10-Q 1 zions1q02-10q.txt ZIONS BANCORPORATION 2ND QUARTER 10-Q 2002 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 March 31, 2002 -------------- 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 1134 SALT LAKE CITY, UTAH 84111 ------------------------------------------ ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801)524-4787 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months 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 May 2, 2002 91,766,001 shares ZIONS BANCORPORATION AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION ---- --------------------- ITEM 1. Financial Statements (Unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss) 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 9 ITEM 2. Management's Discussion and Analysis 13 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 27 PART II. OTHER INFORMATION ----------------- ITEM 6. Exhibits and Reports on Form 8-K 27 SIGNATURES 28 ---------- 2 PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS (Unaudited) -------------------------------- ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, March 31, (In thousands, except share amounts) 2002 2001 2001 ------------ ------------ ------------ (Unaudited) (Unaudited) ASSETS Cash and due from banks .............................................. $ 906,611 $ 978,609 $ 1,061,125 Money market investments: Interest-bearing deposits ......................................... 5,238 2,780 1,068 Federal funds sold ................................................ 38,752 57,653 329,028 Security resell agreements ........................................ 287,101 222,147 706,106 Investment securities: Held to maturity, at cost (approximate market value $79,651, $79,752, and $51,559) ............................ 78,584 79,546 51,559 Available for sale, at market (includes $0, $0, and $143,341 transferred as collateral under repurchase agreements) .......... 3,140,897 3,283,915 3,374,519 Trading account, at market (includes $95,870, $87,612, and $232,811 transferred as collateral under repurchase agreements) . 284,308 102,896 326,324 ------------ ------------ ------------ 3,503,789 3,466,357 3,752,402 Loans: Loans held for sale ............................................... 206,758 297,959 210,654 Loans, leases and other receivables ............................... 17,750,667 17,115,485 15,359,827 ------------ ------------ ------------ 17,957,425 17,413,444 15,570,481 Less: Unearned income and fees, net of related costs ................. 103,257 102,606 83,793 Allowance for loan losses ...................................... 264,107 260,483 221,245 ------------ ------------ ------------ Net loans ................................................... 17,590,061 17,050,355 15,265,443 Premises and equipment, net .......................................... 370,472 368,076 338,048 Goodwill ............................................................. 769,379 770,763 670,571 Core deposit and other intangibles ................................... 104,576 109,148 92,823 Other real estate owned .............................................. 13,490 10,302 8,963 Other assets ......................................................... 1,250,154 1,267,974 1,322,602 ------------ ------------ ------------ $ 24,839,623 $ 24,304,164 $ 23,548,179 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand ........................................ $ 4,418,020 $ 4,480,669 $ 4,140,122 Interest-bearing: Savings and money market ....................................... 10,007,607 9,507,817 8,945,391 Time under $100,000 ............................................ 1,926,131 2,055,087 1,890,130 Time $100,000 and over ......................................... 1,540,183 1,664,829 1,774,215 Foreign ........................................................ 108,401 133,288 95,142 ------------ ------------ ------------ 18,000,342 17,841,690 16,845,000 Securities sold, not yet purchased ................................... 188,894 87,255 233,758 Federal funds purchased .............................................. 1,297,094 1,203,764 686,785 Security repurchase agreements ....................................... 788,908 933,973 1,587,643 Accrued liabilities .................................................. 452,999 428,225 678,442 Commercial paper ..................................................... 315,389 309,000 296,154 Federal Home Loan Bank advances and other borrowings: One year or less .................................................. 437,467 181,266 438,228 Over one year ..................................................... 241,219 240,458 151,161 Long-term debt ....................................................... 781,173 781,342 461,343 ------------ ------------ ------------ Total liabilities .............................................. 22,503,485 22,006,973 21,378,514 ------------ ------------ ------------ Minority interest .................................................... 20,769 16,322 53,611 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 91,986,436 92,208,736, and 92,060,315 shares ............................ 1,092,735 1,111,214 1,111,202 Accumulated other comprehensive income ............................ 51,700 59,951 57,985 Retained earnings ................................................. 1,170,934 1,109,704 946,867 ------------ ------------ ------------ Total shareholders' equity ..................................... 2,315,369 2,280,869 2,116,054 ------------ ------------ ------------ $ 24,839,623 $ 24,304,164 $ 23,548,179 ============ ============ ============
3 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended (In thousands, except per share amounts) March 31, ----------------------- 2002 2001 ---------- ---------- Interest income: Interest and fees on loans ................................ $ 305,705 $ 321,572 Interest on loans held for sale ........................... 2,736 3,084 Lease financing ........................................... 5,668 5,020 Interest on money market investments ...................... 3,686 10,214 Interest on securities: Held to maturity - taxable ............................. 798 985 Available for sale - taxable ........................... 34,628 48,976 Available for sale - nontaxable ........................ 6,342 6,064 Trading account ........................................ 5,434 10,998 ---------- ---------- Total interest income ............................... 364,997 406,913 ---------- ---------- Interest expense: Interest on savings and money market deposits ............. 38,455 77,055 Interest on time and foreign deposits ..................... 33,390 46,530 Interest on borrowed funds ................................ 36,937 67,491 ---------- ---------- Total interest expense .............................. 108,782 191,076 ---------- ---------- Net interest income ................................. 256,215 215,837 Provision for loan losses .................................... 18,090 12,772 ---------- ---------- Net interest income after provision for loan losses . 238,125 203,065 ---------- ---------- Noninterest income: Service charges on deposit accounts ....................... 28,420 22,080 Loan sales and servicing income ........................... 6,926 19,595 Other service charges, commissions and fees ............... 21,190 17,534 Trust income .............................................. 4,413 4,775 Income from securities conduit ............................ 4,139 728 Underwriting, trading and nonhedge derivative income ...... 15,435 14,042 Equity securities gains, net .............................. 621 27,854 Fixed income securities gains (losses), net ............... 43 (4,376) Other ..................................................... 14,611 9,628 ---------- ---------- Total noninterest income ............................ 95,798 111,860 ---------- ---------- Noninterest expense: Salaries and employee benefits ............................ 117,474 107,115 Occupancy, net ............................................ 16,853 14,567 Furniture and equipment ................................... 16,362 14,256 Legal and professional services ........................... 6,652 7,615 Postage and supplies ...................................... 7,209 6,027 Advertising ............................................... 5,864 5,869 Merger-related expense .................................... -- 2,537 Amortization of goodwill .................................. -- 7,142 Amortization of core deposit and other intangibles ........ 4,571 2,566 Other ..................................................... 37,422 35,796 ---------- ---------- Total noninterest expense ........................... 212,407 203,490 ---------- ---------- Income before income taxes .......................... 121,516 111,435 Income taxes ................................................. 42,035 41,138 ---------- ---------- Income before minority interest and cumulative effect of change in accounting principle .......... 79,481 70,297 Minority interest ............................................ (150) (1,604) ---------- ---------- Income before cumulative effect of change in accounting principle ........................... 79,631 71,901 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 .......................................... $ 79,631 $ 64,742 ========== ========== Income before cumulative effect, as adjusted*........ $ 79,631 $ 78,996 ========== ========== Net income, as adjusted*............................. $ 79,631 $ 71,837 ========== ==========
4 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited)
