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 June 30, 2003
OR
¨
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 August 5, 2003
89,734,812 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
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
15
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
30
ITEM 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
ITEM 6.
Exhibits and Reports on Form 8-K
31
SIGNATURES
33
2
FINANCIAL STATEMENTS (Unaudited)
ZIONS BANCORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, 2003
December 31, 2002
June 30, 2002
(Unaudited)
ASSETS
Cash and due from banks
$
1,225,316
1,087,296
1,024,778
Money market investments:
Interest-bearing deposits
2,369
1,690
1,773
Federal funds sold
61,482
96,077
21,791
Security resell agreements
512,532
444,995
295,792
Investment securities:
Held to maturity, at cost (approximate market value $0, $0 and $108,859)
—
107,748
Available for sale, at market
3,843,532
3,304,341
3,194,125
Trading account, at market (includes $234,162, $110,886, and $236,344 transferred as collateral under repurchase agreements)
384,728
331,610
307,543
4,228,260
3,635,951
3,609,416
Loans:
Loans held for sale
236,298
289,499
165,375
Loans, leases and other receivables
19,297,984
18,843,006
18,386,461
19,534,282
19,132,505
18,551,836
Less:
Unearned income and fees, net of related costs
94,460
92,662
99,282
Allowance for loan losses
281,486
279,593
264,432
Net loans
19,158,336
18,760,250
18,188,122
Other noninterest bearing investments
599,710
601,641
697,907
Premises and equipment, net
406,952
393,630
366,169
Goodwill
730,069
730,031
736,524
Core deposit and other intangibles
75,817
82,920
100,003
Other real estate owned
18,005
31,608
13,814
Other assets
786,780
699,600
678,625
27,805,628
26,565,689
25,734,714
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand
5,715,616
5,117,458
4,667,661
Interest-bearing:
Savings and money market
11,810,192
11,654,258
10,657,877
Time under $100,000
1,629,569
1,766,844
1,865,214
Time $100,000 and over
1,303,103
1,402,189
1,505,089
Foreign
166,690
191,231
92,588
20,625,170
20,131,980
18,788,429
Securities sold, not yet purchased
280,650
203,838
195,296
Federal funds purchased
1,052,591
819,807
935,959
Security repurchase agreements
874,949
861,177
889,520
Accrued liabilities
539,360
535,044
449,812
Commercial paper
290,907
291,566
338,986
Federal Home Loan Bank advances and other borrowings:
One year or less
267,768
15,554
772,422
Over one year
235,768
240,698
240,530
Long-term debt
1,136,049
1,069,505
763,700
Total liabilities
25,303,212
24,169,169
23,374,654
Minority interest
22,995
22,677
22,782
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 89,724,846, 90,717,692 and 91,701,887 shares
987,021
1,034,888
1,072,005
Retained earnings
1,434,915
1,292,741
1,202,290
Accumulated other comprehensive income
60,416
46,214
62,983
Shares held in trust for deferred compensation, at cost
(2,931
)
Total shareholders’ equity
2,479,421
2,373,843
2,337,278
ZIONS BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Three Months Ended June 30,
Six Months Ended June 30,
2003
2002
Interest income:
Interest and fees on loans
297,866
310,002
595,215
615,707
Interest on loans held for sale
2,225
2,191
4,730
4,927
Lease financing
4,479
5,134
9,013
10,802
Interest on money market investments
3,611
4,217
7,548
7,896
Interest on securities:
Held to maturity – taxable
1,494
2,292
Available for sale – taxable
31,703
33,500
59,923
68,128
Available for sale - nontaxable
7,459
6,665
14,752
13,007
Trading account
6,194
5,479
11,755
10,913
Total interest income
353,537
368,682
702,936
733,672
Interest expense:
Interest on savings and money market deposits
28,531
43,028
61,160
81,483
Interest on time and foreign deposits
18,746
28,862
39,734
62,252
Interest on borrowed funds
32,307
37,748
61,881
74,683
Total interest expense
79,584
109,638
162,775
218,418
Net interest income
273,953
259,044
540,161
515,254
Provision for loan losses
18,150
15,705
35,700
33,795
Net interest income after provision for loan losses
255,803
243,339
504,461
481,459
Noninterest income:
Service charges and fees on deposit accounts
32,107
29,366
63,519
57,786
Loan sales and servicing income
21,924
19,348
40,391
26,274
Other service charges, commissions and fees
21,654
20,723
43,387
40,360
Trust income
5,331
5,165
10,459
9,578
Income from securities conduit
7,065
4,523
13,931
8,662
Dividends and other investment income
7,831
8,023
13,828
16,230
Market making, trading and nonhedge derivative income
7,821
8,466
17,693
23,901
Equity securities gains (losses), net
(6,460
563
(12,364
1,184
Fixed income securities gains, net
219
17
354
60
Other
3,313
5,411
5,946
11,396
Total noninterest income
100,805
101,605
197,144
195,431
Noninterest expense:
Salaries and employee benefits
122,985
119,845
246,571
233,730
Occupancy, net
16,664
17,397
33,511
34,046
Furniture and equipment
16,793
15,925
32,576
32,153
Legal and professional services
6,111
6,642
11,033
12,244
Postage and supplies
6,646
6,920
13,311
14,084
Advertising
4,941
6,639
8,921
12,302
Restructuring charges
823
Amortization of core deposit and other intangibles
3,552
3,337
7,103
6,672
37,888
39,003
76,518
75,731
Total noninterest expense
216,403
215,708
430,367
420,962
Income from continuing operations before income taxes and minority interest
140,205
129,236
271,238
255,928
Income taxes
48,956
44,947
95,350
88,972
(1,159
(575
(3,896
(725
Income from continuing operations
92,408
84,864
179,784
167,681
ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited)
Discontinued operations:
Income (loss) from operations of discontinued subsidiaries
(4,750
585
(9,926
Income taxes (benefit)
16
(1,961
240
(3,951
Income (loss) on discontinued operations
(2,789
345
(5,975
Income before cumulative effect of change in accounting principle
92,425
82,075
180,129
161,706
Cumulative effect of change in accounting principle, net of tax (1)
(32,369
Net income
129,337
Weighted average shares outstanding during the period:
Basic shares
90,008
91,779
90,267
91,916
Diluted shares
90,586
92,629
90,607
92,658
Net income per common share:
Basic:
1.03
0.92
1.99
1.82
(0.03
0.01
(0.06
Cumulative effect of change in accounting principle
(0.35
0.89
2.00
1.41
Diluted:
1.02
1.98
1.81
1.40
(1)
For the six months ended June 30, 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 (Unaudited)
