quality of our borrower. We talked about the business borrower as a primary beneficiary to our mortgage product and us as a beneficiary to their credit strength and our knowledge of their business that helps us underwrite them through the mortgage channel as well.
Thank you, Michael and Ed. Let's take maybe a couple of questions on credit for now and then we will move to Paul's section and then we've got the Q and A at the end, which I think we could take more questions on credit and risk at that point as well. Let me come back to the back. Tim Coffey at Ginnie.
Thank you. My question has to do with kind
of the lessons that you learned from the oil and gas the issues that
you had in say 'fifteen, 'sixteen, 'seventeen in terms of your risk rating. Did you make any tweaks to the methodology that you were using at the time? And how do your lessons learned from that time period
to catch you up for
what we're seeing right now in that marketplace?
Well, we did make some changes. When we converted over to the new risk grade platform, we specifically created a model for oil and gas more particular, the E and P side or the upstream. So we learned, I think, from that how to weight that model and where to weight the model. Like I said, the redetermination cycle allows you to constantly right size your borrowing base, which is very helpful. It's unusual.
We learned from the private equity side a little bit more about the motivations of private equity in the space. We know right now the returns aren't great. There are a lot of production companies are managing to kind of breakeven cash flow, not a lot of new exploration. We learned that there are certain basins that we probably shouldn't go deep into
what else did we
learn? Scott?
I would just add to that real quickly that I think it was fundamentally a mix issue, but that energy services business the company has been in since 1995. And we went 20 years with about a $1,500,000 net charge off over 20 years. And so this downturn in started with the decline in oil and gas prices at the end of 'fourteen go Into 'fifteen, 'sixteen. It was a catastrophic collapse of that industry. And so most of these companies that we underwrite, the underwriting in that was about 50%, fifty-fifty equity to debt, very conservative underwriting, term loans amortizing in 3 to 4 years, very conservative.
But when cash flow goes from really good to like negative for 2 or 3 years, nothing works. And so that's what happened. And so consequently, we took the mix from 40% of our portfolio as has been noted to now it's down to less than 20%. So I think mix was part of it. The times were part of it, but these were not hobby bankers that were doing this.
This was all done in a centralized group that had been doing it for 20 years.
The other comment I'd make is when we do the stress testing, so when we are back in the CCAR deal and when that started happening, the key is making sure you're realistic on your stress testing. So how low can oil go? And most people when you keep looking at it, they go, well, that can't happen. So there's 2 things from a risk perspective that always get me excited. When somebody says it will never happen, right, or it's different this time, I guess my head will snap like $180 like we need to talk, right.
So for us in the downturn there, we actually stressed oil down at $25 a barrel, right? And everybody kept thinking, well, is that too low? And it turned out oil we had bets in the company and how it would go and how well got down that far. So we I think we try to be very realistic making sure that all this can happen. No, we take a look at it and we stress it to see what can happen and then hence the results that we've been talking about why did we make all these adjustments.
And Ed, I might just add that not only do we take it down really low, but we keep it there. Because one of the things why we didn't really have lost content in oilfield services in 2,008, 'nine timeframe is because it didn't go down for an extended 2 or 3 year period of time.
One other thing, let me just add on the oilfield services. We also learned that when everything hits at once, even if you underwrite to orderly liquidation value, we call OLB. We've lowered our advanced rate and we've thought more about OLV because things were not trading even at that value because it all hit kind of at the same time. So we've revisited our advance rates in certain types of equipment and inventory. And during that period, arguably the worst period in sort
of the energy industry, be worse than the 80s, 75% of our losses came from the services portfolio, 75%. That services portfolio, the term portion of it is less than $300,000,000 today. We have virtually no exposure in that industry, in that class. And so what we're left with is upstream, which is reserve based loans. It's secured and it's there's a tremendous discounting that we utilize an underwriting that allows you to go through periods of volatile prices and midstream, which is not a great place for equity investors, but it continues to be a very safe place for senior debt lenders.
One more question on credit. Will Waller with M3. I
saw a statistic recently that apartment construction in Salt Lake is the highest percentage of the stock of existing stock. It's around 11%. So if you took all the apartments in Salt Lake And said how many are being constructed right now would equate to 11% of the total stock and that ranked above Miami, which was at like 10%. Do you have concerns about that and what are your views on how that affects the overall multifamily market over the next 2, 3, 4, 5 years.
Well, I'll take that. And I know this market quite well. A lot of the stock is affordable. So the city has pushed very hard for any Salt Lake Valley a new build apartment to have a pretty substantial affordable component, which is going to be somewhere around 80% of AMI and there's some subsidies in there, and that's how they get their permits to build it. So these multifamily projects down here in downtown and in the surrounding area, they're going to get leased because they're going to have a component that's below market.
There was a luxury transaction that was done here that kind of shocked me. Really the first and only big luxury deal that I've seen. It's for Donovan Mitchell and some of the Goldman Sachs folks that have relocated here live. I didn't think it would fly at the rents
that were pro form a
and it beat my expectation by about 40% and the cap rate was about 4.5%. And I just thought, okay, that's frothy for luxury, but mostly everything else in here is going to have a pretty big affordable component and get leased. There's the West, you can talk about the West, there are affordability issues everywhere. And I think about household formation, I think about 69% homeownership at the peak or the trough, however you want to look at it, down to 63% inching back up. But we've had net in migration, we've had procreation, we have kids moving out of their basement, their parents' basements.
So there's still quite a bit of demand for multifamily. It's been on the radar of the OCC for years. It's been on our radar for more than that. We're pretty prolific in the space, but we have great sponsors and we have quite a bit of recourse on that portfolio. So we're feeling okay about it.
Not as great as we would have felt 3 years ago. And but we do have limits. We're managing to our limits and that creates a higher selection when bankers are out there trying to quote
the next deal. So when we
talked to you, when I mentioned before on that one chart where we had 2 years ago made some adjustments, you hit the asset cost. We did that 2 years ago. So I think that's why we're probably pretty comfortable with that. And my final comment here and I'd be remiss if I didn't say this, but a good risk function is only as good as the culture of a company, I am not a big believer in that you have a risk culture and then you have a culture of the company. The culture of the company should have a risk culture component of it.
