Zions Bancorporation Reports Annual Net Earnings for 2014 of $333 Million, or $1.71 Per Diluted Common Share

SALT LAKE CITY, Jan. 26, 2015 /PRNewswire/ -- Zions Bancorporation (NASDAQ: ZION) ("Zions" or "the Company") today reported annual net earnings for 2014 of $333.0 million, or $1.71 per diluted common share, compared to $294.0 million, or $1.58 per diluted common share, for 2013.

Net earnings for the fourth quarter of 2014 were $73.2 million, or $0.36 per diluted common share, compared to $79.1 million, or $0.40 per diluted share for the third quarter of 2014, and $(59.4) million, or $(0.32) per diluted common share for the fourth quarter of 2013. Earnings per share for the fourth quarter of 2013 were adversely impacted by impairment losses on collateralized debt obligation securities ("CDOs") as a result of the Volcker Rule and the Company's risk reduction strategies.

Fourth Quarter 2014 Highlights

• Net interest income increased to $430 million this quarter from $417 million in the prior quarter, primarily due to lower interest expense that resulted from the redemption of long-term debt during the prior quarter. As a result, the net interest margin increased to 3.25% this quarter from 3.20% in the prior quarter.
• The provision for loan losses increased to $12 million this quarter from a negative $55 million in the prior quarter, as the Company moved to strengthen reserves for its energy-related lending in light of recent declines in energy prices.
• Credit quality metrics were stable to slightly improved, as nonperforming lending-related assets and classified loans each declined 3% this quarter from the prior quarter, and net charge-offs were 0.17% annualized of average loans.
• The estimated Basel I Tier 1 common equity ratio was stable compared to the prior quarter and was among the highest in the industry at 11.92% at December 31, 2014.

"We are encouraged with the continued strength of our capital and credit quality and believe the Company is well positioned for the next several quarters and years," said Harris H. Simmons, chairman and chief executive officer. "Unemployment in our footprint has declined faster than the national average while job creation and household formation is faster than the national rate. However, we are exercising caution on lending and maintaining strong discipline with our underwriting standards and concentration limits."

"We know there is concern regarding the potential effect of the decline of oil and gas prices on Zions' credit quality and loan growth. Our team of energy bankers and executives, most of whom are at our Amegy Bank affiliate, has decades of energy lending experience through multiple oil and gas cycles. We are actively managing our energy-related exposure, including both individual credits and the portfolio as a whole. Our underwriting discipline has remained strong and growth in 2014 was minimal. We added to the energy-related allowance for credit losses this quarter primarily in recognition that, with the decline in oil and gas prices, the inherent credit risk in our energy portfolio has increased. Disciplined underwriting, combined with strong capital and loan loss reserve ratios, position us to deal effectively with challenges that may arise from the current price environment," Simmons concluded.

Loans

Net loans and leases held for investment increased $324 million, or 0.8%, to $40.1 billion at December 31, 2014 from $39.7 billion at September 30, 2014. Increases of $535 million were primarily in Texas and Utah for commercial and industrial, and construction real estate loans. The increases were partially offset by $211 million of decreases in commercial owner occupied loans predominantly in the Company's National Real Estate Group, and term commercial real estate loans primarily in Utah and Colorado, resulting from further competitive pressures from life insurance companies in a flat yield curve environment.

Average loans and leases of $39.8 billion during the fourth quarter of 2014 increased from $39.6 billion during the third quarter. Unfunded lending commitments were $17.6 billion at December 31, 2014, compared to $17.5 billion at September 30, 2014.

Energy-Related Exposure

At December 31, 2014, the Company had approximately $3.2 billion of primarily oil and gas energy-related loan balances, representing 7.9% of the total loan portfolio, compared to $3.1 billion and 7.7% at September 30, 2014, respectively. As of December 2014, $17 million (0.5%) of the $3.2 billion outstanding balances were nonperforming. The distribution of energy-related loans by customer market segment is shown in the following schedule.

The Company's historical energy lending performance has been strong despite significant volatility in both oil and natural gas prices, largely due to efforts of our highly experienced, dedicated team of bankers, conservative underwriting standards, and solid risk management controls, as detailed later. Losses following the 2008-2009 period of oil and gas price volatility were modest, and the Company has applied lessons learned from that cycle to the management of the portfolio.

• Historically, the Company's cumulative energy net charge-offs have been significantly below the cumulative net loss rate of general commercial and industrial lending during the last five years.
• Classified loans increased significantly during the last downturn, but nonaccrual loans increased much more modestly, and annual losses were relatively minor.

Risk Mitigation. Several factors reduce the risk inherent in the portfolio:

• The Company utilizes concentration limits on its energy lending, and such limits served to constrain loan growth during the past several quarters and years.
• The oil and gas energy related portfolio contains only senior loans – no junior or second lien positions. The Company generally avoids making first liens to borrowers that employ significant leverage through the use of junior liens or large unsecured senior tranches of debt.
• More than 90% of the total energy-related portfolio is secured by reserves, equipment, real estate, and other collateral, or a combination of collateral types.

