ZION

Business Context and Reporting Period

Company: Zions Bancorporation, National Association
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Operations: The Company operates a full range of banking and related services through subsidiaries in ten Western and Southwestern states. The reporting period reflects severe economic conditions, including significant asset impairments and increased credit losses.

Key Financial Metrics

Material Changes vs. Prior Period

• Significant Losses: The Company reported a net loss of $852.3 million compared to net earnings of $104.3 million in Q1 2008. This reversal was driven primarily by a $634.0 million goodwill impairment charge, a $205.3 million increase in the provision for loan losses, and $200.4 million in valuation losses on securities purchased.
• Noninterest Income Collapse: Noninterest income swung from a $111.0 million gain to a $145.3 million loss. This was caused by $181.7 million in valuation losses on securities purchased from the Lockhart conduit and $82.7 million in net impairment losses on investment securities.
• Credit Deterioration: The provision for loan losses increased 222.5% to $297.6 million. Net charge-offs rose to $151.7 million from $50.8 million. Nonperforming assets (excluding FDIC-supported assets) increased to $1.66 billion, or 4.00% of net loans and leases.
• Deposit Growth: Total deposits increased 15.4% year-over-year to $43.3 billion, aided by the acquisition of deposits from the failed Alliance Bank and an increase in brokered deposits.

Guidance, Outlook, and Risks

• Outlook: Management expects credit conditions to continue to weaken in most markets and anticipates building reserves over the next several quarters. Core loan growth is expected to remain low due to the economic environment.
• Goodwill Impairment: A $634.0 million impairment was recorded primarily at the Amegy reporting unit due to market value declines of peer banks in Texas and a weaker economic outlook. Management expects to evaluate goodwill more frequently, potentially quarterly.
• Investment Securities: The Company adopted new accounting standards (FSP FAS 115-2) regarding other-than-temporary impairment (OTTI). Significant unrealized losses exist in the asset-backed securities (CDO) portfolio, valued largely using Level 3 inputs. The Company expects to acquire remaining assets of the Lockhart conduit in Q2 2009.
• Liquidity and Ratings: Following the filing, credit rating agencies (Moody's, S&P, Dominion, Fitch) downgraded the Company's ratings and placed outlooks on negative watch. Commercial paper issuance ceased. The Company maintains access to FHLB and Federal Reserve borrowing facilities.
• FDIC Assessment: The Company estimates a potential expense of approximately $41 million related to a proposed FDIC special assessment, which may be imposed in Q2 2009.

Investor Verification Checklist

• Goodwill Valuation: Verify the assumptions used in the discounted cash flow and market value approaches for the Amegy goodwill impairment.
• Level 3 Securities: Review the sensitivity analysis for the $1.38 billion in Level 3 assets (primarily CDOs) and the impact of changes in discount rates and loss assumptions on fair value.
• Lockhart Conduit: Confirm the timeline and financial impact of the full consolidation of the Lockhart securities conduit in Q2 2009.
• Credit Quality Trends: Monitor the trajectory of nonperforming assets, specifically in commercial real estate construction and land development in Nevada, Arizona, and Texas.
• Liquidity Position: Assess the Company's ability to fund operations and meet obligations given the cessation of commercial paper issuance and recent rating downgrades.