-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G0nxseJ2/5JgmNgD3bwpPaQYs8ZzAwY9Zh2hOMqSVqOeTaeGfQcH76irCna3ezUz gBG+07NLjQrEKWr2FzTcNQ== 0000109380-01-500010.txt : 20010815 0000109380-01-500010.hdr.sgml : 20010815 ACCESSION NUMBER: 0000109380-01-500010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZIONS BANCORPORATION /UT/ CENTRAL INDEX KEY: 0000109380 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 870227400 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-02610 FILM NUMBER: 1711237 BUSINESS ADDRESS: STREET 1: ONE SOUTH MAIN STREET STREET 2: SUITE 1380 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 BUSINESS PHONE: 8015244787 MAIL ADDRESS: STREET 1: ONE SOUTH MAIN STREET STREET 2: SUITE 1380 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 FORMER COMPANY: FORMER CONFORMED NAME: ZIONS FIRST NATIONAL INVESTMENT CO DATE OF NAME CHANGE: 19660921 FORMER COMPANY: FORMER CONFORMED NAME: ZIONS UTAH BANCORPORATION DATE OF NAME CHANGE: 19870615 10-Q 1 zions2q01-10q.txt ZIONS BANCORPORATION 10-Q 6/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ------------- 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 (I.R.S. Employer of incorporation or organization) Identification No.) ONE SOUTH MAIN, SUITE 1380 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 and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, without par value, outstanding at August 3, 2001 92,376,614 shares 1 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 Cash Flows 6 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss) 8 Notes to Consolidated Financial Statements 9 ITEM 2. Management's Discussion and Analysis 14 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 29 PART II. OTHER INFORMATION ----------------- ITEM 4. Submission of Matters to a Vote of Shareholders 29 ITEM 6. Exhibits and Reports on Form 8-K 30 SIGNATURES 30 - ---------- 2 PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS (Unaudited) -------------------------------- ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, June 30, (In thousands, except share amounts) 2001 2000 2000 ------------ ------------ ------------ (Unaudited) (Unaudited) ASSETS Cash and due from banks .......................................... $ 978,838 $ 1,047,252 $ 882,064 Money market investments: Interest-bearing deposits ...................................... 4,083 21,237 18,580 Federal funds sold ............................................. 23,965 50,426 210,986 Security resell agreements ..................................... 353,704 456,404 498,581 Investment securities: Held to maturity, at cost (approximate market value $51,109, $3,152,740, and $3,209,248) ................... 51,109 3,125,433 3,241,734 Available for sale, at market (includes $0 at June 30, 2001 and $151,424 at December 31, 2000 pledged to creditors) ...... 2,993,101 782,466 746,324 Trading account, at market (includes $167,487 at June 30, 2001 and $15,096 at December 31, 2000 pledged to creditors) ....... 262,297 280,410 340,070 ------------ ------------ ------------ 3,306,507 4,188,309 4,328,128 Loans: Loans held for sale ............................................ 207,337 181,159 186,644 Loans, leases and other receivables ............................ 16,359,404 14,276,999 13,658,611 ------------ ------------ ------------ 16,566,741 14,458,158 13,845,255 Less: Unearned income and fees, net of related costs ............... 90,422 80,125 70,004 Allowance for loan losses .................................... 229,865 195,535 197,430 ------------ ------------ ------------ Net loans .................................................. 16,246,454 14,182,498 13,577,821 Premises and equipment, net ...................................... 350,715 314,938 294,628 Goodwill ......................................................... 731,176 571,365 571,736 Core deposit intangibles ......................................... 94,845 70,075 75,828 Other real estate owned .......................................... 10,925 9,574 4,073 Other assets ..................................................... 1,386,587 1,027,365 996,010 ------------ ------------ ------------ $ 23,487,799 $ 21,939,443 $ 21,458,435 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand ..................................... $ 4,142,821 $ 3,585,672 $ 3,421,032 Interest-bearing: Savings and money market ..................................... 9,193,595 8,270,122 7,827,135 Time under $100,000 .......................................... 2,072,538 1,628,890 1,665,752 Time over $100,000 ........................................... 1,666,965 1,448,905 1,473,213 Foreign ...................................................... 94,165 136,394 126,851 ------------ ------------ ------------ 17,170,084 15,069,983 14,513,983 Securities sold, not yet purchased ............................... 164,345 291,102 311,133 Federal funds purchased .......................................... 819,437 1,069,124 479,543 Security repurchase agreements ................................... 1,132,907 1,327,721 1,538,393 Accrued liabilities .............................................. 510,305 310,287 319,878 Commercial paper ................................................. 352,632 198,239 235,956 Federal Home Loan Bank advances and other borrowings: Less than one year ............................................. 265,275 1,290,960 1,819,328 Over one year .................................................. 242,337 143,776 145,712 Long-term debt ................................................... 616,681 419,550 420,099 ------------ ------------ ------------ Total liabilities ............................................ 21,274,003 20,120,742 19,784,025 ------------ ------------ ------------ Minority interest ................................................ 16,074 39,857 40,426 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 92,328,261, 87,100,188, and 85,726,222 shares .......................... 1,120,991 907,604 889,422 Accumulated other comprehensive income (loss) .................... 74,796 (3,644) (20,322) Retained earnings ................................................ 1,001,935 874,884 764,884 ------------ ------------ ------------ Total shareholders' equity ..................................... 2,197,722 1,778,844 1,633,984 ------------ ------------ ------------ $ 23,487,799 $ 21,939,443 $ 21,458,435 ============ ============ ============
3 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended (In thousands, except per share amounts) June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Interest income: Interest and fees on loans ................................. $ 331,947 $ 299,142 $ 653,519 $ 579,526 Interest on loans held for sale ............................ 3,158 3,261 6,242 6,580 Lease financing ............................................ 5,897 4,100 10,917 8,312 Interest on money market investments ....................... 11,451 18,313 21,665 38,402 Interest on securities: Held to maturity - taxable ............................... 796 48,585 1,781 97,327 Held to maturity - nontaxable ............................ -- 4,148 -- 8,161 Available for sale - taxable ............................. 40,904 7,627 89,880 16,189 Available for sale - nontaxable .......................... 6,059 1,735 12,123 3,013 Trading account .......................................... 7,197 9,712 18,195 18,668 --------- --------- --------- --------- Total interest income .................................... 407,409 396,623 814,322 776,178 --------- --------- --------- --------- Interest expense: Interest on savings and money market deposits .............. 68,868 81,140 145,923 156,036 Interest on time and foreign deposits ...................... 52,883 38,244 99,413 77,340 Interest on borrowed funds ................................. 50,640 82,641 118,131 157,212 --------- --------- --------- --------- Total interest expense ................................... 172,391 202,025 363,467 390,588 --------- --------- --------- --------- Net interest income ...................................... 235,018 194,598 450,855 385,590 Provision for loan losses .................................... 12,235 6,214 25,007 11,462 --------- --------- --------- --------- Net interest income after provision for loan losses ...... 222,783 188,384 425,848 374,128 --------- --------- --------- --------- Noninterest income: Service charges on deposit accounts ........................ 25,379 19,263 47,459 38,312 Other service charges, commissions and fees ................ 22,678 15,860 40,940 31,699 Trust income ............................................... 4,655 4,548 9,430 9,035 Investment securities gains (losses), net .................. 2,230 2,321 (6,652) 3,456 Impairment loss on First Security Corporation common stock . -- -- -- (96,911) Underwriting and trading income ............................ 3,550 2,016 9,187 5,363 Loan sales and servicing income ............................ 22,177 12,706 41,772 22,530 Other ...................................................... 13,224 13,885 63,526 20,804 --------- --------- --------- --------- Total noninterest income ................................. 93,893 70,599 205,662 34,288 --------- --------- --------- --------- Noninterest expense: Salaries and employee benefits ............................. 106,887 86,374 214,002 167,511 Occupancy, net ............................................. 15,776 12,910 30,343 25,129 Furniture and equipment .................................... 14,650 13,133 28,906 25,901 Other real estate expense .................................. 222 117 404 416 Legal and professional services ............................ 6,320 5,536 13,935 10,526 Supplies ................................................... 4,086 2,770 7,005 5,276 Postage .................................................... 3,269 2,452 6,377 5,494 Advertising ................................................ 6,378 5,561 12,247 10,125 Merger related expense ..................................... 734 1,152 3,271 42,695 FDIC premiums .............................................. 830 894 1,565 1,761 Amortization of goodwill ................................... 8,722 6,429 15,773 12,843 Amortization of core deposit intangibles ................... 3,253 2,878 5,819 5,754 Other ...................................................... 34,783 27,106 69,662 54,193 --------- --------- --------- --------- Total noninterest expense ................................ 205,910 167,312 409,309 367,624 --------- --------- --------- --------- Income before income taxes ............................... 110,766 91,671 222,201 40,792 Income taxes ................................................. 38,954 31,445 80,092 9,490 --------- --------- --------- --------- Income before minority interest and cumulative effect of change in accounting principle ............. 71,812 60,226 142,109 31,302 Minority interest ............................................ (1,783) 643 (3,387) 211 --------- --------- --------- --------- Income before cumulative effect of change in accounting principle .............................. 73,595 59,583 145,496 31,091 Cumulative effect of change in accounting principle, adoption of FASB Statement No. 133, net of income tax benefit of $4,521 ............................... -- -- (7,159) -- --------- --------- --------- --------- Net income ............................................. $ 73,595 $ 59,583 $ 138,337 $ 31,091 ========= ========= ========= =========
