DBRS: Zions Net Up On Lower Expense; Some Energy Exposure Weakness; B/S Sound

Summary:
• 1Q15 earnings applicable to common shareholders of $75.3 million, up 12.8%, QoQ, yet down 1.2% from 1Q14.
• Improved QoQ earnings mostly reflected a sizable decline in non-interest expense, including a large decrease in professional and legal services costs, and the non-recurrence of a large litigation accrual in 4Q14.
• DBRS, Inc. rates Zions Bancorporation Issuer & Senior debt at BBB (low) with a Stable trend.

DBRS, Inc. (DBRS) views Zions Bancorporation’s (Zions or the Company) 1Q15 results as pressured and reflective of the challenging operating environment. Higher quarter-on-quarter (QoQ) earnings were driven by lower expenses, which more than offset a decline in total revenues. Lower expenses reflected the non-recurrence of a large litigation settlement accrual in 4Q14, along with a decrease in professional and legal expenses. Meanwhile, spread income moderately contracted, QoQ, reflecting two fewer days in the quarter. During the quarter, the net interest margin (NIM) narrowed by a slight 3 bps to 3.22%, while average loans held for investment increased by a modest 0.8%, tempered to some extent, by the Company’s active risk management within the energy loan book. Finally, non-interest income declined QoQ, mostly reflecting a sizable decrease in dividends and other investment income.

Asset quality remains sound, yet showed some deterioration within the energy book, as levels of non-performing loans and classified loans were up QoQ. Positively, Zions reported net recoveries for the quarter. As signaled by management in the prior quarter, the increase in nonacrrual loans and classified loans within the energy book were expected, driven by the impact of the significant decline in oil prices. Overall, 2.1% of the oil and gas related loan balances were nonaccruing at March 31, 2015, up from 0.5% at December 31, 2014. Meanwhile classified energy related credits increased by 120% to $295 million, linked-quarter. Importantly, since 3Q14, Amegy Bank, Zions’ Houston based bank subsidiary, has increased its allowance for credit losses by $55 million. DBRS notes that Zions’ oil and gas energy related loan balances are material, representing approximately 7.9% of total loans. DBRS will continue to closely monitor the segment.

Other balance sheet fundamentals remain solid, as Zions’ funding profile is sound and its capital position is adequate. Indeed, easily funding the Company’s loan portfolio is a good sized core deposit base that includes a large component of non-interest bearing demand deposits, which benefits its relatively high NIM. Meanwhile Zions’ had an estimated Basel III common equity tier 1 capital ratio of 11.81% (2015 phase-in basis) at March 31, 2014. In March 2015, The Federal Reserve did not object to Zions’ capital plan, which includes the increase in its dividend to $0.06 per share per quarter from $0.04 per share per quarter, the continued payment of preferred dividends at current rates, and up to $300 million in total reduction of preferred equity.

DBRS rates Zions Bancorporation’s Issuer & Senior debt at BBB (low) with a Stable trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.