Six Months Ended June 30, 2003
Accumulated Other Comprehensive Income (Loss)
(In thousands)
Common Stock
Retained Earnings
Net Unrealized Gains (Losses) on Investments and Retained Interests
Net Unrealized Gains on Derivative Instruments
Minimum Pension Liability
Subtotal
Shares Held in Trust for Deferred Compensation
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 gains during the period, net of income tax expense of $7,053
11,386
Reclassification for net realized gains recorded in operations, net of income tax expense of $2,960
(4,779
Net unrealized gains on derivative instruments, net of reclassification to operations of $19,227 and income tax expense of $4,648
7,595
Other comprehensive income
6,607
14,202
Total comprehensive income
194,331
Cost of shares held in trust for deferred compensation
Cash dividends–common, $.42 per share
(37,955
Stock redeemed and retired
(56,458
Stock options exercised, net of shares tendered and retired
8,591
Balance, June 30, 2003
50,758
33,015
Six Months Ended June 30, 2002
Net Unrealized Gains (Losses) on Derivative Instruments
Balance, January 1, 2002
1,111,214
1,109,704
31,774
28,177
59,951
2,280,869
Net realized and unrealized holding gains during the period, net of income tax expense of $7,705
12,439
Reclassification for net realized gains recorded in operations, net of income tax expense of $23
(37
Net unrealized losses on derivative instruments, net of reclassification to operations of $19,992 and income tax benefit of $5,804
(9,370
Other comprehensive income (loss)
12,402
3,032
132,369
Cash dividends–common, $.40 per share
(36,751
(56,461
17,252
Balance, June 30, 2002
44,176
18,807
Total comprehensive income for the three months ended June 30, 2003 and 2002 was $114,283 and $93,358, respectively.
ZIONS BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Cumulative effect of change in accounting principle, net of tax
32,369
Depreciation of premises and equipment
14,381
14,994
28,486
30,127
Amortization
10,045
11,437
17,035
21,380
Loss to minority interest
Equity securities losses (gains), net
6,460
(563
12,364
(1,184
(219
(17
(354
(60
Proceeds from sales of trading account securities
68,787,574
56,085,237
143,323,104
120,905,430
Increase in trading account securities
(68,836,297
(56,108,472
(143,376,222
(121,110,077
Proceeds from sales of loans held for sale
178,404
141,458
338,398
258,448
Increase in loans held for sale
(187,601
(100,075
(285,197
(125,864
Net gains on sales of loans, leases and other assets
(13,415
(13,431
(24,236
(12,735
Change in accrued income taxes
(41,888
(31,100
(27,116
5,817
Change in accrued interest receivable
(1,769
(10,331
377
15,731
Change in other assets
(135,131
(126,011
(70,200
(142,144
Change in other liabilities
71,097
90,939
3,754
11,196
Change in accrued interest payable
(5,612
(8,478
(3,243
4,023
Other, net
4,951
(5,018
6,926
(2,500
Net cash provided by (used in) operating activities
(39,604
37,774
155,809
52,364
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in money market investments
571,626
11,735
(34,592
(36,776
Proceeds from maturities of investment securities held to maturity
233
1,209
Purchases of investment securities held to maturity
(29,400
Proceeds from sales of investment securities available for sale
1,357,261
1,845,015
3,598,506
6,969,548
Proceeds from maturities of investment securities available for sale
353,134
774,309
643,808
972,180
Purchases of investment securities available for sale
(2,215,602
(2,655,852
(4,765,229
(7,832,592
Proceeds from sales of loans and leases
156,384
297,062
264,380
474,922
Net increase in loans and leases
(472,118
(946,394
(744,536
(1,792,219
Payments on leveraged leases
(5,438
(5,585
Principal collections on leveraged leases
5,438
5,585
Proceeds from sales of premises and equipment
58
4,526
1,187
5,340
Purchases of premises and equipment
(19,637
(14,939
(43,194
(33,611
Proceeds from sales of other assets
7,443
8,547
26,562
12,714
Net cash paid for net liabilities on branches sold
(48,678
(68,352
Net cash used in investing activities
(261,451
(753,836
(1,053,108
(1,357,037
ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits
(157,869
788,087
492,684
1,029,578
Net change in short-term funds borrowed
629,090
104,431
574,923
416,925
Proceeds from FHLB advances and other borrowings over one year
1,500
Payments on FHLB advances and other borrowings over one year
(690
(689
(1,430
(1,428
Proceeds from issuance of long-term debt
123,028
172,930
Payments on long-term debt
(110,103
(17,473
(117,084
(17,642
Proceeds from issuance of common stock
6,160
9,382
7,709
15,121
Payments to redeem common stock
(32,231
(31,159
Dividends paid
(18,924
(18,350
Net cash provided by financing activities
438,461
834,229
1,035,319
1,350,842
Net increase in cash and due from banks
137,406
118,167
138,020
46,169
Cash and due from banks at beginning of period
1,087,910
906,611
978,609
Cash and due from banks at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest
83,476
131,673
166,209
213,309
103,766
80,175
129,837
81,960
Loans transferred to other real estate owned
9,006
8,851
15,291
16,544
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- and six-month periods ended June 30, 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. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149, Amendment of FASB Statement No. 133 on Derivatives and Hedging Transactions. SFAS 149 amends and clarifies the accounting for derivatives, including certain derivative instruments embedded in other contracts, and for certain hedging activities entered into after June 30, 2003. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 affects the issuer’s accounting for certain freestanding financial instruments that have both debt and equity characteristics. Neither of these statements is expected to have any material impact on the Company’s financial position or results of operations.
3. STOCK-BASED COMPENSATION
The following disclosures are required by SFAS 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 under SFAS 123, Accounting for Stock-Based Compensation. The Company continues to account for its stock-based compensation plans under APB 25 and has not recorded any compensation expense, as the exercise price of the stock was equal to its quoted market price on the date of grant.