4 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited)
Three Months Ended Six Months Ended (In thousands, except per share amounts) June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Weighted average shares outstanding during the period Basic shares ............................................ 92,165 85,707 90,217 85,674 Diluted shares .......................................... 93,210 86,323 91,339 86,420 Net income per common share: Income before cumulative effect of change in accounting principle: Basic ................................................... $ 0.80 $ 0.70 $ 1.61 $ 0.36 Diluted ................................................. 0.79 0.69 1.59 0.36 Cumulative effect of change in accounting principle, adoption of FASB Statement No. 133: Basic ................................................... -- -- (0.08) -- Diluted ................................................. -- -- (0.08) -- --------- --------- --------- --------- Net income: Basic ................................................... $ 0.80 $ 0.70 $ 1.53 $ 0.36 Diluted ................................................. 0.79 0.69 1.51 0.36
5 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended (In thousands) June 30, June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income ................................................... $ 73,595 $ 59,583 $ 138,337 $ 31,091 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of change in accounting principle-adoption of FASB Stmt No. 133 ................ -- -- 7,159 -- Provision for loan losses ................................ 12,235 6,214 25,007 11,462 Depreciation of premises and equipment ................... 13,775 11,450 26,809 22,818 Amortization ............................................. 17,138 12,487 28,999 24,571 Accretion of unearned income and fees, net of related costs .......................................... 6,629 11,057 3,228 7,524 Income (loss) to minority interest ....................... (1,783) 643 (3,387) 211 Proceeds from sales of trading account securities ........ 45,880,052 25,258,087 92,052,614 77,640,435 Increase in trading account securities ................... (45,816,025) (25,201,390) (92,030,877) (77,652,660) Investment securities (gain) loss, net ................... (2,230) (2,321) 6,652 (3,456) Impairment loss on First Security Corporation common stock ........................................... -- -- -- 96,911 Proceeds from loans held for sale ........................ 147,509 89,753 256,850 282,485 Increase in loans held for sale .......................... (144,192) (97,065) (283,028) (264,391) Net gain on sales of loans, leases and other assets ...... (15,845) (8,910) (28,902) (16,874) Net loss (gain) on other nonmarketable equity securities . 784 (1,254) (27,407) 5,332 Change in accrued income taxes ........................... 72,314 (6,404) 88,534 15,529 Change in accrued interest receivable .................... 11,585 7,912 16,799 (9,420) Change in other assets ................................... (31,898) 61,237 (249,942) (104,911) Change in other liabilities .............................. (285,555) (72,325) 58,246 54,964 Change in accrued interest payable ....................... (1,558) (243) (12,192) 2,775 Other, net ............................................... (2,259) (143) 13,507 1,372 ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities ... (67,297) 128,368 87,006 145,768 ------------ ------------ ------------ ------------ Cash flows from investing activities: Net decrease (increase) in money market investments .......... 654,450 58,539 227,215 (202,978) Proceeds from maturities of investment securities held to maturity ......................................... 450 455,018 1,246 549,352 Purchases of investment securities held to maturity .......... -- (383,971) -- (444,556) Proceeds from sales of investment securities available for sale ....................................... 459,953 171,919 1,592,520 256,263 Proceeds from maturities of investment securities available for sale ....................................... 1,245,045 52,447 2,112,386 79,951 Purchases of investment securities available for sale ........ (1,297,866) (339,528) (2,431,984) (451,485) Proceeds from sales of loans and leases ...................... 259,850 154,432 483,651 292,134 Net increase in loans and leases ............................. (1,029,541) (809,995) (1,419,994) (1,307,747) Payments on leveraged leases ................................. -- -- (4,870) (4,943) Principal collections on leveraged leases .................... -- -- 4,870 4,943 Proceeds from sales of premises and equipment ................ 1,903 3,091 2,182 4,983 Purchases of premises and equipment .......................... (26,512) (18,449) (48,320) (34,988) Proceeds from sales of other assets .......................... 5,953 4,688 8,226 8,904 Cash received for acquisitions, net of cash paid ............. 171,710 -- 264,039 -- ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities ... 445,395 (651,809) 791,167 (1,250,167) ------------ ------------ ------------ ------------
6 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
Three Months Ended Six Months Ended (In thousands) June 30, June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Cash flows from financing activities: Net increase (decrease) in deposits .......................... (122,955) (70,793) 389,949 452,044 Net change in short-term funds borrowed ...................... (507,972) 585,193 (1,492,387) 677,978 Proceeds from FHLB advances over one year .................... 100,000 100,000 100,000 200,000 Payments on FHLB advances over one year ...................... (21,324) (104,489) (22,069) (166,910) Proceeds from issuance of long-term debt ..................... 200,000 -- 201,914 -- Payments on long-term debt ................................... (32,362) (17,548) (32,640) (33,372) Cash paid to reacquire minority interest ..................... (66,044) -- (66,044) -- Proceeds from issuance of common stock ....................... 8,799 544 11,675 4,231 Payments to redeem common stock .............................. -- (24) -- (3,836) Dividends paid ............................................... (18,527) (17,141) (36,985) (41,972) ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities ... (460,385) 475,742 (946,587) 1,088,163 ------------ ------------ ------------ ------------ Net decrease in cash and due from banks ........................... (82,287) (47,699) (68,414) (16,236) Cash and due from banks at beginning of period .................... 1,061,125 929,763 1,047,252 898,300 ------------ ------------ ------------ ------------ Cash and due from banks at end of period .......................... $ 978,838 $ 882,064 $ 978,838 $ 882,064 ============ ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid for: Interest ..................................................... $ 173,809 $ 205,431 $ 372,430 $ 391,116 Income taxes ................................................. 13,813 22,552 25,674 22,556 Loans transferred to other real estate owned ...................... 7,685 588 8,286 2,391
7 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
Six Months Ended June 30, 2001 ------------------------------------------------------------------------- Accumulated Other Comprehensive Income (Loss) ---------------------------------- Net Unrealized Net Gains (Losses) Unrealized Total on Investments Gains on Share- Common and Derivative Retained holders' (In thousands) Stock Securitizations Instruments Subtotal Earnings Equity ---------- ----------- ----------- -------- ---------- ---------- Balance, January 1, 2001 ................................. $ 907,604 $ (3,644) $ (3,644) $ 874,884 $1,778,844 Comprehensive income: Net income for the period .............................. 138,337 138,337 Other comprehensive income: Net realized and unrealized holding gains during the period, net of income tax expense of $19,311 ....... 31,175 31,175 Reclassification for net realized losses recorded in operations, net of income tax benefit of $2,544 .... 4,107 4,107 Change in net unrealized gains on derivative instruments, net of reclassification to operations of $4,936 and income tax expense of $5,347. 8,633 8,633 Cumulative effect of change in accounting principle, adoption of FASB Statement No. 133, net of income tax expense of $21,245 ...................... 13,259 21,266 34,525 ---------- ----------- -------- Other comprehensive income ........................... 48,541 29,899 78,440 78,440 ---------- Total comprehensive income ............................. 216,777 Cash dividends--common, $.40 per share ................... (36,985) (36,985) Issuance of common shares for acquisitions ............... 199,671 25,699 225,370 Stock options exercised, net of shares tendered and retired ............................................ 13,716 13,716 ---------- ---------- ----------- -------- ---------- ---------- Balance, June 30, 2001 ................................... $1,120,991 $ 44,897 $ 29,899 $ 74,796 $1,001,935 $2,197,722 ========== ========== =========== ======== ========== ==========
Six Months Ended June 30, 2000 ------------------------------------------------------------------------- Accumulated Other Comprehensive Income (Loss) ---------------------------------- Net Unrealized Gains (Losses) Total on Investments Share- Common and Retained holders' (In thousands) Stock Securitizations Subtotal Earnings Equity ---------- ----------- -------- ---------- ---------- Balance, January 1, 2000 ................................. $ 888,231 $ (4,158) $ (4,158) $ 775,765 $1,659,838 Comprehensive income: Net income for the period .............................. 31,091 31,091 Other comprehensive income (loss): Net realized and unrealized holding losses during the period, net of income tax benefit of $45,759 ... (73,872) (73,872) Reclassification for net realized losses recorded in operations, net of income tax benefit of $35,747 ... 57,708 57,708 ---------- -------- Other comprehensive loss ............................. (16,164) (16,164) (16,164) ---------- Total comprehensive income ............................. 14,927 Cash dividends--common, $.49 per share ................... (41,972) (41,972) Stock redeemed and retired ............................... (3,836) (3,836) Stock options exercised, net of shares tendered and retired ............................................ 5,027 5,027 ---------- ---------- -------- ---------- ---------- Balance, June 30, 2000 ................................... $ 889,422 $ (20,322) $(20,322) $ 764,884 $1,633,984 ========== ========== ======== ========== ==========
