UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2003
OR
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
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 ¨
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 November 5, 2003
89,859,546 shares
ZIONS BANCORPORATION AND SUBSIDIARIES
INDEX
ITEM 1.
Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 4.
Controls and Procedures
Legal Proceedings
ITEM 6.
Exhibits and Reports on Form 8-K
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks
Money market investments:
Interest-bearing deposits
Federal funds sold
Security resell agreements
Investment securities:
Available for sale, at market
Trading account, at market (includes $108,772, $110,886, and $274,031 transferred as collateral under repurchase agreements)
Loans:
Loans held for sale
Loans, leases and other receivables
Less:
Unearned income and fees, net of related costs
Allowance for loan losses
Net loans
Other noninterest-bearing investments
Premises and equipment, net
Goodwill
Core deposit and other intangibles
Other real estate owned
Other assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand
Interest-bearing:
Savings and money market
Time under $100,000
Time $100,000 and over
Foreign
Securities sold, not yet purchased
Federal funds purchased
Security repurchase agreements
Accrued liabilities
Commercial paper
Federal Home Loan Bank advances and other borrowings:
One year or less
Over one year
Long-term debt
Total liabilities
Minority interest
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 89,864,022, 90,717,692, and 91,154,578 shares
Retained earnings
Accumulated other comprehensive income
Shares held in trust for deferred compensation, at cost
Total shareholders’ equity
3
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
Interest income:
Interest and fees on loans
Interest on loans held for sale
Lease financing
Interest on money market investments
Interest on securities:
Held to maturity—taxable
Available for sale—taxable
Available for sale—nontaxable
Trading account
Total interest income
Interest expense:
Interest on savings and money market deposits
Interest on time and foreign deposits
Interest on borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges and fees on deposit accounts
Loan sales and servicing income
Other service charges, commissions and fees
Trust and investment management income
Income from securities conduit
Dividends and other investment income
Market making, trading and nonhedge derivative income
Equity securities gains (losses), net
Fixed income securities gains (losses), net
Other
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy, net
Furniture and equipment
Legal and professional services
Postage and supplies
Advertising
Restructuring charges
Amortization of core deposit and other intangibles
Debt extinguishment cost
Impairment losses on long-lived assets
Total noninterest expense
Impairment loss on goodwill
Income from continuing operations before income taxes and minority interest
Income taxes
Income from continuing operations
4
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Discontinued operations:
Loss from operations of discontinued subsidiaries
Impairment losses and loss on sale
Income tax benefit
Loss on discontinued operations
Income before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle, net of tax (1)
Net income
Weighted average shares outstanding during the period:
Basic shares
Diluted shares
Net income per common share:
Basic:
Cumulative effect of change in accounting principle
Diluted:
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands)
NetUnrealizedGains(Losses)
onInvestmentsand
RetainedInterests
on
DerivativeInstruments
Shares
Held in
Trust forDeferredCompensation
Balance, January 1, 2003
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 $1,366
Reclassification for net realized gains recorded in operations, net of income tax expense of $8,341
Net unrealized losses on derivative instruments, net of reclassification to operations of $30,941 and income tax benefit of $2,263
Other comprehensive loss
Total comprehensive income
Stock redeemed and retired
Stock options exercised, net of shares tendered and retired
Cash dividends—common, $.72 per share
Cost of shares held in trust for deferred compensation
Balance, September 30, 2003
Accumulated Other Comprehensive
Income (Loss)
onInvestmentsandRetainedInterests
onDerivativeInstruments
Balance, January 1, 2002
Net realized and unrealized holding gains during the period, net of income tax expense of $22,355
Reclassification for net realized gains recorded in operations, net of income tax expense of $1,306
Net unrealized losses on derivative instruments, net of reclassification to operations of $27,907 and income tax benefit of $5,309
Other comprehensive income (loss)
Cash dividends—common, $.60 per share
Balance, September 30, 2002
Total comprehensive income for the three months ended September 30, 2003 and 2002 was $28,696 and $61,824, respectively.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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
Impairment losses on goodwill and long-lived assets
Depreciation of premises and equipment
Amortization
Loss to minority interest
Equity securities losses (gains), net
Fixed income securities losses (gains), net
Proceeds from sales of trading account securities
Increase in trading account securities
Proceeds from sales of loans held for sale
Increase in loans held for sale
Net gains on sales of loans, leases and other assets
Net increase in cash surrender value of bank owned life insurance
Undistributed earnings of affiliates
Change in accrued income taxes
Change in accrued interest receivable
Change in other assets
Change in other liabilities
Change in accrued interest payable
Other, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in money market investments
Proceeds from maturities of investment securities held to maturity
Purchases of investment securities held to maturity
Proceeds from sales of investment securitiesavailable for sale
Proceeds from maturities of investment securitiesavailable for sale
Purchases of investment securities available for sale
Proceeds from sales of loans and leases
Net increase in loans and leases
Proceeds from sales of other noninterest bearing investments
Payments on leveraged leases
Principal collections on leveraged leases
Proceeds from sales of premises and equipment
Purchases of premises and equipment
Proceeds from sales of other assets
Net cash paid for net liabilities on branches sold
Net cash provided by (used in) investing activities
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
Net change in short-term funds borrowed
Proceeds from FHLB advances and other borrowings over one year
Payments on FHLB advances and other borrowings over one year
Proceeds from issuance of long-term debt
Debt issuance costs
Payments on long-term debt
Proceeds from issuance of common stock
Payments to redeem common stock
Dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest
Loans transferred to other real estate owned
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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 nine-month periods ended September 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 Statement 133 on Derivative Instruments and Hedging Activities. 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. Generally, it must be applied for interim financial reporting periods beginning after June 15, 2003. Neither of these statements had a material impact on the Company’s financial position or results of operations.
