Zions Bancorp (NASDAQ:ZION) had a tough third quarter, with pressure coming from nearly all angles. Nevertheless, the bank managed to escape somewhat unscathed from a scalding environment.

Compared with the other banks I've looked at, I'd say Zions did much better than those with heavy leveraged finance and subprime credit exposure, including Citigroup (NYSE:C) and Washington Mutual (NYSE:WM). It also did a bit better than KeyCorp (NYSE:KEY), but slightly worse than Wells Fargo (NYSE:WFC) and US Bancorp (NYSE:USB). 

For the quarter, Zions' net income fell to $132 million from $154 million. A lot of pressure came from credit quality. Even though net charge-offs only came in at an annualized 19 basis points of total loans, net charge-offs and nonperforming assets doubled from the previous quarter.

Bear in mind, these numbers require a lot of judgment. For example, Zions pointed out that 44% of its non-accrual loans are still fully current on interest and principal. (Non-accrual loans are those on which the bank has suspended interest, because it isn't sure that the borrower will be able to pay back the principal.) To some extent, Zions decided that even if these borrowers were making their payments, they were undergoing a lot of stress; the bank erred on the side of caution by putting these loans in the non-accrual bucket.

In addition, I had mixed feelings about Lockhart, Zions' commercial paper conduit. In a nutshell, Lockhart is an off-balance sheet conduit; Lockhart basically buys long-term assets and sells short-term commercial paper and makes a spread. Zions gets a fee for managing Lockhart, and it's supposedly not responsible for Lockhart's credit or liquidity risk.

However, when the commercial paper markets shut down, Zions agreed to buy some of Lockhart's commercial paper to keep it afloat. I was happy to hear that the $500 million of Lockhart's commercial paper Zions held at the end of the just-completed third quarter has since been whittled down to $160 million. It also appears that the commercial paper market is now performing adequately enough for Lockhart to function on its own.

However, I'm still concerned. Lockhart's assets stand at $3.1 billion, down from $3.4 billion a quarter ago. Zions has about $3 billion in tangible equity, and a 6.4% tangible equity ratio. (Tangible equity is assets minus goodwill and liabilities; the tangible equity ratio divides that figure by tangible assets, or assets minus goodwill alone.) Given that, I wouldn't like to see Zions' balance sheet further stretched by more of Lockhart's assets. Nevertheless, the exposure looks manageable for now, and hopefully, the commercial paper markets will continue to recover.

All in all, the quarter wasn't too bad in light of the turmoil in the industry. The bottom looks a ways off, but it's never too early to start sifting through wreckage. I'd advise bottom-fishers to at least take a glance at the beat-up banking sector.

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