As also required by SFAS 148 for interim financial statements, the following discloses the impact on net income and net income per common share if the Company had applied the 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
(4,264
(5,396
(9,647
(9,799
Pro forma net income
88,161
76,679
170,482
119,538
Basic - as reported
Basic - pro forma
0.98
0.84
1.89
1.30
Diluted - as reported
Diluted - pro forma
0.97
0.83
1.88
1.29
4. GUARANTEES
The following are the financial and performance letters of credit issued by the Company as guarantees that come under the provisions of Interpretation No. 45 ("FIN 45") of the FASB, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, (in thousands):
June 30,
Standby letters of credit:
Performance
81,585
83,619
Financial
270,344
223,834
351,929
307,453
The Company’s Annual Report on Form 10-K for the year ended December 31, 2002 contains further information on the nature of these letters of credit along with their terms and collateral requirements. The adoption of FIN 45 was not material to the Company's financial position or results of operations.
At June 30, 2003, the Company has guaranteed approximately $676 million of debt issued by various subsidiaries.
Zions First National Bank (“ZFNB”) provides a liquidity facility (“Liquidity Facility”) for a fee to a qualifying special-purpose entity securities conduit (“Conduit”). The Conduit purchases U.S. Government and AAA-rated securities with funds from the issuance of commercial paper. Pursuant to the Liquidity Facility 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 any given time, the maximum commitment of ZFNB is the lesser of the size of the Liquidity Facility commitment or the market value of the Conduit’s securities portfolio. At June 30, 2003, the size of the Liquidity Facility commitment was up to $5.1 billion and the market value of the Conduit’s securities portfolio was approximately $4.0 billion. No amounts were outstanding under the Liquidity Facility at June 30, 2003.
In June 2003, the FASB issued for public comment an Exposure Draft, Qualifying Special-Purpose Entities and Isolation of Transferred Assets, that would amend SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This new guidance proposes to change the requirements that an entity must meet to be considered a qualifying special-purpose entity. If this guidance were adopted as presently proposed, the Company would be required to consolidate the Conduit discussed above in its financial statements. Management is looking at ways to restructure the Conduit to maintain its status as a qualifying special-purpose entity. Any impact on operations as a result of the restructuring is not expected to be material.
5. 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
10
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 qualifying special-purpose entities, which are exempt from the consolidation requirements of FIN 46. As noted in the Quarterly Report on Form 10-Q for the first quarter of 2003, the Company was assessing the impact of FIN 46 on one VIE and has now determined that the VIE is not required to be consolidated in the Company’s financial statements.
6. DEFERRED COMPENSATION
During the second quarter of 2003, the Company began accounting for a new and a previously formed deferred compensation rabbi trust established for certain employees and directors in accordance with Emerging Issues Task Force Issue No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. Amounts deferred are held in rabbi trusts and invested in diversified assets or shares of the Company’s stock, subject to plan limitations. The Company consolidates the assets and obligations of the trusts and accounts for amounts invested in the Company’s stock at cost in shareholders’ equity in a manner similar to the accounting for treasury stock. At June 30, 2003, other invested assets of the trusts amounted to approximately $19.6 million and are included in other assets. The deferred compensation obligations amounted to approximately $22.5 million and are included in accrued liabilities. There is no effect on net income. Prior to this quarter, the previously existing rabbi trust was not consolidated as the deferred amounts were not considered material.
7. DEBT FINANCING
In June 2003, the Company’s board of directors passed a resolution allowing the issuance of up to $1 billion of new senior and/or subordinated debt, which is to be registered with the Securities and Exchange Commission. Proceeds of this debt will be used to refinance certain currently outstanding debt and for other general corporate purposes.
8. SUBSEQUENT EVENTS
On July 1, 2003, the Company auctioned its holdings of 5,941,080 shares of ICAP plc (formerly known as Garban-Intercapital plc) for approximately $107 million, resulting in a pretax gain of approximately $68 million to be recognized in the third quarter. The Company previously accounted for its investment in ICAP under the equity method.
On July 15, 2003, the board of directors declared a regular quarterly dividend of $.30 per common share beginning with the third quarter of 2003, an increase of 43% over the previous $.21 dividend per common share.
11
9. 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 125 branches in Utah and 22 in Idaho. California Bank & Trust operates 91 branches in Northern and Southern California. Nevada State Bank operates 64 branches in Nevada. National Bank of Arizona operates 53 branches in Arizona. Vectra Bank Colorado operates 52 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 is as follows (in millions):
Zions First National Bank
(6.1
(13.3
(13.6
(24.6
Nevada State Bank
0.6
2.8
1.4
6.2
National Bank of Arizona
1.6
3.3
3.5
5.1
Vectra Bank Colorado
2.9
6.0
6.4
11.2
The Commerce Bank of Washington
1.0
1.2
2.3
2.1