So without the support, and I'll start at the top at the Board, right, particularly our risk committee and Harris had laid out some of the new members on there that are on the risk committee, they're excellent. Harris, Scott, you have Keith, Jennifer, all the folks that are on the Executive Management Committee, I would view as great partners and supporters of doing things right, which means you balance it and risk is a component of it. So without that, all these changes that you see, everything that's been done could not have been done, right, without the support of the executive team of this company, right? So it makes our lives, particularly Michael's and I's, a lot easier, but I'd probably say we're pretty blessed because I've seen other companies, as I mentioned, as being a bank examiner where you surely can't make that statement and then all hell breaks loose. Thank you guys for your time.
Thank you. Thank you, Ed. And thank you, Michael. With that, I'm going to have I'm going to ask our Chief Financial Officer, Paul Burdes to come up and You want the podium microphone or you want this one? Please.
Yes.
Okay. Thank you, James. Thanks everyone for coming. I certainly I think we all appreciate you being here. I certainly do.
One of the hard things about when you really start controlling Spence's. It's all about prioritization, making hard decisions, resource allocation. I couldn't help but notice that there are no Tia Chips with lunch today. I think that's maybe a problem as it relates to the budget, but we'll be sure to get some. However, I will say there is cake and nobody's taken any yet.
So if you want some cake, please go over and get some. So thanks everyone for coming. We do this every 2 years. And if you take a step back and you think about where we were 2 years ago and where we are today. This page, page I think it says 107, It is kind of a reminder of what we said 2 years ago and where we worked here 2 years ago.
And I am really proud about our performance over the course of the last couple of years. Earnings per share, you can see have gone from 2.60 to 4.16 teen this past year, very strong growth in pre provision net revenue. You can see all of that on the slide. The efficiency ratio, which if you go back 5 years in the Q4 of 'fourteen with 74%. It's under 60% this year.
We feel good about the progress there. We think we better and that's what we're fighting to continue to do. Loans and deposits, loan growth has been great. Deposit growth is even a better story. And I'm a little bit about more a little bit more about deposits today.
Credit quality, we
just talked a lot about that,
I won't get into it, but it is strong and continues to be strong. And capital, we had more capital than we needed a couple of years ago. And just this past year, as Harris mentioned, we bought back $1,100,000,000 stock. Our common equity Tier 1 ratio now is a little over 10%, and I'll talk a little bit more about that too. So let's look at the last 5 years.
So if you go back to 2014, fast forward to 2019, our revenues have grown 30%, three-zero. Our expenses have grown less than 5%. So think about the operating leverage that we've achieved over the last 5 years, 30% revenue growth, less than 5% expense growth. And so that creates and I think you're familiar with these bars at this point. The gray bar is sort of the top quartile, the blue bar is the bottom quartile of our peers and you can see that our PPNR is in the top quartile over the last 5 years because in the upper right hand corner, our expenses have effectively, I would argue, been flat over these last 5 years.
And as you know, we provided an outlook for next year, which is not just flat, but flat to down. And I think it's important and it's important part of our story and it's something I want to make sure we continue to reiterate as we go through the day. One of the big changes over the last several years is the composition of the securities portfolio. So if you think back to 2,005, going back even further now. On the left hand side of this chart, you can see the composition of the securities book in I'm sorry, yes, 2,005 in the composition of securities book today, completely changed.
And so I'm going to talk about in composition and risk profile. And I'm going to talk a little bit more about composition of risk profile in both the securities portfolio and the loan portfolio over time. But you can see here how the composition of our securities portfolio has changed. And then the securities portfolio yield on the right hand side, you can see that and I'm going to talk a little bit about why that yield is where it is. The point, I think everyone knows, the point of the securities portfolio now is on balance liquidity.
That's number 1. And it's very important. These are relatively short duration assets. We don't go over 15 years on anything we buy. And it's highly liquid, which is really important as we think about liquidity, liquidity risk management.
So it exists first for liquidity risk management, second for interest rate risk There's a very little bit of credit risk in there, largely related to our municipal portfolio strategy. But this is a securities portfolio that exists for liquidity and for secondarily for interest rate risk. So let's go back in time, okay, 2,005. Let's do a little kind of thought experiment and I'll be the first to admit that the numbers aren't perfect because we had to make a lot of simplifying assumptions, particularly around the peer analytics. But I think it's directionally right.
And I think it tells
a really important story that not only applies to the investment portfolio, but applies to the entire balance sheet and the risk management infrastructure we put in place over the 15 years. Take a look at on the left hand side, the securities portfolio spread. This is where our spread was relative to peers 15 years ago. And you can see we really we stand out on the right hand side. I firmly believe that spread and risk are tightly related.
And so this implied that there was a lot of risk in the portfolio, and in fact, there was. You may recall for those of you who have followed us a long time. We had collateralized debt obligations in that portfolio, upon which I believe we lost about $1,000,000,000 over the kind of ensuing 5 years after this snapshot. So there's a lot of risk, a lot of yield. We've changed that around completely, right?
Now it's a lot of liquidity with some interest rate risk management. And you can see that the sort of implied portfolio spread on the right hand chart reflects that. We just have a lot less risk in that portfolio than we did previously, and that is reflected in the spread. This is a loosely analytical chart, I'll Abe, but we kind of take a look at yield versus duration. The idea behind the chart is if you're above the line and I'm not trying to cast shade on any of our peers, but the idea conceptually is if you're above the line, maybe you're taking a little more risk than the duration would imply, below the line, maybe a little less risk.
And so this is where we're kind of on the line as it relates to risk and duration. And the point is the yield is consistent with the risk and we are on the shorter end of the duration spectrum. So let's take a look at loan portfolio yields. Just as with the investment portfolio, the composition of the loan portfolio has changed a lot over the last 15 years, right? And you can see that on the left hand side of that chart.
Take a look at the composition of commercial real estate in our book in the Q4 of 'fifteen, that was 36%. Today, it's 24%. So the composition of the book changed. A lot of that changes, I think Harris mentioned previously, and I think Michael may have mentioned is sort of the decline in the A and D part of that portfolio. The risk portfolio has changed, but the overall yield you can see on the right hand side, and again, we've taken some liberties around analytics to come up with yield, well, it's spread, which you'll see in a minute.
