UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
Registrant's telephone number, including area code: (801) 524-4787
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirement for the past 90 days. Yes x No¨
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
ZIONS BANCORPORATION AND SUBSIDIARIES
INDEX
2
PART I. FINANCIAL INFORMATIONITEM I. FINANCIAL STATEMENTS (Unaudited)
3
4
5
ZIONS BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
Total comprehensive income for the three months ended June 30, 2002 and 2001 was $93,358 and $90,406, respectively.
6
7
ZIONS BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)(Unaudited)
8
ZIONS BANCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
June 30, 2002
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current financial statement presentation.
Operating results for the three- and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The balance sheet at December 31, 2001 is from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Zions Bancorporation’s Annual Report on Form 10-K for the year ended December 31, 2001.
BUSINESS COMBINATIONS, GOODWILL, AND OTHER INTANGIBLE ASSETS
Financial Accounting Standards Board (“FASB”) Statement No. 141, Business Combinations, became effective for the Company for business combinations completed after June 30, 2001. Statement No. 141 supersedes certain previous accounting guidance on business combinations, and eliminates the pooling-of-interest method of accounting. There were no acquisitions during the six months ended June 30, 2002.
FASB Statement No. 142, Goodwill and Other Intangible Assets, became effective for the Company beginning January 1, 2002. Under this Statement, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to specified annual impairment tests. Other intangible assets are amortized over their useful lives.
9
Transitional disclosures under Statement No. 142 to reconcile prior period amounts of income before cumulative effect and net income to their respective adjusted amounts for the add back of goodwill amortization are as follows (in thousands, except per share amounts):
Changes in the carrying amount of goodwill for the six months ended June 30, 2002 by operating segment are as follows (in thousands):
10
During the second quarter, the Company completed all goodwill impairment testing required under the transitional provisions of Statement No. 142. The impairment losses indicated above, net of income tax benefit of $2.7 million, were recognized during the six months ended June 30, 2002 as a cumulative effect of a change in accounting principle in accordance with Statement No. 142. This adjustment relates to the impairment in carrying value of the Company’s investments in certain e-commerce subsidiaries included in the “Other” operating segment. The impairment amount was determined as of January 1, 2002 by comparing the carrying value of these subsidiaries to their fair value, which was estimated from comparable market values including price-to-revenue multiples.
The accompanying financial statements include the following restatement of the Company’s first quarter financial statements as required by Statement No. 142 for the cumulative effect adjustment (in thousands, except per share amounts):
EXCHANGE OF INTEREST IN SUBSIDIARY
On April 30, 2002, the Company finalized the exchange of its interest in Digital Signature Trust Co., a subsidiary of Zions First National Bank engaged in e-commerce digital certification, to Identrus, LLC (a corporate joint venture), for an approximate 33% ownership in Identrus. No gain or loss was recognized in the financial statements.
11
OPERATING SEGMENT INFORMATION
The Company manages its operations and prepares management reports with a primary focus on geographical area. All segments presented, except for the segment defined as “Other,” are based on commercial banking operations. Zions First National Bank and subsidiaries operates 128 branches in Utah and 22 in Idaho. California Bank & Trust operates 92 branches in Northern and Southern California. Nevada State Bank and subsidiaries operates 61 offices in Nevada. National Bank of Arizona operates 47 branches in Arizona. Vectra Bank Colorado operates 57 branches in Colorado and one branch in New Mexico. The Commerce Bank of Washington operates one branch in the state of Washington. The operating segment defined as “Other” includes the parent company, certain e-commerce subsidiaries, other smaller nonbank operating units, and eliminations of transactions between segments.
The accounting policies of the individual segments are the same as those of the Company. The Company allocates centrally provided services to the business segments based upon estimated usage of those services. Commencing January 1, 2002, the Company began transfer pricing on a consolidated company level. Allocated transfer pricing (expense) income included in net interest income of the banking subsidiaries for the three- and six-month periods ended June 30, 2002, respectively, are as follows: Zions First National Bank - $(13.3) and $(24.6) million, Nevada State Bank - $2.8 and 6.2 million, National Bank of Arizona - $3.3 and $5.1 million, Vectra Bank Colorado - $6.0 and $11.2 million, and The Commerce Bank of Washington - $1.2 and $2.1 million. Also, for consistency between periods, net income of each segment for the three- and six-month periods ended June 30, 2001 has been adjusted for the add back of goodwill amortization following the adoption of FASB Statement No. 142 in 2002.
