UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 0-2610
ZIONS BANCORPORATION
(Exact name of registrant as specified in its charter)
UTAH
87-0227400
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
ONE SOUTH MAIN, SUITE 1134
SALT LAKE CITY, UTAH
84111
(Address of principal executive offices)
(Zip Code)
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x
No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, without par value, outstanding at May 2, 2003
90,141,139 shares
ZIONS BANCORPORATION AND SUBSIDIARIES
INDEX
Page
PART I.
FINANCIAL INFORMATION
ITEM 1.
Financial Statements (Unaudited)
Consolidated Balance Sheets
3
Consolidated Statements of Income
4
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)
6
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements
9
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
27
ITEM 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
ITEM 6.
Exhibits and Reports on Form 8-K
SIGNATURES
29
CERTIFICATIONS
30
2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Unaudited)
ZIONS BANCORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, 2003
December 31, 2002
March 31, 2002
(Unaudited)
ASSETS
Cash and due from banks
$
1,087,910
1,087,296
906,611
Money market investments:
Interest-bearing deposits
1,189
1,690
5,238
Federal funds sold
454,168
96,077
38,752
Security resell agreements
693,623
444,995
287,101
Investment securities:
Held to maturity, at cost (approximate market value $0, $0, and $79,651)
—
78,584
Available for sale, at market
3,328,412
3,304,341
3,140,897
Trading account, at market (includes $197,257, $110,886, and $95,870 transferred as collateral under repurchase agreements)
336,005
331,610
284,308
3,664,417
3,635,951
3,503,789
Loans:
Loans held for sale
227,101
289,499
206,758
Loans, leases and other receivables
18,994,438
18,843,006
17,750,667
19,221,539
19,132,505
17,957,425
Less:
Unearned income and fees, net of related costs
90,621
92,662
103,257
Allowance for loan losses
280,533
279,593
264,107
Net loans
18,850,385
18,760,250
17,590,061
Other noninterest bearing investments
595,238
601,641
651,771
Premises and equipment, net
401,827
393,630
370,472
Goodwill
730,069
730,031
734,334
Core deposit and other intangibles
79,368
82,920
104,576
Other real estate owned
18,231
31,608
13,490
Other assets
632,309
699,600
598,383
27,208,734
26,565,689
24,804,578
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand
5,296,261
5,117,458
4,418,020
Interest-bearing:
Savings and money market
12,303,049
11,654,258
10,007,607
Time under $100,000
1,693,752
1,766,844
1,926,131
Time $100,000 and over
1,314,220
1,402,189
1,540,183
Foreign
193,723
191,231
108,401
20,801,005
20,131,980
18,000,342
Securities sold, not yet purchased
221,936
203,838
188,894
Federal funds purchased
841,237
819,807
1,297,094
Security repurchase agreements
791,360
861,177
788,908
Accrued liabilities
479,778
535,044
450,323
Commercial paper
276,640
291,566
315,389
Federal Home Loan Bank advances and other borrowings:
One year or less
6,602
15,554
437,467
Over one year
239,958
240,698
241,219
Long-term debt
1,114,429
1,069,505
781,173
Total liabilities
24,772,945
24,169,169
22,500,809
Minority interest
23,285
22,677
20,769
Shareholders’ equity:
Capital stock:
Preferred stock, without par value; authorized 3,000,000 shares; issued and outstanding, none
Common stock, without par value; authorized 350,000,000 shares; issued and outstanding 90,215,449, 90,717,692, and 91,986,436 shares
1,012,532
1,034,888
1,092,735
Accumulated other comprehensive income
38,558
46,214
51,700
Retained earnings
1,361,414
1,292,741
1,138,565
Total shareholders’ equity
2,412,504
2,373,843
2,283,000
ZIONS BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31,
(In thousands, except per share amounts)
2003
2002
Interest income:
Interest and fees on loans
297,349
305,705
Interest on loans held for sale
2,505
2,736
Lease financing
4,534
5,668
Interest on money market investments
3,937
3,679
Interest on securities:
Held to maturity – taxable
798
Available for sale – taxable
28,220
34,628
Available for sale – nontaxable
7,293
6,342
Trading account
5,561
5,434
Total interest income
349,399
364,990
Interest expense:
Interest on savings and money market deposits
32,629
38,455
Interest on time and foreign deposits
20,988
33,390
Interest on borrowed funds
29,574
36,935
Total interest expense
83,191
108,780
Net interest income
266,208
256,210
Provision for loan losses
17,550
18,090
Net interest income after provision for loan losses
248,658
238,120
Noninterest income:
Service charges on deposit accounts
31,412
28,420
Loan sales and servicing income
18,467
6,926
Other service charges, commissions and fees
20,589
19,637
Trust income
5,128
4,413
Income from securities conduit
6,866
4,139
Dividends and other investment income
5,997
8,207
Market making, trading and nonhedge derivative income
9,872
15,435
Equity securities gains (losses), net
(5,904
)
621
Fixed income securities gains, net
135
43
Other
3,777
5,985
Total noninterest income
96,339
93,826
Noninterest expense:
Salaries and employee benefits
123,586
113,885
Occupancy, net
16,847
16,649
Furniture and equipment
15,783
16,228
Legal and professional services
4,922
5,602
Postage and supplies
6,665
7,164
Advertising
3,980
5,663
Amortization of core deposit and other intangibles
3,551
3,335
38,630
36,728
Total noninterest expense
213,964
205,254
Income from continuing operations before income taxes and minority interest
131,033
126,692
Income taxes
46,394
44,025
(2,737
(150
Income from continuing operations
87,376
82,817
ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited)
Discontinued operations:
Income (loss) from operations of discontinued subsidiaries
552
(5,176
Income taxes (benefit)
224
(1,990
Income (loss) on discontinued operations
328
(3,186
Income before cumulative effect of change in accounting principle
87,704
79,631
Cumulative effect of change in accounting principle, net of tax (1)
(32,369
Net income
47,262
Weighted average shares outstanding during the period:
Basic shares
90,529
92,055
Diluted shares
90,648
92,814
Net income per common share:
Basic:
0.96
0.90
0.01
(0.03
Cumulative effect of change in accounting principle
(0.35
0.97
0.52
Diluted:
0.89
0.51
(1)
For the three months ended March 31, 2002, the cumulative effect adjustment relates to an impairment charge from the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, net of income tax benefit of $2,676.
