Business Context and Reporting Period
Company: Zions Bancorporation, National Association
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2008
Business Overview: Zions Bancorporation operates a full range of banking and related services through subsidiaries in ten Western and Southwestern states, including Utah, Idaho, California, Texas, Arizona, Nevada, Colorado, New Mexico, Washington, and Oregon. The company also operates nonbank subsidiaries focused on financial technologies.
Key Financial Metrics
| Metric (in millions, except per share) | Q2 2008 | Q2 2007 | YTD 2008 | YTD 2007 |
|---|---|---|---|---|
| Net Interest Income | $484.7 | $469.3 | $971.2 | $926.4 |
| Noninterest Income | $72.4 | $141.3 | $183.4 | $286.8 |
| Provision for Loan Losses | $114.2 | $17.8 | $206.5 | $26.9 |
| Net Income | $72.2 | $159.2 | $178.9 | $312.5 |
| Diluted EPS | $0.65 | $1.43 | $1.63 | $2.78 |
| Total Assets (Period End) | $54,630.9 | $48,691.4 | - | - |
| Total Deposits (Period End) | $37,608.0 | $36,185.6 | - | - |
| Shareholders' Equity (Period End) | $5,273.5 | $5,224.7 | - | - |
| Net Interest Margin | 4.18% | 4.53% | 4.20% | 4.52% |
| Efficiency Ratio | 62.96% | 56.30% | 60.40% | 57.04% |
Material Changes vs. Prior Period
- Significant Earnings Decline: Net income applicable to common shareholders dropped 55.2% in Q2 2008 compared to Q2 2007, and 43.0% year-to-date. This was primarily driven by a massive increase in the provision for loan losses and impairment charges on investment securities.
- Provision for Loan Losses: The provision surged to $114.2 million in Q2 2008 from $17.8 million in Q2 2007 (a 543% increase). This reflects deteriorating credit quality, specifically in residential land acquisition, development, and construction loans in the Southwest and Utah.
- Investment Impairments: The company recognized $38.8 million in other-than-temporary impairment (OTTI) losses on investment securities in Q2 2008, primarily related to asset-backed CDOs, bank/insurance income notes, and REIT trust preferred securities. Year-to-date impairment and valuation losses totaled $84.8 million.
- Noninterest Income Drop: Noninterest income fell 48.8% in Q2 2008 due to the aforementioned impairment losses and a $19.8 million loss on fair value and nonhedge derivatives.
- Nonperforming Assets: Nonperforming assets increased to $697.4 million at June 30, 2008, a 631% increase from $95.4 million at June 30, 2007. Nonaccrual loans rose to $570 million.
Guidance, Outlook, Risks, and Unusual Items
- Lockhart Funding Liquidity Event: On June 23, 2008, Zions Bank was required to purchase $787 million of securities from its off-balance sheet conduit, Lockhart Funding, following a downgrade of MBIA Inc. below AA-. This purchase brought $897 million of loans onto the balance sheet. The book value of Lockhart's remaining portfolio exceeded its fair value by approximately $65 million.
- Capital Management: The company suspended its common stock repurchase program to conserve capital due to market disruptions. The tangible equity ratio declined to 5.97%, below the target range of 6.25% to 6.50%.
- Outlook: Management expects net interest margin pressure to continue due to competitive deposit pricing and increased reliance on nondeposit borrowings. Credit quality deterioration in residential development is expected to persist in some markets over the next few quarters.
- Subsequent Event: On July 2, 2008, the company completed a $46.7 million offering of Series C Fixed-Rate Non-Cumulative Perpetual Preferred Stock.
- Accounting Changes: The company adopted SFAS 157 (Fair Value Measurements) and SFAS 159 (Fair Value Option) effective January 1, 2008. Approximately $1.2 billion of available-for-sale securities were reclassified to held-to-maturity in Q2 2008.
Investor Verification Checklist
- Credit Quality Trends: Verify the trajectory of nonperforming assets and charge-offs, particularly in the commercial real estate and construction sectors in the Southwest.
- Lockhart Exposure: Assess the remaining exposure to the Lockhart Funding conduit and the potential for further asset purchases if commercial paper markets remain disrupted.
- Investment Portfolio Valuation: Review the composition of the investment securities portfolio, specifically the Level 3 assets (CDOs) and the potential for further OTTI charges given the lack of observable market data.
- Liquidity Position: Confirm the company's ability to fund loan growth and meet obligations given the suspension of share buybacks and the shift in funding sources.
- Capital Ratios: Monitor the tangible equity ratio to ensure it returns to the management target range of 6.25% to 6.50%.