-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NYUOmfX8uVZ/kWGc0MhL5JNHT3CKTfJoilyF1oVBtyl6LPX8AcCGilGWPU2r7J10 uMRrd6+lv2Erzc1eJOYyMw== 0000109380-99-000004.txt : 19990331 0000109380-99-000004.hdr.sgml : 19990331 ACCESSION NUMBER: 0000109380-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZIONS BANCORPORATION /UT/ CENTRAL INDEX KEY: 0000109380 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 870227400 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-02610 FILM NUMBER: 99579213 BUSINESS ADDRESS: STREET 1: ONE SOUTH MAIN STREET STREET 2: SUITE 1380 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 BUSINESS PHONE: 8015244787 MAIL ADDRESS: STREET 1: ONE SOUTH MAIN STREET STREET 2: SUITE 1380 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 FORMER COMPANY: FORMER CONFORMED NAME: ZIONS UTAH BANCORPORATION DATE OF NAME CHANGE: 19870615 FORMER COMPANY: FORMER CONFORMED NAME: ZIONS FIRST NATIONAL INVESTMENT CO DATE OF NAME CHANGE: 19660921 10-K 1 ZIONS BANCORPORATION 1998 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ COMMISSION FILE NUMBER 0-2610 ZIONS BANCORPORATION (Exact name of Registrant as specified in its charter) UTAH 87-0227400 - --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) ONE SOUTH MAIN, SUITE 1380 SALT LAKE CITY, UTAH 84111 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 524-4787 Securities registered pursuant to Section 12(b) of the act: None Securities registered pursuant to Section 12(g) of the act: Common Stock - without par value - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ Aggregate Market Value of Common Stock Held by Nonaffiliates at February 26, 1999 ................................................$4,362,248,000 Number of Common Shares Outstanding at February 26, 1999 ......78,752,711 Shares Documents Incorporated by Reference: Portions of 1998 Annual Report to Shareholders - Incorporated into Parts I, II and IV Portions of Proxy Statement for the 1999 Annual Meeting of Shareholders - Incorporated into Part III FORM 10-K CROSS-REFERENCE INDEX
Page ----------------------------------------------- Form Annual Proxy 10-K Report (1) Statement (2) ------ ------------------- ------------- PART I Item 1. Business Description of Business ........................... 2-6 2-73 -- Statistical Disclosure: Distribution of Assets, Liabilities and Stockholder's Equity; Interest Rates and Interest Differential ....... -- 23, 26-28 -- Investment Portfolio ..................... -- 31-32, 51, 57-58 -- Loan Portfolio ........................... -- 33-37, 51-52, 58-59 -- Summary of Loan Loss Experience .......... -- 37-39, 52, 58 -- Deposits ................................. -- 26-27, 34, 59 -- Return on Equity and Assets .............. -- *, 20 -- Short-Term Borrowings .................... -- 60 -- Item 2. Properties ................................................. 6 -- -- Item 3. Legal Proceedings .......................................... -- 62-63 -- Item 4. Submission of Matters to a Vote of Security- Holders (in fourth quarter 1998) (3) .............. -- -- -- Executive Officers of the Registrant ....................... 6-7 -- -- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................... 7 * -- Item 6. Selected Financial Data .................................... -- *, 44 -- Item 7. Management's Discussion and Analysis of Finan- cial Condition and Results of Operations .......... -- 20-44 -- Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................... -- 40-42 -- Item 8. Financial Statements and Supplementary Data ................ -- 45-73 -- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure (3) ........ -- -- -- PART III Item 10. Directors and Executive Officers of the Registrant ........................................ -- -- 2-3, 5-6 Item 11. Executive Compensation ..................................... -- -- 4, 8-11 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................. -- -- 6-7 Item 13. Certain Relationships and Related Transactions ............. -- -- 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................... 8-11 45-73 -- Signatures .......................................................... 12 -- -- - ---------------------------------------------------------------------
(1) The 1998 Annual Report to Shareholders, portions of which are incorporated by reference into this Form 10-K. (2) The Proxy Statement dated March 24, 1999 for the Annual Meeting of Shareholders, portions of which are incorporated by reference into this Form 10-K. (3) None. * Financial Highlights - inside front cover of 1998 Annual Report to Shareholders 1 BUSINESS Description of Business Zions Bancorporation is a multibank holding company organized under the laws of Utah in 1955, and registered under the Bank Holding Company Act of 1956, as amended. Zions Bancorporation and Subsidiaries (the Company) owns and operates six commercial banks with a total of 333 offices. The Company provides a full range of banking and related services through its banking and other subsidiaries, primarily in Utah, Idaho, California, Colorado, Arizona, Nevada and Washington. On December 31, 1998 the Company had total assets of approximately $16.6 billion, loans of $10.6 billion, deposits of $13.3 billion and shareholders' equity of $1.0 billion. Active full-time equivalent employees totaled 6,793 at year-end 1998. For further information about the Company's industry segments see the Business Segment Results section of the 1998 Annual Report to Shareholders. Growth In 1998, the Company experienced unprecedented merger activity with the completion of 12 bank acquisitions in 3 states. The most significant acquisition during the year was the purchase of The Sumitomo Bank of California with total assets of approximately $4.5 billion. The Sumitomo Bank of California and First Pacific National Bank, also acquired during 1998, were merged with the Company's Grossmont Bank subsidiary which was renamed California Bank & Trust. The resulting bank is the sixth largest commercial banking organization in California with approximately $6 billion in total assets and 71 offices throughout the state. The Company also significantly expanded its operations in Colorado building on the acquisition of Aspen Bancshares in 1997. Acquisitions in Colorado during 1998 included Vectra Banking Corporation located in Denver and eight small banks which expanded the Company's operations into the Colorado Springs area, Steamboat Springs and the San Luis Valley in Southern Colorado. Another acquisition completed during 1998 was The Commerce Bank of Washington with total assets of approximately $300 million. The Commerce Bank of Washington is based in Seattle and focuses on serving the needs of small and medium-sized businesses in the Puget Sound area. For further information about merger activities during the year see the 1998 Annual Report to Shareholders. Products and Services The Company focuses on maintaining community-minded banking by strengthening its core business lines of retail banking, small and medium-sized business lending, residential mortgage and investment activities. The banks provide a variety of commercial and retail banking and mortgage-lending financial services. Commercial loans, lease financing, cash management, lockbox, customized draft processing, and other special financial services are provided for business and other commercial banking customers. A wide range of personal banking services are provided to individuals, including bankcard, student and other installment loans and home equity lines of credit, checking accounts, savings accounts, time certificates of various types and 2 maturities, trust services, safe deposit facilities, direct deposit and 24 hour ATM access. Zions First National Bank also provides services to key segments through its Women's Financial, Private Banking and Executive Banking Groups. In addition to these core businesses, the Company has built specialized lines of business in capital markets and public finance. The Company is the only primary dealer in U.S. Treasury securities headquartered west of the Mississippi River. It has pioneered the online trading of government securities through its websites, which display live, executable quotes to financial institutions and money managers nationwide. The Company's combined public finance operations constitute one of the largest municipal finance advisory firms in the country and ranked ninth in the Securities Data Corporation's listing of the nation's top 100 municipal advisors. The Company is also a leader in U.S. Small Business Administration ("SBA") lending. Through Zions Small Business Finance division, the Company provides SBA 7(a) loans to small businesses throughout the United States. The Company's SBA 504 group works with Certified Development Companies and correspondent banks to provide the nation's largest source of secondary market financing for this loan program. The Company also owns nearly a 20 percent equity interest in the Federal Agricultural Mortgage Corporation ("Farmer Mac") and originates and sells qualified loans to Farmer Mac through its cash window program. The Company is developing a reputation as one of the industry's real innovators in providing customer solutions in the new world of electronic commerce. Digital Signature Trust Company ("DST"), a subsidiary of Zions First National Bank, became the first banking organization in the nation to be authorized by federal regulators to serve as a "certification authority," issuing digital certificates used to establish with certainty the identity and credentials of parties to transactions over networks such as the Internet. The Company has also developed an Internet presence for conducting retail banking business, including a Web-based bill payment system. The Company's banking subsidiaries will also introduce additional on-line capabilities over the next year. Other Nonbanking Subsidiaries The Company conducts various other bank-related business activities through subsidiaries of Zions First National Bank and the Parent. Zions Credit Corporation, a subsidiary of Zions First National Bank, engages in lease origination and servicing operations primarily in Utah, Nevada, and Arizona. Zions Investment Securities, Inc., also a subsidiary of the Bank, provides discount investment brokerage services on a nonadvisory basis to both commercial and consumer customers. Personal investment officers employed by this discount brokerage subsidiary provide customers with a wide range of investment products, including municipal bond, mutual funds and tax-deferred annuities. Zions First National Bank's Wasatch Venture Corporation provides early-stage capital, primarily for technology companies located in the West. Zions Life Insurance Company underwrites, as reinsurer, credit-related life and disability insurance. Zions Insurance Agency, Inc. operates an insurance brokerage business, which administers various credit-related insurance programs in the Company's subsidiaries and sells general lines of insurance. Zions Management Services Company provides administrative, data processing, and other services to other subsidiaries of the Company. 3 Competition Zions Bancorporation and its subsidiaries operate in a highly competitive environment due to the diverse financial services and products they offer. Competitors include not only other banks, thrift institutions, credit unions, and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Most of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in many significant products. These competitive trends are likely to continue. Supervision and Regulation Zion Bancorporation is a bank holding company within the meaning of the Bank Holding Company Act (the "Act") and is registered as such with the Federal Reserve Board. The Company is required to file reports of its operations with the Board of Governors of the Federal Reserve System and is subject to examination by it. Under the Act, the Company is restricted as to the activities in which it may engage and the nature of any company which it controls or holds more than 5% of the voting stock. Generally, allowable activities are those which are determined by the Federal Reserve Board to be closely related to banking and a proper incident thereto. Additionally under the Act, prior approval by the Board of Governors is required for a bank holding company to acquire substantially all the assets of any domestic bank or savings association or the ownership or control of more than 5% of its voting shares. Under the Riegle-Neal Interstate Branching and Efficiency Act of 1994, bank holding companies which are adequately capitalized and managed are permitted to acquire control of a bank located outside the bank holding company's home state subject to certain limitations. The merger of commonly owned banks in different states is also permitted except in states that have passed legislation to prohibit such mergers. The statute also permits banks to establish branches outside their home state in states that pass legislation to permit branch banking. The Federal Reserve Board has established risk-based capital guidelines for bank holding companies. The Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board have also issued regulations establishing capital requirements for banks under federal law. Failure to meet capital requirements could subject the Company and its subsidiary banks to a variety of restrictions and enforcement remedies. See Note 17 of Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders for information regarding risk-based capital requirements. The Company's banking subsidiaries are also subject to various requirements and restrictions in the laws of the U.S. and the states in which the banks operate. These include restrictions on the amount of loans to a borrower and its affiliates, the nature and amount of their investments, their ability to act as an underwriter of securities, the opening of branches and the acquisition of other banks or savings associations. The subsidiary banks are under the supervision of, and are subject to periodic examination by, the OCC or the respective state banking departments, and are subject to the rules and regulations of the OCC, the Board of Governors of the Federal Reserve System and the FDIC. They are also subject to certain laws of each state in which such banks are located. 4 Dividends payable by the subsidiary banks to Zions Bancorporation are subject to various legal and regulatory restrictions. These restrictions and the amount available for the payment of dividends at year-end are summarized in Note 17 of Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of any FDIC-assisted transaction involving an affiliated insured bank or savings association. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") prescribes standards for safety and soundness of insured banks. These standards relate to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, as well as other operational and management standards deemed appropriate by the agencies. The Community Reinvestment Act ("CRA") requires banks to help serve the credit needs in their communities, including credit to low and moderate income individuals and geographies. Should the Company or its subsidiaries fail to adequately serve the community, there are penalties which might be imposed including denials of applications to expand branches, relocate, add subsidiaries and affiliates and merge with or purchase other financial institutions. Regulators and Congress continue to enact rules, laws, and policies to regulate the industry and protect consumers. The nature of these regulations and the effect of such policies on future business and earnings of the Company cannot be predicted. Government Monetary Policies The earnings and business of the Company are affected not only by general economic conditions, but also by fiscal and other policies adopted by various governmental authorities. The Company is particularly affected by the policies of the Federal Reserve Board which affects the national supply of bank credit. The instruments of monetary policy available to the Federal Reserve Board include open-market operations in United States government securities; manipulation of the discount rates of member bank borrowings; imposing or changing reserve requirements against member bank deposits; and imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying combinations to influence the overall growth of bank loans, investments and deposits, and the interest rates charged on loans or paid for deposits. In view of the changing conditions in the economy and the effect of the credit policies of monetary authorities, it is difficult to predict future changes in loan demand, deposit levels and interest rates, or their effect on the business and earnings of the Company. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. 5 PROPERTIES Zions First National Bank operates 132 branches, of which 67 are owned by the Company and 65 are on leased premises. For Vectra Bank Colorado, 32 of 53 branches are owned and the remaining 21 branches are on leased premises. California Bank & Trust owns 22 of their 71 branches and leases the remaining 49 branch premises. Nevada State Bank operates 43 branches, of which 13 are owned and 30 are on leased premises. In Arizona, 13 of 33 branches are owned and the remaining 20 branches are on leased premises. In Washington, The Commerce Bank of Washington operates 1 branch on leased premises. The annual rentals under long-term leases for such banking premises are determined under various formulas and include as various factors, operating costs, maintenance and taxes. The Company's subsidiaries conducting lease financing, insurance, and discount brokerage activities operate from leased premises. For information regarding rental payments, see Note 12 of Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, positions, and backgrounds of the Company's executive officers as of February 26, 1999 are set forth as follows:
Positions and Offices Held With Individual Zions Bancorporation and Principal Subsidiaries Officer Since Age - ---------- ----------------------------------------------- ------------- --- Roy W. Simmons Chairman of the Company; Member of the Board of Directors of 1961 83 Zions First National Bank; prior to January 1998, Chairman of Zions First National Bank. Harris H. Simmons President and Chief Executive Officer of the Company; 1981 44 Chairman of Zions First National Bank; prior to January 1998, President and Chief Executive Officer of Zions First National Bank. A. Scott Anderson Executive Vice President of the Company; President and Chief 1997(1) 52 Executive Officer of Zions First National Bank; prior to January 1998, Executive Vice President of Zions First National Bank. Danne L. Buchanan Executive Vice President of the Company; prior to March 1995, 1995 41 Senior Vice President and General Manager of Zions Data Services Company. Gerald J. Dent Executive Vice President of the Company; Executive Vice 1987 57 President of Zions First National Bank. Dale M. Gibbons Executive Vice President, Chief Financial Officer and 1996 38 Secretary of the Company; Executive Vice President and Secretary of Zions First National Bank; prior to August 1996, Senior Vice President of First Interstate Bancorp. John J. Gisi Senior Vice President of the Company; Chairman and 1994 53 Chief Executive Officer of National Bank of Arizona. 6 James C. Hawkanson Senior Vice President of the Company; Managing Director and 1998 55 Chief Executive Officer of The Commerce Bank of Washington. W. David Hemingway Executive Vice President of the Company; Executive Vice 1997(2) 51 President of Zions First National Bank. Clark B. Hinckley Senior Vice President of the Company; prior to March 1994, 1994 51 President of Zions First National Bank of Arizona. George Hofmann III Senior Vice President of the Company; President and Chief 1995 49 Executive Officer of Nevada State Bank; prior to April 1995, Senior Vice President of Zions First National Bank. Gary S. Judd Senior Vice President of the Company; President and Chief 1998 58 Executive Officer of Vectra Bank Colorado. Robert G. Sarver Executive Vice President of the Company; Chairman and Chief 19983 37 Executive Officer of California Bank & Trust; prior to 1995, President of National Bank of Arizona. Nolan X. Bellon Controller of the Company; prior to June 1998, Controller of 1987 50 Zions First National Bank.
1 Officer of Zions First National Bank since 1990. 2 Officer of Zions First National Bank since 1977. 3 Member of the Board of Directors since 1994. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS Nasdaq: ZION High and low quarterly stock prices: 1998 1997 --------------------------- --------------------------- HIGH LOW HIGH LOW ---- --- ---- --- 1st Quarter $55.69 $39.56 $33.25 $25.69 2nd Quarter 54.00 48.06 37.63 28.38 3rd Quarter 57.25 38.38 41.13 34.69 4th Quarter 62.38 39.13 46.00 37.63 As of February 26, 1999, there were 6,191 common shareholders of the Company's stock. 7 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules, and Exhibits: (1) The consolidated financial statements and related notes and the Independent Auditor's Report that appear on pages 45 through 73 of the 1998 Annual Report to Shareholders are incorporated herein by reference. (2) The Financial Statement Schedules are omitted because conditions requiring their filing do not exist. (3) Exhibits Index:
Exhibit Number Description ------ ----------- 3.1 Restated Articles of Incorporation of Zions Bancorporation dated * November 8, 1993, incorporated by reference to Exhibit 3.1 of Form S-4 filed on November 22, 1993. 3.2 Restated Bylaws of Zions Bancorporation, dated November 8, 1993, * incorporated by Reference to Exhibit 3.2 of Form S-4 filed November 22, 1993. 3.3 Articles of Amendment to the Restated Articles of Incorporation * of Zions Bancorporation dated April 30, 1997, incorporated by reference to Exhibit 3.1 of Form 10-Q for the quarter ended June 30, 1997. 3.4 Articles of Amendment to the Restated Articles of Incorporation * of Zions Bancorporation dated April 24, 1998, incorporated by reference to Exhibit 3 of Form 10-Q for the quarter ended June 30, 1998. 3.5 Amendment to the Restated Bylaws of Zions Bancorporation, dated * September 18, 1998, incorporated by reference to Exhibit 3 of Form 10-Q for the quarter ended September 30, 1998. 4 Shareholder Protection Rights Agreement, dated September 27, * 1996, incorporated by reference to Exhibit 1 of Form 8-K filed October 12, 1996. 10.1 Amended and Restated Zions Bancorporation Pension Plan, * incorporated by reference to Exhibit 10.1 of Form 10-K for the year ended December 31, 1994. 10.2 Amendment to Zions Bancorporation Pension Plan effective December * 1, 1994, incorporated by reference to Exhibit 10.2 of Form 10-K for the year ended December 31, 1994. 10.3 Zions Bancorporation Supplemental Retirement Plan Form, * incorporated by reference to Exhibit 19.4 of Form 10-Q for the quarter ended September 30, 1985. 8 10.4 Zions Bancorporation Key Employee Incentive Stock Option Plan * dated April 28, 1982, incorporated by reference to Exhibit 10.1 of Form 10-Q for the quarter ended June 30, 1995. 10.5 Amendment No. 1 to Zions Bancorporation Key Employee Incentive * Stock Option plan dated April 27, 1990, incorporated by reference to Exhibit 10.2 of Form 10-Q for the quarter ended June 30, 1995. 10.6 Amendment No. 2 to Zions Bancorporation Key Employee Incentive * Stock Option plan dated April 28, 1995, incorporated by reference to Exhibit 10.3 of From 10-Q for the quarter ended June 30, 1995. 10.7 Amendment No. 3 to Zions Bancorporation Key Employee Incentive * Stock Option plan dated April 24, 1998, incorporated by reference to Exhibit 10 of Form 10-Q for the quarter ended June 30, 1998. 10.8 Zions Bancorporation Deferred Compensation Plan for Directors, as * amended May 1, 1991, incorporated by reference to Exhibit 19 of Form 10-K for the year ended December 31, 1991. 10.9 Zions Bancorporation Senior Management Value Sharing Plan, Award * Period 1994-1997, incorporated by reference to Exhibit 10.9 of Form 10-K for the year ended December 31, 1994. 10.10 Zions Bancorporation Senior Management Value Sharing Plan, Award * Period 1995-1998, incorporated by reference to Exhibit 10.14 of Form 10-K for the year ended December 31, 1995. 10.11 Zions Bancorporation Senior Management Value Sharing Plan, Award * Period 1996-1999, incorporated by reference to Exhibit 10.16 of Form 10-K for the year ended December 31, 1996 10.12 Zions Bancorporation Senior Management Value Sharing Plan, Award * Period 1997-2000, incorporated by reference to Exhibit 10.16 of Form 10-K for the year ended December 31, 1997. 10.13 Zions Bancorporation Executive Management Pension Plan, * incorporated by reference to Exhibit 10.10 of Form 10-K for the year ended December 31, 1994. 10.14 Employment Agreement between Zions Bancorporation and Mr. John * Gisi, incorporated by reference to Exhibit 10.13 of Form 10-K for the year ended December 31, 1995. 10.15 Zions Bancorporation Non-Employee Directors Stock Option Plan * dated April 26, 1996, incorporated by reference to Exhibit 10 of Form 10-Q for the quarter ended June 30, 1996. 9 10.16 Zions Bancorporation Pension Plan amended and restated effective * April 1, 1997, Incorporated by reference to Exhibit 10 of Form 10-Q for the quarter ended March 31, 1997. 10.17 Stock Option Agreement between Zions Bancorporation and W. David * Hemingway dated April 13, 1983, incorporated by reference to Exhibit 4.8 of Form S-8 filed March 10, 1999. 10.18 Amended Stock Option Agreement between Zions Bancorporation and * W. David Hemingway dated January 31, 1991, incorporated by reference to Exhibit 4.9 of Form S-8 Filed March 10, 1999. 10.19 Shareholder Agreement, dated October 1, 1998, among Zions * Bancorporation, The Robert G. Sarver Separate Property Trust dated September 29, 1997 and CBT Holdings, incorporated by reference to Exhibit 10.1 of Form 8-K filed October 14, 1998. 10.20 Loan Agreement, dated October 1, 1998, between Zions * Bancorporation and The Robert G. Sarver Separate Property Trust dated September 29, 1997, incorporated by reference to Exhibit 10.2 of Form 8-K filed October 14, 1998. 10.21 Employment Agreement, dated October 1, 1998, between Grossmont * Bank and Robert Sarver, incorporated by reference to Exhibit 10.3 of Form 8-K filed October 14, 1998. 10.22 Promissory Note, dated October 1, 1998, by The Robert G. Sarver * Separate Property Trust dated * September 29, 1997 in favor of Zions Bancorporation, incorporated by reference to Exhibit 10.4 of Form 8-K filed October 14, 1998. 10.23 Zions Bancorporation Senior Management Value Sharing Plan, Award Period 1998- 2001 (filed) 13 1998 Annual Report to Shareholders, pages 1 through 73 (filed) 21 List of subsidiaries of Zions Bancorporation (filed) 23 Consent of KPMG LLP, independent certified public accountants (filed) 27.1 Article 9 Financial Data Schedule for the year ended December 31, 1998 (filed) 27.2 Article 9 Restated Financial Data Schedule for the six months ended June 30, 1998 (filed) 27.3 Article 9 Restated Financial Data Schedule for the three months ended March 31, 1998 (filed) 27.4 Article 9 Restated Financial Data Schedule for the year ended December 31, 1997 (filed) 10 27.5 Article 9 Restated Financial Data Schedule for the six months ended June 30, 1997 (filed) 27.6 Article 9 Restated Financial Data Schedule for the three months ended March 31, 1997 (filed) 27.7 Article 9 Restated Financial Data Schedule for the year ended December 31, 1996 (filed) 99.1 Form 11-K Annual Report of Zions Bancorporation Employee Stock Savings Plan (filed) 99.2 Form 11-K Annual Report of Zions Bancorporation Employee Investment Savings Plan (filed)