12
The following table presents selected operating segment information for the three months ended June 30, 2002 and 2001:
13
The following table presents selected operating segment information for the six months ended June 30, 2002 and 2001:
14
ZIONS BANCORPORATION AND SUBSIDIARIESITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSISFINANCIAL HIGHLIGHTS(Unaudited)
15
ZIONS BANCORPORATION AND SUBSIDIARIESFINANCIAL HIGHLIGHTS (Continued)(Unaudited)
16
OPERATING RESULTS
Zions Bancorporation and subsidiaries (“the Company”) achieved net income of $82.1 million, or $0.89 per diluted share for the second quarter of 2002, an increase of 11.5% and 12.7%, respectively, over the $73.6 million, or $0.79 per diluted share in the second quarter of 2001. Net income for the second quarter of 2001, adjusted for the add back of goodwill amortization under Financial Accounting Standards Board (“FASB”) Statement No. 142, was $82.3 million, or $0.88 per diluted share. Comparing the equivalent amount in the second quarter of 2002 to this adjusted amount in 2001 reflects a 0.21% decrease in net income and a 1.1% increase per share. All references hereinafter to prior periods are on an “as adjusted” basis for the add back of goodwill amortization under FASB Statement No. 142.
For the first six months of 2002, net income was $129.3 million or $1.40 per diluted share, compared to $154.1 million or $1.69 per diluted share for the first six months of 2001. The 2002 amounts include impairment losses of $32.4 million, net of an income tax benefit of $2.7 million, recognized under the transitional provisions of FASB Statement No. 142 and accounted for as a cumulative effect of a change in accounting principle. This adjustment relates to an impairment in carrying value as of January 1, 2002 of the Company’s investments in certain e-commerce subsidiaries. The remaining investment of these impaired subsidiaries was $31.7 million as of June 30, 2002. The 2001 amounts include a cumulative effect of a change in accounting principle for the adoption of FASB Statement No. 133.
On April 30, 2002, the Company finalized the exchange of its interest in Digital Signature Trust (“DST”) for an approximate 33% ownership in Identrus, LLC. No gain or loss was recognized in the financial statements. Included in the 2002 second quarter results are after-tax operating losses at DST of $1.5 million, or $0.02 per share and equity in after-tax losses of Identrus of $0.7 million or $0.01 per share. DST losses in the second quarter of 2001 were $3.4 million or $0.04 per share.
The annualized return on average assets was 1.26% in the second quarter of 2002, compared to 1.39% in the second quarter of 2001. The annualized return on average common shareholders’ equity was 14.21% in the second quarter of 2002, compared to 15.28% in the second quarter of 2001. The efficiency ratio, defined as the percentage of noninterest expenses to the sum of taxable equivalent net interest income and noninterest income, increased to 60.51% in the second quarter of 2002 from 59.00% in the second quarter of 2001.
For the first six months of 2002, the annualized return on average assets was 1.01%, compared to 1.36% for the first six months of 2001. The annualized return on average common shareholders’ equity was 11.37% for the first six months of 2002 compared to 15.37% for the first six months of 2001. The decreases reflect the impairment losses discussed above.
The Company’s second quarter decrease in earnings of $0.2 million, (0.21%), compared to the same period the previous year includes a $24.0 million (10.2%) increase in net interest income and a $9.9 million (10.6%) increase in noninterest income, offset by a $3.5 million (28.4%) increase in the provision for loan losses, a $25.7 million (13.0%) increase in noninterest expense, a $4.0 million (10.4%) increase in income taxes, and a $1.2 million (67.8%) decrease from the effects of minority interests.
For the first six months of 2002 compared to the same period in 2001, the $24.8 million (16.1%) decrease in net income reflects a $64.4 million (14.3%) increase in net interest income, offset by a $6.1 million (3.0%) decrease in noninterest income, a $8.8 million (35.1%) increase in the provision for loan losses, a $41.7 million (10.6%) increase in noninterest expense, a $4.9 million (6.2%) increase in income taxes, a
17
$2.7 million (78.6%) decrease from the effects of minority interests, and a $25.2 million (352.1%) increase in the cumulative effect of a change in accounting principle resulting from the adoption in 2002 of FASB Statement No. 142 and the impairment losses previously described, compared to the adoption in 2001 of FASB Statement No. 133.
Noninterest income for the first six months of 2001 included a $50.2 million gain from the sale of a nonpublic investee of the Company to a public company, Concord EFS, Inc., offset by valuation adjustments to venture capital investments of $23.1 million. Noninterest expense included $14.4 million in nonrecurring charges for certain benefit obligations, consulting services, and closed business operations. Also during the same period in 2001, the Company completed several acquisitions accounted for as purchases. Results of operations between periods are influenced because of these transactions.