Three Months Ended (In thousands, except per share amounts) March 31, ----------------------- 2002 2001 ---------- ---------- Weighted average common shares outstanding during the period: Basic shares ............................................ 92,055 88,247 Diluted shares .......................................... 92,814 89,495 Net income per common share: Basic: Income before cumulative effect of change in accounting principle ............................... $ 0.87 $ 0.81 Cumulative effect of change in accounting principle, adoption of FASB Statement No. 133 .................... -- (0.08) ---------- ---------- Net income .............................................. $ 0.87 $ 0.73 ========== ========== Income before cumulative effect, as adjusted* ........... $ 0.87 $ 0.89 ========== ========== Net income, as adjusted* ................................ $ 0.87 $ 0.81 ========== ========== Diluted: Income before cumulative effect of change in accounting principle ............................... $ 0.86 $ 0.80 Cumulative effect of change in accounting principle, adoption of FASB Statement No. 133 .................... -- (0.08) ---------- ---------- Net income .............................................. $ 0.86 $ 0.72 ========== ========== Income before cumulative effect, as adjusted* ........... $ 0.86 $ 0.88 ========== ========== Net income, as adjusted* ................................ $ 0.86 $ 0.80 ========== ==========
*See Notes to Consolidated Financial Statements - "Business Combinations, Goodwill, and Other Intangible Assets." 5 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three Months Ended March 31, 2002 ----------------------------------------------------------------------------- Accumulated Other Comprehensive Income (Loss) ------------------------------------- Net Unrealized Net Gains (Losses) Unrealized on Investments Gains on Total Common and Retained Derivative Retained Shareholders' (In thousands) Stock Interests Instruments Subtotal Earnings Equity ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 1, 2002 ........................... $ 1,111,214 $ 31,774 $ 28,177 $ 59,951 $ 1,109,704 $ 2,280,869 Comprehensive income: Net income for the period ........................ 79,631 79,631 Other comprehensive income: Net realized and unrealized holding gains during the period, net of income tax expense of $640 .............................. 1,033 1,033 Reclassification for net realized gains recorded in operations, net of income tax expense of $16 ............................... (27) (27) Change in net unrealized losses on derivative instruments, net of reclassification to operations of $13,285 and income tax benefit of $5,734 ............................ (9,257) (9,257) ----------- ----------- ----------- Other comprehensive income (loss) .............. 1,006 (9,257) (8,251) (8,251) ----------- Total comprehensive income ....................... 71,380 Cash dividends--common, $.20 per share ............. (18,401) (18,401) Stock redeemed and retired ......................... (25,302) (25,302) Stock options exercised, net of shares tendered and retired ............................. 6,823 6,823 ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 2002 ............................ $ 1,092,735 $ 32,780 $ 18,920 $ 51,700 $ 1,170,934 $ 2,315,369 =========== =========== =========== =========== =========== =========== Three Months Ended March 31, 2001 ----------------------------------------------------------------------------- Accumulated Other Comprehensive Income (Loss) ------------------------------------- Net Unrealized Net Gains (Losses) Unrealized on Investments Gains on Total Common and Retained Derivative Retained Shareholders' (In thousands) Stock Interests 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 ........................ 64,742 64,742 Other comprehensive income: Net realized and unrealized holding gains during the period, net of income tax expense of $6,536 ............................ 10,551 10,551 Reclassification for net realized losses recorded in operations, net of income tax benefit of $3,398 ............................ 5,484 5,484 Change in net unrealized gains on derivative instruments, net of reclassification to operations of $1,368 and income tax expense of $6,857 ............................ $ 11,069 11,069 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 ..................... 29,294 32,335 61,629 61,629 ----------- Total comprehensive income ....................... 126,371 Cash dividends--common, $.20 per share ............. (18,458) (18,458) Issuance of common shares for acquisitions ......... 199,680 25,699 225,379 Stock options exercised, net of shares tendered and retired ............................. 3,918 3,918 ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 2001 ............................ $ 1,111,202 $ 25,650 $ 32,335 $ 57,985 $ 946,867 $ 2,116,054 =========== =========== =========== =========== =========== ===========
6 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended (In thousands) March 31, ---------------------------- 2002 2001 ------------ ------------ Cash flows from operating activities: Net income ............................................................ $ 79,631 $ 64,742 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle, adoption of FASB Stmt No. 133 ....................... -- 7,159 Provision for loan losses ......................................... 18,090 12,772 Depreciation of premises and equipment ............................ 15,133 13,034 Amortization ...................................................... 4,609 11,861 Accretion of unearned income and fees, net of related costs .................................................. 651 (3,401) Loss to minority interest ......................................... (150) (1,604) Fixed income securities (gains) losses, net ....................... (43) 4,376 Equity securities gains, net ...................................... (621) (27,854) Proceeds from sales of trading account securities ................. 64,820,193 46,172,562 Increase in trading account securities ............................ (65,001,605) (46,214,852) Proceeds from loans held for sale ................................. 116,990 109,341 Increase in loans held for sale ................................... (25,789) (138,836) Net losses (gains) on sales of loans, leases and other assets ..... 696 (13,057) Change in accrued income taxes .................................... 36,917 16,220 Change in accrued interest receivable ............................. 26,062 5,214 Change in other assets ............................................ (16,133) (218,044) Change in other liabilities ....................................... (79,743) 343,801 Change in accrued interest payable ................................ 12,501 (10,634) Other, net ........................................................ 1,867 21,503 ------------ ------------ Net cash provided by operating activities ...................... 9,256 154,303 ------------ ------------ Cash flows from investing activities: Net increase in money market investments .............................. (48,511) (427,235) Proceeds from maturities of investment securities held to maturity .................................................... 948 796 Proceeds from sales of investment securities available for sale .................................................. 5,124,533 1,132,567 Proceeds from maturities of investment securities available for sale .................................................. 203,233 867,341 Purchases of investment securities available for sale ................. (5,176,740) (1,134,118) Proceeds from sales of loans and leases ............................... 177,860 223,801 Net increase in loans and leases ...................................... (845,825) (390,453) Payments on leveraged leases .......................................... (5,585) (4,870) Principal collections on leveraged leases ............................. 5,585 4,870 Proceeds from sales of premises and equipment ......................... 814 279 Purchases of premises and equipment ................................... (18,672) (21,808) Proceeds from sales of other assets ................................... 4,167 2,273 Cash received for acquisitions, net of cash paid ...................... -- 92,329 Cash paid for net liabilities on branches sold, net of cash received .. (19,674) -- ------------ ------------ Net cash provided by (used in) investing activities ................. (597,867) 345,772 ------------ ------------
7 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
Three Months Ended (In thousands) March 31, ---------------------------- 2002 2001 ------------ ------------ Cash flows from financing activities: Net increase in deposits .............................................. $ 241,491 $ 512,904 Net change in short-term funds borrowed ............................... 312,494 (984,415) Proceeds from FHLB advances over one year ............................. 1,500 -- Payments on FHLB advances over one year ............................... (739) (745) Proceeds from issuance of long-term debt .............................. -- 1,914 Payments on long-term debt ............................................ (169) (278) Proceeds from issuance of common stock ................................ 5,739 2,876 Payments to redeem common stock ....................................... (25,302) -- Dividends paid ........................................................ (18,401) (18,458) ------------ ------------ Net cash provided by (used in) financing activities ................. 516,613 (486,202) ------------ ------------ Net increase (decrease) in cash and due from banks ........................ (71,998) 13,873 Cash and due from banks at beginning of period ............................ 978,609 1,047,252 ------------ ------------ Cash and due from banks at end of period .................................. $ 906,611 $ 1,061,125 ============ ============ Supplemental disclosures of cash flow information: Cash paid for: Interest .............................................................. $ 81,636 $ 198,621 Income taxes .......................................................... 1,785 11,861 Loans transferred to other real estate owned .............................. 7,693 601
