Business Context and Reporting Period
Company: Zions Bancorporation, National Association
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Zions Bancorporation operates a full range of banking and related services through subsidiaries in ten Western and Southwestern states. The reporting period reflects significant economic stress, characterized by increased loan losses, substantial investment security impairments, and strategic capital management actions including debt modifications and equity issuances.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Interest Income | $476.1 million | $492.0 million | $1,444.5 million | $1,463.2 million |
| Noninterest Income | $270.7 million | $89.6 million | $710.8 million | $273.0 million |
| Provision for Loan Losses | $565.9 million | $156.6 million | $1,626.2 million | $363.1 million |
| Noninterest Expense | $434.7 million | $372.3 million | $1,230.4 million | $1,076.8 million |
| Net Income (Loss) Applicable to Common Shareholders | $(179.5) million | $33.4 million | $(1,072.5) million | $207.4 million |
| Diluted EPS | $(1.41) | $0.31 | $(8.99) | $1.93 |
| Total Assets | $53.4 billion | $54.0 billion | $53.4 billion | $54.0 billion |
| Total Deposits | $43.0 billion | $38.6 billion | $43.0 billion | $38.6 billion |
| Allowance for Loan Losses | $1.43 billion | $609.4 million | $1.43 billion | $609.4 million |
| Shareholders' Equity | $5.52 billion | $5.60 billion | $5.52 billion | $5.60 billion |
Material Changes vs. Prior Period
- Significant Losses: The Company reported a net loss of $179.5 million for Q3 2009, a reversal from a $33.4 million profit in Q3 2008. The YTD 2009 loss was $1.07 billion compared to a $207.4 million profit in YTD 2008.
- Provision for Loan Losses: The provision increased 261% in Q3 2009 ($565.9 million) compared to Q3 2008 ($156.6 million) due to deteriorating credit quality, particularly in commercial real estate and commercial lending.
- Investment Impairments: Net impairment losses on investment securities were $56.5 million in Q3 2009, driven by credit-related losses on asset-backed securities (CDOs). YTD 2009 impairment losses totaled $181.2 million.
- Goodwill Impairment: A non-cash goodwill impairment charge of $634.0 million was recorded in the first quarter of 2009, primarily related to the Amegy reporting unit, reflecting market deterioration in Texas.
- Noninterest Income Surge: Noninterest income increased 202% in Q3 2009, largely due to $146.2 million in acquisition-related gains from FDIC-assisted bank acquisitions and $84.2 million in fair value derivative income.
- Capital Actions: The Company recognized a $466.3 million gain on swap termination and debt modification in the first nine months of 2009. It also issued approximately $311 million of common stock and redeemed $100.5 million of preferred stock.
Guidance, Outlook, and Risks
- Outlook: Management expects credit and general economic conditions to remain weak, impacting both commercial and consumer borrowers. Core loan growth is expected to be low for the next few quarters due to reduced loan demand and continued pay-downs and charge-offs.
- Interest Rate Risk: The Company maintains a slightly "asset-sensitive" position. However, due to historically low interest rates, the balance sheet has become more asset-sensitive than historically typical. Net interest margin is expected to be adversely affected by nonperforming assets and amortization of debt discounts.
- Investment Securities Risk: Significant exposure remains in asset-backed securities (CDOs). The Company is involved in litigation regarding potential sales of collateral in four CDOs by equity holders to a hedge fund, which could materially adversely affect the investment value.
- Liquidity: The Parent company's cash earnings from subsidiaries and investments currently do not cover interest and dividend payments. The Company relies on capital markets (senior notes, equity issuances) and FDIC programs for liquidity. Rating agencies have downgraded the Company's debt ratings with negative outlooks.
- FDIC-Supported Assets: The Company holds $2.0 billion in FDIC-supported assets from failed bank acquisitions. While loss sharing agreements limit exposure (FDIC assumes 80-95% of losses), these assets carry high credit risk profiles.
Investor Verification Checklist
- CDO Exposure: Verify the status of the litigation regarding the four CDOs and the potential impact of collateral sales on the $166 million carrying value of these securities.
- Loan Loss Migration: Review the updated loss migration factors used to calculate the allowance for loan losses, as these were adjusted to reflect recent loss experience.
- Capital Ratios: Confirm that the Company maintains "well capitalized" status across all subsidiary banks despite the significant net losses and goodwill impairment.
- Parent Liquidity: Monitor the Parent company's ability to fund operations and dividends given that subsidiary earnings are currently insufficient to cover these obligations.
- Nonperforming Assets: Track the growth of nonperforming assets (excluding FDIC-supported assets), which rose to $2.17 billion (5.40% of net loans) as of September 30, 2009.