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| ZION > SEC Filings for ZION > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
FINANCIAL HIGHLIGHTS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share and
ratio data) 2009 2008 % Change 2009 2008 % Change
EARNINGS
Taxable-equivalent net interest income $ 499,432 $ 490,587 1.80 % $ 980,102 $ 983,124 (0.31)%
Taxable-equivalent revenue 1,084,776 562,959 92.69 % 1,420,184 1,166,496 21.75 %
Net interest income 493,688 484,743 1.85 % 968,463 971,201 (0.28)%
Noninterest income 585,344 72,372 708.80 % 440,082 183,372 139.99 %
Provision for loan losses 762,654 114,192 567.87 % 1,060,278 206,474 413.52 %
Noninterest expense 419,469 354,417 18.35 % 795,674 704,520 12.94 %
Impairment loss on goodwill - - 633,992 -
Income (loss) before income taxes (103,091) 88,506 (216.48)% (1,081,399) 243,579 (543.96)%
Income taxes (benefit) (34,239) 22,037 (255.37)% (185,966) 71,933 (358.53)%
Net income (loss) (68,852) 66,469 (203.59)% (895,433) 171,646 (621.67)%
Net loss applicable to noncontrolling
interests (1,209) (5,729) (78.90)% (1,749) (7,301) (76.04)%
Net income (loss) applicable to
controlling interest (67,643) 72,198 (193.69)% (893,684) 178,947 (599.41)%
Net earnings (loss) applicable to common
shareholders (40,672) 69,744 (158.32)% (892,999) 174,040 (613.10)%
PER COMMON SHARE
Net earnings (loss) (diluted) (0.35) 0.65 (153.85)% (7.77) 1.62 (579.63)%
Dividends 0.04 0.43 (90.70)% 0.08 0.86 (90.70)%
Book value per common share 32.50 46.82 (30.59)%
SELECTED RATIOS
Return on average assets (0.50)% 0.54% (3.29)% 0.68%
Return on average common equity (4.06)% 5.53% (40.27)% 6.86%
Efficiency ratio 38.67% 62.96% 56.03% 60.40%
Net interest margin 4.09% 4.18% 4.01% 4.20%
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ZIONS BANCORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS (Continued)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except share
and ratio data) 2009 2008 % Change 2009 2008 % Change
AVERAGE BALANCES
Total assets $ 54,070,154 $ 53,293,375 1.46 % $ 54,731,243 $ 53,103,599 3.07 %
Total interest-earning
assets 49,018,640 47,202,577 3.85 % 49,298,298 47,028,006 4.83 %
Securities 4,907,115 4,866,421 0.84 % 4,697,746 5,103,854 (7.96)%
Net loans and leases 41,910,940 40,325,657 3.93 % 41,899,844 39,781,734 5.32 %
Goodwill 1,017,382 2,009,517 (49.37)% 1,334,043 2,009,497 (33.61)%
Core deposit and other
intangibles 125,768 137,675 (8.65)% 126,261 142,019 (11.10)%
Total deposits 42,958,798 36,774,214 16.82 % 42,546,019 36,684,444 15.98 %
Shareholders' equity:
Preferred equity 1,587,752 240,000 561.56 % 1,585,717 240,000 560.72 %
Common equity 4,016,134 5,070,047 (20.79)% 4,472,023 5,098,334 (12.28)%
Noncontrolling interests 25,268 27,244 (7.25)% 26,487 28,960 (8.54)%
Weighted average common and
common-equivalent shares
outstanding 115,908,127 106,711,948 8.62 % 115,012,123 106,696,919 7.79 %
AT PERIOD END
Total assets $ 52,874,957 $ 54,630,883 (3.21)%
Total interest-earning
assets 48,024,659 47,920,419 0.22 %
Securities 4,920,445 4,784,185 2.85 %
Net loans and leases 41,399,533 41,714,468 (0.75)%
Allowance for loan losses 1,248,055 548,958 127.35 %
Reserve for unfunded lending
commitments 60,688 26,838 126.13 %
Goodwill 1,017,385 2,009,511 (49.37)%
Core deposit and other
intangibles 121,675 132,481 (8.16)%
Total deposits 42,644,172 37,607,995 13.39 %
Shareholders' equity:
Preferred equity 1,491,730 240,000 521.55 %
Common equity 4,066,202 5,033,530 (19.22)%
Noncontrolling interests 24,021 25,528 (5.90)%
Common shares outstanding 125,095,328 107,518,975 16.35 %
Average equity to average
assets 10.41% 10.01% 11.12% 10.11%
Common dividend payout na 66.23% na 52.98%
Tangible common equity ratio 5.66% 5.51%
Tangible equity ratio 8.59% 6.01%
Nonperforming assets,
excluding FDIC-supported
assets $ 1,922,557 $ 695,287 176.51 %
Ratio of nonperforming
assets, excluding
FDIC-supported assets, to
net loans and leases and
other real estate owned 4.68% 1.66%
Accruing loans past due 90
days or more, excluding
FDIC-supported assets $ 178,300 $ 108,934 63.68 %
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ZIONS BANCORPORATION AND SUBSIDIARIES
FORWARD-LOOKING INFORMATION
Statements in Management's Discussion and Analysis that are based on other than historical data are forward-looking, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:
• statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Zions Bancorporation ("the Parent") and its subsidiaries (collectively "the Company," "Zions," "we," "our," "us");
• statements preceded by, followed by or that include the words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "projects," or similar expressions.