But overall, the yield is roughly comparable to our peers 15 years ago Anne today. So, but if we break that down a little bit more and we get into this is loan portfolio spread, but it's not credit spread as you might think about it. This is actually rate spread. So we're looking at the yield on the loan portfolio relative to yield on the deposit book. Obviously, our results are helped by a very, very on deposit franchise.
But you take a look at where the spread was 15 years ago relative to peers and you look at where the spread is today and you can see that has migrated left today from where it was previously. And the reason is, I would argue, that we are taking a lot less risk today in the loan portfolio than we have previously. That shows up in yield, it shows up in spread, and it's also going to show up in much better credit results, we believe, as we move through the next phase of the economic cycle. So this is a little something that we call the risk adjusted loan yield and the risk adjusted loan spread. Again, spread is not credit spread, it's like rate spread.
But what we're trying to do here is we take the loan yield, we scale charge offs to the loan portfolio, so it's consistent with the yield calculation, right? So you take the loan yield, you subtract off the equivalent amount of charge offs to come up with a risk adjusted loan yield with the idea there that, of course, charge offs are the ultimate measure of risk in the portfolio. And this is how we compare so we're the blue bars, the peers are the median the red line is the median of the peers. And you can see in this page, on this chart, how we compare to peers on this risk adjusted this. Yields are really consistent with peers.
Actually spreads are better. Spreads are better, as I said, because we've got a really strong deposit base. We have a very, very good credit quality and that all affects this comparison in a positive way. And then this is a longer term average from 'fourteen to 'nineteen, so kind of over the last 5 years. What is that risk adjusted loan yield and loan spread look like relative to peers.
And you can see on both a yield and a spread basis by this comparison, we look pretty good relative to peers. This is a kind of an interesting chart. It's the just for to be consistent, we calculated this risk adjusted loan spread as we've just calculated it relative to duration. Now, duration is a lot harder to capture for peers, but you probably know on the RCC of a call report, there's kind of a GAAP a report that's created. It's a non prepay adjusted GAAP, but you can kind of pretty get a pretty good estimate of loan duration for all based on that call report information, that's kind of what we try to do here, which we explained in the footnote.
But you could see there's it's interesting that there it doesn't feel like there's sort of a tight line between spread and duration. So that just tells me there's a lot of other stuff going on in there. I'm not surprised by that given cost of deposits and loan composition and everything else. But you can see with a green dot there, you where we compare relative to peers. And on a spread basis, as noted in the previous slides, we compare really well relative to peers.
So let's talk about deposits. Deposits, in my opinion,
are a lot of value
of any bank is based on deposits. And certainly in our organization, that's absolutely true. So on the left hand side is the deposit composition and how that's changed over time. And you can see that the dark blue bar on the bottom there is non interest bearing demand deposits. And you think about where interest rates were back in 2,005 and where interest rates are now and the fact that we've got so much more demand deposits is pretty interesting.
The fact that rates have gone up here over the last several quarters. You can see that our demand deposits have really stayed pretty stable relative to that underlying change in rates. So it's a testimony to our customers, to the operating nature of their deposits. They are less rate sensitive for a lot of reasons we can talk about, largely that they are the main operating accounts for our customers. And that's created a lot of ability and I would argue less price sensitivity on our entire deposit base, particularly on our demand deposits.
You can see that on the right hand side of this chart, non interest bearing deposits to total deposits compared to peers. And I think everyone who follows us knows this is a good story for us and continues to be a really good story for us. And likewise, the cost of deposits, we've got one of the absolute lowest cost deposits in the industry. And as I'll point out a little bit, our loan to deposit ratio is 85%, right? We've got $58,000,000,000 of loans, $49,000,000,000 of deposits I'm sorry, other way around, dollars 58,000,000,000 of deposits, dollars 49,000,000,000 of loans.
And so when you kind of consider the sort of strength and flexibility that we have from a funding perspective. It's a really powerful value creator for our organization. Now interestingly, I showed some other charts that sort of implied loose correlation between the axis. Not surprisingly, there's a pretty decent correlation between the cost of deposits and the cost deposit increases relative to deposit growth. And you can see how that pulls out on this page.
And you can see where we are too. Obviously, below the line on this chart is good because the y axis is deposit increases and so you want to be low there and you want to be off to the right and you can see how we compare to peers. We are a real standout on deposits, this is another way to say that. And then let's look at deposits over history. Deposits are deposit value is not a new thing for us, right?
For 20 years, our cost of deposits has been very, very strong relative to peers and continues to be strong and arguably even stronger today than it was 10 or 15 years ago.
And then we put it all together. So here's our
cost deposits, our risk adjusted net interest margin, risk adjusted loan yields and our cost of deposits. You sort of put the 2 on the right together to come up with the 1 on the left. And again the risk adjusted net interest margin is pretty strong, I would argue relative to peers. And then let's look at volatility of the net interest margin over time. So on the left hand side, you can see where our margin has been relative to peers, going back to 2,004, and then volatility is on the right hand side from 2,004 to 2011 on the top, and then 2012 to 2019, you can see in the last 7 ish years, volatility is a lot lower than it was kind of in that 2004 to 2011 timeframe.
And I talked about liquidity, this is really important, but loan to deposit ratio, very, very strong. We do have some broker deposits in here, but our broker deposit Zigi is really it's a kind of a wholesale funding strategy. That is to say, we are stingy with the broker rates we offer and if people pick them up, fine and if they don't pick them up, that's okay. It's really kind of an extension of our wholesale funding strategy and you see that there's a combination of sort of large corporate deposits, which show up as deposits, which are more rate sensitive. We've talked about that on previous calls and other things.
It's broker deposits and other forms of senior funding. We've issued, as you know, dollars 1,000,000,000 of senior notes here over the last 18 months or so another $500,000,000 of subordinated notes. So it all goes together and the broker deposits are just a really important part of that wholesale funding strategy, but priced very well.
