Business Context and Reporting Period
Company: Zions Bancorporation, National Association
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Operations: The Company 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.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2008 | Q1 2007 |
|---|---|---|
| Net Interest Income | $486,458 | $457,083 |
| Noninterest Income | $111,000 | $145,414 |
| Total Revenue | $597,458 | $602,497 |
| Provision for Loan Losses | $92,282 | $9,111 |
| Noninterest Expense | $350,103 | $351,979 |
| Net Income | $106,749 | $153,258 |
| Net Earnings Applicable to Common Shareholders | $104,296 | $149,655 |
| Diluted EPS | $0.98 | $1.36 |
| Total Assets (Period End) | $53,408,293 | $48,558,866 |
| Total Deposits (Period End) | $37,516,337 | $36,325,739 |
| Net Loans and Leases (Period End) | $39,404,472 | $35,573,635 |
| Allowance for Loan Losses | $501,283 | $371,213 |
| Shareholders' Equity | $5,327,801 | $5,261,170 |
Key Ratios:
- Return on Average Assets: 0.81% (vs. 1.31% in Q1 2007)
- Return on Average Common Equity: 8.18% (vs. 12.25% in Q1 2007)
- Net Interest Margin: 4.23% (vs. 4.51% in Q1 2007)
- Efficiency Ratio: 58.01% (vs. 57.78% in Q1 2007)
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 30.4% year-over-year, primarily driven by a significant increase in the provision for loan losses and impairment charges on securities.
- Provision for Loan Losses: The provision surged to $92.3 million from $9.1 million in the prior year, a 913% increase. This was attributed to weakness in residential land acquisition, development, and construction loans in the Southwest and emerging deterioration in Utah/Idaho.
- Impairment Charges: The Company recognized $46.0 million in impairment losses on available-for-sale securities and valuation losses on securities purchased from Lockhart Funding. This included $40.8 million in other-than-temporary impairment (OTTI) on trust preferred REIT CDOs and $5.2 million in valuation losses from purchasing securities from Lockhart.
- Noninterest Income: Decreased 23.7% to $111.0 million, largely due to the $46.0 million in impairment losses. Excluding these losses, noninterest income increased 8.0%.
- Nonperforming Assets: Increased significantly to $434.3 million (1.09% of net loans) from $82.5 million (0.23% of net loans) in Q1 2007, driven by residential construction loans.
Guidance, Outlook, Risks, and Unusual Items
- Lockhart Funding Liquidity Agreement: Zions Bank provides a liquidity facility to Lockhart Funding, LLC, an off-balance sheet conduit. Due to disruptions in the asset-backed commercial paper market, Zions purchased $280 million of securities from Lockhart at book value, recording a $5.2 million loss. The book value of Lockhart's remaining portfolio ($1.75 billion) exceeded fair value by approximately $48.4 million.
- Capital Management: The Company suspended its common stock repurchase program to conserve capital due to market disruptions. The tangible equity ratio was 6.20%, slightly below the target range of 6.25% to 6.50%.
- Interest Rate Outlook: Management expects net interest margin pressure to continue in the coming quarters due to competitive pricing pressures, a shift to more expensive deposit products, and reliance on nondeposit borrowings.
- Credit Quality: Management anticipates continued credit quality deterioration related to residential development and construction activity in the Southwest and Utah/Idaho over the next few quarters.
- Accounting Changes: The Company adopted SFAS 157 (Fair Value Measurements) and SFAS 159 (Fair Value Option) effective January 1, 2008. The adoption of SFAS 159 resulted in a cumulative effect adjustment decreasing retained earnings by $11.5 million.
Investor Verification Checklist
- Lockhart Exposure: Verify the extent of potential losses if Zions is required to purchase the remaining $1.75 billion of Lockhart assets at book value versus fair value.
- CDO Valuation: Review the methodology and assumptions used for Level 3 fair value measurements of the $587 million in available-for-sale CDOs, particularly regarding REIT exposure.
- Real Estate Concentration: Assess the specific exposure to residential land acquisition, development, and construction loans in Nevada, Arizona, California, and Utah/Idaho.
- Capital Adequacy: Monitor the tangible equity ratio and the impact of potential future credit losses on regulatory capital ratios.
- Provision Adequacy: Evaluate whether the $92.3 million provision is sufficient given the rapid increase in nonperforming assets and charge-offs.