Effective January 1, 2003, the Company changed the method by which it allocates this hedge program income (expense). Therefore, the amounts allocated to each segment for the periods shown 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 June 30, 2003 and 2002:
(In millions)
Zions First National Bank and Subsidiaries
California Bank & Trust
CONDENSED INCOME STATEMENT
84.3
70.7
96.1
31.3
31.0
31.7
29.8
11.5
8.0
4.1
4.5
1.1
0.4
72.8
62.7
92.0
91.6
30.2
29.4
Noninterest income
49.7
57.1
19.5
19.7
9.1
7.3
5.3
Noninterest expense
78.5
77.9
57.4
58.7
21.1
21.0
19.2
17.3
44.0
41.9
54.1
52.6
18.2
16.1
18.7
17.4
Income tax expense (benefit)
13.6
14.0
21.6
21.2
5.4
6.9
(0.2
30.6
28.1
32.5
31.4
12.0
10.7
11.4
10.5
Income before cumulative effect adjustment
Cumulative effect adjustment
Net income (loss)
AVERAGE BALANCE SHEET DATA
Assets
11,200
10,294
8,688
8,624
2,812
2,565
2,876
2,620
Net loans and leases
6,778
6,647
6,039
5,749
1,977
1,624
2,082
1,826
Deposits
6,689
6,011
7,133
6,712
2,478
2,231
2,451
2,214
Shareholder’s equity
687
646
980
1,009
174
160
228
211
Consolidated Company
26.1
28.9
(1.9
(3.6
274.0
259.1
1.5
0.1
18.1
15.7
24.7
27.4
6.1
255.9
243.4
10.4
7.8
0.5
3.9
100.8
101.6
25.1
24.9
2.7
12.5
13.2
216.5
215.7
10.0
10.3
4.2
(9.0
(12.9
140.2
129.3
3.6
3.7
(4.8
(7.6
49.0
45.0
(1.0
(0.4
(1.2
(0.6
6.6
2.5
(3.2
(4.9
92.4
84.9
(2.9
(7.8
82.0
2,733
2,580
632
549
(921
(1,103
28,021
26,129
1,856
1,832
328
310
146
96
19,207
18,083
1,883
1,720
444
390
(1,203
(1,060
19,875
18,218
447
435
48
41
(105
(185
2,459
2,317
13
The following table presents selected operating segment information for the six months ended June 30, 2003 and 2002:
168.4
146.6
190.9
188.7
60.9
62.9
61.9
57.0
23.5
19.3
6.3
8.5
3.1
2.2
144.9
127.3
184.6
180.2
57.8
60.7
56.0
106.4
107.3
37.7
40.6
16.2
14.1
11.7
10.1
153.5
150.5
115.3
118.1
42.3
41.1
39.0
33.3
97.8
84.1
107.0
102.7
33.7
34.6
32.8
30.7
42.8
41.7
10.8
13.7
13.0
(0.3
67.4
56.2
64.2
61.0
20.9
22.3
19.8
11,326
10,153
8,702
8,486
2,769
2,527
2,830
2,610
6,742
6,456
6,078
5,733
1,914
1,590
2,028
1,815
6,887
5,652
7,035
6,723
2,433
2,186
2,399
2,197
683
989
1,008
173
161
230
213
50.1
56.1
12.1
(4.1
(7.7
540.2
515.3
2.4
35.7
33.8
47.3
53.7
11.3
504.5
481.5
15.2
0.9
7.2
197.1
195.4
50.4
5.7
5.2
24.2
22.6
430.4
420.9
16.6
18.8
7.0
(23.8
(23.1
271.2
256.0
5.9
2.6
(11.2
(14.3
95.3
89.0
(0.5
(3.9
(0.7
12.2
4.7
(8.3
179.8
167.7
0.3
(6.0
(8.7
180.1
161.7
(32.4
(46.7
2,743
2,584
629
536
(1,330
(991
27,669
25,905
1,862
1,827
320
299
143
93
19,087
17,813
1,893
1,719
439
380
(1,189
(909
19,897
17,948
437
47
40
(135
(211
2,431
2,294
14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS (Unaudited)
(In thousands, except per share and ratio data)
% Change
EARNINGS
Taxable-equivalent net interest income
279,794
264,282
5.87
%
551,774
525,587
4.98
5.76
4.83
(0.79
)%
0.88
15.57
5.64
0.32
2.23
Income before income taxes and minority interest
8.49
5.98
8.92
7.17
101.57
437.38
8.89
7.22
100.61
105.77
100.00
12.61
39.27
PER COMMON SHARE
Net income (diluted)
14.61
42.14
Income from continuing operations (diluted)
10.87
9.39
Income (loss) on discontinued operations (diluted)
116.67
Dividends
0.21
0.20
5.00
0.42
0.40
Book value
27.63
25.49
8.40
SELECTED RATIOS
Return on average assets
1.32
1.26
1.31
1.01
Return on average common equity
15.07
14.21
14.94
11.37
Efficiency ratio
56.96
60.51
57.53
60.00
Net interest margin
4.50
4.61
4.52
4.65
ZIONS BANCORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (Continued) (Unaudited)
(In thousands, except share and ratio data)
%Change
AVERAGE BALANCES
Total assets
28,021,084
26,128,886
7.24
27,669,319
25,905,200
6.81
Securities
4,360,357
3,901,341
11.77
4,137,334
3,990,091
3.69
19,207,484
18,083,224
6.22
19,086,852
17,812,584
7.15
730,067
735,622
(0.76
730,084
735,409
(0.72
79,314
102,544
(22.65
80,516
104,860
(23.22
Total deposits
19,874,701
18,217,798
9.09
19,896,599
17,947,954
10.86
22,991
21,354
7.67
22,986
19,958
15.17
Shareholders’ equity
2,459,145
2,317,029
6.13
2,430,796
2,293,991
5.96
Weighted average common and common-equivalent shares outstanding
90,586,065
92,628,770
(2.21
90,607,173
92,658,111
AT PERIOD END
8.05
17.15
19,439,822
18,452,554
5.35
Sold loans being serviced
2,367,751
2,543,887
(6.92
6.45
(0.88
(24.19
9.78
0.93
6.08
Common shares outstanding
89,724,846
91,701,887
(2.16
Average equity to average assets
8.78
8.87
8.79
8.86
Common dividend payout
20.47
22.36
21.07
28.41
Nonperforming assets
119,371
115,513
3.34
Loans past due 90 days or more
35,055
32,332
8.42
Nonperforming assets to net loans and leases, other real estate owned and other nonperforming assets at period end
0.61
0.63
OPERATING RESULTS
Zions Bancorporation and subsidiaries (“the Company”) achieved net income of $92.4 million, or $1.02 per diluted share for the second quarter of 2003, an increase of 12.6% and 14.6%, respectively, over the $82.1 million, or $0.89 per diluted share, in the second quarter of 2002. For the same comparative periods, income from continuing operations was also $92.4 million, or $1.02 per diluted share, an increase of 8.9% and 10.9%, respectively, over $84.9 million or $0.92 per diluted share. Net income for the second quarter of 2002 included a loss from discontinued operations of $2.8 million, or $0.03 per diluted share.
Net income for the first six months of 2003 was $180.1 million or $1.99 per diluted share, compared to $129.3 million or $1.40 per diluted share for the first six months of 2002. Included in net income for the first six months of 2002 was 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 same period was a loss from discontinued operations of the e-commerce subsidiaries of $6.0 million, or $0.06 per diluted share. Income from continuing operations for the first six months of 2003 was $179.8 million, or $1.98 per diluted share, an increase of 7.2% and 9.4%, respectively, over income from continuing operations of $167.7 million, or $1.81 per diluted share for the same period in 2002.