8 ZIONS BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2002 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current financial statement presentation. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The balance sheet at December 31, 2001 is from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Zions Bancorporation's Annual Report on Form 10-K for the year ended December 31, 2001. BUSINESS COMBINATIONS, GOODWILL, AND OTHER INTANGIBLE ASSETS Financial Accounting Standards Board ("FASB") Statement No. 141, Business Combinations, became effective for the Company for business combinations completed after June 30, 2001. Statement No. 141 supersedes certain previous accounting guidance on business combinations, and eliminates the pooling-of-interest method of accounting. There were no acquisitions during the three months ended March 31, 2002. FASB Statement No. 142, Goodwill and Other Intangible Assets, became effective for the Company beginning January 1, 2002. Under this Statement, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to specified annual impairment tests. Other intangible assets are amortized over their useful lives. 9 ZIONS BANCORPORATION AND SUBSIDIARIES Transitional disclosures under Statement No. 142 to reconcile prior period amounts of income before cumulative effect and net income to their respective adjusted amounts for the add back of goodwill amortization are as follows:
Earnings per Share ----------------------------------------- Basic Diluted Three Months Ended ------------------- ------------------- (In thousands, except per share amounts) March 31, Three Months Ended March 31, ------------------- ----------------------------------------- 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle .................... $ 79,631 $ 71,901 $ 0.87 $ 0.81 $ 0.86 $ 0.80 Add back of goodwill amortization net of income tax benefit ......................... 7,095 0.08 0.08 -------- -------- -------- -------- -------- -------- Income before cumulative effect, as adjusted . $ 79,631 $ 78,996 $ 0.87 $ 0.89 $ 0.86 $ 0.88 ======== ======== ======== ======== ======== ======== Net income ................................... $ 79,631 $ 64,742 $ 0.87 $ 0.73 $ 0.86 $ 0.72 Add back of goodwill amortization net of income tax benefit ......................... 7,095 0.08 0.08 -------- -------- -------- -------- -------- -------- Net income, as adjusted ...................... $ 79,631 $ 71,837 $ 0.87 $ 0.81 $ 0.86 $ 0.80 ======== ======== ======== ======== ======== ========
Information with respect to core deposit and other intangible assets and related amortization is as follows (in thousands): March 31, 2002 ---------------------------- Gross Carrying Accumulated Amount Amortization ------------ ------------ Core deposit intangibles .. $ 141,475 $ (52,657) Other intangibles ......... 19,816 (4,058) ------------ ------------ $ 161,291 $ (56,715) ============ ============ Estimated amortization expense of core deposit and other intangible assets (in thousands): Year ended December 31, 2002 $ 18,291 Year ended December 31, 2003 16,678 Year ended December 31, 2004 15,406 Year ended December 31, 2005 15,406 Year ended December 31, 2006 15,061 The aggregate amount of amortization expense of core deposit and other intangible assets for the three months ended March 31, 2002 is separately reflected in the statement of income. The Company has no intangible assets with indefinite lives. 10 ZIONS BANCORPORATION AND SUBSIDIARIES Changes in the carrying amount of goodwill for the three months ended March 31, 2002 by operating segment are as follows (in thousands):
Zions First The National California Nevada State National Vectra Commerce Bank and Bank & Bank and Bank Bank Bank of Consolidated Subsidiaries Trust Subsidiaries of Arizona Colorado Washington Other Company ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ Balance as of January 1, 2002 . $ 11,533 $ 387,387 $ 21,051 $ 57,168 $ 239,232 $ -- $ 54,392 $ 770,763 Goodwill written off from sale of branches ........ (1,082) (1,082) Other adjustments .. (474) 195 (23) (302) ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ Balance as of March 31, 2002 .. $ 11,533 $ 385,831 $ 21,051 $ 57,363 $ 239,209 $ -- $ 54,392 $ 769,379 ============ =========== ============ ============ =========== ============ =========== ============
By June 30, 2002, as required under the provisions of Statement No. 142, the Company will complete the first of the required impairment tests of goodwill for each operating segment. The Company has not yet determined whether any impairment will be indicated, including the likelihood or amount of such impairment. Any significant impairment indicated will be recorded by operating segment as a cumulative effect of a change in accounting principle by December 31, 2002. EXCHANGE OF INTEREST IN SUBSIDIARY On March 25, 2002, the Company entered into an agreement to exchange its interest in Digital Signature Trust Co., a subsidiary of Zions First National Bank engaged in e-commerce digital certification, to Identrus, LLC (a corporate joint venture), for an approximate 33% ownership in Identrus. The Company finalized the transaction on April 30, 2002. No gain or loss was recognized on the exchange. OPERATING SEGMENT INFORMATION The Company manages its operations and prepares management reports with a primary focus on geographical area. All segments presented, except for the segment defined as "Other," are based on commercial banking operations. Zions First National Bank and subsidiaries operates 128 branches in Utah and 22 in Idaho. California Bank & Trust operates 92 branches in Northern and Southern California. Nevada State Bank and subsidiaries operates 61 offices in Nevada. National Bank of Arizona operates 46 branches in Arizona. Vectra Bank Colorado operates 57 branches in Colorado and one branch in New Mexico. The Commerce Bank of Washington operates one branch in the state of Washington. The operating segment defined as "Other" includes the parent company, smaller nonbank operating units, and eliminations of transactions between segments. The accounting policies of the individual segments are the same as those of the Company. The Company allocates centrally provided services to the business segments based upon estimated usage of those services. Commencing January 1, 2002, the Company began transfer pricing on a consolidated company level. Allocated transfer pricing (expense) income included in net interest income of the banking subsidiaries for the three months ended March 31, 2002 is as follows: Zions First National Bank - $(11.3) million, Nevada State Bank - $3.4 million, National Bank of Arizona - $1.8 million, Vectra Bank Colorado - $5.2 million, 11 ZIONS BANCORPORATION AND SUBSIDIARIES and The Commerce Bank of Washington - $.9 million. Also, net income of each segment for the three months ended March 31, 2001 has been adjusted for the add back of goodwill amortization as required by FASB Statement No. 142. The following table presents selected operating segment information for the three months ended March 31, 2002 and 2001:
Zions First Nevada State National Bank California Bank and National Bank (In millions) and Subsidiaries Bank & Trust Subsidiaries of Arizona ------------------ ------------------ ------------------- --------------------- 2002 2001 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- -------- --------- --------- CONDENSED INCOME STATEMENT Net interest income ........................... $ 75.9 $ 69.3 $ 92.6 $ 71.3 $ 31.9 $ 27.7 $ 27.2 $ 24.2 Provision for loan losses ..................... 11.3 5.7 4.0 0.8 1.0 2.5 0.6 0.6 Noninterest income ............................ 50.2 64.4 20.9 33.1 6.8 6.3 4.8 3.6 Merger expense and amortization of goodwill, core deposit and other intangibles 0.3 1.9 1.9 5.1 0.1 0.4 0.4 0.5 Other noninterest expense ..................... 72.3 67.3 57.5 52.7 20.0 19.9 15.6 14.4 Income tax expense (benefit) .................. 14.1 19.9 20.5 19.8 6.0 3.8 6.1 4.9 Minority interest ............................. -- (0.7) -- -- -- -- -- -- Cumulative effect, adoption of FASB Stmt No.133 -- (5.3) -- (1.3) -- (0.6) -- -- Add back of goodwill amortization ............. -- 0.1 -- 3.0 -- 0.2 -- 0.2 -------- -------- -------- -------- -------- -------- --------- --------- Net income (loss), as adjusted .............. $ 28.1 $ 34.4 $ 29.6 $ 27.7 $ 11.6 $ 7.0 $ 9.3 $ 7.6 ======== ======== ======== ======== ======== ======== ========= ========= AVERAGE BALANCE SHEET DATA Total assets .................................. $ 10,010 $ 8,765 $ 8,346 $ 6,740 $ 2,489 $ 2,347 $ 2,600 $ 1,946 Net loans and leases .......................... 6,263 5,113 5,717 4,837 1,556 1,377 1,804 1,498 Total deposits ................................ 