Zions Shows Continued Losses

Zions Bancorporation (ZION - Analyst Report) reported a third quarter 2009 net loss applicable to common shareholders of $179.5 million or $1.41 per share, compared to net loss of $40.7 million or 35 cents per share in the prior quarter and a net income of $33.4 million or $0.31 per share in the prior-year quarter. Results were substantially short of the Zacks Consensus Estimated loss of $1.29.

Results included the acquisition of the failed Vineyard Bank with FDIC assistance in July, which resulted in a pretax acquisition related gain of $146.2 million for the third quarter of 2009. It also included credit-related impairment losses on investment securities of $56.5 million compared to $42.0 million in second quarter of 2009.

Tax-equivalent net interest income for the quarter decreased 3.5% sequentially and 3.2% year-over-year to $482.0 million. Net Interest Margin (NIM) declined 18 bps sequentially and 22 bps on a year-over-year basis to 3.91%. The decline in NIM during the quarter was driven primarily by the discount amortization on the modified subordinated debt and an additional 0.07% for the conversion of subordinated debt to Series C preferred stock.

Total loans at the end of the quarter improved 0.7% sequentially to $41.7 billion. Average total deposits for the quarter increased 0.7% sequentially and 16.1% year-over-year to $43.3 billion. Average non-interest-bearing deposits increased 27.4% sequentially to $11.4 billion.

Non-interest income was $270.7 million in the third quarter of 2009, down 53.8% sequentially attributable to unusual items in both the second and third quarters of 2009, including acquisition related gains of $146.2 million and fair value and non-hedged derivative income in the third quarter and $466.3 million of gains on swap termination and debt modification in the second quarter.

Non-interest expense increased 3.6% sequentially and 16.8% year-over-year to $434.7 million.

Credit metrics deteriorated drastically during the quarter, with non-performing assets ending the period at 5.40% of related assets (up 72 bps sequentially and 321 bps year-over-year) while net charge-offs deteriorated significantly to 3.79% of average loans (up 40 bps sequentially and 288 bps year-over-year). Provision for loan losses was $762.7 million for the third quarter of 2009, down 25.8% sequentially but up 261.4% year-over-year.

Tangible common equity was down 23 bps sequentially to 5.43% of tangible assets reflecting the impact of the common stock issuances and acquisition related gains, offset by the provisions for credit losses and impairment losses on securities. The annualized return on average assets was negative 1.13% in the reported quarter, compared to negative 0.50% in the prior quarter and 0.28% in the prior-year quarter.

While Zions’ net interest margin and deposit growth remain satisfactory, credit quality continues to deteriorate, necessitating high levels of loss provisions. The company has been successful in enhancing capital ratios and making efforts on the cost control front, but the credit ratings agencies appear to be unimpressed. Ongoing weakness in the Southwestern residential real estate markets, where the company has a significant exposure, continues to hurt the results.

Based on our concerns for further credit deterioration, particularly in the construction portfolio, we are maintaining our Underperform recommendation on the stock.