Total comprehensive income for the three months ended June 30, 2001 and 2000 was $90,406 and $64,761, respectively. 8 ZIONS BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2001 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. Operating results for the three- and six-month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 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, 2000. MERGERS AND ACQUISITIONS In April 2001, the Company completed its acquisition of nine Arizona branches of Pacific Century Bank. The Company purchased approximately $231 million in loans, assumed approximately $447 million in deposits, and acquired branch facilities in the transaction. The total purchase premium resulting from the acquisition was approximately $48 million. In July 2001, the Company completed three acquisitions of companies providing e-commerce solutions. The Company acquired Internet Commerce Express, Inc. based in Nashua, New Hampshire, ThinkXML, Inc. based in Rockville, Maryland, and purchased assets of Frontier Technologies Corporation, based in Mequon, Wisconsin. Consideration for the acquisitions consisted of approximately $50 million in cash and the issuance of approximately 112 thousand shares of common stock. In July 2001, the Company also announced that it had signed a definitive agreement under which Minnequa Bank of Pueblo ("Minnequa") headquartered in Pueblo, Colorado, will merge with and into the Company's subsidiary, Vectra Bank Colorado. As of December 31, 2000, Minnequa had deposits of approximately $292 million and five banking offices. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On January 1, 2001, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Statement No. 133, as amended by Statement Nos. 137 and 138, establishes accounting and reporting standards for derivative instruments and hedging activities. 9 ZIONS BANCORPORATION AND SUBSIDIARIES The adoption of Statement No. 133, as amended, resulted in transition adjustments presented as a cumulative effect of change in accounting principle in the statement of income and in the statement of changes in shareholders' equity and comprehensive income (loss). The transition adjustments relate to recording the fair value of derivatives on the balance sheet, and to the effect of transferring certain held-to-maturity investments to either the trading or available-for-sale categories, as allowed by the Statement's transition provisions. In the statement of income for the six months ended June 30, 2001, the transition adjustments resulted in a reduction to net income of $7.2 million, consisting of $.3 million, net of tax benefit of $.2 million, to record the fair value of derivatives on the balance sheet, and $6.9 million, net of tax benefit of $4.3 million, to reclassify certain investment securities. In the related statement of changes in shareholders' equity and comprehensive income (loss), the transition adjustments resulted in an increase to accumulated other comprehensive income of $34.5 million, consisting of $21.3 million, net of tax expense of $13.2 million, to record the fair value of derivatives on the balance sheet, and $13.2 million, net of tax expense of $8.0 million, to reclassify certain investment securities. DEBT FINANCING In May 2001, the Company issued $200 million in subordinated debt through Zions Financial Corp., a newly formed subsidiary. The debt consists of fixed/floating rate notes unconditionally guaranteed by Zions Bancorporation. The notes mature in May 2011 and bear interest at 6.95% through May 2006 and at one-month LIBOR plus 2.86% thereafter until maturity. The notes were originally issued through a private placement; however, they were registered with the Securities and Exchange Commission in August 2001. PURCHASE OF MINORITY INTEREST On April 16, 2001, the Company reacquired the minority interest of its subsidiary, California Bank & Trust ("CB&T"). This minority interest was sold to the management of CB&T and other individuals when the Company's acquisition of The Sumitomo Bank of California was completed in October 1998. One half of the minority interest was sold to the former CEO of CB&T, who was also a director of the Company. The other half was sold to two limited liability companies, which the CEO managed. Members of these limited liability companies include, among others, certain senior officers of CB&T. The Company sold the minority interest to these individuals to provide incentive to them to substantially improve the performance of CB&T. The Company believes this objective has now been accomplished. In accordance with the valuation terms of the minority shareholder agreement entered into in 1998, the Company repurchased the total minority interest for $66.0 million. On April 1, 2001, the carrying value of this minority interest was $37.8 million. INCREASE OF AUTHORIZED SHARES On April 20, 2001, the Company's shareholders voted to increase the authorized shares of the Company's common stock from 200,000,000 to 350,000,000. 10 ZIONS BANCORPORATION RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Statement No. 141 supersedes certain previous accounting guidance on business combinations, and eliminates the pooling-of-interest method of accounting unless the business combination was initiated prior to July 1, 2001. Certain changes were also made to the criteria used to recognize intangible assets apart from goodwill. The Statement is effective for any business combination completed after June 30, 2001. Statement No. 142 also supersedes certain previous accounting rules for the amortization of goodwill and intangible assets. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to specified annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. This Statement will be effective for the Company beginning January 1, 2002. Until the Statement is adopted, transition rules provide for amortization of goodwill and intangible assets acquired before June 30, 2001. Application of the nonamortization provisions of Statement No. 142 is expected to increase net income by approximately $34 million ($0.36 per diluted share) per year. Also, beginning in 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002, and has not yet determined what effect the results of these tests will have on the Company's operations and financial position. SUBSIDIARY COMPANY STOCK OPTIONS Digital Signature Trust Co. (DST), a majority-owned subsidiary of the Company's wholly-owned subsidiary, Zions First National Bank, has stock options outstanding to employees and others to purchase approximately 2,117,000 shares of DST common stock at June 30, 2001. The options are not included in the Company's calculation of diluted earnings per share since they are antidilutive. OPERATING SEGMENT INFORMATION The Company manages its operations and prepares management reports with a primary focus on geographical area. All segments presented, except for the segment defined as "other," are based on commercial banking operations. Zions First National Bank and subsidiaries operates 128 branches in Utah and 22 in Idaho. California Bank & Trust operates 99 branches in Northern and Southern California. Nevada State Bank and subsidiaries operates 59 offices in Nevada. National Bank of Arizona operates 49 branches in Arizona. Vectra Bank Colorado operates 54 branches in Colorado and one branch in New Mexico. The Commerce Bank of Washington operates one branch in the state of Washington. The operating segment defined as "other" includes the parent company, 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. 11 ZIONS BANCORPORATION AND SUBSIDIARIES The following table presents selected operating segment information for the three months ended June 30, 2001 and June 30, 2000:
ZIONS FIRST NEVADA STATE NATIONAL BANK CALIFORNIA BANK AND NATIONAL BANK AND SUBSIDIARIES BANK & TRUST SUBSIDIARIES OF ARIZONA ------------------- ------------------- -------------------- ---------------------- (Amounts in millions) 2001 2000 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- --------- --------- CONDENSED INCOME STATEMENT Net interest income .................... $ 69.6 $ 55.1 $ 86.9 $ 72.8 $ 28.9 $ 25.1 $ 26.0 $ 21.0 Provision for loan losses .............. 6.0 2.3 0.7 -- 2.5 1.5 0.3 1.0 Noninterest income ..................... 53.1 41.2 16.6 10.9 5.5 5.5 4.2 3.5 Merger expense and amortization of goodwill and core deposit intangibles 0.7 0.8 6.6 5.2 0.3 0.6 0.9 0.5 Other noninterest expense .............. 70.5 52.7 57.9 44.2 19.8 18.0 15.8 11.6 Income tax expense (benefit) ........... 15.1 12.6 16.8 15.4 4.0 3.5 5.3 4.5 Minority interest ...................... -- (0.3) -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- --------- --------- Net income (loss) ............. $ 30.4 $ 28.2 $ 21.5 $ 18.9 $ 7.8 $ 7.0 $ 7.9 $ 6.9 ======== ======== ======== ======== ======== ======== ========= ========= AVERAGE BALANCE SHEET DATA Total assets ........................... $ 9,011 $ 8,258 $ 8,064 $ 6,631 $ 2,363 $ 2,355 $ 2,516 $ 1,605 Net loans and leases ................... 5,489 4,434 5,545 4,652 1,371 1,359 1,760 1,237 Total deposits ......................... 4,386 3,894 6,736 5,332 2,041 1,979 2,127 1,246
VECTRA BANK THE COMMERCE BANK OF CONSOLIDATED COLORADO WASHINGTON OTHER COMPANY ------------------- ------------------- -------------------- ---------------------- (Amounts in millions) 2001 2000 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- --------- --------- CONDENSED INCOME STATEMENT Net interest income .................... $ 21.3 $ 21.8 $ 5.7 $ 5.0 $ (3.4) $ (6.2) $ 235.0 $ 194.6 Provision for loan losses .............. 2.2 1.3 0.6 0.3 (0.1) (0.1) 12.2 6.3 Noninterest income ..................... 6.4 5.0 0.4 0.5 7.7 4.0 93.9 70.6 Merger expense and amortization of goodwill and core deposit intangibles 3.2 3.3 -- -- 1.0 0.1 12.7 10.5 Other noninterest expense .............. 19.9 19.2 2.6 2.2 6.7 8.9 193.2 156.8 Income tax expense (benefit) ........... 1.6 1.8 1.0 1.0 (4.8) (7.4) 39.0 31.4 Minority interest ...................... -- -- -- -- (1.8) 0.9 (1.8) 0.6 -------- -------- -------- -------- -------- -------- --------- --------- Net income (loss) ............. $ 0.8 $ 1.2 $ 1.9 $ 2.0 $ 3.3 $ (4.6) $ 73.6 $ 59.6 ======== ======== ======== ======== ======== ======== ========= ========= AVERAGE BALANCE SHEET DATA Total assets ........................... $ 2,261 $ 2,162 $ 516 $ 413 $ (1,014) $ (14) $ 23,717 $ 21,410 Net loans and leases ................... 1,536 1,403 257 214 72 28 16,030 13,327 Total deposits ......................... 1,410 1,419 362 295 (96) (53) 16,966 14,112
12 ZIONS BANCORPORATION AND SUBSIDIARIES The following table presents operating segment information for the six months ended June 30, 2001 and June 30, 2000.