These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in the Management's Discussion and Analysis. Factors that might cause such differences include, but are not limited to:
• the Company's ability to successfully execute its business plans, manage its risks, and achieve its objectives;
• changes in political and economic conditions, including the political and economic effects of the current economic crisis and other major developments, including wars, military actions and terrorist attacks;
• changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts its operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate development and real estate prices;
• fluctuations in markets for equity, fixed-income, commercial paper and other securities, including availability, market liquidity levels, and pricing;
• changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;
• acquisitions and integration of acquired businesses;
• increases in the levels of losses, customer bankruptcies, claims and assessments;
• changes in fiscal, monetary, regulatory, trade and tax policies and laws, including policies of the U.S. Department of Treasury and the Federal Reserve Board;
• the Company's participation or lack of participation in governmental programs implemented under the Emergency Economic Stabilization Act ("EESA") and the American Recovery and Reinvestment Act ("ARRA"), including without limitation the Troubled Asset Relief Program ("TARP"), the Capital Purchase Program ("CPP"), and the Temporary Liquidity Guarantee Program ("TLGP") and the impact of such programs and related regulations on the Company and on international, national, and local economic and financial markets and conditions;
• the impact of the EESA and the ARRA and related rules and regulations on the business operations and competitiveness of the Company and other participating American financial institutions, including the impact of the executive compensation limits of these acts, which may impact the ability of the Company and other American financial institutions to retain and recruit executives and other personnel necessary for their businesses and competitiveness;
• the impact of certain provisions of the EESA and ARRA and related rules and regulations on the attractiveness of governmental programs to mitigate the effects of the current economic crisis, including the risks that certain financial institutions may elect not to participate in such programs, thereby decreasing the effectiveness of such programs;
• continuing consolidation in the financial services industry;
• new litigation or changes in existing litigation;
ZIONS BANCORPORATION AND SUBSIDIARIES
• success in gaining regulatory approvals, when required;
• changes in consumer spending and savings habits;
• increased competitive challenges and expanding product and pricing pressures among financial institutions;
• demand for financial services in the Company's market areas;
• inflation and deflation;
• technological changes and the Company's implementation of new technologies;
• the Company's ability to develop and maintain secure and reliable information technology systems;
• legislation or regulatory changes which adversely affect the Company's operations or business;
• the Company's ability to comply with applicable laws and regulations;
• changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies; and
• increased costs of deposit insurance and changes with respect to Federal Deposit Insurance Corporation ("FDIC") insurance coverage levels.
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the 2008 Annual Report on Form 10-K of Zions Bancorporation filed with the Securities and Exchange Commission ("SEC") and available at the SEC's Internet site (http://www.sec.gov).
The Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Company has made no significant changes in its critical accounting policies and significant estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2008, except as noted below.
