While there are many reasons a bank might fail, the common pattern is excessive loan losses followed by a lack of confidence from depositors. The actual closure of a bank may be triggered by a run on deposits, or regulators may step in if it appears that capital has been exhausted due to large losses. Bank failures over the past year have generally followed this pattern. For example, the failures of Washington Mutual and IndyMac happened as a result of unwise expansion and risks taken during the housing bubble, including an inordinate number of subprime mortgage loans that defaulted when the housing bubble burst.

There are many factors that can lead to excessive loan losses. Expanding rapidly into new geographic areas may result in banks taking on risks they don’t fully understand or trying to “buy” market share by liberalizing credit underwriting. Some may expand into new product types without fully understanding the risks involved, as was the case with subprime mortgages. Banks may also simply be lax in enforcing credit standards when the economy seems robust. Occasionally, a bank may acquire another company without fully understanding the risk in that company’s loan portfolio.

Recent bank failures have highlighted the three key elements that define the strength or weakness of a bank: loan quality, capital and liquidity. To some degree, investors and other observers can get a reasonably good picture of the health of a bank by analyzing these three factors.

While no one can predict the future with certainty, Zions Bancorporation remains strong and stable. None of the banks within Zions Bancorporation engaged in subprime mortgage lending, and when many banks were trying to grow home equity credit lines by lowering underwriting standards, Zions resisted that temptation and continued to maintain very consistent standards over recent years. Zions’ geographic diversification has also helped tremendously. While downturns in the housing markets in Southern California, Nevada and Arizona have adversely impacted the local economies, the economies in Utah, Texas, Colorado and elsewhere have remained relatively strong. Also, Zions’ home equity credit line and credit card portfolios have performed well above those of its peers. So, while net chargeoffs in 2008 were high by recent standards, they were roughly half the level experienced by the industry.

Additionally, Zions has a very strong capital position with a tangible common equity at 5.89 percent, an increase from 5.70 percent a year ago, which is 11 percent greater than the median of our peers, and 78 percent greater than the asset-weighted average for that group. In addition to these statistics, Zions’ Tier 1 risk-based capital ratio was 10.52 percent, up from 7.57 percent a year ago, and the total risk-based capital ratio increased from 11.68 percent to 14.71 percent. In a year in which losses were fairly significant, Zions actually increased its capital to near historically high levels.

Also, Zions’ liquidity has been strengthened significantly in recent months, as short-term borrowings were paid off. Zions’ unused borrowing capacity is greater than one-third of total deposits, which means the company has plenty of borrowing power in addition to its cash balances.

The FDIC’s confidence in Zions’ strength and stability has also been evidenced by the company winning bids for two failed banks. This confidence has transferred to many clients of other failed or faltering institutions as they look for a safe place to do business.

Like other business cycles Zions Bancorporation has been through in its 135-year history, this one will end. When it does, Zions is ideally situated to capitalize on a high-growth geographic footprint and a unique operating model that will keep Zions Bancorporation close to its clients and will position Zions to provide credit that will enable businesses to grow and the economy to strengthen.

Harris H. Simmons is chairman, president and chief executive officer of Zions Bancorporation.

*Artwork from kevindooley under Creative Commons license at Flickr.com.

Featured in the May/June 2009 issue of Zions Bank’s Community magazine.

Since the latter part of 2007, the financial world has been in one of the worst crises of the last half century. Just a cursory look at news headlines around the world reveals a telling and stress-inducing story:

• Bloomberg: U.S. Stock Futures Decline on Concern Banks Need More Capital
• Guatemala Times: The Great Depression Analogy
• SmartMoney: Investors Are Scared, and That’s the Good News
• Belfast Telegraph: US hit by its worst slump in 50 years

With these articles, the spotlight remains squarely on financial institutions as we are continually reminded of failing and nearly failing banks needing “bailouts”. Unfortunately, we are too often only exposed to part of the story. As we have addressed what these bailouts actually mean in previous commentary, we won’t readdress it here. What we would like to briefly examine here is the profitability of banking institutions and how different measures tell remarkably different stories.

We will begin by defining a term: GAAP (pronounced like gap)—an acronym referring to the Generally Accepted Accounting Principles of the United States. These principles are what the U.S. Securities and Exchange Commission (SEC) requires publicly-traded companies to use in preparing and reporting financial statements.

