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| ZION > SEC Filings for ZION > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
FINANCIAL HIGHLIGHTS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per
share and ratio data) 2009 2008 % Change 2009 2008 % Change
EARNINGS
Taxable-equivalent net
interest income $ 482,005 $ 497,822 (3.18)% $ 1,462,107 $ 1,480,946 (1.27)%
Taxable-equivalent revenue 752,745 587,432 28.14 % 2,172,929 1,753,928 23.89 %
Net interest income 476,050 492,003 (3.24)% 1,444,513 1,463,204 (1.28)%
Noninterest income 270,740 89,610 202.13 % 710,822 272,982 160.39 %
Provision for loan losses 565,930 156,606 261.37 % 1,626,208 363,080 347.89 %
Noninterest expense 434,707 372,276 16.77 % 1,230,381 1,076,796 14.26 %
Impairment loss on goodwill - - 633,992 -
Income (loss) before income
taxes (253,847) 52,731 (581.40)% (1,335,246) 296,310 (550.62)%
Income taxes (benefit) (98,565) 11,214 (978.95)% (284,531) 83,147 (442.20)%
Net income (loss) (155,282) 41,517 (474.02)% (1,050,715) 213,163 (592.92)%
Net income (loss) applicable
to noncontrolling interests (2,394) 3,757 (163.72)% (4,143) (3,544) (16.90)%
Net income (loss) applicable
to controlling interest (152,888) 37,760 (504.89)% (1,046,572) 216,707 (582.94)%
Net earnings (loss) applicable
to common shareholders (179,491) 33,351 (638.19)% (1,072,490) 207,391 (617.13)%
PER COMMON SHARE
Net earnings (loss) (diluted) (1.41) 0.31 (554.84)% (8.99) 1.93 (565.80)%
Dividends 0.01 0.43 (97.67)% 0.09 1.29 (93.02)%
Book value per common share 29.16 45.78 (36.30)%
SELECTED RATIOS
Return on average assets (1.13)% 0.28% (2.57)% 0.54 %
Return on average common
equity (17.19)% 2.59% (32.88)% 5.42 %
Efficiency ratio 57.75 % 63.37% 56.62 % 61.39 %
Net interest margin 3.91 % 4.13% 3.97 % 4.18 %
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ZIONS BANCORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS (Continued)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except share and
ratio data) 2009 2008 % Change 2009 2008 % Change
AVERAGE BALANCES
Total assets $ 53,600,060 $ 54,279,760 (1.25)% $ 54,350,039 $ 53,498,514 1.59 %
Total interest-earning assets 48,950,422 47,984,725 2.01 % 49,181,065 47,349,240 3.87 %
Securities 4,758,872 4,582,727 3.84 % 4,718,345 4,928,877 (4.27)%
Net loans and leases 42,135,431 41,824,097 0.74 % 41,979,236 40,467,491 3.74 %
Goodwill 1,017,387 2,009,509 (49.37)% 1,227,331 2,009,501 (38.92)%
Core deposit and other
intangibles 126,614 132,167 (4.20)% 126,380 138,711 (8.89)%
Total deposits 43,349,431 37,321,656 16.15 % 42,816,766 36,898,398 16.04 %
Shareholders' equity:
Preferred equity 1,514,675 282,500 436.17 % 1,561,776 254,270 514.22 %
Common equity 4,142,749 5,123,399 (19.14)% 4,361,059 5,106,750 (14.60)%
Noncontrolling interests 22,810 29,949 (23.84)% 25,248 29,292 (13.81)%
Weighted average common and
common-equivalent shares
outstanding 127,581,404 108,497,464 17.59 % 119,247,925 107,333,422 11.10 %
AT PERIOD END
Total assets $ 53,403,672 $ 53,974,168 (1.06)%
Total interest-earning assets 48,711,261 47,656,065 2.21 %
Securities 4,500,906 4,755,359 (5.35)%
Net loans and leases 41,673,036 41,735,598 (0.15)%
Allowance for loan losses 1,432,715 609,433 135.09 %
Reserve for unfunded lending
commitments 97,225 23,574 312.42 %
Goodwill 1,017,385 2,009,504 (49.37)%
Core deposit and other
intangibles 123,551 133,989 (7.79)%
Total deposits 43,007,981 38,590,901 11.45 %
Shareholders' equity:
Preferred equity 1,524,722 286,949 431.36 %
Common equity 3,977,633 5,279,078 (24.65)%
Noncontrolling interests 21,533 30,288 (28.91)%
Common shares outstanding 136,398,089 115,302,598 18.30 %
Average equity to average
assets 10.60% 10.01% 10.94% 10.08%
Common dividend payout na 138.44% na 66.72%
Tangible common equity ratio 5.43% 6.05%
Tangible equity ratio 8.39% 6.66%
Nonperforming assets, excluding
FDIC-supported assets $ 2,171,014 $ 922,339 135.38 %
Ratio of nonperforming assets,
excluding FDIC-supported
assets, to net loans and leases
and other real estate owned 5.40% 2.19%
Accruing loans past due 90 days
or more, excluding
FDIC-supported assets $ 186,519 $ 97,831 90.65 %