ZIONS BANCORPORATION AND SUBSIDIARIES
Valuation of Asset-Backed Securities ("ABS")
The Company values ABS available-for-sale and held-to-maturity securities using several methodologies based on the appropriate fair value hierarchy consistent with currently available market information. At June 30, 2009, the Company valued substantially all of the ABS portfolio using Level 3 pricing methods as follows:
ASSET-BACKED SECURITIES FAIR VALUES
Held-to-maturity Available-for-sale
Estimated Estimated
Amortized fair Amortized fair
(In millions) cost value cost value
Trust preferred securities - bank and
insurance:
Internal model $ 265 $ 201 $ 2,122 $ 1,505
Third party models - - 25 9
Dealer quotes - - 25 21
Other - Level 2 - - 2 1
265 201 2,174 1,536
Trust preferred securities - real estate
investment trusts:
Third party models - - 77 35
- - 77 35
Other:
Third party models 33 19 53 22
Dealer quotes - - 18 8
CDS spreads - - 68 53
Other - Level 2 - - 23 24
33 19 162 107
Municipal Securities:
Third party models - - 48 48
CDS spreads - - 17 17
- - 65 65
Auction Rate Securities:
Third party models - - 172 171
- - 172 171
Total $ 298 $ 220 $ 2,650 $ 1,914
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Internal Model
In the third quarter of 2008, the Company began using a licensed third party model to value bank and insurance trust preferred collateralized debt obligations ("CDOs"). The model uses a combination of market-based and ratings based estimates of expected loss for the individual pieces of underlying collateral to arrive at a pool-level expected loss rate for each CDO. These loss assumptions are applied to the CDOs structure to generate cash flow projections for each tranche of the CDO. The fair value of each tranche is determined by discounting its resultant loss-adjusted cash flows with appropriate market based discount rates.
During the fourth quarter of 2008 and continuing into 2009, several market developments made it increasingly difficult to use rating levels referenced to collateralized loan obligations ("CLOs") when discounting CDO cash flows. Included in these developments are the following:
• Moody's downgraded a large portion of the CDO tranches resulting in most of the securities carrying a split rating of either investment grade or non investment grade. A significant number of securities exhibited substantial differences in ratings at June 30, 2009.
• Trading volume including new issuances in CLOs, which had been among the most liquid structured products, declined significantly. As a result, the market information became less reliable for CLOs and less relevant for other structured products.
• As the number of deferring and defaulted securities within the bank and insurance trust preferred CDO pools increased, each CDO has become more unique. At the end of the second quarter of 2009, the amount of currently deferring collateral ranged from none up to 61% in the sixty CDO deals of which Zions owns tranches.
• As the credit quality of the performing securities within the bank and insurance trust preferred CDO pools diverged, the Company's projection for further collateral defaults became more pool specific.
ZIONS BANCORPORATION AND SUBSIDIARIES
For example, the additional projected 5 year cumulative defaults for the CDO collateral pools ranged from 2.8% to 8.6% at the end of the quarter.
• Finally, the FASB's April 9, 2009 issuance of FASB Staff Position ("FSP") FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Indentifying Transactions That Are Not Orderly, provided additional guidance on determining fair value for assets when the markets for such assets have low or no activity. The FASB view is that a significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be determinative of fair value.
The method for deriving loss expectation for collateral underlying the CDOs depends on whether the collateral is from a public or private company. For public companies, a term structure of Probabilities of Default ("PDs") is obtained from a commercially available service. The service estimates PDs using a proprietary reduced form model derived using logistic regression on a historical default database. Because the service's model requires equity valuation related inputs (along with other macro and firm specific inputs) to produce default probabilities, the service does not produce results for private firms and some very small public firms that do not have readily available market data.
For private companies (and the few small public companies not evaluated by the service) PDs are estimated based on credit ratings. The credit ratings come from two external rating sources; one specific to banks, and the other to insurers. The Company has credit ratings for each piece of collateral whether private or public. Using the PD data on the public companies obtained from the commercial service, the Company calculates the average PD for each credit rating level by industry. The rating level average is then applied to all corresponding credits within each rating level that do not have a PD from the commercial service.
The PDs for the underlying collateral are then used to develop CDO deal-level expected loss curves. Loss curves include an assumed recovery rate on currently performing collateral (non defaulted or deferring) of either 10% or 40%, with the lower recovery assumed for issuers that were not recipients of TARP capital and the higher assumption for those issuers that are or were TARP recipients. An external service which models the unique cash-flow waterfall and structure of each CDO deal is used to generate tranche-level cash flows using the Company's derived CDO deal-level loss assumptions (along with other relevant assumptions). The resultant cash-flows are discounted using the discount rate assumptions described below in order to produce valuations.
