DBRS Ratings on Zions Bancorporation Unchanged after 3Q12 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 3Q12 earnings. The trend on all ratings is Stable. The Company reported net income available to common shareholders of $62.3 million for 3Q12, up from $55.2 million for 2Q12. This quarter’s improved results came despite $16.6 million of costs related to the redemption in September 2012 of Zions’ remaining TARP funds as well as the TARP warrants held by the US Treasury.

Notwithstanding the improvement in reported earnings, DBRS sees Zions’ core profitability as remaining pressured by the challenging rate environment and an uncertain outlook for the economy. Positively, Zions reported solid loan growth in 3Q12 and expects continued growth in coming quarters, which should offset some of the pressure on the Company’s core net interest margin (NIM). On a period-end basis, loans increased $351.1 million from 2Q12 to $36.6 billion (excluding FDIC supported loans) at September 30, 2012. Similar to last quarter, C&I loans, which increased 3.5%, and 1-4 family lending, which increased 4% QoQ, drove the growth. In addition, though asset quality issues remain elevated relative to other banks, nearly all credit quality metrics continued to improve in the third quarter, supporting a negative provision. Provisioning needs are expected to be modest in coming quarters.

Total revenues were $563.4 million for 3Q12, up from $555.0 million in 2Q12. Net interest income which represented 79% of total revenues increased 3% from the second quarter. The increase was primarily due to higher effective yields on FDIC-covered loans, which supported a 1 bp expansion in the reported NIM to 3.63%. The core NIM, however, which adjusts for discount amortization on convertible subordinated debt and additional accretion on acquired loans, declined 12 bps from 2Q12 to 3.60%. Core net interest income declined approximately $5 million QoQ. Noninterest income declined $3.8 million from 2Q12 due to lower dividends and other private equity related income, which were strong in the second quarter. This decline was offset by lower impairment losses on securities and mostly stable results for other core fee lines.

Noninterest expenses declined $6.7 million from 2Q12 due primarily to other real estate expenses that declined $6.2 million QoQ to just $207,000. Other major expense lines, including compensation and benefits, were mostly flat from the second quarter. Zions expects noninterest expense to remain stable in coming quarters.

Importantly, Zions continues to exhibit solid improvement in asset quality. Nonperforming assets (NPA) fell 11% to $838 million and represented 2.23% of loans and OREO (excluding performing restructured loans), down from 2.53% at the end of 2Q12. Net charge-offs also improved further in the quarter, and, annualized, represented 0.42% of average loans, down from 0.47% in 2Q12. In addition, NPA inflows, classified loans and 90+ day delinquencies declined relative to the second quarter. These positive trends supported a negative provision of $1.9 million in 3Q12, compared to a provision of $10.9 million in 2Q12. DBRS notes that Zions has not yet implemented the new OCC guidance related to consumer loans where the borrower has filed for Chapter 7 bankruptcy; however, the Company’s preliminary estimates are that only around $31 million of loans will be affected. As such, DBRS does not anticipate a material impact on the Company’s credit metrics once the guidance is implemented. At current loss rates, Zions’ loan loss reserve coverage remains adequate in DBRS’s view at 128.6% of nonperforming loans and 2.49% of total loans.

Zions’ funding profile remains solid and its capital position remains sound, providing adequate loss absorption capacity in DBRS’s view. Deposit trends were positive again this quarter, with noninterest-bearing demand deposits showing a notable 4.8% increase from 2Q12 to $17.3 billion. In terms of capital, at September 30, 2012, Zions’ estimated Common Equity Tier 1 ratio was 9.84%, up from 9.78% in 2Q12. Its estimated Tier 1 ratio was 15.21%, down from 16.89% in the prior quarter. DBRS notes that the decline reflected the redemption of the Company’s remaining $700 million of TARP preferred shares in the quarter.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Alan G. Reid
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.