5
ZIONS BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three Months Ended March 31, 2003
Accumulated Other Comprehensive Income (Loss)
(In thousands)
Common Stock
Net Unrealized Gains (Losses) on Investments and Retained Interests
Net Unrealized Gains on Derivative Instruments
Minimum Pension Liability
Subtotal
Retained Earnings
Total Shareholders’ Equity
Balance, January 1, 2003
44,151
25,420
(23,357
Comprehensive income:
Net income for the period
Other comprehensive income, net of tax:
Net realized and unrealized holding losses during the period, net of income tax benefit of $5,516
(8,905
Reclassification for net realized gains recorded in operations, net of income tax expense of $350
(565
Net unrealized gains on derivative instruments, net of reclassification to operations of $9,575 and income tax expense of $1,090
1,814
Other comprehensive income (loss)
(9,470
(7,656
Total comprehensive income
80,048
Cash dividends--common, $.21 per share
(19,031
Stock redeemed and retired
(24,227
Stock options exercised, net of shares tendered and retired
1,871
Balance, March 31, 2003
34,681
27,234
Three Months Ended March 31, 2002
Net Unrealized Gains (Losses) on Derivative Instruments
Balance, January 1, 2002
1,111,214
31,774
28,177
59,951
1,109,704
2,280,869
Net realized and unrealized holding gains during the period, net of income tax expense of $640
1,033
Reclassification for net realized gains recorded in operations, net of income tax expense of $16
(27
Net unrealized losses on derivative instruments, net of reclassification to operations of $13,285 and income tax benefit of $5,734
(9,257
1,006
(8,251
39,011
Cash dividends--common, $.20 per share
(18,401
(25,302
6,823
Balance, March 31, 2002
32,780
18,920
ZIONS BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax
32,369
Depreciation of premises and equipment
14,105
15,133
Amortization
6,990
4,609
Accretion of unearned income and fees, net of related costs
(2,041
651
Loss to minority interest
Equity securities losses (gains), net
5,904
(621
(135
(43
Proceeds from sales of trading account securities
74,535,530
64,820,193
Increase in trading account securities
(74,539,925
(65,001,605
Proceeds from sales of loans held for sale
159,994
116,990
Increase in loans held for sale
(97,596
(25,789
Net losses (gains) on sales of loans, leases and other assets
(10,821
696
Change in accrued income taxes
14,772
36,917
Change in accrued interest receivable
2,146
26,062
Change in other assets
64,931
(16,133
Change in other liabilities
(67,343
(79,743
Change in accrued interest payable
2,369
12,501
Other, net
4,016
1,867
Net cash provided by operating activities
195,413
9,256
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in money market investments
(606,218
(48,511
Proceeds from maturities of investment securities held to maturity
948
Proceeds from sales of investment securities available for sale
2,241,245
5,124,533
Proceeds from maturities of investment securities available for sale
290,674
203,233
Purchases of investment securities available for sale
(2,549,627
(5,176,740
Proceeds from sales of loans and leases
107,996
177,860
Net increase in loans and leases
(272,418
(845,825
Payments on leveraged leases
(5,438
(5,585
Principal collections on leveraged leases
5,438
5,585
Proceeds from sales of premises and equipment
1,129
814
Purchases of premises and equipment
(23,557
(18,672
Proceeds from sales of other assets
19,119
4,167
Net cash paid for net liabilities on branches sold
(19,674
Net cash used in investing activities
(791,657
(597,867
ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
650,553
241,491
Net change in short-term funds borrowed
(54,167
312,494
Proceeds from FHLB advances over one year
1,500
Payments on FHLB advances over one year
(740
(739
Proceeds from issuance of long-term debt
49,902
Payments on long-term debt
(6,981
(169
Proceeds from issuance of common stock
1,549
5,739
Payments to redeem common stock
Dividends paid
Net cash provided by financing activities
596,858
516,613
Net increase (decrease) in cash and due from banks
614
(71,998
Cash and due from banks at beginning of period
978,609
Cash and due from banks at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest
82,733
81,636
26,071
1,785
Loans transferred to other real estate owned
6,285
7,693
8
ZIONS BANCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. 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 months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 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, 2002.
2. STOCK-BASED COMPENSATION
In December 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. This Statement provides guidance to transition from the intrinsic value method of accounting for stock-based compensation under Accounting Principles Board Opinion 25 (“APB 25”), Accounting for Stock Issued to Employees, to the fair value method of accounting, if a company so elects, under SFAS 123,Accounting for Stock-Based Compensation. SFAS 148 also contains new requirements for disclosing the impact of applying the fair value method of SFAS 123.
The Company continues to account for its stock-based compensation plans based on the intrinsic value method under APB 25. Accordingly, no compensation expense has been recorded, as the exercise price of the stock was equal to its quoted market price on the date of grant.
