Memo to executives at Zions Bancorp.: Cut costs or pay up ... from your own wallet.
The Salt Lake City company has been underperforming its peers, and executives promised during its biennial investor day Thursday to close the gap. Notably, compensation of the $59 billion-asset company's top 16 executives and of several hundred other employees will be linked to its current cost-cutting effort.
Zions is pursuing massive changes, consolidating its banking charters, upgrading core systems and restructuring its balance sheet. The hope is that simplified operations will boost profit.
"We see a lot of opportunities for generating a lot of value," Zions Chairman and Chief Executive Harris Simmons said during the conference.
"The focus is on increasing the return on — and of — capital," Simmons added. The Comprehensive Capital Analysis and Review, or CCAR, "is a constraint. It's a challenge. … We believe that we've done a lot of the heavy lifting in terms of managing the risk profile to a much better place in this company."
Still, executives faced tough questions over whether these changes were enough. One attendee expressed concern that Zions could no longer rely on things like higher interest rates that lead to higher loan yields. (Zions is widely considered one of the most asset-sensitive banks.)
The attendee pressed management on its ability to make enough fundamental changes.
"We're working very hard on fundamentally changing so we can operate in a zero-rate environment and earn our cost of capital," Simmons said. "That has to be the goal."
One feature of these changes is tying executive compensation more tightly to meeting goals laid out in an efficiency initiative goal announced in June. Management, which said it had already trimmed $70 million of the promised $120 million in expenses tied to the plan, expects the number to reach $100 million by the end of the year.
Zions is tracking cost-cutting results monthly, Simmons said. "I find myself telling the senior officer group that, on the margins, they should think about every dollar we spend is coming out of their pockets and not shareholder pockets," he added.
The top 16 executives could lose up to half of their compensation, Zions President and Chief Operating Officer Scott McLean said after an audience member asked him to specify how much was at stake. Executives generally receive a base salary, an annual bonus, a long-term cash incentive that vests after three years, and equity. Certain executives risk losing their annual bonuses and the long-term cash incentive.
"It depends on your definition of punitive, but I'd say that would be very punitive," McLean said. "That feels significant to us."
Zions has pledged to push its efficiency ratio, which stood at 69.8% at Dec. 31, below 65% by 2017. To boost revenue, the company has been investing more cash into medium-duration securities while also expanding its mortgage and wealth management operations.
To cut costs, Zions consolidated seven charters and closed about a fifth of its branches.
Simplifying back-office operations and upgrading technology are also key parts of the plan. Previously, Zions had five decades-old core systems — three for loans and two for deposits — that had been customized in six different ways for each affiliated bank, McLean said. Upgrades had been limited due to complexity.
After the upgrade Zions will have one system that should reduce all other interfaces. The upgrade, which will also allow the company to launch products faster, should provide for real-time payments and transactions processing, McLean said.
Zions has also changed how its lenders process loan requests, moving away from a paper system that required employees to enter the same data multiple times. Commercial lenders are now expected to enter their data into a single system that feeds into Zions' loan operations group. The change should make the company more efficient and consistent, which became increasingly important because of CCAR, McLean said.
Zions has struggled in the past with CCAR. In 2014, the Federal Reserve Board rejected the company's capital plan after its Tier 1 common capital fell below a critical threshold during the stress test, but it passed last year.
Zions' projects, "from a risk standpoint, significantly de-risk our company," McLean said. "That's a great thing in a CCAR world."