Material Disclosures Rocky Mountain News finance editor David Milstead reveals hidden stories from the world of finance. Contact him at milsteadd@rockymountainnews.com.

Every week has a Friday when a company can make a disclosure with little notice.

But only once a year can a company announce bad news on New Years' Eve!

About two weeks ago, Salt Lake City-based Zions Bancorporation, the parent of Vectra bank Colorado, disclosed it had experienced a sharp drop in value of some of its mortgage-backed securities. See my prior item here.

Monday, at about 5:15 eastern, 3:15 mountain, the company acknowledged its troubles are not over, and another $55 million in charges to earnings are coming.

Zions has an "off-balance sheet commercial paper conduit" called Lockhart Funding, with which it has a "liquidity agreement."

This agreement seems to force Zions to buy back securities from Lockhart at book value, plus interest, when Lockhart is having trouble with its commercial paper. And that time is now, with Zions buying back $840 million worth on Dec. 26 and Dec. 27. The writedown on this deal is $33 million.

Zions also bought a $25 million REIT Collateralized Debt Obligation from Lockhart at book value, taking a $7 million writedown.

And, returning to the issue of two weeks ago, Zions says it must now classify another one of the REIT CDOs it holds as "Other Than Temporarily Impaired," taking a $15 million charge on it.

The full disclosure, in all its glory, follows:

Item 8.01 Other Items

Lockhart Funding

Due to ongoing disruptions in and contraction of the market for asset-backed commercial paper (“ABCP” or “CP”), on December 26 and 27 Zions First National Bank (“Zions Bank”) purchased $840 million of U. S. Government agency-guaranteed and AAA-rated securities from Lockhart Funding, LLC (“Lockhart”) at a price equal to book value plus accrued and unpaid interest, and the amount of outstanding commercial paper issued by Lockhart was reduced by the same amount. These actions were taken pursuant to the Liquidity Agreement between Zions Bank and Lockhart (the “Liquidity Agreement”), which requires securities purchases in the absence of sufficient CP funding. Since the fair value of the assets purchased was less than their book value, a pretax write-down of approximately $33 million (about $0.19 per diluted common share after-tax) will be recorded in conjunction with the purchase of these securities.

On December 21, 2007, Fitch Ratings downgraded from “AAA” to “A-” a $25 million REIT Collateralized Debt Obligation (“REIT CDOs”) held by Lockhart. Under the terms of the Liquidity Agreement, Zions Bank purchased this security at book value; a pretax write-down of approximately $7 million (about $0.04 per diluted common share after-tax) will be recorded in marking this security to fair value. The security continues to be rated “AAA” by the two other agencies which rate it.

After these purchases, total assets held and commercial paper issued by Lockhart are approximately $2.1 billion. The current book value of these $2.1 billion of assets exceeds their fair value by approximately $22 million. Zions’ affiliates currently own approximately $710 million of Lockhart’s CP. Lockhart is an off-balance sheet commercial paper conduit sponsored by Zions Bank. For further information on Lockhart and the Liquidity Agreement, refer to Zions Bancorporation’s most recent SEC Forms 10-K and 10-Q.

Available For Sale Securities

Due to a number of downgrades of REIT CDOs announced by Fitch Ratings on December 21, as well as additional recently released information regarding several underlying components of some REIT CDOs, Zions Bancorporation (“Zions” or “the Company”) has determined to add one additional REIT CDO to the list of REIT CDOs deemed to be Other Than Temporarily Impaired (“OTTI”) as announced on December 19, 2007. This additional security had an original book value of $25 million and a Fitch rating of “A”. Fitch downgraded the security to “BB-”. This security is currently rated “A” by Standard & Poor’s. As required by GAAP for securities deemed OTTI, a pretax expense of approximately $15 million (about $0.08 per diluted common share after-tax) will be recognized in marking this security to fair value.

Other Comments

Combining the information in this announcement with the Form 8-K filed on December 19, 2007, the pretax charge for REIT CDOs deemed OTTI in the fourth quarter will be approximately $109 million or $0.60 per diluted common share after-tax. In addition, the pretax charge for securities purchased from Lockhart will be approximately $49 million or $0.28 per diluted common share after-tax.

Following these actions, Zions has REIT CDOs with a book value of approximately $156 million, of which $123 million has not been deemed OTTI. Additional information on the composition of the Available For Sale portfolio is found in Zions’ most recent SEC Form 10-Q.

READER COMMENTS

Does "Other than temporarily impaired" mean permanently impaired?

Milstead responds:

That would make perfect sense, except that we're dealing with the accounting literature.

At the risk of erring, I'll say "no," in the sense that things can change and a company can ultimately sell a security and book a gain on the new, lower impaired value.

I'm working from a lengthy piece on the Web site of the Federal Deposit Insurance Corp. from 2005. It says accounting rule FAS 115:

"requires that an institution determine whether a decline in fair value below amortized cost for an individual available-for-sale or held-to-maturity security is other than temporary. If the impairment is judged to be other than temporary, the cost basis of the individual security must be written down to fair value, thereby establishing a new cost basis for the security, and the amount of the write-down must be included in earnings as a realized loss. FAS 115 further provides that after such a write-down, 'the new cost basis shall not be changed for subsequent recoveries in fair value.' A recovery in fair value, both for an available-for-sale security and a held-to-maturity security, should not be recognized in earnings until the security is sold."

The FDIC guidance goes on to note that the one explicit example in FAS 115 for what "other than temporay" means is:

"if it is probable that an institution 'will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred.'"

Recently, a Goldman,Sachs VP characterized for me in a discussion, the heart of problem in mortgage investment pools not being able to properly protect institutional investors as mortgagors try to renegotiate mortgage work out deals with mortgage servicers or to sell off their homes at prices below 15 % below the face value of their mortgages. He called the mortgage pools " brain dead". I replied, you mean they have failed as manaagers? He wryly replied, Well, you call also characterize this as success of accounting."

Some success!!!!!!

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