The following disclosure required by SFAS 148 illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share amounts):
Net income, as reported
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
(5,383
(4,403
Pro forma net income
82,321
42,859
Earnings per share:
Basic - as reported
Basic - pro forma
0.91
0.47
Diluted - as reported
Diluted - pro forma
0.46
3. GUARANTEES
In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The disclosure requirements of FIN 45 were effective for the Company as of December 31, 2002 and required disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have any significant effect on the financial position or operations of the Company.
Financial and performance standby letters of credit are guarantees issued by the Company that come under the provisions of FIN 45. Total amounts of these guarantees are as follows (in thousands):
March 31,
Standby letters of credit:
Performance
90,414
80,613
Financial
287,017
203,196
377,431
283,809
10
These letters of credit are conditional commitments issued by the Company generally to guarantee the performance of a customer to a third party. The guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Terms of the guarantees can be as short as 30 days or as long as generally 5 years. The credit risk involved in issuing these guarantees is essentially the same as that involved in extending loan facilities to customers. The Company generally holds marketable securities and cash equivalents as collateral supporting those commitments for which collateral is deemed necessary. At March 31, 2003, the carrying value recorded by the Company as a liability for these guarantees was $2.5 million.
At March 31, 2003, the Company has guaranteed approximately $706 million of debt issued by various subsidiaries.
Zions First National Bank provides a liquidity facility for a fee to a qualified special purpose entity securities conduit (“conduit”). At March 31, 2003, the size of this liquidity facility was $5.1 billion. The conduit purchases U.S. Government and AAA rated securities. These assets are funded through the issuance of commercial paper. Pursuant to the liquidity contract, ZFNB is required to purchase securities from the conduit to provide funds for 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 as specified in governing documents to the conduit. At March 31, 2003, no amounts were outstanding under this liquidity facility and the market value of the conduit’s securities portfolio was approximately $3.9 billion.
4. ACCOUNTING FOR VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 provides guidance on identifying a variable interest entity (“VIE”) and determining when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in a company’s consolidated financial statements. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of FIN 46 are required immediately for companies with an interest in a VIE created after January 31, 2003. A public company with an interest in a VIE created before February 1, 2003 must apply the provisions of FIN 46 as of the beginning of the first interim or annual reporting period beginning after June 15, 2003.
Zions First National Bank holds variable interests in securitization structures as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. All such structures are qualified special purpose entities, which are exempt from the consolidation requirements of FIN 46. The Company is currently assessing the impact that FIN 46 may have on one VIE. The impact, if any, is not expected to be significant.
11
5. 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 operates 124 branches in Utah and 22 in Idaho. California Bank & Trust operates 90 branches in Northern and Southern California. Nevada State Bank operates 63 branches in Nevada. National Bank of Arizona operates 52 branches in Arizona. Vectra Bank Colorado operates 54 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 identified 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. The Company initiated a program in 2002 to allocate income between certain of its banking subsidiaries to better match revenues from hedging strategies to the operating units which gave rise to the exposures being hedged. Allocated income (expense) from this program included in net interest income of the banking subsidiaries for the three months ended March 31, 2003 and 2002, respectively, is as follows: Zions First National Bank – $(7.4) million and $(11.3) million, Nevada State Bank – $0.8 million and $3.4 million, National Bank of Arizona – $1.9 million and $1.8 million, Vectra Bank Colorado – $3.5 million and $5.2 million, and The Commerce Bank of Washington – $1.2 million and $0.9 million. The Company changed the method by which it allocates this hedge program income (expense) effective January 1, 2003; therefore, the amounts allocated to each segment in the quarters ended March 31, 2003 and March 31, 2002 are not directly comparable. Further, the amount of allocated hedge income is expected to decrease in subsequent quarters as the underlying hedges mature and new hedges are being recorded directly at the banking subsidiaries.
