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EXHIBIT 13
ZIONS BANCORP0RATION
1998 ANNUAL REP0RT
FINANCIAL HIGHLIGHTS
98/97
1998 1997 1996 1995 1994
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CHANGE
FOR THE YEAR (IN MILLIONS)
Net income + 9% $130.1 $119.9 $104.7 $83.8 $65.8
OPERATING CASH EARNINGS (1) + 43% 181.1 126.8 106.9 85.9 67.4
PER SHARE
Net income (diluted) - 11% $1.70 $1.91 $1.72 $1.36 $1.08
Net income (basic) - 11% 1.72 1.93 1.74 1.38 1.10
Operating cash earnings (diluted) (1) + 17% 2.37 2.02 1.75 1.42 1.12
Dividends declared + 15% .54 .47 .425 .3525 .29
Book value (2) + 44% 17.61 12.23 8.71 7.46 6.35
Market price - end + 37% 62.38 45.38 26.00 20.06 8.97
Market price - high 62.38 46.00 26.00 20.28 10.50
Market price - low 38.38 25.69 16.69 8.88 8.38
AT YEAR END (IN MILLIONS)
Assets + 71% $17,020 $9,943 $6,722 $5,803 $5,087
Loans and leases + 112% 10,636 5,023 3,585 2,922 2,489
Loans sold being serviced (3) + 1% 1,057 1,050 868 831 787
Deposits + 88% 13,321 7,090 4,738 4,242 3,836
Shareholders' equity + 72% 1,385 803 528 447 380
PERFORMANCE RATIOS
Return on average assets .97% 1.34% 1.59% 1.44% 1.18%
Return on average common equity 10.46% 19.03% 21.50% 20.29% 18.69%
Efficiency ratio 71.00% 59.89% 56.57% 59.37% 62.23%
Net interest margin 4.53% 4.19% 4.59% 4.54% 4.11%
OPERATING CASH PERFORMANCE RATIOS (1)
Return on average assets 1.40% 1.43% 1.63% 1.48% 1.21%
Return on average common equity 26.98% 25.46% 23.44% 21.90% 20.22%
Efficiency ratio 61.58% 58.42% 55.98% 58.63% 62.54%
CAPITAL RATIOS(2)
Equity to assets 8.14% 8.08% 7.85% 7.70% 7.47%
Tier 1 leverage 5.86% 6.96% 9.09% 6.40% 6.32%
Tier 1 risk-based capital 8.34% 12.17% 14.83% 11.48% 11.84%
Total risk-based capital 11.38% 14.11% 17.29% 14.27% 14.92%
SELECTED INFORMATION
Average common-equivalent shares (in 76,527 62,895 60,976 60,633 59,959
thousands)
Common dividend payout ratio 31.27% 24.19% 23.88% 24.53% 25.53%
Full-time equivalent employees 6,793 4,393 3,118 2,892 2,732
Commercial Banking Offices 333 230 143 132 119
ATMs 463 485 327 255 215
(1) Before amortization of goodwill and core deposit intangible assets and
merger expense.
(2) At year end.
(3) Amount represents the outstanding balance of loans sold and being
serviced by the company, excluding long-term first mortgage residential
real-estate loans.
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[graphic omitted]
Central to the Company's success is its core banking business. In 1998,
Zions moved aggressively to expand its banking franchise, especially in the
profitable and high-growth markets of California, Colorado, and Washington. The
Company now provides banking services in eight western states.
The Company's banking business continues to enjoy a generally favorable
business climate and strong local economies. These eight states have enjoyed
exceptional employment growth in recent years, and population growth over the
next 30 years is projected to be among the highest in the nation.
The approach has been to achieve profitable growth through the acquisition
of strong banks, strategic deployment of new branches, and the introduction of a
broader and more innovative array of products and services. The company's
enhanced capital resources enable the acquired banks to take advantage of
further growth opportunities in these markets.
Unlike most other regional or super-regional banking operations, Zions
Bancorporation's strategy is to maintain a strong, local presence for affiliate
banks in each state. These banks have the authority and ability to respond to
the financial needs of their local clients. Therefore, essential to the success
of this philosophy is strong, local management that understands and can respond
to unique business opportunities in the markets they serve.
While Zions affiliates give their customers the attention and
responsiveness of a community bank, the Company provides back-office and
administrative support to yield greater efficiencies and cost savings in a
manner transparent to the customer.
Significant Acquisitions
California
The year 1998 is highlighted by the company's most significant acquisition
to date. Starting from the base of the former Grossmont Bank in San Diego, Zions
completed its acquisition of FP Bancorp and its subsidiary, First Pacific
National Bank, with offices in San Diego and Riverside counties. In the first
quarter, Zions surprised many observers when it announced an agreement to
acquire The Sumitomo Bank of California ("Sumitomo"), with approximately $4.5
billion in assets.
These moves give the Company a foothold in the important Los Angeles and
San Francisco markets. The Sumitomo acquisition was completed during the fourth
quarter. The three banks were merged into a single, statewide franchise, and the
name was changed to California Bank & Trust ("CB&T")
Referring to itself as a super-community bank, CB&T is headquartered in the
San Francisco Bay area. However, consistent with the company's community banking
philosophy, each region has local management and decision-making authority.
California Bank & Trust has an initial statewide network of 71 offices and
assets of approximately $6 billion, making it the sixth largest commercial bank
in California. The state of California is projected to be the fastest growing in
the United States over the next 30 years.
California Bank & Trust will focus on delivering what Californians need and
deserve: a bank with a statewide reach, centered around relationship banking and
delivered through a regional approach.
Largely as a result of initiatives by new local management and an expanded
array of services and products, former Sumitomo customers are rewarding the new
bank with their loyalty and additional business.
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Colorado
Aggressive acquisitions were undertaken to establish a significant and
solid franchise within the growing state of Colorado during 1998. In order to
develop a network of branches throughout the state, the Company acquired
multiple banking organizations. This was necessary because, until recently,
Colorado banking laws did not permit the development of statewide branch banking
franchises.
During the year, Zions completed mergers with Vectra Banking Corp., Routt
County National Bank Corp., Sky Valley Bank Corp., Tri-State Finance Corp.,
Kersey Bancorp Inc., Mountain Financial Holding Company, SBT Bankshares, Eagle
Holding Company and Citizens Banco Inc. All of these banking operations were
merged into Vectra Bank Colorado, N.A. ("Vectra").
The Colorado economy is expected to remain very healthy into the next
decade, with technology, tourism and service-related businesses serving as the
engines of stability and prosperity. The state is a magnet to people looking for
a combination of lifestyle and economic opportunity.
With assets of nearly $2 billion, Vectra's statewide network of 52 offices
makes it the state's fifth largest bank. Vectra also operates one office in
Farmington, New Mexico.
Washington
Continuing the company's geographic expansion, 1998 marks Zions' entry into
the fast-growing Seattle market with the acquisition of The Commerce
Bancorporation, the holding company of The Commerce Bank of Washington, N.A.
("The Commerce Bank").
The Commerce bank's approach is unique. From a single office in downtown
Seattle, The Commerce Bank operates very successfully within a narrowly-defined
niche of business and private banking customers. As with other Zions affiliates,
The Commerce Bank has achieved success based on providing superior service.
Joining with Zions allows The Commerce Bank to rise to the next level in
its ability to meet the needs of its clients. Expanded products and services,
combined with its attentiveness and responsiveness to client needs, is sure to
result in a win-win-win situation for the Company, The Commerce Bank of
Washington, and its clients.
The Seattle area is one of the nation's leading centers for advanced
technology in computer software, bio-technology, electronics, medical equipment
and environmental engineering. Seattle is also ranked as one of the top cities
in the U. S. in which to live and locate a business.
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Internal Growth
In addition to acquiring other banking franchises, Zions Bancorporation's
strategy is to leverage its existing branch network and selectively expand
within the states it serves. Excluding the loans and deposits from the company's
acquisitions, which are not reflected in the previous-year balances,
on-balance-sheet and securitized loans in 1998 increased 20.9% and deposits were
up 9.5% from a year ago.
The company's Utah/Idaho banking affiliate, Zions First National Bank,
continued to achieve growth through its well-developed branch and ATM
distribution network, as well as the increasingly important online and telephone
banking channels. A new branch was opened in Idaho Falls, Idaho, and the Bank
moved into new offices in Park City, Utah and Rigby, Idaho. Also, three
convenient new grocery store branches were opened, bringing the total to 44. In
addition, the Bank targets key segments through its Private Banking, Executive
Banking and women's Financial Groups. In 1998, Zions Bank celebrated its 125th
anniversary with a retail loan campaign that generated record loan originations
approaching $500 million.
Nevada State Bank ("NSB") is the oldest state-chartered bank in Nevada
(1959). In 1998, NSB added seven branches and grew to more than $1.1 billion in
assets and a total of 44 locations. Because NSB competes with large, national
banking operations, its strategy is to emphasize its community bank leadership
position, providing personalized, client first service.
As in previous years, National Bank of Arizona ("NBA") continues to focus
on the business and executive banking segments, while expanding its retail
branch operations. Three new offices were opened during the year: one in the
southeast corner of Arizona, at Sierra Vista, and two in the popular Sedona
area, at Cottonwood and the Village of Oak Creek. This brings the total to 33
branch offices statewide.
... on balance sheet and securitized loans in 1998 increased 20.9%
and deposits were up 9.5% from a year ago.
[graphic omitted]
Complementary Businesses
While banking is the company's core business, an ever-increasing component
of revenue comes from complementary niche businesses. Each of these represents
high growth prospects and potential for revenue enhancements, leveraging the
company's competencies and resources.
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Some of these businesses represent pioneering technologies while others
merely represent underserved markets or undiscovered opportunities. The common
thread is that these businesses result from creative, "outside the box"
thinking.
Because these businesses are providing complementary products to a growing
client base, they help to deepen relationships with current clients and
diversify earnings from the core banking franchise.
Digital Signature Trust Company
With the rapid growth in electronic commerce, Digital Signature Trust
Company offers an intriguing opportunity for Zions Bancorporation's future.
Early in the year, Zions Bank received approval from the Office of the
Comptroller of the Currency ("OCC") to establish an operating subsidiary to act
as a certification authority and repository for certificates used to verify
digital signatures. DST was the first bank subsidiary in the nation to receive
such approval.
As a certification authority, DST issues, stores and verifies digital
certificates that are used in the digital "signing" of electronic documents and
transactions. Digital signatures are a form of electronic authentication,
permitting a recipient to compare decoded signatures with the message and
confirm that the message has not been altered.
In September, DST announced it had become American Bankers association's
exclusive partner in providing secure e-commerce technology services for a new
ABA subsidiary. ABAecom(SM) will serve as the "trusted third party" in providing
an assortment of electronic authentication and encryption services for financial
institutions. These services will include a Web site authentication seal and
digital certificates to allow financial institutions and their customers to
engage in private, secure communications.
Electronic Bond Trading
As the only primary dealer in U.S. Treasury securities headquartered west
of the Mississippi River, Zions Bank acts as underwriter and distributor of U.S.
Treasury and Federal Agency securities. It has pioneered the online trading of
such government securities through its Web sites, www.oddlot.com and
www.govrate.com. The Web sites display live, executable quotes, available to
financial institutions and money managers nationwide. In addition, prices and
electronic trading are offered on Bloomberg and several other vendor systems.
Accessor Capital Management
During the year, Accessor Funds, a family of eight mutual funds totaling
$1.1 billion in assets, placed two funds on U.S. Banker magazine's list of the
top 20 bank-managed equity funds, and one fund on the magazine's list of top 10
international funds. Accessor Funds are advised by Seattle-based Accessor
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Capital Management, which is approximately 25 percent owned by Zions First
National Bank.
Municipal Finance
Zions is one of the largest municipal financial advisory firms in the
country. Combined, the company's public finance offices operating under the
names of Zions Bank Public Finance, Kelling, Northcross & Nobriga (California),
Howarth & Associates (Nevada) and National Bank of Arizona Public Finance ranked
ninth in the Securities Data corporation's listing of the nation's top 100
municipal financial advisors.
U.S. Small Business Administration Lending
Zions Bank continues to be a leader in U.S. Small Business Administration
("SBA") lending, originating loans in 31 of 65 markets identified by the SBA.
Through its Zions Small Business Finance division, headquartered in St. Louis,
the bank provides fast and efficient SBA 7(a) financing through offices
strategically located across the country.
In addition, Zions provides real estate financing for businesses through
the SBA 504 loan program. Zions bank's Real Estate Securitization department
works with certified development companies and correspondent banks throughout
the country to provide the nation's largest source of secondary market financing
for SBA 504 loans.
Farmer Mac
Federal Agricultural Mortgage Corporation ("Farmer Mac") continues to
provide needed funding to the nation's farmers. Zions Bank maintains nearly a 20
percent equity interest in Farmer Mac and originates and sells qualified loans
directly to Farmer Mac through its cash window program. Zions is the largest
seller of agricultural mortgages to the Farmer Mac cash window. These
agricultural mortgages are originated throughout the United States and
underwritten and serviced by Zions Agricultural Finance, located in Ames, Iowa.
Zions Agricultural Finance is a division of Zions First National Bank.
Technology for the next millennium
Technological advances already have changed the face of the financial
services industry. This trend is expected to continue at a faster pace in future
years. New technologies continue to revolutionize the industry, paving the way
to a brighter, more customer-oriented financial services future. Zions
Bancorporation is a leader in utilizing new technologies to provide
state-of-the-art, creative solutions to satisfy financial needs.
Rapidly expanding use of the Internet presents several new opportunities
almost daily for many financial service providers. Internet banking is
increasingly being used by individuals and businesses. In the state of Utah, the
number of Zions Internet banking customers grew by over 200 percent in 1998. New
electronic services include brokerage, bill payment and loan applications, each
of which helps add to Zions bank's image as a regional area leader in Internet
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banking. Nevada State Bank introduced its Web site and Internet banking in 1998.
Internet banking applications are being developed for the company's other
banking affiliates.
Zions Bancorporation will continue to explore new, innovative applications
of emerging technologies that have the potential of deepening client
relationships, diversifying earnings, serving under-served markets or creating
new, profitable business opportunities.
Year 2000
In a few short months, the world will experience the much-anticipated
transition to the new millennium. Opinions vary about the potential impact of
computers that fail to read the Year 2000 (Y2K) correctly. Because of society's
heavy reliance upon computer technology, the outcome is still somewhat
uncertain. Since financial institutions rely heavily on date-based calculations,
the industry has a particular challenge. Fortunately, Zions Bancorporation has
been aggressively preparing.
For several years, the Company has been identifying all of the computer
hardware and software systems it uses, evaluating Y2K risks, and renovating or
replacing these systems, as necessary. The task was simplified somewhat because
in recent years, many of the company's operating systems already had been
upgraded with Year 2000-compliant systems. During 1998, the Y2K team replaced or
renovated most of its mission-critical systems. In December, the Company
successfully completed its first of several planned off-site tests of
mission-critical operating systems.
Through the balance of 1999, each system is being subjected to rigorous
testing and further remediation, if needed. Contingency plans have been prepared
so Zions' affiliate banks can provide uninterrupted service during any
difficulties. Affiliate banks continue to inform their clients about the Y2K
issue and about the company's preparations, using a variety of marketing
communications, including well-attended seminars that are being held throughout
the market area.
While Zions Bancorporation remains very optimistic, it considers
preparations for Y2K as the company's highest priority for 1999. The Company is
proud of the fact that Zions Bank President and CEO A. Scott Anderson recently
was selected to represent the nation's banking industry as a member of the
Senior Advisors Group to the president's Council on Year 2000 Conversion.
Operational Integration
Zions Bancorporation remains committed to the strategy of allowing local
bank affiliates to run their own businesses with local managers who know their
markets, understand unique community needs and deliver the highest quality
customer service. Recognizing the need to also deliver these services in the
most efficient and cost-effective manner, the Company centralized and
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consolidated certain back-office, support functions.
Zions Management Services Company ("ZMSC") was created in 1998 to provide
this support. ZMSC serves as an umbrella organization, delivering a variety of
support services to affiliates. It provides a higher level of quality,
consistency, and cost-effective delivery of services than could be achieved by
any of the affiliates on a stand-alone basis. At the same time, ZMSC provides a
set of operating controls to assure that these support functions are being
performed in a safe and sound manner. ZMSC provides assistance to affiliates in
the areas of operations/information systems, human resources, finance and
accounting, credit policy, credit administration, and investments. In addition,
ZMSC operates centralized call centers for taking loan applications and
providing telephone customer service. Call centers are equipped to respond to
calls from customers of any affiliate, using a multiple que environment, which
enables the bank to optimize staffing efficiency and allows a customer service
representative to use the local bank's name and database to assist the caller.
Winning Formula
A business - like a chess player - utilizes various pieces to accomplish a
goal. Each unit must work in harmony to be effective. Each piece is unique in
shape, function and purpose. All are powerful if used effectively. (Even the
pawn can capture the queen.) All pieces must act in unison complementary to a
master strategy - in order to find a winning formula. Measured in shareholder
value, 1998 was a year of winning strategies for Zions Bancorporation.
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MANAGEMENT'S COMMENTS
PERFORMANCE SUMMARY
Zions Bancorporation reported record earnings of $130.0 million or $1.70 per
share in 1998. Net income increased 8.5% over the $119.9 million earned in 1997
and 14.5% over the $104.7 million earned in 1996. On a diluted net income per
share basis, per share earned decreased 11.0% from $1.91 in 1997 to 1.70 in
1998. Per share earnings increased 1.72 to 1.91, an 11.0% increase, from 1996 to
1997. Dividends per share were $.54 per share in 1998, an increase of 14.9% over
$.47 in 1997, which were up 10.6% from $.425 in 1996. Financial results have
been restated for prior periods to reflect the acquisition of The Commerce
Bancorporation during 1998, which was accounted for as a pooling of interests
and considered significant. The acquisitions of Vectra Banking Corporation, FP
Bancorp, Inc., and The Sumitomo Bank of California were accounted for as
purchases and results of operations are included as if the acquisitions had
occurred January 1, 1998, April 1, 1998, and October 1, 1998, respectively.
Therefore, results of operations for 1998 can not be compared directly with
prior periods.
Included in reported net income were after-tax merger expenses of $24.1 million
or $.32 per share in 1998 and $.1 million or $.01 per share in 1997. Excluding
merger expenses, earnings for 1998 would have been $154.2 million or $2.02 per
share , an increase of 28.0% and 5.2%, respectively, over $120.5 or $1.92 for
1997. Merger expenses in 1998 relate to the company's acquisitions of twelve
banking organizations during the year and are further discussed in Note 2 of
Notes to Consolidated Financial Statements.
The return on average shareholders' equity was 10.46% and the return on average
assets was 0.97% for 1998, compared with 19.03% and 1.34%, respectively, in
1997, and 21.50% and 1.59%, respectively, in 1996.
The Company is also providing its earnings performance on an operating cash
basis since it believes that its cash operating performance is a better
reflection of its financial position and shareholder value creation as well as
its ability to support growth and return capital to shareholders than reported
net income. Operating cash earnings are earnings before the amortization of
goodwill and core deposit intangible assets and merger expense.
Operating cash earnings were $181.1 million or $2.37 per share for 1998, an
increase of 42.8% and 17.3%, respectively, over the $126.8 or $2.02 per share
for 1997, which was up 18.6% and 15.4% over the $106.9 million or $1.75 per
share in 1996. The return on average shareholders' equity and the return on
average assets on an operating cash basis were 26.98% and 1.40%, respectively,
for 1998 compared to 25.46 % and 1.43% for 1997 and 23.44% and 1.63% for 1996.
The strong performance of the Company was driven by a 71.3% growth in average
loans and leases and a 46.3% growth in average total earning assets that led to
a 58.4% increase in taxable-equivalent net interest income to $541.9 million in
1998. Noninterest income increased 42.1% to $199.9 million in 1998, with strong
growth in service charges, trust income, underwriting and trading income, and
loan sales and servicing income. Noninterest expense, including merger expenses
increased 82.1% to $526.7 million in 1998. Excluding merger expenses,
noninterest expense increased 69.4% over 1997. The increase in revenue and
noninterest expense is mainly attributable to the record growth of the Company
during 1998 through acquisitions and expansion. The number of full-time
equivalent employees increased to 6,793 at year-end 1998 from 4,393 at the end
of 1997 and banking offices increased to 333 from 230. Increased expenses,
related primarily to acquisitions and related conversion and functional
integration, resulted in an increase in the Company's efficiency ratio, or
noninterest expenses as a percentage of total taxable-equivalent net revenues to
71.00% for 1998 compared to 59.89% for 1997 and 56.57% for 1996. The operating
cash performance efficiency ratio was 61.58% for 1998 compared to 58.42% for
1997 and 55.98% for 1996.
The Company's provision for loan losses totaled $11.9 million for 1998 compared
to $4.6 million for 1997. Net charge-offs were $14.9 million, or .21% of average
loans and leases in 1998 compared to $8.1 million or .20% in 1997. Nonperforming
assets increased to $64 million or .60% of loans and other real estate owned on
December 31, 1998 from $16 million or .32% on December 31, 1997. Nonperforming
assets on December 31, 1998 include $29 million related to the acquired loans of
The Sumitomo Bank of California.
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BUSINESS SEGMENT RESULTS
The Company manages its operations and prepares management reports with a
primary focus on geographical area. Operating segments information is presented
in Note 20 of Notes to Consolidated Financial Statements. The company allocates
centrally provided services to the business segments based upon estimated usage
of those services. The operating segment identified as other includes the
Parent, several smaller business units and inter-segment eliminations.