* incorporated by reference (b) Zions Bancorporation filed the following reports on Form 8-K during the quarter ended December 31, 1998; 1) Filed December 10, 1998 (Item 7), amending the 8-K filed on October 14, 1998 which announced the consummation of the acquisition of The Sumitomo Bank of California ("Sumitomo"). This amendment contained Sumitomo's financial statements for the period ending June 30, 1998 as well as a pro forma Balance Sheet as of June 30, 1998 and pro forma Income Statement for the year ended December 31, 1997 and the six months ended June 30, 1998. 2) Filed October 14, 1998 (Item 2), announcing the consummation of the acquisition of The Sumitomo Bank of California by Zions Bancorporation. Zions Bancorporation's Annual Report on Form 10-K for the year ended December 31, 1998, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all documents filed prior to January 1, 1999 pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of an offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference such Annual Report on Form 10-K. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will governed by the final adjudication of such issue. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 23, 1999 ZIONS BANCORPORATION By /s/ Harris H. Simmons ---------------------------- HARRIS H. SIMMONS, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. March 23, 1999 /s/ Harris H. Simmons /s/ Dale M. Gibbons - ------------------------------------ -------------------------------------- HARRIS H. SIMMONS, President, Chief Dale M. Gibbons, Executive Vice Executive Officer and Director President, Chief Financial Officer and Secretary /s/ Roy W. Simmons /s/ Nolan Bellon - ------------------------------------ -------------------------------------- ROY W. SIMMONS, Chairman and Director NOLAN BELLON, Controller /s/ Jerry C. Atkin /s/ Robert G. Sarver - ------------------------------------- -------------------------------------- JERRY C. ATKIN, Director ROBERT G. SARVER, Director /s/ Grant R. Caldwell /s/ L.E. Simmons - ------------------------------------ -------------------------------------- GRANT R. CALDWELL, Director L.E. SIMMONS, Director /s/ R.D. Cash /s/ Shelley Thomas - ------------------------------------ -------------------------------------- R. D. CASH, Director SHELLEY THOMAS, Director /s/ Richard H. Madsen /s/ I.J. Wagner - ------------------------------------ -------------------------------------- RICHARD H. MADSEN, Director I.J. WAGNER, Director /s/ Roger B. Porter - ------------------------------------ ROGER B. PORTER, Director 12 EX-10.23 2 SENIOR MANAGEMENT VALUE SHARING PLAN EXHIBIT 10.23 Zions Bancorporation Senior Management Value Sharing Plan Award Period: 1998 - 2001 Objective: To provide an ongoing multi-year incentive for the senior managers of Zions Bancorporation and its subsidiaries which: A. Focuses managers' attention on the creation of long-term shareholder B. Creates an incentive that promotes teamwork across departments and subsidiaries, and which encourages managers to balance profit center accountability with Company-wide goals; and, C. Complements the short-range annual bonuses which reflect the achievement of annual objectives and the Company's short-term profitability. Eligibility: Participants in the Plan shall consist of designated members of the senior management group (and certain other key managers) of the Company and its major subsidiaries. Participants for each Award Period shall be specifically identified by the Company's Board of Directors (the "Board") or its Executive Compensation Committee (the "Committee"). Allocation of Awards: It is anticipated that during the first quarter of each year in which the Plan operates, the Board of Directors shall approve the establishment of a pool of Award Funds to be generated during the Award Period, according to the general formula outlined below. Participants shall be designated by the Board or the Committee. Claims against the pool of Award Funds for each Award Period shall be represented by Participation Units ("PU's), and each participant shall be allocated a specific number of PU's by the Committee. The PU's shall represent a pro-rata claim, in proportion to the total PU's designated for that Award Period, on any Award Funds generated by the Plan during the Award Period. Term: Each Award Period shall consist of a continuous four-calendar-year period. The Plan is intended to constitute a "moving four-year-average" incentive plan, with the anticipation that a new Award Period would be designated each year, with multiple Award Periods overlapping one another. Nevertheless, the establishment of a new Award Period each year is subject to the Board's discretion. 1 Determination of Award Funds: The amount of Award Funds in the pool for each Award Period shall be a function of the Aggregate Cash Earnings Per Share ("ACEPS") during the Award Period, together with the mathematical Average Modified Cash Return On Shareholders' Equity ("AMCROE") for each of the four years in the Award Period, Aggregate Cash Earnings Per Share (ACEPS) shall be defined as the aggregate, over the four year Award Period, of each year's diluted earnings per share before the cumulative effect of changes in accounting principles, plus the after-tax cost per share of amortization of goodwill and core deposit intangible assets, plus the after-tax cost per share of charges recognized to standardize accounting practices of acquired entities, less the after-tax cost per share of capitalized transaction costs which would have been expensed if pooling-of-interests accounting treatment had been employed. Average Modified Cash Return on Equity ("AMCROE") shall be defined as the average, for each of the four years in the Award Period, of the Company's Net Cash Income divided by the average Modified Tangible Equity. Net Cash Income shall mean the net income available to common shareholders, plus the after-tax cost of amortization of goodwill and core deposit intangible assets, plus the after-tax cost of charges recognized to standardize accounting practices of acquired entities, less the after-tax cost of capitalized transaction costs which would have been expensed if pooling-of-interests accounting had been employed. Modified Tangible Equity shall mean total common shareholders' equity, less goodwill and core deposit intangible assets, except if such intangible assets arise as a result of acquisitions of businesses, stock or deposits for cash. (If such acquisitions are made with a combination of cash and stock, goodwill and core deposit intangible assets shall be deducted from common shareholders' equity only to the extent that such items exceed the total value of Zions' shares issued in the transaction.) Each year, the Committee shall establish minimum targets for AMCROE and ACEPS for the Award Period. These minimum targets would both be required to be reached in order for any Award Funds to be earned. Additionally, the Committee may designate Award Fund allocation amounts based upon the achievement of higher levels of AMCROE, with upward adjustments possible if higher levels of ACEPS are achieved. The Committee may also designate other conditions and adjustment factors to ensure the Plan's integrity and consistency with shareholder and depositor interests. The 1998-2001 Award Period formula for the determination of the value of PU's is as indicated in the Appendix. For the 1998-2001 Award Period, the following parameters shall be established, and adjustments made to the Company's earnings calculations, for purposes of determining Award Funds available under the Plan: 1). The Plan is intended to create an incentive for increasing shareholder value. However, this is not to be accomplished by reducing capital levels or assuming extraordinary or unwarranted risks. Accordingly, it is expected that total risk-based capital levels shall be maintained at a level at least 125% of "well-capitalized" regulatory requirements. 2 2). The Company's reserve levels are to be conservatively maintained. To the extent that the consolidated Allowance for Loan and Lease Losses is less than 110% of the peer group level, as expressed in terms of reserves/non-current loans as reported in the most current Uniform Bank Performance Report available at December 31, 2001, an appropriate adjustment shall be made to after-tax earnings (for purposes of calculating Award Funds only) to compensate for any deficit relative to the 110% minimum target level. Actual reserve levels are, of course, subject to Board and/or regulatory decisions. No upward adjustments shall be made in "pro forma" earnings in the event actual reserve levels exceed 110% of the peer group target. 3). Unless determined otherwise by the Board, in the event of any merger involving an acquisition by Zions for the exchange of Zions' shares in a pooling-of-interests transaction, earnings per share prior to the acquisition date shall, for the purpose of calculating ACEPS during the Award Period, be determined using Zions' un-restated numbers. Other Terms and Conditions: The Plan is to be governed and interpreted by the Committee, whose decisions shall be final. The terms of the Plan are subject to change or termination at their sole discretion. The Company shall retain the right to withhold payment of Award Funds to participants in the event of a significant deterioration in the Company's financial condition, or if so required by regulatory authorities, or for any other reason considered valid by the Board in its sole discretion. Participants shall not vest in any benefits available under the Plan until the conclusion of each Award Period. Nevertheless, upon death, permanent disability, or normal or early retirement (unless upon early retirement the participant becomes employed by an entity which competes with Zions Bancorporation), participants (or their estates) shall be eligible to receive a proportionate share of Award Funds based upon the number of PU's granted, and the number of full calendar quarters the participant was engaged as an officer of the Company or its subsidiaries prior to death, disability, or retirement. The PU's shall not be transferable without the express approval of the Committee. In the event of the merger or acquisition of the Company, the Plan may be terminated as of the end of the fiscal quarter preceding the first full quarter before the transaction is consummated. The Board may make any reasonable estimates or adjustments necessary in calculating Award Funds for any Award Period. The Board may also, at its sole discretion, alter the terms of the Plan at any time during an Award Period. This document is intended to provide a guideline for the creation and distribution of incentive compensation. Nothing herein creates a contractual obligation binding on the Board, and no Participant shall have any legal rights with respect to an Award until such Award is distributed. Earnings per share calculations shall be adjusted to reflect any stock splits, stock dividends, or other such changes in capitalization, at the discretion of the Committee. 3 The award of PU's to any participant shall not confer any right with respect to continuance of employment by the Company or its subsidiaries, nor limit in any way the right of the Company to terminate his or her employment at any time, with or without cause. APPENDIX ZIONS BANCORPORATION VALUE-SHARING PLAN: 1998-2001 Calculation of Participation Unit Value Aggregate Cash Earnings Per Share (ACEPS) - -----------------------------------------
If the ACEPS is: The basic value of a Over - But not over- Participation Unit is- - ------------------------------------------------------------------------------------- $8.57 $8.78 $.00 plus $.015 per each cent of the amount over $8.57. $8.78 $9.00 $.322 plus $.030 per each cent of the amount over $8.78. $9.00 $9.22 $.979 plus $.046 per each cent of the amount over $9.00. $9.22 $9.44 $1.983 plus $.062 per each cent of the amount over $9.22. $9.44 $9.67 $3.349 plus $.076 per each cent of the amount over $9.44. $9.67 $9.90 $5.089 plus $.093 per each cent of the amount over $9.67. $9.90 $10.14 $7.217 plus $.105 per each cent of the amount over $9.90. $10.14 $10.38 $9.748 plus $.123 per each cent of the amount over $10.14. $10.38 $10.63 $12.695 plus $.135 per each cent of the amount over $10.38. $10.63 $10.88 $16.074 plus $.153 per each cent of the amount over 10.63. $10.88 $11.14 $19.90 plus $.165 per each cent of the amount over $10.88. $11.14 $11.40 $24.187 plus $.183 per each cent of the amount over $11.14. 4 $11.40 $11.67 $28.952 plus $.195 per each cent of the amount over $11.40. $11.67 $11.94 $34.209 plus $.179 per each cent of the amount over $11.67. $11.94 $12.22 $39.030 plus $.159 per each cent of the amount over $11.94. $12.22 $12.50 $43.493 plus $.146 per each cent of the amount over $12.22. $12.50 $12.78 $47.584 plus $.132 per each cent of the amount over $12.50. $12.78 $13.07 $51.286 plus $.114 per each cent of the amount over $12.78. $13.07 $13.37 $54.585 plus $.096 per each cent of the amount over $13.07. $13.37 $13.67 $57.463 plus $.081 per each cent of the amount over $13.37. $13.67 $13.98 $59.905 plus $.064 per each cent of the amount over $13.67. $13.98 $61.893
Average Modified Cash Return on Equity ("AMCROE") Modifier: - ----------------------------------------------------------- The basic Participation Unit value determined above shall be adjusted as follows: o If AMCROE for 1998-2001 is less than 16.00%, the Participation Units shall have no value. o If AMCROE is equal to or greater than 16.00% but less than 19.00%, the basic value of a Participation Unit shall be multiplied by a factor of 1.00. o If AMCROE is equal to or greater than 19.00% but less than 24.00%, the basic value of a Participation Unit shall be multiplied by the following factor: 1+(AMCROE - .19)6.60. o If AMCROE is 24.00% or more, the basic value of a Participation Unit shall be multiplied by 1.33. ****************************** Example: If ACEPS is $10.19 and AMCROE is 22.60%, each Participation Unit would be worth $36.71. [$9.748+100($10.19-$10.14)$.123] X [1+(.2260 - .19)6.6] = $12.825 5 EX-13 3 ZIONS BANCORPORATION 1998 ANNUAL REPORT Financial Highlights
98/97 Change 1998 1997 1996 1995 1994 ------ --------- --------- --------- --------- --------- For The Year (IN MILLIONS) Net income ............................. + 9% $ 146.8 $ 134.3 $ 120.4 $ 90.1 $ 68.8 Operating cash earnings(1) ............. + 29% 184.5 142.5 123.7 92.5 71.0 Per Share Net income (diluted) ................... + 4% $ 1.91 $ 1.84 $ 1.66 $ 1.36 $ 1.08 Net income (basic) ..................... + 3% 1.93 1.88 1.69 1.38 1.10 Operating cash earnings (diluted)(1) ... + 23% 2.40 1.95 1.71 1.40 1.13 Dividends declared ..................... + 15% .54 .47 .425 .3525 .29 Book value(2)........................... + 24% 12.89 10.40 9.04 7.71 6.44 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 ................................. + 53% $ 16,649 $ 10,869 $ 8,224 $ 6,904 $ 5,714 Loans and leases ....................... + 88% 10,633 5,669 4,503 3,533 2,791 Loans sold being serviced(3)............ + 1% 1,057 1,050 868 831 787 Deposits ............................... + 67% 13,321 7,956 6,009 5,149 4,251 Shareholders' equity ................... + 37% 1,014 742 641 535 413 Performance Ratios Return on average assets ............... 1.11% 1.29% 1.53% 1.37% 1.12% Return on average common equity ........ 16.38% 19.08% 20.47% 19.36% 17.90% Efficiency ratio ....................... 68.23% 60.85% 58.47% 61.44% 64.97% Net interest margin .................... 4.60% 4.42% 4.80% 4.63% 4.21% Operating Cash Performance Ratios(1) Return on average assets ............... 1.42% 1.38% 1.58% 1.41% 1.16% Return on average common equity ........ 26.46% 24.23% 22.84% 20.99% 19.43% Efficiency ratio ....................... 61.10% 59.20% 57.75% 60.72% 64.15% Capital Ratios(2) Equity to assets ....................... 6.09% 6.83% 7.80% 7.75% 7.23% Tier 1 leverage ........................ 5.98% 6.83% 9.05% 6.50% 6.33% Tier 1 risk-based capital .............. 8.46% 11.55% 14.43% 11.41% 11.69% Total risk-based capital ............... 11.48% 13.42% 16.65% 13.93% 14.57% Selected Information Average common-equivalent shares (in thousands) 76,988 72,813 72,158 65,960 63,109 Common dividend payout ratio ........... 27.69% 21.14% 20.76% 22.82% 25.11% Full-time equivalent employees ......... 6,793 4,895 3,874 3,498 3,018 Commercial Banking Offices ............. 333 254 175 160 135 ATMs ................................... 463 509 362 284 230
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. (inside front cover) Winning Strategies - ------------------ Just as in the game of chess, strategy is the foundation of a successful business. Chess moves are comparable to business moves from both a strategic and a tactical perspective. Former word chess champion Emmanuel Lasker said, regarding chess, "When you see a good move, wait - look for a better one." Valuable advise for the chess player. Valuable, too, for a competitive business. Zions Bancorporation followed this adage when forming business moves in 1998: Consider options, consider smarter options, then move decisively. Timing, in business as in chess, is the key. Businesses need to think two or three moves ahead. It's crucial to consider how one move will affect the next. The result: priorities must be established and tasks executed to maximize effectiveness and efficiency. Successful business strategies are also dependent upon an understanding of competitors' strenghts, weaknesses, and customary tactics. Ultimately, competitive victories in the marketplace are measured in increased shareholder value. Contents - -------- To Our Shareholders .................................................... 2 Community Banking ...................................................... 8 Significant Acquisitions ............................................... 10 Internal Growth ........................................................ 12 Complementary Businesses ............................................... 14 Technology ............................................................. 16 Year 2000 .............................................................. 17 Operational Integration ................................................ 18 Management's Comments .................................................. 20 Business Segment Results ............................................... 21 Income Statement Analysis .............................................. 23 Balance Sheet Analysis ................................................. 31 Risk Elements .......................................................... 35 Independent Auditors' Report ........................................... 45 Consolidated Financial Statements ...................................... 46 Notes to Consolidated Financial Statements ............................. 51 Officers and Directors ................................................. 74 1 To Our Shareholders The year 1998 was extraordinary for Zions Bancorporation. We dramatically increased the reach of our franchise through solid internal expansion and a series of disciplined strategic acquisitions, setting the stage for continued growth in the future. We also produced record financial results, with strong gains in operating cash income and operating cash earnings per share. Financial Results The Company's net cash operating earnings, before merger charges and amortization of goodwill and core deposit intangible assets, increased 29.4% to $184.5 million from the restated $142.5 million recorded in 1997. Net cash operating earnings per share increased 23.1% to $2.40 from the restated $1.95 per share in 1997. Net income in 1998, including after-tax merger-related charges of $28.2 million, totaled $146.8 million, up 9.3% from $134.3 million achieved in 1997. Fully diluted net income per share increased 3.8% (including the effect of after-tax merger-related charges of $.37 per share) to $1.91 from $1.84 in 1997. Operating cash return on average tangible equity was 26.5%, an increase from the 24.2% achieved in the previous year. Average net loans and leases outstanding increased to $7.2 billion in 1998, up 41.3% from the $5.1 billion outstanding in 1997, while average deposits increased 41.0% to $9.5 billion from $6.7 billion in 1997. The 1997 figures have been restated to reflect the effect of certain acquisitions in 1998 accounted for under the "pooling of interests" accounting method. Before restatements, average earning assets increased 78% in 1998, while average shares outstanding increased only 23% during the same period. Excluding loans and deposits gained through acquisitions which are not reflected in the year-ago financial statements, year-end 1998 on-balance sheet and securitized loans increased 18.6% and deposits increased 8.8% over the previous year's levels. The net interest margin improved to 4.60% in 1998, up from 4.42% in 1997. The improvement in the margin resulted from an improved mix of assets during the year. A relatively flat yield curve during 1998 presented the twin challenges of a higher rate of mortgage prepayments and lower investment yields. It nevertheless resulted in continued strong lending activity. The Company's cash efficiency ratio (the ratio of operating costs excluding merger charges and amortization of goodwill and certain other intangibles - as a percentage of revenues) was 61.1% in 1998, up from 59.2% in 1997. The increase was primarily the result of higher expense ratios at the Company's newly acquired operation in California. The acquisition of The Sumitomo Bank of California for cash reduced the Company's capital ratios during 1998. The three measures of capital subject to regulatory review nevertheless remained within the "well capitalized" classification, and a strong level of cash generation, combined with a relatively moderate dividend payout promises to strengthen our capital position in 1999. The Sumitomo transaction also had the effect of measurably increasing our loan loss reserves. Total loss 2 reserves rose 124% during 1998, while loans outstanding at year-end rose 88%. Credit quality remained very healthy in 1998. Non-performing loans increased to .60% of net loans, leases and other real estate owned at year-end 1998 from .42% at the end of 1997, primarily as a result of the acquisition of The Sumitomo Bank of California. 1998 Merger Activity This past year was a period of unprecedented merger activity for Zions Bancorporation, with the completion of 12 bank acquisitions in three states. A summary of these transactions is as follows: Principal Total Assets Date Location ($ millions) Acquired -------- ------------ -------- Vectra Banking Corporation Denver, Co. 703 January 6 Sky Valley Bank Corp. Alamosa, Co 122 January 23 Tri-State Finance Corporation Denver, Co. 28 February 27 FP Bancorp, Inc. Escondido, Ca. 363 May 22 Routt County National Bank Corp. Steamboat Springs, Co. 102 May 29 SBT Bankshares, Inc. Colorado Springs, Co. 97 May 29 Kersey Bancorp, Inc. Kersey, Co. 150 August 28 Eagle Holding Company Broomfield, Co. 42 August 31 The Commerce Bancorporation Seattle, Wa. 300 September 8 The Sumitomo Bank of California San Francisco, Ca. 4,545 October 1 Mountain Financial Holding Company Woodland Park, Co. 92 October 30 Citizens Banco, Inc. Westminster, Co. 52 November 30 We've worked hard in recent years to diversify the Company's geographic exposure, and the acquisitions we completed in 1998 measurably decreased our credit concentration in any one market. At the same time, we've improved our prospects for growth by expanding our franchise in some of the nation's most attractive markets. The most significant transaction we completed in 1998 was the acquisition of The Sumitomo Bank of California, a $4.5 billion institution which has been combined with our Grossmont Bank subsidiary in San Diego and our newly acquired First Pacific National Bank in Escondido. The resulting organization has been renamed California Bank & Trust, and is the sixth largest commercial banking organization in California with approximately $6 billion in assets and 71 offices throughout the state. Many observers hailed this as one of the industry's best deals of the year, as it provided Zions with a significant presence in the nation's largest economy at a very affordable price. A measure of the potential impact of the transaction on our future results may be gauged by the fact that the purchase price, which was paid in cash, resulted in the issuance of only 2.8 million new Zions shares as part of the financing package, or a net increase of only about 4% in our outstanding common stock. At the same time, the transaction increased the Company's earning assets by 52% relative to unrestated year-end 1997 levels. 3 The California Bank & Trust franchise presents a variety of challenges and opportunities. The challenges include enhancing the bank's loan origination capabilities and broadening its product lines, strengthening the sales skills of its employees and increasing the bank's efficiency. However, we believe our prospects for success are very high in this market. We acquired the bank for a very attractive price, giving us the ability to recruit some talented, veteran California bankers to supplement and strengthen the Sumitomo staff. The Sumitomo Bank of California's employees have been extremely service-oriented and have a loyal customer following. As a result, customer retention has thus far exceeded our expectations. Our experience with Grossmont Bank has been extremely favorable, and the employees and officers of Grossmont have worked hard to ensure that the combined operation is a success. We will be introducing a variety of new products to California Bank & Trust's customers, and we have developed incentives for virtually all of the bank's employees based on building shareholder value. Finally, California Bank & Trust's management group has been provided with significant incentives to create value over the next few years, including a 5% direct equity stake sold to a group of the bank's senior officers, which will be subject to repurchase by Zions Bancorporation in four years based on the value of the investment at that time. We expect our California operations to provide a significant contribution to our results over the next several years. We were also very active in 1998 expanding our franchise in Colorado, building on our acquisition of Aspen Bancshares in 1997. We completed the acquisition of Vectra Bank, with over $700 million in assets, creating a solid base in the Denver metropolitan market and providing us with additional management strength. We then embarked on an expansion program which gave us additional locations in the greater Denver market, as well as extending our reach into the Colorado Springs area, Steamboat Springs, and the San Luis Valley in southern Colorado. Vectra Bank Colorado, the name of the resulting entity, has approximately $2 billion in assets and is the fifth largest commercial banking organization in Colorado, with 52 branches throughout the state. During 1998 we also completed the acquisition of The Commerce Bank of Washington, a boutique, business-oriented bank which has had an impressive track record since its founding 10 years ago. Based in Seattle, the bank is staffed with a group of professionals who are very focused on serving the needs of small and medium-sized businesses in the Puget Sound area. Organizational Changes In light of the tremendous expansion we've experienced over the past few years, we organized a new subsidiary, Zions Management Services Company, to place under a single umbrella many of the "utility" support functions for Zions Bancorporations' various operating units. These functions include finance, information systems and item processing, telephone call centers, credit policy and administration and the Company's treasury and investment functions. Over time, we expect to achieve significant efficiencies by reducing overhead redundancies in these support departments. 