The other accounting method that every U.S. company is required to adhere to is the IRS Code. An underlying premise of GAAP is that companies should not overstate their earnings, which would mislead investors—while the underlying premise of the IRS Code is that companies should not understate their earnings, which would lead to less income tax for the government.

Today’s headline-grabbing losses stemming from issues like mark-to-market on securities, impairments of goodwill, and net additions to loan loss reserves—all appear on a bank’s financial statements because of GAAP requirements. What is also significant about these losses is that they don’t affect an institutions’ cash on hand and they are not tax deductible.

Recently, Zions Bancorporation’s CEO Harris Simmons asked a simple question, “How many of the nation’s largest banks paid taxes last year?”—realizing that Zions, having reported a loss last year in its financial statements, actually paid out over $300 million in taxes. It turns out that the two dozen largest domestically headquartered bank holding companies* had a GAAP net income loss which was nearly equal to that of their taxes paid. In fact, not one of these twenty-four organizations avoided paying millions—and in some cases billions—of dollars in taxes.

The point to remember is that these losses generally have more to do with accounting practices than the core operations of many of these bank holding companies, and the largest financial institutions in America are paying billions of dollars in taxes to Washington DC and their respective states.

The health of the banking industry can only be determined by an in-depth study of the industries’ financial statements. Which financial statements you decide to use (GAAP or the IRS Code) will lend to entirely different conclusions.

*The banks in the sample are taken from the 36 largest banks included in the Fed’s listing, excluding nine bank holding companies that are subsidiaries of foreign companies (that do not in all cases file 10-Ks from which the tax information is taken) and the three large trust and processing banks (Bank of New York/Mellon, State Street, and Northern Trust). The actual cash payments for income taxes are taken from the “Supplemental Disclosures of Cash Flow Information” that is a standard part of an audited financial statement’s “Consolidated Statements of Cash Flows” included in a bank holding company’s 10-K.

*Artwork from kevindooley under Creative Commons license at Flickr.com.

ZIONS BANCORPORATION AND AFFILIATES IN THE NEWS |

Regional and national publications and community leaders have once again turned to Zions Bancorporation and affiliate executives to help give understanding and perspective about our current economic environment. See the links below for more information.

Les Roka of Utah CEO Magazine writes in “Clear the Fog from Annual Reports” of CEO Harris Simmons’ “straightforward approach” when speaking with shareholders.

February 27, 2009
“With a sputtering economy and soaring unemployment numbers, some may question whether now is a good time to be starting a new business. Scott Anderson, President and CEO of Zions Bank, wants to ensure that it is.”

February 12, 2009
George Feiger tells SNL Financial that while funds of funds have been outperforming the market, “they have broken the promise that they won’t go down.”

February 7, 2009
Mike Freeman at The San Diego Union-Tribune reports that “California Bank & Trust will acquire the branches, deposits and loan pool of Alliance Bank.”

January 23, 2009
George Feiger expects economic losses to continue through 2009, the Daily Camera reported.

December 2008
Vectra Bank President and CEO Bruce Alexander tells Jeff Rundles that Vectra is continuing to “make loans” while “being careful and prudent.”

December 5, 2008
Brice Wallace of the Deseret News quotes Contango CEO George Feiger when writing that “the longterm ramifications of the downturn will ‘reshape the topography’ of American retail.”

December 18, 2008
Bruce Alexander, President/CEO, Vectra Bank Colorado, has been picked to take part in a leadership team to “help draft an economic stimulus plan for Denver.”

November 14, 2008
Katie Kuehner-Hebert of American Banker quotes from CFO Doyle Arnold’s presentation at a Merrill Lynch & Co. conference, during which he discussed Zions participation in the Treasury Department’s Capital Purchase Program (article: “Treasury Funds Secured, Zions Looks Outward”)

*Artwork created by City On Fire at Flickr.com.

ZIONS BANCORPORATION REPORTS 2008 FOURTH QUARTER
LOSS DRIVEN LARGELY BY NONCASH GOODWILL IMPAIRMENT |

Company Bolstered Loan Loss Reserves, Strengthened Capital and Liquidity, and Originated $2.7 Billion of New Loans

Zions Bancorporation (Nasdaq: ZION) (“Zions” or “the Company”) today reported a fourth quarter loss from core banking operations of $0.32 per diluted common share, excluding noncash charges from goodwill impairment of $2.97 per diluted share and impairment and valuation losses on securities of $1.07 per diluted share. Including these charges, the fourth quarter net loss applicable to common shareholders was $498.1 million, or $4.36 per diluted share. The Company also built its reserve for loan losses by $105.5 million in excess of actual net loan charge-offs.