OPERATING CASH EARNINGS RESULTS
The Company also provides its earnings performance on an operating cash basis because it believes its cash performance gives a better reflection of its financial position and shareholder value creation, and better demonstrates its ability to support growth, pay dividends, and repurchase stock, than providing only reported net income. Operating cash earnings are earnings before amortization of goodwill in the prior period, amortization of core deposit and other intangible assets, goodwill allocated to the value of branches sold in 2002, merger-related expenses and the cumulative effect of adoption of FASB Statements No. 133 and 142.
Operating cash earnings for the second quarter of 2002 were $84.8 million or $0.92 per diluted share, an increase of 0.2% and 1.1%, respectively, over the $84.6 million or $0.91 per diluted share earned in the second quarter of 2001. Operating cash earnings for the second quarter of 2002 increased 1.6% over the $83.5 million earned during the first quarter of 2002. Operating cash earnings per diluted share increased 2.2% from the $0.90 in the first quarter of 2002. Year-to-date operating cash earnings were $168.2 million, an increase of 1.0% over the $166.6 million earned in the first half of 2001. Year-to-date operating cash earnings per diluted share were $1.82, unchanged from the same period in 2001.
The operating cash annualized return on average assets for the second quarter and for the first six months of 2002 was 1.34% and 1.35%, compared to 1.48% and 1.51%, respectively, in 2001. Operating cash annualized return on average common shareholders’ equity was 22.99% and 23.34% for the second quarter and for the first six months of 2002, compared to 25.04% and 25.82% for the same periods in 2001. The Company’s cash efficiency ratio for the second quarter and for the first six months of 2002 was 59.27% and 58.66%, respectively, compared to 57.81% and 57.66% for the same periods in 2001.
NET INTEREST INCOME AND INTEREST RATE SPREADS
Net interest income for the second quarter of 2002, adjusted to a fully taxable-equivalent basis, increased 10.1% to $264.3 million compared to $240.2 million for the second quarter of 2001, and increased 1.1% from $261.3 million for the first quarter of 2002. Net interest margin was 4.61% for the second quarter of 2002, compared to 4.63% for the second quarter of 2001 and 4.70% for the first quarter of 2002. The decreased margin reflects primarily a reduced amount reclassified from other comprehensive income to interest income compared to the prior quarter. This reclassification results from certain interest rate swaps that were dedesignated as cash flow hedges in March and April of 2001. The pattern of reclassification was fixed at that time based on the then current yield curve. Six-month net interest income, on a fully taxable-equivalent basis, was $525.6 million in 2002, an increase of 14.0% compared to $460.9 million in 2001.
18
Net interest margin for the first six months of 2002 was 4.65% compared to 4.62% for the first six months of 2001.
The yield on average earning assets decreased 144 basis points during the second quarter of 2002 compared to the second quarter of 2001, and 14 basis points from the first quarter of 2002. The average rate paid this quarter on interest-bearing funds decreased 169 basis points from the second quarter of 2001 and 5 basis points from the first quarter of 2002. Comparing the first six months of 2002 with 2001, the yield on average earning assets decreased 167 basis points, while the cost of interest bearing funds decreased 201 basis points.
The spread on average interest-bearing funds for the second quarter of 2002 was 4.21%, up from 3.96% for the second quarter of 2001 and down from the 4.30% for the first quarter of 2002. The spread on average interest-bearing funds for the first six months of 2002 was 4.26%, up from 3.92% for the first six months of 2001.
19
20
21
PROVISION FOR LOAN LOSSES
The provision for loan losses was $15.7 million for the second quarter of 2002, compared to $18.1 million for the first quarter of 2002, and $12.2 million for the second quarter of 2001. The provision for loan losses for the first six months of 2002 totaled $33.8 million, 35.1% more that the $25.0 million provision for the first six months of 2001. Annualized, the year-to-date provision is 0.38% of average loans for 2002 compared to 0.33% for the first six months of 2001. The increased provision for loan losses for the first six months of 2002 compared to the same period in 2001 reflects management’s evaluation of its various portfolios, statistical trends, and other various economic factors. It is management’s intent to maintain a strong coverage of nonperforming assets in a continued uncertain economic environment in the markets in which the Company operates.