Due to the ongoing market developments outlined above, the Company determined during the first quarter of 2009 it would no longer be appropriate to bucket securities by ratings level and make reference to yield indices of structured finance securities from other asset classes in order to establish the discount margins required to estimate fair value of CDO securities. Instead, a more granular approach was developed to reflect the specific risks embedded in every deal and to reference trading levels of publicly traded single issuer trust preferred securities. This change in inputs/assumptions was driven by market developments and was not related to the Company's adoption of FSP FAS 157-4.
The discount rate assumption used for valuation purpose for each CDO tranche was derived from trading yields on publicly traded trust preferred securities and projected default probabilities on the underlying financial companies. For the quarter ending June 30, 2009, the discount margins on the traded securities were regressed to those of the CDOs by comparing expected levels of cash flow impairments between the two types of securities after adjusting the regression's slope to acknowledge the greater uncertainty in the cash flows of junior trust preferred CDO tranches compared to single name trust preferred securities with similar projected default probabilities. CDO tranches with greater uncertainty in their cash flows should be discounted at rates in excess of those rates that market participants would use for tranches with more stable expected cash flows as a result of more subordination and/or better credit quality in the underlying collateral. The effect of this assumption methodology for the quarter ending June 30, 2009, was discount margins between LIBOR +
ZIONS BANCORPORATION AND SUBSIDIARIES
3.92% and LIBOR + 13.19% with the low end applied to tranches with substantial current subordination and/or high credit quality of remaining performing collateral. The high end of the discount margin spectrum was applied to tranches in which minor changes in future default assumptions produced substantial deterioration in tranche cash flows. These discount rates are applied to the model to produce credit stressed cash flows which constitute each tranche's expected cash flows, not to a hypothetical contractual cash flow.
During the first quarter of 2009, the Company modified its recovery rate assumption which is a component of the CDO loss assumption. As of March 31, 2009, the model incorporated a 60% loss assumption for trust preferred collateral where the deferral option of the issuer had been exercised as permitted under the terms of the security. The assumption is supported by observable data on default probabilities for banks with deferring collateral, trading levels for a deferring publicly traded trust preferred security and other data relevant to banks in deferral. An option to defer current interest and capitalize such interest for up to five years is a standard in trust preferred securities. If and when deferring issuers were to default, the model would revert to a 0% recovery rate. This change in inputs/assumptions was driven by market developments and not related to the Company's adoption of FSP FAS 157-4.
The following schedule sets forth the sensitivity of the current CDO fair values using an internal model to changes in the most significant assumptions utilized in the model:
SENSITIVITY OF BANK AND INSURANCE CDO VALUATIONS TO ADVERSE
CHANGES OF CURRENT MODEL KEY VALUATION ASSUMPTIONS
Bank and insurance
CDOs at Level 3
(Amounts in millions) Held-to-maturity Available-for-sale
Fair value balance at June 30, 2009 $ 201 $ 1,505
Expected collateral credit losses 1
Incremental Cumulative Incremental Cumulative
Weighted average:
Loss percentage from currently
defaulted or deferring collateral 2 3.1% 13.0%
Projected loss percentage from
currently performing collateral
1-year 1.7% 4.8% 2.0% 14.9%
years 2-5 2.8% 7.6% 3.2% 18.1%
years 6-30 4.1% 11.7% 4.4% 22.6%
Decrease in fair value due to
increase in projected loss percentage
from currently performing collateral
3 25% $ (0.2) $ (21.7)
50% (0.4) (42.7)
100% (0.8) (92.3)
Discount rate 4
Weighted average spread over LIBOR 470 bp 589 bp
Decrease in fair value due to
increase in discount rate + 100 bp $ (16.9) $ (123.0)
+ 200 bp (31.8) (230.3)
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1 The Company uses an expected credit loss model which specifies cumulative losses at the 1-year, 5-year, and 30-year points from the date of valuation.
2 Weighted average percentage of collateral that is defaulted due to bank failures or deferring payment as allowed under the terms of security, including a 0% recovery rate on defaulted collateral and a 40% recovery rate on deferring collateral.
. . .
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