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ZION > SEC Filings for ZION > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ZIONS BANCORPORATION /UT/

Form 10-Q for ZIONS BANCORPORATION /UT/


8-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION
Statements in this Quarterly Report on Form 10-Q 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, including, but not limited to, those presented 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 local, national and international political and economic conditions, including without limitation the political and economic effects of the recent economic crisis, delay of recovery from that crisis, economic conditions and fiscal imbalances in the United States and other countries, potential or actual downgrades in rating of sovereign debt issued by the United States and other countries, 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, bank failures, claims, and assessments;

changes in fiscal, monetary, regulatory, trade and tax policies and laws, and regulatory assessments and fees, including policies of the U.S. Department of Treasury, the OCC, the Board of Governors of the Federal Reserve Board System, and the FDIC;

the Company's participation in and exit from governmental programs implemented under the EESA and the ARRA, including the TARP and CPP, and the impact of such programs and related regulations on the Company;

the impact of executive compensation rules under the Dodd-Frank Act, the EESA and the ARRA, 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 the Dodd-Frank Act and of new international standards known as Basel III, and rules and regulations thereunder, many of which have not yet been promulgated, on our required regulatory capital and liquidity levels, governmental assessments on us, the scope of business activities in which we may engage, the manner in which we engage in such activities, the fees we may charge for certain products and services, and other matters affected by the Dodd-Frank Act and these international standards;

continuing consolidation in the financial services industry;

new legal claims against the Company, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies, or changes in existing legal matters;


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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;

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 FDIC insurance coverage levels.

Except to the extent required by law, 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.

GLOSSARY OF ACRONYMS
ABS            Asset-Backed Security           IA         Indemnification Asset
                                                          International Financial
ACL            Allowance for Credit Losses     IFRS       Reporting Standards
                                                          International Swap Dealer
AFS            Available-for-Sale              ISDA       Association
ALCO           Asset/Liability Committee       LIBOR      London Interbank Offered Rate
               Allowance for Loan and Lease
ALLL           Losses                          Lockhart   Lockhart Funding LLC
Amegy          Amegy Corporation               MVE        Market Value of Equity
               Accumulated Other Comprehensive
AOCI           Income                          NBA        National Bank of Arizona
               American Recovery and
ARRA           Reinvestment Act                NII        Net Interest Income
ASC            Accounting Standards            NOW        Negotiable Order of Withdrawal
               Codification
ASU            Accounting Standards Update     NRSRO      Nationally Recognized
                                                          Statistical Rating Organization
ATM            Automated Teller Machine        NSB        Nevada State Bank
                                                          Office of the Comptroller of
bps            Basis Points                    OCC        the Currency
CB&T           California Bank & Trust         OCI        Other Comprehensive Income
CDO            Collateralized Debt Obligation  OREO       Other Real Estate Owned
CDR            Constant Default Rate           OTC        Over-the-Counter
CLTV           Combined Loan-to-Value Ratio    OTTI       Other-Than-Temporary Impairment
CPP            Capital Purchase Program        Parent     Zions Bancorporation
CPR            Constant Prepayment Rate        PCI        Purchased Credit-Impaired
CRE            Commercial Real Estate          PD         Probability of Default
DB             Deutsche Bank AG                PIK        Payment in Kind
DBRS           Dominion Bond Rating Service    REIT       Real Estate Investment Trust
Dodd-Frank Act Dodd-Frank Wall Street Reform   RULC       Reserve for Unfunded Lending
               and Consumer Protection Act                Commitments
DTA            Deferred Tax Asset              SBA        Small Business Administration
                                                          Small Business Investment
DTL            Deferred Tax Liability          SBIC       Company
               Emergency Economic                         Securities and Exchange
EESA           Stabilization Act               SEC        Commission
FAMC           Federal Agricultural Mortgage   TARP       Troubled Asset Relief Program
               Corporation, or "Farmer Mac"
FASB           Financial Accounting Standards  TCBO       The Commerce Bank of Oregon
               Board
               Federal Deposit Insurance
FDIC           Corporation                     TCBW       The Commerce Bank of Washington
FHLB           Federal Home Loan Bank          TDR        Troubled Debt Restructuring
FICO           Fair Isaac Corporation          TRS        Total Return Swap
FRB            Federal Reserve Board           Vectra     Vectra Bank Colorado
               Generally Accepted Accounting

GAAP Principles Zions Bank Zions First National Bank Zions Management Services HECL Home Equity Credit Line ZMSC Company HTM Held-to-Maturity


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ZIONS BANCORPORATION AND SUBSIDIARIES

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 2011 Annual Report on Form 10-K.