12
The following table presents selected operating segment information for the three months ended March 31, 2003 and 2002:
Zions First National Bank and Subsidiaries
California Bank & Trust
Nevada State Bank
National Bank of Arizona
(In millions)
CONDENSED INCOME STATEMENT
84.1
75.9
94.8
92.6
29.6
31.9
30.2
27.2
12.0
11.3
2.2
4.0
2.0
1.0
0.6
72.1
64.6
88.6
27.6
30.9
26.6
Noninterest income
56.7
50.2
18.2
20.9
7.1
6.8
5.5
4.8
Noninterest expense
75.0
72.6
57.9
59.4
21.2
20.1
19.8
16.0
53.8
42.2
52.9
50.1
13.5
17.6
15.9
15.4
Income tax expense (benefit)
17.1
14.1
20.5
4.6
6.0
6.4
6.1
(0.1
36.8
28.1
31.7
8.9
11.6
9.5
9.3
Income before cumulative effect adjustment
Cumulative effect adjustment
Net income (loss)
AVERAGE BALANCE SHEET DATA
Assets
11,453
10,010
8,716
8,346
2,726
2,489
2,783
2,600
Net loans and leases
6,706
6,263
6,117
5,717
1,850
1,556
1,973
1,804
Deposits
7,087
5,289
6,936
6,734
2,388
2,140
2,346
2,180
Shareholder’s equity
679
646
998
1,007
172
162
232
215
Vectra Bank Colorado
The Commerce Bank of Washington
Consolidated Company
24.0
5.7
(2.2
(4.1
266.2
256.2
1.4
0.9
0.3
18.1
22.6
26.3
5.2
248.6
238.1
7.4
0.4
(0.9
3.3
96.3
93.8
25.3
25.2
3.0
2.5
11.7
9.4
213.9
205.2
6.6
8.5
3.1
(14.8
(10.2
131.0
126.7
2.3
2.9
1.1
(6.4
(6.7
46.3
44.0
(2.6
(2.7
4.3
5.6
(5.8
(3.4
87.4
82.8
(3.1
(5.5
(6.5
87.7
79.7
(32.4
(38.9
47.3
2,753
2,588
626
523
(1,743
(877
27,314
25,679
1,868
1,822
312
288
139
89
18,965
17,539
1,903
1,718
434
370
(1,175
(756
19,919
17,675
441
439
46
39
(166
(237
2,402
2,271
13
FINANCIAL HIGHLIGHTS (Unaudited)
(In thousands, except per share and ratio data)
%Change
EARNINGS
Taxable-equivalent net interest income
271,980
261,305
4.09
%
3.90
2.68
(2.99
)%
4.24
Income before income taxes and minority interest
3.43
5.38
1,724.67
5.50
110.30
100.00
85.57
PER COMMON SHARE
Net income (diluted)
90.20
Income from continuing operations (diluted)
7.87
Income (loss) on discontinued operations (diluted)
133.33
Dividends
0.21
0.20
5.00
Book value
26.74
24.82
7.74
SELECTED RATIOS
Return on average assets
1.30
0.75
Return on average common equity
14.81
8.44
Efficiency ratio
58.11
59.48
Net interest margin
4.54
4.70
ZIONS BANCORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (Continued) (Unaudited)
(In thousands, except share and ratio data)
% Change
AVERAGE BALANCES
Total assets
27,313,646
25,679,029
6.37
Securities
3,911,833
4,079,827
(4.12
18,964,880
17,538,937
8.13
730,101
735,194
(0.69
81,731
107,202
(23.76
Total deposits
19,918,741
17,675,111
12.69
22,981
18,546
23.91
Shareholders’ equity
2,402,132
2,270,697
5.79
Weighted average common and common-equivalent shares outstanding
90,647,613
92,813,828
(2.33
AT PERIOD END
9.69
4.58
19,130,918
17,854,168
7.15
Sold loans being serviced
2,401,930
2,526,076
(4.91
6.22
(0.58
(24.10
15.56
12.11
5.67
Common shares outstanding
90,215,449
91,986,436
(1.93
Average equity to average assets
8.79
8.84
Common dividend payout
21.70
38.93
Nonperforming assets
107,381
131,154
(18.13
Loans past due 90 days or more
49,806
37,371
33.27
Nonperforming assets to net loans and leases, other real estate owned and other nonperforming assets at period end
0.56
0.73
15
OPERATING RESULTS
Zions Bancorporation and subsidiaries (“the Company”) achieved net income of $87.7 million, or $0.97 per diluted share for the first quarter of 2003, an increase of 85.6% and 90.2%, respectively, over the $47.3 million, or $0.51 per diluted share, in the first quarter of 2002. Net income for the first quarter of 2002 included an impairment charge of $32.4 million, or $0.35 per diluted share, recognized as a cumulative effect adjustment, from the required adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142. This impairment charge resulted from an adjustment to the carrying value of the Company’s investments in certain e-commerce subsidiaries. Also included in net income for the first quarter of 2002 was a loss from discontinued operations of $3.2 million, or $0.03 per diluted share. For the same comparative periods, income from continuing operations was $87.4 million, or $0.96 per diluted share, an increase of 5.5% and 7.9 %, respectively, over $82.8 million or $0.89 per diluted share.
The improved earnings for the first quarter of 2003 compared to the first quarter of 2002 reflect the results of several actions commenced by Company management during 2002. As discussed in detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, the Company exited and restructured several e-commerce activities during 2002 in light of disappointing results and the difficult e-commerce market environment. The first quarter of 2002 included after-tax losses of approximately $5.6 million, or $0.06 per diluted share, from these e-commerce activities, excluding the impairment charges previously discussed, compared to after-tax losses of approximately $0.4 million for the first quarter of 2003. The Company also increased efforts during 2002 to control expenses and announced its intent to reduce by $50 million the annual run-rate of expenses by mid-2003. Actions taken by management to control expenses include the e-commerce restructuring activities, branch closures, operations consolidation and efforts to improve procurement processes.
The annualized return on average assets was 1.30% in the first quarter of 2003 compared to 0.75% in the first quarter of 2002. For the same comparative periods, the annualized return on average common equity was 14.81% compared to 8.44%. These comparisons reflect the 2002 cumulative effect adjustment and discontinued operations previously discussed. In addition, the efficiency ratio, defined as the percentage of noninterest expenses to the sum of taxable-equivalent net interest income and noninterest income, improved to 58.11% compared to 59.48%.
NET INTEREST INCOME AND INTEREST RATE SPREADS
Net interest income for the first quarter of 2003, adjusted to a fully taxable-equivalent basis, increased 4.1% to $272.0 million compared to $261.3 million for the first quarter of 2002. Net interest margin decreased to 4.54% for the first quarter of 2003, compared to 4.70% for the first quarter of 2002. However, it increased from 4.41% for the fourth quarter of 2002 due to increased interest rate swap income, reductions in deposit rates, a reduction in the average balances of low yielding money market investments, and the effect of the auto loan and credit card securitizations repurchased in December 2002.