The annualized return on average assets was 1.32% in the second quarter of 2003 compared to 1.26% in the second quarter of 2002. For the same comparative periods, the annualized return on average common equity was 15.07% compared to 14.21%. In addition, the efficiency ratio, defined as noninterest expenses as a percentage of the sum of taxable-equivalent net interest income and noninterest income, improved to 56.96% compared to 60.51%.
For the first six months of 2003, the annualized return on average assets was 1.31% compared to 1.01% for the first six months of 2002. For the same comparative periods, the annualized return on average common equity was 14.94% compared to 11.37%. These improved rates reflect the 2002 cumulative effect adjustment and discontinued operations previously discussed. The efficiency ratio was 57.53% compared to 60.00%.
The earnings improvement for both the second quarter and year-to-date periods in 2003 compared to the similar periods in 2002 continues to 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 second quarter and year-to-date periods in 2003 resulted in minor gains from discontinued operations compared to the loss amounts for 2002 previously discussed. The Company’s previously announced commitment to reduce the annual run-rate of expenses by $50 million was met during the second quarter of 2003. Actions taken by management to control expenses include the e-commerce restructuring activities, branch closures, scaling back the indirect auto lending business, operations consolidation, and efforts to improve procurement processes.
Vectra Bank Colorado (“Vectra”) has taken a number of steps in recent quarters to improve performance, and substantial progress has been made. However, due in part to continued weak economic conditions in Colorado, the financial performance of Vectra has not met management’s expectations. Earlier in 2003, the Company engaged a national consulting firm to assist Vectra in analyzing its operating strategy and accelerating its profitability improvement. As a result of this analysis, Vectra will restructure to focus its
efforts more specifically on serving small and middle market business customers, and employees of those businesses. This restructuring decision will necessitate a SFAS 142 impairment review one quarter earlier than the routine annual review and may result in a write-down of goodwill in the third quarter. Such a write-down, if any, would be a noncash charge and would not impact regulatory or tangible capital ratios.
NET INTEREST INCOME, INTEREST RATE SPREADS AND INTEREST RATE SENSITIVITY
Net interest income for the second quarter of 2003, adjusted to a fully taxable-equivalent basis, increased 5.9% to $279.8 million compared to $264.3 million for the second quarter of 2002. Net interest margin was 4.50% for the second quarter of 2003, compared to 4.54% for the first quarter of 2003 and 4.61% for the second quarter of 2002. For the first six months of 2003, net interest income on a fully taxable-equivalent basis was $551.8 million, an increase of 5.0% compared to $525.6 million in 2002. Net interest margin was 4.52% compared to 4.65%. The increase in net interest income results from increases in average interest-earning assets funded in part through strong growth in average noninterest-bearing deposits, partially offset by the declining net interest margin.
The Company uses interest rate swaps as an asset-liability management tool to manage the effect of changes in interest rates on net interest income. This serves to offset some, but not all, of the interest rate compression being experienced in the current economic environment. At June 30, 2003, the Company’s overall asset-liability management position remains somewhat asset sensitive.
The yield on average earning assets for the second quarter of 2003 decreased 73 basis points compared to the second quarter of 2002. The average rate paid during the second quarter on interest-bearing funds decreased 72 basis points from the second quarter of 2002. Comparing the first six months of 2003 with 2002, the yield on average earning assets decreased 73 basis points, while the cost of interest-bearing funds decreased 67 basis points.
The spread on average interest-bearing funds for the second quarter of 2003 was 4.20%, down from 4.21% for both the first quarter of 2003 and the second quarter of 2002. The spread on average interest-bearing funds for the first six months of 2003 was 4.20%, down from 4.26% for the first six months of 2002.
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.
18
ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (Unaudited)
Three Months Ended June 30, 2003
Three Months Ended June 30, 2002
Average Balance
Amount of Interest (1)
Average Rate
Money market investments
1,346,595
1.08
1,026,799
4,215
1.65
Securities:
Held to maturity
93,782
6.39
Available for sale
3,664,436
43,178
4.73
3,216,084
43,754
5.46
695,921
3.57
591,475
3.72
Total securities
49,372
4.54
50,727
5.22
216,987
4.11
175,662
Net loans and leases (2)
18,990,497
304,170
6.42
17,907,562
316,791
7.10
Total loans and leases
306,395
6.40
318,982
7.08
Total interest-earning assets
24,914,436
359,378
5.79
23,011,364
373,924
6.52
944,223
919,176
(281,511
(266,669
1,634,555
1,626,849
LIABILITIES
Interest-bearing deposits:
Savings and NOW
2,933,031
4,834
0.66
2,528,034
6,963
1.10
Money market super NOW
8,744,693
23,697
1.09
7,795,332
36,065
1.86
1,687,633
9,757
2.32
1,915,613
15,777
3.30
1,280,596
8,697
2.72
1,483,627
12,685
3.43
126,987
292
104,124
400
1.54
Total interest-bearing deposits
14,772,940
47,277
1.28
13,826,730
71,890
2.09
Borrowed funds:
554,579
5,104
378,173
4,303
4.56
Federal funds purchased and security repurchase agreements
2,733,363
7,411
2,654,564
10,873
1.64
286,888
1,029
1.44
371,408
2,032
2.19
FHLB advances and other borrowings:
282,051
962
1.37
796,092
3,757
238,447
3,104
240,834
3,109
5.18
1,176,952
14,697
5.01
769,302
13,678
7.13
Total borrowed funds
5,272,280
2.46
5,210,373
37,752
2.91
Total interest-bearing liabilities
20,045,220
1.59
19,037,103
109,642
2.31
Noninterest-bearing deposits
5,101,761
4,391,068
Other liabilities
391,967
362,332
25,538,948
23,790,503
Total liabilities and shareholders’ equity
Spread on average interest-bearing funds
4.20
4.21
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.
