First and foremost, any broker or financial advisor will tell you the importance of portfolio diversification. The old adage, “don’t put all your eggs in one basket,” rings particularly true with today’s economic crisis; you may be hard-pressed to find someone who disagrees. Thus, fixed-income assets should hold a spot in any diverse investment portfolio as a possible safe-haven for some of your money, regardless of your tolerance for other higher-risk, yet higher-reward options.

Second, fixed-income assets can serve as a supplement to your income. For example, a conservative bond ladder can put consistent and dependable cash in an investor’s pocket regularly over the life of the holdings. In tremulous times like these, structuring your securities like this may be a welcome alternative.

Of course, fixed-income assets do have their limitations. There is generally a much smaller reward with these options than with say, stocks. Younger generations are typically better positioned to take the bigger risks as they have the time and (usually) the financial stability to explore investment options in various markets. That said, historically more secure fixed income products, like the FDIC-insured CDs and agency bonds available at Zions Direct, are typically a wiser option for saving for foreseeable events, such as home buying, weddings and college tuition. These life milestones aren’t exactly the experiences on which we should gamble our money.

These trying times have shown that everyone, regardless of their age, can benefit from investments that generally offer less risk and a better chance of reward. Most would do well to take the wisdom of our elders and invest in fixed-income assets sooner rather than later.

Darhl Peterson has traded in the US Treasury, retail bond, and telecom business sectors for the last ten years. Currently Peterson is a Bond Trading Manager for Zions Direct.

While the Card Act has resulted in significant changes for many card issuers, the impact to Zions Bank has been minimal since we have never engaged in the “unfair and deceptive” practices addressed in this new law. Let me share with you a few examples of how we’ve approached some of the issues addressed in the Card Act over the years.

Universal Default – The Card Act eliminates “universal default,” which occurs when issuers increase interest rates for clients who miss a payment on any other account. The average default rate in the U.S. is nearly 29 percent, and 90 percent of the credit cards in the country have penalty rates. Zions Bank has never practiced universal default. In fact, we don’t have any default or penalty rate pricing.

Time to Pay – The Card Act mandates that cardholders must be mailed their statements 21 days before the due date. Zions Bank’s statements have always been mailed at least 21 days before the due date. In addition, Zions Bank consumer cardholders have a full 25-day grace period to pay their balance before interest is charged on new purchases.

Rate Increases – Cardholders are protected against arbitrary interest rate increases under the provisions in the Card Act. Zions Bank does not increase interest rates arbitrarily. In fact, the last time Zions Bank raised interest rates on new credit card purchases was July 2006, since our credit card interest rates are tied to the Prime Rate. As the Prime Rate started dropping in late 2006, all of our interest rates for purchases have come down and have stayed at record lows since December 2008. (Note: Credit card interest rates in the U.S. currently average 14 percent. Zions Bank’s rates are between 7 percent and 12.25 percent on new purchases.)

Allocation of Payments – The Card Act states that cardholders must receive fair allocation of their payments to different balance rates. Ninety-five percent of cards allow issuers to apply payments in a manner that the Federal Reserve found “likely to cause substantial monetary injury to consumers.” Zions Bank allocates payments fairly to different balance rates.

Double-Cycle Billing – Under the provisions in the Card Act, issuers are prohibited from double-cycle billing, a practice that hurts cardholders who pay off their balances in full in one statement cycle, but not the next. Zions Bank has never practiced double-cycle billing.

Zions Bank’s Guiding Principles state that our goal is to create value. These principles also state that we will conduct our business with integrity and decency and will strive to treat our customers with respect and appreciation. At a time when many of our competitors need to make significant changes in their credit card practices, I am proud of the fact that the newly legislated practices of fairness and transparency are the practices we have followed for years.

To our clients, our communities, our employees and our shareholders, this serves as yet another example that we haven’t forgotten who keeps us in business.

View Zions Bank’s credit and debit card options.

Scott Anderson is president and CEO of Zions Bank

Featured in the January/February 2010 issue of Zions Bank’s Community magazine.

As part of this, many individuals are questioning how to work with traditional investment brokers. Understanding that there is more information online than ever before, many investors are choosing to “go it alone,” relying on their own financial instincts and information they can gather from articles, social media and other resources to make investment decisions.

The big question for these investors, of course, is what information is trustworthy. Investors seek control over their investments, especially in the current economic climate. With more and more people touting their “expertise” online, individuals must be wary about where they are gathering their information. Many online brokerage Web sites do not provide complete information on a particular investment, leaving the investor unclear about his or her choices. Further, online investment advice provided via investment Web sites, social network “groups” or e-communities often does not come with a clear view of the “advisor’s” background or “pedigree,” leaving the investor questioning its validity. This lack of clarity can ultimately stall decisions or result in overly cautious decisions, like leaving funds to accrue minimal interest in a “safe” savings account.