ZIONS FIRST NATIONAL BANK AND SUBSIDIARIES
Zions First National Bank and Subsidiaries include the Company's operations in
Utah and Idaho. The Bank experienced strong internal growth in 1998 with loans
increasing 26.2% over 1997 and deposits increasing 7.3%. Net income decreased
1.5% to $87.1 million compared to $88.5 million in 1997 which was up 6.4% from
the $83.1 million earned in 1996. The decrease for 1998 was mainly the result of
a $23.0 million provision for loan losses in 1998. The Bank did not make a
provision for loans losses in 1997 o 1996. Net interest income for 1998
increased 7.8% to $222.0 million and noninterest income increased 25.4% to
$142.7 million.
CALIFORNIA BANK & TRUST
During 1998 the Company acquired FP Bancorp, Inc. and The Sumitomo Bank of
California and merged them into Grossmont Bank, which was renamed California
Bank & Trust. The acquisitions were accounted for as purchases and results of
operations, and are included in the segment information as if the acquisitions
had occurred April 1, 1998 and October 1, 1998. Therefore, the year 1998 is not
comparable to prior years. On the acquisition date The Sumitomo Bank of
California had total assets of $4,545 million, loans of $3,417 million and
deposits of $3,955 million. See Note 2 of Notes to Consolidated Financial
Statements for further information about the acquisitions.
The Bank incurred pre-tax merger expenses of $27.5 million during 1998 related
to the FP and Sumitomo acquisitions. At year-end total assets were $6,183, total
loans were $4,181 and total deposits were $5,349.
VECTRA BANK COLORADO
In January 1998 the Company acquired Vectra Banking Corporation in a transaction
accounted for as a purchase. Vectra had total assets of $703 million, loans of
$413 million and deposits of $556 million. During 1998 the Company also acquired
eight smaller banks in Colorado. The acquired banks, along with previously owned
Colorado banking organizations, were merged during 1998 under the name of Vectra
Bank Colorado, National Association. See Note 2 of Notes to Consolidated
Financial Statements for further information about the acquisitions.
Net income for Vectra Bank Colorado increased 63.3% to $3.6 million from $2.2
million in 1997. Pre-tax merger expenses of $4.3 million were incurred during
1998 in connection with the acquisitions. The increased earnings for 1998
resulted from the acquisition of Vectra and other banks in 1998 and strong loan
growth, which resulted in a 465.8% increase in net interest income.
NATIONAL BANK OF ARIZONA
Net income at National Bank of Arizona was up 24.7% to $22.2 million in 1998 as
compared to $17.8 million in 1997 and $14.7 million for 1996. The increases for
both 1998 and 1997 were driven by strong loan growth. Noninterest income for
1998 increased to $9.3 million from $6.3 for 1997, an increase of 47.6%. The
increase in noninterest income for 1998 included a $1.4 million increase in
service charges on deposit accounts and $.8 million from a new trust operation
started in Arizona during 1998.
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NEVADA STATE BANK
Net income at Nevada State Bank increased 28.0% to $13.7 million as compared to
$10.7 million in 1997 and $7.3 million for 1996. Earnings growth for 1998 and
1997 was driven by increases in net interest income, which increased 35.8% for
1998 compared to 1997 and 44.4% for 1997 compared to 1996. Noninterest income
increased 26.1% to $15.0 million for 1998 compared to $11.9 million for 1997
mainly due to an increase of $2.0 million in service charges and other fee
income.
THE COMMERCE BANK OF WASHINGTON
The Commerce Bank of Washington was acquired in September 1998 and accounted for
as a pooling of interests. The bank operates one branch located in Seattle,
Washington. Net income for 1998 was $.1 million including $5.4 million of
after-tax merger expense compared to net income of $4.5 million for 1997 and
$3.3 million for 1996.
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INCOME STATEMENT ANALYSIS
NET INTEREST INCOME, MARGIN AND INTEREST RATE SPREADS
Net interest income on a tax-equivalent basis is the difference between interest
earned on assets and interest paid on liabilities, with adjustments made to
present income on assets exempt from income taxes comparable to other taxable
income. Changes in the mix and volume of earning assets and interest-bearing
liabilities, their related yields and overall interest rates have a major impact
on earnings. In 1998, taxable-equivalent net interest income provided 73.1% of
the Company's net revenues, compared with 70.9% in 1997 and 71.2% in 1996.
The Company's taxable-equivalent net interest income increased by 58.4% to
$541.9 million in 1998 as compared to $342.2 million in 1997 and $277.7 million
in 1996. The increased level of taxable-equivalent net interest income was
driven by a 46.3% and 35.1% growth in average earning assets for 1998 and 1997,
respectively. The Company manages its earnings sensitivity to interest rate
movements, in part, by matching the repricing characteristics of its assets and
liabilities and, to a lesser extent, through the use of off-balance sheet
arrangements such as caps, floors and interest rate exchange contracts. Net
interest income from the use of such off-balance sheet arrangements for 1998 was
$6.9 million compared to $2.5 million in 1997 and $2.0 million in 1996.
The increase in net interest income was partially offset by the continued
securitization and sale of loans. Securitized loan sales convert net interest
income from loans to gains on loan sales and servicing revenue reported in
noninterest income. Loan sales improve the Company's liquidity, limit its
exposure to credit losses, and may reduce its capital requirements.
The net interest margin, the ratio of taxable-equivalent net interest income to
average earning assets, was 4.53% in 1998, 4.19% in 1997 and 4.59% in 1996. The
decrease in the margin in 1997 was due primarily to interest expense on the $200
million in trust preferred securities issued in December 1996, and increased
arbitrage activity in money market investments and short-term borrowings to
mitigate the reduction in net interest income from the preferred securities.
Schedule 1 analyzes the average balances, the amount of interest earned or paid,
and the applicable rates for the various categories of earning assets and
interest-bearing funds which represent the components of net interest income.
Schedule 2 analyzes the year-to-year changes in net interest income on a fully
taxable-equivalent basis for the years shown. In the schedules, the principle
amounts of nonaccrual and renegotiated loans have been included in the average
loan balances used to determine the rate earned on loans. Interest income on
nonaccrual loans is included in income only to the extent that cash payments
have been received and not applied to principal reductions. Interest on
restructured loans is generally accrued at reduced rates.
The incremental tax rate used for calculating the taxable-equivalent adjustment
was 32% for all years presented.
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SCHEDULE 1
DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY
AVERAGE BALANCE SHEETS, YIELDS AND RATES
1998 1997
--------------------------------------- -----------------------------------
AMOUNT Amount
AVERAGE OF AVERAGE Average of Average
(Amounts in millions) BALANCE INTEREST (1) RATE Balance Interest (1) Rate
------- ---------- ------- ------- --------- ----------
ASSETS:
Money market investments $ 1,559 $ 88.4 5.67% $ 1,492 $ 84.8 5.68%
Securities:
Held to maturity 2,227 152.4 6.84% 1,751 123.2 7.04%
Available for sale 619 34.0 5.49% 500 34.4 6.88%
Trading account 430 24.0 5.58% 276 16.2 5.87%
-------- --------- -------- ---------
Total securities 3,276 210.4 6.42% 2,527 173.8 6.88%
-------- --------- -------- ---------
Loans:
Loans held for sale 202 14.3 7.08% 163 11.9 7.30%
Net loans and leases (2) 6,919 659.1 9.53% 3,993 397.5 9.95%
-------- --------- -------- ---------
Total loans 7,121 673.4 9.46% 4,156 409.4 9.85%
-------- --------- -------- ---------
Total interest-earning assets $ 11,956 $ 972.2 8.13% $ 8,175 $ 668.0 8.17%
--------- ---------
Cash and due from banks 610 420
Allowance for loan losses (125) (75)
Goodwill and core deposit intangibles 573 132
Other assets 460 317
-------- --------
Total Assets $ 13,474 $ 8,969
======== =======
LIABILITIES:
Interest-bearing deposits:
Savings and NOW deposits $ 1,156 $ 35.2 3.04% $ 721 $ 21.3 2.95%
Money market and super NOW deposits 3,442 121.2 3.52% 2,267 88.2 3.89%
Time deposits under $100,000 1,573 81.6 5.19% 815 42.3 5.19%
Time deposits $100,000 or more 823 45.5 5.53% 279 16.3 5.84%
Foreign deposits 182 8.2 4.51% 142 6.4 4.51%
-------- --------- -------- ---------
Total interest-bearing deposits 7,176 291.7 4.06% 4,224 174.5 4.13%
-------- --------- -------- ---------
Borrowed funds:
Securities sold, not yet purchased 202 10.0 4.95% 92 5.4 5.87%
Federal funds purchased and security
repurchase agreements 1,843 87.3 4.74% 2,170 113.0 5.21%
Commercial paper 28 1.6 5.71% -- --
FHLB advances and other borrowings:
Less than one year 63 4.0 6.35% 34 2.3 6.76%
Over one year 114 6.6 5.79% 136 8.2 6.03%
Long-term debt 347 29.1 8.39% 253 22.4 8.85%
-------- --------- -------- ---------
Total borrowed funds 2,597 138.6 5.34% 2,685 151.3 5.64%
-------- --------- -------- ---------
Total interest-bearing liabilities $ 9,773 $ 430.3 4.40% $ 6,909 $ 325.8 4.72%
--------- ---------
Noninterest-bearing deposits 2,255 1,276
Other liabilities 193 154
-------- --------
Total liabilities 12,221 8,339
Minority interest 9 --
Total shareholders' equity 1,244 630
-------- --------
Total liabilities and shareholders' equity $ 13,474 $ 8,969
======== ========
Spread on average interest-bearing funds 3.73% 3.46%
==== ====
Net interest income and net yield on
interest-earning assets
$ 541.9 4.53% $ 342.2 4.19%
========= ==== ========= ====
(1) Taxable-equivalent rates used where applicable.
(2) Net of unearned income and fees, net of related costs. Loans include
nonaccrual and restructured loans.
13
14
1996 1995 1994
------------------------------------------- ------------------------------------- -------------------------------------
Amount Amount Amount
Average of Average Average of Average Average of Average
Balance Interest (1) Rate Balance Interest (1) Rate Balance Interest(1) Rate
--------- ---------- -------- ------- ---------- ---------- ------- ---------- ----------
$ 919 $ 51.5 5.60% $ 942 $ 56.0 5.94% $ 877 $ 35.4 4.04%
1,271 91.1 7.17% 1,138 83.3 7.32% 947 58.2 6.15%
457 30.1 6.59% 388 25.8 6.65% 340 20.6 6.06%
156 9.1 5.83% 147 9.2 6.26% 291 16.5 5.67%
-------- --------- ------- --------- ------- ---------
1,884 130.3 6.92% 1,673 118.3 7.07% 1,578 95.3 6.04%
-------- --------- ------- --------- ------- ---------
151 11.5 7.62% 116 9.3 8.02% 188 12.3 5.54%
3,098 308.3 9.95% 2,589 265.8 10.27% 2,478 225.7 9.11%
-------- --------- ------- --------- ------- ---------
3,249 319.8 9.84% 2,705 275.1 10.17% 2,666 238.0 8.93%
-------- --------- ------- --------- ------- ---------
$ 6,052 $ 501.6 8.29% $ 5,320 $ 449.4 8.45% $ 5,121 $ 368.7 7.20%
--------- --------- ---------
327 329 341
(71) (70) (70)
31 21 19
237 218 185
-------- ------- -------
$ 6,576 $ 5,818 $ 5,596
======== ======= =======
$ 623 $ 19.4 3.11% $ 733 $ 22.7 3.10% $ 755 $ 22.5 2.98%
1,843 70.7 3.84% 1,484 61.8 4.16% 1,341 41.5 3.09%
668 35.0 5.24% 618 32.1 5.19% 519 20.6 3.97%
185 10.8 5.84% 147 8.8 5.99% 114 4.6 4.04%
121 5.4 4.46% 139 7.2 5.18% 108 4.4 4.07%
-------- --------- ------- --------- ------- ---------
3,440 141.3 4.11% 3,121 132.6 4.25% 2,837 93.6 3.30%
-------- --------- ------- --------- ------- ---------
77 4.4 5.71% 90 5.6 6.22% 184 11.0 5.98%
1,337 67.0 5.01% 1,048 57.2 5.46% 1,063 41.3 3.89%
-- -- -- -- -- --
18 1.2 6.67% 20 1.4 7.00% 33 1.8 5.45%
79 4.8 6.08% 94 6.0 6.38% 119 5.8 4.87%
58 5.2 8.97% 58 5.1 8.79% 59 4.8 8.14%
-------- --------- ------- --------- ------- ---------
1,569 82.6 5.26% 1,310 75.3 5.75% 1,458 64.7 4.44%
-------- --------- ------- --------- ------- ---------
$ 5,009 $ 223.9 4.47% $ 4,431 $ 207.9 4.69% $ 4,295 $ 158.3 3.69%
--------- --------- ---------
976 869 867
104 105 82
-------- ------- -------
6,089 5,405 5,244
-- -- --
487 413 352
-------- ------- -------
$ 6,576 $ 5,818 $5,596
======== ======= =======
3.82% 3.76% 3.51%
==== ==== ====
$ 277.7 4.59% $ 241.5 4.54% $ 210.4 4.11%
========= ===== ======= ===== ========= ====
14
15
SCHEDULE 2
ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATE
1998 OVER 1997 1997 OVER 1996
CHANGES DUE TO CHANGES DUE TO
------------------------ TOTAL --------------------- TOTAL
(Amounts in Millions) VOLUME RATE (1) CHANGES VOLUME RATE (1) CHANGES
------ -------- ------- ------- ------ ------
INTEREST-EARNING ASSETS:
Money market investments $ 3.5 $ 0.1 $ 3.6 $ 32.7 $ 0.6 $ 33.3
Securities:
Held to maturity 31.9 (2.7) 29.2 34.1 (2.0) 32.1
Available for sale 6.2 (6.6) (0.4) 3.5 0.8 4.3
Trading account 8.6 (0.8) 7.8 7.1 -- 7.1
------ ------ ------ ------ ------ ------
Total securities 46.7 (10.1) 36.6 44.7 (1.2) 43.5
------ ------ ------ ------ ------ ------
Loans:
Loans held for sale 2.7 (0.3) 2.4 0.9 (0.5) 0.4
Net loans and leases(2) 275.8 (14.2) 261.6 88.4 0.8 89.2
------ ------ ------ ------ ------ ------
Total loans 278.5 (14.5) 264.0 89.3 0.3 89.6
------ ------ ------ ------ ------ ------
Total interest-earning assets $328.7 $(24.5) $304.2 $166.7 $ (0.3) $166.4
------ ------ ------ ------ ------ ------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Savings and NOW deposits $ 14.6 $ (0.6) $ 14.0 $ 2.6 $ (0.7) $ 1.9
Money market and super NOW deposits 40.2 (7.3) 32.9 20.0 (2.5) 17.5
Time deposits under $100,000 39.3 -- 39.3 7.4 (0.1) 7.3
Time deposits $100,000 or more 30.1 (0.9) 29.2 5.7 (0.2) 5.5
Foreign deposits 1.8 -- 1.8 1.0 -- 1.0
------ ------ ------ ------ ------ ------
Total interest-bearing deposits 126.0 (8.8) 117.2 36.7 (3.5) 33.2
------ ------ ------ ------ ------ ------
Borrowed funds:
Securities sold, not yet purchased 5.4 (0.8) 4.6 1.0 -- 1.0
Federal funds purchased and
security repurchase agreements (15.6) (10.1) (25.7) 43.7 2.3 46.0
Commercial paper 0.8 0.8 1.6 -- -- --
FHLB advances and other borrowings:
Less than one year 1.9 (0.2) 1.7 1.1 -- 1.1
Over one year (1.3) (0.3) (1.6) 3.5 (0.1) 3.4
Long-term debt 7.9 (1.2) 6.7 17.2 -- 17.2
------ ------ ------ ------ ------ ------
Total borrowed funds (0.9) (11.8) (12.7) 66.5 2.2 68.7
------ ------ ------ ------ ------ ------
Total interest-bearing liabilities $123.6 $(19.1) $104.5 $103.2 $ (1.3) $101.9
------ ------ ------ ------ ------ ------
Change in net interest income $205.1 $ (5.4) $199.7 $ 63.5 $ 1.0 $ 64.5
====== ====== ====== ====== ====== ======
(1) Taxable-equivalent income used where applicable.
(2) Net of unearned income and fees. Loans include nonaccrual and
restructured loans.
In the analysis of interest changes due to volume and rate, the changes due to
the volume/rate variance have been allocated to volume with the following
exceptions: when volume and rate have both increased, the variance has been
allocated proportionately to both volume and rate; when the rate has increased
and volume has decreased, the variance has been allocated to rate.
15
16
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects management's judgment of the expense to
be recognized in order to maintain an adequate allowance for loan losses. See
the discussion on allowance for loan losses under Risk Elements. The provision
for loan losses was $11.9 million in 1998 compared to $4.6 million in 1997 and
$3.8 million in 1996. The provision was .17% of average loans for 1998, .11% in
1997 and .12% for 1996.
NONINTEREST INCOME
Noninterest income comprised 26.8% of net revenue in 1998 compared to 29.5% in
1997 and 29.3% in 1996. Noninterest income was $199.9 million in 1998, an
increase of 42.1% over $140.7 million in 1997, which was up 25.6% over $112.1
million in 1996. Noninterest income for 1998 includes $5.3 million from Sumitomo
since the acquisition date. Without Sumitomo, noninterest income increased 38.3%
from 1997. Schedule 3 shows the major components of noninterest income.
SCHEDULE 3
NONINTEREST INCOME
PERCENT PERCENT PERCENT PERCENT
(Amounts in millions) 1998 CHANGE 1997 CHANGE 1996 CHANGE 1995 CHANGE 1994
------ ------- ------ ------- ------ ------- ------ ------- -------
Service charges on deposit accounts $ 57.9 39.2% $ 41.6 25.7% $ 33.1 15.7% $ 28.6 18.2% $ 24.2
Other service charges,
commissions and fees 54.4 41.7 38.4 32.9 28.9 14.7 25.2 10.5 22.8
Trust income 9.4 38.2 6.8 30.8 5.2 18.2 4.4 2.3 4.3
Investment securities gains
(losses), net 2.0 150.0 .8 700.0 .1 -- -- -- (0.4)
Underwriting and trading
income (loss) 9.2 61.4 5.7 111.1 2.7 325.0 (1.2) (233.3) 0.9
Loan sales and servicing income 50.4 30.2 38.7 10.3 35.1 45.0 24.2 65.8 14.6
Other income 16.6 90.8 8.7 74.3 7.0 (15.7) 8.3 7.8 7.7
------ ------ ------ ------ ------
Total $199.9 42.1 $140.7 25.6% $112.1 25.3% $ 89.5 15.4% $ 74.1
====== ====== ====== ====== ======
The 39.2% and 25.7% increases in deposit service charges for 1998 and 1997
reflect the continued increase of the Company's deposit base through
acquisitions and internal growth, as well as price adjustments. Other service
charges, commissions and fees, which include investment brokerage and fiscal
agent fees, electronic delivery system fees, insurance commissions, merchant fee
income and other miscellaneous fees were $54.4 million in 1998, an increase of
41.7% over 1997 which was 32.9% above 1996. Loan sales and servicing income rose
30.2% in 1998 to $50.4 million over $38.7 million in 1997 which was 10.3% above
1996. Underwriting and trading income increased 61.4% to $9.2 million in 1998
from $5.7 million in 1997. During 1998, the Company commenced the providing of
online executable government bond sales over Bloomberg and the Internet and the
underwriting of municipal revenue bonds.
Trust income increased to $9.4 million in 1998, up 38.2% from 1997, which was up
30.8% from 1996. Managed trust funds, including $649 million managed by
California Bank & Trust, increased 58.2% to $2,876 million at year-end 1998
compared to $1,818 million at year-end 1997. Other income, which includes
certain fees, income from unconsolidated subsidiaries and associated companies,
net gains on sales of fixed assets, mortgage servicing and other assets, and
other items was $16.6 million in 1998 an increase of 90.8% from 1997. The
increase for 1998 was mainly due to increased income from the Company's
investments in MACC Private Equities, Inc. and Federal Agricultural Mortgage
Corporation accounted for under the equity method, income from bank-owned life
insurance policies and increased gains from the sale of mortgage servicing.
16
17
NONINTEREST EXPENSE
The Company's noninterest expense was $526.7 million in 1998, an increase of
82.1% over $289.2 million in 1997, which was up 31.2% over the $220.5 million in
1996. Included in 1998 expense was $38.1 million in merger expenses related to
the Company's acquisitions during 1998. Also included for 1998 was an additional
$35.9 million of other Sumitomo expense since the acquisition date. Without the
merger and Sumitomo expense, noninterest expense for 1998 increased 69.7% over
1997. Schedule 4 shows the major components of noninterest expense.
SCHEDULE 4
NONINTEREST EXPENSE
Percent Percent Percent Percent
(Amounts in millions) 1998 Change 1997 Change 1996 Change 1995 Change 1994
------- ------- -------- ------- ------ ------- ------- -------- ------
Salaries and benefits $ 247.6 61.0% $ 153.8 26.2 $121.9 14.0% $ 106.9 11.1% $ 96.2
Occupancy, net 29.7 92.9 15.4 32.8 11.6 9.4 10.6 7.1 9.9
Furniture and equipment 36.0 58.6 22.7 41.9 16.0 19.4 13.4 16.5 11.5
Other real estate expense 0.7 133.3 0.3 250.0 (0.2) (300.0) 0.1 200.0 (.1)
Legal and professional services 15.3 104.0 7.5 59.6 4.7 4.4 4.5 (13.5) 5.2
Supplies 11.3 43.0 7.9 25.4 6.3 16.7 5.4 10.2 4.9
Postage 10.2 54.5 6.6 22.2 5.4 5.8 5.2 8.3 4.8
Advertising 11.8 73.5 6.8 28.3 5.3 9.9 5.2 52.9 3.4
FDIC premiums 1.4 75.0 0.7 -- -- -- 4.2 (46.2) 7.8
Merger expense 38.1 5,342.9 0.8 -- -- -- -- -- --
Amortization of goodwill/
core deposit intangibles 31.6 345.1 7.1 208.7 2.3 (36.1) 3.6 (2.7) 3.7
Amortization of mortgage
servicing assets 5.5 150.0 2.2 69.2 1.3 -- -- -- --
Other expenses 87.5 52.4 57.4 25.1 45.9 22.7 37.4 14.7 32.6
------- -------- ------ ------- ------
Total $ 526.7 82.1% $ 289.2 31.2% $220.5 12.2% $ 196.5 9.2% $179.9
======= ======== ====== ======= ======
In 1998 and 1997, salaries and employee benefits increased primarily as a result
of increased staffing from acquisitions and the opening of new offices, as well
as general salary increases and bonuses which are based on increased
profitability. The occupancy, furniture and equipment expense increase resulted
primarily from the addition of office facilities, installation of personal
computers and local area networks and expenses related to technology
initiatives. The increase in all other expenses resulted primarily from
increases related to acquisitions and expansion and increased expenditures in
selected areas to enhance revenue growth.