The yield on average earning assets decreased 73 basis points during the first quarter of 2003 compared to the first quarter of 2002. The average rate paid this quarter on interest-bearing funds decreased 64 basis points from the first quarter of 2002. The spread on average interest-bearing funds for the first quarter of 2003 was 4.21%, down from 4.30% for the first quarter of 2002, and up from 4.01% for the fourth quarter of 2002.
16
ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (Unaudited)
Average
Balance
Amount of
Interest (1)
Rate
Amount of Interest (1)
Money market investments
1,402,979
1.14
930,734
3,686
1.61
Securities:
Held to maturity
79,143
Available for sale
3,259,889
39,440
4.91
3,349,833
44,385
5.37
651,944
3.46
650,851
3.39
Total securities
45,001
4.67
50,617
5.03
250,388
4.06
214,328
5.18
Net loans and leases (2)
18,714,492
303,728
6.58
17,324,609
313,048
7.33
Total loans and leases
306,233
6.55
315,784
7.30
Total interest-earning assets
24,279,692
355,171
5.93
22,549,498
370,087
6.66
910,849
976,923
(281,264
(264,053
1,592,537
1,574,265
LIABILITIES
Interest-bearing deposits:
Savings and NOW
2,768,128
5,015
2,351,800
6,074
1.05
Money market super NOW
9,044,349
27,614
1.24
7,348,527
32,381
1.79
1,741,121
11,225
2.61
2,024,253
18,484
3.70
1,321,938
9,265
2.84
1,592,229
14,518
189,535
498
1.07
101,258
388
1.55
Total interest-bearing deposits
15,065,071
53,617
1.44
13,418,067
71,845
2.17
Borrowed funds:
481,990
4,654
3.92
392,271
3,702
3.83
Federal funds purchased and security repurchase agreements
2,422,087
6,447
1.08
3,127,698
12,893
1.67
293,259
1,120
357,147
1,886
2.14
FHLB advances and other borrowings:
7,178
34
1.92
394,901
1,809
1.86
240,245
3,151
5.32
227,508
2,832
5.05
1,099,333
14,168
5.23
793,828
13,815
7.06
Total borrowed funds
4,544,092
2.64
5,293,353
36,937
2.83
Total interest-bearing liabilities
19,609,163
1.72
18,711,420
108,782
2.36
Noninterest-bearing deposits
4,853,670
4,257,044
Other liabilities
425,700
421,322
24,888,533
23,389,786
Total liabilities and shareholders’ equity
Spread on average interest-bearing funds
4.21
4.30
Taxable-equivalent net interest income and net yield on interest-earning assets
(1) Taxable-equivalent rates used where applicable.
(2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans.
17
PROVISION FOR LOAN LOSSES
The provision for loan losses was $17.6 million for the first quarter of 2003, compared to $15.8 million for the fourth quarter of 2002, and $18.1 million for the first quarter of 2002. Annualized, the provision is 0.38% of average loans for the first quarter of 2003, 0.34% for the fourth quarter of 2002, and 0.42% for the first quarter of 2002. The increased provision for the first quarter of 2003 compared to the fourth quarter of 2002 reflects management’s evaluation of its various portfolios, higher net loan losses, statistical trends and other economic factors, and its desire to maintain a strong coverage of nonperforming assets in a continued uncertain economic environment in the markets in which the Company operates. Further discussion is included in the Risk Elements and Allowance for Loan Losses sections following.
NONINTEREST INCOME
Noninterest income for the first quarter of 2003 of $96.3 million increased 2.7% from $93.8 million for the first quarter of 2002. Comparing the significant segments of the change, service charges on deposit accounts increased 10.5%, loan sales and servicing income increased 166.6%, other service charges, commissions and fees increased 4.8%, income from securities conduit increased 65.9%, dividends and other investment income decreased 26.9%, market making, trading and nonhedge derivative income decreased 36.0%, equity securities gains (losses) decreased 1,050.7%, and other noninterest income decreased 36.9%.
The increase in service charges on deposit accounts resulted mainly from increased internal core deposit growth. During the first quarter of 2002, the Company restructured certain derivatives related to loans. The restructuring resulted in a $13.6 million decrease in loan sales and servicing income and a corresponding increase in nonhedge derivative income. Without this transaction, loan sales and servicing income would have been approximately $20.5 million in the first quarter of 2002, compared to $18.5 million in the first quarter of 2003. In December 2002, the Company repurchased revolving auto loan and credit card securitizations resulting in a reclassification of income from loan sales and servicing income to interest income. Market making, trading and nonhedge derivative income was $9.9 million in the first quarter of 2003 compared to $1.8 million in the first quarter of 2002, excluding the $13.6 million adjustment. Trading income for 2003 was $6.2 million compared to $4.0 million for 2002 and nonhedge derivative income was $3.7 million compared to a loss of $2.2 million for 2002, excluding the $13.6 million adjustment. The increase in trading income reflects increased revenues from the Company’s electronic corporate bond trading business. Nonhedge derivative income for 2003 included fair value increases of $2.1 million compared to a decrease in the fair value of nonhedge derivatives of $6.7 million in 2002.
The increase in income from securities conduit resulted from the increased amount of securities in the conduit’s portfolio, which resulted in increased fees from providing liquidity, an interest rate agreement, and administrative services for the conduit. Dividends and other investment income consist of income from the Company’s bank-owned life insurance and dividends and equity in earnings from investments in unconsolidated companies. The decrease in dividends and other investment income results mainly from a $1.4 million decrease in dividend income from Federal Home Loan Bank (“FHLB”) investments resulting from decreased investments in FHLB stock and a $1.4 million decrease in equity in earning of unconsolidated companies. The decrease in equity securities gains (losses) results from $6.7 million of losses from investments made by venture capital funds (partially offset by $0.8 million of gains realized on the sale of marketable equity securities) compared to venture capital gains of $0.6 million in 2002. Net of minority interest and income taxes, the results of the venture capital funds reduced net income by approximately $3.0 million or $.03 per share in the first quarter of 2003.