ZIONS FIRST NEVADA STATE NATIONAL BANK CALIFORNIA BANK AND NATIONAL BANK AND SUBSIDIARIES BANK & TRUST SUBSIDIARIES OF ARIZONA ------------------- ------------------- -------------------- ---------------------- (Amounts in millions) 2001 2000 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- --------- --------- CONDENSED INCOME STATEMENT Net interest income .................... $ 138.9 $ 108.8 $ 158.2 $ 143.6 $ 56.6 $ 50.4 $ 50.2 $ 41.4 Provision for loan losses .............. 11.7 2.5 1.5 -- 5.0 4.5 0.9 1.7 Noninterest income ..................... 117.5 74.2 49.7 20.8 11.8 11.9 7.8 6.8 Merger expense and amortization of goodwill and core deposit intangibles 2.6 4.5 11.7 14.6 0.7 5.1 1.4 0.9 Other noninterest expense .............. 137.8 104.6 110.6 91.2 39.7 35.5 30.2 22.8 Income tax expense (benefit) ........... 35.0 21.7 36.6 26.6 7.8 5.7 10.2 9.0 Minority interest ...................... (0.7) (1.4) -- -- -- -- -- -- Cumulative effect - adoption of FASB Stmt 133 ............................ (5.3) -- (1.3) -- (0.6) -- -- -- -------- -------- -------- -------- -------- -------- --------- --------- Net income (loss) ............. $ 64.7 $ 51.1 $ 46.2 $ 32.0 $ 14.6 $ 11.5 $ 15.3 $ 13.8 ======== ======== ======== ======== ======== ======== ========= ========= AVERAGE BALANCE SHEET DATA Total assets ........................... $ 8,888 $ 8,265 $ 7,402 $ 6,596 $ 2,355 $ 2,337 $ 2,231 $ 1,607 Net loans and leases ................... 5,301 4,283 5,191 4,616 1,374 1,358 1,629 1,233 Total deposits ......................... 4,307 3,955 6,150 5,364 2,025 1,955 1,875 1,239
VECTRA BANK THE COMMERCE BANK OF CONSOLIDATED COLORADO WASHINGTON OTHER COMPANY ------------------- ------------------- -------------------- ---------------------- (Amounts in millions) 2001 2000 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- --------- --------- CONDENSED INCOME STATEMENT Net interest income .................... $ 42.9 $ 43.7 $ 11.1 $ 9.7 $ (7.1) $ (12.0) $ 450.8 $ 385.6 Provision for loan losses .............. 5.2 2.4 0.8 0.5 (0.1) (0.1) 25.0 11.5 Noninterest income ..................... 12.1 9.1 0.8 0.8 6.0 (89.3) 205.7 34.3 Merger expense and amortization of goodwill and core deposit intangibles. 6.4 7.0 -- -- 2.1 29.2 24.9 61.3 Other noninterest expense .............. 38.8 36.8 5.0 4.4 22.3 11.0 384.4 306.3 Income tax expense (benefit) ........... 3.2 3.9 2.1 1.9 (14.8) (59.3) 80.1 9.5 Minority interest ...................... -- -- -- -- (2.7) 1.6 (3.4) 0.2 Cumulative effect - adoption of FASB Stmt 133 ............................ -- -- -- -- -- -- (7.2) -- -------- -------- -------- -------- -------- -------- --------- --------- Net income (loss) ............. $ 1.4 $ 2.7 $ 4.0 $ 3.7 $ (7.9) $ (83.7) $ 138.3 $ 31.1 ======== ======== ======== ======== ======== ======== ========= ========= AVERAGE BALANCE SHEET DATA Total assets ........................... $ 2,213 $ 2,158 $ 519 $ 416 $ (678) $ 31 $ 22,930 $ 21,410 Net loans and leases ................... 1,511 1,388 247 208 65 26 15,318 13,112 Total deposits ......................... 1,403 1,441 368 296 (79) (67) 16,049 14,183
For the six months ended June 30, 2000, the "other" operating segment includes the impairment loss on the First Security Corporation common stock in noninterest income and part of the merger-related expense in noninterest expense. 13 ZIONS BANCORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ FINANCIAL HIGHLIGHTS (Unaudited)
Three Months Ended Six Months Ended (In thousands, except per share and ratio data) June 30, June 30, ---------------------------------- ------------------------------------- 2001 2000 % Change 2001 2000 % Change --------- --------- --------- --------- --------- ---------- EARNINGS Taxable-equivalent net interest income .......... $ 240,151 $ 199,099 20.62 % $ 460,860 $ 393,939 16.99 % Net interest income ............................. 235,018 194,598 20.77 % 450,855 385,590 16.93 % Noninterest income (3) .......................... 93,893 70,599 32.99 % 205,662 131,199 56.76 % Impairment loss First Security Corporation common stock (1) ........................... -- -- -- (96,911) Provision for loan losses ....................... 12,235 6,214 96.89 % 25,007 11,462 118.17 % Noninterest expense ............................. 205,910 167,312 23.07 % 409,309 367,624 11.34 % Income before income taxes ...................... 110,766 91,671 20.83 % 222,201 40,792 444.72 % Income taxes .................................... 38,954 31,445 23.88 % 80,092 9,490 743.96 % Minority interest ............................... (1,783) 643 (377.29)% (3,387) 211 (1705.21)% Cumulative effect of adoption of FASB Stmt 133 . -- -- (7,159) -- -- Net income ...................................... 73,595 59,583 23.52 % 138,337 31,091 344.94 % PER COMMON SHARE Net income (diluted) before cumulative effect ... 0.79 0.69 14.49 % 1.59 0.36 341.67 % Cumulative effect of adoption of FASB Stmt 133 . -- -- (0.08) -- Net income (diluted) ............................ 0.79 0.69 14.49 % 1.51 0.36 319.44 % Dividends ....................................... 0.20 0.20 0.00 % 0.40 0.49 (18.37)% Book value ...................................... 23.80 19.06 24.87 % SELECTED RATIOS Return on average assets ........................ 1.24 % 1.12 % 1.22% 0.29% Return on average common equity ................. 13.67 % 14.93 % 13.80% 3.83% Efficiency ratio (3) ............................ 61.64 % 62.04 % 61.41% 70.01% Net interest margin ............................. 4.63 % 4.23 % 4.62% 4.18% OPERATING CASH EARNINGS (2) (3) Taxable-equivalent net interest income .......... $ 240,151 $ 199,099 20.62 % $ 460,860 $ 393,939 16.99 % Net interest income ............................. 235,018 194,598 20.77 % 450,855 385,590 16.93 % Noninterest income .............................. 93,893 70,599 32.99 % 205,662 131,199 56.76 % Provision for loan losses ....................... 12,235 6,214 96.89 % 25,007 11,462 118.17 % Noninterest expense ............................. 193,201 156,853 23.17 % 384,446 306,332 25.50 % Income before income taxes ...................... 123,475 102,130 20.90 % 247,064 198,995 24.16 % Income taxes .................................... 40,736 33,079 23.15 % 83,798 65,298 28.33 % Minority interest ............................... (1,783) 847 (310.51)% (3,187) 731 (535.98)% Net income before cumulative effect of adoption of FASB Stmt 133 ........................... 84,522 68,204 23.93 % 166,453 132,966 25.18 % PER COMMON SHARE Net income (diluted) ............................ 0.91 0.79 15.19 % 1.82 1.54 18.18 % Dividends ....................................... 0.20 0.20 0.00 % 0.40 0.49 (18.37)% Book value ...................................... 14.86 11.51 29.11 % SELECTED RATIOS Return on average assets ........................ 1.48 % 1.32 % 1.51 % 1.29% Return on average common equity ................. 25.01 % 28.82 % 25.80 % 27.45% Efficiency ratio ................................ 57.84 % 58.16 % 57.68 % 58.33% Net interest margin ............................. 4.63 % 4.23 % 4.62 % 4.18%
(1) This investment was written down to $14.11 per common share. (2) Before amortization of goodwill and core deposit intangible assets, merger related expense and the cumulative effect of adoption of FASB Statement No. 133. (3) Excludes impairment loss on First Security Corporation common stock. 14 ZIONS BANCORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (Continued) (Unaudited)
Three Months Ended Six Months Ended (In thousands, except share and ratio data) June 30, June 30, ----------------------------------------- -------------------------------------------- 2001 2000 % Change 2001 2000 % Change ------------ ------------ ----------- ----------- ----------- -------------- AVERAGE BALANCES Total assets .............................. $ 23,717,349 $ 21,410,382 10.77 % $22,930,070 $21,409,795 7.10 % Securities ................................ 3,698,320 4,509,800 (17.99)% 3,889,179 4,578,079 (15.05)% Net loans and leases ...................... 16,030,368 13,327,079 20.28 % 15,317,892 13,111,695 16.83 % Goodwill .................................. 697,978 575,352 21.31 % 633,192 578,539 9.45 % Core deposit intangibles .................. 104,960 77,486 35.46 % 87,000 79,309 9.70 % Total deposits ............................ 16,966,059 14,111,988 20.22 % 16,048,889 14,182,678 13.16 % Minority interest ......................... 28,574 40,172 (28.87)% 41,073 39,918 2.89 % Shareholders' equity ...................... 2,158,613 1,604,801 34.51 % 2,021,357 1,632,068 23.85 % Weighted average common and common- equivalent shares outstanding ........... 93,210,378 86,322,966 7.98 % 91,338,796 86,420,490 5.69 % AT PERIOD END Total assets .............................. 23,487,799 21,458,435 9.46 % Securities ................................ 3,306,507 4,328,128 (23.60)% Net loans and leases ...................... 16,476,319 13,775,251 19.61 % Sold loans being serviced (1) ............. 1,794,063 1,201,290 49.34 % Allowance for loan losses ................. 229,865 197,430 16.43 % Goodwill .................................. 731,176 571,736 27.89 % Core deposit intangibles .................. 94,845 75,828 25.08 % Total deposits ............................ 17,170,084 14,513,983 18.30 % Minority interest ......................... 16,074 40,426 (60.24)% Shareholders' equity ...................... 2,197,722 1,633,984 34.50 % Common shares outstanding ................. 92,328,261 85,726,222 7.70 % Average equity to average assets .......... 9.10% 7.50% 8.82% 7.62% Common dividend payout .................... 25.17% 28.77% 26.74% 46.16%(2) Nonperforming assets ...................... 87,500 84,255 3.85 % Loans past due 90 days or more ............ 40,750 22,298 82.75 % Nonperforming assets to net loans and leases, other real estate owned and other nonperforming assets at June 30 ......... 0.53% 0.61%