4 During 1998, A. Scott Anderson, formerly head of Retail Banking at Zions First National Bank, was named president and chief executive officer of that flagship subsidiary. Scott Anderson has done an extraordinary job of strengthening our retail banking business in recent years, and he brings tremendous leadership skills to his new role as CEO of Zions Bank. During the year, we also welcomed Shelley Thomas, senior vice president of communications and public affairs of the Salt Lake Organizing Committee for the Winter Olympic Games of 2002, to the Zions Bancorporation board of directors. Electronic Commerce As we prepare to enter the new millennium, it is clear that providers of information-based products and services, including financial services, will need to be adept at distributing those products on-line to customers' homes and businesses. Zions Bancorporation is developing a reputation as one of the industry's real innovators in providing customer solutions in the new world of electronic commerce. Through Digital Signature Trust Company ("DST"), a subsidiary of Zions Bank, we became the first banking organization in the nation to be authorized by federal regulators to serve as a "certification authority," issuing digital certificates used to establish with certainty the identity and credentials of parties to transactions over networks such as the Internet. DST's 1998 accomplishments included developing a partnership with the American Bankers Association to provide support services for ABAecom(SM), which will in turn support electronic commerce initiatives throughout the banking industry. The Automotive Industry Action Group, a trade association of North America's vehicle manufacturers and their suppliers, also selected DST to provide services to Automotive Network eXchange(R), a private network which will be used by automobile manufacturers and suppliers to exchange information such as secure e-mail, computer-aided design files, and purchase order, invoice and payment information. DST will also play an important role within our own organization as we develop new on-line services for our own customers. A good example of this is the development of an on-line electronic trading capability through which we buy and sell odd-lot government and government agency securities from institutional clients. Zions was a leading market-maker in this segment of the securities market in 1998, executing over 78,000 trades on-line, with a "paperless" back office. Zions Bank and Nevada State Bank have also developed a strong Internet presence for conducting retail banking business, including a Web-based bill payment system which has been well-received by customers. Zions Investment Securities, Inc. also provides a full range of retail investment products over the Internet. Our bank subsidiaries will roll out additional on-line capabilities over the course of the coming year. To learn more about these initiatives, and to keep current on news about the Company, we invite you to visit us on the World Wide Web at zionsbank.com, calbanktrust.com, nsbank.com, digsigtrust.com and govrate.com. 5 Year 2000 Preparations The media has begun to devote a great deal of attention to the "Year 2000" or "Y2K" phenomenon in recent times. Zions Bancorporation has been devoting a great deal of attention to the matter for the past several years. At issue is the fact that many older computer programs and hardware components use two-digit date fields in date-based calculations. The concern is that, with the advent of the new century, a computer program might understand a date such as 3/31/00 to mean March 31, 1900 instead of March 31, 2000, resulting in calculation errors and computer failures. Because banking calculations are so heavily date-dependent, the issue has been the subject of intense focus by both bankers and regulators. Within Zions Bancorporation, we have a Year 2000 team in each of our operating units, overseen by a corporate-level Year 2000 Program Office. We have developed and have been executing detailed work plans with five major tasks: (1) inventorying all of the Corporation's software systems and hardware; (2) assessing the Year 2000 compliance of each hardware and software component; (3) remediating or replacing systems which are not Year 2000 compliant; (4) testing all critical systems and hardware with sample data and post-2000 dates to ensure that each system functions properly, as well as testing links between systems; and (5) creating back-up and contingency plans in the event of system breakdowns. Additionally, credit administration personnel and loan officers have, over the past two years, been assessing the Year 2000 efforts and readiness of our larger borrowers in order to reduce the risk of borrower defaults caused by system failures in their own businesses. In preparation for the Year 2000, we have, over the past three years, replaced several of our backbone software systems, including our consumer loan system, our deposit accounting system and our general ledger system with Year 2000-compliant products. We have also installed many updated versions of other systems, and we are replacing numerous desktop computers to ensure their functionality. Our computer operations in California and Arizona are out-sourced to a major national vendor, and we have been working closely with this provider, in concert with other clients, to ensure their readiness to accurately process transactions in the new year. We expect to have completed our systems testing by the end of the first quarter of 1999. As of the writing of this letter, we have experienced no material problems that cause us concern. This has been a major project to which we have devoted substantial resources. Many of the expenditures we've incurred, however, were to replace aging systems and hardware nearing the end of its life cycle, and the result has been a general upgrade in the capabilities of many of these hardware and software systems. A number of outside observers have noted that the American banking industry is, as a whole, well ahead of other industries in preparing for the turn of the century. While the only absolute guarantee of success will come through the live production of data, we feel confident that we will be well prepared with respect to Year 2000 issues as we enter the new year. 6 The Credit Union Issue A growing issue for banks in recent years has been the increasing competitive threat from large tax-exempt credit unions. This has been particularly the case for us in the state of Utah, where credit unions' share of the total insured-deposit market has grown to about 19% (and a much larger portion of the consumer market, since credit union penetration of the commercial market has heretofore been limited). Many of the larger credit unions have, in recent years, exceeded the boundaries of the law at both the state and federal levels by expanding their fields of membership virtually without limitation. Litigation initiated by bank trade associations was concluded favorably during the year at both the federal level and in the state of Utah. In both cases, subsequent legislation has been enacted modifying credit union membership rules. While these new statutes contain both negative and favorable provisions, some progress was made which should improve the situation. We appreciate the efforts of many of our shareholders who expressed their feelings about these issues to legislators in recent months. Looking Back and Looking Forward Zions Bancorporation has experienced an incredible decade of growth and value creation. Our total annually-compounded return to shareholders has been 40.1% for the past ten years, 48.9% for the past five years, 47.4% for the past three years, and 38.7% through the turbulent market of 1998. We've accomplished this with revenue growth that has compounded at 21% since 1990, effective capital management, good credit quality and a strong value orientation. Our performance in revenue growth, profitability and shareholder return has placed us in the top ranks of the industry. We have some extremely talented and innovative bankers, and we've further strengthened our "bench" during 1998. We are operating in many of the nation's most vibrant markets. Our franchise covers a "footprint" as attractive as any in the nation, and we are optimistic about the future. While there continue to be risks in the world economy that could produce slower growth at home, the U.S. economy continues to display exceptional strength. We believe 1999 will be another strong year for Zions Bancorporation. We thank you for your continued loyal support and enthusiasm for the course we're pursuing. Respectfully, /s/ Harris H. Simmons /s/ Roy W. Simmons Harris H. Simmons Roy W. Simmons President and Chief Executive Officer Chairman February 26, 1999 7 Community Banking Moves that Make Sense [graphic omitted] 8 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. 9 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. Colorado Aggressive acquisitions were undertaken to establish a significant and 10 solid franchise within thegrowing 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. 11 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 18.6% and deposits were up 8.8% 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. 12 ...on balance sheet and securitized loans in 1998 increased 18.6% and deposits were up 8.8% from a year ago. [graphic omitted] 13 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. 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 14 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 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. 15 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 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. 16 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. 17 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 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. 18 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. 19 Management's Comments PERFORMANCE SUMMARY Zions Bancorporation reported record earnings of $146.8 million or $1.91 per share in 1998. Net income and diluted net income per share increased 9.3% and 3.8%, respectively, over the restated $134.3 million or $1.84 per share for 1997 which were up 11.5% and 10.8%, respectively, over the restated $120.4 million or $1.66 per share earned in 1996. 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 acquisitions of Vectra Banking Corporation, FP Bancorp, Inc. and The Commerce Bancorporation during 1998, which were accounted for as poolings of interests and considered significant. The acquisition of The Sumitomo Bank of California was accounted for as a purchase and results of operations are included subsequent to the acquisition date of October 1, 1998. 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 $28.2 million or $.37 per share in 1998 and $2.2 million or $.03 per share in 1997. Excluding merger expenses, earnings for 1998 would have been $175.0 million or $2.28 per share , an increase of 28.2% and 21.9%, respectively over $136.5 or $1.87 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 16.38% and the return on average assets was 1.11% for 1998, compared with 19.08% and 1.29%, respectively, in 1997, and 20.47% and 1.53%, 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 $184.5 million or $2.40 per share for 1998, an increase of 29.4% and 23.1%, respectively, over the $142.5 or $1.95 per share for 1997, which was up 15.2% and 14.0% over the $123.7 million or $1.71 per share in 1996. The return on average shareholders' equity and the return on average assets on an operating cash basis were 26.46% and 1.42%, respectively, for 1998 compared to 24.23% and 1.38% for 1997 and 22.84% and 1.58% for 1996. The strong performance of the Company was driven by a 41.4% growth in average loans and leases and a 26.6% growth in average total earning assets that led to a 31.6% increase in taxable-equivalent net interest income to $552.7 million in 1998. Noninterest income increased 37.1% to $200.7 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 49.2% to $514.1 million in 1998. Excluding merger expenses, noninterest expense increased 37.8% 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 4,895 at the end of 1997 and banking offices increased to 333 from 254. 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 68.23% for 1998 compared to 60.85% for 1997 and 58.47% for 1996. The operating cash performance efficiency ratio was 61.10% for 1998 compared to 59.20% for 1997 and 57.75% for 1996. The Company's provision for loan losses totaled $12.2 million for 1998 compared to $7.8 million for 1997. Net charge-offs were $14.9 million, or .21% of average loans and leases in 1998 compared to $9.5 million or .19% in 1997. Nonperforming assets increased to $64 million or .60% of loans and other real estate owned on December 31, 1998 from $24 million or .41% on December 31, 1997. Nonperforming assets on December 31, 1998 include $29 million related to the acquired loans of The Sumitomo Bank of California. 20 Business Segment Results The Company manages its operations and prepares management reports with a primary focus on geographical area. Operating segments information, including earnings performance on an operating cash basis, is presented in Schedule 1. 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%. Operating cash earnings for 1998 decreased 1.0% to $88.6 million as compared to $89.4 million in 1997, which were up 6.9% from $83.6 million for 1997. Net income decreased 1.4% to $87.4 million compared to $88.6 million in 1997 which was up 6.6% from the $83.1 million earned in 1997. 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 or 1996. Net interest income for 1998 increased 7.8% to $222.0 million, noninterest income increased 25.4% to $142.7 million and noninterest expense on an operating cash basis increased 17.5% to $217.1 million. Zions First National Bank and Subsidiaries operating cash performance efficiency ratio was 58.75% in 1998 as compared to 56.85% in 1997 and 54.50% in 1996. Zions First National Bank opened two new grocery store banking centers during 1998, bringing the total number of banking centers in Utah to 40 and total offices in Utah to 116. Zions First National Bank also operates two grocery store banking centers and 13 traditional branches in Idaho. 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 merged banks operate 71 branches in Northern and Southern California. The acquisition of FP Bancorp, Inc. was accounted for as a pooling of interests. The acquisition was considered significant and financial information was restated for all prior years. The acquisition of The Sumitomo Bank of California was accounted for as a purchase and results of operations prior to the acquisition date of October 1, 1998 are not included in the segment information. 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. Operating cash earnings for 1998 were $41.8 million and net income was $23.2 million for California Bank & Trust. The Bank incurred pre-tax merger expenses of $27.7 million during 1998 related to the FP and Sumitomo acquisitions. Return on average equity was 12.91% and operating cash return on average equity was 30.06%. The operating cash efficiency ratio for 1998 was 61.56%. At year-end total assets were $6,013, total loans were $4,183 and total deposits were $5,349. For 1997 compared to 1996 operating cash earnings increased 44.3% to $16.6 million and net income increased 46.3% to $15.8 million. The increase was driven by a 33.6% increase in net interest income mainly attributable to a 36.0% increase in average loans from 1996 to1997. VECTRA BANK COLORADO In January 1998 the Company acquired Vectra Banking Corporation in a transaction accounted for as a pooling of interests. Vectra had total assets of $703 million, loans of $413 million and deposits of $556 million. The transaction was considered material and financial information was restated for all prior years. 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. 21 Net income for Vectra Bank Colorado increased 179.2% to $14.8 million from $5.3 million in 1997 which was down from $5.4 million for 1996. Operating cash earnings were up 183.6% to $20.7 million for 1998 compared to $7.3 million for 1997 and $5.6 million for 1996. Pre-tax merger expenses of $4.6 million were incurred during 1998 in connection with the acquisitions. The increased earnings for 1998 resulted from strong loan growth which resulted in a 90.0% increase in net interest income. Net income for 1997 was down from 1996 mainly due to a $5.9 million loss on securities recognized during 1997. The operating cash efficiency ratio decreased to 60.54% for 1998 compared to 71.36% for 1997 which was up from 64.80% for 1996. Vectra Bank Colorado operates 52 branches in Colorado and one branch in New Mexico. NATIONAL BANK OF ARIZONA Operating cash earnings at National Bank of Arizona increased 23.4% to $23.7 million in 1998 as compared to $19.2 million in 1997 and $15.8 million for 1996. Net income 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 with average loans increasing 17.7% for 1998 compared to 1997 and 21.3% for 1997 compared to 1996. 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. National Bank of Arizona's operating cash performance efficiency ratio was 49.73% in 1998 as compared to 49.86% in 1997 and 47.97% in 1996. National Bank of Arizona opened three new branches during 1998 bringing the total offices in Arizona to 33. NEVADA STATE BANK Nevada State Bank achieved operating cash earnings of $15.0 million in 1998, an increase of 36.4% over $11.0 million in 1997 which were up 48.6% from $7.4 million in 1996. Net income 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. Nevada State Bank's operating cash performance efficiency ratio improved to 62.93% in 1998 as compared to 63.10% in 1997 and 64.67% for 1996. During 1998, Nevada State Bank opened three new grocery store banking centers bringing the total offices in Nevada to 43. 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. Operating cash earnings for 1998 were $5.5 million, an increase of 22.2% from $4.5 million earned in 1997 which were up 36.4% from $3.3 million for 1996. 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. The operating cash efficiency ratio was 46.92% for 1998 compared to 50.10% for 1997 and 53.82% for 1996. 22 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 73.4% of the Company's net revenues, compared with 74.2% in 1997 and 73.9% in 1996. The Company's taxable-equivalent net interest income increased by 31.6% to $552.7 million in 1998 as compared to $419.9 million in 1997 and $345.1 million in 1996. The increased level of taxable-equivalent net interest income was driven by a 26.6% and 32.0% 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 4.60% in 1998, 4.42% in 1997 and 4.80% 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 2 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 3 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. 23
Schedule 1 Operating Segments Information ZIONS FIRST NATIONAL BAN CALIFORNIA VECTRA BANK AND SUBSIDIARIES BANK & TRUST COLORADO ------------------------------- ------------------------------ ------------------------------ (Amounts in millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- ------- ------- ------- CONDENSED INCOME STATEMENT Net interest income ............ $ 222.0 $ 206.0 $ 187.9 $ 117.8 $ 60.4 $ 45.2 $ 78.3 $ 41.2 $ 22.7 Noninterest income ............. 142.7 113.8 93.7 15.1 8.0 5.4 14.8 1.0 4.5 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total revenue .................. 364.7 319.8 281.6 132.9 68.4 50.6 93.1 42.2 27.2 Provision for loan losses ...... 23.0 -- -- (18.4) 2.9 1.8 4.6 0.8 0.9 Noninterest expense(1).......... 217.1 184.8 156.5 82.1 38.4 33.9 57.2 30.3 17.7 ------- ------- ------- ------- ------- ------- ------- ------- ------- Pretax cash earnings ........... 124.6 135.0 125.1 69.2 27.1 14.9 31.3 11.1 8.6 Income tax expense (benefit) ... 36.0 45.6 41.5 27.4 10.5 3.4 10.6 3.8 3.0 Minority interest .............. -- -- -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Cash earnings1 ................. 88.6 89.4 83.6 41.8 16.6 11.5 20.7 7.3 5.6 Amortization of goodwill and CDI 1.7 1.1 0.5 1.9 0.8 0.7 3.1 2.0 0.2 Merger expense ................. -- -- -- 27.7 -- -- 4.6 -- -- Income tax (benefit) ........... (0.5) (0.3) -- (11.0) -- -- (1.8) -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income ................ $ 87.4 $ 88.6 $ 83.1 $ 23.2 $ 15.8 $ 10.8 $ 14.8 $ 5.3 $ 5.4 ======= ======= ======= ======= ======= ======= ======= ======= ======= AVERAGE BALANCE SHEET DATA Total assets ................... $ 6,512 $ 6,341 $ 4,945 $ 2,453 $ 1,058 $ 800 $ 1,632 $ 925 $ 483 Net loans and leases ........... 2,982 2,604 2,276 1,626 665 489 1,011 560 256 Sold loans being serviced(2).... 1,038 958 856 -- -- -- -- -- -- Allowance for loan losses ...... 46 49 54 40 11 9 13 7 3 Total deposits ................. 3,795 3,281 3,011 2,198 952 715 1,365 710 368 Common equity .................. 395 418 355 179 83 68 193 104 38 END OF YEAR BALANCE SHEET DATA Total assets ................... $ 6,042 $ 5,894 $ 4,863 $ 6,013 $ 1,211 $ 940 $ 1,955 $ 1,204 $ 562 Net loans and leases ........... 3,509 2,781 2,476 4,183 727 599 1,212 717 320 Total deposits ................. 3,934 3,666 3,168 5,349 1,086 832 1,689 952 439 PERFORMANCE RATIOS Return on average assets ....... 1.34% 1.40% 1.68% 0.94% 1.50% 1.34% 0.91% 0.57% 1.13% Return on average common equity 22.09% 21.18% 23.39% 12.91% 19.02% 15.79% 7.65% 5.09% 14.41% Efficiency ratio ............... 59.21% 57.20% 54.67% 83.79% 57.13% 68.44% 68.66% 76.05% 65.65% OPERATING CASH PERFORMANCE RATIOS(1) Return on average assets ....... 1.36% 1.41% 1.69% 1.73% 1.59% 1.45% 1.32% 0.83% 1.19% Return on average common equity 23.51% 22.03% 23.78% 30.06% 23.10% 20.07% 16.90% 13.04% 17.00% Efficiency ratio ............... 58.75% 56.85% 54.50% 61.56% 55.95% 67.04% 60.54% 71.36% 64.80% REGULATORY CAPITAL RATIOS Tier I leverage ratio .......... 5.56% 5.66% 6.61% 5.40% 7.00% 5.77% 6.09% 7.57% 7.27% Tier I risk-based capital ratio 9.04% 10.94% 11.36% 7.06% 9.89% 8.38% 9.17% 10.54% 10.49% Total risk-based capital ratio . 15.15% 18.22% 19.47% 10.78% 11.14% 9.63% 10.58% 11.66% 11.57% OTHER INFORMATION Full-time equivalent employees . 1,992 2,538 2,091 1,870 493 446 860 518 310 Domestic offices: Traditional branches ........ 89 89 73 71 23 20 51 28 12 Banking centers in grocery stores .................... 42 40 26 -- -- -- 2 2 -- Foreign office ................. 1 1 1 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total offices ............... 132 130 100 71 23 20 53 30 12 ATMs ........................... 202 224 203 91 25 22 76 25 13
1Before amortization of goodwill and core deposit intangible assets and merger expense. 2Amount represents outstanding balance of loans sold and being serviced by the Company, excluding long-term first mortgage residential real estate loans.
NATIONAL BANK NEVADA STATE BANK THE COMMERCE BANK OF ARIZONA AND SUBSIDIARY OF WASHINGTON --------------------------- --------------------------- --------------------------- (Amounts in millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- ------- ------- ------- CONDENSED INCOME STATEMENT Net interest income ............ $ 70.7 $ 61.6 $ 50.5 $ 50.4 $ 37.1 $ 25.7 $ 13.9 $ 12.6 $ 10.1 Noninterest income ............. 9.3 6.3 3.6 15.0 11.9 8.8 1.7 1.3 1.2 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total revenue .................. 80.0 67.9 54.1 65.4 49.0 34.5 15.6 13.9 11.3 Provision for loan losses ...... 1.8 2.4 2.3 1.6 1.6 1.2 0.1 0.3 0.3 Noninterest expense1 ........... 40.1 34.2 26.3 41.7 31.4 22.8 7.4 7.0 6.2 ------- ------- ------- ------- ------- ------- ------- ------- ------- Pretax cash earnings ........... 38.1 31.3 25.5 22.1 16.0 10.5 8.1 6.6 4.8 Income tax expense (benefit) ... 14.4 12.1 9.7 7.1 5.0 3.1 2.6 2.1 1.5 Minority interest .............. -- -- -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Cash earnings1 ................. 23.7 19.2 15.8 15.0 11.0 7.4 5.5 4.5 3.3 Amortization of goodwill and CDI 1.9 1.6 1.1 1.5 0.4 0.1 -- -- -- Merger expense ................. -- -- -- -- -- -- 7.7 -- -- Income tax (benefit) ........... (0.4) (0.2) -- (0.2) (0.1) -- (2.3) -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income ................ $ 22.2 $ 17.8 $ 14.7 $ 13.7 $ 10.7 $ 7.3 $ 0.1 $ 4.5 $ 3.3 ======= ======= ======= ======= ======= ======= ======= ======= ======= AVERAGE BALANCE SHEET DATA Total assets ................... $ 1,371 $ 1,122 $ 908 $ 1,038 $ 716 $ 526 $ 306 $ 254 $ 198 Net loans and leases ........... 879 747 616 513 352 230 155 140 122 Sold loans being serviced(2).... -- -- -- -- -- -- -- -- -- Allowance for loan losses ...... 16 14 11 8 5 3 2 2 2 Total deposits ................. 1,168 989 800 863 629 466 214 191 157 Common equity .................. 112 99 93 88 46 44 23 21 19 END OF YEAR BALANCE SHEET DATA Total assets ................... $ 1,452 $ 1,352 $ 1,024 $ 1,121 $ 988 $ 571 $ 337 $ 298 $ 238 Net loans and leases ........... 1,012 798 704 551 489 268 155 154 132 Total deposits ................. 1,226 1,192 900 929 834 500 221 236 186 PERFORMANCE RATIOS Return on average assets ....... 1.62% 1.59% 1.62% 1.32% 1.49% 1.38% 0.02% 1.76% 1.69% Return on average common equity 19.84% 17.98% 15.75% 15.56% 23.07% 16.41% 0.27% 20.91% 17.75% Efficiency ratio ............... 52.05% 52.15% 49.97% 65.17% 64.01% 64.96% 95.40% 50.10% 53.82% OPERATING CASH PERFORMANCE RATIOS(1) Return on average assets ....... 1.76% 1.75% 1.76% 1.48% 1.56% 1.39% 1.80% 1.76% 1.69% Return on average common equity 28.35% 25.84% 20.05% 25.44% 28.29% 16.60% 23.67% 20.91% 17.75% Efficiency ratio ............... 49.73% 49.86% 47.97% 62.93% 63.10% 64.67% 46.92% 50.10% 53.82% REGULATORY CAPITAL RATIOS Tier I leverage ratio .......... 6.44% 6.07% 8.85% 5.44% 6.39% 7.86% 6.82% 8.71% 9.20% Tier I risk-based capital ratio 8.79% 9.04% 12.39% 8.99% 9.15% 12.58% 11.22% 12.59% 13.08% Total risk-based capital ratio . 10.04% 10.30% 13.65% 10.22% 10.19% 13.62% 12.41% 13.84% 14.33% OTHER INFORMATION Full-time equivalent employees . 544 519 414 532 570 359 43 46 41 Domestic offices: Traditional branches ........ 33 30 17 18 18 7 1 1 1 Banking centers in grocery stores .................. -- -- -- 25 22 18 -- -- -- Foreign office ................. -- -- -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total offices ............... 33 30 17 43 40 25 1 1 1 ATMs ........................... 26 21 14 56 69 70 -- -- --
1Before amortization of goodwill and core deposit intangible assets and merger expense. 2Amount represents outstanding balance of loans sold and being serviced by the Company, excluding long-term first mortgage residential real estate loans. 25
CONSOLIDATED OTHER COMPANY ------------------------- ------------------------- (Amounts in millions) 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- CONDENSED INCOME STATEMENT Net interest income ............ $ (9.3) $ (6.4) $ (4.4) $ 543.8 $ 412.5 $ 337.7 Noninterest income ............. 2.1 4.1 4.8 200.7 146.4 122.0 ------- ------- ------- ------- ------- ------- Total revenue .................. (7.2) (2.3) 0.4 744.5 558.9 459.7 Provision for loan losses ...... (0.5) (0.2) -- 12.2 7.8 6.5 Noninterest expense(1).......... 14.8 9.1 6.4 460.4 335.2 269.8 ------- ------- ------- ------- ------- ------- Pretax cash earnings ........... (21.5) (11.2) (6.0) 271.9 215.9 183.4 Income tax expense (benefit) ... (11.2) (5.7) (2.4) 86.9 73.4 59.8 Minority interest .............. 0.5 -- -- 0.5 -- -- ------- ------- ------- ------- ------- ------- Cash earnings1 ................. (10.8) (5.5) (3.6) 184.5 142.5 123.6 Amortization of goodwill and CDI 0.6 0.8 0.7 10.7 6.7 3.3 Merger expense ................. 3.0 2.7 -- 43.0 2.7 -- Income tax (benefit) ........... 0.2 (0.6) (0.1) (16.0) (1.2) (0.1) ------- ------- ------- ------- ------- ------- Net income ................ $ (14.6) $ (8.4) $ (4.2) $ 146.8 $ 134.3 $ 120.4 ======= ======= ======= ======= ======= ======= AVERAGE BALANCE SHEET DATA Total assets ................... $ (109) $ 4 $ 2 $13,203 $10,420 $ 7,862 Net loans and leases ........... 8 4 4 7,174 5,072 3,993 Sold loans being serviced(2) ... -- -- -- 1,038 958 856 Allowance for loan losses ...... 1 1 1 126 89 83 Total deposits ................. (96) (11) (19) 9,507 6,741 5,498 Common equity .................. (94) (67) (29) 896 704 588 END OF YEAR BALANCE SHEET DATA Total assets ................... $ (271) $ (78) $ 26 $16,649 $10,869 $ 8,224 Net loans and leases ........... 11 3 4 10,633 5,669 4,503 Total deposits ................. (27) (10) (16) 13,321 7,956 6,009 PERFORMANCE RATIOS Return on average assets ....... 1.11% 1.29% 1.53% Return on average common equity 16.38% 19.08% 20.47% Efficiency ratio ............... 68.23% 60.85% 58.47% OPERATING CASH PERFORMANCE RATIOS(1) Return on average assets ....... 1.42% 1.38% 1.58% Return on average common equity 26.46% 24.23% 22.84% Efficiency ratio ............... 61.10% 59.20% 57.75% REGULATORY CAPITAL RATIOS Tier I leverage ratio .......... 5.98% 6.83% 9.05% Tier I risk-based capital ratio 8.46% 11.55% 14.43% Total risk-based capital ratio . 11.48% 13.42% 16.65% OTHER INFORMATION Full-time equivalent employees . 952 211 213 6,793 4,895 3,874 Domestic offices: Traditional branches ........ -- -- -- 263 189 130 Banking centers in grocery stores ........... -- -- -- 69 64 44 Foreign office ................. -- -- -- 1 1 1 ------- ------- ------- ------- ------- ------- Total offices ............... -- -- -- 333 254 175 ATMs ........................... 12 145 40 463 509 362
