Zions Investment Securities Inc., the broker-dealer subsidiary of Zions First National Bank, has a reputation as the underwriter that will do anything - including risky private-placement transactions and innovative municipal revenue bond activities.
"If other underwriters don't want to touch it, the saying is 'give it to Zions, they'll try it,' " said a direct competitor who requested anonymity.
And Zions' chief investment officer David Hemingway says this is exactly how senior managers at the bank want to be perceived.
"If the issuer has a deal that is difficult to do publicly, we will buy it ourselves," Hemingway said. "We are the solution for the smaller regional issuer."
Indeed, in keeping with the bank's audacious character, Salt Lake City- based Zions earlier this year became the only commercial bank that does not have a section 20 investment banking subsidiary to underwrite municipal revenue bonds.
Its first deal - a $4.2 million lease revenue bond sale by Summit County, Utah, that Zions bought through a competitive bid - was made possible because of the Office of the Comptroller of the Currency's "section five" regulations, which allow banks to apply to underwrite municipal revenue product through an operating subsidiary.
Zions said the OCC ruling will allow it to challenge the stranglehold regional underwriters have had on municipal revenue offerings from issuers in the Western expanse between Denver and California.
The bank expects to underwrite additional revenue financings this year for other Utah municipalities, such as Ogden City, Brighan City, Layton City, and Pleasant Grove.
Prior to the OCC ruling, banks were only allowed to directly underwrite, and deal in, general obligation bonds and special revenue bonds through a special Section 20 subsidiary that is registered with the Securities and Exchange Commission as a broker-dealer. However, it still stands that no more than 25% of a bank's revenues may come from those activities.
"For the small issuer in our region, (Zions' entry into the field) means milk and honey on the table," said head trader Charles Loughridge.
A Convert to Public Finance
Zions' initial foray into public finance started in 1988, when it entered a business agreement with the financial advisory firm Smith Capital Inc. Smith Capital's name has since been dropped by the bank and the operation is known as Zions Bank Public Finance. Zions Bank Corp. is the holding company, which owns Zions First National Bank.
Zions was started by Brigham Young in 1873, the second president of the Mormon Church, as a unit of the church. In 1962, however, the bank was sold to a group of Salt Lake City businessmen, and while the church remains a customer of the bank, the institution is run independently of it, Hemingway said.
But it wasn't until the mid-1990s that the firm really moved to solidify its role as both a regional banking institution and financial adviser. During this time, Zions acquired select financial advisory firms at breakneck speed, which propelled the firm to rank within the top 15 financial advisers nationwide last year, according to Securities Data Co. It came in 14th, with approximately $1.9 billion on 51 deals.
But a key element of the bank's public finance expansion rests in its attempts to leverage off its success as a financial adviser to increase the amount of its senior-managed transactions.
And while the amount of deals the bank has run the books on has been modest in the last few years, its numbers have been increasing steadily since 1995.
According to Securities Data, the bank was senior manager on transactions worth $79 million in 1995 on 25 issues. In 1996, the number essentially hovered: $76 million on 27 issues. But things took off in 1997, when Zions ran the books on 36 transactions worth $207 million.
The majority of the origination was done in Utah, Texas, Arizona, New Mexico, Nevada, and Idaho. Moreover, it did one transaction in Pennsylvania, via Internet bidding this year.
In Arizona, the firm's public finance operations are included in its subsidiary, the National Bank of Arizona Public Finance. In Nevada, it operates through Howarth & Associates, which it acquired in 1996. In California, the firm's operations are conducted by Kelling, Northcross & Nobriga, which it bought in 1997, and in Colorado it operates as Vectra Bank Colorado Public Finance.
Zions' entire underwriting business is conducted out of Salt Lake City, where veteran underwriter Scott Burnett, vice president and manager of municipal underwriting and trading, is located. Burnett was formerly a municipal trader in Dean Witter Reynolds Inc.'s Dallas office.
Additionally, the firm employs 20 institutional salespeople, headed by Loughridge, a municipal finance veteran of 24 years, and former Dain Bosworth Inc. municipal trading head. The firm does the majority of its municipal underwriting in the competitive arena, having completed 22 issues worth $130.5 million in the competitive market last year.
Community-Based Banking
The parent bank's strategy to expand and win competitive underwriting has been simple: establish a regional banking presence through select acquisitions within its underwriting footprint, thus providing a broad range of community-based financial services.
"We let our regional bankers decide what's best for the issuer. They do not report to our trading desk," said Hemingway. He added that when the bank acquires another institution, it adopts a "storefront" marketing approach, maintaining the regional name and flavor of the acquired firm.
This approach is designed to provide clients and municipal issuers with one-stop shopping ease, offering municipalities a variety of financial services within one institution.
Separately, Hemingway said that Zions conducted almost $50 million in private municipal transactions, the sum total of which it bought for its own accounts.
The deals range from $100,000 to $15 million, and have covered an extensive product base, including public-purpose activities such as jails, phone and cafeteria systems, roofs, scoreboards, recreational water slides, storm drains, parking garages, and street lighting systems.
But some critics have questioned how well a financial adviser like Zions can serve the future financing needs of its clients.
"The financial adviser cannot always be there for an issuer after the public sale," an underwriter with a large New York firm said. "The FAs don't always know the issuers' needs very well, and can lose touch with their portfolio and refunding needs down the road."
But the consensus among other underwriters is that it depends on the financial advisory firm, with some firms more diligent than others.
And Hemingway insists that Zions offers its clients the best of all worlds, allowing municipalities to work closely with regional bankers, while providing quick private-placement capital in emergencies.
"In the general model, that is the weakness of the FA, where they have the general advice and no money to commit. We think our model is the perfect model, since we buy privates all the time," Hemingway said, adding that the flexibility contributes to the firm's ability to offer more than plain-vanilla FA work.
Positioning for a Sale?
Some market insiders also wonder if Zions' aggressive acquisitions are actually geared to positioning the institution for a future sale.
"You have to wonder," said Alexander Brown, senior vice president of public finance at George K. Baum & Co. "Are they trying to be an attractive acquisition? They certainly seem to be adding about a bank a month out here (in Colorado). Their real focus seems to be building a strong network of banks."
But Hemingway contends that the bank does not have any buyout aspirations.
"We are trying to get the best price for our shareholders. We fully intend on managing the bank ourselves," he said.
Moreover, for all its bravado, Zions has been apt to pounce a tad too aggressively on deals, according to several direct competitors.
On its recent Summit County lease revenue bond deal, Zions priced the offering more than 10 basis points through the market, winning the transaction at a bid of 4.51%, and saving the county 10 basis points over the cover-bid of 4.61%. As a result, sources close to the deal said, more than half of the paper has gone unsold.
"They sold it too expensive to the market," said another competitor. "Eventually the bonds will be marked to the market and they will take a loss."
But head trader Loughridge insists the deal was a sound one for the regional firm, adding that the Zions presence in this new underwriting market was significant enough for the firm to commit as aggressively as it did in the pricing.
"We wanted to buy the paper because it was a very significant deal for us," he said. "We want to show the market how committed we are to this new endeavor."