Here at Zions Direct, we do things a bit differently than traditional brokerages. Zions Direct offers an online auction platform that puts the control in your hands, allowing you to choose what you want to invest in, how much you want to invest and at what rate. And the transparency of the auctions helps you make each of these decisions, providing information about participation levels, bidding volume, and market-clearing yields of current and previous auctions. You can use that intelligence to determine if a bond or CD is too risky for you or if it would provide a high enough yield. With Zions Direct’s online auction platform, individual investors are on equal footing with major investment houses, getting the same yield as the big guys whether investing $1,000 or $10,000.

It’s what we call rethinking.

An article in SeekingAlpha* reiterates this point, but reminds buyers to think carefully about which bond they purchase: “Bonds and other high-income securities can create an anchor during rough seas – just don’t pay for a gold-plated anchor when stainless steel will serve you better.” Just as in any investment, buyers must think carefully about which bond they purchase. While no investment has 100% guaranteed safety, bonds can provide some financial security in an otherwise unstable market.

In this tumultuous economy, many investors seek transparency and easy-to-use platforms—Zions Direct’s online platforms offer just that. With Bonds for Less and Zions Direct Auctions, investors have considerable variety to carefully choose which bonds are right for them while paying little to nothing in brokerage fees when purchasing these securities.

*Shaefer, Joseph L., “Looking to Invest in Bonds in Troubled Times? Caveat Emptor!”, SeekingAlpha, seekingalpha.com/article/132194-looking-to-invest-in-bonds-in-troubled-times-caveat-emptor.

It’s time we put this confusion to rest. Sure, everyone is entitled to their own opinion on how they want to invest their money, and I encourage anyone looking to make an investment today to do their research to find the best options. With that in mind, I think I can help shed some light on this situation and explain why we are all so confused in the first place.

First and foremost: nothing is foolproof. When it comes to investing money, there will always be some risk—very few opportunities are guaranteed. How much risk you may take on really depends on your tolerance level. In today’s economy, it’s very clear we are at a point where most individuals want to lower their risk as much as possible and most of us are looking for options to “safely” invest our money with little backlash, and this general move to quality investments means more people are taking note of the confusion around municipal bonds.

Conventional wisdom says that if you buy an investment-grade municipal bond, the likelihood that you will not get your interest and principal paid back if you hold that investment to maturity is extremely small. However, in a financial crisis (similar to what we are enduring now), there is always a chance that people may panic at the sight of any risk and leave municipal bonds, turning to Treasury bills paying a minimal return— resulting in a decline in the value of muni bonds.

Nevertheless, even with muni bonds tied to troubled cities and states, if it’s a general obligation bond, as opposed to a revenue bond, it’s very likely the financials will be sorted out to avoid any default. Moreover, many municipalities across the nation still maintain solid financial fundamentals and as a result are able to offer investment grade bonds—in a time when it appears that rating agencies are inclined to be extra cautious. The simple answer is to be wise, do your homework, objectively analyze the risks with your investment, and look for those areas that others might overlook more because of a general panic and less because of sound principles.

Darhl Peterson has traded in the US Treasury, retail bond, and telecom business sectors for the last ten years. Currently Peterson is a Bond Trading Manager for Zions Direct.

Back in the 1980s, a period, like today, of great stress in the banking industry, I saw a bumper sticker that read: “Don’t tell my mother I’m a banker. She thinks I play the piano at a bordello.” Bank-bashing has once again become a popular sport with little, if any, distinction made between the great majority of well-capitalized, customer-focused and community-minded commercial banks who have acted responsibly, and the few institutions — primarily in the investment banking industry — that have become poster children for excessive risk-taking and eye-popping compensation practices.

Many traditional bankers have grown tired of the high-pitched ranting by media “talking heads,” politicians and others who overnight have become self-proclaimed authorities on banking. Here are a few of the questions being asked, and some answers you’re not hearing:

Q: Why Aren’t Banks Making Loans?

A: Banks are making loans! In fact, during the first full year of this recession, banks’ business loans increased 12 percent, and consumer loans increased 9 percent; in contrast, median business loans declined by 0.7 percent and consumer loans by 5.1 percent during the previous six recessions. Zions Bancorporation’s total average outstanding loans increased 11.3 percent during 2008. During the fourth quarter of 2008 alone, we made more than $2.7 billion in new loans. The real contraction is taking place outside the commercial banking industry; until recently more than 70 percent of credit in our economy came from outside the commercial banking system, up from about 40 percent 30 years ago.

The fact of the matter is that loan demand typically contracts during recessions, as borrowers pay down debt and pull back on their capital spending. Zions Bank, as well as each of our affiliate banks throughout the West, has aggressively promoted the availability of credit, particularly to smaller businesses that rely almost exclusively on bank credit. What we shouldn’t do is become complacent in our underwriting of credit — now or ever. Too-easy credit is what got the world in this mess in the first place.