5,289 4,228 6,734 5,564 2,140 2,009 2,180 1,623 The Commerce Vectra Bank Bank of Consolidated (In millions) Colorado Washington Other Company ------------------ ------------------ ------------------- --------------------- 2002 2001 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- -------- --------- --------- CONDENSED INCOME STATEMENT Net interest income ........................... $ 27.2 $ 21.6 $ 5.5 $ 5.4 $ (4.1) $ (3.7) $ 256.2 $ 215.8 Provision for loan losses ..................... 0.9 3.0 0.3 0.2 -- -- 18.1 12.8 Noninterest income ............................ 7.4 5.7 0.4 0.4 5.3 (1.7) 95.8 111.8 Merger expense and amortization of goodwill, core deposit and other intangibles 0.6 3.2 -- -- 1.3 1.1 4.6 12.2 Other noninterest expense ..................... 24.6 18.9 2.5 2.4 15.3 15.6 207.8 191.2 Income tax expense (benefit) .................. 2.9 1.6 1.1 1.1 (8.7) (10.0) 42.0 41.1 Minority interest ............................. -- -- -- -- (0.1) (0.9) (0.1) (1.6) Cumulative effect, adoption of FASB Stmt No.133 -- -- -- -- -- -- -- (7.2) Add back of goodwill amortization ............. -- 2.6 -- -- -- 1.0 -- 7.1 -------- -------- -------- -------- -------- -------- --------- --------- Net income (loss), as adjusted .............. $ 5.6 $ 3.2 $ 2.0 $ 2.1 $ (6.6) $ (10.2) $ 79.6 $ 71.8 ======== ======== ======== ======== ======== ======== ========= ========= AVERAGE BALANCE SHEET DATA Total assets .................................. $ 2,588 $ 2,165 $ 523 $ 522 $ (842) $ (342) $ 25,714 $ 22,143 Net loans and leases .......................... 1,822 1,486 288 237 89 57 17,539 14,605 Total deposits ................................ 1,718 1,396 370 374 (756) (62) 17,675 15,132
12 ZIONS BANCORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ FINANCIAL HIGHLIGHTS (Unaudited)
Three Months Ended (In thousands, except per share and ratio data) March 31, -------------------------------------------- 2002 2001 % Change ------------ ------------ ------------ EARNINGS Taxable-equivalent net interest income ...................... $ 261,305 $ 220,709 18.39 % Net interest income ......................................... 256,215 215,837 18.71 % Noninterest income .......................................... 95,798 111,860 (14.36)% Provision for loan losses ................................... 18,090 12,772 41.64 % Noninterest expense ......................................... 212,407 203,490 4.38 % Income before income taxes .................................. 121,516 111,435 9.05 % Income taxes ................................................ 42,035 41,138 2.18 % Minority interest ........................................... (150) (1,604) (90.65)% Cumulative effect of adoption of FASB Statement No. 133 ..... -- (7,159) (100.00)% Net income .................................................. 79,631 64,742 23.00 % Income before cumulative effect, as adjusted (1) ............ 79,631 78,996 0.80 % Net income, as adjusted (1) ................................. 79,631 71,837 10.85 % PER COMMON SHARE Net income (diluted) ........................................ 0.86 0.72 19.44 % Income (diluted) before cumulative effect, as adjusted (1) .. 0.86 0.88 (2.27)% Net income (diluted), as adjusted (1) ....................... 0.86 0.80 7.50 % Dividends ................................................... 0.20 0.20 -- Book value .................................................. 25.17 22.99 9.48 % SELECTED RATIOS (1) Return on average assets .................................... 1.26 % 1.32 % Return on average common equity ............................. 14.02 % 15.46 % Efficiency ratio ............................................ 59.48 % 59.04 % Net interest margin ......................................... 4.70 % 4.59 % OPERATING CASH EARNINGS (2) Taxable-equivalent net interest income ...................... $ 261,305 $ 220,709 18.39 % Net interest income ......................................... 256,215 215,837 18.71 % Noninterest income .......................................... 96,880 111,860 (13.39)% Provision for loan losses ................................... 18,090 12,772 41.64 % Noninterest expense ......................................... 207,836 191,245 8.68 % Income before income taxes .................................. 127,169 123,680 2.82 % Income taxes ................................................ 43,865 43,097 1.78 % Minority interest ........................................... (150) (1,404) (89.32)% Net income before cumulative effect of adoption of FASB Statement No. 133 .............................. 83,454 81,987 1.79 % PER COMMON SHARE Net income (diluted) ........................................ 0.90 0.92 (2.17)% Dividends ................................................... 0.20 0.20 -- Book value .................................................. 15.67 14.69 6.67 % SELECTED RATIOS Return on average assets .................................... 1.36 % 1.55 % Return on average common equity ............................. 23.74 % 26.67 % Efficiency ratio ............................................ 58.02 % 57.51 % Net interest margin ......................................... 4.70 % 4.59 %
(1) Adjusted according to FASB Statement No. 142 for the add back of goodwill amortization, net of income tax benefit. (2) Before amortization of goodwill in prior period, amortization of core deposit and other intangible assets, merger expense, goodwill allocated to the carrying value of branches sold and the cumulative effect of the adoption of FASB Statement No. 133. 13 ZIONS BANCORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (Continued) (Unaudited)
Three Months Ended (In thousands, except per share and ratio data) March 31, -------------------------------------------- 2002 2001 % Change ------------ ------------ ------------ AVERAGE BALANCES Total assets ................................................ $ 25,714,074 $ 22,142,791 16.13 % Securities .................................................. 4,079,827 4,080,038 (0.01)% Net loans and leases ........................................ 17,538,937 14,605,416 20.09 % Goodwill .................................................... 770,239 568,406 35.51 % Core deposit and other intangibles .......................... 107,202 69,040 55.28 % Total deposits .............................................. 17,675,111 15,131,719 16.81 % Minority interest ........................................... 18,546 53,572 (65.38)% Shareholders' equity ........................................ 2,303,066 1,884,101 22.24 % Weighted average common and common- equivalent shares outstanding ............................ 92,813,828 89,494,543 3.71 % AT PERIOD END Total assets ................................................ 24,839,623 23,548,179 5.48 % Securities .................................................. 3,503,789 3,752,402 (6.63)% Net loans and leases ........................................ 17,854,168 15,486,688 15.29 % Sold loans being serviced (1) ............................... 2,526,076 1,776,139 42.22 % Allowance for loan losses ................................... 264,107 221,245 19.37 % Goodwill .................................................... 769,379 670,571 14.73 % Core deposit and other intangibles .......................... 104,576 92,823 12.66 % Total deposits .............................................. 18,000,342 16,845,000 6.86 % Minority interest ........................................... 20,769 53,611 (61.26)% Shareholders' equity ........................................ 2,315,369 2,116,054 9.42 % Common shares outstanding ................................... 91,986,436 92,060,315 (0.08)% Average equity to average assets ............................ 8.96% 8.51% Common dividend payout ...................................... 23.11% 28.51% Nonperforming assets ........................................ 131,154 82,265 59.43 % Accruing loans past due 90 days or more ..................... 37,371 45,983 (18.73)% Nonperforming assets to net loans and leases, other real estate owned and other nonperforming assets at period end ....................... 0.73% 0.53%
(1) Amount represents the outstanding balance of loans sold and being serviced by the Company, excluding conforming first mortgage residential real estate loans. 