The decrease in other income is explained principally by a pretax gain in 2002 from the sales of three
18
California branches for approximately $3.2 million, net of nondeductible goodwill write downs allocated to the branches sold. The after-tax gain from the sales was approximately $1.4 million.
NONINTEREST EXPENSE
Noninterest expense for the first quarter of 2003 of $214.0 million increased $8.7 million or 4.2% over $205.3 million for the first quarter of 2002. Comparing significant components of this change, salaries and employee benefits increased $9.7 million or 8.5%, legal and professional fees decreased 12.1%, postage and supplies decreased 7.0%, advertising decreased 29.7%, amortization of core deposit and other intangibles increased 6.5%, and the total of all other noninterest expenses increased 2.4%.
The increase in salaries and employee benefits includes an increase in the first quarter of 2003 of $3.6 million in employee health insurance costs and an increase of $3.0 million in retirement plan expenses. The decrease in legal and professional fees, postage and supplies, advertising, and the modest increase in other expense categories reflect the Company’s cost containment measures previously discussed.
At March 31, 2003, the Company had 7,914 full-time equivalent employees, 407 branches, and 579 ATMs, compared to 8,255 full-time equivalent employees, 408 branches, and 587 ATMs at March 31, 2002.
INCOME TAXES
The Company’s income taxes on continuing operations increased 5.4% to $46.4 million for the first quarter of 2003 compared to $44.0 million for the first quarter of 2002. The Company’s effective income tax rate was 35.4% for the first quarter of 2003 compared to 34.7% for the first quarter of 2002.
DISCONTINUED OPERATIONS
During the third quarter of 2002, the Company decided to discontinue the operations of certain e-commerce subsidiaries. The Company determined that its plan to offer all or part of these subsidiaries for sale met the held for sale and discontinued operations criteria of SFAS 144. The results of operations for the first quarter of 2002 were reclassified to reflect the discontinued operations of these subsidiaries.
The improvement in income (loss) on discontinued operations for the first quarter of 2003 compared to 2002 results mainly from the sale of one of the subsidiaries in December 2002 and significantly curtailed operations of the remaining subsidiary.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS
Average earning assets increased 7.7% to $24,280 million for the three months ended March 31, 2003 compared to $22,549 million for the three months ended March 31, 2002. Earning assets comprised 88.9% of total average assets for the first three months of 2003, compared with 87.8% for the first three months of 2002.
Average money market investments, consisting of interest-bearing deposits, federal funds sold and security resell agreements, increased 50.7% to $1,403 million for the first three months of 2003 compared to $931 million for the first three months of 2002. This increase resulted from a significant acceleration in the rate of deposit growth, particularly in the second half of 2002, relative to loan growth.
19
Average securities decreased 4.1% to $3,912 million for the first three months of 2003 compared to $4,080 million for the first three months of 2002. Average investment portfolio securities decreased 4.9% and average trading securities increased 0.2%.
Average net loans and leases increased 8.1% to $18,965 million for the first three months of 2003 compared to $17,539 million for the first three months of 2002, representing 78.1% of earning assets in the first three months of 2003 compared to 77.8% in the first three months of 2002. Average net loans and leases were 95.2% of average total deposits for the first three months of 2003 compared to 99.2% for the first three months of 2002.
INVESTMENT SECURITIES
The following table presents the Company’s held-to-maturity and available-for-sale investment securities:
Amortized Cost
Estimated Market Value
HELD TO MATURITY
Mortgage-backed securities
79
80
AVAILABLE FOR SALE
U.S. Treasury securities
36
38
44
47
56
57
U.S. government agencies and corporations:
Small Business Administration loan-backed securities
757
760
752
756
706
707
Other agency securities
341
342
299
302
709
713
States and political subdivisions
666
670
640
645
530
537
Mortgage/asset-backed and other debt securities
1,306
1,326
1,187
1,208
851
856
3,106
3,136
2,922
2,958
2,852
2,870
Equity securities:
Mutual funds
168
317
321
234
238
Stock
20
25
33
183
192
332
346
250
271
3,289
3,328
3,254
3,304
3,102
3,141
Total
3,181
3,221
LOANS
The Company has structured its organization to separate the lending function from the credit administration 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. The commercial real estate loan portfolio is also well diversified by property type and collateral location.
The table below sets forth the amount of loans outstanding by type:
227
289
207
Commercial lending:
Commercial and industrial
4,052
4,124
3,893
Leasing
372
384
408
Owner occupied
3,182
3,018
2,520
Total commercial lending
7,606
7,526
6,821
Commercial real estate:
Construction
2,991
2,947
2,939
Term
3,293
3,175
3,227
Total commercial real estate
6,284
6,122
6,166
Consumer:
Home equity credit line
703
454
1-4 family residential
3,191
3,209
3,374
Bankcard and other revolving plans (1)
182
205
116
Other (2)
934
1,000
726
Total consumer
5,010
5,065
4,670
Foreign loans
24
Other receivables
75
126
69
Total loans
19,222
19,133
17,957
The increase in Bankcard and other revolving plans from 03/31/02 to 12/31/02 includes $68.5 million in credit card receivables repurchased from securitizations in December 2002.