RESULTS OF OPERATIONS
The Company reported net earnings applicable to common shareholders of $62.3 million, or $0.34 per diluted share for the third quarter of 2012, compared to net earnings applicable to common shareholders of $65.2 million, or $0.35 per diluted share for the same prior year period. The following changes had a favorable impact on net earnings:

$20.4 million decrease in other real estate expense;

$16.4 million decrease in the provision for loan losses;

$13.0 million reduction in total interest expense;

$10.6 million decline in net impairment losses on investment securities; and

$4.5 million increase in loan sales and servicing income.

The impact of these items was partially offset by the following:

$39.4 million decrease in total interest income;

$10.0 million decline in fixed income securities gains, net;

$6.7 million reduction in other service charges, commissions, and fees; and

$4.5 million increase in the provision for unfunded lending commitments.

Net earnings applicable to common shareholders for the first nine months of 2012 were $143.0 million, or $0.77 per diluted share, compared to net earnings applicable to common shareholders of $109.0 million, or $0.59 per diluted share in the corresponding prior year period. The improved result reflects the following:

$116.3 million decrease in total interest expense;

$51.3 million decrease in the provision for loan losses;

$48.2 million decrease in other real estate expense;

$19.3 million reduction in FDIC premiums; and

$10.9 million decline in other noninterest expense.

The impact of these items was partially offset by the following:

$108.5 million decrease in total interest income;

$22.4 million increase in preferred stock dividends;

$19.5 million decrease in other service charges, commissions and fees;

$17.1 million increase in the provision for unfunded lending commitments; and

$16.7 million increase in fair value and nonhedge derivative loss.

During 2009, the Company executed a subordinated debt modification and exchange transaction. The original discount on the convertible subordinated debt was $679 million and the remaining discount at September 30, 2012 was $161 million. It included the following components:

the fair value discount on the debt; and

the value of the beneficial conversion feature which added the right of the debt holder to convert the debt into preferred stock.

The discount associated with the convertible subordinated debt is amortized to interest expense using the interest method over the remaining term of the subordinated debt (referred to herein as "discount amortization"). When holders of the convertible subordinated notes convert to preferred stock, the rate of amortization is accelerated by immediately


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ZIONS BANCORPORATION AND SUBSIDIARIES



expensing any unamortized discount associated with the converted debt (referred
to herein as "accelerated discount amortization").

Excluding the impact of these noncash expenses, income before income taxes and
subordinated debt conversions for the third quarter of 2012 was $183 million
compared to $186 million for the third quarter of 2011.
                                                                        Three Months Ended
(In millions)                        September 30,       June 30,       March 31,         December 31,           September 30,
                                         2012              2012           2012                2011                   2011
Income before income taxes
(GAAP)                                $       170       $     143     $       141        $     136                $       168
Convertible subordinated debt
discount amortization                          11              10              12               11                         11
Accelerated convertible
subordinated debt discount
amortization                                    2              16              12                6                          7
Income before income taxes and
subordinated debt conversions
(non-GAAP)                            $       183       $     169     $       165        $     153                $       186

The impact of the conversion of subordinated debt into preferred stock is further discussed in the "Capital Management" section. Net Interest Income, Margin and Interest Rate Spreads Net interest income is the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities. Taxable-equivalent net interest income is the largest portion of the Company's revenue. For the third quarter of 2012, taxable-equivalent net interest income was $448.6 million, compared to $436.6 million for the second quarter of 2012, and $475.6 million in the third quarter of 2011. The tax rate used for calculating all taxable-equivalent adjustments was 35% for all periods presented.

The net interest margin was 3.63% and 3.62% for the third and second quarters of 2012, respectively, and 3.99% for the third quarter of 2011. The increased net interest margin for the third quarter of 2012 compared to the second quarter of 2012 resulted primarily from:

decreases in the amount of amortization and accelerated amortization on convertible subordinated debt, see "Capital Management" for further discussion;

lower cost of funding due to continued favorable change in the mix of funding sources and rates; and

lower balances of investment securities, and lower rates earned on investment securities and loans, partially offsetting the positive impact of the above items.

The decreased net interest margin for the third quarter of 2012 compared to the same prior year period was impacted by:
lower yields on loans;

lower rates paid on interest-bearing deposits; and

increased balances of and slightly higher interest rates earned on money market investments.