See Notes 4 and 5 for discussions of other recent accounting pronouncements.
3. STOCK-BASED COMPENSATION
The following disclosures are required for interim financial statements 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.
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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 is as follows (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
Pro forma net income
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma
4. GUARANTEES
The following are the performance and financial letters of credit issued by the Company as guarantees that come under the provisions of FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, (in thousands):
Standby letters of credit:
Performance
Financial
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 September 30, 2003, the Company has guaranteed approximately $580 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 floating rate 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 September 30, 2003, the size of the Liquidity Facility commitment was $5.1 billion and the market value of the Conduit’s securities
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portfolio was approximately $4.6 billion. No amounts were outstanding under the Liquidity Facility at September 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. In October 2003, the FASB agreed to issue a revised Exposure Draft; however, management does not believe the anticipated revisions would change the proposed requirement for consolidation. Management is considering its options with regard to the ongoing business operations of the Conduit.
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 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 was to apply the provisions of FIN 46 as of the beginning of the first interim or annual reporting period beginning after June 15, 2003. In October 2003, the FASB agreed to a broad-based deferral of the effective date of FIN 46 until December 31, 2003 for interests in a VIE created before February 1, 2003. The new date was determined to allow time for implementation issues to be addressed through the issuance of certain modifications to FIN 46. Among the issues that may be addressed are the applicability of FIN 46 to trust accounts for which a bank is trustee and to troubled loan work out situations.
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 previous quarters, the Company assessed the impact of FIN 46 on one other VIE and determined that it did not have to be consolidated in the Company’s financial statements. The Company is continuing to assess the impact of FIN 46 and any proposed modifications.
6. GOODWILL
The impairment loss on goodwill of $75.6 million relates to the restructuring of Vectra Bank Colorado (“Vectra”). As discussed in previous quarters, Vectra has taken a number of steps to improve performance, including the engagement of a national consulting firm to analyze its operations and improve profitability. As a result of this analysis, Vectra is restructuring to refocus its marketing efforts.
Part of the impairment loss consists of $7.1 million related to 11 branches that the Company offered for sale as part of the restructuring. The amount was determined by comparing the carrying value of the branches to their fair value based on bids, letters of intent and current negotiations.
The remaining $68.5 million relates to an impairment analysis on the retained operations of Vectra performed as a result of the restructuring. The amount was determined based on the calculation process
11
specified in SFAS 142, which compares carrying value to the determined fair value of assets and liabilities excluding the branches held for sale. The determination of the fair values by independent valuation consultants was made by a combination of an income approach using a discounted projected cash flow analysis and market value approaches using guideline companies and acquisition transactions.
The total impairment loss of $75.6 million accounts for substantially all the change in recorded goodwill at the end of the third quarter of 2003 compared to the second quarter. The nondeductibility of the impairment loss for income tax purposes resulted in an increase in the effective tax rate for both the third quarter and year-to-date results.
7. DEBT FINANCING
In September 2003, the Company issued $500 million of 6.00% fixed rate subordinated notes due in September 2015. The notes are not redeemable prior to maturity and require semiannual interest payments. The Company subsequently hedged these notes with LIBOR-based floating interest rate swaps. This new debt is part of a $1,050 million shelf registration statement filed with the Securities and Exchange Commission in August 2003 for the issuance of senior or subordinated debt securities at fixed or floating rates.
In September 2003, the Company conducted a “modified Dutch auction” tender offer in which $197.4 million of the Company’s floating rate subordinated notes due in May and October 2011 were repurchased. The associated debt extinguishment cost of $24.2 million is separately included in noninterest expense in the statement of income. In October 2003, the Company repaid $50 million of its Senior Floating Rate Medium-Term Notes due in October 2004 that were callable in 2003.
In November 2003, under the shelf registration, the Company issued an additional $150 million of 2.70% fixed rate Senior Notes due in May 2006, which were also hedged with LIBOR-based floating interest rate swaps.
8. 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 52 branches in Arizona. Vectra Bank Colorado operates 53 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.
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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
Nevada State Bank
National Bank of Arizona
Vectra Bank Colorado
The Commerce Bank of Washington
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 (expense) continues to decrease as the underlying hedges mature and new hedges are being recorded directly at the banking subsidiaries.
