Business Context and Reporting Period
Company: Zions Bancorporation, National Association
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Operations: The Company operates a full range of banking and related services through subsidiaries in ten Western and Southwestern states. Key subsidiaries include Zions First National Bank, California Bank & Trust, Amegy Bank, National Bank of Arizona, Nevada State Bank, Vectra Bank Colorado, and Commerce Banks in Washington and Oregon.
Key Financial Metrics
| Metric (in millions, except per share) | Q3 2008 | Q3 2007 | YTD 9M 2008 | YTD 9M 2007 |
|---|---|---|---|---|
| Net Interest Income | $492.0 | $476.6 | $1,463.2 | $1,403.1 |
| Noninterest Income | $89.6 | $145.8 | $273.0 | $432.6 |
| Total Revenue | $581.6 | $622.4 | $1,736.2 | $1,835.7 |
| Provision for Loan Losses | $156.6 | $55.4 | $363.1 | $82.2 |
| Noninterest Expense | $372.3 | $352.0 | $1,076.8 | $1,051.6 |
| Net Income | $37.8 | $135.7 | $216.7 | $448.2 |
| Net Earnings to Common Shareholders | $33.4 | $132.0 | $207.4 | $437.2 |
| Diluted EPS | $0.31 | $1.22 | $1.93 | $4.01 |
| Total Assets | $53,974 | $50,045 | $53,974 | $50,045 |
| Total Deposits | $38,591 | $35,775 | $38,591 | $35,775 |
| Shareholders' Equity | $5,566 | $5,257 | $5,566 | $5,257 |
Key Ratios (Q3 2008 vs Q3 2007):
- Return on Average Assets: 0.28% vs 1.10%
- Return on Average Common Equity: 2.59% vs 10.50%
- Net Interest Margin: 4.13% vs 4.44%
- Efficiency Ratio: 63.37% vs 55.97%
Material Changes vs. Prior Period
- Significant Earnings Decline: Net earnings applicable to common shareholders dropped 74.7% year-over-year in Q3 2008. This was driven primarily by a $101.3 million increase in the provision for loan losses and $28.0 million in impairment losses on investment securities.
- Provision for Loan Losses: The provision surged 183% in Q3 2008 compared to Q3 2007, reflecting weakness in residential land acquisition, development, and construction loans, particularly in the Southwest and Utah.
- Noninterest Income Drop: Noninterest income fell 38.6% in Q3 2008, largely due to impairment losses on investment securities and increased fair value losses on nonhedge derivatives.
- Nonperforming Assets: Total nonperforming assets increased 370% year-over-year to $924 million, with nonaccrual loans rising to $765 million. This increase was concentrated in residential construction and land development loans in Nevada, Arizona, and California.
- Allowance for Loan Losses: The allowance increased to $609 million (1.45% of net loans) from $418 million in the prior year, reflecting the deteriorating credit quality.
Guidance, Outlook, Risks, and Unusual Items
- Capital Purchase Program (CPP): On October 27, 2008, the U.S. Treasury granted preliminary approval for the Company to receive a $1.4 billion capital investment under the CPP. This will be in the form of nonvoting senior preferred shares and warrants for common stock. The Company expects to deploy this capital for prudent lending and potential acquisitions of failed banks.
- Outlook: Management expects credit conditions to continue to soften and general economic conditions to weaken, impacting commercial borrowers. The Company anticipates building reserves over the next several quarters. Net interest margin is expected to remain under pressure due to increased nonperforming assets and competitive deposit rates.
- Off-Balance Sheet Arrangement (Lockhart): The Company maintains a liquidity facility for Lockhart, a securities conduit. Due to market disruptions and rating downgrades, Zions Bank purchased $1.067 billion of securities from Lockhart in the first half of 2008. At period end, the book value of Lockhart's assets exceeded their fair value by approximately $110 million.
- Investment Securities Impairment: The Company recognized $28.0 million in other-than-temporary impairment (OTTI) losses in Q3 2008, primarily related to collateralized debt obligations (CDOs). Total OTTI for the first nine months of 2008 was $107.6 million.
- Acquisition: In September 2008, the Company acquired the insured deposits and certain assets of the failed Silver State Bank, adding approximately $737 million in deposits.
Investor Verification Checklist
- Credit Quality Trends: Verify the trajectory of nonperforming assets and the adequacy of the allowance for loan losses, specifically regarding the exposure to residential construction and land development in the Southwest.
- Lockhart Exposure: Assess the potential for further losses related to the Lockhart securities conduit, given the $110 million gap between book value and fair value of remaining assets.
- Capital Ratios: Confirm the impact of the $1.4 billion Treasury capital injection on the Company's tangible equity ratio and risk-based capital ratios.
- Net Interest Margin Pressure: Monitor the ability to reprice deposits and the impact of rising nonperforming assets on the net interest margin in future quarters.
- Investment Portfolio Valuation: Review the valuation methodologies for Level 3 assets (CDOs) and the potential for additional OTTI charges in a distressed market.