DBRS: Zions 2Q Loss Due to CDO Sale: Core Earnings Up, Despite Slight Loan Contraction

Summary:
• Zions reported a loss to common shareholders of $1.1 million for 2Q15, as compared to net earnings of $75.3 million for 1Q15. The Company’s 2Q15 results reflected $137 million of losses associated with the sale of the remainder of its collateralized debt obligations (CDOs). Zions’ 2Q15 adjusted IBPT (income before provisions and taxes excluding non-core items and security gains/losses), improved, quarter-on-quarter (QoQ), due to broad-based increases in fee income, along with one additional day in the quarter.
• Despite the Company’s pressured energy book, asset quality remains sound.
• 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) 2Q15 results as sound, despite the significant loss associated with the sale of the remainder of its CDO portfolio. Specifically, during 2Q15, the Company reported a $1.1 million loss applicable to common shareholders, mostly reflecting a $137 million loss related to the sale of its CDOs. Zions’ adjusted IBPT improved sequentially, driven by a broad-based increase in fee income, led by higher levels of capital markets and foreign exchange fees, and other service charges, commissions and fees. Meanwhile, despite modest loan contraction, spread income improved QoQ and benefited from one additional day in the quarter. DBRS notes that the decline in loans reflected a $284 million decrease in energy related exposure, due to higher prepayment rates. Finally, core expenses which remain high, were well-managed during the quarter.

Despite pressure from the energy portfolio, asset quality remains sound. Indeed, during the quarter, nonaccrual loans declined modestly and net charge-offs were very low. Nonetheless, the energy book remains pressured by the difficult operating environment. Specifically, 2.1% of the portfolio was nonaccruing at June 30, 2015, up from 1.9% at March 31, 2015. Furthermore, classified loans within the portfolio increased to approximately 11%, up from 9% for 1Q15, but were still well below the 20% peak in the last downturn. Overall, Zions’ oil and gas related loan balances are material, representing approximately 7.2% of total loans, and 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 11.91% (2015 phased-in basis) at June 30, 2015.

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.