NONINTEREST INCOME
Noninterest income for the second quarter of 2002 was $104.0 million, an increase of 10.6% from the $94.1 million for the second quarter of 2001, and an increase of 8.6% from the $95.8 million for the first quarter of 2002.
Comparing the segments of noninterest income for the second quarter of 2002 to the second quarter of 2001, service charges on deposit accounts increased 15.7%, loan sales and servicing income decreased 12.8%, other service charges, commissions and fees increased 15.4%, income from securities conduit increased 36.2%, underwriting, trading and nonhedge derivative income increased 23.3%, equity securities gains decreased 72.4%, fixed income securities gains decreased 93.9%, and other noninterest income increased 42.2%.
The increase in service charges on deposit accounts results mainly from increased fees associated with acquisitions consummated at the end of the first quarter of 2001 and later in 2001, as well as increased internal core deposit growth. Increased other service charges, commissions and fees also reflect the effect of the acquisitions. The increase in other noninterest income results in part from increased income from investments in bank-owned life insurance and from increases in the Company’s equity in earnings of unconsolidated investee companies, along with a gain of $.5 million from the sale of an investment advisory subsidiary.
Noninterest income for the six months ended June 30, 2002 was $199.8 million, a decrease of 3.0% from the $205.9 million for the same period in 2001.
Comparing the segments of noninterest income for the first six months of 2002 with the first six months of 2001, service charges on deposit accounts increased 21.8%, loan sales and servicing income decreased 37.1%, other service charges, commissions and fees increased 18.0%, income from securities conduit increased 114.0%, underwriting, trading and nonhedge derivative income increased 14.3%, equity securities gains decreased 96.0%, fixed income securities losses decreased 101.5%, and other noninterest income increased 46.9%.
The decrease in loan sales and servicing income results from the Company recording a writedown during the first quarter of 2002 of approximately $13.5 million on the capitalized residual cash flows related to an auto securitization nonhedge derivative transaction. The $13.5 million fair value of a swap entered into in this transaction was recorded as an asset, and nonhedge derivative income was increased by this amount. Without this transaction, underwriting, trading and nonhedge derivative income would have been approximately $10.4 million for the first six months of 2002 compared to $20.9 million for the first six
22
months of 2001. The adjusted decrease from the first six months of 2001 results mainly from the recognition of approximately $11.8 million of nonhedge derivative income during the first six months of 2001 resulting from increases in fair values of nonhedge derivatives in a rapidly decreasing interest rate environment, compared to $1.7 million recognized in 2002. The first six months of 2001 also included approximately $3.3 million of income from held to maturity securities transferred to trading in conjunction with the adoption of FASB Statement No. 133 and sold during the first quarter of 2001.
Income from securities conduit represents liquidity, interest rate agreement, and administrative fees from a sponsored qualified special purpose entity securities conduit established during 2001. The increased fees result from increases in the conduit’s securities portfolio activity.
As previously discussed, the decrease in equity securities gains from the first six months of 2001 results mainly from a gain of $50.2 million from the nonpublic investee transaction and losses of $23.1 million from writedowns of venture capital investments during the first six months of 2001. Fixed income securities losses for the first six months of 2001 included an impairment loss of approximately $4.9 million on SBA interest-only securities.
Changes in other noninterest income between the comparable six-month periods include a $1.4 million increase in income from bank-owned life insurance and a $1.8 million increase in the Company’s equity in earnings of unconsolidated investee companies. Other income for the first six months of 2002 also includes a pretax gain of approximately $3.2 million from the sales of three California branches. The after-tax gain from the sales was approximately $1.4 million.
NONINTEREST EXPENSE
Noninterest expense for the second quarter of 2002 was $222.9 million, an increase of $16.8 million, or 8.1% over $206.1 million for the second quarter of 2001. Excluding the amortization of goodwill in the second quarter of 2001, noninterest expense increased $25.7 million, or 13.0%. Comparing significant changes in noninterest expense segments for the second quarter of 2002 with the second quarter of 2001, salaries and employee benefits increased 15.6%, occupancy increased 11.8%, furniture and equipment increased 9.6%, legal and professional fees increased 17.7%, merger-related expense and amortization of goodwill decreased 100.0% to zero amounts, amortization of core deposit and other intangibles increased 40.6%, and the total of all other noninterest expenses increased 8.1%.