1Before amortization of goodwill and core deposit intangible assets and merger expense. 2Amount represents outstanding balance of loans sold and being serviced by the Company, excluding long-term first mortgage residential real estate loans. 25 - continued Schedule 2 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 ........................ $ 1,556 $ 88.5 5.69% $ 1,506 $ 85.4 5.67% Securities: Held to maturity ....................... 2,232 153.6 6.88% 1,885 132.3 7.02% Available for sale ..................... 634 35.3 5.57% 762 51.1 6.71% Trading account ........................ 429 24.0 5.59% 276 16.2 5.88% ---------- ---------- ---------- ---------- Total securities .............. 3,295 212.9 6.46% 2,923 199.6 6.83% ---------- ---------- ---------- ---------- Loans: Loans held for sale .................... 202 14.3 7.07% 163 11.9 7.27% Net loans and leases(2)................. 6,972 669.3 9.60% 4,909 490.0 9.98% ---------- ---------- ---------- ---------- Total loans ................... 7,174 683.6 9.53% 5,072 501.9 9.89% ---------- ---------- ---------- ---------- Total interest-earning assets ................... $ 12,025 $ 985.0 8.19% $ 9,501 $ 786.9 8.28% ---------- ---------- Cash and due from banks ......................... 615 517 Allowance for loan losses ....................... (126) (89) Goodwill and core deposit intangibles ........... 199 116 Other assets .................................... 490 375 ---------- ---------- Total assets .................. $ 13,203 $ 10,420 ========== ========== LIABILITIES: Interest-bearing deposits: Savings and NOW deposits ............... $ 1,160 $ 33.2 2.86% $ 940 $ 28.2 3.00% Money market and super NOW deposits .... 3,475 123.9 3.57% 2,609 96.4 3.70% Time deposits under $100,000 ........... 1,587 82.3 5.19% 1,017 53.1 5.22% Time deposits $100,000 or more ......... 833 46.1 5.53% 418 23.9 5.70% Foreign deposits ....................... 182 8.2 4.52% 142 6.4 4.49% ---------- ---------- ---------- ---------- Total interest-bearing deposits 7,237 293.7 4.06% 5,126 208.0 4.06% ---------- ---------- ---------- ---------- Borrowed funds: Securities sold, not yet purchased ..... 202 10.0 4.97% 92 5.4 5.82% Federal funds purchased and security repurchase agreements ......... 1,844 87.3 4.74% 2,223 115.1 5.18% Commercial paper ....................... 28 1.6 5.77% -- -- FHLB advances and other borrowings: Less than one year ............ 63 4.0 6.28% 84 5.7 6.72% Over one year ................. 114 6.6 5.79% 136 8.2 6.02% Long-term debt ......................... 347 29.1 8.37% 274 24.6 8.98% ---------- ---------- ---------- ---------- Total borrowed funds .......... 2,598 138.6 5.33% 2,809 159.0 5.66% ---------- ---------- ---------- ---------- Total interest-bearing liabilities .............. $ 9,835 $ 432.3 4.40% $ 7,935 $ 367.0 4.63% ---------- ---------- Noninterest-bearing deposits .................... 2,269 1,616 Other liabilities ............................... 194 165 ---------- ---------- Total liabilities ............................... 12,298 9,716 Minority interest ............................... 9 -- Total shareholders' equity ...................... 896 704 ---------- ---------- Total liabilities and shareholders' equity ...... $ 13,203 $ 10,420 ========== ========== Spread on average interest-bearing funds ........ 3.80% 3.66% ==== ==== Net interest income and net yield on Interest-earning assets ................ $ 552.7 4.60% $ 419.9 4.42% ========== ==== ========== ====
1 Taxable-equivalent rates used where applicable. 2 Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. 26
1996 1995 -------------------------------------- -------------------------------------- Amount Amount Average of Average Average of Average (Amounts in millions) Balance Interest(1) Rate Balance Interest(1) Rate ---------- ---------- ---------- ---------- ---------- ---------- Money market investments ........................ $ 943 $ 52.7 5.59% $ 961 $ 57.0 5.93% Securities: Held to maturity ....................... 1,396 99.1 7.10% 1,183 85.8 7.25% Available for sale ..................... 707 45.7 6.47% 624 41.3 6.62% Trading account ........................ 157 9.2 5.87% 147 9.3 6.30% ---------- ---------- ---------- ---------- Total securities .............. 2,260 154.0 6.82% 1,954 136.4 6.98% ---------- ---------- ---------- ---------- Loans: Loans held for sale .................... 151 11.6 7.62% 116 9.3 7.99% Net loans and leases(2)................. 3,842 383.8 9.99% 2,975 307.2 10.33% ---------- ---------- ---------- ---------- Total loans ................... 3,993 395.4 9.90% 3,091 316.5 10.24% ---------- ---------- ---------- ---------- Total interest-earning assets ................... $ 7,196 $ 602.1 8.37% $ 6,006 $ 509.9 8.49% ---------- ---------- Cash and due from banks ......................... 409 368 Allowance for loan losses ....................... (83) (76) Goodwill and core deposit intangibles ........... 47 25 Other assets .................................... 293 257 ---------- ---------- Total assets .................. $ 7,862 $ 6,580 ========== ========== LIABILITIES: Interest-bearing deposits: Savings and NOW deposits ............... $ 828 $ 26.0 3.14% $ 873 $ 26.6 3.04% Money market and super NOW deposits .... 2,168 78.2 3.61% 1,640 66.4 4.05% Time deposits under $100,000 ........... 828 43.3 5.23% 705 36.8 5.22% Time deposits $100,000 or more ......... 284 16.0 5.60% 187 10.9 5.82% Foreign deposits ....................... 121 5.4 4.46% 139 7.2 5.16% ---------- ---------- ---------- ---------- Total interest-bearing deposits 4,229 168.9 3.99% 3,544 147.9 4.17% ---------- ---------- ---------- ---------- Borrowed funds: Securities sold, not yet purchased ..... 77 4.5 5.85% 90 5.6 6.23% Federal funds purchased and security repurchase agreements ......... 1,365 68.4 5.02% 1,067 58.3 5.47% Commercial paper ....................... -- -- -- -- FHLB advances and other borrowings: Less than one year ............ 66 4.3 6.47% 131 8.8 6.70% Over one year ................. 88 5.3 6.04% 97 5.8 5.96% Long-term debt ......................... 63 5.6 8.78% 62 5.5 8.86% ---------- ---------- ---------- ---------- Total borrowed funds .......... 1,659 88.1 5.31% 1,447 84.0 5.80% ---------- ---------- ---------- ---------- Total interest-bearing liabilities .............. $ 5,888 $ 257.0 4.37% $ 4,991 $ 231.9 4.65% ---------- ---------- Noninterest-bearing deposits .................... 1,269 1,013 Other liabilities ............................... 117 111 ---------- ---------- Total liabilities ............................... 7,274 6,115 Minority interest ............................... -- -- Total shareholders' equity ...................... 588 465 ---------- ---------- Total liabilities and shareholders' equity ...... $ 7,862 $ 6,580 ========== ========== Spread on average interest-bearing funds ........ 4.00% 3.84% ==== ==== Net interest income and net yield on Interest-earning assets ................ $ 345.1 4.80% $ 278.0 4.63% ========== ==== ========== ====
1 Taxable-equivalent rates used where applicable. 2 Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. 27
1994 -------------------------------------- Amount Average of Average (Amounts in millions) Balance Interest(1) Rate ---------- ---------- ---------- Money market investments ........................ $ 883 $ 35.6 4.03% Securities: Held to maturity ....................... 963 60.4 6.27% Available for sale ..................... 560 32.1 5.74% Trading account ........................ 291 16.5 5.68% ---------- ---------- Total securities .............. 1,814 109.0 6.01% ---------- ---------- Loans: Loans held for sale .................... 188 12.3 6.56% Net loans and leases(2)................. 2,751 253.1 9.20% ---------- ---------- Total loans ................... 2,939 265.4 9.03% ---------- ---------- Total interest-earning assets ................... $ 5,636 $ 410.0 7.28% ---------- Cash and due from banks ......................... 370 Allowance for loan losses ....................... (75) Goodwill and core deposit intangibles ........... 19 Other assets .................................... 216 ---------- Total assets .................. $ 6,166 ========== LIABILITIES: Interest-bearing deposits: Savings and NOW deposits ............... $ 875 $ 25.4 2.90% Money market and super NOW deposits .... 1,460 44.6 3.05% Time deposits under $100,000 ........... 566 22.1 3.91% Time deposits $100,000 or more ......... 133 5.3 3.95% Foreign deposits ....................... 108 4.4 4.10% ---------- ---------- Total interest-bearing deposits 3,142 101.8 3.24% ---------- ---------- Borrowed funds: Securities sold, not yet purchased ..... 184 11.0 5.95% Federal funds purchased and security repurchase agreements ......... 1,081 42.2 3.91% Commercial paper ....................... -- -- FHLB advances and other borrowings: Less than one year ............ 134 6.9 5.20% Over one year ................. 119 5.5 4.60% Long-term debt ......................... 64 5.1 8.00% ---------- ---------- Total borrowed funds .......... 1,582 70.7 4.47% ---------- ---------- Total interest-bearing liabilities .............. $ 4,724 $ 172.5 3.65% ---------- Noninterest-bearing deposits .................... 972 Other liabilities ............................... 86 ---------- Total liabilities ............................... 5,782 Minority interest ............................... -- Total shareholders' equity ...................... 384 ---------- Total liabilities and shareholders' equity ...... $ 6,166 ========== Spread on average interest-bearing funds ........ 3.62% ==== Net interest income and net yield on Interest-earning assets ................ $ 237.5 4.21% ========== ====
1 Taxable-equivalent rates used where applicable. 2 Net of unearned income and fees, net of related costs. Loans include nonaccrual and restructured loans. 27 - continued Schedule 3 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 .................. $ 2.8 $ 0.3 $ 3.1 $ 31.9 $ 0.8 $ 32.7 Securities: Held to maturity ...................... 23.9 (2.6) 21.3 34.5 (1.3) 33.2 Available for sale .................... (7.1) (8.7) (15.8) 3.6 1.8 5.4 Trading account ....................... 8.6 (0.8) 7.8 7.0 -- 7.0 ------- ------- ------- ------- ------- ------- Total securities .................... 25.4 (12.1) 13.3 45.1 0.5 45.6 ------- ------- ------- ------- ------- ------- Loans: Loans held for sale ................... 2.7 (0.3) 2.4 0.9 (0.6) 0.3 Net loans and leases(2)................ 198.0 (18.7) 179.3 106.5 (0.3) 106.2 ------- ------- ------- ------- ------- ------- Total loans ......................... 200.7 (19.0) 181.7 107.4 (0.9) 106.5 ------- ------- ------- ------- ------- ------- Total interest-earning assets ............. $ 228.9 $ (30.8) $ 198.1 $ 184.4 $ 0.4 $ 184.8 ------- ------- ------- ------- ------- ------- Interest-bearing liabilities: Interest-bearing deposits: Savings and NOW deposits .............. $ 6.3 $ (1.3) $ 5.0 $ 3.4 $ (1.2) $ 2.2 Money market and super NOW deposits ... 30.9 (3.4) 27.5 16.3 1.9 18.2 Time deposits under $100,000 .......... 29.5 (0.3) 29.2 9.9 (0.1) 9.8 Time deposits $100,000 or more ........ 22.9 (0.7) 22.2 7.6 0.3 7.9 Foreign deposits ...................... 1.8 -- 1.8 1.0 -- 1.0 ------- ------- ------- ------- ------- ------- Total interest-bearing deposits ..... 91.4 (5.7) 85.7 38.2 0.9 39.1 ------- ------- ------- ------- ------- ------- Borrowed funds: Securities sold, not yet purchased .... 5.4 (0.8) 4.6 0.9 -- 0.9 Federal funds purchased and security repurchase agreements ...... (18.0) (9.8) (27.8) 44.4 2.3 46.7 Commercial paper ...................... 0.8 0.8 1.6 -- -- -- FHLB advances and other borrowings: Less than one year .................. (1.3) (0.4) (1.7) 1.2 0.2 1.4 Over one year ....................... (1.3) (0.3) (1.6) 2.9 -- 2.9 Long-term debt ........................ 6.1 (1.6) 4.5 18.9 0.1 19.0 ------- ------- ------- ------- ------- ------- Total borrowed funds ................ (8.3) (12.1) (20.4) 68.3 2.6 70.9 ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities ........ $ 83.1 $ (17.8) $ 65.3 $ 106.5 $ 3.5 $ 110.0 ------- ------- ------- ------- ------- ------- Change in net interest income ............. $ 145.8 $ (13.0) $ 132.8 $ 77.9 $ (3.1) $ 74.8 ======= ======= ======= ======= ======= =======
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. 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 $12.2 million in 1998 compared to $7.8 million in 1997 and $6.5 million in 1996. The provision was .17% of average loans for 1998, .15% in 1997 and .16% for 1996. NONINTEREST INCOME Noninterest income comprised 26.6% of net revenue in 1998 compared to 25.8% in 1997 and 26.1% in 1996. Noninterest income was $200.7 million in 1998, an increase of 37.1% over $146.4 million in 1997, which was up 20.0% over $122.0 million in 1996. Noninterest income for 1998 includes $5.3 million from Sumitomo since the acquisition date. Without Sumitomo, noninterest income increased 33.5% from 1997. Schedule 4 shows the major components of noninterest income. Schedule 4 Noninterest Income
Percent Percent Percent Percent (Amounts in millions) 1998 Change 1997 Change 1996 Change 1995 Change 1994 -------- ---- -------- ---- -------- ---- ------- ---- ------- Service charges on deposit accounts $ 58.2 20.0% $ 48.5 22.8% $ 39.5 20.4% $ 32.8 18.4% $ 27.7 Other service charges, Commissions and fees ......... 54.7 35.1 40.5 32.4 30.6 18.6 25.8 12.2 23.0 Trust income ...................... 9.4 38.2 6.8 30.8 5.2 20.9 4.3 -- 4.3 Investment securities Gains (losses), net .......... 2.1 141.2 (5.1) (1,175.0) (0.4) (300.0) (0.1) 75.0 (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 24.8 40.4 10.4 36.6 44.7 25.3 66.4 15.2 Other income ...................... 16.7 74.0 9.6 23.1 7.8 (12.4) 8.9 7.2 8.3 -------- -------- -------- ------- ------- Total ............................. $ 200.7 37.1% $ 146.4 20.0% $ 122.0 27.3% $ 95.8 21.3% $ 79.0 ======== ======== ======== ======= =======
The 20.0% and 22.8% 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 $54.7 million in 1998, an increase of 35.1% over 1997 which was 32.4% above 1996. Loan sales and servicing income rose 24.8% in 1998 to $50.4 million over $40.4 million in 1997 which was 10.4% 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 $16.7 million in 1998 an increase of 74.0% 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. 29 NONINTEREST EXPENSE The Company's noninterest expense was $514.1 million in 1998, an increase of 49.2% over $344.6 million in 1997, which was up 26.2% over the $273.1 million in 1996. Included in 1998 expense was $43.0 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 26.3% over 1997. Schedule 5 shows the major components of noninterest expense. Schedule 5 Noninterest Expense
Percent Percent Percent Percent (Amounts in millions) 1998 Change 1997 Change 1996 Change 1995 Change 1994 ------- ------- ------- ------- ------- ------- ------- ------- ------- Salaries and benefits ............ $ 249.6 35.1% $ 184.7 22.7% $ 150.5 21.8% $ 123.6 13.6% $ 108.8 Occupancy, net ................... 30.1 59.3 18.9 21.9 15.5 5.4 14.7 9.7 13.4 Furniture and equipment .......... 36.2 28.8 28.1 34.4 20.9 44.1 14.5 19.8 12.1 Other real estate expense ........ 0.7 75.0 0.4 100.0 0.2 (75.0) 0.8 14.3 0.7 Legal and professional services .. 15.3 71.9 8.9 39.1 6.4 6.7 6.0 (4.8) 6.3 Supplies ......................... 11.3 22.8 9.2 22.7 7.5 31.6 5.7 11.8 5.1 Postage .......................... 10.3 37.3 7.5 19.0 6.3 3.3 6.1 10.9 5.5 Advertising ...................... 11.9 56.6 7.6 26.7 6.0 11.1 5.4 50.0 3.6 FDIC premiums .................... 1.4 75.0 0.8 700.0 0.1 (98.0) 4.9 (43.7) 8.7 Merger expense ................... 43.0 1,492.6 2.7 -- -- -- -- -- -- Amortization of goodwill/ and core deposit intangibles .. 10.7 59.7 6.7 103.0 3.3 22.2 2.7 3.8 2.6 Amortization of mortgage servicing assets ............ 5.5 161.9 2.1 61.5 1.3 8.3 1.2 (29.4) 1.7 Other expenses ................... 88.1 31.5 67.0 21.6 55.1 24.9 44.1 18.5 37.2 ------- ------- ------- ------- ------- Total ............................ $ 514.1 49.2% $ 344.6 26.2% $ 273.1 18.9% $ 229.7 11.7% $205.70 ======= ======= ======= ======= =======
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 38.8% and 31.1%, respectively, compared to year-end 1997. On December 31, 1997, the Company had 4,895 full-time equivalent employees and 254 offices for increases of 26.4% and 45.1%, 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 61.10% in 1998 compared to 59.20% in 1997 and 57.75% in 1996. INCOME TAXES The Company's income tax expense for 1998 was $70.9 million compared to $72.2 million in 1997 and $59.7 million in 1996. The Company's effective income tax rate was 32.5% in 1998, 35.0% in 1997 and 33.1% in 1996. The decrease in the effective tax rate for 1998 results primarily from decisions regarding a corporate reorganization over the past year. 30 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 2. Average earning assets increased 26.6% to $12,025 million in 1998 compared to $9,501 million in 1997. Earning assets comprised 91.1% 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 3.3% to $1,556 million in 1998 compared to $1,506 million in 1997. Average securities increased 12.8% to $3,295 million in 1998, compared to $2,923 million in 1997. Average held to maturity securities increased 18.4% to $2,232 million, available for sale securities decreased 16.7% to $634 million and trading account securities increased 55.9% to $429 million. Average net loans and leases increased 41.4% to $7,174 million in 1998 compared to $5,072 million in 1997, representing 59.7% of earning assets in 1998 compared to 53.4% in 1997. Average net loans and leases were 75.5% of average total deposits in 1998, as compared to 75.2% in 1997. Schedule 6 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 $ 62 $ 4 $ 4 $ 33 $ 33 U.S. government agencies and corporations: Small Business Administration loan- backed securities ...... 358 356 441 449 488 492 Other agency securities .... 940 944 1,426 1,432 643 642 States and political subdivisions ... 285 293 240 245 269 274 Mortgage-backed securities .......... 1,159 1,166 89 90 76 77 --------- --------- --------- --------- --------- --------- 2,804 2,821 2,200 2,220 1,509 1,518 --------- --------- --------- --------- --------- --------- AVAILABLE FOR SALE: U.S. Treasury securities ............ 46 47 37 38 30 30 U.S. government agencies and corporations: Small Business Administration originator fees certificates ...... 85 69 75 72 50 46 Other agency securities .... 112 113 347 347 173 172 States and political subdivisions ... 15 16 31 32 42 44 Mortgage- and other asset-backed securities ................. 179 180 83 84 262 256 --------- --------- --------- --------- --------- --------- 437 425 573 573 557 548 --------- --------- --------- --------- --------- --------- Equity securities: Mutual funds: Accessor Funds, Inc. ............ 117 118 109 111 109 109 Stock: Federal Home Loan Bank .......... 101 101 98 98 85 85 Other ........................... 36 41 24 25 18 18 --------- --------- --------- --------- --------- --------- 254 260 231 234 212 212 --------- --------- --------- --------- --------- --------- 691 685 804 807 769 760 --------- --------- --------- --------- --------- --------- Total ............................ $ 3,495 $ 3,506 $ 3,004 $ 3,027 $ 2,278 $ 2,278 ========= ========= ========= ========= ========= =========
31 INVESTMENT SECURITIES PORTFOLIO Schedule 6 presents the Company's year-end investment securities on December 31, 1998, 1997 and 1996. Schedules 7 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. Schedule 7 Maturities And Average Yields On Securities On December 31, 1998
After one After five but within but within Total Securities Within one year five years ten years After 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... 940 6.3% 41 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% ------ ------ ------ ------ ------ 2,804 6.5% 611 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 ............. 112 6.1% 11 5.8% 92 6.1% 8 6.3% 1 5.3% securities 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% ------ ------ ------ ------ ------ 437 6.7% 94 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% ------ ------ ------ ------ ------ 691 6.6% 94 6.3% 232 6.6% 64 7.3% 301 6.6% ------ ------ ------ ------ ------ Total ........................ $3,495 6.5% $ 705 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. 32 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 $10,682 million, an increase of 87.0% compared to $5,713 million on December 31, 1997. Included in this increase are loans from acquisitions totaling $3,917 million. Excluding the acquired loans the increase for 1998 compared to 1997 was 18.4%. Schedule 8 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 8 Loan Portfolio By Type
December 31, 1998 ---------------------------------- One Year Through Over December 31, One year five Five ---------------------------------- (Amounts in millions) or Less 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 1,445 1,087 923 614 Real estate: Construction ....................... 667 191 9 867 567 385 315 247 Other: Home equity credit line ......... 78 42 102 222 179 231 152 56 1-4 family residential .......... 233 306 1,648 2,187 818 689 520 573 Other real estate-secured ....... 550 1,061 2,013 3,624 1,726 1,410 973 631 ------- ------- ------- ------- ------- ------- ------- ------- 1,528 1,600 3,772 6,900 3,290 2,715 1,960 1,507 ------- ------- ------- ------- ------- ------- ------- ------- Consumer: Bankcard ........................... 34 52 1 87 67 48 65 44 Other .............................. 144 252 56 452 458 341 326 381 ------- ------- ------- ------- ------- ------- ------- ------- 178 304 57 539 525 389 391 425 ------- ------- ------- ------- ------- ------- ------- ------- Lease financing ......................... 9 153 51 213 176 160 133 129 Foreign loans ........................... 21 7 16 44 -- -- -- -- Other receivables ....................... 36 21 5 62 98 45 35 33 ------- ------- ------- ------- ------- ------- ------- ------- Total loans ..................... $ 3,613 $ 2,841 $ 4,228 $10,682 $ 5,713 $ 4,547 $ 3,568 $ 2,817 ======= ======= ======= ======= ======= ======= ======= ======= Loans maturing in more than one year: With fixed interest rates .......... $ 1,490 $ 2,467 $ 3,957 With variable interest rates ....... 1,351 1,761 3,112 ------- ------- ------- Total ........................... $ 2,841 $ 4,228 $ 7,069 ======= ======= =======
33 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 9 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 =========== =========== =========== =========== =========== ===========
DEPOSITS AND BORROWED FUNDS As derived from Schedule 2, total average deposits increased 41.0% to $9,506 million in 1998 from $6,742 million in 1997. Average noninterest-bearing deposits increased 40.5%, average savings and NOW deposits increased 23.5%, average money market and super NOW deposits increased 33.2%, and average time deposits under $100,000 increased 56.1%. Average time deposits over $100,000 increased 99.3% over 1997 average balances and average foreign deposits increased 28.5% for 1998, as compared with 1997. Total deposits increased 67.4% to $13,321 million on December 31, 1998 as compared to $7,956 million on December 31, 1997. Included in this increase are deposits from acquisitions totaling $4,666 million. Without the acquired deposits the increase was 8.8%. Comparing December 31, 1998 to December 31, 1997, demand deposits increased 52.1%, savings and money market deposits increased 52.8%, time deposits under $100,000 increased 101.0%, while time deposits over $100,000 increased 179.6% 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 $1,014 million, an increase of 36.6% over the $742 million on December 31, 1997. The ratio of average equity to average assets for the year 1998 was 6.79%, compared to 6.76% for 1997. 34 During 1998, 1997 and 1996, the Company repurchased and retired 625,288, 3,809,724 and 1,306,042 shares of its common stock at a cost of $26.7 million, $134.6 million and $25.1 million, respectively. On December 31, 1998, the Company's Tier 1 leverage ratio was 5.98%, as compared to 6.83% on December 31, 1997. On December 31, 1998, the Company's Tier 1 risk-based capital ratio was 8.46%, as compared to 11.55% on December 31, 1997. On December 31, 1998 the Company's total risk-based capital ratio was 11.48%, as compared to 13.42% 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. 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. 35 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 $24 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 .41% 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 $11 million on December 31, 1997. These loans equaled .24% of net loans and leases on December 31, 1998, as compared to .19% 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 $10 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 $0.3 million, respectively, on $11.6 million and $1.9 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. 36 Schedule 10 Nonperforming Assets
December 31, ------------------------------------ (Amounts in millions) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Nonaccrual loans: Commercial, financial and agricultural ..... $ 11 $ 5 $ 7 $ 4 $ 3 Real estate ................................ 39 10 7 7 8 Consumer ................................... 1 -- 1 1 1 Lease financing ............................ 3 1 1 2 2 Other ...................................... -- -- -- -- 4 ---- ---- ---- ---- ---- Total .................................... 54 16 16 14 18 ---- ---- ---- ---- ---- Restructured loans: Real estate ................................ 5 2 2 1 1 Other real estate owned: Commercial, financial and agricultural: Improved ................................. -- 2 -- -- 4 Unimproved ............................... -- 1 -- -- 1 Residential: 1-4 Family ............................... 2 1 1 2 -- Multi-family ............................. -- -- -- 1 -- Other ...................................... 3 2 2 2 3 ---- ---- ---- ---- ---- Total .................................... 5 6 3 5 8 Other nonperforming assets ..................... -- -- -- -- 3 ---- ---- ---- ---- ---- Total .................................... 5 6 3 5 11 ---- ---- ---- ---- ---- Total .................................... $ 64 $ 24 $ 21 $ 20 $ 30 ==== ==== ==== ==== ==== % of Net loans* and leases, other real estate owned and other nonperforming assets ....... .60% .41% .45% .56% 1.08% Accruing loans past due 90 days or more: Commercial, financial and agricultural ..... $ 5 $ 2 $ 2 $ 1 $ 1 Real estate ................................ 20 7 3 4 2 Consumer 1 2 1 1 1 ---- ---- ---- ---- ---- Total .................................... $ 26 $ 11 $ 6 $ 6 $ 4 ==== ==== ==== ==== ==== % of Net loans* and leases ..................... .24% .19% .13% .16% .12% *Includes loans held for sale.
