DBRS: Zions’ 1Q14 Earnings Up QoQ, Due to Significant Noise; Core Earnings Down

Summary:
• 1Q14 earnings applicable to common shares of $76.2 million, compared to a loss of $59.4 million for 4Q13, and earnings of $88.3 million for 1Q13.
• Excluding non-core items, 1Q14 adjusted IBPT declined 6.9% QoQ, reflecting lower adjusted revenues, partially offset by lower adjusted expenses.
• DBRS, Inc. rates Zions Bancorporation Issuer & Senior debt at BBB (low) with a Stable trend.

Improved quarter-on-quarter (QoQ) earnings reflected significant noise. In 1Q14, Zions Bancorporation (Zions or the Company) reported $31 million in net securities gains, while in 4Q13 it reported $142 million of other-than-temporary-impairment charges, both of which were related to its collateralized debt obligation (CDO) portfolio. Also in 4Q13, the Company reported $80 million of debt extinguishment expense. On an adjusted basis, which excludes these non-core items, Zions’ adjusted income before provisions and taxes (IBPT) decreased 6.9%, mostly reflecting lower adjusted revenues, partially offset by lower adjusted non-interest expense.

Importantly, and supporting the Company’s current ratings, balance sheet fundamentals remain solid, including sequential loan growth, stabilizing credit quality, and sound capital and funding profiles. That said, during the quarter, the Federal Reserve objected to the Company’s capital plan submitted as part of the 2014 Comprehensive Capital Analysis and Review (CCAR) process, due to Zions not meeting the minimum, post stress tier-1 common ratio of 5%. Zions will resubmit its plan, which will include reduced hypothetical impairment charges under stress to its securities portfolio, reflecting the approximately $1 billion in par value of CDO sales made in the quarter.

As with most banks, earnings growth remains a challenge for Zions. The Company’s lower linked-quarter revenues reflected declines across most line items, most notably, other service charges, commissions and fees, which declined by 7.1%, mostly due to seasonal factors. Meanwhile, net interest income was down modestly QoQ, pressured by lower spread income on some FDIC-supported loans, and two fewer days in the quarter. Positively, average loans and leases increased modestly during 1Q14, reflecting higher levels of commercial real estate loans. Finally, adjusted expenses were moderately down, driven by lower levels of professional and legal services expense, along with a favorable swing in provisions for unfunded lending commitments. Lower professional and legal services cost reflected higher consulting expense in 4Q13, related to the CCAR process.

Positively, Zions’ asset quality continued to stabilize during the quarter, reflecting lower levels of non-performing assets, and net charge-offs, 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.

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.]