19
1,374,631
1.11
979,032
7,901
1.63
86,503
5.34
3,463,280
82,618
4.81
3,282,589
88,139
5.41
674,054
3.52
620,999
3.54
94,373
4.60
101,344
5.12
233,595
4.08
194,888
5.10
18,853,257
607,898
6.50
17,617,696
629,839
7.21
612,628
6.47
634,766
7.19
24,598,817
714,549
5.86
22,781,707
744,011
6.59
927,628
947,890
(281,388
(265,368
1,613,662
1,600,702
2,851,035
9,849
0.70
2,440,404
13,037
8,893,693
51,311
1.16
7,573,164
68,446
1,714,229
20,982
2.47
1,969,633
34,261
3.51
1,301,153
17,962
2.78
1,537,628
27,203
158,088
790
102,699
788
1.55
14,918,198
100,894
1.36
13,623,528
143,735
2.13
518,485
9,758
3.80
385,183
8,005
4.19
2,578,585
13,858
2,889,824
23,766
1.66
290,056
2,149
1.49
364,317
3,918
2.17
145,374
996
1.38
596,605
5,566
239,341
6,255
5.27
240,448
6,190
5.19
1,138,357
28,865
5.11
775,257
27,244
7.09
4,910,198
2.54
5,251,634
74,689
2.87
19,828,396
18,875,162
218,424
2.33
4,978,401
4,324,426
408,740
391,663
25,215,537
23,591,251
4.26
20
PROVISION FOR LOAN LOSSES
The provision for loan losses was $18.2 million for the second quarter of 2003, compared to $17.6 million for the first quarter of 2003, and $15.7 million for the second quarter of 2002. The provision for loan losses for the first six months of 2003 was $35.7 million, 5.6% more than the $33.8 million provision for the first six months of 2002. Annualized, the year-to-date provision is 0.37% of average loans and leases for 2003 compared to 0.38% for the first six months of 2002. The provision reflects management’s evaluation of its various portfolios, 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 second quarter of 2003 of $100.8 million decreased 0.8% from $101.6 million for the second quarter of 2002. As detailed below, the second quarter of 2003 included equity security losses of $6.5 million compared to gains of $0.6 million for the second quarter of 2002. Excluding equity security gains (losses), noninterest income increased 6.2%. Comparing other significant components of this change, service charges and fees on deposit accounts increased 9.3%, loan sales and servicing income increased 13.3%, other service charges, commissions and fees increased 4.5%, income from securities conduit increased 56.2%, dividends and other investment income decreased 2.4%, and market making, trading and nonhedge derivative income decreased 7.6%.
The increase in service charges and fees on deposit accounts resulted mainly from increased internal core deposit growth. The increase in loan sales and servicing income included $2.1 million of gains on servicing released sales of residential mortgages primarily because of increased refinancing activity, and $0.8 million of gains on sales of SBA loans. The increase in income from securities conduit resulted from the increased amount of securities in the conduit’s portfolio, resulting in increased fees from the liquidity, interest rate, and administrative services agreements for the conduit. Equity securities gains (losses) for the second quarter of 2003 included a $6.0 million write-down in the Company’s investment in Identrus, LLC, $7.1 million of net write-downs of investments made by venture capital funds, and $6.6 million of gains from sales of other publicly traded securities. Net of minority interest and income taxes, the results of the venture capital funds reduced net income by $4.3 million or $0.05 per diluted share in the second quarter of 2003.
Noninterest income for the first six months of 2003 of $197.1 million increased 0.9% from $195.4 million for the first six months of 2002. Comparing significant components of this change, service charges and fees on deposit accounts increased 9.9%, loan sales and servicing income increased 53.7%, other service charges, commissions and fees increased 7.5%, income from securities conduit increased 60.8%, dividends and other investment income decreased 14.8%, market making, trading and nonhedge derivative income decreased 26.0%, equity securities gains (losses) decreased 1,144.3%, and other noninterest income decreased 47.8%.
Explanations previously provided for the quarterly changes also apply to the year-to-date changes. In addition, as previously disclosed, during the first quarter of 2002, the Company restructured certain derivatives related to sold loans. The restructuring resulted in a $13.6 million decrease in loan sales and servicing income and a corresponding increase in market making, trading and nonhedge derivative income. Without this transaction, loan sales and servicing income would have been approximately $39.9 million in the first six months of 2002, compared to $40.4 million in the first six months of 2003. Market making, trading and nonhedge derivative income was $17.7 million in the first six months of 2003 compared to $10.3 million in the first six months of 2002, excluding the $13.6 million adjustment. Of these amounts, market
21
making and trading income was $13.7 million for 2003 compared to $8.7 million for 2002 and nonhedge derivative income was $4.0 million compared to $1.6 million for 2002, excluding the $13.6 million adjustment. The increase in market making and trading income reflects increased revenues from the Company’s electronic corporate bond trading business.
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 $2.8 million decrease in dividend income from Federal Home Loan Bank (“FHLB”) investments resulting from decreased investments in FHLB stock. Equity securities gains (losses) included $13.7 million of net write-downs of investments made by venture capital funds and the $6.0 million write-down in the Company’s investment in Identrus, LLC, partially offset by $7.4 million of gains from sales of other publicly traded securities. Net of minority interest and income taxes, the results of the venture capital funds reduced net income by approximately $7.3 million or $0.08 per diluted share in the first six months of 2003, compared to a reduction of $0.7 million or $0.01 per diluted share for the same period in 2002.
The decrease in other income is explained principally by a pretax gain in 2002 from the sales of three 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 second quarter of 2003 of $216.4 million was essentially unchanged from $215.7 million in the second quarter of 2002. All significant expense categories either decreased or increased very modestly reflecting the results of the previously discussed expense control plan.
Noninterest expense for the first six months of 2003 of $430.4 million increased 2.2% from $421.0 million for the first six months of 2002, again reflecting cost control efforts. Salaries and employee benefits increased $12.8 million or 5.5%. Salaries increased $2.4 million or 1.2% and benefits increased $10.4 million driven by an increase of $3.5 million in employee health insurance costs and an increase of $6.6 million in retirement plan expenses.
At June 30, 2003, the Company had 7,945 full-time equivalent employees, 409 branches, and 579 ATMs, compared to 8,221 full-time equivalent employees, 409 branches, and 587 ATMs at June 30, 2002.
INCOME TAXES
The Company’s income taxes on continuing operations increased 8.9% to $49.0 million for the second quarter of 2003 compared to $44.9 million for the second quarter of 2002. The Company’s effective income tax rate was 34.9% for the second quarter of 2003 compared to 34.8% for the second quarter of 2002. The effective income tax rate for the first six months of 2003 was 35.2% compared to 34.8% for the first six months 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 six months of 2002 were reclassified to reflect the discontinued operations of these subsidiaries. One of these
22
subsidiaries was sold in December 2002 and another is still held as available for sale, although operations have been significantly curtailed. The Company recorded a small profit on discontinued operations for both the second quarter of 2003 and the first six months of 2003, which included a litigation settlement in the first quarter of 2003.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS
Average earning assets increased 8.0% to $24.6 billion for the first six months of 2003 compared to $22.8 billion for the first six months of 2002. Earning assets comprised 88.9% of total average assets for the first six months of 2003, compared with 87.9% for the first six months of 2002.