14 ZIONS BANCORPORATION AND SUBSIDIARIES OPERATING RESULTS Zions Bancorporation and subsidiaries ("the Company") achieved net income of $79.6 million, or $0.86 per diluted share for the first quarter of 2002, an increase of 23.0% and 19.4%, respectively, over the $64.7 million, or $0.72 per diluted share in the first quarter of 2001. Income for the first quarter of 2001, adjusted for the add back of goodwill amortization and before the cumulative effect of a change in accounting principle, was $79.0 million, or $0.88 per diluted share. Comparing the equivalent amount in the first quarter of 2002 to this adjusted amount in 2001 reflects a 0.8% increase in net income and a 2.3% decrease per share. All references hereinafter to prior periods are on an "as adjusted" basis for the add back of goodwill under FASB Statement No. 142. Included in the 2002 first quarter results are after-tax operating losses at Digital Signature Trust ("DST") of $2.4 million, or $.03 per share, compared to after-tax operating losses of $2.9 million, or $.03 per share in the first quarter of 2001. As previously announced and also discussed in the Notes to Consolidated Financial Statements, the Company agreed to exchange its interest in DST to Identrus, LLC for an approximate 33% ownership in Identrus. The exchange was finalized on April 30, 2002 for which no gain or loss was recognized. The first quarter of 2001 included a gain of $50.2 million from the sale of a nonpublic investee of the Company to a public company, Concord EFS, Inc., offset by valuation adjustments to venture capital investments of $22.4 million. The $50.2 million gain was recognized based on the estimated fair value of restricted stock received by the Company as consideration for the investee company. Noninterest expense also included $14.4 million in nonrecurring charges for certain benefit obligations, consulting services, and closed business operations. These items contributed approximately $.09 per diluted share to earnings in the first quarter of 2001. The annualized return on average assets was 1.26% in the first quarter of 2002, compared to 1.32% in the first quarter of 2001. The annualized return on average common equity was 14.02% in the first quarter of 2002, compared to 15.46% in the first quarter of 2001. The efficiency ratio, defined as the percentage of noninterest expenses to the sum of taxable equivalent net interest income and noninterest income, increased to 59.48% in the first quarter of 2002 from 59.04% in the first quarter of 2001. The Company's first quarter increase in earnings of $14.9 million (23.0%), compared to the same period the previous year reflects a $40.4 million (18.7%) increase in net interest income and the effect of the 2001 cumulative effect of an accounting change of $7.2 million, offset by a $16.1 million (14.4%) decrease in noninterest income, a $5.3 million (41.6%) increase in the provision for loan losses, an $8.9 million (4.4%) increase in noninterest expense, a $1.5 million (90.7%) decrease from the effects of minority interests, and a $.9 million (2.2%) increase in income taxes. During 2001, the Company completed several acquisitions accounted for as purchases. Results of operations between periods are influenced because of these transactions. 15 OPERATING CASH EARNINGS RESULTS The Company also provides its earnings performance on an operating cash basis because it believes its cash performance gives a better reflection of its financial position and shareholder value creation, and better demonstrates its ability to support growth, pay dividends, and repurchase stock, than providing only reported net income. Operating cash earnings are earnings before amortization of goodwill in the prior period, amortization of core deposit and other intangible assets, goodwill allocated to the value of branches sold in 2002, merger-related expenses and the cumulative effect of adoption of FASB Statement No. 133. Operating cash earnings for the first quarter of 2002 were $83.5 million or $0.90 per diluted share, an increase of 1.8% and a decrease of 2.2%, respectively, over the $82.0 million or $0.92 per diluted share earned in the first quarter of 2001. The operating cash annualized return on average assets for the first quarter of 2002 was 1.36% compared to 1.55% for the first quarter of 2001. Operating cash annualized return on average common shareholders' equity for the first quarter of 2002 was 23.74% compared to 26.67% for the first quarter of 2001. The Company's cash efficiency ratio for the first quarter of 2002 was 58.02% compared to 57.51% in the first quarter of 2001. NET INTEREST INCOME AND INTEREST RATE SPREADS Net interest income for the first quarter of 2002, adjusted to a fully taxable-equivalent basis, increased 18.4% to $261.3 million compared to $220.7 million for the first quarter of 2001. Net interest margin increased to 4.70% for the first quarter of 2002, compared to 4.59% for the first quarter of 2001. The increased margins for 2002 compared to 2001 result primarily from a more attractive balance sheet composition that includes strong loan growth as well as the major decreases in interest rates. The yield on average earning assets decreased 191 basis points during the first quarter of 2002 compared to the first quarter of 2001. The average rate paid this quarter on interest-bearing funds decreased 235 basis points from the first quarter of 2001. The spread on average interest-bearing funds for the first quarter of 2002 was 4.30%, up from 3.86% for the first quarter of 2001. 16 ZIONS BANCORPORATION AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (Unaudited)
Three Months Ended Three Months Ended (In thousands) March 31, 2002 March 31, 2001 --------------------------------------- --------------------------------------- Average Amount of Average Average Amount of Average Balance Interest (1) Rate Balance Interest (1) Rate ------------ ------------ ------- ------------ ------------ ------- ASSETS Money market investments ................... $ 930,734 $ 3,686 1.61% $ 799,148 $ 10,214 5.18% Securities: Held to maturity ........................ 79,143 798 4.09% 51,975 985 7.69% Available for sale ...................... 3,349,833 44,385 5.37% 3,294,006 58,305 7.18% Trading account ......................... 650,851 5,434 3.39% 734,057 10,998 6.08% ------------ ------------ ------------ ------------ Total securities ..................... 4,079,827 50,617 5.03% 4,080,038 70,288 6.99% ------------ ------------ ------------ ------------ Loans: Loans held for sale ..................... 214,328 2,736 5.18% 180,054 3,084 6.95% Net loans and leases (2) ................ 17,324,609 313,048 7.33% 14,425,362 328,199 9.23% ------------ ------------ ------------ ------------ Total loans .......................... 17,538,937 315,784 7.30% 14,605,416 331,283 9.20% ------------ ------------ ------------ ------------ Total interest-earning assets .............. 22,549,498 370,087 6.66% 19,484,602 411,785 8.57% Cash and due from banks .................... 976,923 788,602 Allowance for loan losses .................. (264,053) (201,551) Goodwill ................................... 770,239 568,406 Core deposit and other intangibles ......... 107,202 69,040 Other assets ............................... 1,574,265 1,433,692 ------------ ------------ Total assets ......................... $ 25,714,074 $ 22,142,791 ============ ============ LIABILITIES Interest-bearing deposits: Savings and NOW deposits ................ $ 2,351,800 6,074 1.05% $ 1,753,766 8,612 1.99% Money market super NOW deposits ......... 7,348,527 32,381 1.79% 6,589,871 68,443 4.21% Time under $100,000 ..................... 2,024,253 18,484 3.70% 1,790,988 23,744 5.38% Time $100,000 and over .................. 1,592,229 14,518 3.70% 1,448,965 21,717 6.08% Foreign deposits ........................ 101,258 388 1.55% 122,620 1,069 3.54% ------------ ------------ ------------ ------------ Total interest-bearing deposits ...... 13,418,067 71,845 2.17% 11,706,210 123,585 4.28% ------------ ------------ ------------ ------------ Borrowed funds: Securities sold, not yet purchased ...... 392,271 3,702 3.83% 383,740 5,285 5.59% Federal funds purchased and security repurchase agreements ................. 3,127,698 12,893 1.67% 2,721,791 34,723 5.17% Commercial paper ........................ 357,147 1,886 2.14% 286,730 4,317 6.11% FHLB advances and other borrowings: One year or less ..................... 394,901 1,809 1.86% 799,570 12,431 6.31% Over one year ........................ 227,508 2,832 5.05% 130,867 1,909 5.92% Long-term debt .......................... 793,828 13,815 7.06% 433,843 8,826 8.25% ------------ ------------ ------------ ------------ Total borrowed funds ................. 5,293,353 36,937 2.83% 4,756,541 67,491 5.75% ------------ ------------ ------------ ------------ Total interest-bearing liabilities ......... 18,711,420 108,782 2.36% 16,462,751 191,076 4.71% ------------ ------------ Noninterest-bearing deposits ............... 4,257,044 3,425,509 Other liabilities .......................... 423,998 316,858 ------------ ------------ Total liabilities .......................... 23,392,462 20,205,118 Minority interest .......................... 18,546 53,572 Total shareholders' equity ........... 2,303,066 1,884,101 ------------ ------------ Total liabilities and shareholders' equity . $ 25,714,074 $ 22,142,791 ============ ============ Spread on average interest-bearing funds ... 4.30% 3.86% Net interest income and net yield on interest-earning assets .................. $ 261,305 4.70% $ 220,709 4.59% ============ ============
