Zions Faces $50M Loan Shock—but Says It’s Just a One-Off

Zions Bancorporation (ZION) reported stronger-than-expected third-quarter results late Monday, but the company’s performance was overshadowed by the recently announced $50 million charge-off tied to two related commercial borrowers—an incident that reignited market concerns over credit quality at regional banks. The Salt Lake City-based lender posted adjusted EPS of $1.48, topping Wall Street estimates of $1.41, as net interest income rose 8% year over year to $672 million. Still, the quarter's credit results dominated the discussion on the company’s earnings call and in investor circles, where the key question was whether the issue represents an isolated problem or an early sign of broader stress in regional lending.

Chief Executive Officer Harris Simmons was unequivocal in his answer. “We view this as an isolated situation resulting from a couple of borrowers,” he told analysts. “We have no further exposure related to these borrowers or guarantors.” Simmons said the losses stemmed from “apparent irregularities and misrepresentations” discovered in recent weeks, prompting Zions to charge off $50 million and set aside a $10 million specific reserve against the remaining exposure. Excluding the event, credit performance was benign, with net charge-offs of just $6 million, or four basis points of loans on an annualized basis. Management described the bank’s broader credit portfolio as healthy and noted that classified and criticized loans both declined from the prior quarter.

The bank’s provision for credit losses rose to $49 million, up sharply from $13 million in the prior year period, but largely attributable to the one incident. Zions reported net charge-offs of $56 million in total, with nonperforming assets representing 0.54% of loans and other real estate owned, down from 0.62% a year ago. The allowance for credit losses remained stable at 1.20% of total loans, and executives emphasized that their internal review had not uncovered any comparable loans or credit anomalies elsewhere in the portfolio. “We’ve gone through the portfolio,” said Chief Credit Officer Derek Steward, “and we think it’s an isolated incident. We haven’t found similar loans or other issues.”

The borrowers at the center of the problem have since become the focus of a legal battle. According to a lawsuit filed by Zions subsidiary California Bank & Trust in California state court on October 15, the bank is seeking to recover more than $60 million in unpaid loans from real estate investors Andrew Stupin and Gerald Marcil and two investment funds they manage. The suit alleges the group “manipulated loan structures for their own enrichment and systematically eliminated the collateral protections that were supposed to secure the bank’s loans.” Attorneys for the defendants have denied wrongdoing, calling the claims “unfounded” and saying they “misrepresent the facts.” Zions’ legal filing suggests a highly sophisticated scheme to strip collateral and obscure the ultimate ownership of the underlying assets. The bank’s legal pursuit, while separate from the First Brands and Tricolor auto lender bankruptcies that rattled markets last week, has nonetheless added to investor anxiety around the soundness of commercial lending standards.

Despite the noise around credit, Zions’ operating trends remained solid. Net interest margin expanded to 3.28% from 3.03% a year ago, marking the seventh consecutive quarterly increase. Pre-provision net revenue rose 14% year over year, or 18% on an adjusted basis, and customer-related noninterest income climbed 8% excluding credit valuation adjustments. Total deposits excluding brokered funds grew at a 7% annualized rate, while tangible book value per share increased 17% over the past year. The bank’s capital position also improved, with its CET1 ratio rising to 11.3% from 10.7% in the previous quarter.

Simmons struck a confident tone about the company’s underlying momentum. “We’re pleased with the company’s core earnings,” he said, highlighting positive operating leverage, improving efficiency, and loan and deposit growth. CFO R. Richards echoed that sentiment, noting, “The net interest margin expanded for the seventh consecutive quarter to 3.28%.” Management guided to “moderately increasing” trends for net interest income, customer fee income, and commercial loan growth into next year, supported by repricing benefits and modestly higher customer activity.

Analysts, however, pressed management repeatedly on credit oversight and internal controls. The tone of the Q&A was cautious, with multiple questions probing how the irregularities had escaped detection and whether the issue might reveal structural weaknesses in the bank’s review process. Steward said Zions is conducting an external review of its credit procedures “to make sure that we’re learning from experience.” Simmons, meanwhile, acknowledged that management remains “sensitive to the concept of dilution” and sees no urgency to pursue M&A activity while the bank shores up investor confidence.

The market reaction has been relatively calm compared to last week’s selloff, when Zions’ stock dropped nearly 20% after disclosing the credit charge. Shares rose about 3% in after-hours trading Monday following the earnings release, as investors took some comfort from management’s insistence that the problem was contained. The incident comes at a time when credit quality across the regional banking sector is under a microscope following several high-profile corporate bankruptcies. JPMorgan CEO Jamie Dimon stoked concern last week when he remarked, “When you see one cockroach, there are probably more,” referring to the need for vigilance across the banking system.

For now, Zions appears to have contained its own pest problem. The company’s legal action signals an aggressive stance toward recovery, and its internal and external reviews aim to restore confidence in underwriting discipline. With core profitability trending higher, operating leverage improving, and capital ratios robust, Zions is positioning the episode as a one-off blemish in an otherwise strong year. The burden now falls on management to prove that this truly was an isolated event—and not an early crack in the regional banking credit cycle.