Average money market investments, consisting of interest-bearing deposits, federal funds sold and security resell agreements, increased 40.4% to $1,375 million for the first six months of 2003 compared to $979 million for the first six 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.
Average securities increased 3.7% to $4,137 million for the first six months of 2003 compared to $3,990 million for the first six months of 2002. Average investment portfolio securities increased 2.8% and average trading securities increased 8.5%.
Average net loans and leases increased 7.2% to $19.1 billion for the first six months of 2003 compared to $17.8 billion for the first six months of 2002, representing 77.6% of earning assets in the first six months of 2003 compared to 78.2% in the first six months of 2002. Average net loans and leases were 95.9% of average total deposits for the first six months of 2003 compared to 99.2% for the first six 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
108
109
AVAILABLE FOR SALE
U.S. Treasury securities
35
38
44
51
54
U.S. government agencies and corporations:
Small Business Administration loan-backed securities
750
753
752
756
768
770
Other agency securities
244
302
656
661
States and political subdivisions
677
682
640
645
546
559
Mortgage/asset-backed and other debt securities
1,894
1,923
1,208
826
842
3,596
3,640
2,922
2,958
2,847
2,886
Other securities:
Mutual funds
178
317
321
272
278
Stock
26
25
187
204
332
346
287
308
3,783
3,844
3,254
3,304
3,134
3,194
Total
3,242
3,303
23
LOANS
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:
236
289
165
Commercial lending:
Commercial and industrial
4,071
4,124
3,990
Leasing
391
384
409
Owner occupied
3,353
3,018
3,030
Total commercial lending
7,815
7,526
7,429
Commercial real estate:
Construction
2,983
2,947
2,968
Term
3,326
3,175
3,071
Total commercial real estate
6,309
6,122
Consumer:
Home equity credit line
762
651
582
1-4 family residential (1)
3,275
3,209
3,380
Bankcard and other revolving plans (2)
186
205
121
Other (3)
867
1,000
743
Total consumer
5,090
5,065
4,826
Foreign loans
Other receivables
67
126
68
Total loans
19,534
19,133
18,552
Includes $137.5 million of purchased residential mortgages acquired in June 2003.
(2)
The increase from 6/30/02 to 12/31/02 includes $68.5 million in credit card receivables repurchased from securitizations.
(3)
The increase from 6/30/02 to 12/31/02 includes $361.7 million in auto loans repurchased from securitizations.
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 June 30, 2003 were $19.4 billion, including purchases of $137.5 million of single family mortgages in June 2003. Excluding the purchased loans, net loans and leases increased 4.6% from June 30, 2002 and an annualized increase of 2.8% from December 31, 2002. On balance sheet and sold loans being serviced were $21.8 billion at June 30, 2003, an increase of 3.2% from June 30, 2002 and an annualized increase of 1.4% from December 31, 2002, excluding the purchased loans.
On June 30, 2003, long-term conforming first mortgage real estate loans serviced for others totaled $358 million, and consumer and other loan securitizations, which include loans sold under revolving securitization structures, totaled $2,368 million. During the first six months of 2003, the Company sold $338 million of loans classified in held for sale, and securitized and sold home equity credit line and other loans totaling $241
24
million. During the first six months of 2003, total loans sold were $579 million compared to total loans sold of $722 million during the first six months of 2002.
As of June 30, 2003, the following table shows that the Company had residual interests of $233 million recorded on its balance sheet related to the $2,368 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 $134 million representing the Company’s junior position to other investors in the securities. The capitalized residual cash flows (sometimes called “excess servicing”) of $99 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 June 30, 2003
Sales for six months ended June 30, 2003
Outstanding balance at June 30, 2003
Subordinated retained interests
Capitalized residual cash flows
Home equity credit lines
163
Nonconforming residential real estate loans
39
1
Small business loans
1,253
120
81
201
SBA 7(a) loans
Farmer Mac
55
425
241
2,368
134
99
RISK ELEMENTS
The following table sets forth the Company’s nonperforming assets:
Nonaccrual loans
82
101
Restructured loans
Other real estate owned and other nonperforming assets
32
119
116
% of net loans and leases*, other real estate owned and other nonperforming assets
Accruing loans past due 90 days or more
37
% of net loans and leases*
0.18
*Includes loans held for sale
For the first six months of 2003, the Company experienced stable 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 Company’s total recorded investment in impaired loans included in nonaccrual loans and leases amounted to $58 million on June 30, 2003 compared to $44 million on December 31, 2002 and $59 million on June 30, 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 loan losses on June 30, 2003, December 31, 2002, and June 30, 2002, is a required allowance of $5 million, $7 million and $9 million, respectively, on $27 million, $20 million and $25 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
19,440
19,040
18,453
Average loans* and leases outstanding (net of unearned income)
18,114
Allowance for loan losses:
Allowance of companies acquired
Allowance associated with repurchased revolving securitized loans
Provision charged against earnings
36
72
34
Loans and leases charged-off:
Commercial lending
(26
(54
Commercial real estate
(1
(10
(2
Consumer
(14
(20
(9
(41
(84
Recoveries:
Net loan and lease charge-offs
(35
(63
(30
Balance at end of period
281
280
264
Ratio of annualized net charge-offs to average loans and leases
0.35
0.34
Ratio of allowance for loan losses to net loans and leases
1.45
1.47
1.43
Ratio of allowance for loan losses to nonperforming loans
277.69
332.37
260.01
Ratio of allowance for loan losses to nonaccrual loans and accruing loans past due 90 days or more
210.22
234.14
199.31
Net loan and lease charge-offs, along with their annualized ratios to average loans and leases, are shown in the previous table for the periods presented. Included in charge-offs for the first six months of 2003 were approximately $4.5 million related to the auto loan and credit card securitizations repurchased in December 2002.
