DBRS Downgrades Zions Bancorporation’s Senior Debt to BBB (low); Trend Negative

DBRS has today downgraded the ratings of Zions Bancorporation (Zions or the Company) and its related entities, including its Issuer and Senior debt rating to BBB (low) from BBB. At the same time, DBRS downgraded Zions’ banking subsidiaries’ Deposits and Senior debt ratings to BBB from BBB (high). With the exception of its AAA rated FDIC guaranteed debt, which remains on Stable trend, all ratings were placed on Negative trend.

Today’s rating actions conclude a review with Negative Implications initiated by DBRS in April 2009. The downgrade reflects Zions’ struggle with significant asset quality erosion, heightened credit costs, and securities impairment and valuation losses. Even excluding recent quarterly goodwill impairment charges, results have been negatively impacted by elevated credit costs, primarily related to Zions’ sizeable construction and development portfolio. Moreover, the Company continues to suffer securities impairment losses, within its bank and insurance company trust preferred collateralized debt obligations.

The Negative ratings trend reflects DBRS’s view that Zions faces considerable headwinds over the near-to-intermediate term, including asset quality erosion and the likelihood of additional valuation charges against its securities portfolio. DBRS comments that sustained elevated asset quality erosion and additional significant charges to Zions’ securities portfolio, may negatively pressure ratings.

Zions’ ratings reflect its adequate liquidity, solid and recently augmented capital and strong presence in the highly stressed, yet demographically favorable, southwestern and Western regions of the United States. Ratings also reflect the Company’s continued lack of profitability, elevated asset quality issues and highly strained securities portfolio.

Zions reported a Q2 2009 net loss applicable to common shareholders of $40.7 million. The loss reflected a sizeable $763 million provision for loan loss reserves, partially offset by substantial gains related to the Company’s capital augmentation program and a 16 basis points widening of net interest margin to 4.09%, which benefited from lower cost deposits and an improved funding mix.

The Company’s high credit costs continue to reflect deterioration within its acquisition, development and construction portfolio. At June 30, 2009 Zions’ non-performing assets (NPA) represented a high 4.68% (excludes FDIC supported assets) of total loans versus 3.96% at March 31, 2009. Meanwhile, Q2 2009 net charge-offs (NCO) represented 3.39% (excludes FDIC supported assets) of average loans, up from 1.47% for the prior quarter. The increase in NCOs was spurred by declining collateral values on residential and commercial construction loans, mostly in Arizona and Nevada. For Q2 2009, loan loss provisions were $763 million, of which 54% was for reserve build. Despite the build, Zions’ allowance for loan loss reserves to non-accruals (excludes FDIC supported assets) was moderate at 77%.

Zions’ capital position has been bolstered through several actions including debt modification, a tender for Series A Preferred Shares and the issuance of $124 million of common stock. At June 30, 2009, Zions’ estimated Tier 1 and Total risk-based capital ratios were 9.64% and 12.84%, respectively, providing it with solid loss absorption capacity. Moreover, the capital actions augmented the Company’s Tier 1 common and Tangible common equity ratios to 6.07% and 5.66%, respectively.

The Company’s liquidity profile remains adequate and is underpinned by a core deposit base that accounts for approximately 88% (at March 31, 2009) of net loans. Zions’ securities portfolio, which represented 9% of total assets, access to the Federal Home Loan Bank and Federal Reserve Discount Window round out its liquidity profile. DBRS comments that Zions’ securities portfolio contains roughly $2.5 billion (amortized cost) of problematic bank and insurance company trust preferred collateralized debt obligations. DBRS anticipates further losses within this portfolio, especially as the market remains unstable and the recession continues.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.