13
The following table presents selected operating segment information for the three months ended September 30, 2003 and 2002:
(In millions)
Zions First
National Bank
and Subsidiaries
California
Bank & Trust
Nevada
State Bank
National
Bank of
Arizona
CONDENSED INCOME STATEMENT
Noninterest income
Noninterest expense
Income tax expense (benefit)
Income (loss) on discontinued operations
Income before cumulative effect adjustment
Cumulative effect adjustment
Net income (loss)
AVERAGE BALANCE SHEET DATA
Assets
Net loans and leases
Deposits
Shareholder’s equity
Consolidated
Company
14
The following table presents selected operating segment information for the nine months ended September 30, 2003 and 2002:
15
FINANCIAL HIGHLIGHTS
EARNINGS
Taxable-equivalent net interest income
Income before income taxes and minority interest
PER COMMON SHARE
Net income (diluted)
Income from continuing operations (diluted)
Loss on discontinued operations (diluted)
Dividends
Book value
SELECTED RATIOS
Return on average assets
Return on average common equity
Efficiency ratio
Net interest margin
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FINANCIAL HIGHLIGHTS (Continued)
AVERAGE BALANCES
Total assets
Securities
Total deposits
Shareholders' equity
Weighted average common and common-equivalent shares outstanding
AT PERIOD END
Sold loans being serviced
Common shares outstanding
Average equity to average assets
Common dividend payout
Nonperforming assets
Loans past due 90 days or more
Nonperforming assets to net loans and leases, other real estate owned and other nonperforming assets at period end
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OPERATING RESULTS
Zions Bancorporation and subsidiaries (“the Company”) achieved net income of $62.1 million or $0.68 per diluted share for the third quarter of 2003, an increase of 57.4% and 58.1%, respectively, over the $39.4 million, or $0.43 per diluted share, in the third quarter of 2002. Net income for the third quarter of 2003 included a loss on discontinued operations of $2.1 million, or $0.03 per diluted share, compared to a loss of $25.9 million, or $0.28 per diluted share in the third quarter of 2002. Income from continuing operations for the third quarter of 2003 was $64.2 million, a decrease of 1.8% from $65.4 million in the third quarter of 2002. Income from continuing operations for the third quarter of 2003 was $0.71 per diluted share, unchanged from the third quarter of 2002.
Results of operations for the third quarter of 2003 include the impact of several key strategic actions undertaken by management. These include the previously announced restructuring of Vectra Bank Colorado (“Vectra”), the rationalization of certain branches at Zions First National Bank (“ZFNB”), discontinued operations related to the exit of certain e-commerce activities (commenced in 2002), restructuring of debt, and the final disposition of certain strategic investments. The impact of these items during the third quarter of 2003 according to the line item affected in the statement of income is summarized as follows:
Impact of Strategic Actions
Pretax
Amount
After-tax
Diluted
EPS
Gain on sale of ICAP, plc
Gain on sale of other equity investments
Restructuring charges—Vectra
ZFNB branches
Vectra restructuring
Loss on sale of Lexign, Inc.
Other tax effects of above items
Total impact
Discussion of these items follows under the respective captions.
Results of operations for the third quarter of 2002 include the effects of the Company’s decisions to discontinue the operations of certain e-commerce subsidiaries. Impairment losses principally relating to goodwill and identified intangibles of $28.7 million were included in discontinued operations for the third quarter of 2002. Continuing operations in the third quarter of 2002 also included venture capital write-downs (including a minority interest in an investment banking firm) of $28.9 million (discussed under Noninterest Income following), $2.7 million of restructuring charges, and $4.0 million in impairment losses on long-lived assets, both of which related to branch closings and trust and administrative operations.
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Net income for the first nine months of 2003 was $242.2 million or $2.67 per diluted share, compared to $168.8 million or $1.83 per diluted share for the first nine months of 2002. Included in net income for the first nine 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. Included in net income for the first nine months of 2003 was a loss on discontinued operations of $1.8 million or $0.02 per diluted share, compared to a loss of $31.9 million, or $0.34 per diluted share for the same period in 2002. Income from continuing operations for the first nine months of 2003 was $244.0 million, or $2.69 per diluted share, an increase of 4.7% and 6.7%, respectively, over income from continuing operations of $233.0 million, or $2.52 per diluted share for the same period in 2002.
The earnings improvement in 2003 compared to 2002 continues to reflect the results of several actions commenced by the Company in 2002. In addition to the above discussion for the third quarter of 2003 on management’s strategic actions, the Company committed in 2002 to reduce the annual run-rate of expenses by $50 million, which was met during the second quarter of 2003. Actions taken by management to control expenses include the e-commerce restructuring activities, branch closures, scale-back of the indirect auto lending business, operations consolidation, and the improvement of procurement processes.
The annualized return on average assets was 0.86% in the third quarter of 2003 compared to 0.59% in the third quarter of 2002. For the same comparative periods, the annualized return on average common equity was 9.89% compared to 6.51%.
For the first nine months of 2003, the annualized return on average assets was 1.16% compared to 0.87% for the first nine months of 2002. For the same comparative periods, the annualized return on average common equity was 13.21% compared to 9.68%.