At June 30, 2003, the allowance for loan losses included an allocation of $9.1 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, 2003, December 31, 2002, and June 30, 2002 totaled $8,052 million, $7,915 million, and $7,502 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 second quarter of 2003 moderated from the rate experienced during the first quarter and the year 2002. As expected, a governmental deposit of approximately $450 million that was deposited in the fourth quarter of 2002 was withdrawn during the second quarter. Deposits increased 9.8% over balances reported one year ago to $20.6 billion, and increased 4.9% annualized from balances reported at December 31, 2002. Excluding the governmental deposit previously discussed, deposits increased 9.6% annualized from balances reported at year-end. Deposits at June 30, 2003 were down 0.8% from balances reported at March 31, 2003. Excluding the governmental withdrawal, deposits grew at a 5.4% annualized rate during the second quarter.
Average total deposits of $19.9 billion for the first six months of 2003 increased 10.9% compared to $17.9 billion for the first six months of 2002, with average noninterest-bearing demand deposits increasing 15.1%. Average savings and NOW deposits increased 16.8% and average money market and super NOW deposits increased 17.4% during the first six months of 2003 compared to the same period in 2002. Average time deposits under $100,000 decreased 13.0% and time deposits $100,000 and over decreased 15.4% for the first six months of 2003 compared to the same period in 2002. Average foreign deposits increased 53.9% for these same periods.
LIQUIDITY
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.
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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 92.9% of total deposits on June 30, 2003, as compared to 92.1% on December 31, 2002 and 91.5% on June 30, 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 June 30, 2003, the Company had issued $219 million of Senior Medium-Term Notes, compared to $46 million outstanding at December 31, 2002.
In June 2003, the Company repaid $110 million of floating rate subordinated notes that were callable in 2003. Also in June 2003, the Company’s board of directors passed a resolution allowing the issuance of up to $1 billion of new senior and/or subordinated debt, which is to be registered with the Securities and Exchange Commission. Proceeds of this debt will be used to refinance certain currently outstanding debt and for other general corporate purposes.
At June 30, 2003, $199.2 million of dividend capacity was available from subsidiaries to pay to the parent without having to obtain regulatory approval. During the six months ended June 30, 2003, dividends from subsidiaries were $150.5 million. The parent also has a program to issue short-term commercial paper. At June 30, 2003, outstanding commercial paper was $290.9 million. Also at June 30, 2003, the parent had a revolving credit facility with a bank totaling $40 million and a margin borrowing facility totaling $11.8 million. No amounts were outstanding on either of these facilities at June 30, 2003.
28
CAPITAL RESOURCES AND DIVIDENDS
Total shareholders’ equity on June 30, 2003 was $2,479 million, an increase of 4.4% over the $2,374 million on December 31, 2002, and an increase of 6.1% over the $2,337 million on June 30, 2002. The Company’s capital ratios are as follows as of the dates indicated:
Tangible common equity ratio
6.20
6.06
6.03
Average common equity to average assets (three months ended)
8.80
Risk-based capital ratios:
Tier 1 leverage
7.59
7.56
6.48
Tier 1 risk-based capital
9.14
9.26
Total risk-based capital
12.19
12.94
11.86
The decrease in the total risk-based capital ratio at June 30, 2003 to 12.19% from 12.94% is primarily the result of the repayment of $110 million of subordinated debt, which was includable in total risk-based capital.
During the second quarter of 2003, the Company repurchased 646,168 shares of common stock at a cost of $32.2 million, or an average price of $49.88 per share. For the first six months of 2003, the Company has repurchased 1,224,648 shares at a cost of $56.5 million, or an average price of $46.10 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. As of June 30, 2003, the Company had $21.1 million remaining in its currently authorized share repurchase program. During the first six months of 2002, the Company repurchased 1,042,980 shares of common stock at a cost of $56.5 million, or an average price of $54.13 per share.
On July 15, 2003, the board of directors declared a regular quarterly dividend of $.30 per common share beginning with the third quarter of 2003. This is a 43% increase over the $.21 per common share for the first and second quarters of 2003. Such $.09 per share dividend increase will increase total quarterly dividend payments by approximately $8 million. The Company’s decision to significantly increase its dividend reflects its continued strong internal capital generation, as well as recent tax law changes. Dividends for each quarter during 2002 were $.20 per common share. The common cash dividend payout of net income for the second quarter of 2003 was 20.5%, compared to 21.7% for the first quarter of 2003 and 22.4% for the second 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.
29
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.
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.
CONTROLS AND PROCEDURES
An evaluation was carried out by the Company’s management with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report these disclosure controls and procedures were effective. There have been no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
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 effect on its consolidated financial position, operations, or liquidity.
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.
Restated Bylaws of Zions Bancorporation dated January 19, 2001, incorporated by reference to Exhibit 3.4 of Form S-4 filed February 5, 2001.
Zions Bancorporation Restated Deferred Compensation Plan for Directors (Effective July 1, 2003) (filed herewith).
31.1
Certification by Chief Executive Officer required by Rule 13a-14(a) under the Securities Exchange Act of 1934 (filed herewith).
31.2
Certification by Chief Financial Officer required by Rule 13a-14(a) under the Securities Exchange Act of 1934 (filed herewith).
Certification by Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350 (furnished herewith).
*
Incorporated by reference
b)
Reports on Form 8-K
Zions Bancorporation filed the following reports on Form 8-K during the quarter ended June 30, 2003:
Form 8-K filed on April 17, 2003 (Items 7 and 9) – Copy of Press Release issued April 17, 2003 announcing 2003 first quarter earnings.
Form 8-K filed on April 30, 2003 (Items 7 and 9) – Copy of Press Release issued April 25, 2003 announcing Board of Directors’ authorization of a $50 million stock buyback and a $.21 dividend payable May 28, 2003.
Form 8-K filed on April 30, 2003 (Items 7 and 9) – Copy of Press Release issued April 25, 2003 announcing the election of Patricia Frobes to the Board of Directors and the retirement of I. J. Wagner from the Board.
Form 8-K filed on May 15, 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
Form 8-K filed on June 30, 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 11-K of Zions Bancorporation Payshelter 401(k) Plan for the year ended December 31, 2002.
Form 8-K filed on July 1, 2003 (Item 5) – Disclosure of Zions Bancorporation auction of its shares of ICAP plc (formerly known as Garban-Intercapital plc) for proceeds of approximately $107 million.
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.
ZIONS BANCORPORATION
/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: August 14, 2003