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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 or other 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 and regulations, 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 available-for-sale and held-to-maturity ABS using several methodologies based on the appropriate fair value hierarchy consistent with currently available market information. At September 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 $ 266 $ 202 $ 2,082 $ 1,360
Third party models - - 25 8
Dealer quotes - - 25 22
Other - Level 2 - - 2 1
266 202 2,134 1,391
Trust preferred securities - real estate
investment trusts:
Third party models - - 68 27
- - 68 27
Other:
Third party models 31 18 44 22
Dealer quotes - - 17 11
CDS spreads - - 65 39
Other - Level 2 - - 21 23
31 18 147 95
Municipal Securities:
Third party models - - 48 47
CDS spreads - - 16 17
- - 64 64
Auction Rate Securities:
Third party models - - 165 165
- - 165 165
Total $ 297 $ 220 $ 2,578 $ 1,742
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Internal Model
In the third quarter of 2009, the Company changed the way it forecasts the default assumption for private banks and non performing public banks within its collateralized debt obligation ("CDO") pools. Beginning in the third quarter of 2008, the Company used a combination of a licensed third party model for public companies in conjunction with third party ratings for private companies to forecast defaults of bank and insurance collateral. The third party model estimated probabilities of default ("PDs") using a proprietary reduced form model derived using logistic regression on a historical default database. Because the licensed third party model required equity valuation related inputs (along with other macro and issuer specific inputs) to produce default probabilities, the model did not produce results for private firms and some very small public firms without readily available market data. The Company utilized the third party model to calculate the average of the default probabilities by rating level of the public collateral, and this rating level default probability was applied to each private issuer within the CDO pools. When combined with pool specific collateral lists these PDs created estimates of pool-level expected loss rates for each CDO.
This ratings bucketing approach for private issuers was replaced in the quarter ending September 30, 2009 by a statistical regression using financial ratios which the Company has identified as predictive of future bank failures for the private banks in the CDO pools. As this credit cycle has progressed, the Company has an increasingly significant data set of failed banks. The regression draws upon the quarterly call report ratios of failed banks for the four quarters prior to failure to determine one year default probabilities. A five year default probability is calculated by assigning a mathematical relationship to the one year and five year default probabilities from the licensed third party model. The updated model has a strong correlation with actual bank failures. Banks that failed within our CDO pools during the third quarter of 2009 generally had default probabilities in the high 90% range using the new approach. The Company found this ratio-based approach produced higher default probabilities than the previous approach for private banks that subsequently
ZIONS BANCORPORATION AND SUBSIDIARIES
failed during the third quarter of 2009. Although both methods produced a comparable expected number of failures, the ratio based approach exhibited better specificity in regard to predicting which banks would fail. The inputs and regression formula will be updated quarterly.
The Company has seen nearly all of the failures within its CDO pools come from those private and public banks which have previously deferred in paying current interest on their trust preferred securities. The terms of the securities within the CDO pools generally allow for deferral of current interest for five years without causing default. The Company found that for the public deferring banks, the ratios based approach to identify a default probability generally generated higher PDs than the licensed third party model for banks that subsequently failed. In the interest of better projecting public bank failures, the Company utilized the higher of probabilities of default from our ratio based approach and those from the licensed third party model for public deferring banks effective for the quarter ending September 30, 2009.