NET INTEREST INCOME, INTEREST RATE SPREADS AND INTEREST RATE SENSITIVITY
Net interest income for the third quarter of 2003, adjusted to a fully taxable-equivalent basis, increased 6.0% to $282.8 million compared to $266.7 million for the third quarter of 2002. Net interest margin was 4.39% for the third quarter of 2003, compared to 4.50% for the second quarter of 2003 and 4.53% for the third quarter of 2002. For the first nine months of 2003, net interest income on a fully taxable-equivalent basis was $834.6 million, an increase of 5.3% compared to $792.2 million for the same period in 2002. Net interest margin for the first nine months of 2003 was 4.48% compared to 4.61% for the same period in 2002. The increase in net interest income results from continued increases in average interest-earning assets funded in part through strong growth in average noninterest-bearing deposits and the Company’s higher tangible capital levels. The declining net interest margin continues to result from the maturity of higher rate fixed loans and securities being replaced by lower yielding assets. The Company has not been able to adjust deposit liability rates enough to offset the decreased rate on earning assets.
Interest rate risk is the most significant market risk regularly undertaken by the Company and is closely monitored. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates and to timing differences in the repricing of assets and liabilities, net of derivative activity. The Company’s Asset/Liability Committee (“ALCOM”) measures and reviews the market risk of the Company and establishes policies and procedures to limit its exposure to changes in interest rates. These policies are reviewed and approved by the Boards of Directors of the Company’s subsidiary banks. Interest
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rate risk is monitored through the use of two complementary measurement methods: duration of equity and income simulation. Duration of equity is a measure of changes in the market value of equity in response to changes in interest rates. Income simulation analyzes the change in income in response to changes in interest rates.
In general, the Company’s interest rate risk management practices seek to not take positions with regard to either duration or income simulation that seek to benefit from a particular forecast of interest rate changes, and under most circumstances to maintain a slightly “asset sensitive” position. An “asset sensitive” position is one in which net interest income would increase if interest rates increase. In a rising rate environment management believes that the market cost of equity, or implied rate at which future earnings are discounted, also would tend to rise. Therefore, it seeks to have increased net interest income in a rising environment in order to mitigate declines in the market value of equity due to higher discount rates. Refer to Zions Bancorporation’s Annual Report on Form 10-K for the year ended December 31, 2002 for ALCOM objectives and more detailed descriptions of the computations of duration of equity and income simulation.
At September 30, 2003, the Company’s duration of equity was estimated to be within a range of negative 0.67 years and positive 2.48 years. Duration of equity is highly sensitive to the assumptions used for deposits with no maturities, such as checking, savings, and money market accounts. Given the uncertainty of these durations, management views the duration of equity as falling within a range of possibilities. If interest rates were to sustain an immediate parallel increase of 200 basis points, the duration of equity would be estimated to fall within the range of positive 0.70 years and positive 3.85 years.
For income simulation, Company policy requires that net interest income not be expected to decline by more than 10% during one year if rates were to immediately rise or fall in parallel by 200 basis points. At September 30, 2003, net interest income was expected to increase 1.0% if interest rates were to sustain an immediate parallel increase of 200 basis points and decline 8.7% if rates were to sustain an immediate parallel decrease of 200 basis points.
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. During the first nine months of 2003, the Company swapped $1,136 million of floating rate loans and securities for “received fixed” contracts, and at September 30, 2003 had $2,006 million notional amount of such swaps in total. These swaps have remaining maturities of approximately 3 months to 5 years, and qualify as cash flow hedges under SFAS 133. Of such swaps, $120 million mature between January 1 and December 31, 2004. At September 30, 2003, the Company believes that its overall asset/liability management position remains somewhat asset sensitive.
The yield on average earning assets for the third quarter of 2003 decreased 81 basis points compared to the third quarter of 2002. The average rate paid during the third quarter on interest-bearing funds decreased 77 basis points from the third quarter of 2002. Comparing the first nine months of 2003 with 2002, the yield on average earning assets decreased 76 basis points, while the cost of interest-bearing funds decreased 71 basis points.
The spread on average interest-bearing funds for the third quarter of 2003 was 4.09%, down from 4.20% for the second quarter of 2003 and 4.13% for the third quarter of 2002. The spread on average interest-bearing funds for the first nine months of 2003 was 4.17%, down from 4.22% for the first nine months of 2002.
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CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES
September 30, 2002
Money market investments
Securities:
Available for sale
Total securities
Net loans and leases (2)
Total loans and leases
Total interest-earning assets
LIABILITIES
Interest-bearing deposits:
Savings and NOW
Money market super NOW
Total interest-bearing deposits
Borrowed funds:
Federal funds purchased and security repurchase agreements
FHLB advances and other borrowings:
Total borrowed funds
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total shareholders' equity
Total liabilities and shareholders' equity
Spread on average interest-bearing funds
Taxable-equivalent net interest income and net yield on interest-earning assets
21
Held to maturity
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PROVISION FOR LOAN LOSSES
The provision for loan losses was $18.3 million for the third quarter of 2003, compared to $18.2 million for the second quarter of 2003, and $22.3 million for the third quarter of 2002. The provision for loan losses for the first nine months of 2003 was $54.0 million, a decrease of 3.8% from the $56.1 million provision for the first nine months of 2002. Annualized, the year-to-date provision is 0.37% of average loans and leases for 2003 compared to 0.42% for the first nine 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 third quarter of 2003 was $190.2 million compared to $74.8 million for the third quarter of 2002. As shown in the table below, a significant portion of the increase results from the sale of certain strategic investments during the third quarter of 2003 and a decrease in write-downs of venture capital investments, which are both included in equity securities gains (losses):
Gain on sale of ICAP, plc stock
Net gain on sale of other equity investments
Write-downs of venture capital investments(in 2002, the write-downs included$10.3 million for a minority interest in aninvestment banking firm)
Total
The gain on the sale of ICAP, plc was previously reported in a Form 8-K filed with the Securities and Exchange Commission on July 1, 2003. Net of income taxes and minority interest, the results of the venture capital funds reduced net income by $3.5 million or $0.04 per diluted share for the third quarter of 2003, compared to a reduction of $9.9 million or $0.11 per diluted share for the third quarter of 2002. Excluding equity securities gains (losses), noninterest income for the third quarter of 2003 increased 11.3% from the third quarter of 2002.
