Scott Anderson: Creating Value

One of the things I enjoy most about my job is the interaction I have with you — our clients. Whether the interaction is face-to-face, on the phone or through e-mail, I appreciate hearing from you.

Over the past few weeks, I have received a number of questions and comments regarding Zions Bancorporation’s participation in the U.S. Treasury’s TARP Capital Purchase Program. As we have reported, in mid-November 2008, Zions Bancorporation sold $1.4 billion of senior preferred stock and warrants to the U.S. Treasury as part of the CPP. Since many of the comments I have received center on misperceptions related to the CPP, I’d like to address the facts related to the program.

The Treasury’s CPP was designed to restore confidence in the financial system by strengthening the capital ratios of well-managed banks during this very uncertain economy so that those banks can make loans available to credit-worthy borrowers without being constrained by capital ratios. From its inception, the CPP has been available only to healthy banks.

While Zions did not contribute to the current turbulence in our economy — we never originated or purchased the subprime mortgage loans that are at the root of the crises — we believe we can play a part in helping to resolve the current economic slowdown by making loans available as a result of our infusion of TARP capital.

The term “bailout” has been mistakenly used in connection with discussions on the Treasury’s CPP. As opposed to a bailout, which implies that free money was given to rescue troubled banks, the CPP provides for federal investments in healthy banks. These investments will be repaid, and participating banks will pay dividends to the Treasury until they are repaid. The initial dividend rate is 5 percent per year for the first five years and increases to 9 percent per year thereafter. The Treasury also receives warrants to purchase either common or preferred stock depending on whether the financial institution is a public or privately held organization.

The fact of the matter is that the Treasury is expected to make millions of dollars on its investments under the TARP CPP. The net cash inflow to the Treasury from its investment is estimated to exceed $30 billion. In addition, the warrants issued to the Treasury are conservatively valued at between $10 billion and $15 billion. The total return to the government is likely to be somewhere between $40 billion and $45 billion. So the Treasury’s Capital Purchase Program is a true “win-win” — healthy banks, like Zions, are able to strengthen capital at a time when normal capital markets are closed, taxpayers get a good return on their investment, and the entire economy benefits.

Some have questioned whether banks are lending, and some have even implied that banks that have received capital under the TARP CPP program are sitting on those funds. However, the evidence proves otherwise. Zions has money to lend, and we have been aggressively soliciting loans from credit-worthy consumers and businesses.

While this is a challenging environment for Zions and the industry, we continue to successfully extend new credit and serve our clients. In the fourth quarter of 2008 alone, Zions Bancorporation originated $4.6 billion of credit, including $2.7 billion of new loans. We have money to lend.

For more than 135 years, Zions Bank’s goal has been to create value, and we believe our participation in the Treasury’s CPP reflects our continued efforts to achieve this goal by making credit available to creditworthy individuals and businesses. This, in turn, will help them — you — weather this economic storm and strengthen the economy.

A. Scott Anderson is President and Chief Executive Officer of Zions First National Bank

Featured in the March/April 2009 issue of Zions Bank’s Community magazine.

*Artwork from vinicius.cipriano under Creative Commons license at Flickr.com.