Even though the Company's average loan portfolio, excluding FDIC-supported loans, was $531 million higher in the third quarter of 2012 than in the same prior year period, the average interest rate earned on those assets declined by 45 basis points to 4.94% in the third quarter of 2012 from 5.39% in the corresponding prior year period. The two factors that primarily caused this decrease are (1) adjustable rate loans originated in the past resetting to lower rates due to the current repricing index being lower than the rate when the loans were originated, and (2) maturing loans, many of which had rate floors, being replaced with new loans at lower original coupons and/or lower floors compared to the rates at which loans were originated when spreads were higher.

Average noninterest-bearing deposits increased by $2.0 billion to comprise 35.9% of average total liabilities for the third quarter of 2012, compared to 33.2% in the same prior year period. Average interest-bearing deposits were $59.5 million higher for the third quarter of 2012 compared to the third quarter of 2011. The average interest rate paid was 18 basis points lower than in the third quarter of 2011, resulting in decreased interest expense.


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ZIONS BANCORPORATION AND SUBSIDIARIES

In the third quarter of 2012, average money market investments increased by $2,471 million and the average interest rate earned increased by two basis points compared to the corresponding prior year period.

The net interest margin was 3.66% and 3.79% for the first nine months of 2012 and 2011, respectively. The fluctuation was mostly affected by a 45 bps decline in the average rate earned on the loan portfolio, partially offset by a $73.6 million, or 29.7%, reduction in interest expense on long-term debt.

See "Interest Rate and Market Risk Management" for further discussion of how we manage the portfolios of interest-earning assets, interest-bearing liabilities, and associated risk.

The Company believes that in addition to the net interest margin, its "core net interest margin" is also an important measure of operating performance. We calculate the core net interest margin by excluding the impact of discount amortization on convertible subordinated debt, accelerated discount amortization on convertible subordinated debt, and additional accretion of interest income on acquired loans from the net interest margin. The core net interest margin was 3.60% for the third quarter of 2012 and 3.97% for the third quarter of 2011 due to the previously discussed changes in the loan portfolio and funding sources. See "GAAP to non-GAAP Reconciliations" for a reconciliation between the GAAP net interest margin and the non-GAAP core net interest margin.

The spread on average interest-bearing funds was 3.25% and 3.56% for the third quarters of 2012 and 2011, respectively. The spread on average interest-bearing funds for the third quarter of 2012 was affected by the same factors that had an impact on the net interest margin.

The spread on average interest-bearing funds increased by four bps to 3.24% during the first nine months of 2012 compared to the first nine months of 2011. Except for the items discussed below, explanations previously provided for the quarterly changes also apply to the year-to-date fluctuations.

We believe the following factors may positively impact net interest income in the next several quarters: decreased level of nonperforming assets, decreased long-term debt service cost and modest loan growth. However, net loan growth has proven to be difficult to forecast. While pipelines and new commitment originations remain strong, actual drawdowns have lagged and have been largely offset by paydowns and prepayments of existing loans. We also believe the following factors may adversely affect net interest income: competitive loan pricing conditions and declines in the reference index rates for adjustable rate loans. On balance, we expect the trend in net interest income to be stable or slightly lower for several quarters.

The unamortized discount on the convertible subordinated debt was $161 million as of September 30, 2012, or 34.9% of the $462 million of remaining outstanding convertible subordinated notes, and will be amortized to interest expense over the remaining life of the debt using the interest method.

The Company expects to remain somewhat "asset-sensitive" with regard to interest rate risk. The current period of historically low interest rates has lasted for several years. During this time, the Company has maintained an interest rate risk position that is more asset sensitive than it was prior to the economic crisis, and it expects to maintain this more asset sensitive position for a prolonged period. With interest rates at historically low levels, there is a reduced need to protect against falling interest rates. Our estimates of the Company's actual rate risk position are highly dependent upon a number of assumptions regarding the repricing behavior of various deposit and loan types in response to changes in both short-term and long-term interest rates, balance sheet composition, and other modeling assumptions, as well as the actions of competitors and customers in response to those changes. Further detail on interest rate risk is discussed in "Interest Rate Risk" on page 80 of the Company's 2011 Annual Report on Form 10-K, and in this filing in "Interest Rate Risk."


