While we expect economic recovery to gain momentum soon, there remain lingering concerns in the banking industry. Failure of both residential and commercial real estate loans as a result of the credit crisis has primarily hurt banks. As the industry tolerates bad loans made during the credit explosion, the trouble in the banking system goes even deeper, increasing the possibility of more bank failures.

The failed banks were: Boca Raton, Florida-based Sun American Bank with $535.7 million in assets and $443.5 million in deposits, Normal, Illinois-based Bank of Illinois with $211.7 million in assets and $198.5 million in deposits, Maryland-based Waterfield Bank of Germantown with $155.6 million in assets and $156.4 million in deposits and Centennial Bank in Ogden, Utah, with $215.2 million in assets and $205.1 million in deposits.

These bank failures will deal another blow to the Federal Deposit Insurance Corporation’s (FDIC) fund meant for protecting customer accounts, as it has been appointed receiver for these banks. The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets.

When a bank fails, FDIC reimburses customers for their deposits of up to $250,000 per account. The outbreak of bank failures has significantly stretched the regulator’s deposit insurance fund. However, the FDIC has about $66 billion in cash and securities available in reserve to cover losses of bank failures. Also, the FDIC has access to the Treasury Department’s credit line of up to $500 billion.

The failure of Sun American Bank is expected to cost the deposit insurance fund about $103.8 million, Bank of Illinois is estimated to cost abut $53.7 million, Waterfield Bank of Germantown is expected to cost about $51 million and Centennial Bank is estimated to cost about $96.3 million.

Bloomington, Illinois-based Heartland Bank and Trust Co. will assume the assets and deposits of Bank of Illinois. The FDIC will share losses with Heartland on $166.6 million loans and other assets of Bank of Illinois.

Raleigh, North Carolina-based First-Citizens Bank & Trust Co. will assume the assets and deposits of Sun American Bank and it will share losses with the FDIC on $433 million of the Sun American Bank’s loans and other assets.

FDIC was unable to find buyers for Centennial Bank and Waterfield Bank. However, Zions Bancorp. (ZION) will take over some operations of Centennial Bank.

Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. The FDIC anticipates bank failures to cost about $100 billion over the next three years. The failure of Washington Mutual in 2008 was the largest in U.S. banking history. It was acquired by JPMorgan Chase (JPM).

The other major acquirers of failed institutions since 2008 include Fifth Third Bancorp (FITB), U.S. Bancorp (USB), Zions Bancorp, SunTrust Banks (STI), PNC Financial (PNC), BB&T Corporation (BBT) and Regions Financial (RF).

We expect loan losses on the commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.

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(USB) FDIC Figures Show U.S. Bank Failures Reach 26 in 2010

For this, Zions’ management has put three series of non-convertible subordinated notes for the exchange offer. These are the 2009 5.65% subordinated notes due 2014, the 2009 6.00% subordinated notes due 2015 and the 2009 5.50% subordinated notes due 2015. The company has appointed Deutsche Bank Securities Inc. (DB) and Goldman Sachs & Co. (GS) as its financial advisors for the exchange offer.

The swapping of notes into stock is expected to increase Zions’ tangible common equity (TCE) by the aggregate principal amount of the notes exchanged. This in turn will also increase the company’s TCE ratio, while also diminishing the related interest expense that is adjoined with the notes.

Concurrently, Zions also announced the successful completion of its common equity issuance that started on Sep 17, 2009 and ended on Feb 26, 2010. Under this offering, the company sold about 16.4 million shares of its common stock at a volume weighted average price of $15.25 each that resulted in net proceeds of $245.7 million.

Simultaneously, the company has entered into new common equity distribution agreements with Deutsche Bank and Goldman Sachs, also appointed as sales agents wherein Zions may offer to and sell its common stock worth $250 million through these agents from time to time. The execution of the new equity offering is expected to further augment Zions’ existing capital and liquidity position.

Zions’ debt modifications and the favorable capital trends are also helping the ascent of non-interest demand deposits, thereby putting less pressure on the balance sheet and increasing the return on equity. If this steadfastness continues, the company’s strategic growth initiatives will soon be reflected in its operating results.

