DBRS: Zions’ 2Q14 Earnings Up QoQ, Due to Higher Neg. Provisions For LLR; Core Earnings Up

Summary:
• 2Q14 earnings applicable to common shareholders of $104.5 million, up 37.1% from 1Q14.
• Excluding non-core items, 2Q14 adjusted income before provisions and taxes (IBPT) increased 2.2% QoQ.
• DBRS, Inc. rates Zions Bancorporation Issuer & Senior debt at BBB (low) with a Stable trend.

Zions Bancorporation (Zions or the Company) reported net income available to common shareholders of $104.5 million for 2Q14, up 37.1% from the prior quarter. Improved quarter-on-quarter (QoQ) earnings mostly reflected a $53.8 million increase in negative provisions for loan losses. On a core operating basis, excluding negative provisions, securities gains and other-than-temporary impairment losses, Zion’s IBPT improved 2.2% QoQ, to $128 million, driven by a 2.0% increase in adjusted revenues, partially offset by a 2.0% increase in adjusted expenses.

Improved adjusted revenues on a linked-quarter basis reflected a 10.2% broad-based increase in adjusted non-interest income. Indeed, Zions reported improvements across most line items, including other service charges/commissions/fees, wealth management income and capital markets/foreign exchange. Meanwhile, sound loan growth was able to offset modest net interest margin pressure, resulting in stable spread income. Specifically, average loans grew 1.1% linked-quarter, mostly reflecting higher levels of commercial & industrial loans, and to a lesser extent, commercial owner occupied loans, commercial construction exposures, and 1-4 family residential mortgages. Importantly, loan pipelines remain stable, perhaps signaling continuing growth.

Expenses remain elevated, with Zions’ adjusted efficiency ratio at 76% (DBRS calculated) signaling room for improvement. Higher 2Q14 linked-quarter expenses were driven by higher levels of salaries and benefits, provisions for unfunded lending commitments, and an increase in professional and legal services.

Positively, Zions’ asset quality continues to improve, reflecting lower levels of non-performing assets and net charge-offs.

Although capital metrics remain solid, DBRS notes that the Federal Reserve objected to Zions’ original capital plan, as the Company did not meet the minimum, post stress tier-1 common ratio of 5%. Zions subsequently resubmitted its plan and expects a response by July 28, 2014.

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.