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ZIONS BANCORPORATION AND SUBSIDIARIES



CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES
(Unaudited)
                                             Three Months Ended                           Three Months Ended
                                             September 30, 2012                           September 30, 2011
(In thousands)                      Average         Amount of      Average       Average         Amount of      Average
                                    balance         interest 1       rate        balance         interest 1       rate
ASSETS
Money market investments         $  7,990,243     $      5,349       0.27 %   $  5,519,190     $      3,482       0.25 %
Securities:
Held-to-maturity                      758,761           10,138       5.32 %        821,510           11,158       5.39 %
Available-for-sale                  3,052,559           22,507       2.93 %      3,951,546           21,977       2.21 %
Trading account                        13,691              110       3.20 %         55,214              462       3.32 %
Total securities                    3,825,011           32,755       3.41 %      4,828,270           33,597       2.76 %
Loans held for sale                   183,224            1,621       3.52 %        118,054            1,215       4.08 %
Loans 2:
Loans and leases                   36,494,927          453,098       4.94 %     35,964,005          488,472       5.39 %
FDIC-supported loans                  613,710           26,648      17.27 %        819,696           32,615      15.79 %
Total loans                        37,108,637          479,746       5.14 %     36,783,701          521,087       5.62 %
Total interest-earning assets      49,107,115          519,471       4.21 %     47,249,215          559,381       4.70 %
Cash and due from banks             1,000,159                                    1,036,218
Allowance for loan losses            (962,950 )                                 (1,210,111 )
Goodwill                            1,015,129                                    1,015,161
Core deposit and other
intangibles                            57,345                                       75,153
Other assets                        3,150,014                                    3,407,914
Total assets                     $ 53,366,812                                 $ 51,573,550
LIABILITIES
Interest-bearing deposits:
Savings and NOW                  $  7,567,020            3,056       0.16 %   $  6,637,565            4,563       0.27 %
Money market                       14,458,871            9,447       0.26 %     14,838,406           16,174       0.43 %
Time                                3,162,165            5,484       0.69 %      3,630,024            8,287       0.91 %
Foreign                             1,472,437            1,062       0.29 %      1,494,995            2,069       0.55 %
Total interest-bearing deposits    26,660,493           19,049       0.28 %     26,600,990           31,093       0.46 %
Borrowed funds:
Securities sold, not yet
purchased                               2,062                -          - %         31,077              333       4.25 %
Federal funds purchased and
security repurchase agreements        453,209              157       0.14 %        616,150              183       0.12 %
Other short-term borrowings             8,273               36       1.73 %        140,252              985       2.79 %
Long-term debt                      2,297,409           51,597       8.93 %      1,893,251           51,207      10.73 %
Total borrowed funds                2,760,953           51,790       7.46 %      2,680,730           52,708       7.80 %
Total interest-bearing
liabilities                        29,421,446           70,839       0.96 %     29,281,720           83,801       1.14 %
Noninterest-bearing deposits       16,817,085                                   14,795,706
Other liabilities                     606,973                                      529,343
Total liabilities                  46,845,504                                   44,606,769
Shareholders' equity:
Preferred equity                    1,765,162                                    2,334,784
Common equity                       4,758,858                                    4,633,555
Controlling interest
shareholders' equity                6,524,020                                    6,968,339
Noncontrolling interests               (2,712 )                                     (1,558 )
Total shareholders' equity          6,521,308                                    6,966,781
Total liabilities and
shareholders' equity             $ 53,366,812                                 $ 51,573,550
Spread on average
interest-bearing funds                                               3.25 %                                       3.56 %
Taxable-equivalent net interest
income and net yield on
interest-earning assets                           $    448,632       3.63 %                    $    475,580       3.99 %

1 Taxable-equivalent rates used where applicable.
2 Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.


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ZIONS BANCORPORATION AND SUBSIDIARIES



 CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES
(Unaudited)
                                              Nine Months Ended                           Nine Months Ended
                                             September 30, 2012                          September 30, 2011
(In thousands)                       Average          Amount of    Average       Average          Amount of    Average
                                     balance         interest 1      rate        balance         interest 1      rate
ASSETS
Money market investments          $  7,687,336     $    15,076       0.26 %   $  4,945,625     $     9,524       0.26 %
Securities:
Held-to-maturity                       785,351          32,476       5.52 %        825,384          33,494       5.43 %
Available-for-sale                   3,076,963          71,814       3.12 %      4,029,559          67,805       2.25 %
Trading account                         24,546             596       3.24 %         55,312           1,452       3.51 %
. . .
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