On December 31, 1998, the Company had 6,793 full-time equivalent employees and
333 offices for increases of 54.6% and 44.8%, respectively, compared to year-end
1997. On December 31, 1997, the Company had 4,393 full-time equivalent employees
and 230 offices for increases of 40.9% and 60.8%, respectively, compared to
year-end 1996.
The Company's operating cash "efficiency ratio," or noninterest expenses,
excluding amortization of goodwill and core deposit intangibles and merger
expenses, as a percentage of total taxable-equivalent net revenues, increased to
61.6% in 1998 compared to 58.4% in 1997 and 56.0% in 1996.
17
18
INCOME TAXES
The Company's income tax expense for 1998 was $64.7 million compared to $62.7
million in 1997 and $53.7 million in 1996. The Company's effective income tax
rate was 33.1% in 1998, 34.3% in 1997 and 33.9% in 1996. The decrease in the
effective tax rate for 1998 results primarily from decisions regarding a
corporate reorganization over the past year.
BALANCE SHEET ANALYSIS
EARNING ASSETS
Earning assets consist of money market investments, securities and loans. A
comparative average balance sheet report, including earning assets, is presented
in Schedule 1.
Average earning assets increased 46.2% to $11,956 million in 1998 compared to
$8,175 million in 1997. Earning assets comprised 88.7% of total average assets
in 1998 compared with 91.2% in 1997.
Average money market investments, consisting of interest-bearing deposits,
federal funds sold and security resell agreements increased 4.5% to $1,559
million in 1998 compared to $1,492 million in 1997.
Average securities increased 29.6% to $3,276 million in 1998, compared to $2,527
million in 1997. Average held to maturity securities increased 27.2% to $2,227
million, available for sale securities increased 23.8% to $619 million and
trading account securities increased 55.8% to $430 million.
Average net loans and leases increased 71.3% to $7,121 million in 1998 compared
to $4,156 million in 1997, representing 59.6% of earning assets in 1998 compared
to 50.8% in 1997. Average net loans and leases were 75.5% of average total
deposits in 1998, as compared to 75.6% in 1997.
INVESTMENT SECURITIES PORTFOLIO
Schedule 5 presents the Company's year-end investment securities on December 31,
1998, 1997, and 1996. Schedule 6 presents the Company's maturities and average
yields on securities on December 31, 1998. See Note 3 of Notes to Consolidated
Financial Statements for additional information about securities.
18
19
SCHEDULE 5
INVESTMENT SECURITIES PORTFOLIO
December 31,
------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
(Amounts in millions) COST VALUE COST VALUE COST VALUE
------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Treasury securities $ 62 $ 63 $ 4 $ 4 $ 4 $ 4
U.S. government agencies
and corporations:
Small Business
Administration loan-
backed securities 358 356 441 449 488 492
Other agency securities 941 944 1,422 1,427 530 529
States and political subdivisions 285 293 222 227 263 268
Mortgage-backed securities 1,159 1,166 82 83 61 62
------ ------ ------ ------ ------ ------
2,805 2,822 2,171 2,190 1,346 1,355
------ ------ ------ ------ ------ ------
AVAILABLE FOR SALE:
U.S. Treasury securities 46 47 37 38 20 20
U.S. government agencies
and corporations:
Small Business
Administration
originator fees
certificates 85 68 75 72 50 46
Other agency securities 113 114 146 146 110 111
States and political subdivisions 15 16 26 27 40 41
Mortgage- and other asset-backed
securities 179 180 28 28 87 85
------ ------ ------ ------ ------ ------
438 425 312 311 307 303
------ ------ ------ ------ ------ ------
Equity securities:
Mutual funds:
Accessor Funds, Inc. 117 118 110 111 109 109
Stock:
Federal Home Loan Bank 101 101 91 91 80 80
Other 36 41 27 32 15 16
------ ------ ------ ------ ------ ------
254 260 228 234 204 205
------ ------ ------ ------ ------ ------
692 685 540 545 511 508
------ ------ ------ ------ ------ ------
Total $3,497 $3,507 $2,711 $2,735 $1,857 $1,863
====== ====== ====== ====== ====== ======
19
20
SCHEDULE 6
MATURITIES AND AVERAGE YIELDS ON SECURITIES
ON DECEMBER 31, 1998
TOTAL WITHIN AFTER ONE AFTER FIVE
SECURITIES ONE YEAR BUT WITHIN BUT WITHIN AFTER
----------------- ---------------- FIVE YEARS TEN YEARS TEN YEARS
----------------- --------------- -----------
(AMOUNTS IN MILLIONS) AMOUNT YIELD* AMOUNT YIELD* AMOUNT YIELD* AMOUNT YIELD* AMOUNT YIELD*
------ ------ ------- ------- ------ ------ ------ ------ ------ ------
HELD TO MATURITY:
U.S. TREASURY SECURITIES $ 62 6.0% $ 61 6.0% $ 1 6.3% $ -- $ --
U. S. GOVERNMENT AGENCIES
AND CORPORATIONS:
SMALL BUSINESS
ADMINISTRATION LOAN-
BACKED SECURITIES 358 6.5% 75 6.5% 157 6.4% 83 6.5% 43 6.6%
OTHER AGENCY SECURITIES 941 6.3% 42 5.8% 337 6.5% 530 6.2% 32 7.7%
STATES AND POLITICAL
SUBDIVISIONS 285 7.8% 41 7.4% 129 7.8% 64 7.9% 51 7.6%
MORTGAGE-BACKED SECURITIES 1,159 6.4% 393 6.4% 606 6.4% 135 6.4% 25 6.4%
------ ------ ------ ------ ------
2,805 6.5% 612 6.4% 1,230 6.6% 812 6.4% 151 7.1%
------ ------ ------ ------ ------
AVAILABLE FOR SALE:
U.S. TREASURY SECURITIES 46 6.1% 29 6.0% 17 6.2% -- --
U. S. GOVERNMENT AGENCIES
AND CORPORATIONS:
SMALL BUSINESS
ADMINISTRATION
ORIGINATOR FEES
CERTIFICATES** 85 3.6% 13 3.6% 37 3.6% 22 3.6% 13 3.6%
OTHER AGENCY SECURITIES 113 6.1% 12 5.8% 92 6.1% 8 6.3% 1 5.3%
STATES AND POLITICAL
SUBDIVISIONS 15 7.2% 2 5.8% 7 7.6% 6 7.1% --
MORTGAGE- AND OTHER ASSET-
BACKED SECURITIES 179 6.0% 39 5.7% 79 6.0% 28 6.0% 33 6.3%
------ ------ ------ ------ ------
438 6.7% 95 6.3% 232 6.6% 64 7.3% 47 7.1%
------ ------ ------ ------ ------
EQUITY SECURITIES:
MUTUAL FUNDS:
ACCESSOR FUNDS, INC 117 4.7% -- -- -- 117 4.7%
STOCK:
FEDERAL HOME LOAN BANK 101 7.5% -- -- -- 101 7.5%
OTHER 36 9.5% -- -- -- 36 9.5%
------ ------ ------ ------ ------
254 6.5% -- -- -- 254 6.5%
------ ------ ------ ------ ------
692 6.6% 95 6.3% 232 6.6% 64 7.3% 301 6.6%
------ ------ ------ ------ ------
TOTAL $3,497 6.5% $ 707 6.4% $1,462 6.6% $ 876 6.4% $ 452 6.8%
====== ====== ====== ====== ======
* TAXABLE-EQUIVALENT RATES USED WHERE APPLICABLE.
** RATES DETERMINED USING A 16% CONSTANT PREPAYMENT RATE.
20
21
LOAN PORTFOLIO
During 1998, the Company consummated securitized loan sales of automobile loans,
credit card receivables, home equity credit lines, Small Business Administration
and Federal Agricultural Mortgage Corporation ("Farmer Mac") loans totaling $895
million. The Company also sold $1,238 million of long-term residential mortgage
loans, SBA loans, Farmer Mac loans and student loans classified as held for
sale. After these sales, loans and leases on December 31, 1998 totaled $10,685
million, an increase of 110.9% compared to $5,065 million on December 31, 1997.
Included in this increase are loans from acquisitions totaling $4,564 million.
Excluding the acquired loans the increase for 1998 compared to 1997 was 20.9%.
Schedule 7 sets forth the amount of loans outstanding by type on December 31 for
the years indicated and the maturity distribution and sensitivity to changes in
interest rates of the portfolio on December 31, 1998.
SCHEDULE 7
LOAN PORTFOLIO BY TYPE
December 31, 1998
---------------------------------------
ONE ONE YEAR OVER DECEMBER 31,
YEAR THROUGH FIVE ---------------------------------------
(Amounts in millions) OR LESS FIVE YEARS YEARS TOTAL 1997 1996 1995 1994
-------- ---------- ----- --------- ------- ------- ------- ------
Loans held for sale $ 232 $ -- $ -- $ 232 $ 179 $ 151 $ 126 $ 109
Commercial, financial and agricultural 1,609 756 327 2,692 1,287 843 745 540
Real estate:
Construction 667 191 9 867 491 329 271 219
Other:
Home equity credit line 78 42 102 222 154 179 99 45
1-4 family residential 233 306 1,648 2,187 726 546 432 464
Other real estate-secured 554 1,060 2,013 3,627 1,501 1,068 770 576
------- ------- ------- ------- ------- ------- ------- -------
1,532 1,599 3,772 6,903 2,872 2,122 1,572 1,304
------- ------- ------- ------- ------- ------- ------- -------
Consumer:
Bankcard 34 52 1 87 61 38 53 43
Other 144 252 56 452 397 271 293 358
------- ------- ------- ------- ------- ------- ------- -------
178 304 57 539 458 309 346 401
------- ------- ------- ------- ------- ------- ------- -------
Lease financing 9 153 51 213 176 160 133 130
Foreign loans 21 7 16 44 -- -- -- --
Other receivables 36 21 5 62 93 38 31 30
------- ------- ------- ------- ------- ------- ------- -------
Total loans $ 3,617 $ 2,840 $ 4,228 $10,685 $ 5,065 $ 3,623 $ 2,953 $ 2,514
======= ======= ======= ======= ======= ======= ======= =======
Loans maturing in more than one year:
With fixed interest rates $ 1,489 $ 2,467 $ 3,956
With variable interest rates 1,351 1,761 3,112
------- ------- -------
Total $ 2,840 $ 4,228 $ 7,068
======= ======= =======
21
22
SOLD LOANS BEING SERVICED
On December 31, 1998, long-term first mortgage real estate loans serviced for
others amounted to $1,995 million compared to $1,897 million on December 31,
1997, and $1,542 million on December 31, 1996.
Consumer and other loan securitizations serviced, which relate primarily to
loans sold under revolving securitization structures, totaled $1,057 million on
December 31, 1998, $1,050 million on December 31, 1997, and $868 million on
December 31, 1996.
The Company's activity in its sold loans being serviced portfolio (excluding
long-term first mortgage real estate loans) is summarized as follows:
SCHEDULE 8
SOLD LOANS BEING SERVICED
1998 1997 1996
--------------------------------------------------------------------------------------
OUTSTANDING Outstanding Outstanding
(Amounts in millions) SALES AT YEAR END Sales at year end Sales at year end
----- ----------- ----- ----------- ----- -----------
Auto loans $ 198 $ 345 $ 201 $ 389 $ 284 $ 434
Home equity credit lines 261 261 342 327 180 220
Bankcard receivables 283 134 232 79 238 85
Home refinance loans -- 23 -- 45 -- 68
SBA 504 loans 4 100 115 131 -- 31
SBA 7(a) loans 39 90 38 56 41 30
Farmer Mac 110 104 23 23 -- --
------ ------ ------ ------ ------ ------
Total $ 895 $1,057 $ 951 $1,050 $ 743 $ 868
====== ====== ====== ====== ====== ======
22
23
DEPOSITS AND BORROWED FUNDS
As derived from Schedule 1, total average deposits increased 71.5% to $9,431
million in 1998 from $5,500 million in 1997. Average noninterest-bearing
deposits increased 76.7%, average savings and NOW deposits increased 60.3%,
average money market and super NOW deposits increased 51.8%, and average time
deposits under $100,000 increased 92.9%. Average time deposits over $100,000
increased 195.4% over 1997 average balances and average foreign deposits
increased 28.5% for 1998, as compared with 1997.
Total deposits increased 87.9% to $13,321 million on December 31, 1998 as
compared to $7,090 million on December 31, 1997. Included in this increase are
deposits from acquisitions totaling $5,555 million. Without the acquired
deposits the increase was 9.5%. Comparing December 31, 1998 to December 31,
1997, demand deposits increased 70.7%, savings and money market deposits
increased 69.0%, time deposits under $100,000 increased 132.4%, while time
deposits over $100,000 increased 242.1% and foreign deposits increased 11.6%.
See Notes 9, 10 and 11 of Notes to Consolidated Financial Statements and the
discussion under Liquidity Risk Management for information on borrowed funds.
CAPITAL
The Company's basic financial objective is to consistently produce superior
risk-adjusted returns on its shareholders' capital. The Company believes that a
strong capital position is vital to continued profitability and to promote
depositor and investor confidence. The Company's goal is to steadily achieve a
high return on shareholders' equity, while at the same time maintaining
"risk-based capital" of not less than the "well-capitalized" threshold, as
defined by federal banking regulators.
Total shareholders' equity on December 31, 1998 was $1,385 million, an increase
of 72.5% over the $803 million on December 31, 1997. The ratio of average equity
to average assets for the year 1998 was 9.23%, compared to 7.03% for 1997.
During 1998, 1997 and 1996, the Company repurchased and retired 591,009,
3,649,018 and 1,306,041 shares of its common stock at a cost of $25.7 million,
$121.3 million and $25.1 million, respectively.
On December 31, 1998, the Company's Tier 1 leverage ratio was 5.86%, as compared
to 6.96% on December 31, 1997. On December 31, 1998, the Company's Tier 1
risk-based capital ratio was 8.34%, as compared to 12.17% on December 31, 1997.
On December 31, 1998 the Company's total risk-based capital ratio was 11.38%, as
compared to 14.11% on December 31, 1997. Regulatory minimum capital adequacy
ratios for Tier 1 leverage, Tier 1 risk-based capital and total risk-based
capital are 3%, 4% and 8%, respectively Ratios to be considered well capitalized
are 5%, 6% and 10%, respectively. The decreases in regulatory capital ratios
from 1997 are primarily related to the acquisition of The Sumitomo Bank of
California. See Note 17 of Notes to Consolidated Financial Statements for
additional information on risk-based capital.
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DIVIDENDS
Dividends per share were $.54 in 1998, an increase of 14.9% over $.47 in 1997,
which were up 10.6% over $.425 in 1996. The Company's quarterly dividend rate
was $.1025 for the first and second quarters of 1996, increasing to $.11 per
share for the third and fourth quarters of 1996 and the first quarter of 1997,
increasing to $.12 per share for the second, third and fourth quarters of 1997
and the first quarter of 1998, increasing to $.14 per share for the second,
third and fourth quarters of 1998.
RISK ELEMENTS
CREDIT RISK MANAGEMENT
Management of credit risk is essential in maintaining a safe and sound
institution. 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 a comprehensive loan grading
system to determine risk potential in the portfolio. A separate internal credit
examination department periodically conducts examinations of the quality,
documentation and administration of the Company's lending departments, and
submits reports thereon to a committee of the board of directors. Emphasis is
placed on early detection of potential problem credits so that action plans can
be developed on a timely basis to mitigate losses.
Another aspect of the Company's credit risk management strategy is the
diversification of the loan portfolio. At year end, the Company had 2% of its
portfolio in loans held for sale, 25% in commercial loans, 65% in real estate
loans, 5% in consumer loans, 2% in lease financing and 1% in other loans. The
Company's real estate portfolio is also diversified. Of the total portfolio, 12%
is in real estate construction loans, 3% is in home equity credit lines, 32% is
in 1-4 family residential loans and 53% is in commercial loans secured by real
estate. The Company's commercial real estate concentration is in part mitigated
by its emphasis of lending programs sponsored by the Small Business
Administration, which carries the preponderance of credit risk on these types of
loans. The Company also focuses on the provision of commercial real estate
credit to borrowers that occupy the facility. In addition, the Company attempts
to avoid the risk of an undue concentration of credits in a particular industry
or trade group. See Note 5 of Notes to Consolidated Financial Statements for
further information on concentrations of credit risk. The Company has no
significant exposure to highly leveraged transactions. Most of the Company's
business activity is with customers located within the states of Utah, Idaho,
California, Colorado, Arizona, Nevada and Washington. Also, the Company does not
have significant exposure to any individual customer or counterparty.
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NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, restructured loans and other real
estate owned. Loans are generally placed on nonaccrual status when the loan is
90 days or more past due as to principal or interest, unless the loan is in the
process of collection and well-secured. Consumer loans are not placed on a
nonaccrual status, inasmuch as they are generally charged off when they become
120 days past due. Loans are restructured to provide a reduction or deferral of
interest or principal payments when the financial condition of the borrower
deteriorates and requires that the borrower be given temporary or permanent
relief from the original contractual terms of the credit. Other real estate
owned is primarily acquired through or in lieu of foreclosure on credits secured
by real estate.
The Company's nonperforming assets were $64 million on December 31, 1998, up
from $16 million on December 31, 1997. Such nonperforming assets as a percentage
of net loans and leases, other real estate owned and other nonperforming assets
were .60% on December 31, 1998, as compared to .32% on December 31, 1997.
Included in nonperforming assets on December 31, 1998 are $23 million in
nonaccrual loans and $4 million in restructured loans acquired in The Sumitomo
Bank of California acquisition.
Accruing loans past due 90 days or more totaled $26 million on December 31,
1998, up from $10 million on December 31, 1997. These loans equaled .24% of net
loans and leases on December 31, 1998, as compared to .20% on December 31, 1997.
No loans were considered potential problem loans on December 31, 1998 or 1997.
Potential problem loans are defined as loans presently on accrual and 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 in the future.
The Company's total recorded investment in impaired loans included in nonaccrual
loans and leases amounted to $41 million and $7.1 million on December 31, 1998
and 1997, respectively. The Company considers a loan to be impaired when the
accrual of interest has been discontinued and 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 December 31, 1998 and 1997, is an allowance of $5 million and $46
thousand, respectively, on $11.6 million and $.3 million, respectively, of the
recorded investment in impaired loans. Included in the 1998 totals are $23
million investment in impaired loans and a reserve of $4 million for these loans
acquired in the Sumitomo acquisition.
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SCHEDULE 9
NONPERFORMING ASSETS
December 31,
----------------------------------------------------------------
(Amounts in millions) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Nonaccrual loans:
Commercial, financial and agricultural $11 $ 4 $ 5 $ 3 $ 6
Real estate 39 7 5 3 6
Consumer 1 -- 1 1 1
Lease financing 3 1 1 1 1
Other -- -- -- -- --
--- --- --- --- ---
Total 54 12 12 8 14
--- --- --- --- ---
Restructured loans:
Real estate 5 1 1 -- 1
--- --- --- --- ---
Other real estate owned:
Commercial, financial and agricultural:
Improved -- 2 -- -- 1
Unimproved -- -- -- -- 1
Residential:
1-4 Family 2 1 -- 1 --
Multi-family -- -- -- -- --
Other 3 -- -- -- --
--- --- --- --- ---
Total 5 3 -- 1 2
Other nonperforming assets -- -- -- 1 3
--- --- --- --- ---
Total 5 3 -- 2 5
--- --- --- --- ---
Total $64 $16 $13 $10 $20
=== === === === ===
% of Net loans* and leases, other real estate
owned and other nonperforming assets .60% .32% .35% .33% .79%
Accruing loans past due 90 days or more:
Commercial, financial and agricultural $ 5 $ 2 $ 1 $ 1 $--
Real estate 20 7 2 3 2
Consumer 1 1 1 1 1
--- --- --- --- ---
Total $26 $10 $ 4 $ 5 $ 3
=== === === === ===
% of Net loans* and leases .24% .20% .10% .18% .12%
*Includes loans held for sale.
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ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses was 1.93% of net loans and leases on
December 31, 1998 compared to 1.65% on December 31, 1997. Net charge-offs in
1998 were $15 million, or .21% of average loans and leases, compared to net
charge-offs of $8 million, or .20% of average net loans and leases in 1997 and
net charge-offs of $4 million, or .11% of average net loans and leases in 1996.
The allowance, as a percentage of nonaccrual loans and restructured loans, was
347.86% on December 31, 1998, compared to 657.64% on December 31, 1997 and
574.57% on December 31, 1996. The allowance, as a percentage of nonaccrual loans
and accruing loans past due 90 days or more was 258.04% on December 31, 1998,
compared to 379.15% on December 31, 1997, and 472.89% on December 31, 1996.