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 1.62% 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 $9 million, or .19% of average net loans and leases in 1997 and net charge-offs of $5 million, or .13% 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 514.18% on December 31, 1997 and 490.77% 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 340.22% on December 31, 1997, and 393.92% on December 31, 1996. 37 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, $2,787 million, and $2,301 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 11 provides a breakdown of the allowance for loan losses by loan category and Schedule 12 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. Schedule 11 Allocation of the Allowance for Loan Losses
1998 1997 1996 1995 1994 ---------------- ---------------- ---------------- ---------------- ---------------- (Amounts in millions) % of Allocation % of Allocation % of Allocation % of Allocation % of Allocation total of total of total of total of total of loans Allowance loans Allowance loans Allowance loans Allowance loans Allowance ------ --------- ----- --------- ----- --------- ----- --------- ----- --------- Type of loan Loans held for sale .................... 2.2% $ -- 3.1% $ -- 3.3% $ -- 3.5% $ -- 3.8% $ -- Commercial, financial and agricultural . 25.3% 81 25.3% 20 23.9% 18 25.9% 13 21.8% 11 Real estate ............................ 64.8% 47 57.6% 27 59.7% 28 54.9% 17 53.5% 14 Consumer ............................... 5.1% 12 9.2% 11 8.6% 9 11.0% 12 15.1% 11 Lease financing ........................ 2.0% 6 3.1% 2 3.5% 2 3.7% 2 4.6% 2 Other receivables ...................... 0.6% -- 1.7% -- 1.0% -- 1.0% -- 1.2% -- ----- ----- ----- ----- ----- Total loans ................... 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- Off-balance sheet unused commitments and standby letters of credit ....... 20 9 6 8 5 --------- --------- --------- --------- --------- Total allocated ........................ 166 69 63 52 43 Unallocated ............................ 40 23 23 28 30 --------- --------- --------- --------- --------- Total allowance for loan losses $ 206 $ 92 $ 86 $ 80 $ 73 ========= ========= ========= ========= =========
38 Schedule 12 Summary Of Loan Loss Experience
(Amounts in millions) 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Loans* and leases outstanding on December 31 (net of unearned income) ................. $ 10,633 $ 5,669 $ 4,503 $ 3,533 $ 2,791 ======== ======== ======== ======== ======== Average loans* and leases outstanding (net of unearned income) ................. $ 7,174 $ 5,072 $ 3,993 $ 3,091 $ 2,939 ======== ======== ======== ======== ======== Allowance for loan losses: Balance at beginning of year ................. $ 92 $ 86 $ 80 $ 73 $ 76 Allowance of companies acquired .............. 117 7 4 7 1 Provision charged against earnings ........... 12 8 7 5 3 Loans and leases charged off: Commercial, financial and agricultural .... (8) (6) (3) (2) (7) Real estate ............................... (6) (1) (1) (3) (1) Consumer .................................. (9) (9) (8) (7) (5) Lease financing .......................... (1) -- -- -- (1) -------- -------- -------- -------- -------- Total ................................... (24) (16) (12) (12) (14) -------- -------- -------- -------- -------- Recoveries: Commercial, financial and agricultural .... 3 3 3 3 2 Real estate ............................... 3 2 1 1 1 Consumer .................................. 3 2 2 3 4 Lease financing ........................... -- -- 1 -- -- -------- -------- -------- -------- -------- Total ................................... 9 7 7 7 7 -------- -------- -------- -------- -------- Net loan and lease charge-offs ............... (15) (9) (5) (5) (7) -------- -------- -------- -------- -------- Balance at end of year ....................... $ 206 $ 92 $ 86 $ 80 $ 73 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans and leases ................. .21% .19% .13% .17% .25% Ratio of allowance for loan losses to loans and leases outstanding on December 31 ..... 1.93% 1.62% 1.92% 2.26% 2.62% Ratio of allowance for loan losses to nonperforming loans on December 31 ........ 347.86% 514.18% 490.77% 562.38% 382.10% Ratio of allowance for loan losses to nonaccrual loans and accruing loans past due 90 days or more on December 31 ........ 258.04% 340.22% 393.92% 415.29% 345.45%
*Includes loans held for sale. 39 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. 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 $337 million: i.e., the $9,476 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 13. The Company does not have policy limits regarding its gap position. 40 Schedule 13 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 ..................... 960 906 433 $ 505 2,804 Available for sale ................... 307 49 237 92 685 Trading account ...................... 192 192 Loans and leases ....................... 5,316 1,147 2,341 1,830 10,634 Nonearning assets .......................... $ 1,723 1,723 --------- --------- --------- --------- --------- --------- Total uses of funds ................ $ 7,368 $ 2,108 $ 3,023 $ 2,427 $ 1,723 $ 16,649 --------- --------- --------- --------- --------- --------- 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 ....................... 1,014 1,014 --------- --------- --------- --------- --------- --------- Total sources of funds ............ $ 6,428 $ 2,591 $ 2,630 $ 1,076 $ 3,924 $ 16,649 --------- --------- --------- --------- --------- --------- 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 14. For additional information regarding off-balance sheet financial contracts, refer to Notes 1, 12 and 19 of Notes to Consolidated Financial Statements. 41 Schedule 14 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, $53.5 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. 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 Zions' 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 42 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 Year 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. 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 43 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. CONSOLIDATED CONDENSED STATEMENTS OF INCOME The following consolidated condensed statements of income present earnings and operating cash earnings information as originally reported and restated. The Company has restated prior year financial information for significant acquisitions accounted for as poolings of interests. See Note 2 of Notes to Consolidated Financial Statements for further information on the acquisitions.
Originally Reported Earnings(1) (Amounts in millions) -------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Net interest income ..................................... $ 543.8 $ 351.8 $ 260.4 $ 227.1 $ 198.6 Noninterest income ...................................... 200.7 143.2 110.9 86.7 73.2 ------- ------- ------- ------- ------- Total revenue ........................................... 744.5 495.0 371.3 313.8 271.8 Provision for loan losses ............................... 12.2 6.2 3.5 2.8 2.2 Noninterest expense(2) .................................. 460.4 292.7 212.0 186.2 172.9 ------- ------- ------- ------- ------- Pretax cash earnings .................................... 271.9 196.1 155.8 124.8 96.7 Income tax expense ...................................... 86.9 66.1 52.2 41.3 31.2 Minority interest ....................................... 0.5 -- -- -- -- ------- ------- ------- ------- ------- Cash earnings(2) ........................................ 184.5 130.0 103.6 83.5 65.5 Amortization of goodwill and core deposit ............... 10.7 5.9 2.3 2.5 2.0 intangibles Merger expense .......................................... 43.0 2.7 -- -- -- Income tax (benefit) .................................... (16.0) (1.0) (0.1) (0.3) (0.3) ------- ------- ------- ------- ------- Net income .......................................... $ 146.8 $ 122.4 $ 101.4 $ 81.3 $ 63.8 ======= ======= ======= ======= ======= Operating cash earnings per share (diluted)(2) .......... $ 2.40 $ 2.01 $ 1.75 $ 1.42 $ 1.12 Net income per share (diluted) .......................... $ 1.91 $ 1.89 $ 1.71 $ 1.38 $ 1.09
Restated Earnings ---------------------------------------- 1997 1996 1995 1994 ------- ------- ------- ------- Net interest income ..................................... $ 412.5 $ 337.7 $ 272.5 $ 232.7 Noninterest income ...................................... 146.4 122.0 95.7 79.0 ------- ------- ------- ------- Total revenue ........................................... 558.9 459.7 368.2 311.7 Provision for loan losses ............................... 7.8 6.5 4.7 3.1 Noninterest expense(2) .................................. 335.2 269.8 226.9 203.1 ------- ------- ------- ------- Pretax cash earnings .................................... 215.9 183.4 136.6 105.5 Income tax expense ...................................... 73.4 59.8 44.1 32.9 Minority interest ....................................... -- -- -- -- ------- ------- ------- ------- Cash earnings(2) ........................................ 142.5 123.6 92.5 72.6 Amortization of goodwill and core deposit intangibles ... 6.7 3.3 2.7 2.6 Merger expense .......................................... 2.7 -- -- -- Income tax (benefit) .................................... (1.2) (0.1) (0.3) (0.3) Cumulative effect of changes in accounting principles ... -- -- -- 1.5 ------- ------- ------- ------- Net income .......................................... $ 134.3 $ 120.4 $ 90.1 $ 68.8 ======= ======= ======= ======= Operating cash earnings per share (diluted)(2) .......... $ 1.95 $ 1.71 $ 1.40 $ 1.13 Net income per share (diluted) .......................... $ 1.84 $ 1.66 $ 1.36 $ 1.08
1 Before restatements for acquisitions accounted for as poolings of interests. 2 Before amortization of goodwill and core deposit intangible assets and merger expense. 44 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. /s/KPMG LLP Salt Lake City, Utah January 26, 1999 45 ZIONS BANCORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 (In thousands, except share amounts)
1998 1997 ------------ ------------ Assets Cash and due from banks ............................................................. $ 864,446 710,171 Money market investments: Interest-bearing deposits ....................................................... 30,484 62,001 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 $2,220,179) .. 2,803,903 2,199,555 Available for sale, at market ................................................... 684,581 807,273 Trading account, at market ...................................................... 191,855 83,681 Loans: Loans held for sale ............................................................. 232,253 178,642 Loans, leases, and other receivables ............................................ 10,449,362 5,534,324 ------------ ------------ 10,681,615 5,712,966 Less: Unearned income and fees, net of related costs ............................... 48,123 44,064 Allowance for loan losses .................................................... 205,553 91,571 ------------ ------------ Net loans ........................................................... 10,427,939 5,577,331 Premises and equipment, net ......................................................... 231,066 155,648 Goodwill and core deposit intangibles ............................................... 271,578 174,433 Other real estate owned ............................................................. 5,270 5,738 Other assets ........................................................................ 556,078 301,856 ------------ ------------ $ 16,648,921 10,869,204 ============ ============ Liabilities and Shareholders' Equity Deposits: Noninterest-bearing ............................................................. $ 3,170,436 2,084,153 Interest-bearing: Savings and money market ..................................................... 6,077,556 3,978,009 Time: Under $100,000 ............................................................. 2,340,598 1,164,342 Over $100,000 .............................................................. 1,528,329 546,686 Foreign ...................................................................... 204,244 183,044 ------------ ------------ 13,321,163 7,956,234 Securities sold, not yet purchased .................................................. 29,702 45,067 Federal funds purchased ............................................................. 337,283 350,109 Security repurchase agreements ...................................................... 932,560 1,042,156 Accrued liabilities ................................................................. 319,278 173,331 Commercial paper .................................................................... 49,217 -- Federal Home Loan Bank advances and other borrowings: Less than one year .............................................................. 100,750 68,933 Over one year ................................................................... 56,796 210,681 Long-term debt ...................................................................... 453,735 280,641 ------------ ------------ Total liabilities ................................................... 15,600,484 10,127,152 ------------ ------------ Minority interest ................................................................... 34,781 -- 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 71,366,159 shares ................... 324,099 190,039 Accumulated other comprehensive income (loss) ................................... (4,280) 1,902 Retained earnings ............................................................... 693,837 550,111 ------------ ------------ Total shareholders' equity .......................................... 1,013,656 742,052 ------------ ------------ $ 16,648,921 10,869,204 ============ ============
See accompanying notes to consolidated financial statements 46 ZIONS BANCORPORATION AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1998, 1997, and 1996 (In thousands, except per share amounts)
1998 1997 1996 -------- -------- -------- Interest income: Interest and fees on loans ................................................. $654,318 475,477 371,880 Interest on loans held for sale ............................................ 14,256 11,874 11,509 Interest on money market investments ....................................... 88,510 85,456 52,758 Interest on securities: Held to maturity: Taxable .............................................................. 132,678 115,054 77,909 Nontaxable ........................................................... 14,654 12,092 14,869 Available for sale: Taxable .............................................................. 34,119 47,961 42,360 Nontaxable ........................................................... 836 2,209 2,380 Trading account ......................................................... 24,043 16,211 9,179 Lease financing ............................................................ 12,630 13,197 11,896 -------- -------- -------- Total interest income .............................................. 976,044 779,531 594,740 -------- -------- -------- Interest expense: Interest on savings and money market deposits .............................. 157,119 124,781 104,351 Interest on time and foreign deposits ...................................... 136,588 83,222 64,582 Interest on borrowed funds ................................................. 138,574 158,997 88,082 -------- -------- -------- Total interest expense .............................................. 432,281 367,000 257,015 -------- -------- -------- Net interest income ................................................. 543,763 412,531 337,725 Provision for loan losses ...................................................... 12,179 7,758 6,526 -------- -------- -------- Net interest income after provision for loan losses ................. 531,584 404,773 331,199 -------- -------- -------- Noninterest income: Service charges on deposit accounts ........................................ 58,249 48,540 39,515 Other service charges, commissions, and fees ............................... 54,663 40,485 30,567 Trust income ............................................................... 9,415 6,757 5,195 Investment securities gain (loss), net ..................................... 2,142 (5,071) (385) Underwriting and trading income ............................................ 9,239 5,716 2,721 Loan sales and servicing income ............................................ 50,365 40,399 36,569 Other ...................................................................... 16,640 9,548 7,825 -------- -------- -------- Total noninterest income ............................................ 200,713 146,374 122,007 -------- -------- -------- Noninterest expense: Salaries and employee benefits ............................................. 249,641 184,708 150,448 Occupancy, net ............................................................. 30,080 18,939 15,520 Furniture and equipment .................................................... 36,223 28,084 20,943 Other real estate expense .................................................. 675 356 210 Legal and professional services ............................................ 15,310 8,919 6,443 Supplies ................................................................... 11,332 9,235 7,544 Postage .................................................................... 10,259 7,490 6,253 Advertising ................................................................ 11,859 7,548 6,014 FDIC premiums .............................................................. 1,450 831 50 Merger expense ............................................................. 42,990 2,707 -- Amortization of goodwill and core deposit intangibles ...................... 10,694 6,670 3,337 Amortization of mortgage servicing assets .................................. 5,484 2,152 1,299 Other ...................................................................... 88,060 66,990 55,063 -------- -------- -------- Total noninterest expense ........................................... 514,057 344,629 273,124 -------- -------- -------- Income before income taxes and minority interest ............................... 218,240 206,518 180,082 Income taxes ................................................................... 70,862 72,218 59,664 -------- -------- -------- Net income before minority interest ................................. 147,378 134,300 120,418 Minority interest .............................................................. 531 -- -- -------- -------- -------- Net income .......................................................... $146,847 134,300 120,418 ======== ======== ======== Weighted-average common and common-equivalent shares outstanding during the .... 76,988 72,813 72,158 year ======== ======== ======== Net income per common share: Basic ...................................................................... $ 1.93 1.88 1.69 ======== ======== ======== Diluted .................................................................... $ 1.91 1.84 1.66 ======== ======== ========
See accompanying notes to consolidated financial statements 47 ZIONS BANCORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996 (In thousands)
1998 1997 1996 ------------- ------------- ------------- Cash flows from operating activities: Net income ............................................................. $ 146,847 134,300 120,418 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses .......................................... 12,179 7,758 6,526 Depreciation of premises and equipment ............................. 27,747 20,539 16,577 Amortization ....................................................... 24,393 14,512 10,317 Accretion of unearned income and fees, net of related costs ........ (5,826) 1,444 (34,387) 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) loss, net ............................. (2,142) 5,071 385 Proceeds from loans held-for-sale .................................. 1,237,514 742,244 664,327 Increase in loans held-for-sale .................................... (1,296,803) (766,739) (670,299) Net gain on sales of loans, leases and other assets ................ (43,264) (28,142) (26,739) Change in accrued income taxes ..................................... 23,228 (794) 4,677 Change in accrued interest receivable .............................. 2,293 (20,603) (8,186) Change in accrued interest payable ................................. (1,196) 5,383 (1,736) Other, net ......................................................... (80,004) (25,879) 23,285 ------------- ------------- ------------- Net cash provided by (used in) operating activities ............. (62,861) 39,489 134,796 ------------- ------------- ------------- Cash flows from investing activities: Net decrease (increase) in money market investments .................... 835,930 (208,096) 115,971 Proceeds from maturities of investment securities held to maturity ..... 3,463,175 984,705 378,745 Purchases of investment securities held to maturity .................... (3,511,333) (1,652,068) (680,836) Proceeds from sales of investment securities available for sale ........ 521,415 494,481 190,975 Proceeds from maturities of investment securities available for sale ... 252,429 145,922 167,029 Purchases of investment securities available for sale .................. (660,939) (608,274) (423,740) Proceeds from sales of loans and leases ................................ 918,948 968,717 765,341 Net increase in loans and leases ....................................... (1,893,593) (1,587,939) (1,466,957) 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 3,290 806 Purchases of premises and equipment .................................... (63,728) (39,691) (32,836) 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 .................................... 7,956 6,075 5,335 Purchases of other assets .............................................. -- -- (18,887) Cash paid for acquisitions, net of cash received ....................... (308,539) (25,756) 3,682 ------------- ------------- ------------- Net cash used in investing activities ........................... (431,404) (1,519,986) (995,658) ------------- ------------- ------------- Cash flows from financing activities: Net increase in deposits ............................................... 642,840 1,311,562 595,207 Net change in short-term funds borrowed ................................ (108,755) 377,750 160,194 Proceeds from FHLB advances over one year .............................. 4,665 180,000 4,201 Payments on FHLB advances over one year ................................ (167,886) (74,894) (18,143) Proceeds from issuance of long-term debt ............................... 195,041 24,001 204,050 Payments on long-term debt ............................................. (20,556) (554) (6,020) Net change in minority interest ........................................ 34,781 -- -- Proceeds from issuance of common stock ................................. 136,751 4,643 3,015 Payments to redeem common stock ........................................ (26,741) (121,389) (25,148) Payments to redeem preferred stock ..................................... -- (8,050) -- Dividends paid ......................................................... (41,600) (30,352) (26,207) ------------- ------------- ------------- Net cash provided by financing activities ....................... 648,540 1,662,717 891,149 ------------- ------------- ------------- Net increase in cash and due from banks .................................... 154,275 182,220 30,287 Cash and due from banks at beginning of year ............................... 710,171 527,951 497,664 ------------- ------------- ------------- Cash and due from banks at end of year ..................................... $ 864,446 710,171 527,951 ============= ============= =============
See accompanying notes to consolidated financial statements. 48
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) Accumulated Common stock other Total ------------------------ Comprehensive comprehensive Retained shareholders' Shares Amount income income (loss) earnings equity ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1995 ........................ 69,348,831 $ 184,301 (1,260) 351,952 534,993 Net income ........................................ -- -- 120,418 -- 120,418 120,418 Other comprehensive loss, net of tax: Realized and unrealized holding loss arising during the year, net of tax benefit of $2,838 -- -- (4,581) -- -- -- Reclassification for realized loss recorded in the income statement, net of tax benefit of $148 ..................................... -- -- 237 -- -- -- ----------- Other comprehensive loss ...................... -- -- (4,344) (4,344) -- (4,344) ----------- Total comprehensive income ........................ -- -- $ 116,074 -- -- -- =========== Cash dividends: Preferred, paid by subsidiaries to minority shareholders ................................ -- -- -- (36) (36) Common, $.425 per share ....................... -- -- -- (24,997) (24,997) Preferred dividends of acquired companies prior to merger ............................. -- -- -- (1,174) (1,174) Issuance of common shares for acquisitions ........ 2,305,554 37,171 -- -- 37,171 Stock redeemed and retired ........................ (1,306,042) (25,148) -- -- (25,148) Stock options exercised, net of shares tendered and retired ........................................ 591,487 4,440 -- -- 4,440 ---------- ------- ----- ------- ------- BALANCE, DECEMBER 31, 1996 ........................ 70,939,830 200,764 (5,604) 446,163 641,323 Net income ........................................ -- -- 134,300 -- 134,300 134,300 Other comprehensive income, net of tax: Realized and unrealized holding gain arising during the year, net of tax expense of $4,190 ........................... -- -- 4,375 -- -- -- Reclassification for realized loss recorded in the income statement, net of tax benefit of $1,940 ................................... -- -- 3,131 -- -- -- ----------- Other comprehensive income .................... -- -- 7,506 7,506 -- 7,506 ----------- Total comprehensive income ........................ -- -- $ 141,806 -- -- -- =========== Cash dividends: Preferred, paid by subsidiaries to minority shareholders ................................ -- -- -- (42) (42) Common, $.47 per share ........................ -- -- -- (28,387) (28,387) Dividends of acquired companies prior to merger ............................. -- -- -- (1,923) (1,923) Issuance of common shares for acquisitions ........ 3,672,785 117,835 -- -- 117,835 Stock redeemed and retired ........................ (3,809,724) (134,598) -- -- (134,598) Stock options exercised, net of shares tendered and retired ........................................ 563,268 6,038 -- -- 6,038 ---------- ------- ----- ------- ------- BALANCE, DECEMBER 31, 1997 ........................ 71,366,159 190,039 1,902 550,111 742,052