(1) Taxable-equivalent rates used where applicable. (2) Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. 17 ZIONS BANCORPORATION AND SUBSIDIARIES PROVISION FOR LOAN LOSSES The provision for loan losses was $18.1 million for the first quarter of 2002, compared to $26.7 million for the fourth quarter of 2001, and $12.8 million for the first quarter of 2001. Annualized, the provision is 0.42% of average loans for the first quarter of 2002, 0.63% for the fourth quarter of 2001, and 0.35% for the first quarter of 2001. The increased provision for loan losses for the first quarter of 2002 and the fourth quarter of 2001 compared to the first quarter of 2001, reflects management's evaluation of its various portfolios, statistical trends, and other various economic factors. It is management's intent to maintain a strong coverage of nonperforming assets in a continued uncertain economic environment in the markets in which the Company operates. NONINTEREST INCOME Noninterest income for the first quarter of 2002 was $95.8 million, a decrease of 14.4% from the $111.9 million for the first quarter of 2001. As previously discussed, noninterest income for the first quarter of 2001 included a gain of $50.2 million related to the Company's investment in a nonpublic investee acquired by a public company, offset by valuation writedowns of venture capital investments of $22.4 million. Excluding these items, noninterest income increased $11.7 million or 14.0%. Comparing the segments of noninterest income for the first quarter of 2002 to the first quarter of 2001, service charges on deposit accounts increased 28.7%, loan sales and servicing income decreased 64.7%, other service charges, commissions, and fees increased 20.9%, income from securities conduit increased 468.5%, underwriting, trading and nonhedge derivative income increased 9.9%, equity securities gains decreased 97.8%, fixed income securities gains increased 101.0%, and other noninterest income increased 51.8%. The increase in service charges on deposit accounts results mainly from increased fees associated with acquisitions consummated at the end of the first quarter of 2001 and later in 2001, as well as increased internal core deposit growth. Increased other service charges, commissions, and fees also reflect the effect of the acquisitions. The decrease in loan sales and servicing income results from the Company recording a writedown of approximately $13.5 million on capitalized excess servicing related to an auto securitization nonhedge derivative transaction. The $13.5 million fair value of a swap entered into in this transaction was recorded as an asset, and nonhedge derivative income was increased by this amount. Without this transaction, underwriting, trading and nonhedge derivative income would have been approximately $1.9 million for the first quarter of 2002 compared to $14.0 million for the first quarter of 2001. The adjusted decrease from the first quarter of 2001 results mainly from the recognition of approximately $8.4 million of nonhedge derivative income during the first quarter of 2001 resulting from increases in fair values of nonhedge derivatives in a rapidly decreasing interest rate environment. The first quarter of 2001 also included approximately $3.3 million of income from held to maturity securities transferred to trading in conjunction with the adoption of FASB Statement No. 133 and sold during the quarter. Income from securities conduit represents liquidity, interest rate agreement, and administrative fees from a sponsored qualified special purpose entity securities conduit established during 2001. The increased fees result from increases in the conduit's securities portfolio activity. As previously discussed, the decrease in equity securities gains from the first quarter of 2001 results mainly from a gain of $50.2 million from the nonpublic investee transaction and losses of $22.4 million from writedowns of venture 18 ZIONS BANCORPORATION AND SUBSIDIARIES capital investments during the first quarter of 2001. Fixed income securities losses for the first quarter of 2001 included an impairment loss of approximately $4.5 million on SBA interest-only securities. Other income includes approximately $4.5 million of income from bank-owned life insurance for the first quarter of 2002 compared to $3.7 million for the first quarter of 2001. Other income for the first quarter of 2002 also includes a pretax gain of approximately $3.2 million from the sales of three California branches. The after-tax gain from the sales was approximately $1.4 million. NONINTEREST EXPENSE Noninterest expense for the first quarter of 2002 was $212.4 million, an increase of $8.9 million, or 4.4% over $203.5 million for the first quarter of 2001. Excluding the amortization of goodwill in the first quarter of 2001, noninterest expense increased $16.1 million, or 8.2%. Comparing significant changes in noninterest expense segments for the first quarter of 2002 with the first quarter of 2001, salaries and employee benefits increased 9.7%, occupancy increased 15.7%, furniture and equipment increased 14.8%, legal and professional fees decreased 12.7%, merger-related expense and amortization of goodwill decreased 100.0% to zero amounts, amortization of core deposit and other intangibles increased 78.1%, and the total of all other noninterest expenses increased 5.9%. Expenses for the first quarter of 2001 do not include expenses associated with the operations of Eldorado Banchsares, Inc., acquired March 30, 2001, branches acquired in Arizona from Pacific Century Bank, several companies acquired to form Lexign, Inc., and Minnequa Bancorp, all of which were acquired subsequent to March 31, 2001. The decrease in legal and professional fees is mainly the result of professional fees incurred during the first quarter of 2001 related to the nonpublic investee transaction. The increase in amortization of core deposit and other intangibles reflects increased amortization related to the previously discussed purchase acquisitions. At March 31, 2002, the Company had 8,255 full-time equivalent employees, 408 offices, and 587 ATMs, compared to 7,570 full-time equivalent employees, 402 offices, and 548 ATMs at March 31, 2001. INCOME TAXES The Company's income taxes increased 2.2% to $42.0 million for the first quarter of 2002 compared to $41.1 million for the first quarter of 2001. The Company's effective income tax rate was 34.6% for the first quarter of 2002, compared to 36.9% for the first quarter of 2001. The lower effective rate is mainly due to higher book income resulting from the nonamortization of goodwill in the first quarter of 2002. ANALYSIS OF FINANCIAL CONDITION EARNING ASSETS Average earning assets increased 15.7% to $22,549 million for the three months ended March 31, 2002, compared to $19,485 million for the three months ended March 31, 2001. Earning assets comprised 87.7% of total average assets for the first three months of 2002, compared with 88.0% for the first three months of 2001. 19 ZIONS BANCORPORATION AND SUBSIDIARIES Average money market investments, consisting of interest-bearing deposits, federal funds sold and security resell agreements increased 16.5% to $931 million in the first three months of 2002 as compared to $799 million in the first three months of 2001. Average securities remained relatively constant at $4,080 million for both the first three months of 2002 and 2001. Average investment portfolio securities increased 2.5% and average trading securities decreased 11.3%. Average net loans and leases increased 20.1% to $17,539 million for the first three months of 2002 compared to $14,605 million for the first three months of 2001, representing 77.8% of earning assets in the first three months of 2002 compared to 75.0% in the first three months of 2001. Average net loans and leases were 99.2% of average total deposits for the three months ended March 31, 2002, as compared to 96.5% for the three months ended March 31, 2001. INVESTMENT SECURITIES The following table presents the Company's held-to-maturity and available-for-sale investment securities:
March 31, December 31, March 31, (In millions) 2002 2001 2001 --------------------- --------------------- --------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- --------- --------- --------- --------- --------- HELD TO MATURITY Mortgage-backed securities ...................... $ 79 $ 80 $ 79 $ 80 $ 52 $ 52 --------- --------- --------- --------- --------- --------- 79 80 79 80 52 52 --------- --------- --------- --------- --------- --------- AVAILABLE FOR SALE U.S. Treasury securities ........................ 56 57 61 63 57 60 U.S. government agencies and corporations: Small Business Administration loan-backed securities ..................... 706 707 674 674 590 604 Other agency securities ...................... 709 713 769 781 673 680 States and political subdivisions ............... 530 537 505 514 507 515 Mortgage/asset-backed and other debt securities . 851 856 960 969 1,270 1,280 --------- --------- --------- --------- --------- --------- 2,852 2,870 2,969 3,001 3,097 3,139 --------- --------- --------- --------- --------- --------- Equity securities: Mutual funds: Accessor Funds, Inc. ...................... 234 238 266 267 172 173 Stock ........................................ 16 33 10 16 64 63 --------- --------- --------- --------- --------- --------- 250 271 276 283 236 236 --------- --------- --------- --------- --------- --------- 3,102 3,141 3,245 3,284 3,333 3,375 --------- --------- --------- --------- --------- --------- Total ........................................... $ 3,181 $ 3,221 $ 3,324 $ 3,364 $ 3,385 $ 3,427 ========= ========= ========= ========= ========= =========
LOANS The Company has structured its organization to separate the lending function from the credit administration function to strengthen the control and independent evaluation of credit activities. Loan policies and procedures provide the Company with a framework for consistent underwriting and a basis for sound credit decisions. In addition, the Company has well-defined standards for grading its loan portfolio, and management utilizes the comprehensive loan grading system to determine risk potential in the portfolio. Another aspect of the Company's credit risk management strategy is the diversification of the loan portfolio. The Company has a diversified loan portfolio with some emphasis in real estate (as set forth in the following table), but has no significant exposure to highly leveraged transactions. 20 ZIONS BANCORPORATION AND SUBSIDIARIES The table below sets forth the amount of loans outstanding by type:
