The Salt Lake City company plans to rev up its mortgage business, hoping to take advantage of disruptions in the market. An unexpected spike in long-term rates seriously undercut refinancing and has led several big banks to pull back. Meanwhile, new rules on qualified mortgages have frustrated community banks.
So Harris Simmons, the president and chief executive of Zions, senses a chance to make headway in a business that the $56-billion-asset company had largely ignored for years.
Zions has long been "somewhat underweight relative to our market share in many mortgage markets, both in terms of purchase and refinance," Simmons said during an interview at the American Bankers Association's annual conference in New Orleans this week.
"Our hope is to change that somewhat and become a bigger player," Simmons says. "It is a great time to [be in mortgages] because there are a lot of players leaving."
Banks are no longer able to dabble in mortgages, industry observers say. Compliance costs are forcing banks to become more serious about the business or exit it entirely. Some lenders have urged the Consumer Financial Protection Bureau at least to delay QM implementation to provide them more preparation time.
For its part, Zions is installing new compliance software. Simmons says he expects to be ready in January when the QM rules take effect.
"We're making sure that we're crossing t's and dotting i's," he says. "We have found that it is really expensive if you don't do that. We want to make sure we have a real strong back office."
In the third quarter, one-to-four family residential loans made up just 12% of Zions' total portfolio. Still, that segment increased nearly 11% from a year earlier, to $4.6 billion. Simmons says he wants like to see originations rise, though he declined to say how much.
Zions has been a "little hit or miss in terms of what we've done in [mortgages] over the last couple of decades," Simmons says.
Zions' rationale for building a mortgage business is solid, says Brad Milsaps, an analyst at Sandler O'Neill. But the company may be a "little late to the cycle," he says.
Zions is not the only regional bank eager to make more loans to homebuyers. The $26 billion-asset Synovus Financial has hired lenders in certain markets to boost originations, Kessel Stelling, the Columbus, Ga., company's chairman and chief executive, said during a conference call Tuesday.
Still, Zions has enough of a physical presence to make a run at mortgage originations. Simmons says Zions wants to make better use of 480 branches in 10 states. The company could also hire lenders who were laid off from other banks. Additionally, Zions expects to gain business from owners and employees of small and midsize companies it already works with, Simmons says.
Improving mortgage originations will take time, Milsaps says. Zions could accelerate that process by buying a mortgage lender, though Zions has shown lukewarm interest in acquisitions in recent years.
"They certainly have opportunities to grow," Milsaps says. "They have a large customer base to possibly grow that business, but a lot of mortgages are rate-driven. It is something they can expand, but I don't expect it to be a huge contributor."
Zions' third-quarter earnings more than tripled from a year earlier, to $210 million, after it redeemed a series of preferred stock. Still, the quarter was "a bit disappointing," Milsaps says. Its net interest margin narrowed by 36 basis points from a year earlier, to 3.2%, and loan growth fell short of expectations, he says.
Total loans rose almost 3% from a year earlier, to $38 billion. The commercial book increased by roughly 4% from a year earlier but fell slightly from the second quarter. As a result, management slightly tempered its outlook on loan growth.
"Zions had been sort of a better grower of loans than their competitors," Milsaps says. "Their commercial loan growth slowed and the outlook is a little dreary for everyone given the economy and the fiscal situation in Washington."