Regarding upstream exploration and production loans:

• Most borrowers have relatively balanced production between oil and gas. Gas prices have experienced a much more muted decline than oil.
• A significant portion of the Company's reserve-based borrowers are hedged. Of the oil production projected in 2015 and 2016, more than 50% is hedged, based on weighted average commitments and the latest data provided by customers.
• The Company applies multiple discounts to the borrower's stated value of the collateral in determining the borrowing base (commitment), to help protect credit quality against significant commodity price declines.
• The Company employs several third-party engineering firms to conduct independent and unbiased evaluations of the energy reserves. The Company also employs internal engineering staff to review the third party evaluations; such staff report to the chief credit officer.
• Reserve-based commitments are subject to a borrowing base re-determination based on then-current energy prices at least every six months. The Company generally has the right to conduct two other re-determinations during the year.

Regarding energy service loans:

• Because of the potential volatility in cash flows for energy services companies, the Company significantly limits leverage and analyzes the hypothetical performance of such loans under severely reduced cash flows during underwriting. Debt-to-EBITDA ratios for energy services companies were generally in the area of 1.5-to-1 as of the most recent financial statements available from the borrowers.
• Many borrowers are diversified geographically and service both oil and gas related drilling and production.
• Included in the energy service loans shown in the previous schedule are companies that have a concentration of revenues to the energy industry. However, many of these borrowers provide a broad range of products and services to the energy industry, many of which are not subject to the same volatility as new drilling activities.

In the fourth quarter, observed credit quality in the energy-related portfolio remained strong and was relatively unchanged from the third quarter. During the fourth quarter, the Company conducted certain sensitivity analyses, and based on those analyses, subjected certain energy-related credits to further scrutiny, resulting in a small number of credit downgrades. The fact that the decline in energy prices has basically all taken place in one quarter makes it difficult to see any measurable changes to the financial condition of borrowers, which is a primary driver of individual loan risk grades; such grades, in turn, are a primary driver of the quantitative portion of the allowance for credit losses. Nevertheless, the Company recognizes that some of its energy-related credits likely have incurred losses, assuming current levels of oil and gas prices persist. Therefore, it made changes to certain qualitative adjustment factors that had the effect of increasing the allowance for credit losses by approximately $25 million.

Finally, in addition to re-evaluating certain credits and bolstering the allowance for credit losses in the fourth quarter, the Company has initiated the process of interim borrowing base re-determinations on selected borrowers. This is expected to result in some reduction of the size of the lines of credit available to those borrowers, and may result in some credit downgrades. However, the Company believes it is prudent to take early action and secure additional collateral, reduce commitments, etc., rather than wait for the normal borrowing base re-determination period in the spring of 2015.

Deposits

Total deposits increased $1.5 billion to $47.8 billion at December 31, 2014, compared to $46.3 billion at September 30, 2014, due to increases in both commercial and consumer account balances. Average total deposits for the fourth quarter of 2014 increased $1.2 billion, or 3%, to $47.5 billion, compared to $46.3 billion for the third quarter of 2014. Average noninterest-bearing deposits accounted for $0.8 billion of the total quarterly growth and amounted to 44% of total average deposits, up from 41% in the same year-ago period. Deposit increases are usually seasonally strong in the fourth quarter.

Debt and Shareholders' Equity

After several quarters of increases, accumulated other comprehensive income (loss) declined to $(128) million at December 31, 2014 from $(111) million at September 30, 2014 primarily due to increased pension benefit obligations at December 31, 2014, which resulted from a decline in long-term interest rates and increased life expectancy assumptions.

Tangible book value per common share improved by approximately 1% to $26.27 at December 31, 2014, compared to $26.00 at September 30, 2014. Compared to December 31, 2013, tangible book value per common share improved by approximately 10%.

The estimated Basel I Tier 1 common equity ratio was 11.92% at December 31, 2014, essentially unchanged from 11.86% at September 30, 2014, but improved 17%, or 1.74 percentage points from 10.18% at December 31, 2013, due largely to the issuance of $525 million of common equity in July 2014. 

Investment Securities

During the fourth quarter of 2014, the Company sold approximately $195 million par amount of CDO securities ($158 million amortized cost), resulting in net realized losses of $13 million. This compares to sales of $239 million par amount ($174 million amortized cost) during the third quarter, which resulted in net realized losses of $19 million. Gains on paydowns and payoffs of CDO securities were approximately $2 million during the fourth quarter, compared to $5 million during the third quarter. As of December 31, 2014, the Company had either sold or received full payoff of all of its Volcker-prohibited fixed income investment securities.

Also during the fourth quarter of 2014, driven by the Federal Reserve's adoption of the liquidity coverage ratio and consistent with previously stated intentions, the Company purchased approximately $450 million par amount of U.S. agency mortgage-backed securities. These securities have a duration of approximately 3.5 years.

Net Interest Income

Net interest income increased to $430 million in the fourth quarter of 2014 from $417 million in the third quarter. The net interest margin increased to 3.25% in the fourth quarter of 2014, compared to 3.20% in the third quarter of 2014. Interest expense on long-term debt during the fourth quarter declined approximately $12 million due to the effect of long-term debt redemptions during the third quarter.