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(ZION) Zions Bancorporation’s Note Conversion Update

Zions’ fourth-quarter loss of $1.26 per share came in substantially lower than the Zacks Consensus Estimate of a loss of $1.66 per share primarily due to improvement in demand deposits, lower loan loss provisions and strong pricing on new loans. However, these were partially offset by a marginal increase in non-performing assets, credit-related impairment losses on Collateral Debt Obligation (CDO) securities and continued weakness in loan demand.

Despite the sluggishness and fragility experienced in the economic recovery, post the global crisis in the last couple of years, Zions has witnessed improvement with respect to its loan loss provisions and net loan charge-offs that posed a declining trend since the last couple of quarters. Alongside, debt modifications and the favorable trends are also helping the ascent of non-interest demand deposits, thereby putting less pressure on the balance sheet and increasing the return on equity. If this steadfastness continues, the company’s strategic growth initiatives will soon be reflected in its operating results.

Moreover, Zions has achieved solid organic loan growth, consistent with the economic activity across its diverse footprint. This gets further enhanced by acquisitions that fit in well with Zions’ strategic plans. Further, Zions seems much more focused now than it has been for a number of years. After restructuring the operations of Vectra Bank, closing its supermarket branches in Utah and disposing off its e-commerce subsidiary, Zions is now consolidating the system of its various community banks.

However, given the high competitive pressure in the banking industry, we expect continuous deposit pricing pressure as well as growth in higher cost funding accounts to weigh on Zions’ net interest margins (NIM), creating headwinds on the revenue front.

Besides, though loan growth has remained solid, slowing growth in core deposits could cause a negative mix shift, another setback for the NIM. Management expects deposit growth to continue to deter loan growth, a portion of which may be funded from alternative higher cost funding sources.

Overall, while the near-term outlook remains cautious on deteriorating credit quality primarily in the construction portfolio, we believe that Zions’ successful enhancement of capital ratios and improving expense management will drive growth and enhance its competitive leverage once the market rebounds to its historical highs.

On Friday, the shares of Zions closed at $18.44, up 4.1%, on New York Stock Exchange.

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(ZION) Zions Bancorp Analysts Upgrade to Neutral

Overall results reflected low cost of funding on loan and investment portfolios, risk reduction in loan portfolio and decrease in non-covered non-performing assets. These were partially offset by increase in the provision for loan losses and decrease in non-interest income.

During the reported quarter, net income applicable to common equity was $23.3 million, up from $20.8 million in the year-ago quarter but marginally down from $23.8 million in the prior quarter.

On a fully-taxable equivalent basis, Westamerica’s net interest income was $58.9 million, up from $49.9 million in the year-ago period but down from $61.6 million in the prior quarter. Total non-interest expense increased 25.5% year-over-year but decreased 6.6% sequentially, to $32.8 million. However, interest expense decreased 6.3% year-over-year and 4.4% sequentially to $4.3 million.

For full year 2009, Westamerica generated net income applicable to common equity of $121 million or $4.14 per share, compared to $60 million or $2.04 per share in 2008. Results for 2009 include a $28.3 million net of tax gain from the acquisition of assets and assumption of liabilities of County Bank. Net interest income increased 23.4% year-over-year to $242.2 million in 2009, primarily due to acquired assets and a higher net interest margin.

Credit metrics deteriorated during the reported quarter. Provision for loan losses increased substantially by 267% year-over-year and by 17.9% sequentially to $3.3 million. Annualized net loan losses on non-FDIC covered loans as a percentage of average non-FDIC covered loans increased to 0.88% from 0.56% in the third quarter of 2009. However, non-performing assets not covered by FDIC loss-sharing agreements were $33 million at Dec 31, 2009, down $4 million from $37 million at Sep 30, 2009.

Total earnings assets were $4.27 billion, up 16.8% year-over-year but down 4.5% sequentially. Total deposits were $4.07 billion, up 30.7% year-over-year but down 1.4% sequentially.

Profitability metrics also reflected a challenging outlook. Westamerica’s annualized return on assets decreased to 1.85% from  2.04% in the year-ago quarter and 1.86% in the sequential quarter. Also annualized return on common equity declined to 18.8% from 20.6% in the year-ago quarter and 19.7% in the sequential quarter.