(In millions) March 31, December 31, March 31, 2002 2001 2001 ------------ ------------ ------------ Types Loans held for sale ...................... $ 207 $ 298 $ 211 Commercial, financial, and agricultural .. 4,114 4,109 3,818 Real estate: Construction .......................... 2,995 2,936 2,463 Other: Home equity credit line ............ 454 401 305 1-4 family residential ............. 3,364 3,168 2,933 Other real estate-secured .......... 5,480 5,126 4,679 ------------ ------------ ------------ 9,298 8,695 7,917 ------------ ------------ ------------ 12,293 11,631 10,380 Consumer: Bankcard and other revolving plans .... 116 126 106 Other ................................. 726 707 616 ------------ ------------ ------------ 842 833 722 Lease financing .......................... 408 421 360 Foreign loans ............................ 24 14 27 Other receivables ........................ 69 107 52 ------------ ------------ ------------ Total loans ........................... $ 17,957 $ 17,413 $ 15,570 ============ ============ ============
Loans held for sale on March 31, 2002 decreased 30.6% from December 31, 2001. All other loans, net of unearned income and fees increased 3.7% to $17,647 million on March 31, 2002 compared to $17,013 million on December 31, 2001. Commercial loans, construction loans, and other real estate loans increased from year-end .1%, 2.0%, and 6.9%, respectively. Consumer loans increased 1.1% while lease financing decreased 3.1%. Foreign loans increased 71.4% to $24 million and other receivables decreased 35.5%. Within the other real estate loan portfolio, home equity credit line loans increased 13.2%, 1-4 family residential loans increased 6.2%, and all other real estate-secured loans increased 6.9% from year-end. On March 31, 2002, long-term conforming first mortgage real estate loans serviced for others totaled $317 million, and consumer and other loan securitizations, which include loans sold under revolving securitization structures, totaled $2,526 million. During the first three months of 2002, the Company sold $117 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 $179 million. During the first three months of 2002, total loans sold were $296 million compared to total loans sold of $319 million during the first three months of 2001. As of March 31, 2002, the following table shows that the Company had assets of $229 million recorded on its balance sheet related to the $2,526 million of loans sold to securitized trusts. The Company does not control or have any equity interest in the trusts. However, as is common with securitized transactions, the Company has retained subordinated interests of $132 million representing the Company's junior position to other investors in the securities. The capitalized residual cash flows (sometimes called "excess servicing") of $97 million principally represent the present value of estimated excess cash flows over the life of the sold loans. These excess cash flows are subject to prepayment and credit risk. 21 ZIONS BANCORPORATION AND SUBSIDIARIES
Sold loans being serviced Residual interests ------------------------------- on balance sheet at March 31, 2002 Sales ------------------------------------------------ for three Outstanding Subordinated Capitalized months ended balance at retained residual (In millions) March 31, 2002 March 31, 2002 interest cash flows Total -------------- -------------- -------------- -------------- -------------- Auto loans ................. $ 39 $ 302 $ 24 $ 6 $ 30 Home equity credit lines ... 62 349 9 10 19 Bankcard receivables ....... 57 70 3 1 4 Nonconforming residential real estate loans ........ -- 159 3 3 6 SBA 504 loans .............. -- 1,039 93 72 165 SBA 7(a) loans ............. -- 222 -- 1 1 Farmer Mac ................. 21 385 -- 4 4 ------------- -------------- -------------- -------------- -------------- Total .................... $ 179 $ 2,526 $ 132 $ 97 $ 229 ============= ============== ============== ============== ==============
RISK ELEMENTS The Company's nonperforming assets, which include nonaccruing loans, restructured loans, other real estate owned and other nonperforming assets, were $131 million on March 31, 2002, up from $120 million on December 31, 2001, and up from $82 million on March 31, 2001. Such nonperforming assets as a percentage of net loans and leases, other real estate owned and other nonperforming assets were .73% on March 31, 2002, .69% on December 31, 2001, and .53% March 31, 2001. Accruing loans past due 90 days or more totaled $37 million on March 31, 2002, down from $46 million on both December 31, 2001 and March 31, 2001. These loans equaled 0.21% of net loans and leases on March 31, 2002, 0.27% on December 31, 2001, and 0.30% on March 31, 2001. No loans to borrowers were considered potential problem loans at March 31, 2002, December 31, 2001 or March 31, 2001. 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 $69 million on March 31, 2002, as compared to $80 million on December 31, 2001, and $49 million on March 31, 2001. The Company considers a loan to be impaired when the accrual of interest has been discontinued and it meets other applicable criteria under current accounting standards. The amount of the impairment is measured based on the present value of expected cash flows, the observable market price of the loan, or the fair value of the collateral. Impairment losses are included in the allowance for loan losses through a provision for loan losses. Included in the allowance for loan losses on March 31, 2002, December 31, 2001, and March 31, 2001, is a required allowance of $9 million, $18 million and $12 million, respectively, on $28 million, $20 million and $20 million, respectively, of the recorded investment in impaired loans. 22 ZIONS BANCORPORATION AND SUBSIDIARIES The following table sets forth the nonperforming assets:
March 31, December 31, March 31, (In millions) 2002 2001 2001 ------------ ------------ ------------ Nonaccrual loans .............................. $ 116 $ 109 $ 71 Restructured loans ............................ 1 1 2 Other real estate owned and other nonperforming assets ........................ 14 10 9 ------------ ------------ ------------ Total ......................................... $ 131 $ 120 $ 82 ============ ============ ============ % of net loans and leases*, other real estate owned and other nonperforming assets ........ 0.73% 0.69% 0.53% Accruing loans past due 90 days or more ....... $ 37 $ 46 $ 46 ============ ============ ============ % of net loans and leases* .................... 0.21% 0.27% 0.30% *Includes loans held for sale.
ALLOWANCE FOR LOAN LOSSES The Company's allowance for loan losses was 1.48% of net loans and leases on March 31, 2002, compared to 1.50% on December 31, 2001 and 1.43% on March 31, 2001. Net charge-offs during the first quarter of 2002 were $14.5 million, or annualized 0.33% of average net loans and leases, compared to net charge-offs of $18.2 million (annualized 0.43%) for the fourth quarter of 2001, and $6.1 million (annualized 0.17%) for the first quarter of 2001. The allowance, as a percentage of nonaccrual loans and restructured loans, was 224.5% on March 31, 2002, compared to 236.7% on December 31, 2001 and 301.8% on March 31, 2001. The allowance, as a percentage of nonaccrual loans and accruing loans past due 90 days or more was 171.9% on March 31, 2002, compared to 168.2% on December 31, 2001 and 189.7% on March 31, 2001. At March 31, 2002, the allowance for loan losses includes an allocation of $9 million related to commitments to extend credit for which the Company could separate the credit risk from that of any related loans on the balance sheet and for standby letters of credit. Commitments to extend credit on loans and standby letters of credit on March 31, 2002, December 31, 2001, and March 31, 2001 totaled $7,317 million, $6,812 million, and $7,514 million, respectively. In analyzing the adequacy of the allowance for loan and lease losses, management utilizes a comprehensive loan grading system to determine risk potential in the portfolio, and considers the results of independent internal and external credit reviews, historical charge-off experience, and changes in the composition and volume of the portfolio. Other factors, such as general economic conditions and collateral values, are also considered. Larger problem credits are individually evaluated to determine appropriate reserve allocations. Additions to the allowance are based upon the resulting risk profile of the portfolio developed through the evaluation of the above factors. 23 ZIONS BANCORPORATION AND SUBSIDIARIES The following table shows the changes in the allowance for loan losses and a summary of loan loss experience:
Three Months Twelve Months Three Months Ended Ended Ended (In millions) March 31, December 31, March 31, 2002 2001 2001 ------------ ------------ ------------ Average loans* and leases outstanding (net of unearned income) ............... $ 17,539 $ 16,015 $ 14,605 ============ ============ ============ Allowance for possible losses: Balance at beginning of year .............. $ 260 $ 196 $ 196 Allowance of companies acquired ........... -- 30 19 Provision charged against earnings ........ 18 73 13 Loans and leases charged-off: Commercial, financial and agricultural . (11) (30) (6) Real estate ............................ (2) (5) -- Consumer ............................... (4) (13) (3) Lease financing ........................ (2) (7) (1) ------------ ------------ ------------ Total ............................... (19) (55) (10) ------------ ------------ ------------ Recoveries: Commercial, financial and agricultural . 3 10 2 Real estate ............................ -- 2 -- Consumer ............................... 1 3 1 Lease financing ........................ 1 1 -- ------------ ------------ ------------ Total ............................... 5 16 3 ------------ ------------ ------------ Net loan and lease charge-offs ............ (14) (39) (7) ------------ ------------ ------------ Balance at end of the period .............. $ 264 $ 260 $ 221 ============ ============ ============ *Includes loans held for sale Ratio of annualized net charge-offs to average loans and leases ............. 0.33% 0.24% 0.17%