49
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) Accumulated Common stock other Total ------------------------ Comprehensive comprehensive Retained shareholders' Shares Amount income income (loss) earnings equity ----------- ----------- ----------- ----------- ----------- ----------- Net income ........................................ -- $ -- 146,847 -- 146,847 146,847 Other comprehensive loss, net of tax: Realized and unrealized holding loss arising during the year, net of tax benefit of $3,973 -- -- (5,243) -- -- -- Reclassification for realized gain recorded in the income statement, net of tax expense of $819 ..................................... -- -- (1,323) -- -- -- ----------- Other comprehensive loss ...................... -- -- (6,566) (6,566) -- (6,566) =========== Total comprehensive income ........................ -- -- $ 140,281 -- -- -- =========== Cash dividends: Preferred, paid by subsidiaries to minority shareholders ................................ -- -- -- (46) (46) Common, $.54 per share ........................ -- -- -- (40,669) (40,669) Dividends of acquired companies prior to merger ............................. -- -- -- (885) (885) Net proceeds from stock offering .................. 2,760,000 129,832 -- -- 129,832 Issuance of common shares for acquisitions ........ 4,108,353 16,204 384 38,479 55,067 Conversion of acquired company convertible debt prior to acquisition ...................... 213,741 4,546 -- -- 4,546 Exercise of acquired company warrants prior to acquisition .................................... 257,056 1,852 -- -- 1,852 Stock redeemed and retired ........................ (625,288) (26,741) -- -- (26,741) Stock options exercised, net of shares tendered and retired ........................................ 556,062 8,367 -- -- 8,367 ---------- ----------- ------ ------- --------- BALANCE, DECEMBER 31, 1998 ........................ 78,636,083 $ 324,099 (4,280) 693,837 1,013,656 ========== =========== ====== ======= =========
See accompanying notes to consolidated financial statements. 50 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 three significant acquisitions 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. 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. 51 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. 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 52 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. 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. 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 $433.2 million, $368.0 million, and $257.3 million, respectively, and income taxes of $49.4 million, $67.4 million, and $50.3 million, respectively, for the years ended December 31, 1998, 1997, and 1996. Loans transferred to other real estate owned totaled $5.1 million, $8.8 million, and $1.5 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 53 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. 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. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, 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. 54 2. MERGERS AND Acquisitions On January 6, 1998, the Company acquired Vectra Banking Corporation and its banking subsidiary, Vectra Bank, located in Denver, Colorado for 4,021,303 shares of common stock. Vectra Banking Corporation had total assets of approximately $703 million at the date of acquisition. On May 22, 1998, the Company acquired FP Bancorp, Inc. of Escondido, California, and its banking subsidiary, First Pacific National Bank, for 1,914,731 shares of common stock. FP Bancorp, Inc. had total assets of approximately $363 million on the date of acquisition. FP Bancorp, Inc.'s total interest and noninterest income and net income for the period January 1 through March 31, 1998, were $8.1 million and $1.3 million, respectively. 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 acquisitions of Vectra Banking Corporation, FP Bancorp, Inc., and The Commerce Bancorporation were accounted for as poolings of interests and considered significant business combinations. 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 the restated amounts presented in the accompanying financial statements follows:
Company Vectra FP previously Banking Bancorp, The Commerce Company reported Corporation Inc. Bancorporation restated ----------- ------------ ----------- ----------- ----------- Total revenue .. $ 825,463 48,722 30,943 20,777 925,905 Net income ..... 122,362 3,097 4,383 4,458 134,300
During 1998, the Company issued a total of 4,108,353 shares of common stock to acquire eight additional banking organizations in Colorado, namely Sky Valley Bank Corp., Tri-State Finance Corporation, Routt County National Bank Corporation, SBT Bankshares, Inc., 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. On October 1, 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. Accordingly, the results of operations of Sumitomo are included with those of the Company for the period October 1, 1998 through December 31, 1998. The following unaudited amounts represent the Company and Sumitomo combined as if the acquisition had occurred at January 1, 1998 and 1997, respectively (in thousands): 1998 1997 ---------- --------- Total revenue ........................ $1,452,000 1,315,000 Net income ........................... 141,800 154,600 Diluted net income per common share .. 1.89 1.86 55 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 $106,684,000, 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 $5,962,000 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 $1,385,000 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. 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 ......... 11,314 -- Professional fees ........................... 5,957 940 Conversion and other miscellaneous charges .. 5,154 1,767 ======= ======= $42,990 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 $5,290,000 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 $7,773,000 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. 56 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 securities ................................ 358,161 1,065 3,110 356,116 Other agency securities ..................... 939,308 6,504 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 ----------- ----------- ----------- ----------- $ 2,803,903 23,063 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 agency securities ..................... 112,291 1,401 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 ----------- ----------- ----------- ----------- 437,549 4,148 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 ----------- ----------- ----------- ----------- $ 691,498 9,830 16,747 684,581 =========== =========== =========== =========== 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 ..................... 1,425,656 7,036 1,099 1,431,593 States and political subdivisions ................ 240,217 5,999 834 245,382 Mortgage-backed securities ....................... 89,063 1,329 103 90,289 ----------- ----------- ----------- ----------- $ 2,199,555 23,137 2,513 2,220,179 =========== =========== =========== =========== 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 agency securities...................... 346,140 1,034 229 346,945 States and political subdivisions ................ 31,029 1,166 8 32,187 Mortgage- and other asset-backed securities ...... 82,764 1,060 80 83,744 ----------- ----------- ----------- ----------- 572,636 3,674 3,471 572,839 Equity securities: Mutual funds: Accessor Funds, Inc. ...................... 109,530 1,456 28 110,958 Federal Home Loan Bank stock ................. 97,711 -- -- 97,711 Other stock .................................. 24,338 1,463 36 25,765 ----------- ----------- ----------- ----------- $ 804,215 6,593 3,535 807,273 =========== =========== =========== ===========
57 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 .................. $ 610,613 613,383 94,351 92,423 Due after one year through five years .... 1,230,153 1,242,212 232,083 227,727 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 ---------- ---------- ---------- ---------- $2,803,903 2,821,535 437,549 424,960 ========== ========== ========== ==========
Gross gains of $7,510,000, $9,179,000, and $490,000 and gross losses of $5,368,000, $14,250,000, and $875,000 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 $1,030,633,000, 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 1,445,417 Real estate: Construction ......................... 866,548 566,844 Other ................................ 6,032,095 2,723,172 Consumer ................................. 539,349 524,894 Lease financing .......................... 213,410 176,514 Foreign .................................. 44,368 -- Other receivables ........................ 61,677 97,483 ----------- ----------- $10,681,615 5,712,966 =========== =========== As of December 31, 1998 and 1997, loans with a carrying value of $63,125,000 and $188,417,000, 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 $895 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 $36.4 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 ............ $ 91,571 86,249 79,757 Allowance for loan losses of companies acquired ............................. 116,676 7,063 5,203 Additions: Provision for loan losses ........... 12,179 7,758 6,526 Recoveries .......................... 9,355 7,042 6,763 Deductions: Loan charge-offs .................... (24,228) (16,541) (12,000) --------- --------- --------- Balance at end of year .................. $ 205,553 91,571 86,249 ========= ========= ========= 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. The Company's total recorded investment in impaired loans amounted to $41,000,000 and $10,000,000 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 $300,000, respectively, on $11,600,000 and $1,900,000, 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, $1,670,000 and $751,000, respectively, for 1997, and $1,626,000 and $731,000, respectively, for 1996. The average recorded investment in impaired loans amounted to $17,551,000 in 1998, $11,005,000 in 1997, and $9,534,000 in 1996. 58 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 .......................................... $ 46,456 32,767 Buildings ..................................... 137,353 85,467 Furniture and equipment ....................... 226,951 141,110 Leasehold improvements ........................ 48,385 18,353 -------- -------- Total ...................................... 459,145 277,697 Less accumulated depreciation and amortization 228,079 122,049 -------- -------- Net book value ............................. $231,066 155,648 ======== ======== 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 $546,686,000 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 $40.2 million at December 31, 1998 and 1997, respectively. 59 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 .................. $ 401,412 329,502 225,964 Weighted average rate ....................... 4.61% 5.44% 5.45% Highest month-end balance ................... 594,503 526,098 483,656 Year-end balance ............................ 337,283 350,109 191,909 Weighted average rate on outstandings at year-end .................................. 4.58% 5.83% 6.26% Security repurchase agreements: Average amount outstanding .................. $1,442,260 1,892,962 1,139,394 Weighted average rate ....................... 4.77% 5.17% 4.93% Highest month-end balance ................... 1,710,676 2,262,818 1,353,298 Year-end balance ............................ 932,560 1,042,156 811,833 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. 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 ........... $223,000 225,000 Subordinated notes: Floating rate subordinated notes, maturity 2005-2008 .. 177,000 -- 8.625%-9.00% subordinated notes, maturity in 1998-2002. 50,150 54,575 Capital leases and other notes payable ................... 3,585 1,066 -------- -------- $453,735 280,641 ======== ======== 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 60 (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, $24,600,000, and $10,539,000 for the years ended December 31, 1998, 1997, and 1996, respectively. 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 2,658,369 Standby letters of credit: Performance ............... 69,648 88,133 Financial ................. 104,530 40,279 Commercial letters of credit .. 25,294 10,043 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. 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 61 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. 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 $340,611,000, 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 62 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 $31,417,000, $19,281,000, and $15,370,000 for the years ended December 31, 1998, 1997, and 1996, respectively. 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 $7.42, $10.33, and $5.19, 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 ... 5.34% 6.51% 6.30% Expected volatility ....... 33.94% 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 .............. $146,847 134,300 120,418 Pro forma ................ 144,730 131,254 119,647 Earnings per share: As reported: Basic .................. $ 1.93 1.88 1.69 Diluted ................ 1.91 1.84 1.66 Pro forma: Basic .................. 1.91 1.84 1.68 Diluted ................ 1.88 1.80 1.65 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. 63 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 ................ 2,116,325 $ 8.33 Granted ................................. 842,309 13.89 Exercised ............................... (648,332) 6.42 Forfeited ............................... (78,112) 3.92 Expired ................................. (10,000) 6.03 --------- Balance at December 31, 1996 ................ 2,222,190 11.16 Acquired ................................ 184,991 12.54 Granted ................................. 703,258 27.48 Exercised ............................... (835,358) 8.94 Forfeited ............................... (47,767) 13.25 --------- Balance at December 31, 1997 ................ 2,227,314 17.21 Acquired ................................ 95,174 4.99 Granted ................................. 1,005,383 47.21 Exercised ............................... (588,138) 12.31 Forfeited ............................... (25,963) 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 ....................... 717,824 10.54 December 31, 1996 ....................... 804,092 7.17 Selected information on stock options as of December 31, 1998 follows:
Outstanding options Exercisable options -------------------------------------- -------------------------- Weighted- Weighted- average Weighted- average remaining average Number of exercise contractual Number of exercise Exercise price range shares price life shares price - ------------------------- ---------- ----------- ---------- ---------- ----------- $2.38 to $18.98 ......... 1,122,179 $ 12.18 5.9 years 867,619 $ 11.29 $21.89 to $31.00 ........ 593,108 14.46 5.4 237,468 26.50 $39.13 to $43.50 ........ 231,408 42.42 4.3 -- -- $46.38 to $56.00 ........ 767,075 48.76 5.5 11,000 49.20 --------- --------- 2,713,770 $ 28.81 5.6 years 1,116,087 $ 14.90 ========= =========
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 .................................... $146,847 134,300 120,418 Less preferred dividends ...................... 46 1,353 1,211 -------- -------- -------- Net income applicable to common stock ......... $146,801 132,947 119,207 -------- -------- -------- Average common shares outstanding ............. 75,868 70,535 70,389 -------- -------- -------- Net income per common share - basic ........... $ 1.93 1.88 1.69 ======== ======== ======== Diluted: Net income applicable to common stock ......... $146,801 132,947 119,207 -------- -------- -------- Average common shares outstanding ............. 75,868 70,535 70,389 Stock option adjustment ....................... 1,120 2,278 1,769 -------- -------- -------- Average common shares outstanding - diluted ... 76,988 72,813 72,158 -------- -------- -------- Net income per common share - diluted ......... $ 1.91 1.84 1.66 ======== ======== ======== 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 64 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. 16. Income Taxes Income taxes are summarized as follows (in thousands): 1998 1997 1996 ------- ------ ------ Federal: Current .... $59,119 59,007 48,015 Deferred ... 874 4,381 2,779 State .......... 10,869 8,830 8,870 ------- ------ ------ $70,862 72,218 59,664 ======= ====== ====== 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 .... $ 76,384 72,281 63,029 State income taxes, net ......................... 7,065 5,740 5,766 Nondeductible expenses .......................... 6,027 3,125 1,762 Nontaxable interest ............................. (7,926) (6,140) (6,086) Tax credits and other taxes ..................... (1,877) (1,826) (1,597) Deferred tax assets realized .................... -- -- 246 Corporate reorganization ........................ (6,117) -- -- Decrease in valuation allowance ................. (1,992) (843) (2,454) Other items ..................................... (702) (119) (1,002) -------- -------- -------- Income tax expense ....................... $ 70,862 72,218 59,664 ======== ======== ========
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 --------- --------- Gross deferred tax liabilities: Premises and equipment, due to differences in depreciation .................................... $ (7,568) (5,185) 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 ............................................. (5,275) (1,992) --------- --------- Total deferred tax liabilities ................... (62,791) (46,440) --------- --------- Statement No. 115 market equity adjustment ............ 3,154 (2,250) --------- --------- Net deferred tax assets ........................ $ 71,820 9,687 ========= ========= 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. 65 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. The actual capital amounts and ratios of the Company and significant banking subsidiaries are as follows (in thousands):
For capital adequacy To be Actual purposes well capitalized ----------------- ------------------ ----------------- Amount Ratio Amount Ratio Amount Ratio ---------- ----- ---------- ----- ---------- ----- As of December 31, 1998: Total capital (to risk-weighted assets) The Company ................. $1,358,821 11.48% $ 946,588 8.00% $1,183,235 10.00% Zions First National Bank ... 619,720 15.15 327,189 8.00 408,986 10.00 California Bank & Trust ..... 477,685 10.78 354,567 8.00 443,209 10.00 Tier I capital (to risk-weighted assets) The Company ................. 1,000,653 8.46 473,294 4.00 709,941 6.00 Zions First National Bank ... 369,840 9.04 163,594 4.00 245,391 6.00 California Bank & Trust ..... 312,976 7.06 177,284 4.00 265,925 6.00 Tier I capital (to average assets) The Company ................. 1,000,653 5.98 501,933 3.00 836,555 5.00 Zions First National Bank ... 369,840 5.56 199,718 3.00 332,864 5.00 California Bank & Trust ..... 312,976 5.40 173,948 3.00 289,913 5.00 As of December 31, 1997: Total capital (to risk-weighted assets) The Company ............... $ 879,292 13.42% $ 524,339 8.00% $ 655,424 10.00% Zions First National Bank ... 604,475 18.22 265,430 8.00 331,788 10.00 Tier I capital (to risk-weighted assets) The Company ................. 757,245 11.55 262,170 4.00 393,254 6.00 Zions First National Bank ... 362,951 10.94 132,715 4.00 199,073 6.00 Tier I capital (to average assets) The Company ................. 757,245 6.83 332,829 3.00 554,715 5.00 Zions First National Bank ... 362,951 5.66 192,417 3.00 320,695 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 $53.5 million available for the payment of dividends under the foregoing restrictions. 66 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 of Financial Accounting Standards (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 3,455 Interest cost ............................. 5,192 4,313 Acquisitions .............................. 41,626 5,720 Curtailments .............................. -- (1,551) Actuarial (gain) loss ..................... (5,536) 1,585 Benefits paid ............................. (4,163) (2,964) --------- --------- 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 15,103 Acquisitions .................................... 27,831 5,679 Employer contributions .......................... 77 975 Benefits paid ................................... (4,163) (2,964) --------- --------- 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 .............. 685 1,582 Unrecognized net transition asset ............ (663) (1,147) Unrecognized prior service cost .............. (3,296) (3,659) ------- ------- Net prepaid cost (accrued liability) ... $(4,942) 3,475 ======= ======= 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 3,456 3,702 Interest cost ................................ 5,192 4,312 4,094 Expected return on plan assets ............... (6,581) (5,235) (4,724) Amortization of prior service cost ........... (424) (423) (122) Amortization of transitional asset ........... (484) (634) (634) Recognized actuarial loss .................... -- 347 826 ------- ------- ------- Net periodic benefit cost recognized ... $ 3,020 1,823 3,142 ======= ======= ======= 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. 67 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 $2.6 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 ======= ======= 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 $3,577,000, $2,672,000, and $2,198,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The Company terminated its broad-based employee profit-sharing plan and replaced it with a broad-based Employee Stock Option Plan, as discussed in note 13. 68 19. FAIR VALUE OF FINANCIAL INSTRUMENTS 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 $91,571,000 at December 31, 1998 and 1997, respectively, is the present value of estimated net charge-offs. 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. Carrying value and estimated fair value of principal financial instruments are summarized as follows (in thousands):
December 31, 1998 December 31, 1997 --------------------------- --------------------------- Carrying Estimated Carrying Estimated value fair value value fair value ------------ ------------ ------------ ------------ Financial assets: Cash and due from banks ...................... $ 864,446 864,446 710,171 710,171 Money market investments ..................... 612,205 612,205 853,518 853,518 Investment securities ........................ 3,680,339 3,697,971 3,090,509 3,111,133 Loans, net ................................... 10,427,939 10,662,279 5,577,331 5,626,531 ------------ ------------ ------------ ------------ Total financial assets ................... $ 15,584,929 15,836,901 10,231,529 10,301,353 ============ ============ ============ ============ Financial liabilities: Demand, savings, and money market deposits ... $ 9,247,992 9,247,992 6,062,162 6,062,162 Time deposits ................................ 3,868,927 3,898,832 1,711,028 1,708,086 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 1,392,265 1,392,265 FHLB advances and other borrowings ........... 206,763 209,797 279,614 287,425 Long-term debt ............................... 453,735 460,104 280,641 295,374 ------------ ------------ ------------ ------------ Total financial liabilities ................ $ 15,281,206 15,322,082 9,953,821 9,973,535 ============ ============ ============ ============ 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 ============ ============ ============ ============
69 The following is a summary of selected operating segment information for the years ended December 31, 1998, 1997, and 1996 (in thousands):