Comparing other significant components of the change in noninterest income, service charges and fees on deposit accounts increased 11.1%, loan sales and servicing income increased 23.2%, other service charges, commissions and fees increased 13.8%, income from securities conduit increased 41.6%, dividends and other investment income decreased 32.4%, and other noninterest income increased 91.8%.
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 a gain on sale of $2.4 million from the securitization of $587 million of small business 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. The decrease in dividends and other investment income included a $1.5 million decrease in dividend income from Federal Home Loan Bank (“FHLB”) investments resulting from decreased investments in FHLB stock and a decreased dividend
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rate. Other decreases in dividends and other investment income were from equity in earnings of investments in unconsolidated companies. The increase in other noninterest income includes income of $2.6 million from the demutualization of an underwriter for the Company’s “bank-owned life insurance.”
Noninterest income for the first nine months of 2003 of $387.3 million increased 43.3% from $270.2 million for the first nine months of 2002. Comparing significant components of this change, service charges and fees on deposit accounts increased 10.3%, loan sales and servicing income increased 40.7%, other service charges, commissions and fees increased 9.6%, income from securities conduit increased 53.6%, dividends and other investment income decreased 21.7%, market making, trading and nonhedge derivative income decreased 20.3%, equity securities gains (losses) increased 357.5%, and other noninterest income decreased 19.7%.
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 $59.7 million in the first nine months of 2002, compared to $64.8 million in the first nine months of 2003. Market making, trading and nonhedge derivative income was $25.0 million in the first nine months of 2003 compared to $17.7 million in the first nine months of 2002, excluding the $13.6 million adjustment. Of these amounts, market making and trading income was $21.5 million for 2003 compared to $16.0 million for 2002 and nonhedge derivative income was $3.5 million compared to $1.7 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. While revenue from this source has increased significantly compared to the prior year, it was essentially unchanged from the second quarter of 2003.
The decrease in dividends and other investment income primarily results from a $4.3 million decrease in FHLB dividend income. In addition to the previous explanations, equity securities gains (losses) for the first nine months of 2003 included a $6.0 million write-down in the Company’s investment in Identrus, LLC. Net of minority interest and income taxes, the results of the venture capital funds reduced net income by approximately $10.8 million or $0.12 per diluted share for the first nine months of 2003, compared to a reduction of $10.5 million or $0.11 per diluted share for the same period in 2002.
NONINTEREST EXPENSE
Noninterest expense for the third quarter of 2003 was $245.5 million, an increase of $26.3 million or 12.0% over $219.2 million for the third quarter of 2002. Substantially all of the increase is due to debt extinguishment cost of $24.2 million incurred when the Company repurchased $197.4 million of its debt. See the “Impact of Strategic Actions” table previously presented, the following discussion under Liquidity, and Note 7 of the Notes to Consolidated Financial Statements. Excluding the debt extinguishment cost, noninterest expense for the third quarter of 2003 increased 1.0% over the third quarter of 2002. This small increase reflects the Company’s cost containment efforts initiated in 2002. As noted in the “Impact of Strategic Actions” table, $0.6 million of the total restructuring charges of $0.8 million relate to the Vectra restructuring discussed subsequently. Also, $1.2 million of the total impairment losses on long-lived assets of $1.6 million relate to ZFNB’s efforts to exit certain branches in supermarket locations.
Noninterest expense for the first nine months of 2003 of $675.9 million increased 5.6% from $640.1 million for the first nine months of 2002. Excluding the debt extinguishment cost previously discussed, noninterest expense increased 1.8%, again reflecting the cost containment initiative. The increase in salaries and
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employee benefits of $10.1 million or 2.8% was substantially driven by increases of $7.6 million in retirement plan expenses and $1.8 million in employee health insurance costs.
For the third quarter of 2003, the efficiency ratio, defined as noninterest expense as a percentage of the sum of taxable-equivalent net interest income and noninterest income, was 52.08% compared to 74.23% for the third quarter of 2002. For the first nine months of 2003, the efficiency ratio was 55.42% compared to 64.57% for the same period in 2002. The efficiency ratios noted for both 2003 and 2002 were impacted by a number of nonrecurring and strategic items; management believes that the current run rate efficiency ratio is approximately 57%.
At September 30, 2003, the Company had 7,875 full-time equivalent employees, 409 branches, and 576 ATMs, compared to 8,049 full-time equivalent employees, 409 branches, and 588 ATMs at September 30, 2002.