I think Keith talked about this
a little bit, but it's worth reiterating as a reminder about a third of our deposits are consumer and 2 thirds are commercial and you can see the kind of distribution of those commercial deposits on the left hand chart as you move to the right, small business commercial, commercial real estate deposits. Those make up in aggregate the majority of our deposit base. And again, just a reminder on interest bearing deposits on the non interest bearing deposits on the right hand side, how we continue to perform really well by any measure on our non interest bearing deposits, particularly in light of a recently a pretty significantly rising rate environment, we've really been able to maintain and hold on those non interest bearing deposits. The net interest margin is down about 20 basis points over the last year, which is on the left hand side of that chart. The right hand side of the chart goes back 2 years.
You can see the margin is relatively stable. A lot of activity that happens in the middle that's kind of not covered when you go year to year because I think we all know that kind of margin went up with rates and has come down a little bit with rates. But the change on a 2 year basis is on the right hand side of that chart. Net interest income, back to the left hand side, is down versus last here. We had a lot of loan growth in the last year, but it wasn't quite enough to offset the net interest margin compression, which is why you see a slight decrease in net interest income over that timeframe.
A little bit about interest rate sensitivity. I think we provide pretty decent disclosures around this, but I think as you know for 100 basis point shock, we see up 3% for 200 basis points up 6%, a little more extreme on the downside. The reason it's a little more extreme on the downside is because our rates on deposits are so low, they don't have a lot of room to go lower, which is why we have been actively, where possible, I have been actively managing the downside risk through the addition of primarily interest rate swaps, but also interest rate floors. So we've done a little bit of both over the last year. I think everyone knows.
CECL is an exciting topic. There's really not a new exposure not really a new disclosure here. We've been talking about CECL and working on this for years. And so we really good about the process we put in place. We had certainty around that day 1 adjustment, which we disclosed on our earnings call a couple of weeks ago.
And then we can provide granular details on how things have changed over the with the adoption of CECL. As we've mentioned, the allowance for credit losses is down about 5% in CECL land versus non CECL land. And so we have a lot of questions about the day 2 effect. The day 2 effect is heavily weighted to the change in the economic outlook. So whatever the economic outlook is at the end of this quarter, that's going to be a large determinant of what our allowance ends up being, all other things being equal.
Obviously, adverse credit migration can also affect that. But really the key factor in our analytics is really, as you can see it on the right hand side of this page, the key driver. The key driver is the RNS, as a reminder, is a reasonable and supportable forecast, which is part of the accounting principle. So a relatively benign, reasonable and supportable forecast creates a relatively low allowance related to our commercial real estate. Duration is also a really important part of CECL and you can see that in the consumer side, consumers up largely because of the mortgages we have in the books.
They are kind of 30 year final. A lot of them are arms, but they've got 30 year finals. And so the new rule says you need to take it all the way out to final maturity. And so which is why you see an increase in the allowance associated with consumer loans. That's really term related.
So let's talk a little bit about capital. Our common equity loan ratio, 10 0.2%. As Harris mentioned, it was over 12% kind of 18 months ago. So we have really been actively managing this down. And we're doing it because our stress test results Support that and I'm going to talk about that in just a little bit.
But I think increasingly important is going to be on the right hand side of this chart. I think that looking at common equity Tier 1 capital and adding the allowance to it, I think CECL is going to create a lot more the adoption of the accounting standard, CECL, is going to create a lot more volatility in the allowance for credit losses over time. And so I think when you're thinking about ability to absorb loss and manage risk. I think an analytical an important analytical exercise will be to look at the combination of both the common equity on capital on the books as well as the allowance for credit losses because ultimately as we all know, the allowance for credit losses is the same thing as equity. It's just on the other side of the balance sheet.
And so because there's going to be more volatility, I think we're all going to probably start looking at that a little bit more in the aggregate and then you can see how we compare to peers on both sort of a straight common equity Tier 1 and Comenity Tier 1 plus the allowance. Now this is a backward looking allowance. So this is not CECL, but we'll be paying a lot of attention to this as we get into the Q1 and beyond. As I mentioned, on the lower right hand side of that chart, we bought $1,100,000,000 of common stock. We've announced a $75,000,000 share repurchase in the Q1 of this year.
And then we have substantially increased our dividend over the course of the last couple of years. And you can see that 170 percent of earnings were distributed to shareholders in 2019. So we disclose our stress test results. I think everyone knows that we're no longer a CCAR bank. But as I think Ed and others have mentioned, stress testing continues to be a really important part of our risk management activities.
And stress a really important part of that. In fact, it underpins a lot of the other things we do. We do interest rate stress testing, we do liquidity stress testing, and importantly, we do credit testing in addition to any other things we might be doing. So you and on the right hand I'm sorry, the left hand side of this chart, you can see what I call capital destruction. So this is the deterioration of the common equity Tier 1 ratio in this hypothetical adverse event.
And it has significantly declined over time. Now there's 2 things going on there. One is that the credit portfolio credit quality of the portfolio has improved, but it hasn't improved that much. The other thing is the economic forecast has also improved. That is the adverse economic forecast has gotten better over time.
What we do is the key economic scenario that we use to manage capital and risk is one that goes back to the extremes in terms of decline from the kind of the financial recession of 2,007 to 2010. So we are looking at the decline in economic activity and other key measures. The Fed severely adverse scenario actually takes it down to the levels that occurred. It's 2 ways of looking at it. The way we have presented it here is a little less extreme than what the Federal Reserve's supervisory severely adverse is, but we think it's more indicative because we use stress testing to manage so much of the book.
We don't want to be overly punitive when we think about the stress test because it can adversely really adversely affect the way we go to market and the way we do business. So this is why we do it this way. And you could see while capital has come down over the course of last year, you can see that if we were to take the sort of the losses implied in last year's stress test applied to the current capital ratios. Our common equity is still in kind of the 8.5% range on a post stress basis, which is significantly better than it was 5 years ago. A little bit about warrants.
We've been talking about warrants for a couple of years, but because they expire on May 22nd, I thought that this group might want to just have a little refresher to the extent you really haven't been looking at it. The warrants our a key determinant of the difference between basic shares and diluted shares. The warrants go into the diluted share calc. And so ultimately the stock price that is in place in the month of May is largely going to determine the sort of permanent dilutive nature of those warrants. And so just as a reminder, we've got a little analytical chart here this shows the dilution relative to the share price.
