DBRS Confirms Zions Bancorporation Senior Debt at BBB (low); Stable Trend

DBRS, Inc. (DBRS) has today confirmed most of the ratings of Zions Bancorporation (Zions or the Company), including its BBB (low) Issuer & Senior Debt rating. At the same time, DBRS upgraded the Company’s preferred stock rating to B from B (low) and discontinued the rating for Zions Capital Trust B securities, which were recently redeemed. The trend on all ratings remains Stable. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The ratings confirmation and upgrade of the preferred stock reflect the Company’s improving credit profile, solid capital and funding position, and demographically appealing banking franchise. Ratings also consider Zions’ pressured core earnings generation capacity, commercial real estate (CRE) concentration, and sizable level of stressed trust preferred collateralized debt obligations (CDOs).

Underpinning the Company’s ratings is a banking franchise located in ten Western and Southwestern states, a region that has historically reflected GDP and job creation growth rates that have outpaced the national average. DBRS notes that Zions operates through eight commercial bank subsidiaries, each with their own brand name, CEO, and management team. This operating structure allows the Company to specifically tailor its products and services to customers on a local level.

Despite the difficult business environment, Zions continues to make headway in reducing levels of problematic loans, as non-performing assets (NPAs) are well off their peaks. Specifically, NPAs (excluding performing restructured loans) declined $346.7 million, or 33.6%, since March 31, 2012 and represented 1.80% of total loans, leases and OREO. Meanwhile, net charge-offs were a modest 0.19% of average loans for 1Q13, down from 0.20% for 4Q12 and 0.59% for 1Q12. Reflecting positively on future credit quality, classified loans (excluding FDIC covered loans) continued to decline. These positive trends supported a negative provision for loan losses of $29.0 million in 1Q13, compared to a negative provision of $10.4 million in 4Q12. At current loss rates, Zions’ loan loss reserve coverage remains adequate in DBRS’s view at 141.68% of nonperforming loans and 2.23% of total loans.

With a small-to- middle market commercial business focus, Zions’ loan portfolio is heavily weighted in C&I and CRE loans. DBRS considers the Company’s CRE component to be a concentration at 440% of tangible common equity. Nonetheless, the Company does have a sizable level of owner occupied CRE loans, which in general have credit characteristics more akin to C&I loans. Excluding these loans, CRE loans represented 252% of tangible common equity. DBRS notes that the Company currently has a moderately sized construction loan portfolio, which totals 6.2% of total loans.

Ratings also consider Zions pressured core income before provisions and taxes (IBPT). Zions’ IBPT remains strained by the slow growth economy, low interest rate environment and higher dependence on spread income. Specifically, the Company’s spread income continues to be pressured by a narrowing net interest margin, mostly offset by moderate loan growth. Positively, Zions’ loan portfolio (average basis) has increased for three consecutive quarters. 1Q13 growth reflected higher levels of C&I loans, construction/ land development exposure, and residential mortgages. Easily funding the loan portfolio is a sizable level of core deposits, which includes a large component of non-interest bearing demand deposits that represented 38.9% of total deposits (as of March 31, 2013). Going forward, DBRS anticipates continued margin pressure, given low interest rates. Nonetheless, when interest rates do increase, Zion’s spread income will benefit from its significant asset sensitivity.

Zions’ pressured core earnings also reflect its limited fee income and relatively high expenses. Specifically, the Company’s adjusted fee income remains fairly low, at 23.3% of total revenues. Meanwhile, non-interest expense remains relatively high, as reflected by the Company’s 1Q13 and 2012 efficiency ratios of 73.7% and 74.3% (DBRS calculated), respectively. Importantly, despite an outsized OTTI charge in 4Q12, related to its $1.2 billion (carrying value) trust preferred CDO portfolio, DBRS sees future related charges as manageable. The larger 4Q12 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. Finally, DBRS notes that Zions’ bottom line will benefit from lower levels of future preferred stock dividends, as the Company refinances out of higher cost capital.

Zions’ capital position is sound, in DBRS’s opinion, and provides adequate loss absorption capacity, especially at current loss rates. Zions’ tangible common equity represents 7.53% of tangible assets at March 31, 2013, while the Company’s regulatory capital ratios are comfortably above regulators’ “well capitalized" levels with a Tier 1 common equity ratio of 10.06% and Tier 1 ratio at 11.56%.

Zions Bancorporation, a financial holding company headquartered in Salt Lake City, Utah, reported $54.1 billion in assets at March 31, 2013.

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, Rating Bank Preferred Shares & Equivalent Hybrids, Bank and Bank Holding Company Trust Preferred Securities, and Rating Bank Subordinated Debt & Hybrid instruments with Discretionary Payments. These can be found at http://www.dbrs.com/about/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.

[Amended on August 7, 2014, to reflect actual applicable methodologies used and sources of information]

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

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