DBRS: Zions’ 4Q13 Core Earnings Down; Loss Reflects CDO OTTI Charge and Debt Ext. Cost

Summary:

• 4Q13 adjusted core earnings (adjusted income before provisions and taxes; IBPT) decreased 20%, due to a sizable increase in volatile expense components (including provisions for unfunded lending commitments, due in part to a higher volume of loan commitments), partially offset by improved spread income
• Capital remains sound despite the loss for the quarter,
• DBRS rates Zions Bancorporation Issuer & Senior debt at BBB (low) with a Stable trend

DBRS, Inc. (DBRS) considers Zions Bancorporation’s (Zions or the Company) 4Q13 loss to common shareholders as absorbable, as capital remains sound despite a modest quarter-on-quarter (QoQ) decline. Nonetheless, core earnings (excluding other than temporary impairment (OTTI) charges, debt extinguishment costs and securities gains/losses) remain pressured and decreased 20% QoQ, primarily due to volatile expense components, including provisions for unfunded lending commitments, due in part to a higher volume of loan commitments. Importantly, and supporting the Company’s current ratings, balance sheet fundamentals remain solid, including sound capital and funding profiles, sustained loan and deposit growth, and stabilizing credit quality.

Despite the $59.4 million net loss to common shareholders in 4Q13 (due to a sizable OTTI charge related to the Company marking for sale certain Trup CDOs, along with significant debt extinguishment costs), Zions’ capital profile remains solid and provides sound loss absorption capacity, especially at current loss rates. The Company’s estimated Tier 1 common equity ratio contracted by 32 basis points (bps) to 10.15% primarily due to loan growth and a decrease in retained earnings driven by the charges. Meanwhile, Zions’ tangible common equity ratio increased 12 bps to a solid 8.02%, benefiting from the improvement in fair value of the Company’s CDO securities. Importantly, Zions’ estimated Basel III common equity Tier I capital ratio was sound at 10.2%.

During the quarter, core earnings were down a material 20%, primarily due to higher adjusted expenses, largely attributable a significant swing in provisions for unfunded lending commitments and higher professional and legal services costs. Furthermore core fee income decreased 5% sequentially, in-part reflecting lower loan sales and servicing income, and a decline in dividends and other investment income. Partially offsetting these headwinds, Zions reported sustained broad-based loan growth which when combined with an 11 bps widening of net interest margin led to a 4% increase in spread income, sequentially.

Positively, Zions’ asset quality continued to stabilize during the quarter, reflecting lower levels of non-performing assets, and classified loans (excluding FDIC-supported loans), resulting in sustained negative provisions for loan loss reserves, which benefited earnings. DBRS considers the Company’s total allowance for credit losses to be satisfactory at 2.1% of total loans.

Finally, Zions’ funding profile remains strong, supported by a core deposit base that fully funds net loans. During the quarter, deposit growth was sustained, led by higher levels of non-interest bearing deposits.

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

Notes:

All figures are in U.S. dollars unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]