First Nevada The National California Vectra National State Commerce Bank and Bank & Bank Bank of Bank and Bank of Consolidated Subsidiaries Trust Colorado Arizona Subsidiary Washington Other Company ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1998: Net interest income ...... $ 222,044 117,808 78,308 70,687 50,397 13,939 (9,420) 543,763 Provision for loan losses 23,000 (18,447) 4,588 1,800 1,560 78 (400) 12,179 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 199,044 136,255 73,720 68,887 48,837 13,861 (9,020) 531,584 Noninterest income ....... 142,654 15,051 14,844 9,312 15,047 1,702 2,103 200,713 Merger expense and amortization of goodwill and core deposit intangibles ..... 2,445 29,635 7,681 1,867 1,490 7,702 2,864 53,684 Other noninterest expense 216,377 82,080 57,299 40,131 41,854 7,453 15,179 460,373 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes and minority interest ................ 122,876 39,591 23,584 36,201 20,540 408 (24,960) 218,240 Income taxes ............. 35,519 16,439 8,807 14,013 6,881 346 (11,143) 70,862 Minority interest ........ -- -- -- -- -- -- (531) (531) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income ................. $ 87,357 23,152 14,777 22,188 13,659 62 (14,348) 146,847 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Assets .................... $ 6,042,170 6,012,572 1,955,087 1,451,866 1,120,703 337,351 (270,828) 16,648,921 Net loans and leases ...... 3,509,319 4,182,821 1,211,653 1,012,038 550,570 154,892 12,199 10,633,492 Deposits .................. 3,933,823 5,348,694 1,688,719 1,225,796 929,370 221,403 (26,642) 13,321,163 Shareholders' equity ...... 378,449 435,723 192,564 116,262 84,976 23,159 (217,477) 1,013,656 =========== =========== =========== =========== =========== =========== =========== =========== 1997: Net interest income ...... $ 206,009 60,388 41,175 61,577 37,076 12,596 (6,290) 412,531 Provision for loan losses -- 2,892 781 2,400 1,560 300 (175) 7,758 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 206,009 57,496 40,394 59,177 35,516 12,296 (6,115) 404,773 Noninterest income ....... 113,756 8,062 1,032 6,272 11,884 1,303 4,065 146,374 Merger expense and amortization of goodwill and core deposit intangibles ..... 1,132 814 1,992 1,568 450 -- 3,421 9,377 Other noninterest expense 184,758 38,424 30,352 34,168 31,400 7,059 9,091 335,252 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes 133,875 26,320 9,082 29,713 15,550 6,540 (14,562) 206,518 Income taxes ............. 45,295 10,490 3,797 11,896 4,863 2,082 (6,205) ,272,218 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income ................. $ 88,580 15,830 5,285 17,817 10,687 4,458 (8,357) 134,300 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Assets .................... $ 5,894,174 1,211,371 1,203,866 1,351,876 988,010 298,478 (78,571) 10,869,204 Net loans and leases ...... 2,780,986 727,302 717,255 797,620 488,659 153,765 3,315 5,668,902 Deposits .................. 3,665,705 1,085,679 951,840 1,191,774 833,644 235,771 (8,179) 7,956,234 Shareholders' equity ...... 421,501 91,951 140,500 105,099 86,170 23,890 (127,059) 742,052 =========== =========== =========== =========== =========== =========== =========== =========== 1996: Net interest income ...... $ 187,900 45,154 22,727 50,485 25,694 10,106 (4,341) 337,725 Provision for loan losses -- 1,800 916 2,300 1,240 270 -- 6,526 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 187,900 43,354 21,811 48,185 24,454 9,836 (4,341) 331,199 Noninterest income ....... 93,737 5,371 4,492 3,575 8,807 1,233 4,792 122,007 Merger expense and amortization of goodwill and core deposit intangibles ..... 502 713 231 1,096 103 -- 692 3,337 Other noninterest expense 156,535 33,865 17,687 26,284 22,813 6,182 6,421 269,787 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes 124,600 14,147 8,385 24,380 10,345 4,887 (6,662) 180,082 Income taxes ............. 41,460 3,385 2,940 9,715 3,094 1,545 (2,475) 59,664 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income ................. $ 83,140 10,762 5,445 14,665 7,251 3,342 (4,187) 120,418 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Assets .................... $ 4,862,570 940,034 561,811 1,023,915 570,927 237,517 27,552 8,224,326 Net loans and leases ...... 2,476,218 598,603 319,905 704,432 268,333 132,102 3,560 4,503,153 Deposits .................. 3,167,894 832,196 439,351 900,432 500,498 185,740 (16,807) 6,009,304 Shareholders' equity ...... 374,432 68,136 45,435 109,304 46,703 20,300 (22,987) 641,323 =========== =========== =========== =========== =========== =========== =========== ===========
70 20. Operating Segment Information As of December 31, 1998, the Company adopted FASB 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. 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 income Gross Net Non- Non- Provision taxes and per interest interest interest interest for loan minority Net common income income income expense losses interest income share -------- -------- -------- -------- -------- -------- -------- ------- 1998: First quarter ........ $214,456 116,623 44,806 100,757 3,555 57,117 38,996 0.52 Second quarter ....... 218,829 121,673 47,752 117,412 3,264 48,749 32,984 0.44 Third quarter ........ 234,517 130,749 49,607 112,840 2,485 65,031 42,739 0.54 Fourth quarter ....... 308,242 174,718 58,548 183,048 2,875 47,343 32,128 0.40 -------- -------- -------- -------- -------- -------- -------- $976,044 543,763 200,713 514,057 12,179 218,240 146,847 1.91 ======== ======== ======== ======== ======== ======== ======== 1997: First quarter ........ $171,218 90,418 34,956 73,431 2,018 49,925 32,416 0.45 Second quarter ....... 192,869 100,738 35,404 80,751 1,842 53,549 34,357 0.47 Third quarter ........ 203,315 107,526 40,031 90,593 2,091 54,873 35,704 0.49 Fourth quarter ....... 212,129 113,849 35,983 99,854 1,807 48,171 31,823 0.43 -------- -------- -------- -------- -------- -------- -------- $779,531 412,531 146,374 344,629 7,758 206,518 134,300 1.84 ======== ======== ======== ======== ======== ======== ======== 1996: First quarter ........ $138,109 76,140 28,807 62,833 1,203 40,911 27,458 0.39 Second quarter ....... 143,452 81,866 28,826 65,816 1,347 43,529 29,869 0.42 Third quarter ........ 152,955 86,445 31,790 69,656 1,779 46,800 30,744 0.43 Fourth quarter ....... 160,224 93,274 32,584 74,819 2,197 48,842 32,347 0.45 -------- -------- -------- -------- -------- -------- -------- $594,740 337,725 122,007 273,124 6,526 180,082 120,418 1.66 ======== ======== ======== ======== ======== ======== ========
71 22. Parent Company Financial Information Condensed financial information of Zions Bancorporation (parent only) follows: ZIONS BANCORPORATION Condensed Balance Sheets December 31, 1998 and 1997
(In thousands) 1998 1997 ----------- ----------- Assets Cash and due from banks ........................................................ $ 155 4,122 Interest-bearing deposits ...................................................... 19,637 2,241 Investment securities .......................................................... 9,950 2,490 Loans, lease financing, and other receivables, net ............................. 14,797 1,680 Investments in subsidiaries: Commercial banks and bank holding company .................................. 1,196,520 902,621 Other ...................................................................... 25,711 5,828 Receivables from subsidiaries: Commercial banks ........................................................... 110,000 -- Other ...................................................................... 2,865 2,945 Other assets ................................................................... 32,742 22,351 ----------- ----------- $ 1,412,377 944,278 =========== =========== Liabilities and Shareholders' Equity Accrued liabilities ............................................................ $ 36,731 23,828 Borrowings less than one year .................................................. 111,217 48,050 Borrowings over one year ....................................................... -- 50,000 Subordinated debt to subsidiary ................................................ 23,773 25,773 Long-term debt ................................................................. 227,000 54,575 ----------- ----------- Total liabilities ........................................................ 398,721 202,226 ----------- ----------- Shareholders' equity: Common stock ............................................................... 324,099 190,039 Net unrealized holding gains and losses on securities available for sale ... (4,280) 1,902 Retained earnings .......................................................... 693,837 550,111 ----------- ----------- Total shareholders' equity ............................................... 1,013,656 742,052 ----------- ----------- $ 1,412,377 944,278 =========== ===========
Condensed Statements of Income Years ended December 31, 1998, 1997, and 1996
(In thousands) 1998 1997 1996 --------- --------- --------- Interest income - interest and fees on loans and securities ................ $ 7,023 942 895 Interest expense - interest on borrowed funds .............................. 17,307 9,217 6,154 --------- --------- --------- Net interest loss ..................................................... (10,284) (8,275) (5,259) --------- --------- --------- Other income: Dividends from consolidated subsidiaries: Commercial banks ...................................................... 210,890 100,534 49,838 Other ................................................................. 1,430 500 1,000 Other income ............................................................ 7,080 5,511 4,141 --------- --------- --------- 219,400 106,545 54,979 --------- --------- --------- Expenses: Salaries and employee benefits .......................................... 5,473 7,768 6,483 Operating expenses ...................................................... 9,714 6,982 2,766 --------- --------- --------- 15,187 14,750 9,249 ========= ========= ========= Income before income tax benefit ........................................... 193,929 83,520 40,471 Income tax benefit ......................................................... (8,249) (6,955) (3,306) --------- --------- --------- Income before equity in undistributed income of consolidated subsidiaries .. 202,178 90,475 43,777 --------- --------- --------- Equity in undistributed income of consolidated subsidiaries: Commercial banks and bank holding company .............................. (50,559) 44,176 76,015 Other .................................................................. (4,772) (351) 626 --------- --------- --------- (55,331) 43,825 76,641 --------- --------- --------- Net income ........................................................... $ 146,847 134,300 120,418 ========= ========= =========
72 ZIONS BANCORPORATION Condensed Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996
(In thousands) 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net income ............................................... $ 146,847 134,300 120,418 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of consolidated subsidiaries .. 55,331 (43,825) (76,641) Depreciation of premises and equipment ................. 160 161 440 Amortization ........................................... 662 714 692 Other .................................................. 17,486 (6,832) 9,239 --------- --------- --------- Net cash provided by operating activities ............ 220,486 84,518 54,148 --------- --------- --------- Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits ....... (17,396) 1,287 12,975 Collection of advances to subsidiaries ..................... 8,341 2,890 1,176 Advances to subsidiaries ................................... (118,261) (4,226) (1,921) Increase of investment in subsidiaries ..................... (335,340) (39,609) (15,051) Purchases of other assets .................................. -- -- (12,000) Other ...................................................... (18,344) (1,466) (1,686) --------- --------- --------- Net cash used in investing activities ................ (481,000) (41,124) (16,507) --------- --------- --------- Cash flows from financing activities: Net change in borrowings under one year .................... 38,167 44,000 4,050 Proceeds from borrowings over one year ..................... -- 50,000 -- Payments on borrowings over one year ....................... (25,000) (8,214) (1,429) Proceeds from issuance of long-term debt ................... 176,971 25,773 -- Payments on long-term debt ................................. (2,000) (5) (4,715) Proceeds from issuance of common stock ..................... 136,750 4,643 13,997 Payments to redeem common and preferred stock .............. (26,741) (129,439) (25,148) Dividends paid ............................................. (41,600) (30,311) (26,171) --------- --------- --------- Net cash provided by (used in) financing activities ... 256,547 (43,553) (39,416) --------- --------- --------- Net decrease in cash and due from banks .................... (3,967) (159) (1,775) Cash and due from banks at beginning of year ................ 4,122 4,281 6,056 --------- --------- --------- Cash and due from banks at end of year ..................... $ 155 4,122 4,281 ========= ========= =========
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. 73 EX-21 4 ZIONS BANCORPORATION AND SUBSIDIARIES AT 12/31/98 EXHIBIT 21 ZIONS BANCORPORATION AND SUBSIDIARIES AT DECEMBER 31, 1998 SUBSIDIARY STATE ---------- ----- Zions First National Bank Federally chartered doing business in Utah and Idaho California Bank & Trust California Vectra Bank Colorado Federally chartered doing business in Colorado and New Mexico National Bank of Arizona Federally chartered doing business in Arizona Nevada State Bank Nevada The Commerce Bank of Washington Federally chartered doing business in Washington Val Cor Bancorporation, Inc. Colorado Cash Access, Inc. Utah GB Capital Trust Delaware Great Western Financial Corporation Utah Lockhart Realty Company Utah VBC Capital I Delaware Zions Management Services Company Utah Zions Insurance Agency, Inc. Utah Zions Life Insurance Company Arizona EX-23 5 CONSENT OF INDEPENDENT CPAS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Zions Bancorporation: We consent to the incorporation by reference in Zions Bancorporation's (i) Registration Statement (Form S-3 No. 33-58801) and related Prospectus pertaining to the Zions Bancorporation Dividend Reinvestment and Common Stock Purchase Plan, (ii) Registration Statement (Form S-8 No. 333-36207) and related Prospectus pertaining to Zions Bancorporation Employee Stock Savings Plan, (iii) Registration Statement (Form S-8 No. 333-36205) and related Prospectus pertaining to Zions Bancorporation Employee Investment Savings Plan, (iv) Registration Statement (Form S-8 No. 333-68461) and related Prospectus pertaining to Aspen Bancshares, Inc. 1993 Non-Qualified Stock Option Plan for Directors, Aspen Bancshares, Inc. 1990 Incentive Stock Option Plan, Vectra Banking Corporation Employees' Equity Incentive Stock Option Plan, Vectra Banking Corporation Non-Employee Directors' Stock Option Plan, Vectra Banking Corporation 1989 Non-Statutory Stock Option Plan, Second Amended and Restated 1988 Stock Option Plan of FP Bancorp, Inc., SBT Bankshares, Inc. 1995 Non-Qualified Stock Option Agreement, The Commerce Bancorporation 1995 Restated Incentive Compensation Plan, and The Commerce Bancorporation 1987 Stock Option Plan, and (v) Registration Statement Form S-8 No. 333-74179) and the related Prospectus pertaining to Zions Bancorporation 1996 Non-Employee Directors Stock Option Plan, and Hemingway Stock Option Agreement, of our report dated January 26, 1999, relating to the 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, which report appears in this annual report on Form 10-K for the year ended December 31, 1998. We also consent to the incorporation by reference in Zions Bancorporation's Registration Statement (Form S-8 No. 333-36207) of Zions Bancorporation Employee Stock Savings Plan of our report dated March 16, 1999, relating to the statements of net assets available for benefits of Zions Bancorporation Employee Stock Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998, which report appears in the annual report on Form 11-K for the year ended December 31, 1998, which is included as an exhibit in this annual report on Form 10-K. We also consent to the incorporation by reference in Zions Bancorporation's Registration Statement (Form S-8 No. 333-36205) of Zions Bancorporation Employee Investment Savings Plan of our report dated March 16, 1999, relating to the statements of net assets available for benefits of Zions Bancorporation Employee Investment Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998, which report appears in the annual report on Form 11-K for the year ended December 31, 1998, which is included as an exhibit in this annual report on Form 10-K. /s/KPMG LLP Salt Lake City, Utah March 22, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 INCLUDED IN THE COMPANY'S FORM 10-K DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000109380 Zions Bancorporation /UT/ 1,000 U.S. YEAR DEC-31-1998 DEC-31-1998 1 864,446 30,484 581,721 191,855 684,581 2,803,903 2,821,535 10,633,492 205,553 16,648,921 13,321,163 1,449,512 319,278 510,531 0 0 324,099 689,557 16,648,921 681,204 294,840 0 976,044 293,707 432,281 543,763 12,179 2,142 514,588 217,709 146,847 0 0 146,847 1.93 1.91 4.52 53,879 25,779 5,212 0 91,571 24,228 9,355 205,553 166,253 0 39,300
EX-27.2 7 FINANCIAL DATA SCHEDULE
9 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 WHICH HAVE BEEN RESTATED AS A RESULT OF POOLING OF INTERESTS. 0000109380 Zions Bancorporation /UT/ 1,000 U.S. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 697,265 56,643 1,237,072 401,914 589,448 2,249,644 2,264,846 6,279,359 98,488 12,120,421 8,551,900 1,739,001 378,342 504,254 0 0 326,079 620,845 12,120,421 289,702 143,583 0 433,285 125,576 194,989 238,296 6,819 3,026 218,169 105,866 71,980 0 0 71,980 .98 .96 4.49 25,092 18,003 685 0 91,571 7,636 3,907 98,488 22,335 0 76,153
EX-27.3 8 FINANCIAL DATA SCHEDULE
9 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 WHICH HAVE BEEN RESTATED AS A RESULT OF POOLING OF INTERESTS. 0000109380 Zions Bancorporation /UT/ 1,000 U.S. 3-Mos DEC-31-1998 JAN-01-1998 MAR-31-1998 1 631,444 64,911 1,139,443 276,277 607,935 1,931,266 1,949,777 6,034,838 97,194 11,303,986 8,374,323 1,472,094 191,294 400,064 0 0 188,551 589,716 11,303,986 140,473 73,983 0 214,456 61,711 97,833 116,623 3,555 799 100,757 57,117 38,996 0 0 38,996 .54 .52 4.47 17,083 14,054 1,222 0 91,571 3,244 2,584 97,194 24,438 0 72,756
EX-27.4 9 FINANCIAL DATA SCHEDULE
9 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 WHICH HAVE BEEN RESTATED AS A RESULT OF POOLING OF INTERESTS AND INCLUDED IN THE COMPANY'S FORM 10-K DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000109380 Zions Bancorporation /UT/ 1,000 U.S. YEAR DEC-31-1997 DEC-31-1997 1 710,171 62,001 791,517 83,681 807,273 2,199,555 2,220,179 5,668,902 91,571 10,869,204 7,956,234 1,506,265 173,331 491,322 0 0 190,039 552,013 10,869,204 500,548 278,983 0 779,531 208,003 367,000 412,531 7,758 (5,071) 344,629 206,518 134,300 0 0 134,300 1.88 1.84 4.34 16,299 10,616 1,510 0 86,249 16,541 7,042 91,571 68,588 0 22,983
EX-27.5 10 FINANCIAL DATA SCHEDULE
9 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 WHICH HAVE BEEN RESTATED AS A RESULT OF POOLING OF INTERESTS. 0000109380 Zions Bancorporation /UT/ 1,000 U.S. 6-Mos DEC-31-1997 JAN-01-1997 JUN-30-1997 1 540,345 51,375 795,312 437,994 770,382 1,858,498 1,870,760 5,100,419 89,097 9,950,681 6,722,926 2,002,971 108,730 390,878 0 0 230,166 495,010 9,950,681 232,739 131,348 0 364,087 92,850 172,931 191,156 3,860 443 154,182 103,474 66,773 0 0 66,773 .94 .91 4.26 16,060 8,280 830 2,500 86,249 6,903 2,668 89,097 19,724 0 69,373
EX-27.6 11 FINANCIAL DATA SCHEDULE
9 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 WHICH HAVE BEEN RESTATED AS A RESULT OF POOLING OF INTERESTS. 0000109380 Zions Bancorporation /UT/ 1,000 U.S. 3-Mos DEC-31-1997 JAN-01-1997 MAR-31-1997 1 496,976 51,147 1,004,628 157,957 724,696 1,531,982 1,532,833 4,812,058 86,329 9,076,789 6,211,189 1,783,938 107,668 332,809 0 0 177,530 463,655 9,076,789 110,093 61,125 0 171,218 44,191 80,800 90,418 2,018 29 73,431 49,925 32,416 0 0 32,416 .46 .45 4.25 15,909 7,088 1,608 0 86,249 3,287 1,349 86,329 23,040 0 63,289
EX-27.7 12 FINANCIAL DATA SCHEDULE
9 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 WHICH HAVE BEEN RESTATED AS A RESULT OF POOLING OF INTERESTS. 0000109380 Zions Bancorporation /UT/ 1,000 U.S. YEAR DEC-31-1996 DEC-31-1996 1 527,951 47,854 572,883 34,076 760,225 1,508,403 1,517,876 4,503,153 86,248 8,224,326 6,009,304 1,138,922 94,165 340,612 0 0 200,764 440,559 8,224,326 395,285 199,455 0 594,740 168,933 257,015 337,725 6,526 (385) 273,124 180,082 120,418 0 0 120,418 1.69 1.66 4.69 16,000 5,895 1,574 0 79,757 12,000 6,763 86,249 63,059 0 23,190
EX-99.1 13 FORM 11-K EXHIBIT 99.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K ---------------------------------- ANNUAL REPORT Pursuant to Section 15(d) Of The Securities Exchange Act of 1934 For the Year Ended December 31, 1998 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN ZIONS BANCORPORATION One South Main, Suite 1380 Salt Lake City, Utah 84111 1 Item 1. Changes in the Plan The Plan was completely amended and restated as of October 1, 1992, with certain provisions retroactively effective as of January 1, 1989. In 1994, the Plan was amended for the purpose of maintaining its qualification under the Internal Revenue Code pursuant to the Tax Reform Act of 1986 and, in order to conform the Plan to the requirements of the Unemployment Compensation Act of 1992 and the Omnibus Budget Reconciliation Act of 1993. No changes were made in the Plan during the year 1998. Item 2. Changes in Investment Policy No material changes were made during the fiscal year in the policy with respect to the kind of securities and other investments in which funds held under the plan may be invested. Item 3. Contributions under the Plan The Company's contributions are measured by reference to employee contributions and are not discretionary. Item 4. Participating Employees There were 4,155 participating employees in the Plan on December 31, 1998. Item 5. Administration of the Plan (a) Zions Bancorporation is the Plan administrator. The Company's Board of Directors has appointed an Administrative Committee consisting of six persons. The Committee has full power and authority to administer the Plan and to interpret its provisions. The present members of the Committee and their positions held are: Member Position - Company - --------------------------- -------------------------------------------------- Clark B. Hinckley, Chairman Senior Vice President of Zions Bancorporation Harris H. Simmons President and Chief Executive Officer of Zions Bancorporation Dale M. Gibbons Executive Vice President of Zions Bancorporation W. David Hemingway Executive Vice President of Zions Bancorporation Richard G. Crandall Vice President of Zions First National Bank Russell W. Miller President of Zions Insurance Agency, Inc. The address of each fiduciary listed above is One South Main, Suite 1380, Salt Lake City, Utah 84111. (b) No compensation is paid to the Committee members by the Plan. All expenses of the Plan and its administration are paid by the Company. 2 Item 6. Custodian of Investments (a) Zions First National Bank, One South Main, Salt Lake City, Utah 84111 is the custodian and trustee. (b) The custodian and trustee receives no compensation from the Plan. Item 7. Reports to Participating Employees Participating employees are furnished an annual statement reflecting the status of their accounts as of the end of the fiscal year. Item 8. Investment of Funds Substantially all of the assets of the Plan are invested in securities of the Company. Item 9. Financial Statements and Exhibits (a) Financial Statements Page ----- Independent Auditors' Report ..................................... 4 Statements of Net Assets Available for Benefits - December 31, 1998 and 1997 .................................... 5 Statements of Changes in Net Assets Available for Benefits - Years ended December 31, 1998, 1997, and 1996 ................. 6 Notes to Financial Statements .................................... 7 Schedules - Schedules I, II, and III have been omitted for the reasons that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. (b) Exhibits - None 3 Independent Auditors' Report The Trust Committee Zions Bancorporation Employee Stock Savings Plan: We have audited the accompanying statements of net assets available for benefits of Zions Bancorporation Employee Stock Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the plan administrator. Our responsibility is to express an opinion on these 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 the plan administrator, 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 financial statements referred to above present fairly, in all material respects, the net assets available for benefits of Zions Bancorporation Employee Stock Savings Plan as of December 31, 1998 and 1997, and the changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions for the year ended December 31, 1998, are presented for purpose of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic 1998 financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/KPMG LLP March 16, 1999 4 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Statement of Net Assets Available for Benefits December 31, 1998 and 1997
1998 1997 ----------- ---------- Assets: Cash and cash equivalents ............................................. $ 51 173,627 Investments, at fair value: Zions Bancorporation common stock (approximate cost of $24,852,480 in 1998 and $18,067,701 in 1997) ........ 90,567,426 63,033,316 Contributions receivable: Employee ........................................................ 266,162 50,449 Employer ........................................................ 136,643 25,224 Dividends receivable .................................................. 203,273 166,700 Interest receivable ................................................... 579 333 ----------- ---------- Total assets .......................................... 91,174,134 63,449,649 ----------- ---------- Liabilities: Accounts payable ...................................................... -- 56,614 Excess contribution refunds ........................................... 33,675 19,730 ----------- ---------- Total liabilities ..................................... 33,675 76,344 ----------- ---------- Net assets available for benefits ........................................ $91,140,459 63,373,305 =========== ========== See accompanying notes to financial statements.
5 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Statement of Changes in Net Assets Available for Benefits Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ----------- ---------- ---------- Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments in Zions Bancorporation common stock $24,594,856 26,586,307 7,966,631 Dividends ................................... 771,268 793,341 389,789 Interest .................................... 7,562 4,113 3,979 ----------- ---------- ---------- 25,373,686 27,383,761 8,360,399 ----------- ---------- ---------- Contributions: Employee .................................... 5,349,824 3,331,020 2,674,067 Employer .................................... 2,691,189 1,645,785 1,295,816 ----------- ---------- ---------- 8,041,013 4,976,805 3,969,883 ----------- ---------- ---------- Rollover from nonaffiliated plan .................. -- 89,279 -- ----------- ---------- ---------- Total additions 33,414,699 32,449,845 12,330,282 ----------- ---------- ---------- Deductions from net assets attributed to: Benefits paid directly to participants ............ 5,647,545 3,590,944 2,109,580 Rollover to affiliated plan ....................... -- -- 183,050 ----------- ---------- ---------- Total deductions 5,647,545 3,590,944 2,292,630 ----------- ---------- ---------- 27,767,154 28,858,901 10,037,652 Net increase Net assets available for benefits: Beginning of year ................................. 63,373,305 34,514,404 24,476,752 ----------- ---------- ---------- End of year ....................................... $91,140,459 63,373,305 34,514,404 =========== ========== ========== See accompanying notes to financial statements.
