DBRS Ratings on Zions Bancorporation Unchanged after 2Q12 Results; Senior at BBB (low), Stable Trend

DBRS, Inc. (DBRS) has commented today that its ratings for Zions Bancorporation (Zions or the Company), including its BBB (low) Issuer & Senior Debt rating, are unchanged following the release of 2Q12 results. The trend on all ratings is Stable. The Company reported net income available to common shareholders of $55.2 million for 2Q12, up from $25.5 million for 1Q12. Part of the improvement from the first quarter reflected the absence of the $19.6 million accelerated amortization of discount charge related to the $700 million redemption of TARP preferred stock that impacted 1Q12 results. The reduction in preferred dividends following the partial TARP redemption also contributed to the QoQ growth in earnings available to common shareholders. The Company anticipates that it will redeem the remaining outstanding TARP preferred shares in 2H12.

Notwithstanding the solid improvement in reported earnings, DBRS sees Zions’ core profitability as remaining pressured by the challenging rate environment, muted economic growth and still-elevated asset quality issues. That said, balance sheet trends were mostly positive in the quarter as Zions reported loan and deposit growth and credit quality continues to track in the right direction.

Revenues were relatively stable from the prior quarter at $555.0 million. Net interest income declined approximately $10 million, or 2.3% from 1Q12 to $432.0 million, primarily reflecting debt issuance that was necessary to fund TARP repayment, as well as lower loan yields that were partially offset by lower deposit costs, and higher levels of earning assets. The Company’s core NIM, which adjusts for the discount amortization on convertible subordinated debt and additional accretion on acquired loans, declined 9 bps QoQ to a still-strong 3.72%. Noninterest income increased $16.0 million from the first quarter, primarily due to higher dividends and other private equity related income though most core fee income categories reported modest QoQ growth.

Noninterest expenses increased $9.3 million from 1Q12 due primarily to an $8.6 million increase in the provision for unfunded lending commitments to $4.9 million. DBRS notes, however, that this increase was largely due to the growth in loan commitments in the quarter. Positively, OREO expense and credit related expenses both continued to decline in 2Q12. Going forward, DBRS believes that cost control will be an important factor in sustaining earnings momentum for the industry given the difficult revenue-growth environment. On that front, Zions expects noninterest expense to benefit from continued declines in credit-related costs in coming quarters. In addition, DBRS comments that further declines in loan loss provisions may also benefit earnings.

On a period-end basis, loans increased $327.6 million from 1Q12 to $36.2 billion (excluding FDIC supported loans) at June 30, 2012. C&I loans, which increased 2%, and 1-4 family lending, which increased 4% QoQ, drove the growth. Though overall balances were down QoQ, DBRS views favorably the mix shift within Zions’ CRE book. Specifically, national real estate lending continues to decline, as do loans collateralized by land and hotels. At the same time, multi-family lending continues to exhibit solid growth. Going forward, Zions expects moderate loan growth over the balance of 2012.

Importantly, Zions continues to make progress in improving its asset quality. During 2Q12, nonperforming assets (NPA) fell 9% to $938.3 million and represented 2.53% of loans and OREO (excluding performing restructured loans), down from 2.79% at the end of 1Q12. NPA contraction (excluding FDIC-supported loans) was broad-based in the quarter, though the largest decline was again in the construction and land development portfolio where nonaccrual balances declined $33 million to $115 million. In addition, classified loans, 90+ day delinquencies and early stage delinquencies (excluding FDIC-supported loans) all declined in the second quarter. Together, these trends supported a $4.8 million QoQ decline in the provision for loan losses to $10.9 million, though, as noted, the provision for unfunded commitments increased considerably QoQ. Net charge-offs also improved further in the quarter, and, annualized, represented 0.47% of average loans, down from 0.59% in 1Q12 and 1.23% in 2Q11. At current loss rates, Zions’ loan loss reserve coverage remains adequate at 122.5% of nonperforming loans and 2.64% of total loans. DBRS notes that Zions’ securities portfolio contains roughly $2.5 billion (par value) of problematic collateralized debt obligations, with bank trust preferred securities being the majority of the underlying collateral. DBRS anticipates future, albeit manageable losses within this portfolio, especially given the continuing economic pressures.

Zions’ funding profile remains solid and the Company’s capital position remains sound, providing adequate loss absorption capacity in DBRS’s view. Noninterest-bearing demand deposits increased 2% from 1Q12 to $16.5 billion and represented a solid 38% of total deposits at June 30. DBRS notes that core deposits continue to fund the entire loan book. In terms of capital, at June 30, 2012, Zions’ estimated Tier 1 ratio was 15.01% and its estimated Tier 1 Common ratio was 9.77%. The Company’s estimated Basel III Tier I common ratio, which incorporates the recent NPR, was approximately 7.75% at quarter end, down from 8.2% previously. DBRS notes that the Company’s Tier 1 and Total regulatory capital ratios include the remaining $700 million of outstanding TARP preferred shares.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 5 January 2005
Most Recent Rating Update: 20 December 2011

For additional information on this rating, please refer to the linking document under Related Research.