“In what most observers agree is the most difficult economic environment in over half a century, we have strengthened our balance sheet by building record high levels of capital and liquidity,” said Harris H. Simmons, chairman and chief executive officer. “The goodwill impairment has no impact on regulatory and tangible capital ratios, and reflects in part the fact that market values of all banks are significantly lower in current highly stressed markets.” Simmons added, “While this is a challenging environment for Zions and the industry, we continue to successfully extend new credit and serve our customers. In fact, we extended $4.6 billion of credit in the fourth quarter, of which $2.7 billion were new loans, in our continued effort to make credit available to credit-worthy individuals and businesses. This, in turn, will help them weather this economic storm and strengthen the economy.”

Fourth Quarter 2008 Highlights

For the year 2008, the Company’s core banking operations made $2.20 per diluted share, excluding noncash charges from goodwill impairment of $3.11 per diluted share and impairment and valuation losses on securities of $1.75 per diluted share. Including these charges, the 2008 net loss applicable to common shareholders was $290.7 million, or $2.66 per diluted share.

Loans
On-balance-sheet net loans and leases were $41.9 billion at December 31, 2008, an increase of approximately $2.8 billion or 7.1% from $39.1 billion at December 31, 2007, and were essentially unchanged from the balance at September 30, 2008. For both the year-over-year and quarterly comparisons, net growth in commercial and industrial loans, consumer loans, and commercial real estate term loans was offset by pay-downs and charge-offs of construction and land development loans.

Deposits
Average total deposits for the fourth quarter of 2008 increased $3.2 billion or 8.8% to $39.6 billion compared to $36.4 billion for the fourth quarter of 2007, and increased $2.3 billion or 24.2% annualized compared to $37.3 billion for the third quarter of 2008. Most of the increase in deposits for the quarter was in brokered money market and other brokered deposits; the growth in these deposits was used primarily to reduce short-term Federal Home Loan Bank and other borrowings by $2.7 billion to $2.0 billion at December 31, 2008.

Net Interest Income
The net interest margin was 4.20% for the fourth quarter of 2008 compared to 4.27% for the fourth quarter of 2007 and 4.13% for the third quarter of 2008. The increased net interest margin for the fourth quarter of 2008 compared to the third quarter of 2008 was driven primarily by the capital investment from the U.S. Treasury, reduced deposit rates, and significantly lower borrowing costs.

Net interest income for the fourth quarter of 2008 increased $29.5 million or 6.2% to $508.4 million compared to $478.9 million for the fourth quarter of 2007, and increased $16.4 million or 13.4% annualized compared to $492.0 million for the third quarter of 2008.

Impairment Loss on Goodwill
The Company recognized an impairment loss on goodwill during the fourth quarter of $353.8 million, or $2.97 per diluted share. Substantially all of this loss resulted from impairment of all of the goodwill at three subsidiary bank reporting segments – National Bank of Arizona, Nevada State Bank, and Vectra Bank Colorado. This impairment loss reflects the Company’s annual impairment testing as of October 1, 2008, as well as an update to December 31, 2008 due to continued market deterioration in the fourth quarter, and is a noncash accounting adjustment to the Company’s balance sheet that does not affect regulatory and tangible capital ratios.

Asset Quality
Nonperforming assets were $1,140.5 million at December 31, 2008 compared to $283.9 million at December 31, 2007 and $924.4 million at September 30, 2008. The increase was driven primarily by deterioration in residential real estate acquisition, development and construction exposures in the Southwest, and by continued weakening in Utah residential construction and commercial and industrial portfolios. The ratio of nonperforming assets to net loans and leases and other real estate owned was 2.71% at December 31, 2008 compared to 0.73% at December 31, 2007 and 2.20% at September 30, 2008.

Net loan and lease charge-offs for 2008 were $393.7 million or 0.96% of average loans. Net loan and lease charge-offs for the fourth quarter of 2008 were $179.7 million or 1.71% annualized of average loans. This compares with $26.7 million or 0.28% annualized of average loans for the fourth quarter of 2007 and $95.3 million or 0.91% annualized of average loans for the third quarter of 2008. The increase in charge-offs largely was driven by declining collateral values on residential acquisition, development, and construction loans in the Southwest and in Utah.