And that volatility in shares implied shares outstanding is going to be gone on March 23 I'm sorry, on May 23 because the warrants will have expired and presumably all the warrants will have been exercised at that time. These are net share settle warrants. So and if I remember correctly, the net shares are based on the prior 30 days before settlement. So we will have a pretty good idea what this number is as we roll through May. And certainly, by the time we have our 2nd quarter earnings release in July that will be totally resolved.
So as we think about our key financial objectives, I've got a lot of commentary on positive operating leverage. We remain committed to positive operating leverage. We remain committed to controlling expenses. As I said, our expenses have been when revenues have been up 30% over the last 5 years, our expenses have been up 5 or less than 5. We went through a pretty significant realignment of our positions in the 4th quarter, reducing about 5% of our outstanding positions to ensure that these expenses are going to continue to remain controlled as you look into next year.
And just as a reminder on the expense expense control efforts. When you think about sort of that 5% increase or so of expenses in the last 5 years, go back to the other presentations we had today, going back to Keith's presentation, Jennifer's presentation. We have been investing so much money into this organization. Future Core alone, as Scott sort of in the $40 plus 1,000,000 range. Think about our expenses, if they are $1,700,000,000 which approximately what they were on an adjusted basis last year, $1,100,000,000 of that was compensation effectively, right?
So there's $600,000,000 non comp expense, future core alone, just the core system replacement was kind of $40,000,000 of that. That's like 7.5% of that $600,000,000 we are making a massive investment in this organization and we are holding expenses flat while we're doing that. And we think it's going to create a lot of a positive opportunity for us because we are making the investments today. They're going to free us up to do other things in the future. One of the questions I get as well, when you're done with this expenses are probably going to drop, right?
I am not expecting expenses that are just going to fall off a cliff once we get all of this technology infrastructure in place because we're going to continue to invest in technology. Banks ultimately make money on information and information Dmitry. And all of information now is defined by technology. And so we're going to continue to make those investments. And it's going to be an increasing part of our expense base.
I think for those of you who have spoken to me recently, I think you know that we're in the process of trying to realign our expense breakout on our income statement. And the reason I want to do that is because we have got a fantastic story on technology spend relative to total spend. But if you look at the face of our financials, it's really, really hard to see. So we're in the process now of kind of going back and reassessing the alignment sort of the mapping of costs to line items. And I'm hopeful in the near term that we'll be able to break that out I think we've got a great story.
It's going to continue. Expenses are going to grow much, much slower than our overall level of technology and technology investment. So financial performance continues to be really important to us and you have seen that over the 5 years and I'm certainly hopeful and expecting that you will see that over the next 5 years. The technology upgrade, really important to us. That is not going away.
It's an important part of who we are and that will continue. Automation and simplification, I hope you guys enjoyed that conversation we had with Jennifer's team. Ken Collins, who is up here, he is sat here on the right hand side. He's been doing so much with automation and artificial intelligence and other things. It's creating a lot of opportunities for us.
And so we're investing continuing to invest in those enabling technologies. Returning capital continues to be important to us. We have been telegraphing that our share buybacks would be declining in 2020, and you saw that with this most recent announcement. We went from $275,000,000 a quarter to this quarter $75,000,000 and that's because we've gotten to a level of common equity Tier 1 relative to the risk in the balance sheet, relative to our expectation for the next couple of years in terms of economic risk. We think the level of capital that we have today is appropriate.
And so that's kind of what we're targeting and it's very, very consistent, as I think all of these messages are with the story that we've been saying for the last couple of years. In doing business on a local basis, this is so important to our organization. When you look at the value in our balance sheet and the value that resides in the deposit portfolio. This exists because we are banking on a local basis. You know our brands, you know the states.
In fact, our little things that we left on the tables, you guys have probably noticed that there's kind of something from every bank in there. And it's just a reminder, the intent of that is it's a reminder is that if I go to Irvine, California. Nobody knows who Zions Bank Corporation is, I hope, right? But everyone knows who California Bank and Trust is. And likewise, if I go to Denver, nobody knows who Zions Bancorp is, but they know who Vectra is.
It's a really important part of who we are for our customers to be dealing with their local banker empowered, as we discussed previously, not somebody who is running widgets to the machine, but somebody who is empowered to make decisions and develop the relationship. That's a really, really important part of who we are and that's not going to change. So I could spend a little time in the outlook, but it's unchanged from what you saw, which I think everyone's probably noticed at this point. I just want to reiterate though that we are absolutely committed to controlling non interest expenses. What we went through in the Q4 was difficult as it would be for any organization, but the purpose of that was in a rapidly changing interest rate environment where we saw revenue headwinds developing on the horizon.
I am just so proud of the way this organization reacted to a rapidly changing environment, to rapidly change the way our expense trajectory was moving. And so I just want to reiterate that we are absolutely committed to continuing to control non interest expenses in a difficult revenue environment. So with that James, I think we could probably open Q and A to probably stay on time, right? Yes. Let's oh, sorry.
I want let's yes, let's see. Would it be okay for would you guys
like to sit? No. No.
You're going to stand. Not at all. Okay.
Okay. And then let's see, we may have to share a mic or 2, but oh, wow! You guys are popular, everybody wants to ask a question. Okay, I got to go to somebody who I haven't had yet. I'll be back.
Duck, Ken, you're out of
luck. Appreciate all the color on financials. When I look at your Uniform Bank performance report, which a little bit old school, but you guys, when you look at where you pay employees, it's pretty much
on average with the peer group. However, when
you look at assets per employee around $7,000,000 and peers are closer to $12,000,000 I'm sure some of that gap can be explained by Scott said earlier about things you don't do, whether it be shared national credits, leverage lending, the more riskier aspects, but that gap is still pretty large. Just curious, do you have the capacity with the employee base that you have now to narrow that gap? Or as granular as you want to keep things, do you have to keep adding to the employee base to continue to leverage the balance sheet infrastructure we have in place to kind of decrease that gap and
my own belief is, no, there's a lot of opportunity to continue to lever that. We have a we do have a more granular kind of loan portfolio and the composition of the business is different than some of our peers. But I think we can fundamentally, the transactional part of this business has changed so much that it's becoming, I think, a little more fixed cost in terms of the infrastructure we have out there. So I would expect that we can to see sort of operating leverage in the physical infrastructure that we have. I don't know if
I would just I'll give you an example. We so while we look, the RFP level is moderately flat and we just brought it down 5%. But if you take our deposit operations, our branch back office support group, our enterprise loan operations, it's about 1,000 employees in total. It was about 4 years ago. It's down 25% during that time.