DEPOSITS Total deposits increased .9% to $18,000 million on March 31, 2002 as compared to $17,842 million on December 31, 2001. Comparing March 31, 2002 to December 31, 2001, demand deposits decreased 1.4%, savings and money market deposits increased 5.3%, time deposits under $100,000 decreased 6.3%, time deposits $100,000 and over decreased 7.5%, and foreign deposits decreased 18.7%. Average total deposits of $17,675 million for the first three months of 2002 increased 16.8% compared to $15,132 million for the first three months of 2001, with average demand deposits increasing 24.3%. Average savings and NOW deposits increased 34.1% and average money market and super NOW deposits increased 11.5% during the first three months of 2002 compared with the same period one year earlier. Average time deposits under $100,000 increased 13.0% and time deposits $100,000 and over increased 9.9% for the first three months of 2002 compared to the first three months of 2002. Average foreign deposits decreased 17.4% for the same periods. 24 ZIONS BANCORPORATION AND SUBSIDIARIES LIQUIDITY AND INTEREST RATE SENSITIVITY The Company manages its liquidity to provide adequate funds to meet its anticipated financial obligations, including withdrawals by depositors and debt service requirements, as well as to fund customers' demand for credit. Liquidity is provided primarily by the regularly scheduled maturities of the Company's investment and loan portfolios. Management of the maturities of these portfolios is an important source of medium to long-term liquidity. The Company's ability to raise funds in the capital markets through the securitization process also allows it to meet funding needs at a reasonable cost. The Federal Home Loan Bank ("FHLB") system is a major source of liquidity for each of the Company's subsidiary banks. Zions First National Bank and The Commerce Bank of Washington are members of the FHLB of Seattle. California Bank & Trust, Nevada State Bank, and National Bank of Arizona are members of the FHLB of San Francisco. Vectra Bank Colorado is a member of the FHLB of Topeka. The FHLB allows member banks to borrow against their eligible loans to satisfy liquidity requirements. The Company's core deposits, consisting of demand, savings and money market deposits and time deposits under $100,000, constituted 90.8% of total deposits on March 31, 2002, as compared to 89.9% on December 31, 2001 and 88.9% on March 31, 2001. Maturing balances in loan portfolios provide flexibility in managing cash flows. Maturity management of those funds is an important source of medium to long-term liquidity. The Company's ability to raise funds in the capital markets through the securitization process and by debt issuance allows the Company to take advantage of market opportunities to meet funding needs at a reasonable cost. The parent company's cash requirements consist primarily of debt service, operating expenses, income taxes, dividends to shareholders, and share repurchases. The parent's cash needs are routinely met through dividends from subsidiaries, proportionate shares of current income taxes, management and other fees, unaffiliated bank lines, and debt issuance. At March 31, 2002, $218.5 million of dividend capacity was available from subsidiaries to pay to the parent without having to obtain regulatory approval. During the three months ended March 31, 2002, dividends from subsidiaries were $32 million. The parent also has a program to issue short-term commercial paper. At March 31, 2002 outstanding commercial paper was $315.4 million. At March 31, 2002, the parent had a revolving credit facility with a bank totaling $40 million and a margin borrowing facility totaling $22 million. The parent had $18 million outstanding on the revolving credit facility at March 31, 2002. Zions First National Bank provides a $5.1 billion liquidity facility for a fee to a qualified special purpose entity securities conduit ("conduit"). The conduit purchases U.S. Government-backed and AAA rated securities. These assets are funded through the issuance of commercial paper. With certain limitations, ZFNB is required to advance funds to the conduit to repay maturing commercial paper upon the conduit's inability to access the commercial paper market or upon a commercial paper market disruption. No amounts were outstanding under this liquidity facility at March 31, 2002. On January 18, 2002, the Company's board of directors authorized a repurchase of up to $55 million of the Company's common stock. Previously, on July 30, 2001, the Company's board of directors authorized a repurchase of up to $50 million of the Company's common stock. During the first quarter of 2002, the Company repurchased approximately 486 thousand common shares at a cost of $25.3 million. During the year 2001, the Company repurchased approximately 883 thousand common shares at a cost of $46.5 million. 25 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 certain derivative instruments, including interest rate caps, floors, futures, options and exchange agreements, attempts to manage the effect on net interest income of changes in interest rates. The prime lending and the LIBOR (London Interbank Offer Rate) curve, are the primary indices used for pricing the Company's loans, and the 91-day Treasury bill rate is the index used for pricing many of the Company's deposits. The Company does not hedge the prime/LIBOR/T-bill spread risk through the use of derivative instruments. CAPITAL RESOURCES AND DIVIDENDS Total shareholders' equity on March 31, 2002 was $2,315 million, an increase of 1.5% over the $2,281 million on December 31, 2001, and an increase of 9.4% over the $2,116 million on March 31, 2001. The Company's tangible common equity ratio, tangible equity to tangible assets, was 6.01% at March 31, 2002 compared to 5.94% at March 31, 2001. The ratio of average equity to average assets for the first three months of 2002 was 8.96% as compared to 8.51% for the same period in 2001. On March 31, 2002, the Company's total risk-based capital ratio was 12.22%, as compared to 12.20% on December 31, 2001 and 11.31% on March 31, 2001. On March 31, 2002, the Company's Tier I risk-based capital ratio was 8.31%, as compared to 8.25% on December 31, 2001 and 9.05% on March 31, 2001. The Company's leverage ratio on both March 31, 2002 and on December 31, 2001 was 6.56%, as compared to 7.33% on March 31, 2001. Dividends declared of $.20 per common share for the first quarter of 2002 were unchanged from the dividends declared for each quarter during 2001. The common cash dividend payout of net income for the first quarter of 2002 was 23.1% compared to 26.1% for the year 2001 and 28.5% for the first quarter of 2001. CRITICAL ACCOUNTING POLICIES The Company has reviewed and made no significant changes in critical accounting policies and assumptions compared to the disclosures made in Zions Bancorporation's Annual Report on Form 10-K for the year ended December 31, 2001. FORWARD-LOOKING INFORMATION Statements in Management's Discussion and Analysis that are not based on historical data are forward- looking, including, for example, the projected performance of the Company and its operations. These statements constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from the projections discussed in Management's Discussion and Analysis since such projections involve significant risks and uncertainties. Factors that might cause such differences include, but are not limited to: the timing of closing proposed acquisitions being delayed or such acquisitions being prohibited; competitive pressures among financial institutions increasing significantly; economic conditions, either nationally or locally in areas in which the Company conducts its operations, being less favorable than expected; and legislation or regulatory changes which adversely affect the Company's operations or business. 26 ZIONS BANCORPORATION AND SUBSIDIARIES The Company disclaims any obligation to update any factors or to publicly announce the results of revisions to any of the forward-looking statements included herein to reflect future events or developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Interest rate risk is the most significant market risk regularly undertaken by the Company. The Company believes there have been no significant changes in market risk compared to the disclosures in Zions Bancorporation's Annual Report on Form 10-K for the year ended December 31, 2001. PART II. OTHER INFORMATION ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- a) Exhibits None. b) Reports on Form 8-K Zions Bancorporation did not file any reports on Form 8-K during the quarter ended March 31, 2002. 27 ZIONS BANCORPORATION AND SUBSIDIARIES S I G N A T U R E S ------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ZIONS BANCORPORATION /s/Harris H. Simmons -------------------------------- Harris H. Simmons, Chairman, President and Chief Executive Officer /s/Doyle L. Arnold -------------------------------- Doyle L. Arnold, Executive Vice President and Chief Financial Officer Dated May 14, 2002 28