IMPAIRMENT LOSS ON GOODWILL
The impairment loss on goodwill relates to the restructuring of Vectra Bank Colorado (“Vectra”). As discussed in previous quarters, Vectra has taken a number of steps to improve performance, including the engagement of a national consulting firm to analyze its operations and improve profitability. As a result of this analysis, Vectra is restructuring to focus on small- and mid-sized businesses and their employees.
As part of the restructuring, the Company offered for sale 11 of Vectra’s branches. The assets and liabilities to be sold were measured at their fair value based on bids, letters of intent and current negotiations. The comparison of fair value to current carrying value for these branches resulted in an impairment loss on goodwill of $7.1 million. The loans and deposits associated with these branches at September 30, 2003 were $153.9 million and $133.0 million, respectively.
As a result of this restructuring, during the third quarter the Company performed an impairment analysis on the retained operations of Vectra. The Company was assisted in this analysis by independent valuation consultants from KPMG LLP. As a result, the Company recognized an additional impairment loss on goodwill of $68.5 million. The determination of this amount was made in accordance with the calculation process specified in SFAS 142. The “Step 1” calculation indicated an impairment of $38.7 million, determined from comparing Vectra’s “fair value of equity” to its carrying value, adjusted to exclude the branches being sold. The results of “Step 1” triggered the requirement to perform “Step 2,” which compared the implied amount of goodwill (Step 1 “fair value of equity” less Step 2 “fair value of assets and liabilities”) to the carrying value of goodwill, as adjusted to exclude the branches being sold. The resultant amount of $68.5 million, when added to the $7.1 million discussed in the previous paragraph, totals to the $75.6 million impairment loss on goodwill shown in the “Impact of Strategic Actions” table. The determination of the fair values was made by a combination of an income approach using a discounted projected cash flow analysis and market value approaches using guideline companies and acquisition transactions.
INCOME TAXES
The Company’s income taxes on continuing operations increased 109.3% to $66.5 million for the third quarter of 2003 compared to $31.8 million for the third quarter of 2002. The Company’s effective income tax rate was 52.0% for the third quarter of 2003 compared to 33.6% for the third quarter of 2002. The effective income tax rate for the first nine months of 2003 was 40.6% compared to 34.4% for the first nine months of 2002. Excluding the impairment loss on goodwill previously discussed, because of its nondeductibility for income tax purposes, the effective tax rate was 32.7% for the third quarter of 2003 and 34.1% for the first nine months of 2003.
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The “Other tax effects of above items” of $7.3 million included in the “Impact of Strategic Actions” table consists of (1) an income tax benefit of $11.9 million (see Discontinued Operations following) and (2) income tax expense of $4.6 million related to the estimated premium expected on the sale of the Vectra branches previously discussed.
DISCONTINUED OPERATIONS
The Company decided during the third quarter of 2002 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 nine months of 2002 were reclassified to reflect the discontinued operations of these subsidiaries. One of these subsidiaries was sold in December 2002.
During the third quarter of 2003, the Company sold the remaining subsidiary, Lexign, Inc., and recognized a pretax loss on sale of $2.4 million. However, the sale also triggered a capital loss for income tax purposes that was recognizable only due to capital gains from the sale of equity investments during the quarter. This capital loss resulted in an income tax benefit of $11.9 million, which is included in income taxes on continuing operations.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS
Average earning assets increased 8.5% to $24.9 billion for the first nine months of 2003 compared to $23.0 billion for the first nine months of 2002. Average earning assets comprised 89.0% of total average assets for the first nine months of 2003, compared with 88.1% for the first nine months of 2002.
Average money market investments, consisting of interest-bearing deposits, federal funds sold and security resell agreements, increased 33.6% to $1,365 million for the first nine months of 2003 compared to $1,022 million for the first nine 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 9.8% to $4,308 million for the first nine months of 2003 compared to $3,922 million for the first nine months of 2002. Average investment portfolio securities increased 9.7% and average trading securities increased 10.7%.
Average net loans and leases increased 6.8% to $19.3 billion for the first nine months of 2003 compared to $18.0 billion for the first nine months of 2002, representing 77.2% of earning assets in the first nine months of 2003 compared to 78.5% in the first nine months of 2002. Average net loans and leases were 95.9% of average total deposits for the first nine months of 2003 compared to 98.8% for the first nine months of 2002.
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INVESTMENT SECURITIES
The following table presents the Company’s available-for-sale investment securities:
2003
December 31,
2002
U.S. Treasury securities
U.S. government agencies and corporations:
Small Business Administration loan-backed securities
Other agency securities
States and political subdivisions
Mortgage/asset-backed and other debt securities
Other securities:
Mutual funds
Stock
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.
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The table below sets forth the amount of loans outstanding by type:
Commercial lending:
Commercial and industrial
Leasing
Owner occupied (1)
Total commercial lending
Commercial real estate:
Construction
Term
Total commercial real estate
Consumer:
Home equity credit line
1-4 family residential (2)
Bankcard and other revolving plans (3)
Other (4)
Total consumer
Foreign loans
Other receivables
Total loans
Loan growth for the quarter was modest, reflecting the improving but still soft economy. On-balance-sheet net loans and leases at September 30, 2003 were $19.4 billion. On balance sheet and sold loans being serviced were $22.3 billion at September 30, 2003, an increase of 4.7% from September 30, 2002 and an annualized increase of 5.0% from December 31, 2002.
