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On July 20, 2009, Zions Bancorporation (NASDAQ:ZION) reported the second quarter of 2009 financial results. Adjusted loss for the quarter came in at $0.04 per diluted share, substantially ahead of our estimates and consensus (conference call transcript here).

Net loss for the quarter came in at $40.7 million or $0.35 per share, largely driven by impairment losses on investment securities of $42.0 million and valuation losses due to write-downs of impaired securities of $11.7 million. The loss was also caused by significantly higher provisions for loan losses. Excluding impairment losses and valuation losses on investment securities, operating loss came in at $4.7 million or $0.04 per diluted share, compared to the loss of $44.9 million or $0.39 per diluted share in the prior quarter, and adjusted net income of $70.0 million or $0.66 per diluted share in the prior-year quarter.

Tax-equivalent net interest income for the quarter increased 3.9% sequentially and 1.8% year-over-year to $499.4 million. NIM [net interest margin] improved 16 bps sequentially but declined 9 bps on a year-over-year basis to 4.09%. The sequential improvement in NIM during the quarter was driven primarily by lower rates on deposits, a more favorable funding mix and reduction of short-term, lower yielding assets.

Total loans at the end of the quarter declined 0.7% year-over-year to $41.4 billion. Average total deposits for the quarter increased 1.9% sequentially and 16.6% year-over-year to $42.1 billion. Average non-interest-bearing deposits increased 8.1% sequentially to $10.7 billion.

Core non-interest income (which excludes impairment and valuation losses on securities, the gains on debt modification and terminated swaps, and the acquisition related gains) was $149.7 million in the second quarter of 2009, up 8.64% sequentially. Non-interest expense increased 11.5% sequentially and 18.4% year-over-year to $415.5 million.

Credit metrics deteriorated drastically during the quarter, with non-performing assets ending the period at 4.68% of related assets (down 72 bps sequentially and 302 bps year-over-year) while net charge-offs deteriorated significantly to 3.39% of average loans (down 192 bps sequentially and 272 bps year-over-year). Provision for loan losses was $762.7 million for the second quarter of 2009, up 156.3% sequentially and 567.9% year-over-year.

Tangible common equity was up 40 bps sequentially to 5.66% of tangible assets. The annualized return on average assets was negative 0.50% in the reported quarter, compared to negative 0.14% in the prior quarter and 0.54% in the prior-year quarter.

Though NIM and deposit growth were satisfactory, credit quality continued to deteriorate with alarming levels of loss provisions. The company was successful in enhancing capital ratios and controlling costs. However, recently the company was downgraded by both S&P and Fitch Ratings. Ongoing weakness in the southwestern residential real estate markets, where the company has a significant exposure, continues to hurt the results.

Based on of the second quarter 2009 results, we are maintaining our Sell recommendation on the shares.

Source: Zions' Q2 Shows Mixed Results