Zions Bancorp. NA provided some additional color about its lending to nondepository financial institutions and the general risk posed by private credit, while otherwise declining to disclose further details on credit losses related to two loans, citing ongoing litigation.
The bank said that it would absorb an expense of $60 million in the third quarter for the full amount of the two loans, including $50 million of charge-offs. The loans were "revolving lines of credit extended to two related commercial borrowers to finance the origination and purchase of commercial mortgages," according to Zions' third-quarter earnings release.
The bank continued to describe the episode as "isolated," and net charge-offs (NCOs) were otherwise low at about $6 million during the period. Zions kept its ratio of credit reserves to loans flat sequentially at 1.20%.
"This was a case where we had some unusual things going on that really are not kind of a commonplace," Chairman and CEO Harris Simmons said during a conference call on third-quarter earnings. Zions has disclosed that it identified "apparent misrepresentations and contractual defaults" and is suing obligors for the loans, seeking a full recovery.
"We have a lot of people in the bank that do a great job every day monitoring the collateral, and we have rarely seen issues like the ones that we saw with these loans," said Chief Credit Officer Derek Steward.
Zions included a slide in its earnings deck detailing its lending to nondepository financial institutions (NDFIs), which account for about 3% of its total loans.
"Growth actually has been fairly minimal over the last several years," Steward said. Executives noted that the NDFI category is broad, and includes loan types that have historically been associated with few losses. A large NDFI sub-category for Zions is equipment leasing, Steward said.
Across the industry, "if I think there's risk out there, I think it's probably in private credit," Simmons said. "I say it because, given the rate of growth and the lack of regulation, the dearth of covenants and sometimes more liberal structures that I think we see in that kind of credit."
"At least there's kind of a yellow flag," he said, predicting that the risk to banks would not arise from direct exposure but rather "spillover risk if or when that private credit sector finds itself in a period of stress" such as a recession.
Observing that bank credit performance has been relatively strong for a long time, Simmons said, "I worry about what we haven't seen that will hit when we go through a cycle."
