SALT LAKE CITY - Disappointing earnings. Restructuring charges. Layoffs.
All in all, 2002 turned out to be a trial by fire for Doyle Arnold, the chief financial officer of Zions Bancorp.
Mr. Arnold knew the job would be demanding when he joined Zions as the right hand to chairman and chief executive Harris H. Simmons in December 2001. After all, Mr. Simmons, who with his family holds almost 10% of Zions' stock, had spent five months hunting for a CFO, shouldering some of the position's duties himself in the interim.
Earlier that year Zions had been the subject of some big headlines - and not flattering ones.
Mr. Arnold's predecessor, Dale Gibbons, who was respected for his financial acumen and his negotiating skills, resigned in June 2001 after being arrested for drug possession and child endangerment. A jury acquitted him of the charges last year, but Mr. Gibbons' personal crisis had rocked a company still struggling to regain momentum. A year earlier it had canceled its proposed merger with local rival First Security Corp.
As much as overseeing accounting activities and budgeting strategies - the usual tasks of a chief financial officer - Mr. Arnold would have to soothe the shaken nerves of colleagues and investors. And the critics were getting more vocal.
By early 2002 Zions' financial performance was bogged down by losses from its e-commerce ventures. Its technology unit, Digital Signature Trust, had racked up $25.6 million in after-tax operating losses over the previous three years. In addition, expenses were inching higher and the recession was beginning to pinch customers in the West.
Zions Bancorp grew to $27 billion of assets by a series of small acquisitions during the 1990s and now owns six community banks in eight western states.
Mr. Arnold had spent 15 years at California's biggest banks - first Wells Fargo & Co. and then BankAmerica Corp. (now Bank of America Corp.) - and hoped he could apply what he had learned to dealmaking at Zions. He said he was drawn to the Utah company for "the opportunity to grow, in part through acquisitions, which I think plays to my strengths."
But those expectations were battered by the growing impatience of investors.
"In my second week on the job, Clark Hinckley" - who heads investor relations - "and I spent three days with investors," Mr. Arnold recalled last week in an interview at Zions' headquarters. "What we heard was that our expense rate was too high. And 'when are you going to face the music on e-commerce?' "
In January of 2002 Zions reported fourth-quarter earnings that missed the consensus by 5 cents, largely because of a higher-than-expected loan-loss provision. Losses from e-commerce had shaved 4 cents a share from the results. Mr. Arnold and Mr. Simmons told analysts they were beginning to see signs of a slowdown, which forced the company to keep loan-loss provisions at 2001 levels.
Management got busy on controlling costs. Mr. Arnold reviewed Zions' technology units to identify which ones appeared likely to turn a profit within a year. He had spent most of 2000 and part of 2001 doing just that as CFO of BankServe, a privately held software start-up he joined after leaving Bank of America. He was also a board member or consultant to several other tech start-ups, some of which were casualties of the Internet blowout.
"It's a part of my job experience that I used more than I thought I would," Mr. Arnold said.
In March of 2002 the company decided to sell Digital Signature Trust, a unit some analysts once considered more valuable than the banking operations. Zions also deemphasized other e-commerce. By yearend Enterprise Vault had been shut down, Phaos Technology Corp. had been sold back to its management, and Lexign, a Nashua, N.H., subsidiary formed just one year earlier from three small acquired firms, had been restructured.
"Last year we dealt with most of the likely and actual problems with investments that aren't going to pan out," Mr. Arnold said. "That was painful - emotionally painful for some of the people who started those, and it was financially painful for the company and its shareholders. But I think that's largely behind us."
In September, Mr. Simmons unveiled a plan to reduce annual expenses by $50 million, including the e-commerce downsizing, branch closings, and venture capital writedowns. By yearend expenses had been cut by $40 million.
Mr. Arnold acknowledges that some of Zions' problems were "self-inflicted." Last April it said it would no longer provide earnings guidance, and that, combined with its falling short of first-quarter estimates by 3 cents, drove the stock down 6%. Even though other banks and large companies have made similar decisions, some analysts maintain that the lack of guidance weighs on the value of Zions' shares.
"We did not handle the decision well," Mr. Arnold said last week. "We sprang it on them as a surprise, and I take the blame for that."
But he stands by the rationale: Earnings-per-share guidance rewards short-term investors at the expense of long-term stockholders.
Zions' cost-cutting could not offset slow revenue growth and credits costs last year. By the time the books closed Dec. 31, analysts had repeatedly notched down their growth projections on it. The stock, which for years traded at a premium to its peers, is now below the group and trading at 11 times the consensus estimates for 2003.
"We're probably still trading at a bit of a discount," Mr. Arnold said. "We've become a 'show-me' stock - we need to post a couple of quarters of consistent, clean numbers" before Zions returns to its place as a "premium" stock - one that has a higher price to earnings ratio, he says. He thinks the turnaround has started already, with lower expenses and improved credit quality in the fourth quarter.
Mr. Arnold has checked some problems off his fix-it list. E-commerce costs, once skimming an average of 3 cents a quarter from earnings per share, had fallen to less than 1 cent a quarter by the fourth quarter. "I had said when it's down under a penny, I could declare victory," he said.
Zions, like many others, has amplified and clarified its financial disclosures for investors. It has revised parts of its corporate governance policy, including the structure of the board's audit committee.
Some analysts are now starting to call the stock cheap and undervalued.
"He came in at time of turbulence, and seems to have a good understanding of what needs to be done, in the context of a difficult operating environment," said Mike Holton, a portfolio manager for the T. Rowe Price Financial Services Fund.
"He comes across as a very solid-operating chief financial officer. That's what I want as an investor in the company," Mr. Holton said.
If things go well the rest of the year, Mr. Arnold says, he may even slip in a few deals.
"We want to strengthen trust and management, and, at the right price, resume acquisitions of community and regional banks in the West," he said.