On December 31, 1998, 1997 and 1996, the allowance for loan losses includes an
allocation of $20 million, $9 million and $6 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 December 31, 1998,
1997 and 1996, totaled $4,758 million, $2,534 million, and $1,907 million,
respectively. The Company's actual future credit exposure is much lower than the
contractual amounts of the commitments because a significant portion of the
commitments is expected to expire without being drawn upon.
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. To determine the adequacy of the allowance, the Company's loan and lease
portfolio is broken into segments based on loan type. Historical loss experience
factors by segment, adjusted for changes in trends and conditions, are used in
determining the required allowance for each segment. Historical loss factors are
evaluated and updated using migration analysis techniques and other
considerations based on the makeup of the specific portfolio segment. Other
considerations such as volumes and trends of delinquencies, nonaccruals,
repossessions and bankruptcies, criticized and classified loan trends, current
and anticipated foreclosure losses, new products and policies, economic
conditions, concentrations of credit risk, and experience and abilities of
lending personnel are also considered in establishing the loss factors.
All loans graded substandard in the amount of $1 million or more and all credits
graded doubtful in the amount of $100 thousand or more are individually
evaluated based on facts and circumstances of the loan and a specific allowance
amount designated. Specific allowances may also be established for loans in
amounts below the specified thresholds when it is determined that the risk
differs significantly from factor amounts established for the category. Although
management has allocated a portion of the allowance to specific loan categories
using the methods described, the adequacy of the allowance must be considered in
its entirety. To mitigate the imprecision in most estimates of expected credit
losses, the allocated component of the allowance is supplemented by an
unallocated component. The unallocated portion of the allowance includes
management's judgmental determination of the amounts necessary for subjective
factors such as economic uncertainties and concentration risks. Accordingly, the
relationship of the unallocated component to the total allowance for loan losses
may fluctuate from period to period. Schedule 10 provides a breakdown of the
allowance for loan losses by loan category and Schedule 11 summarizes loan loss
experience. The increases in the allocated allowance at year-end 1998 compared
to year-end 1997 for commercial, financial and agricultural and real estate
loans are a result of the acquisition of The Sumitomo Bank of California.
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SCHEDULE 10
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1998 1997 1996
---- ---- ----
(Amounts in millions) % OF ALLOCATION % OF ALLOCATION % OF ALLOCATION
TOTAL OF TOTAL OF TOTAL OF
LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE
----- --------- ----- --------- ----- ---------
Type of loan
Loans held for sale 2.2% $ -- 3.5% $ -- 4.2 $ --
Commercial, financial and agricultural 25.3% 81 25.4% 15 23.3% 14
Real estate 64.8% 47 56.8% 24 58.5% 25
Consumer 5.1% 12 9.0% 10 8.5% 8
Lease financing 2.0% 6 3.5% 2 4.4% 2
Other receivables 0.6% -- 1.8% -- 1.1% --
Total loans 100.0% 100.0% 100.0%
Off-balance sheet unused commit-
ments and standby letters of credit 20 9 6
---- ---- ----
Total allocated 166 60 55
Unallocated 40 23 17
---- ---- ----
Total allowance for loan losses $206 $ 83 $ 72
==== ==== ====
1995 1994
---- ----
(Amounts in millions) % OF ALLOCATION % OF ALLOCATION
TOTAL OF TOTAL OF
LOANS ALLOWANCE LOANS ALLOWANCE
----- --------- ----- ---------
Type of loan
Loans held for sale 4.3% $ -- 4.3% $ --
Commercial, financial and agricultural 25.2% 10 21.5% 9
Real estate 53.3% 16 51.9% 12
Consumer 11.7% 11 15.9% 11
Lease financing 4.5% 2 5.2% 2
Other receivables 1.0% -- 1.2% --
Total loans 100.0% 100.0%
Off-balance sheet unused commit-
ments and standby letters of credit 8 5
----- ----
Total allocated 47 39
Unallocated 22 30
----- ----
Total allowance for loan losses $ 69 $ 69
===== ====
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SCHEDULE 11
SUMMARY OF LOAN LOSS EXPERIENCE
(Amounts in millions) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Loans* and leases outstanding on December 31
(net of unearned income) $ 10,636 $ 5,023 $ 3,585 $ 2,922 $ 2,489
======== ======== ======== ======== ========
Average loans* and leases outstanding
(net of unearned income) $ 7,121 $ 4,156 $ 3,249 $ 2,705 $ 2,666
======== ======== ======== ======== ========
Allowance for loan losses:
Balance at beginning of year $ 83 $ 72 $ 69 $ 69 $ 70
Allowance of companies acquired 126 14 3 -- 1
Provision charged against earnings 12 5 4 3 2
Loans and leases charged off:
Commercial, financial and agricultural (8) (5) (1) (1) (5)
Real estate (6) (1) (1) (1) --
Consumer (9) (8) (8) (7) (5)
Lease financing (1) -- -- -- (1)
-------- -------- -------- -------- --------
Total (24) (14) (10) (9) (11)
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial and agricultural 3 2 2 3 2
Real estate 3 2 1 -- 1
Consumer 3 2 2 3 4
Lease financing -- -- 1 -- --
-------- -------- -------- -------- --------
Total 9 6 6 6 7
-------- -------- -------- -------- --------
Net loan and lease charge-offs (15) (8) (4) (3) (4)
-------- -------- -------- -------- --------
Balance at end of year $ 206 $ 83 $ 72 $ 69 $ 69
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans and leases .21% .20% .11% .10% .19%
Ratio of allowance for loan losses to loans
and leases outstanding on December 31 1.93% 1.65% 2.01% 2.37% 2.76%
Ratio of allowance for loan losses to
nonperforming loans on December 31 347.86% 657.64% 574.57% 863.44% 457.12%
Ratio of allowance for loan losses to
nonaccrual loans and accruing loans past
due 90 days or more on December 31 258.04% 379.15% 472.89% 527.32% 392.42%
*Includes loans held for sale.
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MARKET RISK MANAGEMENT
Market risk is the possibility that changes in interest rates or equity
securities prices will impair the fair value of the Company's financial
instruments. The Asset/Liability Committee (ALCOM) measures and reviews the
market risk of the Company and establishes policies and procedures to limit its
exposure to changes in interest rates. These policies are reviewed and approved
by the Boards of Directors of the Company's subsidiary banks. ALCOM objectives
are summarized as follows: ensure the safety and soundness of bank deposits,
while providing an appropriate return to shareholders; provide the basis for
integrated balance sheet, net interest income and liquidity management;
calculate the duration, dollar duration, and convexity of each class of assets,
liabilities, and net equity given defined interest rate scenarios; manage the
Company's exposure to changes in net interest income and market value of equity
due to interest rate fluctuations; quantify the effect of hedging instruments on
the market value of equity and net interest income under defined interest rate
scenarios; and identify and report any risk exposures that exceed limitations
approved by the Board of Directors.
Interest rate risk is the most significant market risk regularly undertaken by
the Company. This risk is monitored through the use of two complementary
measurement methods: equity duration and income simulation.
Equity duration is derived by first calculating the dollar duration of all
assets, liabilities and off-balance sheet investments. Dollar duration is
determined by calculating the market value of each instrument assuming interest
rates sustain immediate and parallel movements up 1% and down 1%. The average of
these two changes in market value is the dollar duration, which incorporates the
value of embedded and explicit options within each instrument. Subtracting the
dollar duration of liabilities from the dollar duration of assets and adding the
net dollar duration of off-balance sheet items results in the dollar duration of
equity. Duration of equity is computed by dividing the dollar duration of equity
by the market value of equity.
Income simulation is an estimate of the net interest income which would be
recognized under different rate environments. Net interest income is measured
under several parallel and non-parallel interest rate environments and considers
the possible exercise of options within the portfolio.
At year-end, the Company's duration of equity was estimated to be approximately
2.1 years. A 200 basis point immediate increase in rates was estimated to
increase the duration of equity to 4.5 years. Conversely, an immediate decrease
in rates of similar magnitude was estimated to decrease the duration of equity
to .5 years. Company policy requires that all three of these measures be between
0 and 7 years.
For income simulation, Company policy requires that net interest income not be
expected to decline by more than 10% during one year if rates were to
immediately rise or fall by 200 basis points. At year-end, net interest income
was expected to decline 4.3% if interest rates were to sustain an immediate
increase of 200 basis points. If interest rates were to similarly decline 200
basis points, net interest income would be expected to increase 2.4%. These
estimates include management's assumptions regarding loan and deposit pricing,
security and loan prepayments, and changing relationships to market rates.
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31
Management exercises its best judgment in making assumptions regarding loan and
security prepayments, early deposit withdrawals, and other non-controllable
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 position in any subsequent period.
At year-end the one-year gap for the Company was negative $335 million: i.e.,
the $9,478 million of assets that mature or reprice during 1999 was less than
the sum of $9,019 million of liabilities and the $794 million net effect of
off-balance sheet swaps that mature or reprice during the same period. This gap
represented 2.0% of total assets. Detail of the repricing characteristics of the
balance sheet as of year-end are presented in Schedule 12. The Company does not
have policy limits regarding its gap position.
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32
SCHEDULE 12
MATURITIES AND INTEREST RATE SENSITIVITY
ON DECEMBER 31, 1998
Rate Sensitive
---------------------------------------------------
After
Three After one
Within Months year but
three But within within After five Not rate
(Amounts in millions) months One year five years Years Sensitive Total
--------- ----------- ---------- ---------- ---------- -----
USES OF FUNDS
Earning Assets:
Interest-bearing deposits $ 12 $ 6 $ 12 $ 30
Federal funds sold 199 199
Security resell agreements 382 382
Securities:
Held to maturity 960 907 433 $ 505 2,805
Available for sale 307 49 237 92 685
Trading account 192 192
Loans and leases 5,316 1,148 2,342 1,830 10,636
Nonearning assets $ 2,091 2,091
-------- -------- -------- -------- -------- --------
Total uses of funds $ 7,368 $ 2,110 $ 3,024 $ 2,427 $ 2,091 $ 17,020
-------- -------- -------- -------- -------- --------
SOURCES OF FUNDS
Interest-bearing deposits and liabilities:
Savings and money market deposits $ 2,028 $ 1,215 $ 2,025 $ 810 $ 6,078
Time deposits under $100,000 1,221 741 378 1 2,341
Time deposits $100,000 or more 802 599 127 1,528
Foreign 204 204
Securities sold, not yet
purchased 30 30
Federal funds purchased 337 337
Security repurchase agreements 933 933
Commercial paper 43 6 49
FHLB advances and other
borrowings:
Less than one year 75 26 101
Over one year 2 29 26 57
Long-term debt 142 2 71 239 454
Noninterest-bearing deposits 613 $ 2,557 3,170
Other liabilities 318 318
Minority interest 35 35
Shareholders' equity 1,385 1,385
-------- -------- -------- -------- -------- --------
Total sources of funds $ 6,428 $ 2,591 $ 2,630 $ 1,076 $ 4,295 $ 17,020
-------- -------- -------- -------- -------- --------
Off-balance sheet items affecting
interest rate sensitivity $ (1,029) $ 235 $ 751 $ 43
Interest rate sensitivity gap $ (89) $ (248) $ 1,144 $ 1,394 $ (2,201)
Percent of total assets (.5)% (1.5)% 6.9% 8.4% (13.3)%
Cumulative interest rate sensitivity gap $ (89) $ (337) $ 807 $ 2,201
Cumulative as a % of total assets (.5)% (2.0)% 4.9% 13.3%
The Company, through the management of maturities and repricing of its assets
and liabilities and the use of off-balance sheet arrangements, 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 rate is the primary basis 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, however, is unable to economically hedge the
prime/T-bill spread risk through the use of derivative financial instruments.
Interest rate swap maturities and average rates are presented in Schedule 13.
For additional information regarding off-balance sheet financial contracts,
refer to Notes 1, 12 and 19 of Notes to Consolidated Financial Statements.
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33
SCHEDULE 13
INTEREST RATE SWAP MATURITIES AND AVERAGE RATES
(Amounts in millions) 1999 2000 2001 2002 THEREAFTER TOTAL
---------- ----------- ---------- --------- ---------- ---------
Receive fixed rate:
Notional amount $ 300 $ 221 $ 206 $ 236 $ 244 $ 1,207
Weighted average rate received 6.19% 6.28% 6.23% 6.39% 6.20% 6.25%
Weighted average rate paid 5.48% 5.50% 5.28% 5.34% 5.45% 5.42%
Receive floating rate:
Notional amount $ 45 $ 67 $ 40 $ 6 $ 158
Weighted average rate received 5.64% 5.25% 5.24% 5.25% 5.36%
Weighted average rate paid 5.90% 4.75% 7.00% 7.98% 5.77%
LIQUIDITY RISK MANAGEMENT
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. 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 allows
it to take advantage of market opportunities to meet funding needs at a
reasonable cost.
To meet the Company's short-term liquidity needs, on December 31, 1998 the
Company had cash, money market investments, and liquid securities net of
short-term or "purchased" liabilities and foreign deposits, of $1.7 billion or
14.5% of core deposits. The Company's core deposits, consisting of demand,
savings, money market, and time deposits under $100,000, constituted 87.0% of
total deposits at year-end.
The Parent Company's cash requirements consist primarily of debt service,
dividends to shareholders, operating expenses, income taxes 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 December 31, 1998, $32.4 million of dividend capacity was available from
subsidiaries to pay to the Parent without having to obtain regulatory approval.
During 1998, dividends from subsidiaries were $212.3 million. During 1998 the
Company started a program to issue short-term commercial paper. At December 31,
1998 outstanding commercial paper was $49 million. At December 31, 1998 the
Parent had revolving credit facilities with two banks totaling $65 million. On
that date, the balance outstanding on these bank lines was $37 million.
YEAR 2000
A number of electronic systems utilize a two-digit field for year references,
e.g., 98 for 1998. Such systems may compute that the year 2000, if represented
as 00, to be 99 years ago rather than one year hence. If these systems are not
corrected prior to December 31, 1999, many processing failures could result.
This section describes the status of the Company's efforts to correct these
system deficiencies.
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STATE OF READINESS
The Company is well underway with its Year 2000 Program efforts and has
segmented the remediation process into phases. The organizational awareness
phase was substantially completed in the second quarter of 1998, but is
considered ongoing throughout 1999. The assessment and detailed planning phase
was completed by the end of third quarter 1998. The renovation phase for mission
critical components was substantially completed by December 31, 1998, except for
the conversion of recently acquired small Colorado banks, the last of which is
scheduled to be converted to Zion's systems by June 30, 1999. Renovation of
non-mission critical components is expected to be complete during the second
quarter of 1999. The validation phase for mission critical components will be
completed in the first quarter 1999 and for non-critical components by the end
of second quarter 1999. The Company uses third party servicers for some of its
information and data processing needs and is monitoring the progress of these
entities in addressing the Year 2000 issue. It expects that all of these
companies will be compliant by March 31, 1999. Validation of these third-party
provided systems is expected to be completed during the second quarter of 1999.
The Company is also assessing the operability of other devices after 1999,
including vaults, fax machines, stand-alone personal computers, security systems
and elevators. Although the Company does not believe that the failure of these
systems would have a material adverse effect on the financial condition of the
enterprise, it is addressing deficiencies in these systems and expects
compliance to be achieved by September 30, 1999.
COSTS
In order to achieve and confirm Year 2000 readiness, significant costs are being
incurred to test and modify or replace computer software and hardware, as well
as a variety of other items, e.g., ATMs. The Company believes that its
remediation costs have been mitigated since it replaced the large majority of
its core banking systems during the past five years with Year 2000 compliant
software in the ordinary course of business. However, the considerable effort
required to implement new software and sufficiently test its compliance is
consuming a substantial portion of the Company's internal information technology
resources. This diversion of resources to the Year 2000 project has resulted in
delays in implementing enhancements to a number of the Company's systems and
products. The Company does not believe, however, that these delays have had or
will have a significant effect on its revenue or expense growth. The aggregate
increase in operating expense to achieve Yea 2000 readiness is estimated to be
$3 million of which $2.1 million has been incurred through December 31, 1998. In
addition, a significant portion of the Company's ATMs and personal computers are
expected to be replaced to achieve Year 2000 compliance. The capital outlay to
replace these assets is estimated to be between $2 to $4 million, a portion of
which would have been incurred in the ordinary course of business without regard
to Year 2000 issues.
RISKS
If the Company's mission-critical applications are not compliant by 2000,
it may not be able to correctly process transactions in a reasonable period of
time. This scenario could result in a wide variety of claims against the Company
for improper handling of its assets and deposits and other borrowings from its
customers. The Company is also at risk if the credit worthiness of a few of its
large borrowers, or a significant number of its small borrowers, were to
deteriorate quickly and severely as a result of their inability to conduct
business operations after December 31, 1999, for whatever reason. The Company
has surveyed and reviewed the Year 2000 plans of a number of its credit
customers to ascertain the sufficiency of their remediation efforts and the
implications of their actions on their credit worthiness. From this review, the
Company believes that the increased credit risk that the Company may experience
as a result of the Year 2000 issue will not materially adversely effect its
financial condition. The Company explicitly disclaims however, any obligation or
liability for the completeness, or lack thereof, of its customers' Year 2000
remediation plans or actions.
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35
CONTINGENCY PLANS
The Company has developed business resumption plans for each significant
business unit in the event that unforeseen events beyond the bank's control
adversely impact our ability to provide financial services to our customers. In
the event of such a failure, these plans outline the steps that will be taken to
minimize the effect on customers and losses to the Company. Although the Company
believes that its Year 2000 remediation plan sufficiently addresses this issue,
there can be no assurance that Year 2000 events will not materially adversely
effect the Company's financial condition. Failure of other companies and vendors
to be compliant could result in disruption of important services by the Company
to its customers. Such failures could include, but are not limited to,
telecommunication services, electrical power, and information processing.
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 Zions 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: competitive pressures
among financial institutions increasing significantly; economic conditions,
either nationally or locally in areas in which Zions conducts its operations,
being less favorable than expected; legislation or regulatory changes which
adversely affect the Company's operations or business; the cost and effort
required to correct Year 2000 processing deficiencies being more difficult than
expected due to the difficulty of attracting and retaining qualified systems
personnel or vendor-supplied software releases being delayed or not functioning
properly. Zions disclaims any obligation to update any factors or to publicly
announce the result of revisions to any of the forward-looking statements
included herein to reflect future events or developments.
35
36
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
The following consolidated condensed statements of income present earnings and
operating cash earnings information as restated (see Note 22 of Notes to
Consolidated Financial Statements). The Company has restated prior year
financial information for a significant acquisition accounted for as a pooling
of interests. See Note 2 of Notes to Consolidated Financial Statements for
further information on the acquisition.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
-------------------------------------------------------------------
(Amounts in millions)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Net interest income $ 533.8 $ 335.7 $ 270.6 $ 236.0 $ 205.8
Noninterest income 199.9 140.7 112.1 89.5 74.1
------- ------- ------- ------- -------
Total revenue 733.7 476.4 382.7 325.5 279.9
Provision for loan losses 11.9 4.6 3.8 3.1 2.3
Noninterest expense(1) 456.8 281.4 218.2 194.1 178.0
------- ------- ------- ------- -------
Pretax cash earnings 265.0 190.4 160.7 128.3 99.6
Income tax expense 83.5 63.6 53.8 42.3 32.1
Minority interest 0.4 -- -- -- --
------- ------- ------- ------- -------
Cash earnings(1) 181.1 126.8 106.9 86.0 67.5
Amortization of goodwill and core deposit 31.7 7.1 2.3 2.5 2.0
intangibles
Merger expense 38.1 0.7 -- -- --
Income tax benefit (18.8) (0.9) (0.1) (0.3) (0.3)
------- ------- ------- ------- -------
Net income $ 130.1 $ 119.9 $ 104.7 $ 83.8 $ 65.8
======= ======= ======= ======= =======
Operating cash earnings per share (diluted) (1) $ 2.37 $ 2.02 $ 1.75 $ 1.42 $ 1.12
======= ======= ======= ======= =======
Net income per share (diluted) $ 1.70 $ 1.91 $ 1.72 $ 1.36 $ 1.08
======= ======= ======= ======= =======
(1) Before amortization of goodwill and core deposit intangible assets and
merger expense.
36
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Zions Bancorporation:
We have audited the accompanying consolidated balance sheets of Zions
Bancorporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, cash flows, and changes in
shareholders' equity and comprehensive income for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zions Bancorporation
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in note 22, the accompanying consolidated financial statements have
been restated.
/s/ KPMG LLP
Salt Lake City, Utah
February 7, 2000
37
38
ZIONS BANCORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(In thousands, except share amounts)
(as restated - See
note 22)
--------------------------
ASSETS 1998 1997
------------ ---------
Cash and due from banks $ 864,446 643,493
Money market investments:
Interest-bearing deposits 30,484 61,986
Federal funds sold 199,446 442,179
Security resell agreements 382,275 349,338
Investment securities:
Held to maturity, at cost (approximate market value $2,821,535 and $2,189,672) 2,804,654 2,170,602
Available for sale, at market 684,581 544,819
Trading account, at market 191,855 83,681
Loans:
Loans held for sale 232,253 178,642
Loans, leases, and other receivables 10,452,246 4,886,763
------------ ---------
10,684,499 5,065,405
Less:
Unearned income and fees, net of related costs 48,123 42,854
Allowance for loan losses 205,553 82,849
------------ ---------
Net loans 10,430,823 4,939,702
Premises and equipment, net 231,847 137,030
Goodwill and core deposit intangibles 663,606 294,925
Other real estate owned 5,270 3,371
Other assets 530,944 272,321
------------ ---------
$ 17,020,231 9,943,447
============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 3,170,436 1,856,881
Interest-bearing:
Savings and money market 6,077,556 3,596,442
Time:
Under $100,000 2,340,598 1,007,165
Over $100,000 1,528,329 446,701
Foreign 204,244 183,044
------------ ---------
13,321,163 7,090,233
Securities sold, not yet purchased 29,702 45,067
Federal funds purchased 337,283 294,109
Security repurchase agreements 932,560 1,013,332
Accrued liabilities 319,278 169,027
Commercial paper 49,217 --
Federal Home Loan Bank advances and other borrowings:
Less than one year 100,750 59,883
Over one year 56,796 210,681
Long-term debt 453,735 258,566
------------ ---------
Total liabilities 15,600,484 9,140,898
------------ ---------
Minority interest 34,670 --
Shareholders' equity:
Capital stock:
Preferred stock, without par value; authorized 3,000,000 shares; issued
and outstanding, none -- --
Common stock, without par value; authorized 200,000,000 shares; issued
and outstanding, 78,636,083 shares and 65,621,175 shares 752,845 270,359
Accumulated other comprehensive income (loss) (4,432) 3,077
Retained earnings 636,664 529,113
------------ ---------
Total shareholders' equity 1,385,077 802,549
------------ ---------
$ 17,020,231 9,943,447
============ =========
See accompanying notes to consolidated financial statements.
