Shares of Zions Bancorp. NA and Western Alliance Bancorp. are under pressure after the companies disclosed exposure to allegedly fraudulent lending relationships.
Salt Lake City-based Zions is taking a $50 million charge-off and a $60 million provision related to two commercial and industrial loans after an internal review found apparent misrepresentations and contractual defaults by the borrowers and obligors, as well as other irregularities with respect to the loans and collateral. This followed Zions' discovery of legal actions initiated by other lenders against parties linked to two borrowers under the loans.
Zions' disclosure prompted investor inquiries at Western Alliance, which then released an 8-K confirming their exposure to the same clients through a revolving credit facility.
At 12:28 p.m. ET on Oct. 16, Zions' stock price was down 9.10% from the prior day's closing price, while Western Alliance's stock had fallen 8.55%.
In looking at the lawsuits, Stephens analyst Terry McEvoy identified the customers as Andrew Stupin, Gerald Marcil, and others, as well as investment funds Cantor Group II, LLC and Cantor Group IV, LLC. Western Alliance has filed a complaint seeking $100 million in recoveries, according to McEvoy's note to clients.
Western Alliance's 8-K confirmed the exposure to Cantor Group V, LLC, but did not disclose an amount. The bank filed a lawsuit in August, alleging fraud by the borrower in failing to provide collateral loans in first position, according to the filing.
Western Alliance said the existing collateral covers the obligation based on "as-is" appraisals and said has a limited guaranty and full guaranty from two ultra-high-net-worth individuals under circumstances like fraud. The company's total criticized assets are lower from June 30, according to the regulatory filing.
Based on Western Alliance's disclosure and his review of the company's collateral position disclosed in the complaint, Stephens analyst Andrew Terrell is positive on Western Alliance's position. He recommended buying the stock given its month-to-date underperformance and credit messaging.
Analysts were also positive on the event for Zions too, with Raymond James analyst David Long calling it a "one-off credit hiccup" and not indicative of systemic issue for the company. Still, "this new issue will not be viewed favorably," considering that the consistent and noticeable rise in Zions' classified and nonaccrual loans over the past few years has been a major topic among investors, he said.
"The optics of a large balance C&I loan to a fraudulent borrower from a bank that specializes in small balance C&I loans is not great, and puts into question Zions' underwriting standards and risk management policies," Long wrote in an Oct. 15 research note.
The provision and charge-off will be reflected in Zions' earnings and financial statements for the third quarter. Following the announcement, Piper Sandler analyst Matthew Clark lowered his third-quarter earnings per share estimate by 31 cents to $1.20, with expectations for Zions' net charge-off ratio to normalize in the 2026 fourth quarter. Raymond James' Long cut his third-quarter EPS estimate by 30 cents to $1.06.
