Business Context and Reporting Period
Company: Zions Bancorporation, National Association
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 deteriorating credit quality, substantial asset impairments, and strategic capital management actions.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Interest Income | $493.7 million | $968.5 million |
| Noninterest Income | $585.3 million | $440.1 million |
| Provision for Loan Losses | $762.7 million | $1,060.3 million |
| Noninterest Expense | $419.5 million | $795.7 million |
| Impairment Loss on Goodwill | $0 | $634.0 million |
| Net Income (Loss) | $(68.9) million | $(895.4) million |
| Net Loss Applicable to Common Shareholders | $(40.7) million | $(893.0) million |
| Diluted EPS | $(0.35) | $(7.77) |
| Total Assets | $52.9 billion | $52.9 billion |
| Total Deposits | $42.6 billion | $42.6 billion |
| Allowance for Loan Losses | $1.25 billion | $1.25 billion |
| Shareholders' Equity | $5.58 billion | $5.58 billion |
Material Changes vs. Prior Period
- Provision for Loan Losses: Increased 568% to $762.7 million for the quarter (from $114.2 million in Q2 2008) and 414% for the six-month period. This reflects higher charge-offs, increased criticized loans, and re-estimation of loss factors due to economic deterioration.
- Noninterest Income: Surged 709% to $585.3 million for the quarter, primarily driven by $466.3 million in gains from swap termination and debt modification, and $23.0 million in acquisition-related gains. Excluding these one-time items, core noninterest income remained relatively flat.
- Goodwill Impairment: A $634.0 million charge was recorded in the first quarter of 2009, primarily affecting the Amegy reporting unit due to market value declines in Texas peer banks and a weaker economic outlook.
- Investment Securities: Recorded $42.0 million in credit-related Other-Than-Temporary Impairment (OTTI) losses in the quarter and $124.6 million for the six months. Significant valuation losses on securities purchased from Lockhart Funding LLC were also recognized.
- Nonperforming Assets: Increased to $2.06 billion (including FDIC-supported assets) from $695 million at June 30, 2008. Nonaccrual loans rose to $1.63 billion.
Guidance, Outlook, and Management Commentary
- Capital Actions: Management executed significant capital strengthening measures, including a subordinated debt modification that generated a $305.0 million pretax gain, a $161.3 million gain on terminated swaps, and a $52.4 million gain from preferred stock redemption. The company also issued approximately $123.7 million of new common stock.
- Credit Outlook: Management expects credit conditions to continue weakening, albeit at moderating rates. The company anticipates continued loan growth will be low due to the economic environment, with pay-downs and charge-offs likely to offset originations.
- FDIC Acquisitions: The company acquired failed banks (Alliance Bank and Great Basin Bank) with FDIC loss-sharing agreements, adding $875 million in FDIC-supported assets. A subsequent acquisition of Vineyard Bank was announced in July 2009.
- Liquidity: The Parent company's cash earnings from subsidiaries and investments do not currently cover interest and dividend payments. The company has reduced common dividends to $0.01 per share to conserve capital. Access to external financing markets remains constrained, though the company utilized the FDIC's Temporary Liquidity Guarantee Program.
- Dividends: The Board declared a dividend of $0.01 per share for the third quarter, payable August 26, 2009.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of nonperforming assets and the adequacy of the allowance for loan losses given the re-estimation of loss factors.
- Investment Portfolio Valuation: Review the composition of Level 3 assets (CDOs, auction rate securities) and the assumptions used for fair value modeling, particularly regarding credit losses and discount rates.
- Capital Ratios: Confirm that the company maintains "well-capitalized" status under regulatory guidelines despite the net losses and goodwill impairment.
- One-Time Gains: Assess the sustainability of earnings by excluding the $466.3 million gain from debt modification and swap termination.
- Liquidity Position: Monitor the Parent company's ability to fund operations and dividends without relying on subsidiary dividends, given the current cash flow deficit.