(1) Amount represents the outstanding balance of loans sold and being serviced by the Company, excluding long-term first mortgage residential real estate loans. (2) Excludes impairment loss on First Security Corporation common stock. 15 ZIONS BANCORPORATION AND SUBSIDIARIES OPERATING RESULTS Zions Bancorporation and subsidiaries (the Company) achieved net income of $73.6 million or $0.79 per diluted share for the second quarter of 2001, an increase of 23.5% and 14.5%, respectively, over the $59.6 million or $0.69 per diluted share earned in the second quarter of 2000. Consolidated net income was $138.3 million or $1.51 per diluted share for the first six months of 2001, compared to $31.1 million or $0.36 per diluted share for the first six months of 2000. In 2001, net income included merger-related charges of $2.1 million ($0.02 per share) and nonrecurring charges related to the reclassification of investment securities and the related cumulative effect of a change in accounting principle totaling $7.2 million ($0.08 per share). In 2000, net income included $86.1 million ($1.00 per share) related to the Company's terminated merger with First Security Corporation, including a write-down to market value of its investment in First Security Corporation common stock. The annualized return on average assets for the second quarter of 2001 was 1.24% compared to 1.12% for the second quarter of 2000, and 1.19% for the first quarter of 2001. The annualized return on average common shareholders' equity was 13.67% for the quarter, compared to 14.93% for the second quarter of 2000, and 13.94% for the first quarter of 2001. The Company's "efficiency ratio," or noninterest expenses as a percentage of total taxable-equivalent net revenues for the second quarter was 61.64% compared to 62.04% for the second quarter of 2000 and 61.18% for the first quarter of 2001. For the first six months of 2001, the annualized return on average assets was 1.22% compared to 0.29% for the same period in 2000. The annualized return on average common shareholders' equity was 13.80% for the first six months of 2001 compared to 3.83% for the first six months of 2000. The Company's second quarter $14.0 million (23.5%) increase in earnings compared to the same period the previous year reflects a $40.4 million (20.8%) increase in net interest income and a $23.3 million (33.0%) increase in noninterest income, partially offset by a $6.0 million (96.9%) increase in the provision for loan losses, a $38.6 million (23.1%) increase in noninterest expense, and a $7.5 million (23.9%) increase in income taxes. For the first six months of 2001 compared to the same period the previous year, the $107.2 million (344.9%) increase in net income results from a $65.3 million (16.9%) increase in net interest income, a $74.5 million (56.8%) increase in noninterest income, excluding the $96.9 million impairment loss on First Security Corporation common stock in 2000, and a $3.6 million increase resulting from changes to the minority interest, all offset by a $13.5 million (118.2%) increase in the provision for loan losses, a $41.7 million (11.3%) increase in noninterest expense, a $70.6 million (744.0%) increase in income taxes, and the $7.2 million cumulative effect of a change in accounting principle. OPERATING CASH EARNINGS RESULTS The Company also provides its earnings performance on an operating cash basis because it believes its cash performance gives a better reflection of its financial position and shareholder value creation, and better demonstrates its ability to support growth, pay dividends, and repurchase stock, than providing only reported net income. Operating cash earnings are earnings before amortization of goodwill and core deposit intangible assets and merger-related expenses. 16 ZIONS BANCORPORATION AND SUBSIDIARIES Operating cash earnings for the second quarter of 2001 were $84.5 million or $0.91 per diluted share, an increase of 23.9% and 15.2%, respectively, over the $68.2 million or $0.79 per diluted share earned in the second quarter of 2000. Operating cash earnings for the second quarter of 2001 increased 3.2% over the $81.9 million earned during the first quarter of 2001. Operating cash earnings per diluted share for the second quarter of 2001 decreased 1.1% from the $0.92 for the first quarter of 2001. Year-to-date operating cash earnings were $166.5 million or $1.82 per diluted share, an increase of 25.2% and 18.2%, respectively, over the $133.0 million or $1.54 per diluted share earned in the first half of 2000. The operating cash annualized return on average assets for the second quarter and for the first six months of 2001 was 1.48% and 1.51% compared to 1.32% and 1.29%, respectively, in 2000. Operating cash annualized return on average common shareholders' equity was 25.01% and 25.80% for the second quarter and for the first six months of 2001, compared to 28.82% and 27.45% for the same periods in 2000. The Company's cash efficiency ratio for the second quarter and for the first six months of 2001 was 57.84% and 57.68%, respectively, compared to 58.16% and 58.33% for the same periods in 2000. NET INTEREST INCOME AND INTEREST RATE SPREADS Net interest income for the second quarter of 2001, adjusted to a fully taxable-equivalent basis, increased 20.6% to $240.2 million compared to $199.1 million for the second quarter of 2000, and increased 8.8% from $220.7 million from the first quarter of 2001. Net interest margin was 4.63% for the second quarter of 2001, compared to 4.23% for the second quarter of 2000 and 4.59% for the first quarter of 2001. Six-month net interest income, on a fully taxable-equivalent basis, was $460.9 million in 2001, an increase of 17.0% compared to $393.9 million for the first six months of 2000. Net interest margin for the first six months of 2001 was 4.62%, compared to 4.18% for the first six months of 2000. The increased margins for 2001 compared to 2000 result primarily from a more attractive balance sheet composition including robust loan growth and a decrease in borrowed funds. The yield on average earning assets decreased 56 basis points during the second quarter of 2001 as compared to the second quarter of 2000, and 61 basis points from the first quarter of 2001. The average rate paid this quarter on interest-bearing funds decreased 101 basis points from the second quarter of 2000 and 71 basis points from the first quarter of 2001. Comparing the first six months of 2001 with 2000, the yield on average earning assets decreased 7 basis points, while the cost of interest-bearing funds decreased 51 basis points. The spread on average interest-bearing funds for the second quarter of 2001 was 3.96%, up from 3.51% for the second quarter of 2000 and up from the 3.86% for the first quarter of 2001. The spread on average interest-bearing funds for the first six months of 2001 was 3.92%, up from 3.48% for the first six months of 2000. 17 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (Unaudited)
Three Months Ended Three Months Ended June 30, 2001 June 30, 2000 --------------------------------------- --------------------------------------- Average Amount of Average Average Amount of Average (In thousands) Balance Interest (1) Rate Balance Interest (1) Rate ------------ ------------ ------- ------------ ------------ ------- ASSETS Money market investments ................... $ 1,055,018 $ 11,451 4.35% $ 1,107,087 $ 18,313 6.65% Securities: Held to maturity ......................... 51,365 796 6.22% 3,279,077 54,967 6.74% Available for sale ....................... 3,080,120 50,226 6.54% 614,748 10,296 6.74% Trading account .......................... 566,835 7,197 5.09% 615,975 9,712 6.34% ------------ ------------ ------------ ------------ Total securities ....................... 3,698,320 58,219 6.31% 4,509,800 74,975 6.69% ------------ ------------ ------------ ------------ Loans: Loans held for sale ...................... 206,384 3,158 6.14% 174,358 3,261 7.52% Net loans and leases (2) ................. 15,823,984 339,714 8.61% 13,152,721 304,575 9.31% ------------ ------------ ------------ ------------ Total loans ............................ 16,030,368 342,872 8.58% 13,327,079 307,836 9.29% ------------ ------------ ------------ ------------ Total interest-earning assets .............. 20,783,706 412,542 7.96% 18,943,966 401,124 8.52% ------------ ------------ Cash and due from banks .................... 835,000 833,878 Allowance for loan losses .................. (227,809) (201,311) Goodwill ................................... 697,978 575,352 Core deposit intangibles ................... 104,960 77,486 Other assets ............................... 1,523,514 1,181,011 ------------ ------------ Total assets ........................... $ 23,717,349 $ 21,410,382 ============ ============ LIABILITIES Interest-bearing deposits: Savings and NOW deposits ................. $ 2,131,000 8,759 1.65% $ 1,824,264 9,727 2.14% Money market super NOW deposits .......... 6,961,095 60,109 3.46% 6,075,324 71,413 4.73% Time deposits under $100,000 ............. 2,201,258 27,801 5.07% 1,705,326 21,029 4.96% Time deposits $100,000 or more ........... 1,643,045 24,305 5.93% 1,130,266 15,638 5.56% Foreign deposits ......................... 97,504 777 3.20% 132,195 1,577 4.80% ------------ ------------ ------------ ------------ Total interest-bearing deposits ........ 13,033,902 121,751 3.75% 10,867,375 119,384 4.42% ------------ ------------ ------------ ------------ Borrowed funds: Securities sold, not yet purchased ....... 331,314 4,562 5.52% 303,219 4,830 6.41% Federal funds purchased and security repurchase agreements .................. 2,561,867 25,214 3.95% 2,784,960 40,186 5.80% Commercial paper ......................... 330,896 4,025 4.88% 293,205 4,545 6.23% FHLB advances and other borrowings: less than one year ..................... 303,306 4,208 5.56% 1,377,691 22,225 6.49% over one year .......................... 172,127 2,327 5.42% 134,989 2,009 5.99% Long-term debt ........................... 550,985 10,304 7.50% 446,993 8,846 7.96% ------------ ------------ ------------ ------------ Total borrowed funds ................... 4,250,495 50,640 4.78% 5,341,057 82,641 6.22% ------------ ------------ ------------ ------------ Total interest-bearing liabilities ......... 17,284,397 172,391 4.00% 16,208,432 202,025 5.01% ------------ ------------ Noninterest-bearing deposits ............... 3,932,157 3,244,613 Other liabilities .......................... 313,608 312,364 ------------ ------------ Total liabilities .......................... 21,530,162 19,765,409 Minority interest .......................... 28,574 40,172 Total shareholders' equity ................. 2,158,613 1,604,801 ------------ ------------ Total liabilities and shareholders' equity . $ 23,717,349 $ 21,410,382 ============ ============ Spread on average interest-bearing funds ... 3.96% 3.51% Net interest income and net yield on interest-earning assets .................. $ 240,151 4.63% $ 199,099 4.23% ============ ============
(1) Taxable-equivalent-rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. 18 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (Unaudited)