The provision for loan losses was $285.2 million for the fourth quarter of 2008 compared to $70.0 million for the fourth quarter of 2007 and $156.6 million for the third quarter of 2008. The provision for the fourth quarter of 2008 was 2.72% annualized of average loans and was $105.5 million in excess of net loan and lease charge-offs.

The allowance for loan losses as a percentage of net loans and leases was 1.64% at December 31, 2008 compared to 1.18% at December 31, 2007 and 1.45% at September 30, 2008. The combined allowance for loan losses and the reserve for unfunded lending commitments was $737.9 million, or 1.76% of net loans and leases at December 31, 2008, compared to 1.23% at December 31, 2007 and 1.51% at September 30, 2008.

Investment Securities
The Company recognized other-than-temporary impairment (“OTTI”) and valuation losses during the fourth quarter of 2008 of $204.3 million pretax, or $1.07 per diluted share, including securities newly deemed OTTI and additional impairment on securities on which OTTI had been previously recognized. OTTI and valuation losses during the fourth quarter of 2008 consisted of:

Lockhart Funding
At December 31, 2008, Lockhart had total assets of $738 million, with pretax unrealized losses of approximately $119 million. The Company held approximately $412 million at December 31, 2008 of asset-backed commercial paper purchased from Lockhart, compared to $557 million at September 30, 2008 and $493 million at June 30, 2008. The amount of Lockhart commercial paper included in money market investments on the Company’s average balance sheet was approximately $574 million for the fourth quarter of 2008, compared to $597 million for the third quarter of 2008 and $1,091 million for the second quarter of 2008. The Company was able to reduce its purchases of Lockhart commercial paper because Lockhart elected to participate in the Federal Reserve’s Commercial Paper Funding Facility Program.

Noninterest Income
Noninterest income for the fourth quarter of 2008 was $(82.3) million compared to $(20.2) million for the fourth quarter of 2007 and $89.6 million for the third quarter of 2008. The amount for the fourth quarter of 2008 includes impairment and valuation losses on securities of $204.3 million compared to $28.0 million for the third quarter of 2008. Fair value and nonhedge derivative loss was $(5.8) million during the fourth quarter compared to $(26.2) million during the third quarter. The fourth quarter loss includes $2.5 million of income from changes in fair value and interest on nonhedge derivatives, $(4.6) million of counterparty credit adjustments on derivative transactions, and $(3.7) million of other losses. Net equity securities gains (losses) for the fourth quarter were $(14.1) million and include $11.0 million in impairment on Federal Agricultural Mortgage Corporation stock and $3.1 million of net losses on venture capital investments.

Noninterest Expense
Noninterest expense for the fourth quarter of 2008 was $398.2 million compared to $353.0 million for the fourth quarter of 2007 and $372.3 million for the third quarter of 2008. Salaries and employee benefits decreased from the third quarter due to the adjustment of certain employee benefit and variable compensation accruals. Other real estate owned expenses increased $33.0 million (including $22.1 million in charge-downs) compared to the third quarter.

Liquidity Risk Management
As of December 31, 2008, the Company estimates it has available borrowing capacity from the Federal Reserve and the FHLB that approximates one-third of its deposits.

On January 15, 2009, the Company issued $254.9 million of senior floating rate notes due June 21, 2012 at a coupon rate of three-month LIBOR plus 37 basis points. The debt is guaranteed under the FDIC’s Temporary Liquidity Guarantee Program.

Capital Management
Tangible equity increased primarily due to the $1.4 billion preferred capital investment from the U.S. Treasury. The Company’s tangible equity ratio was 8.86% at December 31, 2008 compared to 6.17% at December 31, 2007 and 6.60% at September 30, 2008. The tangible common equity ratio was 5.89% at December 31, 2008 compared to 5.70% at December 31, 2007 and 6.05% at September 30, 2008. At December 31, 2008, estimated regulatory Tier 1 risk-based capital and total risk-based capital were $5,267 million and $7,365 million compared to $3,985 million and $6,073 million at September 30, 2008, respectively. Estimated ratios at December 31, 2008 for Tier 1 risk-based capital and total risk-based capital were 10.52% and 14.71% compared to 8.07% and 12.30% at September 30, 2008, respectively.

Significant changes in Other Comprehensive Income included a $98.3 million increase in unrealized gains on derivative instruments and a net charge of $32.2 million related to the Company’s pension and postretirement plans.