And you may say, well, why did so about 250, almost 300 people. Why didn't your total FTE came in? Well, a lot of that has been redirected to technology. So our investment in technology colleagues has gone up during this time. So there's a it's not just same old, same old, there's significant reductions in staffing that are coming from automation and simplification in back office functions that we're redirecting either to the front office revenue producing groups or the technology.
That number should come down to I mean, that's
just part of the reductions that we did in the Q4. And the other piece of it is we actually we have about how many people working on the FutureCore project?
We have about 300 here and about 100, 150 offshore.
So there are some things that weigh on that ratio a little bit.
Okay, next question. One of
the other things And it depends on what banks you compare us to. We a lot of our large peers probably off for 10% to 15% of their FTEs. We're at about 4%. And I'm not saying we're going to 10% in terms of either domestically, offshore or offshore. But we're like we look at automation, offshoring of activities is a strategy that we basically gone from 0% to 4% in a fairly short period of time.
We'll continue to look at that. It does make these kind of comparisons a little complicated though.
You mentioned some of the challenges that you have with a flat yield curve and some momentum you have on some of the fee income businesses. I'm just curious what your thought is on doing bolt on fee income acquisitions and getting that growth rate higher.
Well, it's
you know,
the opportunities I think are a little bit limited. I mean wealth management is one that some companies pursue. It's one we've been wary of because we really think that the real opportunities within our own customer base and to do it organically and the risks in doing wealth management acquisitions are I think reasonably high in terms of just retaining people. We have been building I mentioned corporate trust. We've been hiring people, teams of people.
So we've been doing kind of whole micro acquisitions, if you will, just in terms of hires. But if anybody sees anything that you think would be a good fit, let us know. That's why I have investment banker, I had somebody here yesterday. They're always fishing, what can we sell you? It an interesting fee income business that's really a good fit because we're looking for them.
But we want to be sure that they really are a good fit you know, things that you don't end up paying twice for, so.
Thanks. So back to the operating leverage a comment. I know you're focused on achieving operating models, but I think you've also indicated that achieving it in 2020 would be a challenge.
I said that on the call, Ray.
And you said that on the call, Ray.
I'm assuming that's still the case. And so the question is, what's the likelihood of positive operating leverage for 2021. It looks like it would be pretty substantial. Can you do you care to give us an idea of the magnitude that you would expect that you could achieve
when you look at 2021. Look, yes, it is so hard to see what is going to happen 2 or 3 years from now, right? So as you know, we've been reticent to provide kind of 2 or more year guidance. Even this year, I think everyone knew going into 2019 that rates were going to go up throughout the year. That changed so quickly, changed our revenue outlook so quickly that it's really hard for us to predict with 100% certainty, positive operating leverage when the revenue picture is somewhat interest rate dependent and that part of it is a little cloudier.
I just say tell me what the
yield curve is and I'll tell the probability looks
We're confident on expenses as I tried to sort of reiterate in my call. I mean, we are actively managing expenses and we are committed to flat to down and we will be, but the revenue piece of it is just a little harder to predict.
Okay. Then my follow-up would be around a topic that we talked about last Investor Day that you're reluctant to provide a comment around the return ROE. Wanted to see if you're willing to go.
2 years closer to that.
ROTCE, wanted to get your if you're able to comment on where you think an appropriate long term ROTCE, and what do you think you're looking at for 2020?
Well, again, we an important a good determinant of that is credit and economic outlook related to credit. So, while we think we expect we look at our ranking relative to peers.
One of
the things I think I have said and I even said here is that we are continuing to be focused on improving relative financial performance and so that is relative to peers. So it's hard for me to provide an absolute sort of hard number figure, but I can say that we're committing to we're committed to continue to improve our relative standing.
John, I'd also just add, I one
of the ways I kind of think about all of
this given where we are almost 11 years into a cycle is just a determination that we go into whenever it comes that we have a little somewhat stronger capital, better credit quality and really good technology. I think it's going to be
a powerful
combination. And I know you all have models you're trying populate and everything else and I respect that. I mean, but it's hard in the absence of kind of understanding what the yield curve looks like. I was looking recently, our margins, which have been under pressure for a long time and kind of coming down. The Fed has been down at 0.
They started to raise rates, our margins started to improve. Then they took a reverse course back in about July. A start of coming down. I mean, we're still somewhat asset sensitive, less so than we used to be. But it is going to be a factor.
And so it's just hard to know in the absence of kind of being able to predict what that curve looks like.
And I would hope too on this topic We have some credibility in the sense that as Paul pointed out numerous times, I mean, our expenses literally for 5 years are virtually flat. And if you take our guidance for 6 years, they're going to be virtually flat if based on that guidance. And it's not like we're just powering forward blindly increasing expenses. Now the revenues, we're facing headwinds. And so So we are highly committed to adjusting the expense side of this equation.
But as we've tried to point out, we have purchased with that flat expense environment for 5 years. We have purchased a tremendous amount of technology that is going to be a strategic differentiator and we've also been investing in our growth businesses. So it hasn't just been a slash and burn thing. It's been a heavy investment piece while keeping expenses flat.
Harris, actually question for you,
but feel free to jump in. You mentioned at the
very beginning, you had a 55% efficiency ratio target over some future period, right? I know you
didn't quantify that. Even if I
hold expenses literally 0 for the next several years putting in mid single digit loan growth, which I think is what you guys are targeting, I think mid low single digit fee growth, which is what we've seen.
I still don't get you there for at least 4 years, I mean give or take 3 or 4 years from now. Is that consistent with what you have in mind?
Well, I think again, it gets how are you doing the margins on that?
I also have a rate cut, only one, but
the futures curve has 2 rate cuts in there. So Yes, but that's what I think. I don't I fundamentally don't think that the kind of yield curve that we have today is what we're going to see for the next 5 years. Now who knows?
But listen, if we do, I think it's going to be
a challenging time. Okay. So I read that a steeper curve.