Six Months Ended Six Months Ended June 30, 2001 June 30, 2000 --------------------------------------- --------------------------------------- Average Amount of Average Average Amount of Average (In thousands) Balance Interest (1) Rate Balance Interest (1) Rate ------------ ------------ ------- ------------ ------------ ------- ASSETS Money market investments ................... $ 927,083 $ 21,665 4.71% $ 1,244,112 $ 38,402 6.21% Securities: Held to maturity ......................... 51,670 1,781 6.95% 3,295,519 109,883 6.71% Available for sale ....................... 3,187,063 108,531 6.87% 678,305 20,824 6.17% Trading account .......................... 650,446 18,195 5.64% 604,255 18,668 6.21% ------------ ------------ ------------ ------------ Total securities ....................... 3,889,179 128,507 6.66% 4,578,079 149,375 6.56% ------------ ------------ ------------ ------------ Loans: Loans held for sale ...................... 193,219 6,242 6.51% 183,203 6,580 7.22% Net loans and leases (2) ................. 15,124,673 667,913 8.91% 12,928,492 590,170 9.18% ------------ ------------ ------------ ------------ Total loans ............................ 15,317,892 674,155 8.88% 13,111,695 596,750 9.15% ------------ ------------ ------------ ------------ Total interest-earning assets .............. 20,134,154 824,327 8.26% 18,933,886 784,527 8.33% ------------ ------------ Cash and due from banks .................... 811,801 850,665 Allowance for loan losses .................. (214,680) (203,296) Goodwill ................................... 633,192 578,539 Core deposit intangibles ................... 87,000 79,309 Other assets ............................... 1,478,603 1,170,692 ------------ ------------ Total assets ........................... $ 22,930,070 $ 21,409,795 ============ ============ LIABILITIES Interest-bearing deposits: Savings and NOW deposits ................. $ 1,942,383 17,371 1.80% $ 1,800,622 19,575 2.19% Money market super NOW deposits .......... 6,775,483 128,552 3.83% 6,035,199 136,461 4.55% Time deposits under $100,000 ............. 1,996,123 51,545 5.21% 1,756,156 42,651 4.88% Time deposits $100,000 or more ........... 1,546,005 46,022 6.00% 1,194,490 31,088 5.23% Foreign deposits ......................... 110,062 1,846 3.38% 142,371 3,601 5.09% ------------ ------------ ------------ ------------ Total interest-bearing deposits ........ 12,370,056 245,336 4.00% 10,928,838 233,376 4.29% ------------ ------------ ------------ ------------ Borrowed funds: Securities sold, not yet purchased ....... 357,527 9,847 5.55% 302,817 9,605 6.38% Federal funds purchased and security repurchase agreements .................. 2,641,829 59,937 4.58% 2,956,192 82,109 5.59% Commercial paper ......................... 308,813 8,342 5.45% 301,615 9,324 6.22% FHLB advances and other borrowings: less than one year ..................... 551,438 16,639 6.08% 1,117,744 34,851 6.27% over one year .......................... 151,497 4,236 5.64% 124,835 3,647 5.88% Long-term debt ........................... 492,414 19,130 7.83% 449,776 17,676 7.90% ------------ ------------ ------------ ------------ Total borrowed funds ................... 4,503,518 118,131 5.29% 5,252,979 157,212 6.02% ------------ ------------ ------------ ------------ Total interest-bearing liabilities ......... 16,873,574 363,467 4.34% 16,181,817 390,588 4.85% ------------ ------------ Noninterest-bearing deposits ............... 3,678,833 3,253,840 Other liabilities .......................... 315,233 302,152 ------------ ------------ Total liabilities .......................... 20,867,640 19,737,809 Minority interest .......................... 41,073 39,918 Total shareholders' equity ................. 2,021,357 1,632,068 ------------ ------------ Total liabilities and shareholders' equity . $ 22,930,070 $ 21,409,795 ============ ============ Spread on average interest-bearing funds ... 3.92% 3.48% Net interest income and net yield on interest-earning assets .................. $ 460,860 4.62% $ 393,939 4.18% ============ ============
(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 ZIONS BANCORPORATION AND SUBSIDIARIES PROVISION FOR LOAN LOSSES The provision for loan losses increased 96.9% to $12.2 million for the second quarter of 2001, compared to $6.2 million for the second quarter of 2000, and decreased 4.2% from the $12.8 million for the first quarter of 2001. The provision for loan losses for the first six months of 2001 totaled $25.0 million, 118.2% more than the $11.5 million provision for the first six months of 2000. On an annualized basis, the year-to-date provision is 0.33% of average loans for 2001 compared to 0.17% for 2000. The provision for loan losses reflects management's judgment of the expense required to maintain an adequate allowance for loan losses. NONINTEREST INCOME Noninterest income for the second quarter of 2001 was $93.9 million, an increase of 33.0% from the $70.6 million for the second quarter of 2000, and a decrease of 16.0% from the $111.8 million for the first quarter of 2001. The first quarter of 2001 included a gain of $50.2 million from the Company's investment in Star System and $22.4 million in valuation adjustment write-downs on venture capital investments. Comparing the segments of noninterest income for the second quarter of 2001 with the second quarter of 2000, service charges on deposit accounts increased 31.7%, other service charges and fees increased 43.0%, underwriting and trading income increased 76.1%, and loan sales and servicing income increased 74.5%. Service charges on deposit accounts for the second quarter of 2001 include income from the acquisitions of County Bank, Draper Bancorp, Eldorado Bancshares and the Arizona branches of Pacific Century Bank. Other service charges and fees include revenues from the above acquisitions and increased investment department fees. The increase in loan sales and servicing income for the second quarter of 2001 compared to the second quarter of 2000 is primarily due to a 67.8% increase in loans sold into securitization facilities and additional servicing fees from a small business securitization completed during the third quarter of 2000. Noninterest income for the six months ended June 30, 2001 was $205.7 million, an increase of 56.8% from the $131.2 million for same period in 2000, excluding the $96.9 million impairment loss on the First Security Corporation common stock. Comparing the segments of noninterest income for the first six months of 2001 with the first six months of 2000, excluding the $96.9 million impairment loss, service charges on deposit accounts increased 23.9%, other service charges, commissions and fees increased 29.2%, underwriting and trading income increased 71.3%, loan sales and servicing income increased 85.4%, and other income increased 205.4%. The Company recognized net investment securities losses of $6.7 million during the first six months of 2001 compared to net gains of $3.5 million for the same period in 2000. The year-to-date increases in service charges on deposit accounts and other service charges and fees are attributable to the same factors previously discussed for the quarterly increases. The increased loan sales and servicing income relate to increased sales volumes in revolving securitizations and servicing fee income from the small business securitization previously mentioned. The increase in other income is mainly attributable to the $50.2 million Star System gain in the first quarter of 2001 offset in part by valuation adjustment write-downs on venture capital investments. The $6.7 million recognized net loss on investment securities for the first six months of 2001 includes $9.4 million of net losses on venture fund marketable equity securities recognized during the first quarter of 2001. 20 ZIONS BANCORPORATION AND SUBSIDIARIES NONINTEREST EXPENSE Noninterest expense for the second quarter of 2001 was $205.9 million, an increase of 23.1% over $167.3 million for the second quarter of 2000, and an increase of 1.2% over the $203.4 million for the first quarter of 2001. Comparing significant changes in noninterest expense segments for the second quarter of 2001 with the second quarter of 2000, salaries and employee benefits increased 23.7%, occupancy increased 22.2%, amortization of goodwill and core deposit intangibles increased 28.7%, other noninterest expense increased 28.3%, and the total of all other noninterest expenses increased 15.4%. Noninterest expense for 2001 includes expenses related to the acquisitions previously discussed. Noninterest expense for the six months ended June 30, 2001 was $409.3 million compared to $367.6 million for the six months ended June 30, 2000, for an increase of 11.3%. Comparing significant changes in noninterest expense segments for the first six months of 2001 with the comparable period in 2000, salaries and employee benefits increased 27.8%, occupancy increased 20.7%, merger-related expense decreased 92.3%, other noninterest expense increased 28.5%, and the total of all other noninterest expenses increased 17.8%. Merger-related expense for 2000 included approximately $42.7 million mainly related to a terminated merger agreement with First Security Corporation and the related disengagement process. At June 30, 2001, the Company had 7,738 full-time equivalent employees, 413 offices, and 537 ATMs, compared to 6,787 full-time equivalent employees, 364 offices, and 498 ATMs at June 30, 2000. INCOME TAXES The Company's income taxes increased 24.2% to $39.0 million for the second quarter of 2001 compared to $31.4 million for the second quarter of 2000. The Company's income taxes were $80.1 million for the first six months of 2001, compared to $9.5 million for the first six months of 2000. The Company's effective income tax rate was 35.2% for the second quarter of 2001, compared to 34.3% for the second quarter of 2000. The effective income tax rate for the first six months of 2001 was 36.0% compared to 23.3% for the first six months of 2000. The lower rate in 2000 was due to the effect of merger costs and the impairment loss on First Security Corporation common stock, which were considered unusual, infrequently occurring items. ANALYSIS OF FINANCIAL CONDITION EARNING ASSETS Average earning assets increased 6.3% to $20,134 million for the six months ended June 30, 2001, compared to $18,934 million for the six months ended June 30, 2000. Earning assets comprised 87.8% of total average assets for the first six months of 2001, compared with 88.4% for the first six months of 2000. Average money market investments, consisting of interest-bearing deposits, federal funds sold and security resell agreements decreased 25.5% to $927 million in the first six months of 2001 as compared to $1,244 million in the first six months of 2000. 21 ZIONS BANCORPORATION AND SUBSIDIARIES During the first six months of 2001, average securities decreased 15.0% to $3,889 million compared to $4,578 million in the first six months of 2000. Average investment portfolio securities decreased 18.5% and average trading securities increased 7.6%. Effective January 1, 2001, the Company transferred securities from held-to-maturity to available for sale as allowed by FASB Statement No. 133 transition provisions and, mainly during the first quarter, sold investment securities to improve its balance sheet composition. Average net loans and leases increased 16.8% to $15,318 million for the first six months of 2001 compared to $13,112 million in the first six months of 2000, representing 76.1% of earning assets in the first six months of 2001 compared to 69.2% in the first six months of 2000. Average net loans and leases were 95.4% of average total deposits for the six months ended June 30, 2001, as compared to 92.4% for the six months ended June 30, 2000. INVESTMENT SECURITIES The following table presents the Company's held-to-maturity and available-for-sale investment securities:
June 30, December 31, June 30, 2001 2000 2000 --------------------- --------------------- --------------------- Amortized Market Amortized Market Amortized Market (In millions) cost value cost value cost value --------- --------- --------- --------- --------- --------- Held to maturity U.S. Treasury Securities ................... $ -- $ -- $ 1 $ 1 $ 1 $ 1 U.S. government agencies and corporations: Small Business Administration loan- backed securities .................. -- -- 560 563 467 486 Other agency securities ................. -- -- 1,269 1,285 1,283 1,247 States and political subdivisions .......... -- -- 292 296 319 314 Mortgage-backed securities ................. 51 51 1,003 1,008 1,172 1,161 --------- --------- --------- --------- --------- --------- 51 51 3,125 3,153 3,242 3,209 --------- --------- --------- --------- --------- --------- Available for sale U.S. Treasury securities ................... 57 59 51 52 57 57 U.S. government agencies and corporations .. 1,018 1,022 94 94 209 209 States and political subdivisions .......... 425 430 185 190 133 132 Mortgage/asset-backed and debt securities .. 1,117 1,131 274 273 94 89 --------- --------- --------- --------- --------- --------- 2,617 2,642 604 609 493 487 --------- --------- --------- --------- --------- --------- Equity securities: Mutual funds: Accessor Funds, Inc. ............... 235 245 159 160 154 140 Other Stock ............................. 63 106 18 13 121 119 --------- --------- --------- --------- --------- --------- 298 351 177 173 275 259 --------- --------- --------- --------- --------- --------- 2,915 2,993 781 782 768 746 --------- --------- --------- --------- --------- --------- Total ...................................... $ 2,966 $ 3,044 $ 3,906 $ 3,935 $ 4,010 $ 3,955 ========= ========= ========= ========= ========= =========
22 ZIONS BANCORPORATION AND SUBSIDIARIES LOANS The Company has structured its organization to separate the lending function from the credit administration function to strengthen the control and independent evaluation of credit activities. Loan policies and procedures provide the Company with a framework for consistent underwriting and a basis for sound credit decisions. In addition, the Company has well-defined standards for grading its loan portfolio, and management utilizes the comprehensive loan grading system to determine risk potential in the portfolio. Another aspect of the Company's credit risk management strategy is the diversification of the loan portfolio. The Company has a well-diversified loan portfolio with no significant exposure to highly leveraged transactions. The table below sets forth the amount of loans outstanding by type:
(In millions) June 30, December 31, June 30, Types 2001 2000 2000 - ----- ------------ ------------ ------------ Loans held for sale ...................... $ 207 $ 181 $ 187 Commercial, financial, and agricultural .. 4,043 3,615 3,244 Real estate: Construction ...................... 2,699 2,273 2,104 Other: Home equity credit line ... 330 263 234 1-4 family residential .... 3,075 2,911 2,869 Other real estate-secured . 4,997 4,190 4,232 ------------ ------------ ------------ 8,402 7,364 7,335 ------------ ------------ ------------ 11,101 9,637 9,439 Consumer: Bankcard .......................... 111 135 115 Other ............................. 646 472 450 ------------ ------------ ------------ 757 607 565 Lease financing .......................... 372 317 273 Foreign loans ............................ 17 26 39 Other receivables ........................ 70 75 98 ------------ ------------ ------------ Total loans ....................... $ 16,567 $ 14,458 $ 13,845 ============ ============ ============
Loans held for sale on June 30, 2001 increased 14.4% from December 31, 2000. All other loans, net of unearned income and fees increased 14.6% to $16,269 million on June 30, 2001 compared to $14,197 million on December 31, 2000. Commercial loans, construction loans, and other real estate loans increased from year-end 11.8%, 18.7%, and 14.1%, respectively. Consumer loans and lease financing increased 24.7% and 17.4%, respectively. Foreign loans decreased 34.6% to $17 million and other receivables decreased 6.7%. Within the other real estate loan portfolio, home equity credit line loans increased 25.5%, 1-4 family residential loans increased 5.6%, and all other real estate-secured loans increased 19.3% 23 ZIONS BANCORPORATION AND SUBSIDIARIES from year-end. During the first six months of 2001, the Company acquired loans aggregating approximately $1,127 million from the acquisitions of Draper Bancorp, Eldorado Bancshares and the Arizona branches of Pacific Century Bank. On June 30, 2001, long-term first mortgage real estate loans serviced for others totaled $182 million, and consumer and other loan securitizations, which include loans sold under revolving securitization structures, totaled $1,794 million. During the first six months of 2001, the Company sold $257 million of loans classified in held for sale, and securitized and sold SBA loans, home equity credit line loans, credit card receivables and automobile loans totaling $455 million. During the first six months of 2001, total loans sold were $712 million compared to total loans sold of $559 million during the first six months of 2000. RISK ELEMENTS The Company's nonperforming assets, which include nonaccruing loans, restructured loans, other real estate owned and other nonperforming assets, were $88 million on June 30, 2001, up from $71 million on December 31, 2000, and up from $84 million on June 30, 2000. Such nonperforming assets as a percentage of net loans and leases, other real estate owned and other nonperforming assets were .53%, .49% and .61% on June 30, 2001, December 31, 2000, and June 30, 2000, respectively. Accruing loans past due 90 days or more totaled $41 million on June 30, 2001, up from $27 million on December 31, 2000, and $22 million on June 30, 2000. These loans equaled 0.25% of net loans and leases on June 30, 2001, 0.19% on December 31, 2000 and 0.16% on June 30, 2000. The Company had one loan totaling $14.0 million on June 30, 2001 that was considered a potential problem loan. No loans to borrowers were considered potential problem loans at December 31, 2000 and June 30, 2000. Potential problem loans are defined as loans presently on accrual, not contractually past due 90 days or more, and not restructured, but about which management has serious doubt as to the future ability of the borrower to comply with present repayment terms and which may result in the reporting of the loans as nonperforming assets. The Company's total recorded investment in impaired loans included in nonaccrual loans and leases, amounted to $63 million on June 30, 2001, as compared to $46 million on December 31, 2000, and $68 million on June 30, 2000. The Company considers a loan to be impaired when the accrual of interest has been discontinued and it meets other criteria under the statements. The amount of the impairment is measured based on the present value of expected cash flows, the observable market price of the loan, or the fair value of the collateral. Impairment losses are included in the allowance for loan losses through a provision for loan losses. Included in the allowance for loan losses on June 30, 2001, December 31, 2000, and June 30, 2000, is a required allowance of $13 million, $10 million and $17 million, respectively, on $17 million, $16 million and $25 million, respectively, of the recorded investment in impaired loans. 24 ZIONS BANCORPORATION AND SUBSIDIARIES The following table sets forth the nonperforming assets:
June 30, December 31, June 30, (In millions) 2001 2000 2000 ------------ ------------ ------------ Nonaccrual loans .............................. $ 75 $ 58 $ 79 Restructured loans ............................ 2 3 1 Other real estate owned and other nonperforming assets ..................... 11 10 4 ------------ ------------ ------------ Total .................................... $ 88 $ 71 $ 84 ============ ============ ============ % of net loans and leases*, other real estate owned and other nonperforming assets ..... .53% .49% .61% Accruing loans past due 90 days or more ....... $ 41 $ 27 $ 22 ============ ============ ============ % of net loans and leases* .................... .25% .19% .16%
*Includes loans held for sale ALLOWANCE FOR LOAN LOSSES The Company's allowance for loan losses was 1.40% of net loans and leases on June 30, 2001, compared to 1.36% on December 31, 2000 and 1.43% on June 30, 2000. Net charge-offs during the second quarter of 2001 were $9 million, or annualized 0.21% of average net loans and leases, compared to net charge-offs of $9 million for the second quarter of 2000. Net charge-offs for the first six months of 2001 were $15 million, or annualized, 19% of average net loans and leases, compared to $18 million or 0.28% annualized of average net loans and leases for the first six months of 2000. The allowance, as a percentage of nonaccrual loans and restructured loans, was 300.2% on June 30, 2001, compared to 320.7% on December 31, 2000 and 246.2% on June 30, 2000. The allowance, as a percentage of nonaccrual loans and accruing loans past due 90 days or more was 199.2% on June 30, 2001, compared to 229.3% on December 31, 2000 and 194.2% on June 30, 2000. On June 30, 2001, December 31, 2000, and June 30, 2000, the allowance for loan losses includes an allocation of $37 million, $22 million, and $28 million, respectively, related to commitments to extend credit on loans and standby letters of credit. Commitments to extend credit on loans and standby letters of credit on June 30, 2001, December 31, 2000 and June 30, 2000 totaled $7,506 million, $7,254 million and $6,260 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 review, 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. 