DBRS Comments on Zions Bancorporation’s 4Q12 Results; Senior at BBB (low), Stable Trend

DBRS, Inc. (DBRS) has commented today on the 4Q12 results of Zions Bancorporation (Zions or the Company). Zions has an Issuer & Senior Debt rating of BBB (low) and a Stable trend. The Company reported net income available to common shareholders of $35.6 million for 4Q12, down from $62.3 million for 3Q12.

The linked-quarter earnings contraction mostly reflected an $83.8 million other-than-temporary impairment (OTTI) charge, partially offset by $10.2 million in fixed income securities gains. The OTTI charge reflected significant changes to Zion’s modeling assumptions related to prepayment speeds and probability of defaults on certain deferring bank holding company trust preferred securities. DBRS notes that with the OTTI charge and significant improvement in credit spreads for junior tranches, net unrealized pre-tax losses in Zions’ adjusted other comprehensive income improved to $718 million in 4Q12, from $857 million in 3Q12.

Highlights for the quarter included continued loan and deposit growth, and improved asset quality. Specifically, period-end loans (excluding FDIC-Supported loans) increased $462.7 million, or 1.3%, sequentially, primarily driven by higher levels of commercial & industrial loans (up 3.9%) and residential mortgages (up 4.0%). DBRS notes that most of the loan growth was towards the end of 4Q12, as average loan growth was more moderate, up $100.2 million, or 0.3%. Supporting loan growth, period-end deposits increased by 5.4% sequentially and the mix improved, as non-interest bearing demand deposits increased by 6.8% and time deposits declined by 4.7%. Finally, asset quality was improved, with net charge-offs (NCOs) and non-performing assets (NPAs) declining sequentially.

Overall, total revenues were $484.2 million in 4Q12, down from $563.4 million in 3Q12. Net interest income declined $8.2 million, or 1.9%, QoQ, to $430.0 million. Lower spread income reflected an 11 bps narrowing of net interest margin (NIM) to a still solid 3.47%, partially offset by a 1.3% increase in average earning assets. The narrower NIM was attributable to decreasing earning asset yields outpacing declining liability costs. The decrease in spread income also reflected the reclassification of credit card interchange fees from interest and fees on loans to other service charges, commissions and fees. Meanwhile, non-interest income declined $71.1 million, or 56.8%, to $54.1 million, due to the aforementioned OTTI charge, partially offset by securities gains. The securities gains reflected cash principal payments on CDOs previously written down.

Noninterest expenses increased $12.0 million, or 3.0% from 3Q12, primarily due to higher legal & professional and other real estate expense.

Importantly, Zions continues to exhibit improvement in its asset quality. Specifically, NPAs fell $92.0 million, or 11.0%, to $745.6 million and represented 1.96% of loans and OREO (excluding performing restructured loans) at December 31, 2012, down from 2.23% at the end of 3Q12. NCOs also improved further in the quarter, and, annualized, represented a low 0.20% of average loans, down from 0.41% in 3Q12. In addition, classified loans continued to decline. These positive trends supported a negative provision of $10.4 million in 4Q12, compared to a negative provision of $1.9 million in 3Q12. At current loss rates, Zions’ loan loss reserve coverage remains adequate in DBRS’s view at 138.4% of nonperforming loans and 2.38% of total loans.

Zions’ funding profile remains solid, underpinned by an 82% loans to deposit ratio, and its capital position is sound, in DBRS’s view. At December 31, 2012, Zions’ estimated Common Equity Tier 1 ratio was 9.78% and Tier 1 ratio was 13.35%.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]