38
39
ZIONS BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
(In thousands, except per share amounts)
(as restated - See note 22)
-------------------------------
1998 1997 1996
-------- ------- --------
Interest income:
Interest and fees on loans $644,750 383,547 296,410
Interest on loans held for sale 14,256 11,874 11,509
Interest on money market investments 88,448 84,780 51,471
Interest on securities:
Held to maturity:
Taxable 131,711 106,691 70,292
Nontaxable 14,472 11,551 14,645
Available for sale:
Taxable 32,836 31,413 26,836
Nontaxable 836 2,112 2,287
Trading account 24,043 16,211 9,172
Lease financing 12,630 13,190 11,885
-------- ------- --------
Total interest income 963,982 661,369 494,507
-------- ------- --------
Interest expense:
Interest on savings and money market deposits 156,370 109,487 90,134
Interest on time and foreign deposits 135,239 65,016 51,135
Interest on borrowed funds 138,553 151,192 82,659
-------- ------- --------
Total interest expense 430,162 325,695 223,928
-------- ------- --------
Net interest income 533,820 335,674 270,579
Provision for loan losses 11,909 4,630 3,810
-------- ------- --------
Net interest income after provision for loan losses 521,911 331,044 266,769
-------- ------- --------
Noninterest income:
Service charges on deposit accounts 57,853 41,587 33,073
Other service charges, commissions, and fees 54,437 38,407 28,872
Trust income 9,415 6,757 5,195
Investment securities gain, net 2,039 777 123
Underwriting and trading income 9,239 5,716 2,721
Loan sales and servicing income 50,365 38,734 35,098
Other 16,598 8,746 7,042
-------- ------- --------
Total noninterest income 199,946 140,724 112,124
-------- ------- --------
Noninterest expense:
Salaries and employee benefits 247,648 153,837 121,884
Occupancy, net 29,725 15,357 11,588
Furniture and equipment 35,952 22,717 15,992
Other real estate expense (income) 656 301 (240)
Legal and professional services 15,249 7,496 4,756
Supplies 11,267 7,926 6,356
Postage 10,194 6,610 5,392
Advertising 11,819 6,804 5,296
FDIC premiums 1,441 708 11
Merger expense 38,128 815 --
Amortization of goodwill and core deposit intangibles 31,641 7,069 2,300
Amortization of mortgage servicing assets 5,484 2,152 1,299
Other 87,493 57,406 45,880
-------- ------- --------
Total noninterest expense 526,697 289,198 220,514
-------- ------- --------
Income before income taxes and minority interest 195,160 182,570 158,379
Income taxes 64,678 62,711 53,687
-------- ------- --------
Net income before minority interest 130,482 119,859 104,692
Minority interest 420 -- --
-------- ------- --------
Net income $130,062 119,859 104,692
======== ======= ========
Weighted-average common and common-equivalent shares outstanding during the year 76,527 62,895 60,976
======== ======= ========
Net income per common share:
Basic $ 1.72 1.93 1.74
======== ======= ========
Diluted $ 1.70 1.91 1.72
======== ======= ========
See accompanying notes to consolidated financial statements.
39
40
ZIONS BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(In thousands)
(as restated - See note 22)
----------------------------------------------
1998 1997 1996
------------- ------------ -----------
Cash flows from operating activities:
Net income $ 130,062 119,859 104,692
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 11,909 4,630 3,810
Depreciation of premises and equipment 27,560 16,973 13,023
Amortization 49,994 14,919 9,220
Accretion of unearned income and fees, net of related costs (5,695) 1,545 6,607
Proceeds from sales of trading account securities 175,432,243 119,209,754 80,374,843
Increase in trading account securities (175,540,070) (119,259,359) (80,345,212)
Investment securities gain, net (2,039) (777) (123)
Proceeds from loans held-for-sale 1,237,514 742,244 664,327
Increase in loans held-for-sale (1,296,803) (764,066) (671,343)
Net gain on sales of loans, leases and other assets (43,264) (27,914) (26,803)
Change in accrued income taxes 22,916 677 5,077
Change in accrued interest receivable 2,270 (19,319) (6,673)
Change in accrued interest payable (1,147) 4,162 (675)
Other, net (85,416) (25,335) 24,566
------------- ------------ -----------
Net cash provided by (used in) operating activities (59,966) 17,993 155,336
------------- ------------ -----------
Cash flows from investing activities:
Net decrease (increase) in money market investments 838,130 (190,635) 101,576
Proceeds from maturities of investment securities held to maturity 3,461,649 952,544 339,335
Purchases of investment securities held to maturity (3,509,343) (1,594,927) (596,277)
Proceeds from sales of investment securities available for sale 512,283 288,423 134,116
Proceeds from maturities of investment securities available for sale 250,250 104,619 116,424
Purchases of investment securities available for sale (645,793) (332,611) (332,630)
Proceeds from sales of loans and leases 918,948 968,717 757,516
Net increase in loans and leases (1,889,571) (1,450,619) (1,307,068)
Principal collections on leveraged leases 3,840 5,748 --
Payments on leveraged leases (3,840) (5,748) --
Proceeds from sales of premises and equipment 5,370 2,736 746
Purchases of premises and equipment (63,702) (36,867) (20,765)
Proceeds from sales of mortgage-servicing rights 6,654 1,771 1,339
Purchases of mortgage-servicing rights (5,149) (3,123) (1,625)
Proceeds from sales of other assets 7,624 3,578 2,367
Purchases of other assets -- -- (27,401)
Cash paid for acquisitions, net of cash received (246,485) 37,304 3,540
------------- ------------ -----------
Net cash used in investing activities (359,135) (1,249,090) (828,807)
------------- ------------ -----------
Cash flows from financing activities:
Net increase in deposits 622,356 1,110,515 381,826
Net change in short-term funds borrowed (97,655) 356,985 151,117
Proceeds from FHLB advances over one year 4,665 180,000 4,201
Payments on FHLB advances over one year (167,886) (47,980) (16,714)
Proceeds from issuance of long-term debt 195,041 -- 200,000
Payments on long-term debt (20,556) (554) (4,969)
Net change in minority interest 34,670 -- --
Proceeds from issuance of common stock 136,751 3,368 2,965
Payments to redeem common stock (25,732) (121,389) (25,148)
Dividends paid (41,600) (29,040) (25,033)
------------- ------------ -----------
Net cash provided by financing activities 640,054 1,451,905 668,245
------------- ------------ -----------
Net increase (decrease) in cash and due from banks 220,953 220,808 (5,226)
Cash and due from banks at beginning of year 643,493 422,685 427,911
------------- ------------ -----------
Cash and due from banks at end of year $ 864,446 643,493 422,685
============= ============ ===========
See accompanying notes to consolidated financial statements.
40
41
ZIONS BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in
Shareholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
(In thousands, except share amounts)
(as restated - See note 22)
Accumu-
lated
other
compre- Total
Common stock Compre- hensive share-
---------------------- hensive income Retained holders'
Shares Amount income (loss) earnings equity
----------- --------- ---------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 59,854,033 $ 86,188 1,980 358,635 446,803
Net income -- -- 104,692 -- 104,692 104,692
Other comprehensive loss, net of
tax:
Realized and unrealized
holding loss arising during
the year, net of tax benefit
of $2,421 -- -- (3,867) -- -- --
Reclassification for realized
gain recorded in the income
statement, net of tax
expense of $48 -- -- (76) -- -- --
--------
Other comprehensive loss -- -- (3,943) (3,943) -- (3,943)
--------
Total comprehensive income -- -- $ 100,749 -- -- --
=========
Cash dividends:
Common, $.425 per share -- -- -- (25,033) (25,033)
Issuance of common shares for
acquisitions 1,454,792 26,200 -- -- 26,200
Stock redeemed and retired (1,306,041) (25,149) -- -- (25,149)
Stock options exercised, net of
shares tendered and retired 582,373 4,182 -- -- 4,182
---------- --------- --------- -------- --------
BALANCE, DECEMBER 31, 1996 60,585,157 91,421 (1,963) 438,294 527,752
Net income -- -- 119,859 -- 119,859 119,859
Other comprehensive income, net of tax:
Realized and unrealized holding
gain arising during the year,
net of tax expense of $3,203 -- -- 5,117 -- -- --
Reclassification for realized gain
recorded in the income statement,
net of tax expense of $48 -- -- (77) -- -- --
--------
Other comprehensive income -- -- 5,040 5,040 -- 5,040
--------
Total comprehensive income -- -- $ 124,899 -- -- --
=========
Cash dividends:
Common, $.47 per share -- -- -- (28,428) (28,428)
Preferred dividends of acquired
companies prior to merger -- -- -- -- (612) (612)
Issuance of common shares for
acquisitions 8,374,833 295,564 -- -- 295,564
Stock redeemed and retired (3,649,018) (121,389) -- -- (121,389)
Stock options exercised, net of shares
tendered and retired 310,203 4,763 -- -- 4,763
---------- --------- --------- -------- --------
BALANCE, DECEMBER 31, 1997 65,621,175 270,359 3,077 529,113 802,549
41
42
ZIONS BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in
Shareholders' Equity and Comprehensive Income (continued)
Years ended December 31, 1998, 1997, and 1996
(In thousands, except share amounts)
(as restated - See note 22)
Accumu-
lated
other
compre- Total
Common stock Compre- hensive share-
---------------------- hensive income Retained holders'
Shares Amount income (loss) earnings equity
---------- --------- -------- ---------- ---------- ---------
Net income -- $ -- 130,062 -- 130,062 130,062
Other comprehensive loss, net of tax:
Realized and unrealized holding loss
arising during the year, net of
tax benefit of $3,916 -- -- (6,618) -- -- --
Reclassification for realized gain
recorded in the income statement,
net of tax expense of $785 -- (1,254) -- -- --
----------
Other comprehensive loss -- -- (7,872) (7,872) -- (7,872)
----------
Total comprehensive income -- -- $ 122,190 -- -- --
==========
Cash dividends:
Common, $.54 per share -- -- -- (40,715) (40,715)
Preferred dividends of acquired
companies prior to merger -- -- -- -- (887) (887)
Net proceeds from stock offering 2,760,000 129,832 -- -- 129,832
Issuance of common shares for
acquisitions 10,041,306 368,259 363 19,091 387,713
Exercise of acquired company warrants
prior to acquisition 257,056 1,852 -- -- 1,852
Stock redeemed and retired (591,009) (25,696) -- -- (25,696)
Stock options exercised, net of
shares tendered and retired 547,555 8,239 -- -- 8,239
---------- --------- ---------- ---------- ---------
BALANCE, DECEMBER 31, 1998 78,636,083 $ 752,845 (4,432) 636,664 1,385,077
========== ========= ========== ========== =========
See accompanying notes to consolidated financial statements.
42
43
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Zions Bancorporation (the Parent) is a multibank holding company organized under
the laws of Utah in 1955, which provides a full range of banking and related
services through its subsidiaries operating primarily in Utah, Idaho,
California, Colorado, Arizona, Nevada, and Washington.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Zions
Bancorporation and its subsidiaries (the Company). All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified to conform to the 1998 presentation. Prior
year amounts have also been restated for one significant acquisition accounted
for under the pooling-of-interest method. (see note 2)
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates.
SECURITY RESELL AGREEMENTS
Security resell agreements represent overnight and term agreements, the majority
maturing within 30 days. Either the Company or, in some instances, third parties
on behalf of the Company take possession of underlying securities. The market
value of such securities is monitored throughout the contract term to ensure
that asset value remains sufficient to protect against counterparty default.
Security resell agreements averaged approximately $1,260,646,000 during 1998,
and the maximum amount outstanding at any month-end during 1998 was
$1,636,078,000.
INVESTMENT SECURITIES
The Company classifies its investment securities in one of three categories:
trading, available for sale, or held to maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term. Held to
maturity securities are those securities which the Company has the ability and
intent to hold until maturity. All other securities not included in trading or
held to maturity are classified as available for sale.
Trading securities (including futures and options used to hedge trading
positions against interest rate risk) and available for sale securities are
recorded at fair value. Held to maturity securities are recorded at cost,
adjusted for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses on trading securities are included in net income.
Unrealized holding gains and losses, net of related tax effect, on available for
sale securities are excluded from net income and are reported as a separate
component of shareholders' equity until realized.
A decline in the market value of any available for sale or held to maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
43
44
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Premiums and discounts are amortized or accreted over the life of the related
held to maturity security as an adjustment to yield using the effective-interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses for securities classified as available for sale and held to maturity
are included in net income and are derived using the specific-identification
method of determining the cost of securities sold.
LOANS
Loans are reported at the principal amount outstanding, net of unearned income.
Unearned income, which includes deferred fees net of deferred direct incremental
loan origination costs, is amortized to interest income generally over the life
of the loan using an interest method or the straight-line method if it is not
materially different.
Loans identified as held for sale are carried at the lower of cost or market
value. Nonrefundable fees, related direct loan origination costs, and related
hedging gains or losses, if any, are deferred and recognized as a component of
the gain or loss on sale recorded in noninterest income.
LOAN FEES
Nonrefundable fees and related direct costs associated with the origination of
loans are deferred. The net deferred fees and costs are recognized in interest
income over the loan term using methods that generally produce a level yield on
the unpaid loan balance. Other nonrefundable fees related to lending activities
other than direct loan origination are recognized as other operating income over
the period the related service is provided. Bankcard discounts and fees charged
to merchants for processing transactions through the Company are shown net of
interchange discounts and fees expense and are included in other service
charges, commissions, and fees.
ALLOWANCE FOR LOAN LOSSES
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
potential in the portfolio, and considers the results of independent internal
and external credit review. To determine the adequacy of the allowance, the
Company's loan and lease portfolio is broken into segments based on loan type.
Historical loss experience factors by segment, adjusted for changes in trends
and conditions, are used in determining the required allowance for each segment.
Historical loss factors are evaluated and updated using migration analysis
techniques and other considerations based on the makeup of the specific
portfolio segment. Other considerations such as volumes and trends of
delinquencies, nonaccruals, repossessions and bankruptcies, criticized and
classified loan trends, current and anticipated foreclosure losses, new products
and policies, economic conditions, concentrations of credit risk, and experience
and abilities of lending personnel are also considered in establishing the loss
factors.
44
45
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
All loans graded substandard in the amount of $1 million or more and all credits
graded doubtful in the amount of $100 thousand or more are individually
evaluated based on facts and circumstances of the loan and a specific allowance
amount designated. Specific allowances may also be established for loans in
amounts below the specific thresholds when it is determined that the risk
differs significantly from factor amounts established for the category. Although
management has allocated a portion of the allowance to specific loan categories
using the methods described, the adequacy of the allowance must be considered in
its entirety. To mitigate the imprecision in most estimates of expected credit
losses, the allocated component of the allowance is supplemented by an
unallocated component. The unallocated portion of the allowance includes
management's judgmental determination of the amounts necessary for subjective
factors such as economic uncertainties and concentration risks. Accordingly, the
relationship of the unallocated component to the total allowance for loan losses
may fluctuate from period to period.
IMPAIRED LOANS
The Company considers a loan to be impaired when the accrual of interest has
been discontinued and the loan meets other criteria established by the Company.
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. An allowance for impairment losses is included in the allowance for
loan losses through a provision for loan losses. The Company primarily uses a
cost recovery accounting method to recognize interest income on impaired loans.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciation, computed on the straight-line method, is charged to
operations over the estimated useful lives of the properties. Leasehold
improvements are amortized over the terms of respective leases or the estimated
useful lives of the improvements, whichever is shorter.
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued, loans for which the terms have been renegotiated to less
than market rates due to a weakening of the borrower's financial condition
(restructured loans), and other real estate acquired primarily through
foreclosure that is awaiting disposition.
Loans are generally placed on a nonaccrual status when principal or interest is
past due 90 days or more unless the loan is both well-secured and in the process
of collection, or when in the opinion of management, full collection of
principal or interest is unlikely. Generally, consumer loans are not placed on a
nonaccrual status, inasmuch as they are generally charged off when they become
120 days past due. Generally, a loan may be returned to accrual status when all
delinquent interest and principal become current in accordance with the terms of
the loan agreement or when the loan is both well-secured and in the process of
collection.
45
46
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
GOODWILL AND CORE DEPOSIT INTANGIBLES
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the balance over its remaining life can
be recovered through future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. Goodwill and core deposit intangibles are generally amortized using
the straight-line method over 25 and 10 year periods, respectively.
MORTGAGE SERVICING RIGHTS
The Company recognizes as separate assets the rights to service mortgage loans
for others, whether the servicing rights are acquired through purchases or loan
originations. The fair value of capitalized mortgage servicing rights is based
upon the present value of estimated future cash flows. Based upon current fair
values capitalized mortgage servicing rights are periodically assessed for
impairment, which is recognized in the statement of income during the period in
which impairment occurs. For purposes of performing its impairment evaluation,
the Company stratifies its portfolio on the basis of certain risk
characteristics including loan type and note rate. Capitalized mortgage
servicing rights are amortized over the period of estimated net servicing income
and take into account appropriate prepayment assumptions.
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standard (Statement) No. 125 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. This Statement requires that after a
transfer of financial assets, the Company must recognize the financial and
servicing assets controlled and liabilities incurred, and derecognize financial
assets and liabilities in which control is surrendered or debt is extinguished.
In such cases, servicing assets are determined based on estimated future
revenues from contractually specified servicing fees and other ancillary
revenues that are expected to compensate the Company for performing the
servicing. The adoption of Statement No. 125 has not had a material effect on
the Company's consolidated financial statements.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commercial letters of credit, and standby letters of credit. Such financial
instruments are recorded in the consolidated financial statements when they
become payable. The credit risk associated with these commitments is considered
in management's determination of the allowance for possible losses.
46
47
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTEREST RATE EXCHANGE CONTRACTS AND CAP AND FLOOR AGREEMENTS
The Company enters into interest rate exchange contracts (swaps) and cap and
floor agreements as part of its overall asset and liability duration and
interest rate risk management strategy. The objective of these financial
instruments is to match estimated repricing periods of interest-sensitive assets
and liabilities in order to reduce interest rate exposure and or manage desired
asset and liability duration. With the exception of interest rate caps and
floors, these instruments are used to hedge asset and liability portfolios and,
therefore, are not marked to market. Fees associated with these financial
instruments are accreted into interest income or amortized to interest expense
on a straight-line basis over the lives of the contracts and agreements. Gains
or losses on early termination of a swap are amortized on the remaining term of
the contract when the underlying assets or liabilities still exist. Otherwise,
such gains or losses are fully recorded as income or expense at the termination
of the contract. The net interest received or paid on these contracts is
reflected on a current basis in the interest income or expense related to the
hedged obligation or asset.
STATEMENTS OF CASH FLOWS
The Company paid interest of $431.1 million, $356.9 million, and $224.1 million,
respectively, and income taxes of $49.4 million, $62.9 million, and $41.9
million, respectively, for the years ended December 31, 1998, 1997, and 1996.
Loans transferred to other real estate owned totaled $5.1 million, $8.4 million,
and $0.4 million, respectively, for the years ended December 31, 1998, 1997, and
1996.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The exercise of stock options under the Company's nonqualified stock option
plan, resulted in tax benefits reducing the Company's current income tax payable
and increasing common stock in the amounts of $3.4 million, $1.2 million, and
$0.6 million in 1998, 1997, and 1996, respectively.
NET INCOME PER COMMON SHARE
Diluted net income per common share is based on the weighted-average outstanding
common shares during each year, including common stock equivalents. Basic net
income per common share is based on the weighted-average outstanding common
shares during each year.
STOCK SPLIT
On April 25, 1997, the Company's Board of Directors approved a four-for-one
split of the common stock. This action was effective on May 14, 1997 for
shareholders of record as of May 9, 1997. A total of 43,347,903 shares of common
stock were issued. All references to the number of common shares and per common
share amounts have been restated to reflect the split.
47
48
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 130, Reporting Comprehensive Income. Statement No. 130
establishes standards for reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
consists of net income and net unrealized gains (losses) on securities and is
presented in the consolidated statement of changes in shareholders' equity and
comprehensive income. The statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's financial
position or results of operations. Prior year financial statements have been
reclassified to conform to the requirements of Statement No. 130.
ACCOUNTING STANDARDS NOT ADOPTED
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Statement No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for gains and losses of a derivative depends on the intended use of
the derivative and the resulting designation.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. The original
effective date of this statement, as amended by Statement No. 137, has been
delayed and is now effective for all fiscal quarters of fiscal years beginning
after June 15, 2000, and should not be applied retroactively to financial
statements of prior periods. The Company is currently studying the statement to
determine its future effects.
In October 1998, the FASB issued Statement No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This statement amends FASB
Statement No. 65, Accounting for Certain Mortgage Banking Activities, to require
that after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. This statement conforms the subsequent accounting for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a nonmortgage banking enterprise.