On September 30, 2003, long-term conforming first mortgage real estate loans serviced for others totaled $287 million, and consumer and other loan securitizations, which include loans sold under revolving securitization structures, totaled $2,895 million. During the first nine months of 2003, the Company sold $485 million of loans classified as held for sale, and securitized and sold home equity credit line, small business and other loans totaling $956 million. During the first nine months of 2003, total loans sold were $1,441 million compared to total loans sold of $1,583 million during the first nine months of 2002.
As of September 30, 2003, the following table shows that the Company had residual interests of $295 million recorded on its balance sheet related to the $2,895 million of loans sold to securitized trusts. The Company
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does not control or have any equity interest in the trusts. However, as is common with securitized transactions, the Company has subordinated retained interests of $167 million representing the Company’s junior position to other investors in the securities. The capitalized residual cash flows (sometimes called “excess servicing”) of $128 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 September 30, 2003
Subordinated
retained
interests
Capitalized
residual
cash flows
Home equity credit lines
Nonconforming residential real estate loans
Small business loans
SBA 7(a) loans
Farmer Mac
RISK ELEMENTS
The following table sets forth the Company’s nonperforming assets:
Nonaccrual loans
Restructured loans
Other real estate owned and other nonperforming assets
% of net loans and leases*, other real estate owned and other nonperforming assets
Accruing loans past due 90 days or more
% of net loans and leases*
For the first nine months of 2003, the Company experienced stable credit quality performance in a weak economic environment in certain of the Company’s markets. Total nonperforming assets decreased $9.8 million from June 30, 2003. Nonaccrual and restructured loans decreased $19.2 million and other real estate owned and other nonperforming assets increased $9.4 million from June 30, 2003. The increase in other real estate owned from June 30, 2003 includes a $4.9 million owner-occupied building that was sold subsequent to September 30, 2003 and a golf course property for approximately $4.0 million that is in process of being sold.
The Company’s total recorded investment in impaired loans included in nonaccrual loans and leases amounted to $45 million on September 30, 2003 compared to $44 million on December 31, 2002 and $75 million on September 30, 2002. Loans are considered impaired when it is probable that the Company will be
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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 September 30, 2003, December 31, 2002, and September 30, 2002, is a required allowance of $6 million, $7 million and $13 million, respectively, on $28 million, $20 million and $44 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:
Loans* and leases outstanding (net of unearned income) at end of period
Average loans* and leases outstanding (net of unearned income)
Allowance for loan losses:
Balance at beginning of the year
Allowance of companies acquired
Allowance associated with repurchased revolving securitized loans
Provision charged against earnings
Loans and leases charged-off:
Commercial lending
Commercial real estate
Consumer
Recoveries:
Net loan and lease charge-offs
Balance at end of period
Ratio of annualized net charge-offs to average loans and leases
Ratio of allowance for loan losses to net loans and leases
Ratio of allowance for loan losses to nonperforming loans
Ratio of allowance for loan losses to nonaccrual loans and accruing loans past due 90 days or more
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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 consumer charge-offs for the first nine months of 2003 were approximately $6.3 million related to the auto loan and credit card securitizations repurchased in December 2002.
At September 30, 2003, the allowance for loan losses included an allocation of $10.0 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 September 30, 2003, December 31, 2002, and September 30, 2002 totaled $8,008 million, $7,915 million, and $7,702 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
Consistent with the second quarter of 2003, deposit growth continued to be moderate compared to the growth rates experienced during 2002 and the first quarter of 2003. Deposits at September 30, 2003 increased 7.2% over balances reported one year ago to $20.9 billion, and increased 4.8% annualized from balances reported at June 30, 2003 and 4.9% annualized from December 31, 2002. The Company’s core deposits, consisting of demand, savings and money market, and time deposits under $100,000 increased 8.0% over balances reported one year ago, 4.0% annualized from balances reported at June 30, 2003 and 5.8% annualized from December 31, 2002.
Average total deposits of $20.1 billion for the first nine months of 2003 increased 10.0% compared to $18.3 billion for the first nine months of 2002, with average noninterest-bearing demand deposits increasing 16.5%. Average savings and NOW deposits increased 16.9% and average money market and super NOW deposits increased 13.8% during the first nine months of 2003 compared to the same period in 2002. Average time deposits under $100,000 decreased 13.4% and time deposits $100,000 and over decreased 13.9% for the first nine months of 2003 compared to the same period in 2002. Average foreign deposits increased 64.0% 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, and time deposits under $100,000, constituted 92.7% of total deposits on September 30, 2003, as compared to 92.1% on December 31, 2002 and 91.9% on September 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 shelf registration statement with the Securities and Exchange Commission, which became effective during the third quarter of 2002, for the issuance of Senior Medium-Term Notes, Series A and Subordinated Medium-Term Notes, Series B. As of September 30, 2003, the Company had issued $290 million of Senior Medium-Term Notes. During the third quarter of 2003, the Company filed a new registration statement, which also constituted a post effective amendment to the prior registration statement under which an aggregate of $50 million in principal amount of debt securities remained unsold. This shelf registration statement provides for the issuance of up to $1,050 million of senior or subordinated debt securities at fixed or floating rates. In September 2003, the Company issued $500 million of 6.00% fixed rate subordinated notes due in September 2015. The notes are not redeemable prior to maturity and require semiannual interest payments. The Company subsequently hedged these notes with LIBOR-based floating interest rate swaps. In November 2003, under the shelf registration, the Company issued an additional $150 million of 2.70% fixed rate Senior Notes due in May 2006, which were also hedged with LIBOR-based floating interest rate swaps.