Q: Are Banks Going to Be Nationalized?

A: While the very term “nationalization” can mean different things to different people, it is generally understood to mean ownership of a majority of the common equity of an institution. While this has happened with a small handful of firms, including Fannie Mae, Freddie Mac (both of which were U.S. Government-sponsored enterprises in the first place) and AIG, it is extremely unlikely that any broad-based nationalization of the industry will occur. This is particularly true of institutions possessing strong “tangible common equity” — the most bedrock form of capital. In this respect, you’ll be interested to know that Zions’ tangible common equity was approximately 78 percent greater than the asset-weighted average for the largest two dozen banks in the U.S. at year-end, while our net interest margin was about 29 percent stronger and our loan losses about 47 percent lower than our peers’.

Q: What About the Taxpayer “Bailout” of the Banks With TARP Money?

A: The investments made in major banks by the U.S. Treasury Department in the form of nonvoting, nonconvertible preferred stock had, as the objective, the further strengthening of the banking system’s capital in order to heighten depositor and investor confidence during a period of extraordinary contraction in the nation’s credit markets, and to give banks added confidence to continue extending credit without worrying about unduly straining their ratios of capital as a percentage of loans. The investment is providing the government with a return of approximately 8 percent (the pretax cost of the 5 percent after-tax dividend each recipient is paying), and that return will ratchet up to about 14.4 percent after five years. Additionally, the government received “warrants” to acquire common stock equal to 15 percent of the amount of its investment in each bank.

It’s also useful to remember that the cost of protecting the depositors of failed banks is borne by the banking industry — not by taxpayers. Zions Bancorporation’s premiums paid to the FDIC are expected to be between $65 and $100 million in 2009, up from $6.5 million just two years ago. And we pay extra millions of dollars to cover the cost of regular examinations by government regulators.

There’s also a very mistaken impression that banks don’t pay much in the way of taxes. In fact, Zions’ 2008 results included nearly $1 billion in expenses that reduced our reported income, but were not deductible on our tax return, including net additions to our loan loss reserves, impairment losses on securities, mark-to-market losses on hedges and goodwill impairment. The fact of the matter is that the TARP capital we’ve received — and must repay with interest — totals less than the cash payments we’ve made to federal and state governments for income taxes in just the past five years!

Q: Shouldn’t We Be Outraged by Bankers’ Excessive Executive Compensation?

A: Certainly there have been some excesses, and perhaps especially so in the investment banking industry. (Though I tend to think one should start such a discussion with the reported $30 million Cameron Diaz received to do voice-over work for “Shrek 3”!) Nevertheless, even in investment banking, there is a market for talent. And perhaps one of the great concerns we should all have about the increasing government influence in our industry is that it will lead to a “brain drain” in which the best people go to work for unregulated hedge funds and other institutions where their ability to create value, or to minimize losses, is more highly prized.

The compensation committee of our board of directors looks carefully at market comparables in establishing pay and incentive plans for our senior people. And I’m comfortable having anyone compare our senior officers’ compensation (the specifics of which are spelled out in mind-numbing detail in our proxy statement) with any of our peers, and with companies of similar size outside the banking industry. Finally, on a personal note, I’ve taken no bonus the past two years, and the furnishings in my office I paid for personally — back in 1991.

I am proud to be a banker because of the important role bankers play in the well-being of the economy. Banks provide significant strength to the communities we serve, and are in a critical position to help individuals, businesses and communities work through problems in these challenging times.

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.

While benefits of FDIC insurance can be debated, especially in this economic climate, insurance on certificates of deposit (CD) and bank accounts provides needed relief to the individual investor. Created in 1933 in response to the bank losses suffered during the Great Depression, FDIC insurance guarantees individuals’ bank deposits, currently up to $250,000 for each deposit in a single bank. Today, an individual can use the insurance to buy a CD knowing that their money is protected up to $250,000 until December 2013.

In addition to bank deposits, FDIC insurance carries over to some of the more conservative investment options as well. FDIC-insured CDs are a great alternative to low-interest-rate savings accounts. CDs are easy to open and produce a higher rate of return, usually much better than an everyday savings account.

Those looking to give up FDIC insurance in exchange for typically higher interest rates—without getting into higher-risk investments—might also consider senior notes. While not insured by the FDIC, senior notes historically have less risk than other types of unsecured debt because in the event that the issuer goes bankrupt, holders of these investments are generally paid before any other creditors.

Despite the current economic situation, there are ways to invest that will keep your risk low. Zions Direct offers one of the most popular FDIC-insured CD auction platforms, and, as mentioned in April’s Wall Street Journal article, investor usage in this platform has continued to “accelerate as the recession continues to affect consumers’ investment decisions.” Zions Direct has also recently sold Senior Notes on its auction platform as well, giving investors an easy, transparent way to get investing.

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.