DBRS Ratings on Zions Bancorporation Unchanged after 3Q13 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 3Q13 results. The trend on all ratings is Stable. Zions reported net income available to common shareholders of $209.7 million for the quarter, up from $55.4 million for 2Q13 and from $62.3 million for 3Q12. Higher QoQ earnings mostly reflected a $126 million (after-tax) benefit to earnings related to the redemption of $800 million par amount of Series C preferred stock, which had a carrying value of $926 million. Higher earnings also reflected the non-recurrence of 2Q13’s $40 million of capital restructuring/debt redemption costs.

Importantly, balance sheet fundamentals were sustained in 3Q13, reflecting continued asset quality stabilization, sustained average loan and deposit growth, and the maintenance of solid liquidity and capital positions. During 3Q13, Zions’ core earnings benefited from a significant negative provision for unfunded loan commitments.

DBRS calculated adjusted income before provisions and taxes (excluding securities gains/losses, OTTI and debt extinguishment costs), increased by 16.1% sequentially, driven by a 9.9% decrease in adjusted non-interest expense, partially offset by a 3.0% decrease in adjusted revenues. Lower adjusted non-interest expense mostly reflected a $23.6 million positive swing in provisions for unfunded lending commitments, driven by a decline in line utilization. Meanwhile, most of Zions’ other expense categories were well managed during the quarter.

Lower adjusted revenues were attributable to a 3.5% decline in net interest income to $415.5 million and a 1.3% decrease in adjusted non-interest income to $126.6 million. The decrease in net interest income mostly reflected significantly lower contributions from FDIC supported loans, as well as an increase in Zions’ low yielding cash position. Overall, the Company’s spread income reflected a 22 bps narrowing of net interest margin to 3.22%, partially offset by a 2.1% increase in average earning assets.

Higher sequential average earning assets reflected a 0.7% increase in average loans, mostly 1-4 family residential mortgages and multi-family construction loans. DBRS notes that the Company lowered its outlook on loan growth, which could negatively impact future spread income. Supporting asset growth, average deposits increased 1.0%, QoQ, reflecting higher levels of average non-interest bearing demand deposits.

Lower mortgage banking income mostly pressured adjusted non-interest income. Indeed, loan sales and servicing income was down 21.1% QoQ, driven by a 36% decline in residential mortgage refinancing volumes. DBRS notes that non-core OTTI charges on collateralized debt obligations increased by $4.9 million QoQ to $9.1 million; however, this headwind was partially offset by a $3.7 million increase in securities gains to $4.7 million.

Asset quality continued to improve, as evidenced by the Company’s lower levels of non-performing lending-related assets (NPAs) and net charge-offs (NCOs). Overall, NPAs declined $63.8 million, or 10.6%, to $537.9 million and represented a manageable 1.40% of loans and OREO, at September 30, 2013, down from 1.57% at June 30, 2013. Meanwhile, NCOs increased $3.0 million QoQ, yet still represented a very low 0.09% of average loans, up slightly from 0.06% for 2Q13. Reflecting positively on future credit quality, classified loans (excluding FDIC-supported loans) declined an additional 13.0% sequentially. These positive trends supported continued negative provisions for loan losses which totaled $5.6 million in 3Q13, down from $22.0 million in 2Q13. Finally, at current loss rates, Zions’ loan loss reserve coverage remains adequate at 169% of nonperforming loans and 2.30% of total loans.

Zions’ capital profile remains sound in DBRS’s view. At September 30, 2013, the Company’s estimated Tier 1 common equity ratio was 10.43% and estimated Tier 1 ratio was 13.04%. DBRS notes that during the quarter, Zions continued its capital efficiency initiatives, issuing preferred stock and subordinated debt and redeeming higher cost preferred stock.

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

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