In September 2003, the Company conducted a “modified Dutch auction” tender offer in which $197.4 million of the Company’s floating rate subordinated notes due in May and October 2011 were repurchased. The associated debt extinguishment cost of $24.2 million is separately included in noninterest expense in the statement of income. In October 2003, the Company repaid $50 million of its Senior Floating Rate Medium-Term Notes due in October 2004 that were callable in 2003. Also, in June 2003, the Company repaid $110 million of floating rate subordinated notes that were callable in 2003.
At September 30, 2003, $243.8 million of dividend capacity was available from subsidiaries to pay to the parent without having to obtain regulatory approval. During the nine months ended September 30, 2003, dividends from subsidiaries were $191.5 million. The parent also has a program to issue short-term commercial paper. At September 30, 2003, outstanding commercial paper was $109.8 million compared to $339.6 million at September 30, 2002. Also at September 30, 2003, the parent had a revolving credit facility with a bank totaling $40 million, which was unused at September 30, 2003.
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 floating rate 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
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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 September 30, 2003, the size of the Liquidity Facility commitment was $5.1 billion and the market value of the Conduit’s securities portfolio was approximately $4.6 billion. No amounts were outstanding under the Liquidity Facility at September 30, 2003.
CAPITAL RESOURCES AND DIVIDENDS
Total shareholders’ equity on September 30, 2003 was $2,486 million, an increase of 4.7% over the $2,374 million on December 31, 2002, and an increase of 5.4% over the $2,358 million on September 30, 2002. The Company’s capital ratios are as follows as of the dates indicated:
Tangible common equity ratio
Average common equity to average assets (three months ended)
Risk-based capital ratios:
Tier 1 leverage
Tier 1 risk-based capital
Total risk-based capital
The tangible common equity ratio at September 30, 2003 increased from 6.20% at June 30, 2003. This unusually large increase results primarily from the effects of the strategic actions previously discussed, including the capital gains realized from the sale of certain equity investments. The increase in the total risk-based capital ratio from year-end reflects a net increase of $192.6 million in outstanding subordinated debt that qualifies for inclusion in total risk-based capital.
During the third quarter of 2003, the Company repurchased 352,983 shares of common stock at a cost of $19.3 million, or an average price of $54.60 per share. For the first nine months of 2003, the Company repurchased 1,577,631 shares at a cost of $75.7 million, or an average price of $48.00 per share. As of September 30, 2003, the Company had $1.9 million remaining in its then authorized share repurchase program. On October 17, 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 nine months of 2002, the Company repurchased 1,635,173 shares of common stock at a cost of $83.5 million, or an average price of $51.04 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. This $.09 per share dividend increased the 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 third quarter of 2003 was 43.4%, compared to 20.5% for the second quarter of 2003 and 46.4% for the third quarter of 2002.
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The increased dividend payout ratio for the third quarter of 2003 reflects the increased dividend for the quarter and the ratios for both the third quarters of 2003 and 2002 are impacted by the earnings effects of the strategic actions previously discussed.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the most significant market risk regularly undertaken by the Company. The discussion of this Item is included in the Net Interest Income, Interest Rate Spreads and Interest Rate Sensitivity section under Management’s Discussion and Analysis.
ITEM 4. 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
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 effect on its consolidated financial position, operations, or liquidity.
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Description
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Zions Bancorporation filed the following reports on Form 8-K during the quarter ended September 30, 2003:
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.
Form 8-K filed on July 16, 2003 (Items 7 and 9) – Copy of Press Release issued July 15, 2003 announcing Board of Directors’ authorization of a $0.30 dividend payable August 27, 2003.
Form 8-K filed on July 17, 2003 (Items 7 and 9) – Copy of Press Release issued July 17, 2003 announcing 2003 second quarter earnings.
Form 8-K filed on August 21, 2003 (Item 7) – Exhibits to Registration Statement on Form S-3 (File No. 333-107746), which was declared effective on August 7, 2003.
Form 8-K filed on August 29, 2003 (Items 5 and 7) – Copy of Press Release dated August 28, 2003 announcing modified Dutch auction tender offer for two series of notes.
Form 8-K filed on September 4, 2003 (Items 7 and 9) – Copy of Press Releases dated September 2, 2003 announcing twelve-year subordinated note offering and September 3, 2003 announcing pricing of $500 million twelve-year subordinated notes.
Form 8-K filed on September 10, 2003 (Item 7) – Exhibits to Registration Statement on Form S-3 (File No. 333-107746), which was declared effective on August 7, 2003.
Form 8-K filed on September 11, 2003 (Items 7 and 9) – Copy of slides from presentation delivered by Chairman, President and CEO Harris H. Simmons at the Lehman Brothers Investor Conference in New York City.
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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
Date: November 13, 2003
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