(2)
The increase in Other consumer loans from 03/31/02 to 12/31/02 includes $361.7 million in auto loans repurchased from securitizations in December 2002.
Loan growth for the quarter was modest reflecting the soft economy and the Company’s caution regarding aggressive loan growth in the current economic environment. On-balance-sheet net loans and leases at March 31, 2003 were $19,131 million, an increase of 7.2% from March 31, 2002 and an annualized increase of 1.9% from December 31, 2002. On balance sheet and sold loans being serviced were $21,533 million at March 31, 2003, an increase of 5.7% from March 31, 2002 and an annualized increase of 0.3% from balances reported at December 31, 2002.
On March 31, 2003, long-term conforming first mortgage real estate loans serviced for others totaled $375 million, and consumer and other loan securitizations, which include loans sold under revolving securitization structures, totaled $2,402 million. During the first three months of 2003, the Company sold $160 million of loans classified in held for sale, and securitized and sold home equity credit line and other loans totaling $98 million. During the first three months of 2003, total loans sold were $258 million compared to total loans sold of $296 million during the first three months of 2002.
As of March 31, 2003, the following table shows that the Company had residual interests of $242 million recorded on its balance sheet related to the $2,402 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 $144 million representing the Company’s junior position to other investors in the securities. The capitalized residual cash flows (sometimes called
21
“excess servicing”) of $98 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.
Residual interests on balance sheet at March 31, 2003
Sales for three months ended March 31, 2003
Outstanding balance at March 31, 2003
Subordinated retained interests
Capitalized residual cash flows
Home equity credit lines
78
447
Nonconforming residential real estate loans
55
1
Small business loans
1,304
130
82
212
SBA 7(a) loans
187
Farmer Mac
409
98
144
242
RISK ELEMENTS
The following table sets forth the Company’s nonperforming assets:
Nonaccrual loans
87
Restructured loans
Other real estate owned and other nonperforming assets
32
107
131
% of net loans and leases*, other real estate owned and other nonperforming assets
0.61
Accruing loans past due 90 days or more
50
37
% of net loans and leases*
0.26
*Includes loans held for sale
For the first quarter of 2003, the Company experienced improving credit quality performance in a weak economic environment in certain of the Company’s markets. Other real estate owned and other nonperforming assets decreased from December 31, 2002 due primarily to the sale of an office building in Seattle and a retail location in Arizona. The increase in accruing loans past due 90 days or more was due primarily to two credits; subsequent to March 31, 2003, one credit has been repaid and the other has been placed on nonaccrual status.
The Company’s total recorded investment in impaired loans included in nonaccrual loans and leases amounted to $46 million on March 31, 2003 compared to $44 million on December 31, 2002 and $69 million on March 31, 2002. Loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. 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 recognized by creating or adjusting an existing allocation of the allowance for loan losses. Included in the allowance for
22
loan losses on March 31, 2003, December 31, 2002, and March 31, 2002, is a required allowance of $4 million, $7 million and $9 million, respectively, on $14 million, $20 million and $28 million, respectively, of the recorded investment in impaired loans.
ALLOWANCE FOR LOAN LOSSES
The following table shows the changes in the allowance for loan losses and a summary of loan loss experience:
Twelve Months Ended December 31, 2002
Loans* and leases outstanding (net of unearned income) at end of period
19,131
19,040
17,854
Average loans* and leases outstanding (net of unearned income)
18,114
Allowance for loan losses:
Balance at beginning of year
280
260
Allowance of companies acquired
Allowance associated with repurchased revolving securitized loans
Provision charged against earnings
72
Loans and leases charged-off:
Commercial lending
(12
(54
(13
Commercial real estate
(10
(2
Consumer
(8
(20
(4
(84
(19
Recoveries:
Net loan and lease charge-offs
(17
(63
(14
Balance at end of period
281
264
Ratio of annualized net charge-offs to average loans and leases
0.35
0.33
Ratio of allowance for loan losses to net loans and leases at end of period
1.47
1.48
Ratio of allowance for loan losses to nonperforming loans
314.7
332.4
224.5
Ratio of allowance for loans losses to nonaccrual loans and accruing loans past due 90 days or more
205.0
234.1
171.9
Net loan and lease charge-offs, along with their annualized ratios to average loans and leases, are shown in the above table for the periods presented. The same respective amounts for the fourth quarter of 2002 were $12 million and 0.27%. Included in charge-offs for the first quarter of 2003 were approximately $2.4 million related to the auto loan and credit card securitizations repurchased in December 2002.
23
At March 31, 2003, the allowance for loan losses included 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 March 31, 2003, December 31, 2002, and March 31, 2002 totaled $7,922 million, $7,915 million, and $7,317 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.
DEPOSITS
Deposit growth for the first quarter of 2003 continued to be very strong. Management continues to believe that part of the growth reflects an increase in market share; however, part of this growth may be a result of investors reducing their exposure to volatile market investments. Deposits increased 15.6% over balances reported one year ago to $20,801 million, and increased 13.3% annualized from balances reported at December 31, 2002. Core deposits, which exclude time deposits $100,000 and over, increased 18.4% from March 31, 2002 and at an annualized rate of 16.2% for the quarter. Subsequent to March 31, 2003, one large governmental deposit of approximately $350 million matured and was withdrawn, as expected, partially reversing some recent deposit growth.
Average total deposits of $19,919 million for the first three months of 2003 increased 12.7% compared to $17,675 million for the first three months of 2002, with average demand deposits increasing 14.0%. Average savings and NOW deposits increased 17.7% and average money market and super NOW deposits increased 23.1% during the first three months of 2003 compared to the same period in 2002. Average time deposits under $100,000 decreased 14.0% and time deposits $100,000 and over decreased 17.0% for the first three months of 2003 compared to the same period in 2002. Average foreign deposits increased 87.2% for these same periods.