25 ZIONS BANCORPORATION AND SUBSIDIARIES The following table shows the changes in the allowance for loan losses and a summary of loan loss experience: Six Months Twelve Months Six Months Ended Ended Ended (In millions) June 30, December 31, June 30, 2001 2000 2000 -------- -------- -------- Average loans* and leases outstanding (net of unearned income) .............. $ 15,318 $ 13,649 $ 13,112 ======== ======== ======== Allowance for possible losses: Balance at beginning of the period ......... $ 196 $ 204 $ 204 Allowance of companies acquired ............ 24 2 -- Provision charged against earnings ......... 25 32 11 Loans and leases charged-off: Loans held for sale ................... -- -- -- Commercial, financial and agricultural. (10) (38) (14) Real estate ........................... (3) (4) (2) Consumer .............................. (7) (9) (5) Lease financing ....................... (2) (2) (1) Other receivables ..................... -- -- -- -------- -------- -------- Total ............................ (21) (53) (22) -------- -------- -------- Recoveries: Loans held for sale ................... -- -- -- Commercial, financial and agricultural. 4 6 2 Real estate ........................... -- 1 1 Consumer .............................. 2 3 1 Lease financing ....................... -- 1 -- Other receivables ..................... -- -- -- -------- -------- -------- Total ............................ 6 11 4 -------- -------- -------- Net loan and lease charge-offs ............. (15) (42) (18) -------- -------- -------- Balance at end of the period ............... $ 230 $ 196 $ 197 ======== ======== ======== *Includes loans held for sale Ratio of annualized net charge-offs to average loans and leases .............. .19% .31% .28% DEPOSITS Average total deposits of $16,049 million for the first six months of 2001 increased 13.2% compared to $14,183 million for the first six months of 2000, with average demand deposits increasing 13.1%. Average savings and NOW deposits and average money market and super NOW deposits increased 7.9%, and 12.3%, respectively, during the first six months of 2001, compared with the same period one year earlier. 26 ZIONS BANCORPORATION AND SUBSIDIARIES Average time deposits under $100,000 increased 13.7% and time deposits over $100,000 increased 29.4% for the first six months of 2001 compared to the first six months of 2000. Average foreign deposits decreased 22.7% for the same periods. Total deposits increased 13.9% to $17,170 million on June 30, 2001 as compared to $15,070 million on December 31, 2000. Deposits assumed in the Draper Bancorp, Eldorado Bancshares and Arizona branches of Pacific Century Bank acquisitions consummated during the first six months of 2001 aggregated approximately $1,690 million. Comparing June 30, 2001 to December 31, 2000, demand deposits increased 15.5%, savings and money market deposits increased 11.2%, time deposits under $100,000 increased 27.2%, time deposits over $100,000 increased 15.0% and foreign deposits decreased 31.0%. LIQUIDITY AND INTEREST RATE SENSITIVITY The Company manages its liquidity to provide adequate funds to meet its financial obligations, including withdrawals by depositors and debt service requirements, as well as to fund customers' demand for credit. Liquidity is primarily provided 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. Zions First National Bank provides a liquidity facility to Lockhart Funding LLC (Lockhart), a Qualified Special Purpose Vehicle. Lockhart purchases U.S. Government and AAA rated securities. These assets are funded through the issuance of commercial paper. During July 2001, the size of this liquidity facility was increased to $5.1 billion from $2.0 billion. The Company's core deposits, consisting of demand, savings and money market deposits and time deposits under $100,000, constituted 89.7% of total deposits on June 30, 2001 as compared to 89.5% on December 31, 2000 and 89.0% on June 30, 2000. Maturing balances in loan portfolios provide flexibility in managing cash flows. Maturity management of those funds is an important source of medium to long-term liquidity. The Company's ability to raise funds in the capital markets through the securitization process and by debt issuance allows the Company to take advantage of market opportunities to meet funding needs at reasonable cost. During the second quarter of 2001, the Company issued $200 million of subordinated debt through a newly formed subsidiary, Zions Financial Corp. The debt is unconditionally guaranteed by Zions Bancorporation and matures in May 2011. The notes bear interest at 6.95% per annum through May 14, 2006 and at one-month LIBOR plus 2.86% thereafter until maturity. The parent company's cash requirements consist primarily of debt service, dividends to shareholders, operating expenses, income taxes, and share repurchases. The parent company's cash needs are routinely satisfied through dividends from subsidiaries, the collection of proportionate shares of current income taxes, management and other fees from subsidiaries, and unaffiliated bank lines and debt issuance. On July 30, 2001, the Company's board of directors authorized a repurchase of up to $50 million of the Company's common stock. 27 ZIONS BANCORPORATION AND SUBSIDIARIES 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 off-balance sheet arrangements such as interest rate caps, floors, futures, options, and interest rate exchange agreements, attempts to minimize the effect on net income of changes in interest rates. The Company's management exercises its best judgment in making assumptions with respect to loan and security prepayments, early deposit withdrawals and other noncontrollable events in managing the Company's exposure to changes in interest rates. The interest rate risk position is actively managed and changes daily as the interest rate environment changes; therefore, positions at the end of any period may not be reflective of the Company's interest rate position in subsequent periods. The prime lending rate is the primary basis used for pricing the Company's loans and the short-term Treasury rate is the index used for pricing many of the Company's deposits. The Company, however, is unable to economically hedge the prime/91-day T-bill spread risk. CAPITAL RESOURCES AND DIVIDENDS Total shareholders' equity on June 30, 2001 was $2,198 million, an increase of 23.6% over the $1,779 million on December 31, 2000, and an increase of 34.5% over the $1,634 million on June 30, 2000. The increase in total shareholders' equity during 2001 includes $225 million related to acquisitions and $78 million of other comprehensive income. The ratio of average equity to average assets for the first six months of 2001 was 8.82% as compared to 7.62% for the same period in 2000. On June 30, 2001, the Company's Tier I risk-based capital ratio was 8.35%, as compared to 8.53% on December 31, 2000 and 7.97% on June 30, 2000. On June 30, 2001 the Company's total risk-based capital ratio was 11.63%, as compared to 10.83% on December 31, 2000 and 10.51% on June 30, 2000. The Company's leverage ratio on June 30, 2001 was 6.69%, as compared to 6.38% on December 31, 2000 and 5.91% on June 30, 2000. Dividends declared of $.20 per common share for the second quarter of 2001 were unchanged from the dividends declared for the first quarter of 2001 and the second quarter of 2000. The common cash dividend payout of net income for the second quarter of 2001 was 25.17% compared to 28.51% for the first quarter of 2001 and 28.77% for the second quarter of 2000. The six-month year-to-date common cash dividend payout of net income was 26.74% for 2001 compared to 46.16% for 2000. 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 28 ZIONS BANCORPORATION AND SUBSIDIARIES adversely affect the Company's operations or business. The Company disclaims any obligation to update any factors or to publicly announce the results of revisions to any of the forward-looking statements included herein to reflect future events or developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Interest rate risk is the most significant market risk regularly undertaken by the Company. The Company believes there have been no significant changes in market risk compared to the disclosures in Zions Bancorporation's Annual Report on Form 10-K for the year ended December 31, 2000. PART II. OTHER INFORMATION ----------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS ----------------------------------------------- The following is a summary of matters submitted to vote at the Annual Meeting of Shareholders of Zions Bancorporation: a) The Annual Meeting of Shareholders was held on April 20, 2001. The total number of shares eligible for voting was 85,567,900. b) Election of Directors --------------------- Proxies were solicited by Zions Bancorporation's management pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the proxy statement, and all of such nominees were elected pursuant to the vote of the shareholders as indicated in the proxy statement. c) The matters voted upon and the results were as follows: (1) Election of Directors --------------------- Withhold For Authority ---------- --------- Roger B. Porter 74,248,458 250,573 L.E. Simmons 74,256,965 240,990 I.J. Wagner 74,208,836 290,383 (2) Approve an increase in the number of authorized shares ------------------------------------------------------ of Capital Stock ----------------- Approval to amend the Articles of Incorporation to increase the authorized capital stock from 203,000,000 shares without par value to 353,000,000 shares, divided into 350,000,000 shares of Common Stock without par value, and 3,000,000 shares of Preferred Stock without par value. For Against Abstain 54,821,412 3,273,842 207,191 29 ZIONS BANCORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- a) Exhibits b) Reports on Form 8-K Zions Bancorporation filed the following reports on Form 8-K during the quarter ended June 30, 2001: Form 8-K filed April 16, 2001 (Item 5). Announcement that Zions Bancorporation reacquired the minority interest in its subsidiary, California Bank & Trust for $66.0 million. Form 8-K filed May 14, 2001 (Items 5. and 6.) A copy of a press release issued May 11, 2001 announcing the appointment of David Blackford as Chairman, President and CEO of its banking subsidiary, California Bank & Trust, and the retirement of Robert Sarver from that position and Robert Sarver's retirement from the Zions Bancorporation Board of Directors. 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, President and Chief Executive Officer /s/W. David Hemingway -------------------------------- W. David Hemingway, Executive Vice President and Interim Chief Financial Officer Dated August 14, 2001 30 -----END PRIVACY-ENHANCED MESSAGE-----