Expenses for the second quarter of 2001 do not include expenses associated with the operations of the companies acquired to form Lexign, Inc., and Minnequa Bancorp, all of which were acquired subsequent to June 30, 2001. The increase in salaries and wages for the second quarter of 2002 compared to the second quarter of 2001 includes increased pension and employee medical benefits expense of $3.7 million and nonrecurring salary expense associated with the DST transaction of $1.0 million. Legal and professional fees for the second quarter of 2002 include $.6 million of legal expense related to the DST transaction and $1.2 million of consulting fees related to a procurement initiatives project. The increase in amortization of core deposit and other intangibles reflects increased amortization related to the previously discussed purchase acquisitions.
Noninterest expense for the six months ended June 30, 2002 was $435.3 million compared to $409.6 million for the six months ended June 30, 2001, an increase of 6.3%. Excluding the amortization of goodwill in the six months ended June 30, 2001, noninterest expense increased 10.6%. Comparing significant changes in noninterest expense segments for the first six months of 2002 with the same period for 2001, salaries and
23
employee benefits increased 12.6%, occupancy increased 13.6%, furniture and equipment increased 12.2%, merger-related expense and amortization of goodwill decreased 100.0% to zero amounts, amortization of core deposit and other intangibles increased 57.2%, and the total of all other noninterest expenses increased 6.3%.
Expenses for the six months ended June 30, 2001 do not include expenses associated with the operations of the companies acquired to form Lexign, Inc., and Minnequa Bancorp, all of which were acquired subsequent to June 30, 2001 and only include expenses of Eldorado Bancshares and branches acquired in Arizona from Pacific Century Bank for the second quarter of 2001. The increase in amortization of core deposit and other intangibles reflects increased amortization related to these purchase acquisitions.
At June 30, 2002, the Company had 8,221 full-time equivalent employees, 409 domestic offices, and 587 ATMs, compared to 7,738 full-time equivalent employees, 413 offices, and 537 ATMs at June 30, 2001.
INCOME TAXES
The Company’s income taxes increased 10.4% to $43.0 million for the second quarter of 2002 compared to $39.0 million for the second quarter of 2001. The Company’s income taxes were $85.0 million for the first six months of 2002, compared to $80.1 million for the same period in 2001. The Company’s effective income tax rate was 34.5% for the second quarter of 2002, compared to 35.2% for the second quarter of 2001. The effective income tax rate for the first six months of 2002 was 34.6% compared to 36.0% for the first six months of 2001. The lower effective rate is mainly due to higher book income resulting from the nonamortization of goodwill in 2002.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS
Average earning assets increased 13.1% to $22,782 million for the six months ended June 30, 2002, compared to $20,134 million for the six months ended June 30, 2001. Earning assets comprised 87.9% of total average assets for the first six months of 2002, compared with 87.8% for the first six months of 2001.
Average money market investments, consisting of interest-bearing deposits, federal funds sold and security resell agreements increased 5.6% to $979 million in the first six months of 2002 as compared to $927 million in the first six months of 2001.
Average securities increased 2.6% to $3,990 million for the first six months of 2002 compared to $3,889 million for the first six months of 2001. Average investment portfolio securities increased 4.0% and average trading securities decreased 4.5%.
Average net loans and leases increased 16.3% to $17,813 million for the first six months of 2002 compared to $15,318 million for the first six months of 2001, representing 78.2% of earning assets in the first six months of 2002 compared to 76.1% in the first six months of 2001. Average net loans and leases were 99.2% of average total deposits for the six months ended June 30, 2002, as compared to 95.4% for the first six months of 2001.
24
INVESTMENT SECURITIES
The following table presents the Company’s held-to-maturity and available-for-sale investment securities:
LOANS
The Company has structured its organization to separate the lending function from the credit review function to strengthen the control and independent evaluation of credit activities. Loan policies and procedures provide the Company with a framework for consistent underwriting and a basis for sound credit decisions. In addition, the Company has well-defined standards for grading its loan portfolio, and management utilizes the comprehensive loan grading system to determine risk potential in the portfolio. Another aspect of the Company’s credit risk management strategy is the diversification of the loan portfolio. The Company has a diversified loan portfolio with some emphasis in real estate (as set forth in the following table), but has no significant exposure to highly leveraged transactions.
25
The table below sets forth the amount of loans outstanding by type:
Loans held for sale on June 30, 2002 decreased 44.5% from December 31, 2001. All other loans, net of unearned income and fees increased 7.5% to $18,287 million on June 30, 2002 compared to $17,013 million on December 31, 2001. Commercial loans, construction loans, and other real estate loans increased from year-end 1.4%, 3.7%, and 12.8%, respectively. Consumer loans increased 3.7% while lease financing decreased 2.9%. Foreign loans increased 78.6% to $25 million and other receivables decreased 36.4%. Within the other real estate loan portfolio, home equity credit line loans increased 45.1%, 1-4 family residential loans increased 6.7%, and all other real estate-secured loans increased 14.0% from year-end. Loans are classified in accordance with regulatory guidelines primarily based on collateral. Therefore, other real estate-secured loans include loans which would be classified as commercial if categorized according to loan purpose.