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.
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 92.8% of total deposits on March 31, 2003, as compared to 92.1% on December 31, 2002 and 90.8% on March 31, 2002.
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 provides the Company additional flexibility in meeting funding needs.
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, investment income, proportionate shares of current income taxes, management and other fees, unaffiliated bank lines, and debt issuance.
As discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, the Company filed a prospectus supplement with the Securities and Exchange Commission during the third quarter of 2002 for the issuance of up to $340 million of Senior Medium-Term Notes, Series A and Subordinated Medium-Term Notes, Series B. As of March 31, 2003, the Company had issued $96 million of Senior Medium-Term Notes, compared to $46 million outstanding at December 31, 2002.
At March 31, 2003, $203.4 million of dividend capacity was available from subsidiaries to pay to the parent without having to obtain regulatory approval. During the three months ended March 31, 2003, dividends from subsidiaries were $55.5 million. The parent also has a program to issue short-term commercial paper. At March 31, 2003, outstanding commercial paper was $276.6 million. Also at March 31, 2003, the parent had a revolving credit facility with a bank totaling $40 million and a margin borrowing facility totaling $11 million. No amounts were outstanding on either of these facilities at March 31, 2003.
During the first quarter of 2003, the Company repurchased 578,480 shares of common stock at a cost of $24.2 million, or an average price of $41.88 per share. On April 25, 2003, the board of directors authorized the Company to repurchase $50 million of Company common stock, which superseded all previous buyback authorizations. During the first quarter of 2002, the Company repurchased 486,488 shares of common stock at a cost of $25.3 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 interest rate swap 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 March 31, 2003 was $2,413 million, an increase of 1.6% over the $2,374 million on December 31, 2002, and an increase of 5.7% over the $2,283 million on March 31, 2002. The Company’s capital ratios are as follows as of the dates indicated:
Tangible common equity ratio
6.07
6.06
6.03
Average common equity to average assets (three months ended)
8.80
Risk-based capital ratios:
Tier 1 leverage
7.61
7.56
6.56
Tier 1 risk-based capital
9.33
9.26
8.31
Total risk-based capital
12.96
12.94
12.22
Dividends declared of $.21 per common share for the first quarter of 2003 were increased from $.20 per common share declared for each quarter during 2002. The common cash dividend payout of net income for the first quarter of 2003 was 21.7% compared to 28.6% for the year 2002 and 38.9% for the first quarter of 2002.
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, 2002.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the most significant market risk regularly undertaken by the Company, and is closely monitored as previously discussed. 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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in various legal proceedings arising in the normal course of business. The Company does not believe that the outcome of any such proceedings will have a material adverse effect on its consolidated financial position, operations, or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a)
Exhibits
Exhibit Number
Description
Restated Articles of Incorporation of Zions Bancorporation dated November 8, 1993, incorporated by reference to Exhibit 3.1 of Form S-4 filed on November 22, 1993
*
3.2
Articles of Amendment to the Restated Articles of Incorporation of Zions Bancorporation dated April 30, 1997, incorporated by reference to Exhibit 3.2 of Form 10-K for the year ended December 31, 2002
Articles of Amendment to the Restated Articles of Incorporation of Zions Bancorporation dated April 24, 1998, incorporated by reference to Exhibit 3 of Form 10-Q for the quarter ended June 30, 1998
3.4
Articles of Amendment to Restated Articles of Incorporation of Zions Bancorporation dated April 25, 2001, incorporated by reference to Exhibit 3.6 of Form S-4 filed July 13, 2001
3.5
Restated Bylaws of Zions Bancorporation dated January 19, 2001, incorporated by reference to Exhibit 3.4 of Form S-4 filed February 5, 2001
10.1
Zions Bancorporation PAYSHELTER 401(k) and Employee Stock Ownership Plan, Established and Restated Effective January 1, 2003 (filed herewith)
10.2
Zions Bancorporation 2003 - 2005 Value Sharing Plan (filed herewith)
10.3
Form of Zions Bancorporation 2003 - 2005 Value Sharing Plan, Subsidiary Banks (filed herewith)
10.4
Zions Bancorporation 1998 Non-Qualified Stock Option and Incentive Plan (as amended April 25, 2003) (filed herewith)
Incorporated by reference
b)
Reports on Form 8-K
Zions Bancorporation filed the following reports on Form 8-K during the quarter ended March 31, 2003:
Form 8-K filed on January 23, 2003 (Items 7 and 9) – Copy of Press Release issued January 23, 2003 announcing 2002 fourth quarter earnings.
Form 8-K filed on March 20, 2003 (Items 7 and 9) – Copies of certifications by the Chief Executive Officer, Harris H. Simmons, and Chief Financial Officer, Doyle L. Arnold, to the Securities and Exchange Commission as required by 18 U.S.C. Section 1350 and adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
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S I G N A T U R E S
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.
/s/ HARRIS H. SIMMONS
Harris H. Simmons, Chairman, President and Chief Executive Officer
/s/ DOYLE L. ARNOLD
Doyle L. Arnold, Executive Vice President and Chief Financial Officer
Dated May 14, 2003
C E R T I F I C A T I O NPrincipal Executive Officer
I, Harris H. Simmons, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Zions Bancorporation;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
C E R T I F I C A T I O NPrincipal Financial Officer
I, Doyle L. Arnold, certify that:
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