On January 26, 2009, the Board of Directors declared a regular quarterly dividend of $0.04 per common share payable February 25, 2009 to shareholders of record on February 11, 2009. This is a reduction from the prior quarter dividend of $0.32 per common share.

Weighted average common and common-equivalent shares outstanding for the fourth quarter of 2008 were 114,205,587 compared to 106,902,983 for the fourth quarter of 2007 and 108,497,464 for the third quarter of 2008. Common shares outstanding at December 31, 2008 were 115,344,813 compared to 107,116,505 at December 31, 2007 and 115,302,598 at September 30, 2008.

Conference Call
Zions hosted a conference call to discuss these fourth quarter results at 5:30 p.m. ET January 26, 2009. A link to the webcast will be available on the Zions Bancorporation Web site at
www.zionsbancorporation.com. A replay of the call will be available from 9:30 p.m. ET on Monday, January 26, 2009, until midnight ET on Monday, February 2, 2009, by dialing 1-888-286-8010 (international: 617-801-6888) and entering the passcode 55903048. The webcast of the conference call will also be archived and available for 30 days.

About Zions Bancorporation
Zions Bancorporation is one of the nation’s premier financial services companies, consisting of a collection of great banks in select high growth markets. Zions operates its banking businesses under local management teams and community identities through approximately 500 offices in ten Western and Southwestern states: Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington. The Company is a national leader in Small Business Administration lending and public finance advisory services. In addition, Zions is included in the S&P 500 and NASDAQ Financial 100 indices. Investor information and links to subsidiary banks can be accessed at www.zionsbancorporation.com.

Forward-Looking Information
Statements in this news release 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. 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 this news release. Factors that might cause such differences include, but are not limited to: the Company’s ability to successfully execute its business plans and achieve its objectives; changes in general economic and financial market conditions, either internationally, nationally or locally in areas in which the Company conducts its operations, including changes in asset-backed commercial paper markets and valuations in structured securities and other assets; changes in governmental policies and programs resulting from general economic and financial market conditions; changes in interest and funding rates; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; increased competitive challenges and expanding product and pricing pressures among financial institutions; legislation or regulatory changes which adversely affect the Company’s operations or business; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the 2007 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.

Zions Bancorporation Press Release – 01/26/2009

*Artwork from City On Fire under a Creative Commons license at Flickr.com.

THE WAY I SEE IT |

As the nation’s credit crisis has continued to make headlines, the United States Department of Treasury has continued to develop new tools to engender confidence and strengthen liquidity in the financial system. A major new element of the government’s response is the Capital Purchase Plan, an element of the Emergency Economic Stabilization Act recently passed by Congress, by which up to $250 billion is being invested in healthy banks that form the backbone of our economy. This new capital is being provided in the form of senior preferred stock, with a coupon rate of 5 percent for the first five years, after which the rate increases to 9 percent. Warrants to purchase common stock at current prices, in an amount equal to 15 percent of the total investment, are also provided to the government. The structure of the program virtually ensures that these taxpayer funds will not constitute a “bailout,” but rather an investment that will be fully repaid by the many banks receiving this investment.

Zions Bancorporation has received a $1.4 billion allocation of this capital, providing us with an exceptionally strong capital base during a period that is shaping up to be one of the most challenging in the nation’s economic history. When combined with the nearly $300 million in new capital we raised in the third quarter, these new funds will raise our Tier 1 Capital Ratio to approximately 10.9 percent—more than 80 percent greater than the regulatory “well-capitalized” threshold.

Our participation in the Capital Purchase Plan will ensure that our balance sheet remains very strong relative to our peers, and will enable us to continue to effectively serve our customers. We expect to use the capital to support our ability to provide credit in the communities we serve. Our ability to leverage this capital and further expand our loan production will depend as well on continuing to build our deposit base and prudently underwriting and pricing credit risk. But this is a very important step forward by the government in enabling the banking industry to begin unthawing the frozen plumbing of the nation’s credit markets.

When combined with the increase through the end of 2009 in FDIC deposit insurance coverage to $250,000—with unlimited insurance coverage on noninterest bearing demand deposit accounts—the Capital Purchase Plan provides us with tremendous resources to help serve customers and increase their confidence in our banks, and in the financial system.

Harris H. Simmons is chairman, president and chief executive officer of Zions Bancorporation.

Originally published in November 2008 Zions Bancorporation News Volume 2 issue 9.