On June 30, 2002, long-term conforming first mortgage real estate loans serviced for others totaled $427 million, and consumer and other loan securitizations, which include loans sold under revolving securitization structures, totaled $2,544 million. During the first six months of 2002, the Company sold $258 million of loans classified in held for sale, and securitized and sold SBA loans, home equity credit line loans, credit card receivables and automobile loans totaling $464 million. During the first six months of 2002, total loans sold were $722 million compared to total loans sold of $712 million during the first six months of 2001.
As of June 30, 2002, the following table shows that the Company had assets of $232 million recorded on its balance sheet related to the $2,544 million of loans sold to securitized trusts. The Company does not control or have any equity interest in the trusts. However, as is common with securitized transactions, the Company has retained subordinated interests of $138 million representing the Company's junior position to other
26
investors in the securities. The capitalized residual cash flows (sometimes called “excess servicing”) of $94 million principally represent the present value of estimated excess cash flows over the life of the sold loans. These excess cash flows are subject to prepayment and credit risk.
RISK ELEMENTS
The Company’s nonperforming assets, which include nonaccruing loans, restructured loans, other real estate owned and other nonperforming assets, were $116 million on June 30, 2002, down from $120 million on December 31, 2001, and up from $88 million on June 30, 2001. Such nonperforming assets as a percentage of net loans and leases, other real estate owned and other nonperforming assets were 0.63% on June 30, 2002, compared to 0.69% on December 31, 2001 and 0.53% on June 30, 2001.
Accruing loans past due 90 days or more totaled $32 million on June 30, 2002, down from $46 million on December 31, 2001 and $41 million on June 30, 2001. These loans equaled 0.18% of net loans and leases on June 30, 2002, 0.27% on December 31, 2001, and 0.25% on June 30, 2001.
No loans to borrowers were considered potential problem loans at June 30, 2002 and December 31, 2001. The Company had one loan totaling $14.0 million on June 30, 2001 that was considered a potential problem loan. Potential problem loans are defined as loans presently on accrual, not contractually past due 90 days or more, and not restructured, but about which management has serious doubt as to the future ability of the borrower to comply with present repayment terms and which may result in the reporting of the loans as nonperforming assets.
The Company’s total recorded investment in impaired loans included in nonaccrual loans and leases amounted to $59 million on June 30, 2002, as compared to $80 million on December 31, 2001, and $63 million on June 30, 2001. The Company considers a loan to be impaired when the accrual of interest has been discontinued and it meets other applicable criteria under current accounting standards. The amount of the impairment is measured based on the present value of expected cash flows, the observable market price of the loan, or the fair value of the collateral. Impairment losses are included in the allowance for loan losses through a provision for loan losses. Included in the allowance for loan losses on June 30, 2002, December 31, 2001, and June 30, 2001, is a required allowance of $9 million, $18 million and $13 million, respectively, on $25 million, $20 million and $17 million, respectively, of the recorded investment in impaired loans.
27
The following table sets forth the nonperforming assets:
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses was 1.43% of net loans and leases on June 30, 2002, compared to 1.50% on December 31, 2001 and 1.40% on June 30, 2001. Net charge-offs during the second quarter of 2002 were $15.4 million, or annualized 0.34% of average net loans and leases, compared to net charge-offs of $14.5 million (annualized 0.33%) for the first quarter of 2002, and $8.6 million (annualized 0.21%) for the second quarter of 2001. Net charge-offs for the first six months of 2002 were $29.8 million, or annualized, 0.34% of average net loans and leases, compared to $14.7 million (annualized 0.19%) for the first six months of 2001.
The allowance, as a percentage of nonaccrual loans and restructured loans, was 260.0% on June 30, 2002, compared to 236.7% on December 31, 2001 and 300.2% on June 30, 2001. The allowance, as a percentage of nonaccrual loans and accruing loans past due 90 days or more was 199.3% on June 30, 2002, compared to 168.2% on December 31, 2001 and 199.2% on June 30, 2001.
