DBRS Confirms Zions Bancorporation and Related Entities at A (low); Trend Remains Stable

DBRS has today confirmed the ratings and Stable trend of Zions Bancorporation (Zions or the Company) and its operating bank subsidiaries, with Zions’ Issuer and Senior Debt rating at A (low) and Short-Term Instruments at R-1 (low). The rating action follows a review by DBRS of the Company’s operating performance and financial fundamentals.

Notwithstanding the negative pressure on asset quality and disruptions in the capital markets, which have negatively impacted the Company’s bottom line, Zions’ ratings reflect its demographically appealing footprint; its recurrent, albeit pressured earnings; its deteriorating, yet still sound asset quality and its acceptable capital and liquidity positions. The Stable trend reflects DBRS’s view that the Company’s franchise strengths and favorable demographics will assist in producing solid recurrent earnings.

For 2007, Zions’ net income decreased 17% to $479.4 million, due to higher loan loss provisions, $158 million in pre-tax securities impairment charges, and margin compression. The impairment charges resulted from the Company having designated eight of its twelve real estate investment trust collateralized debt obligation (REIT CDO) securities as “other than temporarily impaired” (OTTI) and the purchase and subsequent mark-to-market of Lockhart Funding LLC (Lockhart) securities. Within the liquidity agreement between Zions and Lockhart, its qualified special purpose entity (QSPE), Zions must purchase securities from the QSPE if the QSPE cannot raise enough funding in the asset-backed commercial paper markets to support its assets. During 2007, Zions’ net interest margin (NIM) decreased by 20 basis points to 4.43%, pressured by lower levels of non-interest bearing deposits, continuing high deposit costs and the purchase of Lockhart’s lower-yielding commercial paper. DBRS notes that Zions’ sizeable level of income before provisions and taxes could absorb the potential future charge if it were determined that the remainder of Zions and Lockhart’s REIT CDOs ($156 million) were OTTI.

During H2 2007, Zions’ asset quality metrics came under pressure as residential land acquisition, development and construction exposures deteriorated due to the downturn in the housing markets. During Q4 2007, non-performing assets (NPAs) and net charge-off (NCO) ratios expanded, yet remained in line with what is expected for its rated peers. DBRS notes that the Company’s conservative underwriting, lending expertise, strong risk management, and a well-developed credit culture will be tested, given the severe downturn in the housing markets. The Company’s credit metrics have historically been sound and compared favorably with that of its similarly rated peers; however, the deterioration in the Company’s sizeable commercial real estate portfolio could be exacerbated if the national economy weakens further. Although DBRS anticipates that Zions’ current earnings capacity can absorb the likely incremental increase in credit costs, without impairing capital, DBRS notes that a deeper credit cycle and accelerating level of asset quality deterioration may impose higher credit costs and could significantly pressure earnings, which could result in negative rating pressure.

Zions’ capital, although currently adequate, falls at the lower end of the range of its similarly rated peers. In light of Zions’ large commercial real estate portfolio, the possibility of perhaps a longer-term, more painful credit cycle, and the potential purchase of the remainder of Lockhart’s securities, which could compress the Company’s capital ratios, DBRS views favorably Zion’s recently announced plan to build up its capital position through restricting asset growth, limiting stock re-purchases and possibly issuing senior or subordinate debt.

The Company’s adequate liquidity for the operating banks is provided by its downward-trending core deposit base, which accounts for 76% of net loans (at December 31, 2007) and high-quality securities and residential mortgage portfolios, which in aggregate account for about 19% of total earnings assets. However, DBRS notes that Zions’ increasing wholesale funding reliance – in particular, Federal Home Loan Bank (FHLB) advances – could pressure future margins. Nonetheless, the Company has sufficient additional FHLB borrowing capacity to cover operating needs and the potential funding of additional purchases of Lockhart securities.

DBRS comments that sustained accelerating credit quality deterioration, increased CRE concentration and/or a material weakening in Zions’ funding profile could result in negative ratings pressure. Moreover, the aggregated impact on Company fundamentals of potential charge-offs related to the remaining REIT CDO portfolios and the purchase of the remainder of the QSPE’s securities would heighten DBRS’s sensitivity to potential future negative rating action, if not offset by appropriate actions.

Zions Bancorporation, a bank holding company with headquarters in Salt Lake City, Utah, reported $52.9 billion in assets at December 31, 2007.

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