6 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (1) Plan Description The following description of the Zions Bancorporation Employee Stock Savings Plan (the Plan) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions. (a) General The Plan is a single employer contributory plan that is designed to provide retirement benefits for eligible employees under either a pre-tax or post-tax salary reduction arrangement by offering employees an opportunity to acquire stock ownership in Zions Bancorporation (the Company). The Plan is subject to the provisions of the Employee Retirement Income Security Act (ERISA) of 1974. (b) Eligibility Participation in the Plan is voluntary. An employee is eligible to participate on January 1, or July 1, whichever coincides with, or immediately follows, the latter of the date on which the employee completes at least 1,000 hours of service during 12 continuous months and attains the age of 21. As of December 31, 1998 and 1997, there were 4,155 and 3,240 participants, respectively, in the Plan. (c) Employee and Company Contributions Each eligible employee who elects to participate makes contributions ranging from one to five percent of their total compensation. Company contributions are equal to 50 percent of the amount contributed by the employee. The maximum amount a participant may contribute to the Plan in a calendar year, in conjunction with the Employee Investment Savings Plan, is $10,000 for 1998. (d) Allocation of Income or Loss Investment income is allocated to each participant's account in proportion to the investment shares held in that participant's account to the total of investment shares held in the Plan. (e) Vesting and Payment of Benefits Employee contributions and the employees' share of the Company contributions are 100 percent vested at all times. Benefits are paid upon death, disability, retirement, or earlier subject to certain restrictions. Benefits are paid in shares of stock. (continued) 7 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Notes to Financial Statements (f) Plan Termination Although the Company has not expressed intent to do so, it has the right under the Plan to discontinue contributions at any time and to terminate the Plan subject to provisions of ERISA. (2) Summary of Significant Accounting Policies The following is a summary of significant accounting policies followed by the Plan in the preparation of its financial statements: (a) Basis of Presentation The Plan's financial statements are presented on the accrual basis of accounting. (b) Costs of Administration All costs of administration are currently being absorbed by the Company. (c) Investments The investment in common stock of the Company is carried at its quoted market price in the accompanying financial statements. Purchases and sales of investments are recorded on a settlement-date basis which does not materially differ from using the trade-date basis required by generally accepted accounting principles. Net unrealized appreciation represents the difference between the book value and the market value of investments held at year-end. Book value is the market value at the end of the previous fiscal year, or cost if the investment was purchased during the year. The following investment represents five percent or more of the net assets available for plan benefits at December 31: 1998 1997 ----------- ---------- Zions Bancorporation common stock $90,567,426 63,033,316 (d) Use of Estimates The preparation the financial statements and supplemental schedules in conformity with generally accepted accounting principles requires the Plan administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statement of net assets available for benefits and supplemental schedules and the changes in net assets during the reporting period. Actual results could differ from those estimates. (continued) 8 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (e) Cash and Cash Equivalents Cash and cash equivalents include cash and short-term investments with maturity dates of 90 days or less. (f) Reclassifications Certain reclassifications have been made in the 1997 financial statements to conform with the 1998 presentation. (3) Tax Status The Plan obtained its latest determination letter on June 5, 1996, in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code (IRC). The Plan has been amended since receiving the determination letter. However, the Plan administrator and the Plan's tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. (4) Zions Bancorporation Common Stock At December 31, 1998 and 1997, the investment in common stock of the Company consisted of 1,451,944 and 1,389,164 shares, respectively. 9 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Line 27a - Schedule of Assets Held for Investment Purposes December 31, 1998
(a) (e) Party in (b) (c) (d) Current interest Issuer Investment description Cost (1) value - -------- --------------------- ------------------------------------- ----------- ---------- Investments at fair value determined by quoted market prices: * Zions Bancorporation Zions Bancorporation common stock $24,852,480 90,567,426
Notes: * Party-in-interest There were no nonexempt party-in-interest transactions. There were no assets which were both acquired and disposed of during the year. (1) Cost is determined using the average-cost method applied on a participant- by-participant basis. 10 ZIONS BANCORPORATION EMPLOYEE STOCK SAVINGS PLAN Line 27d - Schedule of Reportable Transactions Year ended December 31, 1998
(h) Current value (a) (g) of asset Identity of (b) (c) (d) Cost of on trans (i) party involved Description of asset Purchase price Selling price asset -action date Net gain - --------------- -------------------- -------------- ------------- --------- ------------ --------- Zions Zions Bancorporation Bancorporation common stock $ - 5,424,957 1,980,516 5,424,957 3,444,441 Zions Bancorporation common stock 8,623,415 -- -- 8,623,415 --
11 EX-99.2 14 FORM 11-K EXHIBIT 99.2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K ---------------------------------- ANNUAL REPORT Pursuant to Section 15(d) Of The Securities Exchange Act of 1934 For the Year Ended December 31, 1998 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN ZIONS BANCORPORATION One South Main, Suite 1380 Salt Lake City, Utah 84111 1 Item 1. Changes in the Plan The Plan was completely amended and restated as of October 1, 1992, with certain provisions retroactively effective as of January 1, 1989. In 1994, the Plan was amended for the purpose of maintaining its qualification under Internal Revenue Code pursuant to the Tax Reform Act of 1986 and, in order to conform the Plan to the requirements of the Unemployment Compensation Act of 1992 and the Omnibus Budget Reconciliation Act of 1993 and to facilitate the merger of the National Bank of Arizona Savings and Retirement Plan and the Rio Salado Bancorp. Inc. Retirement Plan into the Plan. No changes were made in the Plan during the year 1998. Item 2. Changes in Investment Policy During 1997 the Plan increased the number of investment fund types it maintains from four to nine. The separate types of investment funds maintained by the Plan are as follows: (i) company securities, which consists of Company stock and short-term investments pending the acquisition of Company securities; (ii) Accessor Growth Portfolio, which seeks capital growth by investing primarily in companies and industries from the 500 U.S. issuers with the largest market capitalization and well-established records of growth in profits and earnings; (iii) Accessor Value and Income Portfolio, which seeks a high level of current income and capital growth by investing primarily in companies and industries from the 500 U.S. issuers with the largest market capitalization and attractive valuation levels; (iv) Accessor Small to Mid Cap Portfolio which seeks capital growth by investing primarily in equity securities of small-to-medium sized companies with high growth potential; (v) Accessor International Equity Portfolio which seeks the growth of capital by investing primarily in equity securities of companies domiciled in countries other than the United States; (vi) Accessor Intermediate Fixed-Income Portfolio which seeks the generation of current income by investing in fixed-income securities; (vii) Accessor Short-Intermediate Fixed-Income Portfolio which seeks preservation of capital and generation of current income by investing primarily in fixed-income securities, including government bonds, corporate bonds and mortgage-backed securities, (viii) Accessor Mortgage Securities Portfolio which seeks a high level of current income by investing in mortgage-related securities; and (ix) U.S. Government Money Portfolio which seeks maximum current income consistent with the preservation of principal and liquidity, investing primarily in short-term obligations issued by or guaranteed by the U.S. Government, its agencies or instrumentalities. No changes in investment policy were made during the year 1998. Item 3. Contributions under the Plan The Company's contributions are measured by reference to employee contributions and are not discretionary. Item 4. Participating Employees There were 3,893 participating employees in the Plan on December 31, 1998. 2 Item 5. Administration of the Plan (a) Zions Bancorporation is the Plan administrator. The Company's Board of Directors has appointed an Administrative Committee consisting of six persons. The Committee has full power and authority to administer the Plan and to interpret its provisions. The present members of the Committee and their positions held are: Member Position - Company - --------------------------- -------------------------------------------------- Clark B. Hinckley, Chairman Senior Vice President of Zions Bancorporation Harris H. Simmons President and Chief Executive Officer of Zions Bancorporation Dale M. Gibbons Executive Vice President of Zions Bancorporation W. David Hemingway Executive Vice President of Zions Bancorporation Richard G. Crandall Vice President of Zions First National Bank Russell W. Miller President of Zions Insurance Agency, Inc. The address of each fiduciary listed above is One South Main, Suite 1380, Salt Lake City, Utah 84111. (b) No compensation is paid to the Committee members by the Plan. All expenses of the Plan and its administration are paid by the Company. ITEM 6. CUSTODIAN OF INVESTMENTS (a) Zions First National Bank, One South Main Street, Salt Lake City, Utah 84111 is the custodian and trustee. (b) The custodian and trustee receives no compensation from the Plan. Item 7. Reports to Participating Employees Participating employees are furnished an annual statement reflecting the status of their accounts as of the end of the fiscal year. Item 8. Investment of Funds As elected by participants, approximately seventy seven percent of the assets of the Plan are invested in securities of the Company, and approximately twenty percent in Accessor Funds. 3 Item 9. Financial Statements and Exhibits (a) Financial Statements Page ---- Independent Auditors' Report .............................................. 31 Statements of Net Assets Available for Benefits - December 31, 1998 and 1997 ............................................ 32 Statements of Changes in Net Assets Available for Benefits - Years ended December 31, 1998, 1997, and 1996 ........................ 33 Notes to Financial Statements .............................................. 34 Schedules - Schedules I, II, and III have been omitted for the reasons that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. (b) Exhibits - None 4 Independent Auditors' Report The Trust Committee Zions Bancorporation Employee Investment Savings Plan: We have audited the accompanying statements of net assets available for benefits of Zions Bancorporation Employee Investment Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the plan administrator. Our responsibility is to express an opinion on these 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 the plan administrator, 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 financial statements referred to above present fairly, in all material respects, the net assets available for benefits of Zions Bancorporation Employee Investment Savings Plan as of December 31, 1998 and 1997, and the changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions for the year ended December 31, 1998, are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic 1998 financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/KPMG LLP March 16, 1999 5 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Statements of Net Assets Available for Benefits December 31, 1998 and 1997
1998 1997 ------------ ------------ Assets: Cash and cash equivalents ........................................ $ 28,747 136,111 Investments, at fair value: Zions Bancorporation common stock (approximate cost of $21,778,604 in 1998 and $17,287,725 in 1997) ... 111,008,195 83,746,551 Accessor funds (approximate cost of $25,648,054 in 1998 and $19,168,929 in 1997) .......................... 28,257,934 19,380,190 Fidelity U.S. government reserves (approximate cost of $2,802,271 in 1998 and $2,406,968 in 1997) ........ 2,802,271 2,406,968 Employee loans ............................................. 1,469,143 1,581,233 ------------ ----------- 143,537,543 107,114,942 Contributions receivable: Employee ................................................... 270,707 35,855 Employer ................................................... 56,060 6,737 Dividends receivable ............................................. 249,399 221,478 Interest receivable .............................................. 1,319 3,227 Wires receivable ................................................. -- 10,679 ------------ ----------- Total assets ................................................ 144,143,775 107,529,029 ------------ ----------- Liabilities - accounts payable ...................................... -- 40,483 ------------ ----------- Net assets available for benefits ................................... $144,143,775 107,488,546 ============ ===========
See accompanying notes to financial statements. 6 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Statements of Changes in Net Assets Available for Benefits Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments ... $ 34,672,299 36,818,202 12,105,270 Dividends ....................................... 1,402,606 3,053,076 732,045 Interest ........................................ 156,435 279,067 361,768 ------------ ----------- ---------- 36,231,340 40,150,345 13,199,083 ------------ ----------- ---------- Contributions: Employee ........................................ 4,893,777 2,715,037 2,049,269 Employer ........................................ 991,783 543,577 430,015 Plan rollovers: Nonaffiliated plans .................... 3,248,154 4,132,145 342,799 Affiliated plan ........................ -- -- 183,050 ------------ ----------- ---------- 9,133,714 7,390,759 3,005,133 ------------ ----------- ---------- 45,365,054 47,541,104 16,204,216 ------------ ----------- ---------- Total additions Deductions from net assets - benefits paid directly to participants ................ 8,709,825 4,550,690 3,337,348 ------------ ----------- ---------- 36,644,229 42,990,414 12,866,868 Net increase Net assets available for benefits: Beginning of year ..................................... 107,488,546 64,498,132 51,631,264 ------------ ----------- ---------- End of year ........................................... $144,143,775 107,488,546 64,498,132 ============ =========== ==========
See accompanying notes to financial statements. 7 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (1) Plan Description The following description of the Zions Bancorporation Employee Investment Savings Plan (the Plan) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions. (a) General The Plan is a single employer contributory plan that is designed to provide retirement benefits for eligible employees under a pretax salary reduction (deferral) arrangement and, if employees so elect, an opportunity to acquire stock ownership in Zions Bancorporation (the Company). The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. (b) Eligibility Participation in the Plan is voluntary. An employee is eligible to become a participant on January 1 or July 1, whichever coincides with, or immediately follows, the latter of the date on which the employee completes at least 1,000 hours of service during 12 continuous months and attains the age of 21. At December 31, 1998 and 1997, there were 3,893 and 3,240 participants, respectively, in the Plan. (c) Employee and Company Contributions Participants may elect to contribute one to fifteen percent of their compensation to the Employee Investment Savings Plan, limited by participant contributions made to the Zions Bancorporation Employee Stock Savings Plan. The Company contributes an amount equal to 25 percent of the contribution made by each participant up to ten percent of their compensation with no match made on contributions in excess thereof. The maximum amount a participant may contribute to the Plan in a calendar year is the lesser of fifteen percent of their compensation, or $10,000 for 1998. (d) Allocation of Income or Loss Investment income is allocated to each participant's account in proportion to the investment shares held in that participant's account to the total investment shares held in the Plan. (e) Vesting and Payment of Benefits Employee contributions and the employees' share of the Company contributions are 100 percent vested at all times. Benefits are paid upon death, disability, retirement, or earlier, subject to certain restrictions. Benefits are paid in shares of stock and/or cash pursuant to the nature of the investment vehicle selected by the participant. (continued) 8 (f) Investment Options As of December 31, 1998, the Plan maintains three separate types of investment funds: (i) Company securities, which consist of Company stock; (ii) Accessor funds, consisting of seven investment options (Accessor growth fund adv class, Accessor value and income adv class, Accessor small to mid-cap adv class, Accessor international equity adv class, Accessor intermediate fixed income adv class, Accessor mortgage securities adv class, Accessor short-term intermediate fixed income adv class); and (iii) Fidelity U.S. government reserves. (g) Participant Loans Beginning October 1, 1992, a participant who is an active employee may apply for and obtain a loan of up to 50 percent of the eligible amounts in their account. Loans are secured by the participant's account. Loan repayment is made through payroll deduction. (h) Plan Termination Although the Company has not expressed any intent to do so, it has the right under the Plan to discontinue contributions at any time and to terminate the Plan subject to provisions of ERISA. (2) Summary of Significant Accounting Policies The following is a summary of significant accounting policies followed by the Plan in the preparation of its financial statements: (a) Basis of Presentation The Plan's financial statements are presented on the accrual basis of accounting. (b) Investments Quoted market prices have been used to determine the fair value of investments. Purchases and sales of investments are recorded on a settlement-date basis, which does not materially differ from using the trade-date basis required by generally accepted accounting principles. Net unrealized appreciation represents the difference between the book value and the market value of investments held at year-end. Book value is the market value at the end of the previous fiscal year, or cost if the investment was purchased during the year. 9 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 The following investments represent five percent or more of the net assets available for plan benefits at December 31: 1998 1997 ------------ ------------ Zions Bancorporation common stock $111,008,195 83,746,551 Accessor growth fund adv class 8,495,197 -- (c) Cost of Administration All costs of administration are currently being absorbed by the Company. (d) Cash and Cash Equivalents Cash and cash equivalents include cash and short-term investments with maturity dates of 90 days or less. (e) Reclassifications Certain reclassifications have been made in the 1997 financial statements to conform with the 1998 presentation. (f) Use of Estimates The preparation of the financial statements and supplemental schedules in conformity with generally accepted accounting principles requires the plan administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and supplemental schedules and the reported amounts of changes in net assets during the reporting period. Actual results could differ from those estimates. (3) Tax Status The Plan obtained its latest determination letter on June 5, 1996, in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code (IRC). The Plan has been amended since receiving the determination letter. However, the plan administrator and the Plan's tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. (4) Zions Bancorporation Common Stock At December 31, 1998 and 1997, the investment in common stock of the Company consisted of 1,779,691 and 1,845,654 shares, respectively. 10 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (5) Financial Information by Fund Type Financial information by fund type as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, are as follows: Statement of Net Assets Available for Benefits by Fund Type Year ended December 31, 1998
Zions Fidelity Bancorp- U.S. oration govern- common Accessor ment Employee stock funds* reserves loans Other Total ------------ ------------ ------------ ------------ ------------ ------------ Assets: Cash and cash equivalents ........ -- -- -- -- 28,747 28,747 Investments, at fair value: Zions Bancorporation common .... $111,008,195 -- -- -- -- 111,008,195 stock Accessor funds ................. -- 28,257,934 -- -- -- 28,257,934 Fidelity U.S. government ....... -- -- 2,802,271 -- -- 2,802,271 reserves Employee loans ................. -- -- -- 1,469,143 -- 1,469,143 ------------ ------------ ------------ ------------ ------------ ------------ 111,008,195 28,257,934 2,802,271 1,469,143 -- 143,537,543 Contributions receivable: Employee ......................... -- -- -- -- 270,707 270,707 Employer ......................... -- -- -- -- 56,060 56,060 Dividends receivable ................ -- -- -- -- 249,399 249,399 Interest receivable ................. -- -- -- -- 1,319 1,319 ------------ ------------ ------------ ------------ ------------ ------------ Net assets available for benefits ... $111,008,195 28,257,934 2,802,271 1,469,143 606,232 144,143,775 ============ ============ ============ ============ ============ ============
* Accessor funds shown in detail in note 6. (continued) 11 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 Statement of Net Assets Available for Benefits by Fund Type Year ended December 31, 1997
Zions Fidelity Bancorp- U.S. oration govern- common Accessor ment Employee stock funds* reserves loans Total ------------ ------------ ------------ ------------ ------------ Assets: Cash and cash equivalents .............. $ 34,561 54,545 -- 47,005 136,111 Investments, at fair value: Zions Bancorporation common stock ... 83,746,551 -- -- -- 83,746,551 Accessor funds ...................... -- 19,380,190 -- -- 19,380,190 Fidelity U.S. government reserves ... -- -- 2,406,968 -- 2,406,968 Employee loans ...................... -- -- -- 1,581,233 1,581,233 ------------ ------------ ------------ ------------ ------------ 83,746,551 19,380,190 2,406,968 1,581,233 107,114,942 Contributions receivable: Employee ............................ 15,626 17,999 2,230 -- 35,855 Employer ............................ 3,050 3,280 407 -- 6,737 Dividends receivable .................. 221,478 -- -- -- 221,478 Interest receivable ................... 818 -- -- 2,409 3,227 Wires receivable ...................... -- 9,502 1,177 -- 10,679 ------------ ------------ ------------ ------------ ------------ Total assets ................... 84,022,084 19,465,516 2,410,782 1,630,647 107,529,029 Liabilities - accounts payable ........... 21,847 16,266 560 1,810 40,483 ------------ ------------ ------------ ------------ ------------ Net assets available for benefits ......... $ 84,000,237 19,449,250 2,410,222 1,628,837 107,488,546 ============ ============ ============ ============ ============
* Accessor funds shown in detail in note 6. (continued) 12 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 Statement of Changes in Net Assets Available for Benefits by Fund Type Year ended December 31, 1998
Zions Fidelity Bancorporation U.S. common Accessor government Employee stock funds* reserves loans Other Total ------------ ------------ ------------ ------------ ------------ ------------ Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments...... $ 30,451,745 4,181,224 39,330 -- -- 34,672,299 Dividends ....................... 723,420 313,486 116,269 -- 249,431 1,402,606 Interest ........................ 4,695 2,311 -- 148,110 1,319 156,435 ------------ ------------ ------------ ------------ ------------ ------------ 31,179,860 4,497,021 155,599 148,110 250,750 36,231,340 ------------ ------------ ------------ ------------ ------------ ------------ Contributions: Employee .......................... 1,935,542 2,488,565 198,963 -- 270,707 4,893,777 Employer .......................... 397,767 511,144 26,812 -- 56,060 991,783 Plan rollovers - nonaffiliated plan .............. 1,309,368 1,840,568 98,218 -- -- 3,248,154 ------------ ------------ ------------ ------------ ------------ ------------ 3,642,677 4,840,277 323,993 -- 326,767 9,133,714 ------------ ------------ ------------ ------------ ------------ ------------ Principal loan payments ............. 556,538 136,587 231,093 (952,933) 28,715 -- ------------ ------------ ------------ ------------ ------------ ------------ Total additions .............. 35,379,075 9,473,885 710,685 (804,823) 606,232 45,365,054 Deductions from net assets attributed to: Benefits paid to ................... 6,728,228 1,126,134 687,458 168,005 -- 8,709,825 participants Loans disbursed .................... 476,395 316,966 19,773 (813,134) -- -- ------------ ------------ ------------ ------------ ------------ ------------ Total deductions ............. 7,204,623 1,443,100 707,231 (645,129) -- 8,709,825 ------------ ------------ ------------ ------------ ------------ ------------ Interfund transfers .................... (1,166,494) 777,899 388,595 -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease)....... 27,007,958 8,808,684 392,049 (159,694) 606,232 36,655,229 Net assets available for benefits: Beginning of year ................... 84,000,237 19,449,250 2,410,222 1,628,837 -- 107,488,546 ------------ ------------ ------------ ------------ ------------ ------------ End of year ......................... $111,008,195 28,257,934 2,802,271 1,469,143 606,232 144,143,775 ============ ============ ============ ============ ============ ============
* Accessor funds shown in detail in note 6. (continued) 13 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 Statement of Changes in Net Assets Available for Benefits by Fund Type Year ended December 31, 1997
Zions Fidelity Bancorp- U.S. oration govern- common Fidelity Money Fixed Accessor ment Employee stock mutual fund market income funds* reserves loans Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Additions to net assets attributed to: Investment income: Net appreciation (depreciation) in fair value of investments ........... $35,955,118 2,009,330 -- 10,674 (1,190,747) 33,827 -- 36,818,202 Dividends .................. 1,081,318 -- -- 39,451 1,911,698 20,609 -- 3,053,076 Interest ................... 6,377 665 137,608 721 1,380 -- 132,316 279,067 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 37,042,813 2,009,995 137,608 50,846 722,331 54,436 132,316 40,150,345 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Contributions: Employee ................... 1,209,640 597,263 137,829 65,191 627,369 77,745 -- 2,715,037 Employer ................... 256,049 129,112 12,726 11,954 118,990 14,746 -- 543,577 Plan rollovers -nonaffiliated plan ...... 1,559,859 102,668 38,611 39,018 2,090,624 301,365 -- 4,132,145 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 3,025,548 829,043 189,166 116,163 2,836,983 393,856 -- 7,390,759 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Principal loan payments....... 455,302 74,763 42,000 3,000 120,022 21,008 (716,095) -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total additions.......... 40,523,663 2,913,801 368,774 170,009 3,679,336 469,300 (583,779) 47,541,104 Deductions from net assets attributed to: Benefits paid to participants ............. 3,069,345 242,982 199,921 51,330 279,353 608,285 99,474 4,550,690 Loans disbursed ............ 552,521 169,997 69,472 -- 127,725 22,356 (942,071) -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total deductions......... 3,621,866 412,979 269,393 51,330 407,078 630,641 (842,597) 4,550,690 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Interfund transfers .............. (1,346,059)(11,439,039) (4,779,540) (1,183,917) 16,176,992 2,571,563 -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) . 35,555,738 (8,938,217) (4,680,159) (1,065,238) 19,449,250 2,410,222 258,818 42,990,414 Net assets available for benefits: Beginning of year .......... 48,444,499 8,938,217 4,680,159 1,065,238 -- -- 1,370,019 64,498,132 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- End of year ................ $84,000,237 -- -- -- 19,449,250 2,410,222 1,628,837 107,488,546 =========== =========== =========== =========== =========== =========== =========== ===========
* Accessor funds shown in detail at note 6. (continued) 14 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 Statement of Changes in Net Assets Available for Benefits by Fund Type Year ended December 31, 1996
Zions Bancorporation Fidelity common mutual Money Fixed Employee stock fund market income loans Total ------------ ------------ ------------ ------------ ------------ ------------ Additions to net assets attributed to: Investment income: Net appreciation (depreciation) in fair value of investments ............... $ 11,090,943 1,039,045 -- (24,718) -- 12,105,270 Dividends ............................ 581,303 75,331 -- 75,411 -- 732,045 Interest ............................. 1,972 1,695 222,032 456 135,613 361,768 ------------ ------------ ------------ ------------ ------------ ------------ 11,674,218 1,116,071 222,032 51,149 135,613 13,199,083 ------------ ------------ ------------ ------------ ------------ ------------ Contributions: Employee ............................. 829,922 898,971 220,000 100,376 -- 2,049,269 Employer ............................. 172,015 188,689 51,176 18,135 -- 430,015 Plan rollovers ....................... 250,017 80,839 15,152 179,841 -- 525,849 ------------ ------------ ------------ ------------ ------------ ------------ 1,251,954 1,168,499 286,328 298,352 -- 3,005,133 ------------ ------------ ------------ ------------ ------------ ------------ Principal loan payments .................... 462,897 119,887 131,170 25,426 (739,380) -- ------------ ------------ ------------ ------------ ------------ ------------ Total additions .............. 13,389,069 2,404,457 639,530 374,927 (603,767) 16,204,216 Deductions from net assets attributed to: Benefits paid to participants .......... 2,332,669 453,309 317,861 137,634 95,875 3,337,348 Loans disbursed ........................ 465,087 179,736 81,083 11,244 (737,150) -- ------------ ------------ ------------ ------------ ------------ ------------ Total deductions ............ 2,797,756 633,045 398,944 148,878 (641,275) 3,337,348 ------------ ------------ ------------ ------------ ------------ ------------ Interfund transfers ........................ (313,598) 499,516 69,855 (255,773) -- -- ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) ...... 10,277,715 2,270,928 310,441 (29,724) 37,508 12,866,868 Net assets available for benefits: Beginning of year ...................... 38,166,784 6,667,289 4,369,718 1,094,962 1,332,511 51,631,264 ------------ ------------ ------------ ------------ ------------ ------------ End of year ............................ $ 48,444,499 8,938,217 4,680,159 1,065,238 1,370,019 64,498,132 ============ ============ ============ ============ ============ ============
(continued) 15 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (6) Financial Information by Accessor Funds Investment Option Statement of Changes in Accessor Funds Net Assets Available for Benefits by Investment Option Year ended December 31, 1998
Short- term Inter- inter- Value Small Inter- mediate mediate and to mid- national fixed Mortgage fixed Growth income cap equity income securities income Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments ............ $2,373,297 461,472 777,111 449,622 73,451 5,104 41,167 4,181,224 Dividends ......................... 9,849 52,715 -- -- 194,392 48,551 7,979 313,486 Interest .......................... 406 1,753 152 -- -- -- -- 2,311 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 2,383,552 515,940 777,263 449,622 267,843 53,655 49,146 4,497,021 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Contributions: Employee .............................. 780,655 397,915 545,484 314,782 241,053 123,519 85,157 2,488,565 Employer .............................. 161,407 80,626 113,335 64,343 49,438 24,533 17,462 511,144 Plan rollovers -nonaffiliated plans ................ 552,296 560,310 341,629 146,239 119,154 78,169 42,771 1,840,568 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 1,494,358 1,038,851 1,000,448 525,364 409,645 226,221 145,390 4,840,277 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Principal loan payments ................. 34,309 21,084 27,025 18,054 16,845 11,963 7,307 136,587 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total additions .................. 3,912,219 1,575,875 1,804,736 993,040 694,333 291,839 201,843 9,473,885 Deductions from net assets attributed to: Benefits paid to participants ................... 235,970 225,348 239,349 178,271 167,032 21,651 58,513 1,126,134 Loans disbursed ..................... 81,064 61,133 55,110 26,614 76,988 8,321 7,736 316,966 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total deductions ................. 317,034 286,481 294,459 204,885 244,020 29,972 66,249 1,443,100 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Interfund transfers ..................... 619,581 190,387 284,625 (82,735) 252,196 136,242 (622,397) 777,899 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) ..................... 4,214,766 1,479,781 1,794,902 705,420 702,509 398,109 (486,803) 8,808,684 Net assets available for benefits: Beginning of year ................... 4,280,431 3,386,177 4,113,602 2,729,008 3,070,995 641,784 1,227,253 19,449,250 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- End of year ......................... $8,495,197 4,865,958 5,908,504 3,434,428 3,773,504 1,039,893 740,450 28,257,934 ========== ========== ========== ========== ========== ========== ========== ==========
16 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Notes to Financial Statements December 31, 1998 and 1997 (6) Financial Information by Accessor Funds Investment Option Statement of Changes in Accessor Funds Net Assets Available for Benefits by Investment Option Year ended December 31, 1997
Short- term Inter- inter- Value Small Inter- mediate mediate and to mid- national fixed Mortgage fixed Growth income cap equity income securities income Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Additions to net assets attributed to: Investment income (loss)..............$ 118,302 220,511 394,169 (157,230) 110,284 18,387 17,908 722,331 Contributions ......................... 652,443 465,441 575,766 454,634 421,771 91,294 175,634 2,836,983 Principal loan payments ............... 36,217 16,821 26,259 22,879 11,886 2,411 3,549 120,022 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total additions.................... 806,962 702,773 996,194 320,283 543,941 112,092 197,091 3,679,336 Deductions from net assets attributed to: Benefits paid to participants..................... 108,867 31,295 47,247 44,652 33,046 730 13,516 279,353 Loans disbursed ...................... 38,541 17,901 27,944 24,347 12,649 2,566 3,777 127,725 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total deductions .................. 147,408 49,196 75,191 68,999 45,695 3,296 17,293 407,078 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Interfund transfers....................... 3,620,877 2,732,600 3,192,599 2,477,724 2,572,749 532,988 1,047,455 16,176,992 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net increase ...................... 4,280,431 3,386,177 4,113,602 2,729,008 3,070,995 641,784 1,227,253 19,449,250 Net assets available for benefits: Beginning of year....................... -- -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- End of year ..........................$4,280,431 3,386,177 4,113,602 2,729,008 3,070,995 641,784 1,227,253 19,449,250 ========== ========== ========== ========== ========== ========== ========== ==========
17 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Line 27a - Schedule of Assets Held for Investment Purposes December 31, 1998
(a) (e) Party in (b) (c) (d) Current interest Issuer Investment description Cost (1) value - ------------ -------------------- ---------------------------------------------- ----------- ----------- * Investments at fair value determined by quoted market prices: Zions Bancorporation Zions Bancorporation common stock $21,778,604 111,008,195 Accessor Accessor growth fund adv class 6,867,230 8,495,197 Accessor value and income adv class 4,797,594 4,865,958 Accessor small to mid-cap adv class 5,416,724 5,908,504 Accessor international equity adv class 3,026,980 3,434,428 Accessor intermediate fixed income adv class 3,745,727 3,773,504 Accessor mortgage securities adv class 1,048,810 1,039,893 Accessor short-term intermediate fixed income adv class 744,989 740,450 Fidelity Investments Institutional Brokerage Group Fidelity U.S. government reserves 2,802,271 2,802,271 Investments at fair value which is approximated by book value - participant loans (261) with interest between 7 and 10.5 percent and maturing by 2026 1,469,143 1,469,143 ----------- ----------- $51,698,072 143,537,543 =========== ===========
Notes: * Party-in-interest There were no nonexempt party-in-interest transactions. There were no assets which were both acquired and disposed of during the year. (1) Cost is determined using the average-cost method applied on a participant- by-participant basis. 18 ZIONS BANCORPORATION EMPLOYEE INVESTMENT SAVINGS PLAN Line 27d - Schedule of Reportable Transactions Year ended December 31, 1998
(h) Current (a) value Identity of (c) (g) of asset party (b) Purchase (d) Cost of on trans- (i) involved Description of asset price Selling price asset action date Net gain - --------------- -------------------- ---------------- -------------- ------------ -------------- -------------- Zions Bancorp- Zions Bancorporation oration common stock $ - 9,207,511 1,704,972 9,207,511 7,502,539 Zions Bancorporation common stock 6,219,975 - - 6,219,975 -
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