This statement shall be effective for the first fiscal quarter beginning after
December 15, 1998. It is anticipated that the adoption of Statement No. 134 will
not have a significant impact on the Company's financial position or results of
operations.
48
49
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. MERGERS AND ACQUISITIONS
During 1998, the Company acquired Vectra Banking Corporation and its subsidiary,
Vectra Bank (Vectra) located in Denver, Colorado, and FP Bancorp, Inc. and its
banking subsidiary, First Pacific National Bank (FP) located in Escondido,
California. Both acquisitions were consummated with the issuance of common stock
by the Company and have been accounted for using the purchase method of
accounting. Accordingly, the cost of acquisition has been allocated to assets
acquired and liabilities assumed based upon their estimated fair market values
at the dates of acquisition. Goodwill resulting from these acquisitions is being
amortized on a straight-line basis over 25 years.
Vectra FP
----------------- -----------------
Common stock issued 4,018,222 shares 1,914,731 shares
Approximate cost of acquisition $174.1 million $89.8 million
Excess of acquisition cost over fair value of net
identifiable assets acquired (goodwill) $128.7 million $56.9 million
Results of operations included in the Company's income
statement from: January 1, 1998 April 1, 1998
During 1998, the Company also acquired four additional banking organizations in
Colorado, namely Sky Valley Bank Corp., Tri-State Finance Corporation, Routt
County National Bank Corporation, and SBT Bankshares (the Banks) for 2,393,079
shares of common stock. A total purchase price of approximately $105.4 million
was paid for the acquisitions consisting of Bank stock, Bank merger costs, and
the fair value of stock options assumed by the Bank. The acquisitions were
accounted for using the purchase method of accounting. The acquisition costs
have been allocated to assets acquired and liabilities assumed based upon their
estimated fair market values at the dates of acquisitions. The excess cost of
acquisition over the fair value of the net identifiable assets acquired of
approximately $69.0 million has been recorded as goodwill and is being amortized
on a straight-line basis over twenty-five years. The results of operations of
the Banks have been included with those of the Company from the effective date
of each transaction through December 31, 1998.
49
50
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. MERGERS AND ACQUISITIONS (continued)
Further, in 1998, the Company acquired The Sumitomo Bank of California
(Sumitomo), located in San Francisco, California. Cash consideration of
approximately $546 million was paid for the acquisition. Sumitomo had total
assets of approximately $4.5 billion at the date of acquisition. Sumitomo, as
well as FP Bancorp, Inc., was merged with Grossmont Bank and the name changed to
California Bank & Trust. The Company sold a minority interest in California Bank
& Trust to a limited partnership and a Director of the Company for its cost
basis of approximately $33 million. The acquisition was accounted for as a
purchase transaction.
The major components of management's plan for the combined company include the
restructuring of operational functions and the consolidation of administrative
facilities. Total goodwill arising from the transaction was approximately $106.7
million, which will be amortized over a period of 25 years using the
straight-line method. The Company recorded an $18 million liability in the
purchase business combination and included such costs in the allocation of the
purchase price. This liability included approximately $6.0 million of salaries
and benefits for Sumitomo executives and staff who were terminated in relation
to the acquisition. All of these individuals were identified prior to the
consummation of the merger, and the majority were notified of the termination in
early October 1998. In addition, a liability for approximately $1.4 million was
recorded in the combination for data service employees terminated in relation to
a system conversion. These employees were identified and notified that the
termination is anticipated as of February 1999.
50
51
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. MERGERS AND ACQUISITIONS (continued)
Merger expenses in the accompanying consolidated statements of income are
summarized as follows:
1998 1997
------- -------
Sumitomo acquisition:
Severance and related employee benefits $ 5,290 --
Real property lease terminations 7,773 --
Integration of business operations 5,834 --
Integration of information systems 1,668 --
Other acquisition:
Incremental personnel-related costs 6,452 --
Professional fees 5,957 940
Conversion and other miscellaneous charges 5,154 1,767
------- -------
$38,128 2,707
======= =======
The amounts set forth above for severance and related employee benefits and real
property lease terminations are included in accrued liabilities in the
accompanying consolidated balance sheets as of December 31, 1998. The severance
and related employee benefits costs of approximately $5.3 million are associated
with the termination of 250 branch employees of the acquired operation. In
December 1998, the decision to terminate these employees was made by management,
and a formal severance plan was adopted which outlined the amount of severance
and type of benefits to be received upon termination. This plan was communicated
to all Sumitomo employees at that time. Additionally, the real property lease
terminations costs of approximately $7.8 million represent the remaining
noncancellable obligation with respect to operating leases for several former
Sumitomo branches and production facilities. It is anticipated that the
remaining liability balance will be paid by the end of 1999, except for amounts
related to long-term real property leases.
The $7,502,000 costs for integration of business operations and information
systems primarily represent charges associated with the conversion of Sumitomo's
computer and networking systems, bonus payments, and relocation and recruiting
fees paid to hire new management.
The following unaudited amounts represent the Company combined with the 1998
acquisitions as if the acquisitions had occurred at January 1, 1998 and 1997,
respectively (in thousands):
1998 acquisitions 1998 1997
--------------------------------------------------------- -------------- -------------
Total revenue $1,451,107 1,323,480
Net income 126,155 137,729
Diluted net income per common share 1.58 1.85
Pro forma information relating to 1997 acquisitions accounted for as purchase
transactions has not been provided as the acquisitions were not considered
significant in relation to the Company's financial position or results of
operations.
On September 8, 1998, the Company acquired The Commerce Bancorporation, and its
banking subsidiary The Commerce Bank of Washington, N.A. for 1,938,590 shares of
common stock. The Commerce Bancorporation had total assets of approximately $300
million on the date of acquisition. The Commerce Bancorporation's total interest
and noninterest income and net loss for the period January 1 through June 30,
1998 were $11.8 million and $3.2 million, respectively. The acquisition of
Commerce Bancorporation was accounted for as a pooling of interests and
considered a significant business combination. Prior year amounts have been
restated.
A reconciliation between revenue and net income previously reported by the
Company for the year ended December 31, 1997, with restated amounts presented in
the accompanying financial statements follows:
Company Effects of
previously restatement The Commerce Company
reported (note 22) Bancorporation restated
------------- -------------- ----------------- ----------------
Total revenue $ 825,463 (44,147) 20,777 802,093
Net income 122,362 (6,961) 4,458 119,859
51
52
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. MERGERS AND ACQUISITIONS (continued)
During 1998, the Company issued a total of 1,715,274 shares of common stock to
acquire four additional banking organizations in Colorado, namely Kersey
Bancorp., N.A., Eagle Holding Company, Citizens Banco, Inc., and Mountain
Financial Holding Company. Each of these acquisitions was accounted for as a
pooling of interests and was not significant to the consolidated financial
statements.
3. INVESTMENT SECURITIES
Investment securities as of December 31, 1998, are summarized as follows (in
thousands):
Held to maturity
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---------- ---------- ---------- ----------
U.S. Treasury securities $ 62,412 155 -- 62,567
U.S. government agencies and corporations:
Small Business Administration loan-backed 358,161 1,065 3,110 356,116
securities
Other agency securities 940,059 5,753 1,984 943,828
States and political subdivisions 285,212 7,552 71 292,693
Mortgage-backed securities 1,158,810 7,787 266 1,166,331
---------- ---------- ---------- ----------
$2,804,654 22,312 5,431 2,821,535
========== ========== ========== ==========
Available for sale
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
U.S. Treasury securities $ 45,738 1,002 4 46,736
U.S. government agencies and corporations:
Small Business Administration originator fees
certificates 84,933 -- 16,283 68,650
Other agencies 112,551 1,141 46 113,646
States and political subdivisions 15,198 497 3 15,692
Mortgage- and other asset-backed securities 179,389 1,248 401 180,236
-------- -------- -------- --------
437,809 3,888 16,737 424,960
Equity securities:
Mutual funds:
Accessor Funds, Inc. 116,566 1,865 10 118,421
Federal Home Loan Bank stock 100,579 -- -- 100,579
Other stock 36,804 3,817 -- 40,621
-------- -------- -------- --------
$691,758 9,570 16,747 684,581
======== ======== ======== ========
52
53
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. INVESTMENT SECURITIES (continued)
Investment securities as of December 31, 1997, are summarized as follows (in
thousands):
Held to maturity
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
U.S. Treasury securities $ 4,004 45 1 4,048
U.S. government agencies and corporations:
Small Business Administration loan-backed
securities 440,615 8,728 476 448,867
Other agency securities 1,422,324 5,757 1,099 1,426,982
States and political subdivisions 221,553 5,654 809 226,398
Mortgage-backed securities 82,106 1,323 52 83,377
---------- ---------- ---------- ----------
$2,170,602 21,507 2,437 2,189,672
========== ========== ========== ==========
Available for sale
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- -------
U.S. Treasury securities $ 37,332 414 -- 37,746
U.S. government agencies and corporations:
Small Business Administration originator fees
certificates 75,371 -- 3,154 72,217
Other agencies 145,497 677 212 145,962
States and political subdivisions 26,397 1,085 8 27,474
Mortgage- and other asset-backed securities 27,815 468 35 28,248
-------- -------- -------- --------
312,412 2,644 3,409 311,647
Equity securities:
Mutual funds:
Accessor Funds, Inc. 109,530 1,456 28 110,958
Federal Home Loan Bank stock 90,537 -- -- 90,537
Other stock 27,404 4,309 36 31,677
-------- -------- -------- --------
$539,883 8,409 3,473 544,819
======== ======== ======== ========
The amortized cost and estimated market value of investment securities as of
December 31, 1998, by contractual maturity, excluding equity securities, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties (in thousands):
Held to maturity Available for sale
------------------------ ------------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
--------- --------- --------- ---------
Due in one year or less $ 611,170 613,383 94,467 92,423
Due after one year through five years 1,230,347 1,242,212 232,227 227,727
Due after five years through ten years 811,749 814,078 63,843 60,013
Due after ten years 151,388 151,862 47,272 44,797
---------- --------- ------- -------
$2,804,654 2,821,535 437,809 424,960
========== ========= ======= =======
53
54
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. INVESTMENT SECURITIES (continued)
Gross gains of $7,407,000, $8,996,000, and $355,000 and gross losses of
$5,368,000, $8,219,000, and $232,000 were recognized on sales and write downs of
investment securities for the years ended December 31, 1998, 1997, and 1996,
respectively.
As of December 31, 1998 and 1997, securities with an amortized cost of
$1,107,743,000 and $802,039,000, respectively, were pledged to secure public and
trust deposits, advances, and for other purposes as required by law.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized as follows (in thousands):
1998 1997
----------- -----------
Loans held for sale $ 232,253 178,642
Commercial, financial, and agricultural 2,691,915 1,287,430
Real estate:
Construction 866,548 490,610
Other 6,034,979 2,380,838
Consumer 539,349 458,162
Lease financing 213,410 176,419
Foreign 44,368 --
Other receivables 61,677 93,304
----------- -----------
$10,684,499 5,065,405
=========== ===========
As of December 31, 1998 and 1997, loans with a carrying value of $63,125,000 and
$183,417,000, respectively, were pledged as security for Federal Home Loan Bank
advances.
During 1998, 1997, and 1996, sales of loans held for sale totaled $1,238
million, $733 million, and $654 million, respectively. Consumer and other loan
securitizations totaled $884 million in 1998, $951 million in 1997, and $746
million in 1996, and relate primarily to loans sold under revolving
securitization structures. Gain on the sales, excluding servicing, of both loans
held for sale and loan securitizations amounted to $36.2 million in 1998, $28.3
million in 1997, and $25.8 million in 1996.
The allowance for loan losses is summarized as follows (in thousands):
1998 1997 1996
--------- --------- ---------
Balance at beginning of year $ 82,849 72,040 69,369
Allowance for loan losses of companies
acquired 125,690 14,316 2,566
Additions:
Provision for loan losses 11,909 4,630 3,810
Recoveries 9,326 5,888 5,727
Deductions:
Loan charge-offs (24,221) (14,025) (9,432)
--------- --------- ---------
Balance at end of year $ 205,553 82,849 72,040
========= ========= =========
At December 31, 1998, 1997, and 1996, the allowance for loan losses includes an
allocation of $20 million, $9 million, and $6 million, respectively, related to
commitments to extend credit and standby letters of credit.
54
55
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)
The Company's total recorded investment in impaired loans amounted to
$41,000,000 and $7,100,000 as of December 31, 1998 and 1997, respectively.
Included in the allowance for loan losses as of December 31, 1998 and 1997, is a
required allowance of $5,000,000 and $46,000, respectively, on $11,600,000 and
$300,000, respectively, of the recorded investment in impaired loans.
Contractual interest due and interest foregone on impaired loans totaled
$3,797,000 and $2,051,000, respectively, for 1998, $554,000 and $204,000,
respectively, for 1997, and $1,377,000 and $657,000, respectively, for 1996. The
average recorded investment in impaired loans amounted to $16,944,000 in 1998,
$6,421,000 in 1997, and $5,605,000 in 1996.
5. CONCENTRATIONS OF CREDIT RISK
Credit risk represents the loss that would be recognized subsequent to the
reporting date if counterparties failed to perform as contracted. Concentrations
of credit risk (whether on- or off-balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. The Company does not have significant exposure to any individual
customer or counterparty.
Most of the Company's business activity is with customers located within the
states of Utah, Idaho, California, Colorado, Arizona, Nevada, and Washington.
The commercial loan portfolio is well diversified, consisting of 11 major
industry classification groupings. As of December 31, 1998, the larger
concentrations of risk in the commercial loan and leasing portfolio are
represented by the real estate, construction, business services and
transportation industry groupings. The Company has minimal credit exposure from
lending transactions with highly leveraged entities. The majority of foreign
loans are supported by domestic real estate or letters of credit.
6. PREMISES AND EQUIPMENT
The following table presents comparative data for premises and equipment (in
thousands):
1998 1997
-------- --------
Land $ 46,809 27,773
Buildings 132,308 72,781
Furniture and equipment 212,498 122,063
Leasehold improvements 44,596 13,809
-------- --------
Total 436,211 236,426
Less accumulated depreciation and amortization 204,364 99,396
-------- --------
Net book value $231,847 137,030
======== ========
55
56
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7. MORTGAGE SERVICING RIGHTS
Mortgage servicing rights, included in other assets in the accompanying balance
sheets, are summarized as follows (in thousands):
1998 1997
-------- ------
Balance at beginning of year $ 10,595 5,447
Additions 9,231 7,300
Obtained through acquisition 1,595 --
Amortization (5,484) (2,152)
Sales (623) --
-------- ------
Balance at end of year $ 15,314 10,595
======== ======
At December 31, 1998 and 1997, the aggregate fair value of mortgage servicing
rights was $20.4 million and $14.2 million, respectively. Fair values are
determined by discounted anticipated future net cash flows from mortgage
servicing activities considering market consensus loan prepayment predictions,
interest rates, servicing costs, and other economic factors.
8. DEPOSITS
At December 31, 1998, the scheduled maturities of all time deposits are as
follows (in thousands):
1999 $3,300,783
2000 345,551
2001 93,665
2002 56,258
2003 and thereafter 72,670
----------
$3,868,927
==========
The aggregate amount of time deposits with a denomination of $100,000 or more
was $1,528,329,000 and $446,701,000 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the contractual maturities of these deposits were as
follows: $780,318,000 in 3 months or less, $330,816,000 over 3 months through 6
months, $288,441,000 over 6 months through 12 months and $128,754,000 over 12
months.
Deposit overdrafts that have been reclassified as loan balances were $23.2
million and $39.5 million at December 31, 1998 and 1997, respectively.
56
57
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9. SHORT-TERM BORROWINGS
Short-term borrowings generally mature in less than 30 days. The following table
shows selected information for these borrowings (in thousands):
1998 1997 1996
---------- --------- ---------
Federal funds purchased:
Average amount outstanding $ 401,412 297,399 205,329
Weighted average rate 4.61% 5.46% 5.44%
Highest month-end balance 594,503 487,098 454,857
Year-end balance 337,283 294,129 155,407
Weighted average rate on
outstandings at year-end 4.58% 5.83% 6.26%
Security repurchase agreements:
Average amount outstanding $1,442,260 1,873,019 1,131,791
Weighted average rate 4.77% 5.17% 4.93%
Highest month-end balance 1,710,676 2,250,488 1,343,824
Year-end balance 932,560 1,013,332 801,100
Weighted average rate on
outstandings at year-end 4.40% 5.74% 4.76%
The Company participates in overnight and term security repurchase agreements.
Most of the overnight agreements are performed with sweep accounts in
conjunction with a master repurchase agreement. In this case, securities under
the Company's control are pledged for and interest is paid on the collected
balance of the customers' accounts. For term repurchase agreements, securities
are transferred to the applicable counterparty.
10. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
The following table presents comparative data for FHLB advances and other
borrowings over one year (in thousands):
1998 1997
-------- -------
Medium-term note payable by parent, 6.03% $ -- 50,000
FHLB advances payable by subsidiaries,
5.46%-7.30% 44,696 153,681
Notes payable, 5.60%-8.32% 12,100 7,000
-------- -------
$ 56,796 210,681
======== ========
Federal Home Loan Bank advances as of December 31, 1998 are borrowed by Zions
First National Bank (ZFNB), a wholly-owned subsidiary, under its line of credit
with the Federal Home Loan Bank of Seattle. The line of credit provides for
borrowing of amounts up to ten percent of total assets. The line of credit is
secured under a blanket pledge whereby ZFNB maintains unencumbered collateral
with carrying amount, which has been adjusted using a pledge requirement
percentage based upon the types of collateral pledged, equal to at least 100
percent of outstanding advances and Federal Home Loan Bank stock.
Interest expense on FHLB advances and other borrowings over one year was
$6,602,000, $8,206,000, and $740,000 for the years ended December 31, 1998,
1997, and 1996, respectively.
57
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ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (continued)
Maturities of Federal Home Loan Bank advances and other borrowings over one year
are as follows (in thousands):
1999 $ 15,393
2000 9,833
2001 3,320
2002 2,515
2003 2,862
Thereafter 22,873
---------
$ 56,796
=========
11. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
1998 1997
-------- --------
Guaranteed preferred beneficial interests in
junior subordinated deferrable interest
debentures $223,000 207,500
Subordinated notes:
Floating rate subordinated notes, maturity
2005-2008 177,000 --
8.625%-9.00% subordinated notes, maturity
in 1998-2002 50,150 50,000
Capital leases and other notes payable 3,585 1,066
-------- --------
$453,735 258,566
======== ========
The guaranteed preferred beneficial interests in junior subordinated deferrable
interest debentures include $200 million of 8.536 percent debentures issued by
Zions Institutional Capital Trust A (ZICTA), $5.5 million of 10.25 percent
debentures issued by GB Capital Trust (GBCT), and $17.5 million of 9.50 percent
debentures issued by VBC Capital I Trust (VBCCIT).
The ZICTA debentures are direct and unsecured obligations of ZFNB and are
subordinate to the claims of depositors and general creditors. The Company has
irrevocably and unconditionally guaranteed all of ZFNB's obligations under the
debentures. The GBCT and VBCCIT debentures are direct and unsecured obligations
of the Company through the acquisition of GB Bancorporation and Vectra Banking
Corporation, and are subordinate to other indebtedness and general creditors of
the Company. ZICTA, GBCT, and VBCCIT debentures have the right, with the
approval of banking regulators, to early redemption in 2006, 2007, and 2002,
respectively. ZICTA and GBCT debentures require semiannual interest payments and
mature on December 15, 2026 and January 15, 2027, respectively. VBCCIT
debentures require quarterly interest payments and mature on April 30, 2027.
Floating-rate subordinated notes consist of $67 million callable in 2000 and
$110 million callable in 2003. These notes require quarterly interest payments.
Subordinated notes also include $50 million of 8.625 percent notes which are not
redeemable prior to maturity and require semiannual interest payments. All
subordinated notes are unsecured.
Interest expense on long-term debt was $29,051,000, $22,399,000, and $10,156,000
for the years ended December 31, 1998, 1997, and 1996, respectively.
58
59
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
11. LONG-TERM DEBT (continued)
Maturities and sinking fund requirements on long-term debt at December 31, 1998
for each of the succeeding five years are as follows (in thousands):
Consoli- Parent
dated only
---------- --------
1999 $ 609 --
2000 485 --
2001 424 --
2002 50,427 50,000
2003 437 --
Thereafter 401,353 177,000
-------- --------
$453,735 227,000
======== ========
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers, to
reduce its own exposure to fluctuations in interest rates, and to make a market
in U.S. government, agency, and municipal securities. These financial
instruments involve, to varying degrees, elements of credit, liquidity, and
interest rate risk in excess of the amount recognized in the balance sheets.
Contractual amounts of the off-balance sheet financial instruments used to meet
the financing needs of the Company's customers are as follows (in thousands):
1998 1997
---------- ---------
Commitments to extend credit $4,583,488 2,506,220
Standby letters of credit:
Performance 69,648 86,886
Financial 104,530 27,903
Commercial letters of credit 25,294 9,336
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing properties.
Establishing commitments to extend credit gives rise to credit risk. As of
December 31, 1998, a significant portion of the Company's commitments is
expected to expire without being drawn upon; commitments totaling $3,192,208,000
expire in 1999. As a result, the Company's actual future credit exposure or
liquidity requirements will be lower than the contractual amounts of the
commitments. The Company uses the same credit policies and procedures in making
commitments to extend credit and conditional obligations as it does for
on-balance sheet instruments. These policies and procedures include credit
approvals, limits, and monitoring.
59
60
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Standby and commercial letters of credit are conditional commitments issued by
the Company generally to guarantee the performance of a customer to a third
party. The guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. Standby letters of credit include commitments in the amount of
$145,395,000 expiring in 1999 and $28,783,000 expiring thereafter through 2012.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Company generally
holds marketable securities and cash equivalents as collateral supporting those
commitments for which collateral is deemed necessary.