At June 30, 2002, the allowance for loan losses includes an allocation of $10 million related to commitments to extend credit for which the Company could separate the credit risk from that of any related loans on the balance sheet and for standby letters of credit. Commitments to extend credit on loans and standby letters of credit on June 30, 2002, December 31, 2001, and June 30, 2001 totaled $7,502 million, $6,812 million, and $7,506 million, respectively.
In analyzing the adequacy of the allowance for loan and lease losses, management utilizes a comprehensive loan grading system to determine risk potential in the portfolio, and considers the results of independent internal and external credit reviews, historical charge-off experience, and changes in the composition and volume of the portfolio. Other factors, such as general economic conditions and collateral values, are also considered. Larger problem credits are individually evaluated to determine appropriate reserve allocations. Additions to the allowance are based upon the resulting risk profile of the portfolio developed through the evaluation of the above factors.
28
The following table shows the changes in the allowance for loan losses and a summary of loan loss experience:
DEPOSITS
Total deposits increased 5.3% to $18,788 million on June 30, 2002 as compared to $17,842 million on December 31, 2001. The Company’s core deposits, consisting of demand, savings and money market deposits and time deposits under $100,000 increased 7.2% from December 31, 2001. Comparing June 30, 2002 to December 31, 2001, demand deposits increased 4.2%, savings and money market deposits increased 12.1%, time deposits under $100,000 decreased 9.2%, time deposits $100,000 and over decreased 9.6%, and foreign deposits decreased 30.5%.
Average total deposits of $17,948 million for the first six months of 2002 increased 11.8% compared to $16,049 million for the first six months of 2001, with average demand deposits increasing 17.5%. Average savings and NOW deposits increased 25.6% and average money market and super NOW deposits increased 11.8% during the first six months of 2002 compared with the same period one year earlier.
Average time deposits under $100,000 decreased 1.3% and time deposits $100,000 and over decreased 0.5% for the first six months of 2002 compared to the first six months of 2001. Average foreign deposits decreased 6.7% for the same periods.
29
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Company manages its liquidity to provide adequate funds to meet its anticipated financial obligations, including withdrawals by depositors and debt service requirements, as well as to fund customers’ demand for credit. Liquidity is provided primarily by the regularly scheduled maturities of the Company’s investment and loan portfolios. Management of the maturities of these portfolios is an important source of medium to long-term liquidity. The Company’s ability to raise funds in the capital markets through the securitization process also allows it to meet funding needs at a reasonable cost.
The Federal Home Loan Bank (“FHLB”) system is a major source of liquidity for each of the Company’s subsidiary banks. Zions First National Bank and The Commerce Bank of Washington are members of the FHLB of Seattle. California Bank & Trust, Nevada State Bank, and National Bank of Arizona are members of the FHLB of San Francisco. Vectra Bank Colorado is a member of the FHLB of Topeka. The FHLB allows member banks to borrow against their eligible loans to satisfy liquidity requirements.
As another source of liquidity, the Company’s core deposits, consisting of demand, savings and money market deposits and time deposits under $100,000, constituted 91.5% of total deposits on June 30, 2002, as compared to 89.9% on December 31, 2001 and 89.7% on June 30, 2001.
Maturing balances in loan portfolios provide flexibility in managing cash flows. Maturity management of those funds is an important source of medium to long-term liquidity. The Company’s ability to raise funds in the capital markets through the securitization process and by debt issuance allows the Company to take advantage of market opportunities to meet funding needs at a reasonable cost.
The parent company’s cash requirements consist primarily of debt service, operating expenses, income taxes, dividends to shareholders, and share repurchases. The parent’s cash needs are routinely met through dividends from subsidiaries, proportionate shares of current income taxes, management and other fees, unaffiliated bank lines, and debt issuance.
At June 30, 2002, $223.5 million of dividend capacity was available from subsidiaries to pay to the parent without having to obtain regulatory approval. Dividends received by the parent from subsidiaries were $88.8 million for the second quarter of 2002 and $120.8 million for the six months ended June 30, 2002. The parent also has a program to issue short-term commercial paper. At June 30, 2002 outstanding commercial paper was $339.0 million. At June 30, 2002, the parent had a revolving credit facility with a bank totaling $40 million and a margin borrowing facility totaling $14 million. The parent had $7 million outstanding on the revolving credit facility at June 30, 2002.
Zions First National Bank (“ZFNB”) provides a $5.1 billion liquidity facility for a fee to a qualified special purpose entity securities conduit (“conduit”). ZFNB also provides for a fee administrative and investment advisory services and hedge support to the conduit. The conduit purchases U.S. Government-backed and AAA rated securities. These assets are funded through the issuance of commercial paper. With certain limitations, ZFNB is required to advance funds to the conduit to repay maturing commercial paper upon the conduit’s inability to access the commercial paper market or upon a commercial paper market disruption. No amounts were outstanding under this liquidity facility at June 30, 2002.
