Zions 2Q16 Earnings Call Notes

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Zions Bancorp. (ZION) Harris H. Simmons on Q2 2016 Results

Credit quality great outside of oil and gas

“Credit quality is a little bit of a tale of two cities. We consistently tried to be very transparent about the credit quality challenges of the oil and gas portfolios through this energy cycle. It remains challenged, and we’ll discuss that in a little more detail later. Outside of oil and gas, the loan net charge-offs were only $1 million on a portfolio of approximately $40 billion of non-oil and gas loans. So when you get outside of the oil and gas portfolio, we’re actually really, really pleased with quality that we’re seeing there.”

Paul E. Burdiss – Chief Financial Officer & Executive Vice President

Remain positioned to benefit from rising rates

“We remain positioned to benefit from rising rates, particularly short-term rates, as shown in the box at the bottom right hand side of the slide. Although we have deployed a substantial amount of cash into securities and loans, the interest rate risk characteristics of those assets, combined with continued deposit growth, have resulted in a somewhat stable interest rate sensitivity position. Using the midpoint of the range shown, a 25-basis point rate increase would improve annual net interest income by $25 million to $30 million, we expect.”

Made a decision to decrease CRE growth

“We are downgrading our loan growth outlook to moderately increasing from increasing, due primarily to internal decisions to constrain some of the commercial real estate growth we have recently experienced, although the quality of what we’re producing remains very strong.”

Scott J. McLean – President & Chief Operating Officer

Have to take both oil and gas prices into account when looking at the energy space

“Sure, Brad. Happy to respond to that. The other thing that I would note, we don’t comment about it enough, but natural gas prices also have rallied significantly since early March. Recall that they declined quite a bit in the fourth quarter of last year and through the middle of March. Oil prices really declined kind of January-February and the first part of March, and then both have really made a very nice recovery since then. I only note that because, recall that in our reserve-based lending activity, about 50% of the reserve is – I mean of the borrowing bases are natural gas reserves. So you really kind of have to focus on both.”

Stressed portfolio to $30 oil so can withstand some decline here

“But what I would say is that the underwriting that we did in our spring redetermination generally had prices, oil prices, around kind of in the mid-$30s to high $30s. And the sensitivity would have been down – in the high $20s, excuse me. High $20s, $30ish. And so if prices retreated here back to the high $30s, I don’t think that would really impact our reserve. If we saw prices go down into the low $30s, high $20s, well then it might change how we would think about it. But I think there’s a lot of room between where we are and that kind of really negative environment because fundamentally, the supply and demand curves have improved since six months ago, and that’s fundamentally driving the price changes.”

We’ve seen a large injection of capital from the PE funds into the energy space

“I would also note because the vast majority of our charge-offs on to the energy side are coming from the oil field service fees. Recall that we’ve significant private equity sponsorship with our 70 some-odd service-based companies, our larger service-based companies that we finance. And to date, last year and through six months this year, they’ve injected about $250 million of capital into our borrowers. Just back of the envelope, that would be 15% to 25% in increased equity to those existing deals, which generally were 50% equity, 50% debt; I’m using some broad generalizations here.”