At Dec 31, 2009, total regulatory capital ratios for Westamerica Bancorp and its subsidiary, Westamerica Bank, were 14.5% and 14.9%, respectively, exceeding the 10% requirement for adequate capitalization under regulatory standards. Westamerica’s long-tem debt was marginally reduced to $26.5 million at the end of fourth quarter 2009.

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(WABC) Westamerica Bancorp Misses Earnings Estimates

Results were helped by declining loan loss provision and net loan charge-offs, increase in average non-interest bearing demand deposits and strong pricing on new loans. However, these were partially offset by a marginal increase in non-performing assets, credit-related impairment losses on CDO securities and continued weakness in loan demand. Tax-equivalent net interest income for the quarter decreased 3.2% sequentially and 7.4% year-over-year to $462.6 million. Net Interest Margin (NIM) declined 10 bps sequentially and 29 bps on a year-over-year basis to 3.81%. The decline in NIM during the quarter was driven primarily by 0.11% for the discount amortization on the modified subordinated debt and an additional 0.17% for the accelerated discount amortization due to the conversion of $35.7 million of modified subordinated debt.

Total loans at the end of the quarter decreased 3.6% year-over-year to $40.2 billion. Average total deposits for the quarter increased 8.5% year-over-year to $42.9 billion. Average non-interest-bearing deposits increased 25.3% sequentially, on an annualized basis, to $12.1 billion. Non-interest income was $65.9 million compared to $270.7 million in the sequential quarter and a loss of $82.3 million in the prior-year quarter. The sequential decline was attributable to unusual items such as higher security impairment losses and lower fair value and non-hedge derivative income in the reported quarter and acquisition-related gains of $146.2 million in the third quarter. These declines were partially offset by the $15.2 million gain from the $40 million debt modification initiated in the second quarter of 2009. Non-interest expense increased 1.5% sequentially and 10.8% year-over-year to $441.1 million. Credit metrics deteriorated drastically during the quarter, with non-performing assets ending the period at 5.93% of related assets (up 53 bps sequentially and 322 bps year-over-year) while net charge-offs deteriorated significantly to 2.98% of average loans (down 81 bps sequentially but up 126 bps year-over-year). Provision for loan losses was $390.7 million for the reported quarter, down 31.0% sequentially and 48.8% year-over-year. Tangible common equity ratio increased to 6.12% from 5.76% sequentially and 5.89% year-over-year. The sequential increase was primarily due to the impact of equity transactions and secondarily to reductions in the balance sheet. The annualized return on average assets was negative 1.37% in the reported quarter, compared to negative 1.15% in the prior quarter and 3.52% in the prior-year quarter.

For full year 2009, Zions reported a net loss of $1.23 billion or $9.92 per share compared to a loss of $290.7 million or $2.68. Tax-equivalent net interest income decreased 3.7% year-over-year to $1.92 billion. Non-interest expense increased 13.3% year-over-year to $1.67 billion.

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 residential real estate markets, where the company has a significant exposure, continues to hurt results.

Dividend Update

During the reported quarter, Zions’ board declared a regular quarterly dividend of $0.01 per common share. The dividend was paid on Nov 20, 2009 to shareholders on record as on Nov 12, 2009.

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(ZION) Zions Bancorporation’s Loss Slims as They Beat Earnings Estimates

According to the rules set by the federal government, the executives of a beneficiary company have to forgo their hefty bonuses until the company exits the TARP. Therefore, Zions has considered the alternative of awarding shares under the name of “salary stock” to its executives, giving them the right on the company’s common stock. The units of the shares thus granted will be decided according to the market price of these shares at the time of the grant. The right to the shares granted in 2010 will be fully vested when they are awarded.

Zions has been going through tough times given the economic turmoil that has already had a devastating effect on the company’s operations. While strong competition is continuously exerting pressure on deposit pricing, growth in higher cost funding accounts are weighing on net interest margins. Moreover, growth in Zions’ highly exposed commercial real estate market is heading south due to weakness in the residential development and construction activities.