Noninterest Income

Noninterest income for the fourth quarter of 2014 was $129 million, compared to $116 million for the third quarter of 2014. The increase in dividends and other investment income and equity securities gains was primarily due to approximately $15 million of unrealized gains on Small Business Investment Company investments. This increase was partially offset by $4 million of impairment on certain Volcker-prohibited ("covered") private equity investments ("PEIs"). During the fourth quarter, the Company sold two covered PEIs of approximately $6 million and, with the impairment charge, recorded the remaining covered portfolio at an estimated market value of $41 million at December 31, 2014.

Noninterest Expense

Noninterest expense for the fourth quarter of 2014 was $412 million, compared to $439 million for the third quarter of 2014. The decrease was due primarily to the $44 million debt extinguishment and a $5 million severance accrual in salaries and benefits that were both recorded in the third quarter, partially offset by (1) the provision for unfunded lending commitments increasing to a positive $2 million in the fourth quarter from a negative $16 million in the prior quarter, and (2) an increase in professional and legal services related to the Company's CCAR submission and new lending, deposit and reporting systems.

Asset Quality

Nonperforming lending-related assets declined 3% to $326 million at December 31, 2014 from $335 million at September 30, 2014. Classified loans were $1.1 billion at December 31, 2014, compared to $1.2 billion at September 30, 2014, or a decline of 3%. The ratio of nonperforming lending-related assets to loans and leases and other real estate owned decreased to 0.81% at December 31, 2014, compared to 0.84% at September 30, 2014.

Net loan and lease charge-offs were $17 million in the fourth quarter of 2014, compared to $11 million in the third quarter of 2014. Recoveries were $18 million in the fourth quarter, compared to $15 million in the third quarter. Charge-offs during the quarter took place in the commercial portfolio and were not driven by energy-related lending.

The provision for credit losses consists of the provision for loan losses, $12 million in the fourth quarter, plus the provision for unfunded lending commitments of $2 million in the fourth quarter. The provisions for loan losses and unfunded lending commitments in the fourth quarter reflect the Company's decision to increase the qualitative portion of the reserves due to recent sharp declines in energy prices, offset by continued improvement in credit quality metrics during the quarter. The large negative provisions during the third quarter were due to significant reductions in commitments and outstanding balances of construction and land development loans,which carry a higher reserve ratio, and to sustained improvement in broader economic and credit quality indicators. The allowance for credit losses was $686 million, or 1.71%, of loans and leases at December 31, 2014, compared to $690 million, or 1.74%, of loans and leases at September 30, 2014.

Conference Call

Zions will host a conference call to discuss these fourth quarter results at 5:30 p.m. ET this afternoon (January 26, 2015). Media representatives, analysts and the public are invited to listen to this discussion by calling 253-237-1247 (domestic and international) and entering the passcode 55239414, or via on-demand webcast. A link to the webcast will be available on the Zions Bancorporation website at www.zionsbancorporation.com. The webcast of the conference call will also be archived and available for 30 days.

About Zions Bancorporation

Zions Bancorporation is one of the nation's premier financial services companies, consisting of a collection of great banks in select Western markets. Zions operates its banking businesses under local management teams and community identities in 11 Western and Southwestern states: Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming. The Company is a national leader in Small Business Administration lending and received 12 "Excellence" awards by Greenwich Associates for the 2013 survey. In addition, Zions is included in the S&P 500 and NASDAQ Financial 100 indices. Investor information and links to subsidiary banks can be accessed at www.zionsbancorporation.com.

Forward-Looking Information

Statements in this press release that are based on other than historical data or that express the Company's expectations regarding future events or determinations are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements based on historical data are not intended and should not be understood to indicate the Company's expectations regarding future events. Forward-looking statements provide current expectations or forecasts of future events or determinations. These forward-looking statements are not guarantees of future performance or determinations, nor should they be relied upon as representing management's views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from those presented, either expressed or implied, in this press release. Factors that could cause actual results to differ materially from those expressed in the forward-looking statements include the actual amount and duration of declines in the price of oil and gas as well as other factors discussed in the Company's most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission ("SEC") and available at the SEC's Internet site (http://www.sec.gov).

Except as required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

This press release presents the non-GAAP financial measures previously shown. The adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures are included where applicable in financial results presented in accordance with GAAP. The Company considers these adjustments to be relevant to ongoing operating results.

The Company believes that excluding the amounts associated with these adjustments to present the non-GAAP financial measures provides a meaningful base for period-to-period and company-to-company comparisons, which will assist investors and analysts in analyzing the operating results of the Company and in predicting future performance. These non-GAAP financial measures are used by management and the Board of Directors to assess the performance of the Company's business for evaluating bank reporting segment performance, for presentations of Company performance to investors, and for other reasons as may be requested by investors and analysts. The Company further believes that presenting these non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that applied by management and the Board of Directors.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although non-GAAP financial measures are frequently used by stakeholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP.

SOURCE Zions Bancorporation