Notional values of interest rate contracts are summarized as follows (in
thousands):
1998 1997
---------- -----------
Caps and floors - written $ 707,137 1,052,000
Swaps 1,364,584 701,331
Forwards 133,204 87,565
Options -- 3,000
The Company enters into interest rate cap, floor, exchange contract (swap),
forward, and option agreements as part of its overall asset and liability
duration and interest rate risk management strategy. These transactions enable
the Company to manage asset and liability durations, and transfer, modify, or
reduce its interest rate risk. With the exception of interest rate caps and
floors, these instruments are used to hedge asset and liability portfolios and,
therefore, are not marked to market. The notional amounts of the contracts are
used to express volume, but the amounts potentially subject to credit risk are
much smaller. Exposure to credit risk arises from the possibility of
nonperformance by counterparties to the interest rate contracts. The Company
controls this credit risk (except futures contracts and interest rate cap and
floor contracts written, for which credit risk is de minimus) through credit
approvals, limits, and monitoring procedures. As the Company generally enters
into transactions only with high-quality counterparties, no losses associated
with counterparty nonperformance on interest rate contracts have occurred.
Nevertheless, the related credit risk is considered and provided for in the
allowance for loan losses.
Interest rate caps and floors obligate one of the parties to the contract to
make payments to the other if an interest rate index exceeds a specified upper
"capped" level or if the index falls below a specified "floor" level. The
interest rate caps and floors to which the Company is a party at December 31,
1998, have remaining terms of three to twenty-three years.
Interest rate swaps generally involve the exchange of fixed and variable rate
interest payment obligations based on an underlying notional value, without the
exchange of the notional value. Entering into interest rate swap agreements
involves not only the risk of dealing with counterparties and their ability to
meet the terms of the contract but also the interest rate risk associated with
unmatched positions. Swaps to which the Company is a party at December 31, 1998,
have remaining terms ranging from one to six years.
Forwards are contracts for the delayed delivery of financial instruments in
which the seller agrees to deliver on a specified future date, a specified
instrument, at a specified price or yield. As of December 31, 1998, the
Company's forward contracts have remaining terms ranging from one to four
months. An option contract is an agreement that conveys to the purchaser the
right, but not the obligation, to buy or sell a quantity of a financial
instrument or commodity at a predetermined rate or price on a specified future
date.
60
61
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
As a market maker in U.S. government, agency, and municipal securities, the
Company enters into agreements to purchase and sell such securities. As of
December 31, 1998 and 1997, the Company had outstanding commitments to purchase
securities of $532,749,000 and $76,870,000, respectively, and outstanding
commitments to sell securities of $528,711,000 and $75,717,000, respectively.
These agreements at December 31, 1998, have remaining terms of one month or
less.
The contract or notional amount of financial instruments indicates a level of
activity associated with a particular class of financial instrument and is not a
reflection of the actual level of risk. As of December 31, 1998 and 1997, the
regulatory risk-weighted values assigned to all off-balance sheet financial
instruments described herein totaled $895,337,000 and $301,385,000,
respectively.
The Company has a total of $65.0 million available in lines of credit from two
separate institutions. At December 31, 1998, the Company had drawn $37.0 million
on these lines, with interest rates ranging from 5.52 percent to 5.93 percent.
There were no compensating balance arrangements on either of these lines of
credit.
At December 31, 1998, the Company was required to maintain a cash balance of
$69.5 million with the Federal Reserve Banks to meet minimum balance
requirements in accordance with Federal Reserve Board regulations.
The Company is a defendant in various legal proceedings arising in the normal
course of business. The Company does not believe that the outcome of any such
proceedings will have a material adverse effect on its consolidated financial
position, operations, or liquidity.
The Company has commitments for leasing premises and equipment under the terms
of noncancelable operating leases expiring from 1999 to 2031. Future aggregate
minimum rental payments under existing noncancelable leases at December 31, 1998
are as follows (in thousands):
Capital Operating
leases leases
--------- -----------
1999 $ 606 20,587
2000 521 17,973
2001 477 15,040
2002 479 13,574
2003 479 12,001
Thereafter 1,734 38,212
--------- -----------
$ 4,296 117,387
========= ===========
Future aggregate minimum rental payments have been reduced by noncancelable
subleases as follows: 1999, $532,646; 2000, $491,742; 2001, $387,747; 2002,
$301,368; 2003, $196,706; and thereafter $5,973,921. Aggregate rental expense on
operating leases amounted to $31,256,000, $16,879,000, and $7,499,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
61
62
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13. STOCK OPTIONS
The Company adopted a qualified stock option plan in 1981, under which stock
options may be granted to key employees; and a nonqualified plan under which
options may be granted to nonemployee directors. Under the qualified plan and
nonqualified plan, respectively, 3,244,000 and 400,000 shares of common stock
were reserved.
No compensation expense was recorded for the qualified and nonqualified option
plans, as the exercise price was equal to the quoted market price of the stock
at the time of grant. Options granted are generally exercisable in increments
from one to four years after the date of grant and expire six years after the
date of grant. Under the nonqualified plan, options expire five to ten years
from the date of grant. At December 31, 1998, there were 83,962 and 295,000
additional shares available for grant under the qualified and nonqualified plan,
respectively.
During 1998, the Company adopted a broad-based employee stock option plan in
substitution of an employee profit-sharing plan, which assets were comprised of
Company common stock. Substantially all participants of the employee
profit-sharing plan are eligible to participate in the employee stock option
plan. The Company bases participation in the employee stock option plan upon
employment for a full year prior to the option grant date with service of 20
hours a week or more. Stock options will be granted to eligible employees based
on an internal job grade structure. All options vest at a rate of one third each
year with expiration at four years after grant date. At December 31, 1998, there
were 300,000 options authorized with 163,908 options outstanding. The plan is
noncompensatory and results in no expense to the Company, as the exercise price
of the options is equal to the quoted market price of the stock at the option
grant date.
The per share weighted-average fair value of stock options granted during 1998,
1997, and 1996 was $7.22, $10.56, and $5.73, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1998 1997 1996
---------- --------- ---------
Expected dividend yield 1.39% 1.55% 2.26%
Risk-free interest rate 5.31% 6.52% 6.00%
Expected volatility 33.96% 22.17% 23.19%
Expected life 5.5 years 5.5 years 5.5 years
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
1998 1997 1996
--------- --------- ---------
Net income (in thousands):
As reported $ 130,062 119,859 104,692
Pro forma 128,192 118,619 104,187
Earnings per share:
As reported:
Basic $ 1.72 1.93 1.74
Diluted 1.70 1.91 1.72
Pro forma:
Basic 1.70 1.91 1.73
Diluted 1.68 1.89 1.71
62
63
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13. STOCK OPTIONS (continued)
Pro forma amounts reflect only stock-based compensation grants made after 1994.
The full impact of calculating compensation cost for stock options under
Statement No. 123 is not reflected in the pro forma amounts presented above
because compensation cost is reflected over the options' vesting period and
compensation cost of options granted prior to January 1, 1995 is not considered.
The following table is a summary of the Company's stock option activity and
related information for the three years ended December 31, 1998:
Weighted-
Number average
of exercise
shares price
----------- ----------
Balance at December 31, 1995 1,830,194 $ 8.49
Granted 396,700 18.27
Exercised (641,145) 6.39
Forfeited (74,312) 2.89
Expired (10,000) 6.03
---------
Balance at December 31, 1996 1,501,437 12.27
Acquired 184,991 12.54
Granted 581,182 28.87
Exercised (338,756) 9.03
Forfeited (47,767) 13.25
---------
Balance at December 31, 1997 1,881,087 17.98
Acquired 430,998 11.35
Granted 1,005,383 47.21
Exercised (577,734) 12.38
Forfeited (25,964) 32.82
---------
Balance at December 31, 1998 2,713,770 28.81
=========
Outstanding options exercisable as of:
December 31, 1998 1,116,087 14.90
December 31, 1997 589,899 10.83
December 31, 1996 480,434 7.19
Selected information on stock options as of December 31, 1998 follows:
Outstanding options Exercisable options
---------------------------------------- ----------------------------
Weighted-
Weighted- average
average remaining Weighted-
Exercise price Number of exercise contractual Number of average
range shares price life shares exercise price
-------------- --------- --------- ----------- --------- --------------
$2.38 to $3.81 104,509 $ 3.11 2.71 86,509 $ 3.14
$4.06 to $6.09 41,875 4.94 8.82 41,875 4.94
$6.42 to $9.63 132,780 7.91 4.45 132,780 7.91
$9.73 to $13.96 469,734 11.47 3.68 404,250 11.60
$14.73 to $18.98 376,281 17.90 4.49 202,205 17.68
$21.89 to $31.00 593,108 29.11 5.40 237,468 26.50
$39.13 to $43.50 231,408 42.42 4.33 -- --
$46.38 to $56.00 764,075 48.76 5.52 11,000 49.20
--------- ---------
2,713,770 $28.81 4.83 1,116,087 $ 14.90
========= =========
63
64
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
14. NET INCOME PER COMMON SHARE
Basic and diluted net income per common share, based on the weighted-average
outstanding shares, are summarized as follows (in thousands, except per share
amounts):
1998 1997 1996
-------- -------- --------
Basic:
Net income $130,062 119,859 104,692
Less preferred dividends 46 41 36
-------- -------- --------
Net income applicable to common stock $130,016 119,818 104,656
======== ======== ========
Average common shares outstanding 75,407 62,011 60,303
======== ======== ========
Net income per common share - basic $ 1.72 1.93 1.74
======== ======== ========
Diluted:
Net income applicable to common stock $130,016 119,818 104,656
======== ======== ========
Average common shares outstanding 75,407 62,011 60,303
Stock option adjustment 1,120 884 673
-------- -------- --------
Average common shares outstanding - 76,527 62,895 60,976
diluted
======== ======== ========
Net income per common share - diluted $ 1.70 1.91 1.72
======== ======== ========
15. SHAREHOLDER RIGHTS PROTECTION PLAN
The Company has in place a Shareholder Rights Protection Plan. The Shareholder
Rights Protection Plan contains provisions intended to protect shareholders in
the event of unsolicited offers or attempts to acquire the Company, including
offers that do not treat all shareholders equally, acquisitions in the open
market of shares constituting control without offering fair value to all
shareholders, and other coercive or unfair takeover tactics that could impair
the Board of Directors' ability to represent shareholders' interests fully. The
Shareholder Rights Protection Plan provides that attached to each share of
common stock is one right (a "Right") to purchase one one-hundredth of a share
of participating preferred stock for an exercise price of $90, subject to
adjustment.
The Rights have certain anti-takeover effects. The Rights may cause substantial
dilution to a person that attempts to acquire the Company without the approval
of the Board of Directors. The Rights, however, should not affect offers for all
outstanding shares of common stock at a fair price and, otherwise, in the best
interests of the Company and its shareholders as determined by the Board of
Directors. The Board of Directors may, at its option, redeem all, but not fewer
than all, of the then outstanding Rights at any time until the 10th business day
following a public announcement that a person or a group had acquired beneficial
ownership of 10 percent or more of the Company's outstanding common stock or
total voting power.
64
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ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
16. INCOME TAXES
Income taxes are summarized as follows (in thousands):
1998 1997 1996
-------- ------ ------
Federal:
Current $ 59,119 56,458 41,348
Deferred (4,196) (1,278) 5,192
State 9,755 7,531 7,147
-------- ------ ------
$ 64,678 62,711 53,687
======== ====== ======
A reconciliation between income tax expense computed using the statutory federal
income tax rate of 35 percent and actual income tax expense is as follows (in
thousands):
1998 1997 1996
-------- -------- --------
Income tax expense at statutory federal rate $ 68,306 63,900 55,433
State income taxes, net 6,341 4,895 4,645
Nondeductible expenses 8,643 2,738 1,611
Nontaxable interest (7,926) (5,871) (5,982)
Tax credits and other taxes (1,877) (1,826) (1,597)
Corporate reorganization (6,117) -- --
Decrease in valuation allowance (1,992) (761) --
Other items (700) (364) (423)
-------- -------- --------
Income tax expense $ 64,678 62,711 53,687
======== ======== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of December 31, 1998
and 1997, are presented below (in thousands):
1998 1997
-------- --------
Gross deferred tax assets:
Book loan loss deduction in excess of tax $ 75,913 32,087
Postretirement benefits 9,258 2,517
Deferred compensation 7,993 6,289
Deferred loan fees 5,059 1,233
Deferred agreements 3,046 3,427
Capital leases 3,268 --
Acquired net operating losses 3,536 4,730
Other real estate owned 4,890 463
Accrued severance costs 3,361 --
Other 15,133 9,623
-------- --------
Total deferred tax assets 131,457 60,369
Less valuation allowance -- 1,992
-------- --------
Total deferred tax assets net of valuation
allowance 131,457 58,377
65
66
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
16. INCOME TAXES (CONTINUED)
1998 1997
-------- --------
Gross deferred tax liabilities:
Premises and equipment, due to
differences in depreciation $ (7,568) (5,185)
Core deposits (23,719) (12,182)
FHLB stock dividends (18,100) (15,536)
Leasing operations (28,267) (21,396)
Prepaid pension reserves (1,405) (818)
Mortgage servicing (2,176) (1,513)
Other (6,281) (3,065)
-------- --------
Total deferred tax liabilities (87,516) (59,695)
-------- --------
Statement No. 115 market equity adjustment 2,745 (1,859)
-------- --------
Net deferred tax assets (liabilities) $ 46,686 (3,177)
======== ========
The Company has determined that it is not required to establish a valuation
reserve for the net deferred tax assets since it is "more likely than not" that
such net assets will be principally realized through future taxable income and
tax planning strategies. The Company's conclusion that it is "more likely than
not" that the net deferred tax assets will be realized is based on history of
growth in earnings and the prospects for continued growth and profitability.
The Company has net operating loss carryforwards totaling $15,726,000 that
expire yearly through the year 2010.
17. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the
Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the Company's capital ratios significantly exceeded the
minimum capital levels and is considered well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or events
that management believes have changed the Company's category.
66
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ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
17. REGULATORY MATTERS (continued)
The actual capital amounts and ratios of the Company and significant banking
subsidiaries are as follows (in thousands):
For capital adequacy
Actual purposes To be well capitalized
-------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1998:
Total capital (to
risk-weighted assets)
The Company $1,337,226 11.38% $ 939,917 8.00% $1,174,897 10.00%
Zions First National Bank 619,784 15.15 327,213 8.00 409,016 10.00
California Bank & Trust 461,981 10.43 354,427 8.00 443,034 10.00
Tier I capital (to risk-weighted
assets)
The Company 980,087 8.34 469,959 4.00 704,938 6.00
Zions First National Bank 369,900 9.04 163,607 4.00 245,410 6.00
California Bank & Trust 297,294 6.71 177,213 4.00 265,820 6.00
Tier I capital (to average assets)
The Company 980,087 5.86 501,393 3.00 835,654 5.00
Zions First National Bank 369,900 5.56 199,729 3.00 332,881 5.00
California Bank & Trust 297,294 5.14 173,527 3.00 289,212 5.00
For capital adequacy
Actual purposes To be well capitalized
-------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Total capital (to risk-
weighted assets)
The Company $813,783 14.11% $461,298 8.00% $576,623 10.00%
Zions First National Bank 604,517 18.22 205,459 8.00 331,824 10.00
Tier I capital (to risk-
weighted assets)
The Company 701,572 12.17 230,649 4.00 345,974 6.00
Zions First National Bank 362,988 10.94 132,730 4.00 199,094 6.00
Tier I capital (to
average assets)
The Company 701,572 6.96 302,466 3.00 504,110 5.00
Zions First National Bank 362,988 5.66 192,429 3.00 320,715 5.00
Dividends declared by the Company's national banking subsidiaries in any
calendar year may not, without the approval of the appropriate federal
regulator, exceed their net earnings for that year combined with their net
earnings less dividends paid for the preceding two years. At December 31, 1998,
the Company's subsidiaries had approximately $32.4 million available for the
payment of dividends under the foregoing restrictions.
67
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ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
18. RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan for eligible
employees. Plan benefits are based on years of service and employees'
compensation levels. Benefits vest under the plan upon completion of five years
of service. Plan assets consist principally of corporate equity and debt
securities and cash investments.
Effective January 1, 1997, the plan was amended such that plan benefits are now
defined as a lump-sum cash value or an annuity at age 65. The 1997 income from
curtailment resulted from the merger of Grossmont Bank plan participants into
the Company's plan at December 31, 1997.
On January 1, 1998, the Company adopted the provisions of Statement No. 132.
Statement No. 132 revises employer's disclosures about pension and other
postretirement benefit plans. Statement No. 132 does not change the method of
accounting for such plans.
The following table presents the change in the plan's benefit obligation for the
years ended December 31, 1998 and 1997, as follows (in thousands):
1998 1997
--------- ---------
Benefit obligation at beginning of year $ 66,267 55,709
Service cost 5,587 3,042
Interest cost 5,192 4,066
Acquisitions 41,626 6,337
Curtailments -- --
Actuarial gain (5,536) (27)
Benefits paid (4,163) (2,860)
--------- ---------
Benefit obligation at end of year $ 108,973 66,267
========= =========
Plan assets included 86,760 shares of Company common stock as of December 31,
1998 and 1997. The following table presents the change in plan assets for the
years ended December 31, 1998 and 1997, as follows (in thousands):
1998 1997
--------- ---------
Fair value of plan assets at beginning of year $ 72,966 54,173
Actual return on plan assets 10,534 14,727
Acquisitions 27,831 6,786
Employer contributions 77 140
Benefits paid (4,163) (2,860)
--------- ---------
Fair value of plan assets at end of year $ 107,245 72,966
========= =========
The following table presents the plan's funded status reconciled with amounts
recognized in the Company's consolidated balance sheets at December 31, 1998 and
1997, as follows (in thousands):
1998 1997
-------- --------
Funded status $(1,728) 6,699
Unrecognized net actuarial loss 2,372 3,309
Unrecognized net transition asset (431) (1,056)
Unrecognized prior service cost (3,031) (3,416)
------- -------
Net prepaid cost (accrued liability) $(2,818) 5,536
======= =======
68
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ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
18. RETIREMENT PLANS (continued)
The ending net accrued liability and net prepaid benefit cost at December 31,
1998 and 1997, respectively, is fully recognized in the Company's respective
consolidated balance sheets.
Net periodic benefit cost recognized for the years ended December 31, 1998,
1997, and 1996, includes the following components (in thousands):
1998 1997 1996
------- ------- -------
Service cost $ 5,587 3,042 3,311
Interest cost 5,192 4,066 3,791
Expected return on plan assets (6,851) (5,076) (4,270)
Amortization of prior service cost (385) (384) (83)
Amortization of transitional asset (625) (625) (625)
Recognized actuarial loss 39 260 838
------- ------- -------
Net periodic benefit cost recognized $ 2,957 1,283 2,962
======= ======= =======
The weighted average discount rate used in determining the pension benefit
obligation was 6.75% and 7.00% in 1998 and 1997, respectively. The rate of
compensation increase and the expected long-term rate of return were 5.00% and
9.00%, respectively, for both 1998 and 1997. Any net transition asset or
obligation and any unrecognized prior service cost are being amortized on a
straight-line basis. Unrecognized gains and losses are amortized using the
minimum recognition method described in paragraph 32 of Statement of Financial
Accounting Standards No. 87.
The Company also sponsors three unfunded, nonqualified supplemental executive
retirement plans, which restore pension benefits limited by federal tax law. At
December 31, 1998 and 1997, the Company's liability included in accrued expenses
totaled $5.4 million and $2.7 million, respectively.
In addition to the Company's defined benefit pension plan, the Company sponsors
a defined benefit health care plan that provides postretirement medical benefits
to full-time employees hired before January 1, 1993, who meet minimum age and
service requirements. The plan is contributory, with retiree contributions
adjusted annually, and contains other cost-sharing features such as deductibles
and coinsurance. Plan coverage is provided by self-funding or health maintenance
organizations (HMOs) options. Reductions in the Company's obligations to provide
benefits resulting from cost sharing changes have been applied to reduce the
plan's unrecognized transition obligation. The Company's retiree premium
contribution rate is frozen at 50 percent of 1996 dollar amounts. The Company's
policy is to fund the cost of medical benefits in amounts determined at the
discretion of management.
The following table presents the change in the plan's benefit obligation for the
years ended December 31, 1998 and 1997, as follows (in thousands):
1998 1997
------- -------
Benefit obligation at beginning of year $ 3,817 3,747
Service cost 114 111
Interest cost 230 270
Actuarial gain (434) --
Benefits paid 254 311
------- -------
Benefit obligation at end of year $ 3,473 3,817
======= =======
69
70
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
18. RETIREMENT PLANS (continued)
The following table presents the plan's funded status reconciled with amounts
recognized in the Company's consolidated balance sheets at December 31, 1998 and
1997, as follows (in thousands):
1998 1997
------- -------
Benefit obligation at end of year $ 3,473 3,817
Unrecognized net actuarial gain (1,821) (1,947)
------- -------
Accrued benefit cost $ 5,294 5,764
======= =======
Net periodic benefit cost recognized for the years ended December 31, 1998,
1997, and 1996, includes the following components (in thousands):
1998 1997 1996
----- ----- -----
Service cost $ 114 111 195
Interest cost 230 270 414
Recognized net gain (515) (487) --
----- ----- -----
Net periodic benefit cost $(171) (106) 609
===== ===== =====
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0 percent at December 31, 1998 and 7.5
percent at December 31, 1997.
The actuarial assumed health care cost trend rate is 7.0 percent for 1999,
decreasing to an ultimate level of 5 percent for the years 2003 and thereafter.
The effect of a one-percentage point increase and decrease in the assumed health
care cost trend rate at December 31, 1998 would be a $352,000 increase and a
$341,000 decrease, respectively, to the aggregate service and interest cost
components of the net periodic postretirement health care benefit cost and a
$3,503,000 increase and a $3,444,000 decrease, respectively, to the accumulated
postretirement benefit obligation for health care benefits.