Additionally, the TARP loan liability at a time when the company’s both organic and inorganic growth is indicating weak trends makes the decision of stopping cash bonus payments appear justified. We believe this will provide some stability to Zions’ funds and boost investor confidence before it can explore better opportunities once the economy rebounds. Currently, we recommend an Underperform stance on the stock.

Zacks Investment Research

(ZION) Zions Bancorporation Replaces Cash with Stock for Top Executives

Post exchange offer, each of Zions’ Depositary Share represents a 1/40th ownership interest in a share of Series A Preferred Stock with a liquidation preference of $25.00 per Depositary Share. This is equivalent to $1,000 per share of Series A Preferred Stock.

According to the preliminary information provided by the exchange agent for the exchange offer, D.F. King & Co. Inc., 51.29% of the Depositary Shares outstanding were validly tendered and not withdrawn in the exchange offer. In the aggregate, Zions’ board has decided to issue 2,816,834 shares of common stock, representing approximately 1.96% of the number of common shares outstanding as of Nov30, 2009, in exchange for the tendered Depositary Shares.

The company will pay cash instead of any fractional shares. Additionally, Zions will also pay cash for accrued and unpaid dividends to all Depositary Shares accepted in the exchange offer. However, this will exclude the settlement date. After settlement of the exchange offer, Zions will hold 2,718,072 outstanding Depositary Shares, representing 67,951.8 shares of series A Preferred Stock.

Deutsche Bank Securities Inc. (DB) and Goldman Sachs & Co. (GS) acted as Zions’ financial advisors in connection with the stock exchange offer.

We believe that at this financially critical juncture, the exchange offer program can increase Zions’ net income available to common shareholders, which the company would otherwise be liable to issue to its floating-rate non-cumulative perpetual preferred stockholders. It could also provide the company with some tax benefits. However, dividend payment on such Depositary Shares could have a neutralizing effect. Further, excess dilution could also impact the earnings per share in the hands of the investors.

Zacks Investment Research

(ZION) Zions Bancorporation Finishes Exchange Offer

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.

Zacks Investment Research
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(ZION) Zions Bancorporation Shows Continued Losses

As of September 29, San Joaquin Bank, a subsidiary of San Joaquin Bancorp, had about $775 million in assets, $631 million in deposits and 5 branches. The bank had not been included in a previous list of 89 institutions that were undercapitalized as of March 31. But its first quarter amended filing showed that there were additional loan charge-offs and a higher net loss.

As of June 30, San Joaquin Bank’s Tier 1 leverage ratio was 4.12% and the total risk-based capital ratio was 6.70%. Though the Tier 1 leverage ratio was above the minimum level of 4% considered adequately capitalized, its total risk-based capital ratio was well below the minimum level of 8%.

The failure of San Joaquin Bank represents another impact on the Federal Deposit Insurance Corporation’s (FDIC) fund for protecting customer accounts as it has been appointed receiver for the bank. The bank failure is expected to cost the deposit insurance fund an estimated $103 million.

The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. When a bank fails, it reimburses customers for deposits of up to $250,000 per account. The outbreak of financial institution failures has significantly stretched the regulator’s deposit insurance fund. At June 30, 2009, the fund corpus fell to $10.4 billion, the lowest since 1993, from $13.0 billion in the prior quarter.

Ontario, California-based Citizens Business Bank, a subsidiary of CVB Financial (CVBF), will assume all of the deposits of San Joaquin Bank. So there will be no losses to any depositor.

In order to replenish the declining fund, the FDIC board recently proposed that the U.S. banks should pay fees for three years in advance. Also, the regulators are considering requesting the healthy banks to bail out the government as soon as it is necessary to replenish the deposit insurance fund, which has slipped to 0.22% of insured deposits, below the mandated minimum of 1.15%.

In the second quarter of 2009, the number of banks on the FDIC’s list of problem institutions grew to 416 from 305 in the first quarter. This is the highest since the savings and loan crisis in 1994. Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. The FDIC anticipates the bank failures to cost about $70 billion over the next five years.

