DBRS Ratings on Zions Bancorporation Unchanged after 2Q13 Results - Senior at BBB (low), Stable

DBRS, Inc. (DBRS) has today commented that its ratings for Zions Bancorporation (Zions or the Company), including its Issuer & Senior Debt rating of BBB (low) are unchanged following the release of 2Q13 results. The trend on all ratings is Stable. Zions reported net income available to common shareholders of $55.4 million for the quarter, down from $88.3 million for 1Q13, and up from $55.2 million for 2Q12. Lower QoQ earnings mostly reflected the significant costs of capital restructuring and debt redemption.

Positively, balance sheet fundamentals remained solid in 2Q13, reflecting sustained asset quality improvement, average loan and deposit growth, and the maintenance of solid liquidity and capital positions. During 2Q13, Zions continued to work down its funding cost through capital and financing actions. Specifically, the Company redeemed its $285 million of Zions Capital Trust B trust preferred securities, and repurchased $258 million of higher cost senior notes. Additionally, the Company issued a total of $427.1 million of non-cumulative perpetual preferred stock, as well as $300 million of lower cost senior notes.

Overall, lower 2Q13 earnings on a QoQ basis, reflected higher levels of non-interest expense, partially offset by improved total revenue. Specifically, non-interest expense increased 13.7% sequentially to $451.7 million, driven by $40.3 million of debt extinguishment costs, a $9.9 million negative swing in provision for unfunded lending commitments and a $6.7 million increase in professional and legal services expense. Most other expense categories were fairly well managed during the quarter. DBRS notes that future expenses will be pressured by the announced investments to replace Zions’ loan and deposits systems, and upgrade its accounting systems. The Company estimates the initiatives will take between five to seven years to implement, with a total cost of $200 million, with approximately one third of the cost estimated to be capitalized.

Total revenues increased 3.0% sequentially to $555.8 million, driven by a 3.0% increase in net interest income to $430.7 million and a 3.2% increase in non-interest income to $125.1 million. Higher QoQ spread income reflected a stable net interest margin (NIM) of 3.44% and a 1.8% increase in average earning assets. Positively, 2Q13 results benefited from approximately $9.4 million (8 basis points of NIM) of better than expected performance from the Company’s FDIC-supported loans. Meanwhile, higher average earning assets were driven by a 6.7% increase in average money market investments and a 1.0% increase in average loans. Loan growth reflected higher levels of commercial & industrial, construction and residential mortgage loans. Supporting earning asset growth, average deposits increased 1.0%, mostly due to higher levels of average non-interest bearing demand deposits.

Higher QoQ non-interest income reflected increased levels of other service charges and commissions (up 7.4%), deposit service charges (up 1.7%), and trust and wealth management income (up 10.5%). Positively, Zions reported a $5.9 million decrease in other-than-temporary-impairment charges, related to its CDO portfolio; however, this benefit was mostly offset by a $5.0 million decline in securities gains.

Asset quality continued to improve, as evidenced by the Company’s lower levels of non-performing assets (NPAs) and net charge-offs (NCOs). Overall, NPAs declined $82.3 million, or 12.0%, to $601.7 million and represented a manageable 1.57% of loans and OREO, at June 30, 2013, down from 1.80% at March 31, 2013. Meanwhile, NCOs decreased sequentially, and benefited from significant recoveries on loans previously charged-off. On a gross basis, charge-offs were relatively flat, QoQ. For 2Q13, NCOs represented a low 0.06% of average loans, down from 0.19% for 1Q13. Reflecting positively on future credit quality, classified loans (excluding FDIC supported loans) declined approximately 6.0% sequentially. These positive trends supported negative provisions for loan losses of $22.0 million in 2Q13 and $29.0 million in 1Q13. Finally, at current loss rates, Zions’ loan loss reserve coverage remains adequate at 156% of nonperforming loans and 2.40% of total loans.

Zions’ capital profile remains sound in DBRS’s view. At June 30, 2013, the Company’s estimated Tier 1 common equity ratio was 10.05% and estimated Tier 1 ratio was 14.32%.

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

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