The Company has an Employee Stock Savings Plan and an Employee Investment
Savings Plan (PAYSHELTER). Under PAYSHELTER, employees select from a
nontax-deferred or tax-deferred plan and several investment alternatives.
Employees can contribute from 1 to 15 percent of compensation, which is matched
up to 50 percent by the Company for contributions up to 5 percent and 25 percent
for contributions greater than 5 percent up to 10 percent. The Company's
contributions to the plans amounted to $3,546,930, $2,209,353, and $1,781,825
for the years ended December 31, 1998, 1997, and 1996, respectively.
70
71
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying value and estimated fair value of principal financial instruments are
summarized as follows (in thousands):
December 31, 1998 December 31, 1997
------------------------------- -------------------------------
Carrying Estimated fair Carrying Estimated
value value value fair value
------------ -------------- ------------ ------------
Financial assets:
Cash and due from banks $ 864,446 864,446 643,493 643,493
Money market investments 612,205 612,205 853,503 853,503
Investment securities 3,681,090 3,697,971 2,799,102 2,818,172
Loans, net 10,430,823 10,662,279 4,939,702 4,981,933
------------ ------------ ------------ ------------
Total financial assets $ 15,588,564 15,836,901 9,235,800 9,297,101
============ ============ ============ ============
Financial liabilities:
Demand, savings, and money market deposits $ 9,247,992 9,247,992 5,453,323 5,453,323
Time deposits 3,868,927 3,898,832 1,453,866 1,450,692
Foreign deposits 204,244 205,812 183,044 183,156
Securities sold, not yet purchased 29,702 29,702 45,067 45,067
Federal funds purchased and security
repurchase agreements 1,269,843 1,269,843 1,307,441 1,307,441
FHLB advances and other borrowings 206,763 209,797 270,564 278,375
Long-term debt 453,735 460,104 258,566 268,181
------------ ------------ ------------ ------------
Total financial liabilities $ 15,281,206 15,322,082 8,971,871 8,986,235
============ ============ ============ ============
Off-balance sheet instruments:
Caps and floors:
Written $ (3,123) (3,123) (1,099) (1,099)
Purchased -- -- -- --
Swaps -- 7,103 -- 4,642
Forwards -- (331) -- (442)
------------ ------------ ------------ ------------
Total off-balance sheet instruments $ (3,123) 3,649 (1,099) 3,101
============ ============ ============ ============
Financial assets and financial liabilities other than investment securities of
the Company are not traded in active markets. The above estimates of fair value
require subjective judgments and are approximate. Changes in the following
methodologies and assumptions could significantly affect the estimates.
Financial Assets - The estimated fair value approximates the carrying value of
cash and due from banks and money market investments. For securities, the fair
value is based on quoted market prices where available. If quoted market prices
are not available, fair values are based on quoted market prices of comparable
instruments or a discounted cash flow model based on established market rates.
The fair value of fixed-rate loans is estimated by discounting future cash flows
using the London Interbank Offered Rate (LIBOR) yield curve adjusted by a factor
which reflects the credit and interest rate risk inherent in the loan.
Variable-rate loans reprice with changes in market rates. As such their carrying
amounts are deemed to approximate fair value. The fair value of the allowance
for loan losses of $205,553,000 and $82,849,000 at December 31, 1998 and 1997,
respectively, is the present value of estimated net charge-offs.
71
72
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
19. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Financial Liabilities - The estimated fair value of demand and savings deposits,
securities sold not yet purchased, and federal funds purchased and security
repurchase agreements approximates the carrying value. The fair value of time
and foreign deposits is estimated by discounting future cash flows using
generally the LIBOR yield curve. Substantially all FHLB advances reprice with
changes in market interest rates or have short terms to maturity. The carrying
value of such indebtedness is deemed to approximate market value. Other
borrowings are not significant. The estimated fair value of the subordinated
notes is based on a quoted market price. The remaining long-term debt is not
significant.
Off-Balance Sheet Financial Instruments - The fair value of the caps, floors,
and swaps reflects the estimated amounts that the Company would receive or pay
to terminate the contracts at the reporting date based upon pricing or valuation
models applied to current market information, thereby taking into account the
current unrealized gains or losses of open contracts. The carrying amounts
include unamortized fees paid or received and deferred gains or losses.
The fair value of commitments to extend credit and letters of credit, based on
fees currently charged for similar commitments, is not significant.
20. OPERATING SEGMENT INFORMATION
As of December 31, 1998, the Company adopted Statement No. 131, Financial
Reporting for Segments of a Business Enterprise. This statement requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. According to the statement, operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
The Company evaluates segment performance internally based on geography, and
thus the operating segments are so defined. All segments, except for the segment
defined as "other," are based on commercial banking operations. 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 operating segments are the same as
those of the Company described in note 1. Transactions between operating
segments are primarily conducted at fair value, resulting in profits that are
eliminated for reporting consolidated results of operations. Expenses for
centrally provided services are allocated based on the estimated usage of those
services.
72
73
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
20. OPERATING SEGMENT INFORMATION (continued)
The following is a summary of selected operating segment information for the
years ended December 31, 1998, 1997, and 1996 (in thousands):
Zions
First Nevada
National California Vectra National State
Bank and Bank & Bank Bank of Bank and
Subsidiaries Trust Colorado Arizona Subsidiary
------------ ---------- ---------- ---------- ----------
1998:
Net interest income $ 222,044 112,726 73,447 70,687 50,397
Provision for loan losses 23,000 (18,717) 4,588 1,800 1,560
---------- ---------- ---------- --------- ---------
Net interest income after
provision for loan losses 199,044 131,443 68,859 68,887 48,837
Noninterest income 142,654 14,284 14,844 9,312 15,047
Merger expense and
amortization of
goodwill and core
deposit intangibles 2,717 37,363 17,076 1,867 1,490
Other noninterest expense 216,405 78,596 57,310 40,131 41,854
---------- ---------- ---------- --------- ---------
Income before income
taxes and minority
interest 122,576 29,768 9,317 36,201 20,540
Income taxes 35,477 13,360 5,745 14,013 6,881
Minority interest -- -- -- -- --
---------- ---------- ---------- --------- ---------
Net income $ 87,099 16,408 3,572 22,188 13,659
========== ========== ========== ========= =========
Assets $6,047,071 6,183,044 2,151,029 1,451,866 1,120,703
Net loans and leases 3,509,319 4,180,999 1,216,359 1,012,038 550,570
Deposits 3,933,823 5,348,694 1,688,719 1,225,796 929,370
Shareholders' equity 383,350 606,195 388,506 116,262 84,976
1997:
Net interest income $ 206,009 11,727 12,980 61,577 37,076
Provision for loan losses -- 615 (70) 2,400 1,560
---------- ---------- ---------- --------- ---------
Net interest income after
provision for loan losses 206,009 11,112 13,050 59,177 35,516
Noninterest income 113,756 1,775 1,668 6,272 11,884
Merger expense and
amortization of
goodwill and core
deposit intangibles 1,270 1,511 1,556 1,568 450
Other noninterest expense 184,772 5,300 8,928 34,168 31,400
---------- ---------- ---------- --------- ---------
Income before income taxes 133,723 6,076 4,234 29,713 15,550
Income taxes 45,273 2,756 2,046 11,896 4,863
---------- ---------- ---------- --------- ---------
Net income $ 88,450 3,320 2,188 17,817 10,687
========== ========== ========== ========= =========
Assets $5,899,333 976,930 501,197 1,351,876 988,010
Net loans and leases 2,780,986 493,936 304,270 797,620 488,659
Deposits 3,665,705 776,177 395,341 1,191,774 833,644
Shareholders' equity 426,660 184,525 97,070 105,099 86,170
1996:
Net interest income $ 187,900 -- -- 50,485 25,694
Provision for loan losses -- -- -- 2,300 1,240
---------- ---------- ---------- --------- ---------
Net interest income after
provision for loan losses 187,900 -- -- 48,185 24,454
Noninterest income 93,737 -- -- 3,575 8,807
Merger expense and
amortization of
goodwill and core
deposit intangibles 502 -- -- 1,096 103
Other noninterest expense 156,535 -- -- 26,284 22,813
---------- ---------- ---------- --------- ---------
Income before income taxes 124,600 -- -- 24,380 10,345
Income taxes 41,460 -- -- 9,715 3,094
---------- ---------- ---------- --------- ---------
Net income $ 83,140 -- -- 14,665 7,251
========== ========== ========== ========= =========
Assets $4,862,570 -- -- 1,023,915 570,927
Net loans and leases 2,476,218 -- -- 704,432 268,333
Deposits 3,167,894 -- -- 900,432 500,498
Shareholders' equity 374,432 -- -- 109,304 46,703
73
74
The
Commerce Consoli-
Bank of dated
Washington Other Company
---------- -------- ----------
1998:
Net interest income 13,939 (9,420) 533,820
Provision for loan losses 78 (400) 11,909
-------- -------- ----------
Net interest income after
provision for loan losses 13,861 (9,020) 521,911
Noninterest income 1,702 2,103 199,946
Merger expense and
amortization of
goodwill and core
deposit intangibles 7,702 1,554 69,769
Other noninterest expense 7,453 15,179 456,928
-------- -------- ----------
Income before income
taxes and minority
interest 408 (23,650) 195,160
Income taxes 346 (11,144) 64,678
Minority interest -- 420 420
-------- -------- ----------
Net income 62 (12,926) 130,062
======== ======== ==========
Assets 337,351 (270,833) 17,020,231
Net loans and leases 154,892 12,199 10,636,376
Deposits 221,403 (26,642) 13,321,163
Shareholders' equity 23,159 (217,371) 1,385,077
1997:
Net interest income 12,596 (6,291) 335,674
Provision for loan losses 300 (175) 4,630
-------- -------- ----------
Net interest income after
provision for loan losses 12,296 (6,116) 331,044
Noninterest income 1,303 4,066 140,724
Merger expense and
amortization of
goodwill and core
deposit intangibles -- 1,422 7,777
Other noninterest expense 7,059 9,794 281,421
-------- -------- ----------
Income before income taxes 6,540 (13,266) 182,570
Income taxes 2,082 (6,205) 62,711
-------- -------- ----------
Net income 4,458 (7,061) 119,859
======== ======== ==========
Assets 298,478 (72,377) 9,943,447
Net loans and leases 153,765 3,315 5,022,551
Deposits 235,771 (8,179) 7,090,233
Shareholders' equity 23,890 (120,865) 802,549
1996:
Net interest income 10,106 (3,606) 270,579
Provision for loan losses 270 -- 3,810
-------- -------- ----------
Net interest income after
provision for loan losses 9,836 (3,606) 266,769
Noninterest income 1,233 4,772 112,124
Merger expense and
amortization of
goodwill and core
deposit intangibles -- 599 2,300
Other noninterest expense 6,182 6,400 218,214
-------- -------- ----------
Income before income taxes 4,887 (5,833) 158,379
Income taxes 1,545 (2,127) 53,687
-------- -------- ----------
Net income 3,342 (3,706) 104,692
======== ======== ==========
Assets 237,517 27,552 6,722,481
Net loans and leases 132,102 3,560 3,584,645
Deposits 185,740 (16,807) 4,737,757
Shareholders' equity 20,300 (22,987) 527,752
74
75
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial information by quarter for the three years ended December 31, 1998, is
as follows (in thousands, except per share amounts):
Income
before Diluted
income net
taxes income
Gross Net Non- Provision Non- and per
interest interest interest for loan interest minority Net common
income income income losses expense interest income share
--------- --------- -------- --------- --------- --------- -------- ----------
1998:
First quarter $ 205,893 110,179 44,039 3,285 99,846 51,087 35,030 0.48
Second quarter 217,651 120,495 47,752 3,264 119,696 45,287 30,900 0.41
Third quarter 233,348 129,580 49,607 2,485 118,473 58,229 37,311 0.47
Fourth quarter 307,090 173,566 58,548 2,875 188,682 40,557 26,821 0.34
----------- ------- ------- ----- ------- ------- -------
$ 963,982 533,820 199,946 11,909 526,697 195,160 130,062 1.70
=========== ======= ======= ===== ======= ======= =======
1997:
First quarter $ 141,253 70,453 32,043 1,065 59,369 42,062 27,619 0.45
Second quarter 160,353 79,158 32,383 895 65,801 44,845 29,057 0.47
Third quarter 168,497 85,015 36,829 1,170 73,915 46,759 30,700 0.49
Fourth quarter 191,266 101,048 39,469 1,500 90,113 48,904 32,483 0.47
----------- ------- ------- ----- ------- ------- -------
$ 661,369 335,674 140,724 4,630 289,198 182,570 119,859 1.91
=========== ======= ======= ===== ======= ======= =======
75
76
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
22. RESTATEMENT
As a result of a recent interpretation by the Securities and Exchange Commission
Staff regarding the treatment of share repurchases under Staff Accounting
Bulletin 96, the Company has decided to restate the presentation of 8 of 13
business combinations, consummated during 1998 and 1997, as purchases rather
than as poolings of interests as previously reported.
As a result of the foregoing, the Company's 1996, 1997, and 1998 consolidated
financial statements have been restated from amounts previously reported. The
principal effects of the restatement on the accompanying consolidated financial
statements are set forth below:
(In thousands, except per share amounts) Condensed
Consolidated Balance Sheets
-----------------------------------------------
As of December 31,
1998 1997
---------------------- -----------------------
As previ- As previ-
ously ously
ASSETS As restated reported As restated reported
------------- ---------- ----------- ----------
Cash and due from banks $ 864,446 864,446 643,493 710,171
Money market investments 612,205 612,205 853,503 853,518
Investment securities 3,681,090 3,680,339 2,799,102 3,090,509
Loans, net 10,430,823 10,427,939 4,939,702 5,577,331
Premises and equipment, net 231,847 231,066 137,030 155,648
Goodwill and core deposit intangibles 663,606 271,578 294,925 174,433
Other real estate owned 5,270 5,270 3,371 5,738
Other assets 530,944 556,078 272,321 301,856
------------- ---------- --------- ----------
$ 17,020,231 16,648,921 9,943,447 10,869,204
============= ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 13,321,163 13,321,163 7,090,233 7,956,234
Securities sold, not yet purchased 29,702 29,702 45,067 45,067
Federal funds purchased 337,283 337,283 294,109 350,109
Security repurchase agreements 932,560 932,560 1,013,332 1,042,156
Accrued liabilities 319,278 319,278 169,027 173,331
Commercial paper 49,217 49,217 -- --
Federal Home Loan Bank advances and other borrowings 157,546 157,546 270,564 279,614
Long-term debt 453,735 453,735 258,566 280,641
------------- ---------- --------- ----------
Total liabilities 15,600,484 15,600,484 9,140,898 10,127,152
------------- ---------- --------- ----------
Minority interest 34,670 34,781 -- --
Shareholders' equity:
Common stock 752,845 324,099 270,359 190,039
Accumulated other comprehensive income (loss) (4,432) (4,280) 3,077 1,902
Retained earnings 636,664 693,837 529,113 550,111
------------- ---------- --------- ----------
Total stockholders' equity 1,385,077 1,013,656 802,549 742,052
------------- ---------- --------- ----------
$ 17,020,231 16,648,921 9,943,447 10,869,204
============= ========== ========= ==========
76
77
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
22. RESTATEMENT (continued)
(In thousands, except per share amounts) Condensed
Consolidated Statements of Income
-----------------------------------------------------------------------------
Years ended December 31,
1998 1997 1996
--------------------- ----------------------- ---------------------
As As As
As previously As previously As previously
restated reported restated reported restated reported
-------- -------- -------- -------- -------- --------
Interest income $963,982 976,044 661,369 779,531 494,507 594,740
Interest expense 430,162 432,281 325,695 367,000 223,928 257,015
-------- -------- -------- -------- -------- --------
Net interest income 533,820 543,763 335,674 412,531 270,579 337,725
Provision for loan losses 11,909 12,179 4,630 7,758 3,810 6,526
-------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 521,911 531,584 331,044 404,773 266,769 331,199
Noninterest income 199,946 200,713 140,724 146,374 112,124 122,007
Noninterest expense 526,697 514,057 289,198 344,629 220,514 273,124
-------- -------- -------- -------- -------- --------
Income before income taxes and
minority interest 195,160 218,240 182,570 206,518 158,379 180,082
Income taxes 64,678 70,862 62,711 72,218 53,687 59,664
-------- -------- -------- -------- -------- --------
Net income before minority interest 130,482 147,378 119,859 134,300 104,692 120,418
Minority interest 420 531 -- -- -- --
-------- -------- -------- -------- -------- --------
Net income $130,062 146,847 119,859 134,300 104,692 120,418
======== ======== ======== ======== ======== ========
Net income per common share:
Basic $ 1.72 1.93 1.93 1.88 1.74 1.69
Diluted $ 1.70 1.91 1.91 1.84 1.72 1.66
77
78
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ZIONS BANCORPORATION
Condensed Balance Sheets
December 31, 1998 and 1997
(In thousands)
23. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Zions Bancorporation (parent only) follows:
1998 1997
----------- -----------
ASSETS
Cash and due from banks $ 155 1,370
Interest-bearing deposits 19,637 2,241
Investment securities 9,950 10,494
Loans and lease financing receivables 14,797 1,680
Loans and advances to subsidiaries:
Commercial banks and bank holding company 110,000 --
Other 2,865 2,945
Investments in subsidiaries:
Commercial banks and bank holding company 1,567,946 933,756
Other 25,711 5,828
Other assets 32,737 19,170
----------- -----------
$ 1,783,798 977,484
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities $ 36,731 23,203
Commercial paper and other short-term borrowings 111,217 44,000
Borrowings over one year -- 50,000
Subordinated debt to subsidiaries 23,773 7,732
Long-term debt 227,000 50,000
----------- -----------
Total liabilities 398,721 174,935
----------- -----------
Shareholders' equity:
Common stock 752,845 270,359
Accumulated other comprehensive income (loss) (4,432) 3,077
Retained earnings 636,664 529,113
----------- -----------
Total shareholders' equity 1,385,077 802,549
----------- -----------
$ 1,783,798 977,484
=========== ===========
78
79
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ZIONS BANCORPORATION
Condensed Statements of Income
Years ended December 31, 1998, 1997, and 1996
(In thousands)
23. PARENT COMPANY FINANCIAL INFORMATION (continued)
1998 1997 1996
--------- --------- ---------
Interest income - interest and fees on loans and securities $ 7,023 932 890
Interest expense - interest on borrowed funds 17,307 6,674 4,769
--------- --------- ---------
Net interest loss (10,284) (5,742) (3,879)
Provision for loan losses -- -- --
Net interest income after provision for loan losses (10,284) (5,742) (3,879)
--------- --------- ---------
Other income:
Dividends from consolidated subsidiaries:
Commercial banks and bank holding company 210,890 98,234 44,970
Other 1,430 500 1,000
Other income 7,064 5,381 3,990
--------- --------- ---------
Total other income 219,384 104,115 49,960
--------- --------- ---------
Expenses:
Salaries and employee benefits 5,449 7,768 6,472
Other operating expenses 8,367 4,041 1,754
--------- --------- ---------
Total expenses 13,816 11,809 8,226
--------- --------- ---------
Income before income tax benefit and undistributed income of subsidiaries 195,284 86,564 37,855
Income tax benefit 8,254 5,654 (2,762)
--------- --------- ---------
Income before equity in undistributed income of consolidated subsidiaries 203,538 92,218 40,617
--------- --------- ---------
Equity in undistributed income (losses) of subsidiaries:
Commercial banks and bank holding company (68,704) 27,992 63,449
Other (4,772) (351) 626
--------- --------- ---------
(73,476) 27,641 64,075
--------- --------- ---------
Net income $ 130,062 119,859 104,692
========= ========= =========
79
80
ZIONS BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ZIONS BANCORPORATION
Condensed Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(In thousands)
23. PARENT COMPANY FINANCIAL INFORMATION (continued)
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income $ 130,062 119,859 104,692
Adjustments to reconcile net income to net cash provided by
operating activities:
Undistributed net (income) losses of consolidated subsidiaries 73,476 (27,641) (64,075)
Depreciation of premises and equipment 160 161 440
Amortization of intangibles 644 644 599
Other 16,304 (7,530) 9,992
--------- --------- ---------
Net cash provided by operating activities 220,646 85,493 51,648
--------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits (17,396) 1,287 12,975
Collection of advances to subsidiaries 8,054 1,911 986
Advances to subsidiaries (118,261) (4,226) (1,745)
Increase of investment in subsidiaries (335,340) (31,430) (30)
Purchases of other assets -- -- (12,000)
Other (18,344) (1,354) (961)
--------- --------- ---------
Net cash used in investing activities (481,287) (33,812) (775)
--------- --------- ---------
Cash flows from financing activities:
Net change in commercial paper and other borrowings
under one year 38,167 44,000 --
Proceeds from borrowings over one year -- 50,000 --
Payments on borrowings over one year (25,000) -- --
Proceeds from issuance of long-term debt 177,267 232 --
Payments on long-term debt (2,000) (5) (4,715)
Proceeds from issuance of common stock 139,333 3,754 2,965
Payments to redeem common and preferred stock (26,741) (121,389) (25,148)
Dividends paid (41,600) (28,999) (24,997)
--------- --------- ---------
Net cash provided by (used in) financing activities 259,426 (52,407) (51,895)
--------- --------- ---------
Net decrease in cash and due from banks (1,215) (726) (1,022)
Cash and due from banks at beginning of year 1,370 2,096 3,118
--------- --------- ---------
Cash and due from banks at end of year $ 155 1,370 2,096
========= ========= =========
The parent company paid interest of $16,427,000, $8,287,000, and $5,856,000 for
the years ended December 31, 1998, 1997, and 1996, respectively.
80