On January 18, 2002, the Company’s board of directors authorized a repurchase of up to $55 million of the Company’s common stock. An additional repurchase of up to $50 million was authorized on July 18, 2002. On July 30, 2001, the Company’s board of directors authorized a repurchase of up to $50 million of the Company’s common stock. During the second quarter of 2002, the Company repurchased approximately 561
30
thousand common shares at a cost of $31.2 million. The Company repurchased approximately 481 thousand shares during the first quarter of 2002 at a cost of $25.3 million. For the year 2001, the Company repurchased approximately 883 thousand common shares at a cost of $46.5 million.
Interest rate sensitivity measures the Company’s financial exposure to changes in interest rates. Interest rate sensitivity is, like liquidity, affected by maturities of assets and liabilities. The Company assesses its interest rate sensitivity using duration and simulation analysis. Duration is a measure of the weighted-average expected lives of the discounted cash flows from assets and liabilities. Simulation is used to estimate net interest income over time using alternative interest rate scenarios.
The Company, through the management of maturities and repricing of its assets and liabilities and the use of certain derivative instruments, including interest rate caps, floors, futures, options and exchange agreements, attempts to manage the effect on net interest income of changes in interest rates. The prime lending and the LIBOR (London Interbank Offer Rate) curve, are the primary indices used for pricing the Company’s loans, and the 91-day Treasury bill rate is the index used for pricing many of the Company’s deposits. The Company does not hedge the prime/LIBOR/T-bill spread risk through the use of derivative instruments.
CAPITAL RESOURCES AND DIVIDENDS
Total shareholders’ equity on June 30, 2002 was $2,337 million, an increase of 2.5% over the $2,281 million on December 31, 2001, and an increase of 6.4% over the $2,198 million on June 30, 2001. The Company’s tangible common equity ratio, tangible equity to tangible assets, was 6.03% at June 30, 2002 compared to 5.98% at December 31, 2001 and 6.05% at June 30, 2001. The ratio of average equity to average assets for the first six months of 2002 was 8.86% as compared to 8.82% for the same period in 2001. On June 30, 2002, the Company’s total risk-based capital ratio was 11.86%, as compared to 12.20% on December 31, 2001 and 11.63% on June 30, 2001. On June 30, 2002, the Company’s Tier I risk-based capital ratio was 8.05%, as compared to 8.25% on December 31, 2001 and 8.35% on June 30, 2001. The Company’s leverage ratio on June 30, 2002 was 6.48% compared to 6.56% on December 31, 2001 and 6.69% on June 30, 2001. The decrease in the capital ratios as of June 30, 2002 resulted mainly from the repurchase of common stock previously discussed and the loan growth experienced by the Company.
Dividends declared of $.20 per common share for the second quarter of 2002 were unchanged from the dividends declared for the first quarter of 2002 and each quarter during 2001. The common cash dividend payout of net income for the second quarter of 2002 was 22.4% compared to 38.9% for the first quarter of 2002 which was adjusted to reflect the effect of the goodwill impairment loss, and 25.2% for the second quarter of 2001.
CRITICAL ACCOUNTING POLICIES
The Company has reviewed and made no significant changes in critical accounting policies and assumptions compared to the disclosures made in Zions Bancorporation’s Annual Report on Form 10-K for the year ended December 31, 2001.
31
FORWARD-LOOKING INFORMATION
Statements in Management’s Discussion and Analysis that are not based on historical data are forward- looking, including, for example, the projected performance of the Company and its operations. These statements constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from the projections discussed in Management’s Discussion and Analysis since such projections involve significant risks and uncertainties. Factors that might cause such differences include, but are not limited to: the timing of closing proposed acquisitions being delayed or such acquisitions being prohibited; competitive pressures among financial institutions increasing significantly; economic conditions, either nationally or locally in areas in which the Company conducts its operations, being less favorable than expected; and legislation or regulatory changes which adversely affect the Company’s operations or business. The Company disclaims any obligation to update any factors or to publicly announce the results of revisions to any of the forward-looking statements included herein to reflect future events or developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the most significant market risk regularly undertaken by the Company. The Company believes there have been no significant changes in market risk compared to the disclosures in Zions Bancorporation’s Annual Report on Form 10-K for the year ended December 31, 2001.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
32
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
34