Yes, I think without some steepening in the curve, we don't get to 55 anytime really soon anyway. I think it's going to take a normalization of when I say normalization, I mean most of us grew up thinking the yield curve kind of looked like that, not like that. That's a yield, whatever it is. There's no curve in it.
The yield line. The yield
line. So we need something beyond the yield line to make this work.
Okay. Jennifer had a question.
Jennifer has got it.
Hi. Paul, I have a question. You've guided modest provisioning for 2020, you had 39 $1,000,000 in provision last year. I mean, are we looking at just slightly up versus last year? What are you kind of thinking assuming Credit environment stays stable right now.
Yes, the reasonable forecast, as
I was saying, in CECL land is the key determinant of that. Assuming that we stay relatively consistent. That's why our guidance is where it is. We are not seeing a deterioration in any part of any significant part of the portfolio. And based on sort of early warning indicators and other things, I think if we were to some activity over the course of the next 12 months, we would start to see it, and we're just not seeing it.
So there's 2 factors now. 1 is sort of overall credit quality and the other is what is the economic forecast, right? Based on both of those things and our outlook for both of things. Our outlook is based on us.
I can't help CECL without thinking of BD and CECL and somehow it seems about as ridiculous. I mean, it's I don't know how any of us kind of start thinking about forecasts of provisions, but I guess we're all under aggressive with that.
Can I ask one more question? Maude, I still have a mic. Harrods, can you clarify your interest in bank acquisitions over the next 2, 3 years? Thanks.
Sure. I mean, we would look at things, but it's there is a lot of stuff out there that just doesn't fit very well. Either there's just a lot of banks with a whole bunch of commercial real a we could do more commercial real estate. I hope one of the things you go away thinking is that we're trying to be disciplined about that. It just doesn't make a lot of sense to me to go out and buy a bunch of
it when we can do it organically.
It's all about deposit base. It's about kind of the fit. So we'd look, clearly the work we have going on with this core transformation is really top of mind for us. Distracting the several 100 people we have working on that with an acquisition integration isn't something that I'd want to do, but sometimes you can't pick the timing. So I wouldn't say I'd take it off the table.
Some of it's going to be a matter of just the the deal. Probably, you're seeing a lot of low premium deals. So is it possible? Sure. It's nothing that we're out looking for right now.
Sorry, it's another question on expenses. You guys had $1,700,000,000 of expenses in 2019. You're starting the year with 5% fewer headcount. You're closing 15 branches. What's the gross amount cost savings that realizes and then how much do you expect to reinvest in like everything that we've talked about today?
Have you exposed the gross amount of cost savings, I don't remember. What we have said is that, yes, there was there's a lot of things in the STU, right, in terms of outlook for next here, but the workforce, the number of positions are down about 5% and the reduction in comp is roughly proportional to that. Now we're taking some of that, investing it in technology and other enabling businesses, but that's sort of the scale of what we're describing.
And you also have merit increases. I mean, we're in economies that are pretty full employment, and so the pressure is that way too. But that's we boil it all down and we say
that's where we say kind
of flat slightly decreasing. So we think there is room to see an absolute decrease. I don't think it's going to be significant, but I think it's really going to lead us to be able to keep things flat. Yes, maybe just to clarify, I mean, if we look back in 2020 is flat or $1,700,000,000 would you be pleased with that number? Would you like to be below it?
Well, we've said flat slightly down.
We obviously love to be yes, it'd be great. I think there's reasonable odds that we will be. It's not going to be materially below it, but I think we can actually been the curve down on an absolute basis.
I'm just going to pause the Q for just a second. There are for those of you that are heading to the airport right now, the cabs are down there waiting. So they'll wait for about 10 or 15 minutes or so. So but you can join us on the webcast as you head to the airport. We're going to continue for a few more minutes.
So let me go over to Ryan.
Thanks, James. This question is for Paul. So Harris has communicated that the yield curve is just not that conducive for your business right now. And when I think about what transpired over the last quarter. You saw a little bit of net interest margin pressure.
We saw loan yields come down a decent amount, half of which I believe was due to portfolio churn or repricing. I guess when I think about all the moving pieces related to the guidance, it implies that we're going to see some net interest margin pressure clearly over
the course of the year. How do you
think about the remixing of the portfolio? How far the way through are we through in terms of the repricing down
of the loan portfolio? That's a hard question to answer with a lot of specificity. I will say we're focused on loan growth. We recognize that there could be some margin compression. We are absolutely looking for opportunities to continue to hedge.
One of the artifacts of our portfolio is because we're 42% sort of DDA funded, it's all fixed at 0. So we've got a natural bias to asset sensitivity that we're constantly sort of fighting. It's not like it's an adverse struggle, but I think you know what I mean. I mean, we need to really actively management. And when the yield curve has got 2 or 3 rate cuts priced in, it's kind of hard to put on that next hedge, right?
So we are our alco meets regularly. We are actively thinking of ways to manage and hedge that risk. The biggest leverage lever that we have next year while there is some modest some loan repricing that's going to hasn't been occurring and will continue to occur. The biggest level we have is actually deposit pricing. And while it's true that we've got one of the lowest interest bearing and overall deposit rates in the industry, it's also true that we have managed that very, very effectively.
And I that's our in my mind from a revenue perspective, our biggest opportunity next year is really around deposit pricing.
Next question, Amanda, Jefferies. I guess on
that point, deposit cost decreases. So for the month of January, where are
you guys at to give an indication into the quarter? We usually don't
talk about the intra month stuff. What I can say though, and what you saw and I think what we said on the call, is that you saw in approximately August or September, rates have been increasing on our deposit portfolio while market rates were decreasing, right? And there was what 5 or so month period where that sort of difference occurred. That crossed over again late in the Q3 and well into the 4th quarter we saw deposit rates falling, while the Federal Reserve, while there was one rate decrease, I guess, in October. That has now kind of slowed down, but we've continued to see those deposit rates falling as
we move through the 4th quarter.
Thanks. So I think the last time I was in this building was 2,008, and I remember the pain in commercial real estate and construction. But I guess the good thing about construction is that it can burn off pretty quickly, if course of all things go well.
It can convert off in other ways. Yes, it can. It can.
But as you look at
your portfolio flat since 2015 at least.
Do you
it's maybe the wrong management team to be asking this question, but do you ever think about whether you're taking enough risk there, especially on residential construction projects.