The Company replaced its previous 60% loss rate assumption on deferring collateral with an issuer specific loss rate equal to the five year probability of default subject to a minimum assumed loss rate of 35%. This resulted in loss rates of between 100% and 35% with a 48% weighted average loss rate on deferring collateral. Previously, the Company had assumed recovery rates of 40% for banks with TARP and 10% for banks without TARP on projected defaults on currently performing collateral. The Company replaced its previous recovery rate assumptions on performing collateral with a 0% recovery rate assumption, supported by the lack of any recovery seen thus far in the credit cycle. Our experience with deferring collateral has been that of all collateral that has elected to defer beginning in 2007, 38% has defaulted and 62% remains within the allowable deferrable period.
The model for projecting expected cash flows for CDO tranches after identifying collateral level probabilities of default remains the same as disclosed in previous filings. Estimates of expected loss for the individual pieces of underlying collateral are aggregated 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. The presence of other than temporary impairment ("OTTI") is identified and the amount of the credit component of OTTI is calculated by discounting the resulting loss adjusted cash flows at each tranche's coupon rate and comparing that value to the Company's amortized cost of the tranche.
Beginning in the quarter ending March 31, 2009, the Company began utilizing a more granular approach 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 due to change in accounting rules during the first quarter of 2009.
The discount rate assumption used for the valuation purposes for each CDO tranche was derived from trading yields on publicly traded trust preferred securities and projected probabilities of default on the underlying financial companies. For the quarter ending September 30, 2009, the data set included a publicly traded trust preferred security which was in deferral with regard to the payment of current interest. The discount margins on the traded securities including the deferring security were regressed to those of the CDOs by comparing expected levels of cash flow impairments between the CDOs and the publicly traded trust preferred securities. For the quarter ending September 30, 2009, the Company increased the discount rate range to LIBOR +3.75% for the highest quality/most over collateralized tranches in order to reflect market level assumptions for structured finance securities and LIBOR +17.35% with the lowest credit quality for remaining performing collateral. In addition, in order to acknowledge the greater uncertainty in the cash flows of those junior trust preferred CDO tranches which are PIKing (capitalizing interest), the Company utilized a discount rate of at least LIBOR + 13% using the forward LIBOR curve.
ZIONS BANCORPORATION AND SUBSIDIARIES
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 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; discount rates are not applied to a hypothetical contractual cash flow.
The following schedule sets forth the effect on the OTTI for the third quarter of 2009 and fair values at September 30, 2009 of the previously discussed assumption changes made this quarter in valuing bank and insurance CDOs.
The schedule contains two scenarios. The previous assumptions scenario uses the
previous quarter's credit related assumptions of a 40% recovery rate on
deferrals and a 10% or 40% recovery rate on performing collateral dependent upon
the issuers TARP status. The previous assumption scenario uses as an input the
September 30 trading levels of publicly traded trust preferreds to relate
expected losses to discount rates. The resulting discount rates are not adjusted
upward for PIKing tranches. The discount range is from LIBOR +3.75% to LIBOR
+14.31%.
The new assumptions scenario uses the current quarter's credit related assumptions of an issuer specific recovery rate on deferrals and a 0% recovery rate on performing collateral. The new assumption scenario also uses the same input of the September 30 trading levels of publicly traded trust preferreds to relate expected losses to discount rates, but the resulting discount rates are then adjusted upward to ensure that any PIKing tranches are discounted at rates of at least LIBOR +13%. The discount range is from LIBOR +3.75% to LIBOR +17.4% with a minimum of LIBOR +13% for PIKing tranches.
EFFECT OF BANK AND INSURANCE CDO ASSUMPTION CHANGES
ON OTTI AND FAIR VALUES
Bank and insurance
CDOs at Level 3
(Amounts in millions) Held-to-maturity Available-for-sale
Components of OTTI
3rd quarter of 2009 using previous credit and
discount assumptions
Credit component $ - $ 67.2
Incremental illiquidity component - 55.8
3rd quarter of 2009 using new credit and
discount assumptions
Credit component - 37.3
Incremental illiquidity component - 125.3
Effect of new assumptions on credit component (29.9)
Effect of new assumptions on illiquidity
component 69.5
Fair Value
3rd quarter of 2009 using previous credit and
discount assumptions
Fair value $ 203 $ 1,582
3rd quarter of 2009 using new credit and
discount assumptions
Fair value $ 202 $ 1,391
Effect of new assumptions (1) (191)
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The assumption changes were partially offsetting, but the net effect of the new . . .
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