The failure of Washington Mutual last year was the largest in the U.S. history. It was acquired by JP Morgan Chase (JPM). The other major acquirers of failed institutions since 2008 include Fifth Third Bancorp (FITB), U.S. Bancorp (USB), Zions Bancorp (ZION), SunTrust Banks (STI), PNC Financial (PNC), BB&T Corporation (BBT) and Regions Financial (RF).

The failed banks are victims of recession and rising loan losses. As a result of the ongoing market turmoil, these institutions experienced massive capital erosion stemming from losses due to a significant exposure to collateralized mortgage obligations, commercial real estate loans and other commercial and industrial loans. All these factors were responsible for a drag on profitability and write-downs.

According to the FDIC, the U.S. banks overall lost $3.7 billion in the second quarter of 2009, compared to a profit of $7.6 billion in the prior quarter.??Though current signals indicate that the economy may stabilize, we expect loan losses on commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.

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(CVBF) FDIC Makes it 99 U.S. Bank Failures Reach in 2009

Loan growth has remained solid, but slowing growth in core deposits could cause a negative mix shift, another setback for the NIM. Management expects deposit growth to continue to lag loan growth and that a portion of future loan growth may be funded from alternative higher cost funding sources.

The growth through acquisition model exposes the company to the risk of overpaying for targets. We are concerned about Zions commercial real estate [CRE] exposure. CRE represents over one-third of Zions overall loan portfolio. Continued weakness in the residential development and
construction activity in the southwest has resulted in further deterioration of credit metrics in the past several quarters. Given the sluggish economic conditions, we expect credit to further deteriorate across the industry in the coming quarters.

Zions has faced several downgrades by credit rating agencies, primarily reflecting significant net losses, continued deterioration in credit quality and material decline in its tangible common equity capital ratio.

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

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(ZION) Zions Bancorporation – Bear of the Day

Joy Global aims at maximizing operating efficiency and useful life of mining equipment through value-added aftermarket services, which gives the company significant edge over its competitors. Additionally, the stable revenue stream from the high-margin aftermarket operations help Joy Global offset its cyclical original equipment business.

Of late, Joy Global management has implemented several strategies to optimize cost-structure and realign production capacity to cope with the slowing customer orders and stay competitive amid the ongoing global slowdown. The company is pushing its overall inventory and working capital efficiency. Moreover, Joy Global is looking at increasingly relocating production capacity to low-cost regions like China, Poland, and South Africa. These actions will improve operational efficiency, boost profitability and also solidify long term viability of the company.

Joy Global has a strong balance sheet and a solid cash flow generating profile. The capex requirements should be reduced markedly when the company completes its ongoing projects. As of July 31, 2009, Joy Global had $266.6 million in cash and $243.3 million in available credit line; debt-to-capital was 38%. It has a favorable debt maturity schedule with the bulk of its long-term debt obligations falling due after
2015.

We see Joy Global shares performing above the broader market going forward and as such recommend it as Outperform.

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(JOYG) Joy Global – Bull of the Day

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.

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(ZION) Zions Bancorp- Bear of the Day

During the third quarter, the bank holding company issued 7.6 million common shares at an average price of $16.13 each, for gross proceeds of $123.5 million. During the second quarter, Zions issued common shares for gross proceeds of $126.5 million. Therefore, the cumulative offering totaled 16.8 common shares at an average price of $14.85 apiece. Net of commissions and fees, total proceeds were $245.7 million.

The registered sales took place through a previously announced common equity distribution program via Goldman Sachs Group Inc. (GS). Given the recent interest in current market prices, the common stock offering was completed earlier than expected.

Zions continues to suffer due to its significant exposure to the residential real estate markets. We are concerned about its commercial real estate exposure. Commercial real estate represents over one-third of the company’s overall loan portfolio. Persistent weakness in residential development and construction activity in the southwest led to deterioration of credit metrics in the past several quarters. Given the sluggish economic conditions, we expect credit to worsen further across the industry in the coming quarters.

Based on our concerns of further credit deterioration in the upcoming quarters, particularly in the construction portfolio, we are maintaining our Underperform recommendation on the shares of Zions.

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(ZION) Zions Completes New Common Stock Offering