Yes, I mean, we do ask the question gets asked around here. I'm always haunted by we had a board member who asked that question in 2,000 and 6 because we had kind of 0 charge offs, everything looked great back then too. And I remember saying, yes, we're taking a little bit. Our objective, I think, is to try to be as consistent cycles as we possibly can be in terms of how we think about credit. And I think there's some people who are really good at calling troughs and peaks and things like that.
I give credit to Robert Sarver, he worked here started Western Alliance. He's one of the best people I ever knew terms of figuring out when to get into the bottom, get out of the top. God bless him. But most mere mortals aren't very good at this. And so trying to be as consistent through a cycle as you possibly can, I think is probably the better formula for somebody like us?
I think that we're taking the right kinds of risk. We haven't changed the credit box. And in my mind, that's the right way to approach this and especially given how long we are in this cycle. So not a time where I'd rather see just flat loans for 2 or 3 quarters than to say, hey, just start to panic and say, we've got to go out and just grow. People aren't here, I say this all the time.
We'll have growth targets. I seldom really pay much attention to them in terms of when I'm thinking about bonuses and everything like that, because you get what you ask for. If you create
a culture where you say we got to have loan growth,
I almost guarantee that you'll live to regret it. And so, we want people out looking for good business, including good construction business. I mean, the stuff the structured right, but it's just not where I'd want to get everybody all choked up about, hey, we got to go out and do things that feel unnatural.
So I don't know. Yes. I would just add that the industry has changed. So the homebuilders Themselves are more disciplined and most land and A and D is equity capitalized these days. And so we could really lean in there And probably have a really nice spread, maybe even have good loan to cost metrics in there.
But when it all stops, when the music stops all at once. Land has negative value in many cases. And so there are probably other places to look inside our book of business and the skill sets that we have around the banking universe of bankers that we have and especially that wouldn't be one. The homebuilding space has changed. It's not that banks have changed as much as the industry has.
We do when we bank a homebuilder, we'll have a borrowing base that will have some land because that's essential to their production.
Moving to an A and
D phase, it will move into sticks, sometimes models, but it's all very they're very disciplined now. All equity capital is really on the dirt.
Go to Lana and then Peter.
Just wanted to get an update on what you're hearing from your commercial business borrowers. I mean, obviously, we've had some pretty weak H8 data and 4th quarter was pretty weak across commercial. Any change in terms of what you're Jerry from Danann from Burs.
It's a great question and I would say no. I think our business customers are small business customers, medium size, they're working in a pretty good environment And the economy is strong and interest rate environment is favorable and the trade issues, the global trade issues, it really it's had an impact on some industries, but generally speaking, most folks in small business and middle market business land haven't seen a real significant impact on that. And
I do think though, that said, I think everybody is just probably they're waiting long I think everybody's been more conservative since the last since 10 years ago, since the crisis. And people are stretching things out further. So we've talked about loan demand today and given the strength in the economy, it's just it's not what I would have expected it to be. I think some of us and some of the riskier stuff has probably gone to non bank lenders and that kind of thing. You get this very, very flat yield curve, these low levels and you get people refinancing into life companies and what have you with real estate, but the loan demand picture, I think continues to at least to me to be a little bit of a mystery in terms of why we're not seeing more growth, I think it's probably everybody's being pretty careful.
As Harris said, these are hard things to project. We just the 4th quarter was soft. We're not overly anxious about that. We had 4 really good quarters before that. Loan growth was kind of 7% year over year for 4 quarters in a row.
Everybody was like, gee, you're going to raise your estimate to maybe high single digit loan growth. No. Couldn't really explain the 7% and we're not sure we can really playing the flat quarter. We had 3 moderately flat quarters in loan growth before the 4 really strong quarters and now we've had a flat quarter. We just you just have to keep doing the right things.
If we thought our people weren't out there in the Q4 or Q3 trying to generate business, well, that would have us anxious. But They're out there doing the right things and we're working on processes to make their life easier. And then loan growth will just it will take care of itself.
Along those same lines, with all this focus on automation and eliminating a lot of the manual processes, have
you seen the productivity increase
with the business bankers or is that a real more to come where you can see them out more out calling clients something you have.
Yes, it's hard to measure the percentage of time that our bankers are actually outside of their office and actually talking to customers. And Michael spoke about some simplification we're trying to do on the credit side, not cutting corners, but just simplification in processes. But I'll give you an interesting an example, it was on Page 13. There is this internal system we call best. It basically took about 700 processes in our affiliates and simplified them down to 70, okay, and then put it into a tool, an online tool they could utilize.
Our employees our frontline employees are hitting that 38,000 times a month now. That's how many times they hit it in December. Their calls to our we have an internal hotline for bankers call when they have questions about how to get stuff done. Calls have gone from 37,000 to 23,000 a month Since this system has been in existence. 37,000 times they were having to call somebody to figure out what to do to service a customer or get things done.
37,000 calls to 23,000. I don't know how you measure that. Folks Well, you asked me last night, are we going to have a named expense reduction program? We had one. It was in June 1, 2015.
We've been doing this for 5 years. And it's things like that. How do you measure the dollar amount? I think that it comes through an employee satisfaction. There's more time they spend on stuff that matters and customers benefit from that.
There is a dollar benefit to that either in expense or revenue. If
you are on somebody waiting for ride to the airport, we need you to please come now.
Thanks Jennifer. And I was just going to say, we probably need to wrap up anyway. We've disclosed everything that we can possibly think of from a Reg D perspective. So if you have a follow-up question, we'll be around. We'll be happy to clarify anything.
But thank you very much for your attendance. Thank you so much for those of you who came in person. Thank you for those who have been joining us by webcast. The Snowbird Ski Resort has a 1 star marketing campaign, too much snow, too steep, that kind of thing, not enough green runs. So maybe the Zions Investor Day, not enough breaks, not enough but hopefully we've given you great access to management and great disclosure that you can make the most out of.
We really appreciate your time today. Look forward to seeing you again in this forum a couple of years from now. And Harrison, any final comments?
Well, just my thanks to all of our colleagues over here too who participated today. We've got some great people and just super people to work with and so we really appreciate them. Thank you all for coming out and being with us.
Thank you. We will stand adjourned.